- November 15, 2019
- Posted by: august19
- Category: Podcast
Investing in non-performing seconds can be quite risky. For Bill McCafferty, the founder of People’s Mortgage Relief II, doing so is well worth the risk. Being involved in note investing for over a decade, he equips us with the right strategies in managing second position mortgage notes. He discusses the differences in the process of handling first notes versus second notes. For him, being laser-focused and sticking to a well thought of process and system within the business are keys to handling non-performing seconds. Learn more from Bill as he shares the importance of sourcing in the notes business, what people fear most in non-performing seconds, buying notes, and running a note investment business.
Listen to the podcast here:
Why Invest In Second Position Mortgage Notes With Bill McCafferty
I do have a special guest on, Bill McCafferty with PMR II. Bill, how are you doing?
I’m doing great, Chris. I appreciate you having me on. I look forward to spending the next hour with everybody.
Why don’t you take a moment to introduce yourself and tell people what you’ve been doing? We’ve been talking briefly about it, but let everyone know a little bit about you.
I’m from Pennsylvania. I’m a big family guy. I’ve been married for many years. Over the last several years, I’ve been building a note business. I have two companies. I have People’s Debt Relief Solutions, which is my own portfolio. Within my own portfolio, I fully concentrate on buying nonperforming and re-performing residential, institutional second mortgage notes. Both nonperforming and re-performing, that’s my own portfolio. It borrows money and it owns a lot of assets. I have another company, which you mentioned. People’s Mortgage Relief II, that’s my asset management company. I manage assets for different investors that are looking to buy nonperforming seconds and they need somebody to work the file for them.
I get hired, it’s a service fee, commission-based business. I don’t own the asset. The note investor buys a nonperforming second. They hire me to a board to file. I’m not a servicer. We also use servicers. I manage the servicer. I manage the attorneys. I manage the borrowers. My job is to get a deal done for us, get a workout done, get a discounted pay off done. When they get sloppy, try to push through the slop and get a resolution for us that will at least benefit the portfolio somewhat. Within the seconds, there’s a lot of good and bad stuff. It’s a combination of both that you’re dealing with the asset management company. To put it in perspective, the asset management company has worked about 1,000 seconds for different investors, with about 100 different investors over the last couple of years. That is where a lot of my education and real deal experience comes from. I take all that and I put it back into my own portfolio. I’m a full-time note investor. This is what I do every day for a living. It’s a combination of the client’s portfolio, the asset management company and my own portfolio that allows me to do this full-time.
It’s interesting because one thing that we haven’t discussed in every episode that we’ve done has been the seconds. It’s intrigued me because I’m a first guy. I’ll be honest that I’m a neophyte when it comes to second. I have two of them in my portfolio, which we’ll talk about later on because I’ll need some advice. They’re a part of a pool that I purchased, but with seconds, from your perspective, what do you see as the biggest differences between being a seconds guy and a first guy? Also, to touch on that too is what geared you towards seconds versus first just out of curiosity?
What I see as the biggest difference when you’re dealing with nonperforming seconds, about 80% of your exits are through the homeowner, through the borrower. Whereas I believe from what I’ve been told by different investors and what I’ve experienced working some first myself that about 80% of the exits are through the property. I’m sure you can vouch on what those actual statistics and numbers are. It’s more about liquidating the property, selling the property, maybe doing some contract for deeds that you guys do. In the second space, it’s all about the borrower. Even when we utilize the foreclosure process and we get close to sale date or even sometimes when we go through the foreclosure sale, rarely do you ever end up with a property.
Even when there’s a lot of equity in a property, you get to a foreclosure sale, you get on the other side for some reason, a lot of the borrowers do get a misconception that you can’t foreclose. When you do that, they’re not going to let you tap into that equity easy. The majority of the time you’re not liquidating properties in the seconds space. What intrigued me with the seconds is back in 2005, 2006, I started going to local investor groups. I wanted something different in life. I was working a 9:00 to 5:00 job at a school. I saw some of those commercials on TV about buying properties with no money down. I set out looking for something different. I’m going into a lot of local groups. I was in the right place at the right time. In 2007, I was at a local real estate group and that is where I met my mentors and the guys that taught me the business, Dave Van Horn and Partners for Payment Relief. It’s what they started doing. They were buying nonperforming seconds. I dove right into that. I didn’t start with first. I went right into seconds. My first purchase of a nonperforming second and a re-performing second was in 2008. I saw the results from both of them right away and started going full tilt at the seconds.
When I set out to find something in real estate, it was to find a computer-based business that I could do in my house that I could handle and manage without going into properties. From 2006 to 2010, I got myself involved in all kinds of different property stuff, rehabs and rentals. I bought some property down in Texas, south of Galveston on Crystal Beach. I did some subdivisions, all kinds of stuff. Some stuff worked out and some stuff didn’t. I definitely got caught up in the height of the market. When a lot of the mess was going on with the property stuff, that’s when I was seeing a lot of good results with the seconds that I was buying. A good nugget for everybody is, “Don’t reinvent the wheel.” Go find successful people that are truly making money and know exactly what they’re doing, figure it out and learn from them. That’s what I did. I set out to find people that knew what they were doing. I was very blessed and very thankful to be in the right place at the right time and I ran with it.
One of the things that I’ve always highly respected you for, Bill, is you keep things very simple, your systems, how you manage. You don’t have twenty different software programs for doing things. You do it on your own and you stay laser-focused. Do you want to talk about that a little bit?
With any business and especially in real estate to be successful, you need to have a clear vision. You need to have a plan and you absolutely need to know your why. Why are you doing this? I’m a family guy. My family needed me to succeed. When I started this thing, my goal was to get myself out of the 9:00 to 5:00 job and eventually get my wife out of the 9:00 to 5:00 job. I left school back in 2011. I got my wife out of a teaching job in 2015. Both of us are smacked in the middle of my kids’ lives right now. We’re getting them ready for school. We’re picking them up from school. We’re at all their sporting events. We’re involved in stuff that they’re involved in. That was important for me as I started maneuvering through this business. I needed to be clear on my vision. I needed to be clear on my why. It all comes down to processes and systems within a business. You banged it on the head. I’m not the smartest guy in the world but I do know some things and I got good in this niche. As I proceeded to maneuver through it, I wanted to learn everything I could.Don't reinvent the wheel. Go find successful people that are truly making money and know exactly what they're doing. Click To Tweet
One thing that my mentor beat my head early on was scalability. If somebody threw a bunch of notes at you or threw a bunch of money at you, could you handle it? At first, it didn’t make sense to me but as I maneuvered through the business, it started making sense. That’s what I started building. I wanted to put all these systems and processes into place. When the time came, I could build and I could grow. Even now I know what I can manage. I know where I can scale to. I don’t have anybody that works for me. I’ve gone back and forth about getting an assistant or having somebody do stuff. I do outsource a lot. We outsource servicing. We outsource attorneys. We have document companies that we use. There is a lot of outsourcing that we can utilize within this business without hiring people.
I do stay on a level that I’m comfortable at. Right now, I’m managing about 125 nonperforming seconds for about 25 different investors. The bulk of them is from two different funds in the business. When I first started, I was managing a handful of assets for a lot of different investors. Somebody could’ve hired me to work, 2 notes, 4 notes, 7 notes. When it comes to nonperforming seconds, it’s definitely a numbers game. The more numbers, the better off you’ll be because probably one out of two will work out normal and the other one is not going to work out normal. As I started growing, my end result was like, “I’d rather have 150 notes from four different investors than to have 150 notes from 40 different investors.” It’s a different mindset and a different mentality of what you’re dealing with within the business.
You touched on a point that I want to go back because a lot of times I hear people talk about, “I want to buy a second because sometimes they’re very affordable. You also mentioned seconds is a numbers game because you got some that may not work out, some that do well and some that go through the normal process. What’s your recommendation of people who say, “I’ve only got a few thousand bucks and I want to go buy one second?” Is that something that basically they throw money away? I’m curious what your opinion is on that?
It’s a numbers game, but you absolutely have to start somewhere. When I first started, I bought one nonperforming second and then I ended up buying three nonperforming seconds. You got to start somewhere and you’ve got to get the experience. As my mentor has always shared with me, it’s learning by doing business. You’re not going to learn this business without doing it. You can sit there and analyze it. You can sit there and do all the due diligence in the world. There are experts everywhere that will tell you that they are experts with due diligence. One thing that I figured out with the seconds is there are a lot of things that you can’t see before purchase. Sometimes a borrower will have a friend that has money or they got some insurance money that you have no idea about. We can sit there and analyze all day long if this borrower is going to pay us or not. Some of the things we can’t see. As much as some workout and some don’t, even the ones that don’t work out great, there’s still money to be made and there’s still a whole education platform that can be learned from every aspect of this business. Some deals go in and out of bankruptcy. When you buy these nonperforming seconds, it may take 12, 24, 36 months before you see a resolution.
That’s one of the things that I had heard in the past with seconds, you have to be more patient. One of my attorneys laughed at me when somebody mentioned seconds. He looked at me and said, “You’re not a seconds guy because I’m a Type A. I am focused on the property. Maybe it’s not a fit for me where it fits other people and stuff. You mentioned the timing for, it might take a few years and stuff. Do you mind sharing with people take one that goes through two years? What is the process? Someone interested because I know the process on a first and I’m guessing it’s similar, but I like to hear it from you as well.
To touch base on what you said, it’s definitely true. One of the toughest things about this business and I’ve learned how to deal with it. If you’re working a lot of assets, there’s always something going on so you’re dealing with it. There are times that you own a nonperforming second and you’re moving forward with legal. Everything’s in place and there’s nothing you can do to make the deal go faster. That’s where people struggle. They think, “Let me reach out to the borrower every day. Let me do this, let me do that.” Sometimes there’s nothing you can do. When I figured that out, that is when I began building my systems and processes and fine-tuning everything because sometimes a good nonperforming second deal could last two years, but you only spend 25 or 30 hours on that deal the whole time.
An example would be you could buy a nonperforming second, in the first 30 days, you’re going through the collateral. You’re getting everything organized. You’re starting your outreach or sending letters out. You’re calling the homeowner. Early on I would get excited if somebody responded on the other side. Eventually, I figured out the people that responded to me in the first 60 days are trying to tell me a story and push me away. They’re not trying to resolve the nonperforming second within the first 60 days. They’re trying to give me this crazy story so I’m scared and I get pushed away. That is why I learned that the foreclosure process and the legal process with nonperforming seconds is so crucial. Everywhere from, if it’s a no equity deal to a full equity deal to an upside-down deal, the foreclosure process is not about getting possession of the property, but it’s about creating leverage and giving a homeowner a deadline to deal with you.
The numbers are probably a little different but a few years ago, I used to say 75% of my exits happen 30 days before the foreclosure sale or 30 days after the foreclosure sale. No matter what I did the whole time leading up to that, the deal wasn’t going to get done until we got close to a foreclosure sale. You could be in a state like Kentucky or Illinois. You could be twelve months into the foreclosure process with a sale date set and then on month 13 or 14 that homeowner files bankruptcy. Depending on if it’s Chapter 7 or Chapter 13, it could delay the process. Maybe you’re included in the Chapter 13 plan. If it’s a Chapter 7, they’re going to eventually get discharged and I can go after the property. When a homeowner gets discharged in a Chapter 7 bankruptcy, they’re personally not liable anymore for the debt, but the lien still exists on the property. You’ll have plenty of borrowers that will do that. They’ll get discharged from the Seven BK in 4 or 5 months and you start back after the house. I don’t know if they didn’t understand it. If an attorney lied to them or they were happy that the bankruptcy stopped everything.
All of a sudden, they’re realizing that they’re going to have to deal with the lender again if they want to stay in the property. The attorney convinces them to now do Chapter 13 and they file that and things don’t work out. All of a sudden, you’re at two years now. You went through a lot of the foreclosure process. They utilize bankruptcy to try to get you to go away and things didn’t work out. Let’s say in that Chapter 13 bankruptcy and it gets dismissed. All of a sudden, there you are again. It is a game of patience sometimes and that’s why with the seconds, it’s about the portfolio rather than the deal itself. Your decisions are being based on everything that’s going on in the portfolio. On a deal like this that we’re using the example, I’d be killing myself if I was sitting there and I had one deal going on. I have other stuff going on, I can be patient. Now that I’ve been doing this so long, I know a deal like that is not done yet. It’s eventually going to come back to life.
It’s interesting because two things popped in my head in that with first you know the time frame a little better than you do on seconds. As a full-time guy in seconds, it must be more challenging or even more stressful if you’re trying to figure out your cashflow or your future cashflows on things that again like putting food on the table. That can be challenging if you’ve got a bunch of borrowers filing BKs or whatnot and so forth. I know you’ve got that other service that you have where you’re managing this for clients and so forth. For somebody that doesn’t have a service like that, is it more challenging because the cashflows are more unstable?
I listened to people tell me they’re buying a nonperforming note and this is what their expected ROI is or their yield. I chuckle because there’s a lot of money to be made in this space, but you don’t know. Number one, you may say this is what I want out of it, but when push comes to shove, the homeowner may only be able to afford a certain amount and you’re going to have to take that to get the deal done. It’s not about your yield. It’s about what they can afford and what they’re comfortable paying you every month. One out of three of these foreclosures in the nonperforming second space get contested by an opposing attorney. When that happens, you can’t disappear, you have to answer.
When I file a complaint or I request judgment, a homeowner can answer with their opposing attorney and they can request a lot of different stuff from us. You were talking about before the webinar started about some of the processes to get licensed in the different states. I got an email from an attorney and we got to answer an opposing attorney and a borrower responded to our judgment request. It’s basically called discovery. We have to produce a bunch of different documents that they’re requesting. Everywhere from the payment history through PNC, the payment history through Land Home Financial Services who is servicing it and Madison who is servicing it.
I’ve got to get all the payment history. I’ve got to get all the RESPA letters. It was twenty questions that we have to respond to and all they’re doing is trying to get you to go away. We’re going to be able to produce everything and get everything, but it’s time-consuming. It’s crazy what goes on because these opposing attorneys on the other side are saying, “Let’s request all this and I can get them to go away.” All I’m saying is I’m going to be able to produce everything and you’re going to have to give me more money when push comes to shove because you made me do all this work one day. It’s funny how it works.
I have a question for you and our audience because here’s a real-life example of a second. I’ve got two of my portfolios. This was included as part of a pool that I acquired. The borrower is in default on the first and second. There’s a little bit of equity in the property still. The borrower was first to file for foreclosure. They stalled it because the borrower was trying to refinance. The borrower ended up passing away back in June or July. They basically opened it back up for the first two if they wanted to go through the foreclosure. I go online, check and be like, “Why aren’t they filing? I’m in second.” I’m used to being at first. The minute that would happen, I’m like, “I own for foreclosure and I’m going to go get this property so I can secure it and sell it.” I’m sitting here in a second position twiddling my thumbs and I’ll ask my attorney what to do. We did have to file because we were named in the suit in the first filed. We’re a junior lien holder. He’s like, “You wait.” I’m sitting here. It’s killing me. Is there anything else I can do from that perspective?
What you said is a major wait game with the seconds. It does test your patience. It’s definitely a true skill that you take on and you have to deal with it. With the first, there’s a lot of hands-on stuff that you’re dealing with and you have to push forward or the deal is not going to move forward. With the seconds, there are a lot of things that you can’t do and you have to be patient. What I learned early on with the foreclosure process is that it’s your true way to get a deal done and to create that leverage that we’re looking for.
With seconds as well, all my experience with first, I always worry about taxes, homeowner’s insurance and stuff like that. Is that stuff as a seconds guy that you also focus on or is it assumed okay, the first has it or how is that typically handled in your world?
One big misconception with delinquent seconds is that you’re dealing with lower-income people and you’re dealing with lower income properties.
I would think it’s the opposite. You’re dealing with probably better borrowers than you are with the people. I’m buying $50,000 properties. You’re buying $300,000 properties with $30,000 or $100,000 second.
When you’re buying in that range, even if the first mortgage is not current but the majority of the deals that we’re working, the first is current. The first is paying the taxes and insurance. It’s escrowed in there. If the homeowner is not paying on the first mortgage and it’s a $300,000 loan from the first mortgage, the first is going to make sure that those taxes are being paid and they’re going to force an insurance on the property to protect themselves. That part of the business is what got me comfortable maneuvering through it, knowing that the first is dealing with that. With a nonperforming second, I’m not too worried about getting myself listed as lost pay. Once I get a loan re-performing or I buy a re-performing loan, I do want to reach out and be listed on the insurance policy as lost pay. One of the best things about the seconds space is that the first is the one with the taxes. The insurance, it’s usually escrowed.
You’re not fronting taxes. You’re not fronting insurance. You’re typically not foreclosing. You don’t have a lot of costs after the acquisition of these things besides your servicing fees. Am I missing something?
Legal expense is your big one. If you’re not prepared for it, it will crush you. If you buy 30 delinquent seconds and you expect to go push legal on all of them, it’s very expensive. You need to be prepared. You need to understand the difference between your judicial states and your nonjudicial states. When a loan is contested and you’re in the middle of the process, you can’t say, “I’m done and I don’t want to spend any more legal fees.” You’re foreclosing on somebody. You’re suing somebody. You now have to produce what they’re asking for and respond. Like in any business, you could get sued at any time and you have to deal with it. It’s basically purchase price, legal costs and servicing costs are your three costs when you buy a nonperforming second.
Do you buy lines of credit as well or typically just seconds? If you do buy lines of credit, is there a difference between them?Typically, one out of three of foreclosures in the non-performing second space gets contested by an opposing attorney. Click To Tweet
In my world, it’s a fixed-rate second or a line of credit second. It doesn’t matter to me. It’s the delinquent second because when we resolve it, we’re going to put a fixed rate around that. We’re going to create a new document. It happens and it’s probably only happened about five times total. To me, is somebody reinstating their loan. Once they reinstated the old terms are in place so we don’t modify it. A lot of times, the reinstatement is too much or they reach out. We create a new agreement and it’s cleaner. Even this person that reinstated on the line, they reinstated on a line of credit. The line of credit will term out and it will be all situated. I always, even when they reinstate, reach out, “Do you want to put a new agreement in place? Do you want to redo your terms? A lot of the people that reinstate don’t want to talk to you. They want to hide and they want you to go away.
With your business goal, do you typically try and get either the short pay off or do you try and get them to reinstate? It sounds like each one is treated differently in that sense, but from a percentage standpoint, I’m guessing to see a lot more payoffs on seconds than you do on first. I rarely see payoffs. I get reinstatements pretty frequently or do a lot of modifications when borrowers truly want to do stay in the property. One thing that I want to mention that you joked about early on is they reach out to you in the first 60 days. A lot of times, that’s very similar on the first side as well. I’m laughing because I ran into that situation with somebody who for the last 90 days has been promising to come up with about $5,000 and still haven’t come up with $500, never mind $5,000. They’re stalling.
That’s what I learned early on. If I didn’t start legal on a deal like that now amount 90 to 120 days, you’re still being promised something but there’s no pressure going on them. That’s truly what creates the leverage. It’s a combination of both. You definitely get a lot of discounted payoffs in a second space. Early on when I was doing this, when I started negotiating with a homeowner, it was all about not talking numbers, seeing what they wanted, getting a feel for what they can afford and all that. As I maneuvered through, I created a lot of processes and put them in place to help speed everything up. One thing that I do when a homeowner does reach out, I have a six-page loss mitigation form and they have to supply that form filled out with a bunch of financial documents. It’s more of a stepping stone than me studying their financials and trying to become their financial advisor.
With a lot of these seconds, it’s about what they can afford, but it’s pretty easy to put a payment around $20,000, $30,000, $40,000 second when all the cards are laid out. It’s in their court and once they supply everything back to me, one thing that I’ve got good at is I have a two-page options sheet that I put in front of them, three-payment options and a discounted-payoff option. It’s to let them know that dialogue that everything needs to be negotiated around. It’s not written in stone like they have to pick one of these options or the discounted payoff is written in stone. Maybe they say, “I like option four but I can only do a discounted payoff at this amount.” It’s going to start the negotiation.
Maybe they like one of your options. I have three payment options and the payment options are there’s an arrears part, what can they put down upfront and how we’re going to deal with the rest of the arrears that they can’t pay on. The second part is how we’re going to deal with the loan balance. Maybe they like one of the arrears plans and they like one of the loan balances. It’s a way to keep the deal moving forward and to speed up because the hardest thing to doing real estate is to close the deal. No matter what you do, if you’re rehabbing houses, if you’re wholesaling, if you’re working loans out, the hardest thing to do is to get somebody to agree and send you money and close the deal.
It’s interesting that you mentioned because sometimes I know people will listen and try and target to get 4 months or 5 months of reinstatement and sometimes you can’t get water from a rock with some of these borrowers. On the first side of things, it’s like, “Do you want to boot somebody out of the house if they can’t come up with $2,000, but they can come up with $1,000, which is going to cost you $100 by the time we send the demand letter and start that foreclosure process. It’s interesting that the other thing you touched upon a little bit too is the fact that closing the deal and the aspect of what you touched upon about the returns and so forth. I like to look at your returns is like standing up on the tee and hitting a golf ball. That’s how accurate your returns are going to be. Tell me before you hit the ball, how far it’s going to go and where it’s going to land. That’s how these calculators are. I’ll be the first to say I built a very robust calculator, I enjoyed doing it and use it, but at the end of the day, it’s garbage in, garbage out because you can’t predict what the borrower is going to be doing.
It’s definitely good to have an idea. I always say with the second, like when you eventually work out a deal with a homeowner and they start paying again, that’s when you can determine like, “This is a good re-performer that I might be able to sell. The return is not going to be too crazy for me to sell it. I’m just going to keep it.” Not to get sidetracked, but it’s about leveraging the portfolio to see the true returns and get creative.
It’s also the thing that a lot of people miss upon is everyone always talks about the velocity of money, but if you’ve got a deal that you’ve got low-dollar value into the deal and it’s giving good returns. It’s like, “Do I sell it or not?” You’ve also got to look at, “What am I going to do with that money if there’s nothing there to invest in it right now?” I know people that do that, they’re like, “I’ll sell this deal and their money sits for six months. It doesn’t do anything.” It’s like, “You could’ve still collected payments over the next six months and stuff.” I see that a lot as well.
It’s good and bad for the business. I got an email from FCI that one of our seconds was paid off. We knew they were refinancing. It’s a $23,000 second. It’s what you said, it’s one of the best seconds that we have with one of the IRAs. We got the payoff and it’s great and all, but now I’ve got to go deploy it again. It’s a good problem to have.
One of the things that I hear a lot from young people in the first and it’s interesting because sometimes you hear people talking first and seconds. It’s almost like a rivalry, which honestly I don’t know why. Sometimes you hear people who do a lot of stuff on first are like, “Seconds,” and toss them aside and stuff like that. I see it more from people who do first about seconds and seconds about first. What I was curious about with seconds is I know during the downturn there was a large demand for people getting piggyback mortgages and stuff. People are always concerned about supply. How do you see the supply in the second industry? You’re a larger main street investor but you’re not $100 million fund. I’m curious, for people out there reading as well who might want to get in seconds or involved in seconds, do you still see plentiful supply for investors?
This is my best year within the asset management company and outside since 2015. In 2016 and 2017, it definitely got slow. In 2018, there was a big trade. It’s like anything, how bad do you want it? Go out and find it. You need to network. It’s not easy. You probably get the same thing. You get the emails. You get the Facebook messages, “That was a great webinar. I’m new to the business. How do you get your notes?” There’s no easy answer. It’s about going to these different conferences. It’s about networking and adding value. My asset management company, I’ve added a lot of value to different people. I’ve put myself around 100 to 200 different note buyers that are always looking for product. Over the last couple of years, I’ve put myself around some hedge funds that are looking for products. I call them the paper chasers. I personally don’t have tons of time all the time to be sourcing every day. Sourcing is a humongous part of this business. What I figured out is I can add value to people and I can put myself around people that are sourcing every day. I can take advantage of that when I need a product.
For myself personally, I’m out there calling hedge funds and banks. I still work a 9:00 to 5:00 job and so forth. My niche has been working with a few of these funds. I solve some of their problems by taking stuff that might be a little hairier than what most people want. A lot of people would be, “I want to buy a first position note that’s got 30% equity in it, in a nonjudicial state and I want to get it for $0.40 on the dollar.” It’s like, “No, that’s not going to happen.” You got these hairier ones where they’ve been dragged out or in foreclosure or there might be some clouded title. They need work. A lot of people don’t want to do work, unfortunately. If you can solve a problem like that with some of these funds that are starting to liquidate or it’s a closed-end fund that you’re closing, they’re going to say, “I’ll sell you these five, but can you take these five hairy ones off my chest,” and you do. The next time it happens, they’re going to call and all of a sudden, you’re going to realize, “I want to dump these ten assets.” You’re getting them for pennies on a dollar and realize, “Three of them are good.”
That’s what it is. You banged it on the head. Even with the seconds, everybody wants a nonjudicial, nonperforming second with tons of equity at a great price. They’re hard to find right now. You’re exiting through the homeowners. You’re going to spend that top dollar to get that asset. Sometimes that homeowner can only afford so much, so you’re better off sometimes with these no equity deals that you bought for a lower price. That’s where some of the great returns come from. It’s a balance of everything. Equity is definitely good to have. It protects you if you have to liquidate. It makes your re-performing second more valuable when you go to sell it. I only like to leverage my re-performing seconds that have equity if I sell a partial or I do some type of collateral assignment. I only like to do them on my re-performing seconds that have equity.
It makes sense to reduce risk from that perspective.
I was having this conversation with two investors up in New York City. They were talking about a note seller in our space who has a hedge fund. They made the comment that if he’s selling any type of notes, it’s got to be a bad note. I’m like, “That’s not true.” Sometimes these funds sell what looks like better notes because they can get more money for it. If they’re in this business and they’ve lasted, they get it, which means you need to sell the good stuff because people need to succeed to come back and buy from you.
Another thing to think about is with my asset management company, I’m working 125 loans, probably about 80 of those loans are an active foreclosure. Do you know how hard it would be for a fund to buy 125 assets and pumped 80 of them down the foreclosure pipeline? They would go out of business. When you start thinking about it that way, I was like, “The hedge fund’s business model isn’t to by 150 notes and put them all down the pipeline of foreclosure.” They might randomly pick out 30 and play with them. They’re going to sit on a bunch and they’re going to sell some.
I know one fund I work with, they won’t foreclose. They won’t spend the money. They don’t want to deal with the timing. They’d rather sell it off. It’s similar to like a bank’s philosophy, the foreclosure for them, the money, they can’t lend and everything else. This fund doesn’t want to go through it because they’re also afraid they’re going to get sued and so forth. They’d rather turn around and take it. I’d say 80% of assets I bought from them probably had to foreclose on unfortunately, but it’s part of business as well.
Here’s a little thing that I tell a lot of different people. The biggest thing that people fear in the nonperforming second space is a homeowner files Chapter 13 on an upside-down deal and they file a motion to strip your second mortgage. What that means is they file Chapter 13 bankruptcy. They file a motion to strip your second lien. They’re basically telling the court there is no equity above the first mortgage. The value of the house is $200,000. I owe $200,000 on a first mortgage. I owe $50,000 on a second. I want to strip that. There will be a hearing where they can prove their value and we can prove our value. A homeowner has to complete the plan, bankruptcy plans 3 to 5 years.
They have to complete the plan before you get stripped. That is like the biggest thing that people fear in this space. People are looking at no equity deals or they’re looking at stuff in different states. They’re like, “I don’t want to get stripped.” I share with them that I’ve had three seconds over the last few years that filed the motion to strip my second mortgage. It was granted, but I became the number one unsecured creditor. I’ve got unsecured BK payments on these three bankruptcy files that I got stripped on. Believe me, I made a lot of money as an unsecured creditor. It’s stuff people don’t understand or realize happens because they’re scared to play the game. As I started to maneuver through this thing, I had mentors and I had people that I could talk to, but it was all new territory every time we started doing something. I was always excited. Win or lose, I wanted to figure it out and see what the next step was and what could happen. A lot of good things happen all along the way.
It’s interesting because that was one of my questions. The other component it has is I love notes that are in bankruptcy and I’ve done very well with them. I’m thinking, “How many finished a plan?” You mentioned that you only stripped if they finished the plan and so forth. I typically like to buy in about 18 to 24 months in because there are 3 to 5 years, in 24 months, they see a light at the end of the tunnel with a lot of the credit card debt. You can see that they would get wiped out and so forth. It’s interesting because I wasn’t thinking of it that way. I was thinking like, “You get stripped from that perspective.” I know the other concern people have is, if you foreclose and it’s upside down, you get wiped out at the foreclosure auction from that perspective. On the flip side, on first, a lot of times you get these BPOs done that say the property is worth $75,000. Typically, I mark them 20%, 30% off of that because that’s truly what they’re worth in the grand scheme of things. It’s almost like similar where you’re getting stripped of equity in that sense?
A few years ago, it was probably one out of four that would complete the bankruptcy plan. The other three would fall out. Over the last few years, a lot of us have forced these homeowners into Chapter 13 from the second position and the plans that have gotten easier. I probably say right now, one out of two will complete it. The other one will fall out. When they fall out, the lien is valid again and not stripped. I became the number one unsecured creditor. Between these three bankruptcy files, I probably made over $100,000 on the unsecured payments.
One question I was going to ask too was what’s the pricing like on seconds? I know for example on a performing first, you’re anywhere from, $0.70 to $0.85 on the dollar. A nonperforming is typically between $0.30 and $0.65 on the dollar. I’m curious where seconds typically fall into play on that.The hardest thing to do in real estate is to get somebody to agree and send you money and close the deal. Click To Tweet
It’s not everybody’s appetite. When we first started buying these back in ‘09 and 2010, you could buy these for $0.10 to $0.20 on the loan balance. Right now, I would say pricing on nonperforming seconds is probably anywhere from $0.10 on the loan balance all the way up to about $0.70 on the loan balance. The biggest factors are the status of the first mortgage. Clearly, if something’s delinquent, I can buy it a lot cheaper. If the first is current, it’s going to cost me more. The state that it’s in, nonjudicial states you can get more money for. Judicial states are going to be cheaper. Note sellers know that because they’re cheaper, it’s going to take me longer to go down to the foreclosure path. It’s going to cost me more money. Where a nonjudicial, it’s a lot quicker and it’s going to cost me a lot less in legal expenses.
The third big one is equity. It’s a combined loan-to-value. You’re taking into consideration what the first is owed, what the value of the house. Is my second covered in equity? Is part of it covered in equity or is it upside down? Those three factors are going to influence the pricing. It’s all over the place right now. I personally would never ever buy a nonperforming second over $0.50 on the dollar, no matter what the equity level is, no matter what state or where it’s at. I’m not going above that. That is probably why personally I have bought my last twenty purchases, probably about fourteen of those have been re-performing seconds and not nonperforming seconds. In the last couple of years, the prices have been driven up and when you buy re-performing seconds, it’s based on your yield. There are no other factors in my opinion. Clearly, the seasoning on the loan, the equity position, the state that it’s in and the note seller that it’s coming from will influence that yield, but it’s based on the yield that you want.
I got an email from you that you’re also now starting to assist people in learning about seconds. Do you want to talk about what you’ve got going on there?
It’s been a long time in the making. I’ve gone back and forth for years about putting an education platform out. A few months ago, we launched an education course. It’s geared on every aspect of the nonperforming and re-performing second mortgage base. It goes everywhere from building the back office, building the business, through sourcing, through due diligence, through boarding files to working the math, bankruptcy, attorneys, legal, all the way through to managing a portfolio of mortgage notes. That was released. It’s about thirteen hours of content in eleven modules. I call it My Note Business Toolkit. It’s all my documents, spreadsheets, agreements, everything that I have to offer that I’ve put together over the last several years. Also, it’s a-six month a private group for support. That’s what it is right now.
One of the things you mentioned on is putting all your forms and so forth because one of the things that I see in this business, as part of a challenge is, a lot of ways to learn how to buy a note. There is such a big difference between buying a note and running a note business. I know you understand that based on the size of your business, but it seems like you’re also trying to assist people with that. I see so many people out there saying, “We’re going to teach you how to buy a note.” Buying the note, I don’t think it is the hard part. Anyone can buy the note. It’s the management of it and managing your business from that perspective. Would you agree?
Absolutely and that’s my vision and what I put out. You can only put so much into a course. I wanted to lay it out where it was a start to finish. The guys that I had lunch with, the one guy did buy my course. It made sense of what he said. The one module is only about an hour, but he said, “He’s spending about six hours on that module.” I personally cramped so much content into that hour that it’s taken him about six hours to break that thing down and fully start grasping and understanding. That’s what I wanted to do. I wanted to put real deal education together and that’s what I wanted to lay out, everything from building that business to the back office. At the end of the day, to be successful in this business, it’s about the back office. There’s nothing sexy and fancy about it, but the back office is what makes this business go. I have a workstation. I have to be at that workstation 20 to 25 hours a week. If I’m not there, my business doesn’t move the way it needs to move. I can handle my business on the phone and I could do some things mobile but it’s that back office that keeps the thing moving.
Something sunk in with me that you touched upon too is you’re managing 125 notes and you mentioned 20 to 25 hours a week is what you spend roughly. We know it fluctuates up and down and so forth but on an average, is that what you say?
That’s at the workstation. I definitely work off my phone. Everything is linked and synced together and that’s to scan stuff, print stuff out and to create documents. It may be more and it may be less, but it’s all my time when I want. My schedule is created by me. It’s truly the nonperforming portfolio for the clients that makes me be at my workstation.
For the clients that you have from a reporting process, do you report to them monthly? Do you set up calls with them? I’m curious how that interaction goes for people who buy seconds and they realize, “This isn’t for me and so forth.” It’s interesting because there are not many services like you have where you’re an asset manager for other people managing needs. I don’t know anybody on the first that does it. I’m curious for people out there who have some seconds that might be like, “I don’t want to deal with this anymore, pick up the phone and give me a call.” How does that process work?
We definitely interact. Before we do business, we always want to be on the same page. A lot of times when I talk to somebody, it’s more about me educating them and making sure that they’re well aware of what is about to happen with a nonperforming second if they hire me, what the legal process looks like, how my time is more valuable working my systems, dealing with the loan and be on the phone for an hour every week with each client because there’s not enough time. What I’ve gotten good at is getting approval from the clients through email on major things of, “Can we send out a demand letter?” “Yes.” “The demand letter expired. We’re about to move forward with the foreclosure. Here’s what the cost and the timeframe looks like. Do you want to move forward?”
When I get something worked out, I put the options in front of them, “This is what I’m going to send over to the homeowner. Are you okay with it?” It’s major stepping stones and major things that happen. I am in communication, looking for approval and some direction, but what I operate out of is a Dropbox, which is a web-based shared folder system. Every client of mine has a shared folder with me and their whole note system is in there. We have an admin folder. We have a folder for each nonperforming note. When we turn one into a re-performing note, it goes into another folder. Within that specific nonperforming note folder is a three-tier Excel spreadsheet that I’ve created. It’s called My Dashboard. It handles all the loan information, the borrower info. It’s at a glance of everything on page one. Page two is accounting, which I usually use accounting from the servicer, but I do have own accounting.
On page three, it’s a log. Everything that I do in real-time gets put on this log. My clients can always log in and see what’s going on their files, on a daily basis and in real-time. That has worked out well because some clients may have a full-time job and they get home at night. I’m working five files and they want to see what’s going on with them and not bother me or email me so they can go in and say, “Here’s what happened. Any email, I’ll copy and throw it onto the Excel spreadsheet. It’s one of my biggest systems to stay on top of everything is to be detailed on these spreadsheets. I’ll stay in check and make sure I’m doing everything in real-time the way it needs to be done.
It also shows a great amount of transparency. People I would think would be very comfortable in the fact that they can log in and can see everything that’s going on from that perspective versus being in the dark wondering what’s going on and not sending you $3,000, $5,000 and wait through a foreclosure. They can log in and see what’s going on. I think that’s important as well. You probably assisted in building your reputation in this business by being open, transparent. I remember the first time I met you and the first thing I thought of it is beside you being an Eagles fan, this guy is a straight shooter and he’s going to tell you like it is. There’s no BS coming out of any side of him. It was at a convention where 90% of the people I met there, I could tell they’re trying to sell somebody on something that was garbage. It was refreshing.
I appreciate it. It’s how I sell my asset management service. If we get on the phone, I’m not pushing my agreement towards you. I’m going to educate you on what happens in the seconds space. When we’re done, if you want to do business, you can send me an email. If not, no big deal. I know when you hang up with me, you know what’s going to happen in the seconds space with your note and with all the notes that I’ve worked and everything that I’ve seen. It’s what you said. I’ll share the success stories with you, but I’m also going to share the bad with you. I learned long ago with working people’s files. When you take money from people, you need to communicate. Even when it’s all uncomfortable, things aren’t working out, deals aren’t working out. You have to communicate with your investors, you have to communicate with your clients. You need to be on the same page and it works out well.
That’s the one thing. I’ve been around long enough. I’ve had some bad deals and I had one probably a few months ago that we got the property back and we were looking at rehabbing it. Basically, the JV partner on the deal was like, “We’re going to split the costs on the rehab. We had put a roof on the property. The contractor bailed on us and we couldn’t find anyone.” I said, “I’m going to bite the bullet on this one and give your money back and stuff and so forth. If we keep going, we’re going to lose on it.” I knew the person was bent out of shape about it and so forth because again they’ve been seeing people say, “You make all this money on all these other deals where people always brag about making all these home runs, which it’s like being a lead-off hitter.” You hit a home run once in a while, but it’s all about walks and singles. The whole time I told him being upfront and honest with him. That’s what you’ve got to be with people.
I can honestly say, I’ve never rehabbed the property from the nonperforming second side.
I tried but I wasn’t successful. It’s funny because people are like, “That’s what you do for a living.” I said, “That’s why I don’t do it because trying to rehab a property from afar is a disaster 99% of the time.”
I have a little nugget for you with the second. I always say, “If a deal is not going to work out, you have to figure out and accept it.” If it’s going to cost you $20,000 to fix a property up or throw it the first mortgage to try to save your deal, you’re better off taking that $20,000 and going to buy another note and continuing to play the number game and see if this deal figures itself out without you throwing $20,000 at it. If it does, it’s great. If it falls apart and you get wiped, it becomes a write-off and you move on.
It’s similar where I know people on the first are like, “If I sell it, I’m going to lose $5,000. If I put $20,000 into it, I might make that $5,000 back or whatnot.” I said, “Look at the amount of time it’s going to take you to renovate it. You’re going to put in $20,000 to make that $5,000, which you’re better off.” Like you said the same thing, bite the bullet, take the loss, go buy another one and try and target the 20% return on a new one. That’s going to be a lot less of a hassle than trying to renovate or work something out after the fact because it’s going to take a lot longer and it’s going to cost you a lot more. The agent is probably giving you a number now that’s going to not sell for that price either.
Christina Fuller was commenting on the Dropbox idea. She thought it was a great idea. Here’s another good nugget for you, Christina. I have a shared Dropbox folder with my accountant and my QuickBooks assistant. Everything goes in that Dropbox and they can access it at all times. I don’t do any of my own QuickBooks. They do all my data entry. I put all my bank statements, all my servicing statements, I update all my spreadsheets. I track all my expenses in and out on a regular piece of paper. Each bank account has its own thing. I scanned them in monthly. I put them in every folder. My QuickBooks lady goes in, does all my data entry, all my reconcile and we don’t even talk. I see my accountant once a quarter. That system alone is very powerful. My accountant always tells everybody about that particular system. Dropbox is great. My whole life is in Dropbox.
I use OneDrive, which is pretty much the same thing better. It’s the same thing with my bookkeeper and stuff. She’s got view access where she can download my statements, but I’ll put all my W-9s or comments or I’ll download and put if I wired money, I’ll break out what assets to look for. I put it in one folder and we rarely talk. She’ll download everything, send me the report and there might be 3, 4 questions. I’ll usually have a call with her typically once a quarter. We’ll sit down to go through, scrub and make sure everything, but on a month by month basis. We may talk for fifteen minutes. There are a lot of assets as well. For people who are looking to have JV partners or managing something, you need to use some type of cloud that people can go in and get information on. It’s important because it builds trust. At the end of the day, that’s what you want to do in this business is to build trust.
I ended up building what I call these generic folder systems. A new client comes in, I have a generic admin folder. Every year I have a generic yearly folder for each company that has been added and built. Drag it over and it creates a new folder and it’s already got everything in it.The foreclosure process is your true way to get a deal done and to create the leverage you are looking for. Click To Tweet
I did the same thing. I created a templates folder that broken into, I’ve got due diligence, which is before I buy it. I’ve got the closing process folder for where the loan sale agreement and everything goes. I’ve got the management folder, which has folders for my servicer, my attorney, my preservation company, insurance folder. I’ve got five folders under that, the same thing collateral. MetaSource for all my collateral and download everything, so it’s all there. I give access to my partners on that so they can go in, they can see the collateral or the documents that have come in as well. It’s been helpful.
One of the things that people have got to recognize as well, Bill, you’ve been around now for ten plus years in this business. You’ve seen a lot of people come and go, but also a lot of things happen. One of the things that, not frighten me but gives me a little pause is because the markets are doing well right now. It’s almost like people don’t fix and flips. The market is doing well. I’m doing these things and are going well, but people haven’t experienced any type of issues from an outside influence like the economy and so forth and so on. I’m curious about your experience with notes. You’ve ridden the waves and a lot of people say when the economy goes down, it’s a boom for note investors. Would you agree with that or do you still think you’ve got to proceed with caution in the sense? You’ve got to keep managing your business the way you do it.
You’ve got to stay the course. You have to stick to your business model, what you’d like. Clearly, when a market crashes, there may be a lot more delinquent loans that come out into the marketplace. That’s another reason why I don’t buy a lot of equity deals. You’re going to pay for equity. If something does happen in the marketplace, maybe all of a sudden, that deal that you spent $0.60 or $0.70 on the loan balance lost a lot of equity. It’s one of the reasons. Another reason I like the note space is because every cycle, it’s a different aspect of it. At the height right now, we see a lot of refinances. In all my performing notes, even if the market tanked right now, even if the equity disappeared, my good performers are still going to pay me. It’s a combination of everything, be a smart investor, understand the market a little bit, try not to get too caught up in it especially with the seconds. It’s different than rehabbing properties or multiunit investing. It’s definitely different than what you’re doing with the first.
People always get focused on the equity component, but seconds might have less volatility because on the first one, you’re buying properties that are $50,000 to $100,000. Usually, those are more blue-collar workers. Those usually have higher unemployment or sometimes at first get laid off. They don’t have that nest egg as much as somebody with a second on $250,000 home or $500,000 home or whatever it may be. Usually, their jobs are slightly more secure. I’m curious from your perspective if that’s your thought process. I know you don’t deal with first, but people focus on the equity where it’s more influenced by job loss than it is the equity at the end of the day.
I agree with everything you said. You banged it on the head. Sometimes they get so caught up with the seconds that it’s nice to hear somebody else lay it out the way you did but it’s definitely the truth.
I pay my mortgage. I don’t care if my house drops by 10%. I do but in this grand scheme of things, it’s not going to affect if I pay my mortgage or not. It’s if I lose my job, it’s going to be the “What moment of what do I do?” A few questions came through. Hassan mentioned about your loan management fees and so on.
Is that specific on my asset management? Is that what the loan management fees are?
He was asking how much you charge for your asset management services.
My asset management contract, I get $500 upfront to take on the file. That’s $500 is I board the file in my system. I check all the documents. I get everything moving for us. I get a percentage of what I can collect upfront in arrears and a percentage of what I can collect on a discounted payoff. When I get a note re-performing, I give that back to the client. I don’t get any of the monthly payments. I get 35% of what I can collect in the upfront arrears. I always try to at least get $1,000 because that’s what my minimum is. At the end of the day, some homeowners can only afford $1,000 or $2,000. I get my $1,000 if that’s all I can get. If I can collect $5,000 upfront, I’d get $1,750. If I can get $10,000 upfront, I get $3,500. I get 35% of the upfront collected arrears with $1,000 minimum.
At the end of the day, it’s very affordable in that sense of what the person is getting in. It rolls into Jamie’s question about JV deals, it almost seems like it’s a quasi JV deal in the sense of instead of traditional first position notes is JV with someone, they fund the deal and you split everything 50/50. Like the sponsor on that, you’re also taking on risk. It seems like in your end, you’re giving up maybe some of the fees or profit. Are you taking on any risk if it gets wiped? I’m guessing not but I was curious.
No, I don’t. I get 35% of the net profit on a discounted payoff and there are some other clauses for bankruptcy, REOs. If I don’t get anything resolved and we get wiped, I get that $500 that I got up front. The power of that is I see the good, the bad and the ugly. I usually can get paid for every aspect of it. To pinpoint right in on Jamie’s question, I was in a fund for two years back in 2012 and 2013. I got good at working these loans out. When I left the fund that I was in, I took that aspect of our business, the asset management component. I left with the clients. I never got into the joint venture partnership. I’ve always stayed with my contract because it’s clean. My role is spelled out. The note investor buys the asset, they pay for everything. If they don’t like what I’m doing, they can pull the asset out. They take it back and I’m done. That’s how I stayed a good name in this business. I’ve established myself with this contract and I keep it like that. I don’t do joint ventures and I have been in a fund. Sometimes I questioned myself if I’d like to take on more money, but at the same time, more money, more problems. I’m a slow and steady guy and it’s worked out for me so far.
You’ve built yourself a niche and you built your business around what you’re doing. If it works for you, you don’t need to reinvent the wheel. Let people know how to contact you, Bill.
My email address is MortgagePayHelp@Gmail.com. That’s the best way to get in touch with me. We can set up a call. We can dive into any more questions or anything that you’re looking to do, I can help you out with. Email is the best way to get in touch with me. I can also give you the link for the education program if you’re looking for it. I’ll also put that on Chris’ Facebook page.
How much is the education program that you’ve got rolling out?
Right now, it’s $997. It’s affordable, fair price. Eventually, it may go up from there. At $997, you’re tapping into well over 10,000 hours of real-deal experience. It’s very worth it.
Thank you, Bill, for joining us. As always, if people want to reach out to Bill, you can reach out to him. Leave comments on the Facebook group. As always, thank you for reading this episode and go out and do some good deeds. Thank you.
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