With proper documentation, work process, and guidance, you’ll learn what to do and what not to do within your first three months in note investing. Jamie Bateman and Chris Seveney are joined by their special guest Steven Burke with his notes company Phoenix Notes. This is a follow-up to an episode they did a couple of months ago. Join in the conversation and get a glimpse of Steven’s experiences with different servicers like Paperstac and Madison. Discover how you should oversee the whole process because nothing is foolproof. You’ll also get to learn why Steven prefers to go the nonperforming route.
Listen to the podcast here:
The First Three Months: Challenges And Lessons In Note Investing With Steven Burke
We are joined by a special guest, Steven Burke. He is joining us here with Phoenix Notes, his note company. He’s joining us here as a follow-up to an episode we did. Chris, Steven, how are you guys doing?
Doing well, Jamie. Thank you.
We had Steven on some time ago. Steven was in the process, at that time, of going through his first note acquisition and getting up and started in notes. Since that time, he’s bought a note and started to get an understanding of the process of working with the servicer, getting aboard it. A lot of those aspects which is important for note investing because it’s not anything you can be taught. People can go through the steps. It’s something where you make sure you got the right forms or paperwork. It’s a little bit of a nuance, and you have to get in a rhythm and understand the servicer and what their requirements are, which is pretty much the same.
It’s something that you can’t pick up a book and read of how to board alone or how to get started on a note. We wanted to bring Steven on while it’s fresh in everyone’s minds for him to share his experience. We’re going to pick his brain. We’re going to throw questions at him that he probably doesn’t know are coming. He’s going to do well in answering, coming from the firing squad. Steven, why don’t you tell us a little bit more about yourself?
Around the time when we last talked, my wife at the time was 36, 37 weeks pregnant. Since then, we have had our second baby, which is a girl. Her name’s Lucille.
You’ve been able to keep your eye on the note business even through all that. That’s impressive.
That’s pretty brave to go through, starting a new business with a wife who’s 36 weeks pregnant. God help you.
I don’t think you’re ever fully ready to be a parent or a note investor, for that matter.
You got involved at the same time. I like this guy, actually.
Knock it out, rip off the band-aid.
Steven, tell us a little bit more about your personal situation, your background. A little bit of how you got into notes.
I’m an engineer by trade. I graduated from the University of Minnesota with a Chemical Engineering Degree. My wife was also going to school in Minnesota at that time. We graduated with some student loan debt. It led to me researching around investing in personal finance-type subjects. You do enough exploring in that arena and real estate investing comes up pretty frequently as a good option and a way to build wealth. I got more interested in real estate. BiggerPockets is also obviously a great resource. Looking into that and this subject of note investing came up.
The first thing I read about it was around David Warren, some of his BiggerPockets posts. Eventually, he came up with that note investing book that I read. That spiraled into Jimmy Napier’s Invest in Debt and a bunch of other books around note investing. I found the finance world or the paper world more interesting than the hard real estate. Obviously, there are pros and cons to each method and strategy. From a personal standpoint, I find all the options that you have with notes, the different exit strategies, and the financing game is more interesting than the hard real estate.
That led me reaching out. I was laid off from work for three months because of COVID, furlough, and cutbacks. At that time, I had reached out to both of you, both Chris and Jamie, asking if they need any support or help with the business. I got my W-2 job. I’m process-focused. We do a lot of process documentation and work instructions. Communication is a big part of that. Personal circumstances changed for Jamie later in the summer of 2020 with the stay-at-home work because his wife ended up staying home with the kids for schooling and stuff.
He needed help at that time, so I jumped aboard and was helping Jamie with his business and the contracting work side. Eventually, that led me to start my business. I registered my LLC in 2020. I had the LLC for a long time but did nothing with it until this past January of 2021, when I bought my first note. There was a period of time where I was researching and preparing for that first purchase. Being involved with Jamie’s business, I built my confidence, my knowledge base, and allowed me to jump in this year to start purchasing notes ourselves.Whatever you have going on, you can make time for notes. It's a matter of prioritizing. Click To Tweet
At what point are you going to say, “Jamie, thanks for all the assistance. Now is the point to go do it on my own and I’m going to be bigger than you.” When is that coming?
That thought process hasn’t happened yet to be quite honest with you. I still find a lot of value from it. I put in six hours a week. It’s not what it used to be.
I sent you ACH. I sent your payment for the 12.5 hours you did in the last two weeks.
Hopefully, he’s still finding value in the limited time. I don’t have any intention to stop as long as Jamie continues to think it’s beneficial.
In all seriousness, we touched on this last time, but it’s worth reiterating. People might look around and say, “I don’t have much time. I don’t have much money. I can’t get into notes or real estate because of these obstacles.” You still don’t have a lot of free time. With the limited amount of free time you have, you decided to add value to someone else. I would like to bring that up because people will drop questions in the Facebook groups or say, “Give me. What’s in it for me?” You approached it in a different manner. You approach it with, “What can I bring to the table? What are my strengths?” That’s starting to pay off for you.
I’ll touch on the time thing. It’s interesting. It always seems like whatever you have going on, you can make time for it. It’s a matter of prioritizing. You are both busy as well. I have stuff going on with the new family. I’m training for a marathon, too. I’m running 50 miles a week.
I know I’m driving 50 miles. I love to run but my doctors are like, “Anytime you want to get your knee replaced, we can do it. You realize it’s only going to last you 20 years,” because I’ve had three ACL surgeries.
Steven, you texted me on a Saturday and was like, “I ran a marathon. I’ve got some free time. Do you have any projects for me to work on or something?” I’m like, “What? I didn’t even know you had ever run more than two miles.” That was pretty impressive.
Back in August 2020, I seem to start with Jamie and the marathon training at the same time. Looking back, it’s not as intelligent. Again, whatever you prioritize, you make time for it.
A few questions I have outside of running marathons and so forth. Since the time we last talked, you bought a note with full disclosure. You bought it from me. Before, he asked, “Can I mention that?” I said, “As long as it’s still paying you, you can.” What did you think was going to be difficult and challenging that was like, “That was pretty simple?” Is there any process that you thought was much easier than you anticipated?
If you bid on a note on Paperstac, they show you all those different steps to close. You got to complete all these different actions. I didn’t know, Chris, how much work you did on your side as the informed seller. I signed some documents that came over and things were taken care of. I kept it with the same servicer that was at. There wasn’t any major boarding or transferring for servicing. The overall process was smoother than I expected. I have purchased a second note through Paperstac. That one was a little bit more involved from a process standpoint. That Paperstac checklist and notification systems are slick and walk you through what you need to do. It’s calming. I’m detailed. I do worry about all the proper steps getting completed. In both cases, for my current purchases, it’s gone smoothly.
Paperstac is good at how they systematically do things and putting out the process. From a time perspective, it does take a lot longer to close a note on Paperstac than if you’re then doing it outside with a note. For Steven and I, it was like, “You do due diligence. Here’s a loan sale agreement. You sign it. Wire me the money. I mailed you.” Usually, within two weeks, I try and get out the assignment and any other collateral that I owe him. Get that out the door and basically, you’re done.
Whereas, with Paperstac, they do add an escrow. They can do the collateral review and some of those things which are good for new-known investors, don’t get me wrong, but it does take a little bit longer. For people, if you’re a seller looking to sell on Paperstac more, be aware that it might take a little bit longer. For buyers, they put the steps in order. It’s something that you can follow. That’s one part of it. What did you find to be a little more challenging as part of the initial boarding process or overall owning this note?
You mentioned the process in Paperstac does take a little longer than I anticipated. The biggest challenge is with the servicing transfer. I hadn’t heard any information or I didn’t see any emails come through about the communication between the servicing companies. I had to follow up quite a few times to understand where the process was at. I’m boarding with Madison. I was checking with Madison saying, “Have you heard from the previous servicer and whatnot?” There were some communication gaps. Eventually, I had to contact the seller to get me some updates and then talk to the previous servicer. It’s supposed to transfer to Madison. We’ll see if that happens. I’m trying to understand where the process is from a boarding standpoint. The servicing transfer have been the most challenging. I didn’t see any emails from the servicing company, so I didn’t know what was going on. I had to give him a call.
I’d be curious to have you on a third time in a year. Let’s see what you say about this. It sounds like you left your first note at the same servicer. The second one, you’re transferring to that same servicer. Both of your notes will be at Madison. That was the approach you wanted to take as far as having one servicer, one point of contact for your assets.
The work that we’ve done with Labrador, Madison has been good as far as communication and stuff with me. I felt the most comfortable going with Madison. The servicer that was servicing the second note that I purchased was not one of the ones that Labrador Lending uses. It was more of a known versus unknown decision. I decided to go with what I was more comfortable with or what was known to me.
It makes sense.
I would also recommend it for people getting started, it’s like a catch-22. If you use two different servicers, you can weigh the pros and cons of each one. On the flip side, depending on how much time you have, if you’re limited for time, you’ve got the W-2, you got other stuff going on like two kids and all that other mumbo jumbo, you’re better off leaving it with one servicer because it’s one point of contact. It’s one portal you log in to from getting payments and invoices. You’re dealing with one vendor versus two. Each individual investor starting out has to weigh the pros and cons with that. For me, if somebody was getting starting saying, “I have 1, 2, 3, 5 notes.” I’d start with one. If then you get a one-off, that’s another servicer you want to try, then leave that one with them. Get a feel or grasp for how they do their accounting processes, their loss mitigation, and their reporting because that’s all very important.
There is some risk in switching servicers. There are some costs and if your borrower is on automatic ACH, you’re better off leaving it alone and not switching servicers. I do agree, if you’ve got a lot going on in your personal life, have one servicer. Those both of your deals that you’ve already closed on, the second one that’s switching servicer is boarding. Is that right?
Are they both Contracts for Deed?
They are both CFDs.
I was curious, was that also something you weren’t afraid of because we’ve dealt with a lot of CFDs? Are you already familiar with that? What was your thought process around whether to jump into CFDs or not?
For the first one I bought, I was only looking to purchase a deal. I wasn’t too picky with the note mortgage for CFD. It was a performing asset. Right, wrong, or indifferent, I didn’t consider the difference between a contract for deed or note for that one. The second one, I was a little bit more aware of because it is nonperforming. I was going back and forth with the seller around the status of the loan, what happened to it, and what led me to go forward with it. In the end, he said, “We had communication with the borrower. He wants to do a loan modification and convert to a note mortgage.” The plan for the CFD for this one is to do a conversion over. This was not only part of the consideration but because the borrower currently has interest and is in communication with the previous lender. I didn’t put too much weight on the CFD. We’ll see how it pans out. It’s not converted yet. I know that’s sometimes a struggle, but the plan is to convert that one over to a note mortgage.
Few tips I’ll give you on converting and I’ve shared these 1,000 times with people. When you get the documents, find a local mobile notary and send them to them. Have them bring them over to get everything notarized because if you put them in the mail, what will happen is, let’s say, you sent them out in the middle of April 2021. You probably have to put a first payment due on June 1st because there’s no way you’re getting that by May 1st. I can tell you that.There's more excitement, more creativity, and work-out solutions with nonperformers. Click To Tweet
If you got them back by June 1st, you’d be lucky if you mailed it to them. If you’ve got a mobile notary and say, “I’ve got to get this thing done by May 1st,” and send it to them. Email them. They print out and you’d have it by May 1st in that instance but If you put it in the mail, it’s one of those things where, “I never got it. It sits on the table.” You got the tracking number that shows they signed for but then, “I don’t know where to get a notary.” It’s a process that I had. One of my first ones took four months and I had to change the paperwork three different times. I then realized, “Idiot me. Why don’t I get a mobile notary? You got a lot to learn.”
Steven has been pretty hands-on with our conversions as well. That’s been good. Nothing is foolproof that even the mobile notary during COVID, we tried that. We played that game. It’s a good thing for people to understand. You got to oversee the whole thing. It’s not as easy as snapping your fingers, “I’m going to convert this.”
I was going to say, as part of working and getting some of that mentoring from Jamie or you mentoring Jamie, whichever it may be, have you found that to be beneficial? I’m stepping back for a second thinking, “This guy is on his first asset and he’s like, ‘I’m going to convert this,’ and so forth.” That’s an advanced strategy, I would say. I know some long-term note investors who buy a lot of CFDs. They don’t get to that point. I don’t want to put words in anyone’s mouth, but I’ll let you answer a question. Has the benefit of working with Jamie on this helped at all with purchases and some of these strategies?
Absolutely. When I joined Labrador Lending as a contractor, that was an initiative that Jamie was undertaking. I thought that’s what you tried to do. I still do that. If the borrower is willing and it makes sense, let’s try and convert it because it’s less risk on the lender. I never considered this an advanced strategy or not. It’s like, “If they’re willing to do it and if it makes sense, let’s do it.” Jamie has been a great resource for us in Phoenix Notes for the process stuff. I always bounce questions off him if I have them. He’s got a lot more assets, a lot more documentation, and he’s been through it. The files themselves have been great references for me to go back to if I have any questions around, how did he do this conversion? What documents were involved? I have a great place to go for references, not only in Jamie himself but in the files and the existing assets that he has.
How much did Jamie pay you to make those statements?
The contract pay is enough. No additional.
This topic started with and this segment has been about the early trials and tribulations of a note investor. It’s interesting. My brain, which is pretty crazy, is leaning me towards the experience you’re also getting from Jamie because you throw things out there like the collateral and stuff. Are you being experienced in a lot of different collateral files and different loans? For example, is Jamie had you look at any of these assets in the Empire State, which your assets he bought from a wonderful note investor that Jamie’s going to make a lot of money on? Have you had any experience with any of those? Are you getting to see wide assets as part of dealing with Jamie?
I get a lot of exposure to a ton of different scenarios. I’ve been pretty involved with the New York stuff.
Can I get credit for that, by the way? I started and said, “Jamie, here’s a nice package, beautifully wrapped loans for you. Here you go. All yours. I’m going to be a good guy here and sell these to you at a wonderful price. You can go off right off into the sunset and retire.”
I’m still working on recording a couple of them six months later.
You’ve got my documents on. You got what I need but it wasn’t filled outright.
Steven, when you started, we were doing a bunch of conversions. We were doing a lot of FPI. We were taking over the letter cycle on insurance. You talked about that in the last episode. There was a lot going on even when we don’t have 250, 300 notes like Chris does but we had a lot going on with our portfolio at that time. You’ve worked and I’m not afraid to delegate anything. You’ve had exposure to pretty much everything we have going on. I’m getting you more involved with the books and things like that. It may sound like tooting my own horn, but I would think from your perspective, it would be helpful for your own note business growth. You started out with a performer from Chris and then you’ve pivoted, whether intentionally or not, to a non-performer. What was the thought process there?
Going in the nonperforming route is a way to expose me to different scenarios. You can buy performers at 10%, 12%, 13% return or you can go into nonperforming space. My initial thought process was, “If this is going to be a longer-term side business or potentially full-time thing in the future, eventually, you’re going to have to go nonperforming.” I was going to keep my eye both on performing and nonperforming assets. This one came up that I was interested in and it fit my criteria. I decided to go through the process. It’s the confidence that I’ve gained with Jamie, helping you with all of your assets. If you want to do this, you’re going to have to get into the nonperforming space. That was my thought process.
Walk us through your thought process if there are any differences on the performing loan versus nonperforming loan. I like to ask this question to new investors. Take us back to what intrigued you about the asset. You don’t need to give addresses and all this stuff. The state and some of the numbers behind it. What was your thought process? How you went through the bidding and the negotiation? People like to hear those stories because the first time you try and negotiate a note, it’s a little scary. I was trying to negotiate. I wasn’t a great negotiator. It’s something people haven’t done before. Usually, they’re a little timider to process it. Can you share some of your thoughts on that?
I initially had my criteria to look for assets within the states that Labrador Lending has or Jamie has. This one is not in the state that Jamie has bought a note before. There was some initial thought there. It didn’t pan out that way. As far as criteria, I was looking for something on the lower end under $50,000 or so UPV. For a nonperforming asset, because starting out, we’re a little low on the capital side. I know we talked about this. It’s not something that I feel extremely comfortable with. I wanted to use our capital.
Since we touched on that, as much as you’re comfortable speaking about it, how are you funding this business? It’s more for the reader. How much do you think somebody needs to have available to get into note investing? Where do you see the future going for your business as far as funding and access to capital?
I’ll break that down into two questions because that’s important. He mentioned, he wasn’t ready to go out and raise capital, which is a smart thing. Something we highly recommend. Let’s talk that then I’d like to have a five-minute discussion later on about where you think you see yourself going in the next 6 to 12 months.
For these initial deals, my wife and I had saved up some money. Every month, we’re putting money aside from our regular income into an investing account. I would say the majority of the funding for the first one came from personal savings. Because of the impact of COVID, I’m an anti-stock market guy. I cashed out my 401(k). I would say the majority of the funds for the non-performer came from the 401(k) distribution that I took out of my W-2. Those were the two ways that I funded my current notes. Similar to Jamie, I do have an infinite banking and life insurance policy. We do have some money in there that we have not tapped into yet. Depending on deals that come up, we’re more than willing to dip into that as well to fund additional purchases.
Overall, somewhere between $20,000 and $50,000 roughly if I were to throw an X amount out there?
Both of my purchases were right around $20,000.
I like to share that without getting too detailed and personal information. A lot of people think that you need $100,000 or all this money to start. You do need to keep some money in reserves, especially on the nonperforming ones, in case it does go delinquent. On the performing ones, you got that money coming in the door. It’s got payments coming in. This is a business that you can start with, “You need money.” I would not recommend somebody not have any money or use credit cards for starting any type of business. No matter what type of business it is.
It’s something that is less capital intensive, especially depending on where you live, than traditional real estate. If you had to put 20% to 25% down on a rental property to get typically decent rentals, you’re going to be in six figures. You’re at the $20,000 to $25,000 right there as well. The cashflow and leverage that have the tax benefits can also be seen potentially at a little higher risk depending on when you’re buying it, especially in the current market. You’re buying it at a little higher risk because of all the unknowns.
It’s a good approach you’ve taken. You’ve got a performer and nonperformer. You also have partial that we haven’t talked about.
Where did you buy that from?
I bought that one from Jamie.
You got two. Where’s the one you bought from Chris?
Two partials and a performer in Mississippi and a nonperformer in Tennessee.
It’s a good place to start with, by the way.
You don’t own anything in Tennessee, Jaime?
No. I know.
You got to get on that. It’s an awesome state to buy notes in.
Why do you say that? Either one of you. You mentioned the states, Chris. That’s definitely a key decision. I recommend people looked at 3 to 5 states to buy in initially. What are your thoughts on that, Steven, as far as states are going forward or your thought process already up to this point?
With the states, Jamie, you have through Labradors. It was my initial criteria because you have experience. I figured you’d be a good resource to talk to about all things that would come up. The Tennessee decision was more Facebook group-related. I’ve seen stuff around Tennessee and know that it’s a fairly popular state to buy notes in. This might be bad, but I try not to put too much thought into it, especially at the beginning. For me, it’s better for me to jump in, right, wrong, or indifferent. That’s what I did with this Tennessee.
Chris, why do you like Tennessee?
I have ten assets in Tennessee. It’s a fast and cost-effective foreclosure state. I got one that has been delinquent for a significant amount of time, and we’re missing two of the allonges. Because we have the original note and it’s a Deed of Trust, as long as you have them, missing the allonge doesn’t play into that. It’s a little more lenient on the collateral side of things, as well. Weigh those factors in. Contract for Deeds versus notes is somewhat irrelevant in Tennessee because it’s such a fast foreclosure state. I’ve got some Contracts for Deeds but I prefer notes in states that usually are on the non-judicial side.Don't be shy to bid, especially if you're starting out. Be conservative in your numbers. Click To Tweet
Granted, if there’s any equity in the property and they’re delinquent, you might be able to, in certain states, capture that. It’s very rare that I’ve ever had CFDs that the equity was significantly higher than what they owed. I’ve had hundreds of CFDs and probably count on one hand how many times that’s occurred. There are good attorneys in Tennessee as well. It’s important to understand who your attorneys are in those states. Tennessee and Missouri are two states that I like down in that Southeast area in that quarter.
Steven, will you stick to those two states or branch out a little bit going forward?
When I start getting tapes, I do filter and I’m trying to keep it a little smaller. The same thing with a servicer discussion is, the less states, the easier it might be to get familiar with those and easier to manage. I have put some more thought into what states I want to go in, where I’m at, and then expand the criteria to Jamie. What you have with Labrador is my bubble. We’ll see how it goes. I’m not looking to purchase 75 assets or 50 assets in 2021. My goal starting out was five in 2021. The state restriction that I have is not inhibiting me from hitting my purchasing goals.
You mentioned you’re trying to stick to a few states. If you have an attorney that services several of those states, you can stick with that one attorney. You build a better relationship with them. Relationship with your attorney is key because of few things. One is dependent on how they bill you. A lot of times, you can pick up the phone after you’ve done several cases with them. You can ask them questions and they’re not going to bill you on the clock. That’s important.
They start to get to know you. If then there are states later on that they may not do, you can pick up the phone and say, “I know you’re not in this state. You’re in twelve other states. Do you have somebody that can refer me to somebody in this other state?” That’s important as well because one of the things I caution people on is I see a lot of people throw these lists out there with all attorneys and all these states and so forth. Honestly, a lot of them are names that like, “Have you ever used them?” “No, but this person has.” You then talk to that person. This person is like, “No. I didn’t use them. This person referred me to them,” and then it will come full circle and nobody ever used that person. I had an instance where I had an attorney in the Southeast who was referred to me. It’s the only attorney I fired not once but twice.
Things change, too. Attorneys are people. Businesses change and you can’t have a static list over 4 or 5 years. Go check the list. It’s important to update those things and talk to other people.
Especially during COVID because one thing a lot of people don’t realize is foreclosure attorneys are hurting big time because of these moratoriums. A lot of them have laid off a lot of staff. It’s unfortunate. I was talking to an attorney about this because all these states, when they put these moratoriums in, don’t update it until the last second. There’s one state I invest in that the 15th of every month gets extended. Lo and behold, on that 15th day, they extend it again. As an attorney, it’s like, “How do I manage my practice when I don’t know when to bring people back on?” It’s almost like I have to wait. People were sitting at home wondering how long it’s going to last. They’re letting them wait and the states are doing it intentionally. My attorney received an email from somebody within a certain jurisdiction who said, “We are told to wait until the 11th hour before we announce any more extensions.” I’m like, “This is insane.” Steven, as we wrap up this episode, where do you see yourself going in the next 6 to 12 months?
My 2021 goals were to purchase five notes. We’re at two so far. Looking at another three-note purchase is where we see ourselves going. What I’m battling with is performing or nonperforming. I’m looking at both. I’m going to ask you a question. When you were starting outweighing the pros and cons of going performing or nonperforming, where would you suggest folks with 1 or 2-note purchases? How would you expect them or what advice do you have for expanding their business? Would you recommend performing or nonperforming or does it not matter?
My opinion has changed a little bit. I recommend people start out with performing notes that have equity. You’re going to run out of money sooner. You’re going to get capped a little bit quicker, but getting 2 or 3 notes under your belt that are performing is a good idea. For the ways you can expand, joint ventures with non-performers work if done legally. You then can certainly sell partials. I used to think a joint venture on a nonperformer was the way to go initially. Partials were then more advanced. I’m not sure that partials are more advanced than a joint venture. There’s a lot more going on. They’re easier and they can be structured in different ways. Looking back over the last few years, I personally would have got into partials earlier.
I’m not doing any more joint ventures, so not starting any. For the point being, you can take that performer and sell a partial on. That’s one way to expand your business. You’re deferring cashflow, going out, and buying another asset. Those are two ways to get access to capital to expand but I do want to reiterate that you should have some type of track record before you’re doing either one of those options. You’ve been working with us since 2020. That’s a track record right there. I don’t want to lead people down the path of, “I can buy a note and sell a partial. Five days later, I have no idea what I’m doing.” It’s not what I’m talking about. Those are two ways that you can expand your business because you will run out of cash that’s allocated for your business. Those are my initial thoughts. What do you think, Chris?
It’s not a one-size-fits-all answer for people. The reason I say that is it depends on your personality and your style. I know people who start out buy a performer, so they understand the process. They’re then like, “I understand this. Let me go to the nonperforming route and get some of this experience.” There are others then who are like, “I’m not ready, or I don’t want to deal with it. I don’t have the time,” because there’s more time involved than a nonperformer. There’s a lot of variables to play into that.
If you’ve got two kids at home, what your significant other does, and how much time you have to manage it. I would say, a nonperformer, if you have a handful of them, you’re not spending hours a day on them. You still need to check or spend every time, every week looking at them. On performing loans, you can check this thing once a month. Did they pay or did they not? You can focus on other things. The other component to it is if you have performing and you have time, do you focus your time then on some marketing or some other aspect of the business that could eventually lead to raising money?
If you’re looking to raise money or to network or to tell people your stories because you’ve done it. For you, it’s a unique instance because you’ve worked with Jamie, so you can share some of those stories. “While I was working with this person, here’s some of the stuff that I’ve learned.” Share those stories that people like to hear. Most people don’t have that, which is a benefit to you. Even on the performing loans, if you start telling your story in networking and started sharing that experience. Over time, you’ll grow your brand. It can be beneficial. I’m answering it like a politician in the sense.
It’s true, though. It depends.
From what I know, based on some of the conversations we’ve had, you would do fine on nonperformers. You have the background and experience. Basically, you’re not somebody who’s going to get all fired up or discombobulated because of something going on. Some people are sensitive in that. Certainly, things happen. It’s like, “I’m never going to do this again.” You seem like the type of person, “That happened. What do I do to fix it?” If you’re one of those people, then yes.
If you’re somebody who is easily distracted or sometimes sensitive in the way like, “I don’t want to deal with conflict.” Nonperforming is conflict-oriented. I don’t care what anybody tells you. You’re going to face conflict all the time. I got an email at 11:00 PM from an attorney on something. It was one of those things where if I was with you or if I was you when you start, I was only three months in, I wouldn’t have been able to asleep that night. I slept like a baby because it’s something that I’m used to dealing with. You got to go through that process. It’s a matter of when you are mentally ready to go through that process.
The other thing I’ll mention, too, it is not only you. It’s also if you’ve got a significant other involved or knowing when they are mentally ready to go through it as well because you should keep them informed on certain things. The last thing you want to have happened is to have a borrower send QWR or if something doesn’t happen, and they file a lawsuit or something. Somebody from the sheriff’s offices comes up knocking on your door with a complaint. That would be something that wouldn’t go over well.
To piggyback quickly on that. The answer is it depends. It always does it. I was talking to a note investor. I had a call with someone who’s an older gentleman, probably mid-70s. He’s bought seconds. In my mind, I have this generalization that if you’re retired, getting out there a little bit in age, you might want to go the more passive route, partials, funds, and that thing. He said, “I’m not interested in performing notes.” Think about it, he’s got time. He’s much with it, mentally.
This isn’t a physically demanding thing, no matter what. He’s interested in nonperformers. It’s hard for him when people say, “What should I do? Performers or nonperformers? First or Second?” What Chris and I tried to do with the show is talk about what’s worked for us or what hasn’t worked. Everyone’s situation is different with the family, your finances, time, and goals. It gets to what I love about notes in real estate is you can make it what you want. You can approach it. If you want to buy your five notes in 2021 and never buy another note, there’s nothing wrong with that. It’s one thing I love about it.
Where my head is at is why I went nonperforming was the initial curiosity and interest in the financing game. You don’t necessarily get that with performers if they keep paying. I hesitate to say boring because it’s not boring.
There’s more work on the bookkeeping end but it’s boring.
There’s more excitement, more creativity, and work out solutions with nonperformers. That’s what led me down the nonperforming route. For us, at least, there’s got to be some balance. The income from performers is nice to have to sustain and maintain but the business structure and the profitability are in the nonperformers.
As we wrap up this episode, Steven, do you have a Note and Bolt for people? You mentioned one earlier. Do you have something for everybody?
As we’re looking at growing here at Phoenix Notes, I’ve learned to not be shy about bidding. I’ve seen stuff come through. I’m running deal analysis. I’ve learned that it doesn’t hurt to bid. I didn’t get them. Live and learn. I was short. That’s part of the process. I would say don’t be shy to bid, especially if you’re starting out. Be conservative in your numbers. You get feedback. Chris, you’re open and said, “You’re above the mark.” That’s part of the cycle and part of the process, so bid.
Not only bid but also ask the seller, “Can you tell me what it’s sold for when it closes?” I’ll wait until it closes because I don’t know something could happen where the person backs out or something like that. After I close these deals, if Steven reaches back out because I’ll forget by that time but if he reached back out and asks where these assets have gone for. I won’t typically say who they were sold to, but I’ll give you a ballpark of like, “They went for around $25,000. You were $13,000 or they went on for $20,000.” It’s to give you an idea.
That’s important information to have because, as a new note investor, you don’t know where things are at. You hear what people say but how accurate is that information. Sellers could blow smoke up and give you bad information to make your time bid higher on other ones. I wouldn’t do that. Most of them sold. The performing sold for $0.80 or $0.85 and the ones you bid on were going for $0.45 or something along those lines. I have no problems reaching out to people after the fact and let them know where they missed that mark. We have this show to try and educate people. That’s another form of us giving back.
I’ve bid on an asset and performing one in Michigan for $29,000 and $29,500. I got an email that said it sold for $36,000. I’m like, “Go back to the calculator.” I must have either missed something or people are willing to pay what I’m not.
I had somebody bid on an asset that they overbid. I went back to them and told them, “Go back and check this. Drop your number because you’re bidding too much.” It was an asset and it’s on my own personal portfolio, then it’s somebody in the businesses who are going to go a lot of places. They’re new as well but I won’t take advantage of somebody who has a nonperforming asset. I do know a seller that did that with me early on. I highly respect them for that. That shows the integrity that person has. We’re not talking tens of thousands of dollars to drop the price, but it was more than $1,000 to move that number. If people overbid on stuff like that, too, in instances in my own personal portfolio, I’ll let them know like, “You need to go take another look at that because I’m running new numbers again.” That’s the wink-wink of you’re too high. I don’t know if Jamie does anything like that.
That’s a key point. This is a long-term play. This is a relationship business. You want people to buy from you again and you also want them to succeed. This isn’t about ripping people off and never looking back.
I got a call from a woman. I hadn’t heard from her in 1.5 years. It was in Missouri. She wanted to convert a CFD to a note. She was asking stuff. I said, “Is this one you bought from me?” She’s like, “Yes, it is.” I said, “How’s it doing?” She bought it as a nonperformer. She’s like, “Awesome. The person is this and that. We want to convert it because we’re going to sell it. We’re going to make all this money and stuff.” I’m like, “Great.” She’s like, “You’re not upset I didn’t keep it?” I’m like, “No, I sold it for a reason. I didn’t want one to move it to get my money to put it elsewhere and stuff.” I’m happy when people buy assets from me and make money. That’s why Jamie, I’m always happy with you because you’re always making so much money off the assets I’ve made.
Some of them have yet to play out. It’s true. It’s not a cutthroat thing. Hopefully, we can all benefit from sharing information like this. What’s your saying, Chris? Something for 2021, we’re all succeeding together.
I threw my Note and Bolt in there about not only adding on to Steve’s about bidding but also trying to get the information after the fact, so you have some historical numbers.
Once you close on an asset, Steven, this could be for you, make sure you review the hard collateral file, not the trailing documents but the actual physical collateral file. I can tell you it’s easy for me to move on to the next deal or go back to asset management. I focused on the assets we already had. Depending on what you’re doing whether you’re using a third-party custodian, have them do it. Make sure you have all of the original doc, especially the original note and things like that. My Note and Bolt is your transaction is not complete until you’ve reviewed the collateral file and then you’ve got to do some recording. Check the hard collateral file. Don’t rely on copies that were in PDF or something like that.
When you open it, don’t take it and say, “I got this thick folder.” Make sure there’s stuff in there as originals. Can you deal with stuff that are not originals? Yes, I have many loans that they lost the originals but I got a Lost Note Affidavit with copies information. Jamie, I know some of those New York loans, you also have some of that information. It’s important to understand if it’s not there, is it detrimental or is it something that can impact significantly. In certain states, if you don’t have the original stuff, it can be impactful. You might not be able to do anything on that loan for those purposes. In most instances, if you have the Lost Note Affidavit and it depends truly on the state, for the most part, there’s stuff you can do. That’s where you got to get with your attorney.
If you find out after the fact that the collateral is not full and it’s PDF copies, you notify that seller, it is something that’s an issue, and it makes the loan unsecured from that perspective, you could get a refund. You’re not going to get refunded on all your due diligence expenses and stuff but you could say, “This isn’t what I bought. You don’t have any collateral. I can’t do anything with this loan.” For those purposes, I need my money back. A good, legitimate seller would say, “Sorry. Here you go.”
If it’s right away, yes, but if it’s a year or two later, sorry.
If it’s a year or two later, I would say the same thing. I’d say, “Sorry. We’re running a little long.” I had a loan where I sold to somebody and I sent all the collateral to their servicer. They emailed me saying, “We need the original collateral, and you need to provide all this information. We need this and that.” The borrower paid off the loan. They were looking for I’m not even sure what. I don’t think they ever recorded the deed into their name. I finally went back to the person and said, “It’s like, I sold you a car and 1.5 years later, your car gets stolen and you’re calling me to say, ‘Where’s the car?’” I’m like, “I have no idea where this stuff is.” Here’s the information I sent. Here’s the date I sent it. Here’s the confirmation. Another little Note and Bolt is, when you send stuff like that, make sure you send it in a way that can be tracked. Don’t put it in regular mail. Thank you everybody for reading the blog. Thank you, Steven, for also coming on. As always, please leave us a review on your favorite listening station. As always, go out and do some good deeds. Thank you, everybody.
- Phoenix Notes
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About Steven Burke
Steven is a chemical engineer by profession but discovered his passion for finance when him and his wife found themselves with nearly 6-figures of student loan debt.
After reading countless books on how to build wealth, it became clear to Steven that the traditional retirement strategy of using qualified plans to “invest” in the stock market is not working for the vast majority of Americans. He was also surprised to find out how little he had learned about basic financial principals and strategies in the public school system.
Combining his passions of teaching and finance, Steven helps his clients reach their financial goals using non-traditional methods.
Steven currently resides near the Twin Cities with his wife and 1-year old son.
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