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Top Ten Reasons To Invest In Mortgage Notes With James Bateman

October 30, 2020

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GDNI 123 | Mortgage Note Investing

Why should you consider investing in mortgage notes? It may not be the typical route somebody takes when they go to real estate, but it does have a number of unique qualities that might just leave you considering. Control, opportunity, scalability: these are just some of the amazing perks of being in this relatively less known side of the business. Join Chris Seveney and James Bateman as they count down the top ten reasons why mortgage notes are something you should seriously look into. They explain each of these reasons and throw in some examples and case studies that illustrate just how neat this niche is. Whether you’re a beginner or a seasoned investor, this episode is something you wouldn’t want to slip through! For this episode’s Notes and Bolts: Mindset.

Listen to the podcast here:

Top Ten Reasons To Invest In Mortgage Notes With James Bateman

Jamie, how are you doing?

I’m doing well, Chris. How are you doing?

I haven’t looked outside yet. Needless to say, we are still coming at you with some more great note investing content where we try and give you the tools necessary to advance your note investing business. This is Jamie’s idea. He came up with this one. We are going to talk about the top ten reasons to invest in mortgage notes. I feel like you need a little David Letterman drum roll or something like that, but we don’t have that. We’re not that advanced yet. Maybe next time. I got all these cool tools and gadgets hiding out that I need to test before we start using them. I want to get my website done first, which I finally got that launched.

It’s nice looking.

Thank you. We’ve been working on that for some time. Sometime around COVID. Jamie, let’s start rolling into this. What’s going on with you? What are some of your trials and tribulations?

I got a bunch of things going on. I’ll talk about converting these CFDs over to notes. This is another one where you can write on your paper. I told you so and hold it up for me. It’s been more challenging than I expected. I can make all kinds of excuses. We’ve had a couple of turnovers, personnel issues with servicers. The real challenge is getting the borrowers to execute these documents.

Mobile notary?

Yes. We’ve taken the time to prepare these documents only for those borrowers who have said they want to do this. Off the top of my head, we’d probably have prepared the conversion docs for 8 to 10 of these CFDs and we’ve gotten one recorded. That’s it. That’s been more of a struggle than I anticipated. I was contacting the borrowers to see, where are you? What do you want to do? We’re going to have to redo these documents because you do this too crispy. They’re making payments to a lot of them, so the principal balance has gone down and the terms don’t make sense anymore. That’s been one of our struggles.

I got one returned and it’s funny, I did this in between. This one borrower, I didn’t do it. What I’m referring to are those stickies that say sign here. Invest in that company when you’re converting CFD accounts. You need those because these people get these documents. The mortgage is probably sixteen pages, notes only is like three pages, and cancellation is a few pages. You send us to them and you get it back. My wife says this about me all the time. I always miss one thing. There’s always one thing. I put everything away from the counter and I leave one thing.

Ours is the same way. I got one where the borrower didn’t sign the last page of that note and sends it back. I’m like, “I’m going to mail it back to you.” I had ordered on Amazon those stickies that say sign here and I started putting out those on documents. I’m trying to make it as simple as possible. The other thing you mentioned is mobile notary. Find a mobile notary that email them the docs and then tell them, “Here you go.”

I remember you mentioning that in a previous episode. In the back of my mind, I’m like, “I don’t know that my borrowers still don’t make it happen.” We include a return envelope and everything and I’m sure my wife uses those stickers too. It’s like, “How difficult is it?” I know COVID and everything, but they can even do Notarize.com. It’s not that challenging.

I’m working with a vendor now. As you know, I’ve got these master plans working on a lot of things. One of them is working with a vendor who provides this mobile notary and recording service. They will get it notarized for you and take it to the next step, which is to get it recorded for you. Think of how much less gray hair I would have if I was able to do that. You touched upon something. I was going to my trial and tribulation. As you know, you and I had been having someone assist us in some of our daily tasks. Some administrative and some work overall on our portfolios.

I’ve worked with this person in the past and they did a good job and so forth, but the person ghosted us. I emailed him, “Are you able to do anything?” They completely go non-responsive. It’s one thing if you’ve got other stuff going on and so forth but it’s like, at least have the common courtesy to respond and be like, “I’m not going to be able to get to it.” When he got ghosted, I spent much all that weekend going through everything that I had that person to do to get done. It sucks but it’s a learning lesson as well. It’s one of those things. It sucks running a business. You’re going to run into these if you’re running a business. The business itself is easy. It’s the people issues that are typically the most challenging thing you’ll run into.

GDNI 123 | Mortgage Note Investing

Mortgage Note Investing: Nonperformers are going to trade at a greater discount than a performing note.

 

I do think that at the end of the day, the person’s got to be motivated. Having maybe collections experience and servicing experiences is great, but you can teach that. It’s not that complicated. They’ve got to be reliable and motivated. That’s more important than having some skillset. Have you found a replacement already, Chris?

I haven’t started looking yet. I’m going to start looking for a replacement. If you’re motivated, you can count to ten, have email, cell phone and know how to use Zoom, then hit me up.

This is the one time I’m ahead of Chris on something. I got to celebrate.

Top ten reasons to invest in notes. Jamie, why don’t you go through? What’s one of the top reasons to invest in notes?

Number one reason, in no particular order, but discounted pricing. This is a key one. Nonperformers are going to trade at a greater discount than a performing note. You can potentially buy something that’s theoretically worth more than your pay for it, if that makes sense. If you’re buying less than par, you’re buying it at a discount. Assuming you end up getting that principal balance back along with interest, that gives you some wiggle room to not only mitigate risk but also obtain profit. That’s key. You can’t go buy a stock at a discount. I know there are other certain stock strategies you can do with options and things like that. To me, discounted pricing is a key one.

Even in hard real estate nowadays, you want to go buy an asset. It might be a property that needs some work and so forth. It was cool into a nonperforming note. Those are not selling at a discount. The one I’ll talk about is the secured instrument, the collateral. Both of us primarily invest in first position notes. You’ve got a note that’s $100,000 face value and the property is worth $250,000, that’s a secured investment. Unlike stocks or some of these other investment options, you don’t know how secure your asset was. When we were on the show with Wealth Without Wall Street, I mentioned WorldCom and thought that was the greatest company in the world many years ago. Look what happened. At least with a property that’s secured, if you’ve got insurance on it and it implodes, you’re still covered. Mine is simply the fact that it’s a secured asset that has collateral behind it.

The next one is diversification or another way to think of it is the fact that the asset and the performance of your investment are not tied to the markets. You can define diversification in many different ways. People normally think of diversification as, “I invest in the S&P 500, so I’m diversified.” This is a way to diversify all of your investments, diversify your portfolio outside of the stock market or the more traditional investments. Maybe you’re a real estate investor, but you want to get into debt investing, note investing. This is a way to help diversify your portfolio. It’s fairly straightforward.

Tagging along with diversification is correlation. Essentially, it doesn’t follow most other markets. The one I’d say for me that probably I look at the most as a note investor on the performing side, I’m curious what your thoughts are on this. I follow job reports. Housing pricing can go down 20%, but I look at myself. My house value goes down by 20%, I don’t care. I’m still paying my mortgage. I don’t have any intent on maybe I was thinking of moving, maybe not. The correlating component to that are jobs. If people have jobs, then typically they pay their bills unless new iPhones come out, then maybe that might change, which happens. I’m curious how many payments are missed now because of the new iPhones.

I feel like the employment factor has come to the forefront a lot more. I find myself when I’m doing the due diligence now, asking the seller more about the borrower’s employment status than I ever had before. Property values are sky-high but, who cares? That is important, don’t get me wrong, but that has nothing to do with the borrower’s ability to pay.

One of the things that tags along with that too that I found with the borrowers as well is during COVID, nobody wants to move. With borrowers that are nonperforming, I’m finding a lot more workout options available because people realize it’s a much harder time to move as well. The next one and you came up with this quote and I use this all the time now. I say I get it from you too, so I do give you a credit. The whole thing with note investing is the control that you have. You posted in a blog post, “When was the last time you sat in a boardroom meeting at Apple and had influence over the company’s operations?” I’m like, “That’s awesome.” It’s a good catchphrase.

With notes, you get to evaluate the asset that you buy and then you decide steps to manage it and move it forward. It’s a lot more in your control. Everything does have some trade-off over time, but the control factor, that’s why people like to be the bank because you’re in control. A lot of times you’ll say, “Who has the biggest building in every city?” When you drive through every city, who owns the tallest building? It’s typically a bank because he who holds the gold makes the rules or whatever it is. Who’s holding the gold is the lender.

The next one is tied to control. It’s multiple exit strategies and options essentially. You can’t necessarily control exactly how the deal is going to go, but you’re not always backed into your corner. You do have many different possible exit strategies if a note does go south. If you evaluated your collateral that we talked about earlier if you’ve evaluated that properly, you’ve got potentially an exit through the property. That could be a deed in lieu or foreclosure. You can also do exit through the borrower, get them reperforming with the modification or different strategies that we don’t need to go into in-depth now. That’s one thing that I like about note investing as compared to some other types of maybe real estate investing. You’re getting in early in the process. You can look at it in different ways. You can look at it as a cycle, but you can also look at it as, “I’m getting in early before this.” Earlier than maybe a rehabber or an REO investor, and that gives you options. Not only do you have control, but you also have different exit strategies, so you’re not backed into a corner typically. That’s a big one.

It’s interesting because I got a call from another investor. This is a woman who is going to be rocking it well. She has a note that was nonperforming. The borrower went through a forbearance plan or a trial payment plan where they made 6 or 12 months of payments. That’s the option at that point in time. We take the arrears and roll it into a new UPB. Do you have it be a balloon payment at the end? How do you defer? How long do you defer it? Do you provide any discount if they continue to pay over time? The options are there from that perspective.

The best thing about notes is that you are in control. You get to evaluate the asset that you buy and decide the steps to move it forward. Click To Tweet

That one little part of the process. You have lots of options.

The question I get back to her was, what’s your angle? If you’re going to hold this thing, you could do many things. You could now put it at the end, then sell a partial and get your money back. You get the balloon payment at the end, or you could roll it in. You got more flexibility because people are better off with UPB. It would be more valuable now, but there are many creative financing ways. That’s one thing I love because I’m a numbers guy. I’m just crunching numbers and options to see how creative I get. Sometimes I challenge myself this crazy creative. I have to talk to Brian and he brings me back down to earth and says, “No, you can’t do that.”

Do your borrowers even know that they’re guinea pigs sometimes? I’m just kidding.

I’m sure we’ll talk about it later on. At the end of the day, I try and make it a win-win. Tagging along to your comment about the options for each asset, from an overall business strategy, there are many options and strategies for note investing and the angles you can take. You can do seller financing transactions where maybe if you’ve got rehab experience, you pick up a property, rehab it and sell it as owner financing versus renting. You could do it on a land contract or note. You could acquire land contracts. There are the bank-owned notes that make their way from banks to hedge funds down to us. There are different position notes. There are first position notes, second position notes, unsecured notes, commercial notes and hard money loans.

When you think about lending, it’s almost like a number of credit cards like, “I’ve got my Amazon card, Apple card, Best Buy card, Visa card and MasterCard.” It’s almost like notes. Each one has a different option because you can do, “I’m buying from the hedge fund. I’m buying the seller finance note where somebody developed some land. I’ve taken an REO back that I’m going to resell on owner financing.” There are many different strategies. I was talking to Uncle Barrio doing a little prelude into the DME. Our conversation is on converting CFDs to notes.

It was funny. Marco was talking about how he dipped his toes and everything to try to see what he likes, but his strategy is sending out mailers to people who do seller financing and trying to buy those notes. He says, “The thing I love the most is talking to these people and getting a pulse.” I thought of him because I saw in an auction nearby. They have a machine that I guess you put your letters in envelopes and it automatically folds a letter. It sticks them in the envelope or something like that. I was like, “That’s cool.”

I remember him posting a picture of all these letters and envelopes. I was like, “It looked like a lot of work.”

I saw it and I’m thinking, “That would be a great job for my kids.”

Your point that you mentioned on the numerous strategies, you touched on it, but you can also look at it as maybe you could be a note investor and buy 1 or 2 performers. If that’s what you do, that’s fine or you can blow it up and start a $10 million fund and run a full-scale business out of it. Not only at the granular level but also the full business approach. There are many different angles to it.

Just buy the 1 or 2 performers before you go start that $10 million.

That’s probably a good idea.

I do know of an investor who did go out and start like a $1 million or $2 million fund. This was a few years ago and I was talking with him. I heard the name, but as I start Googling and I’m looking at BiggerPockets six weeks prior, they’re asking questions like, “What’s UPB?” All of a sudden, the next thing I know, I get a thing saying, “Invest in my fund.” I’m like, “Okay.” I think he did team up with a more seasoned investor. Anytime I see that, it scared me.

It takes a while to learn all this stuff. You don’t have to be an expert on everything, but there are a lot of moving parts.

GDNI 123 | Mortgage Note Investing

Mortgage Note Investing: It takes a while to learn all this stuff. You don’t have to be an expert on everything, but there are a lot of moving parts.

 

There’s a progression through and that’s another episode. You can’t just jump from one to the other. People like to try and get ahead, and that 10X rule of trying to do ten times as much, but you got to also make sure you’re running a little bit with the parachute. I see the athletes run and they have the parachute behind them. It slows them down a little bit. You get to do that early on in notes because you may run by stuff that you don’t even know you’re running by. That could come back and bite you in the behind later on.

Number seven, opportunity on the horizon. We’re pulling this from a blog post that I wrote. The reason I mentioned that is when I wrote that, COVID wasn’t a thing. The market conditions were certainly different than they are now, but I still think it holds true. No matter what, there’s going to be an opportunity on the horizon, you might have to pivot and look at it differently. We’ve talked about this in previous episodes. I don’t think we’re going to see the massive flood of nonperformers like there was in 2009, 2010, but I do think there will be an increase for sure in the next couple of years. To me, that’s an opportunity. If not, take it from a different angle. Buy performers and sell partials, whatever you need to do. There’s going to be an opportunity in this space. That’s another reason to invest in mortgage notes.

I want to go back and listen to an episode. It was the end of 2019, my top predictions for 2020. Honestly, I can’t remember what any of them were. I can’t wait when you and I are going to go back and listen to that episode and see how good my dart throwing is.

It’s impossible to predict these things.

As they say, you have a better chance of taking The Wall Street Journal stock page and throwing a dart and hitting a stock and picking that than you do with all these professional investors providing better returns. I’m curious about what I was predicting for 2020 because I don’t think many people probably had the right predictions. One of the things I’ve mentioned is for me, 2020, from a business perspective, has been a good year. Personally, with COVID, it’s been challenging for everybody, but you got to take those challenges and roll with them and try and do the best you can. Everyone’s a Debbie Downer, this and that. I look at it from a positive of I’ve got spent a lot more time with my kids. I get to work from home. I get to continue to grow my note business. I don’t know if I’m wanting a select few, but I’m like, “It’s been a good year.”

You got to be a little careful. I don’t want to come across like I’m pro-COVID. I’m not suggesting you are, but people are clearly suffering, but I 100% agree. We’ve realized how good we have it. For a while there, I was working my real job every other week. I had a lot of extra time to work on my note business and spend time with the family. It’s been a good year.

There are a lot of people out there struggling who are unemployed. Employments, we have 30 million people at one time. People are trying to homeschool their kids. These are all significant challenges that many of us go through. We’re going through it together. Two hundred thousand people have been lost. Many people have gotten sick. 2020 has been a horrible year overall, but you still try and make the best you can of it. That’s what I was more referring to.

You have to look at the opportunity. I do think a lot of people who could have approached it that way in a positive manner and said, “How can I improve my business, my personal, my health,” whatever. Some people have wasted that opportunity.

We’ll touch base later on another point that popped in my head. Let’s jump to the next on this. Number eight, which is the interesting thing in notes is the ability to scale. Unlike most other real estates, I find it to be significantly easier from that perspective. You can buy notes for $5,000, $10,000, $20,000, which I didn’t realize you could buy houses in Michigan for that same price. I was joking with my wife that I want to get a new TV and I’m joking that Samsung came out with some ridiculous TV, not the 262-inch one, though I did look at that. I think it was $500,000. It’s like $9,000 or $10,000 and I’m sitting there looking like, “House in Gary, house in Flint, TV.” I’m like, “The TV isn’t going to get me $600, $800 a month in recurring revenue.”

The ability to scale notes, I find compared to other real estate, typically you have to put 25% down and then you don’t have to get financing and the banks and fill out this work. It’s a little more challenging. With notes, it seems so much easier where it’s like, “I have this deal. Does somebody want to invest in it?” You raise the money for it. I thought money-raising would be extremely difficult. It’s not as hard as I thought it was. I’ve got 200-plus notes. In four years, there is no way I could have 200 properties or that monthly revenue that I’ve got coming in the door with real estate in a shorter time. People do it, don’t get me wrong. I know people who crush it and do ten times better than I do. I also work full-time as well, which we’ll talk to some of those items later on. For me, this has been great to try and scale my business.

Related to that part of the ability to scale, you can be a note investor from anywhere. That’s the next one, number nine. It helps you scale because you’re not out there driving around the properties and you’re swinging a hammer and that thing. Maybe it’s the way I look at it, but it’s a nice perk of note investing. If you have an internet connection and a cell phone, you can be a note investor. As you do scale, you’re going to need to invest in more infrastructure, more systems and people, but you can do it from anywhere. That’s a big reason to invest in mortgage notes. I’ve said it before in other episodes, the only property that I’ve ever been to that I owned the note on or some part of the note was Nightmare on Elm Street. We’ve owned notes in eleven states now. What is your number, Chris?

I think it’s 35. While you’re talking, I’ll count now.

Other than 337 Elm Street in Maryland, it was less than a 1.5-hour drive for me. Other than that one, I’ve never been to any of the properties that back up the notes that we’ve owned. I still have never been to Jacksonville, Florida. We did a full rehab and own a rental there now. To me, that’s key. That’s a nice perk of note investing.

If you have an internet connection and a cell phone, you can be a note investor. Click To Tweet

I have in 36 states. Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, Wisconsin and Wyoming.

Are you actively trying to grow that?

We’re going to get to 50.

I know you used to talk about that with Gail early on, but I didn’t know if there were specific states you’d ruled out.

I’m thinking of Massachusetts where I’m from. I’m like, “Do I have a family member I can slap a second or something?” You mentioned to invest anywhere. One of the things I want to tag on to that is you’ve got, 30, 40 notes under your belt?

I have about 34.

How many physical note conferences have you gone to and networking events?

I’m almost embarrassed to say, one.

I’ve been to two. I’ve been to a Quest thing and maybe 1 or 2 DMEs, local REIAs. I got a wife and kids. I don’t have time running around going this. My point on this is that you don’t need to be running around chasing everybody or everything to get into this business. If I was investing in local property, which I like to do, I need to get a realtor license because I can’t get people to call me back. You have to go on their time and then you have to go to REIAs to meet who those wholesalers are and stuff like that. With notes, if you were sitting in the airport and they were next to you, how many note sellers would you notice who you’ve bought from?

There are a couple of others I would recognize. That’s probably about it.

John Keith, how many people know what John Keith looks like? Paul Brick, I think we would notice. Rob Hytha, I think we would notice.

I bought a few from Rick Allen. I would probably remember him.

Rick Allen, you’ll notice, the Paperstac guys. Dave Pollio. I met Dave. He’s one that I have met with SN.

GDNI 123 | Mortgage Note Investing

Mortgage Note Investing: In a perfect world, you’re not going to be dealing with tenants, toilets and termites.

 

I’ve bought some from Gail. I would recognize her.

Gail and I, we did 100 episodes. I probably met Gail three times. We’re best friends. It’s interesting, in this world. The adaption now is with Zoom calls and everything else. People are a little more laid back which is good because people are dealing with a lot and struggling, but also meeting people informally, but formally now via the internet is okay from that perspective. That’s a plus.

The IMN pricing certainly was a lot better. That was one reason. I have not been there in person. I am at an event and it’s like $1,500 or something.

It’s funny because they usually have it in Dana Point, California or somewhere down in Florida as well. I hate to fly. That’s one of my things. I’ll go on vacations with my wife. That’s the only time. I’ve had job opportunities that were unbelievable jobs, but they required to travel. I’m like, “No.” I know that like once I start having to fly regularly, I’ll die by the time I’m 50 from heart attacks. I’m a control freak. The only time typically we’ll fly is if we’ll go on vacation. If I have to fly for business, I’d rather not have to. It’s one of the reasons why I don’t have a lot of travel expenses. If those were local like in the Washington DC area, which is a lot of money and a lot of people in this area, but it seems like there’s no note of investors in this area. They’re all politicians and lobbyists and attorneys, unfortunately. Let’s touch base on number ten, which is in a perfect world, you’re not dealing with tenants, toilets, and termites. You’re working on your travel and your golf game, and the things you enjoy. Let’s be honest, people will sell you on that.

I did write this a little while ago but I will say, I do think there are note investors like Bob Malecki, for example. He doesn’t touch CFDs. There are a lot of note investors that don’t.

If you’re buying the note, you don’t get the 1:11 PM call that, “My toilet’s broke,” or this or that, but you still eventually sometimes get the letter from the county that taxes aren’t paid, the grass isn’t cut. You may not get the $10,000 water bill, but at the end of the day, you’re still going to have to pay it because when you take that property back, it’s still your problem. You’re right in that sense. Note investing is like your servicer is your property manager. That’s an important aspect.

I do think there is something you’re dealing with the paper, especially if you’re not into CFDs, you’re not dealing with the property quite as much, but you’re right, it gets sold as something that’s not necessarily 100%.

It’s almost like a politician put a little spin on that.

That’s a good segue for what we’ll talk about next time doing reasons not to invest in notes.

The top ten reasons why you shouldn’t invest in notes. I’ve got a bunch and I’m already off to write them down and put my thoughts together from that perspective. One of the things we didn’t touch upon and I almost touched upon it earlier when we were talking about COVID and how this year hasn’t been too bad. It’s the impact on investing side of this. I’ll let you give your thoughts first and I’ll wrap up with mine.

I have that on my website as well. You are put in a position to help people. There’s always the element that you can’t help people if they’re not willing to help themselves. You told this story a couple of episodes ago of the lady. Her son died. That’s one example and that’s an important one. As you said, Bank of America is not going to probably be talking to her about that. We’re able to bring some flexibility, understand the situation much better than a big bank or even a big hedge fund. Trying to keep people in their homes. That one also gets sold sometimes a little too much because sometimes it doesn’t work to keep people in their homes. I speak for myself. That is my primary goal.

I’m trying to make money. I’m trying to keep people in their homes. As you said earlier, it’s a win-win. I am trying to work toward a win-win solution. If it’s keeping them in their home is not the best for them. That happened in our Jacksonville deal. These people were living in terrible conditions. They needed to get out. It wasn’t good for them. I still feel like that was a win-win. We can impact the community for good and do good deeds, so I agree.

During this time, my philosophy has always been trying to work with them. If they want to play ball, we play ball, and see what we can do. During these times, we’re almost going to take an even more concerted effort to try and help people. I’m fortunate with the things that I have and I don’t take those things for granted. You have to put yourself sometimes in other people’s shoes. Here’s a perfect example. I got an email from my servicer. I have a borrower who hasn’t paid in four years. The prior seller, for them, it was too well of a balance. It’s a $20,000 balance on the loan. Their servicers don’t want to deal with it. We acquire the loan and trying to do a workout with them. The husband and wife both have some health issues. They’re trying to live off $500 a month. They’re not going to be able to afford the payment, which the payment is maybe $300 a month. It’s more like $500 or $600, which for this property is probably high and there’s some wiggle room in there. The sons have both moved into the house and are trying to save the property.

If don’t take a moment to step back think about where your business is headed, you're not going to have success. Click To Tweet

From that perspective, they’ve been in there twenty years. I got the paperwork. I quickly scanned it. I haven’t gone through it, but I’ve already started legal. I probably spent $1,000 on this thing and so forth. A lot of people will be of the opinion of they got to put at least $1,000 down to get my money back that I spent on legal. Typically, that’s a philosophy that I follow, but in some instances, you may shift gears from that and try and figure out what’s the best situation. I don’t know the answer yet. I got to go through everything. I tell most borrowers this. The first thing pops in my head, I’m like, “I don’t want your property. I invest in notes because I want a payment stream. I don’t want to own a property in Hiawatha, West Virginia. What am I going to do with it?” This is one of those areas where you can make a difference in people’s lives.

I got a couple of two quick examples of this if we have time. I mentioned one a couple of episodes ago where it was CFD in Kansas City, Missouri. This was an elderly couple who ran a cleaning business and COVID essentially put them out of business. We deferred first for two months, and then it was three months. We said, “Don’t even worry about making your payment at all.” These are not government-backed loans. I have no obligations to do that whatsoever, but people fall on hard times. At the end of the day, they were thankful and appreciative. They dealt with the city to take care of the issues at the property. I feel like the one reason they were so responsive in fixing up the property was that we had worked with them. First of all, they had more money to do that because they weren’t making their payments.

Secondly, this was the one CFD that we converted. She was happy to be able to take full ownership of the property. It’s a performing loan, not a high balance or anything but as you said, I’m not after the property. The fact that we were working with them during these tough times because of COVID, it was reciprocated with how they’ve treated us. One other quick example is I bought a CFD in a small pool from John Keith. It was these three Michigan CFDs I bought together. This guy was paying and then was a major issue with the servicing transfer over to Lake City. That was probably part of the issue. This guy went dark.

Through my own research, I found out his wife had passed away. She was 42. He lost his job and his wife died. No wonder he wasn’t worried about making his payment. He’s got a lot going on. I will say communication from the borrower is critical. We did start legal on that because what else am I going to do if I have no communication from this guy? I can’t help him. Eventually, the communication lines did open up and he fully reinstated and it’s a performing loan. The guy’s back on track and now I’m telling him, “If you make twelve straight payments on time, we’ll convert this to a regular note and mortgage. There’s equity in this property that will be yours.” We can work with people to come up with win-win scenarios.

The communication, that’s why I always say that they’ve got to want to play ball. They need to be involved. It can’t be a one-way street. Some of the times too now in this country, because a lot of people with social media and the news, take a lot for granted. My wife’s from a foreign country and their style of living growing up is much vastly different than the style that I’ve had. Fortunately, I had a good upbringing, but there’s still parts of this country, it’s a damn big country, where there are some rural areas where things are different. The opportunities that you and I have are not there for these people. Sometimes we forget that. We’ve got to remember that sometimes as well. Jamie, we’ve touched upon the top ten reasons to invest in notes. We’re going to do an episode about top ten reasons not to invest in notes. In that way, then everyone will start selling all their assets at $0.05 on the dollar to us and we can buy them all.

At least let us manage their assets or something.

What is your note and bolt?

My note and bolt is that this business is all about mindset. I know typically the note and bolt might be something in the weeds like you need some affidavit in this particular state for this, whatever. My note and bolt are that it’s about mindset. You hear the 80-20 quote. I’ve heard that 80% of success is mindset ad 20% is execution or the mechanics of how do you do this, whether it’s note investing or anything else. It’s easy to forget that. I don’t think 80% is a real verified number, but that’s not the point. Mindset is a huge factor to success. It’s easy to get caught up in managing your portfolio or trying to bid on assets or whatever, work things out with borrowers. It’s all-important. Execution is key, but if you’re not taking a moment to step back and think about your business, think about where your business is headed. I know, Chris, you’ve been doing that a lot. You’re not going to have success if you don’t do that. You’ve got to create that space and create that mindset that you can accomplish some neat things. You can grow your business fairly quickly if you have a positive, growth-oriented mindset. It’s critical.

To tag on that a little bit before I hit mine, I’ve used to give out a free one-page business plan that starts with 5-year, 3-year, 12-month down to 3-month. Something as simple as that, because most people with a business don’t put a plan together or their goals. I’m putting together my plan for next year. What do I want to do? How many funds do I want to start? What are my goals for my business? You start with, “I had a five-year goal. I’m working on next year. How much do I want to raise? How many notes do I want to buy? What do I want my business to look like next year? Towards the end of this year, I’m going to take the one I did a year ago and measure to see how I did.”

It’s those simple things like if you want to market. How many articles did I read about note investing? How many questions did I post on BiggerPockets or on a Facebook Group? Simple things that roll into my note and bolt, which is to get an accountability partner or somebody you can talk to and run issues by. Simple things like that call I had about options and scenarios. That person called two other people and are getting ideas from people on, what could I do? What should I do?

I used to do this with Gail a lot because I can sometimes get a little candid on things and want to crush somebody and rollover. It’s like, “Calm down,” the mother in her tells me to calm down. Even in workout situations. Certain things like I talked to somebody once and they’re like, “Why don’t you break it into a first and a second because they didn’t have the down payment, then you can sell the first. You still get the second instead of maybe doing it as a partial.” Crazy stuff like that, that you can do. The more you talk to people and reach out to people, that’s one of the best ways to learn for people who are not yet buying a note or comfortable buying a note. It’s not from taking all these training, which they’re valuable, don’t get me wrong. You can learn a lot.

When do you start talking about people and saying, “Go find an asset on Paperstac and evaluate,” and say, “Can I get ten minutes of your time? Let me know what you think about this.” Most people will give you ten minutes of their time. They talk to you about it, then they talk to me about it and I’m wrong and you are right. They can figure out what’s going on and stuff like that. Those are the things that you’ll pick up and then it might be something. You brought up a good point about foreclosure, and maybe I brought up a good point about the weather, in that area and getting it preserved. Who knows? Something along those lines because not everyone’s excellent at everything, except my wife. People have strengths and weaknesses. The more you can learn from that, it’ll allow you to create your own avatar and you’ll be your own person. You don’t want to be exactly that person. You want to be your own little avatar. That’s my note and bolt.

I’ve never been a huge fan of walking up to someone and saying, “Will you be my mentor?” It’s cheesy, but I’ve tried to learn from him and I’ve learned a ton from you. Try to learn from lots of people and create a mentor in that sense from podcasts and that kind of thing. I totally agree with you. Whether it’s a formal accountability partner or not, just bounce things off of people that are more experienced than you.

You’re going to force me to self-promote myself when you mentioned that. One of the things I did want to mention that you brought up is a new website that we launched. As you know, I’ve gotten out of JV deals and run funds and that perspective, and then do the partials. One of the areas I saw a huge gap in this business is from the training. You take training and then stepping in to buy a note and having somebody there for you during that process, which I’ll call a mentor for all intents and purposes. That’s something that 70 investments are rolled out. It’s not a training program for somebody who found what note investing is on BiggerPockets or something.

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It’s somebody who’s had some type of formal training. They’re at the point where they’re ready to bid or buy an asset, but they want somebody looking over their shoulder. That’s something that we’re launching for people. I did a few case trials with people to fine-tune some of the details. That person, you are buying the note, you are managing the asset where I’m assisting. I’m a consultant essentially, but I’m making sure you’re not making that major mistake or try to avoid that. I’ve seen people who have bought a $40,000 note in Detroit that the borrower was a self-directed IRA, which was non-recourse, and they never checked to see if the power was on, on the property or the water was on, which had been turned off for seven years. The properties worth $3,000. It cost them $4,000 to close after I told them to wipe it out. Not only did they lose their $40,000 they’ve invested. They ended up losing more than $40,000 because now they thought they could still work through this.

I can’t tell people how many phone calls I get from people that have these horror stories. We talk about stuff how we do well and so forth, but for every good deal, there are also many bad deals out there. A lot of times it’s because of that sponsor or not doing the right steps. That’s why I wanted to come out with this. It’s because I know a lot of people take training and they’re like, “I don’t even know how to board a note.” We get you to that step. We’ll work with you on how to get the note board. We’ll work with you on how to get the documents recorded. We’ll work with you on the asset management or where the options are.

I’ll piggyback really quickly. I do two things. One, that’s one thing that people like about your show and your approach is that telling it like it is. Not everything is perfect in this note investing world. I don’t think you’d be afraid to say like, “Don’t do this deal. This is where your risk is.” Secondly, I think there’s a huge need for this in the note investing marketplace. Even for someone in my position, I’ve been looking around for different intermediate to advanced training. There are lots of little intro programs. As you said, you get dumped into the real world. Sink or swim, that may not always be the best approach.

I’ll be honest, this is a stepping stone. I’ve got something bigger. I’m trying to create the Death Star, as somebody mentioned. I do want to say, the first person I worked with and hit that point, they had an asset in Pennsylvania that they were looking to acquire. It was a line of credit that was in the first position. They’re like, “It’s the first position. The house is worth $30,000. It’s got $10,000 and taxes on it. The borrower passed away.” It had $10,000 UPB on it and pay off $20,000. They could get it for $4,000.

He’s like, “$4,000, I pay $10,000 in taxes, I’m in it for $20,000, it sells for $30,000.” The guy wanted them. He’s like, “The person’s deceased. It’s a B house. I’d renovate, maybe keep it as a rental and whatnot.” He’s looking at it and stuff and gets a title report. I’m like, “You need to order a title report.” He already had eyes on the property. I walked him through that step of here are the options to order title reports. Here’s the type you should order. We get the title report and lo and behold, first position note, I’ll use any bank, Wells Fargo. First position, original, $20,000, dated June 2, 2002. There was a second position note that was from Wells Fargo for $120,000 origination dated the same day.

Most people would look at them and be like, “I’m in the first position.” When you look at the collateral, it was clearly evident the mortgage has got recorded out of order. I call Julia Snyder, who’s my attorney in Pennsylvania who I love and who’s also expensive. I tell her that all the time. She’s like, “I’m worth it.” I asked her, I said, “What would happen in this case?” She said three words, “You would lose.” What would happen is even though the note was recorded in the first position, if something was done in error, it doesn’t mean that it’s right.

What they would do is whoever owned that other note will bring Wells Fargo in to testify and Wells Fargo would say, “Yes, this is a first, this is a second. The title company screwed up. We’ll fix it with the title insurance.” You’ll lose at first, which is $100,000 balance. It was already foreclosing. You end up being wiped because you’re after the first $120,000. You’re not first anymore where you have the first $10,000. You’re after the first $120,000 on a $30,000 property. I don’t think a newer note investor may have picked that up.

In the world, we often don’t see second mortgages even when we’re buying these firsts. That’s an interesting scenario for your first consulting test.

It’s something I never experienced too, but I knew who to go to. We got to wrap up, but what I’ll mention though is I’m doing some due diligence on some seconds that becomes first that have also been charged off. My head is exploding because you’re dealing with charge offs. You’re dealing with a statute of limitations. When was the last payment? It is crazy understanding some of this stuff. I’m afraid to see how much of a bill I have racked up with Brian Gallagher going through some of this stuff to try and understand it because that is potentially an opportunity that we’re going to see. I know PNC and some of these other lenders have a lot of this paper that they’re looking to move off their books. That was a long episode. Any final thoughts before we wrap up and I tell everyone to follow us on iTunes, Stitcher, Google Play, and all these other places?

No, we’re good to go.

Thank you for reading this episode and as always, go out and do some good deeds.

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