The Role of Sellers, Resellers & Brokers in Debt Purchasing

In the early 1990′s, the concept of selling Judgments/Deficiencies/Charge-Offs (JDCs) took off as a result of the now almost-forgotten savings and loan failures. One inside story was the hiring of Savings and Loan (S&L) employees by the Resolution Trust Corporation, which valued their knowledge of the failed institutions’ assets, policies, procedures, customs, and practices. The RTC’S objective was an orderly liquidation of assets from failed institutions to solvent entities, which was achieved on behalf of approximately 735 failed S&Ls.

Some of the more enterprising former S&L employees and government contractors saw an opportunity to fill a growing business need by offering a similar service to major financial institutions with non-performing and charged-off debt. This sort of risk mitigation tool was a relatively new strategy for the banks, and their own employees were to a large degree inexperienced in this area. Today, most major lenders have dedicated departments that are responsible for selling non-performing assets. You would be hard pressed to find a major lender that doesn’t engage in delinquent receivables sales.

The feature that attracts profit-minded business people to this space as buyers is also a reason for the buyer to beware. Unlike real estate or stocks, bonds, and commodities, there is no organized marketplace and no responsible middleman held to rules with something tangible at stake other than his reputation. Thus, what we call a "broker" in the asset-buying industry is really the seller’s representative. The seller’s representative can usually access multiple sellers each year, and those credit issuers are generally nationally recognized volume sellers.

As A Debt Buyer You Have Three Choices: Direct Sellers, Resellers Or Brokers

Direct Sellers
If you are a first time buyer, I would suggest you approach the seller with an experienced joint venture buying partner. My company has done this many times with a great deal of success. You get the benefit of having a guide to help you avoid the normal beginner pitfalls, and you gain invaluable experience. Another suggestion if you are a contingency agency, purchasing for the first time, would be to approach your own clients. The obvious benefits are familiarity with liquidation rates and the comfort of dealing with an existing partner. Your joint venture partner would be very valuable here in assisting you to offer your client a new service.

Resellers
Resellers take the risk of ownership and may sell all or part of their own inventory. Resellers may offer portfolios for sale that have been passed through immediately upon purchase without any work being performed, or they may have an offering that has been held, worked, and re-sold at various stages. Sometimes you can buy a portfolio intact on a pass-through basis, or you may find a number of portfolios mixed together in various ways. Geography and product type are the usual breakdowns.

Brokers
To differentiate between a reseller and broker, think in these terms: a reseller owns the portfolio, with all the inherent risks, pressures, and responsibilities that ownership implies. The broker or seller’s representative is usually hired by the seller on a "best efforts" basis for a specified time, with an explicit agreement between the parties for an expected pricing result.

The fees to the seller range from 1% to 10% and are always negotiable, but 5% is considered reasonable. Success fees are also part of the internal negotiation.

A recent challenge for brokers has been the shrinking number of credit issuers using their services. As the issuers have become more educated in this area, they are doing the work of the seller’s reps themselves. The seller has learned how to evaluate their product better, and most have staff for contracts and contract negotiation. In a sense, the seller’s reps’ own success has led to their loss of market share. Lately we see more re-sold product being offered by the middleman. Often, a major seller will become comfortable with a favorite buyer and create a "forward flow" working relationship until it is time to probe the market for new pricing levels.

The market place in 2004 and into 2005 has been flooded with ready-to-buy capital looking for opportunity. Seller’s reps have done a great job matching up those parties. Some have even made the introduction of all three parties: capital, product, and operations. That really is full service.

Recently, high prices have put pressure on buyers’ operations, and it may force some to consider stepping out of their original pricing models in order to purchase product. In the short term, commissions are made. In the longer term, who knows what the results of that decision will be? Debt buyers who have been in the business for an extended period have seen this cycle on a number of occasions, and tend to stay within their pricing models. The financial institutions remain, and the short-term players fade away. The corporate musical chairs begins, and the stories of the guys who took the bullet are told and re-told at the latest conference. The market retracts both in price and volume, reasonableness and fairness return in proportion to the market adjustment, and we begin again. The difference is that the lead players once again look like high-level collection professionals, not finance specialists.

Tom Ferris is CEO of The Sagres Company, San Diego, California and currently serves as President of the California Association of Collectors (CAC).

The Sagres Company (www.sagresco.com) is an experienced investor and collector of distressed debt. They buy and sell portfolios of charged-off receivables, serving lending institutions and other credit grantors.