One of the best things about the note investment process? You can rinse and repeat. Chris Seveney welcomes Dan Deppen, the Senior Product Manager and Retail Integrations at Ibotta, Inc. Dan shares how he systematizes his note investment process. He touches upon doing due diligence in Confluence®, creating a workflow system, and how his processes have evolved over time. Dan also talks about the hiring process and offers some great insights to consider when thinking about your internal SOPs. If you want more tips on creating a repeatable note investment process, don’t miss this episode!
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Systemizing Your Note Investment Process With Dan Deppen
Chris, how are you doing?
I’m wonderful, Jamie. How are you?
I’m doing well.
Did you like my dancing penguin?
Yes. I was doing something else. Luckily for the readers, it’s not just the two of us. We have a special guest, Dan Deppen of Fusion Notes and The Note Investor Podcast. We will get into all that stuff later. Dan, how are you doing?
I’m doing well. It’s good to be here.
What is the weather like out West?
I’m in the Denver area. It didn’t snow until almost the very end of the year. We’ve had snow on the ground since the beginning of January 2022 now so it flipped. It started to get back up into the 50s. It’s warming up a little bit. It was minus 12 at my house.
Did you get any late-season golf games in with the lack of snow?
Yes, I played all the way up through December 2021. We had the Summer Tuesday League and then some of the guys informally kept it going. We went all the way to December 22nd or something like that.
You are like a scratch golfer, aren’t you?
I have wandered between 2 and plus 1 over the last several years. I played a lot of competitive golf and stuff.
Dan is being modest.
He is really good.
I do military-style, left, right, left, right. That’s in my golf game.
I do VR golf and that’s it.
I did buy a new house in the fall. One of the key requirements was having a basement ceiling tall enough to put a simulator. We’ve got a full simulator in my basement. On the ground, I’m still playing.
I haven’t played in a while. I used to golf before I moved down to Virginia, but I had an issue with my hands at a point in time from a medical issue. We joined a sports complex. Inside, they have eight simulators and weekly golf leagues. I’m like, “Once things settle down a little bit, I definitely know where I’m going to be at least 1 or 2 nights a week.”
We have one of those here. They call it the Sports Stable. It’s got multiple hockey rinks, golf simulators, basketball and all kinds of stuff.
I should probably get into golf since apparently badminton is too violent for me. Anyway, we are moving right along.
Jamie tore his Achilles playing badminton.
It’s a manly sport.
I lost a tooth on the golf course. It was about 40 degrees in the morning and I had this power bar that was in my car overnight.
Wear a mouthpiece next time. That’s funny. Dan, putting all that stuff aside, I know a lot of our reader base is likely familiar with you. I know you have a pretty big following. You’ve got your own podcast. We don’t need to go too far into your background. For the readers who are unfamiliar with you, do you mind giving us a quick synopsis of who you are?
I started my career in the aerospace industry as a mechanical engineer and then later, I did an MBA. I became a product manager. When I was nineteen, I started buying stocks. I was always interested in investments and analyzing them. I did stocks and then I’ve got into options for a little while. I reached a point where I wanted to put money in real estate and then I looked at rentals. Even several years ago, in the market out here in Denver, the math on rentals was pretty tough. It’s probably not any better now. I was looking for other niches. That’s where I found notes. I ended up going down the rabbit hole and getting way into that.
I’ve got started buying stuff and grew the business pretty quickly. I did it full-time for a couple of years to get it up and going. Now, I’m back. I’ve got a product manager job again and also the notes business. I have two jobs but I’ve got one employee who runs a lot of the day-to-day. I was big on building systems and processes for all this stuff. One of the cool things about notes is they can be rinsed and repeated. Every note has its own nuance. I’ve got my share of wacky stories like everybody else. The basic process and flow tend to repeat. If I could systematize that stuff, then you could scale and not get bogged down.When you document your business process, it’s easier to bring someone else in. Click To Tweet
I have heard some of your stuff before as far as how you systematize and things like that. I would like to get into how you have changed over the years, what you have tweaked, what has worked and what hasn’t worked. Anything that you want to mention there?
It has definitely evolved. I started with more standard processes. What I’ve got is I use a brand called Confluence. It’s like an online Wiki that you can set up. I have these little Wiki articles for everything. It’s like, “Here’s how we do due diligence. Here’s how we do different things.” A lot of stuff I do on a regular cadence. One of the things I do is every month, how am I assisting to go through the whole portfolio and see what payments were missed.
Some of them you expect because it’s setting a foreclosure. Others are surprises, so I can intervene early. I’ve got some other things I do on other cadences. Every six months, I start pulling tax reports on all of them to prevent it because I had one where you go through periodically and keep an eye on taxes. I’m not sure exactly what happened but it got away and almost went to a tax sale. I’m like, “We are going to try this other process to make sure that it can’t happen.”
I have heard you say that about checking the payments once a month. I’m curious if that was always the case because Chris and I have talked about this on our show. When you start out, I don’t know about you, guys, I was pretty much every day logging into my portal and seeing my three loans or whatever it was. I’m like, “Nothing changed in 24 hours.” I spent way too much time watching the pot not boil or whatever.
It moves too slow to do that. I remember when I was nineteen, I bought my first stock. I was doing the same thing, like getting a newspaper every day and I’m like, “It went down a quarter of a point.”
It’s like, “Who cares?” That’s good that you developed the discipline to not do that. Probably, you reached a point where it was impractical with the number of assets you are managing. To log in every day didn’t make sense to the portal, but to do it once a month it’s probably frequent enough. Chris, do you have any questions?
I’m going to hit rewind and play. Dan told my story of note investing. Thank you, Dan. People should pay attention because that is somewhat of the blueprint of, “You start and you are very involved.” For example, it’s the same thing with my notes. We check them once a month. The ones that are inactive, legal and whatnot, things may move a little quicker. For us, we do the same thing. We stagger them because I also work full-time.
We check so many per day over the first few weeks of the month and then if we have to go back on any. For example, we have at any point in time roughly about 250 assets. We try and do 15 to 20 every day, which in the morning takes me about 45 minutes. You have about 75 to 100 a week. After two weeks, you have gone through all your notes.
You are a product manager. You are the same way with all your systems. You break everything down into little bits and pieces. By doing so, it allows you to systematize your business. Jamie will probably want to talk to you later about hiring processes from that perspective because he had some hiccups with his VAs. I wrote down Confluence because you mentioned the Wiki. I’m like, “That’s a pretty cool idea of you are putting everything down.” I know you came out with due diligence training. I’m sure you probably give that to your people as well.
The other thing I have within that Wiki is lots of little videos, like little snippets that say, “Here’s how you actually do that.” If you have to bring someone new in, it’s pretty easy. My assistant, who is working for me and who is freaking awesome, got an offer she couldn’t refuse from someone else because the market was so hot. What was cool was she had built it out. After a while, I wasn’t adding to the Wiki and she was as things evolved. She had it well-updated.
When I had to hire someone else, she had a good referral. That person was able to come in and everything was there. We have been meeting up twice a week and she has gotten up to speed pretty quickly. That has been nice. That’s the other purpose of the Wiki. People can come and go for whatever reason. It’s nice to have everything documented. It’s easier anyways to bring someone else in if you have to.
That’s a key piece. It’s easy not to think ahead and just to think because I have spent a lot of time personally on Zoom and non-recorded calls and going through training people and then they are gone. We have been instituting Loom, SOPs and that kind of thing because we don’t assume that person is going to be there forever. They are not going to care about your business as much as you do. Let’s be honest. Things happen. People have lives. For the newer investor, it’s easy to miss that. You just focus. You are so in the weeds. You are not thinking about, “What is my business going to look like in 2 or 3 years?”
Speaking of business in 2 to 3 years, one of the questions I want to ask is we finished Cash Flow Expo. I did a presentation on scaling your business and making it profitable. As many people know, I typically like to keep things pretty upfront and honest. I’m not trying to overhype things.
We keep it real on the show for sure.
I know you keep it real on your podcast as well. I don’t know if you were able to see it or not. You started right around when I did in 2016 or 2017.
It’s the very beginning of 2017.
You have been in this business for several years. How has it been for you to start your business, buy the note to scale, turn it into something that was profitable and then continue that success? I’m curious to hear your story.
I did catch your presentation. You had this chart where you were showing a four-year timeline to go from absolutely zero to having a profitable business. At first, I was like, “That shouldn’t take that long.” I was looking back through my timeline and I was like, “That’s exactly how long it took me.” It was about six months of watching videos or podcasts and talking to people.
It’s challenging because pretty much all the information you need is out there someplace for free. You can find it but it’s not organized. It’s like taking a soda straw and trying to look at a forest and then going back and putting together the whole picture. That takes a while. You get into that process where you are buying stuff. I remember I was nervous about buying the first note. I paid too much for it but it has worked out. I’ve still got it in my IRA. It’s still making payments.
There’s more assistance now than there was years ago if you were trying to buy a note and ask somebody, “Can you look at this? Am I my bidding this properly?” I know you help a lot of people. Jamie does. I do. Bill McCafferty does. There are a lot of people out there who will provide some assistance. Years ago, there were only two groups. There was the Eddie Speed Group and the Carson Group. There were a few others, but from the primary, it’s politicians. Those are the two.
There was a lot of education out there but it’s not the assistant side of things where you can probably pick up the phone, call someone and say, “Do these numbers look right?” Maybe I didn’t see it back then but it seems like now, there are more avenues to pop a question and ask somebody, “Does this look right?” You can have somebody jump in and give you a little more advice.
It’s a lot easier now. The network has grown from where it was. That’s part of why that ramp-up period could take so long because the industry is obscure and small. Get to some critical mass where if more people are doing it, then the information is available. More people will get involved and then you will have more assets trading around.
Dan, when you started roughly, how much did you start with? With your first few notes, how much money did you invest early on?
The first one I bought was in my IRA. That was probably a $20,000 or $25,000 note. Maybe it’s a performing note.
In this business, there’s that happy medium of, “If you have $5,000 to $10,000, it’s very difficult but you also don’t need $250,000.” $25,000 to $50,000 is a spot where probably most people fall or at least are comfortable starting out with investing because you are somewhat jumping out of the plane with a parachute but not doing it solo your first time. Sometimes you have to do tandem, but you also want to take that huge risk.
If you did the first one in an IRA, you can roll over a small portion of your normal 401(k) or IRA into something self-directed and buy one note. When I rolled over money, I rolled over too much because it took me a while to get going and then I had a bunch of cash sitting there for a while. You don’t have to do that. You can roll over $25,000 or whatever. If you are buying a performing note, that’s probably okay and you can roll over more later when you are ready.The secret sauce to succeed in your business is to talk to people about what you do. Click To Tweet
What would you say to the newer note investor who hasn’t worked with other people’s money? What is the tipping point there where you are open to or feel comfortable working with other people’s money?
For me, it was when I’ve got to the point that I felt like I knew what I was doing. I had a process. I’m like, “I’ve got a business model.” Everybody has their own filters and the specific things that they are looking for. I had a good understanding of what I was trying to buy. I knew at that time there was a supply available for that. I had a model for doing pricing. I had done a number of these deals. I felt like the whole deal mechanics I was comfortable with, like that whole buying process. You want to do enough to where you are comfortable that everything makes sense because you don’t know what you don’t know when you get started.
You need some level of experience to do that because that’s a big responsibility. It’s weird that one of the big surprises for me was how easy it was to get outside money. My limiting factor since I started doing that has always been my ability to buy the right deals at the right pricing. There has always been plenty of outside money available. It’s a big responsibility if you are going to take that on. You have to know what you are doing and then ethically the way you operate your business. I’m sure everyone has heard horror stories of people who took money from people and then did crazy things throughout the real estate.
It’s an impossible question to answer because it depends on your personal situation specifically. It’s the same for me. I felt comfortable. I knew what I was doing. I had a real estate background. It’s exciting but it’s a little bit nerve-racking at the same time. It’s a big responsibility and I take it very seriously. I would rather lose my own money than someone else’s.
The first one where I did it was a nonperforming note. It was a different scenario than I had done before. I’m like, “I’m going to do this one with my own money.” It was a good thing I did because that one went some ways. I used to say in that one like, “The only saving grace is I don’t have any investor.” One of my other processes too is once a quarter, I go through and do a lot of financial reporting. I rake through the books.
I go through every note to make sure everything is on track. Part of that is a spreadsheet with the balance of every note and where I stand. Take a look at all your investor money and what it boils down to. It’s like, “To pay all the investors, you should have this much cash in the bank. This is how much cash I do have in the bank.” I keep real tight control.
The numbers and books don’t lie.
Here’s a question I will pose to both of you. Dan and I are engineers. Jamie, you have been in the military and worked for the government as well.
I started down the engineering path but that’s a different story.
Between the three of us, our business careers haven’t been based on sales and marketing. Typically, engineers are known as the people you want to walk in a closet and don’t let them talk to anybody or do any types of presentations. Between the three of us, we have raised tens of millions of dollars. What is the secret? Dan, you’ve got investors. I’ve got investors, Jamie.
A lot of people, when they get started, they start buying some notes with their own money and then they are like, “How do I get outside money?” It’s a common question. A lot of people think, “I have to be very outgoing or I have to be a salesperson.” I want to take that stereotype and nip it in the bud a little bit because I know I’m not a big salesperson. I don’t know if either the two of you are. I was curious. What was your secret sauce?
If there was a secret sauce, all I ever did was talk to people about what I was doing. I’m like, “I’m doing this and that. Here’s what I’m learning.” I have always found that people come to me. They are like, “That’s interesting. How can I get involved in that?” I don’t even want to call it marketing to investors. That should be very pull-versus-push. You don’t know what you are doing and they should come to you. If you are going to somebody and you are trying to convince them to work with you as an investor or they are unsure but you are a good salesperson, you push them over the edge and now they are in.
That’s a bad situation because the notes business is wild and every deal has its swings. We may have little bumps in the road that aren’t even problems. If you are working with an investor, no matter how that investment is structured, it needs to be a partnership. You are going to need to be on the same page. It’s not quite as far as getting married. They have to be fully all-in on their own. If they are not, you are begging for problems. They are going to freak out about things that aren’t even problems. They are going to become high-maintenance.
Fortunately, that’s one thing. I have been lucky. I’ve had good success with JV partners. I’ve had ones where I’ve had to deliver bad news. I’m like, “This is going to be a tough conversation.” Everyone has been pros. I’ve had a few that I had scrubbed out before we did the deal because I could tell by the way things were heading. I’m like, “This guy is going to be a major pain in the butt. If I don’t nip this in the bud now, I’m going to regret it totally.”
I would quickly piggyback on that and say very similar. What I was doing, in the beginning, was essentially documenting my progress. If I was researching a particular topic, I put it out there for other people. I wasn’t thinking of it as content creation per se. It was documenting what I was doing. One of my first JV partners was a guy I played lacrosse with many years ago in college. I had no clue he was even following what I was doing. He reached out to me on LinkedIn. He wanted to do a JV deal. I’m like, “Okay.” It’s a similar thing where he was reaching out to me. Sometimes I need to be a little pushier.
It’s a matter of building trust, is what it boils down to. People get a sense of our show, videos and different things, whether or not they can trust you. If you communicate through the deal well, like you were talking about Dan, I have a couple of deals now that are a little touch and go that are still JV deals. Because I have been communicating and they have seen the work I have been putting in, they are fine. The JV partner obviously wants to make as much money as possible, but they see that it is what it is. I can’t control everything. Building trust and then communicating are key for marketing and finding outside capital.
Communication is huge. I’ve had so many stories where I have talked to people. They are like, “I was working with this person or that person. They won’t even call me back. I can’t get a hold of them. That is so scary.” In some of those cases, the operator is doing the job. If you are not communicating, even if you are doing your job well, they are going to get scared. That’s creepy if you are on the other side of that.
One thing I wanted to jump back at because it’s very difficult to do when you are getting started and you touched upon it, Dan, is you have created an influence on people who are interested in investing. You are raising some money and then you’ve got that person who is going to be a pain in the ass. You are going back and telling them no because when you get started, it’s like, “This is awesome. I will take anybody.” After you have the first pain in the ass, then all of a sudden, you realize like, “I don’t want to deal with that anymore.”
I’ve had people with six significant figures. Essentially, I pushed it aside because I knew that I would not be able to handle them. There were things they wanted that were over-reporting in certain things, “Sign up with this and that.” I’m like, “Go do a background check. Go do this and that or whatever you want. Here are 50 people you can go talk to.” I’ve got the sense from working with this person early on at the moment they sent me money. If the dividend wasn’t there on the first and the first is a Sunday, that Monday morning, I will get this email like, “Where is my money?”
I’ve had the same thing. That’s where it gets back like it’s a partnership. I set the expectations of like, “Here’s how I do things. Here’s the communication cadence.” I’ve had a few of those people where they want these elaborate contracts, where it’s like, “Dan, you are going to work for me. You are going to do this thing on this date. You are going to do this thing then. If you don’t, it’s a problem.” You are not hiring me. It’s a partnership. If you don’t trust me to do it, then that’s a bad actor because we have all seen bad actors in the industry. If somebody is a bad actor, I don’t care what is in your agreement. You are going to have a problem. Why do you worry about that?
It gets to the abundance mindset. Chris, we turned down somebody who had significant capital for our fund, but there’s other money out there. Dan, you have realized there’s a lot of capital waiting for a home. You are providing value to that person. In the beginning, you are so starved for that capital. You don’t realize how much value you are providing to that either passive partner or whatever you want to call it, the money partner.
It has been like this for several years. There’s an exorbitant amount of cash on the sidelines. You look at the stock market, which is great but very volatile. In the bond market, interest rates are still super low, so if you look at what you can get in notes, even if it’s a high single-digit rate. Considering the equity coverage and things you have from it, risk-reward-wise, it’s pretty nice.
My phone beeped me to say, “Stocks drift as the 10-year Treasury yield now sits at 2%.” We are in for a little bit of a hurt on the stock market. Based on the reports, they think that we will probably do a full-point jump at the next Fed meeting. Instead of a quarter, they are going to go at half for the next two quarterly meetings to get the interest rate up.
The inflation is 7.5%. It’s formal.
The inflation is an interesting one too because I was reading a Wall Street Journal article. They’ve got the 10-year Treasury. They’ve got those inflation-protected ones, the TIPS. Some people can look at the spread to see. The market is thinking inflation is going to settle back down based on the way that those are priced. We will see, hopefully, that’s true.
Where do you see specifically the note space going in the next couple of years? I get this question and I’m always a little hesitant, so I get it. Nobody has a crystal ball but I’m curious. Inventory-wise or pricing-wise, what do you see for the next couple of years?Grow steadily at a time by increments. Click To Tweet
I will give you my prediction with a caveat. My predictions in the last few years have been pretty off the mark. Especially when COVID hit, I thought, “My portfolio is going to go to crap. Real estate prices are going to drop.” The opposite of everything I expected happened. For a while now, I have been waiting for the next wave of foreclosures. COVID had all of the moratoriums. There is this backlog in the system that, at some point, will wash out. I don’t know when. I was hoping it would start now. I don’t know if I have seen it quite yet. Pricing will continue to stay probably around where it is.
When I started years ago, I saw people complaining that pricing was too high because they were anchored on five years right after the financial crisis. Now, a lot of people are like, “This is too high because they are anchored on what the pricing was from 2017.” If I go back in time a few years, I would have bought way more stuff and would have been willing to pay more. I didn’t realize how good their pricing was. I don’t know that it’s necessarily going to go up from where it is now. I don’t know that it’s necessarily going to be brought to some of those incredible deals that you could get.
It’s maybe more of the same but maybe an uptick in inventory.
That’s what I would expect. The other thing too is housing prices have run so hard. That changes the equation too. When pricing was lower, there were a lot more upside-down borrowers. Now, those things have a lot of equity. That changes the value of the fundamental.
You will see more bankruptcies or foreclosures as inflation increases and if people can’t afford payments. I have mentioned this to Jamie in the past. Back when we started, I used the analogy, “We are farmers and now we are hunters.” Previously, you drop a few seeds or make a few emails and calls and then it grows. You have these notes every week sent to you. You have so many notes. You didn’t even know what to do. You couldn’t even look and have all the tapes you were getting years ago. Now, it’s a drought.
That’s why I use the term hunter. You’ve got to go out and search for the tapes now. That’s where a lot of people complain about inventory because people are caught up in what it used to be years ago, where you didn’t have to do anything to get on an email list. Now, being on an email list doesn’t cut it unless you want to pay ridiculous pricing. You do have to go out and work it. Do you agree?
Yes, definitely. That’s one thing that has changed in my business. I used to have much stricter filters when I went through a tape. I’m like, “My model is here.” Nowadays, it’s helpful to have a better understanding of how the process works, the deal flow and how to determine the value so you will look at each deal and say, “What would I need to apply this at to make this work?” There’s more flexibility. It’s not quite as cookie-cutter.
You are not going to pigeonhole yourself like, “I’m only doing these states right now.” It’s because you have the experience to say, “I’ve got a good attorney in the state. I understand the state. It’s not my A-plus breadbasket, but if I can get it for this price, it’s worth the risk and financial reward to take a look at that asset.” It’s what you are saying. Is that correct?
Yes, exactly. Everything has some value except for those notes that are so upside down. They might be worth zero.
I’ve got one that I know very well that I have been talking with. I mentioned to Jamie a few times that my attorney finally got back to me. If they gave this to you, I don’t think you would even want it. They have to pay you to take this. That’s the one Jamie in Pennsylvania.
I was talking to somebody about this topic. It’s the same thing you said, Dan. It was essential to expand your buy-box. We’ve had to. I have been in notes in a shorter time period than you two have a little bit. Even in that time period, my buy-box has expanded partially because my confidence and experience level have grown but also because of the lack of deal flow. I used to tell new note investors, “Pick three states that you are comfortable with.”
Now, I’m saying, “Maybe 8 to 10 because we want you actually to do a deal. Don’t pick 50.” Each deal still needs to cater to some of your strengths. You’ve got to push yourself a little bit and get a little bit uncomfortable in order to have access to more deals. I’m curious, Dan. Where do you see your note career going? It’s not so much the market but your personal business and note investing situation. Where do you see that in three years?
My plan is to grow it and keep going incrementally at a time steadily. I’m not going to necessarily try to double it overnight unless there are some cool opportunities that come out. It’s continuing to run it effectively and efficiently on a day-to-day basis and then opportunistically adding to the portfolio to get along.
What is the one thing somebody new to space should not do? I know there are many. What is the one thing you see a lot of people are doing and you want to rip your hair out and be like, “Why are you doing that?” Is there one thing you can think of off the top of your head?
Don’t take everything you hear in the business at face value. Be reasonably skeptical. Don’t be fearful and never pull the trigger on everything. Sanity-check all the information that you find. If something sounds super good to be true, talk to some other people because it’s an awesome business. The way you build a business is you are like building a snowball over time. These things gain steam.
Earlier in 2021, I had this series of months where I had all these big exits one after another. All of a sudden, from a profit perspective, my business took off and then I was like, “I did that deal three years previous. I did that deal two years previous.” To understand that, when you do these deals, a lot of times, the money shows up much later. It could be years later in some cases. Be a little skeptical if somebody is saying, “You can make boatloads of money in the next month.” It’s not that you can make boatloads of money. Your time horizon is going to be years.
You’ve got the COVID refinance as well, I can see. Once COVID hits the interest rate, all of a sudden, the product values go up. The interest rates were low. I had the same thing. People are asking because of COVID. It delayed a lot of foreclosures, but from a returns perspective, my returns were better because I had people who I never thought would pay off start refinancing and paying off loans.
I even had foreclosures during COVID. Some of the counties were still open.
Non-judicial ones, I had a few.
One was in Tennessee. I had one that was in Nebraska.
I had one in Maryland, which is quasi-judicial that we foreclosed on 20th of October 2020. We finally got the courts to ratify the sale and it’s going to be closing. It was sold at auction to a third party. This guy has been waiting for a year and a half to be like, “When is the court going to do this so I can get it?” He is going to have to, unfortunately, evict the borrower or the person in the property, which will be another six months in this county of Maryland. You get it sold and you are like, “I’m going to get my money.” A year and a half later, you still don’t have it. These are some of the things that people should be aware of.
Sometimes I get paid right away. At other times, it takes a while.
Can you think of any good deed that you have done or has happened to your business that someone else has benefited from?
The biggest thing I have noticed is a lot of it is going through the monthly report and reaching out to borrowers. I have been doing it increasingly through the servicers for a while. I was doing a lot of it myself. It turned out that the borrower wanted to get things on track, but the loan was owned by a larger institution. They couldn’t get anybody on the phone and it was confusing. When they talked to me, it was like, “We can do this and that.” They are very grateful. I’ve had a lot of loans that were nonperforming and I bought them in one phone call to the borrower.
We get an agreement in place to get it back on track. All of a sudden, it flips to a performing note overnight, which is awesome for me. It’s also awesome for the borrower because that’s causing a lot of stress to them. When they have this loan, it’s like, “I don’t know if I should send payments because I don’t want to get foreclosed on. I’m willing to send payments, but I can’t talk to anybody.” When you can remove a lot of that stress, that’s awesome for them and they are very appreciative. I could make a lot of borrower testimonials. I have never done that.You need to find your competitive edge. Click To Tweet
That’s a good idea. I like that. There’s the human element there in every way we talk. Every note has the math side and then the human side or a story. That’s pretty cool. I have enjoyed that part myself.
As an individual investor in any investment or business, you want to understand like, “What is your edge? What is your competitive advantage?” In notes, a lot of it is the ability to pay attention to your portfolio because it’s scary what I have seen with some of these larger funds.
I’m not the one who came up with this. Your note business boils down to deal acquisition and money acquisition. We spent some time talking about it. The third piece is asset management. That’s the piece you are talking about where these larger hedge funds and maybe banks don’t do the best job on an individual level managing those assets.
It’s because they are buying at the right price and then the next question is like, “What can you do to add value to the asset?” If somebody buys or acquires a business, usually, a part of that model is, “What can I do to add value?” There are cases where you can do a similar thing.
One of the things that I was thinking of too is when you look at some of these other funds, the fund managers at the top are well-paid and very highly educated. They are probably MBA-type people. When you get to our level, Dan, you’ve got an MBA. We all get advanced degrees. We are acting as a role of people who, if you took our W-2 jobs, are probably making 1/3 of what we probably make in our W-2 jobs. It’s almost as if you took a large fund and had that fund manager managing every asset. That’s how it is with us. We can think outside. I’m not trying to say anything about our egos and stuff.
You, as a product manager, I know you have probably been in a lot of situations where you’ve got to figure some shit out and it’s like, “How do I do this?” That’s what note investing is. It’s coming up with creative solutions on how to get through things. A lot of times, people who might be working these loans are more trained on, “Here are the laws on what I can say and I can’t say.” They have no idea that, “If I modify this borrower, am I better to modify them over four years or I do it at three years with a balloon? Do I run it out for six years? What does that scenario look like?”
They have no clue if you ask them that. For the most part, I’m sure you can do it. I know Jamie can do it. For us, it gives us that competitive advantage over some of these large funds because of the amount of involvement we have. You’ve got to have that fine balance of working on your business to put in your business. A lot of times, once you go through that when you start your business, that comes so naturally now that you can like, “This is what I need to do because I have run that scenario 37 times already.”
There were a lot of things early on. I would spend hours crunching numbers and figuring things out, but nowadays, it’s especially the pricing in some cases. After you have done a bunch, there’s a lot of stuff you can do back of the napkin. You are like, “I have done this so many times.”
Do you use your calculator anymore?
I use Excel. I’ve got some spreadsheets that I plug things into to check. A lot of times, as I’m going through a tape, I can go like, “Here’s the balance, term and interest rate. I’m going to need to be here.”
When you started out, you put everything into your Excel. Into the calculator, it’s like, “This is where I need to be.” You have been on probably 1,000 assets in Tennessee with a UPB of 55,000 properties or 75,000. The payment is $500 a month. It’s nonperforming. It’s like, “Back in the day, I would probably be at $25,000 or $30,000. Maybe now I’m at $35,000.” You are probably in that range somewhere of $30,000 or $35,000. That’s like, “Let me stick it in my calculator and see where it plugs in at.” You already know where that starting point probably is. You know the approximate range of what it should be.
I have done a lot of contracts for deeds as well. Most of those have the same terms. Those get even easier to do.
People get so wrapped up and it’s fine when you are brand new. You are so wrapped up in XIRR, IRR or YIELD. We can debate that all day. It’s fun but at the end of the day, it’s wrong as soon as you buy the deal anyway. It’s part of the process once you get going and you are looking at maybe 5 or 10 assets at the same time to buy. It’s not a good use of your time to be spending hours plugging in those numbers.
There’s so much variation deal to deal. You can’t be precise. For people that are brand new in buying their new one, take your time. Figure out what you are doing, but don’t necessarily sweat optimizing all the pricing on the first one. The other thing that was eye-opening for me when I bought the new note was how the whole process worked.
I was used to stocks where you click a button and the trade is on. I’m like, “Why is this taking weeks to get this transferred?” There’s a big learning process from going through that whole end buying a note. Don’t overpay for stuff. You don’t necessarily have to crazily optimize the very first one because if you do that too much, it’s going to delay you getting into a deal and then learning all those other things.
What I like that people look at is not as much how much you are going to make. What is the risk? If I pay $25,000 on this note as an example, how much cost is based on, “Here’s what is going to happen?” How much money is there to protect me in case something goes wrong, it takes longer or whatnot? If the foreclosure goes from $5,000 to $10,000, is that a problem? Do I still make money? Do I not? That’s one of the things people miss the most. Everyone is returns-based on, “I’m going to make this or that percent. As Jamie said, it’s wrong. The first time you look at it, what is the risk involved with getting that percent?”
I see people posting syndications for a multifamily deal, “It’s 20%.” I’m like, “What is the risk on that because it’s probably in Podunk, Iowa, somewhere in a class-C neighborhood, they are going to try and renovate from that perspective, or would I rather get 8% on a class-A apartment building in Nashville, Tennessee that is booming?” People missed the boat on that. They are chasing the money versus looking back and understanding the risk with it as well.
That’s a good point because the other thing that will happen is if you are obsessed with getting what I call novelty returns. The other thing is people talk about deals they did in 2013. They were like, “A 50% ROI is not good.” If you are new and you go through and you say, “I’m not going to buy a deal unless I get a 30% annual return,” then what is going to happen is you are either going to buy nothing or you are going to have missed something. You are going to buy some crappy asset and it’s not going to work out well. It’s very rare that you are going to find the $20 bill laying on the sidewalk. If that’s what you are trying to do, especially in this environment, you are going to be looking for a long time or you are going to mess up.
You mentioned that maybe you overpaid a little bit previously. When you look back at the five years you have been in notes, what would you say is something you would change or something you would say is your biggest mistake so far?
If I had it to do over, knowing how the market has gone, I would have bought more earlier. My ramp-up was probably faster than most. It’s not nearly as fast as you and Chris. It’s not bad. It would have been nice to have been on the Chris plan of buying faster because I would have done better, but you don’t know what you don’t know.
Jamie thought I was nuts. He was like, “You are going too fast. You are blowing through this.” Now, he is probably like, “Damn it.”
Thought, you put that in the past tense. I still think you are a little bit nuts.
I was mentioning in my membership group certain things like, “If somebody throws a note at me, I can make a decision on that asset in seconds like yes or no.” If you asked me to go buy a car, I joked that I would do so much research that by the time that I get to the finish line, it’s a new model year and I have to start all over. It’s that repetitive component.
I try not to do that. In a lot of these things, their numbers gain. I know a certain percentage is going to go sideways and a certain percentage is going to be home runs. The vast majority are going to be solid base hits. If you are doing a bunch and you have a lot of experience in that, you become not as concerned.
The other thing, at least for me is, by the end of the day, I don’t have the brainpower to figure out what is for dinner. Chris, you are probably so focused on your day job and your notes. You may have been tapped out of your mental capacity.
I know notes and I understand it. If it’s an area that I don’t have the confidence or education in, I try and educate myself and be a master at some of the other things I’m good at. It’s such an overkill. That’s the engineer in me coming out from that perspective. As we wrap up, Dan, we like to also ask people for a Note and Bolt. It’s a little tidbit of information, lessons learned or something in general in the note space that people can walk away with. Do you have anything? If you need a minute to think, I will go over to Jamie over here and have him come up with his. If he doesn’t have one, I will start with mine.When facing too much information, start by breaking it down. Click To Tweet
My Note and Bolt is for the new note investor to think 2 to 3 years ahead and document your processes. I’m not even talking about marketing. I’m talking about your internal SOPs like we talked about. It’s easy not to do this. Document whether you are using Loom or Dan’s processes he talked about. Document because it makes it so much easier to systematize. Think about where your business is going to be in 2 to 3 years internally as opposed to focusing on working the deal that’s right in front of you. It’s easier said than done but it’s pretty key.
My tidbit is if you are in that mode where you are in the learning phase, you are listening to stuff and you are like, “There’s all this information. I don’t know how it’s organized.” Start breaking it down. I go, “Here’s a video or a BiggerPockets post about pricing. I’ve got due diligence or legal process.” Create some bookmarks yourself and organize those. That makes it a little bit easier to go back and reference things because otherwise, you can get lost in the sea of information.
Chris uses the saying, “How do you eat an elephant one bite at a time?” It can seem overwhelming if you are looking at the big picture all the time. It’s bite-sized chunks. Now, I understand that part of it incrementally grows.
Mine is going to touch base on something Dan mentioned as well. If you want to get in this business and start managing a business, you have to treat your finances seriously and understand that you need to do your books. You need to know where you stand on your books. If you look at most companies or people who get themselves in trouble, it’s because they have no idea what is going on with their books. If you are looking to invest with somebody in this space, the two questions I would ask them are, “Send me a copy of the last report that you sent to an investor and black out the names that are in it so you can see the type of report.”
Ask them to send you a sample financial report that they have because if they can’t produce either one, then run for the hills. Everyone can sit there and say, “I provide this quarterly report. I do quarterly financials. I do this and that.” It’s like, “It’s great you say that. Show me an example of a quarterly report or monthly report that you sent to an investor. Show me a sample balance sheet and P&L of one asset. You can black out the asset’s name. I just want to see how it’s done in your books because at the end of the day, if the JV deal is done, how do I know I’ve got the right amount of money?” If you can’t show me that, that doesn’t give me a lot of confidence that the person manages their business properly.
That’s good advice because anybody who is doing that is going to have piles of those things. They are like, “Let me take five seconds and get that to you.” If they are not, they are going to be like, “Ugh.”
It’s something they should be able to email in five minutes. They can go in and black out the thing and say, “Here’s the one that I sent for end of year December. Here’s a sample of the quarterly one.” Dan, thank you for joining us. How can people reach out to you if people want more information about you, your company, or your podcast where they can listen?
Dan, thanks for having you on. As always for our readers, thanks for reading. Make sure to leave us a review on your favorite reading station. Go out and do some good deeds. Thank you all.
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About Dan Deppen
CROSS-FUNCTIONAL TEAM LEADER ?️
-Work with C-Suite to ensure product strategy is in alignment with overall strategy
-Engage with engineering to develop roadmaps, sprint plans and feature prioritization
-Coordinate with demand gen, marketing and sales to take product to market
-Do whatever else is needed to make sure things run smoothly and customers are happy
PRODUCT STRATEGY AND IMPLEMENTATION ??
-Create comprehensive plans and product roadmaps that are strategic, in line with corporate goals, play to the product’s and team’s strength, and balance both short and long-term objectives.
MARKETING AND SALES ENABLEMENT ??
-Training global sales teams
-Pre-sales and customer engagement
-Content strategy and creation
MENTOR AND TEACHER ???
-Mentored several new engineers and product managers
-Create and sell online courses for real estate investors
PARTNERSHIPS AND BUSINESS DEVELOPMENT ?
-Responsible for existing partnerships with HP and IBM while at Oracle
-Developed new partnerships and go to market plans with ISV’s to provide access to new markets.
-Track record of understanding the strategic landscape to determine which partnerships to pursue, and then work to get internal and external buy in to make them a reality.