When buying a debt portfolio, these are the 3 questions you must answer!
For the average investor, buying a debt portfolio can be an intimidating and risky venture. But for those with enough time, patience and money to invest in this type of asset class, there are three questions you must answer before making your purchase:
What is the risk profile of the underlying assets?
How does it compare to other investments out there?
And do I understand how these investments work?
A good way to start is by asking for their due diligence requirements. The seller should have a list of things they want the buyer to do before acquisition, and if not, ask them now.
Due diligence is an important step in the process of purchasing a debt portfolio. There are many questions that need to be answered before one can begin buying and collecting on receivables from companies or individuals who owe money.
A couple questions to ask for example, when was this portfolio acquired? How long has it been shelved ? If it hasn't been shelved, then there may not have been any updates since purchase which could severely affect your collection efforts.
Due Diligence 1.1 Receiving a Debt Portfolio from a Potential Debt Seller
- Type of debt
- Agency level
- How long the file has been shelved
- Chain of title ( ask to review after you sign an NDA and offer an LOI to purchase )
- Previous collect tactics
- Copies of the signed contract or check and the billing statement
The process of receiving debt portfolios from potential sellers can be a tedious one. However, it is crucial to have the key metrics in order before signing on with them. Account numbers are essential so that they can be cross-referenced for accuracy and authenticity; original loan balances will also determine how much money you stand to gain after the sale is complete! There's no point trying if there isn't any profit at stake - these two measurements should give an indication as to whether or not taking this portfolio would produce results worth your time investing into the portfolio.
Step 2: Due Diligence 1.2
- Key metrics to determine a quality portfolio
- Original account numbers
- Original loan amount
- Overall average account balance
- Original loan date
- Last payment date
- Charge off date
- Debtor States
- Zip codes
Once you review the unmasked file, your team checks a few key metrics to determine if there is any missing data or inconsistencies in the unmasked debt portfolio. We are looking for social security numbers and date of birth among other things to validate the portfolio.
Step 3: Due Diligence 1.3
- If all metrics are provided and met, we will then review the unmasked file to determine performance. The following are key metrics to determine the performance of a portfolio.
- Social Security Numbers
- Date of Birth
- Phone Number
- Reference Name
- Reference Number
- Reference Address
Above is some key metrics that we'll be looking for: social security numbers, date of birth, phone number and address; reference name and reference number; employer details, Media (copies of the signed contract, check, or billing statement) Bills of Sale make up a complete chain of title.
How much money do you have? All this is to say that, before investing in a debt portfolio, the most important question investors should ask themselves is how much time and cash they are willing to invest. If you don’t have enough of either one of these resources then buying into a debt portfolio will likely be an unpleasant experience for both your wallet and your psyche. But if you are patient with yourself, understand that there will always be risk involved when it comes to investing (especially in today's market), and can afford some upfront capital investment while waiting on interest payments from investments like loans or bonds, then congratulations! You just may become part of the small but growing group of people who make their living off of other peoples' debts.