If you’re new to note investing, you may have a lot of questions. What really is note investing, and what are note investors anyway? More importantly, what’s in it for you? In this episode, join Chris Seveney and Jamie Bateman as they take a deep dive into note investing by breaking down five key decisions new note investors must keep in mind. They answer some of the common questions from those who are just starting in the industry and provide clear-cut lines on the areas many often get confused with. Join this conversation as Chris and Jamie help you cut your learning curve so you can take the leap into note investing.
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5 Key Decisions For New Note Investors
Welcome to another episode of the show. I am with Mr. Jamie Bateman. Jamie, how are you?
I’m doing all right, Chris. I’m a little fired up.
Jamie is the one who’s going to rant so I can sit back, relax and say, “That’s what I sound like. That’s usually me going on with the rants.”
It usually is. It’s a little frustrating dealing with attorneys, frankly.
I don’t know if you know Dave Hauser.
I’ve seen the name.
He does life insurances and so forth. He posted, “If there’s one thing that you could eliminate in the world, what would it be?” I put “stupid.” I don’t want to put stupid people, I just put stupid. I’m not saying that people we deal with are stupid by any way, shape or form, but sometimes there are things that happen that just frustrate you to no end. Why don’t we talk about what just happened, Jamie? The stage is yours.You can do very well in business, but just like any business, it takes a lot of hard work. Click To Tweet
My trials and tribulations of the week is I’ve had some frustrations with a couple of different attorneys and their staff. It’s one of those things where if they were only working on my files and my deals, they would be pretty close to perfect. The fact is they’re running a business as well so things get lost. I’ve got a Florida deal that I’m foreclosing on, and we should have been able to file the suit as of early February. Here we are, March 12, 2021. I believe that the paperwork finally went out after I put the attorney’s office on blast saying, “This is completely unacceptable. It takes a month to run title and then I have to ping you to follow-up.” It’s frustrating. Thankfully, they responded quickly to my complaint to them.
I’ve got some other deals in New York that you’re very aware of, Chris, that we’ve talked about before. I was under the impression that the 90-day letters had gone out in late January, which they brought after the demand letter go out. It turns out that here we are in mid-March and those were pulled from the mail. Those have not gone out yet and that has to do with the fact that you’ve got to register in the state of New York if you’re going to proceed with a foreclosure action. The follow-up was initiated by me, not by the attorney’s office. This will play into my Notes and Bolts. It’s frustrating that you’ve got to constantly ping attorneys and their staff. These are intelligent, hardworking, successful people that I trust but it’s frustrating when the system fails. That’s what I’ve been dealing with.
It’s a little bit challenging because it’s like the placeholder kicking, you’ll go an extra point. You expect everyone to do their job and the moment it doesn’t work, they’re the one to blame. It gets magnified 1,000 times. That’s what it’s like in this business because time is money. Unfortunately, we pay a lot of money for these services. If they dropped the ball and kicked the field goal then they’re going to hear it. It’s going to get magnified.
It’s not personal, it’s a business. I’m trying to make a profit here. They get it but it’s still frustrating.
My trials and tribulations had been I got my insurance claim resolved. I worked a modification with a borrower who reached out directly to me. That is one that I got resolved. I’ve got two other modifications in the works that my Pennsylvania attorney is handling as well. Those are good. One of the things I’ll mention and I’ll hit a point on, I don’t know if I should say it now or say this in my Notes and Bolts. Let’s just say, try to limit your servicer’s interactions dealing with insurance. The reason I say that is I have my own force-placed insurance policy. The servicer or the client service rep or whatever you call these people was trying to explain to my borrower that, “There’s force-placed insurance and it’s got liability, it covers all these things.” All of a sudden, I get two claims because people are complaining, “I need a new roof. I need to redo the floors in my house,” and they think that’s insurance claims. They’re getting this from the servicer, some components of it. When my servicer starts talking about liability insurance and these things when they have never seen my policy, that’s scary.
To chime in quickly because I had a similar episode where the servicer was telling the borrower, “I know you have FPI and it’s fine. We can file a claim and everything.” It’s like, “I have to file the claim if I want to file the claim.”
That’s the thing that most people don’t understand. I’ll say with my Notes and Bolts, my early one is the borrower doesn’t have the right to file an insurance claim. That’s your insurance policy on the asset and it’s up to you. In one situation, I told the attorney, “Let them know there’s a $5,000 deductible that they’ve got to come up.” All of a sudden, that ends the story quickly. That’s been my week that I’m working. I have somebody helping me on some marketing stuff. To get a little teaser, I’m working on something that I don’t think anyone’s using in this space. I’m going to see and test it first to see if it works. I don’t want to roll it out yet and have everyone copy me and steal it from me.
No one would do that.
This isn’t a copycat business. It’s like the NFL. This is a copycat business from that perspective. That would be interesting. I’m teasing that out there and trying to wrap up my membership group. I’m trying to get that launched for May 1, 2021. The website is pretty much done. Now, it’s branding a lot of the content that’s going in there and we’ve got a lot of cool stuff. It’s in-depth stuff that I want to put in there. It goes way above and beyond the typical 30,000-foot level of what’s a note type of thing. I’ve been with a lot of case studies and a lot of interviews and stuff like that.
We’ve talked many episodes ago about your plans. You’ve already got the mentorship program, which I’m doing as well. I can’t deny it. As part of that, you do some asset management if people want to have you manage their assets.
I talked to a guy and we’ve been working on these three loans. We’ve got the collateral on them and he’s sending those my way. I’ve got that working too.
The membership site is a separate thing but then you’re going to put together a training program inside of that at some point most likely.
It was originally a 2021 goal but the way things are looking, it’s probably going to be 2022. That’s going to be something completely separate. I may do some other stuff in advance of that. That’s the stuff that people know about. I’ve got all these stuff that nobody knows about I’m working on too.
You’ve always got 27 things brewing. I’m just trying to distill it down for the readers.
One thing I want to mention is I started doing Clubhouse on Sunday evenings. We started a new club called What is Mortgage Note Investing? One of the things for you, Jamie, and some of these other investors as part of having the club that I started, I’d like to have other speakers host something whether it’s a weekly or monthly basis. I talked to Cody Cox and said, “Do you want to have something once a month or once a week?” You come on and have coffee with Cody or something like that and talk about different things or topics. I’m sure people get sick of hearing me talk all the time. It’s also good to get other people’s opinions on other things there. If there are investors out there who are interested, feel free to reach out to myself, Jamie or whatnot because I like to try and set something up on there where people have some periodic conversations. It’s another avenue and it goes back to my whole co-elevation thing about trying to get everyone. If you, me and five other people have something, we each bring in a certain segment of people, it helps all of us be better known.
You’ve been doing those at 6:30 on Sundays?
Eastern, yes. Our main topic of the day is, Jamie?
Five key decisions for new note investors. You get a lot of people who are new to notes and they have a lot of different questions. Some of these five decisions I wish I’d given more thought to, and some of them I gave plenty of thought to. This will help somebody cut their learning curve and be able to take their leap into note investing if that’s what they want to do.
It’s a very good topic that people have to think about. Can I do number one because I’m probably going to use the biggest word I’m going to use all month? I don’t even know if it’s a word or not, it’s passivity. First, I want to talk about how passive or active you want to be. That’s a really important question. Don’t you think, Jamie?
First: How Passive Or Active You Want To Be
Absolutely. We’ve talked about it before. Note investing can be passive if you set it up that way but it’s generally pretty active. First off and I’ll let you run with it, you’ve got to define passive versus active. It’s not a physically demanding job or business by any stretch. In that sense, it’s passive. You can do it from a desk, your computer or phone. In many ways, if you‘re going to scale, it’s very active. Would you agree?
It goes to the question, do you want to invest in notes or do you want to be a note investor? The difference is investing in notes is okay. I own a few notes here and there. I do some private lending. For the most part, it’s passive. It’s like owning a rental here and there. I consider that passive. If you want to be a note investor where you build a portfolio, it is active.
We’ll get on some other subtopics or other questions which play into that as well. For myself, I’ve got my self-directed IRA. My wife has one as well and that’s passive. I buy strong performing notes or partials. I’ll check the balance and payments. Other than that, I’m not doing a whole lot. If I only did that, I could call myself a note investor and it wouldn’t be very active. Most of my time is not spent on that.
Most of us chase the bare returns. To chase the bare returns, you’ve got to run a nonperforming. As you’ve started with your trials and tribulations, you need to be active, constantly checking on things and managing them. Otherwise, things will continue to slide as your money. At the end of the day, you did all that work for 10% or 8%. It’s like I could have invested in a partial with somebody at 8% and have nothing to do. I could have been on the beach sipping Mai Tai.Everything varies so much by state with the note investing business. Click To Tweet
What is your drink of choice, Chris?
I quit drinking a few years ago. I technically don’t have a drink of choice. When I did have a drink of choice, it was beer. I could digress but the Tree House Brewing up in Massachusetts, a very well-known company now, I went to high school with those guys. They have good beer. Northeast for microbrews and stuff. People wait three hours to buy their beer.
New England IPAs, that’s where that all came from. Anyway, the second key decision for new note investors is?
Second: You Invest In The First Versus Second.
You invest in firsts versus seconds. I was talking to somebody about this because they asked me about it. They’re like, “Do you invest in firsts or seconds?” I said, “There’s no right or wrong answer to which one is better. It’s more what fits you?” It’s like, do you drive an SUV or sedan? For me, my personality of being highly impatient, wanting to be in absolute control and moving 1,000 miles an hour, seconds don’t add to this description because you’ve got to be patient. You have to wait. It’s a waiting game and you’re not in control. My personality does not fit seconds. Other people who have patience, God bless you but I don’t. Seconds can be great.
Why do you say they take more patience?
A lot of times especially if they’re underwater, you have to wait because you can’t foreclose. If you try and they filed bankruptcy, you get wiped out. You have to wait and see. Also, you’re taking it subject to the first potentially, which if you don’t want to take it subject to the first, then it’s okay. We have to continue to wait and see what happens. Maybe get them to try and work. Your workout period is much longer from what I hear. I’ve only bought a few seconds in my career but speaking with other investors, they said it’s much more of a patient waiting game to see what happens, then try and get a workout or a lump-sum payment.
For me, it seems safer to get into firsts. That may or may not be true but I felt more comfortable dealing with first because I understood them. I understand what a second mortgage is or HELOC. You’re in first position so you’re ahead of the second. You’re better protected in that regard. You’re one step closer to the collateral. A lot of people do get into seconds because generally speaking, they’re less expensive. It’s less money-intensive. You don’t need the capital upfront. It’s one reason people get into CFDs. That’s the appeal of seconds. Generally, you can get a higher return or at least that seems to be the case as far as the people who invest in seconds, but you’ve got to be patient.
You’re also focused more on the borrower a little bit. Personally, we’ve started to focus more on the borrower than we did maybe a couple of years ago, given the pandemic and the unemployment issues. The general rule of thumb is with firsts, you’re looking at the property more than the borrower. With seconds, you’re looking at the credit and pay history of the borrower, their employment situation and that kind of thing. Another thing I’ll point out too is there are a lot more firsts out there. There are more first investors but there’s a lot more deal flow. Seconds are a niche within this niche.
One thing I want to comment on that, I didn’t mention my trials and tribulations but I closed on over 30 assets at our first position notes. The average price on these is about $5,000 average acquisition price. You buy a second at $5,000 and it may have a balance, call it $30,000, $40,000, maybe at $0.15 on the dollar. These may have balances of $15,000 to $20,000. There’s not enough skin in the game for me. The total UPB was close to $800,000. I’m getting them for $0.20 on the dollar. Even if I collect and make 20% in each one, $1,000 times 30, that’s $30,000. They’re not bad. There’s work involved. For me, when I talk to people and they’re like, “That’s a lot of work.” I’m like, “Okay. I do my work instead of sitting in front of the TV.” It’s not late at night and it’s not taking time away from my family or something else. What would you rather do? Watch the latest reruns of Friends? I’d work on some notes. For me, I’m a numbers guy and I like research.
What you’re saying is you can get firsts at the similar price point as seconds. We’re both more comfortable with firsts.
At number three is, Jamie?
What states are you going to invest in? This is something I didn’t give enough research to initially. I don’t mean that it was a big mistake, but I underestimated the importance of this question initially. Everything varies so much by state with this business. I tell new note investors, “Pick 3 to 5 states that you’re comfortable investing in.” It depends on your background, your experience and all of that stuff. Some people only want to invest in a state that they live in. They want to be able to drive by and that’s fine. If you’re limiting yourself to one state like you live in California, you want to invest in firsts and you’ve got $20,000, good luck. You do need to open it up a little bit to have 3 to 5 or a handful of states that you’re willing to invest in. If you get up to 10, 12 states right out of the gate, I don’t know if that’s smart either because you’re spreading yourself too thin. You may not have boots on the ground, attorneys, your team in place and all that stuff. It’s something to research and understand the laws, judicial versus non-judicial. It’s important.
I used to go hunting when I was in high school and stuff. A buddy of mine used to always use buckshot and I used to use slugs. The difference is a slug is one bullet and a buckshot is little BBs that spread everywhere. I was always a big fan of shoot for shit. That’s why he uses buckshot and I use the slug. For note investing, you want to use the slug. Unfortunately, I use the buckshot. I just shot over the whole map of the United States and I was buying stuff. It’s not what I recommend. It’s done well for me but you’re right. I talked to some people. I was working with some of our mentoring and they mentioned it’s taking them an hour to review every asset that they’re looking at.
I’m working with them to get that down to no more than twenty minutes, but also they’re looking in many different states. That was part of the problem. Now that you mentioned that, I probably should have that person also target specific states. I know they’re looking at non-judicial but still there’s a lot of non-judicial states. Maybe have them target a little more focused on that conversation with them because that could be an option. You want to know what state you’re going to invest in. The second part to that is research the states. Call an attorney and say, “Can you just walk me?” Spend a half hour. Maybe it does cost you $100 but it’s going to be the best $100 that you spent because you’ll understand that process, what it takes, and some of the gotchas that people went through.If you're on title, taxes and other nuisance issues are going to come straight to you. Click To Tweet
Most of us tend to start out in the Midwest, maybe Southeast, but the price points are lower than the Coasts. Generally speaking, the laws are somewhat friendly to investors. I still haven’t bought in Ohio but you can speak to that. Michigan, Indiana, Missouri, that’s where I started out. I’ve got a lot in Michigan still but I’ve gravitated more to Georgia. It’s a key question. A lot of people won’t touch New York because the foreclosure process is very long and expensive, and your attorney drops the ball.
If you want one in Ohio, I have a client-managed loan in Ohio, which is performing but unfortunately, I still get charged client-managed even though it was performing because I never switched it back. Number four is, Jamie?
Fourth: Are You Willing To Buy CFDs.
Are you willing to buy CFDs? If you’re brand new to notes and you have no idea what a CFD is, it’s a Contract For Deed, also known as land contract. Research it. It’s a form of seller financing, owner financing where the transfer of title doesn’t take place until the loan itself is paid off. As the note investor, you hold legal title to the property. The borrower holds equitable title. These vary by state greatly. There is more liability and more risk with these. Generally speaking, you’re on title, taxes and other nuisance issues and that kind of thing are going to come straight to you. There can be an upside with being able to do a forfeiture versus foreclosure, state-dependent. Are you open to CFDs? You can get them a little bit cheaper than regular note and mortgage, and note of deed and trust. That’s one benefit to them. You and I both said, “Yes, we’re open to that.”
I’ll still buy them but I prefer notes. I could go on a rant because I was laughing. Somebody posted on BiggerPockets, “CFDs are the greatest thing ever and all this stuff.” I’m like, “You don’t know a lot about CFDs.”
Everything he said could be true for just a regular owner–financed or seller-financed note anyway.
The problem especially on social media nowadays is people see one person post something, and then they follow her. People are like, “CFDs in Virginia, Maryland or Georgia.” CFDs in non-judicial states are pretty much worthless. They’re worse. They suck in Florida, Georgia, Missouri, Mississippi, Tennessee, Maryland, Virginia and West Virginia. The only state they’re good in is Indiana and Michigan. Ohio, if they’re less than five years. Other than that, no.
In Missouri, there’s no real benefit.
You can’t do them in Texas and Oklahoma. I rant all those states off because the foreclosure or the process is the same. All you’re doing is adding risk.
They do generally trade a little bit lower in price. You may be able to get a higher yield on a CFD versus a note.
When you go to sell it, you convert it.
It’s just something to think about. Do you want to take on that? If you’re putting force-placed insurance, it’s going to cost you more because you should be adding liability. Do you want to play in the CFD world or not? It’s a key question.
It’s a lot more due diligence–intensive. You’ve got to pay a lot more attention to the title report because there’s not going to be title insurance on that policy. You’ve got to check the documents. What’s recorded? What’s not recorded? There’s a lot more work and some risk involved with the CFD and the collateral.
If you want to learn due diligence, get into CFDs. We’ve been converting a lot of ours over to notes and mortgages. What’s number five?
Number five is, do you do performers or nonperformers?
It plays into question number one about how passive do you want to be.
It’s not only that, but even how thick-skinned you are and how tolerant you are. When you get a call the day before foreclosure from somebody crying on the phone, “Please don’t foreclose on me. I have no money.” Do you have the courage to keep them in or not keep them in?
You’ve said before that this is a conflict-oriented business. It doesn’t mean you’re trying to pick a fight with people, but you have to be willing to follow through with the consequences of not paying your mortgage, for example.
You can’t be a Weeble Wobble. If you’re Weeble Wobble, you’re going to get crushed and you’re going to keep getting punched. You’ve got to remember that it’s your business. You’re in control. The attorneys and servicers work for you. You have to manage them and take the authoritative position on them. Let them know if they’re not doing something right and they’re doing something wrong, you have to have that conversation with them. In nowadays world, everyone wants to blast people on Facebook and not have a conversation with somebody. You’ve got to pick up the phone. I have one attorney who I picked up the phone with. I said, “Let’s chat because I want to talk about some of your systems.” Most people like to know if something isn’t working in their business, “This is a little slow. Is there a way we can work to make it quicker? Is it just human error?” Sometimes it’s human error but they like to know. I know and they know that I’m not the only one that probably has this problem, but I’m the only one that has the stones to bring it up to them.
I will admit I get into that. It’s not that I’m afraid to have that phone call but in my mind it’s more efficient to send an email and hope they respond. Picking up the phone is key.
It’s even sending the email. I know people who’ve let stuff go to tax sale because they were like, “I didn’t want to deal with it or I wasn’t sure with this.”
Fifth: You Do Performers Are Non-Performers.
I do have more to talk about with number five, but we can talk about this on another episode. I have a note that I bought in Jackson, Mississippi. It’s one of the first notes I bought. We ended up reworking it and amortizing it. There were many investors who lost their shirts because they were too passive. They were not willing to take ownership of the deal. We did take ownership of it and now the guy is paying every month. It’s good to go. It’s not a huge win but it could have been a huge loss. Back to the number five, performers versus nonperformers, there is one analogy. I didn’t come up with this by any means, but if you’re buying a strong performer, that’s more like a buy and hold rental property or a turnkey rental. There are some key differences between notes and rental properties but it’s more of a cashflow play.In investment, there is no right or wrong answer. The question is, which one is better? Does it fit you? Click To Tweet
There’s not a lot of opportunity to add value. If you’re coming from the hard real estate world and you’re new to notes, you can equate a performing note to a rental property where you might make a couple of hundred bucks a month but that’s probably it. It’s boring. Nonperformer is more like a fix and flip. You’re buying it at a greater discount. You’re able to add value to that asset whether that’s exiting through a loan mod or foreclosure, deed in lieu and then ideally sell that in 6 to 18 months for a profit. We’d buy both. I know you do too, Chris, and that’s a good way to go. You should buy some performers to keep the lights on. Any thoughts on that?
You pretty much touched base on all of them that you need to look at and understand. The one thing I’ll mention that some people ask a lot is, “Is the due diligence the same on each asset type?” Absolutely. You should have a system in place and do it for every single asset because some that you think are performers are nonperformers. Some that are listed as nonperformers are actually performers.
That’s true. Assume all of your performers will go nonperforming.
Jamie, let’s do a bonus question.
We promised five questions.
There’s a key decision that’s probably one of the most important ones as well. This is almost a two-part question. Will you use OPM or Other People’s Money? If you do, at what point?
I think its key. I don’t see how you can avoid using other people’s money if you’re trying to scale.
If you’re independent and wealthy, you don’t have to. If you’ve got Jamie Bateman money, you don’t have to.
You don’t want to be babysitting attorneys and borrowers if that’s the case. No matter who you are, I don’t care if its notes or whatever your business is, you’re going to run out of your own cash or at least the cash you have set aside for this business. I don’t think you should be using other people’s money until you have some type of track record. Maybe you can say you’ve been in the business for ten years. You need to have worked your own deals first and show it. I don’t know about you, but I don’t want to throw money at somebody or give them money unless they have a bit of a track record of having done some successful deals on their own. What are your thoughts? When is it appropriate to take other people’s money for your business? I say take, not to take and run away with.
It’s to bring on investment. It’s like you mentioned, you need a track record. You’ve been through some assets and you have to truly feel comfortable. You can’t make the decision based on, “I used all my money, now I need to get other people’s.” It’s to a point where I feel comfortable. I know what I’m doing where I’ve used my money that I’d be comfortable bringing on an investor as well. For some people, it could be 7 to 10 deals. For other people, it might be twenty deals. I don’t think after 2 or 3 deals, you’re in a position where you have the experience that you should probably take on. It’s my personal opinion.
One thing I’ll add too and I haven’t done this myself, but some people get into brokering notes and certainly check the licensing requirements for that. I equate that to wholesaling on the hard real estate side where that is a way. If you don’t have a lot of capital but you want to be a note investor, that is something to look into to be able to generate some cash in the short term, and put that toward buying your own assets. You can then develop your track record from there. I’m not recommending it.
I’ve got to say, we can have a whole note conversation because brokering notes, people think that, “I do note investing, I’m just going to start brokering notes.” It doesn’t work. This isn’t like real estate where you can find a lead and broker it. You need to understand the business and understand what the pricing expectation is on that asset. You need to know how to buy a note.
There are experienced note investors who continue to broker because it helps with the cashflow and maybe they don’t want that particular asset. There are different ways to structure it. I’m not an expert on brokering notes.
They don’t own many notes.
You can also flip a note without adding. If you buy it at a discount, you could sell it the next month. It’s not a brokering per se but there are ways to generate cash of your own to be able to put into your own note investing business. You can develop a track record so that down the road, you can take other people’s money.
One of the things that I’ve mentioned with people when they were looking at this is if you have somebody and you want to take on less risk, buy a strong performer, sell a partial. If you buy it at 12%, you sell somebody a partial at 8% or 9%. You’re arbitraging some of that money and getting a good component of your money back that you can then reinvest and buy a second note. Now you own two notes. You’re not going to make a ton of money but you’re building that experience that allows you to expand later on.
You’re deferring some of your profits and your cashflow but you’re scaling your business and building your track record.
Third: You Want To Make Money, But It Shouldn’t Be The Most.
The reality is when you get started, experience and track record should be 1 and 2, and profit should be 3rd. You want to make money but it shouldn’t be the most. If you’re focused solely on the profit, you’re probably not going to expand your business as successfully as you would. It covers the 5 plus 1 of the key decisions for new note investors. Jamie, how about a little Notes and Bolts?
We’ve essentially already hit on this but my Notes and Bolts is that when you’re running a note business, think of yourself as a conductor of an orchestra. In a sense, you’re in charge. You hit on it but don’t wait for your attorney to run the show. Don’t wait for your servicer to tell you what to do. Don’t wait for your investors to tell you what to do. You’re in charge. You don’t need to be the expert trumpet player or whatever but you need to be coordinating everything. That’s where the systems, your organization, follow–up and all that comes into play. Think of yourself as the conductor of an orchestra.
What I didn’t realize is how much my full-time job played into being able to manage notes. When you manage a construction project, you get 50 different subcontractors and one after the other. When you think about a note, it has a life cycle of one phase to the next. During the whole process as a manager, you can’t just sit back and let people say, “I’ll be doing this,” and be like, “That’s fine,” because it impacts so many other people. You’ve got to be like, “I need you done on this date. I need this done,” and then you pin it to track it. Make sure it’s done by that date but you don’t wait until that date a week before, “Is there anything you need from me? Are we ready to start doing this once we’re ready?” You’re setting that tone of not waiting until something is not done to realize that you need another two weeks. That’s one of the things for me that I’ve found when I look back is very important. That experience that I’ve had, which is a benefit for me in this business from a management perspective. It’s like being in an orchestra and stuff.
My Notes and Bolts, I touched on it a little bit on that force-placed insurance as well. One of the things I’ll mention and it ties into this too is if you have CFDs, you want to make sure you have liability insurance. The other thing I’ll mention is some services will insure it for the unpaid balance of the loan. You have the option of unpaid balance or replacement value of the property. I typically will do it based off of the replacement value of the property. It does cost a little more. I know a lot of people say, “I’m never getting that money back.” That always has me scratching my head. The reason why is if you send out the letters and the borrower starts making payments as part of the escrow component, the second half of that, if it’s nonperforming and your loan has equity in it, gets added to the charges. The only time you lose money on it is if it’s an underwater nonperforming loan. On those instances, you’d want to have insurance on it.
I’ve got this one that was arson. It was right around the day before the borrowers were supposed to get evicted. The place got torched. I had it insured for a replacement value, which was probably five times what the UPB was. Think of the numbers perspective that can pay insurance for a long time. For the money that you’re paying out $1 per $1,000 or $0.50 per $1,000 or whatever, a $100,000 house is costing you $1,000 per year. You have one claim that you had that on. It’s going to cover that for a long time. It was one of the things that I don’t go cheap on. I pretty much don’t go cheap on anything. By the way, I bought Jamie a computer.
The only thing you go cheap on is buying your assets, purchase price.
I get them at a good price. I just paid $0.20 per $1,000 on 30 assets. There’s nothing wrong with that.
The way I look at FPI as far as the cost is it’s the cost of doing business. It does get added to the arrear. If you’re bidding on an asset with a lot of arrears, I do pay attention to that. It is there but I don’t bank on it. You may or may not recover it. You probably will get those costs back but don’t go cheap on the monthly expense.
If you do send it to your servicer, make sure they are putting it into the system as charges, not waiting six months. I have a borrower who’s got a $2,000 loan balance. He went to go pay it off. A few months ago, we got to pay off and my servicer didn’t add all the force-placed insurance for the last six months, which shame on me. I should have checked it as well. They add it in and now the guy’s made two payments but his payoff went up. The guy is flipping out, “I made two payments. How did it go up?” I told the servicer side, “This guy called me and asked this question. You can explain to him why it’s gone up and the mistakes that you made on it because this is on you. This is not on me.” “It’s a client-managed.” We could rant all day long. Anything else, Jamie, before we wrap up this episode of the show?
People enjoy the fact that we tell it like it is. I don’t want people to get too discouraged. Note investing is a great niche but there are a lot of moving parts. Like any other asset class or business, there are pros and cons to it. I hope we add value each week.
We can be pessimists but you can make money in this business. You can do very well in this business but it’s like any business, it takes a lot of work. If anyone out there has ever owned a business, it’s not all rainbows and unicorns like some of these gurus tell you. It’s a lot of work. It’s a lot of frustration. You go through a lot of these crazy stories that you could probably see. It’s like watching Cops. I always joke that if I ever feel like my life is bad, I’ll go watch Cops. Nonperforming note investing is like an episode of Cops. I don’t think cops are on it. That’s all I’ve got. For people who read, we would greatly appreciate it if you could go on iTunes and leave us a review. We’re on Stitcher, Google Play, Amazon and any of those listening stations. Go and do some good deeds. Thank you, everyone.
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