- December 5, 2018
- Posted by: august19
- Category: Podcast
All of us hold some kind of preconceived notions and prejudices about certain properties. These things eventually lead us to stray away from them, keeping ourselves within our own comfort zones. But Chris and Gail have seen a big growth week for the both of them; and what they learned will make you want to open up your horizons. They let go some of their pre-judgments about properties and what makes a good deal. They talk about exploring rural properties and what they found going into them. Also giving insights about buying and selling a partial, they lay down some of the benefits you could receive like a payment prepaid and more. They also tackled IRA investing and then give tips on foreclosures.
Listen to the podcast here:
Big Growth Week: Letting Go Of Preconceived Notions About Properties
Gail, how are you doing?
I had a rather big growth week. This was a week to set aside a lot of my bigotries about properties and my preconceived notions of what makes a good deal. Although it pains me to say it, I owe most of the credit to you.
Thank you. My week is closing on a good note as I wrapped up a forfeiture on a contract for deed in Indianapolis. That was an interesting process that we can talk about more another time after Franco Barile took care of that for me. For people out there, he is in an attorney in Ohio, Indiana, Michigan. Also, we’ve been working on these contract for deeds/REOs. What headway have we made on those?
That’s what I mean about it being a big growth week. This was the week for me to toss aside a lot of my prejudices about what makes a good deal. You and I were on Scott Carson’s Note CAMP talking about what’s changed for us. For me, I started my note career having a very rigid idea of what I would buy. Not being willing to contemplate anything else. You are always much more willing to jump in and try different angles and I’ve been much more timid but together we held hands and jumped into the deep end on a pool of notes. That worked out so much better than I realized, the deep end of the pool of notes. I’ve always avoided rural properties and vacant properties and we managed to buy in a pool of six notes that we thought were occupied, maybe were going to be notes. Four of the six turned out to be rural vacant properties. It was more or less my worst nightmare come true.
We’ve been working this for a few weeks. We didn’t sell a vacant property yet but we put one up for sale. It’s in a remote area of Oklahoma, the northeast corner. We had an open house. For people who remember hearing about this before and want to know how it’s going, we did get multiple offers on it. We got a cash offer that was a little over our asking price. I was worried for a couple of days how people drunk dial where they buy stuff from infomercials in the middle of the night because they have no resistance. I was like, “Is this going to happen?” This is a very nice deal. I got a call today. The buyer was at the title company, moving things along. It’s looking good.
Gail and I did have a slight disagreement on the offers because we had one offer, which was a pickup truck and a motorcycle and then we had another offer which was a 1958 Chevrolet Apache, which was in pretty decent shape. If anyone was an antique car buff, they may know what that type of car is. I am not an antique car buff but when Gail sent me the pictures, I was like, “That’s a nice car.”
It was pretty and a real classic too. Apparently, Oklahoma is the barter capital of the country. I’ve never been offered so many stuff. Honestly, if the pickup truck with a motorcycle, if you would agree to ride the motorcycle back from Oklahoma, I would have driven the truck. I don’t think I’m tall enough for my feet to touch the ground on the motorcycle. I was ready to drive a big monster like that back to the East Coast.
One thing I want to mention too about those assets is as you get more engaged and more familiar and more experienced in notes, you start to diversify and expand your comfort zone a little bit. In this instance for you, you were expanding that and as well for myself. In the past, I’ve taken on a little more inherent risk on things but the risk comes down to also what are you getting the assets for and doing your due diligence on the assets. This one that we’re talking about Oklahoma, it’s on two acres, it’s six parcels, four buildable lots. The parcels themselves sell for a few thousand bucks apiece. Within this area, there are no houses that are for sale for even 60% of what we paid for this asset or maybe 80%. In a lot of instances with these assets that they’re not in combat zones, which is something an area, I do stay away from. They’re in a run of the mill small towns that still have properties that have value to them. This might be a vacant property that now might need some work and few of them need some work, few of them aren’t too bad. There was always that value that we thought was there that would definitely provide us to return that we’re looking for.
In this case, we’ve certainly had others that did not get as much enthusiasm as this one did. This is a 2.3-acre lot. That is a big thing. The people who came, they want the land. Weirdly most of our shoppers were older people in their 70s who want to retire in a quiet place. They weren’t concerned about whether they could commute anywhere from there. They don’t want to go anywhere. They just want to sit on the porch and enjoy themselves.
The other thing with these assets is I had a conversation with one of the borrowers of one of these assets on a property in Ohio. This one’s on over an acre of land and it’s a nice farmhouse that was part of this deal and the borrower was about six months behind on payments and he lost a job, has a new job, started working again. I felt like I did my good deed in a sense and this is what our motto and everything we work off is. Investing isn’t just about its return. It’s about the impact we can provide on people. When I was talking with this borrower, it was more of almost a friendly conversation of, “We’re here to work with you. What can we do? How can we help? When can you think you can start making payments?” The guy offered to start basically making bi-weekly payments to catch up. The payments bi-weekly are almost going to be what his monthly payment was because he wants to try and catch up by early next year and just get back in the scheme of things.
That was one of the six that we bought, the four vacant. This is one of the two that has a borrower in it who has made a payment in some recent era, not the Mesozoic era but more recently than that. That’s a gorgeous property. It’s a duplex with a lot of land around it in Ohio. We never want people to fail. We don’t want to get the property back but I have to say if we were taking one back, that’s the one I would like to have. I’m glad he’s going to keep us away from his door. Keep the wolves away awhile longer because we basically got that very cheaply and $350 a month is going to be unbelievable. I said it was a week of a-has for me and that’s what I mean about growth. A lot of things that I was clinging to crashed down. I realized as I was flying through the air not knowing where I was going that’s it’s nothing but soft landings around here.Investing isn't just about its return. It's about the impact we can provide on people. Click To Tweet
IRA Investing And Partials
One of the things that I recognized that I’ve evolved as an investor is that I’ve been investing my IRA. Basically, I have been buying notes and I’ve been waiting for payments to come in and then when there’s enough, buy another note, that’s what I do. You and a presenter on Scott Carson’s Note CAMP both at the same time came together and started talking about partials. Although I knew what they were, I never gave it a lot of thought. I realize it’s a way to super-accelerate the process of what I’m trying to do of using whatever money comes into my IRA to get it reinvested quickly so that it compounds. I got the compounding and it’s working for me. You started a few nights ago crunching the numbers and analyzing what partials can do for people. Why don’t we talk about what you come up with about partials?
If there’s a payment string on the note that’s remaining, say the borrower is paying $300 a month for the next 120 months for ten years. What you’re doing with a partial is you’re selling basically some of those payments off. The great thing about partials is everything is so customizable and can be based upon maybe what you’re looking for or how much money the investor wants to invest. It’s a win-win for both sides. As a simple example, if someone has $5,000 in an IRA and they don’t want to put in the stock market. There are no real estates you can invest in out there. Even a hard money lender would be tough because $5,000 is not a lot of money or won’t get you far. A lot of times that money might be sitting there and your IRA custodian is not doing anything. All of a sudden you could turn around. If you had a performing note and say it was netting you a $155 a month, this performing note which was probably a lower end one. Most people like $300-plus but whatever the case may be. We all have sometimes notes like this. If somebody had that $5,000, they could come in and buy 36 payments from you and get an 8% return.
Let me just recap. I don’t know if we’ve lost people yet or not. There you have a performing loan and that’s certainly the goal in buying any non-performing loans, that you’re going to get it performing. We usually do. We’re pretty successful at it. We’re getting better and better at it all the time. Now you have a performing loan and $300 a month is the payment. You’ve got years of that, oftentimes we buy these in the first six or eight years in their 30-year loans. There are literally hundreds of payments that are going to come in over time. Rather than sit and wait to collect 30 years of payments, you can decide right now, “I’m going to sell the first five years or the first three years or seven years. I am older than you so I’m not going to sell ten years. I don’t want to wait ten years. I’m going to sell some chunks.” Basically, you can figure out what the investors are looking for in terms of a return. We’re a little flexible, 8%, 10% and we can say, “You can have 100 payments of $300 and we’ll give you a 10% yield and this is what it all costs.”
It’s not going to cost the same big money as buying a note all of yourself in one big bite. The thing is if you have limited means, it’s already performing. We will make sure you continue to get your payments and if anything, if the borrower stops for any reason, we will make sure that they start up again and we’ll take care of it. Your money is extremely safe. You can invest small amounts of money and still get in the game with note investing. The thing that is amazing for us as investors, selling the partials, is when you sell payments on the front end. The borrowers’ payments are not reducing the principal very much. The initial payments on any loan are almost all interest, way disproportionately interests. When we sell off early payments in a loan and then you get the loan so someone else gets five years of payments, then we get the loan back for the next twenty years of payments. A lot of times, the principal balance isn’t even reduced that much from where it was when we sold the partials.
One of the other things that I’ll point out too from the investor who’s buying the partial is it’s a first position note. They’re in the first position but they’re in the first position because they may have $5,000, $10,000, $20,000 invested in this thing. The value of that property and the value of the remaining note are much larger than that. Say if a borrower did stop paying and you did have to foreclose on them, their money is what comes in and out first. They clearly would be well in an equity position at any point in time, that they might be at a 10% or 20% equity position based on the size of the partial. That’s another benefit to somebody who’s buying the partial. The term mailbox money comes out a lot. It’s a mailbox money in a position where the inherent risk is reduced significantly because you’ve got such a small investment in a larger balance.
You’ve got a piece of a very secure investment. It’s a preferred position because you’re going to get paid first whatever happens. It’s a cool concept and I know note investors who people come to them all the time and have small amounts to invest and maybe some people want to dip a toe in the water with notes. This is a great way to do it since we can customize it to help people who only have small amounts and they enjoy all the same protections as someone who is now paying much more for that same note.
Another benefit to it is if it goes non-performing, the individual who bought the partial is not going to be working it out. The difference is if they go buy a performing note and put it under their hat, then all of a sudden if that goes non-performing, they’re now having to do the workout. They may not have the experience or they may not have the attorney connections to get that resolved. The other component to that is if you try to joint venture with somebody on a performing note, the numbers typically don’t work or if they do, your return will be significantly lower. On a performing note, you might be getting 10%, 12%. If that’s getting split, you’re at 5%, 6% whereas on the partial you can get a few more points above that. You have no headaches involved in the sense of you’re not the one dealing with the servicer, the borrower or the attorneys. You’re in the partnership but you’re a silent partner in that first preferred position.
That’s such a good point because you don’t have to be a genius and know all about working out notes, which you and I know from doing it. We are a country of 50 states and probably 600 different rules about what’s supposed to happen and having the right people to help you. I’ve had attorney quotes from $500, $5,000 for the same job and it’s difficult to be in a position to manage all that. I have a performing note but the borrower refuses to pay for their own insurance. Our insurance is not expensive, it’s probably about $35 a month but it’s annoying. There are also servicing costs. When we sell a partial you are immunized from all of that. You are just signing up to get a certain amount of money every month like clockwork. It’s up to us to make it happen. That’s the corner we’ve backed ourselves into.
We’ve talked about a lot of the benefits for the person buying the partial. We briefly touched upon some of the benefits of why someone would sell a partial and one of those is getting some of that payment prepaid that allows you then to possibly reinvest that money and arbitrage it into another note.
Partial Agreements And Deeds
In my IRAs, money has been coming in. It’s more than a drip-drip. It’s less than a flood, it’s a trickle. I have enough money invested at this point. In six, eight months, I can buy something, not necessarily something big. It dawned on me after you’re talking about partials. If I sold partials on my notes, in one case I could get back almost what I paid for the note itself. I could get $25,000 and then rather waiting months and years to accumulate that much money from that one note, I can just get that. Now, all I need to do is be in a guardian position, watching and making sure the partial investor gets everything they’re entitled to. I can take that money and go buy something else. The weird thing is if I buy another performing note, I can do it again immediately, which is crazy when you think about it.
One of the questions that pop in people’s head immediately is, “It’s great, I have this partial but what are you going to do if the person does stop paying? Do I get my payments? What happens?” That’s probably the million-dollar question people would ask.
What’s your answer?You can invest small amounts of money and still get in the game with note investing. Click To Tweet
It depends on every agreement and how it’s written. Most agreements will state something along the lines that if the payment’s missed, it’s not like the payment’s not being owed. It would still accrue interest or the person who sold it could continue to fund it to keep it paying. Legally it does follow the note. Most good note investors would continue to pay it and work out the payments with the borrower. If it goes to foreclosure or forfeiture or whatever the case may be, eventually they’re going to recoup that money or have to basically pay off the partial. The agreement is that if the note is 90 days past due, I can either pay off the partial loan or continue the payments and then pay it off after the loan is distinguished either through forfeiture or foreclosure or whatever, deed in lieu, whatever the case may be.
With contracts for deed where we are basically seller financing a property and creating our own notes, I’ve heard people say they basically hit pause on the partial. They get that borrower out, get a new borrower in and pick up where they left off. Some of the time when we own a house because it’s a contract for deed loan versus a conventional loan, it’s more like a car payment where we own the asset and the borrower has the right to buy it when making payments but they don’t get the deed until the end. It’s possible that we can buy a contract for deed with a fairly low balance and then through improving the house a little if we get it back. Improving it a little getting a new borrower in, sometimes these houses have gotten more valuable through the normal growth in the market. Other times we improve them a little and can charge a higher price for them and you can end up with a much higher monthly payment. That could be something that could pay off the partial buyer more quickly, paying off their balance more quickly, which we all love being paid off more quickly.
One thing to note investors out there who might consider selling partials is if the borrower is paying $500 a month, you don’t have to sell the full $500, you could only sell $200 or $300. It’s completely up to you in regards to what amount it is. It’s completely flexible in regards to those arrangements so it’s what’s in the best interest of both parties. That’s another option or another avenue that can be taken down that road to provide the maximum amount of flexibility as possible.
I know a gentleman, what he does is he buys nice houses usually houses that flippers have just finished working on and he looks for IRA investors who can pay for the whole thing. They can create a note, they can sell it on seller financing. He said he has many people who have invested that way and then they have little scraps left in their IRAs. People come to him and say like, “I’ve got $7,500, what can I do?” Normally you require $100,000 to buy a house and seller finance it to someone. “What can I do with this?” He’ll whip out his calculator that moment and be like, “Let me see what I can get you.” It’s pretty cool to have that ability to invest the little amount. There have been times where I have just small amounts in my account too and I wish I could put it to work but it hasn’t always worked out that way.
The simple thing is you can literally whip out a calculator and calculate this thing because it’s calculating either the value or the payment or the terms, which in Excel can be very simple to do. It’s basically an amortization table but it’s something that can be done very simply and allow to provide people with multiple different options. If I had somebody looking at some partials I have and they said, “Can I see a few different options?” I said, “Sure. Here’s a 36-month option, here’s a 60-month option, here’s a 96-month option. Here’s the return you’re getting. Here are your monthly payments strings, which were the same for each one. Here’s what are the prices of each partials,” and that’s basically what the UPB for that person would be paid off from the partial.
What was the monthly payment on that? Do you remember what the numbers are just as an example of a 36 versus a 60 versus a 96?
$1,000 per month and this consists of several partials mix together but the person had some money. The payment was $1,057 and the acquisition price basically was around $33,000 for 36 months. For 60 months, it was roughly around $49,000. An eight-year was roughly about $66,000. It gives you an idea what the numbers incrementally go up that. That was $1,000 a month, that’s a little over $1,000. They end up getting around 9.5% to where it was getting. I just threw that out there and said, “Here are several different options.” These were five different notes. I said, “You can do to 36 months, one at 60 months, one at 93 months. You can play with them, put them in whichever scenario you want just let me know.” It only comes down to knowing how much money the person has and you already know what the payment is. Once you negotiate that interest rate, it’s a matter of, “How much time do they want to invest that money over?”
You talked about an Excel spreadsheet but I’m sure you have a financial calculator on your phone, which I do too. I’ve become that ridiculous person at parties and on buses and things calculating returns on loans. It’s great. I cannot believe what phones can do, I’m going to say it. I want to declare my love for phones right now.
I do have one on my calculator but I’ll be honest, I don’t use it on my calculator. If you have a present value, future value or anything like that out on your phone, you can easily calculate that. I’ve got a spreadsheet that’s so easy. A lot of times I always have a computer on me so I can just plug in the numbers and see different options.
What if you need a laundering IRA investor who is going everywhere, door-to-door, asking for a return?
In about two weeks, I’ll have them all memorized anyways in my head. Those numbers I did run off, that was a mix or a pool of performing notes to get the borrower because they’re looking for certain payments.
That’s already way too complicated for me. Some are longer, some are shorter.Sometimes you feel better by not knowing. Click To Tweet
Each one has its own individual deal. Each one would be its own contract with the borrower. My contract is two pages. It’s very user-friendly. Brian Gallagher from Council, Baradel out of Maryland who does everything for me as my attorney. I can’t give him enough kudos but he wrote it out for me all my other contracts. He has worked with these pretty frequently in the past and basically took it and customized it to some of the terms that I wanted to put in there and then you’re off and running.
I’m going to look at my portfolio and every performing loan in there. I’m going to ask myself, “What am I willing to give up in terms of the number of payments? How many years can I go without payments on these loans so that I can sell them off?” I was going to say, “How much cash I could put together if I sold partials?” I’m excited about that.
Here’s a challenge I’m going to post here. You want to make sure that when you run the numbers, what you’re going to sell a partial for, you can do something with that money. If you’re only getting $5,000 for one partial and that’s the only one you have, can you do anything with that $5,000 or can you invest it? Essentially when you sell a partial, you’re paying interest on that money that you’re getting. If you’re not doing it with anything, you are better off not selling it. If you can get $20,000 for the partials like a magic number for selling a bunch of partials, you can immediately take that money and reinvest it in a non-performing note that you work out, get performing and then rinse and repeat that cycle. You can accelerate some of your growth.
First, I have two IRA accounts and they both have multiple notes. I don’t know exactly how many are performing and will consistently perform but I can put the money together that way. What I also discovered though is you might have a performing note that is delivering a great return on investment, ROI, but when you sell off the number of payments so that you now have so much less money in that deal, your ROI for those remaining payments that come back to you is off the charts. Is that correct or did I make that up?
It does increase but what you need to do is look at it from a portfolio level because you’re taking money from one asset and then moving into another asset. This would be one of those cases where you have to look at things as a portfolio level versus individual level, but you are correct. If you had $20,000 into a deal and then you sold that deal off for $20,000 and you still have those payments on the back end, your return technically is going to be infinity from now on out. You may not see that money for another six years but you don’t have any money that’s sitting there and not accumulating, you’re basically banking maybe ten years of payments six years down the line. That’s the tail end is something we didn’t talk about but some of these might have twenty years left.
You’re selling five or six years for what you paid for the note. All of a sudden, you get that money back. You can go reinvest it but then six years later, you have a string of ten-plus years of payments that are going to start cashflowing coming in the door as well to add to your return. The return rate can be an infinite space. Do you think we’ve blown enough brains, Gail? I probably got too technical. I apologize, everyone. You can always email me, call me, reach out to me or Gail. We’re always more than happy to talk to people about some of our ideas, our thoughts or answer random questions about notes investing.
Some Tips On Note Investing
Hopefully, people will understand the concept of what we’re talking about, have a performing loan, sell off a bunch of payments, keep the rest of the payments, take the money and go buy something else. That way you’re compounding your money quickly and not waiting around like I have been waiting for people to pay me, which they do but again it’s a trickle, not a flood.
With that, I was going to share a tip then if you want to share one as well. I learned something new from Brian Gallagher that I thought was interesting. I foreclosed on a vacant property in Maryland. There’s a lot of interest in this property. Typically in Maryland, after you foreclose, it can take the county up to four months in some instances to finish the paperwork and get you the deed. I was talking to Brian and mention about marketing the property, which he said is perfectly fine. He said, “If you get a cash offer for this thing, you can essentially assign the foreclosure deed directly to them, which would save all the closing costs.” Because he said with the foreclosure, basically everything has been paid as part of the foreclosure. If you take it and then turn around and sell it to somebody, you don’t have to pay the closing costs, which in Maryland can get pretty excessive. Whereas if you get a cash buyer for the deal before the deed is given to you, you just assign that to them and can save somebody several thousand dollars. I thought that was a nice a-ha moment.
I have a question though. I’m doing a foreclosure in Pennsylvania and it’s definitely not going to wipe everything off. I still have property taxes, there are some liens. There’s a Pennsylvania income tax lien. It’s not huge but I would love if that were. It won’t be wiped, but most income tax liens whether they’re federal or state, if the borrower is not getting any money from the sale they will usually take them off without charging you. Even my supposedly very skilled attorney couldn’t definitively say what was going to happen. You’re saying in Maryland everything is definitely you get a clean title when you foreclose?
You have to pay taxes and so forth if there are taxes and things due. In most states that I’ve foreclosed upon, if it’s an IRS or an income tax lien, those stay with the borrower. If the borrower is not getting any money, then those liens will not stay attached to a property. On another episode, we can talk about that contract for deed. The one that I got judgment back to me that we’re talking about earlier where I assume my fist pumps, that one had an IRS lien on it and I went through the process of submitting all the paperwork to the IRS. It’s an interesting process that would probably be a worthwhile conversation at some point in time for people. To answer your question, yes if the property’s worth $50,000 they owe you $100. The income tax or IRS liens do not have superiority over the mortgage. The taxes, school tax, all that fun stuff in Pennsylvania that they take you to the ringer on would have to be paid, but the ones that deal with individuals don’t carry.
I also got $4,000 in weed liens.
That you have to pay?
Yes, I’ve heard. Municipal liens.
The interesting thing is each state is different as it relates to utilities. Some water and sewers stay with the property, some stays with the borrower. Electric is always with the borrower but it’s the public utilities, the water and sewer which I’d seen go either way.
I’m about not calling in Flint Michigan to find out because I have a contract for the borrower who is leaving and she’s got a $2,500 water and sewer bill and I don’t know if it’s in her name. I don’t know if I’m going to get stuck with it or not. My question is if she owes that much money, why in the world that they continue to give her water? It seems like if I’m going to get stuck with it, where would they be looking out for me in this deal? Shouldn’t they have cut her off a long time ago?
That would be a question to reach out to Franco. I’m sure he would answer that for you. You probably don’t want to know. It’s not something that goes away but if you close your eyes and think that it’s going to go away, it’s not but sometimes you feel better by not knowing.
I’m trying to decide when. I’m trying to decide whether I should give myself the holidays to face in January. Everyone faces everything after the holiday. Now it’s a big bleak gray blob of whether you have to go through it. Maybe I’ll save it until then.
Wait until you get a new borrower and they’re on a CFD and they start paying you money and they give you a down payment. Then you’ve got some cash back from the property then it’s like, “I’ve got to put this to water bill or I get a bonus.” Any final thoughts, Gail?
That’s a good start. It’s been lovely spending time with you again, Mr. Seveney.
Thank you and hopefully, you learn from us. Go out and do some good deeds. Thank you.
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