Are you interested in note investing? In today’s episode, Jamie Bateman and Chris Seveney talk about concepts surrounding loans. Some of which are notes and mortgages. If you are new in the real estate business or this industry, listening here provides the knowledge you need to get started. They give the basic principles of loans, notes, and mortgages. They talk about the factors affecting the real estate market and why note investing has advantages. It’s not too late to succeed. If you consider yourself a newbie and just starting note investing, stay tuned and gain a deeper understanding!
Listen to the podcast here:
Notes For Newbies From The Fourth Annual Cash Flow Expo
Welcome to another episode. I am your co-host with Jamie Bateman. Jamie, how are you?
I’m doing well.
Jamie Bateman is going to discuss and I’m going to critique and spitfire at him questions and comments regarding his upcoming presentation for the Cash Flow Expo. If people are not familiar with it, it is numerous speakers, probably 20 to 30 speakers, all talking about different topics and notes. You can learn more at CashFlowExpo.com. Before we get into that, let’s dive into our typical what just happened so far. Jamie, I’ll let you go first.
I got an offer on a property in New York. It’s very likely I’m going to be losing money on this one but it’s a matter of how much. Don’t get me wrong, this portfolio of New York loans I’m going to make out on but this one with back taxes and the property is a total tear down. We’ll see. I got a formal offer but now I’m saying, “You’re responsible for back taxes and everything else.” I don’t want to have to come to the table to close this. I am using an REO company that I was recommended by Andy Mirza so far they’re doing a great job. I’ve got a lot of different things floating around as is typical in the note space, a lot of moving parts. What do you have going on?
I got a payoff on a loan, which is nice to always receive a payoff.
Was that a performer?
It was a performing loan. It had about probably $10,000, $12,000 balance. It was actually a CFD, we converted to a note. The borrower took ownership and I converted it. They were looking to refinance. Good for them and for us as well.
It makes it a lot easier to refinance. It’s pretty much impossible if it’s a CFD. The title’s not in their name.
We talk about on a prior episode with Shante about HELOCs and foreclosures. I started some legal on about a dozen loans. Mostly, these are non-owner-occupied or vacant properties that the borrowers no longer are interested in the property. We’ve tried to work outweighs for Cash for Keys but just been non-responsive. We are going down that process. I’ve literally had to wait six months because we could not get the attorney the proper information because the servicer who had it at that time, didn’t know how to provide the proper information. It was extremely frustrating but thankfully Shante took care of me there.
I remember the other thing that I’ve got. It’s also a New York loan. We had a deadline for a mod to be accepted. We were going through mediation and headed for foreclosure. I posted something in the Facebook group about New York, full steam ahead, as far as the moratorium being lifted. You can move forward with foreclosures and evictions. That puts a little more stress on the borrower at this point to come to the table. This loan, there had been zero communication for a year just refusing to communicate then now, they accepted. I gave them three options. The borrowers came to the table and are going to put down a down payment, sign the mod and move forward. This one could make up for the previous one I mentioned as far as the loss goes.
Is that the one where the borrower, when I send somebody out to take photos, came out with a shotgun?A note and a mortgage are two different things. Mortgages is a security instrument that links that promise to pay to that collateral. Click To Tweet
That’s a different one. That’s the one I was referring to. On the Shante episode, there were statute of limitations issues. That one, we did mod. There are still some issues with it but I’ve actually done quite well with the modifications on these New York loans. That’s one thing I was going to mention. I’ve been thinking about this a little bit. We talk a lot about foreclosures. That’s a key piece if you’re going to be a non-performing loan investor. I don’t want people to think that’s the goal or you can only work with somebody if there’s communication. Most of the time, you’re not getting anywhere.
The ones I’m doing with the lines of credit, that’s why I mentioned and I’ll reiterate it. Most of them are properties now that are vacant in their blight. The thing to consider too is you’re doing a good deed by trying to take it back because you’re trying to do something with the property. Vacant properties and neighborhoods are typically areas for either crime, drugs or whatever the case may be. You take these back, try and get them, seller finance them to a fix and flipper. We’re trying to improve the neighborhood. These aren’t owner-occupied where somebody has missed a payment and I’m like, “I’m coming after you.”
I had somebody reach out to a colleague that I know that wanted to foreclose on somebody because they missed one payment. They were adamant like, “I don’t care. I want to foreclose.” First off, you shouldn’t be in this business if that’s what you want. On the same token, it’s not going happen. I will mention one other thing, Jamie and I are doing some due diligence on a New York loan that’s got some interesting situation to it where the mortgage needs to be reformed, which means a mortgage has the wrong legal description.
As part of the foreclosure process, you have to do what’s called reform the mortgage, which is correct from that perspective. That is creating some challenges because if it’s not allowed to be reformed, it can present significant issues. Now there is title insurance on it. I’m not sure how that would play into it. We’re rolling up our sleeves and getting educated on a daily basis on this.
There are a lot of moving parts on that one. The legal description of the deed did not match the legal description of the mortgage. The current note holder filed an amendment or a motion to amend the complaint. Now that’s sitting in the judicial system. We’ll see what the ruling ends up being. There’s no shortage of stuff to learn in this business. That’s for sure.
Mr. Bateman, let’s get rolling on your presentation.
Notes for Newbies was the third most popular episode. Katie, who does some marketing work for us, she interviewed me on the podcast a while back and people seem to like that episode. It was meant to be a Q&A for newer note investors. I’m going to fly through it.
When you look at the top five episodes, number one was with Shante and Beth. Number three was your episode with Katie and number four was my episode with Lauren.
I just looked at the latest numbers and Sandra’s is number one.
If we go to December 1st, 2021, Debbie Mullins is number one. Sandra is already moving up and she’s already in the top five.
I’m going to start. Mortgage notes are a niche within real estate. A note is a promise to pay. These are real basic stuff, just basic topics to make sure everybody’s on the same page. You can go back and listen to some other episodes and read blog posts that we have about the top ten reasons to invest in mortgage notes. We also did one on the top ten reasons not to. Active versus passive.
The first question I was going to ask is, of the basics, what is the most or the first thing people should understand or most important thing to learn early on?
A note is a promise to pay. Most people are familiar with a loan either on a car or an unsecured loan or a mortgage. Most people are familiar with what a mortgage is. The note itself is a promise to pay so it spells out the terms. Chris, you’re the lender. You lend me $1 million to go buy my second home and I promise to pay that money back over time. The note spells out the terms of that loan.
People need to understand the difference between a note and a mortgage.
A note and a mortgage are two different things. The mortgage links the note to the collateral. In this case, the collateral is the property. A mortgage is a security instrument that links that promise to pay to that collateral. There are lots of reasons to get into notes. A lot of people like the fact that you can control the property without owning the property. It can be considered a little more passive and little less liability than owning a rental property. We’ll get into some of this active versus passive.
Do you want to invest in notes? Do you want to be a note investor? You’ve talked about that a bunch of times but do you want to dabble and have a performing note in your IRA or do you want to actually be a note investor and run a note business? There are all kinds of gray in this business and people love to put everything in black and white. There’s a middle ground where it’s passive and active in my opinion. Performing versus non-performing, performing is the borrower making payments on time and non-performing, they’re not.
What if it’s 60 days behind, where do you consider it?Stocks are extremely overpriced right now. Click To Tweet
I would call that a sub-performing loan that gets to my point of there’s a lot of gray in this industry even though we like the two categories of performing and non-performing because it makes it easier for bidding and communicating. You got to dig a little deeper and say, “Were they performing for ten years and then they just missed a payment? There are two payments and they’re 60 days behind.” That’s closer to performing but if they reinstated three times in the last three years and they’re six days behind, I call that non-performing. It depends. Generally speaking, if I have to give a clear-cut answer, I’d say 90 days is the cutoff where it’s non-performing.
It depends. If the borrower missed two payments and keeps paying, they never fully paid up but they’re making the payments, they’re performing. They’re making payments. If they’re just not paying and they’ll pay every three months to catch up, I typically will treat that as a non-performing loan, even though they’re constantly 60. They miss three months and they’ll pay two or they’ll miss three months and pay three but they’re constantly not consistent. To me, I break it down to, “Are they paying consistently? Are they not?” Are they consistent or are they not consistent? It’s another way to be performing or non-performing to break down some of that gray.
I’ve got one a case study here that is a pretty good example of what I would call a sub-performer. Note investing advantages, a few advantages, it’s an investment that’s not tied to Wall Street. Who knows after this comes out, what the market will look like. There’s been a lot of volatility with Wall Street and crypto and other things. I’ve actually noticed an uptick in people who’ve reached out to me. I don’t know if it’s related to this for sure but people are reaching out for an alternative investment that’s not tied to your typical stock market.
You know J Scott, he’s BiggerPockets. He’s written books on rehabbing houses but he’s a real estate investor. He posted his thoughts on economy. There was some start that was talking about bubbles and things overpriced. One of them was tied to the stock market. There’s some ratio that typically stays around 100% to 120%. In extreme cases like in 2008, it got to 150% which caused everything to get back down to normal. In this environment at the stock market, it’s at 200% so it’s blown away everything.
His basis is, “Real estate is a different animal because it is getting less affordable but also there’s less amount of housing.” There’s rent and stuff. From a stock perspective, what I read from that graph is stocks are extremely overpriced right now. I actually haven’t looked at the market. All I did is saw something on Facebook that Bitcoin was down in the mid to high $30,000s. It was $75,000 or $70,000. Right before the COVID hit, it was only at $5,000.
That’s true for me too. I don’t track the markets at all. I pay attention to headlines and articles. This is mostly from people I follow on Twitter who are both in crypto and stocks. The whole thing with these younger investors, they love to say, “Buy the dip.” It sounds good but a couple of factors there. You need to have money to buy the dip. You need to have cash or access to cash to be able to time that. We’re mostly talking crypto here. Secondly, you don’t know if it’s a dip or if it’s coming back up or if you’re catching a falling knife.
It’s tough to time the market. Not investment advice, not legal advice but you really should take the long view. A lot of people that invest in our funds, they have cash and money in the stock market but they want to diversify so they put it in. They’re not looking for a 50% return. I’m sure they would take it but they’re looking for something with collateral that could be considered safe. Good deeds, we touched on that briefly. We have control as note investors. We’re able to use discretion and work with the borrower in most cases if they’re willing to work with us and we can in a lot of ways to do good deeds.
We’ll get to a couple of examples of that. Control and security, we touched on. There’s collateral. I consider note investing one of the more recession-resistant investment asset classes. I don’t think anything is recession proof but again, it’s not correlated directly to the stock market. That gives you the whole collateral diversification. As real estate prices are climbing, the collateral value is higher and it’s not tied to the stock market. It gives you some protection there.
People oversell certain aspects of note investing. One that I think is true is you can do this from anywhere. You can absolutely be a note investor. It’s location-independent. I know Liz Brumer-Smith. She travels in an RV and she’s a note investor. That’s possible. Getting started, where do you find notes? That’s a million-dollar question.
You can find notes but it’s a question of, “Are they quality? What are they selling? At what price?”
It’s a very inefficient market. It’s a relationship business as much as we like certain online exchanges and we think it could be improved from an efficiency standpoint. The fact is you got to work and make relationships. You mentioned something about, especially in these market conditions, becoming more of a hunter versus a farmer and being more aggressive in going out and finding deals as opposed to just waiting by your laptop.
It’s all about building relationships. You don’t want to ruffle people’s feathers. You don’t want to be divisive in any way, shape or form. You just want to go out there and build a network of people you want to work with and make sure you understand the other people you’re dealing with.
The one I’ll throw in there that I underestimated initially, the one source was other note investors or other small funds that are closing as opposed to going directly to banks.
It’s the opposite of what everyone teaches you because a lot of people will teach, “Go to banks. Go to these large hedge funds.” If you’ve got millions, yes but when you’re starting with $20,000, $50,000, you’re much better off going off to other investors saying, “I’m looking to buy a note in this location. If anyone’s got anything, they’re welcome to move off their books. I’m happy to take a look.” You could find something.
Out-of-pocket financial commitment is definitely a capital-intensive asset class or investment strategy. You need cash. You can’t walk into a bank and say, “I want to buy this CFD down the road. Can you lend me $50,000?” Eventually, if you’re going to scale, you’re going to need access to other people’s money, at least. That can come in many forms, partials, joint ventures and funds. We’ve hit on all those before.
As far as partnership and mentorship, one thing that gets overpromised a lot in the joint venture world is you’re going to learn a lot. Russ of Wealth Without Wall Street has a saying about in a joint venture, one person starts out with the money and the other person starts out with the experience and then they switch roles. I get the experience and you get the money but that’s not always the case. You’re not going to learn a ton in a typical joint venture if you’re the money partner.
I started doing some of my first ones. It’s like, “You can learn and earn at the same time.” As you grew, it’s not viable because when you’re doing this from anywhere at any point during the day, “My attorney asked a question. I’m getting back to him quickly.” It’s like, “Yes, I can copy you on that information. We can discuss it because you should have some understanding and also some decision-making abilities.” At the same token, certain things or provide information, they’re like, “Why is that being provided? What’s this? What’s that?” You get to a point where you don’t have the time and the timing isn’t right. When people promise you that, I did at first because I thought I could do it. You realize you can’t.
I’ve talked to a lot of people who’ve invested in or participated as partners in joint ventures. I’ve never talked to one who was the money partner who said, “I learned so much.” I’m not talking about just us but with anybody, it doesn’t happen.
Are you saying you didn’t learn anything on 337 Nightmare Street?
I’ve actually been to that property twice.
Right then and there, I just proved you wrong. You learned a ton from that.
It was nice when they got a surprise profit at the end.
Is it still for sale?People oversell certain aspects of note investing. Click To Tweet
Yes, it is. Unless it’s sold, it keeps dropping. We had Mike Schultz on. He talked about a joint venture with Dan Deppen. He got a really good return and he absolutely was spoiled but did he learn a ton from that particular deal himself? No. That’s not to bash Dan in any way. My JV partners that I still have, I keep them informed but I’m not actively trying to train them. Five key decisions. One, how active or passive do you want to be? Two, first or second position notes? Do you want to buy seconds? Do you want to buy only first? Do you want to do both? First can offer more protection. You’re closer to the property and then seconds are cheaper. They were less expensive.
Not anymore on a percentage basis. They’re more expensive now.
What states are you going to invest in? I’ve actually bumped this up on my own. If I’m talking to people, I used to say 3 to 5 states. I’d say at this point, deals are hard to find. Pick maybe 7 or 8 states that you’re open to buying because if you’re picking one state, you may not do a deal.
That’s a decision you don’t need to make off the front. The first real decision when you go through these is do you want to be passive or active? That’s the question you’d answer. The others come with education. When the states you go to invest in, the biggest factor I look at more than anything is, do I have a kick-ass attorney in that state? Like New York, if you’ve got a great attorney in that state and someone you can trust, it’s not that bad.
Depending on which part of the state or certain people, if you don’t have an attorney in New York, I wouldn’t even touch it. The same thing with Ohio and Florida, you really need to have an attorney that knows what they’re doing because the laws are so defined. In Florida, if you don’t have the note or the launches, you’re in trouble. An attorney will tell you exactly what you need. If you’re dealing with some attorneys like the ones I’ve worked with in the past, they’re more worried about everything else but your case from that perspective. You just got to be careful.
You definitely don’t need to have all these answers before you become a note investor. The one I skipped over is, should I be a note investor? One thing people do is they just jump into an asset class and then they never asked why. “Notes are cool. I’ll do notes.” It’s like, “Why are you doing that? Think about it.”
There’s a great post on BiggerPockets where somebody went and was like, “I’m going to do tax liens.” They spend all this money and did all this research then they are like, “I’m doing Florida.” They’re like, “Florida tax liens, sell it less than a point, 0.25%.” In Florida, if it’s a tax lien, you buy it. If it’s not redeemed in a certain amount of time, that goes into a tax foreclosure sale. Ned Carey, who knows a lot of tax, he’s like, “This is why nobody actually does tax liens in Florida.” This person’s like, “I can’t believe I spent all this time, research and money and this is what you make?”
It’s like, “Did you ask anyone?” You need to ask people who are actually in the business. This is a prelude to my conversation that we’re going to do on our next episode, when people are telling you, “You can make six figures in notes in your first year and you’re going to make 100% returns,” go ask other investors. How many investors in notes do you know leave their full-time jobs to go do notes? When you look at it, it’s not many. Once you’ll be like “Why aren’t they leaving?” Maybe it’s because they’re not making what people are telling.
Bill Belichick is not a good football player but he’s active in that space. I’ll hit the last two and then make one more point about these top five decisions. Number four, are you willing to buy contracts for deed or land contracts? I’ve got a blog post about this. There are pros and cons. They’re oversold as the pros of, “I get all this equity in the property because I just canceled the land contract.” Typically speaking, the borrower’s not walking away from all that equity if it’s really there. There’s definitely more liability and work with CFDs. It opens you up to more potential upside and deal flow, for sure.
I want to challenge you on that Bill Belichick comment. We could be a great conversation on that topic because while he’s not a great football player, he is involved every single day in going through every scenario and plays it every week. Note investors who aren’t buying or involved or watching how cases go but just talk from what they learn on Facebook is completely different.
Maybe they did some deals years ago or something. CFDs, think about it whether you want to buy those or not. Fifth is, performing or non-performing? It’s not like you have to set out and say, “I’m only picking one of these.” They’re different animals. I usually use the analogy of a fix and flip property on a non-performing loan. A performing loan is more of a buy and hold rental property. Certainly, there are differences but what are you looking for? Are you looking for cashflow or do you have a high-paying job? I interviewed Ryan Harris. He used to make a lot of money in the NFL. Now he’s retired so he needs cash flow. He doesn’t want a big payout in five years.
What do you recommend for newbies? First, you buy a performer or non-performer?
I definitely used to say performing. I still would say performing in general. It does dependent because you got to talk to the person and understand their situation. It depends on if they’re looking for cashflow or not. How much time do they have? How much money do they have? Those are two keys. I’m redoing my website. One of the things we’re working through is it comes down to active versus passive.
We close the loop because number one and number five are pretty related. Performing notes are definitely more passive. Are you looking for cashflow? The downside to buying a performing note for a newbie is they’re more expensive. It can go non-performing and then you overpaid for a non-performing loan. You can mitigate some of that risk by buying a non-performer out of the gate but you can’t ignore it. It’s going to take more work.
It depends on the person. I say that because on a non-performing note, when it’s not paying, you always feel like there’s a sense of rush or urgency. If you’ve never been through the boarding process and the entire process, you’re rushing through it, you get antsy and sometimes you’re very aggressive. On the performing side, you don’t have that sense of urgency. Depending on your internal personality, most people are doing this the first time and they are a little hesitant.
If you add the hesitancy with the anxiety sometimes you’re better off on the performing side from a stress level of, it’s like, “I don’t need to rush just because the person’s making their payments.” Where if they’re not, it’s like, “Time is money. I need to get this boarded. Why is it not getting boarded? I need to file foreclosure. I need to go demand. I need to do this and do that.” Time is money. You’re constantly checking every day and what’s going on in the portal. You’re going to drive yourself insane. From that perspective, depending on the type of person especially if they’ve never done real estate.
It depends on their experience. If they’re a 20, 30-year veteran in real estate investing, fix and flips, rental, maybe they should buy a few NPLS. They’ve got the time. One last thing I was going to say on these five key decisions. This can seem overwhelming to people, they’re hesitant because it’s a whole new world. You mentioned the attorney on the ground in that particular state. As you start to answer some of these questions, the other ones can fall into place.
How active do you want to be? That can get to number five about non-performing. Start with what you consider the most important questions to yourself and the most important decisions for you and then the others will start to fall into place. People get wrapped up in, “I need my team in 50 states.” If you picked three states, make sure you have attorneys or even one attorney that covers those three states. You just checked a couple of different boxes.You definitely don't need to have all the answers before you become a note investor. Click To Tweet
I’ve got two case studies. One is our Jacksonville case study that turned out to be a really good win for us. It was NPL turned deed in lieu turned rental property. We still have this as a rental. We did a long-distance rehab. We actually did a cash-out refinance. I’d already gotten all of my money back out and then some. We did a cash-out refinance on this. This was a big win.
It was a way that we talk about good deeds. There were a lot of ways where the borrower and the occupants are in a better situation now. The home is much improved. We added value to the neighborhood and then we profited. We are now offering affordable housing in the form of a rental property in Jacksonville. There are a lot of ways that things were improved on that one. I’ve got a blog post about this on my website but it’s not updated, LabradorLending.com.
Second case study, this is the sub-performer I was referring to. This borrower was paying consistently for two years straight if I went back and checked. She was on government assistance. She was two years behind but she was making consistent payments. She wasn’t 60 days behind and she wasn’t one of these lumpy payers. She’s two years behind. That’s a non-performer. There’s communication and willingness on her part that she wants to keep the property.
Chances are in that case, you’re likely going to be able to work something out with the borrower. We were able to turn this around, modify this loan. We bumped up the principal balance. We forgave a good bit of arrears for her. We lowered her payment slightly. We lowered her interest rate from 11% down to 8.5% and extended the term. We were able to sell this then for a good profit. This was more active than passive for us. I was able to sell this to a passive note investor who now holds us in his self-directed IRA. The borrower won, we won and another note investor won. That’s one thing I love about note investing. It can be win-win-win.
Good deeds and good deals.
Anything to add on those two? The Jacksonville I really liked because there’s a lot going on.
As a note investor, what I love about it is the challenge. What I mean by that is this is not the business where everything is clear cut and you know the ending or where things are going go. It’s just like doing a fix and flip or anything along those lines. There’s the road you take to get there but you’re definitely going to be knocked off the road and wander. What you think may happen may not. You typically do play the odds. What I mean by that is if the borrower’s got $100,000 in equity in a property and they’re a year behind because they lost their job, they’re going to file bankruptcy 9 out of 10 times.
That’s probably the play you should make from that if something else happens and it’s like, “Something else happened.” Back to football, if it’s 4th and 12th on your own 20-yard line, odds are you should punt. In that essence, not really go for it, unless you’re the Chargers who typically do because the odds are typically against you. You have to think of it like gamification, that sense of understanding and put yourself sometimes into borrower’s shoes. That’s my Note and Bolt as well.
Somebody tweeted, “Successful people treat life like a video game. Unsuccessful people treat it like watching TV.” You’re more active and creative versus just consuming. The next episode will be Chris’s turn to get picked apart. My Note and Bolt is when you’re doing a loan modification, I’ve found success in providing the borrower options. You hear this from people like wholesalers and people who buy property, they give the seller options. I’m not a sales guru but as long as those options all are good for you and you can still profit, it makes sense to provide.
For example, I just provided three options for this one that we’re doing in New York. The first option was $15,000 or $20,000 down. I’m pretty sure that wasn’t going to happen but I would love for that to happen. They ended up taking option three, which is the least amount down, $2,000 down but a higher interest rate, higher payment and less that I’m going to forgive in arrears. It gives them a sense of control and more flexibility.
I know people do trial payment plans either formal or informal. At that point, when you’re offering a load mod, the ball is in your court to present options. I’ve been having success presenting at least three options to the bar. You don’t want to make it too confusing but don’t just pigeonhole them into reinstating or get out.
As part of my membership group, people get used to my calculator that shows loan mod options and what your returns are. As well as another calculator, you could put the loan up there and put the different amounts, interest rates, and payments to put them side by side, to see what the difference is and what they look like as well. You could use that to send to the borrower and say, “Here are the three options. It has an amortization schedule. Go pick one.” They can understand it. Thank you everyone for joining us on this episode. Make sure to follow us on your favorite listening station, which now, there seems to be about 50 of them. Please leave us a review on iTunes. As always, go out and do some good deeds.
- Shante Duffy – Previous Episode
- Notes for Newbies
- Lauren Wells – Previous Episode
- Sandra Andrews – Previous Episode
- Debbie Mullins – Previous Episode
- Top Ten Reasons to Invest in Mortgage Notes
- Mike Schultz – Previous Episode
- Ryan Harris – Previous Episode
- iTunes – Good Deeds Note Investing Podcast