Have you watched the TV show Shark Tank?
If you are one of the few who answers “No”, here is what happens:
A business owner pitches a panel of investors, offering a stake in his company in exchange for a financial investment. The “sharks” ask pointed questions, and if they like what they hear, someone may make an offer. Sometimes, multiple sharks like it and a bidding war ensues. Many times though, the business owner hears “I’m out.”
Why?
Maybe the business is too new. Maybe the market is not there for his product or service. Maybe the market is too crowded and too competitive. Maybe the business owner appears to be too inexperienced or not dedicated enough. Maybe he is too cocky and could be difficult to work with. Whatever the reason, the “sharks” see a business that is not investable.
Essentially, this is what we do in the note business. Given what we are being told initially, does this situation appear to be investable? Will we get our money back? Would further investigation prove that this investment is a wise one?
A few years back, a note industry study revealed that about 70% of notes in the marketplace were not investable. My own experience has that number around 50%.
Why?
Every investor will have his own criteria based on his experience, risk tolerance, etc. For example, we won’t buy notes in 2nd position. We won’t buy notes that are not performing. We won’t buy a note where the property – home or commercial – is not occupied. We may not buy a note if the property has an environmental hazard, is in poor condition, or is located in an isolated area. Sporadic payments, bad credit history or unstable employment by the payor may all keep us away.
Just like the “sharks”, we will be living with this note if we buy it. We want to feel assured that the note payor can perform according to the terms he agreed to. If we conclude he can, we are all in.
