I’ll just buy the note, Thank You.

by Hook Harmeling, Senior Director

So you want to buy a note? Congratulations!  The line forms to the right.

Everyone seems to be in the note buying game, but very few are really transacting. This note buying obsession may be waning a little, but those who are late to the game tend to rely on that one example of an 80% discount that someone got back in 2009. I will say this, “You get what you pay for”.

It is human nature to want to get a “deal” on anything we purchase from a new suit to a commercial loan. But, if you have been a traditional buyer of commercial real estate, you may find the note buying business is a far cry from a traditional purchase.

Here are a few things you may want to keep in mind.

This is Not Monopoly Money – If a bank is selling you a note at a discount greater than 10%, they are probably losing real money. It may not seem that way to the “big bad bank” but someone is taking a loss. They have equity partners and overhead just like you.

No Rent Roll – Don’t be shocked when doing your due diligence when the bank does not have up to date financial information. If they are selling the note, there is usually a reason and a lot times that means the borrower is not their friend and thus not providing updated information.

Sold “As-Is” – The bank is going to take no liability and will rep and warrant very little. Rightfully so, the banks are a bit “skittish” as borrowers are throwing around lawsuits at will. In some cases they are even going after the bankers personally. So, you need to understand the other side.

Re-Trades are Part of the Business – Not to the bank they aren’t.  When making an offer, expect to close on that offer. If there is a material issue, bring it up with the bank’s representative. They may or may not know about it. Don’t be shocked when they tell you no though. Many banks are not desperate sellers.

Notes are sold on Big Discounts – Truth is most good property that a savvy investor wants to get to through a note sale, will not come with a big price discount. You generally get a discount for litigation risk and what I will call borrower’s fatigue. The banks are very aware of what their collateral is and in most cases have a very recent appraisal.

Remember that a lot of these bankers are under a lot of stress and have been for a number of years (like the rest of us). Always go into the negotiation with respect and an understanding of the other side’s position. Helping to clean up the balance sheets of banks can be beneficial on both sides, but remember you are just buying the note, not the collateral.

Want to learn more about this?  Feel free to contact Hook Harmeling, Senior Director.

Posted on by Scott Lynn in CMBS 2 Comments