If you’re thinking about getting into note investing or you’re currently reading about it, Jamie Bateman and Chris Seveney happen to have incredible insights about it. In this discussion, they answer some of the most common questions from their Notes And Bolts Facebook group. Jamie and Chris both talk about some important elements to consider when you’re in the note business such as having a good attorney, how much money you’re willing to spend and all about buying loans past maturity date. Get into these stuff and more as they share their insights on how to get successful at it and how one can grow their money through this type of business.
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Answering The Most Common Questions About Note Investing And The Ways You Can Succeed In The Business
How are you, Chris?
I’m doing good. How are you? You sound very chirpy. You’re upbeat.Buying loans past the maturity date is like buying a second house that’s heavily underwater. Click To Tweet
We’ve been doing a lot with our rentals but looking like 5 out of 6 in Maryland are going to be turning over here in the next couple of months. How about you?
It’s not too bad. Did you want to share any more trials and tribulations along with that?
On the note side, I did get a notification from a township about blight in a yard with one of my CFDs. I got some pictures sent to me.
Is that the mattress house?
Yes. You may have seen a few of those pictures.
Why don’t we pop in there? This house has a dozen mattresses in a half-ripped open trailer. It looks like a dinosaur chewed a piece of the trailer in the yard and mattresses started shooting out of it.
Every one of these has a story. This one I had to send to you because I’m like, “What is going on here?” There are 7 or 8 mattresses coming out of this like a half-eaten trailer RV thing that looks like it was burned up or something. I don’t know what’s going on. It’s a JV deal. I’ll send it to my JV partner and his wife happens to have a couple of Airbnbs. I said, “Send this to your wife. Tell her she’s not the only one with a cozy little Airbnb option.” I have no clue what’s going on there. We had done a mod recently. A long story with this one but I thought we were getting back on track. At this point, we may have to push the legal button again and move forward with the forfeiture.
I’m giving her two weeks to get this removed. I’ve got 30 days before it comes back on me then we’ll start the legal process again. That was one thing. I also have a deal that I’m selling that the buyer’s title report has taken sixteen days so far and he still doesn’t have it. That’s surprising. I was hoping to have that one wrapped up but had been under contract for a month now. We’ll see where this goes. There are a couple of things that I’ve been dealing with.
You made me think of my Note and Bolt for the episode. Thank you.
Hopefully, you’ll make me think of mine.
A lot of weird legal oddities I had come up with in many different aspects, which all happen in the weeks that my main attorney is on vacation. I can’t wait for him to get back and fill his email box with all these. He’s probably wondering like, “Why haven’t I gotten many emails from Chris? Something’s going on. Is he alive?” It’s the calm before the storm. One of the things that I do though is this personal thing when people are on vacation. I try as much as possible not to bother them in any way. At work, I have somebody on vacation, unless it’s something I completely don’t know an answer to and I need to give somebody then I’ll shoot them an email. Other than that, I let people enjoy their vacation because when I’m on vacation that’s what I like to do. I send an auto-reply like, “I’m on vacation. I’m back next week.” The person keeps emailing me and it’s like, “I don’t know.” Personally, I sometimes find it a little disrespectful when people enjoy their time but that’s me. I digress already.
We did reach a settlement on one property with a borrower for a short payoff that he was supposed to wire the money. He didn’t because the money was in one type of account, which you can’t wire from. He’s been taking $3,000 a day out. We’re getting spoon-fed that. I had a few REOs, the one that we had burned down. We got that one under an agreement to sell. That one was supposed to close.
I got another property in Arizona that we had taken back. It’s a 20-acre parcel. Basically, it’s land because the house and trailer on it are infested with drug needles and animals. Somebody wanted the land, which is good. We got that one under the agreement. I got an owner finance deal that was an REO under the agreement. We took back a property in St. Louis. This house has a beautiful front door and looks nice from the outside then I feel like going into a Halloween store. You open the door and it’s like, “The house is a mess.”
I have some people looking at it because the ARV is anywhere from $125,000 maybe. It’s a four-bedroom house. It needs $50,000 to $75,000 but also would make a really good rental. The rental rates in the area are $800 to $1,000 plus maybe. Somebody told me numbers. I got them written down but you see so many numbers. We did sell about ten assets. I’m going to have another tape coming out for people, another Note and Bolt.
Why don’t we roll into our main topic, which is we are going to be answering your questions? We are going to be going through the Facebook group and answering some of the questions that have come through that may have answers already. I want to talk about them a little more in-depth because when you reply online versus physically discussing it, it’s much different.
For those who are not aware and reading this for the first time, it’s the Notes and Bolts From The Good Deeds Note Investing Group.
Here’s the one that I wanted to kick off. This one from your good friend, Steven Burkey, was as you scale your note business, how do you determine the number of cash reserves to have?
We don’t talk about this that much. It seems like everything in this space, my initial take is it depends because it does depend on what notes. Are you all about performers, non-performers, an IRA? Are you running this like a business? Lots of variables but a general rule of thumb might be $1,000 per performer and $3,000 per NPL. As you scale, you don’t quite need that much because it’s very unlikely that everything’s going to go to crap with your note business all in the same week. It’s unlikely you’re going to need all of a sudden $100,00 for legal fees in one week but that’s a good rule of thumb that I’ve used. The other thing I threw in there was I like to hold back a few notes that I could sell partials on pretty quickly. In case I run into a pinch and then all of a sudden I can get a cash infusion. That’s my initial reaction. How about you?
First, I’m going to go back to yours and I’m going to pick your brain on a few things. Let’s take a nonperformer. When you say $3,000, is that your complete holding cost? Is that on top of other costs you’re already holding? Let’s say you buy a loan for $20,000 and you’ve going to go foreclose on the property, are you saying you only keep $3,000 including for foreclosure or is it on top of what you think all the other fees are going to be?
When I quote that, I initially meant $3,000 cash sitting there. Much of this is state-dependent and where are you buying this and the foreclosure process is almost over. My initial reaction to that answer was $3,000 total. I don’t think that’s enough if you’re going to have to go through the legal process in New York, for example. If it’s forfeiture in a non-judicial state, it may be plenty of money. You may have $500 that you didn’t need on another deal that you could cover the difference there but my initial thought was $3,000 total. It’s that whole philosophy of money, time value of money thing. I don’t want to have too much money sitting in my LLC checking account just sitting there doing nothing. That was the total. What are your thoughts on that? Is that a little skimpy?
I think it’s skimpy. There are a few things. Let’s assume you’re using your own money first versus using an OPM, Other People’s Money. It’s a tough question because it depends on how many notes you have and the status of them. I would typically want to carry what an anticipated foreclosure cost would be plus an additional $2,500. If I’m in, let’s say Florida, now you’re probably going to spend around $7,000 to foreclose, I’d want an extra $10,000. In Ohio, you’re going to spend another $5,000 to $6,000. I’d probably still be around $10,000 in that perspective. It depends also on how many notes you have because as you have more notes, you can pull some of that money to have a certain amount stockpiled.
The other thing is I’ve returned with some of my joint ventures. I’ve taken too much upfront meaning a little too conservative. For example, we did a mod on this one that we’re selling. It didn’t need much out of pocket. It depends on what your exit strategy is, too. I probably took a little bit too much to set that aside on that deal so it lowers the JV partner’s ROI a little bit but I didn’t need $5,000 for that one. I needed $1,000 for that and that was a non-performing loan. It depends.
If you’re taking OPM, what you don’t want to do is short yourself either and that’s the fine line that you’ve got to balance. One of the things I’ll mention too, I think this is important to clarify. You can have less if you have personal funds that you can take and put back into the business as well. I’m assuming this question is I’m getting started, I only have $20,000 to start and I have no other money. How much should I buy a note for? How much should I hold in reserves?
The question comes down to it matters because if it’s performing, you don’t need as much. You could pay a little bit more. If it’s non-performing, is it occupied? Has the borrower been making payments? What is the payment status? You’re thinking in your work mod, if they want a mod then you could maybe hold a little less. If it’s somebody who hasn’t paid in for a year, you can’t get in contact with and you’re thinking you’re going to have to foreclose then you’re going to have to hold more. The last thing you want to do is get caught in a situation where you run out of money and then you’re forced to sell the asset.
The other thing I’ll mention and I know you did your presentation on this topic was costs that come up, the cashflow expo. There are lots of unforeseen costs not only with the note itself or the asset itself. Even if you’re in the beginning stages of running your note business, you’re going to have other costs, software. If you’re doing any marketing, marketing budget or if you have any virtual assistant help, all kinds of licensing costs. When I say $1,000 or $3,000, that’s meant for the asset itself. You should also have some additional funds in your business account to run your business. That gives a general ballpark answer for people.
I would agree. You were the only one that replied to that comment.
I guess it was the perfect answer.
Here’s one that I want to touch base upon because this gets asked a lot and it’s been answered. You and I are on the same page on this one. Can you 1031 exchange a contract for deed into another property?
First of all, it’s a question for your CPA.
What has your CPA told you?
I haven’t asked that. Bob Malecki weighed in if I remember correctly and made it pretty clear that the IRS does not view a CFD or a note as real property. For those who are unaware of what a 1031 exchange is, you can exchange an asset for another asset but they have to be like-kind assets. If you’ve bought a rental property in the 1970s and now it’s appreciated $2 million, you can exchange that for another property rather than selling that initial property and getting hit with lots of capital gains taxes and depreciation recapture. It’s a way to get around a big tax hit. Can you do that from real estate to notes? I’ve never heard of someone doing it.
You can’t do it with notes but the other component people think is a contract for deed on one title so I own the property. The intent of the contract for deed is and I did ask my CPA this. My CPA not yours so ask yours, you’re not responsible for taxes. You’re not responsible for maintenance. The underlying purpose is it’s a loan, just like a note and the land contract or agreement for deed is what securitizes that note similar to a mortgage or deed of trust. All it really is it’s replacing the mortgage or deed of trust with an agreement for deed or land contract.If you take back an REO property and you get a BPO, make sure to do your own research. Click To Tweet
The intent is it’s a loan and notes are not considered personal property so they’re not allowed to be exchanged. Somebody mentioned something about Delaware statutory trust and that’s way up here for me. I’ve worked into them in the past but I’ve got 1 or 2 other things going on in my life that I haven’t had time yet to figure out those to try in my grand master plan of taking over the world, in real estate figure out how to implement those into my business yet.
CFDs can be confusing because in some ways they’re seller financing, considered loans and then in some ways they’re not like the blight in the backyard. I don’t think the township cares. All they know is I’m on the title.
The interesting thing is when they do see people on the title that are from out of town, they target you personally. Jamie, have you ever bought a note that was already in foreclosure?
I have not. I was helping somebody who bought five in Baltimore.
Are you mentoring?
Not officially. I was helping him out a little bit. We’ve been working together a little bit because I’m in the Baltimore area. I’ve got some connections as far as property managers, realtors and things like that. The one thing I did tell him was and I think he was already going to do this anyway. Keep your attorney in place. That came up in this question or some of the other comments under this question. I have not bought one that’s already been in foreclosure. At this point, I’m not sure why not. I know you have, Chris. Any insight on this?
I bought several. One that rings a bell was one in Michigan. I kept the same attorney and they were awful. They’re supposed to file the paperwork. They never filed anything. They were saying all the messages they weren’t getting but I had read receipts on them. They said they filed the paperwork and I kept asking, “Where is it?” They’d never gave it to me and then find out they never filed the complaint. I was not happy with them. I replaced them with the attorney I use a lot.
In some instances, while people say it’s easier to keep that attorney, make sure you know who that attorney is. I’ve got one in West Virginia that I’ve kept the same attorney. They had to go back after the title insurance company because there was an error on one of the documents. It’s interesting because you’ve been in the title business. They’ve gone back to the title insurance company back in January and they still don’t have an answer from them. That to me seemed odd.
With this small portfolio in Baltimore, 3 out of the 5 loans, they essentially completed the foreclosure process. It was a matter of the courts with COVID and everything catching up or the eviction moratorium being lifted. The legal work was essentially done. At that point, I’m not switching attorneys. I agree with you. The attorney you’re using matters significantly.
While it’s recommended to keep the attorney, make sure you’re comfortable with them because it also isn’t a big deal to switch attorneys either. I wanted to mention that for people as well because that is something that can easily be done like you are switching as the lender. What are the questions do we have? Have you ever bought loans past the maturity date?
Yes, from you.
How did work out for you?
It’s still going, at least one that I can think of that’s in New York. We’ll see where it goes but we’ve offered a couple of the short payoff demands and the borrower told our servicer that all communication needs to go through her attorney. The problem is she never provided the attorney’s contact information. It’s hard to do that when you don’t have an attorney to talk to. We still have some wiggle room on this one. The price point was pretty low. It’s okay if it ends up being a loss but I guess you’ve got your maturity date and then each state has a statute of limitations after that maturity date, most states do. I have bought loans like that but I haven’t exited them yet. How about you?
I have. You have to be careful because there are so many nuances once you get past the statute of limitations. In some states whether the loan was signed under seal or not under seal, when the last payment can come into play, you might not be able to collect on the note but you can on the mortgage or deed of trust. There’s a lot that you’ve need to make sure you have an attorney thoroughly review it ahead of time. I’ve bought some that we looked at later on and thankfully, during due diligence, I’m like, “These are good.” When we looked at them again with the title and so forth, the attorney came back and did a secondary review after conversations with them. It came back and said, “This one isn’t recoverable.”
You’ve got to be careful. The ones that I see a lot of times, that last payment like 2009 and they mature in ‘12, ‘14 and stuff. I don’t even look at those because the odds of those being recoverable or even if they are, the chance of the property or anything is going to be in good condition and so forth, you’re most likely playing with fire on those. You can get them super cheap. Are you going to make anything? It’s almost like buying a second that’s heavily underwater. If you’re going to buy them, you better buy a lot of them and make sure you can try and hit on one of them.
That’s true. That’s a good point. Don’t just buy one of those. I would not recommend that for brand-new note investors for sure.
Neither would I so definitely not something I would recommend. Here’s an interesting one because this one comes up a lot. This is to ask your CPA, for people who invest with their self-directed IRA and a note fund, depending on who your CPA is and how the fund is operated. It shows up on an ordinary income line. Would you consider it UBIT and have to pay the taxes on that? Certain ordinary income is subject to UBIT, meaning that if Jamie and I put up a lemonade stand on the side of the road in January revenue and we used seed money from somebody in an SDRA to fund the buying of the lemonade, that person would be subject to UBIT because we are generating revenue actively from that purpose. Similar to if you raise capital, it might be UDFI or one of those but similar to if you borrow money in a fund, we’ve got our fund and we excluded that language altogether to give people peace of mind that we weren’t going to include it. I see this come up a lot. Jamie, you’ve invested in funds in the past?
I have with my IRA. It has not come up yet at all.
Have you made money in that fund?
I’ve invested in some funds outside of my IRA that has done well. The one that I’m in now is not making money. It’s a rather small amount compared to in the grand scheme of things. This question has not come up.
It’s interesting because it comes up and it’s dependent on who your CPA is. That’s why I want to bring this up and why you want to have a CPA that understands self-directed IRAs, notes and a lot of real estate syndication. In the funds I’ve run into one we have together, we state that the intent of the fund is to buy notes to see if they get re-performing, hold them to eventually sell them as part of a liquidation, which is when we sunset that period. We’re not in the business to buy them just to flip them. Buy them for a cheap price and sell them a week later. You can do that with a few but if that was your primary business, that would potentially be subject to an IRA investor having to pay their taxes on that. Because you’re holding these for a period of time trying to get them worked out, it’s more considered long-term. From that sense, it’s not considered. I had that written up and I’ve gotten opinions from IRA advisors. I tell people, ‘Here’s what we’re doing. Get your person to write something and put it on paper to give to your CPA” so you have something in the file that shows that we don’t believe this is required.
It comes down to whether this is a transactional business or an investment-based business.With investing, understand what is you have and also what else is available. Click To Tweet
How are the sponsors? What are they doing? An important question to ask as well if you’re investing in a fund is, “Is your intent to buy them just to flip them?” If you’re doing that then that could trigger some tax consequences for the borrowers. Typically, most of these people are credit investors who are paying 35% plus state taxes and stuff. Jamie, we’ve answered some questions and we’ve been on for a little while now. Maybe we could wrap up this episode and keep it a little shorter for our readers?
I do think our Facebook group has a lot of good interaction. People find a lot of value in it. If you’re not in it, you should join it.
Leave us a review on iTunes as well.
Did you think of my Note and Bolt yet? Go ahead. You’ve got 1 or 2.
I got two Notes and Bolts. My first one is if you take back an REO property and you get a BPO, make sure to do your own research as well. A perfect example is this land in Arizona. They wanted to list it for $32,000. I was like, “No.” I’m like, “It’s 20 acres.” It’s not a lot in that area but it’s still 20 acres. I’m like, “List it for $50,000 or $49,999.” The first offer comes in like $35,000. I counter reject it. Three days later, full-price cash offer. I say that because the market’s hot. Understand what it is you have and also what else is available. There also weren’t a lot of properties available in this area at this time either. A lot of people are looking for acreage. Pick up land at $2,500 bucks an acre. That’s pretty cheap honestly and this isn’t in Arizona.
In similar instances, I have a condo that we’ve been using as a rental and we’ve decided that we’re going to sell it. The listing agent called me up and stuff. He lives in the complex where this unit is. He’s like, “There’s not one unit for sale in the complex.” In this town, which is a small area out in Virginia but it’s out 150 miles West of us. There’s this little ski resort, golf course and stuff. It’s a nice small area. There are only three properties for sale in this whole area. I could name two dozen buyers. It’s perfect timing from that perspective.
My Note and Bolt number one is to understand and do your own analysis. Same thing on BPOs because I get people to send me BPOs and they’re low. I disagree with them. You want to do your own analysis. That’s one. Note and Bolt number two, my special. This can be Jamie’s replacement. If you bid on an asset, you submit a bid and the seller comes back to you and says, “I’m going to accept that bid.” When you go dark on them, just be aware that you are never going to buy an asset from that person again. It’s one thing to say, “I screwed up my bid,” or something happened, which in this case they didn’t because they had three bids within $500 of this person. They probably didn’t have the money.
It’s one thing to say, “Something came up. Something happened. I’m going to walk.” To completely go dark, you will get blacklisted so quickly from somebody. I had somebody do this. I took you off my list and I’m never even going to bother considering you again from that intention because there are these things called email. This device right here is called a phone. You can use it and you should use it because if you don’t have the stones to get back to somebody, it’s disrespectful, unprofessional and I recommend people not do that. Don’t be afraid. I had one guy who was going to close on two assets and said, “Last second, something came up. I’m not comfortable with this one. I really don’t want to close on it.” Fine. I’m not the one who spent money on the due diligence and so forth. If somebody backs away on one of my assets, I’m not disappointed in the sense of, “You let me know.” If you don’t let me know, you are going to piss me off.
It’s communication. We’ve talked about it before. I was having a conversation with somebody about accountability and follow through with someone in the note space as well and doing what you say you’re going to do. The one caveat we were talking about is things come up. Life happens. Maybe you thought you had money to buy a note and then, “You need to put your child in private school and this isn’t the right move.” Communicate, that’s the critical part. When you ghost, it’s no good in my book. I do have a Note and Bolt. It’s not note-specific per se.
It’s personal finance-related and for people with kids. We started using this app called Greenlight. I have no reason to promote it or anything, no financial interest. If you’re into trying to help your kids learn personal finance or budgeting, you can set them up with their own credit card and set whatever controls you want with it. It’s a very user-friendly app where you can put money on the account. It enables conversation with your children about personal finance and taking control of your financial future.
Are you using it?
Yeah, with both my kids, primarily with my daughter. My daughter, we set this account up for her and she got her own car and everything. We went to get ice cream and I had her pay for it because I wanted to see how it worked and everything. I assumed she knew how to sign over a credit card receipt. No clue what to do. I was like, “Little things like that come up that you assume as a parent that your kids know and they may not.” Even that little piece was enlightening for her and educational. We are using it to answer your question.
There was a rumor at one point in time and again, this is no political affiliation or representation or support for any or candidate in the sense. There were rumblings once like Donald Trump did a PR stunt to use an ATM machine or something and he didn’t know how to use an ATM. Somebody with the amount of money they say he has, I don’t see why he needs to use one. I still would think you would know how.
An interesting story, my last one was when we built our house, we bought a box truck to store materials and we drive it around because we were buying stuff at auctions and stuff. This was the 1980s, 27-foot box truck like a U-Haul. It had little windows. You have to roll down the windows. You know the phrase. Now, kids don’t understand when you say roll down your window. Why do you say roll down your window? My daughter, we’re in a drive one time, she was like, “How do I put the window down?” I’m like, “You roll it down.” She said, “What do you mean?” I’m like, “You’ve got to roll it down.” She starts rolling it down. At the time, she was probably 8 or 9 years old. She’s like, “This is tiring.” I’m like, “Now you have a little button you’ve got to push nowadays.” Look at all the technology you have. I would like to thank you for joining us. Make sure to check out our prior episodes as well. Leave us a review on iTunes, Stitcher, Amazon, Google or your favorite listening station. As always, go out and do some good deeds. Thank you.