- December 24, 2018
- Posted by: august19
- Category: Podcast
Expanding a Notes and Bolts topic, Gail and Chris get down to looking at tapes, the spreadsheet where all the note information are. For those still wandering around with their notes, having a tape and spreadsheet will save you time and a ton of potential risks when investing. They discuss what a tape looks like, what to do when you get it, and what is the process after. They also outline some good price points to consider and ay down some great tips on how to organize and filter your spreadsheet while discussing taxes and state laws.
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Why You Should Look Into Tapes And Spreadsheets
Gail, how are we doing?
Very well, Chris. I have a killer what just happened segment. It’s so heartwarming. I have a young joint venturer who funded a deal in Indiana. It’s a nice little house in a small town. When we first took it over, we thought there was a reasonable chance for reinstatement and instead, during all our time trying to reach out to the borrower and connect with him and his wife, we never got to talk to them. Our next step was that we send a demand letter to say, “One way or another, you need to talk to us because we’re your lender and you’re behind. Let’s chat.” Instead of contacting us, they moved out. That was a sad situation. It created some complexities because we had to hunt them down to serve them notice of the court date and all those things.
All of that aside, we eventually got possession of the house. We fixed it up a little bit. We put signs out on the front lawn. About two days after the signs went up, I received a call from a gentleman who is 60 years old. He told me that his grandfather built that house and his grandparents lived there. He never saw the inside because they lost possession of it during an economic downturn. It wasn’t the Depression because the house was built in 1935. It was a personal depression of theirs and they lost the house. For his entire life, he’s been driving by that house. He’s never been inside. He’s come to see it. They’re thinking very seriously about buying it. Both the JV and me, every time we talk about it, we start crying. We’re hoping they’ll buy it. We’re going to do whatever we can to make it affordable because we loved their story.
I am doing due diligence on fix assets that got accepted from a hedge fund that we both do business with. It started out as two assets and ended up growing to, “We’ve got few more in our books. Do you want some of these?” I look down again and I said, “No, not really.” They came back and said, “We’ll exchange these two at this price. We’ll throw these other ones.” Once that occurs, I’m like, “Sure, why not?” I’m doing due diligence on six more assets and also another ten bids outstanding that I’ll hear about. That’s my exciting news for what I’m focusing going on.
So much for a peaceful, quiet and relaxing, no-work holiday for you.
Exactly, yes. It will be the due diligence. One of them had a little surprise and in fact, that belonged to bankruptcy. I enjoy buying bankruptcies. It has a balloon payment in a few years as well shortly after it gets out of bankruptcy. The house is pretty close to some equity. I’m hoping to be able to possibly get them through the bankruptcy and then work with them to try and get them refinanced with some of these new vendors out there that do refinance people after twelve months of bankruptcy.
You say after the bankruptcy is over. Chapter 13 bankruptcy lasts five years, but a very small number of people make it the whole five years. Do you have a particular reason to think that this one will go the distance?
I’m hoping it does. Like you said, bankruptcy is five years. One of my little secrets is I like to buy notes that have been in for at least 24 months because people, at that point in time, start to see the light at the end of the tunnel. If I continue to do it for two and a half years, then any unsecured debt in Chapter 13, like credit cards and things like that, pretty much get wiped. At the end of that, then that’s only secured debts, which are their car payment and their house as long as they don’t go rack up more credit card debt. Bankruptcy, the way it can work can help somebody out, especially on a mortgage. Once you’re out of the bankruptcy and your debts are restructured, it gives more cashflow typically for them to continue to pay the mortgage.
I’ve always wanted this. I’ve never thought to ask anyone. When you declare bankruptcy, do you have to surrender your credit cards? Do you have to do anything like that?
I’m guessing the credit card companies would cut you off from that. I’m guessing the cards get closed by the credit company. I never filed a bankruptcy. Hopefully, I never have to.
How do the companies even know? Does it go on your credit history and then they would see it there?
Once you file bankruptcy, you have the list of creditors and they get notified. They file what’s called a proof of claim, which is a document proving how much is owed. That’s a topic for another episode is a whole chapter on bankruptcy.
I filed my first proof of claim. I was shocked. It’s like a 50-page document. I thought, “Seriously? Why is everything so complicated when it gets legal?”
You need to call the government too.
The government gets a little share of the blame too. You mentioned you’re doing due diligence on about sixteen or 22 assets.
Six under agreement and ten I put bids on.
We thought for our main topic, let’s talk about how we look at a tape, the spreadsheet that has all the note information on it. What does it look like? What do we do when we get it? If we bid successfully, what’s our process after that? This will be a real notes and bolts main topic. We should remind everybody we have a Facebook group called Notes and Bolts. I was there adding to what is probably our crowning achievement on that Facebook group, our crowdsource document we have of toxic assets and why you might want to avoid them. That’s something where everyone contributes information that they have discovered about certain notes that keep getting presented over and over again on tapes. We started that spreadsheet so that people would not keep investigating and spending money researching the same toxic assets overnight again. Protect yourself, protect your friends, always use our spreadsheet before you buy.
For your bidding strategy, you don’t put a projector on the wall with a Nerf dart gun and start firing away at assets to figure out which ones you want to bid on or is that your secret sauce? How do you start out once you get a tape?
I would say you have now revealed what was my process initially when I was a young note investor many years ago. When I was new with this, I would get a tape and some of them are giants. They can have like hundreds and hundreds of assets on. I would literally start at the top with the first one. I would start researching houses. I don’t think that I should be totally ridiculed for this because when I have watched people do due diligence demos on videos, it’s like, “Let’s look at some houses.” Now, because I have very specific criteria that I’m looking for financially in terms of returns, looking at the house itself is one of the last things I do.When people are not paying their mortgage payment, they're not paying for the insurance either. Click To Tweet
My first approach when I get a big tape or even a small tape is that I make some additional columns on it. One is if I have historical experience with the note seller and I know that they normally want 50% of UPB or 48% or 60%, whatever it is, I will make a column. In that column, I will put in a formula that takes the UPB, the unpaid balance, and multiplies it by that percentage that I know is the sweet spot for that seller. I will create another column that is the return on investment at that bid price assuming I would get it at that price. That’s another formula that is simply the PI payment, the principal interest payment, times twelve so the yearly PI income divided by the bid price. PI times twelve divided by the bid price and that’s your gross ROI on that.
Essentially, you’re taking what you think the cashflow is for that year, the principal and interest payments, multiplying it by twelve months to see what you’re going to get if it’s performing for the year and divide it by what you’re willing to pay.
I’m not going to get that full PI payment because I have servicing costs and I usually have insurance costs too. If they’re not paying their mortgage payment, they’re not paying for the insurance either. Even after they start paying for their mortgage, they often will pay for their insurance. Do you find that’s the case? Do you have some special thing about getting them to do it?
I have the servicer collect escrow. I send the insurance payments to the servicing company to put in. When they pay for the escrow, the servicing company reimburses me those costs.
A lot of my particularly contract for deed borrowers, because they are very low-income people, we don’t succeed in getting an escrow payment out of them. I have also been out of service or FCI who won’t collect escrow unless the loan is current. Unless someone totally reinstates, they won’t do an escrow account. That’s why I’m not boarding any new loans there. It’s so difficult. We should try not to digress too much and stay on what we do.
You mentioned you spend a little more time looking at the tape for assets. Are there specific price points you look at?
The contract for deed tapes, there’s never anything higher than $80,000 unpaid balance on there. Your purchase price is going to be less than $50,000. I find particularly with new JVs that that’s where they’re most comfortable, in that $25,000 purchase price range. That’s where I focus.
Is there a dollar value or value of the house that anything below a certain value you don’t look at?
A lot of people have a number. Anything under $25,000 in value is going to be a very special-needs house and probably your borrowers are going to be pretty marginal in terms of their income. It’s a big risk having borrowers who are so close to the edge in financial terms all the time. Anything that happens in their life can throw them off in terms of that making the payments. With a contract for deed, there’s also a pretty good chance you might get the house back. You have to ask yourself, “Do I want a $10,000 house in Akron, Ohio?”
Is there a principal on interest payment that if it’s below a certain threshold because of servicing costs, you’re basically like, “It’s not worth my time?”
I don’t like to go below $175 or $200. I’m having to pay my own insurance most of the time. Between servicing and insurance, you’re talking $75 a month getting deducted from your PI payment.
You’re not making anything. On a tape that I know a seller had, without naming sources and stuff because I get the deal or we haven’t closed, an asset I bid on did have a low payment. I sometimes bid on those but when I do, your bid is usually on the $1,000, $2,000, $3,000. It’s sometimes little IRA money that you’re not too concerned with if you can keep them for a while, but I know somebody did $15,000, $20,000 on an asset. Your net asset after servicing and stuff is going to be under $100 a month. They’re going to gain $1,000 a year but when you’re paying $15,000, it’s going to be fifteen years before you get your money back. That’s one thing people don’t look at or realize is you got to look at it holistically. You can’t take a number and multiply like on performing, “I’ll pay 80% of the UPB.” You get your principal and interest payments.
That’s why the ROI column is handy as an alert. If your ROI is 25%, if you were keeping all of that money, that’s a four-year payback. If it’s 33%, that’s a three-year payback. It gives you a quick reference for how long that you’re going to get your money back.
People fear the terms of judicial and non-judicial. Judicial means you have to go through the courts to take a property back and non-judicial is it’s not going to court and it’s much quicker. As a note investor, do you distinguish between the two or are there certain states you typically avoid or do you avoid all judicial states? What’re your thoughts?
When I’m looking at tape, one of the first things I’ll do is that I will do filters. You can click in the top line of a tape or a spreadsheet, and you’ll often get the chance to filter. It will bring up a drop-down menu of every state that’s on the tape. I will get rid of certain states. I can tell you Kentucky is one because of the harsh licensing rules there. I’m never going to buy in Kentucky. It’s very expensive to be licensed. Apparently, it’s very dire consequences if you try to buy there without a license and you get caught. Do you have states that you eliminate? For conventional loans, I would also eliminate most of New England. For contracts for the deed, that would not be the case. It’s interesting that even a harsh judicial state, if you’re buying a contract for deed, it might not be a very expensive or long-lasting repossession experience.
Typically, I’ll say experiences taught me now to stay south of the Mason Dixon and east of the Mississippi. That’s my area. As you said, New York and New Jersey, I stay out of those. Pennsylvania, I stay out for notes. I’m very skittish on Ohio because of an experience there.
You have not received a warm welcome in Ohio.
Also in certain areas, you’ve got to be careful especially on the north and east side of Cleveland. If you take the property and try and sell it, the county or city with jurisdiction comes in and does an inspection. What they’ll do is they’ll say, “Before you sell it, you have to fix all of these things.” A point of sale inspection is what it’s called. They’ll hold a bond where you have to put a bond up or put money in escrow and then also pay for the repairs. They’ll say, “You have to spend $10,000 in repairs. You have to give them money in escrow, plus you have to go fix it.” The time it takes to foreclose in Ohio and so forth, it’s now compared to some of the other Rust Belt states like Michigan and Vienna. It’s quicker to foreclose.
In Michigan, you’ve got to be careful because there is a six-month redemption period there. It’s still not that bad of a process. My primary states are now Virginia and Maryland. Most people stay away from Maryland, but I bet so much boots on the ground there. North Carolina, I like Indiana and Michigan and Tennessee. Those are the primary states. I also have boots on the ground where you have people that you know. It’s important and I recommend to everybody as part of looking at tape, do you know a realtor? Do you know a property manager? Do you know a contractor in those areas? Eventually, you’re going to need them.Once you get out of bankruptcy and debts are restructured, it gives more cashflow for you to continue to pay the mortgage. Click To Tweet
I don’t think in this market, it’s possible to throw away a lot of states because we have no control over what is presented to us as far as the selection of states. It’s good to have a process for getting to know people in an area if you see a lot of assets in there. I wanted to go back to the spreadsheet and say, “All I make is notes.” Comments to myself so that when I do start going through it, I can write down on what the online values are, any questions I have about once I look at the picture and start gathering information when I’m in the due diligence process. I will look up the ones that I get seriously interested in. That’s where I would write down any taxes that I see are owed, any warning or pertinent relevant information that would affect the bid that I make.
That’s an interesting comment that you made that turn their taxes. We talked about filtering the spreadsheet and looking at it and adding some columns. Once you start shortening that risk to a certain thing, you mentioned taxes. It sounds like something I recommend. You go online and do a property tax search to see what the taxes are owed on that property.
I don’t have your fabulous tool for that, but I do the best I can by going onto NETROnline.com, which is your gateway to every county website that’s out there for taxes, recorder’s office, assessor. Most of the time you can find out the taxes, though, sometimes you’ll see that there are no taxes owed. It means that the taxes have gone to tax sale. This is only a very preliminary thing that we do initially to decide what we’re going to bid on. Sometimes you get a surprise because you think the taxes are up-to-date. You get a terrible surprise later after you’ve already had a bid accepted that you now have to try to fight to get it reduced a little because of the taxes. What we do is on the spreadsheet, I create these columns. I make my initial determinations about what I’m interested in bidding on. Before I make the bids, I will call those counties and find out exactly what the situation is with the taxes because you and I both know it is so rare. It is as rare as a pink flying elephant that a seller having accepted your bid is going to now let you lower it.
I want to jump back to the spreadsheet. Once you sort the spreadsheet, do you look at when the borrower last made a payment and how far behind they are?
In general, you don’t want them to be that far behind, but you can also have a big payday if they are far behind and they want to stay. It’s a little bit of a gamble that sometimes pays off. I am very interested in the last payment received date because that shows me that they’re still engaged. They’re still there. Usually, though, one of us had a vacant house or somebody was still paying occasionally. Do you have that?
I still do. They’re paying in because they’re renovating it to rent it out and the payment’s so low right now. It’s $200 a month. We’re working on a few other projects and so forth. As long as they’re paying, I’m fine with that and increasing the value of the home. I agree. I look at when did they make their last payment because that’s important. If they haven’t made a payment in two years, you could be in for a fight. It might take a little longer to work it out, whereas if somebody is making payments, it gives you this sense that they want to stay and with the goal typically being to try and get the borrower on a new plan and staying in the property knowing when that last payment was made is big.
I would say in general if someone hasn’t paid in a year and a half, I pretty much assume I could end up owning that house, but I have a friend and this happened when I was new in this. She bought in Michigan, not a contract for deed, but an actual loan where the people have not made a payment in ten years and they reinstated. That was a huge negotiation. She ended up waving quite a bit of the arrears to get them re-engaged.
That’s interesting because one thing you got to check is a statute of limitation because after so many years in most states, there are laws that you can’t collect it anymore. The debt is wiped. There are states where if you file for closure and stop, then you cancel it, or you resend it and you file foreclosure so many times but never followed through with it. That can kick off and that might not make that debt collectible. There’s a lot of, I’ll say, nuisance laws and regulations like that that. I’ll personally tell you I don’t know all of them and that’s why I always have an attorney review everything. Typically, if it’s been a long time since they paid, I’ll ask them more. I’ll look in a file and say, “Is this tax still redeemable and collectible?”
Most of the sellers that we deal with, if they have no payments for three years or whatever, they do foreclose. They present us with spreadsheets of REOs, which are bank owned properties, lender owned properties in their case. I’ve seen tapes where there are things on there where the next due date is in 2004. You think like, “What in the world have you people been doing all of those times?”
How are they still in the property?
Maybe they’re not.
That is true. Gail, you’ve filtered a tape. I’ve talked about how I use DataTree to go on and look at things and look at the property in Zillow, Realtor or Trulia. When people say look at the property or do look at those websites, what are you looking at?
When you go on a website like that?
Yes, because everyone talks about using those websites, but somebody might say, “That’s great. I’m going to Zillow or Trulia. What am I supposed to be looking at?”
I don’t have a macro to do this, but you might. Some people will have a way of doing on spreadsheets like pulling the Zillow or Realtor and Trulia values first of all. I’ve started to do that manually on the small number that I’m focused on and averaging them to get a ballpark idea. I look for the photos also. There are often photos that are not current, but they are the photos from when the house was sold to the current borrowers. You could see how raw it is. A lot of times, borrowers, they buy these with the intention of fixing them up. The majority of the time, particularly with the lower valued stuff, they don’t get fixed up at all. It might get patched up temporarily. I sold a house to a guy in Flint, Michigan. He’s done extensive work on it. That does happen. This is the Holy Grail that we all seek but rarely find. I figure the pictures give you a ballpark idea of what the place looks like. You can see things like the hardwood floors. I bought a house that had little stain glass windows. That turned out to be the house from hell for me.
It wasn’t a church you mean? A few things I look for is like you said, I’ll look at the pictures, but then I’ll go on Google Maps and then do street view. I’ll check to see if the pink color was changed or was there a new deck put on the house and things. As you said, you can see pictures previously from some of those sites and then go on Google street view to see. I like to go on the Google street view also to take a look at what the adjacent neighbors and properties look like. I used to have a scraper that did that for Zillow, Trulia, and Realtor. I scrapped it, no pun intended because using DataTree, I get a map of the area that shows all the REOs, all the properties currently for sale and all the properties that have sold. Right then and there, I can quickly look at and see what are the comps for a three-bedroom, one-bath, 1,200-square foot house in that area. That that’s much more accurate than looking at Zillow or Trulia. I’ve had a house that the Zillow value went from $95,000 down $50,000 in one week. I know the economy is still doing okay. I don’t think house price has dropped 50% in a span of one a week.
I’ve never seen this and I think we would all love to know how they determined the property values on those sites. Zillow, it’s weird that they still vary, but they only vary by a couple of $100 now. It used to be they could come to silly different conclusions.
The CEO of Zillow, there was an article that his house was sold it or had it listed and the estimate was off by 40% or something. If the CEO can’t get his house right, then what’s the odds you’re getting yours or somebody else’s?
It’s tough because when you’re selling house retail, people definitely look at that. It can be completely insane.
I like to Google the addressed because there’s a property we had put a bid on. During due diligence, I was Googling it and found out that there was a teenager shot and killed inside the house. I’m like, “I’m going to pass on that one.”Current borrowers who do extensive work on the property is the Holy Grail that we all seek but rarely find. Click To Tweet
The way we check for crime is to go on Trulia. They will give an overall rating that it’s either low for the county, low amounts of crime, moderate or high. Even if it’s moderate, you’re not how much of a concern it is. You can click on that little box and it will show you an actual map and it will show you where different crimes have been reported and what the crimes were. Sometimes you see a moderate crime which would alarm me like, “What’s going on here?” You’ll click on the map and you’ll find out it’s like shoplifting, a hit and run accident. It’s not anything that is something we’re all afraid of in our neighborhood.
Gail, as we to wrap up this, is there anything else you’d like to add as part of once you started looking at a tape? For the audience, a tape is a list of assets that are for sale. They call it a tape. It might have 500 assets on it, but they call them tapes.
When you have a very large tape of assets, it’s very easy to get confused that If you have certain things that are important to you, like you want an ROI over a certain number, I will sort by that number and then I will color all of those rows a certain color. If I re-sort by some other criteria, like how there was a payment, then I can instantly see in those now to-ranking most recent payment things which ones are also the highest ROI. It helps me to focus on the assets that are the highest priority to me.
One thing I’ll do is the first column I had, I call it further review. I basically put a yes or no. I’ll do the state to invest in then I’ll put a yes in the states I don’t invest in. I put a no and then I filter that down. The ones that are still yeses, I’ll go back and then look at the price points. If it’s a full $100,000 bar UPB and $600,000 on the house, I’m putting a no. I take that list and continued to chip away at it very quickly to get down to, “here are the ten, twenty, 30 I want to focus on.” We’ll wrap up that segment and go on to our final segment of notes and bolts segment of some insider information. Gail, is there anything you would like to add to that, a nice little ninja tip for people out there to continue to grow?
This is where the juicy tips get revealed. Everybody stop what you’re doing. Everyone gets very quiet. I have given this one before, but now that we’re talking about looking at tapes and avoiding toxic assets, this cannot be stressed enough. I never used to ask for the servicing notes on assets. Now, I absolutely always do because I added to our toxic asset list a house that I was very interested in North Carolina. It looked absolutely beautiful. It turned out the thing was gutted on the inside by a fire. To add insult to injury, a tree crashed through the roof. I sent someone there, they photographed it. It looked great. I would never have known that the biggest issue is finding out those kinds of things. Also finding out what the conversations have been with the servicer that will tell you whether you’re going to get a reinstatement or not.
Thanks for stealing mine, Gail, because that’s what I have.
I can always tell what you have, so don’t let me go first.
Thankfully, I’m an engineer. I have a little paper here that I have ten of these written down for the next ten episodes so I can quickly spin into a new one. The one I’m spinning to is in the process of selling the property, owner finance, and it’s going to be a mortgage and a note on it where I’m going to finance it to a buyer. The thing that always comes up is about having title insurance. Whether you’re buying a note or going to finance the note, always have to make sure it has title insurance on it. We have mentioned that before, but that is a must and as an FYI to people out there who asked this question typically the buyer of the house that I’m financing, they typically will get their own title insurance. As part of that, they should be the one paying for the lender’s title insurance as well.
It’s usually the same title company that does it. That’s always out there who’s paying for the title insurance and so forth. I asked my attorney this question, Brian. Brian is like, “I know you own a house.” I said, “Yes.” He goes, “You paid for the title insurance and paid for the bank title insurance, so you’re the bank. The buyer should be paying for it.” I want to make that comment on notes as part of due diligence, the servicing comments and once you get the collateral, make sure there’s title insurance in there because it could be very imperative. Otherwise, you might have to do a title or some other action which can cost you a few thousand bucks if there’s ever an issue.
Thank you so much, Chris.
Thank you all. Stay tuned for more episodes of the Good Deeds Note Investing podcast. As always, we hope you will start to go out and do some good deeds.
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