TOP 5 Ways to WIN at Note Sales
There are too many clueless CRE investors, brokers and YES even sellers trying to put together non-performing loan (NPL) and Real Estate Owned (REO) transactions. I’m not just writing this to complain, sell you on my loan sale advisory firm Rhenium Capital, or to have you buy-in on my “How to Buy Distressed Debt” seminar- the majority of note sales content out there. I’m just writing this to help shed a little light on the commercial real estate side of the NPL & REO business. Why? Because there’s a ton of interest in this niche market, a tremendous lack of readily available information and because I absolutely love what we do here at Rhenium and I believe we are some of the best guys in the Loan Sale Advisory game. So here goes:
#5 HIGH RISK-REWARD
NPL & REO deals are a deep, dark, gray sub-sector and sub-culture within the CRE industry where the cash rich and risk inclined go in search of high yields. The risk-reward spectrum can range from quick n’ easy modifications, workouts, DPOs and Deed-in-Lieu deals to never ending litigation, environmental remediation, bankruptcies and fix n’ flips turned money pits. In short, this is the dog eat dog, swim with the sharks, running with the wolves side of the CRE industry that most do not have the stomach to pursue. So if you’re not absolutely comfortable with the risk-reward scenario of a given deal or lack confidence in your strategy or ability to effectively execute, you have three options: invest with someone who does, partner with someone who does, or stay the hell home. Period. Did I mention Rhenium Capital offers consulting services?
#4 YOU’RE ON YOUR OWN
Winning NPL & REO deals can be pretty tough. It’s kind of like finding a plane wreck, reassembling the wreckage, taking off, flying and then landing said wreckage. Less metaphorically speaking however, the note sale/REO sale process typically goes something like this:
- NPL or REO buyer/seller/broker make 1st contact
- Confidentiality Agreement (CA) Executed
- Due Diligence Files Exchanged w/ Limited to NO REPS & WARRANTS
- Purchase Offer/LOI submitted w/ little to no pricing guidance
- Negotiation of Purchase and Sale Agreement (PSA) or Loan Sale Agreement (LSA)
- Execute PSA and submit deposit
- Little to NO DD period
- Execute docs, wire funds and your CLOSED
Don’t let the 8-step process above lull you into complacency. There are folks out there that don’t use escrow, don’t have proper title/due diligence, don’t screen buyers or sellers, and most don’t even have a CLUE on how to properly price a deal let alone market, buy, or even sell NPL & REO. Let’s face it, when it comes to NPL & REO sales:
“YOU’RE ON YOUR OWN”
The sooner you realize this, the sooner you will be able to recognize the right deals, sellers and LSAs- like Rhenium Capital– and pounce on the right opportunities. All without losing your cool OR YOUR DEPOSIT.
#3 UNDERSTAND THE SELLER
Confidentiality is of the upmost importance for most Sellers, and for Rhenium Capital of course. One question we hear every day is,
“Can I talk to the seller?”
“NO.” You will rarely ever get to talk to the Seller, or noteholder. Here’s why:
- More than one decision maker– Most Sellers have a committee, or similar process, which will review best and final offers and either accept, reject or counteroffer. So there isn’t usually a central decision maker to speak to.
- No Reps & Warrants– Sellers don’t want to get tied up in is a case of “He Said, She Said” (AKA- Lender Liability), especially when they’re negotiating how much of a loss they’re going to take on an NPL or REO asset. There’s just very little for a seller to gain by speaking to a Buyer directly, which is why it usually doesn’t- and shouldn’t-happen.
- Seller may not be the NoteHolder– Hey it’s okay, we get mistaken for buyers and sellers all the time! Remember, the person or group who originated or holds the loan are rarely the same folks selling it. More than likely the Seller is an LSA, Broker, Special Servicer/Asset Manager, etc and the person selling the deal may or may not even be part of the committee who approves a note sale.
So aside from the few very insightful and pointed questions, you don’t need to talk to the seller! Besides, there are more important things to ask, like:
- Why are they selling this note?
- How did the note holder come upon this note?
- What are pricing expectations?
- What’s the estimated foreclosure date?
- What sort of agreement do you have to sell these notes?
Understanding more about a seller’s potential motivation, pricing expectations and days/costs associated to receiving title are much more beneficial than simply knowing who the seller or noteholder may be. So your focus should be to better understand more about your Seller’s motivation and why they want out of the deal.
#2 KNOW THY SELF
How Cliché! Don’t worry we’re not getting all EXISTENTIAL up in here. What I mean by ‘Know Thy Self’ is know what deals work best for you, your capital, your ownership structure, your business model, your core competencies and obviously your location, location, location. We often see buyers, and sellers, spend a massive amount of time and energy putting an NPL or REO deal together that just wasn’t the right fit from the get-go and the deal inevitably falls out.
This is the main reason folks usually end up at the wholesalers, brokers and LSAs. Sellers aren’t always going to have the perfect buyer on their short list, especially when dealing with NPLs and REO outside of a certain state or region, with environmental contamination, with an SBA guaranty, or DIP/Bankruptcies, etc. This is where a little bit of self-awareness can go a long way for both buyers and sellers. Know what you’re good and stick to it. Worst case scenario when you’re a bit out of your core competency- hire or partner with a pro.
#1 BRING YOUR CHECK BOOK
Not a day goes by where a buyer fails to contact me to let me know “I’m all cash.” YES! I know your all cash. Everyone is all cash because everyone has to be. But by all means, continue to exclaim your affirmation… “I’M ALL CASH!!!” Wow! It is a bit empowering.
Being all cash is the most important thing that separates good offers from bad offers, winners from losers- you get the drift. Proof of Funds is what makes the “I’m All Cash” affirmation, well, more affirming. Yes, Rhenium Capital requires proof of funds from anyone and everyone simply looking to gain access to our tiered due diligence vaults- that’s where we keep all the confidential lender and borrower info safe.
Proof of funds, or POF, come in only a few acceptable forms- something from a bank, a CPA or financial statement. And they should all be certified within the past 90 days. If a buyer doesn’t have cash greater or equal to the note balance, or their offer amount, their offer should NOT be considered. NO! A term sheet from a lender doesn’t count as POF on a note sale, sorry. And NO, I cannot help you obtain note financing.
Bottom line is if you want to win at NPL and REO sales, always have you POF and checkbook ready.
Rhenium Capital has worked on thousands of NPL and REO assets. We know how to set these transactions up for success- with things like an amazing offering memorandum, tiered due diligence access and personally walking every qualified buyer through the deal. We call it ‘INSTITUTIONAL EXECUTION, MIDDLE MARKET FOCUS’ and it’s our motto. Not only because it's extremely effective, but because nobody else really does anything similar for NPL & REO assets under $5mm like we do.
So if you have some tough commercial non-performing loans or REO assets sitting on your balance sheet- we can help.