- April 12, 2019
- Posted by: august19
- Category: Podcast
How does a joint venture work? Chris and Gail clear the confusion as they talk about the dangers of posting deals on Facebook groups. They discuss the importance of ensuring your JV partner is an active participant as well as making sure you create a good relationship with them. They also touch on managing partials and give tips on the proper way of making collection calls, highlighting the importance of ensuring you are talking to the borrower.
Listen to the podcast here:
The Dos And Don’ts Of Joint Ventures
We’re going to talk about everything note investing. There were some hot topics at the Facebook groups. I’m not big on Facebook but Chris always catches me up on what’s happening. What did you see happening out there on the landscape?
Jillian Sidoti, she’s an attorney who is part of www.CrowdFundingLawyers.net. She writes a lot of PPMs for people and is very familiar with SEC laws.
Private placement memorandums.
It’s what people use to raise money. The SEC laws, which is a 506 regulation D, 506 (b) and (c), she puts out some great information on that. Like most of us, her focus was on investors, going out and the proper way to raise funds. We did an episode and we’ve got some corrections or some things we’ve learned from that. A few things popped up that some people were shocked about, which surprised me a little bit because it’s pretty well-known and discussed that you can’t solicit funds openly in public. I know a lot of people will be out there posting deals that are saying, “JV partner wanted.” That’s her first rule of a big no-no.
You gave me the very sad news that the three-touch rule is dead. We’re all counting on it.
It’s not that it’s dead, but it’s not like, “I talked to the person three times, so now I’m safe,” is what it boils down to. On our Notes and Bolts group, we did put information on there. We put Jillian’s videos and in there she discusses what constitutes a relationship between people. I’ve actually spoken to some other attorneys who watch the videos and basically agreed 100% to what they’re saying in those aspects. The question that comes up a lot then is, “How do I raise money?”
If I can’t talk about the deals, I don’t have any money. If I can’t do any deals because I can’t ask for any money, how in the world do I ever become a note investor?
You can talk about the deal. You just can’t ask for money. A perfect example is I posted a picture of a property in Michigan that says, “You’re never supposed to fall in love with a house in note investing, but I like this house that I’m doing due diligence on.” Am I soliciting anybody?
No, you’re just talking.
Yes. If somebody I know who I have a relationship with who also has filled out a questionnaire and I know who they are, I know what they do for work, I know how much money they may have to invest, that’s a relationship.
How do you know that? You know that from the investor form. It’s not like keeping their buttons saying how much money they got and how much they have to invest.
If they reach out to me and say, “Do you need somebody for that deal?” We’ll have another discussion. There are ways for people out there to look at things. It’s marketing. What it boils down to 100% is marketing. You want to tell people what you’re doing. People will see that and be like, “I might be interested,” and then they reach out to you. You’re not actively soliciting anybody. You’re just telling people what you are doing.Go with what you feel in your gut is the correct answer. Click To Tweet
We also see people who will say, “I submitted 70 bids and 35 of them were accepted.” Do you think that’s a helpful type of marketing? That type of marketing is designed to impress your colleagues in the note business. If you’re not already a player, you’re trying to become one. Is someone going to then contact you and say, “Tell me about your 35 deals. I might be interested.” I don’t think so. That’s not specific enough. Telling one great story is probably way better than bragging about how many bids you’re making and how many bids you had accepted, because we all know. We can say this to each other in our little private circle. Most of those bids, they’re not going to be the stuff that you want to buy anyway. How many deals are going to turn out to be great out of your 70 bids?
It boils down to telling your story. If people are starting out, still so share your story with people. I’m 100% an advocate that you should start with your own funds when you invest. Get to understand the business. If you’re going to take a loss, you’re doing it with your money, not somebody else’s. Tell people’s stories because there’s plenty of stories to tell. We’ve got podcasts telling stories about their deals. We want to touch base with people on that. If people have questions, feel free to ask about that. It’s definitely something we highly recommend. You go and watch those two videos so you understand, because I see people saying, “I didn’t know that.” Not knowing something isn’t a defense against doing something that is not correct. They’re Notes and Bolts Facebook group page.
We’re going to actually ask Jillian to come on because she always frightens us whenever she makes a video. She’s always coming out with new information and it is a concern. Probably when you’re a small fish and you’re not doing that much yet, you’re not in that much danger that the SEC is going to take a lot of interest in you. Look at Bernie Madoff, they never got interested in him and he has billions and billions. Soon, early in your career, we all need to know how to do it the right way.
The other thing too is it’s usually not the SEC. It’s usually your State Division of Financial Affairs who’s usually the first who gets wind of it. It’s usually because of a complaint or somebody said something on Facebook or something like that.
Treat your money partners very well. Do not ever take them for granted and always be in communication, always talk about any big moves you’re going to make with their asset. Most of the time, nothing will ever happen because happy money partners don’t call the SEC. They call you. I did a bunch of probably my first flurry of JV deals starting in October of 2017. The ones that re-performed quickly have reached that sweet spot where there’s a year of seasoning. I sold a bunch of them and I got to write some really big checks. It was very exciting. It was fun to see my bank account balloon like that. It’s more like a squishy balloon but it’s a great feeling.
You brought up a good point. There’s a second component to this, which is the partner and the role of the partner. One thing that Jillian talks about is trying to find exceptions. One of the exceptions is if your partner is an active participant. The whole rules are based on it being an investment in a security and a passive investment. Whereas if the person is active in the deal or has the ability to be active, then they have some control. By giving them some control, that is usually something that then can kick it out of being an issue.
It immunizes you.
You can’t promote it. The other component is even if you didn’t promote something and you take somebody’s money and they’re passive, it’s investment security.
It’s checking those boxes.
The other thing too is I don’t care if it’s a note. If it’s a real estate deal and you see people posting, “I need $50,000 and I’ll give you a percent profit on this real estate deal.” That’s illegal too. Most people don’t realize it, but that is as well.
Even when people are asking for money for a flip or like a private loan?
You’re getting a loan. You’re investing in the deal to get a return on the deal. That is a passive investment that can be considered a security.
I’m fixing up a historical house. I submitted an application for historic tax credits that would give me a very nice amount of money back, up to 40% of my renovation cost. In the event that I don’t get that, can I come on one of these Thursday night things and say, “I wasn’t able to borrow enough money to do this renovation. Now I’m looking for loans.” Can I do what I just did?
I believe a loan is different. If you’re saying, “I want a loan and I’m going to pay you 10% interest on the loan,” I’m not the attorney, but I believe getting a loan is okay. If you say, “I want somebody to give me $50,000 to invest in this deal and I would give you 50% of the profits I make when I sell this thing,” I can tell you, I know that’s a no.
Somebody has asked. She says she sees people sending out flyers with ROI yields and talks about what the deal might bring in. Is that something they should be doing?
They should only be doing it to their select group of individuals who have the relationship. People taking that and posting it on Facebook or sending it to their entire newsletter as an email is a no.
You should describe what you do with your tribe of financial investors.
I have people who I have screened where I’ve spoken with them. I’ve had them fill out a questionnaire and they are tagged in my CRM system with a specific tag. When I have deals that come through, I will typically send it to them. What I’ll usually do, which I just switched it over a little bit, is I put it on a password protected webpage where they can go on and look at the deals. Even when I put them up there, I don’t put what the return is going to be because everyone already knows who works with me, I target a 30% return. If they ask for my calculator how I got to that, I can show them. I don’t show returns, I don’t guarantee returns on anything. Even on that, on those pages, I don’t put, “I’m looking for a JV partner on these deals.” I say, “Here are my current deals I’m working on.” If somebody ever worked together on that site, it’s not something that I’m openly or actively appearing to be soliciting.
Didn’t you use to do a Slack group? Didn’t you use to put them in there?
I used to have a Slack group as well. It became too much between Facebook, Slack and everything else. Once I started kicking in Infusionsoft and I could tag people with who these specific people are, then all I do is put a picture up of the property with the information and some other information on there. Basically, it allowed people to download some information about it as well and then reach out to me.
You do Infusionsoft, which is a very expensive program. A lot of people aren’t going to do that, but you can do that very easily in any mail groups.
You can set up different lists, you can pre-screen people and then put them on your, “Safe to talk about the deals,” list. You can send them to a password-protected page. An easy way to do that would be to put something up in your Google Drive. Only make it viewable by people who have the password that you’re going to send out. These are more hands-on versions of doing what Chris has found a way to do completely hands-off.
You can do a flyer that you send out to those specific people.Not knowing something isn't a defense against doing something that is not correct. Click To Tweet
At what point can you talk to them about your deal after they’ve signed an NDA, seen your write-up, filled out a questionnaire and they’ve called you? We make them climb to the top of the magic mountain and bring back a branch from the Tree of Life. That’s the hero’s journey. That’s what we require once they’ve filled out the questionnaire. I’ve had people tell me they don’t want to tell me how much they make. On deals that don’t require accreditation, it’s okay if people don’t want to tell you exactly how much they make but they can give you your range. Another thing that’s important is real estate experience because the question that comes up if there is an issue is did they know what they were getting into or did you lead them down the primrose path? Did they have enough experience to understand the risks that they were taking?
On my questionnaire, I have a question, are they accredited or not accredited? If they’re accredited, when I talk to them, the conversation is different. On a non-accredited, they say, “I’ve got $25,000.” I make sure, “Is this your last $25,000?” I’ll point blank ask them, “What do you make? I’m not taking the last $25,000 and I want to make sure that you understand thoroughly that this is going to take a twelve to eighteen-month process and this money’s going to be tied up. You can pull out of the deal, but it will create a little bit of chaos for some things.”
One of the things I ask on my industrial profile is what your goals are. I’ve had people tell me they want 30%. It’s not us splitting 30%; they want their share to be 30%. It’s very good to screen out people like that early. That’s ridiculous.
I tell them Bitcoin when they say that. What I say to them is, “If you’re getting that from somebody else, please tell me because I’m reaching out to them.”
Someone asked about being passive. You want your JV to be actively involved in making the decisions with you. I think a good way to set it up with them initially is that you’re always going to discuss with them any major decisions about the asset, but you’ll make the final decision. You are after all the more experienced person, that’s why they’re teaming up with you to begin with.
Another question is, “Have you found that most accredited investors are used to filling out questionnaires or have you come across some resistance?”
I have not had resistance from anyone except someone who felt that he was extremely a very sophisticated investor. I’m not sure why he was in touch with me. He was a flipper and he was not that interested in note investing. What I was bringing to the table was not exciting enough to him that he felt like he was ready to give something up in order to work with me. It’s not giving anything up. It’s not like we post these things in public arenas after you tell us what you make. It’s just something we have to do by law depending on the investment. When you’re JV-ing, your money person does not have to be accredited. It’s not an issue. If you’re ever going to do something where you’re going to pool money, there are different ways to do it but some of them require all your investors to be accredited.
If I have somebody that doesn’t want to fill out the questionnaire, honestly I don’t want to do any business with them.
It shouldn’t be a fight. When you have like-minded investors and they appreciate what you do, it shouldn’t be a big battle. If you have to fight with someone to get into a deal with you, I always say it’s like being in a relationship. If the honeymoon phase isn’t going well, it’s not a good sign. You may not want to get in deeper with someone like that. You don’t want to get married if you can’t get through the dating phase.
I was looking up in my JV agreement the language about the active role. I’m going to read what mine says.
This is your actual verbiage?
This is my verbiage that says, “The parties hereto agree that each has the right, duty and obligation to participate in the management of the joint venture and provided herein. Furthermore, the parties agree that this is a joint business relationship in which the skills and strategic oversight planning are expressed conditions upon which the agreement is being executed.” What we’re saying is that each has the duty and obligation to participate in the management. You’re not passive.
In reality, some people are busy and they don’t particularly want to discuss every detail. You have an agreement from the beginning that, “I’m going to come to you with the big decisions. Are we selling? Are we not selling? I got an offer.”
The other thing I do is I send out a monthly report to people. In the email, I’ll send every month to people, I set up a time to say, “Let’s discuss.” If something ever comes up and the person’s like, “I haven’t heard from you in four months,” and so forth. It’s not that you haven’t heard from me, it’s that you haven’t set up a time to talk with me and I’ve reached out to you many times. I try and always over communicate. That’s one thing that I hear from people who I’ve worked with in the past is, “I try and send out a monthly report, not quarterly. I do the numbers on a quarterly basis.” By the time you finish one month, you’re already at the next month when you’re trying to audit your books, communicating.
I do it quarterly. I’m one of the slackers who only communicates every three months. Even that flies by, I can’t believe it. I did it and I’m going to have to do it again.
Partials, this is interesting. Sylvia brought up the question of partials. Depending on how you manage partials, because I had a very long conversation. I’m afraid to see how much it actually cost me because of the several hours of conversation on partials. Typically, Gail buys a partial from me and I manage and hold it. She’s a passive participant. We worked through on several renditions on how that is discussed and how it’s discussed in my partial agreement. You’re buying a partial and you’re getting a stream but you’re still a participant. If the note goes into default, then you become an active manager in that process. You’re still keeping that active role, but partials are the same thing where if you’re selling a note, you can post that note, “I’m selling this note for sale.” When I talked to my attorney and I’m saying, “I’m selling this partial,” he’s like, “You can’t post that because you’re keeping control.” It depends on how you manage it but partials that I sell, I keep control. Basically, the first position you get to A of the first position. I’m in the B, but I’m driving; it’s under my belt. I can’t post that because I’m keeping partial ownership.
You’re saying that it violates the requirement that they be active?
It violates the soliciting. Even though they’re active, but it’s a fact that it’s like posting a JV deal. Posting a partial is like posting a JV deal. It’s the interpretation that I have gotten through my attorney.
How do you deal with the fact that they aren’t going to be active though? Are you edging towards the security cliff?
They’re still active. You keep them active, but there’s a payment stream coming through and they’re getting paid. If the note holds on a performing note, how active are you in that note? You may have to make a decision, but if that person becomes five days late, I will notify that person and they will take an active role in resolving whatever needs to be resolved. The partial agreement gives them the ability to take an active role in the management of the note. What surprised me the most was the fact that we’re selling a tape, we’re selling some assets, which we can say, “I’m selling this note at 123 Main Street,” but because I’m holding some of the partial on it, I can’t post the partial for 123 Main Street because it’s like posting a JV deal. I’m managing the control and keeping servicing under me.
We have some follow-up questions. We have Sylvia.
Gail, how are you?
Good. It’s nice to talk to you.
Likewise, both of you. With a partial thing, I haven’t done one myself, but I know about them. I’m an Eddie Speed student myself. He’s big on partials. I heard him say that he actually holds the assignment. He assigns it but they hold it in escrow. I’m assuming you’re not doing that. Could it be considered a fractional note by doing that? I know, especially Chris goes through to his attorneys all the time, so I know you know what you’re doing. You’re trying to keep it safe and I totally agree with that. How much do they know about partials? Is it not something that a lot of people know about, even though they’re attorneys? I’ve heard even new attorneys that are versed, they have a hard time with some of the stuff themselves.Don't take your money partners for granted. Click To Tweet
I’m going to say in general that attorneys, CPAs and doctors don’t necessarily all agree on what is the correct answer to things. Everything gets resolved in court cases. It’s more like if what you do is defensible or not, but there are no real ultimate answers. We all consult attorneys and go with what we feel in our gut is the correct answer, like which attorneys to follow. Chris was going to give you a much more solid answer about that.
The question I brought up once is why don’t I just get a loan against this person versus sending them a partial? What is the loan secured by? Is that going to get recorded? Especially if you’re doing it on a contract for deed that you’re doing a partial, think about it. You’ve got a loan against the property that in some states can’t be more than 50% of what the contract for deal value is. You’re like, “I’m going to explode.” When I spoke to my attorney and trying to figure this out, my document is called a Partial Purchase Agreement and Assignment. It’s like a JV agreement where I’m keeping the servicing and I’m giving you the first call it 20, 50 payment streams of that note as it comes through. Within my agreement basically, it’s pretty close to almost guaranteeing the payment. If it goes in default, then the collateral is used to basically pay you off from that standpoint. The minute it goes in default, then you would take on a more active role within the document. It talks about being active. With partials, I’ve seen some people who will assign it to somebody and then let them actually take over servicing. I’m on the back-end of this thing and I need to protect my rights.
You’re the one that’s educated and has a knowledge and not necessarily the partner.
I’ve seen Eddie’s presentations about partials and they’re very compelling. Particularly, he talks about how his wife and many partials at a 6% yield. I don’t know how many years Eddie has been doing this, 30 years or whatever. He’s reaping what he’s sown in the sense that he has built such a giant community of people who respect him. He’s got a huge following. For him and his wife, they can put things out and sell them very easily. We as newer individuals in this business, it’s a much tougher sell. I think partials confuse people. This whole ownership idea stresses people out. When you think about it, if you have a contract for deed, you’re not going to deed the house to them. It’s crazy.
The best way I explain partials to somebody is it’s almost as if you are writing me a note. Forget the property. Take the property out. Say you’re giving me a partial of $25,000 at 10% over five years. Go on Google, type in loan amortization schedule, put in $25,000 at 10% in five years, that’s your payment stream. That’s basically what you’re going to be getting. People confuse it. People think when they invest in a fund, if I put $25,000 and I’m getting caught 10%, I’m getting $2,500 a year because your principal remains in that font. Whereas on the partial, you’re getting paid back that principal and interest. It’s like you’re the bank and you’re getting paid that loan, your car or whatever it is.
It’s not an interest-only loan. It’s a principal and interest loan. That’s where some people sometimes get confused because they’re thinking after four years, “I should have made $10,000,” because $2,500 a year times four at 10%, $25,000, but when they say, “Why is it only $30,000?” You’re getting that return, but you’re getting your principal back every month. That’s where I find people get confused the most. You’re getting that yield of 10% or 6% like Eddie does and so forth. It’s the fact that you’re paying down that principal, so the yield is off a bigger number. That’s where I’ve seen the biggest confusion with people. It’s not about how it’s actually done, but how they look at it and think what the return is.
I used to broker. It’s the first thing I ever did with notes. It is difficult. The sellers would offer partials all the time or option to buy the full or the partial. It was difficult to sell the partial. People talk about something that they don’t understand how the whole thing works. All they know is they wanted to get it a lump sum of money. Trying to explain to somebody who is not educated about a partial was difficult. Most people didn’t understand, didn’t want to ask. It was rare to be able to sell a partial.
We used to get that in our little world. We understand the note business very well, but did you ever go out and talk to a random person about notes? I have the most fun talking to people at my bank about notes and I’m like, “You know how you guys work so hard to prevent dead beats from taking out loans? You got it wrong very often and then I get to buy those.” How about that?
I did that with a manager and he was like, “I didn’t know you could do that.” I said to him, “If you look deep within your departments, there’s a department somewhere that does that.” He’s like, “Wow.”
It’s funny you mentioned that. I go into two branches of the same bank that I use, and every time I go in, I need to wire money. It’s usually one or two people at each branch will come in and say, “You’re buying more? What happened to the last ones?” No one knew and they’re so intrigued by this because most people didn’t know you could do it.
That same day I was in there because they had a 3% business money market. I thought it’s no big deal because I’ve had this business account with them for about maybe seven years or so. When I opened it and it was so easy. It’s just giving them my EIN number and not much else. Here I go in there and the same manager starts to try to open this account for me. All of a sudden, he’s asking me all these questions. First, he asked me where to put it under. I’m thinking to myself, “I don’t know what they did last time, but I don’t want to set up any red flags about financial this, financial that.” He calls somebody in corporate or something, I don’t know where he called. He says, “They put it under a lesser code, so that way it doesn’t throw up any flags.” I’m like, “What code?” Long story short, it turns out that they wanted a letter of good standing. They wanted all this stuff. I’m like, “What?” He was also surprised and I’m thinking, “This is what it takes to open up a simple account?”
It actually has gotten a lot harder because I think they are like Homeland Security. I think it’s anti-terrorism.
It has something to do with the marijuana business. I heard it on the business news and I’m going like, “No wonder.” I didn’t even know about that because they deal in cash, and so every time, if you deal in marijuana and you’re bringing in money, of course it’s cash and big amounts. They have to send a letter or something. I’m sure there’s a system to warn the government that it’s high-risk or something. Everybody’s paying for that. I think I saw something on Facebook. Somebody mentioned something about going to the bank and he was trying to open up all these accounts for JVs or something.
My husband opened a bank account because he’s starting up a checkbook IRA. It was unbelievable how much was required to open a bank account, to open the IRA as well.
It rolls into a question that we received, “Do you have your investors on an assignment or create a JV LLC for them? Which ties into if you create a JV LLC, then you have to have a bank account for each one.” I remember a post on Facebook or someone was saying they have 57 bank accounts because they have an LLC for every JV and I was like, “God help you.” To answer that question, I typically do not put my JV partners on the assignment if they request to. I’m not going to tell them no. They have the ability to be on assignment on a note, on a contract for deed. I don’t put them on because then to try and sell it at closing, and then insurance purposes, is a complete nightmare disaster because you’ve got to get everybody to sign off on it.
I had one instance where the person was out in the country. We’re trying to close, so that can create a lot of headaches on a contract for deed on a note. It can be an assignment but what I always tell them is, “Your name or company is going on public record. If there’s ever an issue, they’re going to sue everybody and you’re getting sued twice because you’re getting sued as an entity. You’re getting sued with my firm as part of the JV.” If you have a JV agreement, you can talk to your lawyer. It’s completely valid. I don’t know why anybody would actually want to put their name on the assignment. Back to the JV LLC thing again, if you open up an LLC for every JV, I would pull my hair out because from an accounting tax reporting status and everything else, it would be a nightmare.
Not necessarily from the standpoint and their status in the deal. This exposes them to more liability in the deal without strengthening their position.
The other thing too is you don’t want a separate LLC for the deal because if it goes bad and they did something wrong, you have to sue that LLC, which has nothing left in it. Whereas if they’ve got 50 other deals and their main company, that’s where you want to be. I worked for a full development company and I used to work for a developer that used to build a lot of condominiums. Every developer does this. They’ve got their main company and then every project is a separate LLC. If that project ever had something that was catastrophic, it’s okay. They protect everything else by having that property and project separate. Similar in this instance, if you wanted to get the most protection, if you were the sponsor on these deals, then you can set up separate LLC. If one goes bad, someone’s going to try as soon and it’s like, “I’ve got a separate bank account and run it separately.” There’s nothing there but the amount of work to go through that is going to be astronomical.
Are you saying you don’t have separate LLCs for each deal?
No. I use two companies. One is for CFDs and one is for notes.
That’s what I do. I think Scott has talked about having a million LLCs.
In Texas, you can do what’s called a Series LLC, which is easy where you send them in series. I’m in Virginia. Virginia doesn’t acknowledge them and a lot of states don’t acknowledge a Series LLC. You’ve got to be careful about that. I don’t know how many companies Scott uses and stuff, but I know some people that I saw on Facebook talking about how they have 50, 25 LLCs and 25 bank accounts. It screamed bloody murder from a bookkeeping perspective every month. When you file your taxes every year, you’ll file under an S Corp or if you fund Schedule C’s, you should file a schedule C for every entity. You’re paying $400 for a re-schedule C’s lost, and you’re paying an extra $10,000 if you’re doing it right in tax filings because you have one LLC with one deal.
We have a comment that any deposit of $10,000 or more in cash has to be reported to the federal government. Any fan of the Sopranos knows. Carmela used to go when her husband, Tony Soprano, would give her cash, she will put it in different places never more $9,999.
Somebody asked me why do I separate LLCs for notes and CFDs? There are two components. One is when you get to a certain size, you should separate out your companies, to not keep so many assets in each one. The other reason was typically in notes. In certain states, you need licensing. Maryland for a time, they were back and forth whether you need to have a debt buyer’s license. Certain states, if you’re investing in notes, you may need to have certain licenses or registration. I broke it out and said, “I’m going to keep my notes in one entity.” If you’ve never been on the nationwide mortgage licensing system website, if you want to pull your hair out and spend a weekend trying to figure out which way is up, that is a good site to go to. You have to get licensed for anything. You have to go through their site.Joint venture is like being in a relationship - if the honeymoon phase isn't going well, it's not a good sign. Click To Tweet
If you were trying to use multiple companies to get licensed to their site, God help you. Trying to get several licenses, things that I had filled out for different states and so forth was very difficult. Having it under one entity, it was a saving grace for some of it, but you can have it under one. I decided to do it under two because when you get to a certain size, you should have a separate company. For ease, I was putting all my CFDs on my notes. The other reason I started it that way was for insurance purposes. Before, I was using JB Lloyd and I was using different insurance. I always remember, “Do I need to get liability on this one or was it a note?” It was easy when I tell them and I submit the information, “If you see it from this company, it’s a note that doesn’t have a liability. This company, it’s a note. I need the liability because it’s a CFD.”
Sylvia, any other last-second thoughts, comments over you?
I find it interesting as to the different ways of doing the partials. We were first taught to assign it to the partial up buyer. I’m pretty sure I heard them say that they still assign it, but they keep it in escrow. In other words, they do not hand it over to the partial buyer and it’s different trains of thought of that. It depends on the attorney that you have.
Were you happy with the training that you got from Eddie? Are you actively learning from him?
He teaches a lot of stuff within the note world. He has different classes and different levels which he calls Titanium, which is the highest level, then Diamond and so on and so forth. It’s separated from non-performing, performing. He’s also teaching how to structure a deal. I talked to a neighbor of mine because he couldn’t sell this house. He is helping them structure a seller finance note and then flipping that note to another investor. He’s a consultant to the owner of the property, finding him, betting somebody is going to buy the house or a purchaser and then assigning that to another investor. It’s all good and all because there are always circumstances where you might have to take back a property or there are opportunities that come up. Scott mentioned, “Try to stick to one thing,” although the business has changed, so we all have had to change or try to change our methods. He does teach other things other than just buying non-performing or performing notes. He sells the notes himself.
I find you do focus on one thing, but inevitably you’ll be dragged into other things as well. I have two houses that I never wanted back, but I have them anyways. They’re not worth enough to sell retail, so I’m probably just going to fix them up as rentals. If I want to hold them as rentals, maybe I’ll get a good tenant in there or try to sell them as turnkey rentals. Inevitably, you end up in all these related activities that you weren’t planning on doing.
Business has changed. We’ve all noticed. I see more of CFDs than notes themselves. I want to ask you, what are your thoughts as to why it’s changed? The big guys got in and I know a lot of people left as well. You had mentioned Granite and Condor are around, but even some of the people in the second space are no longer around. What are your thoughts about that?
Actually, I was always buying a lot of CFDs. The fact that they’re cascading down is not new to me. The quality seems to have changed a little. I commented to Chris, “I wonder if this particular seller send out all the good stuff first and they’re getting into their D and F assets.”
I’m going to poke in because I disagree. I’ve been actively buying and this first quarter, I bought over 30 assets. I say there’s a lot more stuff that has more hair on it, but I’m talking strictly about CFDs. There’s a lot of good stuff out there. You just need to find it. The other component to it is the pricing has come back to the level where it was last summer. When we hit last fall, I wasn’t even looking at them because it didn’t make sense. It’s come back to level off back to the place where you can still get good returns.
What’s also happened between notes and CFDs is people hear too many stories about people buying everything for $0.10 thinking that you’re going to make 50% in these humongous returns. This is a business about singles and doubles. If you look at the markets and stuff, 6% to 10% is a good return. When you’re getting 15%, 25% range on some of these assets, that’s a good return. There are not many places you can get that back by real estate with equity. That’s where I think people are starting to think, “I want to buy a performing CFD. I want 18%.” Very rarely could you get it. Once a while you could. Typically it’s 12%. 12% is a good return. Where are you getting that elsewhere?
There’s still a lot of hair on some of these assets, but I’m getting under an agreement that I’m doing due diligence on. One of them was a note that was discharged three years ago. It’s invalid, throw it away. That one’s junk. I wasted $250 on an O&E in a BPO. Another one is in bankruptcy, where basically the monthly payment bankruptcy equals the monthly payment they’re making. It’s almost like you’re getting a double payment. My investment would be paid off for a year and a half. That’s a good one. There’s equity in the property. That’s where people complain a lot, but you can still find deals.
I want to explain to people who don’t get to see all your deals. Early in my note investing career, circumstantially I’ve got a lot of home runs. The whole singles and doubles idea, it’s valid, but I’m having a hard time adjusting. I’m still stumbling around. Sylvia, thank you so much for coming on.
Thank you. I appreciate it.
It’s great talking to you. We have a question.
“If you’re going to lend money, why do you want to lend to an LLC versus a borrower-occupied property?” It’s a Dodd-Frank MLO, interest rates, usury laws. The question is if you’re going to lend money, doing an owner finance, why is it better to lend to an LLC?
The Dodd-Frank rules, if you’re loaning to an investor, you don’t even have to do a Dodd-Frank screening process. You’ll save a bunch of money there. That is the main thing.
You mentioned if it’s an Airbnb, if they’re not occupying it, then I’ll call it safe. In a sense of if it’s an owner-occupied, then you need a mortgage loan originator to run them through the process to make sure they have the ability to repay. You also got to be careful because in certain states, you may need a license. Most states, you can do it up to three times, but after the third time, then you may need a license. It goes back to foreclosure as well, which you mentioned. The owner-occupied, in some states, get a little more leeway on a foreclosure if it’s owner-occupied versus it being non-owner occupied. The interest rate is also the biggest thing.
On owner-occupied, you’ve got to be very careful what the interest rate charge is. You typically don’t want to hit double digits in certain states. You have to be careful. They have laws where it can only be like five points above prime. You’re a 7% rate. If it’s an LLC, you can charge them whatever you want. I hope that answered your question. Back again to the Airbnb, it fits an Airbnb that you’re living in, even though they’re running a business out of it, you need to make sure you comply with all the Dodd-Frank. If you need somebody, if you’re doing that to do that whole MLO process for you, I have somebody who was a registered in all 50 states.
It’s relatively cheap. You should count on spending $350 for them.
$375 is what I was quoted. Say $400, you can charge a borrower that as part of the closing costs.
Every time, send out your own hello letter. Introduce yourself to let the borrower know that you’re the new lender, you’re very interested in working with them, understanding their situation and that you look forward to a great experience with them. We always quote in that letter, “We understand that you are many payments behind and this is your payment,” and things like that. It’s very good to have to send one of those because I once sent one and a borrower called me up and said, “This is completely wrong. I just paid six payments,” and it turned out that they had paid them after I bought the thing and they had these payments that came in after I purchased it. It’s good to get that information. “What are we allowed and not allowed to say the borrower if they call you directly?” This is the fun part. If they call you, all the normal concerns about making a collection call are somewhat mediated. The big thing if you make collection calls or even have someone else making collection calls for them, you have to comply.
The Fair Debt Collections Protections Act, FDCPA.
You have to do the mini Miranda. You have to let them know that you’re calling about the debt and this is an attempt to collect a debt, any information they give you will be used for that purpose. Have to say that at the beginning of every conversation where you called them. When they call you, you don’t have to do that. You have to observe the normal rules of not harassing them. Don’t threaten them, don’t be a jerk.Trying to explain to somebody who is not educated how the whole thing works is difficult. Click To Tweet
In your hello letter, do you put the Miranda at the bottom that you’re a debt collector?
Yes, I do. You’ll notice that when your servicer emails you or have you called them, you will hear a mini Miranda, you will notice it at the bottom of their emails. As a rule, put it on everything to cover themselves.
If you’d like, I can read what my hello letter says.
Why don’t you make it available to all of us, Chris? Let’s do this. I don’t know if everyone has signed up at www.GoodDeedsNoteInvesting.com, but you need to sign up there. You sign up there because we’re sending out a new tape. We can send it out to people who are signed up for our mailing list.
I also posted on Notes and Bolts the location where you can also sign up to also get added to the mailing list as well. What I’ll do is I will send that out as well. Similar where yours says, mine doesn’t talk about collecting the debt. It goes into essentially saying what you said. It’s, “I bought your loan. You should have gotten a letter from the prior servicer noting that your loan was sold. As of a few months ago, here’s where the financial stood.”
No, I didn’t say, “You owe me this much and you better pay.” It’s like, “This is what our records show. We’re new. We’re finding out about you. This is what we’ve been told.”
Do not state, “Pay me,” or request payment in that letter.
We invite them to call us to discuss their situation.
We could have a whole another episode talking about the loan transfer in the 30 days for the borrower to dispute the debt, whether you can collect in that first 30 days, request money or not.
If they call you to talk about their loan, you can absolutely talk about their loan. You’re the lender.
Make sure you’re talking to the borrower.
You’ll see in servicing nets, right party contact. You have to make sure if it’s the spouse of the borrower, if they’re not on the loan, then no.
I was reading some servicing conversations that the daughter was on the phone and the mother was sitting right next to her and they said, “I’m sorry. I can’t talk to you.” In the notes, it basically says the daughter started screaming profanity at me because I wouldn’t talk to her, even though the mother was sitting right next to her. That’s a law that if they’re not on the loan or they don’t have written permission from the borrower to act on their behalf, you can’t talk to them. Be careful because I’ve had an instance where I’ve had a borrower who spoke Spanish. When my attorney wants to reach out to them, they gave the phone to the daughter and basically explained to the daughter. Unfortunately, in the loan, you would need to send me written permission that I can talk to you. The father didn’t speak English and my attorney can’t speak Spanish. Basically, we had to wait for them to get confirmation that he could talk to the daughter. Don’t post deals on Facebook and ask for JV partners. In your JV agreement, make sure your partner is an active participant.
Thank you so much for joining us. Once again, please be sure to a sign up on our website, www.GoodDeedsNoteInvesting.com for a first look at our tapes and to catch up on any podcasts that you may have missed. Please give us reviews on iTunes and Stitcher. Say nice things about us. We’ll make it worth your while.
Go on and do some good deeds. Make sure to join the Good Deeds Note Investing Notes and Bolts Facebook group, especially if you’re investing in contract for deeds. I’ve been giving out some pretty nifty little tools.
He continues to develop amazing tools that are extremely helpful. That site is very popular and growing toxic asset lists, which the more of the CFDs are like it offered, the more you need that list. Be sure to stop in, sign up. We’ll see you there.
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