Note investing may be a bit complicated for most people, but you don’t have to know everything before you start. A lot of the most successful investors in the space started out just like you. They just came into the industry hungry for more knowledge and excited for opportunities to connect. In this episode, Chris Seveney brings in Jeff Laroche to share his journey in note investing. Join in as they talk about due diligence, cultivating good business relationships, and other critical aspects of note investing that every new investor has to learn along the way.
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What You Need To Know About Note Investing And What You Don’t Need To Know To Start With Jeff Laroche
I’m flying solo because Jamie Bateman heads up to the Hamptons or somewhere very ritzy up in the Northeast. I’ve got a special guest. Somebody I’ve known for a few years. Mr. Jeff LaRoche. Jeff, how are you doing?
I’m good. Thanks for having me.
Jeff and I, full disclosure, way back went to college together back in the mid-90s. During COVID, Jeff and I got back together a little bit with another group of guys. We asked each other what we were doing with investing. Jeff was doing some other alternative investments, knew I was in the note space and got intrigued by it. He’s already an addict to notes. Jeff, why don’t you tell people a little bit about yourself and how you stumbled upon note investing?
I’m an engineer. I’m a program capture manager in the defense space. My background is in chemical engineering. I work primarily microelectronics RMD. We had that discussion one night. We were hanging out online. Killing time is probably the most terrible way to put it. We got into a discussion about life in general. We have some similar life experiences. You think about the future and the rat race and getting out of the rat race. The more you talked about notes, the more interesting it was. I have to admit, though, from a financial perspective, it was interesting but initially, I thought, “I don’t know if I can handle looking at spreadsheets. It’s going to be dry going over documents.” My perception about that was completely wrong, which is refreshing and made it interesting.
You have some real estate background. You have a rental or two from some of your travels or relocations.
We have a three-family apartment building in Massachusetts then we relocated to Austin, Texas for several years for work. The real estate environment is much different down there. It’s more of a single-family-type environment. Through that, we learned to do a 1031 exchange and had 1031 exchanged here. We had an LLC. We went through the ropes there. It’s like a physical real estate as well but you have the tenant issues you have to deal with. It’s a whole interesting additional discussion we could have. What type of neighborhood do you want to have your rental in and the return on that versus being in an A neighborhood where it’s fire and forget your tenants never causing the issues?
That could be a whole other discussion because you’ll see a lot of people. I know you’re on BiggerPockets as well buying in the C neighborhoods and looking for cashflow and so forth. I’ve always lived in areas where it didn’t make sense from a cashflow perspective to have rentals because I was in Massachusetts and then down in the DC area. You’re buying them for appreciation. The market, at times, goes down. For a long-term gain, I found that I see more people building wealth off of that case study versus buying a C class asset that is providing cashflow because one moment, you get somebody stopped paying or you got to put in a roof. You lose a lot of your cashflow.
It’s the mental-emotional part of it. We have one tenant that was great. She pays but it’s $50 short every month. She then had to pay, come back and be like, “You have it now.” Yet, she had a summer car and a winter car. Her furniture was better than ours. It is stuff like that that drives you crazy. When we moved to Austin, it’s much more of an appreciation area, low cashflow but we’ve never had an issue with our tenants. It’s on autopilot. I know I’ve ruined it. By verbalizing that, it’s going to explode my face.
You then get into the note investing space where you go to do it, have somebody drive by to take some photos. They haven’t paid in three years but they got a brand-new Lexus in their driveway.
That’s the thing that struck me. I’m still learning sometimes the hard way in a lot of things looking through the documents and chaining them together. Once you get past that and you start doing the due diligence analysis, you get a feel for who the borrowers are and you start to speculate about their life stories. It drives home that there are people behind this. That’s the part that makes it interesting. Sometimes, even in my brief time looking at tapes and doing some initial checking, I’m like, “Why is this person not paying the loan? The penalty fees have been racking up. They could have had this paid off. They’re almost back to where they started.” You wonder what happens and a lot of times, they don’t seem like bad people. It’s interesting. Maybe you have some commentary on that. I don’t know what’s going on there.
I’ll comment and then jump into you getting started, some of the things that you found easy or hard and what experience you’ve had. To me, it’s a little bit like game theory because it’s not only looking at spreadsheets. It’s like, “What should you buy this thing for?” You’re dealing with a human on the other end that you would expect to potentially do one thing but they don’t. My kids play video games. I watch and sometimes I’m playing. He’s then doing something and then sometimes he’ll do something. I’d be like, “I wouldn’t have done that,” or “Somebody else is doing that but they wouldn’t have done that.” It’s similar in the note space where you got to be reactive to what these borrowers do. It’s a little more interesting than on a fix and flip or something like that. You’re going to have headaches and problems but this is more a longer-term, real-world, back-and-forth type of situation.
I have one borrower who’s clearly abused the system. It’s a low-dollar value loan but I want to stick it out because I want to see what happens. It’s a learning experience. Number one, I’m new to it but I’m like, “Why is this guy doing this?” I want to see how it turns out. That’s part of the motivation for me, which is weird.
To give people an idea, you started digesting notes when I sent you a bunch of information around Thanksgiving.
Yes. That ended up being pivotal. For people out there that are waiting to pull the trigger on this or do it, what ended up working out well for me is Thanksgiving. We have a Christmas shutdown in my company for ten days or whatever. What I did on my days off is like, “I’m going to treat this like work. I’m going to go in.” To get a decent start, I’m going to try the block out as if I’m going to work that week and try to learn as much as I can interacting with you.
For the first couple of months, I kept a diary in an Excel sheet. I tried to do one thing every day because when you write it out, you’re like, “I’m making progress.” I play these mental games. Those were the two things. I kept the diary, I utilize some vacation time to get off to a faster start and having you block things out for me in chunks. I’m not trying to learn everything at once. Initially, you provide me with your due diligence sheet and your initial calculations. I took that apart and made sure I understood the underlying math and what was being calculated.
After that, I started looking at the due diligence process. You also recommended books so I banged out a few books during that time. We’ve had this discussion before that we both learned by doing people. I felt like the books were good for philosophy. It’s more about the philosophy of how you approach it. In terms of being able to execute something, I don’t think they lend themselves to that. At least, I haven’t seen the book yet that makes me feel like I can go out and do it. Maybe you should write a book
That would probably be more of a college textbook type where it would need to be. You’re were in 90 to 120 days when you pulled the trigger, which I would say is pretty quick. I took about 6 to 8 months. Most people you’ll talk to take about 6 to 12 months, which is on average that it is going to take for people. When you were doing your initial studies and stuff, I want to pick a few topics like due diligence of looking at the collateral and following the checklist. I know servicing comments. You enjoyed reading those because those are like stories.If you're not interested in something, you're not going to do it. Click To Tweet
What’s one thing I want to mention to people is to make sure you get those. They’re important to understand the frame, the story, and the sparrow. It’s part of the overall due diligence process of looking at a title report or ordering some of these reports and stuff. It was one thing that you thought was, “This is interesting. This is more difficult or this was simpler than I thought.” That curiosity. Is it “Let me understand this process. Once you get it down, follow the same process and operations and things will work themselves out?”
I’ll put it to you this way in a succinct manner. I wouldn’t have done this had I not known you for so long. Two things, I wouldn’t have done this without a mentor. I wouldn’t have felt comfortable picking some random person claiming to be a mastermind on the internet. The term mastermind is a huge turnoff for me. Having known you, I’m like, “Seth knows about this. I can trust him.” Having you then as a mentor, that’s one thing that helped.
Two things that helped me in this process is having a mental framework going into it was. I have twenty years of experience at my job but I still have mentors that are trying to help me grow. I’ve learned something in the engineering world, particularly in the defense space, which is this weird ecosystem. A proper mentor can cut years and months of learning things the hard way or at least minimize the hard lessons. I knew going into it, I’m like, “If I can have Seth help me with this, be a mentor and guide me through the wickets.”
The other thing that helped because it was a firehose of information and you’re blocking things out nicely. I remember having that conversation with you. I was like, “How do I think about this, comprehend this and have a mental framework?” This is something I’d love for you to expand on to the people. We’re both project managers. You told me, “Jeff, think of each note as a separate project at work.” That was the a-ha moment. If you could expand on that whole thought process for the audience, that was everything for me. Once you blocked that out, I could take the pieces of information that you’re giving me and put them in a linear process.
One thing I’ve noticed in this space or I recognize is people who have project management experience tend to get more traction faster. It’s because a lot of them understand what critical path method is and things along those lines of, “What’s the thing that’s stopping you from moving next steps?” If you have five tasks, four of them you need to get done but one of them is holding up. Multiple-tasks-down-the-road type of thing. Each one is its own little separate company and project. You focus on that task getting, “What’s the next step on that when done?”
This space is a waiting game. You get a task and then you’re waiting on something else. You go to the next one, get it fast. Waiting on something else. A lot of people ask me, “How do you get so much done or managed so much?” I was talking to somebody and I said, “I’m not smarter than anybody else. I know how to juggle well. I’ll have 100 balls up in the air. I know which ones are the ones closest to the ground that I need to pick up on and toss that one back up to keep everything going.”
Back to your question or comment about project management, what’s important for people to understand is you look at the end game. “What’s your end game? Where do you want to go on this loan?” Most people won’t try to get it worked out. Think about what are the steps that need to happen? I’d like to get your opinion on this, too. Everyone in this digital world thinks everything happens at the snap of a finger. “I sent an email at 11:00, they haven’t responded by 2:00.” If they haven’t responded in two days, sometimes that occurs.
People also need to understand that things don’t happen instantaneously. Also, as a manager, your responsibility is to manage the people you pay. You need to manage your service here to make sure if you sent them something. They didn’t respond then follow up with it with an attorney or a title company because again, sometimes things get lost in the shuffle. I’d like to get it if you feel the same way about that.
As you’re going through those things, I was like, “There are many aspects of what you were talking about that could be like each one of them their own podcast.” As I talk to you, I’m constantly mapping back to what I’m doing at work, which evolved over the years. If each note is a project and if I think of that as a program at work, there’s the shaping phase, the capture phase, the setup, the close-up phase. Another topic of discussion. I haven’t had a chance to talk to you. Maybe a little bit with the shaping phase that would be, how do you cultivate business relationships particularly as a small note and investor? I can’t go to a hedge fund and be like, “I have two notes. Let me cherry-pick from your billion-dollar portfolio.” I don’t know how to scale. That’s something I definitely want to learn.
You then go to the management phase. One thing that helped me was when you gave me your due diligence sheets. You have the initial, “What’s the information I have on the property? What’s the bid phase and negotiation”? Due diligence is in there. I view each of those like gates. “I have this information. I’ve satisfied this gate. What information am I trying to get here? What’s the next gate?” The way I block out the process is exactly the way I do that work. Before I panic and try to understand everything, I ask myself, “Where are the critical gates? What’s the information I need the decision point on?”
One thing that struck me about this and because I work in RMD is it’s been beaten into me over the years that one person cannot know everything. I’m comfortable with not knowing things and sounding dumb but going to the expert and being like, “This is a dumb question. I know it but help me with this. Speak slowly. Use small words. Explain it to me and help me over this hump.” I’m wondering how many times that you see people that read about this. They try to learn everything but they don’t start because they’re afraid. They think they have to know everything or they don’t know how much they need to know before they can start. That, for me, would be the biggest stressor if I wasn’t used to a certain degree of ambiguity from my main job.
That’s a great point. We call it analysis paralysis in this business and in many businesses where people won’t buy because they always think they need to know a little bit more. On the other spectrum, you have some people who learn about this on a website. The next thing you know, they’re out there trying to buy a note. It’s a happy medium. You hit a great nail on the head. You don’t need to know it all. For example, my background is in real estate development construction management. When we’re going to develop a project or get it permitted, I know the process but there are certain things. I don’t know everything.
The key is, I know who to go-to to get that information and ask the question. They explained it to me like when we’re building a building. My background is in structural engineering. I know a lot of the pieces, parts, components and what to look for but once it gets to certain components like electrical, I’m an idiot. I can tell people, “I know nothing about electrical but I know who to go to ask the question.”
That’s like note investing. It’s the same thing. You’re not going to know and everything like you’re going to get a title report back. There’s going to be some crazy stuff on there. It’s like, “I don’t know this. Who do I go to? Do I go to a title company or do I go to my attorney?” From that perspective or there was something potentially with the note or the mortgage. Ninety-nine percent of the stuff in this business usually gets resolved. For me, if you don’t know, you send it to the attorney. They’re the ones who will either give you the answer or point you in the right direction of somebody else who might be able to tell you because they’ve probably been down that road or again, talk to another investor.
That’s one of the things I wanted to mention about but I like your comments about the gates because that’s a great analogy of each phase. As you phase from putting in a bid and then you’re getting accepted and the next gate is, “I’m getting the collateral file from them and doing your due diligence,” and then the next gate is “We’re done. We got to close.” All of that stuff gets talked about. The first time you went through it, I’m curious of your opinion because people talk about it. There is a pretty significant learning curve doing a loan sale agreement and boarding alone. Wouldn’t you agree?
A lot of that, too, is built around language and etiquette. That’s where having a mentor comes in. A perfect example is I have six loans and all six of them have the demand letters going out. “How do I contact the attorney to give them the information and organize that email and stuff going back and forth with them five times? He’s going to charge me for that time.” Instead, I cut that whole loop. I’m like, “How do you do it? Help me out here.”
It’s like this balance of taking the initiative to learn on your own so that then when you go and ask for people’s time. It’s a whole dance. When I go and ask you a question, you don’t want to feel like you’re doing everything for me. You want to know I put in a certain amount of work. I know if I go to you with the point in question, you can cut out a lot of pain for me. Again, I referenced my own experience as a project manager. In the microelectronics world, it takes me six months or a lot of time to know if I made a mistake. I then have to have a recovery plan. When that blows up in my face, it’s good to know like, “Do other people have this happen? How much should I freak out?” I told the equivalent of a Mercedes. “Is that normal within my industry?”Take the initiative to learn on your own because everybody’s time is precious. Click To Tweet
It’s like having somebody to go through that’s been to the rodeo a few times and a lot of this too upfront is about risk and opportunity management. It’s also having somebody that can help you manage that risk because you’re going to make mistakes. Maybe you can comment on that. You helped me a lot with that at the beginning and how to block it out and frame it. Another perfect example is I was looking at this property at Paperstac. I’m like, “What’s wrong with this property?” You pointed out to me, “The velocity of money is low here and it’s going to take you forever to pay it off.” It’s like, “I should have seen that upfront and I missed it.” Every time I look for a loan, I look for that.
Somebody made the analogy of, think of skydiving for the first time. You’re going to go with somebody who’s done it a few times to say the least. You’re going to be strapped to them. That’s the analogy of buying sometimes your first note. If you have a mentor, it’s that skydiving experience. It’s a thrill ride because you’re going to be scared out of your mind when you buy your first note because it’s something you’ve never done. You’re spending money that you’re like, “I’m putting this at risk.” At the same token, you’re also like, “I’m doing this with somebody who’s done this many times. To them, it’s like making macaroni and cheese. They’ve done that a million times and it’s going to be a fine,” type of situation from that perspective.
Your path has been a little different because you did jump into it. You wanted to learn by doing and you bought nonperforming assets right out of the gate. Some people may start with a performing asset to try and take to slow roll it but you’re, “No, I’m going nonperforming.” You are also getting that firehose of information, dealing with attorneys, getting the demand letters out, dealing with the servicer getting the information from them. I’m sure you’re like a sponge absorbing a lot of information.
There’s one specific incident in my life that framed my thought of why I approach it that way. When I first started at my job, it was a total imposter syndrome. I’m sitting at lunch one day with three guys and the guy across from me, a genius circuit designer, was explaining something. I was sitting there. I’m like, “I going to get fired from my job. I have no idea what this guy’s talking about.” The guy next to me, who I thought was a genius, is smiling and nodding. I’m like, “This guy gets it.”
The first person gets done his explanation. I’m sitting there and the guy next to me goes, “Explain that again, use smaller words and treat me like I’m an idiot.” He started laughing. I’m like, “This guy that I thought was a genius totally felt comfortable going to an expert and be like, ‘dumb this down to me so I can get it and we can move on.’” This same person also told me once because he was a project manager. He’s like, “You can always get more money but you can’t get more time.” He was not talking about being stupid or taking dumb risks but that always stuck with me. By the way, this guy is, at my age is a vice president of a billion-dollar section of our organization. He’ll probably be CEO so I figured he knows something.
The way I approach notes is, “I’m going to buy one relatively large note for me and then a bunch of small notes.” The other five balances were like $7,500, $5,700, $4,700, $8,700 and, $7,500 and they’re all nonperforming. On one of them, I paid $6,000 in back taxes. Another one, I paid $5,000 in back taxes to stop foreclosure on both of them. The reason why I did that is I can spend three years doing performing notes and taking no risk.
Eventually, when I go do nonperforming, I’m going to take this learning anyways. My thought process going back to risk and opportunity is I figure on each of these notes. The worst-case scenario is that it’ll cost me the same as multiple college classes if I make a mistake. I will have learned more here than in the college class because I’m a learn-by-doing person. I don’t retain anything unless I’m doing something. I don’t know if that resonates with you.
It absolutely does because I’m the same way. Granted, for me, when I started doing notes, I was also getting a grad degree. I spent $35,000 to $40,000 in Georgetown getting a degree. I was also doing that more for the other life that I have, in my job, too because I wanted to develop some additional skills. A lot of classes I took were relevant to note investing but you hit a nail on the head that you hear a lot of people talk about and you see this on websites like Facebook or BiggerPockets where you’ll see these people who have these $20,000 training programs. You spend a weekend with them or whatever it may be. After the weekend, you’re done. You’ve dropped all that money. You could go buy a note for that price or less and learn so much more.
That’s one thing I tell a lot of people because of the simple fact that there’s only so much you can learn in a weekend. If you’re trying to get a basis of what you’re learning that weekend, half the stuff that you’re being told, you’re going to retain certain things. The stuff you retain might not even be the important stuff that you should retain because you haven’t bought and a lot of these people haven’t bought a note yet. For me, I look at if you want to get a mentor, either be in the step of ready to buy a note or bought a note and then, have somebody assist you with it. Again, to make sure you’re not making some crazy mistake and learn by doing.
It’s interesting, my brief exposure to that site. I’m seeing that the note space is pretty aggressive. People that are trying to capture mentees or whatever. They’re fairly aggressive. Could you outline what you think a good mentor is? Some of these people look to me almost like a Ponzi scheme where they’re getting people to buy their notes. I get the vibe that it’s not driving people towards independence. I was wondering what you feel a good mentor-mentee is. What are the things that people should look out for?
If I was looking for a mentor, the first thing I would want to understand is, “How are they going to assist me but in the same token, being upfront with me?” For example, your situation, Jeff, compared to the person next door to me. They may have ten times more money than you or tenth the money you have. I see a lot of people doing is they have $5,000 or $10,000 to get in this business and they’re thinking, “I’m going to be full-time in this thing in two years.” The reality of it is, the chances of that being successful are highly unlikely. People aren’t being told that.
One is people got to be upfront and tell the truth to people. For a mentor, a lot of the stuff that’s being taught is, “Let’s get on a webinar once a week and we’ll go through certain things or some type of aspects.” That is good to get an overall basis on certain things. The true benefit of a mentor is somebody who’s there when you need them. For example, let’s say I was mentoring you and we did a session on sending demand letters. You would remember that we went through that but you were sending demand letters last week. How much would you have retained from that three months ago on what that was doing? If a mentor was available where you said, “Chris, I met this step or phase. Can we get a 30-minute call to go through this and make sure I understand what I’m doing?”
That’s how I mentor some people. That’s how I’ve shaped it is on an as-needed basis and to go through and answer the people’s questions. Your education and background are going to be different being an engineer like me, than somebody who was, say in marketing. Somebody in marketing has other strengths and weaknesses and you have other strengths and weaknesses and they don’t align. It’s also understanding that. If you have the same program for everybody, it’s going to work for certain people and not others.
One thing that helped me was when you provided the basic blocked out like due diligence process, deal flow and calculations because I could put it within my framework. Whenever I have projects at work or here, I want to get to the state where I simplify other things as much as possible so that when we hit the complicated things and I can focus on it. I want to be brainless for as much as possible part because there are things you absolutely need to focus your attention on. You then can focus on those things.
Going back to the demand letter, for a specific example, I needed help with, “How do I format this? I then have a bunch being set up at one time and then one fell through the cracks for a month. I’m a month behind them. I went here and the etiquettes things, too. How often should I follow up with the attorney and ask about this? Things of that nature. What’s the etiquette within the industry? Not only how do you do things but what’s the etiquette?
One of the things I haven’t talked to you that’s much about it but I’ve always wondered. A mentor can help here, too. How small is the industry and how much does the etiquette matter in terms of interacting with people? I know, in the defense industry, in the area I work in, everybody knows everybody. They’re there for many years at a time. If you upset them, that’s going to be an immovable object for you for quite a long time. I’m wondering if any of that is the case in the notes industry and things of that nature.
In this space, you’ll see a lot of people come and go because people sometimes will sell it as being passive. It’s anything but that. People realizeafter trying to do this for a year or two, they’re spinning their wheels and spending a lot of hours to make a little bit of money. It’s not an easy business to scale. It only works if you can get it to that scale point. To your other point, it’s similar to the defense industry where it’s small and it’s word-of-mouth. There’s a lot of etiquette where you want to make sure you’re professional with people at all times.You don't retain anything unless you’re doing something right. Click To Tweet
Also, it’s similar to the Wild, Wild West in some instances because what happened with this space is, to be honest, the government and the States never envisioned banks to sell their debt to somebody like you or I or to make its way down to you or I. They’ve never caught up. It’s such a small space as the government doesn’t have the resources to put any anything in place. That’s where there’s the etiquette. You also have to be careful because there’s a lot of bad actors in this space as well. Talking a little bit about your notes, you mentioned demand letters and stuff go out. You’ve mixed it up and invest in a few different states. You mentioned they’re on the low balance component to it from that perspective.
The law for me with the exception of Tennessee which was about $18,000. The balance of that loan was $30,000. The total legal balance is $50,000 or something. I have one note that, at least for me, is relatively large.
That’s probably, I’d say, the average size loan. UPB bids $30,000 to $50,000 from that perspective. What has been the biggest a-ha moment in your experience? It can be something that is you thought was a lot more difficult or seems a lot easier. It could be something that you thought something in your head like, “This is how it would be,” and it was completely opposite of what you thought it was.
From the non-technical perspective how interesting each note is, that was the biggest a-ha thing. The one thing I focused heavily on before, I set up my complete file structure and organizational structure. Once you gave me the heads up that each note was a project, that’s like, “I need a framework to deal with all this.” The biggest surprise is I was able to start in 90 days. If I’d done it alone, it would probably take me a year before I was comfortable. I wouldn’t want to get to the point of comfortable ambiguity as a way of it. It would have taken forever.
It then was, “I need to create the structure.” At this point, I didn’t have a feeling of whether or not I would like it. It was only when I got into the story behind each loan. The biggest surprise and the a-ha moment was how interesting this could be because if you’re not interested in something, you’re not going to do it. From a technical perspective, another surprising thing was Pennsylvania is a little bit off the wall.
You have city tax, neighborhood tax and county tax. It’s crazy. You go to find out like, “How much do I owe you?” They’re like, “You have to pay us to find out how much you owe us,” was another thing. They have a third-party tax service. It’s amazing to me the disparity in some states and counties of how easy or how hard it is to get information. That was surprising on how non-uniform it is. The other big a-ha moment was judicial states versus non-judicial and the different roles they have regarding foreclosure and eviction even the normal times. There’s a lot to unpack there.
I like the biggest thing you mentioned is two components. One is, you have some loans where people haven’t paid in for five years. How could somebody go that long? How could the bank or the prior select lender go that long? It’s sometimes what blows people’s minds. The third is the lack of uniformity. I chuckle because I know you understand blockchain technology and stuff. When they talk about getting real estate title and deed and so forth on the blockchain, I always laugh because I’m like, “You’re telling me you’re going to get this podunk county up in the middle of nowhere who still does paper copies of everything and you can’t even record a document to work on some type of blockchain technology.” I’m like, “They’re probably still using AOL dial-up for their internet service provider.” I would see struggles with that. There are also certain things like you simplify out and you’re like, “This is awesome and easy.” That’s something I would think you’ve seen from some aspects of this business is being Simplifile.
The whole thing about Simplifile is I wouldn’t have known about it unless I was talking to you. It goes back to having a mentor being able to cut down your learning curve or making some things a lot easier so you can focus on things that are more important and more complicated. That saved me hours and hours trying to figure out how to do that and quite frankly, dollars trying to have somebody else do it. It’s a drag-and-drop website. You’re big on Data Tree to like, David tree is such an amazing software package. Having somebody helping you connect the dots is such a huge deal.
Going back to the borrowers and the people that haven’t paid for years, the thing that’s fascinating about that to me is the $30,000 loan with the $50,000 balance they haven’t paid for years. I don’t get the sense that that person is a bad person. It might be an education issue where the note holder died and they had the deed. Maybe they don’t think they have to pay it or nobody’s going to notice. If I could get in touch with them, I’d work with them, no problem.
What irritates me is the $5700 loan I have. The guy who owns ten properties, has an IRS lien and we contact them. He’s like, “I already paid $22,000 in this loan. I don’t need to pay.” For whatever reason, that drives me up the wall. I also find it rewarding like, “Even if this isn’t highly profitable for me, I’m going to drive us to this conclusion because they shouldn’t be gaming the system.” I don’t know if that’s a healthy attitude or not. I’m surprised that people make things much more difficult for themselves than they have to be. A joining thing to that is I always thought of lenders as not evil but people who don’t care. Let’s flip this around on its head. It’s like, “If I’m ever in trouble, the first thing I’m going to do is reach out to my lender in zero time.” It’s put the whole perception on its head. A lot of my views of lenders were ill-informed.
It’s human nature. It’s unfortunate. I had a call with somebody who was doing some stuff for me, ghosted to me and left me hanging. They call me today to apologize. We’ve all probably been there at some point in our lives where we’ve run from something. That’s what happens with a lot of these borrowers. Also, when sometimes you’re dealing with these big lenders, they can’t get through to anybody or get some conclusion so they basically give up. They don’t realize and I don’t know why they would because I didn’t even know this existed until a few years ago that people could buy this. Your lenders are humans who put their socks on the same way as you and doesn’t have to go through 30 different people of red tape to work these things out.
You’re right too in that sense with borrowers and get to understand your borrowers because I’m dealing with two right now. Both of them didn’t think because they filed Chapter 7 bankruptcy, which wipes your debt. “I don’t have to pay this anymore.” “You don’t but if you want to keep your house because your money is on it, we got to work something out.” They’re like, “I didn’t know that. I thought I got a free house.” “Unfortunately, no.” We’ve worked out new modifications with both of those borrowers. One of them signed and the other one, my attorney sent me some documents. It’s interesting on the borrower perspective and understanding where they’re going from there.
I’m looking at the list of the small-dollar loans on them. I’ll give you a rundown of what I’ve learned so far. You’ll find this humorous. Again, $7,300, $5,700 $4,700, $8,700 and $7,500. On the first one, the top one, the $7500, both the borrowers are dead. People are living in the house. We have no idea who they are yet. Needless to say, we can’t contact the borrower. The demand letter went out on that. We’ll see how that turns out. That’d be interesting to find out how you deal with dead people.
I’ve had a dead borrower show up in court, by the way.
The title report was awesome. They pulled pictures of the tombstone. I’m going to say that’s fairly accurate in that case so that was a surprise. I’ve learned something new there that they’ll do that in the title report. The second borrower is the guy that owns ten properties, has the IRS lien and doesn’t want to pay. He also has a nice YouTube channel that’s interesting to watch. There’s a slight douche factor with the guy. I probably shouldn’t say that. That’s a technical term in real estate and lending. This has been an awesome social experiment. In the third loan, I don’t know what’s going on. There’s been zero contact. We don’t even know if anybody’s living in the house. I got to have them go check to see if the house is vacant.
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Yes. Per your recommendation, we used two safeguards. One listed is occupied. One list is vacant and we tried to reach out. We haven’t gotten any response. This one is dry. There isn’t too much going on there. The fourth loan is really interesting. The person with the city has been getting judgment after judgment of unpaid water bills. That was going to go into foreclosure. On an $8,700 loan, I paid $6.000 in taxes to stop the foreclosure on the water bills. They’ve been getting fined. You’re only being fined for the tall grass. Every time the neighbors complain, it’s another $250. When it goes in the collection and doubles to $500. They get two in collections and another four things. I stopped the foreclosure.
Here’s the interesting thing. The government, although they have the new address of the guy, which is in Arizona but because he put the address in the wrong column, they don’t send any of the notices to his address, which they have. They send it to the house. It’s being mailed over and over again. They know it but they won’t do anything about it. We tried contacting him by and we ran a skip trace that aligns with what he says his address is in Arizona. It got returned to the sender so I did a map and I brought the address. The address he listed looks like a resort address.
To stop the bleeding, as you know because I asked your opinion on this and you helped me set it up. We went to secure the property. “You might want to stop and comment here on how you can secure a property before you foreclose.” I wanted pictures of the inside. It may get back to me with the additional information. They’re like, “We couldn’t go inside the house because it’s a hoarder’s house. You’ll have to pay us money to clear out enough garbage to go in the house and take pictures,” but the house is in a nice neighborhood. Maybe we want to stop here. You can chime in on securing a property.
Typically, the mortgage or deed of trust, if a property is vacated, you can post the seven-day notice or notice on the door or if it’s been confirmed vacant like the power is off. For most mortgages, you have the right to secure or protect your asset. If that’s the case then you can have a preservation company line up and say, “We’re the lender on this. The property has been vacated. It’s not an REO.” You want to stipulate that you don’t own it. You’re the lender. They will go out and change the locks for you if they need to be changed. They will do an interior inspection where they go through the house.
The challenge a lot of times with those, being frank, is they’ll take 1,500 photos but they’re a photo of an up-close like there’ll be a crack or water stain on the wall. They’ll take a picture of that water stain but they don’t take a picture of your entire room. Most of us would like to be, “We’ve never seen this house.” We’d like the realtor’s perspective of, “Here’s the family room. Here’s the living room. What do the rooms look like?” They usually don’t do that. It’s frustrating because what they’ll do is they’ll show the cracked door or the leak in the ceiling. It’s like, “This is great but I don’t even know what that inside of the house looks like from a deeper perspective.” That’s I wanted to throw that two cents in. It’s something that a lot of people don’t do. They have the right to do that they should look more into.
Remember the larger one I have, the one in Memphis? Remember how you were helping me get the street photos of that? We sent them down there and they click a picture of the long ranch house on the corner. They took a picture of the end of the house and then drive around the corner and take a picture of the front. You send them back and they did the same thing again. It took three times to get them to take a picture of the front of the house. It’s like UFO photos. It’s like, “You can’t take a clear shot.”
It’s a joke you see on the bank footage. The bank robber with their fuzzy 220 pixels or whatnot. Meanwhile, you can see a picture from a US Embassy that’s got a camera on it that can read somebody’s watch from three miles away. It’s like, “We can see pictures of Mars, crystal clear.” It’s almost that theory and that kept sending them back. In the email, I made reference and told them, “This is a corner lot. Take photos of all sides.” That’s something I recommend people do if you know it’s a corner lot. Tell them, “I want an inspection. I want photos from two sides of the property.” When they don’t, you can say, “I asked you for it but you didn’t do it.” A lot of times, they won’t charge you to go back.
This property, in particular, was unfortunate for my home life because there was a gutter hanging from the side of the house and I thought it was roof damage. Seth had a one-line response, “Jeff, it’s a gutter and a roof,” or something to that effect. Every time I said something stupid around the house in the next week, my wife would be like, “Jeff, it’s a gutter,” would be a response. Let me know. Is that something stupid?
That was your stupidity for telling her.
It was done on a couple of fronts. I’m interested to see how the back property with the hoarder works out. As part of the securing process, they went it, they mow the lawn and they secured the back door. The neighborhood is nice. I’m curious as to how that’s all going to go down. Additionally, thinking about, “Should I pay the fines?” Here’s another thing that I’d like to ask you. If I’m the one who’s initiating foreclosure. I stopped foreclosure from the unpaid water bills but they owe probably another $1,500 to $2,000 in citations. The interesting thing is that the citations, I can negotiate down. The lady was nice enough to tell me. Is that something that’s common and do they do that a lot?
It’s common that certain jurisdictions will negotiate them. Typically, what they’ll do is negotiate the late fees or penalties. If you call up and say, “I’m a small lender. I’m not this large institutional bank. We were lending on this property. If there’s a way you could help me and so forth, we’ll get the regular balance pay but can you waive the late fees and stuff?” Here’s the predicament that you’re running into is this property has equity. The assumption is there’s equity in it.
Do you want to wait until you foreclose and have them if it gets sold at auction, get paid off then? Do you want to pay them off now and then based on your mortgage note, you could probably collect the interest on paying those for your protection? If it’s an 8% or 9% note, you might be able to say, “If I can collect the interest on this, collecting 8% isn’t a bad thing. If the notes are 2%, why would I pay this and only get 2% on it? I can put my money to use elsewhere.” Those are things that people need to evaluate.
That’s an interesting point. This is a good example of pairing up with somebody knowledgeable would come in because I didn’t even think of that. I was thinking more along the lines of, “If I’m the note holder and I’m the one who initiates the foreclosure process.” I was thinking, what if I set the initial bid price is? I would set the initial bid price of what they owe and fines plus what they owe me if I haven’t paid off the city. I hadn’t even considered the fact that I could be earning money at the note rate based on paying off their bills with the city. That never even dawned on me until now.
I always recommend you got to read the note, make sure it’s A) something that’s recoverable but B) that something that’s interesting but the contract for deeds typically gets hairy. We won’t go down that road. On notes and mortgages, it’s allowable. It’s something that could be collected.
On the last small loan, I probably have to secure this property. I’ve been busy with work. I haven’t gotten around to it. This situation is different. This is one where the owner of the property is literally 88 or 90 years old and he’s living around the corner in a retirement community. Hopefully, he’ll reach out. We’re trying to reach out to him. The property’s vacant. I have a feeling he’s in that phase of life. Again, this is a nice area. Hopefully, we can get in touch with him or somebody in his immediate family and work something out.
The larger loan is the loan that I lost the month on because it fell through the cracks with the attorney. It’s not a huge deal in terms of first-world issues but it’s in Tennessee. The foreclosure time in Tennessee is fast. Conceivably, when I’m sending out the demand letter, I could have been starting the foreclosure process. This goes into cycles of learning. If you dollarized or charge the amount of time I put into this against the note, am I making a huge profit? No. I would rather do this now and take a lot of pain on the few numbers of notes and maybe get into a car accident on a small note than wait five years.
Probably the last thing that was on my mind before is your opinion. I don’t think I’ve ever asked you this. If I started out with performing notes and did that for a couple of years before starting the nonperforming, do you think that would cut down on the number of mistakes? Is it like your first year of driving where you venture to nonperforming notes and you’re going to make the same mistakes anyway? Is there no advantage in waiting till later to make the mistakes? Do you feel that there’s a tradeoff there?
There are certain things you’d avoid. One of the benefits of buying a performing loan is understanding the players in the process. Understanding the boarding process, the loan sale agreement, some of those aspects, and, for example, your taxes at the end of the year as you got payments coming in. In that stuff, can you make major mistakes? No but you can learn a lot. The nonperforming realm is conflict-oriented. Performing typically isn’t. It’s a different battle.
As you said, it’s when you start out driving. I’m going to drive on the single-lane roads and so on. It’s pretty generic and basic and then nonperforming is saying, “I’m going to go to drive in Europe on the left-hand side of the road in a major city. That’s a big nut. I grew up in Western Massachusetts where we had two streetlights. The first time I was in Boston, that was a different animal.” That’s an analogy from performing to nonperforming. You’ll still make probably some of the same mistakes but it’s specific to the individual. Certain people are much less risk-averse and they’re better off starting with performing. Some people who aren’t as risk-averse can start with the nonperforming stuff.
It’s been fascinating. The main concern for me is my work goes in waves like working on proposals. It’s a matter of keeping it. You’re making the point earlier. You stay up on it a little bit every day. It’s like the vineyard analogy. I’m planting now. I get to harvest later, bottle and then wait. It’s to the point where I need to start thinking about buying. Once I get all these demands out and the property is secured, I’ll probably work on trying to board my next round of notes. I have to say, by the way, the Paperstac interface is good for what they’re trying to do. Would you recommend that as a place for somebody starting in notes if they’re looking to buy 1 or 2 and see how it goes to start?
I do because there’s a lot of aspects in the buying and selling process that are tedious. If you’re new, you’re not going to know it. Paperstac basically gives you those steps and walks you through that process. For somebody who doesn’t have anybody to assist them and is going through this for the first time, Paperstac is a great resource to understand and go through that process. I’ll be honest, the challenge with Paperstac is you may pay a little more premium for the note from that perspective.
When you look at certain things, sometimes people get so caught up in returns. Let’s look at this as an example. You’re spending $20,000 on a note. The difference between a 10% and 12% return or $2,000 to $2,400 a year, $400 is most likely not going to make or break your bank from that perspective and that education you get from it is probably is worth more than the $400 anyway. That’s one of the tradeoffs.
Do you think people get hung up too much on interest rates because it comes down to what you bid for the note price?
People get too hung up on their yields and returns. Somebody mentioned this guy, Bill McCafferty who’s up in Pennsylvania. You will enjoy Bill if you meet him. He’s a guy married with a wife and stuff. He’s with two other guys and goes, “How many guys’ wives or significant others have come to them, do they say, ‘How much money you make?’ or do they say, ‘What was your yield or return?’ If you tell them, ‘I made 8% or 20%.’ ‘Translate that into dollars.’” From that perspective, at the end of the day, it’s nice to understand a metric is your yield. How much did you make? Did you make this or that? That’s where sometimes people get so hung up on the numbers.
It’s like, “If I can buy a $10,000 note, at the end of the day, in a year, I make $2,500 on it.” Some people were like, “That’s not worth me getting out of bed.” For other people, it may be. That’s where you got to understand that perspective because you can get the same yield. How much work did you have to do? Is it worth you getting out of bed to make that number? Jeff, we’re running out of time. I want to thank you for coming on this episode. I’ll put you on the spot with one last question because probably towards the end, I want to have you back on to see how these notes have panned out. If you fast forward to the end of 2021, where would you like to be in your note investing journey? You have 5 or 6 but what would you be your target if you had one for the end of 2021?
For this first batch, I definitely either want to have reached exit or have the exit in sight and hopefully breakeven or better, particularly for the smaller loans. I would have liked to have boarded at least ten notes by the end of 2021. I don’t know if that’s a reasonable goal. That would be one final question for you. How fast do people typically scale for them to do this successfully, not just peter out and throw their hands up?
It depends because some people could buy ten notes at $10,000 apiece or one note at $100,000. What it breaks down to is how much money do you have to invest as well. I’ll use myself as an example. I started buying in October of 2016. I bought four notes. I probably spent several months working those out. Unfortunately, my father passed away in early 2017. That delayed a bunch of things. In 2017, I probably bought 10 or 15 notes that year. In 2018, I bought maybe 20, 30 notes. 2019 is when I exploded with over 100 notes. It was the ramp-up.
It’s similar to anything. As long as you’re consistently growing, there’s not a magic number. Someone could go from 2, 4, 8, to 16. The power of doubling. Are you making progress? That’s what the important thing is. Don’t look at the number of notes. Are you buying and making progress? That’s what I would say for people. You can set that goal of ten but if you get the nine then basically you bought three notes. You bought, let’s say, one in July, one in September and one in November. That’s a win because you’re constantly still buying.
My strategy is we’ll see how it works out at the end of the year. Whatever I get from this, I’m going to reinvest it back into this is what I’m looking to do.
That’s what I’ve been doing too for several years now. Continue to grow. Again, Jeff, thank you for coming on this episode of the Good Deeds Note Investing Podcast. As always people you can find us on your favorite listening station. Once again, thank you. Go out and do some good deeds.