HOW TO GATHER ALL THE INFORMATION YOU NEED TO BROKER OR BUY NOTES FROM HEDGE FUND COMPANIES Whether you are buying a note for yourself, with another investor or brokering a note to someone else, you need to gather and organize specific information so that an informed decision can be made. After years of trial & error and at a cost of thousands of dollars, NoteSchool has streamlined and simplified the process of working with Hedge Funds. This Guidebook takes you step by step through this process using our latest forms and sample documents as examples. wwwwww.mwww.NoteSchool.com All Riwww NoteSchool Guidebook January 2013 NoteSchool.com All Rights Reserved Overview This guidebook is being provided to assist you through the process of working with and gathering information from potential note sellers. The information in this guidebook was collected from actual documentation of closed deals, NoteSchool students’ experiences and the experts from the NoteSchool faculty. Please keep in mind that this manual is a checklist to point you in the right direction using a step-by-step approach and that you will have to make your personal investment decisions based upon your investment risk tolerance, personal valuation and individual goals. This guidebook has three parts. The first part is a simple checklist; the second part is a detailed expansion of that checklist and the third part is a breakdown of our streamlined executive summary. All content is protected by copyright and may not be used without written permission. Copyright © 2013 THIS PUBLICATION IS DESIGNED FOR INFORMATIVE PURPOSES ONLY IN REGARD THAT THE SUBJECT MATTER COVERED. IT IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICE. THE PUBLISHER SHALL NOT BE LIABLE FOR ANY DEBTS, LOSSES, CLAIMS OR DEMANDS RELATED TO THIS PRODUCT. IF LEGAL ADVICE OR OTHER EXPERT ASSISTANCE IS REQUIRED; THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. www.NoteSchool.com All Material Protected by Copyright © 2013 Table of Contents Overview .....................................................................................................................................1 Part 1: The Checklist ....................................................................................................................3 Part 2: Detailed Breakdown of the Checklist ................................................................................5 Getting Assets from Hedge Funds............................................................................................5 Their Spreadsheet ...............................................................................................................6 Their Loan Description .........................................................................................................6 Their Pricing Expectations ...................................................................................................6 Getting Documentation from Hedge Funds .............................................................................6 Collateral File ..........................................................................................................................7 The Note .............................................................................................................................8 The Security Agreement ......................................................................................................9 The Insurance: Property and Title ......................................................................................11 Credit Application ..............................................................................................................13 HUD-1 Form or Settlement Statement ...............................................................................14 Complete Payment History ................................................................................................15 Picture of the Property ......................................................................................................17 Previous BPO’s ..................................................................................................................18 Payor Information .............................................................................................................18 Examples of other documents ...........................................................................................20 How to Complete the Executive Summary ................................................................................23 Executive Summary Detailed Points ......................................................................................23 Part 3: Sample NoteSchool Executive Summary ........................................................................27 www.NoteSchool.com All Material Protected by Copyright © 2013 Part 1: The Checklist    Getting Assets from Hedge Funds o Call to/from an asset manager o Spreadsheet of assets via email o Loan descriptions via email o Pricing Expectation of asset What documents to ask for first o Collateral File o Credit Application o HUD-1 o Complete Payment History o Picture of the property (Very Important) o Previous BPO’s o Payor Information How to fill out the Executive Summary o Property/Collateral Address o BK Status? o TX HELOC? o Foreclosure law o Is this a 1st position lien loan? o Status? o Is there a 2nd position loan? o Total Property Tax Due? o Total other liens? o Original Balance? o UPB? o First payment due date? o Last payment due date? o Interest Rate? o Original Term o Payment Amount o Remaining Payments o Pay History o Total SF? o Living SF? www.NoteSchool.com All Material Protected by Copyright © 2013 o o o o o o o o o o Beds/Bath? Construction type? Year Built? Value (one of the most important items on the document) Property Condition? Emotional Equity? Occupancy? Property Type? Demographic and economic information Photos of the property www.NoteSchool.com All Material Protected by Copyright © 2013 Part 2: Detailed Breakdown of the Checklist Getting Assets from Hedge Funds Some Hedge Funds have hundreds of asset managers and are often inconsistent as to how they would like for you to register with them. The bottom line is to be proactive. Think of these account or asset managers as independent contractors who make money when people close deals. If your email goes unanswered, call instead; if you call and don’t hear back, call again. You can work with more than one account manager! So, keep at it until you find one or two account managers that you like to work with. That being said, as of this writing, we recommend that you get started by both calling and emailing the hedge fund. Once you have contacted an asset manager, they will gather information over the phone or in writing about what type of assets that you are looking for. Most hedge funds deal in nonperforming, re-performing, and performing notes and have hundreds or even thousands of assets available. In addition, you can specify: vacant or occupied, in bankruptcy, preferred states, asset value range and more. You don’t have to limit yourself but you don’t want to get overwhelmed either. So think about what “space” in the note industry that you would like to pursue at this time and narrow the field to that. You can always expand your business and investment strategies later on. In addition you will need to sign a non-disclosure agreement as many of the documents that they will eventually send to you have personal or confidential information on them. www.NoteSchool.com All Material Protected by Copyright © 2013 Their Spreadsheet The spreadsheet, or “tape”, you receive from hedge funds will vary but almost all of them use Excel so if you don’t have Microsoft Office with Excel, get it. These spreadsheets are filled with information and may include all or some of the items listed below:        Property address Borrowers name BPO value Property type; single family, mobile home, multi-unit All note information: interest rate, term original balance, current balance, last payment, payment amount etc. Current disposition: performing, non-performing, re-performing Other liens on the property and the amount of those liens Their Loan Description After you review a “tape” and have narrowed down your search to the best potential deals for your investment criteria, you will contact the account manager for a loan description. This loan description will give further information on the assets you are considering buying. Think of the tape as a 10,000 foot view and the loan description as a 5,000 foot view. From the 5,000 foot view, you should be able to further zero in on your target (s) by taking a closer look at the data and starting a more focused due diligence process. Their Pricing Expectations Our experience, and that of our students, is that most asset managers will not give the pricing information at this stage however some will, so it doesn’t hurt to ask! Remember, be proactive! You don’t want to end up spending a lot of time on an asset that they are asking too much for. Once you have had a chance to review the basic information about the assets list they sent, you should ask for the following additional documentation detailed below. Getting Documentation from Hedge Funds Once again, some hedge funds have hundreds of asset managers and thousands of assets so expect inconsistency. For example, not all asset managers are forthcoming with information unless you specifically ask for it. Other times, your requested information may not be available. www.NoteSchool.com All Material Protected by Copyright © 2013 Note: We have had and are having students make a lot of money working with hedge funds whose asset managers are less than easy to work with. Our top performers always approach it knowing that things are not going to be perfect and that they will have to be proactive and persistent because the end reward is good. As they saying goes; “successful people are willing to do what unsuccessful people are not”. Below and on the following pages, we will highlight the initial documents and files that you should request. Note: Whether you are buying the note for yourself or brokering it to another investor, NoteSchool has designed an Executive Summary template that we highly recommend that you use. The template prompts you to fill in all the necessary information that a note buyer needs. If you can’t fill out the template, you are not ready to buy it or broker it. Collateral File The collateral file normally contains a copy of the note, the security agreement and proof of insurance. You should familiarize yourself with these documents. In this guidebook we will simply show you the top portion of the documents but we recommend that you review the documents in their entirety. In addition to the collateral file, the hedge fund may have an ownership and encumbrance (O&E) file. This file contains the record of ownership documents, such as a Deed and information on tax liens or other liens. An O&E report is not an extensive search like a typical Title Search so do your own due diligence. Because hedge funds have their own way of distributing information, we have also added the additional document that you should request which may or may not be in their collateral files. www.NoteSchool.com All Material Protected by Copyright © 2013 The Note The note should be a copy of the original and any and all modifications. A screenshot of the top portion of a note is below. Note: Sensitive data such as account numbers have been blacked out by the author but will appear on the documents you receive from the hedge funds. Remember that you signed a nondisclosure agreement. www.NoteSchool.com All Material Protected by Copyright © 2013 The Security Agreement The security agreement will be in the form of a Mortgage or a Deed of Trust. This is the document that collateralizes the property. In addition this document will let you know, if you have to foreclose, if it will be a judicial or non-judicial foreclosure. When buying a note it is always a good idea to know the foreclosure laws of the state in which the property is located ahead of time. There is a difference in both time and money when it comes to judicial and non-judicial foreclosures. There are numerous sources on the internet for this information. A “blacked out” top portion example is below. www.NoteSchool.com All Material Protected by Copyright © 2013 There may also be an Assignment of Mortgage. The sample below clearly shows that “Capital Corporation” was assigned this asset from “Mortgage Corporation”. Even blacking out the actual company names, you can see that this is a typical deal where a hedge fund bought a note from a mortgage company. www.NoteSchool.com All Material Protected by Copyright © 2013 The Insurance: Property and Title The property insurance will be the property owners or the mortgagee’s forced placed policy. Below in the sample, you see a portion of the declaration or evidence of insurance and that it was put in place by “Capital Corp”, a hedge fund. Note: Forced placed insurance only covers the current lender. The new note buyer would need to get their own insurance. www.NoteSchool.com All Material Protected by Copyright © 2013 In addition, you will need to see if the Title Insurance is verifiable. See the sample below. www.NoteSchool.com All Material Protected by Copyright © 2013 Credit Application Sometimes this document may not be available but don’t worry, it’s not the most important document. Normally this will be the original application they completed when they first applied for the loan and since it became a hedge fund asset we can assume, they defaulted on payments at some point. Below is a portion of the universal residential loan application (also known as a 1003 or “ten-othree” in the lending world) which is the most commonly used application. www.NoteSchool.com All Material Protected by Copyright © 2013 HUD-1 Form or Settlement Statement These forms have nothing to do with HUD properties rather they are closing forms that are simply approved by the Department of Housing and Urban Development. Since they are approved by HUD they are widely used. In some areas they are called HUD-1’s in other areas Settlement Statements. These closing documents summarize the financial transaction for all parties involved. A portion of one is showed below. Arrows added by author for emphasis. The “HUD-1” name comes from the bottom of the form: www.NoteSchool.com All Material Protected by Copyright © 2013 Complete Payment History These can come in a few different formats and will require that you go through them in detail. Ultimately you will need to know when they started paying, the percentage that they paid each month, when they stopped paying and when they started paying again! It’s not as easy as it sounds and at NoteSchool, we have additional examples and education on this topic. A portion of a report is below and as you can see there are unapplied payments, late fees, foreclosure attorney fees etc. You will have to learn to read these and account for the percentage and amount of the payments. www.NoteSchool.com All Material Protected by Copyright © 2013 Here is another look at a different format. Again, we have training for this. www.NoteSchool.com All Material Protected by Copyright © 2013 Picture of the Property This is self-explanatory but it is important. Eddie Speed coined the phrase “emotional equity” and if you have been to our live training you have heard that over and over. It is hard to measure how much emotional equity is worth but it does give you an idea of where the borrower stands. Let’s face it, if someone is delinquent on their loan but they are still maintaining the landscape, and the exterior (all we can see from the picture) chances are they want to stay in the property. If they didn’t want it chances are they would have already moved- that’s not always the case as some people are just waiting out the inevitable foreclosure sale date- but no doubt it gives you a sense of the borrowers mindset. In the picture below, you will see that the landscaping is being maintained. The exterior of the property looks nice and well maintained. The windows are intact, the roof looks good and it looks like there are toys in the yard. www.NoteSchool.com All Material Protected by Copyright © 2013 Previous BPO’s The file may or may not have previous broker’s price opinion (BPO) from when the borrower applied, refinance, modified or even one that was requested when the hedge fund was buying the note. It is historical data of course but it may give you a trend to research or might even indicate that a property was improved or neglected. Some hedge funds don’t provide or have this information available but it never hurts to ask. A full BPO for this guidebook is not necessary as we have many examples throughout our educational material. Payor Information What you are looking for here are the pieces to the story. What happened? Why did they stop paying? Did they lose a job? Are they working again? Are they paying again? How are they paying? Did they declare bankruptcy? What type? Has it been discharged? What does their credit look like now? All great questions, so how do we get the answers? Well, how do you get answers to anything, ASK! There is documentation for all of that. www.NoteSchool.com All Material Protected by Copyright © 2013 Bankruptcy In this business bankruptcy is not necessarily a bad thing; in fact, it can be a good thing. What’s important is the type of bankruptcy and if it has been discharged or not. So ask if the borrowers have ever declared bankruptcy and for the paperwork. Example below with debtors name, address and social security numbers blacked out. Attorneys and Trustees also blacked out. You can see by the added arrow that it is pretty easy to see what they filed. Additional information can be found about the bankruptcy by going to www.Pacer.gov with the case number. Other information to ask for Find out if the following if you can: o o o o Credit report Employment information Why they stopped paying? How are they paying again? Are they re-employed or did they get federal or state aid? The above information may not be available from all hedge funds. www.NoteSchool.com All Material Protected by Copyright © 2013 Note: There may be additional information in the collateral file such as an Allonge, Forbearance, Modification, Title Insurance and more. Each file is unique so this booklet is meant to guide you through the basics. Once you get into a file and further into your education, you will find these other documents easy to understand. Some snippets are below (sometimes they are not always copied straight when recorded so some examples are tilted). Examples of other documents The forbearance agreement is a special agreement between the borrower and the lender to delay a foreclosure. www.NoteSchool.com All Material Protected by Copyright © 2013 A loan modification is an agreement between the borrower and the lender to alter some terms or conditions of a loan. www.NoteSchool.com All Material Protected by Copyright © 2013 An Allonge is the document that shows the chain of note ownership. www.NoteSchool.com All Material Protected by Copyright © 2013 How to Complete the Executive Summary NoteSchool created a template, currently version #4, that you can download to your computer. Once downloaded, you can use it over and over again. The reason you can do that is that when you open a template file, unlike a regular document file, the template actually opens up an exact copy. When you go to close the document it will prompt you to save it with a new name. You, of course, don’t have to wait until you close it to save it, but it will always ask you for a new name to save it under. Note: We have created an entire video where we show you how to download the template and another video where we go through completing an entire executive summary. Please watch that video. You should notice that the template “asks” you for all the information; you simply need to fill it in. In some instances there are blanks to fill in, in others, there are dropdown boxes where you just click the appropriate item and it fills it in for you. In addition, there is an area where you can add additional information that is important to your particular deal. Although we have videos on this form, it doesn’t hurt to reemphasis certain key things in this guidebook. So below is a further breakdown of what the form entails. After the breakdown is a copy of the executive summary template. Executive Summary Detailed Points   Property/Collateral Address Bankruptcy Status? o Currently Yes or No  Any time in the past? o What type?  Chap 7 or 13? o Status  Dismissed?  Discharged?  Paying per plan (13)?  Length of the plan?  Debt Affirmed (7)? www.NoteSchool.com All Material Protected by Copyright © 2013                 o Arrearages payments?  Amount?  Term?  Rate? o Info from PACER? TX HELOC? o Determines Foreclosure timeline Foreclosure law o Normal Foreclosure type in particular state Is this a 1st position lien loan? Status? o Performing/Re-Performing/Non-Performing Is there a 2nd position loan? Total Property Tax Due? o Are the taxes paid and current? Total other liens? o Homeowner Associations, IRS, etc. Original Balance? Un Paid Balance (UPB)? First payment due date? o On original loan Last payment due date? Interest Rate? o Current (not previous) Original Term Payment Amount o Current (not previous) o Only Principal and Interest Remaining Payments o How many payments remaining? Pay History o Plot out pay the history on Executive summary. Do not cut and paste it into the document o If a performing/re-performing loan only show a percentage of the amount due (i.e. 100%, etc.). Not the actual payment amount  Principal and Interest Only o Non-Performing, show 0% www.NoteSchool.com All Material Protected by Copyright © 2013             Total SF? Living SF? Beds/Bath? Construction type? Year Built? Value (one of the most important items on the document) o List what you believe the BPO value would be if one were to be done. This is value you have determined from your research and due diligence  Zillow, Eppraisal, Trulia etc.  Call Local Realtor  CoreLogic, etc. o List a single number not a range. o If the value is too far off, this may kill a deal Property Condition? Emotional Equity? Occupancy? Property Type? o SFR o Modular Home o Mobile and Land o Multi-Family o Etc. Demographic and economic information o High Crime vs. Low Crime o Median income o Unemployment rate o Education Level o Vacate properties o Board ups o Burn outs o Ghetto vs. revitalized Photos of the property o Very important that you see the property condition. Always check the dates of the photos as well. www.NoteSchool.com All Material Protected by Copyright © 2013  “Click here to enter text” o Another extremely important area. This is where you put all the information that doesn’t have a home on the executive summary template. Show the investor the complete picture of the deal:  Pricing expectation  Bankruptcy information  Borrower information  Anything information that may affect the deal  Anything strange about the note, modification, payor, or property?  If in BK 13, Arrearage payment info.  Timeline for the sale of the asset.  Links to Aerial view of property  Google Earth  Bing www.NoteSchool.com All Material Protected by Copyright © 2013 Part 3: Sample NoteSchool Executive Summary Note Information Property/Collateral Address: Click here to enter text. BK: Choose an item. Is this a Texas home equity loan: Choose an item. Foreclosure law: Choose an item. Is this a 1st Position Loan: Choose an item. Status: Choose an item. Is there a 2nd position loan: Choose an item. If yes, balance: $ Click here to enter text. Total Property Tax due: $ Click here to enter text. Total other liens due: Click here to enter text. Original Balance: $ Click here to enter text. UPB: $ Click here to enter text. First pmt date: Click here to enter a date. Last pmt date: Click here to enter a date. Interest Rate: Click here to enter text. % text. months Original Term: Click here to enter Payment Amount: $ Click here to enter text. Does this include Taxes and Insurance: Choose an item. Remaining Payments: Click here to enter text. If you have a payment history, enter it below Year: Jan: Feb: Mar: Apr: May: Jun: Jul: Aug: Sep: Oct: Nov: Dec: 2011: % % % % % % % % % % % % 2012: % % % % % % % % % % % % 2013: % % % % % % % % % % % % Property/Collateral Information Total SF: Click here to enter text. Liv SF: Click here to enter text. enter text. Construction type:Choose an item. Beds/Bath: Click here to Year built: Click here to enter a date. BPO value: $ enter value. Website value: $ enter value Researched as-as value: $ enter as is value www.NoteSchool.com All Material Protected by Copyright © 2013 Quick sale value: $ Click here to enter text. Retail value: $ Click here to enter text. Property condition: Choose an item. Emotional Equity: Choose an item. Occupancy: Choose an item. Property Type: Choose an item. Neighborhood Information Violent crime: Choose an item. Property crime: Choose an item. Unemployment rate: Choose an item. % Homes owned: Choose an item. % % Homes rented Choose an item. % Household income: $ Choose an item. Average rent: $ Choose an item. Median Home Cost: $ Click here to enter text. Based upon Google Earth viewing, how do you rate the neighborhood? Choose an item. Comments Click here to enter text. Picture (s) Contact Information Click here to enter text. www.NoteSchool.com All Material Protected by Copyright © 2013