In any business, you have to be very careful in taking risks. It’s very critical to set goals and plan ahead. In this episode, Richard Thornton explains note investing and how you could succeed in yours. He has invested in senior housing facilities, flipped houses, and currently invests in mortgage notes, and is the managing principal of American Note Capital. Richard discusses better ways to spend your time when diving into this business. He mentions that he’s focusing more on larger notes right now in California. Find out why and learn a lot more techniques in this conversation.

—

Listen to the podcast here:

Strategies And Tips For Note Investing Businesses With Richard Thornton

We have a special guest with us. We have another note investor out of the Midwest who primarily deals a lot with some performing loans but also do non-performing loans as well. We have Richard Thornton. Richard, how are you?

I’m great. Thanks. It couldn’t be better.

Jamie, why don’t you share a little insight into something unique that happened to you?

In the note space, I did have an unexpected update from a non-performing CFD in North Carolina, where I’ve got an email out of the blue from a neighbor and reached out to me through my website. That was interesting. We will see where that goes. This person is now updating me with what’s going on at the property and keep sending me pictures, which is nice. I had a court date pushed off for the blight violation I have talked about before.

She is almost done cleaning everything up but she has also got to reinstate. We are in a holding pattern. Those are two somewhat interesting things. I did also wrap up this loan mod that I mentioned previously. It was the most expensive “performing loan” that we have ever bought. It took about eleven months to work through this issue. That was a big win for us.

That was the guy that was paying the wrong people.

He was scammed into paying the wrong people. Legitimately, he thought he was doing the right thing in a way for a little while there. It took us 10 or 11 months in working through the legal process, and then eventually, I’ve got him to the table. I’ve got a $10,000 down payment from him to reinstate and go through with the loan modification. That was a big win. Those are a few interesting things we have had going on.

Richard, how about yourself?

I had a pleasant surprise like Jamie out of the blue, an associate that I have known who usually does not have portfolios for sale called me with a small portfolio of ten performing notes. Since I am desperate for performing notes because a lot of my investors are self-directed IRA investors and they want something easy-peasy, I’m having a hard time finding them.

I also have one that I’m working on that I’m doing hypothecation on. That’s a sub-performing loan but I have been able to buy it at a yield that is high enough so that I can hypothecate it to somebody else, pay them 5% or so, and keep the spread. I’m willing to put up with the very grease of the short payments and pay them consistent cashflow because my spread is so high that it makes a nice little deal for me. I basically don’t have any cash in it.

Jamie, you know what my next question is going to be.

Is it the potential new legislation?

No. I was going to go to the fact that he is hypothecating at 5%. That was where I was going to go. Where are you finding these people at 5%? Is it IRA investors that you are finding?

We all have been in this long enough to know that we had much higher yields in the past. A lot of my investors have been hard money lenders and they say, “I can get 10% or 12% from XYZ.” I explained the differences between a hard money loan and the fact that what they are at is a 30% or 40% loan-to-value. That risk profile is significantly different.

They are self-directed IRA investors. I was originally pitching much higher yields and I have slowly keep edging my way down with new investors. I was at 8%, and then I was at 7% until I was 6%. Now, I’m at 5% and it’s amazing. I pitched two guys at 5% and they didn’t blink at all. They said, “That sounds pretty good. Let’s do that.”

Time is the element and the biggest constraint. Share on X

It’s about as passive as it can get for the other person.

I have to bite my tongue every time I say it.

The reality of it is when you look at low loan-to-value with a lower risk of 5%, and you go put in a bank account, you are getting 0.1% or whatever you are getting. T-Bills or something is at 1.5% a bond or somewhere in that percentage. When you look at it, 5% is still a decent return. When I started out doing some of the hypothecation stuff, I was at 10% or 12%. The same thing, I have crept it down over the years. Now, I’m floating around 9%. I know that’s starting to even continue to creep that down and the same thing with new investors. I had one investor where I started with a 12%. He was like, “Can I still get that?” I was like, “No.”

That’s a really hard sell.

How long do you do the hypothecation for? Does it vary a lot, Richard?

It totally varies. If I want to cash out of the deal, which is always my goal, I want to cash out and put a little money in my pocket, they are usually a ten-year deal but it’s on a 25-year note. I’m cashed out in ten it’s like a partial in that. One thing I’m having fun doing is that I’m focusing a little bit more on California in larger notes.

I will buy a note from them say, I will buy a $500,000 or $600,000 note. They will only sell me a partial and I will turn around and say, “I can double your money on that portion of the loan.” What I’m doing is I’m buying a partial and making money on the purchase. I’m turning around and selling them another note to fill that gap. That’s a fun game. I’m enjoying that.

My head is already starting to spin from many things. It’s interesting having different guests on the show, which we enjoy having because there are other ways that people can invest and you hear these things. It’s interesting at the beginning. Sometimes we cover some topics that all of a sudden, I could spend the whole episode on going from there.

Continuing, I will mention my week. I posted on Facebook my Fired Up Friday. I was a little more fiery. I’ve maybe got a little more sleep than I should have. I was in bed by 11:00. I forgot there was Thursday Night Football on. It has been a challenging week dealing with our vendors and having them do what they are supposed to be doing. I’m not going to get into too much detail on it. Controlling and managing your vendors is challenging in this business.

The one thing I mentioned that was interesting is I had an REO that I’m going to talk about my Note and Bolt that we closed on that, ended up being a nice win there. We are starting to get a lot more traction now on foreclosure sales and continually as a lot of deals that we had non-performing, especially up in Michigan and Indiana slowed down due to COVID. I’ve got a lot of title reports back. We are filing the complaints and setting the sale dates. Things are going well on that front as well. I’m busy as always but I enjoy being busy.

Chris, do you like the foreclosure sales?

In nowadays economy? Yes, because I’m not taking properties back. With the foreclosure sale, one of the things that you need to look at is, let’s say it’s a $100,000 property. I won’t typically bid $100,000. I will look at, “If I take this thing back from $100,000, I’m going to have holding costs, realtor fees and everything else. Where am I probably going to be? $80,000 maybe is what I would probably be after everything. Maybe $80,000 or $90,000, take it back.”

At $70,000, I can make good money on it. I will bid the $70,000 so I know I’m probably not going to take it because investors want that 30% discount, which they used to get and they don’t get any more. I get some bids to see it get up to $70,000, $75,000 or $77,000 that will sell. I will take that all day long because, a lot of times, these properties are in conditions that it’s not easy to turn into a rental. If it was easy to turn into a rental, that may change the game a little bit if you wanted to keep it.

When you are not ready for rental, Jamie and I have talked about this a lot on the show, I’m not a big fan of doing the long-term renovation on a single-family. I’ve got a five-unit in the Northeast that I’m potentially looking at turning that into a rental because I’ve got a property manager who could handle it. It makes sense on that type of scale but to think about $100,000 property or go spend $30,000, $40,000, $50,000 with the contractors and possibly the wool pulled over your eyes, it’s too much time for the aggravation in my mind.

Time is the element for me. That is my biggest constraint.

Let’s talk a little bit about that with the time constraints and so forth. In this episode, we like to come in and not have specific topics because Jamie knows, even if we have a specific topic, I’m going to go off-course anyways. It doesn’t matter in that perspective. Let’s talk a little bit about time in managing a note business.

One of the things that I don’t think gets focused on enough when people are starting is the amount of time it takes, not only to get your business up and running but manage the day-to-day of your business. It relies a lot on your vendors, too. What are some of the pain points that you have had or choke points in your business from the time that caused that time crunch?

What I have been experiencing and I’m still working out is how to handle the minutia and getting somebody that can handle that ongoing basis. A good example is I’ve got to change servicers on a couple of my loans. Allied, if you know, bailing out of Michigan. If Allied is servicing any of your notes, you’ve got to change servicers. I can give that to a VA but if I give it to a VA, I’ve got to train them how to do it. It takes almost as much time to train them how to do it as to do it.

I ended up in a lot of frustrations like that and I ended up doing a lot of them myself. What I have resolved to do is I have two levels of VA. I have a VA who can handle more things like that, that I have on a continual basis that’s on a retainer. I have somebody that’s on a spot basis, that if I need to run some numbers for a spreadsheet or do data input, I have them do that. That’s as good as it’s gotten for me.

I know Jamie is jumping because he has got more experience with this. I wanted to say that I had the same thing, Richard, where I brought somebody on board. They are very bright and intelligent. They knew a little bit about notes. They were wanting to assist to continue their education but I fell into that circle of, “Everything I do is almost like it needs to be done at this point.”

Jamie will send me something and I will be like, “Not getting done now.” I know he gets frustrated because it will take two seconds. I work off the critical path of what’s the thing that’s on the most fire. What happens is by the time I get caught up to the point of being able to show that person something, I have already done it because it needed to be done. Jamie, you are going to mention something, too.

We all work differently. Chris basically juggles 17 balls, and then 1 of them is going to hit the ground. He is very organized. We have both had some experiences with hiring VAs. Chris, you don’t know this but I have something in the works to hire another VA as well. We will see where that goes, whether you are in non-performing notes or performing notes, that’s the part, even that’s underestimated or under-talked about.

There are so many details in this business and many moving parts. We have talked about it on the show many times. It’s seldom on fire where it’s urgent, it must be done immediately but you are talking about money here. If you don’t have insurance on a property and it does burn down, that could be a big problem. It was just one little detail you weren’t tracking. What were you going to say, Chris?

Liz Brumer-Smith used to have something for VA-type things at one point in time. It was more for some due diligence stuff. Jamie, I’ve got nothing better to do with my life and so forth now that we’ve got the assisted Shante’s services company. Maybe we should do a VA training to keep all these different things, record them, and then people can send that to their VAs to train them.

One of the best solutions is a husband-wife team too if you’ve got somebody who you are not having to pay extra and they can handle all the stuff because they can’t say no.

I have been there, done that, too. It was with the pandemic where the kids were. She essentially turned into a homeschool teacher but my wife and I have worked on rental properties and notes a good bit. Now, it’s mostly me. She wants to do her own thing but it’s definitely a dynamic that doesn’t get talked about enough.

We are running our businesses from our home. There’s normally some type of family dynamic that is critical to the success of your business. I was just going to say we should backtrack a little bit if you don’t mind and ask Richard. Richard, what’s your background? Who are you? Why should we listen to you? How did you get here?

I’m dating myself as you can tell with the gray hair. In the early ‘80s, I started a commercial mortgage banking firm with a fellow in Washington, DC. It was a typical startup. It’s just the two of us. We’ve got fortunate. We were heading into the S&L crisis at that point. When we sold the company in 2000, we had over an $8 billion portfolio that we were servicing. We did quite have a good run with that. The minimum loan size was $10 million with that and we did a lot of larger stuff all over the country. After that, I’ve got together with some of my past clients and I said, “Why don’t we buy buildings?” We focused on seniors’ facilities. We would go in and buy Sunrise Senior Living or something like that for $20 million.

The company I used to work for used to build all the Sunrise up the East Coast in New Jersey.

We probably crossed paths with them at some point. You and I both know their history. I had raised $5 million, we would finance $15 million and go forth from there. When the recession came along, I said, “What am I going to do now?” I still had some clients with some money. I started making hard money loans. I had a small fund that did that. From that, I did a bunch of flips myself and also evolved into note investing. That’s where I am.

Hire a virtual assistant to help you get things done. Share on X

That’s quite an impressive background. There are a lot of relevant experiences there for a note investor.

It has all been in and around the lending field and acquisition fields.

Having a commercial or any real estate background is always helpful if you are doing mortgage notes.

I always thought about what Chris does. Chris, you are still working a full-time job, right?

Yes.

You are a busy guy.

I’m very busy. I was joking shaking my head yes or no with the wife. The reason I say that tongue-in-cheek is my wife works twelve hours a day. She is ten times smarter than me. She has accused me of being lazy in the past. She doesn’t want to have any interest in notes because she is in the finance space and dealt with a lot of numbers already. It’s not her thing in the evening or whatnot. Her relaxation is much different than mine. I don’t like to sit down and ever be doing nothing. My brain is always going at 100 miles an hour. I have found that I love numbers and Math, so I thought notes rolled right in.

She still thinks it’s a little hobby he does in the basement. She doesn’t even know.

Netflix has got a great documentary on Black Holes. If you want to watch that, it’s interesting. Not much of a plot.

The one I liked on Netflix is, I’m more of a bank robber type movie once, the Money Heist series. It’s Spanish-dubbed. They are on season three. I have enjoyed that because there’s a guy who is a professor who comes up with this injustice. He would be a great note investor. The reason why is he has got a plan A, B, C and D. In note investing, you absolutely have to have that because what you think is going to happen is not what’s going to happen.

Richard, one of the things I wanted to ask about, and this is something I would say intrigued me as well as your primary focus is on performing. A lot of people, when they get in this space, think of non-performing. They want the sexy, non-performing big returns. You have to be committed and focused just on performing, not chase the shiny object on the non-performing stuff.

Why don’t you tell me a little bit about that? You talked early on about some of the creative things you have done with hypothecation. How long did it take you to learn that process, those steps or some of the other creative things you do on some of these performing notes? When I have looked at some of the hypothecations I have done, I have made as much or a little bit more on those than sometimes on the non-performers because the amount of equity or money you have in the deal is significantly less.

If you don’t need to cover your nut so much now like your wife has got a job, you can afford to do partials and hypothecations. You can talk about sexy non-performers all day long but on my partials, I cash out and make a couple of thousand dollars every time I do one. What’s my return? I buy a 25-year loan. I hypothecate the first ten years on a partial or hypothecation. I get fifteen years after that. There’s no sexy to it but I will take that return at any day.

When you say cash out, this is how I have structured some partials as well, are you might buy that note for $25,000, year-hypothecating or partial the first ten years for $27,500, so you are getting all your money back plus hypothecating $2,500.

It’s a $38,000 note that I bought for $25,000 and I’m selling it for $27,500.

He is getting payments on the back end as well, so he is making a few bucks now, and then he has got cashflow in the future. That’s what I have done now. Jamie, you’ve got about twenty of them. I’ve got 70 or 80 of them.

People have asked. I have seen the question because the BRRRR strategy with rentals is popular. We have done that. To me, this is similar. Instead of doing the rehab, and then a cash-out refi and get all your money back as you would do on a successful BRRRR, you are buying it at such a discount, the whole note. You are getting all your money back when you sell that partial or hypothecation. If you rehab the non-performer, modified it, and then sold a partial, that might be even closer to the BRRRR method and the end result is pretty amazing. It’s an infinite return.

You didn’t have to do all the work. That’s where I get back to my efficiency thing. Now, the bad news is you’ve got to have enough cashflow to cover you from life, rental investments or wherever to cover your nut to do a whole lot of it. I sell whole notes. I do other things too but partials and hypothecations are a big part of my practice.

Let me ask this question, Richard, about the hypothecation side. Are you buying mostly seller-financed notes? What kind of notes are you targeting when you are buying the whole note?

When I’m buying a whole note, they are all seller-financed notes. Maybe some of them are Old Harbor paper or something like that but for the most part, I’m dropping direct mail and making calls. I’ve got people who call me. They find me organically. I’m advertising like you are. You are posting on Facebook and people find you. I have had a lot of luck with my series on my YouTube channel. It’s not fancy. It’s just me sitting at my desk and I talk about different aspects of notes. A lot of people before they even call me, I don’t have to explain what a note is and go, “I know all that.”

Richard, I remember my question now because I hear a lot of people mention and talk about this. You have been in the commercial space and the lending business now for many years. Are you aware of any lenders that would take a portfolio, hypothecate those loans, and lend against those loans to you?

I have not found anybody that will do that.

I call it the unicorn because people will say they have done it and I still haven’t found one. I know there was a bank back in Arizona that was doing it for some lenders. It was Western Alliance but you need to have $50 million. People would go, “They did it.” It’s like, “For $50 million, they are not going to do it for a $50,000 or $100,000 note from that perspective.” I see a lot of people on BiggerPockets and some of the other sites do that.

You mentioned also the direct mail method of sending yellow letters or whatever they are. How has that worked? I’m curious too which company you use because a question some people ask us a lot on the show is, “I wanted to send out some letters. What are some of the companies that people use to do that as well?”

Before I do that, there’s one thing that did pop into my mind. I know Colonial Funding out of Dallas is starting or has started a fund that will lend on the type of thing we are talking about. It’s not cheap money and I haven’t tried it. I just know about it. I’m not saying it’s great or anything for the audience. There’s a group out of Florida. That’s who I use. I send them the stuff and they go, “Fine.” That’s what I have done.

Do you use PropStream or any of those sites to get lists or ListSource to buy your lists to send out?

Yes, Experian and all those different groups. I’m buying lists just like anybody else. That’s how I’m sourcing that stuff.

Let’s face it. Deal flow is a challenge for all of us now. I was curious about what made you gravitate toward note investing. Obviously, your background we discussed and seems to naturally lend itself to becoming a note investor but what was it about note investing that appealed to you initially?

I like the returns. I’m obviously older. I have been there, done that in terms of that. I have managed 70 people at one point. I don’t need to do that anymore. I wanted something that was pretty clean and easy. I have had people call me and say, “I’m a smart guy. Maybe I’ve got a lending background. Maybe I don’t. I would like to be up and running and supporting myself in a year.” That’s not going to happen. Maybe say three years.

I also have to say that I like puzzles, not in terms of Rubik’s Cube but the way I did Geometry. I’ve got an A in Geometry in school and Algebra. The way I did that was I would sit there and look up in the air. I had a couple of teachers say, “Richard, focus on what you are doing. What are you doing?” What I was doing is I was working out the puzzle pieces in the air. I would take a little bit here and there, and move them all together. That’s how I did my Math problems. Note investing is the same thing. It’s taking all those pieces and putting this here and there, “I’ve got this investor here and they are like this.” I like that creative process. I thrive on that.

If you don't have insurance on a property and it does burn down, that could be a big problem. Share on X

I do think, Chris, that you are good with numbers, that Math and Science engineering side. Richard, I don’t know you as well that’s why I’m not sure. You are also very creative. The note investing world rewards that combination, which can be pretty rare in people. I get what you are saying. It makes a lot of sense.

You have to be willing to work in an environment where you are poking Jell-O. What do I mean by that? I mean that I came from a lending background. I have to admit, I was a little bit cocky and I thought, “I can do this.” Somebody told me about a partial and I went, “What?” I realized I had no idea. My pants were down around my ankles.

I use a metaphor of poking a Jell-O. I know you both know what I mean. Just because you poke it on the left doesn’t mean it’s going to ripple on the right. You never know where that ripple is going to go with buying a note, especially on a non-performing note. You don’t know what’s going to happen. You have to be willing to thrive in that.

I view a little bit of note investing to playing Blackjack in a sense where, if people who play Blackjack, basically you play the odds. Sometimes you want to go with your gut and hit on fourteen or whenever. You play the odds and that’s how I look at note investing. Where I see new investors struggle a little bit is they will get all excited about, for example, a foreclosure coming up, “My foreclosure is coming up and the loan was $50,000.”

The borrower isn’t paying because they lost their job but the property is worth $200,000. They are like, “I’m going to get this. I’m going to get paid off. Can I get a nice payday at the foreclosure sale?” I will be talking to them. I’m like, “I hate to bust your balloon but the borrower is going to file bankruptcy. I’m sorry to tell you that.”

The odds are, if they have lost their job, they don’t have the income now and they haven’t sold the house. They are going to file bankruptcy to buy themselves time, get a job, and try and get on some payment plan. That’s probably going to happen the majority of the time. You’ve just got to think through each different situation as you talked about putting the pieces in the air. You’ve got to put the pieces in the air but put yourself in that person’s shoes, “What would I do in that situation? I would be filing bankruptcy just to buy myself time.”

We had a note investor. He was all excited about bankruptcy that the borrower kept filing. He was so happy that went to foreclosure and is sold at the foreclosure sale. He come to find out after the fact that the guy who bid on the foreclosure sale was the borrower. Now, he is probably going to get kicked back and have to go through again. It’s like, “That is creative. I did not expect that.” That was a great point about putting the puzzle pieces together because it relates to many different parts of note investing space.

Honestly, there’s always something new coming up, whether you are trying to do a sub to or any piece. There’s such a big blend of things that you can pull into this. It’s fun.

Have you done a sub to?

I came to sub to from a different angle, out of the S&L crisis. I did sub to commercial properties. You couldn’t do a sub to on a commercial property at all where you haven’t been able to do one since. I probably did 30, 40 or 50 of them back in the day. I haven’t done any on residential properties.

Can you give us an example with fake numbers what that means? What is a sub to? What does that look like?

Tell us what it is, and then an example of one.

You are buying a property subject to the existing debt. Hopefully, if you have done your homework correctly enough, you can turn around and sell that property to somebody else and take a spread on the mortgage and it’s subject to the existing debt. That’s what I would say is a thumbnail of it. There are a lot of different creative ways to do that.

There’s a group on Facebook that’s run by Williams Tingle. It’s interesting because I have started to research because it intrigues me. I understand say, the property is worth $175,000. They owe $100,000. They will give the person like, “I will give you $20,000 to get out. I’ve got the house subject to the first mortgage, which they will pay.”

Some of them will turn around and seller-financed it to somebody else. They wrap it where they will put another loan to somebody for $75,000 and get the $20,000 down payment. They are almost creating a second note for themselves in that instance where the borrower now is paying the 1st, then that 2nd, and then they’ve got their money back that they gave the borrower. Have you seen anybody doing that?

I have read numbers on a lot of these. If you want to go to my website, I’ve got a half-an-hour talk on different examples about how that works doing exactly what you just said.

What’s your website?

My website is AmNoteCap.com. If you go to American Note Capital on YouTube, you will find it there. It’s on creative finance. You can see the numbers and see how it works. I know there are a lot of people kicking up dust on them now. You tell me. I keep hearing a lot of people say, “It sounds good but it’s not working in nowaday’s market.” I don’t know what you guys are hearing.

I haven’t dug too much into it. I’m just looking at it on the periphery. Where I was having the challenges are, “It’s because houses are so hot commodity, why would somebody be interested in selling it subject to? Why not just sell it out?” I know sometimes they talk about, “If there’s little equity in them, it might work.” Now, everyone has gotten so much equity. I would think you would have to almost find somebody in distress who is thinking, “This is simple. I don’t want to have to deal with it.” I haven’t seen or heard too many people doing it. I know some people do.

It seems to be a little less popular now, given the market conditions.

The guys that I know who are beating their chest about it a lot are the wholesalers that have awakened to the fact that they can do that, they’ve got five people calling on a staff every day. Maybe out of the 100 contacts they make, and the 10 houses they buy, 1 of them works as a sub to. Unless you’ve got that staff and horsepower, it’s tough to make it work.

I was going to ask you, Richard, because you have come from the commercial space, have you looked at or invested in commercial notes?

I have looked at them. It’s pretty tough to do because I thought about jumping back into office buildings. You know as well as I do. Our office building is going to fill back up or they are not going to fill back up. I haven’t been able to find enough discount on anything to give me the feeling that, “If it still does go sideways, I’m okay somehow.” I have looked a little bit but not very much just because of that.

Where I have seen a lot of them is in hotels. I see a lot of hotel notes, and then I see people like, “Let’s take a hotel and turn it into apartments or micro-units or this.” I see that being in commercial real estate for my full-time gig. If that was a viable option, you would see all the big-time players doing it and they can’t because of all the code issues you run into in turning into from short-term to more long-term housing.

It’s not as simple, “Let me just stick a different sign on the door and rent this thing out as an apartment.” It’s not that easy. The hotels are getting crushed and they continue to get crushed during COVID. That’s where I have seen a good amount. I almost have no interest in them. I prefer the residential, single-family or even some small multifamily. It’s my preference and I have found to think I do pretty well in it. I will try and stick with it. Maybe I will start to look at other options later on as more of an accessory use type of thing compared to making it a primary driver.

I have heard of a couple of examples. I live not too far out of San Francisco here. A couple of them are being turned into SROs, Single-Room Occupancy apartments but that’s extremely high density. You are going to have a whole lot of things to make that work, just as you said. If you are looking at some suburban Best Western or something like that, sorry.

That’s what most of them are. They are at the side of highways. It’s often on a highway. They are probably about $50,000 to $100,000 per key. A 100-unit one might be $10 million or even less. To try and turn them into an apartment, you never get the numbers to work.

Do you want to live next to a cloverleaf where there are no other buildings around? Maybe not.

Richard, one of the things we try to ask each guest is if you could articulate a good deed that you have done through your note investing career, whether it was intentional or not but something that someone else benefited from through your note investing.

Part of the reason I’ve got into this is that I see it pretty much as a win-win. There are going to be some people who are going to lose houses but I always try and make it a win-win. You guys know. You can tell pretty quickly. If somebody is getting ready to try and rip you off, you can tell their attitude. You know where they are going. If they want to work with you, I will do that.

One of the most challenging things in this business is figuring out who you can trust. Share on X

I’ve got a gal who is a single mom. She is having a hard time making the payments. I’m working with her. Her hubby left. She was used to his income. She has maintained her employment but she is struggling. I’m modifying her loan so she can stay in the house, she doesn’t have that to put up with. I’m fine with doing that.

That’s one of the most challenging things in this business, whether you are working directly with borrowers or through your servicer figuring out which borrowers you can trust. First of all, you can’t work with somebody if there’s no communication. If they are not communicating, your hands are tied. I’ve got some borrowers who there’s communication but it’s maybe not somebody you can work with. I agree with you. You can tell pretty early on but you are not necessarily going to know that when you buy the note.

Here’s a perfect example for both of you. This is something that, for people reading, you are going to have to deal with. What is the solution? You’ve got a borrower who lost their job. They are around 60 years old. They haven’t made a payment in about nine months, delinquent taxes. They are in an area in Michigan. The employment is not that great in that area. There’s some equity in the house but this individual whose significant other passed away hasn’t been able to make payment in nine months and now would have to advance about $1,500 in taxes. What do you do?

The person is like, “What can I do? I don’t have a job. I was on a fixed income and I’ve got nothing. What can we do? Is there a way I can stay in my house?” This is the one you are going to have with borrowers. It comes down to, “Do you want to throw that person out to try and make a few bucks or do you want to try and build a relationship, trying to keep the person in the house and come to a win-win conclusion that benefits both of you?” It’s tough.

Sometimes the best scenario for them is not continuing to live there. It’s not a black-and-white thing.

You have borrowers that clearly can’t afford a property. I’ve got a situation where somebody, let’s say, acquired property and they could never have afforded the payment because the house could pass to them. They can’t afford the payments and they are trying to work out a way but their income couldn’t even afford the interest, even if it was interest-only in that sense, which you don’t want to do.

They are fighting tooth and nail to try and keep this. Their best thing is, “I hear you but there’s no resolution that could even come close to them.” It’s not like they are off by $100. They are off by over $1,000 a month to give you an idea of where this one is. On the other one, if the person gets a job, then they will be able to start paying again but how long do you wait for them to get a job? It’s going to take me six months to foreclose.

If they get a job after four months, are you still going to go through it now that they can pay? You spent that money on the complaint process, which gets added to the loan. Now, you are almost rubbing it in a little bit. It’s not black and white in this business. A lot of people take these training classes that make it look like black and white and it’s not.

That’s a pretty good segue to something we usually don’t talk about, which is fund. I know you have a fund. If you have a fund, it’s different because people aren’t expecting or following maybe one particular asset. If you are a note investor and you’ve got investors who are investing along with you, pick your investors carefully.

I have had probably two instances now where you tell people up front, “At some point in this note, they are going to be a slow pay. Things are going on in their world.” They go berserk, “I’m 60 days late. I can’t stand this.” They have been paying for four years. They are just having a little bump in life. Some people can’t do that and my response is, “What’s your UPB? Here’s the check. Thanks very much.” No harm, no foul.

That’s a good Note and Bolt. I don’t think we have had that one before.

That hits the nail on the head because even though when you get started, you are trying to raise money to get these deals. I have had instances where I have had an investor after a borrower missed a payment and it was in bankruptcy. It missed two payments in bankruptcy. They started making payments again but they’re still two payments behind. They were like, “You need to file a motion for relief.” I was like, “No, I’m not.” They were like, “We need to file this.”

I said, “It’s going to cost us $1,000 and it’s going to get rejected by the court.” “I don’t care.” I was like, “You take $1,000 outside of the deal and go submit a motion for relief so it can get rejected because a court is not going to give a motion for relief on a borrower that is paying and they missed 2 out of 12 payments.” It’s not going to happen. It must be at least 3 to 4 months behind before they even consider it. They would want you to work out some type of modification.

Chris, we have both turned investors away. I know what you did for our fund. I have for at least one partial where the guy sent my partial agreement to his attorney, which is fine but it was a completely shredded red line. Now, I’ve got to go back and take this to my attorney, too. These were small. It was a couple of $6,000 partials. It’s not worth it because it’s a big indicator as to how this is going to go. I get it if you are new. You want to be careful. I’m not saying throw caution to the wind as a partial buyer but it wasn’t worth working with that person.

I will communicate as much as possible. It’s one of the things I try to do and there are times where I don’t communicate properly or I don’t communicate enough. First, admit it and it happens. In the same token, there are certain things where if you get the sense that somebody has $10,000, you can tell when it’s their only $10,000. You don’t want to take their only $10,000 because this business is a risk. You want to be careful because the minute a payment gets missed, they are blowing you up, emailing you and sending you everything. They are going to leave negative reviews about you and it’s not worth it.

Jamie, I didn’t mean to laugh at your experience. I do have to laugh because I had a guy walk up to me and he said, “I will stroke a check for $500,000.” I was thinking, “I like this.” It turns out he was a Contract Administrator. All he does day in and day out is pick apart contracts. I had one and a half meetings with him and I said, “I don’t think this is going to work. Thanks very much.”

I have talked about this a long time ago on the show. My first real tenant was an attorney. I won’t go into too much detail. Be careful if you rent to an attorney. That’s all I will say. She ended up lawyering up. The legal advice that I was given was, “Let her go. Be thankful that she is not your tenant anymore.” This is not bashing all attorneys but there are other tenants out there.

There are better ways to spend your time.

I have had an investor. It was a significant six-figure investment they wanted to make at one point. It was when I was still continuing to grow and that was significant that time. The person would send a message in the evening and the next morning is like, “I haven’t seen a response and just want to make sure.” We all have those people we work with. If you are on W-2, that’s the person in the next office over who sends you an email and walks in and says, “Did you get my email?” It’s like, “Was that important? She just came over.” No, because I don’t check my email every 30 seconds.

There’s somebody like that and I’ve got the sense, “I don’t have the time to manage this person. I would have loved to get the money but I don’t have the time and I will never satisfy this person’s goals.” I had a conversation with him, mentioned that and go like, “I wouldn’t be like that once the money is out there and the notes are.” I’m thinking, “The moment that I forget to wire your money on April 1st or pick a day and it goes out on the 2nd, I’m sure my email got blown up.”

Everybody works differently. In this business, you can work with people you like, which is another plus.

Jamie, we’ve got Richard’s Note and Bolt. What’s yours?

Do you have one?

Yes, I do. I will talk about mine. I sold an REO. One of the things I highly recommend you do is no matter who you are using, whether you are using an REO company or a local realtor, look at your own comps. Try and look up some of the REOs and push the envelope a little bit because properties are selling like hotcakes, especially for rehabbers if it’s an area with high amounts of rehab.

I had an asset that we are talking about in the comps, too. This asset would be somewhere around $40,000 to $50,000. We listed it for $69,900 and we had a $60,000 cash offer. It’s somebody who is going to come in and turn it into a rental because of the rental rate. Now, it’s near probably at $30,000 to $40,000 but they are going to get $1,200 a month in rent. They were happy with putting the money in. They will probably cash-out refi their cashflow to $300 and it would be a win for them.

Is it a grand slam? No. They probably were going to do the BRRRR Method. They had some cash that they were going to go through that process. Don’t be afraid to push the envelope in this environment, especially on some of these ones because you might find a cash buyer with no inspection, which is what it was and that’s what it is. The one caveat I will mention is to make sure that for a deposit, you are not just getting a $500 or $1,000 deposit. Try and make sure you are getting some skin in the game in that deposit so they are not just trying to turn around and wholesale the property.

That’s why we keep Notes and Bolts as plural because Chris throws 27 Notes and Bolts in.

I saw you sitting there like, “Come on, Chris. Buy me more time so I can think of one.”

This is true. I appreciate it.

Don't be afraid to push the envelope in this environment. Share on X

Chris, do you value your properties on the rental value as if renting?

Is it for a foreclosure?

Yes. You are going to buy a foreclosure and you figure, “After I buy it if I put a tenant in it and do a sale that’s fully leased, my buyer is going to get a 10% cap and then use whatever that value is.”

I haven’t. Most of the stuff I have foreclosed upon is uninhabitable. I’m spending $3,000 to $5,000 cleaning this place out and it probably needs $30,000 to $40,000 in rehab. Usually, I’m like, “If it’s not worth my time or effort, let me just sell it.” I have only taken back, as a rental, one property. It’s all I have taken back. I have taken back land and kept the land from that perspective because I don’t mind owning land because it’s not high taxes. I have only taken one property back in Pennsylvania that I was all in for $30,000. I put about $10,000 into it. It’s probably worth about $80,000 to $90,000 with the market now.

When I was in it for $40,000, I was getting $850 a month in rent. I found a good property manager that manages it. That is a nice one. I’ve got some that I’m looking at. I will probably have to spend about $75,000 apiece on them but the rent rates, if I do that, I get about $800 a month. I would get about $3,000 cashflow outside of expenses. I wouldn’t mind putting $75,000 into something that I might be in it for $50,000 at this point. I do look internally for my own self, “How could I make it work as a rental but not for me to sell it to a set of sales price?”

That begs the question, do either of you buy notes on just land?

Yes and no.

Do you want another Note and Bolt?

I’m starting to buy more land notes, so I was just curious.

I like to buy distressed land notes. The reason why is because you can get them very affordable and the person who owns that land if it’s vacant land is not living on that land. That person has another asset, typically. If you foreclose, if you are in a state that allows for deficiencies, you might be able to sneak a second loan on the primary residence hypothetically. I may have done that once, twice or three times.

I do have a Note and Bolt now. I’ve got a couple. This is the one I was going to go with. Multipliers is a good book. It’s not note-related but if you are running a small business, by Liz Wiseman. It’s a leadership book. Definitely check it out. It was good.

Is that on Audible?

Probably. I’m not sure. It’s Multipliers: How the Best Leaders Make Everyone Smarter. It’s not a brand-new book but it’s essentially about how your business will grow and profit as you pour into other people. I thought it was excellent. It’s more note and rental-related. Richard’s question to you about the pricing property based on a rental popped into my head. We are closing on a new building rental in Florida. It keeps getting pushed back and we should have closed a long time ago.

We were under contract for this property in Ocala, Florida, a build-to-rent. I have been under contract since June of 2020. This has been going on for quite some time. We all know that the pricing of materials has gone through the roof, not only because of the pandemic but for a variety of reasons. The builder came back and he said, “It’s going to be $20,000 more expensive. Here’s how we justify it. The building costs are so high.” My point to them was, “That’s fine but that’s from your perspective. I get it and it makes sense.”

I don’t even think they are making a whole lot on this property, “At least do me the courtesy of presenting it. Run the numbers from the perspective that you already provided to me from the beginning but just update them. What does my return look like at this higher price point?” They still work and we are going through with it. It’s your question about, you put yourself in the other person’s shoes and you will have an easier transaction that way. It gets to empathy.

My associates and I have a beginner course on notes that you can usually get for $700. We released it for $300.

What’s the website?

The website is EvergreenSuccess.com/ccf/.

If people do want to reach out to you, Richard, what’s the best way? Is there an email or phone that you would like for them to reach out to?

My email is Richard@AmNoteCap.com. You can reach me at (800) 508-5212.

I have seen some of your YouTube videos and some of the stuff you put out on LinkedIn and I find it very informative. I do recommend people to check it out.

Thank you.

Thank you, everybody, for reading this episode of the show. Thank you, Richard, for coming on. As always, everybody, let’s go out and do some good deeds.

Important Links:

• Richard Thornton
• Colonial Funding
• PropStream
• ListSource
• Experian
• American Note Capital – YouTube
• Multipliers
• EvergreenSuccess.com/ccf/
• Richard@AmNoteCap.com
• LinkedIn – Richard Thornton
• https://www.Facebook.com/americannotecapital/
• https://www.LinkedIn.com/in/americannotecapital/

About Richard Thornton

In 1982 Richard co-founded a commercial mortgage company which had a $8 BB loan portfolio at the time of its sale. He has invested in senior housing facilities, flipped houses, managed a hard money find before the recession. He currently invests in mortgage notes and is the managing principal of American Note Capital.