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Case Studies: Working With Borrowers In A Changing Note Investment Market

June 12, 2024

chrisseveney

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Creating Wealth Simplified | Note Investment Market

 

Stuck in analysis paralysis with real estate investing? Thinking about buying notes but overwhelmed by the changing market? Today’s episode is your wake-up call. Chris Seveney dives into two real-life case studies that show how to navigate the new landscape of note investing. Discover how to be flexible, find win-win solutions with borrowers, and make smart decisions in today’s market. Tune in and learn how to escape analysis paralysis and start building wealth through real estate notes!

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Case Studies: Working With Borrowers In A Changing Note Investment Market

Welcome back everybody to another episode of the show. I wanted to share with people what we’re seeing in the marketplace in regards to loans, and types of loans, but not on the buying side, but on the managing side. What are the outcomes and scenarios that we’re starting to see as I believe we continue with where the economy is headed and I can share my opinions of that. I’m a true believer that people have a lot of equity in their homes. People are going to fight tooth and nail to stay in these properties.

We’re going to continue to see fewer foreclosures. Note investors are going to have to be a little more creative and try to work out win-win scenarios. I want to highlight two case studies that illustrate some of the things we’re seeing. Probably in the near future, I want to record one about bankruptcies because I see a lot of bankruptcies starting to fall into play, which makes sense. I was recently reading a report from the New York Fed that credit cards and debt in general, delinquencies are skyrocketing.

People have a lot of equity in their home. People are going to fight tooth and nail to stay in these properties, and we're going to continue to see less and less foreclosures. Click To Tweet

Mortgages are still pretty low, but credit cards and cars are starting to take off at a higher rate than it was in 2008. I was debating somebody on a forum post about how they are overpaying for properties and that is a whole model to overpay by $25,000 to get the seller to finance it at a lower rate. They are saying, “The housing is going to appreciate by 5% per year. I’m going to be fine. I’m going to put renters in these and nothing to worry about.”

A person has no liquidity and no reserves. When you realize you mentioned that prices appreciate, it’s more on historically about 3%, that it’s not linear. It goes up and it goes down. Unfortunately, it’s typically when it goes down when people are having the most trouble and then renters stop paying. If you have the liquidity to weather that storm, you’re fine, but look at what happened in 2008. People had 100% financing. This person has 120% financing or 110% financing in most cases.

Case Study #1: Iowa

I pinned a little comment to see where this person is in two years because he’s probably not going to be in a good spot, unfortunately. Let’s talk about some of what we’re seeing, some of the case studies that we’re going through, and some loans. The first one I want to talk about is a loan that we had in Iowa. We purchased this loan for around 60 cents on a dollar. The borrower was about ten months behind. It was a pool we bought with fifteen-plus other assets about a year ago. Our standard MO is that the servicer gets it boarded, and we send the demand.

Why do we send the demand? If you haven’t listened to our prior webinars, I can explain it briefly. We send the demand because people typically will get engaged or re-engage with a lender once a demand letter is sent. In this instance, they didn’t re-engage. I came to find out in October that the borrower passed away. We had started with the foreclosure process and continued down that path until we heard from one of the heirs. We reached out to the servicer who they gave our information and they provided the servicer with a copy of the death certificate and confirmation that they are responsible for this asset.

The woman was from out of state and said to me, essentially, “We’re going to sell the property. It was my father’s property. We’re all out of state.” The servicer said, “This much is owed. We’re going to sell the property for $225,000 roughly is what the agent is telling us. There’s a lot of equity. Can you work with us in regards to if it goes on sale, it’ll probably sell for less. is there anything you can work with us on in that fashion?” When people say, what does that mean to work with? There are several things you can do.

One is you can delay the foreclosure or push a foreclosure, which happens in many instances. In this case, the foreclosure wasn’t set until right around this time, which is in May of 2024. This is all going on in the November-December timeframe. Nothing is going to happen until May. As goodwill, what would be great is to see the property on the market for sale, to see it’s cleaned out and in condition because we’ve seen some people who put properties out there for sale and it’s atrocious. We have one right now where they make their bed.

There’s trash on the floor and the agent still took pictures, which blows my mind. Let it be. They got the house trashed out, they got it cleaned out, and they had been speaking to somebody in the neighborhood who was interested in buying the house. They put it on the market and told us what it was listed for. We usually ask if the agent is related in any way, shape, or form because sometimes people will have somebody they know to list the agent and then never appear to a showing just to stall.

We didn’t anticipate this in this case because nobody is living in the property, but properties where the borrower is still living may list it on the market, but they have no intention of selling. They just make it look like they’re listing it. We were working with this borrower or the heir. We stayed in communication and they let us know and let the servicer know in late January that they had an offer, they were accepting it, and it was going to close in late February.

She reached back out and said, “We just want to confirm. Here’s the title. Here’s a closing. I know sometimes you have additional costs that get incurred like continuing with the foreclosure process. Is there any way you can freeze from adding any charges to the loan, from that standpoint?” We said, “Would you be willing to share with us the offer? Was it cash? Was it financing? What was it?” She sent us information on the offer, which was a very strong, good earnest money deposit. We said, “Yes, we can for 30 days.”

When we spoke to the attorney, there was very minor work that would have been needed so it’s not going to slow you up. We worked with them on that. They ended up closing in February and we got that loan paid off. In this instance, I know some lenders would be the type that would ignore the emails, not pick up the phone call, and continue to plow through with foreclosures. When I was younger and starting in this space, sometimes I felt like I had to win every battle. To me, this was a win-win but sometimes, we do what’s best for our team and our investors, and we try and work with people in the same token. If we can create that win-win, which we did in this case.

Case Study #2: Arizona

They got to sell a house at top dollar, we got paid off in a faster time frame, and we didn’t have to put more money out of our pocket and legal to expend on the process. It’s a unique situation. I want to share it with people to understand most people think note investing is black and white. It isn’t. The next case study I want to mention is one in Arizona. This boils down to several things. One is trying to work with a borrower, speaking to your attorneys, but understanding the options.

Most people think note investing is black and white. It really isn't. Click To Tweet

I’ll explain that when we go through this case study, but if you know all the options available, sometimes that creates opportunity. Here’s another example of there’s a house that was worth over half a million dollars. It was under a $50,000 balance on this loan. We picked it up at about 65 cents on the dollar. It was non-performing and the borrower was around twelve months behind. We acquired it about a year ago. The borrower would stop paying about a year prior. We follow SOPs, Standard Operating Procedures, and send the demand, no response.

Foreclosure was set in December, as Arizona is a pretty quick state. Once the foreclosure finally got set, here comes the borrower. The borrower reached out to the servicer and wanted to keep the house. Who wouldn’t want to keep a half-a-million-dollar home that has a balance of less than $50,000? The borrower also was about $8,000 behind and was trying to work something out. We recommend the servicer, put them in contact with the housing assistance program within the state to see if the borrower would qualify.

Lo and behold, the borrower qualified for housing assistance. This process does take time. It goes back to that other case study. Do you wait? Do you foreclose? What do you do? You have to understand in these situations, the chances of that borrower letting you go to foreclosure are pretty much zero. No borrower in their right mind is going to let a home go to foreclosure sale that has close to half a million dollars in equity, actually only being down behind $8,000. We did not push the date.

We did tell the borrower, “You have until December.” Let’s push because you still have to give them some deadline. You still have to let them understand that it’s not at their pace. You have to realize that borrowers, when they’re put up against the deadline, typically will react much faster. This borrower was able to get $8,000 in assistance, which came right to us. We got $8,000, rocked the loan current, and then the borrower was still able to make those monthly payments after that. The reason why is they had several job losses that got caught up.

They’re back on track and they’re able to make their payments. We got the $8,000, then we continued to receive some payments. We sold the loan as a re-performing loan on the market. We sold it for a few thousand dollars more than what we paid for it but you take into account the $10,000 we got in payments as well. We made a nice profit between $10,000 and $15,000 on a loan within a year. I share this story because sometimes people who just push and have tunnel vision think, “We’ll go to foreclosure.” This borrower files for bankruptcy.

That $8,000 is going to be spread out over 60 months. You’re getting $120 to $140 a month during the bankruptcy extra, instead of getting it all upfront, just because you push too hard. You have to know when to put on the pedal and when to take it off. With people having significant equity, we’re seeing a lot more bankruptcies. Within our portfolio in 2023, now we did have 6 foreclosures out of 150 plus assets of which several were from DC’s borrowers that we had to take to foreclosure or they didn’t want the property.

Creating Wealth Simplified | Note Investment Market

Note Investment Market: With people having significant equity, we’re seeing a lot more bankruptcies.

 

I don’t think any of the borrowers who wanted the property decided, “I’m not going to file bankruptcy.” We continue to see an uptick in bankruptcies. Last month, I believe we saw three within our portfolio. This month right now, based on where things are looking, within the next 30 to 45 days, we anticipate we’ll probably see another 2 or 3 bankruptcies. Someone may ask us the question. People are going into bankruptcy and a lot of people will think bankruptcy is a bad thing.

Bankruptcy is restructuring and sometimes that’s what borrowers need because a borrower who hasn’t paid in four years their mortgage or any of their other debts or they’re behind those debts on a year or two years, them coming to the table thinking, I have no money down but I’m going to pay this, pay that. What they end up doing is they typically will pay whoever is screaming the loudest that month and let the other ones fall. Sometimes a restructure and the bankruptcy that restructures everything is what’s best for them to allow them to stay in their home.

Creating Wealth Simplified | Note Investment Market

Note Investment Market: Bankruptcy is a restructuring. Sometimes, that’s what borrowers need.

 

Market Conditions

There’s probably the embarrassment factor of having to file bankruptcy, but in the long run, in five years, if you’re all caught up, your debts are all clean, that’s probably a benefit for this person because some people are swimming and sinking in so much debt. I want to share those two case studies for people about the things that we are and are not seeing. I’m going to spend the last few minutes talking about the market, where things are headed, and what we’re seeing.

We continue to see a significant number of loans come across our desk, starting to see an uptick in non-performing loans, as well as scratching debt loans. The pricing of loans is pretty much stabilized and people again will think, “Loan prices are too expensive. It’s too much.” That’s what people say, “Everything is expensive today.” You can still make good money, but 5 or 6 years ago, you bought an asset at 30 cents, 40 cents on a dollar. You’re making, if you manage it properly, 50% to 100% returns on some of those assets.

Today, you can still make double-digit returns on performing and non-performing starting in the 20s. It’s still available with multiple exit strategies, but people are stuck in prior times, as well as I know there are some gurus out there that teach you don’t pay more than 30 cents or 50 cents or 60 cents on a dollar for an asset, but you didn’t even look at the numbers behind it. If you’re in a state that is nonjudicial and it’s a six-month timeline, the borrower is behind and they file bankruptcy and start paying, you get all those extra payments, which is a windfall.

If something happens where you have to foreclose, you’re in and out of that deal in six months, you can make $20,000 on that deal. Maybe you make 17, maybe you make 23, but it would be very difficult for you to not make anything or lose a significant amount like you’re seeing a lot of other syndications going on. Some people sometimes get so caught up in the whole IRR, their yield, or what their return is. My wife and I joke about this all the time. I tell my wife, “I made an 18% IRR.” She looked at me and said, “Great. How much money do you deposit in the account?” She doesn’t care what the IRR is. She wants to know how much money is going in the bank account because you can’t spend IRR, but you can spend money that’s in your bank account.

I hope everyone enjoyed this episode of the show. For more information on our Regulation A plus offering, check us out at 7EInvestments.com. If you are a note investor looking for assets, you can reach out to us at [email protected] to sign our NDA and get on our list where we send out assets typically on a monthly basis. Thank you all for tuning in. Take care. We’ll catch you on the next one.

 

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