- January 31, 2019
- Posted by: august19
- Category: Podcast
Have you ever purchased nonperforming notes that are in bankruptcy? What documents do you need for due diligence? The Ohio Legislature Bill 489 was recently passed. What’s your take on that? What are clawbacks and are they enforceable? What is the Stair Step Method and how does it work? How does one benefit from inflation in the selling process? Chris and Gail answer some of these questions and more in their Open Mic Night as well as provide insights and advice coming from their own personal experiences. They also share the origin story of how they became partners in note investing and this podcast.
Listen to the podcast here:
Open Mic Night: Contract For Deeds, Performing Notes, And Bidding Strategies
We’re here to answer every conceivable question you could have. I would say I don’t even mind personal questions as long as they’re directed to Chris. The more embarrassing, the better. He’s just in a total ecstatic haze about the Patriots so he needs a little reign on his parade. Bring it on.
That’s worn down right now. I’ll share a quick story regarding that. Every year a bunch of us talk about going to the Super Bowl, which I’ve gone once. We were trying to organize a trip coming to get it going. I said, “I’m booking a hotel for Atlanta next year. They’re probably not going but I’ll book the hotel.” I booked a hotel last January in Atlanta. During the season and so forth, I remember taking the kids on a vacation and realized she booked everything and that we’re going the weekend of the Super Bowl. To cancel a vacation wouldn’t be a good idea.
The upside is that you’ll be all alone at Universal Studios.
We stayed in Disney at Boardwalk and they have an ESPN club there. My wife has already been prepped that I will be leaving the park early to go to the ESPN. A note investing comment though, I will say I’m happy. I put in some bids when I was watching the games and I got back some responses where I’ve got about six to nine assets that got accepted in some counters and other ones that I have to do due diligence on. It seems that this buyer or seller, we’ve been looking at their pricing and it went up. Now, it seems that it’s coming back down to reality and it’s come back out of the cloud, so that’s great.
I didn’t bid because I anticipated they would be ridiculous. We have a question from a mystery guest who would prefer to remain anonymous. “I’m updating my website. I’m creating my website and wonder what kind of blanket disclaimer folks are you using? I’m especially concerned about the three sample deals that Scott has shown us and told us to use if we want. I don’t know if that’s only for mastermind people or if everyone knows about Scott’s sample deals that you are to use until you have your own.”
If you take his Virtual Workshop, he’ll provide them to you.
This gentleman says, “I’m concerned about breaking some rule in some state I don’t know about.” I know, Chris, because you have an excellent disclaimer on your website that you will be able to speak to this. I would like to say in general to this person, the rules that you could break are not state-by-state. They are federal and have to do with the Securities and Exchange Commission. You need to be familiar with those. You don’t have to worry that a particular state is going to come out of nowhere and give you a problem about how you are addressing investors on your website. What you do have to worry about in states, and you wouldn’t put this on your website, is debt buyer rules and things like that. There’s not usually anything on your website that would run afoul of any of that language. Chris, you have an excellent disclaimer so why don’t you tell us what’s in it.
I had my disclaimer drafted. I saw several websites that had disclaimers on them so I picked and chose some verbiage from a few and sent it to my lawyer. It took them fifteen minutes to review it, but the big thing is the things that I would comment on the website. Don’t put a property address, don’t put a borrower name, use the city, use a state and make sure there’s no street sign. I remember a video done by someone we both know who was looking to sell an asset or a JV partner on a deal. One of the pictures had the property address in it that he forgot to edit out. I sent it to them and I’m like, “The property address is in there.”
I recall someone a very well-known to all of us who sent out a tape with all the borrower’s social security numbers on it.
Don’t do that. For your website, if you’re posting things, don’t post asking people to fund a deal. What you do is have people sign an NDA. Have people fill out a questionnaire and then send your group an email. If you’re looking like, “I have some opportunities if you want to discuss.” That’s not soliciting funds, that saying, “I have opportunities if you want to talk about.” Putting on there, “I’m looking for a JV partner to fund this deal.”
Don’t say, “You’ll get a 14% return.”
Be careful when you post. On your website, if you’re going to post sample deals, it’s no different than posting if you’re a fix and flipper or somebody else on these things. You can post what you paid for or what you got for return if you want. I don’t post returns on my website and so forth because if a borrower is going on my website and said, “This person is making hand over foot, why do I want to pay them?” On the flip side, the entity I used to buy notes and the entity that I market with are different entities.
Maybe we shouldn’t assume that everyone knows the three-touch rule also. The basic idea is that you can’t discuss the particulars of a deal with a potential investor until you’ve had three contacts with them. The first time you meet them can be touch number one. You can talk in generalities at that stage about what you do. The second touch can be where you send them an investor profile that you ask them to fill out. Scott has a version of that. He also makes it available to everyone. I’ve added a few things too but that gives you a lot of information about people’s expectations on do ask of their salary so you’re seeing if they are potentially an accredited investor. Some of those have to be an accredited investor to do a JV deal with you, but it’s good to know where somebody falls. You don’t want to be taking some persons only retirement money or if they’re very close to the bone in terms of their finances. You don’t want to be playing around with their money. Once they fill that out and return it to you, then you’re at the third touch and you can talk about the deal with them.
You don’t want to find somebody off of BiggerPockets or Facebook and say, “I’m not going to fund a deal,” and you say, “Wire me $25,000 tomorrow.”
Not that it would likely happen, but people do get pretty enthused on BiggerPockets.
We have a question, “Have you ever purchased NPNs that are in bankruptcy? If so, what documents you need to do for due diligence because I heard that the paperwork is in their folder?”
The best friend of all of us when it comes to bankruptcy is Pacer.gov. It’s a cost nothing to join. You don’t have to be anyone in particular, but it gives you access to all the records of a bankruptcy either past or present. You’re going to see that I happen to buy a note that was in bankruptcy and was able to see that my borrower, at that time, it was his fifth bankruptcy. That’s his seventh dismissed for not doing what he’s supposed to. You can see if your person is a serial bankruptcy person. That has all the information. What you want to look for is the BK plan that tells what he’s paying, whether he’s required to pay you and what else he’s paying and it gives the trustee name.Don't post asking people to fund a deal. Click To Tweet
I haven’t found the trustees to be incredibly helpful. They’re not going to talk to you before you buy it. In big cities, they’ll never talk to you at all like in Philadelphia where mine is. I’ve never gotten anywhere, but I had a bankruptcy done in Mississippi in a much smaller place and the trustee could not have been nicer. The trustee’s assistant answered all my questions. That’s going to give you all the attorney information and everything. There’s not a lot you can do. You can’t call anyone before you buy it, but at least you’ll be able to see what’s in the plan and whether you’re going to get paid.
I love bankruptcy because you can get so much information from them and they allow for you to get so much information from them. The two things I always recommend is to go to the Claims Register in the History Documents. The history documents show everything. It shows a voluntary petition, it shows the plan, employee income records, and it shows what the person makes.
Those little hyperlink numbers on the left will bring up the actual documents.
It will bring up the documents. It will say how many pages it is. This is critical. I like to look at Chapter 13 plan, the petition, the plan itself, employee records and income because I’ve filed that. The other thing I like to look at is the claims register. This is everyone that’s filed the claim. There was Capital One for $24,000, Department of Revenue for $1,200, Pittsburgh Water and Sewer and Health Services. Everything is in here. This filed when I own note, but if it was a note you’re buying in bankruptcy, that claim will be by whichever entity it is. If you click on that, you can see what’s the arrearages are. You can see not only what their payment is, but how much additional they’re paying you every month as well. That’s Pacer in a nutshell.
You get to be in that list of claimants by filing your proof of claim promptly. That makes sure you’re on the mailing list for anything that happens. We have a question here, “Can you please give us your take on the recently passed Ohio legislation House Bill 489, which appears to require all loan services to maintain a physical office in the state. Is that how you’ve interpreted this law? Have you discussed this issue with your legal teams or servicers?”
I’ve reached out to Madison to get their opinion on it. I only have one contract for deed in the great State of Ohio. I’ve reached out to Madison on that to get an understanding of it. Also, I reached out to Frank and another attorney. One of the things I’ll mention is when you read these bills, the articles that get posted about them, sometimes don’t tell the truth or full story. Last 2018, people were berserk about Maryland and meeting a debt buyers license when you really didn’t. There was one article that somebody posted that said you needed to have a debt buyer is licensed. The reality of it was, you didn’t. During the whole time, I was buying up assets left and right Maryland because everyone thought you need one. I was getting them at great pricing.
You spread all those rumors about it requiring a license.
I didn’t spread them. I just didn’t respond to people when they said, “You need it.” This is a similar situation on what the servicer has. That seems a little farfetched that the servicer has a physical office in that state. My question is, “Can I have a virtual office?”
I was thinking the same thing.
They rented a WeWork space or something like that. I wouldn’t get too bent out of shape about it right now. I can’t recall when it takes effect either and so forth.
The major servicers, if it turns out that you do have to have an office, they’re going to open a little one-room offices to satisfy their client. They’re certainly not going to stop taking Ohio assets.
They may use an attorney’s office because all the services are well-connected with the attorneys. To answer your question, that is how I interpreted it from what I’ve read, but I have not read the entire house bill. We have a question, “How do you handle payments that borrower has made in the interim period between the bid acceptance state and closing date since the purchase is based on UPB you were given. Do you receive those payments?” The reason why is because I know a lot of new investors and I sold the note to an investor. They’re like, “The payments, what’s going on?” They’re hounding and hounding thinking that I have the money even though it goes from the servicer back and forth. Gail, do you want to explain that whole process of the transfer to people? It’s very educational because nobody talks about that process and teaches or trains people what to expect.
When you get a purchase agreement for a note or CFD, there will be language in there. They will set several dates. One is the cutoff date which establishes when any income that comes on the property becomes yours versus theirs. For the most part, we’re seeing that the day you fund is the cutoff date in terms of payments, but that hasn’t always been the case. It isn’t always the case with all sellers so you need to check that out. Then you’ll also see the servicing transfer date and that’ll be three weeks or four weeks. They give themselves some time because what happens is you buy the note, the note seller will alert their servicing company that the transaction has happened. If you are not leaving the note where it is being serviced already and it’s going someplace else, the servicing company will contact the servicing company where it’s going. There’s an exchange of paperwork and images of the file and the accounting and all the servicing pay history and accounting on it.
The servicer that currently has the note will prepare a goodbye letter, which is a federal requirement called the RESPA letter. They will have the new servicer to approve it. The reason they do that is because of the information in there saying, “You’ve been paying such company at this address. You’ve been making your payments, henceforth you will be making your payments to this new company at this address.” Both servicers will approve that letter then the current servicer will send it out, we call that a Goodbye letter. The new servicer will send their own version of that letter and that’s called a Hello letter. Depending on which servicer it’s coming from and going to, this could take anywhere from three weeks to three months or four months.
It depends on where the servicers are. Some servicers are very good and some servicers are not so good. The goodbye letter is like, “Don’t send us payments anymore. Send them to the new servicer.” The new services say, “We are the new servicer so here’s where you send the payments to.”
A lot of people don’t read their mail, particularly personal looking letters like that. They get nervous. There will be a chance that your borrower might send a payment to the old servicer when they shouldn’t. That’s an exciting and interesting little bit of discussion only because I happen to that she had made five payments after the time that I funded the deal, but before that, she transferred. She made five payments to the old server and the deal arrived at the new servicer. There was no mention of this at all. I found that very curious that they would not have brought that up or just sent the money as they should have. I had a series of very likable semi-hilarious conversations with the servicing company that had the money.
They kept saying to me, “We credited the account with those. You’ve got the updated information where I gave you credit for it.” I was like, “That’s great, but you still have to give me the money.” I don’t know if they understand that part. He was the vice president in-charge at that company so I had to escalate. I was amazed at how much of an argument that turned into. They did pay me. When I spoke to the office manager, he was like, “Of course, it’s your money.” I wonder to this day had I not found out that these payments have been made, whether they ever would have told me.You have to train yourself to look at a deal in more than just one way. Click To Tweet
There’s one thing I’m going to add to that. Let’s say you bid on a note the 17th of January 2019 and now is the 24th and the UPB was $20,000. You’ve finished your due diligence. Everything’s good. You close on that note on February 1st. During that time, let’s say the borrower made two payments. What happens with that money in between when you bid and when you closed is the seller gets to keep that money. Based on UPB, what the agreement states and this is where you should check and read your loan sale agreements. Usually, it’s just a percentage. If you got accepted at $0.40 on the dollar at $20,000, now the UPB is 19.5, they’ll credit you back $200 or $500 at 40%. You don’t get a dollar for dollar back. It’s a percentage so if you were bidding at 40% and your UPB is reduced by a certain number, you get a new number at 40%.
A good way to catch them and find out what’s going on is, and Scott Carson our mentor gave me this idea. When he buys a note, he sends his own welcome letter even before the service transfer just to say, “I’m your new lender. We’re very interested in helping people stay in their homes. As of now, our records show that you have these many payments on hand. Your last payment was on such and such date or whatever,” and the particulars of what they’re about and it’s amazing. If the information is wrong, how quickly people contact you to correct you to say, “No, I did make a payment.” That letter says, “Please contact us to discuss your loan. We’re a lender. We look forward to helping you.” It’s a nice way to start the relationship. You don’t always hear from them and sometimes letter doesn’t even get delivered, but a little bit of insurance for you that you’ll find out if there have been payments made since. It’s finders keepers with some servicers even though that’s illegal.
I hope that answered your question. We have a question, “I’ve been calling banks and try and of course, their first contact with an asset manager was rough. I gave her third degree and realized that brokering calling private sellers, which she has experienced with, we’re nowhere near calling asset managers. She’s wondering what other experiences have been reaching banks and have been successful. She heard saying that many of you are still buying from a low-hanging fruit, which I’ve also been doing but find the pricing out of line. The Stair Step Method doesn’t seem to work with them.” I’ll start by saying, when Scott was doing his Banking Blitzkrieg, I participated with a family member who’s on as well, who has lots of experience calling banks. It’s hit or miss with the bank. Some people are very friendly, some people are very rude from that instance. It depends on the day they’re having so forth. I had a call where my phone rang twice and within five minutes. I was in the middle of something and then it rang the third time and I saw the number and I answered it. I was not very kind to the person.
They did leave a voice message and it was somebody trying to solicit services so I hung up on them. I look at that from just being on the role reversal side of it could have been the same with the banks and so forth. The success rate on banks is similar to the success rate of people who send out the yellow letters for REO fix and flippers or whatnot. It’s extremely low especially right now where bank’s liquidity is out there where money is very easy to come by. The lending rules right now are pretty lax. Banks don’t have a lot of assets that are non-performing. They may, but a lot of times they may be managing them. It’s not to say you’re not going to get a list from a bank or a list of assets. It’s going to be extremely difficult. It’s going to take a lot of time and if you get one, it’s great.
For me, I buy around five notes a month and yes, I’ve been buying them from my low-hanging fruit people because I know I can get five a month from them and keep myself busy. If I was trying to buy 50 a month, then I have to be looking at other asset managers and other banks. Someone answered your question regarding the stairstep method doesn’t seem to work with them. It’s hit or miss right now on certain things. I’ve been buying contract for deeds because the notes there have been few and far of them and a lot of the pricing has been very high. A lot of people are following these steps of, “I want to be in a major city and near a university in a non-judicial state.” The stair step method, you might as well just throw that out because those notes will sell them for $0.65 plus on the dollar.
Scott said that notes and bankruptcy sell at a premium to a paying bankruptcy.
If you’re doing your due diligence and you look at a tape and start to hone down on certain things, there’s a few out there that you can find. It’s not like there’s none, but there’s some. I picked up a few notes back in December 2018 on two assets that are in bankruptcy and they’re listed as nonperformers. I went into the bankruptcy and I asked them, “Can you give me the trustee report and stuff.” People have been paying in bankruptcy for the last year plus. When they’re selling, they’re on nonperforming rates.
You should also not get too hung up on the percentage of UPB. Start trying to broaden your thinking about what makes something a good deal or not. You don’t want to overpay. If it’s a contract for deed, you could end up getting the house. You’re not limited in terms of what the maximum amount that you can get from a foreclosure. Sometimes you can pay 60% and it’s still a good deal if it’s got a large PI payment and if it’s a house with equity with a pretty low balance. The hardest thing when you’re starting out is like babies have to think about how to walk, but it’s very effortful for them. They don’t know how to walk and it takes a lot more concentration. Note investing is like that too. At first, you feel that you’re so bound by all these rules. You feel that if you go outside, you’re making a bad deal and a bad decision. You have to train yourself to look at a deal in more than just that one way. Would you agree, Chris?
You’ve got to look at it on the qualitative and quantitative. You’ve got to look at it from the number side of things. What are the scenarios? What’s the outcome? What are you trying to shoot for? What do you think is going to occur? Then follow up that in general. Where are you finding the price points at? Probably take the Stair Step Method and say it was 25% under $2,500, $3,500, $4,500 to $5,500, I would move everything up on the percentage-wise at 10%. Under $25,000, you’re closer to 35%. $35,000 to $25,000 you’re probably at 45%. At $45,000 and lower, you are at 55% and above that, you’re probably at 65%. Do you agree with that, Gail?
Yeah, just move the Stair.
Someone asked about where is a percentage due based on the bid date or funding date? Let me go through that again. If you bid $20,000 on a $40,000 UPB so you’re paying 50% and then you closed tomorrow and the borrower yesterday made a payment of $10,000. All of a sudden, when you funded the deal, the UPB was only $30,000. You’re paying 50% of the 30,000 so you are paying $15,000 and not the $20,000. Your bid was a percentage of the UPB. When you closed, there is a new UPB. You’re just paying that same percentage of the UPB of the day you closed.
You have it under contract. The purchase price is $20,000 on a $40,000 UPB so you’re paying 50%. Now the borrower doesn’t pay $10,000. Let’s say he pays $2,000. Now, the UPB is no longer $40,000. It may be at $39,000. You haven’t closed on it yet, but the UPB has changed and the UPB is what’s driving the pricing. You’re paying 50% of the UPB. If the UPB has gone down, you should no longer be paying $20,000. You should be $19,500. I hope that makes sense.
A question here, “Is there a time limit when I’m getting a deed recorded for a CFD?” There are two questions and that’s the first part.
Harbor is one of the companies that the funds had huge numbers of CFDs. The first one I ever bought was from Harbor. They used to just hand over the deeds and let whoever bought the CFD and record them. In some cases, years would go by and they’d be getting tax bills. There would be liens and all the things that leverage against them. The short answer is no. There is no time limit. I bought a note in Birmingham and I didn’t realize this. When I went to start the foreclosure on it, we discovered that the mortgage had never ever been recorded from the beginning. The borrowers sold the house. I would have gotten absolutely nothing because there was no recorded mortgage. I quickly record the mortgage and nobody bats an eye that the mortgage is ten or twelve years old and it just got recorded.
Two things to add to that. One is I would also still check dates. When you say there’s no time limit, in Maryland, you have two weeks to record. If you’re going to buy a CFD in Maryland, beware. Let’s say the contract for deed was originated five years ago. Let’s say they paid for years and haven’t paid in the last year but the contract for deed wasn’t recorded. If you try and take that property back, you would have to give them every penny back that they paid. They made four of payments for $500 a month so that’s $24,000. To get the property back, you’d have to cut them a check for $24,000. You can’t discount rent. They get to live in a house for free and you would have to cut them a check. That’s the craziest thing I’ve ever heard.
Let me ask you something. There’s also a situation if you ever buy a contract for deed in North Carolina. North Carolina is one of those states that has a statute that there has to be very specific language in a contract for deed to make it valid. I can assure you that no one you are buying contracts for deed has that language in it now. All these funds that we buy from, they wrote one contract long ago and they see this everywhere without any regard to what the particular statutes in a state were. If you tried to take a borrower to court to get that property back on a contract for deed, they could very well rule that your contract is invalid and you would owe them their money back. What balances it out is that what the court will then immediately turn around and say, “They’ve been living in there. If they weren’t borrowers, if they weren’t potential owners, then they were renters.” They were tenants because nobody gets to just live for free in somebody else’s house unless you’re a child and your parents are very nice. It sounds horrendous, but it works out in that case. You owe them all the money but then they owe you the same amount of money. Does that happen in Maryland or are you the only one who goes to somebody’s money in that case?
In Maryland, you owe them the money and they don’t look at what the rent would have been or anything like that. I did buy a CFD in Maryland with that because the property was worth over $100,000 and the CFD acquisition price was $25,000. If I had to pay an extra $25,000 to get the property back, it would have cost me $50,000 for $100,000 property. To get to work these issues is to work with your borrower, “Do you want a repayment plan?” “Let’s cancel that old man contract. Here’s a new land contract that meets the laws in North Carolina or Maryland.”Always sweeten the deal. Click To Tweet
If it’s Ohio, there are brand spanking new land contracts that will start the clock on that five-year period of having a land contract beyond which you have to foreclose on them instead of doing a forfeiture.
That is critical and we will give you a little bit of insight. In Ohio, if the land contract is over five years or the borrowers made more than 20% of the UPB, it’s treated as a note then you have to go to foreclosure. In a contract for deed, if it’s a forfeiture that has a much simpler process. If you’re negotiating on a new payment plan, you don’t give a forbearance plan, you don’t do a loan modification. You do a cancellation of a land contract and issuing a new land contract, that way you’re restarting that clock. I’ve been in many instances where I’ve owned land contracts in Ohio that were more than five years. I have bought them then issued a new land contract to the borrower under a new payment plan. In that way, I don’t have to foreclose and spend $7,000 to foreclose. I can spend $500 on forfeiture and have that in place in two months if they stopped paying. The second part of that is, “Is there anything that we shouldn’t do when sending a letter to a borrower who is delinquent?” Don’t send the borrower a letter.
We did a podcast on How to Communicate With Borrowers and about the Mini-Miranda on when you can call them, how you call them and when do you have to stop calling them. In general, we’re not recommending that you call them anyway.
If you were going to send them a letter, you have to have the debt collector language at the bottom of it if it’s about getting stuff. I’ve had contacts with the borrower via email on certain things. I had to email them the new land contract. I didn’t have that language in there at that point in time because it wasn’t the act of trying to collect the debt. If you’re sending something about somebody specifically regarding delinquent, then I would have the servicers to send it. If this is a hard money loan, I would have it come from an attorney honestly and pay them $75 or $100 to send the letter.
There is an occasion where I send a letter too which is about force-placed insurance. If you buy a loan where the borrower is supposed to be paying for their insurance and they’re not doing it, you can put insurance on the property yourself and charge them for it. You can only charge them for it after you’ve sent them two letters, 30 days apart, apprising them of the fact that they’re required to have insurance. They haven’t given you proof of insurance so you are getting insurance and advising them that the insurance that you’re getting is very limited in terms of the benefit it would give to them. It’s only to cover our unpaid balance or in the case of a contract for deed, maybe the value of the house itself. Once you send these two letters about the force-placed insurance, then you can alert your servicer that you have gone through that process. From that point on, their insurance premiums will be added to the fees against the loan itself. If you ever foreclose or anything else, that will be part of your legal balance. The money you spent on insurance. On the insurance letter, you don’t have to do the Mini-Miranda because it’s not about collecting the debt.
If you use Madison, they send the letter to you. They’ll send it with the hello letter and then they’ll send it 30 days with that first invoice. Someone says, “I’m confused. When you bid, do you give a number amount or percent amount?” It’s a number amount. In the loan sale agreement, there is a clause that says, “You’ve paid this percent of the UPB in there.” It’s a clause that says, “If additional payments are received between the bid date and the closing date, the UPB was bid at 70%. You’ll be refunded some of that percentage.”
When you’re with a new note seller, you should read the contract.
Someone commented he has FCI. That’s why I was asking you about that letter. He said there’s no email. They never answered the phone and it’s FCI.
Someone would like to know our origin story, Chris. We never knew we’d be such great partners. We are fire and ice. I was a relatively new note investor and I had gone through Scott Carson’s masterminds. I was chugging along on my own and I couldn’t help noticing this guy who was always on social media. He’s always with great answers and had a lot of heart also in the way he interacted with people and the way he expressed his views about our worlds and things like that. It just happens that even though most note investors seem to live in Texas or Florida, this one was in Washington, DC and I was in Philadelphia.
I happen to have a son living in Washington, DC. I got it into my head after Chris and I got acquainted online. I just asked him one day if he wanted to get together and I hopped on a Megabus to see my son. Chris and I spent four hours in a Starbucks talking about notes while I was waiting for my son to be done working. It was a nice friendship. We’ve been colleagues for a couple of years and then I started to have big ideas about things I want us to do in notes. I thought, “If I’m going to do something big, who do I want to do it with?” There was no one else that came into my mind. It’s Chris all the way.
What you’re realizing this industry is, it’s a very small industry. There are a lot of people out there and stuff, but a lot of people will stay more on the sidelines or low key from that perspective. You’ll go to events and stuff and what you realize is you see the same people at all the events and it’s the same few hundred people. This isn’t an industry with thousands and thousands of people. There could be, but they’re not out there a lot. We’ve met each other and DM me and everything else. When we started talking about partnering on things or the podcasts and stuff, it just seemed a natural fit.
Chris loves to say we’re total opposites. Maybe in our approach, we are but our values and our ethics are compatible with what I consider the big things. Chris, we spent so much time together online. I don’t think I’ve seen you more than five times in person.
I found the section. I’ll read what the agreement says. “The purchase price of the assets shall be equal to the sum of the following, $20,000, which represents 50% of the unpaid principal balance of the loans as of the cutoff date. Buyers shall pay the purchase price to the seller on or before the closing date in immediate available funds by wire transfer. On confirmation to purchase price shall commence the transfer.” There’s a whole section about payments received after and what happens after that. It’s all in your loan sale agreement. These documents are twelve or fifteen pages that are in there. To answer that question back, you do pay a number of prices but in the agreement, it says what that UPB is in case payments are there. We have a question here and it came back with stair-step method. “Are you right off the top sending your bid at the lower end or the higher end of percentage you mentioned or you start high? If you are already, find reasons or bid lower than the lower price.”
Don’t ever think that they will lower the price. In 60 notes, I’m trying to think if anyone has ever lowered the price.
It’s very rare you need. The stair step is a guide to arrange what the price is. One thing that I start by doing is to build the goal we met per se of my bid range. Usually, I’ll start with the stair step method of whatever that percentage times either the lower of the UPB and the fair market value. The other thing I do is I take the principal and interest payment. I subtract $35 from that, which is what Madison charges for servicing in the escrow. If it’s $300, I take $300 minus $35, which is $265. Multiply that by twelve and divided by 0.3.
That’s a rough ballpark of a 30% return based off of the UPB because sometimes you may have an unpaid balance of $25,000, but a payment of $150 because it’s a four-year loan. You don’t want to bid off of that UPB. The factor on that one is what that principal and interest is because that principal and interest is so low. If they start paying, it’s going to take you forever to get your money back. I build that window of, “Here’s where I’m going to be in.” Then I’ll go in and put it in my calculator to target what return I want and see. For people who are just getting a ballpark idea, that’s what I would say is start with a stair step then principal and interest and then you’ll create a window or an area that pricing should fall into.
Someone is interested in bidding strategies, we should talk a little bit. There are two kinds of situations that you find yourself in. One is someone who will put out a tape and it will be like, “Everybody sends me your bid by such and such date in five days or whatever.” Only then will they look at all the bids and they will award it. In a situation like that, if you want something, you can’t low ball it and expect you’re going to win and win if they’re decent assets. There is the CFD seller that we all know and love. John has a very novel approach. We should all appreciate him.You're either performing or you're not. There's no in between. Click To Tweet
Everybody complained at times about their interactions, not just with John, but everybody who’s a seller. The thing that John does is very nice and particularly helpful when you’re new is he’ll put out a tape of contracts for deed. Whoever bids first, even if someone sends him a higher bid on the same asset, he’s going to let that first person who bid go through the entire process of bidding, countering, rebidding until either you give up or realize the seller isn’t going to meet your price. Only then will he go to that next person whose bid came in after yours. It’s a luxury in a way to bid this way because when you think about it, you can put in low-ball bids and the seller will counter. They will lower it if it’s always a super low-ball bid. You’ll find out what they want.
One of my bid is $7,000 and the other was $20,000. I know my bid was low because the principal and interest payment were only $175 a month. I’m not going to pay $20,000 for an asset that’s going to give me a $140 a month if it starts performing again.
It’s going to take you twelve years to get your money back at that or fifteen years. You don’t want to wait that long to get your investment back before you start making anything. You want to get all your money back in three to four years so that you can buy something else and keep building your wealth that way. You need that turnaround.
Someone asked a question, “Are there certain states where you’re making new land contracts or apply to any state or land contract was used?” It’s in Ohio, North Carolina and maybe Maryland. It’s state-specific. In Indiana, I don’t do a new land contract. In Michigan, I don’t do a new land contract.
I haven’t done forfeitures in states other than those two now that I’m thinking about it. I haven’t gotten into the weeds of what’s happening. Tennessee is easy too.
In Oklahoma, we wouldn’t do a new land contract. In Mississippi and Minnesota, I wouldn’t. In Florida, I wouldn’t buy a land contract then because I hear they’re treated like mortgages or you have to foreclose.
It’s expensive. Someone told me that he’s looking at a land contract in Oklahoma. Just make sure you know when you’re doing your numbers, what it would cost you to take it back. We consulted an attorney in Oklahoma. I guess we had never bought anything there and I don’t remember exactly what it costs, but it was over $4,000 to take back a property on a land contract, which was very surprising. Just a word of warning.
Cash for Keys.
Sweeten the deal. If you’re going to pay an attorney $4,000, many borrowers will go for much less than that so make the effort with them first. The sequence is you have to have the attorney send a demand letter first to wake them up and get their attention. Once they realize there’s a process underway, sometimes the person will call. The attorney will even want you to talk to them because that’s not what they do. They’ll want you to take the call. When you have a chance to talk to a borrower and work out a deal, by all means, figure out what they want to go.
We have a question here about John Keith’s information, he has a website and it’s not only Harbor. Window Rock is another fund. He sells assets from another note seller.
He’s broadened and he’s been selling more things for different people. It’s getting more interesting. If you’re new, try not to get on the wrong side of John Keith. He sells a lot of stuff particularly when you’re doing the lower value deals. He’s a very good ally. The whole way that he conducts his business is giving everybody their shot. The thing is when you’re evaluating a tape from him, speed is the most important thing since you want to be the first bidder on a bunch of things. You can’t wait two days to bid. Once you have an accepted bid, you need to close within a week. It takes three days tops to get a title report.
Our process is if you’ve got an accepted bid, do have someone to go look at it after you bid. Have someone go. Make sure the place is still standing. Get a sense of the condition, the neighborhood condition, and whether you’re still interested if it looks good from that standpoint. You should already have looked up the taxes before you bid and considered them in your bid, then order the title report. It takes a few days to get a title report unless there’s an expedited service available. You also want to have someone give you a value for the house. You need to do the stuff quickly because he will expect you to close within five business days of an accepted bid.
He put a tape out on Sunday at about 3:00 and I replied back to him and I said, “Great, I got to watch football and go through the tape at the same time.” He said, “Mine was not as exciting as it is.” I would say within two hours, I had my bids into him.
The fallacy of that though is that he’s got a big list and it goes out in chunks. Sometimes I bid instantly on something and someone’s already got a bid because they got the five hours earlier. Be hasty, but don’t assume you’re getting their first. There’s no crying in real estate and there’s always another deal. If you don’t get the one you want, like the bus, just wait twenty minutes. There’s another one coming.
We have a question based on my morning drive video. I posted about performing notes and where the pricing has been moving on the performing note side. You’re starting to see performing notes returns in all investments starting now that market is getting rockier. Financial fiscal policy starting lighten. I can see returns are starting to go down. Scott did a podcast that 12% is now 8% to 10%. I talked about that briefly curious what people are seeing especially on the performing note side. If people are looking at returns of 8% to 10% then turn around selling these notes, you’re going to get more for them because you’re selling it less return. When you’re going to try and acquire these, you’re also going to be paying more. It’s can be good on one side of things but not good for selling and not good for buying. I’m curious where they’ve seen the performing note side be.
I’m about to put out a tape of those performing to sell. I’m hoping to benefit from this inflation in the selling process. I haven’t tried it yet so I don’t know what to expect. I would have always offered them a 12% return and contracts for deed for 14%. It seems to be the sweet spot for buyers because contracts for the deed by definition are riskier borrowers less stable income. I hope most buyers recognize that they might not always be performing. It falls off the rails.
From note pricing, I’d say note investors are still looking to try. If you’re selling it to note investors who are buying performing and nonperforming, they’re still going to try and get 12% to 15% from you. If you’re looking at other people who are more passive, they may look at 8% to 12% from that. It’s the same thing if you’re looking to buy notes. They’re going to want to try and sell it to you for 8% to 12% to get the max price as well. I do think over the next twelve months or so, you are going to start seeing a good paper on the performing side of people. For me, performing is twelve months. Somebody’s paying three months in a row or six months in a row. I saw somebody post something about semi-performing and I joke to people all the time that my wife is semi-pregnant. There’s no such thing. You’re either performing or you’re not. There’s no in between.If they tell you to go pound sand, you might want to walk. Click To Tweet
I do think that over the next year, you’re going to start to see overall performing the returns start to slow down a little bit. I do think it’s you’re going to start seeing maybe not in the next twelve months, but in the next 24 months. You might start seeing some more inventory as well because this market starts to tighten. Lending policies start to change a little bit. I know people may have seen the report now that banks are starting to do the new income verification. A woman that makes $50,000 a year, just get a mortgage for $4,000 a month because she Airbnb’s it and they’re counting Airbnb money. You’re starting to see some stupid stuff happen as well from the lending side.
Someone says he just received the LSA from John Keith for his closing and it doesn’t contain the redeemable secure first position lien language in it. Should he ask for that to be included? He hadn’t heard that until just now.
If it’s a CFD, you’re going to get the deed issued to you. There’s no lien per se. You’re getting the deed with a contract. We have a question, “Do means on the properties fall like it does the note or the person?”
I have a water bill in Flint, Michigan. We’ve all heard about their water, the nectar of the gods. This woman had a contract for deed on this house for about ten years. Apparently, she got behind on her water bill many times. When she finally signed a cancellation for land contract and moved out, she left a $2,500 water bill. I was told by that company that if she had been a tenant, the bill would be with her, but since she had a land contract, I get to keep it. This has been debated and debated since the borrower doesn’t own the house in a contract for deed, whether anyone could put a lien on it. It seems that no they can’t, but if there’s equity in the house, there seems to be an interpretation. I’ve seen it argued both ways so I don’t know. It’s depending on where you are and the law in that state where you would come out on that.
It’s state-specific and also depends on the type of lien. You mentioned about liens on a property. I’m buying a CFD in the wonderful city of Detroit. I bought it because I closed on it. There was a $15,000 mechanic’s lien for renovation they did for a property. They paid down to $300 balance on it, which stays with the property. It was almost a blessing in disguise because I know there’s been $15,000 worth of work inside the house, but to answer the question, assume they did and then have an attorney review it. If they do attach, that is something you can go back to the seller and the seller will reduce the price if there are liens that we’re not aware of. They’ll take care of them and put a side letter in the agreement. That is a cause we’re reducing the price.
Harbor bought a whole lot of properties and resolve them on contracts for deed in Lake County, Indiana, which includes Gary, Indiana and another town called Hammond, Indiana. Hammond has a rule and I found out that this is not unique to them. If you have a municipal code enforcement lien on a property in Hammond, when that becomes a judgment, it’s on there for a length of time. They go through a court procedure now. It’s a judgment against you. They will put that judgment on every property owned by Harbor in Lake County.
I own a property in Gary, Indiana that has $20,000 in Hammond municipal liens judgments on it, it’s not even in Hammond. I’ve been told by title companies that they can be removed because they’re not from my property and no, they can’t be removed. The thing about judgments in Indiana is after twenty years, they fall off. I just decided that I would just keep the property and I could sell it on another land contract to do forfeiture and make the land contract a twenty-year land contract where they’re not allowed to buy it before twenty years. I don’t know if I’m allowed to tell them they can’t buy it for twenty years. I’m just going to keep it as a rental.
She came back and said, “Their CFD utility liens is an equilateral file. Can I presume that it was paid if there’s a quitclaim deed?” No, don’t presume that. I would pick up the phone and call them and say, “I’m looking at acquiring this property and I saw on a title report that there are some outstanding liens. Are they still outstanding? What is the total balance?” If they give you an answer, see if they can email that to you. If it’s $3,000, you can go back to the seller and say, “There is $3,000 means on this property that we’re not aware of. Instead of paying $10,000 for it, it’s now $7,000.” They’ll either do one of three things. They’ll reduce the price, which is what they’ll do because they don’t want to pay for it so they’ll have you pay it. They’ll pay it or they’ll tell you to go pound sand. In that instance, you might want to walk.
If you’ve got a side letter from them saying that they’ll pay it, be sure there’s a deadline on there for them to pay it or they have to buy it back from you. I hate side letters because I would feel like pushing them if they’re not going to buy it back.
Thank you all for joining. If there are any future questions that people have out there, feel free to reach out to us by email. You can email us. You can go to the Good Deeds Note Investing podcast Facebook group page or the Notes and Bolts Facebook page. If you’re buying CFDs or bidding on CFDs, I recommend joining the Notes and Bolts group that we have because that group was set up to talk about these toxic assets where you run O&E reports and maybe it has $10,000 in liens. Somebody else doesn’t spend $135 on the O&E report or $150 on a BPO. We’re trying to work with everyone and trying to save some money in what assets not to bid. I hope we will see you then. Thank you all.
- How to Communicate With Borrowers – previous episode
- Window Rock
- Good Deeds Note Investing – Facebook
- Notes and Bolts– Facebook
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