- January 21, 2019
- Posted by: august19
- Category: Podcast
Rising up and getting back on your feet after losing money on a deal takes a lot of courage. Gail and Chris talk about dealing with the heartbreaks of losing on a deal and illuminate some techniques to trim down the losses and what could be done differently in the future. Learn as they also take us through their own experiences of losing and how they’ve handled it and moved on. No one is exempted from this kind of loses and misfortunes as we all make mistakes, but learning how to handle it is what would make the difference.
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Winning After Losing Money On A Deal
I am with the amazing Chris Seveney.
Gail, how are you doing?
I’m very well. Chris, I’m going to jump right into What Just Happened. Our first Open Mic Night happened, and I was so excited. It was so much fun, wasn’t it?
It was and we had both gone into wondering, “How many people will participate? Who’s going to be involved? What type of questions are we going to get from people?” It was a great mix of questions regarding note investing, contract for deeds and business in general. I thoroughly enjoyed it.
I was delighted we had some fairly advanced questions from note investors that we know. People who are not brand new, but they’ve bought their first few notes. We had questions from people who are brand new and asked something as simple as, “What’s the difference between doing a foreclosure and forfeiture on a contract for deed?” I thought, “That’s a great question.” That person asked it and probably a lot of people on the call were new and they all probably wanted to hear the answer to that. Our buddy, Rudy, was brave enough to ask it.
A lot of times there are people who don’t even know what to ask because sometimes they might be very new. It gives them the opportunity to hear some of these questions, go back and listen to them. If it spurs other questions, these people have the ability to either ask us during the week or jump on next week to get more familiar or ask the question the following week.
We’re planning to do this every Thursday at 8:30 Eastern time. You can sign up at the link at 7EInvestments.com/PodcastWebinar, come on down.
For me, what happened is it’s the sixth month anniversary for foreclosure in Michigan. The redemption expires. I’m very interested to see what happens because the borrower did have a tenant in there and was still using it as a rental. I’ve reached out to my attorney to see, “How do I either get this person to continue to rent to me or do I evict them? How can I contact them?” Interestingly, it’s something I haven’t had to deal with. It’s a new experience that I will continue to share on the podcast. For others who run into this issue, we’ll be able to educate them on it.
I can’t wait to hear the end of that. Do you think that tenant even knows what’s going on? There’s a good chance that they don’t.
I don’t think so because they moved in around November and there have been some interesting communications with the prior borrower on it.
Have you asked her about the tenant’s status?
I’ve asked about the property and it’s been noted that nobody’s living there. It’s vacant and when I sent an occupancy check through my property preservation company, they went by and someone’s living there. The neighbor gladly came out and said, “Someone’s moved in a few months ago.” They mentioned the former borrower stopped by to check on how the tenant was doing.
You never know who’s in there. I have one of those in Georgia where it’s family members who are living there, which in a way it’s probably a little easier. Those people may or may not be paying anything and they know they’re on borrowed time. It’s not such a surprise when the sheriff shows up to do the lockout.If you wake up in the morning, it's a win. Click To Tweet
One of the things that I thought of was, “What if somebody was getting a foreclosure and then they turn around and had a child or a family member sign a five-year lease for $1 a month?” If you think about it, the person does have a lease. You can’t technically evict somebody if they have the lease. I’m sure there are laws that protect against that because it’s not an arm’s reach agreement. That’s one of the things that go through my mind. I have crazy thoughts all the time of somebody trying to get cute on something and be like, “Why don’t I have a family member sign a long-term lease for $1 a month or something like that and then see where that goes?”
I would like to think that if you brought that lease into a court, they would see it as a clear case of trying to hang you up for five years. I have to say that many surprising things happen in court and in life that I would not assume anything about it.
I have a case that was in bankruptcy and the courts look like they’re approving a bankruptcy plan that is completely unfeasible in the sense that if I turned around and offered those terms to a borrower based on the income that they’re making, any registered mortgage loan originator, anybody would lose their license and probably be thrown in jail if they gave somebody this type of mortgage based on their income.
You have to tell people what is the monthly payment and what is the guy’s annual salary?
The guy’s monthly salary is roughly $1,700 a month. The guy’s payments outside of bankruptcy are about half that, about $800 a month.
Like a car payment?
No, that’s the mortgage outside of the arrears. He makes $1,700.
The principal would not be approved by a mortgage loan originator.
Plus, they’re going to make payments starting at $500 a month up to $2,000 a month in payments for the arrears.
He must be planning to win the lottery at some point, or he’s got a trust fund that kicks in.
The best way I explain this is that’s like saying, “I’m thinking I’m going to be a millionaire in five years. Mr. Banker, can you give me a loan for this $10 million house because I think I’m going to be there but I’m not there yet?”
It’s my virtual income. It’s coming, it’s there in the future waiting for me.
Whatever you expect could happen in a court, I’d say expect the opposite sometimes.
You’re saying that a bankruptcy court approved this plan?
A bankruptcy judge, a federal judge who understands finance in theory and who believes that dreams can come true.
They want to give the guy a chance. I’m all for giving people chances.
There’s something else known as setting people up for success or failure. That’s a real thing too.
The movie, Dumb and Dumber, comes in my mind. She didn’t say no.
If I’m recalling correctly, this is not your first go-round with bankruptcy for this borrower, either.
Second or third, I don’t even know.
Were all the plans as crazy as this or is this truly the nuttiest?
They were all similar like this and they’ve been rejected multiple times. For this time around for some reason, it’s like your child asking for a cookie after like the tenth time you’re finally, “Yes, you can have the cookie.” It’s what I feel like on this one.
Third time’s the charm as they say. We look forward to hearing more about how that goes. I’ve had another wave of appreciation. I have to say once again, what I loved about and talking to all those folks is that I feel like I remember when we were new, when I was new. I don’t know how you felt when you were new but that feeling of confidence you get when you know you can talk to somebody. I felt people were like that. I understand for the first-time what Scott Carson, our mentor, must feel because when you feel like you’re empowering people and they’re going to go out and do something, it’s cool.
There was a question that came after the episode, which is actually by my mother, “What happens when you lose money on a deal?” A great title for this episode would be, What Do You Do When You Lose Money on a Deal? What happens? Gail, you had a deal that didn’t turn out for the positive as well as myself. Everyone always talks about the rose beds. Let’s talk a little bit about some of the negatives of the business, especially on some of these deals. If you’re in this game long enough, it absolutely is going to happen.
This is our main topic. Thank you for reminding me of my greatest defeat in this world. It’s been almost a year. I had almost forgotten but you’ve reopened the wounds, let’s just go there. I obviously haven’t had the pleasure of knowing you since you were a small child but I’m guessing that you grew up with pretty high standards for yourself and pretty perfectionistic. That was me and I don’t like to lose. I don’t like to fail. I know no one likes it but it sets off in me a cascading effect of first shock and horror then guilt, shame. It’s this total feeling of revulsion for me. Let’s talk about the emotional side of it first. I bought a vacant property in a midwestern state. It was the first vacant property I ever bought. I thought I was being clever about it. I understood because it was a cold weather state and the house had sat vacant through a winter that there were definitely going to be plumbing problems. I tried to go into it with very open eyes.How people react in tough times is what would show their true colors. Click To Tweet
I had two people look at it for me before I bought it. They both came back and said, “We don’t love the neighborhood, but the house looks good. The roof needs work.” I knew about that part. The house itself, the inside pictures were absolutely charming. There was even a stain glass window. I fell for that. I bought the thing. After I renovated the whole inside to the tune of about $6,500, fortunately, I hadn’t done the roof yet. We found out that there was a very severe structural problem that could not be overcome no matter what or not for less than $40,000, which was roughly twice what this place was worth.
The walls were moving a little bit. The roof was sliding off.
It was a fun house, the wavy mirrors, wavy walls. At first, I was mad at everyone. I was mad at the people who looked at it for me. I was mad at the preservation company who came in right after I bought it. I took pictures of everything and somehow did not notice a major problem that seemed so obvious after the fact looking back. We ended up selling it to a local investor to use as a rental and losing $4,000, which I know if you only lose $4,000, it’s a win. For me, this was my first-time losing money on any real estate deal. It set off three weeks of deep moping. I wasn’t in such a funk about it. How about you? Are you able to fail and be like, “Today’s a new day, I’m fine?”
I always joke that every day I always say, “The sun is shining, the birds are chirping.” People look at me like I’m nuts, which I am.
I’m at the age where I have friends who are like, “If I wake up in the morning, I’m like, it’s a win.”
It drives me. It pushes me more. The thing I make sure I’ll do is to reflect on what could I have done better or differently. In my instance, step back a property in my favorite state of Ohio that was similar to yours. It’s at what the proverbial Scott Carson stay away from, “It’s so cute house.” It was a nice house. It was a double lot.
I want to say I almost bought that one. It was a very cute house.
The house was cute, the borrower, on the other hand, was not. In this instance, what happened was the basement got flooded because the drain got clogged, which could have been resolved by a simple $150 plumber coming out to Roto-Rooter it. When we had discovered this, the borrower moved next-door and was renting the house next door. When we discovered this, first we tried to pump the water out of the basement and pump it into the yard. The neighbor was a former worker for the water department. The minute we started doing that, he called and said we’re illegally discharging water. The city comes out and says, “You can’t do it. You have to pump it into the storm drain 100 yards down the street.” I’m like, “Do we need a permit? Do we need anything?” “No, you don’t need anything. You can pump it and let us know.” I got my preservation company set to pump the water out. A lot happened in between where the borrower wouldn’t let us in the property. He’d stand at the front door and basically say, “If you step on my property, I’ll have you arrested.”
This whole thing that I’m talking about was over a span of six months. This wasn’t day after day. This was a daily battle where I was spending easily an hour per day trying to resolve this. When you think about the time spent, especially where you value your time at, I was spending almost all of my note time on this asset. What was comical is we go to pump it and then another inspector comes out and says we can’t pump that. We have to pump it to a storm drain, which is right in front of the property but accused us of illegally dumping it. I’m on the phone, I’m like, “Why would I run a hose 100 yards or 300 feet where I could’ve run it twenty feet and started pumping?” I had the name, contact information and the date because I keep copious notes a lot of times, of who I spoke to at that time. Come to fruition, the house was full of mold and needed about $15,000 mold remediation, needed a new roof, probably needed $30,000 to $40,000 worth of work. If I would have done the work, I probably could have gotten broke even or even made a buck.
When you factor in the time that I was going to spend on this to do it, I found a contractor who was interested in it. We did an owner financed deal to him with a six-month balloon on it that we ended up turning around and selling it to him. I ended up out of pockets, file numbers honestly between $3,000 and $5,000. One of the things is how you deal with your JV partner on that. Sometimes on these deals that go south, instead of trying to push, fight, and struggle to get through them, sometimes you’re better off getting out and biting the bullet early on. Cutting your losses when you know exactly what they are. On this one, I didn’t have the option to until I actually sold it. I’ve had deals that I’ve made money on that may have done better if I would have done things differently or gotten out of a deal sooner.
I see this a lot on the fix, flips and so on. Basically, they get caught up and they keep thinking about, “Maybe this or maybe that.” With a note, when especially you take the property back, which in this one I ended up Cash for Keys. Remember you’re paying insurance, taxes and everything on a monthly basis, your note value is going down. Nonperforming note decreases in value every day you hold it if nothing is happening to it. That’s something you need to understand and how are you going to improve that value on that note is what you need to focus on. Sometimes the best way to improve your value is to get out of the deal.
The contractor who bought it, was he flipping it or was he going to be financed it and keep it?
He’s keeping it as a rental.
Is the ex-borrower still across the street?
I don’t know. He wanted to buy the house. He wanted me to fix the house up and sell back to him. I said, “I’ll consider it.” I want him to get Cash for Keys at that point in time. Technically yes, I would consider anything the chances of happening are slim to none. Gail, did you have JV partner on your deal?
Yes, I did. I am sorry to say it was his first JV deal. It was his first venture into note investing, which made me feel ten times worse. It was a young person. I often have young people who will come to me with their entire IRA, which turns out to be $30,000 or less. That’s obviously the next thing after you finished the grieving period and you get into the, “What do I do now?” period of dealing, accepting something like this that has happened. What I ended up doing with my JV is I would be getting half of the cashflow payments. When we sell an asset, we first pay back the investor everything that they’ve put in. Whatever was left over, we’ll split that 50/50. I said to him, “Obviously, I got money from selling it. That was redeployed into a new deal.”
We decided that I would not take any profits from the cashflow or anything else until he had received all of his $4,000 back that he lost. It’s been a year. I’m almost done paying him off. It’s not a huge amount of money. I did thankfully get him into another deal that’s been going well. With the proceeds from the sale of this one, we bought another contract for deed that’s been paying pretty much right from the get-go. We’ve been lucky.
You made your JV partner whole in a sense. It might have taken a little bit of time and so forth. You did what I’d say is the honorable thing of getting this person, getting them their initial investment back and get it paid over time.
I want to say that I have also been an investor with someone else. This was in 2016 before I did any note deals of my own. That person told a group of us that had invested with him that there was a real possibility we weren’t going to get our money back, but he still expected to pay himself. “I’m going to pay myself and there may not be enough to give you all your principal back.” That is not something any investor wants to hear.
The note investing is a very small niche industry. If you start doing that, you’re going to set a reputation for yourself that will probably not be a reputation you want. For me in my deal, I made my investor whole plus I gave them a return on their investment as well. That’s where the majority of the loss had come from was a little short on the initial investment that got paid back but also on top of it, I want to give them a return on their investment as well. I want to continue to work with this investor. The big thing is when a deal goes well for people, you don’t get to judge someone’s character because everyone’s happy. It’s like the honeymoon phase of marriage. It’s when times get tough, how does that person react in tough times? That’s when people show their true colors. I want to do what’s right. My reputation is one of the most important things for me. Every morning I look in the mirror and I want to make sure that I do the right thing. In this instance, I got them their money back, gave them a preferred return on the deal. I continue to do business with them.
Whether or not that person will ever do another deal with you because they’ve seen that you can make a mistake. Maybe they don’t have the confidence to do another deal with you, but it doesn’t matter. It’s not even in my mind totally about keeping the person. It’s about doing what’s right and hopefully, they have faith in you, and they will do other deals. For me as an investor, when I heard from my deal guy that he was going to pay himself and maybe not even give me my principal back, what kind of person does that? To me when someone is like, “It didn’t work out the way we wanted it to but at the very least you’re not going to lose anything. That’s my commitment to you.”
It’s like you said, “Yes, we all make mistakes.” If somebody tells you, “I don’t make mistakes or something like that,” that’s when you run far away. I don’t know anybody who has never made a mistake. I’ve had people who would call me since that time. When they’re trying to vet me about partnering, sometimes they don’t even know what to ask and they’ll ask, “What questions should I ask?” I always ask people, “Ask them if they’ve ever lost money in the deal and how they handle it?” The person goes, “Have you ever lost money in a deal and how did you handle it?” I explained them that story and they ask, “What could you have done differently or what could you have changed?” There was a point in time in the deal where I was probably a little too aggressive. Sometimes I get too caught up in it. You’re looking at it, it’s like, “I’m dealing with somebody who hasn’t paid a mortgage in so many years. I’m going to be giving them money or I’m catering to them,” which is completely something you look back at it and be like, “Why would you ever do that?” At the end of the day sometimes it’s what you need to do.
I was having this conversation with somebody about something completely different where somebody slips and falls because they’re on their cell phone walking and don’t see the curb. They trip and fall on somebody’s property and sue. It’s like the person’s completely negligent and it’s nobody else’s fault. It’s something like, “Do you want to go through the hassle of this big lawsuit or what happens, or you settle it?” A lot of times people may settle it because it’s not worth the hassle, aggravation, time or the legal expense. Unfortunately, that happens a lot in this country. I don’t want to say it is common, but you hear about it a lot. It’s unfortunate because sometimes it’s cheaper in a way to pay somebody off than to battle somebody in court. Sometimes you have to look at the best interests of the big picture and not get caught in those details. In this one, I got a little too emotionally attached to it. It was one of the first deals that I had to go through something where it’s like, “I’m going to have to cater to somebody who shouldn’t have been pampered.”
We both took fairly small losses in this case but what would you have done? We’re talking about how we would repay it but what if we lost a bigger deal and you lost $20,000 or $50,000?
This is one of the things that I thought I did okay on was communicating with my partner in regard to letting them know up front, “This one’s ugly. This one’s a mess.” If it was something that was that substantial, it would have to be constant conversations with them in regard to what is happening. What I would do is I would work out something where I’d probably bring them into another deal. I get them brought up through another deal or something. I work with them in some way, shape, or form to make sure that their investment would try and get them back to being whole at some point in time. It might not be immediately, but I would have those conversations with them that I would try and get them to a point where it’s feasible.
This brings up a good point. When you’re in a joint venture with someone, one of the things that makes it a joint venture versus alone, something else or a partnership is that JVs have to discuss what to do in any situation. What you’re describing is a situation that would be unfolding, and you would be talking to the investor the whole way along about what your feelings are about what we should do in this situation. It’s a collaboration. It’s not like you’re over here losing the money and your investors are just sitting quietly worrying about what’s going on.If somebody tells you they don't make mistakes, run far away because nobody besides your wife has never made a mistake and loves you. Click To Tweet
One thing is most JV agreements are written that they have participation but also that there’s no guarantee on them getting their money back.
This is more like yours and my personal commitment and our ethos about how we want to conduct ourselves in business.
Everyone I’ve talked to would say they’ll do the same. If it was also $20,000 or $30,000, that’s a different animal. It’s a bigger hill to climb. The way I look at it is whether it was $200 or $20,000, the way you operate your business should be done the same. It’s a matter of how you resolve it. For me, the resolution would be trying to work out a solution where that person might take time but gets their investment back. Not to say, “Sorry, we lost $20,000 on this one. See you later.” They may come back and say, “I never want to do business with you again because of this.” I would still try and find a way to get them again, like you did, cut them checks every month for a period of time to get them back to a position. You’ve got to remember these are people’s money. It could be their retirement, their kid’s college education, it’s real. People go through struggles with that and I don’t want to be the cause of somebody losing substantial money.
One of the important takeaways is that even if you are the passive member of a joint venture, your joint venture should be talking to you regularly and talking to you about all the major decisions that are made. If things go terribly wrong, at least it’s going to be half your fault. Did you have anything else you wanted to say about this topic, or should we move on to Notes and Bolts?
No, we should move on to the Notes and Bolts section.
I’m going to share one that came up. You said it and it was a good reminder for me. I don’t always think about these things, but we were talking about when you take over an asset and there are unrecorded past deeds possibly. Whether there are or are not when you take over a loan, you buy a loan, your deed, if it’s a contract for deed, has to be recorded. That has to be recorded before you write any new contracts with your borrower. When you think about it technically on a contract for deed, if your deed of purchase has not been recorded, you technically don’t own that property yet. You cannot be writing contracts with the borrower.
You said one extra contract for deed in there versus quick claim deed. What you’re referring to is if you buy a property that has a contract for deed, you need to record that quick claim deed before entering into any type of agreement with the borrower.
Thank you for making that clear.
What I’m going to share is I posted this online at one point in time. I have a partner who is on the assignment and they were using IRA funds. We were going to sell the property. The property went from a note that was foreclosed upon to an REO and then to a for sale. It was a title company for the buyer. They reached out and said, “You can’t sign this document or that person that has that IRA. The IRA company has to sign it.” That threw me for a curveball. We sent the paperwork into the IRA company and then they came back and said, “First you need to fill out paperwork that takes it from a note to an REO,” which is a change of investment form that they had. Then they had to sign the deed, the settlement statement, the paperwork, and stuff, which this IRA company is known to be very difficult and very painful to deal with by any way, shape, or form. You put expedited down, which should be 24 to 48 hours and I think it’s 24 to 48 days.
I sent them the paperwork on December 19th, and we closed it. That 48 hours extended a little bit. It took probably three weeks. What I want to point to people, which I didn’t know, is if people have their name on the assignment or on the deed is to sell it. There’s a process that has to go through with your custodian and it doesn’t happen overnight. I’ve got another one that is under contract that has a missing IRA’s entity. I’ve let the seller know the closing title, “Get me the paperwork as soon as possible because it is going to take a week or two for me to get this stuff signed. I need it now if you want to close by this certain date.” Be cognizant of that because you don’t want to have it turn into a last-minute scramble.
We could do a whole show of the recounting of the grievances against title companies. Save it for another day. Thanks for joining us. Go out and do some good deeds.
Thank you, all. A reminder to follow us on Facebook, we have a Facebook page, Good Deeds Note Investing. We have the website, GoodDeedsNoteInvesting.com. We are on iTunes, Stitcher, Google Play and all those fun places. I look forward to continuing these conversations and please join us as well. You will thoroughly enjoy it. Thank you. Go out and do some good deeds.
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