The procedure is largely the same whether you’re buying mortgage notes, business notes, or any other notes. The differences lie not in finding the notes from the banks but later in the evaluation of the borrower and the collateral.
The first thing we are going to talk about is a common misconception amongst beginners about how you go about finding notes to buy.
Non-Performing Notes at Banks Aren’t Publicly Listed
What people start looking for online when they get excited about finding non-performing notes at banks are listings of the actual notes. This just doesn’t happen. Banks will report when they have filed a Notice of Default but by then it’s often too late to get at the note. The only way to get a list or a “tape” of notes is from the seller. This is a people or a relationships business.
That means that you are going to have to find and connect with the right people if you want to do deals. There’s no way around this. Over the last decade I’ve heard from countless people who are frustrated that they’re not getting a list of notes from our software or elsewhere on the internet.
There is no such list – anywhere. You must connect with the decision makers if you want to do deals. Period.
Buying notes from banks is more work than buying notes from brokers, hedge funds, or marketplaces but it also provides the best returns and the most flexibility in terms of strategy which means that you have the most options for how to profit.
Here’s what’s covered in this guide:
Buying Performing Mortgage Notes from Banks.
If you’re looking to buy performing notes… banks probably aren’t your best bet unless your name is Fannie, Freddie, Goldman… Morgan… etc.
Occasionally banks will have performing commercial notes that are simply “out of covenant” which means that even though the borrower is paying they have broken another rule or stipulation in the note.
There are also occasions where a note is still being paid but it no longer fits in the lender’s “box”, banks will sell these performing notes.
Sometimes banks hold “portfolio loans”, typically non-conforming loans that they went ahead and made anyway and they hold in their portfolio. You may find these for sale but making a whole business out of buying them would be tough.
Banks bundle and sell pools of performing notes in the secondary market or hold the notes on their books as whole/portfolio loans for interest income.
Non-performing notes, on the other hand, can weigh heavily on a bank’s balance sheet. When banks have non-performing loans they have to set aside cash for future losses which cannot be used for investments.
Buying Defaulted or Non-Performing Mortgage Notes from Banks.
Non-performing notes typically end up in a workout or special assets department or in much smaller banks with the originators. Workouts and default servicing takes manpower.
The non-performers are a drag on the bank in every way.
We focus on buying notes directly from banks and credit unions and you can read in detail about the 4-step process here and elsewhere on this site.
Why Do Banks Sell Non-Performing Notes?
Banks sell non-performing loans for any number of reasons. Here are some of the reasons I’ve seen.
Banks sell notes to avoid unknown liabilities.
Sometimes a lender will have a non-performing note on an asset, like a gas station or an old factory where they don’t want to foreclose due to the possibility of the existence of environmental contamination of the land.
Once a bank gets into the “chain of title” there’s the possibility that they open themselves up as a target for future liabilities, litigation, etc. A smart (and litigious) person goes after “the money”. Obviously, that’s the bank.
If you can think of reasons that the bank might not want to get into the chain of title then so can they. A site could be clean but if the perception is that it might be a liability then the bank may choose to avoid a foreclosure.
Banks want to avoid excessive legal costs and long foreclosure processes.
Different municipalities have different laws regarding foreclosures. If a bank has a pool of non-performing loans in an area where they’re likely to have a long, drawn out foreclosure process they might deem it more advantageous to sell the note.
Banks don’t always have the same flexibility and workout options as private investors.
Banks don’t always have the same kind of flexibility that you and I would have in terms of how we would approach a loan workout.
Remember, banks are highly regulated, that means that “the box” within which they must work to “rehab” or restructure a loan is not as malleable as that of a private investor or fund.
You or I can do any workout on a loan that we see fit. Banks and servicers have much tighter controls.
Selling non-performing loans is faster and cheaper than foreclosing on and selling REO.
A bank can sell and close on a non-performing loan sale in under a month. That means they’re able to refill their coffers and eliminate man-hours, legal fees, compliance costs and months of effort.
Consider what’s involved in foreclosing on a property, “booking it in” (meaning that they buy the note back at auction), then listing it and selling it.
- Legal fees for notices
- Auction fees
- Property preservation costs
- Municipal compliance costs
- Realtor fees
- Market price risks
The list goes on.
Once a bank adds up all the costs and time that it can take to deal with foreclosing on a lot of non-performing loans you can see pretty quickly what the advantages are to simply selling notes.
There are other reasons banks and servicers will sell non-performing loans but I think you get the point.
Next, we will go over the worst and the best ways to buy notes directly from a bank.
The Worst Ways to Buy Non-Performing Notes from Banks.
1) Calling on the Big Banks – One of the questions I get from new note buyers is – “Can I buy notes direct from (Bank of America, Wells Fargo, Chase, Citibank, US Bank, PNC) [other BIG bank]?” The answer is “Probably not”. The problem is that your purchase doesn’t move the needle.
Big banks sell big pools to big players for the most part. There’s no low level special assets person who is going to sell you borrower Dick Johnson’s mortgage.
Inevitably folks who pursue the big boys get frustrated and go over to the BiggerPockets forums and say “it doesn’t work, banks don’t sell notes” and then a bunch of other people who also have absolutely no idea what they’re talking about or how the business works chime in and agree. And that’s just fine for us, less competition ;)
2) The Bottom Up Approach to Buying Notes from Banks – One approach I see a lot is the investor will find a struggling homeowner and will try to parlé that find into a note purchase through the debtor’s lender. This isn’t a total fail if you happen to be working with a borrower who has a portfolio loan with a local, regional or community bank, but this won’t work with the big banks.
I’ve heard of people (who have heard of people) who say they know a guy…. And that they’ve been able to buy notes this way but I’ve not heard one single first-hand account of an independent buyer buying a single residential note from a Top 10 bank – not one.
If you have personally had success with this approach we’d love to hear about it in the comments.
Buying Non-Performing Commercial Notes from the Big Banks
I do have experience and know others who have experience working with regional small balance commercial loan workout teams at the big banks. These commercial workout folks often have the ability to sell, even one-off, commercial notes. This is not the case for residential.
Buying Notes Direct from Banks
The best and most reliable way to buy notes direct from banks is to begin with the decision makers at your local, community and regional banks and credit unions.
Buying notes from banks is essentially a B2B sale. You are in business and they are in business. They have a problem and you have a solution. You need to find the right banks and then find decision makers.
The Best Ways to Buy Non-Performing Notes from Banks.
Find local, community, and regional banks that have the types of notes you want to buy.Banks file reports each quarter that give us surprisingly deep insight into which banks are selling notes and which aren’t. We use these reports to find the real sellers and then we use a collection of other resources to find decision makers.
Call as high up in the bank as possible and have the decision makers direct you to the people who are responsible for selling notes. This person’s title or the department’s name will vary from bank to bank depending on the size and to some degree the locale. We have a complete list of titles in the Academy. The smaller the bank and bigger the credit (credit = bank-speak for note) the higher up the chain the decision will be made.
You need to get an understanding of their note selling process. Some banks will have a dedicated trading desk. Some really small banks will have the “line” (loan officers) handle their own workouts. Some banks will have direct involvement from top officers. You don’t know how any one particular bank handles their note sales and workouts until you call, speak to a decision maker, and ask.
Tip: Banks do very little without legal counsel. Find out who the attorneys are in you area who do most of the bank work and get to know them.
If you’ve done this part right then at this point what you want is to ask the bank to send you what a lot of people in the industry will call a “tape”.
Note Buying Due Diligence.
A tape is simply a spreadsheet with the loan numbers and other pertinent information about the notes that the bank is going to sell.
Again I’m going to give you some broad strokes here so that you can gain a better understanding. At this point you’ve received a “tape” which is just a spreadsheet of notes with pertinent borrower and collateral information.
The types of due diligence you need to perform ties tightly in with the note buying strategy that you’re pursuing. Buying a multi-million dollar “loan to own” single, small-balance commercial note on which you intend to foreclose as promptly as possible requires a very different due diligence process from evaluating 100 non-performing junior liens that you’re buying for 6 cents on the dollar that you intend to “Rehab” and modify.
So here’s the first question I want to answer for you.
Which Banks Sell Non-Performing Notes.
We cover this in depth in a number of places on this site so I’m going to give you an overview plus some links to additional resources.
Start with Local and Regional Banks
Since you’re reading this article I’m going to assume that you’re just getting started. Since that’s the case I’m going to ask you to focus on your local, community, and regional banks first.
Banks like Bank of America, Chase, Capital One, Wells Fargo… these are the major players. What are you going to be able to offer them? They are so big that there are no deals you’re going to be able to put together that will move the needle for them.
They have layers of bureaucracy and management.
The people you’ll be able to speak with will not be decision makers.
How do you get a deal done in an environment like that? You won’t.
With few exceptions I strongly suggest that you start small.
Identify the banks that are most likely to sell non-performing notes
When I first started out selling non-performing assets for banks I used the shotgun approach. There were more than 330 banks headquartered in my area at the time and I simply smiled and dialed.
Waste. Of. Time.
It wasn’t until I discovered how to properly research my prospects and identify the most likely sellers that I finally had a breakthrough.
We have a free training that you can jump on here where you can learn about how to see what a bank has in their portfolio, whether or not they have motivation or capacity to sell at a discount and much more.
Identify and Call on the Decision Makers at the Banks
Deals get done between people. When folks are just getting started they’ll often look for an easy button. They want to be able to call a department at the bank where someone answers and says “Yep! I’ll sell you our non-performing notes at pennies on the dollar!”. That’s not how it works.
Your local and community banks are small business and that’s how they’re run. There are decision makers, processes, meetings, and lots of staff involved. Your job is to identify and then connect with the right people.
That’s all I’m going to cover about that in this article but check out the two resources above to go deeper on this.
What kinds of non-performing notes will banks sell?
Banks sell all kinds of non-performing notes. The most successful note investors that I know tend to focus on individual asset types.
The workout on a non-performing note on with a single family homeowner who lost his job and is behind on his payments is completely different from working with a business owner who is struggling to pay the note on a commercial property where he runs his business which is completely different from auto loans, which is different from unsecured credit cards etc.
Find Your Niche
You may also find that it makes sense to limit your search geographically. It’s hard to be an expert everywhere so you need to find your niche in the marketplace
Some “niches” where I’ve seen investors be successful are:
- First position residential notes
- Junior or second position residential notes
- Gas station and convenience stores
- Office properties
- Hotel and other hospitality properties
- Owner occupied commercial – where the owner runs his business from the property
- Consumer credit cards
All of these and more can be profitable it’s all a matter of what assets and areas you understand or you’re willing to learn about and the systems and processes that you setup for your business.
Will banks sell individual non-performing notes?
This is probably the number one question I get from new people.
The answer is “it depends”.
When you’re buying non-performing notes from a bank you have to ask yourself – “what’s in it for them?”
If you’re trying to buy a single residential note from Bank of America, Wells Fargo etc., ask yourself why would they do that? Your purchase won’t move the needle for them. It will require that they do things that are not part of their normal business routine. There’s no benefit to the bank whatsoever.
If you’re talking to a small local or community bank, the equation changes. A small pool of residential notes, a commercial property note, or even a single residential note might actually make a difference to them if they can get it off their books.
But maybe you need to change your thinking.
There is virtually endless demand for non-performing notes from investors out there today – so why would you go looking for one note!?
What if instead of cramming yourself into this tiny box with the limiting belief that you should be looking for one note, what if instead you found a pool and you kept the best one and flipped or sold the rest to other investors?
The truth is that if you’re going to bother picking up the phone or sending emails to find non-performing notes from banks you should be looking for as big a pool as you can find.
If you find yourself for some reason unable to move the ones you don’t want to keep you can just let us know… we have literally billions of dollars of appetite for these assets as do many other companies in the space.
If all you want to do is buy one note for yourself as an investment calling on banks isn’t the right approach. Use one of these other sources.
You’re just going to have to contact them and find out!
Here are some clues to help you speed up your search.
Banks report a couple of indicators that can help us make sense of what’s happening in their portfolios and what levels of motivation they might have to sell. The key indicators that we look at are:
- Non-Accrual Loans Sold – Banks report the nonaccrual loans that they sell throughout the quarter. Wouldn’t you think that banks that have a history of selling nonaccrual would be more likely to sell in the future? At the very least we know that they have a process in place.
- Late and Non-Accrual Loans Held for Sale – Banks report the total volume of late and non-accrual loans that they’re holding specifically in a “bucket” for sale
There are other indicators we look at like the non-performing loans to loans ratio, whether or not they’re taking charge-offs, and more. You can go deeper on this with our free training or if you’re really serious then you might checkout the Academy.
Who are the decision makers at banks that sell non-performing notes?
The exact titles of the decision makers vary from banks to bank.
Smaller banks could have decision makers all the way up to the president involved in the sale of certain non-performing notes.
I worked with one community bank in Massachusetts where the president was involved in a $5MM commercial note that had gone sideways on them. Bigger banks have entire departments assigned to their note sales.
The main things to keep in mind when you start calling banks for non-performing notes are:
- Call as high up in the organization as you feel is reasonable. At big banks you obviously won’t be talking to the president. At smaller banks you will. Wherever you’re calling – call as high up as seems reasonable.
- Call with a name. Don’t call in and ask for the person in charge – please. This shows that you have no idea what you’re doing. You’ll get endless voicemail at best. Do your research up front to get a name, an email, and hopefully a direct line for the person you suspect is the decision maker.
Know that almost everyone at a bank gets a VP title: AVPs, EVPs, SVPs – they’ve got VPs on top of VPs. Titles you might find attached to the VP are secondary marketing, workout, credit… one bank I worked with setup a whole other organization with different business cards and all with the company name “Global Restructuring” and their VPs carried similarly obtuse titles that wouldn’t actually tell you what they do.
I hope that this step-by-step guide on how to buy notes from banks has been informative and helped you along your way to buying your first note.
Try BankProspector if you are looking for an updated list of deals in your areas or if you would like to get further training in this industry, apply to the Academy.