You are buying a note and while doing your due diligence, the dreaded happens, the appraisal comes in low. Then you have to call your note seller and inform them of the new development. If you have been in the note business any amount of time then you have heard your note seller says things like, “that appraisal is WAY off,” or “my property is worth way more than that” or “your appraisers don’t know the market or what they are doing!” As good note professionals we have to remain calm and explain our position to them and try to salvage the transaction in some way, shape or form.
Perspective is the way individuals see the world. It comes from their personal point of view and is shaped by life experiences, values, their current state of mind, the assumptions they bring into a situation, and a whole lot of other things. Reality can be different things. Some people say, “my perspective is my reality”. There is some truth to that statement. When we look at the shared reality of an event, though, the more perspectives you get, the closer to reality you get.
When purchasing Seller Financed Notes and considering the value of the property securing the note, no matter what type, it seems that every party in the transaction (seller of the property, buyer of the property and note investor) has their own perspective. Let’s take a look at the three parties’ perspectives so we have a better understanding of each person’s own reality which will hopefully in turn help you become a better and more knowledgeable note professional.
Real Estate Value from a Sellers’ (Note holders’) Perspective – In short, a seller of any property is usually heavily invested in the property and believe it is worth more than it really is. It is human nature to want to squeeze the highest price out of the sale of a property. Whether it is a person who has owned a property for 30 years, an investor selling his first rental property or a fix-n-flipper selling his spectacularly remodeled property; all property sellers are emotionally invested in their properties. It is very easy to lose sight of the fact that a seller has a reason for their actions just like we have a reason for our actions as a note investor. For the rehabber, there is the fine line of not “over-rehabbing” the property based on its’ location and eventual value, but sadly, many do. Upgrades in appliances, finishes, flooring and finishing effects seem to be easy answers for a rehabber but may not match the neighborhood and make it hard to find true comparable properties to justify the perceived value in the rehabbers’ mind.
Being able to quickly understand their motivation for selling and seeing the process from their perspective will be a paramount ability for a note investor to make note purchases. Note investors will have to work with note sellers that may not be realistic in their pricing expectations for their note. This can be very frustrating and I have seen many note investors make mistakes in this process because they fail to consider that the seller has their reasoning. Sometimes they walk away when a deal is very close and other times note investors give a little more than they should because they really want the note and are afraid of losing the deal. It is our job as note professionals to think about the sale of their note from a different angle and get to the bottom of what the seller really wants and needs. This will help the note investor get to the bottom line quicker and either make a deal or move on.
Real Estate Value from the Buyers’/Payors’ Perspective – There is always one person (often overlooked) in the equation that will help you determine if you are making good decisions as a note investor. The buyer of the property. Much like taking a picture from a different angle or with a different filter can create a different image, considering your note purchases from the property buyer’s (payor’s) perspective can have tremendous benefit. Not only can it help you to improve your negotiation skills, but it can also help you to win more deals and help you to create more demand for your services.
For a note investor it is always about the numbers. No question about it. But if you can improve your numbers by taking the time to learn about how the buyer of the property feels about their purchase and the property they are making payments on as part of your due diligence (by doing a payor interview) and view the note and property from all angles; well, that could be all the tweaking your note business needs to lead to monumental changes!
Real Estate Value from the Note Investors’ Perspective – As value-based investors (vs speculative investors) a typical Note Investor seeks an investment that provides current income, preservation of capital and growth potential with minimal risk. The typical Note Investor seeks a relatively safe, secure, trouble-free, cash flowing investment. When purchasing a performing note (this applies to non-performing as well) the value of the collateral is a determining factor of risk, safety, comfort and pricing. Note sellers’ (especially rehabbers) may provide a note investor with a CMA (Certified Market Analysis) or BPO (Broker Price Opinion) report from a realtor that they paid for directly and talked to the realtor (and possibly influenced) to find the highest value comparable properties because that helps their cause to sell their property for the highest possible price. It is nice information but may or may not be impartial. I will also add that online sources such as Zillow, Trulia or other are NOT reliable or realistic sources of real estate value at all for note investors.
As note investors we need an independent, disinterested third party to give us the true market value of a property in any given area. By ordering a drive by appraisal or BPO from a nationwide service it gives the note investor the most neutral, unbiased and fair value of the property securing the note. When looking at the real estate value from a note investors perspective the impartial and realistic market value is the value that is desired. It may be true that a property is worth what someone is willing to pay for it. But, if a note investor needs to foreclose, take back a property and resell it, they are not going to wait for a property buyer to pay an inflated price, rather they are going to sell it as quickly as possible.
We live in a world that goes fast and where people do not always take the time to step back, observe and think. When going fast, note professionals often confuse their perspectives with reality and have difficulty truly understanding the point of view of others. A perspective is not right or wrong by default. It just is what it is: the point of view of a single person based on their life experiences and values, among other things. We each have one; sometimes we share it with others, and sometimes we do not. In a note purchase transaction, take the time to understand each of the party’s perspectives on the value of the real estate collateral and use that knowledge to become the best note professional you can be. Hope this helps! Remember success demands action, keep on marketing, it’s going to work! TWITA! (That’s What I’m Talkin’ About!)
Jeff Armstrong of Armstrong Capital has been a note investor and broker specializing in the performing seller financed note industry since 1991. For more updated and current information on how he can help you with your note business, your note investments or to request a quote on a note you currently have visit www.armstrongcapital.com to email him and subscribe to his weekly Note-Able Newsletter.