- September 10, 2019
- Posted by: august19
- Category: Podcast
Many people, specifically homeowners and real estate investors, have been left traumatized by the recent recession. Chris Seveney and Gail Anthony Greenberg talk about what happens if we get a softening in the economy, how it will impact note investors, and how they can survive a recession. As they share their thoughts on property depreciation, losing jobs once a recession happens, and switching over to buy and holds, they also talk about market correction and why lower assets are more work. Don’t miss this episode as they also give great insights on CFDs, the July 2014 ban, Dodd-Frank, and more.
Listen to the podcast here:
Open Mic Night: How Note Investors Can Survive Recession
Gail, how are you?
I’m well. I’m tired. We did a few of these and we had so much to talk about. We did not do what just happened, but I feel like it’s very appropriate that we do. Chris, what just happened?
Gail and I closed on a 45-asset purchase pool of contract for deeds and that we had under the agreement. We closed on that and we got an offer accepted on 82 more CFDs, I believe. We’ve got 129 assets right now. We’re in due diligence on 84 of them. Some of them we’ve agreed to sell off some of those. Gail and I are going to be busy with plenty of assets. If people are interested in acquiring any CFDs and these are performing CFDs, the majority of them, there’s a few that might be 30, 60 days, but these do have a very long payment history. They originated back in ‘09, ‘10 and the borrowers had been in there since, so these aren’t six months or twelve months reperforming and sell–off. These have been there for ten-plus years. They may have had a hiccup here and there, but for the most part, these people have been in these properties for a very long time. It’s an exciting process to really up our game to say the least of buying pools of five, ten, fifteen, twenty up to here now, 80-some odd assets. It’s exciting, but it’s tiring as well. We’ll be sharing our lessons learned.
I look a little haggard at the moment and we’re not even all the way through the due diligence. We should apologize upfront. I wanted to say I think a lot of our readers are more in the market for nonperformers but tell me this. Do any of these have long enough timelines on them that they would work as partials? Are there enough payments left to go that route?
Absolutely. There are twenty-year, 240-term and that maybe eight to ten years. They still might have 120. You could take a partial and sell off the first five to six years, turn around and collect all your money back and then create an income of a few years of $300, $400 a month a few years from now. That’s not too bad a deal. I love doing that.
We should do our next on partials to help people understand whether that might be a business that they’d like to get into.
Partials can be extremely powerful. I think it’s not for everybody. It depends on what your goals are. If you’re looking for instant cashflow, you can still get it. Because instead of giving away the entire payment, you can give away a percentage of it over a period of time or all of it over a shorter period of time to grow it on the backend from that perspective.
You can buy a performer and sell off enough of it in partials to get your money back and then go buy something else that’s a performer for you or with cashflow is what you’re looking for. It’s some ideas to think about.
Before we hit on one of our topics, we do have a question that did come up about lease options and what do we know about them and it’s got a tape and interested in some. I haven’t bought lease options. I looked at doing them and typically they’re done in places that I’ll say to avoid doing land contracts. The devil’s definitely in the details of how the lease option is written. I think we saw some not too long ago that came out, but I don’t think there was something with them. I can’t recall what it was either we never heard back from the person or I haven’t seen too many around, sometimes just some big tapes, but I’ve never pulled the trigger on one. What about you, Gail?
I admit to feeling rather confused about even how to do the due diligence on one. You and I have created them in instances where we’ve gotten houses back or bought vacant houses. The condition of them is too bad to sell to an owner-occupant on a land contract because it’s illegal to sell somebody an uninhabitable house. That’s how all the troubles got started with certain companies that originated a lot of land contracts by selling bad houses to poor people. You don’t want to do that, but a lease option in that case can be a way to sell a house that needs work to be livable. You can already start collecting payments and then you’re free of all the obligation to qualify the borrower by income. It seems like it’s an open window for people.
I’ll mention because you touched upon something. If the borrower does have any of the payments going to pay down the price of the property, you do have to qualify them. You do have to file a Dodd-Frank. I would consider it a land contract for all intents and purposes because you have to treat it pretty much the same. I’m not heavily involved or invested in them enough. I’d say Gail and I are not the most experienced at them. A lot of times you’re probably going to see them, my guess is now in Ohio and some of the more judicial foreclosure states or places maybe like Texas that doesn’t allow land contracts. It’s a different animal and I haven’t gotten to invest in them, so I know a little bit about them.
I would say too that’s an instance. We, especially Chris, always advise you to get legal advice when you’re creating contracts. This one is one where you want to do that because there are some fuzzy areas where you can get in a snag. We have a question, “If a lease option is the same as a land contract?” Do you mean legally or conceptually?
Legally they’re not, but conceptually I would almost bid on them as if they were land contracts in essence.
There are certainly many similarities you’re going to own the house the way you do with land contract.Always seek legal advice when creating contracts. Click To Tweet
If you go more than 180 days in a lease option, it’s trouble. We asked about what states are our assets in. Pretty much all of them. I don’t believe there’s any in New England or anything on the Pacific.
No New Jersey or New York.
Technically I could run down the list, but it’s the majority of the Midwestern states.
The heartland and the south a bit.
Gail, we wanted to talk about what happens if we get a softening in the economy and how will that impact note investors. Because I’ve heard different things that, “It doesn’t impact you in some sense and so forth,” but I think it’s something to think about definitely and plan, have a plan in case it does occur. Let me just talk some topics and get some input from people out there as well on questions they have or thoughts or their opinions. We always enjoy your opinions because this isn’t specific to note investing. It’s more economy in general.
Chris, when people are like, “I can’t be a real estate investor, there could be a recession,” what do you think they are most concerned about? To me, the scariest thing is to be a house flipper and to start a project thinking you’re going to sell a house at the end for one price and then the market plummets while you’re in the middle and now you can’t exit, maybe even break even. You’ll probably lose money. When you’re another real estate investor, what if you own rentals? What is your concern if there’s a recession?
I think there are two concerns people have. One is the property value depreciates. I personally don’t think we’re going to see anything as we saw a decade ago in the near future. I think there’ll be some softening on home prices and I think there’s going to be some softening in rental prices. The other thing that’d be more concerned with I think is the jobs. From note investing, what takes more priority is people lose their source of income because as the note holder, you’re still interested in the price of the property, but you’re more interested in it if the borrower defaults. If the borrower’s paying and has a job and the house goes from $75,000 to $50,000, they’re paying. It’s not a big deal.
Most of the time a lot of people sometimes won’t be moving during that time or if they do, they’re going to sell and get you paid off. If they stop paying, that’s where you get the double whammy because you have your note that goes from performing to nonperforming. The second whammy is the value of the property went down. Now if you had a $50,000 property, call it a UPB of $30,000 and all of a sudden the property value when it was performing, that asset might be worth calling it $24,000. If housing prices dropped by 20% and houses worth $40,000 and it goes nonperforming, now suddenly your $24,000 note, depending on the state, is probably worth $10,000, $15,000.
You got to cash out of it.
If you have to go foreclose and everything, it can be challenging.
I just want to interject that this is in a way we have our own private recessions at times. Sometimes you have borrowers who go from performing to nonperforming anyway and things happen with houses. A house that you’re hoping is worth a certain amount when you buy the note can, in fact, when you get to see the inside turn out to be way less valuable. I feel like there’s a lot of circumstances that we, as note investors, face where the confluence of events where it’s a recession-like experience can happen within even a decent market with your individual situation. I’ve put myself into a recession on a note. I bought a contract for deed in Georgia in an area that on paper looked rather good. It’s very close. It’s a ten and a walk to a big university. The house looked okay, not fabulous, but it took over a year to get the possession of the house. To check for deed and Georgia, you’ve heard the tales, I’m sure. Georgia’s the place to do things, not if it’s contract for deed. In that time, various things like a tree fell on the house, different things happened and I found out when I first started asking people to go mow the lawn and they didn’t want to because they didn’t have a weapon on them. I was like, “Maybe this neighborhood is not as good as Trulia said it is.” In fact, it’s been a disaster. It’s become a recession-like experience for me working on this thing.
That’s the thing people got to be cognizant of is you get people losing their jobs all the time. Whether a recession or not, it goes to what’s your plan and what are you looking to buy? That’s one of the things where on nonperforming, I think you have to have a certain strategy. It’s more important to have a more defined strategy on a performing note than a nonperforming note. What I mean by that is the nonperforming note, you’re assuming the worst–case scenario.
You’re buying the worst-case scenario because they’re not paying. It can only get better from there, in theory.
On a performing note, I’ve seen people buy because if the UPB was near the BPO value and they’re buying it at 10% to 12%. That would worry me because if they do go nonperforming, you’re going to be taking a very big haircut on that.
You just said 10% to 12%, which I think some people might infer means $0.10 to $0.12 on the dollar.
No, 10% to 12% retail. People look at the performers and you want to make sure if you’re buying performing, make sure there’s equity in the property. That’s the first thing I would say is make sure there’s equity in property. I would look more for the payment history and look at something that might have a longer stream of pay history where the borrower’s a little more consistent in the census from the performing side. If it’s a note that somebody originated to an investor and they’ve been paying, but that’s the time too you got to be careful of is on some of these investors that use them as buy and holds. We do have a question that came up about buying holds is some people overleveraged themselves and all of a sudden they may lose a renter for a few months and they do that on two or three properties. They don’t have the cashflow or the pay stream to continue paying it and you may have to take it back. That’s another risk of one that’s an investor, a property versus owner–occupied. People that are in a downturn, they’re more likely to walk away from a rental property than they will at primary residence, in my opinion.
If it’s been rented though, you’d like to think at least it could be returned to a rental quickly and then could be sold either on another contract to a new investor or it could be sold as an outright as a turnkey rental to an investor.
Our good friend, Bill, mentioned that for performing notes, he always looks at your equity, which is the difference between the purchase price and the fair market value. That’s your safety margin, absolutely. Because the other thing too is if it does go nonperforming, your legal costs are recoverable in that sense because there’s that equity that you can build it up too. If there’s not much safety margin there, you could be out of pocket if you have to foreclose as well. Having that safety margin is very important.
Is there anything that you would be doing right now looking at your portfolio of notes? There is a recession being predicted. I know there are always people with their hair on fire predicting that things are about to crash. It seems there’s starting to be more and more signs that something might be brewing in 2020. Are you doing anything strategically with your portfolio?
I’m monitoring it. I’ll be the first to say I don’t believe we’re going to have a downturn in 2020 because it’s an election year and an incumbent will go back to QE and drop rates to zero. They’re going to do anything and everything during the election year to avoid a downturn.
We’re hit after that. That’s the consequences.
It could, but I don’t think 2020 is going to be the year and I don’t want to get into any philosophical political opinions on things. I would find it very difficult for somebody who’s trying to get re–elected for something not do anything and everything. Here’s the thing. If you lose, you can blame it on the other guy, that it was great while you were there and somebody else. If you win, it’s like, “I won and if I have won, I’m only here for four more years anyway. I can’t stay any longer.”
Unfortunately, it’s how some of the thought. What I’m doing though is I am looking at assets that have UPBs and fair market values that are very close to each other. If I can liquidate them at a reasonable price, then I will. If it’s something that doesn’t meet the criteria, I don’t mind holding it because here’s the thing. They may have several years left on them and they’re performing. It’s similar that I can I’ll go through the storm if the storm comes. It’s like a buy and hold. If the value goes down and you have the renters in there, you just weather the storm. From that perspective, that’s a lot of my thoughts on things is weathering that storm.
There’s a couple of things about too. I think one of the things to remember is that the last big recession, the one that knocked the wind out of all of us originated in the housing market because of the subprime prices. Tons of unqualified people were given mortgages. When the whole house of cards came tumbling down, it was a bad housing landscape because it was a big shakeout of people who couldn’t afford houses to begin with but were given loans to buy them anyway. It was a wake-up. That’s not a sustainable situation. We don’t have that anymore. Anyone who’s tried to get a mortgage in the last several years knows it’s impossible. It’s really hard. I refinanced my house and I got a construction loan and I have never been through a process like that. It was grueling. It was in very much more stability among borrowers now than there was. The people who survived the last one and the people who have gotten mortgages since then is a completely different kinds of borrowers than the kind. If anything, it’s for those who are hoping there will be a new giant harvest of foreclosed houses in the next recession. I don’t see that happening either. Do you?
No, I don’t. I think unfortunately the next one is going to continue to split the middle class because I think lending, the rates are going to remain low and people stockpiling cash. The good and bad with some of these new rules that are coming out, with Ohio getting rid of gland contracts essentially, eventually. They haven’t yet, but a lot of states moving away from that going into a mortgage and tightening some of the lending standards in a sense, especially on these low–priced homes. I think it’s going to weed out a lot of people from their ability to buy. It can be investor-driven buying a lot of these lower price assets. It’s going to be more difficult for people to acquire them. I think you’ll still have a lot of homes that probably get dumped where people, renters destroying the place.
I also think investors are picking them up at reasonable prices and if they’re getting great rental rates, you’re going to try and keep them. It’s all about leverage. How much leverage? That’s something to look at in your note business as well is how leveraged you are? Do you have cash to make sure you can something goes wrong or something happens that you’ve got cash sitting aside to cover unforeseen expenses? That’s something interesting. It was in 2008 election year. I don’t think it was until after the election when they said we were in an actual recession. During that time, that was colossal when you had the banks and stuff failing and so forth and all the bailout money and stuff that was getting thrown around.
That wasn’t something that could have been prevented by a little tweaking around the margins. It started in the fall of 2007. When the campaign year got underway, things were already cooked at that point. We didn’t know how bad it was going to go.
A lot of people switching over to buy and holds and then divesting some of the holds they’ve had to pile up cash at the deeper discount when things tank. I see good and bad in that because nobody can predict when it’s going to happen. If you have money sitting around and waiting and it’s not doing anything for you, then you could lose out. I don’t think we’re going to see prices continue to increase. I think they might soften, but over time, the long run, they’re going to continue to increase. If people are putting money aside, I would tell people if you’re going to put aside, put it in something for 12 to 24 months. Invest in a fund or invest in something where the cash is there and see if there’s any liquidity, but it’s something that’s more short–term. When it does break, you have the ability to get in. You weren’t holding something for five years, but if you can get into something for 12 to 24 months, over a short period of time and get a nice small return on that’s in an asset class that might do well. Something people could probably look at. I think with money being so cheap, I still think even piling up cash, there’s so much cash out there. I still think it’s going to be challenging for especially the good investment properties. The A’s and the b’s.People who are in a downturn are more likely to walk away from a rental property than they will from a primary residence. Click To Tweet
I was thinking about it too. We invest in the Midwest and there are many cities. You and I have investments in Gary, Indiana and Flint, Michigan. These are places that are like dystopian wastelands already. The recession probably can’t do anything more to them than the loss of the major industries that were there from the ‘70s. Yet we invest there and it works. Even though employment is a consistent issue in those places, people want to live in those places. People have grown up there and they want to stay there and they figure it out. They figure out the money side of things. Flint happens to be a great place to own rentals and land contracts too. I’ve done well there. You’ve done pretty well there.
I can’t complain. In Gary and Flint, I’ve done very well and it goes back to what are you buying it at. They brings up a good point too about some of these areas and looking at long–term, the concern about the potential loss of jobs due to automation and robotics. Is it going to continue to lead the loss of jobs and the lower–skilled jobs? I think it eventually will, but there’s going to be a breaking point at some time. There’s going to be some type of intervention because you can’t have unemployment at 10%. Unemployment’s been historically extremely low right now and I still think there’s enough of a market and there’s probably going to be new jobs and stuff that come out of some of this.
Who made a living driving Uber several years ago? Nobody. There are new things being invented all the time.
The iPhone just turned ten. It’s interesting. You look back at things. I remember when I got married and we have Blackberries and internet on your phone was barely even.
Are you trying to figure out how long you have been married?
When we met, so it’s several years. One thing I would tell people too is especially the thing where I think you’re going to start seeing it hurt the most honestly is in some of the larger, the mid-level multifamily deals. Why I say that is you get a lot of people who aren’t realistic investors thinking they’re multifamily investors and they’re buying stuff at cap rates at 3%, 4% or 5%. They’re buying it extremely low and they’re banking on rents increasing. Anytime I see somebody post something like, “We’ll rent $750, but you can easily get $850.” I talk with a lot of people who are in REITs and run those and they buy a lot of buildings and stuff. They laugh every time they say that because you go to somebody and you go knock on someone’s door and say, “We’re going to change your rent from $750 to $850 a month.” What do you think they’re going to tell you?
They’ll say, “Thank you. I’m going to go find a new place to live,” because they can’t afford $100 bump in their rent. Maybe you might get $850, but that unit might also sit vacant for a few months. You may end up hurting yourself or you’re giving concessions and everything else. That’s I think the next area where I think you’re going to see the weakness, it isn’t as much in the single-family. I think I see it more in some of these mid-level, I’ll call it 20 to 200–unit multi-families that people are getting themselves into. Property management is a pain and it’s very difficult. That’s my guess.
I would never want to be in a situation where I had a giant loan on something, whether you think there’s a recession coming or you think there will never be another one. It’s a comfort level situation. You bring up a good point, Chris. Don’t do skinny deals. You were saying about don’t buy performing notes at such a high price that if anything happens, you’re in bad shape. Use common sense. It’s not about being an economic genius or being able to predict anything, everything that could happen and when. It’s about not being in a situation where the planets have to align for everything to be okay. You have to have enough padding at anything you do that if something that’s not optimal happens, you’re still going to be okay. One of the reasons we love nonperformers is because the only way is up with a non-performer. You are buying them so cheaply. It feels like anything could work out and be a great outcome. It’s important not to take that philosophy and that feeling and apply it to a performer because you have to recognize that you’re playing in a different game with a performer.
Here’s a question that popped in my head. If you had $100,000 to invest, and let’s say you want to invest in performing notes. Do you buy ten performing notes at $10,000 or do you buy one at a $100,000? Based on where you think the economy is going, I’m curious what are people’s opinions? There’s no right or wrong answer. I’m curious to hear people’s opinions on this. I have my own opinion.
We have someone who would do the ten at $10,000.
It depends on who your borrower is. I’d say these are performing, but if you think housing may slump or settle down or you think you’re coming down into a market correction, I’m curious what people were thinking. This goes back to how much equity is in a deal, but also the risk. What is the sensitivity analysis of it where you’re minimizing your risk? One at $100,000, all your eggs in one basket. If every property was a $200,000 property, in every situation, most people would say, “I’d probably by the ten at $10,000,” knowing you have that much equity, you’ve got more work to put it into it. You might be a little or less risk, but if all payments are the same heading up, you’re doing a lot more work for the same payment. Your work relates to risk. If one or two or three of them fail, you’re still covered. Whereas on the one and $100,000, if it fails, you’re scrambling for that one. There’s no right or wrong answer. I was curious what people’s thoughts are. I know my business has been built around more of the ten at $10,000 ones than the one at $100,000. The other thing I consider with that is if it softens and you need to sell it, is it easier to sell a $10,000 asset or $100,000 asset?
There’s certainly a much bigger audience for a $10,000. It requires a level of courage at $100,000 and experience that not everyone feels they’re ready for.
If I put out a performing note right now that said, “It’s $10,000 and it projects to 25% return,” I bet you I’ll have people jumping at saying, “I’ll buy it.” If I had $100,000 one, it’s the same return, maybe not everyone has the funds to do it against cost scale. It seems it’s always best to spread your risk.
That is true. We have a question, “Isn’t it always better to spread your risk?” To a point, what happens is that you end up with so much complexity sometimes and it can be overwhelming to have too many things going on. That’s the way it feels to me.
We have people coming through. It depends on the borrower. Government job, no problem. Yes, I would agree with that. Typically, that is not a problem. I’m not going to go down that rabbit hole. I could get myself in trouble for saying too much.
If you live in Washington, DC area.
We have a lot of government around us.
You have to be in traffic jams with them all the time.
Someone mentioned lower value assets are more work. They are more work. It’s there’s that pendulum too of what’s lower value versus higher value. Because once you get to a certain point, the higher value can be more work. If you’ve got a borrower who’s got some money in their back pocket and they go nonperforming and you’re trying to go after them, they’re going to fight you tooth and nail. They’re going to pull out their lawyer or they’ve got a friend who’s an attorney or something who is trying to help them and find any way that something got screwed up somewhere along the line. What they may do is they may file a lawsuit against you, possibly to force you to spend money to try and come to a resolve. You’ve got that to fight as well. It’s like anything. It also depends on what state it’s in, certain states. Also, when you’re going to see any softening, it’s going to be more micro and macro. It’s going to hit certain markets a little harder. Honestly, I do think some of the major metropolitan areas are going to get a little hit harder because they‘ve had higher appreciation.
It’s already going on. My son is a realtor in Brooklyn and it was gangbusters for years and years there. Now that things have slowed down. I have a friend who was a realtor in the Bay Area in San Francisco. She told me it’s a very similar, like it’s really markets that appreciated so fast and for so long it seemed like there was no stopping them. Everything changes eventually.
San Francisco, it’s going to hit a tipping point and I think Florida. Florida is usually one because that got so many ups and downs to it. I’ve heard things about certain areas of Texas because of how much they’ve expanded as well. They’re continuing to expand. People are going there. Texas has the income tax component to it that helps significantly. I think New York because of the taxes and some of these other states are going to get hit harder because of the taxes. We’re starting to see it now between Maryland and Virginia. Maryland imposed a lot of no build restrictions for any new permits because of school and overcrowding and a lot of the things going on there. With not only Amazon comes Northern Virginia, but Virginia has a much friendlier state to do business, with what getting built the last few years. Maryland has completely flipped a scale now and all the new construction now is on the Virginia side. It’s interesting and a lot of it is due to a political factor more than anything, to be honest.
I was going to say do you want to talk a little bit about talking about the work required by some assets, which I can talk about what we need to do with someone with the ones from our pool?
We’ve acquired a few assets. We closed on 40, about 45 assets and we’re doing due diligence on 80-plus assets. We’ve had good attorney review on these because they do have I want to say we use the correct term. We’ve got clouded title, fuzzy land contracts. A lot of them were originated by a company called Stewardship Fund. Stewardship Fund was a fund back about a decade ago that is similar to Harbor and some of these other firms, Vision Properties. They were buying properties up for almost nothing, not doing any renovations, putting people into land contracts and selling them off. What ended up happening is they ended up getting caught where they were losing their shirt and they were starting new funds and they were taking the funds from the fund and giving it to the other fund. They were running a Ponzi scheme. They get caught, got arrested and got thrown in jail. It got all put into receivership and they sold off all the assets. When they sold off a lot of these assets, there were some things like some allonges on their land contracts that were missing or some satisfactions and mortgage that they took a deed in lieu of mortgage, but they didn’t get it signed.
You’re talking about a company and they probably didn’t start out to be a criminal enterprise, but they started a fund and then they started another fund and they did that for a while. Some funds did better than others, so they were shifting money around from one to the other and not really cashing people out based on the actual performance of the funds. A company that is run that way might not be all that careful about doing all the right paperwork for everything maybe. Now these things have been swapped like trading cards through several quitclaim deeds and have now come to one of our favorite sellers who are looking to move them.
We’ve done a thorough analysis on the first 45 that we’ve gone through and there was a few of them that they were fatal. There was nothing, so we did toss those back. The others, based on talking with attorneys, there are many different things we can do. Also speaking with title companies about getting title cleared on these and many instances. I’d say only a few, probably only maybe 10% might need a quiet title action. A quiet title is a lawsuit against a previous lender to clear up the title. As a perfect example, if the satisfaction didn’t occur, a lawsuit will be filed against Stewardship Fund to say, “You signed the deed in lieu warranty. You transferred everything but you didn’t satisfy this.”
Now the chances of Stewardship Fund coming out of the grave events essentially to fight the quiet title is slim to none. It’s a process that might take six months, might cost a few thousand dollars, but then you’d get the title cleared up. In many of them, it’s a missing allonge. We’ve been speaking with many individuals and the simplest thing we’re going to do now, and again these are performing so these people who’ve been paying for several years. A lot of them are borrowers who lost their house in the deed in lieu but stayed in the property for warrant to get the land contract. We are going to go back to them and offer them to put them back on mortgage and note.
By me doing that, because the deeds are all in order and corrected, it might be something with the land contract putting them back on a mortgage and note essentially wipes out any deficiencies that exist with the land contract. It’s something that it’s not super creative, but there are things with land contract that something is sometimes missing and you can’t get a signature and stuff and it’s performing, go the route of putting them on the mortgage and note and go from there. You’re starting to see a lot of that in many of these states as well. People will say, “What if the borrower doesn’t want to get on the land contract or get off the land contract?” Gail, what are you going to tell them?
I’m composing that letter right now to introduce them to the idea. We’re going to thank them for being consistent borrowers and let them know that we think the right thing to do to reward them is to give them ownership of their house with full ownership benefits and rights that they don’t enjoy under a land contract. If that doesn’t work, we’ll offer them a free month. We’ll do something. We can’t make them suspicious from the get-go by offering them something.If the property value goes down and you have renters in the property, you just weather the storm. Click To Tweet
You’re doing two things by doing that. You’re also transferring it from a land contract to a note where if we want to look to move that asset, I think you’ve got a higher pool of people who would rather have a note. We’re also going to look to put lenders insurance on it if we can as well. That’s another way to enhance the value on some of these assets. I’ve converted maybe eight to ten CFDs to notes. Every time I’ve asked a borrower, without a doubt it was an immediate yes. Except for one of them. They were hesitant at first and then came back and said, “Yes, please.” I’ve only had one borrower who didn’t accept it and it was based on his attorney review. This is interesting.
It’s a land contract in Indiana, which for those who invest, Indiana is like the best place to have land contracts, honestly. Because you can kick them out in 90 days and have the property. His attorney told him that the language in the mortgage and note, which is standard language from Fannie Mae was too strong in that I could easily take his house from him. I called them. “Did your attorney read the land contract? Because you have more protection in the new land contract.” I offered the guy a point lower on his interest rate as well and the guy didn’t take it. I’m like, “I’ll just keep it as a land contract.” Gail and I are now going through the due diligence depths of that.
I would say getting going on that because we’ve got the first 45 that we closed on. Now we’re going into the boarding process, but we’re what we’re doing during the boarding process now as we’re getting our ducks in a row with our attorneys and stuff to get the documentation we need for the proper purchase agreement, the proper disclosures that you need in the state. In certain states do have quirky disclosures because you are technically selling them property even though they’d been living in it for several years. You want to make sure you do everything right and then once you get it done the first time, you can rinse and repeat that process with the other borrowers.
We should share a good day as well. We did something about indicative bids and we were talking about what things are reasons to bail from an indicative bid that a seller is not going to be upset with you about. We were talking about how much opportunity exists when you’re willing to deal with some complexity with the paperwork and everything. We were talking about if you want to change a borrower from a land contract to a note and mortgage, do you have to requalify them? We thought up absolutely you do have to requalify them and then what just happened?
An MLO, I reached out to and having discussions and it wasn’t from him. It was from another note investor who was buying a few of these assets from us was doing the same strategy. I said, “Do you know this person? He’s in your area.” He’s like, “I have met him. He’s the one who told me.”
The MLO guy that we all use to qualify borrowers?
He said these things were originated before the ability to repay and you’re not increasing the payment. You don’t need to go through that whole process again.
Was it July of 2014?
July 11th, 2014.
Anything originated before that because that’s when the rule that you have to establish the ability to pay went into effect.
He said prior to July 1, 2014, there was no ability to repair your requirement. You don’t need to certify those as long as you’re not increasing the monthly payment amount. Because you’re converting the land contract to a note, it’s a conversion. It’s much different than a new origination with somebody that you’re just doing. As long as you’re not increasing it, you’re essentially doing the one-off swap. You still got to follow certain rules regarding the closing statement and other truths and lending act stuff when you’re selling them the property. Now the HUD and some of these other things in each state, as I said, has certain disclosures, whether it’s lead paint, mold and other seller’s disclosures you need to follow. It’s their ability to repay component to it, which is not that difficult and it’s not super expensive, but it is a step that we’ve been told we can skip over.
The issue is that some people may have a change of circumstance and they might not have the ability to repay. They might not be able to qualify financially to live in the house that they’re already living in and paying the mortgage every month on.
When you look at these again, Gail, most of them, their payment stream has been very consistent for the last several years.
Talking about bureaucracy rules relative to common sense and experience. We have a big pile of due diligence to do, but does anyone want to discuss anything?
We have a question, “Would it be Dodd-Frank compliant though, would it?” You need to be Dodd-Frank compliant when you’re converting. A perfect example is also if you’re transferring property from one person to the other, there’s a lot to Dodd-Frank, so not just the ability to repay, but there are other disclosures and so forth and there are exceptions that you’re allowed. If transferring an asset into your trust or transferring it to a family member, there are exclusions in there and according to this MLO mentioned that because it was originated before that time and you’re using the same terms and not increasing any of the terms, it’s considered an exclusion.
You’re continuing something that’s already working. Are you asking that because of maybe if you’re going to sell the loan that it would have less value if it’s not Dodd-Frank compliant?
It’s not owner-occupied. That’s a whole another thing. Some of these are not owner–occupied. Another thing that you don’t have to. I think the biggest thing that I’d be looking for and is what we’re looking to attempt to do also is see if we can also get a lender’s title policy on it. I think if we can convert it and get a lender’s title policy on it. Because from a title perspective, you’re clean and from the other aspect. I bought many notes or CFD. How many CFDs have you bought that were originated after 2014 and have you seen the ability to repay or seen other things in there? I know there’s a lot of them that don’t have it.
This is looking at collateral files where there are two land contracts and I’ve never seen a cancellation of the first one. There’s a lot of dodgy things that go on.
Here’s the thing too is if there are two land contracts and they’re not recorded, if a tree falls in the forest when you’re not there, it doesn’t make a noise type thing. It’s one of those things is that borrower someday going to come out of the blue after not paying for several years and claiming they still have equity? Most likely I’d say no.
It would be a very large arrears bill that you would be giving them. “Come back. We’ve been waiting for you. Here’s your bill.”
The comment to that would be, I’ll talk to MLO about getting something written up that technically if you provide the right disclosures, yes it is Dodd-Frank compliant because you didn’t have to meet all the terms of Dodd-Frank.
I had someone reviewing a note of mine who has an investor who will only buy ones that have truth in lending statements in them. This note was originated before that was required. I can’t supply that document from the origination, which was in 2004. I offered to if they put it under contract to pay for them to have an attorney of their choice review it to see if they can do what they need to. I assume what they’re concerned about is if there was a legal action, whether they would lose because that document wasn’t there.
It’s funny because I don’t see them on here. They asked about changing from a CFD to note. If you had your service or reach out, here’s a secret and hope no services are watching this. On two of mine, I had the servicer make the phone call to have the person call me and they charged me $250 for coordination. All they did was reach out to the borrower, say, “Do you want to switch?” They said yes and I all the paperwork did everything else. They send me a $250 bill. If you’re going to do it, reach out yourself and work everything behind the scenes and then let the servicer know, “I converted this one. All the terms stay the same. Here’s a mortgage and note.”
I once had the same source or I believe make one phone call to a nonperforming borrower. That person immediately made a big payment and started paying again and they wanted $500 for the reinstatement. The guy was waiting for someone to ask him for the money.
Don’t mention too if we’ve been talking notice and Dodd-Frank compliant, it’s a court. It could be thrown out.
Spoken like someone who lives in Ohio.
I believe you could get fined. I don’t think he had been thrown out because you’ve seen a lot of decisions. What is the original intent? What was the intent? If you’re not compliant, yes you can get fined for not being compliant or not falling for debt collection acts. For example, I was reading in North Carolina form that was a certain disclosure you need to provide. In the disclosure, it says if this isn’t provided within 21 days of closing, you’re subject to a penalty up to $500, but no way does it allow you to resend or terminate the closing or if it occurs post-closing to terminate and now cancel the deed.
You’re probably using them.If you're buying performing, make sure there's equity in the property. Click To Tweet
I wish I could stay away from all servicers. That’s something we are checking and so forth, but I’m going to talk to somebody else I know who’s another MLO. I have heard that in the past too that if you were converting a CFD over to a mortgage and note that you did not need to comply. I don’t know if it’s because they don’t consider it. Because the borrower technically on the land contract has equity, potentially as equity in the property depending on the state, it’s more of an equitable than anything.
The whole intent of Dodd-Frank was we were talking earlier about unqualified borrowers being given loans and put into houses and how that pretty much pulled everyone down into the giant suck hole. The intent is to make sure that people can afford the loans that they have if you have someone who’s isn’t paying for a long time. It’s like the SATs. SATs are supposed to show whether you can be a good student or not. There’s a lot of good students who don’t do well on SATs and it’s silly.
It’s nice if your parents are very wealthy.
If your parents are wealthy, why are you even trying to go to college? Where’s that trust fund when you need it?
I’d still recommend that they get the education. I think it’s still very helpful.
That’s because you were the beer pong champion. That’s why you are touting college. We’re all real estate people. I had very mixed feelings when my daughter wanted to go to college. I was like, “All that money. What are you going to get out of it? Let’s buy something.”
I’m learning a ton right now in college.
You’ve gone at the right age as an old person.
If anyone’s looking at purchasing any assets, I’d be happy to share the list with you. It’s from a seller that a lot of us already buy from, so you’ve probably already seen them, but I’d be happy to discuss if anyone’s interested in any of those. I’d be happy to discuss it with you as well. Do you have any final thoughts?
Thank you for joining us. I cannot wait to attack this pile of due diligence. If you are interested in any of our assets, be sure to know that we pour over these puppies like your mother’s new puppies. We know every inch of them by the time we put them up for sale. It’s our intent to be very careful as sellers.
I posted about banks and downloading the data from the banks and uploading that software.
Where are those reviews?
I hope people are going to give them our reviews and stuff. I promise I will get that up. Now here’s the thing that I’ll mention to everybody is you’re going to need to go to the FDIC site and download, get a username and a token. Because to run a program or to download the data, you have to have a token ID number for it and they don’t let you use different ones from different IP addresses.
Everyone knows what we’re talking about. They can go ahead and sign up at the FDIC website and get that token.
I need to give instructions for how people to put in their token ID and when they download the data, it dumps into a folder and not into the cloud.
Thank you so much for joining us. Please be sure to read more about indicative bids because we talked about a lot of things that we touched on. There are lot of how–tos in that one.
For those who read the one with Tony Sottile, that is up on YouTube as well and it’s in the Notes and Bolts groups. There are a lot of good slides and the slides are in the Notes and Bolts group as well.
Thank you. Go out and do some good deeds.
Love the show? Subscribe, rate, review, and share!
Join the Good Deeds Note Investing movement today: