With the pandemic going on and the elections drawing near, 2020 is a very different year from previous ones when it comes to note investing. However, that doesn’t mean that we cannot make some predictions on how the market is going to look like, at least in the next few months. Joined by his co-host, James Bateman, Chris Seveney discusses what they see as an impending uptick in the inventory in general and in nonperformance in particular. In light of the uncertainty during the pandemic, they also give some tips for new investors on how they can position themselves safely and favorably to grab the next opportunity when it comes. For this episode’s Notes and Bolts: “How passive is note investing?” Stick around for the short and long of it.
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Year End 2020 Note Predictions With Guest Host James Bateman
I’m here with Jamie Bateman. Jamie, how are you?
I’m doing well, Chris. How are you doing?
I’m good. Everyone, thanks for joining us as we talk about the wonderful world of note investing where we try and keep it real and share with everyone the good, the bad, the ugly in this business as it’s not all roses. We start out every week talking about some of our trials and tribulations. Jamie, I’ll let you roll first with some of the challenges you’ve had.
One challenge that stands out in my mind is with a particular servicer. I am set up with four different servicers, which for a while I had one. I’m expanded a little bit with this particular servicer Lake City who a lot of people probably may not have even heard of. I couldn’t get them to respond. This would happen over a period of time off and on. It wasn’t a brand new thing, but getting my main customer service rep to respond to my emails and they’re three hours behind. They’re out on the West Coast in Idaho. The point is phone calls don’t always work that well, so email is good. I could not get my rep to respond. Out of the blue, finally, someone else responds, “She doesn’t work here anymore.” This is the second time that this has happened with this particular servicer where my main rep is no longer there with no explanation. I get it. This is how things work with vendors, but it’s frustrating when you’re trying to do CFD to note conversions or you’re trying to modify a loan or anything. Communication with vendors is critical. My takeaway and I knew this going in, Chris, you may say, “There it is.”
Chris told me to pull my loans from there. That’s a different story. I was holding on because for a couple of different reasons. One, I had one borrower who had gone dark and then finally he reinstated and got back on track. I have another borrower who we’re trying to do a conversion and he’s onboard. These are all Michigan CFDs. I have five loans with them. One of these five, I spoke with a borrower and he doesn’t like change and he wanted to confirm that I would remain with Lake City. I’m trying to get him over to a note. One of his stipulations now that he’s in total control of the negotiation, he wanted to make sure I stayed with Lake City. At the time, I said, “I have no intention of moving and changing servicers.” The point is figuring out when to change servicers can be tricky because it could backfire. I was trying to hold on to let the dust settle a little bit with a couple of these loans before I switched servicers, but I had to pull the plug. I’m switching these over to Allied now.
I had challenges with them in the past and I had to pull the plug on them a few months ago. One thing I’ll tag on with that is don’t burn your bridges in this business. It’s a small industry. I did several years ago with a certain servicer. At that time, I was less experienced than I am now. It was a learning curve going through the boarding process. Honestly, I had boarded some loans at the time with Madison and SN and it was going great. Things were going well. I then tried to board with this other servicer, and this woman there, her name was Cassandra would not respond to emails, phone calls, any. I could not get anybody to respond. After three months, finally, I got a response that, “Your paperwork is not complete.”
I erupted on them and I got on a call with one of the powers to be there and said some things that I shouldn’t have said. I killed the relationship with them and they are a large company in this space. It’s come back to bite me. There are certain states where they provide servicing that I’d like to buy loans and so forth that I can’t because there are no services besides a few of these players. It’s one thing. Be careful. Don’t burn your bridges. Other people use them. Other people love the servicer and I had a bad experience and some people have bad experiences with other servicers. Everyone has a unique experience. It’s like trying to buy a home from Century 21. It’s like, “I had a bad experience with Century 21.” There are a million properties they sell.
It’s probably a million franchises and they’re probably all different.
I worked for a developer and general contractor. I view that type of relationship where somebody will say, “That general contractor sucks.” It’s not the contractor, it’s the team or who you’re dealing with because I’ve done jobs with the same contractor where one was awesome and everyone sucked. It’s the people you work with.
I want to piggyback. Another key point for people is, whether you’re happy with this particular servicer, a vendor or not, I knew this in the back of my mind as I was going along here. Don’t only have one point of contact with a vendor. If there’s more than one person that works for this company, at least have some interaction with somebody else. It’s easier said than done because we’ve got a million things going on in the note space, lots of vendors, a lot of things to keep up with attorneys and preservation companies and whatnot. Don’t solely rely on one person at a particular company. Now, I’m starting from scratch like, “Who do I talk to?”
That’s part one. The other part is when there is a dispute or something, try and handle it in a scenario. There are two components to it. One is how does this specific issue gets resolved? What’s the outcome? How do you improve upon it moving forward? This is a perfect example of an issue that I’ve had and still being worked out so I’m not going to name names. It’s looking like this company will step up. An issue came up regarding a title. It appears something got missed. I went back to them and we’re working out an arrangement and there are two components to it. One is with some things missed. Is this an error on their part? If it’s not, this is how you do your job.
I need to know that because going forward, it adds a step or layer to me that I need to evaluate and determine whether or not I need to add that as part of my workflow. I’ll use an example, servicing and taxes. Ascend and Allied, they check taxes for you. They’ll make sure taxes are getting paid and so on and so forth. Madison doesn’t check taxes for you. They’ll collect escrow, but you’re responsible for giving them the bills. That’s something that people need to realize because it’s something that you need to stay on top of making sure the taxes were paid. That’s probably the most obvious example of what certain people do and don’t do, and you need to understand that to put it in your workflow.
Another trial and tribulations item that we have as well. Let’s roll into our main segment, in which we are going to talk about what are we going to expect however many days are left in 2020. What are we going to see? Are we going to see an influx of notes? Are we going to see people holding tight? Are we going to see a pricing increase or decrease? Does the election have any say on what happens? All of these topics. We’re going to look into our crystal ball, but like all of you, the crystal ball or that eight ball, whatever you shake it, it’s going to give you a different answer each time. Whoever you ask, you’re going to get a different answer. These are our opinions and take them with a grain of salt, follow them or whatever you want to do. Jamie, where do you think are we headed?
I know historically in the note space, you hear people talk about, sometimes the summers can be a little bit slower. Maybe you and Gail have talked about this in previous episodes, but at the end of the year, banks and hedge funds may want to dump off some assets to be able to get those losses on their books for that calendar year. I wouldn’t be surprised if there was an uptick in the amount of inventory available. It’s hard to say. 2020 has been different than any other year. I think much of this has to do with the election, but also whether there’s another stimulus package passed. I haven’t been following that closely because it changes every hour.
I would be expecting more inventory in the next 90 days or so, but not a massive influx like maybe we’ve seen previously. I think in general, we’re due for a long, slow recovery and it’s going to be nuanced geographically. Many different moving parts, but I personally don’t think there’s going to be a major change in pricing or supply in the next 90 days. Maybe an uptick, but I think it will be still another 6 to 12 months before we see major shifts in the note space. That’s my initial thought.
I go back and forth a lot on this. Typically, end of year banks hedge funds will sell either to write off losses, but also try and sell assets for their pockets for bonuses. Get that money in the door so it hits the balance sheet and P&L statement for that year. We said, “We made this much.” Some of these asset managers live off of the bonuses they get. Potentially, you could see that coming down the pipe. That’s part of the reason why we see a lot of stuff. Historically, what I’ve seen is November is usually where you see the best stuff, and then December is everything that’s left over. That’s junk.
I remember once getting eight from John Keith on December 27th, and he’s like, “You need to close this by the end of the year. We’ll guarantee title for you that its first position. If there are taxes owed, we’ll knock taxes off of the price and stuff.” They were $5,000 in assets. They literally wanted to get these off their books. One of the things that people also share is when we talk about funds, there are two types of funds. There’s open and closed. Open mean goes on forever essentially. Close means it has a sunset period. For example, the funds that I run have sunset periods. They last 2 to 3 years. After that period of time, I have to start liquidating those assets to get everyone their principal back. The way they operate typically is a preferred return plus a kicker, which you can’t let people in all the time because then everyone just joined at the end when you’re selling all the assets and take advantage of that kicker.
The question I’ll ask back to you, Jamie. To answer the first question, I think it’s probably going to stay consistent for what we’ve seen maybe a little more uptick because people have been patiently waiting, not doing much over summer. From an inventory perspective, I don’t think there’s a massive increase in defaults that people would go, “I’ve got to get these off my books.” The question I’ll pose to you is if Congress passes like a twelve-month moratorium on foreclosures nationwide, that I think would have a significant impact and start having people liquidate assets because they don’t want to hold on to these things forever, let them sit, run up their balance sheet, costs and expenses. What are your thoughts on that?
That makes a lot of sense. Related to it is the forbearance issue. A lot of people at my level, we’re not dealing with too many government-backed loans, but we did some deferments, which is similar to a forbearance. The reason I bring that up is, like potential eviction moratorium or foreclosure moratorium, all you’re doing is kicking the can down the road. When you’re doing these forbearances and deferments, one thing people forget to appreciate is you’re not collecting escrows. You’re not collecting for taxes and insurance. Don’t make your mortgage payment for six months.
Those taxes have to get paid. On top of that, these states are going to be hurting in the next couple of years based on the pandemic and the shutdown of the economy. Circling back to how’s that going to affect the inventory. I think that’s another reason why there could be these dump-offs because the servicing companies don’t have the money to pay the taxes. That’s another reason that these assets become toxic in a way. I’ve started to see some tapes myself that are still being priced as performers. I may have mentioned this before, they’re in forbearance. It’s like, “How do you price that?” At some point, this is going to come to a head and there will be an uptick in inventory, for sure. To me, I’m pricing it more like it’s a non-performer and hoping that in 6 to 12 months you have a performer on your hands that you got a good deal. We’ll see where it all goes.It will be good in the upcoming year or two to have knowledge of the real estate space, as well as the note space and the lending space. Click To Tweet
A few things I’ll touch on. You mentioned about more non-performers coming to the market. I think also were there historical lows for nonperforming loans. The historical average is 6%, 9%. We’ve been at 3% or 4%. I don’t know the exact numbers, but we’ve been low because the economy has been good in the last few years. That’s one component that we’re going to see an increase. Will those loans make it down to us? That’s for anybody’s guess. I think eventually they will from that perspective. You just got an idea for a future episode, which we are going to have. It’s managing our loans during our pandemic and how much money you carry in reserves because you’ve mentioned taxes and so forth. We can have a whole other topic on that in our next episode. Typically, if you’re doing a JV and it’s $20,000 loans, I’ll hold $5,000 or whatnot. Now, that’s going to be significantly higher, but then if you’re holding that much more, it’s going to impact the returns.
A little plug for the IMN panel discussions that are coming up. This will be out but people can go back and read. The IMN note symposium, whatever it’s called, is free. It’s virtual. You’re talking about managing your servicer and I’m going to be talking about dealing with borrower workouts and that but all of this is related to the pandemic. We know the things we’re talking about.
I’m also speaking at DME. I’m two panels. It changes a little bit, but I’m happy to assist in speaking. I enjoy speaking on these panels and talking with other investors talking about the business and why I started a show and bounce ideas off of people. Back onto the topic with stuff coming towards the end of 2020. The performers versus non-performers and you touched upon it with regards to the pricing of those and how you’re pricing them with assets coming on the market towards the end of 2020. Do you think it’s going to be more on the nonperforming? Do you think it will be more performing assets?
If we’re going to move more toward nonperforming, I think there’s been a lot of performing assets floating around, as we talked about before. The yields have not been there, at least from what we’re used to. For example, Paperstac and NotesDirect.com did a six-month report looking at the first six months of 2020 and how the percentage of non-performers versus performers that were purchased and that kind of thing. It was 89% performers, which we don’t want to rehash the whole episode as to what’s a performer? What’s a nonperformer? Clearly, people have been looking for safety, performers and that kind of thing. You’ve seen a lot of performers floating around, but I think we’re going to be moving more toward the nonperforming and sub-performing assets available.
This is going to be the time that you touched upon with the forbearances and things like what’s happening with taxes, insurance, and some of these other components. This is a time where as you’re doing due diligence on non-performers, you’ve got to pay attention to these taxes because that’s going to be as part of due diligence, the number one component moving forward. A lot of these loans that originated 10, 15 years ago, the non-performers, those have come and gone through the market. Those had a lot of collateral title issues, transfers, merges and all these other things. The next wave of paper and looking at it is going to be those that don’t have much the title issues. The other component of part of our risk matrix is the taxes and everything else that is on top of these taxes like water.
What happens in each state because certain states have water bills and stuff that can attach to liens? I think that’s going to be the next component and states like Pennsylvania, where you’ve got to go to the Prothonotary. Illinois, I know some counties there you have to request things. The other component is some of these states will show the taxes are paid or it was paid by a lien buyer. That’s something that you’ve got to pay attention to. I highly recommend that you work with a title company and that is going to be checking these. The other component that I’ll toss on that is it is going to delay your closing time because getting the tax information may take an extra week or two. That’s something that as part of your overall strategy you’ve got to look at, would you agree?
Absolutely. I’m curious if you could expand on for people that may not be totally familiar with what you mean by lien buyer. I can tell you, before I got into note investing, I’d learned about tax deed investing, tax lien certificates and that kind of thing. What do you mean by lien buyer? How does that work?
If you don’t pay your property taxes, many jurisdictions, we’ll say counties in this instance, will turn around and they’ll sell the taxes off to somebody. Depending on the jurisdiction, it could be 18% interest. You bid down the interest. It depends. There’s a whole strategy, but the county’s like, “We need our money. We’re just going to sell it.” Say, Jamie, you’re not paying your taxes on your house. I’ll buy your taxes. I’ll pay your taxes for you, and then I have a lien. If you don’t pay me back within a period of time, I can take your house and I can wipe your mortgage.
That could be risky for a note investor.
For example, I’m dealing with an issue where I have a property as a note that’s backed by five properties. The taxes on one of the properties is probably about the value of the house. I’m going to let it go to tax sale because there are other properties that back it. If you lose a house as a lender to tax sale, you’re wiped. You have unsecured debt where you can still go after that borrower for that money, but you’re probably getting water from a rock. What’s crazy is like a lot of laws, every state is different and I throw out Pennsylvania because it has county tax and school tax. I don’t even know how many taxes they have from that example. Another one is Florida. A lot of people like to buy these tax liens in Florida. Then after a year or two, you can foreclose, but you’ve got to be careful because if you go on Florida’s website and check property taxes, a lot of times it will say it’s paid, but then you have to go somewhere else to see if there was a tax certificate issued.
That’s a whole other process of due diligence that we could talk. The point I was trying to make is for people, the nonperformers I think we’re going to see more coming to this market as part of people trying to close things by the end of the year. If you’re having conversations with sellers, you should have those that, “It’s probably going to take me a little more time to close,” especially on sites like Paperstac. People want to close in a week. It’s not happening.
That’s a good point especially with some of the research. It has taken longer than it typically does when you’re doing your due diligence because of the pandemic, with the courts closed and all that stuff. The turnaround time I know at least from my vantage point has been a little bit longer to get title reports back. Our due diligence is taking a little bit longer than it had before.
You’re right because counties take a while. For example, using Simplifile to record some assignments. It has been marked as received since the 24th of September. It’s jurisdiction by jurisdiction. For people who are starting out, now is a better time than ever to bear down and focus on 1 or 2 states versus trying to spread yourself thin because there are a lot of moving parts and pieces that are being impacted by the pandemic.
It is all state-specific. That’s certainly true.
We talk about an influx of non-performers and stuff. It’s been a while since I’ve seen a bunch of contract for deeds hit the market. Do you think we’ll see any of those? Do you think that time has come where 2019 was the peak of contract for deeds?
It has dried up. I can tell you at least in my little bubble, I know you’re converting over a bunch of CFDs to notes and mortgages and I’m doing the same. I know a lot of jurisdictions are at least starting to crack down on them a little bit. Not that they’re all bad, illegal or anything. I feel like the general sentiment is we’re moving away from them. What do you think?
I think you’re starting to see a lot of people moving away from them. For example, I saw a topic on one of the Facebook groups, someone who wanted to do one in Indiana. The borrower is putting 30%, 40%, 50% down. Comp heads are like, “Why bother?” Indiana typically case law shows around 20%. It’s not exactly 20%, but if somebody has got a 20% plus equity based on what they paid, the property could be worthless. If they paid at least 20% of the loan down, they’re going to have you foreclose. Why deal with the headaches of that contract for deed and the potential of having the liens and stuff put in your name?
You can still do seller financing. Contracts for deed or a version of seller financing, but I do think there will be an uptick in seller financing in general. It will be good in the upcoming year or two to have knowledge of both the real estate space, as well as the note space and the lending space. I think you’ll see that that come together. Investors that can handle both will profit, but personally, why not do it more traditional seller finance deal rather than a CFD?
Unfortunately, I think as states shy away from them, we’re going to see states like Ohio. You’re going to see fewer people originating seller financing in those states. I have to originate an owner-occupied seller finance loan in Ohio, that borrower is going to have to put at least $10,000, $15,000 down because $2,000 is not going to cut it. If they stop paying, it’s going to cost me $7,000 to foreclose. $2,000 the risk is $7,000, for me, that’s not worth the risk. If it’s in Georgia, I’ve got you in and out in 60, 90 days on other examples. You may start seeing some of those pockets flourish a little better from that perspective. As we reach towards the end of 2020, touching upon that, do you think we’ll see more inventory in certain states versus others?
The short answer, yes. Identifying which states, that’s the tricky part. You’ve published a couple of articles which surprisingly, it seems like so far, at least the Midwest has handled this well as far as non-payments of mortgages and foreclosures and that kind of thing. I think it’s all going to be state-specific. It’s hard to say exactly where states.The more patience you have in the note business, the more money you’re going to make. Click To Tweet
If the government doesn’t come out with specific criteria, I think it’s going to boil down to states. If a state comes out and says, “You can’t do anything for a year?” I’m going to be like, “I have a fund closing in eight months. I’ll start putting those loans out and start selling them.” Why hold them? I’d rather sell them and people think, “People only sell junk loans.” No, it’s strategic where I can sell those and then turn around and buy something in a state that doesn’t have those and then put that money to use before I have to return it to investors. That’s part of managing a portfolio of assets. I think people need to realize that people sell things strategically, but not because it’s junk.
We’re in the distressed asset space. One thing I maybe didn’t realize initially was it can be a distressed asset for many reasons. That’s maybe even too harsh of a term sometimes. You may be a motivated seller in that instance because of opportunity costs and the time value of money and that kind of thing. It’s not necessarily what you’re selling is a bad deal. There are a lot of other factors going on with your personal business model and I think people do need to realize that.
The thing I’ll tell people is the more patience you have in this business, the more money you’re going to make. I know there’s time, value, and money, but the longer you hold onto performers in most instances, if they are solid performers, I think the better long-term building wealth you can do from that perspective. In a full nutshell, I think we both agree. We’re going to probably see some uptick in notes. I don’t think we’re going to see anything greater than what we’ve seen in the last few years. People are going to start looking, I’m guessing after Halloween, November timeframe. You’ll start to see more tapes come out from people. The last-second rush in December as well. From there, focus on what you’re looking for and try and target specific assets if you’re getting started looking to buy 1 or 2. My feedback to people also is, don’t try and reach out to 50 different sellers. Paperstac or a few people and be like, “Do you have a note in this spot or this location or a $20,000 note? What do you have?” Start small and continue to work on it.
I think it’s a good time to remember, a lot of times quality over quantity is a good approach. Don’t spread yourself too thin whether that’s geographically or in any other way. Focus and get all your ducks in a row and be ready for the potential opportunity.
Why don’t we roll into then our Note and Bolts? I know you’ve already got one prepared. I’m still trying to think of one. I come up with them last second. What do you have?
This might sound a little self-serving. It may sound self-serving because it is. There’s an article we put out and I say, we, because this one, I didn’t personally write. I did help with it and I edited it. It’s on my website, LabradorLending.com. If you go to Education/Blog, the article is called How Passive is Note Investing? I think there’s a whole lot of you. The answer is not passive. This article is chock full of nuggets. There’s a lot of value not only for brand-new note investors or people that are interested in this space but also for people that have been doing it for a while.
This article is not necessarily filled with lots of stories, but there’s a lot of education in it. We go through the progression of a note investors’ career path. That’s not defined. That’s not one particular progression. It doesn’t have to be. We talk about investing in a fund as a passive investor. I would say personally, that’s probably the most passive way you can invest in notes. What’s interesting is that when it came out as we wrote this article and went through it and there are a couple of cool visuals in it too that how you can pair up with another note investor or more than one note investor.
The passive investor links up with a more active investor. Managing a fund, whether it’s a $500,000, $10 million or $20 million fund is more active. You’re not out there swinging a hammer per se but there are a lot of moving pieces going on and you’re responsible for other people’s money, all the due diligence and all that stuff we’ve already talked about. It’s far from passive. What’s cool is seeing different approaches you can take. Honestly, one of the things I love about note investing and real estate investing is you can approach it however you want. You want to buy 1 or 2 notes? Great, that’s fine. If you want to make it a full-blown business, go for it. My Note and Bolt is to read that article on my website. I do think there’s a lot of value there for people.
I have four of them pop in my head. I’m like, “Which one do I go with?” Part of that is because it isn’t passive. A lot of people want to team up with somebody. Here’s my self-promotion. By the time this launches, I will have a new website. It’s going to be the same as 7EInvestments.com. One of the things that I put on there is an eBook on due diligence of a sponsor. We’ll do a whole episode on that. One of the things that I thought of is credibility. What is your credibility? For people getting started, there are some things you can still do. For example, I’m a member of ACA International, which is the Association of Credit and Collection Professionals.
What I mean by that is join some memberships. For example, I’m a member of AAPL, the American Association of Private Lenders. As part of that, there are two levels. One is you can get a certification check where they do a full background check on you and your entity to make sure there are no judgment liens. They give you a verified check. It shows that you’ve got somebody who at least doesn’t have a criminal background. Get a mortgage loan originator license. You have to go through a federal background check on that. You’ll have an NMLS number. Even if you don’t ever do anything with it.
It’s not expensive, but it’s ways that you can, at least as you grow your portfolio and start to show that you’re responsible and know how to manage notes, there’s that other component of showing that you are somebody of integrity as well. As you start to buy and manage notes and then build relationships with people, they can act as testimonials for you. Getting to that point, there are a few other things you could do. What I wanted to mention is joining some of these memberships and so forth, but like anything, running a business is not cheap and it’s not free. Unfortunately, there’s money that has to be spent on it and it’s part of the cost of doing business. That’s my Note and Bolt.
One thing, whether it’s note investing or syndications and a multifamily deal or anything, I have learned for sure that the sponsor is critical. People love to chase ROI and these great flashy deals or whatever. That’s fine, but I think underwriting the operator is job number one. You can outsource a lot of things in this business, but I don’t think you should outsource that. That’s too important.
Reputation is key. As you do some of these syndications and stuff, I provide people with references, and one of the things that I’ve had to push back on people is they’re like, “I want to see your P&L from your other funds.” I’m like, “No.” They’re like, “What do you mean? Other people do it.” I’m like, “I’m sorry. It’s specifically written in the operating agreement, which now I have. Everyone’s a member of this LLC. I’ll give you them as a reference and they can tell you whether they think it’s going well or not. Unfortunately, it’s in the agreement. I can’t provide it to you.” That’s one thing that I’ve had some people question and stuff. They almost get the sense of like, “If you’re not willing to share that, that’s not being transparent. What are you hiding now?”
I’m like, “I’m not hiding anything.” Being transparent is following the rules and I’m not going to go just because you want to invest $25,000 and be like, “Here it is secretly.” I’m not going to do it. Here are twenty people who invested in it that you can call and ask them how it’s going and they can give you an opinion. I think a lot of people chase the numbers of, “They’re saying it’s going to get 15% or 20% or whatnot.” I’m like, “That’s what they’re saying, but can they do it?” You need to understand them and also understand the deal as well. That wraps up this episode. I’d like to thank everyone for reading. As always feel free to check us out on iTunes, Stitcher, Google Play, Amazon, iHeartRadio and any of those other sites. Also, feel free to join us on Facebook at the Notes and Bolts from the Good Deeds Note Investing Podcast Group. Jamie, any final words?
Have a good one.
You too, and go out and do some good deeds.
- How Passive is Note Investing? – Article
- Association of Credit and Collection Professionals
- American Association of Private Lenders
- iTunes – Good Deeds Note Investing
- Stitcher – Good Deeds Note Investing
- Google Play – Good Deeds Note Investing
- iHeartRadio – Good Deeds Note Investing
- Notes and Bolts from the Good Deeds Note Investing Podcast – Facebook group
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