If you want to know more about the note investing industry, look no further than the DME. The Diversified Mortgage Expo is the place to go if you want to listen to experienced investors. Kimberly Banks Fawcett runs it with her business partner, Liz Bruner Smith. Join Chris Seveney and Jamie Bateman as they talk to Kimberly about her career in the note space. Kimberly is a note and real estate investor and is co-host of the DME. She is also an educator at the Note Investing Academy. She helps up-and-coming investors on how to get started in the industry with her years of experience. Join in the conversation today to learn how Kimberly started from non-performing to second-lien notes. Learn the importance of a CPA and bookkeeping, and find out what the purpose of the Diversified Mortgage Expo is all about.
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Kimberly Banks Fawcett On Educating People On Note Investing And The Diversified Mortgage Expo
We have a special guest in this episode. We are joined by Miss Kimberly Banks Fawcett of Note Investing Academy and several other entities. Kimberly, how are you?
I’m doing good. How are you guys?
We’re good. Thanks for joining us.
No problem. Thanks for having me.
We could take this conversation in many different ways. You have a ton of experience in real estate, notes and lots of stuff we can talk about but I’ll kick it over to Chris to see what’s on his mind.
I’m back from vacation as well. It’s been a while since I’ve been on a show.
That’s why I have to do some on my own. Without Chris, I can’t get a word in.
That is true. Now I’ve got lots of built-up energy. Summer has been going well. We mentioned this a little bit in the Facebook group where we get to talk a little bit about notes. It’s been a little slower this summer compared to other summers. I don’t know if it’s more people on vacation, people still waiting on assets because of COVID. Kimberly, have you seen that as well?
I have and I’ve seen a number of interesting deals come through. I feel like people are trying to sell some of their bad stuff. I had two different notes where they had gone all the way through foreclosure and it was overturned. Those are always interesting. On either one of them, I offered them $1,000 and they said no. They apparently think they can find someone that wants an uncollectible note. I find those fun. It might be a problem with my personality but there’s always some way to get around it. If you can’t get around it, eventually they get tired of hearing from you and they buy me off for $1,500 and it wasn’t a waste of my time.
There you go.
I was telling Jamie, one, I had a foreclosure overturned because the number of publications was incorrect. It was off by one. We have to go republish one last time so the deceased borrower can be notified the fifth time
Was that in Maryland, Chris?
It was in Virginia. The deceased borrower is going to complain that it was only 4 and not 5. I have had a deceased borrower show up to court, though. It was the son who had the same name claiming it was him. It was interesting. We would like to hear some of your crazy stories as well because you’ve been around a while now more than ten years in the business.
Specifically notes, yes. I’ve been doing real estate. My family were real estate investors but I invested in my own property three months out of college. I’m not going to tell you.
Talking about that, people who have been in the note space long enough knows who you are. For people who haven’t been in the note space long enough, why don’t you give people a little bit of who you are, your background and so forth?
I grew up in a real estate family. My father was a contractor and he was a partner in a development business in town. I went off to college and got my first finance degree. When I came back, my father had passed away and it was time to close down his real estate business. As you can imagine, it worked well when it was the two dads but once it was all of the kids trying to run the investments, that didn’t work for long.
I spent a few years trying to sell those off. Those were all commercial assets. They were strip malls and mixed-use buildings. That’s where I got a lot of my commercial experience. I started investing for myself and I started with rentals as most people do. I eventually got to two apartment buildings with 28 units total. That’s when I decided that being a landlord was not optimal, shall we say?
Tenants and property managers are annoying. When they’re trying to get repairs done, they are annoying. One day I was at a real estate event and someone started talking about note investing and hit me with the, “You can get the same monthly income but you don’t have to deal with tenants anymore,” and I was hooked. Since 2012, I’ve been predominantly doing note investing but we did sell the apartment building and now we have a strip mall because you can’t 1031 it into paper. I have a property manager for that but my big tenant is Starbucks so they’re not that hard to do.
I’ve dealt with Starbucks corporate and their leases can be tedious in the things they want.
I’m lucky though. Since they’re the biggest tenant and they’ve been there for more than ten years, they’ve already gotten all the things that they want and I work around them for the other four spaces because I would like to keep them. I bet if you have them in a 50, 60 spot mall, they’re much more difficult to deal with. When there are five, you can have whatever you want.
Back to notes, primarily firsts, seconds, non-performing, performing and mix of everything.For second-lien notes, you look at the borrower. For first-lien notes, you look at the house. Click To Tweet
Honestly, a mix of everything. I started in non-performing firsts and I got interested in seconds, mostly because it seemed too cowboy-like to me. When you only have $2,000 in an investment, you cannot care when you try this, that or try the other thing. Plus, people told me that you couldn’t possibly be a first and a second notes investor. You have to specialize. When people tell me I can’t do something, I usually go and try and do it. It’s those deals that no one can foreclose on.
I have reached a little bit into performing notes. I prefer to get into nonperforming than buy one already performing. Maybe I’m a pessimist. I figured they’re going to stop paying me and overpay. Nowadays, I like seconds more than firsts. Firsts are cookie cutter. I realized borrowers will take you wherever they want to. You do this, that and the other thing because you’ve got $50,000, $60,000 or $100,000 in that deal. When you’ve got $2,500, $5,000 or something like that, you can try whatever you want. I enjoyed that.
I know a lot of us are struggling with a bit of deal flow challenges. As far as seconds go, have you found any challenges there?
I have had less deal flow with seconds for probably forever. It’s been quite a while. Every once in a while, a new pool of 100 will show up here or a new pool of 50 will show up there. I bid on a whole pool and I’m hoping that the fact that I bid on the entire thing I might get it because it’s hard to cherry-pick seconds. You’ve got 100 deals. I’ll take twelve of them for $50,000. No one gets excited by that. We’ll see. That’s why I’m lucky to do both.
Have you seen people shift from one to the other? At one point, a lot of people were doing seconds and they thought it was drying up so they moved the first. Personally, I’ve seen a lot more people exit the note space or people I talked to have been exiting the note space because they realize it’s not as sexy as a lot of the gurus back in the day would tell you it was. I’ve always thought that I’ve seen more people in the first and seconds but I’m curious for your opinion on that.
More people are in firsts and people do abandon seconds faster than people abandon firsts. The big trend that I’ve seen in the last few years was not necessarily people in the firsts and seconds shifting but people in firsts going into contract for deed. They’re not realizing what they got into losing their whatever and either going into first or given up completely. That was the big, “Look at all this new inventory, it’ll be great. It’s the same thing but it’s cheaper. Isn’t that wonderful?” There’s a reason why it’s cheaper.
Besides the dollar entry point and the lower cost on seconds, what would you say are some other differences between the two? We had Fuquan Bilal and we were talking about some due diligence differences. You might be a little more focused on the borrower in seconds than the property potentially. How would you compare not just due diligence but being a note investor in seconds with firsts?
To hit on due diligence a little bit, when people emphasize the fact that second you look at the borrower and first you look at the house, I almost feel like they’re oversimplifying to get someone to listen to them. I don’t mean to say that Fuquan does that. That’s a sound bite someone might pick up. I feel that you do the same due diligence for a note regardless of what position you’re in or going to be in.
If I look at a second, I want to know why the borrower is not paying. I want to know that they’re paying their first. I want to see if it’s been medical debt that caused a problem or if they bought their fourth jet ski and that’s the problem. I do that a bit with firsts too because you’re looking at it like, “Fine. If I have to foreclose and I don’t get the full UPB, could I do a deficiency judgment on this guy?” That’s still looking at the borrower. All the skills are exactly the same. You need to know all of the things. It’s the different emphases depending on your loan position.
I have more fun doing a second because you’ve let go of the fear of having so much money in that one deal. It’s much easier to get a short payoff in a second. I have one that went into Chapter 7 and the borrower wants to surrender the house to the first. I’m like, “I’m the one that’s delinquent.” At first, you’re like, “This will be the one where I finally get stripped. What am I going to do?” There’s enough equity in the house. If it goes through, it won’t be a home run but I’ll be fine. Maybe I don’t like the stress that you can get into on some firsts with that much money in there.
You’re talking Chris into buying some seconds soon. That’s what’s happening.
The question I was going to ask is, years ago, CFDs were the big thing that people go into and got completely crushed. I remember somebody who never bought a note, took down a pool of 30 of them and afterward was like, “Ugh.” I know another person who took down a large pool and the pool they took down was the stuff I had thrown back. There was a house, for example, in Maine that didn’t have a back roof and there were three feet of snow in the house. All of this was in the servicing notes and the person had it on Paperstac.
I replied to them for the price, I said, “Did you check the servicing notes on this one because there’s no roof on the house and it’s in Maine?” He’s like, “How do you know that?” I’m like, “Servicing notes.” He’s like, “I never got those.” I’m like, “Oh.” I digress. That was a few years ago. What do you think is next where new investors are coming in and looking at things that are going to be potentially problematic down the road? I saw something and I’ll comment on it afterward but I’m curious what your thought is.
I don’t know if it’ll be the biggest thing but we’re going to get hit by those forbearance plans that no one has reported. If you don’t look delinquent on your credit report, a note teller doesn’t have to tell you that and apparently, you don’t have to be smart enough to ask. People are going to get notes that either appear to be performing, appear re-performing when you say forbearance plan or are two years more delinquent than they thought they were when they got them. That’s going to hit some people that don’t pay attention or don’t do great due diligence.
It popped an eye, too because you got people with deferred interest on these loans. It’s going to show current but the person may not have paid in the last two years and it’s like, “It’s current because they deferred the interest because they wrapped it in some plan.” The other thing I’ve been seeing a lot is lines of credit loans and stuff like that and some ugly and bad papers where there are a lot of title issues, the statute of limitation issues and so forth. People will send me this list and I’ll be like, “This isn’t even collectible. It’s not foreclosed but the note is not collectible.” I’m like, “You can’t even go after the person for a deficiency.” They’re like, “Where’d you learn that?” I’m like, “I’ve asked an attorney in the past. Did you ask an attorney?” They’re like, “No.”
I can’t stand the answers you get from sellers sometimes when you notice a problem. They don’t have to have noticed it. They don’t have to admit that. The fact that they downplay it even though it’s come up in conversation is ridiculous. I was bidding on one of my notes where it’s been foreclosed and now it’s been reversed and now it’s a note again. They cannot account for almost $50,000 in legal fees. They don’t have the bills.
They don’t know what it is but they still want me to pay over UPB because it’s going to be an REO. “I’ll pay $12,000 over UPB if you’re going to tell me I’m going to get this $50,000 rental.” This is the answer I got, “We couldn’t find it and we couldn’t possibly lower the price because we had already taken your bid, which was the lowest bid we got.” We don’t have a relationship. It’s not like you owe me a thing. You’re sitting there and you go, “Who paid the least? Let’s go with them.”
I’ve had that in the past too. It’s like, “You want me to pay more UPB. Are you guaranteeing the legal fees and interests?” They’re like, “No.” I’m like, “Why would I?” In certain states, it might not be collectible or you may have added it. If you don’t have an inventory of every single invoice and somebody fights it, it can get stripped easily. I know sellers who will be like, “I want more than the UPB.” There’s one company that’s out there that puts into the thing. The seller wants more than UPB on this and the first thing I’ll ask is, “If it gets stripped, they give me a dollar for dollar back and they won’t give you anything back.” They’re like, “They won’t give you anything back.” I’m like, “Why would I bid off of that?”
Do you follow-up afterward to see if they were able to sell it to somebody?
Typically, I see that tape come back about a month or two months later.
I want to know who’s out there paying these prices and buying these deals that don’t make sense. It’s to keep an eye on them and maybe avoid them if I can.
It’s a good point because I use Data Tree, I can go in and see or go online to the county and be like, “Here’s that property. Who got the assignment?” Sometimes it’s newer investors as well and they don’t even realize that you’re supposed to record the assignment. I don’t know how many times I’ve sold assets especially contracts for deeds and I get tax bills and stuff. I’ll email the person and I’m like, “Did you ever record the deed?” They’re like, “No, was I supposed to?”
I know you’ve got a ton of experience in the space.
I feel like you’re calling me old.
You started right out of college but I was curious what a day or week in the life of Kimberly looks like because you’ve got your hands in several different things as far as note investing, real estate. You’ve got the DME and Note Investing Academy. What I’m getting at is how much of your time and energy is devoted to each. I know you do some training as well. What’s your week look like?
It does depend on what time of the year it is. When we’re closer to the DME, there’s a lot of that going on. It also depends if it’s right after the DME. The way we scheduled for 2021, that’ll be the 3rd quarter or 4th quarter when nobody’s getting rid of things. When we set up our Note Investing Academy, we wanted to make sure that we didn’t end up being one of those investors that now realize education is profitable so I don’t have to bother to buy any more deals.
Is that out there?
Yes, there are. That might bother me more than the seller that tells me something ridiculous to get me to go away.
That’s for me.
Can you name somebody besides Note Investing Academy that has training besides yourself that still buys notes?
Technically, I don’t have training. I have a membership group coming out.
Let’s see. That’s a good one.
We can do that later. Most people go there because they don’t buy any more notes.
We do some sales and marketing and a lot of meetups, Facebook Live or whatever. That does take time away from tracking down deals and doing all that but it’s all recorded on video. There is no reason to redo all the videos every year. It’s not like it’s a super time-intensive program to maintain but we do marketing. I have an assistant and I have a VA. They can do a lot of that so I can focus on the note deals.
If I had to come up with hours and if I was talking about an average week, not an event coming up, I’m 85% deals and 20% working on Note Investing Academy. It doesn’t need more than that. As you both know, you get to a certain point in this space where everybody has questions. Whether you’re running education or you’re staying alive in the Facebook group, someone’s going to ask you something so that takes some time.
The way I see it, there’s a big difference between what you’re offering. The reasonably priced academy and education versus a $40,000 to $100,000 program. There’s nothing wrong with education and helping people. You have more experience. I didn’t say you’re old. I said that you have more experience than a brand-new person. Why not help somebody out? Your time is valuable though so why not charge for that? There’s nothing wrong with that. That makes sense.
Since we’re talking about other programs, it’s the one that’s going to be $100,000. I know the one that used to be $70,000.Learn by doing and asking questions, not by some week-long course. Click To Tweet
I don’t know if it’s still $70,000 or not. The last time I saw it, it was $70,000 or $75,000.
I have not seen one for $100,000. I threw that out there.
There probably is because there was a $70,000. The second friend came out with his $75,000. Wouldn’t the one who was $70,000 want to bump theirs up?
It is a marketing tool to give different options and never expect to sell the expensive one. The expensive one is supposed to drive you into the middle to sell that one. The $100,000 program is selling $50,000.
They call that anchoring or something like that.
Yes, I believe that is the term.
I call it insanity.
Your buddy, Jeff, who we’ve had on the show, he posted. He bought six low-dollar NPLs that you’ve been helping him out with. You’re mentoring whether formally or informally and at the end of the day, you learn by doing. You need someone looking over your shoulder, someone that’s more experienced to help you out. How I learned is by doing and asking questions and not from taking some weekend course and being an expert on Sunday evening, magically.
He’s enjoying the stories because he went to a house that cost $2,500 to get the crap out of the front door to get in the house. He was bragging. He’s talking to his wife about how there were 50 buckets of human waste on the property. He’s like, “This is awesome.” I’m like, “Yes.” On the news and stuff, people are always like, “These beautiful houses that people are losing.” I’ve never taken back a house that would be livable the next day or probably even the next month of cleaning it out.
It sounds like this is the perfect business for him if buckets of human waste are entertaining because the things that you can find are outstanding.
He works in advanced research for the government and stuff so everything that he works on is more theoretical so something that he can feel and touch is better. Speaking of which, tell us one of your craziest stories. Best notes or worst notes.
You have a good deed story that you brought up.
There are crazy stories, icky stories and good stories. There are so many stories. The craziest one I have is continuing to go on. I bought this note in 2014. I put them on a forbearance plan and he paid every single payment for an entire year. It was beautiful. I had my first pre-performer. I was so excited and he went dark. It took me two months to get hold of him again. He pays and he stops paying. He’s not far enough behind to call him a non-performer. He’s not far enough ahead for me to settle this and make money. He had a tree fall on his house and it took out part of the roof. He didn’t have insurance because he assumed I had insurance for him. He’s been calling my assistant. He calls her all the time and he talks in circles.
Clearly, that poor man is not all there. He’s got all kinds of conspiracy theories. I’m sure he wears a tinfoil hat at some times and he gets lost in the conversation. The best part was when the tree fell on his house, he couldn’t understand that it wasn’t his insurance policy that I was the one that was insured. I don’t even know how he did this. He called the local insurance agent. They wouldn’t talk to him. He’s not insured.
He called the regional department and went all the way to corporate headquarters to get someone to talk to him. Every day, people are like, “You have this borrower that’s called.” I’m like, “I know. I can’t make him stop.” We went through the whole process. We found the claim for the roof damage, this and that. It was one of those ones where you get bitten on your replacement cost or actual replacement value or whatever term they used. We got $100 insurance. Because I’m me, I’m like, “You have to make a repair and send me a receipt then I’ll send you $100.”
“Go spend $6,000 to repair it and I’ll send you $100.”
I’ll be happy to do that. We keep everything on the up and up. My good deeds deal that you mentioned Jamie about my first pool seconds, some of them I wanted in the pool and others, you’re like, “It looks fine. I don’t care.” This was one that I had, “Whatever. We’ll figure out what can do with it.” It was in Tennessee. Two days after the borrower received my letter, he was on the phone calling me.
Apparently, a couple of years before that, there had been a category 5 hurricane that took out his entire neighborhood so there no longer was a house. Google didn’t seem to know that, neither did Zillow. He’s telling me his whole situation because of the stress of going through this whole thing and losing everything. During the tornado, he got hurt. His marriage didn’t survive the issue, which is understandable but sad.
This was the last thing he had to deal with before his marriage would be done and he could go on with his life. He had paid off every other debt and his first mortgage was paid off by the insurance. He was so eager to talk to me because the entire time he was trying to find information on how we paid it off, no one had recorded their assignments. It was one of those ones for hedge funds that have owned it in the last twenty minutes and nobody ever records their assignments.
It was the first time I had a long talk with the borrower and it was probably the last time I’m going to. What happened during the storm was it picked up his house. When it did that, it also picked up the concrete slab that was their front porch and they were all in the basement, which is completely exposed now and the whole slab came down. He had to learn how to walk, talk and swallow the whole thing. Hence, that’s probably why it was stressful in his marriage.
He said, “Thank God, it didn’t hurt the kids. They were right next to me.” When he said that, his voice caught and I was like, “I can’t cry. I’m talking to a borrower.” I felt for the guy but I realized that someone’s story about their children could get to me and I don’t think you should allow that to happen. It doesn’t mean you have to be unfeeling but I feel like I need a buffer. I’ll have my servicer and assistant talk to them. We’ll be unemotional and figure out what we’re going to do.
We were able to help him. I paid $4,000 for his loan and he owed about $45,000. It was a while ago when you could buy seconds cheap. He had been talking to a developer. He had bought some of the other locks in that cul-de-sac so he wanted to buy this lot, too. He sold a lot for $25,000. I took $20,000 and he took $5,000. He was able to pay off all the closing costs and he paid off his attorney and now he’s done with his ex-wife. He was thrilled so that was nice. I could have taken less. I could have been like, “Give me $10,000,” but you can do a good deed without harming yourself.
There’s nothing wrong with a win all the way around. That’s a 500% return. He owed more than what you ended up getting.
That is one of the hang-ups on seconds. Who’s going to say that wasn’t a home run? A 500% return? I’m not retiring on that money. I can’t pay for college with that. It was like, “Okay.”
It’s a good point. The percentages of your returns may be high but the dollar amounts are or not relatively speaking.
I’d like to shift and talk a little bit about the Diversified Mortgage Expo, DME, which is coming up in September 2021 down in St. Petersburg, Florida. Why don’t you tell us a little bit about that event? I know you took it over a few years ago and you are a former event that you transformed it into the virtual mortgage, I should say. Why don’t you tell people a little bit about that, who’s it for and we’ll ask them questions about it?
It started out in 2014 and it was completely focused on non-performing debt because we were still working through all the problems from 2008. Everything was fizzling by then. They still felt they could have an event on it and it worked pretty well for the number of years that those two gentlemen owned it. Myself and Liz Brumer-Smith purchased it at the end of 2019 and decided to change it to the Diversified Mortgage Expo. I feel like everybody needs all the same skills and information but we apply it differently.
There are more people buying performers and re-performers. We wanted to make sure we encapsulated all of it. 2020 was our first actual event. I don’t know if anybody noticed, we also had a bit of an international health problem. It was live in Nashville. It was a lot of fun and it was on Zoom but it still turned out good. You two were both wonderful, which I would have said if I wasn’t on your show at this moment. I have to be honest. I was surprised by the great reviews and comments we got from everybody because nobody wants to spend two days on Zoom. The information was good and somehow, we got people to be able to network on Zoom.
The breakout rooms are awesome. We’d have them in between. I haven’t heard from Wayne Snow in a while. I heard the crazy stories he had going on. It was good to catch up with people because a lot of us also don’t have time to also fly around the country to go to live events either.
Didn’t you have two tracks?
Our main sessions are things that anybody in the business at any level should know. We have a new investor track and an advanced track. They’re also different topics. It’s not sessions 1, 2 and 3. Even though you’re brand new, maybe you’re interested in this one advanced topic or reverse, you could be an advanced investor and there’s bankruptcy talk and you want to go see that. Something’s going on there and you want more information there so it’s flexible.
That’s what happened in 2020. Now, it’s 2021 and there’s still a pandemic. The idea of getting everybody into a building and getting someone sick even if we did everything we could keep from it. We had it all planned for the end of May 2021. Everything’s great. It’s going to be on Zoom then my family imploded a bit. It’s hard to try to mother your college student who’s fourteen hours away.
Luckily, I’m spending a little time on that to keep it from becoming a total disaster so it was good so we had to delay the DME. Liz could have done it all by herself but she didn’t want to. She wanted it later. Now, we’re going to meet in St. Pete at the end of September 2021. We are excited to be able to do it in person although COVID is starting to sound scary again.
Every time you pick, it’s following it.
It’s crazy. Someone did send me a message, “Do you think it’s still going to happen? Are you going to be in person?” I’m like, “DeSantis has gone all-in on Florida staying open.” With the exception of Texas, there are no other places more guaranteed to be open for our stuff for good or bad. I’m excited for all the people that are coming together. It’s going to be fun.
It’s for two days. September 30 and October 1.
It’s all day on both days and this time, it is Thursday and Friday because we had a little trouble last time on a Saturday having some people show up. They were like, “I’m not speaking on Saturday.” We fixed that. I encourage anybody else to do this if they’re going to be in St. Pete. I have a meeting scheduled for Monday morning so I go and I get to stay all weekend and be able to deduct that because I have to get to the meeting. All the CPAs say that that works.
As long as it’s planned ahead of time.
I went and looked at investment properties in the Virgin Islands so I flew Saturday night. We looked at properties on Sunday, Tuesday, Thursday and Friday.
Is that why you texted me every day to say, “I’m looking at a property now,” so there would be a trail. I’m just kidding. If Chris gets audited, he can show this.You can do a good deed without harming yourself. Click To Tweet
It’s like a police officer who keeps the little notebook, “It can’t be a he said, she said thing because I wrote it in my book and therefore it must be true.”
With the Note Investing Academy that you also have with Liz, are there two big things you guys have worked on together? Do you end up investing together?
We haven’t invested together but she has flipped me a couple of loans from time to time because she’s more into the seller financing space so she goes out and finds them and resells them. I bought a couple of those. Seller financing isn’t my thing. I prefer the institutional ones but she seems to like that. That adds to Note Investing Academy and to the DME because we both have different strengths and focuses so we can each bring our own flavor to it.
The first panel that she put together was how to source seller finance notes but we’ve got to talk about other things, too. The one panel that we have had trouble filling and maybe you guys can suggest somebody, is about accounting and bookkeeping. I realize it’s not the most fascinating topic. Is there no one out there that can talk about it?
Are you open to a virtual speaker?
She may go.
We both use Debbie Mullins out of Texas. I don’t know if you use Debbie in the past.
I have used her way back when. She’s trained my assistant so now I have an assistant
I could talk accounting all day long and bookkeeping.
Would you want to?
Here’s a crazy story. When I was a little kid, my mother used to work for a bookkeeper and she used to give me the balance sheet, the big 11×17 legal papers and have everything handwritten in the columns in pencil. I’d have the adding machine adding everything up and stuff. I used to love numbers so I’d be like, “Can I do that?” I could talk bookkeeping all day long if you wanted somebody because that’s one thing nobody looks at or talks about. The number one thing I tell people is if you’re going to invest with somebody, the first question I ask them is, “Can you show me a sample of a deal on a balance sheet or in your books?” Most people are like, “What are you talking about?” If they can’t figure out how much they’re making or what’s going on with the money, you’re never going to see any of it.
I feel like there’s a gap between doing the bookkeeping. There are a lot of people doing their bookkeeping but it’s not like the overall strategy that your accountant or your CPA provides. There’s an interim topic that gets solved by those conversations. It’s like principal versus interest because there are so many people that start in this business and don’t realize there’s a difference. If you don’t pay attention, you’re investing and wasting assets. When you recognize expenses and when you capitalize them, it’s a big thing and I haven’t found anybody other than me who will run their mouths on it because it matters.
People need to set it up for what works for them best. For me because I work full-time as well, I will sell partials where I’m giving up all the payment instead of taking a chunk because I will take 40 payments six years from now. Six years from now, I’m going to probably be doing what I want to do and have that money coming in. It’s going to be ancillary where now, the way my family is set up, I don’t need a few extra $100 a month or whatever that number may be. All of a sudden, I start stacking all those together now. I’ve got 75 partials and it’s like, “They add up later on.”
Plus, you don’t have to go crazy with accounting. You get 100% and I get 0%. What’s easier than that?
Note investing is such a niche space. Debbie is good with the books, we present them to her on a silver platter, if you will. It’s not like the deals with note investors all the time. I already had him for real estate stuff and I don’t plan to try to find a new CPA but my point is there are a lot of CPAs out there that have no idea how to handle notes.
I remember the first accountant that I got to help me with notes had a ton of real estate experience and when I said, “Do you work with note investors?” They’re like, “Yeah.” The first draft that I got of my return, every single note was in there as a rental. They completely missed the point there.
That’s a good note and bolt right there. We’ve probably mentioned that before, Chris but I had a different bookkeeper, who was fine with our rentals. She knew how to do rentals but it’s the same thing. She’s like, “I can do notes I did on before.” Let’s say Debbie had a lot of work to do to undo the damage that had been done.
People do it in CFDs and it’s like, “I can depreciate a CFD.” You shouldn’t. The other thing, too, is there’s a lot of people who have an S corp or LLC. I know we spun this episode but it’s important that people hear these conversations. Some people get all caught up in, “I bought it for $20,000 but it’s got a UPB of $60,000 so how do I put that on my books and so forth?” The tax code is thick so you can do it 27 million ways and I know one person was talking once, “If you do a mod, you’re supposed to capitalize all of that at once.” That’s like, “That’s only if you’re doing it one way but if I paid $20,000 for it and I sell it for $30,000. I get my $20,000 back.” I made $10,000. Unfortunately, it’s ordinary income and it is what it is but it’s many different ways you can skin that cat.
There’s no consensus on that. In my opinion, that’s why you need to have a CPA involved somewhere not because they know the answer. None of them do because the code is like this but they’ve seen it go wrong and they have experience in other situations. If the IRS started asking questions, they know how to present an answer that shows why you did it, you’re being consistent and all those things.
There was one guy that was supposed to be the most fantastic accountant in the world in the note space. They’re friendly with the $70,000 probably now $100,000 person we were talking about before. He was speaking at an event. I raised my hand and asked a question about counting for that bump that you get in a modification.
He’s like, “You have to record it.” I’m like, “You don’t have it and you don’t have any guarantee whatsoever that you’re going to get it.” He’s like, “What would you do?” I went, “In the notes space, I’ve heard people talk about taking that new mod and go into a couple of experts in the space. Have them give you a price on what they would pay for it if they bought it that day. It’s not going to be that much more because it’s not seasoned.”
He goes, “Do you know a lot of CPAs in the note space?” I’m like, “No. What do you mean?” He goes, “Go ahead and listen to your investor friends, I’m going to go talk to the people that are going to pay attention.” He said that in front of people. I’m like, “We’re getting defensive when someone asks you questions. You’re the guy that I don’t want to listen to.”
The reality of it is because the code is so thick, as long as you can explain why you did what you did and do things consistently, from what I’ve been told 99 out of 100 times, you’re not going to have a problem. There’s some way you can interpret a code and the reality of it is, I’m not making $10 million a year on notes. It’s something that if they want to come and spend $500,000 to audit what I’m making and paying in taxes, they’re going to spend a lot more money on auditing you than what you’re paying Uncle Sam.
A tidbit that my CPA gave, when you’re trying you try to come up with a plan for how to do it the best way, always leave something little wrong, just a tiny little thing. If they come in at you, they can correct you on that tiny little thing and go away and feel like they’ve won. If they keep looking because you’ve done such a great job, it’s going to take forever.
That’s an open bolt we have not heard before. That’s a good one.
Is your CPA in Texas or California?
Neither. We are thinking of selling the strip mall that I mentioned. It’s in Texas and I’m now in California but if I sell it, I have to pay 10% off the top to California.
You chose to move out there. I’m kidding.
Do you still own anything in Texas where you can own something in Texas, go live there for however many days a year and claim that is your residence?
No. Nice try, though. California considers every single LLC regardless of what state it’s in as being a California LLC. If you have ever answered a phone call or written an email from California. Hubbs got a great job. He used to be a teacher and now this is getting him into construction and real estate where he wants to be. It was something he couldn’t pass up so he’s getting four years and will move the hell out of here. I have to hold my strip mall for a few more years.
Can you 1031 it again?
I hope so, if it still exists then. That’s a whole other topic.
We don’t have enough time for that.
To close the loop on the DME, you both will be there again, which we’re excited about. To encourage your readers to come to join us because it’s going to be great, we have a code so you guys can save some money. It’s a 10% discount and it’s cleverly called GOODDEEDS because I’m a finance person, not a marketer. I hope God’s people join us. We are going to be as COVID safe as we possibly can be. Everybody put masks on and we’ll have extra space at tables and things like that. It’s going to be great.
We’re finance people, not marketers.
Who are some of the speakers who will be there?
Matt Kelly‘s going to be there. He has not titled his own presentation yet but it will again, be something like Would You Stop Being Stupid? Bill Bymel is going to be there. He’s going to be talking about commercial notes and all the options that are available there. That’s going to come probably sooner.
That’s coming down the pike.Everybody needs all the same skills and information. They just apply it differently. Click To Tweet
Erin Quinn is going to be there, my favorite attorney from Florida. Tony Sottile is going to be there. They’re both doing a little happy hour. I’m trying to get Beth to come to speak about insurance. Not doing a whole panel or a whole presentation on insurance but she’s going to be part of how to manage assets and how to work through them appropriately so she’ll give a little more. We did touch on the losing and not getting a good payoff for the insurance that you have. We’ll be doing that.
Is Daniel going to be there?
He’s thinking about it because he’s in California and it’s all the way to Florida.
I’m looking at it now. Nate Hare from NuView Trust.
He’s doing the whole panel as we did in 2020 with one whole note investor IRA panel. What they’re focusing on is like, “That’s my event,” so it’s interesting that I asked them to do this instead of saying, “This is how you could use your IRA to invest for retirement.” They’re also focusing on how we can tap into that. There are some custodians who make it more difficult so if you had all your investors from that one custodian, it would be a nightmare all the time.
Pop quiz. Favorite custodian?
I like Forge Trust who chose to be in IRA services.
I haven’t used them.
Chad Gwyn was going to come on but now he’s involved in that big, huge sale that got announced on Facebook. He’s in California and we’re doing it in Florida. Nashville would have worked better to get the whole country.
I was excited to go to Nashville.
Maybe in 2022. It could happen. We can hope. We could all meet there. We don’t need to have an event.
Washington DC is a great place to have events.
There are almost all the politicians around. Kevin Cordell is finally going to come. He didn’t come in 2020 but he’s going to speak so that will be nice. He’s representing Madison. Davis Palio is coming and he’s going to have a booth but he’s not going to speak. I don’t know why. He’s a little on the shy side. Maybe he doesn’t like that.
He is but he isn’t. Kevin’s shyer than Davis. For those reading, be forewarned, we all love Matt Kelly. What I love about him is he tells it like he sees it from that perspective. His will be educational and probably entertaining as well.
You also have to pay attention. He won’t stand up in front and go, “Don’t deal with company A, B, C. They’re not good.” He’ll be like, “You’ll notice that some people are not on here,” and he’ll keep going. If you’re not paying attention, you’re like, “He’s making the point without having to say it.” I’m a big fan. He’s hysterical.
He knows a ton. I’ve learned a lot from listening to him, for sure.
Have you ever been around him when he decided he wanted to figure out what a person was about? Have you ever watched him do it to someone?
I’ve never met Matt because I also work. The only event I’ve been to in person was DME back in maybe 2017 or 2018.
I have a picture of you talking to Nathan Turner, who’s also going to be at the DME but you two check.
What does Matt do when he’s trying to figure out someone?
Matt doesn’t sleep. At 3:00 AM when we’re all trying to maintain our health, he’s on the internet trying to figure out who’s doing what. If an investor comes along that he can’t figure out when they’re selling a program that says, “You can make $40,000 in recurring income every month,” and he goes on he looks and they don’t own any notes. He wants to figure out the disconnect.
It sounds a lot like Chris.
What’s the name of your LLC? What state is it in?” “No, it’s not there.” “You’re doing it in trust. What’s the name of the trust?” “No, that won’t work because the state doesn’t do that.” You’re sitting there going, “Do I watch? Do I laugh? Should I go to the ladies room so I’m not next? What do we do now?”
Tell the truth.
The whole truth and nothing but the truth.
Somebody will brag, “I make this much per month.” I googled and looked up and I’m like, “Based on the properties that are on public record, no, you don’t.” They’re like, “I’ve done these many deals.” You didn’t. “I’ve made this much money and notes so forth.” I’m like, “You haven’t paid your bills.” Something doesn’t add up if you bought 10,000 notes but you can’t afford lunch without a credit card. You’re either bad at money management or you aren’t good at notes.
The people that pay attention to bookkeeping and all of that, we know, “I can make $1 million.” How much did you keep? What are your expenses, this or that? Have you got holes that the money’s flowing out of? Take it with a grain of salt.
The simple way to look at it is how many people do you know in the space who have quit their jobs to strictly do notes? Not a lot.
There’s not that many. That’s the only one I can think of.
I know some people who have quit. It’s not a fair statement. For example, not to knock the Midwest but the average salary in the Midwest compared to California or Jamie and I here in Washington DC in the East Coast, incomes are significantly higher. If someone said, “I could retire off $50,000 a year,” yeah, I could retire but that would also be taking a significant pay cut and I could barely afford my property taxes. We’ll be wrapping up this episode. Any final thoughts on this, Jamie, Kimberly?
We covered a lot of ground.
It’s hard to sum it up. I know I’ll see you two. I hope I see a lot of your audience in Florida. It’s going to be fun. A lot of people have left the space. I feel like the fun and smart people are still here and we enjoy each other. I can give you one word for note investing. Ethics.
Ethics and integrity.
Kimberly, if people want to contact you or reach out to you, how can they connect with you?
I’m always on Facebook. I use all three names on Facebook but there’s NoteInvestingAcademy.com. There’s DiversifiedMortgageExpo.com. My actual email address is from my other investing company. It’s KBF@InspireCapitalGroup.com. In any of those organizations, you can find me there.
That sounds great. Thanks a lot, Kimberly.
No problem. Thanks for having me.
For everyone reading out there, hopefully, we will see you at the Diversified Mortgage Expo. Make sure to leave a review. As always, go out and do some good deeds. Thank you, everyone.
- Note Investing Academy
- Fuquan Bilal – Past Episode
- Data Tree
- Jeff – past episode
- Liz Brumer-Smith
- Wayne Snow
- Debbie Mullins
- Matt Kelly
- Bill Bymel
- Erin Quinn
- Tony Sottile
- NuView Trust
About Kimberly Banks Fawcett
At Inspired Capital Group, we invest in mortgage notes on residential and commercial properties in most major US markets. At Note Investing Academy (NIA) and the Diversified Mortgage Expo (DME), we teach other investors to create win/wins by investing in mortgage notes as well.