- November 22, 2019
- Posted by: august19
- Category: Podcast
There’s a genuine thrill to bidding on and acquiring assets, sinking money into what could be huge investments. As an investment neophyte, how do you protect yourself from mistakes that could potentially bring you down? Flying solo, Chris Seveney takes you through some of the most common mistakes people make when they’re bidding on an asset. Whether it be gaps in fundamental knowledge or a lack of due diligence, one mistake could be enough to send you tumbling down. Chris runs you through the process and helps ensure that you’re bidding on the right assets.
Listen to the podcast here:
Five Mistakes You’re Making When Bidding On Assets
Our episode is based on feedback from all of you out there. We’re going to talk about the top five mistakes I see investors making when being on assets. I want to get back to what happened. One of the things that I’ve been working on is converting CFD to notes. The whole conversion process is a lot more intriguing and challenging than I thought it was going to be. I’m in the process of trying to wrap up some of the first round of getting these done. We’re going to have on in the future some people who specialize in this because there are different ways to do it in regards to issuing quitclaim deed. Once you start getting into the warranty deeds, things got a lot more complex than I thought. What I found interesting is when I’m speaking with the borrowers on this and explaining it to them, the first question they pose back to me is, “What’s the catch?”
They’re wondering like, “Why are you doing this when every other seller on would never offer this?” They’re always wondering what the benefit is. Things I’ve been telling them are, “It’s both party’s mutual interests. You’ve been paying on the property for many years. I prefer to be a lender, not a property owner.” Once I start explaining that to them and explaining that you’re not a large bank and some of the benefits, most of the time, they’re ecstatic to get it back and put it in their name. That’s one of many things that I’ve got going on, but I wanted to mention it because I am going to be sharing a lot more in regards to that. It’s a very interesting process. I am learning a ton from it. I’ll take that information that I learned and share it out to all of you.
Number Five: Getting Seller Expectations
Let’s get rolling with the top five mistakes I see note investors making on bidding on assets. Let’s start with number five, which is getting seller expectations. This is important because what you don’t want to do is waste your time looking into tape if the expectation is completely aren’t there. A perfect example is there was a tape that was published. I’ve seen this tape in the past. I know the expectations of the seller are very high. It’s something that does not fit any of my criteria for where I’d want to be paying for assets. There are 100 assets on that tape where you could spend eight-plus hours on that thing going through assets and looking at things and trying to put in bids on however much time you’d spend. Once you go through it, you would realize that their expectations are overly dramatic when they’re wanting 80% of the total payoff or the higher of the payoff or the fair market value, which is not there.
An example I remember on the tape was there was an asset of $200,000. The payoff was $160,000. They wanted $150,000 for it. I was like, “There’s no money in that.” Their comment was, “You’re going to make $50,000 because you’re going to get it at foreclosure.” My comment was, “If it’s really worth $200,000, somebody who’s going to bid more than the payoff. The most I can collect is a payoff.” They were trying to tell me, “That’s not the case. Even if the payoff was $40,000 and the property is worth $200,000, you would still get the property back at foreclosure.” That’s what they were trying to sell me on. It was a joke, to be honest. It’s a waste of time on some of these assets that you see. It was always good to know who the seller is to get their expectations. If the expectations aren’t in line with your business plan and structure, then it’s not worth wasting your time or their time. I don’t know if that was a tape that was sent out. If that person sent it or it was sent out by somebody else. Christina, I’ll leave it with that. I did not get that tape that you’re referring to.If the expectations aren't in line with your business plan and structure, don't waste your time. Click To Tweet
Sylvia, you’re exactly correct. Properties have so much equity. You’re not going to get them at foreclosure for the payoff. If a property has a payoff of $50,000 and it’s worth $150,000 to $200,000, you’re not getting it back or it’s not worth $150,000 to $200,000. It’s one or the other. A lot of times, you’re happy. If I get a total payoff, I will be ecstatic, but I’m not going to pay 80% to 90% in the total payoff because there’s no skin in that game. That’s one of the things that I start with because I fell prey to this. When I started investing, I was ecstatic to get tapes from anybody or anything. It’s like being that geeky sophomore kid in high school wanting to go on a date. It’s like, “I’ll go on a date with you.” It feels like that when you get tapes when you start out. You look at everything, but a lot of times, what you’ll find is your time and effort could be better focused on different things. The first thing, the seller expectations.
Number Four: Bidding Off The Payoff For CFPB
The second thing that plays off into that and what I touched about is bidding off the payoff versus the UPB. I know for a fact, I don’t think I’ve ever bid above a UPB on an asset. I would consider bidding close to UPB if their payoff was extremely high. One of the things that sellers look for that I’ve always posed the question is, “Are you guaranteeing that payoff?” They look at you like I have six heads. With a UPB, there’s a payment history that shows if that is being paid. That is something that’s pretty much guaranteed. It’s typically very rarely disputed or it’s easy to distinguish what that is. The payoff is a whole other animal because there are certain things like taxes and you have to provide copies. If it gets contested, you have to show that you’ve paid it, then you may have to chase other borrowers down. There’s force-placed insurance. In certain states, there are certain costs that are not recoverable. Ohio has quirky laws for things like that. I see people who will look to and bid off of the payoff versus UPB. I would say, that’s a mistake. You can take it into consideration that taxes may have not been paid for three years, but you’ve got to be very careful.
Number Three: Loans That Have A Low Principal And Interest Payments But High UPB
I’ll refer back to that tape I saw where they warned you basically the bid off of payoff. In most of those instances, you’re going to be paying well above the UPB. You’re going to have to eventually, confirm all of those costs. Think of the time and effort you’re going to have to do if it ever gets contested of trying to chase down every bill and chase down prior servicers for that. That’s a lot of time and effort that’s going to have to be put out there. The next one, I will mention is loans that have a low principal and interest payments, but high UPB in that instance. There could be loans that have a $30,000 UPB and the payment might be $250 a month because it might have an ultra-low interest rate. I’ll see people randomly pay $0.80, $0.75 for that. When you do the math, that $30,000 at $0.80 is $24,000. If the principal and interest is in the $200,000 after servicing, you’re getting about $2,400 a year. Eventually, it would take about ten years to get your money back.
Make sure when you bid, you’re looking at the yield or how long it takes to get your money back versus looking at the UPB and flat outbidding it $0.75 or $0.80 because that can come back to bite you. I’ve seen this in many instances. I remember some tapes where Paul Birkett at Automation Finance, put out a $50 million or know that he has a $50 million Reg A plus fund. I bought assets from Paul in the past. I view him as a good seller to get assets from, but sometimes he’s got some stuff that is a little hairy. AHP is another one. Some of their loans have high UPBs with low principal interest payments. You have to be careful. When I see those types of loans, I’ll pass because I try and look to get my money back in 3 to 5 years. When you look at a loan that is netting $200 a month, in five years, that is $12,000 on a $30,000 UPB on a performing asset. Is the seller basically going to take an asset at $0.40 when it’s performing? Typically, they don’t because they think of the same thing, “I want to get $0.70 to $0.80 on this thing.” When you’re offering 40%, that’s almost in non-performing range. If you valued it from a yield perspective of what they’re looking for, the yield would be very low.
Number Two: Not Checking The Taxes
We talk about the low principal and interest, the bidding off payoff. Another item is, as part of bidding, these two items rule a little bit more into due diligence checking. I like to check taxes. Checking taxes are important because sometimes the seller may put what the taxes are. A lot of times, they can be wrong. In some instances, it’s not easily available online and you may have to pick up the phone and make a phone call. It takes a little bit of effort. The other component is sometimes, secondary liens or understanding the area or the structure is part of the tax program. I had an instance, this was a note that I had bought a few years ago. It’s in bankruptcy. The borrower’s attorney sent me a letter and said, “The taxes haven’t been paid in three years. The borrower got a letter saying that they have to go court.” It caught me off guard because I went on Madison’s portal and we’ve been collecting escrow and paying the taxes. What we found is there are city taxes and county taxes. That’s an important question to ask that I’ve learned from doing due diligence. I’m bidding an asset and calling the taxes, I’ll ask the question and say, “Are you the only tax authority?”
In Pennsylvania, you’ve got the county and you’ve got school. You’ve got tax for the air in Pennsylvania. It’s a question to ask and the people are very friendly. They’ll help you. In this instance, I didn’t do that. It caught me off guard. I called the attorney. I was very friendly with them and said, “I apologize, but when I look at the escrow payment versus force-placed insurance and the taxes, the number was pretty closed to what was being carried on this other tax, which was only $250 a year.” It wasn’t huge. It’s not thousands. I missed it and I said, “I apologize, I will let the borrowers know, I’m sorry.” I’m sure they got freaked out when they get a letter in the mail saying, “We’ve got to go to court.” I know if it happened to me, I’d be freaking out. I said, “I’ll let them know. We’ll get it taken care of. It’s in bankruptcy. We’ll work on getting an added to the escrow. I’ll reply back to you once I confirm the check goes out the door.” The legal aid for the attorney was like, “Thank you very much. That’s very kind of you and polite to treat it and not be adversarial in any way, shape or form.” It was a mistake that happened. It was because when I’d called taxes years ago, I forgot to ask the question. It’s something that I highly recommend.
Number One: Failing To Check If The Utilities Are Turned Off
Along with that, finding if the municipal liens is part of the bid strategy. In Northwest Indiana and Lake County. Sometimes you get water, sewer lien or other type of liens that can stick. Try to get as much information if you’re calling a tax person as possible and be like, “Is there a water department or someone else I can call?” The next one is you’re making those calls to find out if the power is on, find out if the water’s turned on. You have to ask the question. The reason I say that is you’re spending time doing these bids. You get a bid under the agreement, then you’re going to start spending money having BPO with only one report and all this stuff is done. If the property is vacant and water has been turned off for four years, wasn’t it worth a five-minute phone call to the water department confirming that the water was on? Instead of spending $135 on the O&E report and $100 on a BPO. I know a lot of people don’t like to do that upfront or may not like to make the phone call or do that extra step.
It can save you a ton. I’ll share information, for example, some of the pools that we acquired. We pick up the phone and was calling as part of the bidding because the seller wanted me to take the whole pool. I did some spot checking on certain ones because they provided an O&E report. Once I had some tax balances, I would call and ask stuff. There were some that had liens of over $100,000 on the properties. I wasn’t even wasting my time. I was telling the seller right upfront, “Take these back. I already made the phone calls and there’s no use putting them on the list for me to punt them later. I’m telling you, take them back now.” They’re like, “Thanks.” When you explain to a seller, you could be $20,000 to $40,000 off the property with $100,000 in liens. He’s like, “You’re not going to buy it. You’d be a fool, too.” Those are some of the things that I see. Those are the top five.
Bonus Content: Understanding Your Expenses
I’ll throw in some bonus content because some of the things popped in my head, which is understanding your expenses and a calculator. I love my calculator, but we use the term in real estate, garbage in, garbage out. What you put in, you’ve put garbage into it, you’re going to get garbage out of it. The reality of it is you’re trying to forecast something that you can’t predict. If you’re aware of what the expenses could be, then you can evaluate your risk. From that perspective, understand what state you’re dealing with, what jurisdiction you’re dealing with, and understand the costs. Don’t try and find an attorney or find this stuff out after the fact and throw a dart at something. Get information from an attorney or talk to somebody who’s done a lot in that state. One thing I see a lot of people doing is taking advice from people on Facebook. I love the BiggerPocket posts from people saying, “I’ve got $250,000, how should I invest it?” You’ve got 30 people asking the question the day before, understand what an ROI stands for, then replying back to this person, “Why don’t you invest in me? I’ve got this great real estate deal.” It is the same thing with people asking for tax and legal advice on things. There are experts in that for a reason and that’s who you should use, similar to using your bidding strategy and understanding the risks involved.
Not only to understand the costs that are associated with potential assets and foreclosure but what are the risks involved as well? What I mean by that is, if the borrower contests, is there mediation? What happens in that case? Could that delay? How long could the delay be? You want to understand those things because you can read online about USFN, United States Foreclosure Network. The website is USFN.org. For $30, you can buy an awesome brochure from them that lists a state timeline and a little summary for each state of the steps for foreclosure. I highly recommend people to go out and pay the $30 or $40, whatever that is. Go to the website to get it. You can learn a ton, but that doesn’t tell the full story a lot of times. Sometimes, if you send it the demand letter or the complaint, they respond within 30 days. “What does that happen?” That’s another conversation you want to have with the attorney. A lot of times, you get that from experience from that perspective.
Bonus Content: Understanding The Risks
Back to bidding, the more questions you can ask, the better. My second bonus item in regards to bidding is understanding the risks. A risk-adjusted, weighted return is a phrase we use a lot in my full-time job. What that means is, how much risk are you wanting to take on for a specific return? I’ve had conversations with people before on this, which people talk about doing JV deals on nonperforming assets of giving 12% to 15%. If I called you up and said, “I can give you a 10% partial that you put in $20,000. I’ll cut your payment of $500 a month for the next X months. It was $50,000 left on a loan property which is worth $200,000.” Basically, you’ve got a 10% equity position, making 10% on your money or go to a JV deal on a note in Ohio, where you’re going to try and target 12% to 15% to the investor. What would you rather do? Would you rather have many sleepless nights trying to get 12% to 15% or get the 10% on a $20,000 investment?
Let’s say it’s a twelve-month time frame, for example. 10% is $2,000, 15% is $3,000. What’s that $1,000 worth to you from that perspective? Is $1,000 worth that much risk? That’s something that you need to evaluate as well. A lot of people as they get started out, want to push to the nonperforming. Sometimes, when you look at things, you’re better off on a performing or buying a partial from someone because of that. When people talk about buying performing assets from 12% to 15% on JV deals, you tell them, “I’m going to try and get you 12% to 15%.” Sometimes you scratch your head, why are you going through that risk? The other component you have with the risk is who you’ve given them money to. You want to make sure who that person is and what’s your experience. Make sure they don’t walk away with it. Make sure they understand how one of these things work. You’ve got to use these things once in a while.
I know a lot of people are always looking for that lottery ticket asset. Ask everyone out there who has bought a lot of notes and stuff. How many of those grand slams do you get? It’s far and few in between. Does it happen? It does, but you’re not going to be hitting 30%, 40%, 50% of your assets are going to be hitting grand slams. If you are, then let me know because I’m going to give you all my money to invest from that perspective. I’ll go sit on the couch. Those to me are some of the things I am looking at. The first one is from Owen, asking, “Is there a way during due diligence to determine if a CFD is a good candidate for transforming into a mortgage?” If they’re paying a consistent pay stream for me, they’ve got to have at least 24 months of consistent payments because if not, you’re looking at going through a whole foreclosure process first and forfeiture, depending on the state. It’s got to be a very solid borrower to do that conversion.
Q & A
I wouldn’t do it as part of a modification or anything. I have done 3 or 4 already. Those were quitclaim deed over to borrowers. The ones I’m doing, I’m trying to get title insurance policies on them. It’s a whole other animal. I’m still going through a lot of the hiccups, the bumps in the road and it’s interesting working with title companies and their thought process on things. I’m very close, but not yet at the point where I’m able to share the full story. That is going to be coming out. Sylvia mentioned, “We’ve bought an HOA amount that there was a loan for the second, therefore the first was still in place safe selling, it was in Florida.” A HOA lien, it still owes the first. You’ve got to be careful.
In certain states, they have what is called supermajority where an HOA can strip the first. In Florida, a law has newly originated loans after a certain date can, but older liens, yes. What happens a lot of times, what you’ll see investors do, which is pretty creative. They’ll buy the HOA lien from the HOA. Let’s say it’s $10,000. They’ll give them $2,000 for it. What they’ll do is turn around and foreclose on it, then they’ll put a renter in there, and they’ll collect the rents. Their whole game plan is hoping that it’s a major institution or a lender who constantly ignores and doesn’t foreclose. What they’ll do is keep the renter in there. They know it’s going to take a year plus in Florida to foreclose.
Let’s say, they buy the lien for a few hundred dollars and they spend $3,000 to $5,000 to foreclose, they’re in it for $5,000 to $6,000. They might be getting $1,000 a month in rent. They’ll roll that thing for 1 to 2 years. When the lender finally comes back and says, “I want it back or foreclose it.” Takes it back from them or forecloses on them, they’re like, “Go ahead. I’ve made my money.” From that aspect, they take ownership of it, but it’s still subject to the first lien on that. I see other notes about people. One of the things they prefer to do with JV is they are trying to learn from individuals. That is another aspect of the JV deal. One of the things that I’ve come to the realization is on JV deals, it is very difficult to train people. You can try and keep them in the loop on a lot of things, but lots of times, things happen very quickly. Sometimes, it’s like a history class of taking what happened and explaining it to them to do it live. I find it very difficult and I don’t think there is a perfect way to do that.Making that extra step to check everything will save you a ton in the long run. Click To Tweet
One of the things that has been beneficial for people is the fund that I have, we do training within the fund. I did an hour webinar with people before we did our fund update. We were doing due diligence where we pulled out 4 or 5 title reports. I sent them out to people early. It was like a test. I said, “Find out what’s wrong with these reports. We’ll talk about them.” They’re owning whole collateral. We briefly went through what a collateral package should look like and what’s included in it. Sometimes there are twenty pages. Sometimes there are 800 pages in a collateral package within it. We learned how to read title reports and understand that don’t take what’s on the face or cover sheet as the gospel. Two of them that I went through, one of them was sold a tax sale, which wasn’t covered on the cover sheet. Another one had a title defect because deeds were recorded out of order, which again wasn’t on the cover sheet.
Just because you got an O&E report, don’t read that top line where it says, “Errors.” Make sure you go through the whole thing. Similar to a BPO, don’t look at the BPO, look at the pictures. Look at everything else that they’ve provided in there as well. It’s not that you pay people to provide you a report, but it’s up to you to make sure that you review and understand it. I look at everything that I have consultants give me. I think of it as my eight-year-old homework. He’s got a job that he’s got to go do his division. I expect him to do it properly because he should know how to do division. He’ll bring it to me and I still check it. That’s my philosophy. I’d say that my attorneys and others probably have a little better track record, but at the end of the day, that’s what people should think about. Some of these consultants, you still need to review their work.
“What does it cost to convert a CFD to a mortgage?” There are several things involved in that. The first is, what type of title are you providing to them? If you’re doing a quitclaim deed to them, it costs $250 to create all documents and do a conversion. If you want to provide title insurance, you’ve probably got to tack on another $1,000 because you’re going to spend $200, $250 for title report. You’re going to spend $400 to $500 for title insurance. Can you add that to the borrower? There are certain ways you can have them. You can ask them, “If you want title insurance, you’ve got to pay for it.” You’ve got to make sure you can’t collect those fees upfront. That’s a big no-no in conversions collecting fees upfront. Another component is, when you do these conversions, you can’t increase the rate or increase their payment either because it is a conversion. If you start increasing things, then it kicks off a lot of RESPA and trade stuff.
Typically, when you run a title report and you’re going to get title insurance from First American, you can get a lender policy. It’s easier and more beneficial to get both. For me, it adds value to the asset if he can get it with title insurance. It’s left to be seen, whether or not it does add that value. It can fluctuate. I’ve seen people talk to a mortgage company, who wanted about $2,000 to do it because they were treating it as a refinance versus a modification. A conversion from a CFD to a mortgage is a modification in the mind of an underwriter. There are certain states that you can’t do CFDs. I believe in Texas, you can’t. There are other states that you can do them, but there’s no benefit. For example, in Maryland with a CFD, if it doesn’t get recorded by a certain period of time and the borrower can come back later, dispute it. If it gets disputed, recoup all the money that they paid. In most states, if somebody tries to recoup money because a loan like this, it’s an offset by a rental provision of, “Rent would have been this much.”
In Maryland, my attorney says that’s not the case. If someone was paying $600 a month for five years, all of a sudden they’d defaulted and you tried to do something and they got a wise attorney, they could come back to you for $36,000. The CFD in Florida is treated like notes. In Georgia, CFD takes longer than notes to foreclose. In Indiana, Michigan, and Illinois are much more beneficial for a CFD. Pennsylvania can be, but they focus a little bit on CFDs trying to get people to convert them. With CFDs, you’re starting to see and we’ve done other episodes about these states that start to put restrictions on CFDs. I realized the reason why. I like to consider myself an honest lender, but the stuff that I see out there with people putting a 30% interest rate, putting a house for $20,000, putting a CFD for $50,000 on it. That’s wrong. The other thing I see is people who get CFDs as a borrower turning around and trying to arbitrage them or put people on lease options underneath them and stuff like that. Sometimes, it feels like the Wild West because they go somewhat unregulated. In the States, we’re finally starting to catch up a little bit on that.
“I’m in Louisiana, I only did mortgages.” Louisiana is one of the states I have not acquired anything in yet. I have the goal of trying to acquire an asset in all 50 states. I’ve got a few more check marks on that. I’ve got one in California. I’ve added one in Arizona and New York. If anyone’s interested in a CFD, I’ve got a performing note and a nonperforming note in New York. If you are interested in those, I’m going to be putting out on a tape for sale for people. I know there’s a lot of stuff that came out from a few servicers. We’ve been a little delinquent and getting something out, but I’m trying to get something out.
The question asked, “What’s my main reason for doing these conversions from CFD and notes?” All of the above. Jamie, you hit the nail on the head. There are typically three things. One is resale purposes. I think you’ll find a lot more buyers on a performing note than a performing CFD. If you get title insurance on it, I look at it as sounding pretty much grade-A paper. Originated with title insurance and using the FHA mortgage and promissory note docs. It’s no different than a bank issuing the loan to this person in that sense. Second is the cleanup title issues. Sometimes the cleanup title issues, the title may come back clean, but there could be issues with the contract for deed. Let’s say, you are missing an assignment of a land contract and it’s tough to hunt them down.
People always get the whole allonge issue with CFD can be debated for perpetuity, but sometimes if the CFD is unrecorded and may have a blemish in it, one of the simplest things is converting to a note or cancel and do a new land contract. You’ve got to remember from a title insurance company perspective, that’s unrecorded. They don’t see that. They have no clue that even exists. They will provide them insurance. You cancel that and put it under a mortgage note. If it’s a CFD issue, you could always cancel a CFD and issue a new one. That point in time, it goes to the next component that you talked about, which is the liability of property ownership. I prefer to be a lender. I’ve got a very large portfolio of CFD. I don’t mind owning them. Here’s a perfect example, I got a fax from a borrower of a performing asset, a CFD originating in 2008 in Cleveland. The individual wants to get a permit to do some work, but he wants to pull the permit. He’s not the property owner. He wants me to sign a document that says, “I’m going to be doing all these things.” I’m sitting there like, “I’m not signing this. I have no clue what you’re doing.” The guy is like, “I want to do this and stuff.” There’s $13,000 left on balance alone. I pulled up and saw the payment history and the guy is paying for three years.
At least for years, as far as I went back and stopped, I said, “I’ll make this easy on you. What if I convert it and put you on the title and get rid of the stupid land contract and put it back in your name?” The guy was like, “You’ll do that?” I was like, “Do you think I want to sign documents on you doing a renovation and take responsibility for you renovating the property?” He goes, “No.” I was like, “Exactly. I want to be a lender.” That’s another reason. Another component to it in Ohio, after several years, treat that like a note anyway, you have to foreclose, which then leads to the whole licensing issues in Ohio. If anyone has physically gotten that license, I would love to speak to you. I keep getting caught up with them on having a qualifying individual. I have three years of experience as an MLO because my company is not a servicing company and they either put you in a bucket of an originator or servicer. If you’re not servicing, you’re an originator. I don’t originate anything but I don’t do the servicing. I’ve had this discussion. I’m trying to get in touch with the supervisor to try and come to some conclusion or resolution on it, but my license is hanging out there pending. I think of my Georgia one, that’s good.
“I’m curious in regards to the assets.” I’ll be honest, I haven’t bid on anything after I’ve taken down two large pools of assets. We are in the fourth quarter. Typically, in the fourth quarter, you do see a lot more assets. “I’m curious to know from you, guys, does this stuff you’re seeing decent and priced decent? Is it bottom of the barrel stuff with a lot of hair on it?” One of the interesting things I saw in 2018, I found that October was the best month for assets. When we started the fourth quarter, it seemed like there was a good amount of decent assets in reasonable pricing. As it got closer to that year-end, they regurgitate what was left. We’re trying to give away a bunch of stuff, but it was truly bottom of the barrel stuff that had a significant amount of hair on it. I’m curious if what people out there are seeing.
I did look at one tape. I did come out and it was definitely some much lower-quality assets that were on there compared to some of the other stuff. Make about bidding is you’ve got to bid comfortably. One of the things I was thinking about, I was going to put this up in the Notes And Bolts group was in a hypothetical situation, if five people bought the same note for $20,000. The same note could be bought by five people. At the end of the day, would all five people make the same amount of money on that asset? It’s a hypothetical that I was going to put out to people. The reason I was going to put that out there was granted, people always talk about making money on the buy. It’s true to an extent, but you make money in how you manage your assets. That’s true in every aspect of real estate. You don’t want to overpay for an asset, but the seller in the market and set the price. If the asset is selling on a nonperforming at $0.50, then you probably are not going to get it at $0.30, but in $0.50, you have the skills to manage that asset to make it profitable. The reality is many of us do and many of us don’t.
If you took five different people and took five different ranges of experience and gave them an asset with the same price, would they all have the same outcome? That’s where the management and the gut come in. Some of these gut decisions. For example, I have an asset in Michigan that is in the middle of nowhere. It’s a property that is surrounded by pretty nothing cornfields and the borrower had been delinquent. He missed five payments. I sent a demand letter and the guy finally called the servicer. Eventually, I spoke to the guy to try and short circuit it. I have a direct conversation and the guy said, “I lost my job. I decided to retire and I was waiting for Social Security. That’s why I couldn’t make the payments.” The guy laughed. He was a truck driver and he spoke like a truck driver. He’s dropping F-bombs in this stuff and was saying, “You really don’t want this house.” I joked with him and I said, “You’re right. Why would I want a house in the middle of nowhere of Michigan that I probably couldn’t do anything with? Based on what I paid for it, I could still sell it and get a very good profit on it. Why do I want to throw a guy out of his house waiting on Social Security?” He is not going to move. The guy said he’s fixed up the house and done some things to it.
These are some of the decisions as an investor that get into the gray area of, “Do you accept the payment or do you not accept a payment?” I’ve got another borrower who was given two chances and the reinstate was $3,400. I called the attorney and said, “I can give you $3,000. Do you take it or do you continue to go to the foreclosure?” There’s no right or wrong answer to any of these. It’s that gray area in the note investing. There’s no right or wrong decision from a financial standpoint, from a social impact perspective. Many, including myself, would say, “I want to keep a ball on a property. I don’t want to throw somebody out of the property, especially when they can try and make those payments up.” In the same breath, I also don’t want to take $3,000 from somebody knowing that in three months’ time, they’re not going to have any more payments. They’re eventually going to lose the house. I’d rather give them a few dollars to walk away and keep that money and use it for something else versus continuing to try and go down that death spiral.
“I usually create my own notes, but I’m looking to start buying some more. Where’s a good place to learn all the strategies and where to buy?” I’m hoping to roll out some more free goodies and information for everyone who is new. You’ll be able to download a list of twenty places where you can buy assets. It’s a good place to learn. This is a whole other episode about where to learn and how to invest in notes in first position. For second position, there are some programs out there that people can definitely take advantage of and learn from. We had Bill McCafferty, who launched a training program for seconds and how he manages his business. That can be a very valuable first because I know Bill is very detail-oriented in how to manage his business. There is a difference between buying notes and running a note business. There’s that hurdle that you’ve got to get over to go from one to the other. You’ve got Martin Saenz doing a lot of training on second stuff. On the first, especially on the nonperforming side, there have been issues with one trainer. For the most part, a lot of the feedback I’ve been getting in regards to some of these programs out there that are popping up and stuff have been around is not very positive. I’ve heard a few of them may be okay, but in first base, they’ll push brokered assets to you that are pretty horrible assets.
The first space is really missing a go-to person in regard to nonperforming first. That’s my opinion. People have value to their own, but what I have seen is a lot of investors are trying to get into the training program. The king of training for a nonperforming first slows down a little bit. There’s that opportunity. I have seen people come up with training, but some of the training I’ve seen are people who have bought 5, 10 notes. To me, people who’ve been in the business a year or two haven’t bought a lot of notes. I don’t think they should be training. I’m not shy to state my opinion on things. People have asked me, “How come you haven’t done training or do training?” For me, it is the time aspect of it. If you’re very successful in notes and you’re doing it very well, you’re going to make a lot more money doing notes than you would be on the training. That’s a reality of it. Sometimes I do get a little skeptical about certain training programs. They’re saying they’re making all this because it’s only so many hours in the day from that perspective.
For mentors, it’s difficult because a lot of people that you’ll find, who’ve been around for a long time, they’re so busy that they’re not interested in taking the time to do a lot of one-on-one training with people. Gail has done it in the past, some one-on-one with people. Early on, she has some of the JV whom I’ve done deals with. I’ve tried to share as much information and knowledge with them as possible. I still do with many people but it’s hard. If anyone knows anybody out there, I’ll be honest with people that I’m a social butterfly in regards to going to events. I have the podcast, we have this, and I have the Facebook group, but I’m not traveling a lot of these groups because I’ve got a full-time job. I’ve got my family and that’s how I allocate my time. From that perspective, sometimes I’m not the best resource. For some free information besides podcasts, Rob Hytha at FIXnotes. He has a lot of good information for people that are getting started as well. He goes through and has a whole dictionary of terms, which is valuable to have and things along with that as well.It doesn't take three to six months to get a business up and running. A real estate business takes years. Click To Tweet
Sylvia mentioned, “It seems to be very quick. What are the things you do, initial DD to get the bids out?” It depends on the seller. Certain sellers are first come first serve. I’ve got a relationship with them that I let them know, “I was basing some things off of their tax values if they have them listed.” That comes with building a relationship with them. The simplest thing I do is I’ve showed people, my calculator. A lot of times, I don’t even use it. I’ll use it sometimes as a crosscheck, but I’ll put it in a calculation of the UPB. Sometimes what I do is take the P&I and multiply it by 30%. There are two calculations but that’s one of them. What that does is based on paying the P&I times twelve months divided by 40%. That gives me a ballpark range of where the number is. Sometimes, it might be divided by 0.3. P&I multiplied between 30% and 40% I also cross-referenced that times, making sure that it’s no more than 40% of the UPB as well. I see where that number falls in.
That’s the range where stuff lands. I can talk all day about my calculator, but at the end of the day, 90% of the time, that’s where stuff lands. That’s where I’ve seen it lands within that variance or that range for the most part. That’s one way, but the other thing is when you’re bidding on things from my pool’s perspective, you have to understand. Especially, taking an entire tape. What is a suitable discount? Understand which assets in there are decent and which ones are probably might be throwaways to discount them to precisely zero to manage out the portfolio. I use DataTree. I’ll run down the list of the assets. I like to acquire the assets where they’re occupied. They’ve been made a payment on that in the last six months as part of my component and know what states and what areas I want to look at.
If I look at a tape and I see I’m bidding on cherry-picking assets, typically in Florida, I’m not going to touch it because I’m going to get outbid all day long. In Texas, I’m going to get big outbid all day long. In certain areas of Indiana, I know there’s a buyer out there who flocks certain areas of Indiana. He will outbid me all day long because he’s also got a team in place and he can get stuff there. It’s understanding not only my capabilities but some of the trends. Over time, in the last few years, when I bid on stuff, I see where I fall into play in regards to the pricing on some of these assets. It takes time. One of the things that I like to talk and tell people is it takes time. We mentioned this with Bill, it doesn’t take 3 to 6 months to get a business up and running. This business takes years. You’re like any other business, it’s going to take you 3 to 5 years to get this thing in a position where you’re satisfied. It’s making money. I got my systems in place and it’s starting to follow a path and a strategy. That all comes with experience.
The question is, “When to get a hold of the list when you put it out?” I’ll put a link on the Notes and Bolts Facebook group. If you’re a member, you’ll have it there. I’ll send out an email blast to people as well and that will basically have it. Another comment about, “Not being a social butterfly and hard to think of business as all about networking.” It is yes and no. I’m looking at people in this webinar, for example. There are a handful of people who I’ve teamed with and done deals with. There are several of them I’ve never met. We’ve talked on the phone, but it’s all about building relationships and networking. That can be two completely different things. Being active, sometimes on some social media and trying to be a respected commentator can go a long way for people in that sense.
Another one, they mentioned that come down for lunch, “How about we meet in Berryville?” We’ll have lunch up there. It depends on your goals too, in regards to are you looking to raise funds or are you looking to invest your own money? If you’ve got your own money, then you don’t need to be a social butterfly. You look at some of the funds that are out there and stuff. These people, a lot of them aren’t very active at events or some of these other things. They’ve already got their systems in place or their sources. It comes to a point where you’re going to have to start networking to get to some sources, but you don’t have to probably do it constantly. Once you find a source, maybe you grow a business or you can get a line of credit or something.
I don’t consider myself a social butterfly, but I try and remain active on social media to make sure people know who I am. For me personally, I’d rather have nobody knows who I am and go about my day and do my business. I do enjoy this as well. Someone asked, “Is Rob still selling notes?” I don’t know the answer to that. I haven’t spoken to Rob in a while. I’m not sure if he is or isn’t. He used to represent USMR. He used to sell a lot of their stuff, but a lot of it was also seconds. I haven’t seen Rob active, but I didn’t go to Paper Source. I didn’t go to any of these other network events that people have had going on or any mastermind stuff. My focus has been on my portfolio and I spend my weekends with my family.
Thank you for joining us on this episode. When someone asks, “Where can you find assets?” My plan is to put out a tape within and get that out the door to people so people can have some bidding on some assets. There will be some performing and nonperforming assets on that, some notes, some CFDs. It’s a mixed bag. I’ve decided how many assets I’m going to put out there. It’s probably going to be about 10 to 15 is what I’m figuring. I’m not putting out 50, but I’m putting enough out there to give people something to look at. If people want help look and understand or even some of the due diligence on it, shoot me an email. I’ll give you the background and run down on the asset. With that, as always, go out and do some good deeds. Thank you all.
- First American
- Notes And Bolts – Facebook page
- Bill McCafferty – previous episode
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