This may sound morbid, but it is the best description that I could use to describe a note on its way to its death. If you’ve read my book, The Paper Game, you’ll remember when I explained the word amortization, and how it derives from two Latin words literally meaning, “to the death.” In the case of ugly paper, however, that death comes a lot sooner. In fact, it is almost as if the note has a disease and is expected to die before its time. “How?” you ask?
Simple – once a payor stops paying, in most cases it is inevitable that the note is headed to its death, or in this case, to foreclosure. As we just discussed in depth, lenders and private note holders hate foreclosure for the simple reason that they lose money!
I’ve drawn a little timeline for you below, which has been segmented into different parts. Each segment represents a period of time in the life of a dying note; these are the same segments that I briefly mentioned in the discussion on foreclosure we just had. And while the length of each segment may vary from state to state, keep in mind that the steps are still the same, and happen in the same chronological order, no matter where you live. Here’s the timeline:
S&D Slow Pay Non-Performing N.O.D. NOTICE OF SALE
You’ll see that there are five distinct, different time periods that are included, all leading up to the actual foreclosure. Each of these time periods represents a different time when you can buy ugly paper, and each time period represents different motivation on the part of the note holder (lender or private note holder), as well as differences in how much you would expect to pay for the note. Briefly, they are:
Scratch & Dent: the note payer is current, but the note itself doesn’t fit secondary guidelines. Expect to pay 96-98 cents on the dollar for these notes.
Slow Paying: Self explanatory – the lender wants this loan off of the books because it is a potential problem. Expect to pay 92-94 cents on the dollar.
Non-Performing: Payor has stopped paying – foreclosure is looming. You should be able to pay approx. 80-84 cents for this kind of paper, depending on the demand in that part of the country.
Notice of Default: The NOD has been filed, foreclosure process started. Paper is starting to become a good deal at 65-75 cents on the dollar, again, depending on location of the asset.
Notice of Sale: Foreclosure is imminent! Make an Aggressive Offer!
Now keep in mind that the prices I have listed are only suggestions: lenders and note sellers will ultimately accept a price that is optimal for them, and that price may be higher or lower than what I’ve listed. They’ll vary based on the condition of the property, its location, and the amount of equity in the property. The key here is not to be greedy, but to make the transaction worthwhile for you.
