The whole point of group work is to help each other out. In today’s episode, Chris Seveney and Jamie Bateman answer note questions from their Facebook group, Notes And Bolts. For example, how do you know if you’re making a good investment? The key is due diligence. Whether it’s performing or non-performing, you need to do your share of background checks. Check out what the property looks like. Look into the pay history with the borrower. These are just the very few questions you can anticipate. Don’t miss out on this Q&A session. Enjoy!
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We Help Each Other Out: Note Q&A From Facebook Group
Welcome everybody to another episode of the show. I am with Jamie Bateman and we are going to be answering your questions. We’re going to be taking questions from the readers that have been sent to us and be responding to those to the best of our ability. Jamie, how are you?
I’m great. I said this on a show, but I’m standing, the sun is shining. All is good. For those that are not a part of our Facebook group, you should join. That’s where these questions are coming from. If you ever want to pop questions in there and we’ll try to answer them on different episodes or if we don’t know, we’ll tell you that too. I’m doing well. How are you doing, Chris?
I’m doing well. I’m hoping to get my $70,000-plus wired back to me for the foreclosure sale that I had, whereas the first position lien holder but they don’t allow what is called a credit bid. It’s if you’re owed the money, you can bid up to that amount without having to come out of pocket because it’s already owed to you. In Erie County, Pennsylvania, they do not follow those rules. They have their own completely different set of rules where it doesn’t matter whether or not you’re the lender. If you’re bidding on the asset, you need to make sure you have the money at the bid. My attorney had to have the funds in hand. I had to go scrape up $70,000 to wire to my attorney.
I’ve never heard of that.
I’m fortunate that it’s within one of my funds and we sold an REO because I keep the money aside on the funds and so forth but you don’t want to keep a significant amount of money in your accounts because then your money is sitting there doing nothing for you. You want to try and get it out on the street and this one threw me for a curveball, to say the least but at the end of the day, I was just going to roll with it.
I’ve not heard that. I know PA is a huge state. There are 55 counties or something like that but I’m surprised and have not heard of that one before. This is a first for you too.
Yes, it is. How about you? What happened to you?
We closed on our build a rental property in Ocala, Florida, which has taken almost seventeen months. I’m happy to have it wrapped up, which is nice. It’s advertised for rent now. I’ve heard this on other shows but it’s getting to be a more popular mode of strategy for investing, given the fact that there are not nearly enough rental properties out there. Builders and developers are buying up land oftentimes in the Southeast and building it for much cheaper than I could build and then sell.Set yourself up to live how you want later on in life. Click To Tweet
A lot of people like to go for cashflow rentals. Typically, they’re buying rentals at $50,000 that you can rent for $1,000 and so forth but you can’t build anything new for $50,000. I find it interesting. It’s the anti component to that but you still sound like you’d still cashflow from it and to be able to build them for an affordable price.
Everything has pros and cons. On the pro side, it’s brand new. Theoretically, the maintenance costs should be a lot lower in the beginning. We should be able to attract a higher-quality tenant. That’s the thing with these low-dollar rentals. On paper, your cashflow numbers and your ROI might look good but in reality, that’s not always the case. I’ve found with rentals, I’d rather take a slightly lower return and deal with fewer headaches personally. I told you before, we were able to lock in a 40-year loan, which is the second time I’ve done this. If I want to pay more for it, I can. It helps you cashflow that much more. I’m excited to lock that up. That’s our second rental in Florida. I’ve never been to either city and it adds to the portfolio, which is nice.
That’s great for many reasons. I’m just going to jump back and one of the things is we talk a lot about notes but there are also many different aspects of real estate that we invest in. We recommend other people invest in and Jamie’s doing the rentals and stuff. I would like to expand my rental portfolio. I’m looking at it but it’s challenging right now because of the cost of housing and rental. Everything in real estate right now is expensive. There are still deals to be found and they can be found. You got to work harder to find them.
We popped a question or a post into our Facebook group. People respond with questions that they want to be answered. The first one, where do you want us to place the question?
Thank you, Josh. If you read the post, it says, “Put comments below.” It’s okay. The sarcastic side of us won’t come out too harsh on you.
If you’re investing in performing notes, how do you ensure you’re making a good investment? Do you want to take that one?
First, everything with note investing is about due diligence whether it’s a performing or non-performing note. How do you ensure you’re making a good investment on a performing note? Property value, what’s the property look like? What’s it worth? What’s the pay history with the borrower? Performing means many different things in the eyes of many different people. Somebody that misses eight months of payments then pays once a year and makes up for nine payments. I don’t consider that performing even though they’re current.
We’ve talked about property value, pay history and length. How long have they been paying on loan? Those are some key components that you look at. If it’s newly originated, you’ll want to look at the credit score, pay history and make sure that whoever originated that note knows what they’re doing. If its bank originated, they have to follow mortgage loans originator laws and so forth.
A lot of people would do like the one-off seller financing or like, “I don’t have to comply with Dodd-Frank and do all of that stuff.” There are certain aspects of it you do have to do but if you don’t do any of that stuff that’s required, you’re devaluing your asset because people are going to make sure it’s clean paper. If you don’t have a credit report from the borrower or an appraisal on the property, that can hurt your value significantly. Some of the things I look for, make sure you’re making a good investment is the numbers aren’t coming like property value from the seller.
From a due diligence standpoint, I don’t approach a non-performing loan much differently than a performing loan. You’re crunching the numbers differently and you’re bidding accordingly but from a due diligence standpoint, I would say, “Assume you’re performing note will go non-performing.” Hopefully, you’re wrong but if that happens, do you still have a way out? That’s where you get into the collateral value in everything, just like Chris talked about. With any investment, there’s always a risk. You can never fully ensure you’re making a good investment but make sure that your collateral value is high enough that you’re in a state that you could foreclose fast enough if you have to so that you’re performing loan, if it goes non-performing, you can still make some money.
Doing due diligence on your seller. We can talk about due diligence on a note but who are you buying that from? That’s probably more important than the deal itself. One more thing is if you’re staking your entire retirement on one performing note, it’s probably not a good idea. As you start to buy in a little bit more bulk, the overall portfolio risk of one-note going south is less of a big deal. If you can buy 5 or 6 performing notes and one goes bad for a little bit, you can ride the wave.
I’m going to skip over Colin’s question because I don’t think that’s something about The Back of the Napkin evaluation. I think we could spend days on that and it’s very difficult to do back of the napkin evaluation. We’ll touch upon that one at a later date. Here’s where the wheels are going to get completely go off course on the next question by Cody. You talk about how notes have enhanced your lifestyle. What are you able to do now that you wouldn’t have been able to do without getting involved in notes?
First I’ll mention is this word, the wheel is going to go off the course here. Notes can enhance your lifestyle but the people who tell you you can get started in notes and make $100,000 or $250,000 in your first year. All the hoopla that gets you into some sales product and so forth, it’s not happening. If you’re making 10% at $1 million, that’s only $100,000. If you’ve got $1 million liquid, no problem but if you were just getting started unless you’ve been raising money and other aspects of life for many years, I don’t know anyone that’s raised $1 million in first-year.
To that point, let’s go back to how has it enhanced my lifestyle. For me, it’s been somewhat of a second full-time job that I’ve been operating out of. A lot of the money that I’ve made has been put away towards college education and early retirement. People ask me why don’t I leave my full-time job? I’m doing their reverse of whatever money I make. If I want to retire at 65, that money I’m putting away now allows me to retire sooner. It also allowed me to pick up a vacation property in the Virgin Islands that we’re going to have and other real estate that we’re looking at.
We’ve got some piece of property we’ve got our eyes on right now that we’ve been able to make enough money to put away for a down payment. I haven’t used it to I’ll say, “Live the lap of luxury.” In a sense, I’m not driving around in the Porsche that I want or not buying 27 vacation properties. I am setting myself up for being able to live how I want later on in life and that’s what I want out of my lifestyle.If you're selling a product, you need to market and work to sell it. Click To Tweet
People like that we keep it real on this show and like you said, “It takes a long time to build up a significant income in notes,” normally speaking. I’ve been doing the note thing for several years now, which is not that long if you think about it. I’ve been doing real estate longer. There are so many ways to approach this one. I’ve been able to meet a lot of cool people. I haven’t met you Chris but that’s another part of it. It’s not just the money. I enjoy running my own business, investing and leading a small team. In that way, it’s enhanced my life. I like the work. That gives me a little bit of pride or purpose.
You can make money from anywhere and it has added to our cashflow, our overall net worth. The Jacksonville note turned into a rental. It also increased our rental portfolio size and our cashflow in that way. I’ve learned a ton personally about different states, different foreclosure processes and bankruptcy. It’s helped me to keep learning on a personal level. It’s not something where you start investing in notes and then three months later, you’re on a beach.
You’re not going to see us on the Facebook pictures with some beautiful woman on the beach, like sipping wine and saying, “Invest in our offering and this could be you,” or, “Come take this class and this could be you.” In my membership group, I’ll take a picture of somebody outside shoveling snow or something. You got to do the hard work to get to where you want to be. The next question from Ellen is how do you feel the note business has changed in the past couple of years? How has the playing field changed for note investors who are starting out?
On the one hand, I haven’t been in a space long enough to give you a true answer compared to 10 to 15 years ago or something. I do think it’s tightened up from a deal flow standpoint. I think it’s frankly gotten harder for the little man. As far as you’re trying to buy a one-off deal, it is a little more challenging than even several years ago. I don’t think that’s a permanent thing necessarily. I think it’s going to open up some but pricing has gotten tighter, yields have come down a little bit. The pandemic has been probably the biggest factor in the last several years. From a court standpoint, it’s slowed things down. It’s been a little slower and harder to find deals. What would you add?
Look at anything right now. Try to go buying a TV, refrigerator, getting an appliance, a car, you can’t get them. COVID has thrown a complete curveball in our supply chain and just everything including notes. I think right now, as you said, “Notes are expensive.” Sellers think they can get what they want for them because also there is a lot of cash out there. The government printing $3 trillion doesn’t help the situation because now there’s a lot more money out there and supply and demand. For those starting out, is it a little more challenging? Yes. Is it impossible? No. I’ve heard people at other events say, “The individual note investors going to be extinct in the next twelve months.” That didn’t happen.
The $10 trillion, $20 trillion, $30 trillion industry, you want to go spend $50,000 in a trillion-dollar industry. Let’s be real. You can. You could go out and sell a combined seller finance. That isn’t going away. Is it going to be a little more challenging, where several years ago, little you had people throwing tapes at you to say, “Please bid these?” No, you need to work a little harder for that. How do you work? Networking, make connections and continue to plug away. It’s like any business. If you’re selling a product, you have to market it and work to sell that product. It’s the same thing. You need to buy a note. It’s almost the opposite. You need to do the sales and find the individuals, who you can sell it to.
It’s gotten a little more popular. I don’t have any facts to back that up but from a perception standpoint, it seems like more people have gotten into this space but there are people who have left as well.
I wouldn’t say it’s more because there are a lot of window shoppers. What I mean by that, there’s a lot of people who kick the tires and you see them active but are they doing anything?
How would a person scale a note business from an average of two notes a deal to more? What is the best way to scale? This is a whole three episodes we could spend on this. I’ll start off if you don’t mind. I’ve said this one before. Your note business falls down to three things. It’s finding deals, notes and capital to buy those notes and then managing the notes without finding additional capital as you alluded to Chris before, you’re not going to be able to scale.
You can use other people’s capital through joint ventures, do a fund, sell partials to scale your note business. Among other things, you can lend yourself money through infinite banking. Those are different ways to get access to capital to scale. To scale any business, a lot of things apply to the note business that applies to any other business. You’ve got to either leverage other people or other companies. You can either hire actual employees, contractors or you outsource to companies who are experts in their particular field and property preservation.
You can’t do it all yourself, especially with a full-time job. It’s impossible. You’ve got to figure it out. I know, Chris, you’re a big fan of outsourcing a lot of things but certain things you won’t. We all have to decide what those are. Whether it’s real estate notes, you’ve got to leverage other people’s money and other people’s time in order to scale that. You can’t get around that those two things.
I’m enjoying this because usually, I’m the one who does all the talking and now that you’re like talking, you’re almost gunshy like, “Am I talking too much a little bit?” I enjoy this. It saves my throat because I’m the one who’s always talking, gabbing and cutting you off and so forth. When I sit here quietly, Jamie has no idea how to react. He’s like, “What the hell is wrong with Seveney now? That’s what he’s going through his head. I’ll keep it simple. Plan. You need to plan. What is it you wanted to do and how do you want to get there?
We’re at the end of 2021. Let’s say in 2022, you want to do 50 deals. That’s four deals a month. Your average bid, you hit 20% of them. That’s twenty notes a month book source and figure out how much funds do you have? Do you have $100,000? Do you want to break it up into five at $20,000? Do you want it two at $50,000 and that can change it? It’s got to be fluid as well. Your plan can’t be rigid because all of a sudden, you could get a smoking deal on five asks for $100,000. You’re like, “I only want to buy one for $100,000.” If you can get the five and they’re a smoking deal, you got to get a move because we like to talk. It’s like football. It’s game planning. As the game changes, you need to adapt to those changes as well.
One other thing I’ll add is I heard this the other day on a show. It’s something about scaling for quality first and then scaling for quantity. Meaning, I do think it’s good to be in the game for a little while like you touched on. There are a lot of people who kick the tires and don’t do much. They’re not going to be taken seriously. Honestly, sellers aren’t going to be entertaining your bids.
What I’m saying is to show that you have some staying power whether you’re scaling slowly or not because that will help you scale on a quantity from a quantity standpoint later. People will say, “This person is taking action and has been in the note space for a little bit now.” Focus on quality first and then focus on quantity as you grow your business.
Question number five would be, what are the real risks in non-performing and performing notes and how to evaluate a note on a basic level? It’s a loaded question to row and it’s not something that you could answer in 3 or 5 minutes. We’re trying to answer these questions. Here’s the risk, you could lose all your money. You could get sued and lose your money. That’s a risk. It doesn’t matter whether it’s performing or non-performing.Don't always take no for an answer. Click To Tweet
You’re evaluating the borrower, the property and the paper. Those are your risks and taxes come into there as well. That’s where your risks pop up.
I’ll mention one thing again. We’re assuming this is based on first. The first and second are slightly different. At first, you care about the property, taxes and title, which go together. Those are the three main components. If it’s a second, you also need to review the borrower’s credit because there is a loan in front of you. Is that loan paying? Is it not paying? Here’s my shameless plug. If you want to get more information on how to risk performing and non-performing notes, I launched my new membership group called the Seveney Note Syndicate. Why don’t you look at joining because you could learn all that information there?
One other thing I’ll add is taxes and insurance. You mentioned taxes but I’m saying tracking on an asset management level, tracking taxes and insurance. You could lose the property and all of a sudden, your loan becomes unsecured debt, which you’re still owed that money but your position is not secure. That’s a risk. The biggest thing is you’re trying to make sure your collateral value is there and that your loan is secured.
Answer one more question and we’ll wrap this one up. This one’s from David Rosenhaus. What do you do with a note whose collateral is 26 properties in 3 different counties in 2 different states?
Certainly, I have not dealt with that personally.
I’m assuming that David is looking at buying this so let’s assume he’s looking at buying it. If I was looking at buying this, probably it reviewed first by my general counsel. My attorney is my go-to counsel because he also reviews a lot of businesses and loans. I would hope this was a commercial-style loan, not residential, the typical Fannie Mae documents.
For the sake of argument, let’s say it’s 26 rental properties because there is a good chance that’s what it is.
You have the note, which is, “This person’s borrowing X amount of dollars based off the note is the note.” The key component here is how is it securitized? I’ve got a loan where it was one note by nineteen properties in the same state in two different counties. There was the note. It was a commercial mortgage deed and it listed the legal descriptions of all the properties in the mortgage.
What they did is they recorded that in every jurisdiction. I would assume, in this case, it would be the same. You would use a commercial mortgage and list okay. Based on a note dated this date, it was 26 properties at $100,00 apiece, $2.6 million. Here are the properties that back this note and you’ll list all 26 of them. That commercial mortgage would then get recorded in the proper county of that state.
I’ve been on the other end not to this extent but we’ve gotten commercial loans that one note is backed by 3 or 4 properties as a borrower.
The simplest thing is to check to make sure that the mortgage is recorded and every county. People I know get worried about the states and so forth but if it was 26 rentals, it shouldn’t be 26 different mortgages based on the Fannie Mae document in referencing that note. If it was done right, it would have been handled by attorneys who would have done it right. If this was a seller finance deal, I would probably pretty much want to walk from it because I’m guessing the legal terms that were put in there, was there a confession of judgment? Was there a personal guarantee? You What’s it in? Is it in an LLC or someone’s personal name? Are there other properties in this LLC? There’s a lot that goes into the commercial side of things that you want to take a look at.
I wonder if I’d even want to mess with it. To be honest with you, you have to sell it if the owner property owner wants to go and sell 2 of the 26.
There’s got to be language in there about how much because a certain percentage of those has to all go flow back.
It’s doable. I just don’t know from a business standpoint if I wouldn’t even want to mess with it.
It’s a different type of note investing here in the commercial space now and it’s very different. Jamie, I think we’ve answered a good round of questions on this episode. Speaking of, which I’m going to digress. My wife being Russian, they roll their Rs and it’s not like how we would roll our R is we like almost gurgle. The way they speak, it’s trained at their age. It’s like they do something with their tongue that we could never do. I know I can’t. My kids can do it because they started young age but when you hear them talk and it flows like so natural compared to somebody non-Russian saying it, it’s pretty comical. There’s my digression moment for this episode. Note and bolt, do you have one or I can go first. Where do you want to do, buddy?
Go first.The whole point of group work is to help each other out. Click To Tweet
My note and bolt are about checking taxes. We’ve talked about this all the time but here’s an interesting one where I have a contract for deed and we had to foreclose on it. The foreclosure date is December 7th, 2021. It’s coming up pretty quickly and this one’s been a little hairy because it’s in South Carolina and this county is going back and forth, not understanding contract for deeds, which is why it’s much easier usually in traditional mortgage and note.
It’s been back and forth, has been delayed, the judge keeps delaying certain things asking for more information. We’ve provided everything. As part of bank foreclosure, you have to run the title and make sure everything’s clear. I always have the attorney order the title. They’re like, “Title report.” I’m like, “You order it.” I may pay an extra $100 but that way, you’re in control. When you get it, you can keep filing. There are many different reasons.
In this instance, I go to the post office box and I get a letter. I opened it up and it was dated October 27, 2021. It says, “If you do not redeem your property by November 1st, 2021, your property will be sold at tax sale as the tax lien was sold on this date. I read this and I’m looking at this. This is on 11/11. I’m like, “This one’s already sold.” It’s sold for like $1,100 or $400. It’s like peanuts from my cost. First, I go online and I realized the tax department doesn’t have my entity, even though I’ve owned this thing for two years. It’s recorded the deed and so forth, my name but the tax department never updated it. They’ve been sending the statements to every prior owner for you people to know. If I get mailed and I don’t own the asset anymore, typically it goes in the recycle bin.
I sent an email to the attorney. I’m like, “What’s going on here? Why didn’t this could show up on the title? This seems way off.” I never got to the point of them answering the question about the title, why it did or didn’t? They called the office and it wasn’t open. They called them on again. The tax office admitted they were sending the tax bills that were in a place and we filed foreclosure. Usually, in a foreclosure, the tax department gets notified that they have to put a claim in it as well, a priority claim, which they didn’t do. The tax department, my attorney and I’m not clean because I probably should’ve known the taxes. Nobody is clean.
The tax department said, “if you send us money now, we’ll let you redeem it.” We sent them a check for $1,100. I think the tax notice was only $400 federal fees added up and stuff but I wasn’t going to argue. We got it back out of tax sale, thankfully. Now, I am good to go and take the property back. It was a property that the borrower was occupying. It’s been used as the rental and the person renting it hasn’t been able to pay for COVID. I own the property but hopefully, we have to foreclose on a property I own unfortunately and probably have to evict.
Your notes and bolts are what? Your notes or your taxes?
Yes and don’t always take no for an answer. I saw the letter and some people will go, “My God.” Go cry underneath their desk for a day and stuff. I’m like, “Nope, let me call the attorney. I ask the attorney, can you please help me out on this one?” The thing I did not do is I did not scream at the attorney, “How could this happen?” Anything like that. I sent it to them, picked up the phone, called and said, “Ms. Boom, I got this in the mail. Something doesn’t seem right. Can you reach out on my behalf because you have a better understanding of the laws but also what’s been going on with this case.” They said, “Yes. No problem. We’re going to look into it.” They took care of it.
The one I said I was going to do is that if you sold a note or, in this case, I sold a CFD to someone, I didn’t know through a third-party exchange. That was several months ago and I’m still getting the tax bills as well as code violations. I may end up having to do the recording because I don’t want to deal with this anymore but I guess because you’ve “sold your loan” especially in the case of a CFD, it doesn’t mean you’re entirely done with it. You might want to still monitor whether the buyer recorded the docs.
My second note and bolt are to monitor force-placed insurance. I think you know someone that you’re working with who told his servicer to put force-placed insurance on a group of loans. From my understanding, the servicers said, “We’re good.” One of those loans did not get force-placed insurance put on it. In another case, I bought a loan where the loan seller doesn’t know. I said, “Is there insurance on this?” Both the seller and the servicer do not know whether there are homeowners insurance or force-placed insurance.
I guess they would know if there’s FPI but to me, that’s baffling. I get it. If you’re managing 5,000 notes and you missed one but if you’ve got five notes and you are not tracking whether there’s insurance on the property. It’s not enjoyable to do but find a system that works and tracks hazard insurance whether that’s forced-place or homeowners. It’s way too risky to turn a blind eye. It’s a couple of notes and bolts in there.
By the way, if you want to go after a boutique hotel in Georgetown, Washington, DC, nonperforming note either way.
Only if it’s across three different counties and 26 properties. I could make that happen somehow
Any final thoughts on this episode, Jamie?
This was good. We’ve got more material for another episode. I say no and then I give final thoughts. There were a lot of responses to this post. I appreciate the interaction. The whole point of the group is to help each other out. Thanks for posting questions and thanks for reading.