Building A Successful Note Business From The Fourth Annual Cash Flow Expo

February 16, 2022




GDNI 191 | Successful Note Business

How do you build a successful note business? What are the things you need to keep in mind to transition from a note investor to a full-fledged note business? Chris Seveney and Jamie Bateman take the stage on the Fourth Annual Cash Flow Expo to take on this subject. From systems and people to due diligence and ethics, Chris and Jamie tackle it all. Do you want to build up your own business? Then this is one talk you want to learn from.

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Building A Successful Note Business From The Fourth Annual Cash Flow Expo

Making Sense Of Myths In Note Investing

I am joined by Mr. Chris Seveney. This is our second. We’re doing back-to-back episodes. I did my cashflow expo presentation, and Chris is going to do his. Chris, how are you doing?

I’m good. Thank you, Jamie. In 2021, people enjoyed my presentation on the true cost of note investing. People who know me know I keep things real. I don’t over-inflate things. I try and put things in perspective for people to understand. In the last episode, I briefly touched upon scaling a business and some of those things. Mine was based on that. I went through the common myths of note investing, how to get started, overcoming the F word, and scaling your business.

When people look back, any business, like Rome, was not built in a day, and no businesses were built in that timeframe. I wanted to talk first about some of the common myths. The first one is you can start in a note business with no money. The other is you can walk into a bank to lend money to arbitrage an owner-occupied note. Those are the Loch Ness Monster and Bigfoot in my mind. I’m curious as to what your opinion is.

You hear people talking about doing it. From what I’ve seen and done, you have a lot more success hypothecating once you’ve already owned a note and getting a loan on that note, using the note as collateral for a private investor as opposed to a bank. If you’re Dave Van Horn with PPR and you’ve got a big portfolio, compared to us, they may have $150,000 on their line of credit because they’ve established their business and have much more to back it up. That’s very different than what you’re talking about.

I’m talking about you getting starting, “How can I get money?” I see on websites people be like, “You can do that.” The first question I ask is, “Give me your contact.” They’re like, “I can’t.” I’m like, “Banks aren’t like, ‘I’m only going to lend to you, Jamie.’ Banks will lend to anybody qualified.” That contact is a joke if somebody doesn’t give it to you because that contact doesn’t exist. If you give that contact, that person’s going to like you more. They’re making money because you’re referring people to him.

Rome was not built in a day and no business is built in that timeframe. Click To Tweet

The other are ones that I broke out were starting out that, “You can make six figures in your first-year notes starting with $20,000 to $50,000. You can 2X or 5X your money in your first year.” When I get started, you can post on Facebook, “I find fun flip deals. Give me your money. I’m going to raise all this money without knowing anything about this note that I found and don’t even own.” Are those myths, or do you think there’s some factual evidence behind that, out of curiosity?

The one about starting a no business with no money? You’re always going to have an obstacle. You can do it by the whole brokering notes. You need to be licensed. People do it in real estate wholesaling. There are ways to do it, but you’re not going to do it very easily, not by owning notes and holding them. These are all myths. It sounds great to sell the lifestyle but take the long view.

There’s always an exception to the rule. It’s like note brokering. How many actual note brokers do you know?

Not many.

There’s a reason why. Wholesalers are completely different because it’s much easier to find properties than it is to find notes. If you’re finding notes without being in the business, most note investors already have that contact and have seen that. Jamie, if someone said to you, “If I started in this business, how long would it take to make money?” What would you tell them? What do you think for most businesses in general?

GDNI 191 | Successful Note Business

Successful Note Business: It sounds great to sell the lifestyle, but again, take the long view.

I would say 2 to 3 years.

Playing The Long Game

If you google it, most small businesses take 2 to 3 years. Notes are a little bit different because of the slow play. When you’re in the first year in notes, educate yourself. Don’t take a weekend training and think you can go out and buy a note. It took about six months. Typically, most people take 6 to 9 months. Some have gone as quick as three, but they’re still educating themselves.

Things are a little bit different. I spent two months building a calculator. If I had one already done for me, maybe I could have been down to four. I’ve also spent twenty years in real estate and have an extensive background. Somebody who’s not in real estate, not managing people, you’re going to spend 6 to 9 months educating the first year.

How you educate can be done in many different ways, but play to your strengths. Everyone has strengths that they’re bringing to the table. If you don’t have twenty years of experience in commercial and residential construction and real estate, you’re going to want to allow yourself a little more time than you did, Chris.

Ethics In Note Investing

Let’s say you took 6 to 9 months, and then you started bidding on assets. You’ll end up bidding for several months, so forth and so on. There’s that time. The first year, I tell people, “Understand not only how-to notes, but the note business.” You want to know the rules and concepts, what are the procedures for bidding, and what’s kosher for due diligence. If I back out of a deal, what can you do, and what can you not do? The biggest thing I talk about is ethics.

It's much easier to find properties than it is to find notes. Click To Tweet

This is something that people need to understand. I don’t think they’re unethical in the true sense, but they’re acting in an unethical manner. I go into talking about how I agree with somebody on a deal. We agreed on a price. I’m doing my due diligence, and they turn around and like, “Somebody else is giving me more money. I’m going to pull it from you.” You’ll say, “You accepted my indicative bid. I’ve spent money ordering the title and the attorney looked at it. I dropped $500, and you’re going to pull this from me? Are you serious?” That is the easiest and fastest way to get blackballed in this business. I can’t stress that ethics enough from that perspective. I’m curious if you have any stories like that.

Do Your Due Diligence

I’ve had that happen. It’s quite frustrating. That’s why you have the due diligence phase. That second phase in a transaction is, “I’ve got this locked up as a buyer. We’ve agreed to this. You’re not going to sell it to someone else. Let me do my due diligence, and then I will close.” The other thing is, if you’re the buyer, don’t back out because, “I couldn’t find the money.” That’s a good way to not be able to do business in this industry. I was going to ask you about expectations for the first year. Were your expectations off at all? Did you have any misconceptions for the first twelve months?

Managing construction projects is like its own separate business. You have your own separate budget and contractors. It’s like managing a business. Some jobs I did were $70 to $100 million back when I started and even $140 million. On the scale of things, that’s pretty big compared to a lot of things. It’s like running a $140 million business, so you see a lot of things. I knew It wasn’t a snap of a finger, so I went in knowing I would educate. I had an analysis paralysis as well, but some presentations I saw were, “You can make a few hundred grand in your first year.” They’re like, “Take my training this weekend. You go buy a $50,000 note for $25,000. You get the borrower re-performing after six months and sell it at $0.90.” All of a sudden, you’re selling it for $40,000 to $45,000, plus you collect the payments. You get $15,000. You’re doubling your money.

You get JV partners with that, and you do that for 5 or 10 times, whatever the number is. I see that, and I’m like, “That’s probably not happening.” How many people do that? You look at everyone at the end of these classes. You’re like, “How many classes do you take?” “I’ve been doing this for two years.” “Are you making six figures?” “No.” “Have you bought a note?” “Yes. One.” It’s like, “Okay.” I started doing research. My goal was I wanted to buy a note by the end of that first year. I wanted to buy a note within eight months.

One of the mistakes I made was going too passive in the first year. I set up my LLC. I had some money to invest. I did some JV deals and some more “passive investments.” If I’m not actively engaged, I’m not going to spend two months building my calculator. I was too passive where I wasn’t learning enough in the first year.

GDNI 191 | Successful Note Business

Successful Note Business: Most small businesses take two to three years, in notes, it’s a little bit different because of the slow play.

Once I got in that second year, I got a little impatient and overpaid for some loans. You’ve got to find the right balance for yourself. That tension never goes away because you’re never fully prepared. I learned by doing. You need to be educated. That doesn’t stop. We talked about a deal that we’re doing due diligence on. You and I have learned several things in our fund alone after starting our fund in particular situations.

I’m learning every day if something comes up. I got an email where we have a lost note affidavit. It’s a foreclosure again. It’s a vacant property. It’s been going on for a long time. The attorney was like, “Where’s page two of the note?” I’m like, “We don’t have it. We have a lost note affidavit. Is this a problem?” It’s like, “It better not.” To me, it better not be because I spent about $5,000 on this thing already down this road, and you did a collateral review. I feel a little upset.

People like to say, “Get educated and take action.” I agree for sure, but you don’t stop getting educated, is my point.

Overcoming Fear

It’s a business. It’s your job. Most people have a 9:00 to 5:00 or a job they’ve done. Do you just do one thing all day long and don’t do anything else, or do you do something that you’re constantly learning and growing? The 7 Habits of Highly Effective People book by Stephen Covey is where I get the F word from overcoming the F word, which is fear. He states in the book that people will rise the position in a company until they get too afraid to move up. It’s true.

I’m a senior manager in a company, and I have people that work for me, and they’re like, “I don’t want to go any higher. I’m good where I am.” The reason why is because they’re fearful of taking on that additional responsibility. Growing is part of the business. You’re only going to grow as much as you can to overcome your fear.

You're only going to grow as much as you can overcome your fear. Click To Tweet

Map Out Your Plans And Goals

The other thing in the first year is to map out your planning goals. When you start, “I want to buy in my first year.” Start thinking about your systems. Your systems are always going to be evolving and changing. I can’t tell you how many systems I’ve changed as I’ve grown over the years. It’s constantly changing.

There are two reasons for that. One is technology keeps advancing. There’s artificial intelligence out there that can probably tell you how to manage your notes for you. There’s what suits your needs from that perspective. You want to do what suits your needs or fits your desires. Some people like Mac’s first PC. Some people like Excel. Some people like ClickUp. Some people Trello. Some people like Podio. Do what fits you. I used to use Google for Gmail, and now I use Outlook. I made that whole change. It’s going to evolve, but make sure you’re smart about when you do that, that you plan it out as well.

At least know what type of system you need. You don’t have to pick the exact system yet.

A year or two is looking to buy that first asset. When you’re buying it, don’t be an idiot. I mean that I see people buying without being educated, buying from their mentor, and not following processes and procedures. Somebody tried to sell me a note in New York that was a second position. They bought it for $2,000 with $60,000 UPB. They’re like, “What would you give me for this?” I said, “Who’s your servicer?” He says, “What’s a servicer?” I’m like, “Who’s sending out the statements and collecting payments?” He goes, “I don’t have any of those.”

I’m like, “Do you have a title report?” He goes, “No.” I said, “Did you ever look at the property?” He goes, “I just had a few thousand dollars, so I figured I take a wing at this and had a $60,000 UPB and had these many payments. I figured maybe I could collect $150,000 on this, so I could sell this thing for $40,000 and make a quick $40,000.” I’m like, “Do you think somebody experiencing this would sell something for $2,000 if it’s worth $40,000? I hate to burst your bubble, and please don’t take this the wrong way, but you’re not educated, and your note is worthless.”

GDNI 191 | Successful Note Business

The 7 Habits of Highly Effective People

I had somebody approach me to see what they could do about this pool of nonperforming loans. They bought, and they have access to capital. This was 50, 60 loans. This was not four. They know what they’re doing in this space of real estate and different real estate asset classes and strategies, but they had never gotten into notes. They bought up this whole pool, and then they sat on them.

It was the same thing. They were not with servicers. It was exactly the same thing I said, “What servicers are these with?” “They’re not with servicers.” They have 50 loans, not with servicers. They hadn’t done anything to try to figure out what they could do. Two-thirds of them at least were entirely worthless because of the statute of limitations issues or no servicer. They could have salvaged them if they had acted quickly enough. That blew my mind.

I have a question for you. As people go to buy the first note, as a business person, what is something that somebody should do that most people don’t do? This is a very open question, but I had something in my mind.

Start your note business from a business standpoint.

I took eight months of training. I’m like, “I’m going to buy a note. I’m starting to bid on notes.” Someone’s like, “Whether you’re bidding on the note or you get it on their agreement, what’s something during that time you should do?”

Who's your seller? If you are buying a note, that's probably more important than the asset itself. Click To Tweet

There are a bunch of things, but you should figure out what servicer you’re using.

Find A Mentor

What I’m thinking is to get help. Ask somebody. You can say, “Jamie, you were talking on the podcast about this note in New York. I’m looking at one. Can I pick your brain for two seconds and have you take a look at this?” If you do that to investors, most note investors are happy to assist. They’re not going to do full-blown due diligence and spend three hours on the note for you, but if they want to help on the call for 15 to 20 minutes and pick their brain and you say, “Here’s the attorney I use because this is an attorney thing,” or, “Here’s who you can go to,” get some help. Get guidance.

That’s one of the mistakes I see a lot of people making. They’ll buy a note, and they’ll reach out to me and be like, “I bought this note.” I’m like, “Why didn’t you ask me before you bought this?” “You’re too busy.” I’m like, “I’ll tell you if I’m too busy. I am busy, but I don’t mind spending fifteen minutes to help somebody out to try and save them $20,000.”

There are things that I took for granted that were not related to doing due diligence on an asset, getting a safe, and setting up an LLC if you’re going to go safer or you’re going to get the collateral yourself. Setting up an LLC and opening a bank account in an LLC, I had done that a bunch of times before. I didn’t think about that as far as, “I’m going to be mentoring on this topic.” This is one example.

We go right into due diligence on an asset. That’s important, but there’s more to it if you’re going to treat it even like a part-time business. You need to look at it like a business, not one investment one-off on this asset. Who’s your seller if you are buying a note? That’s more important than the asset itself.

GDNI 191 | Successful Note Business

Successful Note Business: You need to look at it like a business, not like a one investment one-off on this asset.

People get wrapped up in the due diligence on an asset, not downplaying the importance of that. You do want to buy it, right. You don’t want to buy something worthless. There’s more to this business if you’re running a business than just due diligence on an asset or using a calculator. As soon as you buy that asset, your calculations are wrong. You’ve said that before. Get help. It plays to what you’re saying. You’re not alone.

Grow Your Business Systems

About businesses and growing your businesses, there are many different facets. There are the proper systems for setting up an LLC bank account. How do you do that? Register your business in other states. Do you need licensing or certain software? If you’re doing certain software like skip tracing, they may want to see a safe in your house and a paper shredder from that perspective.

Who’s doing your books? Are you using a bookkeeper? Are you doing it yourself? How does that work? To me, understanding the systems and the staff is something that you’ve got to look at how you’re going to manage. I spend a ton of money on systems to try and minimize staff. Others will spend a significant amount on staff and then use other types of systems. They’re more staff heavy versus I’m more systems heavy. We don’t have time to go over the positives and negatives to both.

Understand that as you grow, people and systems are very important because you want to be efficient with your systems, not the people you work with. As you start making money, you’ve got to pay Uncle Sam. People think, “I made $10,000 on this note. I can go reinvest it.” It’s an ordinary income if you’re using your retirement account or not.

When do you go from an LLC, if that’s where you’re in, to an S Corp? If you’re Mark Kohler, where you’re making $40,000 or more, you go over to an S Corp. How do you manage your profits? Another aspect of growing your note business is that you’re not investing in notes. You now have a note business, and these are some of the things you have to tackle.

As you grow, people in systems are very important because remember you want to be efficient with your systems, but not with the people you work with. Click To Tweet

How much are you going to market? You and I have a podcast. We’re out there. That plays into you should be having a couple of different entities. We’re getting a little bit slightly complicated for the brand new note investor, but I bought too many notes in my one entity. You don’t buy anything in your outward-facing entity.

Thinking long term, are you going to sell partials? I’m committed to holding these notes in a particular LLC that is less liquid. Think about 2 to3 years down the road how you want your business to look from an entity standpoint. You don’t have to be in marketing. I don’t think Chad Urbshott does any marketing. I never see him out there, but he’s very successful. He’s got a track record. He’s proven that he is successful.

Following along that year one timeline, you’re educating. In year two, you start to acquire and manage. You look to buy some more assets. You want to understand how to manage them properly. You’re always continuing your education component from that perspective. That’s when you’re starting to go from investing in notes to being a note investor.

Scaling Your Business

It’s within that year two time period. As you start buying in year two, if you have performers or nonperformers and you have to go down some legal route, typically, you start to liquidate some of those by the middle of year three. You look to sell, rinse, and repeat. Year three is when you’re profitable. As you start getting profits, you can look to start scaling in year four. You take some of those relationships you build to raise money and get better assets.

Notice that I always talk about getting educated and doing an education in any of this. That’s a whole another topic. I’m not even going to get into it. Some people, after year one, think they can also start educating. I recommend against that. You’ve got to do what you need to do from that perspective. I started and bought a note at the end of 2016. I started with four notes in 2017. At the beginning of the year, my father passed away. That threw me a bump for a few months. I had some personal stuff that went on later that year, but I still ended up buying sixteen notes in 2017.

GDNI 191 | Successful Note Business

Successful Note Business: How do you manage profits? That’s another aspect of growing your note business that you’re not a note investor anymore. You now have a note business and these are some of the things you have to tackle.

I only bought four the first year. I wasn’t making any money. In 2016, I spent money on education. In 2017, I was spending money on building systems and things along those lines. In 2018, I made money, but I reinvested it back into the company. I bought TMO and some of these other things, which were very expensive. In 2018, I didn’t make anything. 2019 is when I exploded. I had 50 JV partners. I was making good money. I started a fund that year. I bought over 100 assets that 2019, well over close to 200. I continued to grow in 2020. 2021 was my best year ever in every aspect of the business.

If you total the number of notes you’ve bought, what percentage were nonperforming?

60% to 70%.

How would you possibly make money in your first year? These take 1 to 3 or 4 years sometimes to exit. It wouldn’t make any sense.

It’s when I started doing partials in the funds. I was 90% nonperforming at one point in time and 10% percent performing. Now in a fund, I try and do 70/30, but then I have a partials business where I have 75 notes in partials. When you balance them out, I’m 50/50. I have a performing note fund that I buy more performing in. I have a nonperforming note fund. That’s 70/30, and the other one is 100%. When you look at how things scale, it’s more in the middle.

You need confidence to be a successful note investor and to run a successful note business. Confidence comes from competence. Click To Tweet

You could make money in your second year if you’re buying performing notes and selling partials, but you’re not going to make a ton.

If you start with $25,000 and you’re making 10%, that’s $2,500, but you’re still going to have other expenses that you have. Who’s doing your taxes? It’s going to be $500 to $600 to file a tax return. Even if it’s an LLC, roll it up. You have to register your business every year. That’s another cost. If you’re looking to buy notes and do due diligence, and you don’t buy it, there’s a title report and everything else. A $2,500 is long gone already. It is what I’m getting at. You make money on the note, but you’re spending it elsewhere.

As we wrap up, do you have any final thoughts or a Note and Bolt? I got one, if you want.

Go ahead. I’ll let you go first.

It’s not specific to notes, but it popped into my head. You need confidence to be a successful note investor or run a successful note business. Confidence comes from competence. It may sound cheesy, but competence comes from reps. You’ve got to do this over and over. You can’t fake it until you make it. You can do that a little bit, but you’re not going to have true confidence unless you know what you’re doing. You’re not going to know what you’re doing unless you do repetitions with help. You should have a mentor for some help.

GDNI 191 | Successful Note Business

Successful Note Business: You’re not going to have true confidence unless you know what you’re doing. You’re not going to know what you’re doing unless you do some repetitions with help.

Here’s the thing I’ll mention, my Note and Bolt to tag along. This is a business where you need somebody who’s very detail-oriented to roll up the sleeves and dig into things. I’m an engineer, so I’m a detailed guy. Let’s say you’re a marketing person. You’re more at managing people and understanding, and you’re great at raising money. You’re going and doing this and doing that. If you are good at that but don’t dive into the details of every single note and you’re buying notes without diving into the details, you’re going to get crushed.

The competent side is understanding your strengths and your weaknesses. Build a team or systems around you that take care of those weaknesses. This is a business, unlike certain other ones where you’ve got to know every little detail. The people who are most successful are the ones who are reading every page of the title report, taking their time to go through it, understand it, looking at what the mortgage says if there’s any weird language and matter of CFD, and truly understanding it, not just saying, “I got all assignments. I’m good.”

It’s rare to find that combination because a lot of detail-oriented people won’t take action. We’re wrapping up here. Any final thoughts, Chris?

I am good.

Thank you, everyone, for joining us again. Give us a good review. It does help us. Please go out and do some good deeds. Take care, everyone.

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