by Barbara Graff
(Editor comment – Over the last few months several articles have included remarks about getting all of the information from the note holder before you present the completed worksheet to a funding source. It is not only mandatory for the funding source to have all of the information but it helps you determine if you have a potential transaction or whether you are wasting your time. In this article, Barbara Graff will give you a few more tips on how to get the story behind the note.)
The note information sheet (worksheet) is more than just a form to fill in information about the note. Look at this piece of paper as an outline for selling YOU and the note business to the Seller. As you start asking the Seller questions, use this opportunity to explore what is happening in the background with the Seller. What brought him to this point of wanting to sell his note? It might be a need you can identify with and talk about further. What is his line of work? Is he retired? If so, does he have any grandchildren? In other words, don’t make your first exposure with a stranger on the phone sound like an indifferent inquisition. This is a common mistake for most beginners and can be fatal when it comes to keeping a line of communication open with the Seller for future conversations and getting offers accepted. Be friendly on the phone. . .it will go a long way.
When you first talk with the Seller, it is imperative that you educate him on how the note business works. A good idea would be to ask him if he has ever sold a note before to establish a reference point. Most of the time, a Seller will not have any experience selling a note. Consequently, when a Seller’s note was structured initially, the Seller probably did not plan on selling his note (or even know that he could). Occasionally, you might talk with an experienced note holder who has a good idea what to expect when selling a note. This will make your job a little easier. But, for the most part, you will need to be patient and use the note information sheet to educate the Seller as you discuss his note. As you ask for information, explain to the Seller how interest rates affect a note’s value. . .or, how the term or seasoning of his note can be a negative when it comes to getting a high offer. By the time you have gathered all of the information about the note, the Seller should have a good idea what to expect.
Also, when talking with someone on the phone about a note, make sure you are talking with the actual Seller. I know this sounds funny, but, at times, you might be talking with a friend of the Seller, another broker or someone else. Don’t ever assume you are talking with the note holder until you ask. If an investor finds out (and he will) that you are not talking directly with the Seller, you could lose the deal.
As mentioned earlier, plan on spending some time getting to know the Seller. Find a common ground between you. This will help relax both of you and will establish an all important rapport with the Seller. This relationship will prove very beneficial later when you present your offer.
Keeping all of this in mind, your objective is to convince the Seller that YOU are the best at what you do and would like to spend a few minutes discussing what you can do for the Seller to get him the most money for his note. And, if YOU can’t do it, nobody can.
The first thing you need to do is ask the Seller if he has his note in front of him. This will save a lot of time. When the Seller has his note in front of him, start filling out the note information sheet in the order outlined below.
- Ask the Seller the selling price of the property and what date is on the note.
- Ask if the note has been signed by ALL parties.
- Ask the Seller if his note is a 1st or 2nd lien position. If there are other loans currently on the property, his note is technically in a junior position, since foreclosure on the Seller’s note is “subject to” senior liens (recorded ahead of Seller’s note). For example, there might be a bank loan on the property (ask the Seller) that is currently in 1st position that will have to paid off at closing. After the bank loan is paid off at closing, the Seller’s note will be in 1st position. This is good information to have, since it will affect the amount of money the Seller will get after the other loan is paid off. This might be a reason the Seller is asking an unreasonable amount for his note. If he needs a certain amount of money, and, after doing the math, you discover that it can’t be done, then DON’T waste your time.
- If there was a down payment, what is the exact amount stated on the note. Tell the Seller that the more down payment there is the more valuable the note. For example, a down payment of 10% is much better than 5%, especially if the Payor has poor credit.
- Ask the Seller about the terms of the note (i.e.- face amount, interest rate, amortization term, balloon payment term, etc.). Inform the Seller that the better the terms, the more he can get for his note. What are better terms?—a note with an interest rate of 10% or higher, and an amortization term of less than 30 years. If there is a balloon payment, explain to the Seller that this is a “negative” unless the Payor has a 625 credit score or higher.
- Ask the Seller about the payment on the note. How much and is it monthly, quarterly or yearly? Ask him if he keeps track of the note balance after each payment. Then ask him when the first payment was made and was it according to the terms of the note. If not, the number of payments and balance to date will be wrong (according to the terms of the note). If he keeps track of the balance after each payment, ask him what the current balance is. Inform the Seller this is the number that the investor will use to make an offer plus any balloon payment due (not the face amount of the note unless it is a new note). If there is a balloon payment, have the Seller give you this information as stated on the note (if available). Verify with the Seller how many payments have been made. Make sure you agree on this point. If there have been any late payments, write this information down and tell the Seller this will probably affect the value of his note (he will have to disclose a signed payment history). If the note is currently delinquent, tell the Seller to make every effort to collect all delinquent payments before closing. If he says he can’t, then his note is delinquent and he will get a low offer. Also, tell the Seller that the more payments made on time, the better quality note—a seasoned note has a minimum of 12 payments. If there are fewer payments, the note is not as valuable.
- Get the Seller to talk about his property. Ask him if the property needs any repairs (i.e.- roof, foundation, furnace, a/c unit, water heater, etc.). If so, write this information down. Inquire about number of drooms and bathrooms? Is there a basement (finished or unfinished)? Is there a garage (1 or 2 car)? Are there any additional structures on the property? You get the picture. Do this exercise for each type of property—detail is important. Inform the Seller that the better condition the property is in, the more he can get for his note. Write all of this information in the “comments” section.
- Next, ask the Seller exactly where his property is located. Is it in a major subdivision with other structures of the same quality of construction and age? Is it a “stand alone”? Is it on a country road? Is it in a good neighborhood? Get the Seller to tell you details about the location. Write this information down. Inform the Seller that the better the property location, the more he can get for his note. Location details do not need to be disclosed on the information sheet. Remember, you are gathering this information to educate the Seller about the value of his note. If the location of the property actually affects value, it will come out in the appraisal process.
- Finally, ask the Seller what he thinks his property would sell for today “as is”. Do not ask this question any earlier during your discussion. Divide the current note balance by this value.
This number should be 80% or less (this is called the loan-to-value ratio). If it is higher, tell the Seller his note is not as valuable. If the property value has appreciated more than 10% per year, inform the Seller the investor will usually not use any higher value to evaluate an offer. Also, tell the Seller that the sales price or appraised value (whichever is less) is the value used by the investor if 6 payments or less have been made (no matter what the Seller tells you the property is worth).
By this time, the Seller should know whether he has a “good” note or not. You just tell him you have “the best investor contacts in the business and that you will get him the highest possible price for his note; and, by the way, what do you expect to get for your note?”. Notice that you ask this question LAST. If the Seller has unrealistic expectations, DO NOT HANG UP UNTIL YOU FIND OUT WHY.
If after reviewing the above information again with the Seller, he still has an unrealistic price in his mind, you are better off telling him that you do not want to waste his time. Give him your name and phone number and tell him to call you if he changes his mind. You are the professional — walk away from a loser! If this happens, remember to follow up with a “courtesy” call every 60-90 days.
Learn the above approach when talking with Sellers as if your success in this business depended on it! Guess what? IT DOES! Practice your delivery with a partner until you have perfected it. The better you are with your presentation over the phone, the better chance you have of beating out the other brokers that are talking with the same Seller. You want to establish a common ground with the Seller so he will want to do business with YOU.
If you have covered all of the above information, the Seller WILL remember you. And the next time a broker calls him, he will be thinking twice whether or not he wants to go over the same information again, since he has established a “bond” with you.
Barbara Graff is the President of Graff Liquidations. An experienced note broker and buyer in Washington, PA, she can be reached by email at email@example.com.