by Ed Lisogar
One area that exasperates new and inexperienced brokers is why we ask all of these questions before even giving a quote. After all, isn’t that what “due diligence” is for? Does an investor really need to know all of this just to give a quote?
The answer is yes. Certain aspects known at the outset will send up red flags that brokers will miss. Nothing worse than getting well into a deal only to uncover information that kills it on the spot. Many times it’s an issue that could have easily been asked in the first conversation between seller and broker but was not (lien position, seller’s price point, etc.). If you get into the habit of asking pertinent questions that are relevant to the particular note type your working on, gathering a sufficient amount of information for submission, you will find that you’ll maximize your time, just as we try to do on every deal. After all, time is money in this business, whether you’re a broker or a buyer.
Worksheet Let’s start with the basics. Every investor accepts industry standard worksheets that ensure the submitting broker gathers and submits the basic terms and conditions surrounding every note deal. Unless it’s something totally off the wall, reinventing the wheel by sending a brief email doesn’t make sense. Why write it all out when using a worksheet makes it easy: just fill in the blanks! Even worse is sending pages and pages of documents to the investor in lieu of a worksheet. What this tells the investor is that you want us to do the work. Your job as the broker is to gather information in a concise, industry-accepted manner. Leaving out pertinent information only slows the process as we have to get back to you with more questions. Ensuring that the information makes sense, and that the numbers add up is a crucial aspect many brokers skip. It doesn’t matter how “green” you are to this business, if the seller tells you the sale price was $100K, he received $20K down and is carrying a first position note for $130K, you have to ask how that could possibly be! Putting it on the worksheet and telling us “that’s what the seller said it was” doesn’t fly. 4 – 2 = 2 no matter what part of the country you live in and what your experience in the note business is to date.
Price Point – A fancy term for “asking price”. This is really crucial when it comes to any pool or portfolio submission. The finance business has changed drastically over the past 16-18 months. Many loan companies and businesses are…gone…nada. As a result, certain industries (mobile homes are the greatest example) are finding that they now have to provide in house financing (carry the paper themselves) in order to move their inventory.
Problem is they don’t want to hold the paper. Historically they had a lender, sitting at that small desk in the corner of the showroom, just waiting to help a buyer complete the loan application. Loan approved, dealer is cashed out, lender has a new loan to service. Fast forward to today: No more lenders, dealer forced to carry the paper, looks for an “investor” (read: lender), expects PAR for the new note just like he received full cash value from the lender previously. Dealer simply cannot believe that there isn’t a buyer willing to pay PAR for MH paper and cash him out. Worse he REALLY can’t believe you have the audacity of suggesting they sell at the discounts the market is paying these days.
As a result the same pool(s) circulates again and again as one broker after another receives it from the seller (the same seller incidentally that swears, “You’re the only one I’ve shown this to.”). One broker after another advises that his pool has a market in the 65% range and then listens as the seller screams about the high discount and shops it over and over again. Ask the seller what he realistically expects for this pool on your very first conversation.
On individual notes it has ALWAYS been a good idea to find out what the seller’s NEEDS are to both determine if you have a realistic seller (as discussed above) but also to tell you and us which program will work best for the seller (partial, split, etc.). Few sellers understand the different options that they have to pull cash out of the note WITHOUT having to give away the farm. Explaining to a seller how a partial works will show the seller that you are interested in providing a program that works best FOR HIM. As you can see this is even more important on pools.
Why is the seller venturing outside his typical exit strategies (pools/portfolios)
An “exit strategy” is simply a fancy industry term for where/who sellers have been moving their paper to. In many industries, lenders, finance companies, originators, etc., have all the conduits, exits they can handle. Rarely do they need to go to the market or utilize outside brokers to sell their paper. When we’re presented with a pool that fits that description, it surprises us, and the natural next question is why would they be taking these notes to the market? Why haven’t they utilized their typical exits? The answer to those questions will tell us volumes about the paper and MAY save all of us a lot of time. If there are glaring “red flags” accompanying the pool it’s unlikely that we’d buy it either. Again, we might as well get all the information we can right out of the chute before any of us, brokers included, spend a lot of time on something that was doomed to fail from the start. Once you recognize that there is a well established “good old boy network” for certain pool types, this question will make sense to you and it should be the first thing that comes to mind when one falls in your lap. I’m not telling you to look a gift horse in the mouth, just ask yourself why have YOU been so lucky to see something that typically never leaves the standard conduit? We asked a broker this question a few months ago. He became very upset, frustrated that we had the audacity to ask a few questions in our effort to get to a reasonable price point. His response? “What a stupid question…how about, BECAUSE THEY CAN!”. Professional…very professional.
How long has the paper been shopped?
The length of time a note or a pool of notes has been on the market speaks volumes about the quality of the paper, as well as the seller’s realistic expectations (or lack thereof) for the note(s). Any note or pool of any quality will be bought right out of the chute. If it’s quality paper and it’s making the rounds, then the seller is likely unrealistic (see above). If it’s junk, well that speaks for itself. The problem typically is that sellers will rarely tell you how many investors they have presented it to…again, as discussed above, many sellers have no problems telling every broker they send it to that “You’re the only one I’m working with.” Bottom line is ASK. When you determine that the seller has shopped it around pretty well, ask them why it hasn’t sold? Again, you’ll likely get a song and dance, but, on occasion some of the information might be useful.
How long in business at this location? (business note)
A business that has just opened has not had the opportunity to develop a steady clientele (Even more so for hospitality industry businesses-cafes, deli’s, etc.). We typically want to see a business open at the same location, operating and profitable for at least 3-4 years. Submitting a note secured by a “start up” will not be considered for acquisition.
What experience does the buyer have in this business? (business note)
Does the buyer have any history in running this type of business? Did he leave 9-5 to pursue the “American Dream” of owning his own business? Too many people dying to run their own business have, unfortunately, the wrong idea of what running your own business actually involves. Showing up on Tuesdays and Thursdays and golfing three days a week is not the typical schedule of the small, business owner.
Try being the first to arrive and the last to leave seven days a week. For many new owners with little to no actual business ownership experience, 9-5 starts to look pretty good after a while and many walk from their new venture. Then we have a default on our hands. On any business note we’d like to know the Payor’s background in THIS type of business. If it’s a new venture for them, it’s likely we’ll want to minimize our ITV or possibly pass altogether.
Obviously these issues are just the tip of the iceberg when it come to our due diligence. However, the more time saved early on, the greater YOUR return on time invested. None of us has any time to waste, so the better prepared you are when coming to us with a potential deal, the faster we can get it closed and put a check in YOUR pocket.
Ed Lisogar is the President and CEO of National Capital Corporation, Scottsdale, Arizona. NCC has been a principal investor in cash flow nationwide since 1993. He is the best selling author of “Cash Flow Correspondence” and “The Business of Business Notes.” His newest book is “Secrets of a Successful Cash Flow Consultant.” You can view all underwriting criteria for their buying programs at www.nationalcapitalcorp.com