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How The COVID-19 Pandemic Is Affecting The World Of Note Investing

GDNI 99 | Note Investing


The COVID-19 pandemic has undeniably disrupted everyone in the world. Businesses are closing, social distancing has kept people shut inside their homes, and panic and fear have become more and more familiar. Addressing this elephant in the room, Gail Anthony Greenberg and Chris Seveney discuss how the current pandemic is particularly affecting the world of note investing. They talk about the problems many are facing now with their investments and then provide some recommendations on what they can do in preparation for when the clouds lift. Looking back to the past crisis, Gail and Chris gather some important points and lessons that are applicable in this unprecedented time.

Listen to the podcast here:

How The COVID-19 Pandemic Is Affecting The World Of Note Investing

We are in a lockdown. This will be hopefully fun to look back on in the future when we’re outside again having lives. We’re all just dealing with what it’s like to live your whole life inside your house, through your computer reaching out to other people. We’re social distancing, Chris.

That is true. It’s a stay at home order, not a lockdown.

I don’t even know what the difference is. A lockdown is if the police see you on the street, they pick you up and take you home.

I had to go out for a doctor’s appointment and stuff. There are still a good number of cars on the road. Nothing compared to a typical day. It was still more cars than I anticipated.

I know in some places they are anticipating big spikes of cases because people are not taking it that seriously. There are some governors, notably the Midwest. The coasts are on board and the big cities are on board, but there are a lot of more rural places that are not totally bought into the idea that they need to stay home.

For example, Florida was late to the game. That’s my personal opinion and I’m not going to get into how to properly manage the State of Florida. That’s not what our show is about.

Florida always resists any rational management. Normally, it would be okay to be on the beach if you can be six feet away from everybody. During spring break, there’s no such thing as six feet away from anybody. That’s tragic that that happened. I have to say you’ve been very active on the Facebook group, sharing different articles and ideas about what this virus and the stay at home orders mean to the world of investing. I want to say as an upfront, we’re going to talk about it in terms of the world of investing.

It’s a human tragedy and we’re not looking to downplay that in any respect. It’s just that this show is about note investing. We’re going to guide the conversation in that direction. I’ve been talking to a lot of people. We know a lot of people in real estate and they’re all depending on what part of real estate they’re in. They’re all discussing whether they’re feeling okay, whether they’re desperate and very much in danger of losing a lot of money. I realized there are a lot of people who generally in life tend to catastrophize. It feels very important not to spend a lot of time with people like that.

People sometimes try to work towards a number versus letting the number tell you what it should be. Click To Tweet

People who, for them, the world is ending. It will never be the same. We’re all going to die. I had a realtor send me all these articles about the housing market will crash completely. It sounds like we’re all going to be living under a bridge within a couple of months no matter what else is going on. You have brought a lot of interesting ideas to the marketplace that are not all negative. I want to ask you, compared to when we first talked about the impact of the virus, are you thinking any differently about what the impact is going to be?

I was probably one of those people who at first didn’t think it would be as bad. My thought is probably being a little blown out of proportion and so forth. After learning more about it and stuff, the big challenge is you’ve got people selling courses already for how to invest in this. That just irritates me. The reason why things may have changed, but the reality is we don’t know. Six million more people applied for unemployment, but what the government is going to have to be proactive and react, which they’ve been doing and they’re probably going to continue to do. How is that going to play a major role? What is going to happen with the retail in some of these other places? I’ve had conversations with some people who have retail and they’re doing delivery only, but they’re still down about 80%. There’s talk about landlords working with their lenders to allow some of the tenants maybe to get small business loans or something versus a conventional bank because it will tie in more with the lender as well. There are a lot of things being discussed and there are a lot of options that are going to be available.

The reality of it is we don’t. It’s safe to say a few things. One is it’s going to take some time for a recovery. Housing pricing is going to soften. Pretty much everybody acknowledges that. Non-QM lending has gone out the window. A lot of those people are doing reverse mortgages, believe it or not. FHA loans are going to be going out of the window. You’re going to have to put more money down on these types of loans that go to a credit union that might only put 10% down, but the 3% money down is probably gone for the near future.

Those two things right there open up the opportunity for owner financing. A few other things that I’ll just mention as I chat about this too is that’s one component. The second is the timing. From a timing perspective of getting back to normal, we don’t know when we’re going to hit our peak. I watched on the news and it’s very challenging because the reality of it is, the opinion is China was not providing relevant information to how extreme it was over there. Some predict that they were a factor of ten off of what they reported versus what actually happened.

There was an article in the New York Times that in Wuhan, where everything has started, that they reported a total of 2,500 dead. You will appreciate this because you’re analytical and this is a very interesting approach. Based on the amount of time they know that the crematoriums were running in the seven big funeral homes in Wuhan, they are putting the number at 42,000. It’s off by a factor of almost twenty.

Here’s some advice that I throw out to people because I see this a lot on BiggerPockets and other websites. People are using very aggressive analytics and evaluating deals. People sometimes try to work towards a number versus letting the number tell you what it should be. Now is not a time to use 8% vacancy or only $50 a month for repairs and $60 a month for CapEx. People need to be realistic. Vacancy isn’t only being vacant, but it’s how many months you are not collecting rent. I’ve had conversations with numerous attorneys in regards to note investing and in general and in regards to just courts. People are flipping out, “I can’t evict a tenant.” Even if the governor didn’t put that executive order in, try and evict somebody because the counties are shut down. The courts are shut down. Even if the governor didn’t do it, it doesn’t matter because there’s no kangaroo court down the street that’s going to do it for you.

The practical reality is it can’t be done.

The reality too is it’s going to take a while. I’ve never been involved in court systems and stuff. They don’t work at the speed of lightning. You’re going to see until quarter four at the earliest when you start seeing things get back to normal in the court systems.

You hear this word all the time, unprecedented. It’s unprecedented that all the courts are completely shut down. I can’t even remember another situation where that was true. Not at 9/11, not during the crash of 2007, 2008. They kept going. They don’t have a lot of experience in how to start up again. How to relight the pilot light on this and how does it work? How fast do we have hot water?

GDNI 99 | Note Investing
Note Investing: History repeats itself. Something is eventually going to come, and you don’t want to be overleveraged for it.


Here are a few recommendations for people, what you can do. One is dust off that Cash for Keys agreement. Even if you still give them four months to move, you’re going to be better off. Fingers crossed may have a deed in lieu situation that may work out, which would be wonderful for me and one of my loans. What’s going to happen is your loans that are tied up in legal are going to take a while. What I was talking to another investor about is if I buy a loan and it doesn’t get back to normal until the end of the year and it’s in a judicial state, it’s not going to have a major impact. I was explaining to somebody, I said, “Take April 1st and you bid on an asset, you’re not closing on that thing until the third week in April realistically, maybe even longer.” If you can get O&E reports and BPOs and stuff, that’s going to be a little more challenging. It may take you 30 days to close.

Let’s say you close on May 1st, it’s going to take another month to get it boarded. Your June 1st, the hello letter goes out. It’s July 1st and you’ve got to make sure the borrower is 120 days behind. That’s at July 1st, but say even sent the demand letter out in the middle of July. You’ve got 30 days, you’re in August. They don’t respond and you file a complaint. That gets filed towards the end of August. You’re already at Labor Day and then the courts, if they were open, would set mediation up, which again, you’re in quarter four, which is what I anticipate. You’re not going to see, in my mind, a big blip. The comment I’ve been telling everybody is just bid on everything like it’s in Ohio and then you’re fine is my joke.

It’s funny that you say that because you and I put out a tape. I’ve had people looking at some of my assets that weren’t on the tape. People are like, “I don’t want to buy anything right now because I can’t do anything. I can’t evict. I can’t foreclose.” I feel like I’m looking to buy stuff because I want to have some coals in the fire and things ready to go when the cloud lifts. It’s crazy to me, maybe this goes back to the episode we did talking about how people don’t have enough in reserve. If I see a great deal, I’m going to buy it even if I have to wait a while to cash in on it. First of all, like you’ve pointed out before, it often takes a while to do things anyway. You’re not necessarily going to be sitting on cash or sitting on an asset that you can’t do anything with for a while. The other thing is that a great deal is a great deal. You should have enough in reserve that you can have something be unproductive for a little while if it’s going to be a good deal in the end.

There are a few things, too, that play off of that. I was talking with a few people about, one is I sent out twenty emails to a targeted specific area. From those twenty, I’ve got four people to respond that they’re going to send me tapes. Another factor to that is people aren’t as liquid as they should be. What are they going to have to do? They’re going to be forced to sell. You’re going to have people who either don’t have to look at liquidity that needs to sell or people who may have been furloughed from a job that need to sell assets.

The other component you’re going to find is there are a lot of institutions that may have lines of credit, wholesale lenders and people like that who have lines of credit out and those lines are getting called. What are they going to do? They’re going to sell their loans and be aware of an investor who’s got a line of credit out there that’s getting called and they’re looking to liquidate things or move some assets and stuff like that. There are definitely going to be opportunities to buy in the very short-term. I have opinions also long-term whether or not we’re going to physically see a lot of these nonperforming assets hit our proverbial desks.

I want to know what you have already thought about.

Several years ago, one of the major crisis points was banks. One was liquidity, but banks was in regards to reserves. If you don’t understand how banks operate, banks can typically lend up to 90 times every dollar they have in a deposit. If that loan goes nonperforming, they have to put that money in reserves. Banks were running out of reserves several years ago because before Dodd-Frank and stuff, they didn’t have to keep a lot where they have to keep a factor of ten in the reserves, which went back to zero, which is scary. Banks are much fiscally better off than they were a decade ago.

Overleveraged is never a good thing. Click To Tweet

Banks are going to be more willing to work with these borrowers because it’s more of a quick hit to the economy. Whereas a lot of stuff is going to go back up and running. There’s going to be definitely retail in some places where people are going to lose some jobs and stuff. A lot of the unemployment is going to get back to work. Are the banks going to sell? If the banks do sell, the reality of it is, I don’t see bank selling because they need to work through this. If a bank even sells, they’re going to be selling it to hedge funds and hedge funds typically hold things for a period of time as well.

People are sitting on the sidelines waiting, thinking, “I’m going to buy all this distress debt in the next six months from all these banks.” I don’t think that’s happening. I could be 100% wrong on this, but I view banks probably looking more because also there’s going to be more government intervention in regards to foreclosure versus forbearance on this issue. I’m not sure you’re going to see as much trickled down like you did a decade ago. If you do, I still think it would be years out. I don’t think it’s going to be within the next 6 to 12 months.

You don’t think if the banks are constrained from foreclosing that they won’t sell those loans off instead like soon?

No. First off, I don’t think they’re going to be allowed to foreclose.

If they can’t foreclose, won’t they dump the loans?

They’re going to try and work something out with the borrower because the property probably has equity in it. If it’s got equity, they’re somewhat protected. Again, it comes back down to what’s their reserve. How much does the bank have in reserve and how many loans so they have better nonperforming? You may have some small banks in the Midwest that might get crushed. They may get bought up by somebody or they may move to liquidate loans and stuff, but I’m curious too. There are going to be these funds that are going to want to take on some of that stuff. The challenge is going to be also what the government involvement in the trickery with some of these. If the bank can’t foreclose, whoever buys is not going to be able to foreclose either.

It’s going to be interesting if it gets pushed down the line, some of these are 180-day forbearance with the option for another 180 days. The banks may be better off just keeping them in-house. I don’t know. This is just my thought. Even if the bank does look to move it, you look at who buys this stuff, funds, REITs and some of these other large mega REITs are getting crushed. They’re trying to hold onto as much money as possible. The question is, who’s there to buy? You’ve got Blackstone who has funds who’s counting up billions. If they’re buying it, look at how long it would take to close a deal when you look at some of these Fannie sales. Those take 3 to 6 months a sell. If you look at the timing from that and the timing that it makes its way to our desk.

We’ve never talked about this. I’ve never read or heard anyone talk about it. Do we know in better times how long it takes from the moment a bank decides to sell a loan for it to go through those multiple transactions, from bigger hedge funds to smaller hedge funds, to people who will sell to us? What do you think is the total amount of time it takes from the time the bank sells into a hedge fund until it’s available to us to buy?

I don’t know. There are smaller banks that sell. You might be able to pick up some assets from them. I’m googling Fannie Mae loan sales just to see. A performing deal was announced October 10th. It looks like it was October, then closed in December. It looks like it may take 60 to 90 days. That’s the fund and then the fund has to turn around and get it all boarded. That’s what they do.

Someone was asking me why we never see any loans in California and other high luxury states. That’s because they have hedge funds skim off the cream off the top. I have a question for you too. When we started in loan investing, there were a tremendous number of contract for deed loans that were available. These were properties that had been foreclosed after the crash of 2007, 2008. There were tons and tons of foreclosed houses available all across the United States, but mostly in Rust Belt states, the Midwest, Florida, lower-priced houses. Several funds at that time bought up these houses, did usually minimal repair on them and then sold them to borrowers on low down payments and on land contracts and hope for the best. Put people in these houses and see what happens.

For you and me, the people who ultimately failed as borrowers in those houses and they were nonperforming, you and I had a great time buying those and working with those people. If people didn’t want to stay taking back those houses and selling them, that honestly for me was the most fun and the most lucrative. I feel like I helped some people by letting them leave their house. There was a lot of potential in those houses. What’s different is that a lot of states have put rules in place, making it very difficult to create land contracts with people. Does that make you less excited about buying the distressed loans that are going to be created through seller financing?

GDNI 99 | Note Investing
Note Investing: You got to roll with the punches and be like an amoeba, to continue to change with the environment around you.


A few things that with the seller finance component, especially with the land contracts, you’re hitting a lot of regulations. If somebody wants to crush it coming out of this, if you pick a specific market and you start buying up a lot of these distressed homes or borrowers who failed and turn around and get them in a livable condition. Not just turn around and sell it as is because that’s where you also are starting to see those companies. That’s where they ran into trouble is they didn’t do anything. That’s where some of them harbor and vision were getting in trouble. If you had a crew that could renovate these properties, get them in a livable condition and then turned around and owner financed these things to people, you could crush it coming out of this.

I mentioned that FHA has gone, banks are going to probably have some liquidity issues. They’re not going to give loans, especially under probably $50,000 to $100,000. Regulations are tightened up with the state. If you could do a contract for deed to somewhat lessen those or a lease option or work something in that area. If you spent the next three months saying, “I am going to go to this market.” You can’t hop in your car, but find somebody who was an expert that you can partner in that area. It’s something where you can crush it because not only that, you’re going to also see a lot of these rentals and landlords. I call it the BiggerPocket newbies who go and buy these houses where they took a line of credit. They took a personal loan. They wrecked up the credit cards to buy those houses. They’re crushed. They’re done. They’re toast.

I mentioned this prior episode, there was a guy bragging about how he did that. My only comment was this will not end well. He started chomping at me, this and that. I said, “Trust me, these will never end well.” I made another comment. I said, “How is it working for you now?” Other people finally started chiming in and saying, “Yes, that’s not a smart move.” Everyone can play Monday morning quarterback. History is on your side of overleveraged is never a good thing. History repeats itself and nobody saw this coming, but something was eventually going to come and you don’t want to be overleveraged.

I was thinking about this. Hopefully, this is a unique situation that will never be repeated in our lifetime. I’m not sure why this virus as opposed to SARS, MERS, and H1N1. It seems to be the problem is that this is a very stealthy virus that you can have it and not know it. You can have it and infect other people. It’s less lethal than those others, but it’s far more contagious. You end up with a lot more sick people. This was our first experience with something this contagious. Mistakes were made and things could have been done better. I was thinking even if you had people who were preparing themselves for the next one, what would we do differently that would make us not have to go to this extent where we’re all at home? We’re not locked down. Couldn’t this happen again? Is this going to be something that will start to happen more, do you think?

Here are one of the challenges that I heard discussed is if you think of a virus and it’s IQ. This is one of the smartest viruses known to man. The reason why is SARS and these other viruses, they were stupid because they would attack their host and they would kill their host, which didn’t give them enough time to reproduce. What COVID-19 is doing is it’s getting in a host. It’s sitting there for a little while. It’s allowing itself to be spread to other hosts, then it’s potentially fatal to that person. It’s allowing itself to multiply while also still doing its damage. That’s one of the things they mentioned. They’re still trying to figure things out.

I saw on the news a study that 32% of people with diabetes who have this ended up in intensive care. That’s a huge number. They’re trying to figure out why diabetes. They start to go off about how 50% of people over the age of something have Type 2 diabetes just because of our eating habits in this country got awful. From that perspective, it’s a smart virus. What could you have done or prepared differently? It boils down to, again, sound business practices. Don’t overstretch yourself. Keep yourself with liquidity. There are points and times where everybody, I don’t care what business, sometimes stretches things here and there. I don’t think anybody saw this coming, but there’s been enough writing on the wall that the market itself was overheating a little bit prior to this in the next 24 months. You probably would have seen some softening in the market. How bad, who knows?

You listen to a lot of the smarter companies and how they operate, they were not tightening the ship, but they were being very cautious and focused. It goes back to putting that business plan together. Putting your plan of attack together and somewhat following it. Everything’s got to change because you’ve got to roll with the punches, be like an amoeba and continue to change with the environment around you. You’ve also got to set a strategic plan in place. That’s important at the beginning of every year. I put that one-page plan out all the time and I guarantee you, 99% of people reading this don’t have a strategic plan and what their goals were or what their following. That’s why it’s so important to do these. It goes back from the owner of the companies I work for. He always used to say, “Just do the blocking and tackling. That’s all I want you to do.” You do the basics and you’re going to be successful. That tape has a lot of credibility to it.

You cannot be counting on everything to fall into place perfectly. Click To Tweet

We talked about that a lot in the last episode. You cannot be counting on everything to fall into place perfectly. I would like to think that in the aftermath of this virus, there will be hand-wringing and people blaming each other for everything. What I hope also happens is that people ask themselves the questions, “What are we going to do next time when the first cases are reported in some distant land? Is there a way to minimize the impact on America?” I don’t know if the answer can be yes in a world that is as interconnected as ours is. Talking about a virus that people can have and have no symptoms. That is the creepiest, worst-case scenario. What if people were sick and they had no idea? They just ran around and made everybody else sick.

Do you feel as a note investor during times like this with the stock market getting crushed, it would be easier to raise money?

That’s very interesting that you say that. I’m in a mixed couple. My husband is a stock market guy and I am not. There was a time when we both had all of our money in some stock-related instruments. I didn’t know real estate yet, but I hadn’t started it. He has still a lot in the stock market. I have very little, but I did sell everything ironically the day before the big 11% increase. Timing has always been my forte.

I was going to say, “Were you connected with Dianne Feinstein?”

I’m the biggest idiot when it comes to that stuff. I have real estate now. To me, real estate and particularly the right kinds of real estate, it’s so comforting. I would definitely think that people who have all their money in stocks would be asking themselves, when a stock-broker says diversify, they mean other kinds of stocks. “Don’t just be in this stock and these bonds also.” All of that is still one little pond that if it gets poisoned, you’re not in good shape. You need to have another pond entirely. For people who aren’t in real estate at all, I feel bad for them. I also understand how hard it is because it wasn’t that long ago that I was one of those people. It’s hard to know how to be in real estate if you are a civilian and you don’t know real estate yet.

People think being in real estate means flipping houses or loaning money to people flipping houses. That is probably the worst possible situation to be in because if values are about to tank, people are not going to be able to maybe even break even on flipping a house. Their ability to pay back their lenders could be totally compromised. There are lots of people who offer turnkey rentals to investors. That could be a good deal if they’re not overpriced and they’re well managed. They’re in an area where not everybody is dependent on one industry for their livelihood.

I feel like we as note investors have a great story and a great pitch for people because the people who invest with us can be pretty diversified already. If you think about it, if you buy a distressed loan or even a performing loan with a borrower, you can always know a lot about the borrower before you buy a loan. If you can think about that person’s earning power and what kinds of things would compromise their ability to pay, you can think it through in a commonsensical way, you can pick investments that are more catastrophe proof and some.

One of the challenges is with the markets because of the liquidity and how easy it is to get in and out, there’s so much variation from day-to-day. It goes down eight. It goes up ten. In times of volatility like this, it’s just crazy. Real estate market is a little easier to read in the sense of when it’s going down, it’s like you don’t know how far it may go down or how long, but you can sense which way the roller coaster is going. If you were short on things, now probably isn’t a bad time to try and sell stuff because it depends. Whether you’re in for the long haul, you’re doing fix and flipping, that’s a tough one.

If you’re in a rental, do you care whether it goes down? It’s like my 401(k), I’m 44. I don’t care if it goes down to $15,000 because I’m not pulling it out. I’ve got time to recover. Real estate is the same way, but it’s a little better in the sense of it’s somewhat easier to read because it’s not a day-to-day thing. It’s interesting to ask that question because I thought there would be more people looking at real estate or trying to diversify. What I’m seeing is a lot more people are like, “I’m just keeping my money on the sidelines.” It’s interesting in the sense of part of the way I look at this is and people are like, “The borrowers aren’t paying.” We buy loans where people haven’t paid for three years. The Coronavirus has no impact on the loans we buy in reality. It’s a wrinkle where there might be more of them, but most of what we’ve been buying anyway, they haven’t been paying. What’s the difference in some sense?

GDNI 99 | Note Investing
Note Investing: Real estate, if you do it correctly, is always based on value.


People are fearful. I forgot if it was Warren Buffett who said, “You make money doing the opposite. If they were panicking and selling, you buy.” What I think about when I think about investments, the stock market versus real estate or whatever. To me, real estate if you do it correctly is always based on value, buying value of some sort. As note investors, we buy income streams. We buy distressed loans that can be turned into income streams if they can be gotten to reperform and then the value of the asset goes up. We know if we buy it at one price and we can turn it around, we can sell it at a much higher price, but there’s always a value there. There is an asset. There is something there.

You buy a rental. You have a house or an apartment, you own something. The stock market, the valuation that’s put on companies in the stock market. If you think about the tech bubble and these ridiculous values that were put on companies that didn’t create anything and didn’t do anything, they were more like ideas. It’s so funny to me that the stock market is what serious people invest in. This is my friends, “I understand the stock market. I want my money to be there. Real estate feels risky to me.”

To me, the stock market is such a bunch of dreamers. They’re easily panic-stricken. The way things are valued often has no basis in reality. It’s not based on what companies own or the value of what they create. It’s like rumors or ideas. They’re like a bunch of tarot card readers who also panic easily. It’s also ridiculous. It’s a house of cards. My transformation is complete. I started as a total believer. I grew up in a family that believed in the stock market. As a real estate investor, I look at it and like, “What was I thinking?”

There are a few things. One is some Warren Buffett quotes. One is “Widespread fear is your friend as an investor because it serves up bargain purchases.” Another one that I like is “It’s only when the tide goes out that you discover who’s been swimming naked.” Another interesting one that he said once is, “Sometimes the tide is far more important than the swimmers.”

I am selling a house that I took back in a foreclosure. It’s supposed to close. They need a couple of extra days. Hopefully, it’s going to close in this environment. I’m going to sit on some cash for a while and just see what opportunities present themselves. The little upside of this whole situation is that we don’t know what’s going to happen and we don’t know what opportunities are going to present themselves. It would be nice to have some money ready to go and also be in touch with some investors who have money and ready to go.

Another interesting thing is I put out some real estate on assets that I have in Gary. I put five of them that were out for sale. I’ve got four of them under agreement. There are still people buying. Any final thoughts on our rumblings and ramblings about the investment environment?

Prepare with sound business practices. Don't overstretch yourself. Keep yourself with liquidity. Click To Tweet

Get your nickels together. A brighter day is coming. Everybody, stay safe and stay home.

Thank you all.

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