- April 24, 2020
- Posted by: august19
- Category: Podcast
Every note investor has been down the road of loan closing and boarding a few times. Needless to say, it’s one of the things where we can’t find a lot of information and training for. In this episode, Chris Seveney discusses the loan closing and boarding process, diving into how the boarding process works and enumerating its components. He also gives some real examples that he himself or someone he knew went through. Going into some of the common mistakes that people commit during a boarding process, he gives some tips on how to recognize and avoid them.
Listen to the podcast here:
Loan Closing And Boarding Process For Note Investors
We’ve got a COVID-19 special, which we’re going to talk about the loan closing and boarding process. This is something I’m in the process of going through and I’ve been down the road and through this a few times. Needless to say, and it’s one of the things that I find that is not a lot of information and training out there on this. It’s important to understand this process because a lot can happen and there’s a lot you should be aware of during this. Awareness is the biggest priority and focus that I want to talk about.
A few things about me that we can talk about. I, as many of you know, cohost the show with Gail Anthony Greenberg. Gail has a small little hiatus as she’s trying to get some of her renovation properties taken care of and completed. I manage portfolios over about 200 active notes. I know Shante was on here. Madison managed half that portfolio for me, about 100 of those assets, background. People ask how I got involved in notes and so forth. I graduated college with a Civil Engineering degree and was in construction real estate development for twenty-plus years and realized with the wife and kids and family, we had done two fix and flips. The burrs and ran out of time with the kids and everything and trying to look at properties located in Washington, DC made it challenging. I came across notes on BiggerPockets. Since that time that was in 2016, amassing a decent portfolio during this time.
Also, I went back to school, got a Master’s in Real Estate Finance, which I would have finished this semester if it wasn’t for what we’ve got going on. I’ve got one class to take, which is for my thesis on it. It’s writing a business plan for note investing in raising money for a fund. It should be a fun little project. For me, my goal is to educate people in the note space from making costly mistakes. I’m not looking to be the biggest, I’m not looking to amass some humongous training program and charge people oodles of dollars to learn notes. Notes is a combination of experience and a lengthy process. I find it difficult for anyone that teaches notes to have already any type of decent formal training process that’s probably less than a year because it’s a difficult process to do. One thing that I heard and I put this little quote down at the bottom is, “You cannot prevent lawsuits but you can prevent losing lawsuits.” I saw that and started laughing because I know a lot of people talk about, “There’s nothing you can do about getting sued.” That’s true, but there’s a lot you can do about how not losing lawsuits. One of those components is doing the right thing and making sure you understand what you’re doing. I want to talk a little bit about that with this boarding process. Enough about me, let’s roll right into the boarding process itself.
The Boarding Process
Typically, and this happens a lot, your bid is accepted now, what happens? I don’t know how many times I get an email or a phone call from people that say, “I’m excited, I got a bit to happen, but I took all these training courses and nobody told me what to do after you get your bid accepted. I got the boarding process. What happens? What do I do?” I did a webinar a few years ago on this that was basic and generic. During that time, I probably bought 20, 30 notes and based on having been through this and seen a lot of things and lessons learned that could happen. It’s something I wanted to go out and share because I know a lot of people out there during this time are looking for some more education and wanting to provide it. I put together a fancy slide about the process itself. It rolls through. The first thing you should do after you get your bid accepted is I call it data input. It’s inputting all the information into whatever system you’re going to use to manage your notes. We’re going to talk about that because that’s important. Especially as you start to grow, you should definitely want to make sure that you have whatever system you use. I’ve switched from system to system from using Excel to trying to use Infusionsoft for it, and I’ve bitten the bullet and used The Mortgage Office, which is what a lot of services use and it is expensive, but it covers every basis for everything you want to know.
That’s the first thing, making sure that you take everything and we’ll talk about what everything is. The next is communication. What I mean by that is making sure you’re providing the pertinent information to the seller. You bought it from the seller. Who’s your servicer? Make sure of the right entity. All the information that you are going to need for them to go to the next step, which is executing the contract. This is important because you need to review before you execute the loan sale agreement. I don’t know how many people would sign loan sale agreements without reviewing them. My rule of thumb, the first time I ever buy from someone, that loan sale agreement goes right to my attorney and says, “What’s in here? What are the gotchas?” I would bet I could probably count on one hand the number of other people who send loan sale agreements to their attorneys. From that step, once you review it, sign it, you fund the deal. Getting from the bid accepted to funding the deal, there’s a process involved. Especially, once you do your due diligence and get that completed, you then get the loan sale and everything, you say, “I’m going to go with due diligence.” There’s still a few days process this all takes. The biggest and most important thing that I see people failing to do is thinking that they are driving the Tesla during this process and that everything takes care of itself.
That is the furthest from the truth. I don’t care what anybody tells you. That is a complete hoax. You need to manage your servicers, a seller, and third-party vendors. You need to manage yourself in this process. This is an important thing to understand. Let’s talk about the first component, which is your initial data input. You want to start your systems off on the right track. First of all, for people reading, I recommend you grab a pen and paper for this because there’s going to be a lot of stuff that is on the slides, but also components I throw out there but you’re going to want to take some notes on this. The other component I want to mention before I get into this is, there’s the first phase of bidding, which we’ve talked about and negotiating with the seller. I’ll do another episode on that because someone asked about that. This was something that was stuck in my head and I spent one night putting all this together. I will make sure we cover the full gamut of processes from there. For this data input, it’s important to start your systems off on the right track because when you have 1 or 2 notes, you may think, “It’s not a big deal.” When you have 10, 20 notes, it becomes a bigger deal.
When you have 100 notes, you don’t have a good system. Forget it. You’re done. You’re toast. The pertinent information that I believe you should be putting into your systems, you want to have something that tracks the borrower’s information, name, address, phone, email and Social Security. Why all of this? Because later on down the line, you may have to send a demand letter and if you have Social Security, the attorney is going to check if there are any bankruptcies. You can get that information from your servicer, but it may take a few days and then those delays sending that demand letter. It’s something that you should have. You want to keep this information secure, but also their phone and email. There may come a time where they may reach out to you and you may need to reach out to them for something. It’s good to have. When you think about if you have 50 loans and don’t have any of this information to chase all that down, think of how much time it’s going to take you. This is the stuff that you can get right upfront. It should be in a collateral file. If it’s not, servicers will get it. You’ll want this information. Next is the property information. Make sure you have the address, the value. The tax amount is always important. You know what it is.
I keep in my tracking system, “The insurance covered. Who’s got it under insurance?” You grow, you lose track of, “I got this under JB Lloyd, I have this with the servicer, and the borrower has her own insurance.” It gets confusing. You may realize, “Did I put that one under insurance?” Which we’ll talk about what you should be doing at that point in time. It’s important to track all of this information. Loan terms, and I’ll explain why on this one. You want to know the original amount, first payment date. You take the information from the tape and you plug it into your system. The last piece of the pie is to your seller information tracking the collateral. I like to track tax due dates, which servicer I have it with, the acquisition price, JB, all this information. A perfect example why is I get a tax bill in the mail. I need to send it to the servicer. I use 3 or 4 different servicers. With 200 notes, which servicer has that note? If I’m not tracking that anywhere to log into each system to figure out who’s servicing that note, think how much time that’s going to take. I can pop up on my computer and in 30 seconds in the software I use, put in the address and it will spit out who the servicer is, the loan number, and all of that information. It’s also important to know your JV partners as well. If they pick up the phone and call you, you can have that information at your fingertips and not be like, “Jim, which deal am I? We’re doing with Jim?” Setting the stage and getting set on the right track is what this is tailored to.
If you don’t do this, is that the end of the world? No, but as you grow and scale, it’s going to impact your business and negatively. There’s a big difference between buying notes or being a note investor and having a note business. This is the stuff you do as a note business that separates a note buyer from some of those who have the business. I got the loan under agreement. We agreed to the price. Now I’m putting all this data into my system. Next is the seller will ask a bunch of questions, “What’s your entity? When can you fund the deal?” There is some basic information components to you, but then he’ll send you the lump sale agreement and I like to say, you’ve got to know the deal or you’re going to be burned later on. I’m going to do some case studies as we talk through this and I’m going to try and release a case study on a deal every single day for the month of May. We’ll deal with that. Some of the first things with the loan sale agreement, like I mentioned, the bread and butter topics in regards to what you should provide make sure that’s in the loan sale agreement. The price, make sure you know the seller’s names in there. Make sure you’ve got the correct entity you’re buying it with. I use several different entities. I want to make sure I’m buying it with the right entity, especially if some people buy performing notes with their IRA or Solo 401(k). You bought ten notes from one seller one time. You’re buying these for your IRA.
Sometimes they cut and paste the loan sale agreement. If you sign in with one then to go back and sign it, it can be a pain. It’s something you’ll want to consider. Some of the key components of the loan sale agreement, the selling entity who you’re buying it from is the closing date. The closing date is the date that you’re closing, you’re executing, and wiring the funds. That’s important. The funding date is also the date where you say you’re going to fund the deal. Typically, the closing date and funding date are the same. Reps and certs, this is a key one as well. What are they certifying? I’m going to explain all of these. There’s the interim servicing agreement, which is what’s happening during the servicing and then the loans and the price paid. With all of this selling entity basic, who are you buying it from? The closing date is the date where payments after that date go to you. That’s important because some people may take 1.5 months. I know some people think 1.5 months to do due diligence. Some of these loans are performing. It’s Happy Tax Day. If somebody said, “I’ll give you a $10,000 for a note,” fine. All of a sudden, come May 1st, they try and close on that date. There have been payments made already on that loan. The closing date is important to understand based on what is the date of the funds being closed from one entity to the other. It’s a funding date.You cannot prevent lawsuits, but you can avoid losing lawsuits. Click To Tweet
I tried to get the closing date that day my bid got accepted but every seller rejected that. I still try. If I got it approved, I would still try and target that date but the sellers laugh at me. It’s usually the date you’re going to fund the deal. Loans and prices paid, whatever you’re buying, make sure it’s listed in the price paid. This is important. I know people who buy ten notes and they’ll say, “They’re paying $0.50 on the dollar for each one $50,000.” They then turn around and in their own internal books, change the pricing from what they paid to make things look a little better or however they want to arrange it. Instead of paying $10,000 for five assets, they’re like, “I’m buying these two for $12,000, this one for $8,000.” If you change it from the loan sale agreement, you ever get audited your host in that sense, because you’re cooking your books saying you bought it for one and then you change the numbers. Especially if you’re running funds or anything like that or even JV agreements, it’s pretty much fraud I would think. If it says one on the loan sale agreement, that’s what it should be in your accounting system. Let’s talk reps and certs because I have talked about this and the big component to this is making sure whatever you’re buying is redeemable. What does that mean? I will give you a perfect example. I had nonperforming assets that I was looking to acquire and I was asking a bunch of questions on it. What it came to find out is the borrower passed away.
It went through probate. The servicer/lender at the time never did anything. Essentially, the statute of limitations ran up and that note was much useless. Some of this stuff is you should find during due diligence. Others, there’s stuff you may not find doing the due diligence that you didn’t know from that component. One of the things that you’ll see a lot in the reps and certs is that as is, where is, and so forth. You’ve got to be careful with those because you could have a prior servicer who may have discharged a loan and signed off and said, “Have you paid for this anymore?” Nothing ever got recorded, then you go to the borrower and say, “You owe me $20,000.” They’re like, “I got this document from ABC Lender saying that they wiped the loan or I gave him $3,000 and they signed off on everything and I no longer owe that money.” It’s because the satisfaction wasn’t recorded, that’s something that you’ve got to be careful of. A seller, in those instances, would honor it but the statute of limitations is a perfect example. You see loans floating out there from 2008 and in certain states, you can’t do anything with those. They’re past the statute of limitations. You can’t foreclose on the property. You can’t collect on the borrower. Some states you might be able to foreclose but not collect. There’s a lot in there that you want to make sure that if I buy first, a redeemable first position loan.
That loan is still secured in the first position on the property. Some people go even further and say, “There’s a tax lien on the property. Is it still technically a redeemable first position lien?” That gets a little hairy. For me, I would probably say it is but legally and technically, that’s a great question that you should ask your attorney. That’s why it’s the biggest circle. It’s the biggest component of this. The other thing is you’re certifying certain things, too, like your license to do business that you’re a registered company and all these other things. Another component to that is that it goes for both sides. I know sellers who weren’t licensed or they let their registrations expire. On CFDs, that’s huge because you’re transferring deed and if they’re not registered or their entity is closed, then them selling the property to you, you’re not getting title insurance on that if you were trying to get insurance. I’m throwing a lot of things out there. This is why I talk about sending this over and walking through, spending an hour with the attorney so you understand all of these things and that’s what people are certifying in this agreement. A lot of times people are like, “I didn’t know that.” It was clear in the agreement about what was happening. The interim servicing agreement, here’s one that’s less than a month old. I had this issue come up and I’m working with the seller.
Somebody I bought 50 loans from and they’re good to deal with and ethical. That’s one of the key components is you want to know your seller. I bought a nonperforming asset and it was in bankruptcy. They hadn’t paid in the bankruptcy. Nothing was showing up during the bid process about anything with the bankruptcy. Everything was normal, the standard stuff was going through there. Finally, a document came out from the trustee about the loan on the property, noting that it was disputed and that they needed verification and a response from the lender and servicer because the borrower thought it had been previously discharged. This happened three days after I said, “I’m going to buy this thing.” We’d go and I buy the note and the lender had until March 22nd to respond to the letter. I’ll be honest, during that time, I didn’t look, then when it got boarded, the servicer checks out the bankruptcy and says, “Can you ask the prior servicer to send us over the response to the letter from the bankruptcy case and so forth?” I reached out to the seller and said, “Can you get this information to me?” He calls me up and says, “About that, we didn’t do anything. The servicing company never responded to the letter.” In the agreement, it says that they check your agreement, but during the interim servicing, they should maintain and properly service the loan. There’s usually a limit on how much money they will spend.
There’s language in there about not doing anything that can negatively impact the loan. They’re not going to file a motion for relief and spend $1,200 but if they’re supposed to reply to a letter from the trustee that they need to respond to, yes, they should be responding. They didn’t respond. I had my attorney review it and sent me over some information and I sent that back to the seller. They’re looking into it and I know we’re going to get it resolved one way or the other. Whether they give me my money back for it or there’s something that possibly you can still pursue, but whatever the case may be. Here’s an example that nobody that I’m aware of ever even discusses the interim servicing component. This is the first time it’s come up and as you buy lots of notes, stuff as this happens. It’s the first time I had to pull this out because I’m one of those idiots that reads all this stuff. I knew what the expectation was. One last thing I want to mention is when you execute your loan sale agreement, try and fund the deal the same day. Don’t fund before you sign a deal. Don’t execute on a Monday and be like, “I’m going to fund next Tuesday.”
Sometimes the dates will get screwed up in regards to the closing date because there will be a note in their closing date as date funds are received and you may think, “I dated this on April 15th. I didn’t fund until April 20th.” A person pays $1,000 on April 18th. That goes to the prior seller. There a lot of information, I hope you could digest it.
Question And Answer
Brian Gallagher is who I use as my attorney to review this. He is a real estate attorney who does foreclosures. He has a lot of larger clients who do notes. He does all my contracts. He’s written my PPMs. He’s written my JV agreements. He’s written every legal document that I have. He has reviewed and written or at least had a review of it. My loan sale agreement that I sell to people, I had him write for me. You had your attorney review the loan sale agreement. You’ve gone through it, you understand it, you wire that money, and now the fun begins. We’re managing the boarding process and this is critical. This process will be in the contract, a loan sale agreement, and what the transfer date is, it’s usually about four weeks out. It’s in there but I like to remind people this doesn’t happen overnight. This doesn’t happen in a week’s time. There is a process that happens. You wire the money either within the loan sale agreement or that day or next day, and the seller will be like, “Who’s your servicer?” If you’re using different servicers for different loans, you need to send them all that information.
They’re going to want to know who’s your servicer. Where do I send the collateral files? Those are two big things that you need to make sure. When you send them to your servicer or the person with collateral file, make sure you have an agreement in place with them already because if not, it will delay the process. I saw Shante on here from Madison Management. If you haven’t signed up with Madison and you say, “That’s my servicer.” They don’t work out of generosity. They can get in trouble for doing stuff without agreements in place. You need to have the agreement in place. That’s one part of it. The second part that you have to have is when you are buying the loans, you need to let the servicer know what you’re buying as well. A perfect example is I’m buying ten loans. I sent it to the servicer and I’m like, “Here are the ten loans.” The seller only sends eight goodbye letters. If you didn’t send anything to the servicer, a month later, they’re like, “Your eight loans get boarded.” I said, “I bought ten loans. I only got eight.” You lost a month. You want to have your agreement in place with your servicer. When you close, you should have already filled out the paperwork that your servicer requires that shows what you’re boarding. It should have the name, the address, and you should send them the collateral. You may not have the assignment or the deed depending on the contract for deed to entity yet.
That may take a week, but at least you send it to them so they’re aware that it’s coming. When it comes, they know, “This is Chris’ stuff.” Contrary to popular belief, you’re not the only client for that servicer. They get hundreds of loans a week, and I’m guessing that is coming in the door or leaving the door. They have no clue whose 123 Main Street coming from XYZ Servicing is if you didn’t notify them. We’ll sit in La La Land and a bucket being, “Whose loan is this?” It’s something to be cognizant of. Your agreements are in place. The seller servicer will send a goodbye letter, which is like, “Goodbye. We’re not servicing.” That’s why they need the name of the new servicer because your new servicer is ABC. You should get a copy of that. The reason why you should get a copy of that is I have gotten goodbye letters that have had my wrong entity. Here’s a question I’ll pose for people out there, “How many people give your servicer one phone number, but borrowers a different phone number?” I do. I’m sure some other people do as well. The servicer in the email you send them has a phone number, they’ll probably put that phone number in there. When they send it to the borrower, the borrower has probably already got your personal cell phone number. You want to make sure you review it because even though you gave them a different one, they may look at the email and say, “They put that one in.”
It’s the same thing if you use different addresses. Your home address for personal address versus a PO Box or another address. You want to review the goodbye letters. The servicer that you’re using also reviews them and they approve them. They’ll mail you a collateral file. They don’t mail it the day after. Some do, which are good, but it’s a week to two weeks later because they will create and send it as one package along with the assignments that you need. You’ll get that and the question is, what are you doing? Are you sending it off to KDK, Erika to record for you? Are you sending it off to MetaSource or Richmond Monroe? Where is it going and do you have that agreement in place? Everyone that I know I’ve spoken to, the collateral documentation recording has been the biggest challenge for most people the last couple of months in getting information and getting it recorded. I know for me it’s been a nightmare and I’ve sold stuff that I still owe the person some collateral because the company I use has dropped the ball big time in certain aspects. Some of it is my fault too. I’ve screwed up as well. Be cognizant of that and the other thing, too, with the transfer docs, sometimes it’s better to use a third-party. Window Rock, John Keith, a lot of us have bought stuff from him. If CFDs, they use the same deed no matter what. North Carolina, you have to have what’s the tax amount on the deed. Certain states, you need a PTAX form in Illinois. In Indiana, you need an SDF.
They don’t send any of that unless you ask for it. That’s why it’s important sometimes also, for the transfer docs to have a professional looking at those for you. The final loan data, this is one that I’m guessing if I had three people on this say they asked for the final loan data, I will be shocked. If you do, you get the star for the day.
Final Loan Data
What is the final loan data? Next one is a transfer date, which is in the contract. This is something that you want to constantly manage at the seller servicer on making sure with your servicer transferring. Final loan data is the final information on the day of the transfer that goes to your servicer. Let’s say you bought a note on March 30th. The transfer date is April 1st. If the borrower’s payment was due on April 1st, what do you think happened between March 30th and April 21st? The borrower made a payment. Who would they make the payment to? They made it to the seller servicer. If the UPB, and I’ll use simple examples, it was $10,000 with $1,000 a month interest-only loan. They made that payment on April 1st, your loan gets boarded in $9,000. There’s $1,000 that is different from when you bought it to the final loan data. Why is that important? You’re buying one note and a payment may get missed. I did a pool of 80 assets that the boarding process took about 5 to 6 weeks because of the size. I’d say probably 60 of the loans were performing.
When that final loan data got boarded, I went through and checked to see every single loan and what payments were made during that time. I knew you want to guess how much money was received during that time. The first thing I’ll tell you is the seller is not sitting there, calling you up the day after it gets transferred, saying, “I got all these payments that came in the door on this date.” Most sellers and I’ll be the first to admit. I’m super busy, I sell a loan and so forth. Honestly, I don’t go back and check every single time a payment was made to see where it goes. If you came to me and said, “I bought this on April 1st or on March 30th and on April 7th, the payment was made.” You bought it on April 21st, I’d go back, look, and say, “I cut you a check.” I had over $20,000 of payments that had come into the person I bought them from. If I didn’t check the final loan data and didn’t go through everything, how would I have known? I could have checked the UPBs and tried to figure it out. Think about that $20,000. That’s why getting that final loan data is important. What if the borrower made a $2,000 payment because they got their taxes refunded, did you ever go back to check the UPB when you bid versus what it was? There are two things that can happen in this because one question popped up. If it’s after the closing date, that seller owes you 100%. “I bought the loan on March 30th and then the payment was made April 7th.” They owe you that money.
Say you got it under the agreement on March 1st, but then it funds until March 30th and the person made some payments. This goes back to that loan sale agreement. If you bought it at $0.50 on the dollar and UPB went down by $1,000, you get $500, they keep the $500. It’s based on the percentage of what you bought it for. That’s spelled out in the contract as well. From that perspective, if you think of it from the time frame I bid, it was $10,000 on March 1st, say on March 30th I close. If in between that time before you close it went down, a lot of times the agreements will say, “It’s the percentage you bought it on.” On March 30th, you closed and April 30th, it gets boarded. If they made the payment on April 7th, you own the loan on April 30th. They’re interim servicing it for you. No more payments should be going back out of the lender. They do because the interim servicer will put them in the system and they haven’t transferred the loan so they get the payment and be like, “This is John Smith’s loan and we got the payment. Our monthly distribution, Eric goes out to him.” That’s the seller servicer. That’s one side that you have to manage.There's a big difference between buying notes or being a note investor and having a note business. Click To Tweet
You’ve got your own servicer. This is where relationships matter and you send your servicer some brownies or cookies and stuff, this sometimes helps too. You want to send them the loans you’re getting boarded. Nobody likes surprises so let them know in advance what’s coming. As part of that, send them the documentation. You want to send them the note. You want to send them the title report so they have as much as possible. I’ll be honest, I do this too. It’s an 800-page file and I email them everything. For them, that slows the process down. If you organize things like the webinar I talked about, “Here’s the note, here’s the mortgage, allonge, assignment.” You send them that chain and they’re good. You want to send that to them. A lot of times what ends up happening with the soft collateral, too, is there will be a modification that isn’t in the system. The servicer sometimes we’ll notify you and say, “Was this all modified?” The data comes in with a different interest rate or things like that.
I mentioned about the final loan data. Who do you get that from? I get it from my servicer. What I’ll do is if it’s Madison, “Shante, can you send me the final loan data for those loans that got boarded on April 30th?” Shante will say, “Yes.” She sends me the file and I have it. That way I can review it and see everything. The next component is hello letters. The seller sends a goodbye letter and your servicer sends a hello letter. It’s the same thing. You want to make sure the information is accurate on the hello letters. It is but it’s still something that you’ll want to see. The other component why you want the hello letters is you want to know when it goes out. From the hello letters, they have 30 days to dispute the debt. People would go back and forth where they can start legal right after hello letter. My attorney says “You might as well wait 30 days because they can dispute the debt within 30 days and if they can then you seek all legal anyways. You’re wasting money.”
It went out on May 1st, I put a little tickler June 1st if this hasn’t paid in three years and then it goes to the demand letter. Those are some of the things I want to mention, but I’ve had instances where hello letters have had the wrong address on it or the wrong borrower that went with the loan. We’re all human, we all make mistakes. You’ve got seller servicer and I’ll send emails once a week to both saying, “Are we still on track for this date?” Your servicer will say, “I still don’t have anything. I still have the preliminary loan data. I can start putting this in my system.” It’s little kickers to remind people don’t wait until the day before and say, “Are we ready for a transfer?” A lot of times it’d be like, “I’m still waiting for this.” It can be frustrating when loans aren’t getting boarding because it can slow down your processes. Some of your other priorities are part of this whole boarding process.
Forced Place Insurance
I’ve seen and heard a lot about force-placed insurance and here’s what I do. The day I buy the loan, I put force-placed insurance on that property. I know people say, “How can you do that? You have to send the borrower the letters noting that they have so much time to get an insurance policy.” You are correct. I send those letters and I also put it under force-placed insurance. It depends on who you use, but I use JB Lloyd. If I buy a loan, I put it under force-placed insurance.
I find out that person was insured during the time that I had insurance, they will refund you. You’ve got to speak to your agent. I would rather for a lot of these loans, a $50,000 loan or $100,000 loan. I’m paying $40 a month for it to be insured. That’s a cheap insurance policy in case something happens and it wasn’t insured. My bill is right around $5,000 with the 100 loans that I have with Madison, which I carry all force-placed on. My bill is $5,000, $6,000 a month for insurance. If there’s some insurance on those, I go back, I put it in. You want to ensure that property on the day you buy it. There are specific letters you have to send out as well, which if you go to 7EInvestments.com/freebies I have those letters templated there to send. If you get your force-placed insurance through your servicer, they’ll do those letters, but you want to ask them if they are doing them just a note. Besides the loan component, you want to protect your asset. That’s one. Next is, document recording. Who is recording your documents? Once you get the real collateral files, paper copies, who’s going to handle it? You want to get those recorded as fast as possible so you can start getting notices of taxes or anything with the property. If you don’t get assignment record and that thing goes to tax sale, shame on you from that standpoint. You want to make sure you get your stuff recorded and stay on top of it. There’s Erika from KDK, there’s MetaSource, Orion.
There’s Richmond Monroe, Casey Wilson. Call a local title company. Lake County, Indiana has been open and closed. Mail stuff can take 60 to 90 days. I found a local title company who is across the street, called them up and said, “I need these walked in. Do you do this?” They said, “Yes.” It’s $40 for the deeds and it was $20 for the assignments for them to walk them in. I was like, “Thank you.” I was paying $175. $40 is a lot cheaper. I’ve started finding in certain locations, title companies will be like, “Yes.” We do the closing and title, but if you have a few, they’ll do that for you. It’s another component of one of your priorities. Last is what your plan on this loan is. Who’s your workout specialist? Is it going to be the servicer? Is it going to be a third-party like Polaris? Is it going to be an attorney? Is it going to be you? Who is going to manage the outreach? This goes back to your servicing agreement on the type of servicing you have. This is something from day one, you should have that plan in place. You want to be proactive, not reactive on this. This whole process again is important and instrumental. The reason why is I could say probably if I added up between interim payments and everything, a $100,000 plus of money that I “found” during this process that I need to go and get. If you let this process happen, don’t manage it, and don’t pay attention, if I didn’t do that, I’d be $100,000 poor.
That’s a lot of money. You were saying, “Chris, how can it be $100,000?” Let’s talk about some of the common mistakes and I’ll explain some of these. A first common mistake people make, which is tied overall process is not knowing your seller and not doing due diligence on them. With the loan sale agreement, what is the name of their entity? Is their entity registered? Are they still an active business? Are they somebody you trust? That whole act of business thing. I know Adam Adams got burnt on at one time. He got burnt by it, slowed down a lot of things from a standpoint. I mentioned Adam because people who know Adam, he’s well-respected and he knows his stuff as a note investor. It happens to everybody. The person that he was involved with was somebody you would never expect at the time. It’s something that you need to check. I talked to every servicer. I say, “What’s your biggest pain point or pet peeve?” This is always their response. One of two, which is not having the agreements in place prior to the purchase. They’re getting stuff sent their way. They have no agreements in place. I’ve sold loans that people know and I’ll say it was at Madison, they said, “We’ll keep it at Madison.” Two months later, I’ll look and the loan is still in my portfolio. I’ll be like, “Shante, what is going on?” She’s like, “They still haven’t signed the forms.” I’m like, “I’m not doing anything with it if taxes or anything come up.”
From my sense, I sold this thing and so on. That’s probably one thing that this goes back to being a note investor versus having a note business is keeping your paperwork in order and everything organized. Next ties onto that are not completing and sending the documents to a servicer, which is required. Say you have an agreement that you signed a year ago with the servicer. You buy ten loans and there are boarding forms you should fill out. “Here are the boarding forms that I’ve got. Here are the loans coming down the pike.” They know when I see 123 Main Street, they’ve already gotten in this system, “Chris Seveney got 123 Main Street. Here’s the file.” When it’s in their system, back to that data input that I talked about, they do the same thing. They put all that data in so when they get the information, they can finish it. It’s important to complete that because if you don’t, you’re slowing down the process and time is money. You slow this process down, you’re throwing money out the door. These are simple things that can be done that won’t harm you. Next common mistake, not reviewing the loan sale agreement. Everyone gets excited that I’ve got the note on the agreement, I’m closing on this note that they never read the agreement. Read your agreement. It’s all good.
It’s all fun and games until you need to pull some down, and then the seller comes back and says, “This is what I sold you or as is where is, and so forth.” “Yes, but I thought taxes.” “No, here it is.” Be careful. The first time you’re buying from someone, have an attorney review the loan sale agreement. Another mistake, not signing wiring funds the same day or within the same day. You signed documents and you don’t have the funds in place, you’re going to ruin your reputation. A lot of times if you sign it and you’re waiting for the money, be honest with the person and be like, “I’m not going to have the funds until Friday.” They send you a loan sale and say, “I’ll sign it on Friday,” from that perspective. Also, don’t wire the funds before you sign. Make sure you sign because the agreements should be signed before you wire off funds. You would want that anyway because technically you don’t own anything. You want both signatures. Sometimes the seller may sign it first, but you want to make sure you have both signatures before you wire those funds. Some other common mistakes are expecting the process to be done in one week. I had many people be like, “What’s going on? Is it transferred?” “No, the date was in your agreement.”
The other thing that’s in a loan sale agreement is when you’re going to send the collateral, which might be a month later, and the person a week later says, “Where’s the collateral? I need collateral. I don’t have the collateral.” You’ll be like, “It was an agreement.” For example, I have a third-party. The documents, I use a third party to create all my assignments and deeds. The day I sell it, twenty minutes later, I had nothing better to do because I’m the only client. It may take them two weeks to create those documents. It may take them three weeks. I’ve had some that took four weeks to create. You’re at the mercy. That’s one thing again that expectations, it’s in there from that perspective. Don’t expect things to take a week. It takes longer. Not getting force-placed insurance on day one. I know people who bought an asset and it got flooded, a hurricane came through three days later and destroyed the place. They didn’t have insurance. It’s much easier to get reimbursed for the $40 or $80 that you paid and try and get reversed $40,000 or $80,000 for something that you didn’t have insurance on. Think of it that way. Next, not sending force-placed insurance letters. If you’re not using your servicer for force-placed insurance, I give this stuff away. You can take it.
Sometimes I know some people may send their own little hello package saying, “I bought the loan. You should be receiving a goodbye letter from them, a hello letter from this company. I wanted to let you know here’s our understanding of what the balances are. By the way, if you have insurance, make sure you get to the servicer but if not, here’s that letter.” Do I do that all the time? That letter, no. The force-placed insurance letters, yes. Another mistake is not reviewing the hello and goodbye letters. It’s a good practice. Reading those, you understand the process and what’s in them. You learn so much from reading a hello and goodbye letter like, “I didn’t know this was supposed to happen and that was supposed to happen.” Especially for newer investors, I highly recommend it. Not forming weekly check-ins to keep things on schedule. If you bought a loan and it’s transferring on May 7th, on May 6th say, “We’re all set for tomorrow.” I would send something next Monday saying, “Have you drafted the goodbye letter? Have you sent the preliminary loan data? What is the status?” Every Monday, “I want to check to make sure we’re on schedule.” You don’t want to send it every day because then you become a pain in the butt. “I’m doing my weekly check-in. I hope all is well.” Add some flavor to it. “Are we on schedule?” I send emails. “Good morning, I hope you’re doing well, staying safe, and not going crazy. I wanted to check in to see if we are still on schedule. Is there anything you need from me?”Contrary to popular belief, you are not the only client for a certain servicer. Click To Tweet
It’s much more personal. It goes a long way in regards to, “Are we still closing on the state?” Put the person’s first name in there too and check in weekly. That’s part of managing. You can’t think the Tesla, this isn’t a Tesla that is going to self-drive itself. You need to take the steering wheel and drive that car to the finish. Here are the money mistakes is what I call this. Checking UPBs, this goes along with the final loan data. You get a bunch of loans or this process takes a while. The other is bankruptcy. Sometimes trustees may send money in bulk. They make a pool for payments together. If that money came through the door and went to the other servicer, did you go back and check? I know most people on here are saying, “I’ve never gone back and checked all that stuff.” Now you should know. The next one is the escrow information. It depends on your servicer. It’s your responsibility to chase down taxes. The tax information, the insurance payments, you’ve got to get that to the servicer so they can run the escrow analysis and what the escrow is. If you don’t send that to them, they’ll board the loan, and it might not have escrow on it. The borrower whose payment was $600 may only be paying $400 because they’re not paying escrow.
I’ll send it into escrow and you’re putting all this money out of pocket for insurance and everything and you want to get paid, the servicer is going to come back and say, “We didn’t pay taxes because we didn’t have a copy of the tax bill.” Lo and behold, what also happens is once those taxes go delinquent, they won’t take the escrow funds and pay the delinquent taxes. You’ve got to pay it out of your own pocket. At the end of the day, it’s in your contract with that servicer that they say, “It’s on you.” This is one of the things that I get frustrated with and yell at Madison sometimes like, “Why isn’t this the case and so forth?” Deep down inside, “I probably shouldn’t have yelled at them.” It’s important. Tesla grabbed the steering wheel, you’ve got to provide this. This one does frustrate me. Servicing companies, the way their systems work are all not the same. You want to make sure that when a loan gets boarded, make sure everything is clean. I had an example once where the bankruptcy showed the loan had a balance with the total payoff that was around $120,000. It got kicked out of bankruptcy. I bought the loan and then the borrower filed bankruptcy two months later, which I’m not sure how that could happen.
I asked the servicer for proof of claim, the proof of claim comes back to $90,000. I’m like, “There’s a proof of claim from three months ago at $120,000. Where does $30,000 go?” What happens is, the way one servicer reports it versus the other. It can be conflicting information or it’s not clear. The servicer is going to interpret it in a way that they’re not making sure they’re breaking any laws. If it’s something that isn’t clear cut to them, they do what the information tells them. You go back to that final loan data that you get, you can cross-reference that because also sometimes a servicer makes a mistake. You make mistakes, I make mistakes, we all make mistakes. Mistakes happen. One thing to try and avoid this sometimes is to ask for payoff as well. You also have to remember, let’s take Ohio for example, one servicer may have put in legal fees in Ohio and the payoff. You can’t recover those in certain aspects in Ohio. What’s right? What’s not? It’s a complete cluster. When I’m putting in a servicing company, accounting for advances, what I mean by that is you need to double-check the payoff. If you know the prior seller paid taxes in the last three years at $5,000 a pop and it goes to a new servicer, you want to make sure, “By the way, they paid these taxes. I don’t see it. Can we look into this?” Better yet, if you have that final loan data, you highlight the cells in yellow and say, “These advances were made. I don’t see them.”
I’ve had one servicer who I no longer use had as close to $100,000 in advances that were missed. You asked me when I said over $100,000 of money, I could be poor because of this. It was about $80,000 something. There was $20,000 something on the payments that were made. There was this other one with the advances that had a $30,000 issue, which that one the property has equity and hopefully once everything gets lifted, we got our motion free lift and we can get that property sold. You add all that up. That’s over $100,000. If somebody wants more proof, I’d be happy to send it to you. The last thing I had on here is getting documents recorded in a timely manner. This has been a challenging process, but two things. One is you want to make sure when you sell a loan that the person records their documents and when you get stuff, you get it recorded. I go auditing my stuff for now and I still got stuff from December that isn’t recorded. Why? There are several reasons. One is the seller didn’t provide proper documentation so I’m chasing them down. Others, county slowness, everything. You want to make sure you get things recorded from that perspective. I did a lot of talking. I do want to say thank you for reading. I hope this was informative. I was trying to open up the chest and pull everything out. I have experienced this as part of this boarding process.
If you go back to the blocking and tackling, do the simple things or take your time, do things right, don’t rush, and put the data in. You hear communication throughout this. Make sure you’re communicating. Make sure you’re reviewing things or you have a professional review it. You fund the deal. The biggest one is once you find the deal, people think, “I’m done. I want my hands clean. I get the next three weeks off and it’s slow and boring.” It’s slower and it’s not sexy or exciting. I showed you how much money could be lost. You never make money during this process. It’s how much potentially you could be losing because you don’t make money while you’re waiting in limbo. You can clearly lose it. I hope I was showing people that. “Is Polaris a workout special or servicing company?” First off, I’m not sure, I’m assuming they’re still in business. They are a nonprofit agency and one of the benefits for them is because they’re a nonprofit, once goodbye and hello letters go out, they usually come calling immediately.
You should have your attorney wait 30 days where they can try and start sooner. You would use Polaris instead of maybe your servicer. It’s completely up to you. I haven’t used them in a long time. I should probably give Andy a call over there and see how he’s doing. When I used them, they were great but for the most part, I do a lot of my own workouts. You’re welcome to share that experience. For this episode, if you want more information, you can go to GoodDeedsNoteInvesting.com and 7EInvestments/freebies. We give away a ton of free information. Also, if you’re on Facebook, I highly recommend you join the Notes and Bolts from the Good Deeds Note Investing Podcast group.
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