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The Note Investing Journey: Taking On Performing Notes with Bill Griesmer

GDNI 80 | Dealing Performing Notes

 

Becoming a note investor is undeniably a hero’s journey. We go out there and dare to do great things. One who has a great story to tell about his note investing adventure is Bill Griesmer, the President of Stonegate Capital. Joining hosts Gale Anthony Greenberg and Chris Seveney, Bill takes us back to a learning experience on starting a business and buying performing notes. Answering questions from the audience, the three of them go deeper into borrower loan-to-value, dealing with servicers, refinance and modifications, and more. They also tap into the different markets, seller financing, and the value in learning how to take a loss on a deal.

Listen to the podcast here:

The Note Investing Journey: Taking On Performing Notes with Bill Griesmer

I’m not fabulous anymore.

I run out of superlatives for you. You’re everything.

I also have a great cohost with us. I want you to introduce our lovely guest.

We’re thrilled to have with us a colleague and friend, Bill Griesmer from Ohio. Bill is the President and High Pooh-Bah of Stonegate Capital. I’m nostalgic and excited about this episode because the case history that you’re going to talk about was the first time you and I ever talked on the phone. It was one of those moments to huddle and be like, “What would you do with this one?” I’m even more interested probably than anyone to find out the whole epic tale of what went on here.

It was the hero’s journey.

Are you a Joseph Campbell fan?

Any literature, I like good writing.

Joseph Campbell talks about myth. He studied every culture in the world and discovered that the hero’s journey is a common myth. That’s how we all leave home, go out and dare to do great things. In note investing, we would definitely fall into that category. Why don’t you introduce yourself and tell everybody about your hero’s journey and notes?

Thank you very much for having me here, Chris and Gail. My name is Bill Griesmer. I’m the Managing Member of Stonegate Capital with my wife Heidi Griesmer. I’ve been investing in notes since 2016. I’ve been around a little bit and studied or learned materials from a number of different note trainers, that type of thing. I’ve run the whole gamut here. Originally, I was thinking I would want to do performing notes and then I switched and started making nonperforming notes. I’m in the middle and looking for the best opportunities wherever it is I can find it. I started investing in notes for a couple of reasons. First of all, to start my own business. I had this inner drive that I wanted to do something like that but I didn’t want to be a landlord. I was a landlord briefly for about a year-and-a-half. It wasn’t a disaster even though it was a distant property and I had a management company, it was still a lot to it and such. I ended up selling those properties and then I went into note investing. I’m excited to be here and share this with the audience.

Was this the first one you bought or one of the first ones that you’ve got?

This was the first note I bought.

There’s some special rule that the first one has to be a doozy in some respect. Everyone knows my first one burned down. Yours, unfortunately, didn’t burn down.

It was closed. You’re going to see a picture. The note gods almost took care of it for a moment.

It’s quite a merciful solution to this note.

The one thing that I’ve realized, I wrap up a bit toward the end. There’s a flash-forward. You mentioned literature so we’ll start with the end and then work our way back as to how we got there. With any experience, you can learn, make a return in either money or education. I honestly don’t know which is better. Although this did not turn out to be a great experience, I made it work. I learned a tremendous amount from doing this that has helped me in a lot of other things. A few weeks after I bought this one, I bought another performing note that was more or less flawless and it paid. I didn’t learn as much on that but I did make 30% something return on it. I don’t know which is more helpful. I guess it depends on your circumstances, if you’d rather get paid financially or if you’d rather learn a lot from your experience.

It’s nice to have a balance. Otherwise, people who have a lot of bad experiences upfront, they’re not clicking with the note life. They end up leaving because they think it’s not a viable business.

One of my favorite books is Mindset by Carol Dweck. You need to have a growth mindset and if something doesn’t go well, don’t throw up your hands, walk away and discuss. Try to learn from it and say, “What do I need to do differently? What do I need to do better? Who else do I need to talk to?”

After hearing about this one, no one will accuse you of giving up easily.

What we’ll do is we’ll go through this and you are welcome to chime in with your thoughts on what you see and what you might have done differently. I’ve already learned a lot from this, but my whole point in doing this is to share some things with the audience. I presented this once already and got a positive return. Something that I appreciate about your show is you show the ins and outs. Not every note is rainbows and unicorns, maybe a little sunshine. You can’t do it anymore without sunshine. In the note investing business, people work with two separate yet equally important groups, the investors who manage performing notes and the investors who deal with the delinquency. This asset was located in Zanesville, Ohio. I live near Columbus, so Zanesville is roughly an hour-and-a-half away from my house.

This note was originated in early March of 2015. The current unpaid balance, that’s what it was at the time that I bought it. The face interest rate on the note was 9%. The principal and interest which is what we make on our investment were $300 per month. The remaining term was $135. The last payment had been received on March the 14th and the next payment was due on March the 1st. The BPO, the worth of the house, was $40,900. You probably already see one issue right off the bat based on the little information that I sent you so far here, knowing that this at least has been marketed as a performing note. Do you see what I’m referring to?

They paid six weeks late for the February payment. Who knows when the March 1 is coming?

That’s what honestly I hadn’t been taught at the time. I didn’t understand the difference in that. That’s one thing to identify right off the bat. The last payment received and the next payment due. Those ought to be the same and they ought to be recent. This was the first week of April that I bought it. I figured that the April payment hadn’t been posted yet. There might be a little give there but ideally, if it was a true performing note, the last payment received would have been March 1st. The next payment due would have been April 1st.

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I don’t want to say that it never happens, but normally a borrower wouldn’t make another payment two weeks after making the payments.

You like to see the last payment received before the next payment due date. That’s a general for performing because some people get confused about what those two numbers mean.

I’m going to reveal the answers to these. One of the things you calculate that’s a little more important with a performing note is what is the borrower Loan-To-Value? That’s what LTV stands for. I also like to calculate how much equity a borrower has in the house. It’s similar to the loan-to-value ratio, but I realized that a loan-to-value ratio could throw you off depending on the value of a house. There’s a big difference between a $20,000 house and then a $200,000 house.

Was that a seller-supplied BPO value?

Yes. That was another thing that I should mention is always get your own BPO or your own estimate of worth whether you’re hiring a local realtor or at the least, should be more than looking up on Zillow and Trulia. Giving it away a couple of slides in advance, but always get eyes on that property. Another thing I like to do is figure out roughly how much the borrower has, how much equity the borrower has and how much equity I have. I like to figure out what discount on buying that unpaid balance. Pricing is an art more than a science. You look at a lot of these different factors and you figure out what you would pay for this note. The people that are reading, they see what else it is that they would want to know. Does the borrower have the incentive to pay? A lot of these lessons are what I have learned that I didn’t know at that time. You want to see if the borrower has the incentive to stay and pay. Do they have some “skin in the game?” These are the values that we talked about here.

The borrower’s loan-to-value came out to 62%. That’s a measure of how much the borrower is extended. It’s one measure of borrower equity. Usually, for single-family performing note, you want to be in the range of about 75% to 80%. It might be a little bit more if it’s a primo note, but you want to shoot for that range, the lower, the better. On this particular note, I did know enough to figure this out. I saw that 62% is good. If we’re usually shooting for 75% to 80%, that was good. The borrower equity, I figure that out by looking at the fair market value of the house minus the unpaid balance. That puts it into a pure dollar figure. That’s how much the borrower equity has in a specific dollar format. This can indicate their incentive to stay in pay, but as you will find out, it is not a guarantee. I looked at that and said, “This person will probably keep on paying.” If they end up walking away, they’re walking away from roughly $15,000 in equity. Any comments on that so far, Chris or Gail?

None. It’s explanatory.

I understand your logic.

I ended up paying a total of $21,000 for this note. People at home, you can start to get a judgment as to how much you would pay for this. What was my investment to value? My investment to value came out to the right around 51%. That’s good for performing note which it turned out to be with the value of the house. It’s a little bit much but not overwhelmingly. At the time, I thought that was good. I’ve learned to look at it as what is my security going into this situation then? My equity, I took the fair market value minus the cost of the note and that was under $20,000. That’s my margin of safety. If everything goes bad and if they stop paying, that’s what I had to “work with.” I did learn that it can go quick, unless you pay close attention. The other thing that I’ve learned to look at is the discount on the unpaid balance. For this, I was buying that unpaid balance at about 82% or a little bit more than that. That’s a little bit higher than optimal especially for this asset. I already went over I had a lot of other factors that I did like about it. This would come into play a lot. Also, you think there’s a potential for getting the borrower to pay off early.

If you could buy a discount of the unpaid balance on that 60% and then you maybe know a mortgage broker or the borrower’s credit isn’t too bad and you can think about getting them refinanced for six months or so. That can shoot your returns up through the roof. In a situation like that, I would love to get a discount on the unpaid balance low. I have the collateral file review. I did redact it and such but I want to make sure that we get through this for everybody in a timely fashion. Keep those in reserve and if you want to we’ll call them back up later. How does that sound?

That works.

We bought the note for $21,000. The mistake that I made was not freely confirming the current value. We talked about it already, as it turned out this asset was in poor condition. The front porch steps had the Leaning Tower of Pisa situation going on there. On the front porch, you couldn’t walk on it safely. It was definitely a safety hazard concern. Someone would fall through the wood and probably hurt themselves. The paint was bad. The gutter downspouts were missing. The front post was connected with a bungee cord. If I had a realtor go out and look at it, they probably would have told me that, “At least from the outside, this house doesn’t look so hot.” You always want to get physical eyes on an asset before you close. This is crucial, whether it’s performing note or a nonperforming note. I always recommend an investor go out and get physical eyes on the asset. Also, always get your own broker price opinion as what BPO stands for, your own appraisal or your own realtor analysis.

Someone tries to get a reasonable current fair market value price on that asset at that moment. Another mistake I did not know how to do it at the time is I never checked on the utility status. As it turned out if I had, I would have learned that there wasn’t any gas service to the house. This is in Ohio. We do have colder winters. That should raise your eyebrows a little bit. I also did not call to confirm the water service. If I had, I would have learned that there was no water service connected to the house either. That ought to raise your eyebrows or your antenna even a little bit more. There were people living in the house. Why did these people not use water or they had people from the planet Mars? They did not have water service to the house. Another good thing to do when Chris and Gail talked about this before is it’s a good ice shack if the house has basic utility service to the house, basic water, electric and gas. If it doesn’t, it’s worth trying to think of why or know that that’s a potential concern. When I bought this note, it was boarded with a servicer called Peak and I did not know this but Peak was shortly to leave the servicing business. When I bought the note, I asked for the service to be transferred to another servicer called Allied. The transferring took months. It was earlier the first week of April that I bought it and they did not get it boarded with Allied until it was either late July or early August. It can take some time. It’s four or five months and that is not typical.

All this time, the borrower simply stopped paying. As it turned out in the long-term, the borrower’s never paid a single penny on this note after I bought it. Whether that was partly related to Peak leaving the business and then transferring it to Allied. During this time period, I was making frequent phone calls to where I bought the note and then to Peak itself. I got the runaround and I kept calling Allied. They said, “No, we don’t have it. We’re happy to work with it and will start taking action and start to run with the ball after we get it,” but they didn’t get any information. There wasn’t much action I could take as it was in the transaction. All I got from Peak was, “We’re working on it and they should have the file next week.” I can’t remember how many weeks I heard that so watch your servicer transitions. I’ve learned that it depends and you can’t say this all the time, but sometimes it’s worth considering leaving it with a servicer where you buy the note. You can say I was a little too patient. You want to take prompt action if a borrower is not paying and I suppose I could have. If people know me, they know I’m generally even-keeled and I’m not the type to blow up at people. I wonder if I would have gotten better service if I had blown up at somebody after months of this. Sometimes you have to take more of an active role in getting the transfer completed.

Bill, for people reading, what do you think about the other stuff you bought? What’s the average time it usually takes to get something boarded?

It depends on the servicer but a couple of months is at the outset. I would say the further end, don’t you think, Chris?

Most of it usually takes about a month.

That’s for four weeks.

It can go to six. One of the things and the reason I asked that question because a lot of people think on the opposite that for a week, it is transferred. There’s going to be a goodbye letter or a hello letter, “I need to be approved.” If there’s an initial data and final data, it’s a lengthy process.

What your story is reminding me of is when you’re new and you expect things to work a lot better than they do. You don’t realize that you need to be checking in with the servicer and shepherding the process a little bit. You have to find the right balance between harassing them and guiding them appropriately.

That’s what I was getting at. Maybe it would have gone a little better if I’d been a little more insistent. However, at the time, a month or a couple of months later, Peak was getting out of the business altogether.

That was an unusual case. Anybody who knows an investor of any scale who has been in the business for at least as long as you have, Bill, there are a lot of people who lost a lot of money when Peak suddenly and without warning went out of business. They had not been doing their job. People lost properties at a tax sale because they weren’t paying the taxes. It was a major shock wave in the note world.

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That’s why I’m saying I was mad. This was small potatoes compared to a lot of what you’re talking about. This was my one little note. This was an example, a tsunami like that is going to hit much everybody even my little note. That was the first one ever. It’s usually four to six weeks, two months would be at the extreme end of the bell-shaped curve. We get to late July here and the borrower still had not made a payment. We finally got the servicer transferred. Allied, the new servicer, did talk with the borrower several times about a modification and the borrower said, “We like the house. We want to stay in the house. We’re planning to stay here. We want to talk about a modification.” They promised several times about, “One payment next week and you should have that and then we’ll talk about a modification from there.” It never panned out.

For one reason or another, they never delivered, and they never sent even that one token payment or anything. That went on for a few months from August, September and October. Another lesson that I learned from this is that I tried to be too nice. What I should have done are started legal proceedings. I could even do that while we were doing that. They hadn’t paid for four or five months already. People that are learning from this, you can be nice but to a point. After that, you have to take action. I’ve heard Chris and Gail say this, “People have more of a tendency to respond to a letter from an attorney, the old notice of demand, rather than a servicer saying, ‘We’re calling to see how things are going and if we can get some payment from you.’” Sometimes that letter from an attorney is more of an incentive for them to sit up, take notice and make changes.

That occurred to me to wonder how servicers talk to borrowers. Are they that friendly?

They’re recorded. You could always ask for the conversation.

I will. I was hoping for the iron fist in the velvet glove thing.

You’ve posted on a post within the last couple of days here about if you should do this yourself or have a servicer do it? Like Joel has said, “You can have an unpleasant conversation, but you can try to do it pleasantly.” It’s probably more of an art than anything. My day job for some people that know this I still work part-time as a physical therapist. Sometimes I have to do that in physical therapy, but there is a point where you have to do it. When someone’s not doing what they have to do either that they’re not paying on their notes or say they want to get stronger but they can’t find the time in an entire day to do fifteen minutes of exercise. You have to talk to them sometimes. Have a come-to-Jesus talk and you have to take action.

If the borrower starts commenting about pay history or anything like that, I don’t look. I’m not the person you are going to talk to the servicer. Once it’s at the point of negotiating like, “You’re four months behind. How much can you pay? When can you pay it?” I make it clear. I hear from them and then I restate it again. I’ll follow it up on email and I’m friendly in all my conversations but I’ll tell them, “You need to make this work. If it doesn’t, you better pick up the phone and call me because I’m the last resort. After me, it’s too late.” It’s how I play it.

That’s active listening techniques that you’re talking about Chris. It’s very wise of you to do that. When you do that, when you listen carefully to what they said and then a lot of times you’ll restate it may be in slightly different words, it shows the person that, “I’m a real person and I hear what you’re saying. I respect what you’re saying and we can work on this together.” You’re not blowing them off and not even listening to them. That’s an active listening technique. That’s effective and the vast majority of people are like that. We have a question, “Did you say you follow-up with an email? I thought we shouldn’t email the borrowers?” Chris will answer that and then I’ll answer if I have something else to add.

I’ll usually ask them for an email address and I’ll reiterate the conversation. It’s like, “It was good talking to you and part of the discussion here is the payments, the payment plan that you agreed to.” It’s not saying, “Give me a payment.” It’s restating conversation. I do have at the bottom of the footer of the email the whole debt collection comments because I use different entities for my notes. I have different email addresses for those entities that I create the custom footer with it as well. I’m not usually emailing them saying, “Your payment didn’t come in,” or something like that. If I have a conversation with them, there’s no reason why you can’t. It’s literally, “John, based on the discussion on October 1st, you noted that as part of the agreement, you’d make a payment on October 15th of $500, another $1,000 on November 1st.” That’s it. In the record, I usually ask them to please confirm they were in agreement. That way, a few months later, they try and want to go to mediation or something because they didn’t make any of those payments. I’ll say. “I have a phone call. I had to email. The guy confirmed he was going to. What more can I do?” I do not email them by saying, “Where’s your payment? You owe me money.”

Chris, didn’t you take a course from someone based on debt collection practices? Do you want to tell the audience at least where you took the course or maybe two or three highlights you got from doing that?

It was through ACA International. It might be the American Credit Association or whatever it is but it’s ACA International and it’s a .org. The class is $150. It’s dirt cheap and we have many different levels. It’s usually for people who are getting certified to be. People work at Allied or Madison, they usually have to get certified. They’ll go to ACA or some of these organizations that sponsor it to get certified. I took it because I’m not looking to become a debt collector or servicer, but I like to know the rules in case I am speaking with people. That’s why I took that class and it’s helpful. You’ll learn a lot. It’s a lot of common sense things but there are interesting things about talking with family members. If the husband is on the debt and not the wife, you can’t talk to the wife or the daughter. There are a lot of things like that. I didn’t know that I learned about making sure also that you verify who the person is by asking them to confirm like the last four of their social or something about the property. A lot of times they may say, “This is John,” and it’s not John because John knows it’s you calling and he doesn’t want to talk to you so he hands it to his buddy.

You’ll see in the servicing notes the remark that they confirmed the last four digits of their Social Security number. Servicers routinely ask that to make sure they’re talking to the right person.

I agree with everything Chris said. Part of the reason I made sure Chris mentioned that is it might be worth taking a course as Chris did there. That’s on my list of things to do and what he said is a lot of common sense stuff, essentially be a human being. Don’t call up a borrower and threaten them. Don’t say, “You better pay up or I’m going to come to your house and do something I shouldn’t do.” Don’t do that. I don’t think you’re allowed to. I got to use for that bungee cord.

For those who have kids, it’s like negotiating with your six-year-old over how many cookies they can have. The conversation is like, “I want three.” “No. One.” “Three.” “No.” “How about we settle at two?” With your child, you’re treating them like a human being and respectful. It’s the back and forth, “How about October 31st. Can you make something before the 15th? It would make my boss look good if I could get a payment in.”

It’s two human beings who are totally planning to win the conversation.

One other note that at least I do. I don’t know if you do it, Chris and Gail, it wouldn’t surprise me. I don’t even always tell them, “It’s my company.” I tell them, “I work for Stonegate Capital.”

You always have to go back to the office and investors to see if they can still approve it.

I’ll say, “I need to talk to management,” and management is my wife and me. Sometimes, it’s a unilateral manager, just me. It’s not lying. You don’t have to tell them everything. It’s one of those other little tips to help people potentially avoid a bad situation. We have a question, “What are the do’s and don’ts when talking to a borrower about refinancing modification or Cash for Keys?” There’s a lot to that one. That probably could be its own show. I believe Chris and Gail, you tell me if I’m wrong unless you fall under one of the exceptions. If you did a full refinance, you’d have to use a licensed mortgage loan originator. Unless it was one of the exceptions where it was the only one of the three you do that calendar year. That is worth taking into account error. The same thing with the modification, that would be one I would want to talk to my attorney about or the title company and see if I’m writing a modification. Technically, that counts as a new note or a new loan. I might have to get that also or Cash for Keys.

Chris has done so many of these. Take it away.

If you’re talking to a borrower about the option to refinance them out of the loan, doing a modification or even Cash for Keys. If you’re talking about the terms and stuff, you can have that conversation. I would more or less say, “We have these options available.” I had a conversation on a couple of days with a borrower and he finished their forbearance plan. It was a conversation. I got a mono conference call, a husband and wife and I said, “There’s 31 past due to payments on the loan. Here are the options.” I rolled out the options of getting one basically loan mod or what I want to do in this instance is put them on a traditional mortgage and note. I explain to them what that process was and then I do tell everybody that the investor would buy back the property for you. If that was something you’re interested in, if they did, they will give some funds to allow you to move. I don’t force any of them on the borrower. I give them options and let them decide. I never force them to decide that point in time. It’s, “Get back to me next week and let me know. If you need more time, let me know.”

We do cover all of these things. We’ve talked about them a lot of times on the show. There are a number of best practices that we would suggest. When you make Cash for Keys, offer and agree on terms with a borrower, even though it doesn’t feel like it’s something that you have to draw. We have a standard document that we use that makes it clear that them getting the Cash for Keys is contingent on some things like they have to leave. There’s going to be an inspection at the time that we’re signing the agreement for the Cash for Keys. The place has to be in the same condition or better when they leave. It has to be a broom-swept condition. You want to have things that protect you. If you’re at a distance, you need to have that real person who’s going to be the one who goes and makes the inspection and tells you, “It’s okay to go ahead and pay them. You’re going to have a locks change.” I’ve learned a tremendous amount from Chris about how to keep things tidy. That’s an important lesson that we all need to learn without getting too bogged down. I’m dying to know how these people were living in this house without guest’s keep, I presume and without water.

You’re going to find out that on the ending. I want to make sure we get to your audience questions. We have a question, “Are we allowed to record our conversation with the borrower?” That depends on state law.

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You need to know the state whether it’s one right or two right state, two-person state, one-person state, only one person has to agree and two people who both do what you should do. We’re going to have another show on this so I can get through this. You want to read them the Mini-Miranda and then ask them if you can record the conversation.

The day of deliverance here is in mid-September. I finally wised up and I did finally have the attorney send a notice of demand to the borrower and they agreed to move out on the 1st of November. The big day arrived, so I hired a guy to go out to the home and I wanted to have the locks changed after the borrower. A teenager was sitting on the porch and was quite evident that nothing had been moved out. The teenager says, “My parents aren’t home. We haven’t moved out.” I was not happy. It cost me $50 to even have the guy go out there and he couldn’t do what I paid him to do. The lawyer and I called the lawyer that afternoon and had sent them another letter. What I said about sometimes they respond faster to that. This was a sternly worded letter and they did finally agree to get out and they did get out on November the 16th.

My wife and I went out then that following Saturday on the 19th, and we arrived and wished we hadn’t. I told you some of the highlights of it. The house was in terrible condition. There were multiple holes in the ceilings, floors and walls. There was no gas bill because there was no furnace in the house. I’m not quite sure how they were even heating it. There was a large window misting in the upstairs for over a year. They had been staying at this home in Ohio with a garbage bag for a window and no heat in the house. They didn’t have a water bill because they had jury-rigged it and they were stealing water from the neighbor. The water meter was sitting ripped out of the ground in the basement. That was why there was no water bill. We’re a little shell-shocked that someone was living in these conditions. There were children in the house and that irritated me. I have my own children. As a parent, that irritated me. The heck with the note in that but having children living in that house, it did not seem right to me.

The stairs got some Leaning Tower of Pisa there. You can see that bungee cord above there. It’s white. It’s a little hard to make out there, that one wall next to that, that’s a shed. The teenager thought it would be a good idea to burn the shed. They set fire to it. That’s what that is there. There’s a hole in the bathroom. That was unsafe to walk in. The tub was in putrid conditions. You could tell they didn’t have a water bill. I don’t know what they were doing to go to the bathroom. I honestly don’t want to know even a couple of years later. There are general holes in the wall and then the floor was rotting, it was in rough shape.

They should have painted the word shed on the house and showed it to the teenager.

That would have been good. That day we were learning our lesson. We wanted to take prompt action. I knew sitting there wasn’t going to do anything to anybody any good. We did what we knew how to do with the time at least. We listed it that day with a realtor Dennis and Amanda Hitchcock there in Zanesville. They did a great job for us. I’ve heard some investors disparage realtors. I can’t speak for all realtors that do a great job, but Dennis and Amanda helped us out quite a bit with this. The timing was bad. That was a week or two before Thanksgiving and then getting into December, you have holiday season in that. Although the realtors did a good job, it was not a retail house.

What did they tell you should do to the house to prepare it for sale or did you not do anything?

At the time, I didn’t do anything.

They’re going to put it up for sale and CFO and an investor would buy it.

If I was going to do that, that’s probably in full retrospect what I should have done. I shouldn’t have even put it up and listed it with a realtor. What I should have done is talk to a few other experts at the time and saw what they would have done. We had one showing in six weeks and I have a friend of mine there who’s a landlord. He said, “If you sell that for this, what are you going to get out of it?” I had it listed at even a slight loss for us. The realtor did agree that the house was difficult to sell in this condition. At the end of December, we did have a talk with them. The basement is flooded and there was a crack in the basement pipe and you can see that dark line. That’s about a foot or two below the electrical box. That’s water. It was probably about three to four feet of water there. That’s what I was saying that the house almost took care of itself there.

You had turned the water on and didn’t realize that there was a problem with the pipe.

GDNI 80 | Dealing Performing Notes
Dealing Performing Notes: In the note investing business, people work with two separate yet equally important groups – the investors who manage performing notes and the investors who deal with the delinquency.

 

The contractor who wanted the job was there and agreed to pump it out for $500. That’s a good price. Because the contractor was the one who was like, “I found it like this,” it has made me wonder if maybe it wasn’t a cracked pipe or something. I don’t know. I can’t say for sure but one of those things that make you go a couple of years later. This was decision time. It was late December and I talked with the realtors and they said, “If this house was fixed up, it would easily be worth even a lot more than what the VPO was. We think you could probably sell it in the mid-$50,000s.” I did my financial analysis and projections. I had four different contractors out to do the house and to give me bids on the house. I told you my friend who was a realtor there said, “The house isn’t what you’re worth you have in it.” The realtors were saying how much more would be worth fixing up. We decided to try that. We decided to find a contractor, try to full rehab the house and then try to sell it retail. We hired the contractor.

We have a question, “How much did you have it in at this point? You had a little bit of legal. You had the purchase price. What else have you spent?”

I could look it up exactly but I would have estimated mid-$20,000 at this point.

You bought it for $21,000 and you had a miscellaneous.

The servicer costs had some legal costs, miscellaneous costs, and force-placed insurance.

What quotes were you getting from the contractor about what it was going to cost to get to that $50,000 sale price?

One high quote I got for $35,000. There were two that were in the $15,000 to $16,000 range. The one that I ended up going with was $18,000 but he was going to do the most work. That’s why I went with him. By contract, it was supposed to be done by the end of March. I liked that because I was hoping that it would be done for a spring sale. This was the first time I’d ever hired a contractor other than that of much been a do-it-yourself. I didn’t know how to work with a contractor well but I learned. The contractor started off doing a good job. He communicated well. We were talking regularly. He was sending me photos of the progress. We spoke regularly and he did do a decent amount of work at first. He installed some back steps. There was about a four to five-foot gap to even get into the house. He installed the back step so you can get in and out of the house easier.

He put in a furnace and he put it in a water heater. He reinforced the basement and he fixed some of the holes that were in the house. He did install some new closets. We were going to take one of the rooms downstairs and convert that into a third bedroom to make the house worth more as compared to a two-bedroom. However, he started a trail off in March. As it turned out in the end, the house was not finished as agreed. This was something I didn’t do a good job is tracking how much work he was doing and had done compared to how much money he was asking for. I should have taken a more active role and gone out there. From the start, you should know the proper way to do it. This would be a whole other show for you here. You should come up with an exact scope of work. We did do that, but I didn’t have it spaced out in terms of scheduling or in terms of when this is done. I will free up this amount of money. That’s a better way to go about doing it.

Draw schedule.

I finally ended up officially firing the contractor in early July. He’d also said that he was having some health problems and that’s fine. I understand that but because you’re having health problems, it doesn’t mean that you have the right to steal from me. He probably did approximately $6,000 worth of work and I had paid him roughly $13,000 or $14,000. I probably lost roughly $8,000.

If you have contractors and if you’re from afar, send somebody by. Whether you have a preservation company to go by and that’s I’ve had a home inspector. I tried to do one renovation from a fire that failed miserably. I never even got to start the work but at least I’m working on it.

Pricing is an art more than a science. Click To Tweet

That’s what Chris does for a living is to manage construction projects.

If you need a schedule values scope of work, hit me up. I’ll send you one. The more challenges I have, most people won’t sign it.

They won’t even read it, Chris.

It’s a little lengthy, but it covers you in many aspects. It’s written for you as the owner not for them as a contractor. It’s lopsided to you because you own the property and how you are going to pay them. That’s one of the things I’ll mention for people is if you’re doing rehabs and stuff, make sure you send somebody by.

I could have and should have done that. I got along well with those realtors. I’m quite sure that they would have been willing to do that. It was officially not under their listing here. When I signed up with the contract, we had to terminate the listing. I told him I was planning to list it with them again. At that time it was listed, I’m sure that they would have either out of kindness or I could have given them even a little bit of money, “Here’s $20 to go and drive-by. Make sure that this work is being done.”

The preservation company is good, too.

A property preservation realtor or somebody that’s looking after your interests. I already gave that first part away there but then also, no one to talk to others. Chris does this professionally all day long and his rehab failed miserably. It is going to be hard and challenging to rehab from afar. That’s why a lot of people are down on their list of options. It’s the last resort. I should have physically gone out to the house more often. I should have insisted more work be done. The other contractors and part of the reason I hired that one is because he was immediately available. There might be a reason for that. The other ones were saying, “I can get to it. It might be a month or two.” That means they’re in demand. That means that they’re working in the field right then and there. David and I were about an hour-and-a-half away from the house. It doesn’t sound like a lot but I had kids, recitals, track meets and such to go to. Life gets in the way. On the plan C, I found another contractor who was much better and I did learn. I started hiring him and I didn’t think I was going to do the whole rehab at this point, but I did start to hire him to do a few jobs. For example, the original contractor never had fixed that porch. It was in bad shape. I realized I couldn’t even have anyone on liability concern. I can’t even have anyone go out to look at the house when they literally might fall through the porch.

He did fix up that front porch for me. He fixed up a little bit of siding. I was looking in and starting to do some of the work myself to get this over with. You can imagine I wasn’t in too good a mood with this. The second contractor did good work, at least got the house. I didn’t fix the bathroom. I had a ribbon over that to not go inside it. For the most part, they could at least walk around but then that contractor hurt himself on another job so plan C didn’t work. We’re on to plan D at this point. I talked to some other note investors like Gail said, I talked with her a little bit. I’ve talked with another guy by the name of Wayne Snell that I don’t know if he’s been on your show or not. I talked with some people that don’t even make notes and they do general real estate.

Vena Jones-Cox is well known here especially in Ohio, but even nationally. She’s an accomplished real estate investor herself. I threw myself on the mercy of others and was asking for advice. They recommended that I sell the house as-is with seller financing. In retrospect, that probably would have been the best course of action. What did I do with that good advice? I did nothing which was the worst possible choice. Why did I do nothing? Honestly, at the time, I was afraid. I had never done that it sounded mysterious and you had to stand around the sacred fire to do something like that. I did not know how. That’s part of having a growth mindset is willing to do things differently and willing to do something that you’ve never done before. The old saying, “If you want something that you’ve never had, you have to do something you’ve never done.” That’s another thing that I learned from this, essentially a limiting belief. At this point, I was positive and I was swearing up and down. Nothing good can up this God-forsaken house, Zanesville horror at this point. “Vena, Wayne and Gail, they all think it’s going to be so easy to sell those with seller financing. They’re wrong because they haven’t seen this house,” and that’s a limiting belief, which wasn’t doing me much.

I’m happy. I’m not the only one who has trouble in Ohio.

What I’m getting at here, even Chris, other people have made similar or worse mistakes. I’m not the first guy on the entire planet that this has ever happened to. I had to get out of my own way.

GDNI 80 | Dealing Performing Notes
Mindset: The New Psychology of Success

Ohio is where dreams go to die. Am I right?

Ohio is my state. You will not get me to bad-mouth Ohio.

This is almost as bad.

I would argue Pennsylvania’s worse.

That would be a great topic to have you to put on the gloves and see which a worse state of Ohio or Pennsylvania is.

You’re going to get someone from New York or New Jersey also.

We know those are worse.

We’re not the bottom of the barrel but we’re above that.

We can all agree. We hate them.

My next step then is I finally did end up getting out of my own way. In early January, I still don’t know exactly why I did this but I got up early in the morning and put some free ads on Facebook and Craigslist. Essentially for sale by owner with seller financing and I was going to the house that day to check on it. I was starting to go out there fairly regularly, and I was amazed. I got a number of people that started calling within an hour of putting ads up. I met three people at the house that afternoon that wanted to see it.

Did you put a price on it, Bill?

You always want to get physical eyes on an asset before you close. Click To Tweet

I did. This is the actual sales ad that I posted. People can read that it’s nothing amazing. I had not taken a copywriting course or anything at that time or anything. What I did learn through the course of this is that seller finance is a draw that will open up your house to a whole number of people that I thought would not be interested in it. For whatever reason, either they’re afraid of going to a bank or they know for sure that they can’t qualify through a bank. That’s the target audience that was going to be interested in this house. You’ve heard the whole tale up until this moment and this was like rays of sunshine coming down. I might have done a happy dance there that afternoon when I was over at the house.

Someone that afternoon wanted the house. He said, “I’ll give you exactly what you want for it.” That particular gentleman didn’t turn out to be a good option. There were other better potential borrowers out there. I can’t tell you how good it felt to have someone say, “This isn’t that bad. I can deal with this. I’ll give you exactly what you’re asking.” I did get some negative comments based on this also. People did the math and $416 a month for twenty years is way more than the house is worth. You get a place to live for those twenty years and not only that but an apartment would probably cost even more than that. It would cost you more to rent a similar house. My point in mentioning this is some people will tear you down. Don’t worry about it. I didn’t even reply to those negative comments.

People who don’t have experience getting loans for things don’t realize how much interest you pay over. I turned it around and said, “I know I got the same thing with my mortgage. That’s how it is.”

Any comment for a future post, Bill? Post for seller financing, you do have to include the interest rate. When you post part of Dodd-Frank, if you’re posting for seller financing, you need to post the length, the price in which you have the monthly payment and the interest rate, FYI.

This was the first time I’d ever done this. I know I didn’t do everything perfectly but that’s how you learn sometimes. Yoda said, “Failure is the best teacher.” People might know about me. I have to have a key tendency sometimes. Selling via seller financing, I collected applications from all the parties and I ran background checks. I found a young family who had another family close by. They were handy and able to make repairs. They were excited to buy the house. They had $3,500 to put down. They expressed interest at the time and paying off the loan faster. He apparently got bonuses at work. He asked if that would be okay. I said, “We can work with that.” I found a loan payment.

Did he have a down payment?

Yes, he had a down payment. The other guy I’ve told you that the first day wanted it, he had, “I can come up with about $100.”

You never want to give somebody a house without substantial.

I found a local attorney who was able to write the contract. I used my note context and I got hooked up with an RMLO who was able to give it the seal of approval. That helps to increase the value of the note if I ever want to sell it. I had to make a few changes to follow Ohio law. At that time, I thought I was planning to sell it with a 9.5% interest but at least the attorney said in this instance, for most homes, 8% is the maximum by law. The borrower agreed. I actually had to go back to the borrower and said, “I got good news and bad news interest rate. I’m going to have to change that. What I’m going to do is increase the value of the house a little bit but I’m going to work it so that you pay $10 a month less. Is that okay?” It was fixed at $10 a month. That was fine. I worked with FNAC up in Michigan to design the most marketable note.

There are different terms I was looking at and what I ended up with was this. We ended up with a twenty-year term. That’s what he liked. He liked the fact that it could get paid off faster and 8% is the max allowable by Ohio law. The present value was the principle that would be paid off in the note was the $39,800. The payment was $331 plus about $110 to $120 for taxes and insurance. The broadest payment is up around the $450 mark. He was happy with that. He wanted to be below $500. I did not put a balloon on this one partly because I wanted to make sure it would go through with no hassles and I thought that might throw it off. That was the terms of the note.

Bill, you said in your ad that the monthly payment was $416. Was that including the taxes and insurance?

GDNI 80 | Dealing Performing Notes
Dealing Performing Notes: Part of having a growth mindset is being willing to do things differently and do something that you’ve never done before.

 

Yes. We closed the sale in March of 2018. The total sale was $43,300 that includes the principle in the down payment. My total invested when everything was 100% said and done to every last penny was $41,000 something. The profit by the numbers, I will make a little bit of money on this but this was not a great deal. That was after two years of not making anything. However, it’s to the point that they have been good borrowers. They’re paid ahead of where they would be on their amortization schedule. I could resell the note at this point and break even. I still might do that some time or I might sell a partial on it. The value I got from experience and the lessons were priceless. The relief of selling the asset was even more priceless. In the long-term, things don’t always go perfect. If you keep at it, you can make mistakes and still end up okay. That is the epic tale.

This is a lot to the story. There are a few things that stick out to me. One is persistence. Here’s the thing though you’ve got this asset and you’re stuck with it. Digging a hole and sticking your head in the ground isn’t going to make the issues go away. You sometimes got to review and analyze and you get to a point where you make the decision. Do I sell it and take the loss? Do I renovate it to try and make money? That’s always an option that comes up for people in what they want to do. For me, my preference is I’d rather sometimes take the loss upfront than try and renovate it. The reason why it’s more about the time, it’s going to take me working full-time as well to manage somebody knowing that I do it full-time and how hard construction is.

Ideally, if I had this all to do over, I would have either done a minimal rehab to the point where the house was safe to walk into then try to sell it with seller financing. If I made a little bit different decisions and if I had paid a little less for the note, maybe $60,000, and then if I have to ballpark $8,000 with the contractor roughly, I would have done okay with it. That’s how you learn sometimes is sticking at it.

Anything that stuck out at me is this starts as a performing note. You do pay more for when it’s considered performing but how important that property value is. Understanding because if you take it back no matter what, at the end of the day, that’s what you get back.

That was why I said that was crucial. Don’t ever take a seller’s word for the value of the house or anything. You’ll laugh. That’s how I was taught at the time.

It’s a sad experience. We’ve all been there. This has been going since March of 2018. It’s a happy ending. Everything is still going well.

They’ve missed one or two months or they were late, but they paid within the 30-day window. They have been paying some extra at times and as it stands here now, they are ahead of their amortization schedule. They’re on track to pay it off in less than twenty years.

Bill, was this with your own funds or jamming investor?

This was with my own funds.

They’re going to keep this because you can’t sell it as a performing note without taking a little bit of a loss.

He’s going to sell the partial.

Seller finance is a door that opens up your house to a whole number of people you thought would not be interested in it. Click To Tweet

If I do sell it, I will probably do it as a partial. I have considered selling it. At this point, the longer I keep it, the better those numbers end up. We’re looking in the end. If I do sell it, it will be as a partial. Likely, I’ve got a good borrower. At this point, it’s a good solid performing note.

Sell $20,000 of it as a partial, get half your money back out of the deal and then use the $20,000 for your next one.

There’s something that I would like to say about taking a loss on a deal. I have yet another one that is in my IRA. I have the house under contract to be sold to an investor and I’m waiting with terror to find out how much is owed on the house because I thought I knew before I agreed to a purchase price. It turned out there were some additional liens that I wasn’t aware of. I understand the desire and the temptation not to want to take the loss and to hold on. I’m not in any way saying that you made any bad decisions about how to handle this, but I was tempted to hold onto this property. It needs a ton of renovation and will need a ton of money, rather not to take a loss. I realized that I would hate renovating this house. I would hate everything that I have to do. Even though I’m going to take a loss, I am going to walk away with something. I have ideas for how I can redeploy that money to make back the money that I lost. I would rather do that than stay in this. It’s become a matter of pride that you don’t want to take a loss. Sometimes, it’s better to take a loss and move your funds into something else and keep rolling.

That’s an experience. I’ll be honest, I was naive. I truly expected to write out the check, then walk back in on March 31st and have any.

You have a nonperforming note. Why shouldn’t you think that?

Even after it was nonperforming, I anticipated that the contractor would make it a little mini palace. I’d walk back in late March and be able to sell that bad boy for the mid-$50,000s. I had projected a $13,000 profit or something if I did that at that time.

It’s interesting because when I hired contractors and I’ve got one now. I’ve got a property in Montana. I put the pictures up on the group because it’s about to cleanout. It’s in Montana where I get the cleanup going on and I hired the guy. We met with the agent and he said he’d have everything done by the end of this week. There was a lot of stuff so I reached out to the agent because the guy is like, “I’m going to wrap up. Send me money.” I’m like, “Let me confirm with an agent that everything is done first or I’ll send somebody by.” He’s like, “I want the money,” and I’m like, “You’ll get the money when I confirm the work is actually done.” He said, “I can send you pictures.” I said, “You can send me all the pictures in the world, but I’ve never been to the house. I don’t know if you’re missing a room and stuff everything in a room.” I checked if the guy is a legitimate contractor. He has a license. I got his W-9 right upfront. He seems legit but it goes to the point of trust and verifies.

That’s what I didn’t do.

That happened to me on my Fort Wayne one, which is the one I was going to rehab that I never did do. I never got around to it and I’m glad I sold it.

Although Gail, you’ve got a couple of long-distance rehabs that worked out well, correct?

Yes. I also lost money to scamming contractors. It’s challenging.

GDNI 80 | Dealing Performing Notes
Dealing Performing Notes: Don’t ever take a seller’s word for the value of the house or anything.

 

One note that I will add for the audience, a lot of people will use their self-directed IRAs to do these and be careful. Every penny of that has to come out of that IRA. Technically, I guess your IRA could borrow money or something, but then it’s getting to be complicated and you might deal with UBIT. My point is that’s a whole other subject. Be careful and know that whatever investment you buy in a self-directed IRA, it has to be managed with all the funds from that IRA.

When the unexpected happens with everything, you need to have reserve funds. You can’t go too close to the wire on it.

You’re active in the note industry and I know you do your Sunday night videos. Why don’t you tell us the best way people can contact you?

My name is Bill Griesmer and I’m on Facebook, Instagram and LinkedIn. I’d love to link up with people there. I do a weekly video almost every Sunday at 8:00 PM on Facebook Live. I do have a YouTube channel. If you YouTube my name it’s a customized channel for me. What I’ll do is make sure I put a slide with all my contact information there. My email is Bill@StonegateCap.net. I’ll give out my cell phone number, it’s (614) 284-0071. I do have a Google phone and I thought about handing that out. I realized that if I was ever going to call someone back then they’d have my real phone number anyway. I know a lot of the people here.

You don’t want these people calling your regular phone number, but it’s too late now. We have wonderful people at our Open Mic nights. We do have a great solid and consistent group of people. Bill, you also have a connection with Donna Bauer too. Are you teaming up to do anything?

Donna had her four-day note buying academy here. I presented this case study there and helped out a little bit with a couple of other talks here during the four-day event. Donna is a top-notch instructor, honest and ethical. That woman is so detail-focused, unlike any other note instructor that I’ve ever met. You ask her something, she gets in and looks at the actual verbatim wording and says, “I don’t like how this line is worded here. If you were to buy this note, I would insist on this being changed.” For example, if you have a note and it does not spell out, compounded monthly, if you don’t have those two keywords in there and then it was to go to court. The judge could rule that they have to pay you simple interest and that’s all. That gets into the mathematics of it. That’s a big decrease in your return on investment. If you’re making simple interest as compared to compounded interest, it has to say that in those words on the notes. That’s another little tip for everybody that I learned from Donna.

Does Donna deal with CFDs as well? Out of curiosity or is she more into notes?

She will do CFDs. Donna does more so not performing, but she also does some and also teaches nonperforming notes as well. Her focus is ballpark 75% to 80% performing and the remainder nonperforming but she will do some CFDs.

Are you going to be attending any industry events in the near future, Bill?

I will be at Note Expo here and the first part of November there in Dallas, Texas. I’d love to meet everybody there. They’re welcome to come up and introduce themselves.

I talked to Alex Goldovsky from ProTitle. His children are chess prodigies and it turns out Alex is playing competitive chess. Don’t try to out-strategize him. He has several moves ahead of you no matter what you’re doing.

We have a couple of questions. It’s a good idea to get the RMLO before you advertise. Although the RMLO has to check out the borrower, he can’t do all the work before that. You can’t do a ton of stuff ahead of time.

One thing I’ll mention with an RMLO too is don’t think it takes a day to get the process done. I’m getting one now, going on its third or fourth week in back and forth on the information. They finally give the disclosures and once you give the disclosure, you still have to wait for days. It’s time-consuming too.

It’s not instantaneous.

It’s the same as going to a bank honestly. They need a lot of cooperation from the borrower.

Bill, it’s great to see you again and be on again. We always enjoy your company being on the show and definitely we’ll keep in touch with you. Gail, any final thoughts before we head out?

Thanks for joining us. Thank you, Bill, for being so candid and sharing even things that we all are a little shy about mentioning because we’re all trying to look like we know more than we do. You don’t reach any level of expertise without paying your dues along the way with the things that happen.

I want to repeat this was the first note I ever bought and I could be crystal clear, but that’s why it went the way it did.

I’ll be honest with you. I bet you learn more from that experience than you did on probably the next three or four.

People reading are going to learn a tremendous amount about what to do and not do. Thank you for sharing so generously.

You’re welcome. It was my pleasure.

Thank you for joining us. It’s great to be with you again. Please be sure to visit our website and sign up for our mailing list if you haven’t already. All these people are on it much. Please leave us a review on iTunes, Stitcher, Google Play and anywhere else that you can listen to a podcast. Tell people how great note investing is. I have a feeling that people are catching on. I’m seeing a tremendous amount of discussion about note investing. I feel like we used to have the joint to ourselves but not so much anymore. Be sure to come back next episode. We will have another scary story. Hopefully, with also a happy ending like Bill has had.

Thank you.

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