The most expensive real estate education is ignorance. We offer the antidote.View The Course
I purposely delayed my contribution to the newsletter this month until after attending the Paper Source Symposium in Las Vegas. I wanted to talk to as many people as I could at the symposium to get a feel for the current atmosphere and the general feelings of attendees concerning this niche of the defaulted note industry and see if they coincided with my understanding of the market. My perception of the marketplace has been reinforced.
Over the last couple of years we have had a growing concern about the expectations novice note investors, and even sophisticated investors just entering the NPL arena, have about the business. We have also counseled a number of investors concerning the status of their portfolios.
Why our concern? First, we are dedicated to this business. As investors ourselves, we know the industry’s profit potential first hand. Second, we believe there are some huge misunderstandings surrounding these investments. I wanted to see if those misunderstandings and perceptions still existed. Unfortunately they do.
Because of the role we play with our clients, we feel an obligation to be straight shooters. And one of the most important aspects of straight shooting is to help the investor manage expectations. After visiting with a number of investors it is clear that there are some strong misconceptions and expectations.
While the opportunity for profit is great, the investor must be aware of the inherent risk involved. For example, I would not recommend a person with $100,000 in their IRA invest it in NPL seconds. If you are investing in NPLs, it is our suggestion you be able to spread the risk over a number of purchased notes. Unfortunately, there are so called “Gurus” out there who would recommend such an investment whole heartedly, offer you training to become an expert in six months and even sell you the notes from their inventory.
Some investors are ill prepared in their expectations for the length of time required to get results from this investment vehicle. One investor in particular quizzed me on timing. My answer was unsatisfactory to her. Why? She had attended a Meetup where one of the “gurus” was speaking. Of course the “guru” had an expensive coaching program for sale and an inventory of notes available for purchase. The investor told me the “guru” offered her a NPL second mortgage for $4000. She was also told it would probably take, with the gurus training of course, one to three months to get the loan performing. She could then sell the note for $12,000. Possible? Sure. Realistic? Of course not!
Prices are rising. There is no question that prices for NPLs have been going up and the reason is simply supply and demand. In our minds a great deal of this price rise is based on novice investors seeking to get in at any cost. A NPL has only a certain value and that value must be legitimate and based on the possibility of profit. Simply because a seller has three investors wanting to buy the same note in my mind does not make it twice as valuable as one that I am the only bidder on. We base everything on potential profitability and know how much it costs us and how long it takes to get the note back to a re-performing state.
Don’t been fooled by unrealistic expectations. Understand that this business is not “get rich quick.” Yes, there are “home runs”, but these are not to be expected. This industry is about managing borrowers; however, equally important is managing your own realistic expectations.