E331 | Matt Kelley on Risk, Returns, and Real Talk in Note Investing – PTNC Know Your Speakers Series

Welcome to the Paper Trail where we follow the journey My journey through the world of a CEO of a mortgage note fund.

I'm Chris 70 and after years of buying, managing and selling notes with 70 investments, I'm here to share the real stories behind the deals, what went right, what went wrong, and what I wish I knew earlier.

From non performing loans to seller financing to private lending, this show is about more than strategies, about growing your business, learning to follow the paper trail and.

Doing the due diligence that separates the pros from the rest.

Now let's hit the trail running.

Welcome to this episode of the Paper Trail Podcast, another episode of get to know your speaker for the conference we are hosting the paper trail conference September 18th to 20th and Chandler, Arizona to today I get to had sorry had the honor to speak with Matt Kelly.

Matt is a full time note and real estate investor acquiring nationwide delinquent loans and real property.

As a certified foreclosure expert in the states of California, Arizona, Nevada and Washington, Matt has been called upon as an expert witness in the fields of foreclosure, default loss, MIT and has advised some of the largest mortgage servicing companies, credit unions, law firms and investors throughout the United States.

I have known Matt for several years.

What I love about Matt and what we dive into on this episode and getting to know Matt is there's no bs.

Matt calls it like he sees it and had a great time speaking with Matt, talking about the notes space.

Learn more about Matt and where we see things headed in this space.

So hope you get to enjoy this episode and see you in September.

Matt, how are you doing today?

It's a good day and I'm always happy to catch up and chat.

Chris Yep, as I mentioned in the intro, Matt is one of people I respect the most in this industry.

Matt, you know, calls it like he sees it, which is something you don't see a lot of in this space and something I'd like to think I do as well.

When you're trying to find information or learn about this space, if you don't know who Matt Kelly is, he's definitely somebody you definitely to know or learn more about.

And with that Matt, why don't you tell us how you got involved in note investing in the first place.

Again, I've known Chris for many years so you're going to be able to also look at him and be able to see if I'm attempting to bullshit anybody, which there's no point quite honestly.

We both on here underwrite risk and debt for a living and I Got started working at a company that was a foreclosure trustee.

That's a company that processes the legal paperwork involved in the non judicial foreclosure process in a total of 13 different states.

So I learned lot within a very short period of time about a lot of different states, their collection processes.

But in that position I was also able to enter, not only interact with, but see where a lot of notes were coming from.

And I was seeing a lot of note investors do extremely well.

And I will emphasize by attending conferences, one of the things to do is look around the room.

And if you can look around that room and say, my God, if some of these people are doing it, I sure can too.

There's some truth to that.

And I got invested in note investing partially because all roads do lead to notes.

I have purchased properties on the courthouse steps.

I have invested in real estates in a variety of different ways.

And a lot of it boils down to the note.

And there's a lot of money to be able to found moving upstream.

So we found that rather than buying on the courthouse steps and the wind and the rain and the snow, there was a lot of power and a lot of profit to be able to moving up the food chain and becoming the bank those that actually own the note.

And especially at the time I was doing so, there was a lot of opportunity.

And you've also had a focus not only on first and seconds, which I know in the past seconds were something you looked at more frequently.

And I know if anybody ever wants to debate Matt on for seconds make sure you do a lot of background on it.

But you've done both, correct?

That is correct.

And I did want to stress that part as that I'm not.

I believe in opportunity and that is there is opportunity all over the place.

And it does take place in a lot of ways.

But I have come from a company with considerably more resources and a lot more underwriting power to now that I'm an individual investor with completely different outlook upon the entirety of note investing as there is a place and there are individuals for first mortgage note investing, which is great, but also there is opportunity in a lot of ways for second mortgages which can on occasion exceed that of even firsts.

Yep.

Yes.

I've known people, including yourself, who have hit some really grand slams on those seconds and so forth you mentioned.

And one thing that I've always known you for is the underwriting process and going through that because a lot of things that people see online is all the nice sexy, shiny objects of how to raise money or how to do this or that.

You like to talk a lot.

And I'm an engineer by trade, so underwriting is something that I enjoy as well.

Talking about which a lot of people might find boring, but to me, that's where you make your money.

Wouldn't you agree?

Yes, I wholeheartedly agree with that.

I do believe that underwriting is the most important part.

Raising money is exceptionally easy, especially when there's a deal in hand, especially when there's opportunities about.

And there are a lot of notes available, not just on the brokerage websites, but there are a lot of notes in various places that one can go to, some of which have different information packages.

But I will premise that as again, as we underwrite risk for a living, I don't really trust anybody when it comes to the information being prevented.

I can trust.

But verify and being able to verify all the information, whether it be lien, position, delinquency, status, documents of record, just all the little nuances come to it, that is something that can be very easily learned, very quickly learned.

And there's also other individuals out there that one can run the information by.

As this is a community, not only a community within the conferences that one can attend, the online support groups of the Facebook groups, but additionally there's teams of individuals from title companies, the actual foreclosure trustees or foreclosure attorneys.

And I do want to stress that they do not want you to screw up so because if you screw up, it makes their life more difficult.

The servicers that are out there want you to be compliant when regards to everything, whether it be licensing, if it's needed.

Most of the time it's not, but it's always good to double check as well as the documents that one is looking at.

All these individuals are out there to help you out.

And the vast majority of them are absolutely free of charge.

Yeah.

What's one of the biggest mistakes people make when they're underwriting loans?

I'm going through in my mind, a lot of mistakes that people make.

It's a laundry list.

I have underwritten tens of thousands of loans and I have processed foreclosures on behalf of thousands of investors and tens of thousands of foreclosures as a result.

I've seen everywhere from title issues, whether it's not understanding they're in first position, second position, not understanding the data that's provided to them from the servicer or the seller, and that there are bars as to not only statute's limitations, but on what's usually referred to as zombie loans.

There are some problems when it comes to just old defaulted loans.

And that gets into very technical language.

But not reaching out is quite honestly the biggest mistake that I see.

And that's reaching out to again, the foreclosure trustees, the servicers, reaching out to others within their community to be able to get another voice, get another pair of eyes on a particular property.

As some people are very put a lot of emphasis on an in person inspection.

When in reality this is a numbers game.

And if we were to break down what pays a note, there is value within the homeowner and what's usually referred to as emotional equity.

But the reality is it's actual equity and it's the property will ultimately pay off the note rather than over a period of 20, 40 years.

Yep.

And one thing that I've learned also over time and is you got to underwrite the seller as well and make sure you know who you're doing business with.

That is very important.

That was very high up on my list.

It wasn't the biggest one.

But I, Chris and I have been over this many times as we're both very passionate about it.

As much energy as one puts into underwriting the debtor, one should put effectively equal energy into underwriting the seller.

Not only do they actually own the note, but that they don't have a lot of judgments against them.

They don't have active lawsuits, particularly from other investors.

That there's not a tarnished history and they are open and active.

Not only you can see that they attend other conferences, but you can also perhaps see that they have other mortgages, notes out there from documents of record.

Yep.

Because there's one company out there that we know that is in a lawsuit.

Yeah, one.

One's in a lawsuit right now because they're selling the same loan to multiple people as well as I think they took like a line of credit.

Several companies doing that.

Yeah, we had one recently.

It wasn't anything fraudulent, but we had small pool loans under agreement and got ready to close and basically.

Okay, lsa, we had already agreed to lsa, let's get executed.

Why are the funds they come back?

Oh, we're pulling the trade because one of loans is paying off.

I'm like, oh, come on.

Okay.

But there was still that one against them.

Yeah.

But it was four loans, but they pulled all four.

And I'm like, okay.

But then literally three weeks later they call us up and say the loan didn't pay off.

Do you want to do the trade?

So we say yes.

And I'm like, resend the lsa.

And this was on a Friday.

So on Monday I called back and I'm like, okay, we ready to go?

Like, oh no, we're pulling it again.

And I'm like, okay, Yep.

And then a month later they called again and said, hey, you still interested in those loans?

I'm like, no, I'm good.

Pull it.

Once a loan gets paid off, hey, I understand that happens all the time.

We have done that.

But then the second time, and what it was is actually it wasn't getting paid off.

The borrower was trying to sell the property and it was going sale pending and then it kept falling out of sale, which is to me different than getting a payoff.

But either a lot more common now than it was a year ago.

Yeah, but yeah, so underwriting the borrower.

Also, I think one thing people don't understand is when they get these title reports to understand the title report isn't title insurance.

And I've seen title reports wrong or miss all the time loans or stuff.

We'll likely go into it once in the more extended presentation.

But that is a point of personal annoyance for me.

There's a lot of different programs that are out there, none of which are the gospel truth.

And a title report is a guaranteed product.

It's a form of insurance as to the state of title at a given point in time.

Things happen since then.

But a title report is supposed to be a snapshot of the property at a given moment in time.

There are other things that happen where we'll explore and go into what's the title plant date.

If you Google it, it's just good through that moment of time, but it's not necessarily now, but alternatively not just going back a few weeks as again, there is benefit in understanding.

Is that title report just pulling from the grantor grantee index with just the person's name?

Are they looking at the assessor's parcel number?

Because sometimes judgments and municipal liens attach via just the apn.

It doesn't matter who owns the property and other ones, again, judgments under their name that again will attach to the property via that way.

And there's a lot of different methods in which these things attach.

And quite honestly, title reports don't look at all of them.

So there is benefit in verifying the information.

I've also seen liens missed regularly on these title reports, some of which are free of charge.

And I do stress that's a great way to not only start, but it's a Great resource, even on scale, but having the ability to go back and double check it when something might not necessarily be right, or you're really trying to sharpen your pencil and be the most aggressive possible while still hitting your margins.

There's a lot of benefit in understanding where that information comes from and, and been able to verify it and do so very inexpensively, if not free of charge.

Yeah, we found multiple times where there were additional liens on a property that didn't show up.

Or recently had investor reach out to me because they had bought a loan, pulled title and didn't show any municipal liens.

And this is in Cook county.

So of all places, they end up getting a deed in lieu or they got the property back and they have it under agreement to sell and they're selling it with a warranty deed.

So it's coming with title insurance.

And title insurance comes in and says, oh, by the way, here are all these municipal liens that got to get paid off.

And on that list, this seller who owned the property would actually have to pay to sell the property, essentially.

Correct.

Because they used a warranty deed instead of a special warranty deed.

Yeah, it also depends on the state, but that's a very nuanced example that also could very easily be run by a title company and also could be run by the foreclosure trustee that would be able to answer that question as to who's liable for what and when.

Yeah, so I want to pivot real quick because one thing I think people talk about right now, which I think is a fallacy in some sense because most investors out there literally only buying a handful of notes here and there and everyone's complaining.

I can never find any inventory.

And people are trying to find these needles in a haystack.

Yes, we've seen less notes over the last several years and so forth.

But from a abundance standpoint, what's your opinion on where we are in the market today and where you think it's headed?

Note market or real estate market?

Note market.

Note market is.

Is tough, to be very honest.

The downflow of notes, the connection of Wall street to Main street, so to speak, has been broken up many years ago.

And the notes are still out there, they are still being sold, but not necessarily to you.

There are notes in bulk.

I'm going to tell you about some trades that are going on right now.

When we're done with this call, I think you'll be interested in getting that breach.

There are a lot of very licensed brokers and being able to connect with them even to buy a handful is entirely possible, including one off deals, small trades.

And I've become over the years a much bigger fan of utilizing licensed brokers, especially on the small scale as there is an additional level of protection and I do stress the license part of it as there's a lot of people out there that call themselves broker.

But I know that's a personal annoyance to you for the Daisy chain investors, but nonetheless, yeah, it's gotten a little tougher.

But there is immense power in being creative, being able to look around and find out where Notes are beyond the traditional sites and also reaching out directly to sellers.

And I'll definitely be talking about some of the strategies that's how to do.

I'm very happy to share information as one of the biggest things is quite honestly I don't view anybody as competition within this industry.

And additionally I've also found the biggest way to keep a secret is just to tell everyone.

Yeah, it's you've done the same thing I do.

I'm very similar.

Like I give everything away and half the people I know I give it to or probably 90% do nothing with it, which you know is but they.

Come up a year or two later and ask you how it's going and what you're doing and you're like the thing I talked about last time.

I'm doing that.

How's it going?

Fantastic.

Okay.

And then they keep doing what they're doing, which I have no problem with.

Yep.

Also, I know you run a website After Auction Bid that deals with foreclosures in California and overall on the real estate side, are you starting to see more foreclosures California and love to get your opinion overall on real estate, which I know is market driven or MSA driven, but just curious to hear what your thoughts are.

To be clear, a lot of us, including Chris on this call, we do other things besides just notes.

I love notes.

I'm a big fan of Notes notes, but it's very easy to do other things as well.

This is not a full time gig whatsoever.

In fact it takes very little time, especially when it can be done well and efficiently.

So getting back to afterauctionbid.com I really wasn't here to promote it quite honestly as I don't need the competition.

But I do welcome everyone.

I can keep going on about that, but what happens is a property goes to foreclosure sale.

And when that happens, people bid on it or not, regardless, it goes to foreclosure sale and it becomes either bank owned or owned by a third party.

The law changed in California.

There's a few other states where this applies too.

But I'm dealing with California, even live there.

And I can come in after the foreclosure sale either as a prospective owner occupant if I want to do just a one off or if I want to do it on scales, I do it as a nonprofit and be able to buy the property at the foreclosure sale after the fact for that price or a dollar more.

I've been able to look at the basically the winning racehorse and seeing the results of yesterday's winners and be trying to just go, oh, I wish I was there at the right place at the right time with the right amount of money.

Now it can be, in fact I have total of 45 days to do my research and be able to buy that property after the fact.

And if it sounds easy, quite honestly, it is.

There's still immense benefit and being the bank, but sometimes I like skipping to the end and just buying properties at foreclosure sale or even after the auction and bid on them.

But with that said, it has gotten a to be a much tighter market and that it was largely investor driven within years past and hedge funds and wholesalers would utilize foreclosure sales as a very off brand for them is that they wouldn't do that all the time.

They wouldn't count on it.

It would just be some things where they'd occasionally get some home runs.

But as the market has been a dumpster fire in terms of pricing that in California, which is much more sensitive than other parts of the country and it's again regional that it's certain counties, certain cities, certain places are doing worse than other ones.

But we're seeing a shift in the funds that they're now going to the more nuanced forms of investment.

So we are seeing properties sell more at the foreclosure sale and for a significantly higher price, which by the way is fantastic for note investors because they're getting paid off or getting paid at or above the price which they were comfortable taking it to sale for.

Yeah, that's one aspect of note investing that I think a lot of people I want you to forget but just aren't not cognizant of is those properties that have equity and people are always nervous, oh, I'm going to take this property back and like I've got a $300,000 note on a $700,000 property and the borrower's deceased.

Hey, I would love to get that property back for that.

Equ.

I'm really not going to in most instances.

And yeah, when you talk again, California, I'm seeing in Texas and Florida, you want to talk dumpster fire in a bad way.

It is.

It actually works out fantastic for me.

Yeah, we're the opposite of everything else.

Prices are going up.

That's very nice.

That's good.

But ultimately, when prices are going down, this will result as.

And we talked about the market tightening.

Where are we at?

We're kind.

And a lot of what happens in real estate generally, whenever you're hearing about the news, it started at least six months ago and I've been doing presentations for a while and I talked about when I thought things started as they were happening.

And I believe I was correct in all those regards.

But when it comes to those pricing, that's something that we take into consideration as note investors, as taking the property back, being able to flip it, sell it, do all the above.

Those are things that we take into consideration, including the timelines it will take to collect upon said note.

As some states vary greatly.

Florida years, Texas, very short time time frame.

That's one of the things where I have some notes in Florida, but I've never been like a.

Oh my God, Florida.

Like certain people, like love Florida.

And for me, I'm like, I'm not a big fan of it because it takes so long to foreclose.

And now the mandatory mediation.

Google it.

All you hear about is the expedited timeline.

But one challenge and that's out the window.

They are going to challenge it because they're already in court.

What Chris and I are discussing is the differences between judicial and non judicial.

Non judicial is you're not in court.

It does not involve the court system, judges, attorneys, anything along those lines.

So it tends to be faster and cheaper.

Whereas judicial foreclosure process, which is a lot of states, especially the eastern ones, and a bunch in the Midwest, those ones, they are already in court.

It is being processed by attorneys or even it's a quasi judicial that it is processed by attorneys, but it's still a non judicial process.

And then the other component to that I think a lot of people forget about is in certain jurisdictions, just because you're foreclosed, then you still got to take possession or get the deed to a property I've had in Maryland where it's taken me a year from a foreclosure sale to have the sale ratified.

And I wasn't even, I wasn't even the high bidder.

I didn't take it back.

It was sold at third party.

Yep.

That's one thing.

I guess there's a lot of craziness to it.

But guess what?

You can figure out all this stuff without knowing it.

And a lot of this you're not going to be able to figure out by Google.

But pick up the phone, call an attorney, call a foreclosure trustee, call the servicer and even call some other investors or even post about it in some of the online Facebook groups as there's plenty of people out there to help out.

Lots of people with experience and most of us freely share.

Yeah, that's one thing that I find in this space.

Certain people, and I don't know if it's an ego thing, but people are afraid to just pick up the phone and call people, get other advice or opinions to me, I want to try and get as much use as much people's brain power as I can who've been there, done that in this space.

It's not the first time you've heard this.

You're not normal.

Yeah.

Consider that a compliment, though.

Yeah.

Matt, final thoughts again, we have speaking at the conference on, you know, underwriting.

Look forward to, I don't know, have we physically met?

I can't recall if we've actually ever met.

We've been to enough conferences.

It's definitely happened in a few places, but it would have been Vegas at some point.

So it's not memorable.

I know why for you, but go ahead.

We're going to talk about a lot and Chris is hopefully going to razz me more than a little bit.

It's strongly encouraged and I'm going to talk about believing in what you do, not as an empowerment motivational sense, but there is profits to be made and there is power within utilizing investor investors, utilizing funds, but also putting your own skin in the game.

Yep.

And for everyone listening Again, that is September 18th to 20th and Chandler, Arizona.

Go to papertrailconference.com to get your tickets today.

So Matt, thanks for coming on today.

Great speaking with you and for those listening, also make sure all your tickets and leave your favorite like review for us on your favorite listening station.

So take care and thank you all.

For.

Thanks for joining me on this episode of the Paper Trail.

I hope today's insights help you sharpen your note.

Investing Strategies if you found value in this conversation, subscribe, leave a review and share it with fellow investors.

I'm Chris Sevy, reminding you to keep doing the work, trust the process, and.

Always follow the paper trail.

Until next time.