Due Diligence Level 1: Who Is the Counterparty?

Due Diligence Level 1: Who Is the Counterparty?

The “counterparty” is a term used in the note trading business which refers to the person from whom you or the self-directed account is buying the note.  The counterparty may not necessarily be a true counterparty because it could be an individual who wants to collaborate or joint venture with your retirement account to buy notes, but you still have to know who the seller or promoter of the note is.  Sometimes the promoter is different from the seller, sometimes they are one and the same, but you need to do your due diligence on who they are.

That starts with not just reading the Asset Purchase Agreement, but also making sure you have a fundamental knowledge of what the transaction is all about.  If you cannot explain the entire investment in three simple sentences that an 8th grader could understand, then do not do the deal.  You need to have an understanding not only of how you are going to get a return of your principal, but of how there will be a return on your principal, how it is calculated, and when it will come.

I have seen growing concern about notes being offered for sale on tapes and in other forms, that once the money changes hands, the necessary documents don’t show up.  It’s important to make sure the Asset Purchase Agreement has a strong buy-back clause with a relatively short timeframe allowing you to get your money back and forcing the note seller/guru to buy it back from you because they failed to deliver the necessary documents.

In the note investing space, your reputation as someone who will fulfill on your bid is paramount.  Do not have your bid on an asset accepted and then fail to perform.  Have your self-directed account opened in advance, your money lined up, and have complete understanding about the transaction before making your bid.  A counterparty that knows you will perform is a good thing.