Coastline Capital Fund Management

3 Things You Need When Buying Real Estate Notes (from Hedgefunds)

by Andy Mirza

New to note investing? Want to learn how to invest in real estate notes but don’t know how to do it? If you want to buy institutional, non performing notes from a hedge fund, banks, or a private equity fund, you need 3 things:

  1. Access to the Right People
    • Who? Traders and decision makers
    • Where? Offices, Trade Conferences, Online
    • How? See next:
  2. Professionalism
    • Understand the Traders
    • Easy to do business
    • Responsive Communication
  3. Ready Access to your Capital
    • Have quick access to it when buying
    • Close your Deal

Sounds simple enough but, for those who have done it, you know it takes persistence, effort, and a lot of work to form and maintain those relationships with note sellers and capital partners. Read more to find out exactly what I mean.

  1. Access to the Right People

For the purposes of this article, we’ll be talking about institutional, non performing loans, most of which were originated prior to the Financial Crisis of 2008. Most of these are owned or controlled by hedge funds, private equity companies, government agencies, government sponsored entities such as Fannie Mae and Freddie Mac, and banks.

Who?

In order to buy from these entities, you have to talk to the right individuals. Find out who to talk to at the “whole loan trading desk” when calling a private company. Identify the people that control and have the ability to sell to you. Those are your points of contact.

It’s even better when you get to the ultimate decision maker. It’s usually easy to get to the decision maker with a small fund or company because the trader and decision maker are the same guy. The bigger the organization, the harder it will be to get to the top guy and it might not be necessary for what you want to do.

Where do I meet these people?

  1. Their Offices – do some google searching, find the companies that you think are a good fit for you, and contact them by phone, e-mail, or in person.
  2. Trade Conferences – do some google searching and you’ll find out where the conferences are being held and where the professionals go.
  3. Online – you can find some people by searching online forums such as BiggerPockets.com. LinkedIn and Facebook are good resources as well

(I think local note clubs or real estate investment clubs are good for meeting smaller note investors but you’ll  mostly find the others like you looking for investor notes or trying to learn how to invest in notes, not the professional note traders.)

How do you develop the relationships with the right people?

Persistence, effort, motivation and, most importantly, relationship building skills, which segues into #2:

  1. Professionalism

If your experience is mostly in the world of real estate investing, you’ll have to shift mindsets to be successful when buying a real estate note for sale from a professional trader. Some of the things that are considered normal in “regular real estate”, are not acceptable in the note trading world. You make too many mistakes and note traders will stop trading with you. It’s a small community, reputation matters, and word gets around.

Understand the traders

The note traders are typically salaried or contract employees whose compensation is not directly tied to the performance of any particular note for sale. They’re doing a job, want to do it well, and keep their boss happy and off their back so they can collect a paycheck.

Easy to Do Business

When they interact with potential note buyers, note traders want someone who will not cause a lot of headaches or drama for them. They want someone who will be easy to do business with. Most importantly, they want a buyer who will perform and close the deal when they say they’ll close it.

Loan traders have established relationships with buyers that fit the above criteria: easy to work with, know what they’re doing, and close deals when they’re supposed to. If you’re new or unknown, you’re asking them to take a chance on someone they don’t know, which carries the risk of an unpleasant experience when a deal blows up because of the new guy.

Developing a New Relationship

When you’re new and in the process of developing a relationship with a loan trader:

Use the phone – e-mail is just fine for a lot of things but it can’t compare to a conversation when it comes to building rapport.

Visit in person – just as a phone call is better than e-mail, face to face meetings are better than phone calls. We’re not a completely virtual world just yet and nothing will show your sincerity and motivation than the effort it takes to see a person in person on their terms.

Responsive Communication

When the note trader takes the time to show you some product, take the time to acknowledge them. Acknowledge receipt of the tape of non performing loans for sale and let him know that you’ll get back to him within a week at most.

If you have no interest in buying the loans, let the trader know that you’re going to pass but give him the reasons why. Don’t ask him to let you know when they have something else that might fit your criteria. Place the responsibility upon yourself to check back in with the trader at another time.

Whether you end up with a deal or not is secondary to opening the door to a long term relationship with the right person. If you behave professionally, respect your counterpart’s time and energy, and get him to like you, then your chances of buying a real estate note for sale go way up.

3. Ready Access to your Capital

Buying real estate notes is a lot different than buying traditional real estate. You and the seller agree on price first. Due diligence comes next. If a problem comes up, you alert the seller. The seller fixes the problem, agrees to re-price the loan, or pulls it from the trade.

Close Your Deal

At the end of due diligence, you both sign contracts. You are expected to fund the deal in 24 to 48 hours. If you don’t fund on time, you risk your relationship with the seller. You’re making him look bad in front of his boss.

If you completely fail to fund the deal at all, you’ve blown the trade. The seller will most likely not trade with you again. You’ve wasted his time and your chance at a long term relationship, one of several which you need to stay in the real estate note investing business. He’ll let anyone else he does business with know to avoid trading with you.

In traditional real estate, you can get the deal in contract first and go looking for the money second. For note investing with hedge funds, it’s the opposite. Have the capital ready to go first, then try to buy a real estate note for sale.

If you don’t have the capital ready to go, you shouldn’t be looking to buy notes from hedgefunds. Get the money first.

Conclusion:

If you want to buy institutional non performing notes from the wall street traders, you need to develop relationships with the people that have product, conduct yourself with professionalism, and have the money ready to go. These things take time and considerable effort to create and maintain but it can be done by the investor that’s motivated and willing to put the work in.

For most people it’s an issue of not having the time to take these steps. For some, it’s a much better use of time to focus on one’s main career or way of making money and invest with a note investor who has already put in the time and effort to develop those relationships and has the experience to manage and liquidate non performing notes.

Coastline Capital Fund Management LLC

27702 Crown Valley Pkwy D4 #268
Ladera Ranch, CA 92694

P: (949) 371-6749

andy@coastlinecapgrp.com

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