E317 | Luxury, Lies & Livestock: How We Turned a $1M Non-Performer into a Record-Breaking Win

Welcome back to the Papertrail podcast where we dive deep into real stories, real returns and the real weird stuff that happens when you invest in mortgage notes.

I'm Chris Sevigny and today's episode going to go back, do a little storytelling and talk about an asset in Las Vegas first position loan that was non performing, secured by a million plus dollar property and involved a borrower who ended up in prison, a squatter that blew our minds, chickens running loose inside the house and one of our biggest turnarounds to date.

So sit back, relax and enjoy the story of the fun lessons we have in the wonderful world of mortgage note investing.

So first, let's rewind and talk about the acquisition.

This was a single asset tape, which first time listening A tape is a glorified spreadsheet with loans.

This was the only one on the tape.

It was a single asset being sold by a bank that was non performing and it was a luxury home just outside of Las Vegas that had sold several years prior for about 1.6 million and we had it valued somewhere around 1.4 on million, so on paper looked like a solid opportunity.

The UPB, and again, these are just rough numbers was about 1.1 million with a payoff about 1.3 million at the time.

So this asset did sell for 85, 90 cents on a dollar which still was about $300,000 from the payoff.

And Nevada is a state that does not have a lengthy foreclosure timeline, so still had very good returns on paper.

As always, we did our due diligence and found the borrower owned multiple restaurants and like many business owners, clearly been hit hard by Covid.

But from our review, it looked like he was bouncing back.

Payments were still paused, but the signs pointed towards the borrower making a recovery.

Unfortunately, that just wasn't the case.

Turns out the borrower was dealing with more than just financial stress.

He ended up in prison.

Now why did he end up in prison?

We ended up finding out he was in prison because he was operating a lot of his restaurants without licenses.

Now, despite that twist, we went through the foreclosure process.

The borrower had been very quiet and very silent.

At one point in time he wanted to make a $25,000 down payment to try and get the loan restated, but he could not provide proof he had the 25,000 and then he talked about borrowing the money.

And typically in those instances it doesn't end well.

And it's one of those things where the borrower can't afford the property.

Do you take the 25,000, delay the foreclosure and then still end up foreclosing or do you try and get the property back sooner than later?

And typically we just want to get that property back faster in these situations.

Now, again, we primarily want to work with the borrowers, but in this instance they were way in over their head.

And an example of this was there was a small lease on the property from an Internet company that they thought was $3,000 a month.

The lease was actually $300 a month.

Give an idea.

And they were going to use that 3,000 to basically pay the mortgage.

Now, despite all the twists and turns that happened, we thought we were going to have a great exit on this because right before the schedule foreclosure, the borrower who put the property on the market for sale had a buyer for the home and we were open to working with them and actually delayed the foreclosure sale because it was scheduled on a Tuesday and the closing was scheduled for that Thursday.

So we delayed the sale by a month to let it go through.

And a lot of red flags.

The title company wasn't responding.

The borrower was at this point in time, clearly upside down, didn't know what the sales price of the house was.

Just a lot of misinformation.

But to delay it for a month, it was worth the risk to see if we could possibly get this thing closed.

Unfortunately, title company on buyer side went completely radio silent.

No communication, no update, no urgency.

And despite our flexibility, the deal fell apart.

We had no choice but to proceed to foreclosure.

Now, interestingly enough, to this day, still never heard from that title company or whatever until the buyer at that point in time came back around and was trying to buy the property after we had taken it back and renovated, which we'll talk about that right now, which is rolling into the next segment of taking the property back.

Now, for those who listen to us, it's not too often that we take properties back, but it does happen in non performing loans.

And one of the risks in investing in non performing loans is you don't have interior access.

So it's like a mystery.

Growing up as a kid watching the Price is Right or some of these other game shows, what's behind door number one, door number two, door number three, that's like Node Investing in this instance.

We had a little bit of information because the property was actually on the market for sale, but it was difficult even when it was on the market for sale to try and get access.

And it turns out the Property had not only been used for dogs, but chickens.

Yes, chickens.

Now when they're showing the property, there was chickens that they would typically keep outside, but then they started bringing them inside because it was summertime and I guess getting hot.

And there are chickens running around the house.

Yes, I said that correctly.

Chickens running around the house.

So after foreclosure on houses like this, one of the things we typically do is find a real estate agent.

And we a lot of times will work with a nationwide firm that has local agents that can handle REO properties.

But knowing this was a million plus dollar property, I went on Zillow and found out who had listings of a million dollars plus in the area.

And I found this agent, Nicole, who to this day is frickin awesome, who had a house in the area.

And interestingly enough, so it blows my mind sometimes with real estate agents and you hear like majority of them don't even sell like one house or only sell one house.

I probably called 10 real estate agents.

I only had to call me back.

Nicole is one of them and she took the bull by the horns and was like, I'll go over to the property right now, I'll find out who's living there, I'll go knock on the door.

I was like, holy shiznit.

She is on top of this and she wanted this listing and she got this listing.

So she was able to find out the property was occupied, went over there with somebody else just to get a sense and feel.

But nobody ever answered when you were there.

But clearly there's somebody living there.

So we have the attorney file for eviction and my attorney gets a phone call and it's from a woman who says she's living in the property and it was her father in their family home.

And she asked.

And this was in, I want to say September or August, I think it was August.

She asked if she could have till the end of August and no, it was September.

You'll know why in a second.

And she wanted to know if she could have till the end of September.

And we were like sure, on the stipulation we can come back and do another inspection on house.

Because it's been about four or five months since the house had been off the market.

And our agent had heard about this property because it's in a neighborhood that has higher priced homes and it had a little bit of a stigma to it with this borrowers who are living there and the person living the property agreed.

So set up a time with our real estate agent Tuesday.

I'LL meet you at 2:00.

So our agent gets there and texts me and says, hey look, I actually had to come by myself.

I'm just going to text you updates in case like you don't hear from me.

Just you know where I'm at in case I go missing.

I was like, damn.

And text me at 2:15 and says, oh, she's finally here.

Showed up 15 minutes late and she gets out, extremely apologetic.

Oh my God, I'm sorry.

Late my class, I was in school and just class ran late and my agent casually says, oh, do you go to UNLV in traffic?

She replied, no, I'm a junior in high school.

That's right, a teenage girl living in a 5,000 square foot luxury home by herself completely alone.

Our agent goes in and to this woman's credit, she had done a great job trying to tidy up the property.

House was cleaned out, still had the dogs but the chickens were gone.

The place clearly smelled like animals.

Needed significant amount of work and our agent even texted us and was like, you cannot evict this girl.

And we agreed.

We're like, no, we're not going to force a teenager out there.

And I was putting myself in my own shoes.

I'm like, I grew up in a small town.

Now my parents weren't loaded by my dad was a schoolteacher and my mother worked at a local bank.

Traditional middle class family, but I could never imagine in a million years having to live in a house and take care of it by myself.

At the age of 17, I couldn't even figure out how it would survive or even take care of a property.

The amount of responsibility on this poor girl.

And she mentioned, hey, if you give me the end of the month, I'm moving out.

I have a family member I'm going to go living with.

And our agent was asking about like the mother and the father and really getting the full scoop of this story of I believe the mother had ran off, the father was in prison and she was basically left to her own and didn't want people to know because at 17 you don't want to go into child custody.

She was like three months or four months before her 18th birthday stuck in this limbo.

But yes, we worked something out and actually towards the end of the month, three days before, she asked if she could have another week and we said of course, gave her an extra week and then yes, she left at that point in time and actually cleaned out the entire property.

It's probably the best clean out we've ever had and leave it up to a 17 year old who takes responsibility more than some of our 30, 40, 50 year old borrowers.

So now we're stuck with a property that essentially was a farm.

And our agent was very blunt.

Home's not in sellable condition.

You have to make a choice.

Sell it as is, maybe break even.

Or invest in a targeted renovation for potential upside.

Because it was a high end property in a very competitive market, we chose to renovate.

But wisely so.

If you've listened to me in the last seven or eight years, talk extremely rare that we take on and renovation project.

Many reasons.

One is I spent 20 plus years managing construction and doing it while you're there is difficult.

Doing from afar is even harder.

And no matter where you're doing it from, it all boils down to one important thing.

The people and the communication.

And here we had a very strategic plan with our agent.

And this wasn't a plan where we're just throwing money at everything.

We wanted to focus on what mattered to buyers.

So what matters to buyers?

Updated bathrooms, a fresh and modern kitchen.

We redid the flooring throughout.

It had a casita and an apartment that we went and renovated because it was carpet and just filth.

Everything we did was designed with resale value in mind, not just vanity.

We interviewed multiple contractors and not only were interviewing contractors, we are interviewing what I call superintendents.

Somebody to manage the day to day on our behalf that would follow the scope precisely, stay on schedule.

And one of the big things that we never do is provide large upfront payments because that's a sign of a quality operator.

And we found this individual husband wife team who used to do a lot of renovations for HUD and foreclosures.

And it was a little different because they're used to the, I'll call it lipstick on a pig strategy where here that wouldn't work.

So we had a company go in create floor plans of the property.

We'd have zoom calls going through the floor plans, going through the modifications.

They were at the property, walking through detail by detail.

And it was interesting because I felt like I was there.

Now tell my agent, hey, go back to this, go back to that.

Look.

Oh, the base.

Hey, you forgot to caulk the base in this location is one of the things that I found when we were doing our walkthroughs.

But I felt like I was boots on the ground there and was able to easily manage these individuals.

It did take about three to four months because it's a 5,000 square foot house it costs around 150,000 all in.

But it paid off because after the rehab we put a coming soon on it for $2 million for this asset.

And we had one buyer came in low balled offer.

We went back and forth and eventually couldn't come to a value or when we reached a value, this individual thought everything about the property was going to fall down.

So it just didn't work out.

But we ended up getting under agreement for, you know, and selling it within I think one or two weeks of having it listed between 1.9 and $2 million.

So that $150,000 investment, tripled that investment because it ended up getting us half a million dollar added to the value of that property.

Interestingly enough, it actually broke the sales record for that neighborhood.

And going through this entire process and still talk to the agent today, still talk to that contractor today and always joking about future deals and future opportunities.

What did we do right in this situation?

To me I think the power of combining the acquisition and again that in house asset management with the experience that we have then focused on listening to experts, we listen to the contractor, we listen to a realtor, but just be we listen and absorb because they were probably all we at odds a lot on cost versus value and what we should do, what we shouldn't do.

And then we had to parse and really dive in and figure out okay, is that a sword worth dying on?

Is that really going to work?

Is the agent just trying to make her sale as easy as possible by running up costs, which she wasn't by the way.

And certain things worked, certain we go back and forth and using those write up grades, the local partners, we were able to turn a non performing loan with chickens, a teenage squatter, into a huge win.

And most note investors, if they were to take back a property of that size, they would have just sold it and cut their losses.

And yes, we thought about that.

But we also based off of the property, the location and its value, knew there was huge opportunity if we're able to pick and find the right team.

And it wasn't easy.

We had to really dive in and spend the time and do the due diligence.

Due diligence matters, the due diligence not only on the loan, the borrowers, the contractor, the agent, the property comps.

Because we knew this property fixed was worth 1.8 million plus based off of all the other sales.

So we knew that was the case as long as we did a smart renovation and tailored it to buyers expectations.

Last but not least, As I end this, I just want to say never underestimate the craziness of note investing.

If this was your first deal, chickens in living rooms, record breaking sales, teenage borrowers living in a house by themselves.

That freaks a lot of people out.

But for us, it's like we're immune to it because we've seen again 600 plus deals we've done.

Of course, not all non performing.

It's probably more than 700 now, I don't even know.

But we have seen so many insane, crazy things.

Nothing really shocks us anymore in regards to what we find in these properties.

If you enjoyed this story, want to learn more?

Continue to listen to the Paper Trail podcast and also this September, want to let people know we're going to be hosting a conference just outside of Phoenix called the paper trail conference, September 18th to 20th where we're going to talk note investing, we're going to talk private lending, we're going to talk seller finance.

Going to spend three days going through the ins and outs and workshops.

People get more educated on the space.

So if you're interested in that, you can go over to papertrailconference.com and if you're more interested in our fund, reach out to us at 7e Investments.

Until next time, keep learning, keep investing.

And remember, sometimes the messiest notes can bring the biggest rewards.

Take care.