JF2294: How to Buy PreREOs With Jorge Newbery #SkillsetSunday

Jorge is a returned guest who was previously on episode JF1342. Jorge owned about 4000 apartments across the country and a natural disaster happened and caused him to lose everything he had and put him millions of dollars in debt. Then in 2008 when he saw that many Americans were losing their homes he decided to create a company that could help them by buying mortgages from banks in pools. Today he will share what a PreREO is and why he focuses on this.

Jorge Newbery Real Estate Background:

  • CEO of preREO LLC, AHP servicing LLC, and a partner in Activist Legal LLP
  • 30 years of real estate experience
  • A previous guest on episode JF1342
  • Portfolio consist of 10,000 purchased defaulted mortgages, owned 4,000+ multifamily units, and brokered thousands of properties
  • Based in Chicago, IL
  • Say hi to him at: www.preREO.com 



Click here for more info on groundbreaker.co

Best Ever Tweet:

“Local investors have advantages because they can see the work that is needed and typically have a local team they know and trust” – Jorge Newbery


Theo Hicks: Hello Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today I’ll be speaking with Jorge Newbery. Jorge, how are you doing today?

Theo Hicks: Good, thank you. Thanks, Theo, for having me on the show.

Theo Hicks: Absolutely, thanks for joining us again. So Jorge a repeat guest; make sure you check out his other episode, which is Episode 1342. So today is Sunday; we’ll be doing a skillset Sunday where we’ll talk about a specific skill set that our guest has, and as you can tell by the title, we’re talking about how to buy pre-REO’s, not REOs but pre-REO’s on the internet. So Jorge, can you tell us, first of all, what pre-REO’s are and then how you can buy those from your house on the internet?

Before we get into that, Jorge’s background… So he is a CEO of pre-REO, as well as AHP Servicing, and is a partner in Activist Legal. He has 30 years of real estate experience, a portfolio of 10,000 purchased defaulted mortgages, he has also owned over 4,000 multi-family units, and brokered thousands of deals. He is based in Chicago, Illinois and the website is prereo.com. So Jorge, do you mind telling us just a little bit more about your background and what you’re focused on today?

Theo Hicks: Sure, I’ll give you a brief history. About 16 years ago I owned about 4,000 apartments across the country, a natural disaster devastated my largest holding which was 11,000 units in Columbus, Ohio, and it gutted me financially; I ended up losing everything, and over 26 million dollars in debt. That story created a huge amount of challenges for me at that time of my life; actually, enough that I wrote a book about it called Burn Zones.

But I rebuilt myself through a company called American Homeowner Preservation, and this was 2008 when the financial crisis was devastating America and millions of families were at risk of losing their homes… And I saw that many of these families were going through the same things that I was going through. So I started a company called American Homeowner Preservation. And what we started doing was purchasing the defaulted mortgages at big discounts from banks and other lenders, and when we could, we would share those discounts with the families in the form of affordable modifications so they could stay in their homes. So that’s what American Home and Preservation has done. We bought over 10,000 mortgages in the last decade.

But when we bought from banks, we’d often buy pools, and those pools will include some that are occupied and some of them were vacant. Sometimes we got lucky on the vacant ones; we could find the homeowner and we’d pay them cash for a deed in lieu and we’d sell the property. So that’s great. But other times we could not find the family; maybe the homeowner was deceased, or was divorced, and no one could agree on what to do, and we would end up having the fore-close on a vacant home. So we’re the mortgage holder, there’s a property owner, but they’re not living in the home, and it’s sitting there vacant.

Now, in many cases there are great challenges; the returns often on that component of the population and often times was not that good, and I’ll tell you why… As a mortgage holder, if the property owner is not taking care of the property, the mortgage holder needs to, and that  includes anything from cutting the grass to shoveling the snow, to boarding up the property… And sometimes code enforcement, the local city will go out there and say “Hey you need to bring everything up to code. The roof is leaking.” So we have to do it; we don’t own the property, but we’d have to pay for that work.

And then in extreme cases like where I am in Chicago, if the property became a nuisance because people kept breaking in there and whatnot, then the city would actually require that we posted a night watchman. So every night we’d have to pay for a security guard to guard the property. And obviously, that becomes extremely expensive. And we’re still just sitting on a vacant property that’s losing value, in many cases, because it is deteriorating.

So in my mind I was saying “How do we rectify this? We have homes that could be rented out and generating income, but we don’t own the property, so what can we do?” And I guess the opportunity and the challenge is that the situation I described for AHP is the same for all the other hedge funds and mortgage investors across the country that do this nationally; they all have similar situations with a portion of their vacant properties.

So the solution that we came up with is pre-REO. And people say “What is a pre-REO?”. A pre-REO is a first mortgage that’s in default, that is secured by a vacant property; and actually, it could also be secured by a tenant-occupied property, but by and large, is by a vacant property. So what we offer is for hedge funds and other holders of these mortgages to put them on pre-REO, the local investors can bid to buy an interest in that mortgage, and that interest will allow them to follow a strategy that we’ve come up with, which is to work with our law firm Activist Legal to continue the foreclosure, number 1, so they can eventually get title to the property, but also to appoint a receiver, which is typically a local real estate agent who can repair and rent the property while it’s in foreclosure.

So it’s not yet owned, but the court will allow it, because it has been abandoned in many cases, to appoint a receiver to repair and rent the property and start generating income while the foreclosure is continuing. So that is the strategy that we’ve come up with, and so far we are getting a good reception.

Right now we have hundreds of properties on the platform, I anticipate by the end of the year we’ll have thousands. So it’s just a huge demand from lenders, and now we’re trying to reach out. One of the reasons I’m on the show is to let buyers know about the opportunity. It’s in many cases a fantastic opportunity for local investors to buy these at significant discounts to what they would buy REO’s.

Theo Hicks: So from your perspective, the deals that are on there are notes that your company owns, as well as other companies that do the same thing, that have the same issue with a portion of the vacant deal. So someone already owns these notes already, right?

Theo Hicks: Correct.

Theo Hicks: Okay. So from my perspective as a client, as a person who wants to buy these, I go to your website — I went to your website and saw that info on there. What types of things do I need to do in order to figure out how much I should pay for these things, if it’s worth paying for this…? What’s the due diligence that I need to do on my end?

Theo Hicks: Sure. Because it’s vacant, it is truly destined to be an REO in almost all cases. It would be rare that a homeowner would pop back up and say “Hey, you know, I want to pay off my mortgage, or re-instate”, or something like that. So in time, there’s a high likelihood that these will become REO. So I think investors should look at it as “What do I really think this property is worth as an REO?” And as is, where is.

And our guidance to sellers is to price it at 75% of the REO value. So they think the property is worth 200k, offer it at 150k. So there’s a $50,000 equity that’s there to be captured by going through this process. And the sellers – the sale to them is “Hey, you get your money a year or more early, you’re going to save all the legal fees, all the taxes, insurance, boarding up cost, night watchman, all that stuff is gone.” And for the local investor, they’re going to put a tenant in there who could be paying them, call it a thousand a month or something like that during that year, so they pick up $12,000, plus they do the repairs while it’s still being foreclosed upon. And when it’s foreclosed upon, they can choose to either sell it as an REO or to keep renting it.

Theo Hicks: So that offer is to you and these hedge funds, right?

Theo Hicks: Correct. Right now the offers all go to us, and then we share them with the hedge funds. But ultimately, they’re making the decision on “Hey do we accept it? Do we counter it? And how do we respond to this?” So to be clear, all the asking prices on there are simply just that – they’re asking prices; you can offer more, you can offer less, and we do see both of those. We see people who are offering full price, people where there are maybe five or six bids, but they’re all 10% or 20% low, which means that maybe the hedge fund opinion of values may be higher than it should be, and vice versa. There are some times that somebody is selling for a little bit more than what the asking prices are. So pay what you think is fair, offer that. Right now, we’re highly attentive to trying to get these things sold to prove out the models. So we’re trying to broker… In some cases, in the end we’re almost on the phone between the buyer and seller to try and bridge the gap to a price that makes sense.

Theo Hicks: Okay. So if I submit my offer, you mentioned that your company, for the pre-REO, has a system that I can use. So that system is up to the actual foreclosure; then it’s in my hands, right? So you’re saying that you help the second I take over that note to the foreclosure, and then the main thing in between there is appointing the receiver.

Theo Hicks: Appointing the receiver. You, for instance, could choose “Hey I know a friend who is a real estate agent. They are really reliable, I want them to be the receiver.” That’s fine. But the court will have the attorney propose to the court that that agent is appointed as a receiver.

Theo Hicks: Why aren’t the hedge funds appointed the receiver?

Theo Hicks: Because this is very local; we’re in Chicago, so when we’re having to pay for these repairs on properties I know we’re not getting in best prices. The local person will maybe have their own crew or have their own relationships and contacts where they can get stuff done at a better price, done faster; they can also be there watching “Hey this is what the work is, and you’re getting the bid for this.” That makes sense. And besides, we’re a thousand miles away from the bid and we don’t really know; we get photos and sometimes people — they always think it’s a bank or a hedge fund,
“They’re not going know the difference whether it’s 2000 or 3000, so bill them 3000.” We got this clean-up bids sometimes for like $3,000 and $4,000. I’m thinking, if I had a small crew, I’d be out there with the dumpster and get it all done for 500 bucks. And then they say “We’re bonded, we’re insured, and that’s why we’re $4,000.” Sure, that’s important, but the local investor can always do these things better. Also, selecting tenants, making sure they pay…

So I think what pre-REO is trying to bridge is the local investors absolutely, in this case, have the advantage. They know the market, they can watch the work get done, so they are doing that portion of the work and they’re adding value because they have transactions as a result. The hedge funds can never compete with a local investor in that regard.

Theo Hicks: Yeah. Plus, they’re not real estate investors either.

Theo Hicks: They’re not. We got offers on our REO’s, there are always people sending us the photos of like the worst thing in the house, making it look as bad as possible… And again, we are thousands of miles away sometimes so we don’t really know the difference. So local guys can say “Hey this thing is worth $300,000.” Or it’s worth whatever the number is, and if somebody is crying about a little repair that needs need to be done, hey I’ll get that done and they should be paying full price.

Theo Hicks: I’m not very familiar with this. So appointing a receiver – is that something that always happens? There’s no risk of the court say “Well no, you can’t do this, from my perspective.” Who are the receivers?

Theo Hicks: Sure. So that typical receiver is appointed on an office building, a hotel, a property that’s generating revenue, and if they’re not paying the mortgage or the other debt then, the lender can request that court to appoint a receiver to collect the rent, pay the expenses on that type of property; even they put him at sometimes retail stores or whatnot. But those receivers are often times attorneys or other high-priced professionals, and it would not work to use that type of receiver for a single-family residence.

So we were like struggling with who do we use, and who’s going to make sense here… And the receivership is very much akin to property management, with a couple of extra reporting steps with the court; so a local real estate agent makes a ton of sense. And they are doing it — maybe collecting rent, maybe 10% of the rent collected, and that’s okay, but I think what the agents are really looking for is hopefully some of these ends up being listed once they are foreclosed, they’re going to want to sell it, and then I’ll get the listing; so they’re building a pipeline of future listings. In turn, the receivership is usually high cost; we’ve made it affordable for this segment of the market, single-family residences and other small properties.

And then the other part is if real estate investors just call the local attorneys and say “Hey, appoint a receiver on a single-family”, it’s going to be “I’ve never heard of that.” So we have one firm [unintelligible [00:14:35].17] which I’m a partner in, which facilitates default services nationwide; so all of these we recommend that you go through Activist Legal, and Activist Legal will co-counsel with the local attorney in their network to complete the foreclosure and to get the receivership appointed.

And you’ll think “Well, how much is the receivership?” To appoint a receiver, estimated hours maybe a thousand dollars in legal fees. When the receivership is completed, maybe a couple of hours and maybe $500. And your question, which is a good one, “Is this definitely going to work? Is the court definitely going to appoint a receiver?” And the answer is we expect that they will, but we don’t know. There may be some judge who just says “I don’t get this. It doesn’t make sense to me. I’ve never seen it before.” We haven’t run into that yet; we’ve been able to so far convince judges that this makes sense. And the reality is if a judge is going to look at it from a public policy point of view and say “Is it better to leave a home vacant for a year, or better to appoint a receiver and have a tenant in there? Which is better?” It’s clearly to have it occupied; if it’s vacant it either is or could be of blight on the community, so it’s just so much better to have it occupied. The neighbors would appreciate it. So it does make sense, but we do anticipate at one point or another we may have [unintelligible [00:15:41].18] We’ve had this concern enough as we keep going to different jurisdictions to prove out the concept; if a receiver  could not be appointed, our fund would buy the asset from the pre-REO buyer. We expect that to happen one in a hundred times; it hasn’t happen yet. And if it does, then we simply know that in a jurisdiction we can’t do it, and we’ll keep trying. It makes sense, so we expect at some point the judges will all be on board with this.

Theo Hicks: Another question I have from a very limited knowledge of the foreclosure process – I know it’s usually not always the exact same length from when it is initiated to when it’s actually completed, so how do I know when looking at a deal what spot in the process we are at?

Theo Hicks: That’s a good question, because if there’s a sale date next month and you already have a judgment, then you’re just going to say “Skip the receiver, I’m going to get the deed to this thing in a month or two.” So we are trying to provide information on our site; it’s not where we want. Sellers – it always seems like they have to go to the servicer, go to the attorney and get the current updates. So we are trying to improve that. If a property is of interest, and you think of bidding on it and that’s important to you, which it should be, then before you bid, say “Hey, what’s the status of the foreclosure?” And someone will get you that information.

Bear in mind though, the way we’ve structured pre-REO is accepting the ones that are towards the end of foreclosure. If it’s kind of mid or earlier, then it’s going to be months if not years in some cases, so it does make sense to appoint a receiver. And the passage of time, which usually negatively impacts the returns of a mortgage holder using pre-REO, where you’re generating rent during the term for the foreclosure, then the passage of time is no longer a negative drag on your returns.

Theo Hicks: So if I have a receiver, and I get fixed up, I can put someone in for rent before? That makes sense. I was kind of confused. I saw on there in your website, that you could do loans on this as well.

Theo Hicks: Yup.

Theo Hicks: So I put the down payment, obviously I’m paying that loan, because I’ve got an outgoing payment, but with a receiver, I fix it up, I put a tenant in it, the tenant could pay me before I actually own the property.

Theo Hicks: Correct. Now, a big asterisk to all that. The receiver needs to coordinate the work, so the court’s going to allow the receiver to do the work, and they can hire contractors. So you couldn’t actually do the work yourself; you could coordinate it through the receiver. You could tell the receiver “Hey, I recommend that you use this contractor.” Ultimately, you’re the one funding the work. And the rents that are collected would need to go to the receiver, they need to go to the servicer, and then they come back to you. That way it’s fully documented for the court and there’s always a record if they ever ask. In the end, we accomplish what you’re just describing.

Theo Hicks: So you said that rents go to receiver, and then who is this servicer? Is that you?

Theo Hicks: Yeah. But that’s the AHP servicing.

Theo Hicks: Okay.

Theo Hicks: So almost all the states in this country require that a licensed servicer is the one that usually collects the mortgages, interfaces with the bar, facilitates foreclosures… So AHP servicing is a national servicer; we can fill that role. In fact, in pre-REO you can say “Hey, it’s a great way to generate business for AHP servicing, [unintelligible [00:18:29].07] and you’re right. But also, without those two components, it would be very difficult to replicate. Because otherwise, you’d have to go to a servicer, go to a law firm and try to put these pieces together, and that I think would create a challenge. So here I’ve created the roadmap, and the companies and resources that you can utilize along the way, so you just follow the steps for the particular pre-REO that you’re working on.

Theo Hicks: So you say this is pretty passive compared to other strategies. Is that like entirely passive? But it sounds like it’s passive, because a lot of the steps – kind of communicating with the receiver, it sounds like once you’ve bought the deal and then sending the money out for the loan… So those are passive?

Theo Hicks: Yeah. I don’t know if I’d say very passive. You still have to be the quarterback, maximize your success. You want to be very involved [unintelligible [00:19:13].24] you’re right, you’re having to work through others to help execute the strategy.

Theo Hicks: Alright, Jorge. This is very fascinating stuff. It’s from the perspective of buying this, but also just from your perspective in identifying this need and starting a business. Of course, we couldn’t focus on it that much, but I think we did get a lot out. Is there anything else that you want to mention about buying pre-REO’s on the internet, or anything else before we wrap up?

Theo Hicks: No. I think we’ve covered most bases. You mentioned the financing – we provide 75% of the money, so the local investor just needs to come up with 25%. We’ve tried to make it as similar to doing a normal real estate transaction, except here you’re just buying earlier in the process, at a greater discount. So I think we covered all the bases. I appreciate the question, and thanks for having me on today.

Theo Hicks: Absolutely. Thanks for joining us and talking about how to buy pre-REO’s on the internet. So if you want to look at actual live deals, prereo.com. And there you can kind of click and see some details about those deals.

Overall, just to summarize what the process is, you are buying the first mortgage that’s in default, as secured by a vacant property, from a hedge fund or some other company that’s already bought that. And then you being the local investor will be able to add more value to that deal than the company that’s thousands of miles away.

Once you buy the note, which you said that the starting offer price would be 75% of whatever that value is, then you request that the court appoints a receiver, and then this receiver, which your company helps find, will be the person who can coordinate the renovations on that vacant property, putting a tenant in that vacant property, so you are able to make money before you actually foreclose on the property. That sounds like the overall strategy. Obviously, there’s a lot more that goes into it than that, but that’s the overall strategy.

Jorge, thanks again for joining me. It was great talking to you. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

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JF2224: Note Investing Strategies With Jamie Bateman

Jamie is a part-time real estate investor and works part-time in the U.S Defense Department. He currently has a portfolio of 8 rentals and over 20 mortgage notes. Jamie started off as a coach and after some time he decided to work for a mortgage broker where he saw some shady things happening so he decided to quit his job and join the military. Now he is focusing on his own real estate business while working for the U.S Defense Department.


Jamie Bateman Real Estate Background:

  • Part-time real estate investor and part-time in the U.S Defense Department
  • Has over a decade of experience in single-family rentals and 2 years in mortgage notes
  • Portfolio consist of 8 rentals and over 20 mortgage notes
  • Based in Baltimore County, MD
  • Say hi to him at: www.labradorlending.com 
  • Best Ever Book: Wealthy Gardener

Click here for more info on groundbreaker.co

Best Ever Tweet:

“One of the benefits from note investing is you have collateral” – Jamie Bateman


Theo Hicks: Hello best ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re speaking with Jamie Bateman.

Jamie, how are you doing today?

Jamie Bateman: I’m doing great, Theo. I really appreciate you having me on.

Theo Hicks: No Absolutely. Thanks for joining us, I’m looking forward to our conversation. Before we get to that though, let’s go over Jamie’s background. He is a part-time real estate investor and part-time in the US Defense Department. He has over a decade of experience in single-family rentals and two years of experience in mortgage notes. His portfolio consists of eight rentals and over 20 mortgage notes. He’s based in Baltimore County, Maryland, and you can say hi to him at https://labradorlending.com/.

Jamie, do you mind sharing with us a little bit more about your background and what you’re focused on today?

Jamie Bateman: I’d be happy to. As far as background goes, as you mentioned, I’m from Baltimore County, Maryland. I am the oldest of seven kids. I have three brothers and three sisters. Went to Hereford High School in Baltimore County. I went to Gettysburg College in Pennsylvania, played lacrosse there, and met my wife there, graduated in 1999.

After college, frankly, I really wasn’t positive what I wanted to do. Lacrosse was such a big part of my life at that point. I didn’t have too much direction at that point, so I decided to coach a little bit, so I coached in high school and at the college level. Unfortunately, it doesn’t pay real well and certainly not back then.  One year I made $8,500 (not $85,000) as essentially a full-time coach… So I decided it was about time to get a real job.

Through some networking, I linked up with a title company, and I later worked for a mortgage broker. At that point, there were some real shady things – this was probably 2004/2005-ish, kind of right before the peak of the real estate market… And some shady things were going on at the mortgage company I was working for and I said, “You know what, I don’t want to have anything to do with this.”

I quit my job, I joined the Army Reserves, went through Officer Candidate School, chemical school, deployed to Iraq for a year,  I ended up getting a Master’s… But again, as you can see, kind of bouncing around, not totally sure what I wanted to do. I was able to use that army career to pivot to a civilian job with, as you mentioned, the Defense Department, and that was in 2008. I got out of the Army Reserves as a captain. I’m still currently with the Defense Department today.

My wife and I actually bought our first rental property – pivoting over to real estate now – in December 2009. It was a condo, we still own it. In fact, we still have the same tenant there. I’ve kind of always had an inkling that I want to get into real estate investing, but frankly, at that point we weren’t really taking it too seriously, didn’t really know what we were doing. It was later on, 2014-ish, when I was driving a lot for work, for my commute, and listening to a ton of podcasts, and then I kind of decided to take real estate to the next level.

So 2015 is when we actually started buying rentals and I actually went part-time in 2015 at my “real job”, and my wife and I started ramping up our real estate investing.

Theo Hicks: 2015 – is that when you started to accumulate the now eight rentals that you own?

Jamie Bateman: You got it. Yep.

Theo Hicks: Are those all single families?

Jamie Bateman: They are all single families. One is a condo and six townhouses in Baltimore County, and then we actually just picked up a rental in Jacksonville, Florida. It’s our first out of state rental. That’s a true single-family detached home, which is a pretty cool story, I think.

Theo Hicks: Yeah, I definitely want to ask about that rental out of state. One question I want to ask you – a lot of people, when they think about single-family rental investing, you’re only allowed to have a certain number of the types of loans in your own personal name. I think it’s like four or eight or something.

Jamie Bateman: Yeah, I think it’s gone up to 10.

Theo Hicks: Okay, so you’re still just putting those in your personal name, then?

Jamie Bateman: No, actually they are in an LLC, and one of them is in our personal name. But that’s the first one that we bought over 10 years ago. We still have the same tenant there, and he brings us six checks twice a year, which is nice. But anyway, the rest are not in our personal name.

One of the downsides is we do have commercial notes attached to those properties and they are recourse loans that are amortized over 20 years, and they have balloons after five years. It’s your typical commercial loan, which that’s also typically a little bit higher interest rate. I’m actually looking to address that situation, because the payments are a little bit higher than I’d like them to be.

Theo Hicks:  Do you have one commercial loan over all those properties or each property is in a commercial loan?

Jamie Bateman: It’s actually the six townhouses in Baltimore County have three loans on them. So each loan is backed up by two properties.

Theo Hicks: Got it. Okay. Does that mean you bought those two properties at the same time?

Jamie Bateman: It doesn’t mean that. We actually were buying these with cash, and generally speaking, following the BRRRR method, which I’m sure a lot of your listeners are familiar with, and fixing these properties up and renting them out, and then refinancing. But in this case, when I say refinance, it’s really just a cash-out refinance to get some or all of our money back that we put into the deal. We weren’t using hard money or anything like that. We actually were using cash to buy them, fix them up, rent them out, and then went and got more of a standard loan.

Theo Hicks: Okay. When you refinance, you buy them all cash, and then you finance two at a time and bundle them into one loan?

Jamie Bateman: Exactly.

Theo Hicks: Got it. Okay. Let’s talk about the Jacksonville deal then. I’m assuming that the other ones – were all those in Baltimore County, Maryland, or were they also out of state or out of the area?

Jamie Bateman: The Jacksonville one is the first out of Baltimore County, actually. It’s the first one that’s even more than a 15-minute drive from where we live.

Theo Hicks: Walk us through that decision. Why did you decide to invest out of state? Why did you choose Jacksonville? And then kind of just walk us up until you actually found the deal. What team members were put in place from Jacksonville? How did you find them? How did you screen them? Things like that.

Jamie Bateman: Sure. I actually have – just for your listeners, if anybody wants to learn more about this particular deal, I do have a couple blog posts about this. But this actually is a good transition over to our note investing, because this actually was a note deal that we ended up taking back the property on; and I had no intention of keeping it initially frankly. I do like the Jacksonville market, which is one reason that I purchased the note, but I did not intend to pick up a rental there. However, we fixed up that property and I was going to sell it. The more I researched the market, I just thought that it’s a really strong rental market and why sell it now. I can rent it out for a year or two and if it’s just an awful experience, I can sell the property then.

As far as team members and that kind of thing, really, I relied heavily on networking through bigger pockets and other groups that I’m in and decided on a good, established property management company that’s down there, and I’ve relied on them heavily frankly. I’ve never been to Jacksonville, Florida, and so far, it’s going pretty well.

Theo Hicks: Let’s transition into the notes then. Overall, your note strategy, I think I know the answer based off of—or maybe I don’t; so is your goal — because I was talking to someone about notes, I think it was last week, and he buys notes because he wants to take the property. He kind of mentioned there are two strategies; there’s ones where you want the property and there’s the other one where you want to work it out with the person who’s currently living there, so you just make the money on the interest rate. Which one are you and why?

Jamie Bateman: I’m not intending to take the property back. I’m trying to keep people in their homes. I’d love to work with borrowers as much as possible. Sometimes it’s the last resort. That’s one of the nice benefits about note investing, is you have collateral, which is the property, as compared to the stock market and a lot of other investment strategies. That is one benefit there. So no, we buy both performing and non-performing first-lien mortgages.

Another benefit to note investing is that there are so many exit strategies. You mentioned a couple of them, Theo, but there are others. Another really good one is to buy a non-performing note, get it re-performing, and then resell that note. That’s what a lot of non-performing note investors aim for.

Yes, some people do try to take the property back and that’s certainly a strategy. I know, as the real estate market in general, across the country, tightened up over the last five years, there were a lot more flippers and rehabbers, and people who wanted the property, getting into the note investing space just for that reason. For me, it’s not my first goal, but it’s one of several options.

Theo Hicks: Sure. So you buy performing and non-performing. Do you do the strategy where you take the non-performing to performing and sell it, or the buy and hold as a flip strategy?

Jamie Bateman: Yeah. I would say that we’re closer to the buy and hold side of things. I don’t want to pretend like I’ve been doing the note thing for 10 years. It’s actively been more of a year and a half to two years type thing. We’ve had Labrador Lending for about two and a half years, but I’m actually in the process of adding value to some of our lesser performing notes. We’ll be hoping to resell them later this year. That’s definitely on our list of — probably our first option that we’d like to do. But I’m absolutely not opposed to just buying a nice performing note, and holding it for cash flow, especially during these times.

A lot of times what we’ll end up doing is if we’re using our own money, we’ll buy a performing note to pay the bills and keep the business going. I actually hired my wife in January. She helps me out with a lot of the due diligence and a lot of paperwork.. But we will use other people’s money. A lot of times a joint venture is best geared toward a non-performing note. The reason that is — well, several reasons. But with non-performing notes, you have more of a well-defined exit point. If you’re getting the note re-performing and selling it, that’s the transaction that ends your ownership of that note, right? But joint ventures don’t typically work so well on performing notes, so we’ll often buy a performing note with our own funds. Another strategy that I have employed recently is to sell partial notes, which is a part of that sell payment stream. That strategy works better for performing notes.

I hope I’m not confusing things too much, but there are different strategies to use with both performing and non-performing notes. We stick strictly with the first lien space and specific states as well. That’s another way of focusing the business.

But as far as performing, non-performing, frankly, you can’t control the borrower, you don’t know exactly how it’s going to go, so to pretend that you know, “Oh, this is my plan for this note” upfront – it just doesn’t work like that. You might have one or two strategies that you think are going to work, but the fact is, you have many options at your disposal. If you’re doing your due diligence well, you should have equity in the property. In my mind, whether it’s performing or non-performing, it’s actually a safer investment a lot of times than, like, the stock market or things that don’t have any collateral.

Theo Hicks: Can you give us some tips, some things that you do in order to take a non-performing note to performing?

Jamie Bateman: Well, I think it really boils down to carrots and sticks. Especially during this time with COVID and everything we’ve worked with our borrowers to defer a couple of months of payments if they were affected, or even if they said they were affected by COVID and the lack of employment. In other cases, we are modifying loans to lower the interest rates.

As an example, say a borrower — they might have an unpaid principal balance of $50,000, but they have unpaid interest in fees and all kinds of arrears upwards of $25,000, so they actually owe $75,000, and they’re unable to make their payments.  What we have been doing is modifying those loans, lowering the interest rate, potentially extending the term of the loan so that their payment doesn’t go up, and getting them back on track.

Another option there is to take those arrears – and this is a key part of it, and obviously check with attorneys in your state that the note is in… But if you can raise that principal balance, a lot of note investors actually bid on the principal balance, and that’s a key part of this is; you’re adding value to that note by, one, lowering their payment, getting them reinstated, caught up, and they start paying again, and then you’ve also raised the principal balance, so you’ve added value to that note then for the resale.

Theo Hicks: You’re saying that, in that example, a $50,000 principal and 25 payments and stuff, the new loan is actually $75,000 principle?

Jamie Bateman: You got it.

Theo Hicks: Perfect. Okay. All right, Jamie. What is your best real estate investing advice ever?

Jamie Bateman: I would say focus on your strengths and think about how you can add value contributing to something bigger than yourself. One more quick thing is, just do what you say you’re going to do. There are a lot of people that just don’t follow through and I think your word is really important.

Theo Hicks: Perfect. Okay, are you ready for the best ever lightning round?

Jamie Bateman: Let’s do it.

Theo Hicks: Okay.

Break: [00:16:15] to [00:17:06].

Theo Hicks: Okay, Jamie, what is the best ever book you’ve recently read?

Jamie Bateman: The Wealthy Gardener by John Soforic. It’s really good blend between fiction and non-fiction, and it’s got so many life lessons in it. I think I’m going to have to re-read it.

Theo Hicks: If your business were to collapse today, what would you do next?

Jamie Bateman: That’s a really good question. I think I would, again, go back to what I said with the best ever advice, focus on my strengths. I’ve got some networks built-in now as far as note investors and property managers and that kind of thing. It would take a little while but I think I could start over.

Theo Hicks: Out of the eight rental deals you’ve done and the 20 plus note deals you’ve done, which of those was your best ever deal?

Jamie Bateman: I’d have to say it was the Jacksonville deal, because numbers-wise, it’s really good. And again, go to the blog posts about that. It also utilized several different strategies. It used both buying a non-performing note, trying to work with the borrower, unfortunately, for closing, taking the property back, rehabbing the property from a distance, and then renting it out two days after it was on the market for rent, in the middle of a global pandemic. We certainly made some mistakes with that, I don’t want to pretend like it was the perfect deal, but that’s the one I’m most proud of.

Theo Hicks: And that blog post, is that https://labradorlending.com/blog/ and then it says  Jacksonville, FL, Case Study 2.0? Is it the one?

Jamie Bateman: You got it. Yes.

Theo Hicks: Okay. Now, what about a deal that you actually lost money on? How much did you lose? What lessons did you learn?

Jamie Bateman: We’re not really in the transactional space, per se. I’d say we’ve lost money with opportunity costs, the Jacksonville deal, for example, I overpaid for the note. I found out later that I paid $46,000 for the note. And it turns out, I actually could have paid $40,000 and found out through kind of a backchannel… But we didn’t lose money on the deal. We really haven’t lost money on a deal. I think it’s much easier to lose money if you’re actively flipping or that kind of thing.

Just to clarify, I have lost money on passive investments through crowdfunding deals that I totally blame myself for, for not doing enough due diligence there. I guess if you’re including that, then I certainly have lost money.

Theo Hicks: What is the best ever way you like to give back?

Jamie Bateman: We support our church financially and are active members there. My wife has volunteered there over the years and since we’re married, I’ll take credit for that—no, I’m kidding. I also coach youth lacrosse. I’ve coached my son’s lacrosse team for several years, so we’ll see where that goes. Other than that, just trying to support family members when we can and trying to be the best parents that we can.

Theo Hicks: Then lastly, what’s the best ever place to reach you?

Jamie Bateman: I’d say my website https://labradorlending.com/ and then you can also feel free to email me at batemanjames@labradorlending.com. A lot of people actually don’t know how to spell Labrador, surprisingly. batemanjames@labradorlending.com, I’d be happy to help anybody who has questions with single-family rentals or note investing, which is what we’re really focused on these days.

Theo Hicks: Perfect, Jamie. Thanks for joining us today and walking us through your journey. A few of the takeaways that I got… You talked about your strategy for acquiring those eight rentals and how you would buy them all cash, would do a BRRRR model, and then you actually refinance two properties into commercial loans. That was interesting.

You talked about your Jacksonville deal, and you mentioned that people can learn a lot more about that on your blog, and you mentioned how to find it there. But you mentioned the process of how are you able to do that deal by being out of state – it was originally a note that you had take the property back, which you didn’t intend on doing. And you mentioned that you fixed it up, and planned on selling it, but then did a lot of research and found that it was actually a really strong rental market. You relied heavily on networking on Bigger Pockets, and other groups to find a solid property management company that helps you with that process down there.

Then you kind of walked through your note investing, you kind of gave us a crash course on note investing; your strategy is closer to the buy and hold than is actually flipping the notes. You buy performing and non-performing, and you do joint ventures on some of the non-performing liens.

We talked about some of the pros and cons of performing versus non-performing. You talked about how to get a non-performing note to perform. You say it’s kind of like carrots and sticks, so you can defer payments; you can modify loans to have lower incidence rates, you can extend the term of the loan’ so the payment doesn’t go up, you can take the arrears and add it to the principal… So really just a lot about note investing. That was interesting.

And then also your best ever advice, which was focus on strengths, figure out how to add value, and then do what you say you’re going to do and follow through. So I really enjoyed the conversation and I learned a lot.

Better Ever listeners, I hope you enjoyed the conversation as well. Thank you for listening. As always, have a best ever day and we’ll talk to you tomorrow.

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JF2205: Condos To Notes With Andy Mirza

Andy Mirza is the COO for Coastline Capital Fund Management LLC and has been investing in real estate for 17 years. He initially started buying condos and eventually, he started to invest more on the non-performing notes side of the real estate business. He shares what notes are and why he started to invest in notes later in his career. 

Andy Mirza Real Estate Background:




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“If you want to do anything in real estate or investing directly, you need to do it full time” – Andy Mirza


Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, I’m speaking with Andy Mirza. Andy, how you doing today?

Andy Mirza: I’m doing great. Thanks for having me on here.

Theo Hicks: Absolutely. Thanks for joining us. Looking forward to our conversation. Before we get into that, let’s go over Andy’s background. So he is the COO for Coastline Capital Fund Management. He has 17 years of real estate investing experience and five years with non-performing notes. His portfolio consists of $4 million in non-performing notes and $2.2 million in rental condos. He is based in Chino Hills, California, and his website is coastlinecapitalfm.com. So Andy, do you mind telling us a little bit more about your background and what you’re focused on today?

Andy Mirza: Sure. I got my start in real estate as a part-time investor back in 2002. My biggest success prior to notes was buying condos at trustee sales in 2011 to 2013, and buying about 25 from closure auctions, and that experience actually helped me with the notes, understanding the buyer side of it. I still hold on to 19 of those condos as rentals with my partner on those.

I met Sean Urban, my current partner, in 2015, and we bought a few notes together, did very well on them, and then in 2016, we decided that we wanted to take things up to the next level. We wanted to be like the big boys, so we decided to create and manage funds that were focused on raising capital from investors, and then going out and buying non-performing notes that we had great access to through our context, so we could buy them at discounts and then liquidate at higher prices. So since then, in 2016, when we formed Coastline Capital Fund Management, we’ve created in managed and launched four different funds. The first one has gone full cycle. We raised the capital for that, bought the notes, liquidated all of them and the investors got their money back, their preferred return and profit split. The other two are in the process of liquidating now. And then our last fund, we are raising capital for it now and we’re raising capital until the end of July; that’s Coastline Capital Fund five. So during that time, we bought $7.8 million worth of notes. We’ve liquidated about half of them and we’re liquidating the remaining $3.9 to $4 million.

Theo Hicks: Perfect. Thanks for sharing that. So before we dive into more details, for those who don’t necessarily know exactly what a non-performing note is, do you mind explaining or defining what it is, and maybe high-level walk us through what the cycle looks like?

Andy Mirza: Okay. So when I talk to just any random person, I’ll start by saying defaulted mortgages, because most people understand what a mortgage is. We’re talking about a loan against the house as collateral. So non-performing notes, that’s used by people in the industry. So a note is a home loan. Specifically what we go for is residential, first position, non-performing notes. So it’s a note where the borrower is in default. They haven’t made their payments, and then the note goes non-performing. A lot of big banks and hedge funds have limitations on how much non-performing paper they’re allowed to have. So the banks, they’ll sell those things off. Back in 2008, 2009, this was all in the headlines where the banks had so many non-performing notes because so many borrowers ran into so much trouble paying that they had to offload those. So we’re actually still dealing with the consequences of those non-performing notes from back then.

Theo Hicks: Wow.

Andy Mirza: Yeah. Well, if you go back in time, there was just a huge flood of foreclosures. There were a lot of problems with the markets, governments and banks, and everybody did everything they could to dry up foreclosures and stop them. So by 2012, that’s when all these concerted efforts took place, but some of those loans are still out there. So some people got loan modifications, some people filed bankruptcy, but there was no more will to do all the foreclosures. So even in 2020, even before the pandemic and all that stuff, we were still finding a lot of loans that had dragged on from 2008, 2009. Actually, in our last couple of portfolios, I bought loans where the borrowers were delinquent for over ten years.

Theo Hicks: I just wanted to ask how does that work from their perspective, and the bank’s perspective? The bank was okay with them not paying or no one wanted to buy that non-performing note? How did it last that long?

Andy Mirza: So this is my opinion and based on my experience. So 2008, 2009, the banks had a flood of these non-performing notes. So they got the bailouts from the taxpayers, which allowed them to sell what they had to sell to other hedge funds, and then they were no longer on their books.

Now, the different hedge funds have all sorts of different strategies. Really, it depends on their business model, how fast and how quickly they can go through these things. So there was a big incentive for the hedge funds to try and bend over backwards to make things work with these borrowers. But then there are certain amount of notes that trickled down through the system. So it starts where you have these huge pools, then they get broken down, the hedge funds keep what they want to keep, and then they sell what they don’t want to. And then they sell to smaller and smaller investors, until they finally get to the investors that will actually do the liquidations or the final workouts. But you have to keep in mind that so many of these loans were really made to people that couldn’t afford them in the first place, and that’s the issue with those legacy loans, is that there are a lot of borrowers that had been given second, third, fourth, fifth chances, that are barely hanging on, and that actually plays into what’s going on with this pandemic. Because I think some people that were barely hanging on before, they’re gonna be pushed over the edge and won’t be able to handle it.

Theo Hicks: Totally.

Andy Mirza: Yeah. And the thing in my industry – you have these big banks and hedge funds that are very large and bureaucratic, and it’s easy for them to handle 100,000 performing loans, because they have systems that are put in place and they can do that. But when they have situations that fall outside the box, that’s where they’re really at a disadvantage. So for people like me at a much smaller level – and I consider a five to ten million a micro fund, in the whole world of a Wall Street and funds like that. But our advantage is that we can give the attention to the assets that they need; instead of managing 100,000 loans, we’re managing a lot smaller number, where we can really put hands-on and see and really try to resolve whatever issues are possible.

Theo Hicks: So one question that came to mind during that is when you’re looking at these non-performing notes, is the goal ultimately to figure out some plan, so that you don’t have to go through the full foreclosure process and then fixing the house up and selling it? Or is that what you actually want to do? Is that how you make your money? Do you make your money on the interest on the non-performing notes or do you make your money on actually foreclosing on these homes and selling them?

Andy Mirza: Okay. So I can speak about us specifically. Now, other banks, hedge funds and investors out there, everybody’s gonna have their different business model. So it’s really not a one size fits all. It’s like with normal real estate. You have all your different niches. You have your buy and hold people, you have your fix and flips, you have all your different niches. So for what we do, we’re more like fix and flip guys for notes. So we target the ones that are severely delinquent, where the most likely outcome is the foreclosure or the liquidation. We’re not trying to target the ones where they’re only a few months behind and we try and do a loan modification. That’s not our business model.

That being said, though – and this is a really important distinction between real estate and notes, because notes are really [unintelligible [00:11:26].05], we are not controlling the property. We are the note holder or the lender, in due course. The other side of the loan is a borrower, and they have certain rights by the contract of our loan.

So whenever we buy a loan, the first thing we try and do is reach out to the borrower. And if there’s a way that we can figure out some solution to either get it reperforming, I do some type of loan modification that would work for our business model, or do some other loss mitigation like a short sale or a deed in lieu of foreclosure. We will work with the borrower on something like that. The reality for us has been that when you’re looking at these loans where people haven’t paid in years, they’re in more of a mindset of trying to stay in the property for as long as they can, while paying the least amount that they have to. And then usually, they, 9 out of 10, or more like 19 out of 20 borrowers, they just either stay silent or they fight us. So like you said, we’re fix and flip guys. So we take something that’s broken, the non-performing note, we add value to it to different strategies, then we either resell the note if it becomes reperforming, or we take liquidation measures through foreclosures or those other loss mitigation things that I explained.

Theo Hicks: Sure. So after you do the liquidation, then you flip it, and then sell the property itself?

Andy Mirza: Yes, there are different ways. So if we’re foreclosing on the note, we can set an opening bid at the trustee sale or the sheriff sale where we think that a third party bidder will bid on it. Usually, we try and figure out the number that we think that “Okay, if we have to take this back as an REO, and then fix it up and then sell it, how much profit do we expect to make?” And then instead of doing that route, if we just have a certain bid and net a certain profit at the foreclosure sale, why don’t we do that?

So if we do foreclose, there’s the option of it sells to a third party and we get cashed out then. If we take it back, we’re okay with handling REOs. My partner actually runs an asset management company that liquidates REOs for two big hedge funds. So we’ve got systems in place where we can find realtors, we can have them manage rehabs and do the whole thing. So we’re investors that will take it from A to Z. Whereas there are a lot of funds out there that never want to get an REO. They’ll set the opening bid low because they want to get rid of it, and they’re not equipped to handle that part of the business, and that’s okay. Like I said before, all the note investors and funds out there have their different strategies, their different business models and their different strengths.

Theo Hicks: Yeah. So most people I’ve talked about notes do what you just mentioned, which is they don’t want to foreclose. They just want to figure it out with the borrower, or they want to sell it at the foreclosure sale, most likely. So I want to transition really quickly before we go to the best ever advice. So you don’t need to elaborate too much on this, but I’m just curious to see how the investment of non-performing notes, how you present this investment to investors. I’m assuming that a specific type of person is going to happily invest in non-performing notes. So do you mind walking us through what the typical profile is of your investor? What they do, what their experience level is with non-performing notes, what types of returns they want, things like that?

Andy Mirza: Okay. So first of all, our funds, they’re currently open to accredited investors only. So that allows us to do general solicitation. So we’re really looking for people that are interested in specifically what we do, but don’t have the time, the motivation, the connections. Really what it comes down to, like I said at the very beginning, is just the time… Because to do all the things that we’re doing on a full-time level, it’s another full-time job. I have that belief of a lot of real estate, actually. I see a lot of people get involved in real estate and they get their rentals or get their flips, but they also have a full-time job at the same time, that’s separate from real estate. And really, if you want to do anything in real estate or investing correctly, or to the maximum that you can do, you need to do it full-time. So we’re looking for accredited investors that want to be passively involved in what we’re doing, and they want to be involved in alternative investments, and they want to have something that is a safe investment, is backed by real estate, and they have an affinity for real estate and real estate-related investments.

Theo Hicks: What are the returns that you offer up? Is it the preferred return from day one? Is it just a split of the profits on the back end on the sale of the REO? How does me as an investor in this deal get paid?

Andy Mirza: That’s an interesting question. Most of the funds out there, the biggest ones PPR, AMIP, they pretty much offer just a preferred return, and that’s it. You’ll get maybe 8% or 10%. I’m not sure exactly what they’re offering. Ours is different. We wanted to structure our funds so that there was profit sharing with investors. So our latest fund offers the investor an 8% preferred return, and 60% or 50% of the profits on the upside.

It’s a three-year time commitment, and we actually expect it to be a lot less than three years, depending on our liquidations. So the combined preferred return in the profit split that we’re offering, we project that to equate to a 15% IRR, which means a 15% annual return on their money.

Theo Hicks: Perfect. I appreciate you sharing that. Okay, Andy, what is your best real estate investing advice ever?

Andy Mirza: My best advice would be to be very careful about leverage. Leverage is one of those things where it lets you grow a lot quicker, but the flip side of that is that it’s a lot riskier and you can lose a lot of money doing it that way.

This comes from experience. Before I went into business with Sean, I took on a high-value flip for doing fix and flip. I paid $860,000 for this house. The plan was to do a quick rehab on it, and then do a quick resell for $1,050,000. I borrowed almost all the money for it. I had some money for holding costs and the operations, and I did a couple of things wrong on it. One is that I didn’t do the rehab right to where it should have been for that neighborhood, and the other thing, I didn’t do anything wrong; it was just the market. The market stalled all of sudden, and that was everywhere in the local area.

So I did the rehab wrong, and then I had long holding time, a lot longer than I projected. So I ended up getting in trouble, because I had this monthly interest payment that I had to make every month. So I ended up becoming a motivated seller, which is what you don’t want to do when you’re fixing and flipping, and I ended up losing a lot of money. I got out of that loan, and I spent a lot of time paying back my friends and family that helped me into the deal. So by not using so much leverage, you can be a lot more stable.

Our current funds are non-leveraged. So that’s actually helped us tremendously when this pandemic happened, because we weren’t forced to do any fire sales, we weren’t forced to make distributions to our investors, and we didn’t lose any money. We just got delayed by a couple months. I think that concept of over-leveraging can apply to all investments, whether it’s real estate or not.

Theo Hicks: Perfect. Are you ready for the Best Ever lightning round?

Andy Mirza: Sure, let’s do it.

Break [00:19:39]:04] to [00:21:04]:09]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Andy Mirza: I gotta say two books, because I want to give credit to the person who turned me on to the next book. But it’s Raising Capital for Real Estate by Hunter Thompson. If you are interested in syndicating any deals or interested in starting up funds like mine, I got an incredible value out of that book. It’s written at a level where if you’re just starting, it gives you all the basic information and then some. I found a lot of information in it that I can apply to what I’m doing now; a lot of actionable information.

But his book also turned me on to Pitch Anything by Oren Klaff, and that was just an incredible book to me. Especially when it talks about framing things and just how you interact with other people, I thought it was incredibly valuable. So I put those two books and I just read those in the last couple months.

Theo Hicks: If your business were to collapse today, what would you do next?

Andy Mirza: Wow. Okay, so if my business were to collapse… So I don’t think the industry will completely collapse. I think there are different parts of it that I would go to, because my partnership with my partner, Sean, he developed these incredible relationships with these funds on Wall Street, and I don’t have the same level of relationships. So I’ve actually thought of what would happen if, say, something happened to my partner, and I can’t do business anymore. So I guess I’m cheating on answering this question, but I would stick with notes because I know that notes are going to be here forever. But I would go into the seller finance notes that I could find. I would be fishing in a different pond to find notes for me to buy. So that’s my answer.

Theo Hicks: Perfect. And then lastly, what is the best ever place to reach you?

Andy Mirza: The best place to reach me, you can send me an email at andy@coastlinecapgrp.com. Or you could just go to my website, coastlinecapitalfm.com and send me a message there.

Theo Hicks: Alright, Andy. Well, I really appreciate you coming on the show and sharing your experience, your insight into non-performing notes. We talked about the process a lot; so a lot of good information. In that part of the conversation, you gave us some details on the investor profile – someone who’s going to be investing in non-performing notes. You gave a lot of differences between the way you do and what other people do. And then we talked about your best ever advice, which is to be very careful about leverage. You gave an example of the negative consequences of being overleveraged and why you currently have your funds as non-leveraged, which you mentioned is very helpful during this time of the coronavirus pandemic. So Andy, thanks for joining us again. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Andy Mirza: Thanks for having me on the show.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2183: The Texas Property Manager With Danny Webbers

Danny is a real estate broker, and owner of The Texas Property Manager and The Texas Builder. Danny shares his expertise in purchasing notes and how he plans to continue to grow his personal business. 


Danny Webber Real Estate Background:

  • Real estate broker, owner of The Texas Property Manager, and The Texas Builder
  • 15 years of real estate experience
  • Flipped approximately 150 flips, wholesale 40+ , 30+notes
  • Based in Austin, TX
  • Say hi to him at: www.myhomesimple.com  
  • Best Ever Book: Minimalism


Click here for more info on PropStream

Best Ever Tweet:

“Find a mentor, and pay him if needed. You need someone you can call anytime you have a question” – Danny Webber


Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. My name is Theo Hicks and today, I’ll be speaking with Danny Webber. Danny, how are you doing today?

Danny Webber: I’m doing great.

Theo Hicks: Great. Thanks for joining us; looking forward to our conversation. A little bit about Danny – he is a real estate broker, the owner of The Texas Property Manager and The Texas Builder, he has 15 years of real estate experience and he’s done approximately 150 flips, over 40 wholesales and over 30 notes. He’s based in Austin, Texas, and you can say hi to him at myhomesimple.com. So Danny, do you mind telling us a little bit more about your background and what you’re focused on today?

Danny Webber: Sure. Background going way back in military and law enforcement. I’ve got an MBA in Business Management and Finance, lots of hands-on experience. I believe in getting dirty on job sites, learning how to do all the trades, which is one of the reasons I started the construction company. My focus today primarily though, is I’ve been liquidating a lot of rentals and getting cash-heavy, just with all the craziness going on in the world. I really have a lot of dry powder on the side, ready to deploy as deals become available. So focus for me right now is macro and micro economics and trying to take the big macro picture and drill down to how it specifically is going to manifest itself in Austin’s market because we’re a little bit of a strange market comparatively speaking to most other places in the US.

Theo Hicks: Let’s talk about that a little bit. So you said you have a lot of money and you’re in the researching, educational phase right now.

Danny Webber: Mm-hm.

Theo Hicks: Okay, perfect. So what are some of the things you discovered particularly about your market?

Danny Webber: Well, there’s a lot of dynamics going on, and obviously with what we’re going through with the pandemic and everything, and so what I’m doing right now is I’m following the macroeconomic picture, meaning the Fed money printing the financial stimulus and incentives from the government, and then how that’s affecting current mortgage market and real estate market, both nationally and locally. So for instance, in normal times, in a nondistorted macroeconomic market, when the Fed prints trillions and trillions of dollars, and then they’re deployed to the folks on the ground, typically you would see some type of inflation, or typically you would see some type of devaluing our currency, but we’re not seeing that because there’s such a shortage of dollars in the world, which is counterintuitive to a normal macro investor or even a real estate guy… Because as a real estate guy, when our currency devalues and you’re in fixed long term debt, that’s good for you. When a loaf of bread goes to $10 and the house that you paid $100,000 for five years ago, now costs a lot more just because of the devaluation of our dollar – it’s good for you, especially if you’ve got long term low-interest rate debt. So throw that in the mix with the deferments of the evictions, the foreclosures, and then add on top of that the fact that a lot of the lenders that did that are going to want three months plus one when the deferments are over.

The increased delinquency rates on both autos and home loans– I can go over 100 other macro and micro indicators, but you take all that information and you’re like, “How is that going to affect Austin?” because Austin’s one of the strongest real estate markets in the country. It’s been that way for probably a decade, and there’s no signs of that slowing. So some of the problems that we face in Austin, for instance, is our rental prices have not kept up with our purchase prices and sales prices. In addition to Austin not having state income taxes, we’ve got a high property tax rate. So if you looked on the MLS right now in Austin and specifically looked at single-family residents, and you were looking, “Hey, I want to buy a rental, I’ve got the traditional 25% down, going conventional. Let’s just say, four, four and a quarter percent interest rate”, you’re not going to find probably more than five properties in the entire MLS that would cash flow with their traditional 25% down investor purchase, which is a big problem for us. So we end up having to go further and further out in the concentric ring theory until we’re outside of Travis County proper, we’re outside of Williamson County. Although you can still get some deals in farfetched Travis, farfetched Williamson, but you need to go into two or three counties away to get deals that make sense for monthly cash flow.

Now, the flip side of that is that the appreciation often is pretty substantial compared to a lot of other places in the country. So some of the strategies the investors’ using this area is they’re okay breaking even every month or not making any money or even being upside every month because the appreciation rates are so high. I don’t necessarily agree with that, but that’s what a lot of folks are doing. The other thing we’re doing a lot down here, and we have been for years, but we’re really, really trying to acquire properties through non-qualified loan assumption strategies, and then doing mortgage drafts on them so that we’re carrying notes and not rentals. Does that make sense?

Theo Hicks: Yeah. Do you mind expanding on that? So you said, instead of buying the property, you’re buying the notes on those properties?

Danny Webber: Typically what we’re doing – I’ll give you generic numbers here – if we find a distressed home seller or even a non-distressed home seller, and they’ve got a $100,000 property, which is nonexistent in Austin, but we’ll just use that for simple math, and you do the research on the tax database and you find out that their payoff is approximately $87,000. So they’ve got $13,000 equity minus closing costs, commissions and everything. You would go to that person and say, “Hey, I want to take over your note, non-qualified loan assumption for five years. I’m going to give you $10,000 at closing and I’ll have the note paid off or refinanced in five years.” So what that allows you to do is it allows, number one, a quick closing, assuming title work and the property checks out. It allows a quick closing, no banks are involved, no approvals are involved, and you can put that property in whatever entity you want it to be in, so you can avoid the debt to income ratio hit on your normal credit. You’ve still gotta do the tax thing at the end of the year; there’s no tax implications, but you can at least avoid the debt to income ratio hit on your credit. So from there, say I have acquired a property in Company A, non-qualified loan assumption; I could then put it on the MLS the following week and sell it to Buyer B at $110,000, $115,000 because people are going to pay a premium for owner financed properties. I’m going to hold the note to the end buyer and I may have an underlying lien from the person I bought it from at for 4%, 4.5%. I’m telling it to the end buyer at 7%, 8%, 9%, 10%, 12%, whatever the negotiated interest rate’s going to be, and I’m pocketing the interest rate spread from the underlying lien to the rep note to Buyer B every month, and I’m avoiding the maintenance, late rent and all this other crazy stuff that I have to deal with. And if the person never stops paying, then I just foreclose on the property versus evict him.

Theo Hicks: Let me just say this back to make sure I’m grasping this properly. So you find out someone who owns a home and when you say they’re stressed, that means they’re delinquent on their taxes, they’re delinquent on their mortgage payments…

Danny Webber: It could be any and all the above. It could be notes, taxes, they got HOA liens, or the other thing we’re going to do a lot down here is people just want to sell the property quick. They don’t want people in their house checking it out, kicking the tires, nickel and dime; they don’t want negotiations. So they’ll just say, “If you bought my house today, how much would you give me and can I live with that?”

Theo Hicks: Okay. So you need to determine how much debt they have in the property. So in your example, you said a $100,000 house with $87,000 debt, and so you’ll go to them and you’ll say you’ll take over their note, you’ll give them some down payment, and then you’ll pay that note off in five years. So I guess one thing I have a question on is, are you just paying them, and then they’re paying their mortgage? Or are you actually paying the bank directly?

Danny Webber: No, I make it sound simple, but there’s a few moving parts. So when we sign the agreement and we’re at closing, we get obviously some really tight POAs and borrow authorizations to communicate with their bank. We typically want the login for their bank system, and then we change the address for all correspondences with the underlying lien and bank; and then from there, typically, what we’re doing in my operation is we’ll just set up the payments going out auto-draft every month so we don’t have to worry about them. But if we can’t set up auto-draft, then we’re just gonna hit a local branch every month. We’ve got a few that we do that with. We don’t like [unintelligible [00:10:46].04] reality. And we make the payments directly every month, and then the person that we sell it to, they pay us. So the selling point for the underlying lien holder borrower is that we’re going to help your credit. We’re going to have 100% on-time payments for the next 16 months.

Theo Hicks: Perfect. So you have some agreement with them paying you something on top of the mortgage payments? So the mortgages plus 4.5%, you said?

Danny Webber: Yeah, it’s gonna be a negotiated rate. Back in the day when QM came out, Dodd Frank and all that other stuff, there was a max overage for lending rate; I think was 3.5 APOR, which is the average rate of the day, and so you were locked into that. And then as Dodd Frank lost his teeth in the QM standards, they didn’t go away, but they’re just not enforced right now at all. So the last three to five years – not a specific time, but there’s a lot of national lenders that have non QM products, non Dodd Frank compliant products, and so everybody just went in that direction now, where if you ask somebody about Dodd Frank, QM compliant, it’s really not an issue, whereas before when it first came out, the world was ending, the sky was falling, and you couldn’t do owner-financed deals, you couldn’t do adjustable rate mortgages, you couldn’t do this over five years… So there was a lot of issues, people were scared, but that’s gone away now. I’m actually a mortgage broker in our [unintelligible [00:12:04].00], so I do a lot of the compliance side. If I get an industry that says, “Hey Danny, I know I don’t need to do this, but I want to make sure that this is as close to QM, Dodd Frank compliant as I can get,” and what we focus a lot on is focusing on the end buyers’ ability to repay the loan and making sure that if at some point you’re saying, “Hey, we didn’t take advantage of this,” but it wasn’t like the old days in California where they had the option arms and you could put out $300,000 yearly salary working at Walmart. So we actually dig deep, we verify income, verify assets, pull credit and look at atleast one or two years tax returns, and that gets the ball as close to Dodd Frank QM compliant as you can get, even if you are charging over the 3.5 APOR on an interest rate. I’ve got some investors I know that have done 12% interest with an underlying lien of 4%. So they’re pocketing 3%, 4%, 5%, up to 8% in interest per month in a note, versus $150 to $300 per month in rental income, minus vacancies, minus maintenance. So it’s a much stronger strategy to use. It’s a lot more hands-off, and to date – I’ve been doing this for about a decade – to date, I’ve had to take back probably three properties, and all three of them have gone the route of cash for keys. So here’s a couple thousand dollars, here’s a deed to sign the property back over to me.

I think the biggest part of the strategy that’s the most exciting for investors is you don’t stay out of pocket. On that same scenario, the $100,000 current value,  $87,000, let’s say that I give the underlying — so the $10,000 and then I’ve got another $3,500 in closing costs. So I’m out of pocket $13,000, let’s just say $14,000 for easy math. Typically, when I’m reselling that property on the MLS or [unintelligible [00:13:52].20] there’s a bunch of agents that do nothing but owner finance deals and so they’ve got buyers lined up… I will get back about 80% to 90%, sometimes 100%+ of my cash out of pocket on the deal.

So if I’m doing a $20,000 down payment – follow me on this – to the Buyer B, I’ve got to pay a commission out of that. So I’m a few thousand dollars out on a commission. I’m a broker, so I don’t have to pay sellers; they get commissions. But long story short – it’s about you pay a commission, I get all the money back that I put into the deal, meaning the first $14,000, I paid a $3,000 commission, and then I’ve got $1,500 in closing and I’m up to $18,000, $19,000 at the second closing. Well theoretically, I’m completely whole out of any dollars out of pocket, plus I’m a $1,000 above. I’ve made $1,000 plus, and I’m getting monthly cash flow in the form of a note versus rental income. So that happens less than 50% of the time, but it still happens where you’re made completely whole at the end of the transaction, the second sale, and the other time that it’s not [unintelligible [00:14:48].00] you’re out of pocket $3,000, $5,000, $7,000, $10,000, but the benefit is if I bought this property traditionally, I’d be out of pocket 25 grand upfront, just for the 25% down, plus closing costs.

Theo Hicks: I was gonna ask you, how do I find these types of properties to buy the notes off of?

Danny Webber: It’s the same process that you use to find properties in distress – delinquency lists, foreclosure lists, tax delinquent lists, and also what I consider a pretty advanced investor market compared to other areas that I have talked to folks in, is they’re still doing the door knocking and they’re still sending mass letters to areas, and one of the tricks is just to get on the MLS, and then there’s statistics out there that say people sell their homes an average of five to seven years after buying them, in most instances; some large number over, 50%. So if you just do a search on the MLS, the very neighborhood specific properties and areas that you want to be in, that property and just not the blanket, the whole city. Pick out a few areas, few neighborhoods, few zip codes, and just focus on those and just be the king of that area. So that’s what I’ve done.

I’ve got a few neighborhoods around where I live, really within walking distance of where I live, that I focus on, because it’s easy to reproduce success if it’s close. So you can just send out mailers, you can go bang on the door. As a traditional real estate agent, one of the big things I see in the industry is most people are just lazy. So if I walk to my neighborhood and just bang on every door on my street, just my street alone and said, “Hey, I’m Danny Webber. I’m a broker, I live down the street. I want to be the guy you call if you sell your house or you’re looking to buy another one. And oh, by the way, do you know what your house is worth?” 90% of people are never going to turn down an offer just to get a house value, because they’re gonna go to bed at night feeling better. “Oh, I guess that I’ve got $20,000 in equity or $30,000 in equity.”

Long story short is you’re just starting conversations, you’re building relationships. But at that point, once they say, “Wow, I would sell if I had $50,000 in equity,” and then you’re like, “Okay, let me run the numbers and see if you can walk away,” and long story short is you can’t walk away with $50,000 if we go traditional sales, because you’re paying 6% commissions, you’re paying closing costs, you’re paying that which is going to decrease– you’re gonna be 12%, 14%, 15% out of pocket at closing. But if you go on to finance, do a non-qualified loan assumption, I can give you $45,000, which is a net to you of $7,000, $8,000, $9,000 that you wouldn’t have in a traditional sales cycle. Does that make sense?

Theo Hicks: 100%. So it sounds like they don’t actually have to be distressed, either.

Danny Webber: They don’t.

Theo Hicks: So even without them being distressed, you just have to figure out how much cash they want to walk away with, and then see if it makes more sense for them to do–

Danny Webber: If you can make the deal work, yeah.

Theo Hicks: Yeah, exactly. This is very interesting, because I like the whole note idea. It sounds very, very complicated, and I think it actually is, but it sounds like once you do it a few times and you understand the process, you definitely talked about why it’s a lot more beneficial than going the traditional rental route.

Danny Webber: Yeah… And two things on that. So once you get used to doing these – number one, there’s additional disclosures, there’s additional paperwork. You have to go to a very specific title company that’s used to do these transactions, because most of your corporate title companies, if you brought them, they’ll say, “Hey dude, you’re crazy; you can’t do that,” and the reality is you can. You violate the due on sale clause, but there’s some disclosures that you sign from the seller that says, “Hey, we’re violating your due on sale clause because the property is changing hands,” and it’s really a who cares type thing, because at this point, it could change in the future. But at this point, banks are not calling notes due that are performing. They’ve got a performing Wells Fargo note that they’re paying on time every month at 4%. You’re not going to spend the $10,000, $12,000, $15,000 to foreclose on that property because you’re getting your money every month and there’s no delinquencies. So should that ever occur, there’s a couple of workarounds, because at that point there’s a defect on title, and the defect on title can be cured just by transferring the property back into the original seller’s names and Wells Fargo to approve, and then they go away, and then you can put it right back into your name. Again, I’m getting a little bit deep into this, but there’s a whole strategy and process behind it. It’s simple once you do it a few times and you see it laid out, but to wrap your head around it, the first time, you’re gonna have a million questions on how this actually works.

I’ve been doing it for a long time. I’ve got attorneys down here that do the transactions and they manage the transactions, they have their title companies, and it’s all pretty flawless. Mistakes are still made, but as long as you’ve got a good relationship with the seller, anything you need to get defined later or get done later, you’re not gonna have a problem.

Theo Hicks: Yeah. Okay Danny, what is your best real estate investing advice ever?

Danny Webber: Best advice is to not think you are Superman because you went through a two-day or one-week course. One of the biggest problems I’ve seen – and it’s been that way for a long time – is somebody getting some business cards made that say, “I’m an investor”, they take a weekend course, they could take a one-week course that costs them $50,000, and then they fail. Being a real estate investors – it’s not equivalent to putting a band-aid on your kid’s finger because he’s got a cut and you’re a doctor. That’s not the way it works; it’s in-depth. So I think people fail to do proper planning, proper homework and proper preparation before they become an investor. They think it’s easy and it’s really not. Statistically, I think 60% or 70% of investors lose money the first year or two because they just don’t know what they’re doing and they just don’t have the right team of people around them.

I absolutely believe in mentorship. I think it’s the best money you can spend, I believe in finding a local mentor that’s in your market, that is doing the same strategies that you want to do, meaning if you’ve got a real estate investor that doesn’t do a lot of non-qualified loan assumptions, mortgage wraps, but they do a lot of flips and you want to do flips, well stick with the guy. But if you’re a long term investor and you want more cash flow, more notes, payments coming in, and you’ve got a ten year game versus a one year “I need cash” game, then you need to find that specific mentor and pay him. Mentors do not come free. If you want him to pay attention to what you got going on, then you’re going to have to pay him something whether it’s $100 bucks or $10,000, who knows? But you need a paid mentor that’ll answer your phone and answer your questions when you have them.

Theo Hicks: Okay, are you ready for the Best Ever lightning round?

Danny Webber: Let’s go.

Break [00:20:41]:04] to [00:21:53]:03]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Danny Webber: I don’t have a best ever book, because I get a little bit of greatness from all the books that I have. I’d say a topic that I’ve been reading a lot about lately around last year is minimalism and how to filter out all the non-productive, the non-value added tasks and things from your day so that you can work less, but be a lot more effective and efficient while you’re working. So that’s a big body of knowledge that I’m really into right now and it’s already paid off, in my opinion.

Theo Hicks: What is the best ever deal you’ve done?

Danny Webber: Well, in dollars, it’s probably going to a flip. I made a couple of times $100,000+ on flips, but what I think is a cool transaction, I did three wholesale assignments in one day at one time, and I made $20,000 per assignment. So this was back in the day when in Texas you could do an A to B, B to C, but the C buyer was paying off to A’s lien, a double closing. The title company just got away from those in Texas, but I made $60,000 sitting at a table with the title company, same title company, in probably about an hour and a half. That’s as long as it took me to buy three properties and sell three properties at the same table. I made 60 grand, without thought. It’s just a neat thing.

Theo Hicks:  And then lastly, what is the best ever place to reach you?

Danny Webber: Probably my email. The danny.webber@gmail.com is probably going to be the most efficient place, because I’m on that every day. danny.weber@gmail.com.

Theo Hicks: Perfect. Well, thanks for sharing your email address and also sharing your in-depth explanation of how to do note buying. I’m not gonna try to explain it again. I’m probably gonna have to listen to it again, just to make sure I fully understand it, because it’s one strategy that I personally haven’t talked to people about a lot. So I think this is gonna be a very valuable episode for Best Ever listeners, especially as you mentioned during these strange times. So Danny, I really appreciate you coming on the show and speaking with us today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Danny Webber: Yes, sir. Thank you.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF1963: Everything You Need To Know About Short Sales with Nicole Espinosa

Nicole and her company process over 150 short sales per month. They have taken the short sale process and streamlined it, closing short sales in 2-3 months vs 12+ months. Hear how she’s able to close them faster than most other sources. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“Scaling is not necessarily a good thing if you’re not doing it the right way” – Nicole Espinosa


Nicole Espinosa Real Estate Background:

  • Author of “Short Sales Uncensored” and owner of The Short Sale Queen
  • Her company processes over 150 short sales per month
  • They are able to process short sales in any market
  • Based in Dallas, TX
  • Say hi to her at www.thessqueen.com
  • Best Ever Book: Scaling Up


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


Joe Fairless:  Best Ever listeners, how are you doing?  Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the  world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.   With us today, Nicole Espinosa.  How are you doing, Nicole?

Nicole Espinosa:  I’m good. Thanks for having me. How are you?

Joe Fairless:  Oh, I am glad to hear that.  It’s my pleasure and I’m doing well.  And a little bit about Nicole – she is the author of Short Sales Uncensored and the owner of the Short Sale Queen. Her website is thessqueen.com. Her company processes short sales in any market, and in fact, her company processes over 150 short sales per month. She is headquartered in Dallas, Texas.  With that being said, Nicole, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Nicole Espinosa:  Yeah, absolutely.  I started in the real estate industry with foreclosures with REOs (real estate owned transactions) and I really learned about how the banks worked and operated.  I hated working for the bank directly as my client, but learned so much about really how to get around things, how they worked, and had relationships. This is back in 2008-2009 when the market was heavily saturated with foreclosures.

At the time we were evicting people… I was in charge of pretty much all of the worst things we had at the time.  It was definitely a learning curve, but after a couple of years I got licensed, and the first deal that I did as an agent was a  short sale. And there was so many misconceptions of what to do, and those agents – and even my broker at that time – was telling me “Don’t waste your time.”

When it comes to short sale specifically, because it is such a different world than normal transactions, most people don’t understand how to facilitate the transaction or really understand how it works.  So I spent pretty much my entire career just educating so that people would feel equipped to at least know how to guide their client or guide a potential seller in that transaction. So I did my first listing, that was a short sale, and I’ve been doing it ever since. Just a lot better now that I spent some time.

Joe Fairless:  Well yeah, you do a lot of them so that would make sense – 150 per month. And in your bio you mentioned that your company processes over 150 short sales per month. What does that mean, you process 150 short sales a month?

Nicole Espinosa: It means we have a constant flow of properties closing and properties coming in, but in our inventory we are working actively with the bank on these listings to get approval.  So right now for example, we have 151 listings. And when we launched nationwide – we are in about nine to ten different markets right now, it will be ten this month…  So even though we have the ability to process in every market, and obviously we are not in every single market, definitely when we went nationwide, I don’t think we expected to grow this quickly. Just a year and a half ago, we were doing 30 to 40 a month. So to go from that many sellers, to scale that much has just been definitely an adventure.

Joe Fairless:  Oh, I bet.

Nicole Espinosa:  Because every state is different, and every bank has different requirements.  For me it’s just been on how to navigate the different states and different markets that we are in.  But that’s essentially what that means, that we are processing over 150 – it’s that we have that many listings in our pipeline, that we are working with investors and other realtors.

Joe Fairless:  How much do you make on average per deal?

Nicole Espinosa:  Our minimum is $5,000 on each deal. And I think when I was doing the numbers for 2019 in the  last couple of weeks, the average commission with fees and everything is about $7,500.

Joe Fairless:  Wow, okay.  So, $5,000 times 150, that’s $750,000 a month. And at $7,500, that’s $13,500,000 in a year. How much of that is profit?

Nicole Espinosa:  We don’t close 150 a month. We are processing that many [unintelligible [00:05:21].03] how we have in inventory, but we are two to three months out on the short sales.  The average short sale closes in about a year, for most agents.  For us, our time frame is two to three months, because we are highly focused on this.  We are not like traditional agents, where we are working with the buyer, and working with the seller – no, this is all we are doing. I have a staff of eight people. I have negotiators, I have an office manager, I have VAs who are calling the banks just to say “Hey, did you get our email?”

Joe Fairless:  [Laughs]

Nicole Espinosa: Seriously, that’s our operation. We try to do as much as we can to be proactive instead of reactive, so that way we can stay ahead of it, and we try to anticipate what the bank is gonna  need before they ask.  So that’s why our process is so much faster.  Average closings, we have about 30 a month.

Joe Fairless:  Wow.

Nicole Espinosa:  So that’s the average closing that we are doing. Last month was our biggest month, we had 32. And now that we are consistently getting more inventory, now our new goal is 45 a month.  So as much inventory as we have, we are trying to increase our closings.

Now, unlike other contracts – like if you are wholesaling or just in a traditional contract with a seller, you usually can anticipate the closing date, because you put a closing date of 30 days, or 45 days. With short sales, there is no way of knowing.

One short sale we could start at the same with another, and then one could close in two months, the other could closing is four… Because there are so many variables, and every lender is different, and every lender has a different process. So that’s why we do such huge volume at a time, because like I said, it could be one month we close 50, because we have more at the same time… So that’s what how we have to do with such a high volume, because we don’t know when they are going to close.

Joe Fairless:  It’s going to be really interesting talking to you about the different states, and the banks, and then how you scale… We are going to get into that. With the closings now – you said you do about 30, and that’s $7,500 per closing on average; 225k times 12, that’s a 2.7 million dollar business. How long have you been doing this, remind me?

Nicole Espinosa:  I’ve been doing this for nine years. It’s going to be ten next month.

Joe Fairless: At what point was it a million dollar business? How many years into it?

Nicole Espinosa:  I’m going to be very honest, because I am very straightforward – last year.

Joe Fairless:  Last year? Wow… What was the tipping point?

Nicole Espinosa:  Here’s the deal, I’ve learned so much these last couple of years of how to really focus on becoming profitable… Because I think everybody’s vision — as an entrepreneur, I think people are so focused on growing. We do really well and we are “Let’s scale”, but scaling is not necessarily a good thing. Sometimes growing just means that you are spending more money if you are not doing it the right way. So for me, I am a visionary. I see the bigger picture.  I want to take over the world. I’m like, “Let’s do this in every market” or whatever, because I know our value and I know that we are good at it. But I have failed so much when it comes to spending too much money, investing everything back in the business, spending money on the wrong hires…  So we are having rehire, and all that.

The tipping point was I started my business all over in October of 2018, and basically fired everyone and took everything back, because I realized that I had this cap to my business because of the employees that I had. They could only grow to a certain level, and they were great at the time, and I had a great culture, but they just didn’t have the capability to grow with me. So I had to take a step back.

Joe Fairless:  What made you realize that?

Nicole Espinosa:  I wanted to quit, and I was so frustrated because I was in every part of my business, and I couldn’t understand why I couldn’t grow. I couldn’t understand why I was so stressed out, working 80 hours a week, when I had so many employees.

Joe Fairless:  How many did you have?

Nicole Espinosa:  At that time I had four.

Joe Fairless:  Okay.

Nicole Espinosa:  And I was like, okay if we are doing 30 to 40 a month that we are processing – and processing, not closing; we are closing only like ten or eleven a month…  And I was like, why am I so stressed out if I have people? And know it because I wasn’t hiring intentionally and I was promoting people based off of loyalty and based off of just the culture that we had.  And I read Scaling Up, and I started really investing in personal growth. I am like okay, “What are my weaknesses, what are my strengths?” and started reading books that were totally opposite of my personality. And when I read Scaling Up, it said something like “One thing. It only takes that one thing.”

Joe Fairless:  Yeah, it does.

Nicole Espinosa:  It’s like this light bulb of like, “Okay, wow. That totally resonated with me.” And maybe people have told me this before, but it was just in a different way that it didn’t connect with me. So I read Scaling Up and it said this powerful statement, “If you look at your organization and you look at your employees, would you rehire them?” And I started picking apart and I was like “Oh my God, I wouldn’t.” I love these people, but oh my gosh, I am having to micromanage, and I am not even empowering them because I am so worried that they are going to screw up, or whatever… I had these bodies in these roles, but they weren’t taking ownership of them, and it was basically me doing everything.

Joe Fairless:  What a powerful question.

Nicole Espinosa:  Yeah. I tell people all the time, “Look it is so hard because we as individuals, we tend to gravitate towards people that are like us.”  And if we hire that way, we will never grow, because we need people that are the opposite of us. We need people that are going to be better in certain areas where our weaknesses are. And the only time we can do that is to very self-aware of what we are good at and what we suck at. And most people just focus on what they are really good at.  It was very, very humbling.  Being in the business for a while and…

Joe Fairless:  You fired all four?

Nicole Espinosa:  Oh I fired everyone, including my VAs, too.

Joe Fairless:  What was that like?

Nicole Espinosa:  Oh man, high blood pressure… I was so stressed out. [laughs]

Joe Fairless:  What’s a suggestion you’d give to someone who needs to go through similar process?

Nicole Espinosa:  To just do it, because it will be more painful to continue to go the path that you are going if you have the wrong people.  And you know what – what I noticed, when you say you fire someone, you assume that’s ugly, right?

Joe Fairless:  It’s always a good thing, because they are not maximizing their potential as a human being or as a professional, because they are not in the role that’s best suited for them. So it’s a good thing.

Nicole Espinosa:  Exactly.  And they were so relieved and happy too, because they were only staying because they felt loyal to me. So they were miserable too, they just didn’t want to admit it, and they weren’t going to quit. So when I did let them go, it was just like this relief of like, “Oh my gosh, okay… I can do what makes me happy”, and had I identified the right role for them, maybe they would have stayed in the organization and thrived based on their skillset, not based on what I needed at the time.

So my advice would be just to do it. To take an inventory of the people in your organization and figure out are they truly in the right role? They may have the desire to do it, but do they have the capacity? And I don’t think enough people talk about that. It is not until you are in it that you fully understand how important it is that someone is capable of being able to grow with you.

And I do believe that there are certain people that will just be with you for a season, but I also believe that there are people that can stay with your organization and buy into your vision as long as you continue to provide opportunities and growth. There is no reason why they can’t grow with you.

Joe Fairless:  So that’s half the battle, identifying that and then firing them, but the other thing you nailed, clearly, by taking that from 1 million to 2.7, is finding those right people, and making sure you qualify them properly… So how did you do that?

Nicole Espinosa:  Well, I started with the foundation.  Okay, I know my skill set, I know that I can build relationships… I think the important thing was that I knew every aspect of the job. In any given moment, if every single person in my organization quit, I could dive right in and do any part of the job.  And I was like, “Okay, if I am gonna be able to go out there and build relationships and grow the business and bring in the business, then I need someone that’s gonna to hold down the fort.” I needed somebody that was going to be like me, but  better, and be able to manage, because that was the other thing that I was terrible at, was managing. I am a great leader, but I am a horrible manager, because I have no patience. That’s why I can’t do it. Like, I don’t care just do it; just get it done.  I am a great boss and I am very flexible in things like that, but the job has to get done. It’s very black and white for me. We can have the best relationship if you do your job. Besides that, if you don’t, none of us eat. For the bigger purpose, it doesn’t work for anyone. So I realized I need somebody that is a good manager.

So it was actually Facebook – on your Facebook Page you can create a job. So I put it out there as far as like an Office Manager, and I knew that I was looking for a unicorn, because not many people understand short sales, have never done them… So, anyways, fast forward, Stephanie who’s my office manager now, she was doing them for an investment company. And she applied.

It was one of those things where I kind of didn’t believe her… I was asking her certain questions, because I am like “Okay, if you’re BS-ing me, I am going to know.” And she was just amazing. What got me was that in my book — she was like “Yeah, I read your book.” She’s like, “I probably would have added this, this and this”.

1: [laughs] That’s good!

2: I feel in love with her. I was like, “Oh, my God.” So that to me — I mean, it was just such a great fit, because where she was at she wasn’t happy, and there was no room for growth… They kind of just took advantage of her. So we had the same vision as far as where we wanted to grow, same work ethic… And she has helped me so much streamline, where again, I don’t think systems — I do now, because I have thrown myself into it… But I was the type of person that — I am a very visual person, so I had my notebook, I would get leads, and I would write everything down to retain information. And then it got to the point where I was like, “Okay, I can’t do this anymore. I am getting a [unintelligible [00:15:20].00].” Facebook, and Instagram, and this and that… We needed one central place to be able to do it so there’s no balls that are being dropped.  So we basically created the system that we have now. We use Infusionsoft, which is an awesome CRM database or whatever… But the biggest thing with that is that we were able to create a website.

If you go to helpmewithmyshortsale.com, you can literally enter all the lead details and then it goes right into Infusionsoft. So it creates a profile and it tags you as the ambassador [unintelligible [00:15:50] and it triggers a text to the seller saying, “Hey, Joe referred you over to us. When is the best time to connect?” And that way there’s instant contact, and we are not having to enter into it. It takes a lot of the steps out and streamlines it.

So that’s how we are able to scale – I basically looked at my organization as we started growing, and saying “Okay, what are the things that we are doing two to three times a day that we can put a system in place so that way it can go a lot smoother and we are able to scale it?”  We spent almost an entire year just working out the kinks, because working with 30 homeowners a month compared to 150 is a completely different ball game. They’re so many humans…

Joe Fairless: Yeah, it forces you to scale, and you have to.

Nicole Espinosa: Absolutely.

Joe Fairless: Or it forces you to develop a system in place, in order to scale.

Nicole Espinosa: Yeah, and I would rather take less business than not do what but we say we are going to do. So it was very important to me that because my business is 100% referral, we are not marketing for these sellers, we are not cold-calling, we are not doing any of that. So if we are doing such a high volume, my reputation needs to stay intact, and saying “Hey look, if you refer this over to us, you’re trusting that we are going to take care of it.” And we are going to take care of this person and that most importantly will give you an opportunity to be able to buy these properties and have this whole other pipeline, so your marketing dollars aren’t going to waste.

Joe Fairless:  Closing on around 30 a month now; your goal is in the short-term to be up to about 40 to 45, I believe you told me… The perception that I have – which is clearly not correct, so please educate me and perhaps other who are listening – is that short sales are not nearly as prevalent as they were when you started; that has to be a fact. But there’s still clearly a lot of them out there.  So what it’s like being in the business now, and how are you getting this type of volume?

Nicole Espinosa: So I do believe that I have a lot of the market share because I specialize in this and because we are consistent. We’ve been doing this for so long, and most people they just do one day, and they do another…  And they know – when they hear Nicole, they think either “The Short Sale Queen” or “The Short Sale Expert” or whatever.  And that’s why when we went national, that’s why the company name is The Short Sale Queen, because that was my nickname in Dallas-Fort Worth for a really long time.

So as far as the difference, at the time when I was doing short sales and I was teaching classes and things like that before I wrote my book, everybody wanted to do short sales. Because once the REO market kind of dried up, short sales becoming more known and more prevalent. And then of course as the market starts stabilizing and getting better, everybody that was trying to dabble into it and realized how much work it was, kind of fell off.

But here’s the deal – there’s always going to be short sales in any type of market, because even in 2014-2015 when we started seeing the prices going up again and we started seeing all that, we were still busy, because people are always going to have a financial hardship. People are always going to put themselves in situations that they can’t get out of. So it was just different, because short sales were so big before because prices dropped drastically, because the market crashed.  Now, as you shift to 2019-2020, it’s not so much about the prices going down, even locally, it’s turning into a buyer’s market which means sellers lose leverage – it’s not about that, it’s about clients who lost their jobs and get into a bad financial spot and then stop paying, because they are trying to do something with their  bank. So if they are doing loan modifications, they are losing all of their equity. So at any point, if they have to sell, they are forced to do a short sale because they lost all their equity to the bank, because they haven’t been paying. Or they did do a loan mod, and it was a band-aid fix, and now they agreed — because when the banks do loan modifications, they add all of those fees to the back of the loan, and a lot of times they are extending the life of the loan. So they are paying into something where they are not ever going to get out of. So that’s why people don’t understand – if you don’t understand that piece of it, you won’t understand why they’ll always be here.

Now, I believe in the next year that we are going to see so many more short sales coming back, because we are seeing a lot of these loans that were done the last couple of years because people were desperate to become homeowners, get into 100% loans again. We are seeing a lot of like new builds that people were just getting into and not really thinking about it, and they were at their max of the monthly payment, and now it’s been a couple of years and something happened to where they can’t afford it anymore. We are starting to see a lot of those come up now, and I think in the next years, we are going to see a lot more.

Joe Fairless:  When you take a look at the short sale process, what is the most challenging part of the process for you and your team?

Nicole Espinosa:  The price.  And that will always be across the board, not just with our company but just in general.  Number one reason why most short sales fail is because of price… Because the banks, even more now that it’s been years and years where they have been doing short sales and they have short sale departments, they try to pretend like they are in real estate. They try to act like they know based off third-party valuation, like “Okay, this is the price.” Well, we know that price is relative, or it’s an opinion, because it really depends on what someone is willing to pay.  So that’s why it is so difficult, because if the bank is trying to take as less of a loss that they can – they want to get as much as they can for the property.  That’s probably the number one thing – how do we consistently adjust the process so we can stay ahead of being proactive. For example with us – if an investor refers something  over to us, we let them know, “Do you have any repair bids, do you have anything that we can help us justify your offer?” Because if the property is in need of repairs and it’s something to where it won’t finance, it’s going to go to investor, because a traditional buyer cannot purchase it… So why not go to the investor that has relationship with the seller?

So we ask them, “Hey look, what do you have so that we can use as much as leverage as possible to negotiate with the banks?” and then get it to the appraiser so that we can show all that information and try to stay ahead of it. And then a lot of times that works, and then sometimes we get like the older appraisers that are stubborn and think they know everything, and don’t care, and we still have to dispute it with the bank… But we try to be as proactive as possible and get as much information upfront so that we can show that to the lender to have that as much leverage as possible.

Joe Fairless:  Taking a giant step back, what is your best real estate investing advice ever as it relates to your area of expertise?

Nicole Espinosa:  The best advice I can give is to capitalize on every single lead that you come across. I’ve been working with investors obviously for a very long time now, because 75% of my business is from real estate investors; the other 25% are from real estate agents who don’t know how to do short sales. So in working with a lot of the bigger companies and the bigger franchises or even smaller companies, a lot of times in training their acquisition teams and talking to them, they don’t understand that they need to be able to capitalize on everything. And I’m not saying to do everything, right? We can’t spread ourselves thin, we have to be able to be good at something, and highly focus on it… But if you don’t have a solution for everything that you come across, you are wasting money; you are leaving money on the table.

For example, a lot of times investors are just highly focused on properties with high equity. And they spend the money, they get a lead, they build rapport and then the deal doesn’t work, and then they walk away… Instead of trying to find a solution. Because at the end of the day, the sellers still has to sell.  It may not work for your numbers, but how can you provide a solution to where you can still monetize it?  And that’s the way you need to be; if I can’t do it myself, who can I outsource this to, to either still get paid, partner up with someone, but be able to recoup that? Because direct marketing is expensive.

You need to be able to provide solutions — and it’s not just about money, it’s about helping that person, because clearly, if they are coming to you, there’s a need to be able to sell. Something happened to them, they have to move on, especially if they are in foreclosure and they have some type of hardship. So how can you be that resource for them to be able to help them move on to the next phase of their life?

Joe Fairless:  We are going to do a lightning round. Are you ready for the Best Ever Lightning Round?

Nicole Espinosa:  Let’s do it.

Joe Fairless:  Alright, let’s do it.  First, a quick word from my Best Ever partners.

Break: [00:24:39].00] to [00:25:18].28]

Joe Fairless:  Alright, Best Ever book you’ve recently read?

Nicole Espinosa:  Rocket Fuel.

Joe Fairless:  Rocket Fuel?

Nicole Espinosa:  That’s right. I just got finished reading that one.

Joe Fairless:  Okay. And I wrote down one that you’ve mentioned earlier, Scaling Up – would you recommend that one?

Nicole Espinosa:  Oh, a hundred percent. I didn’t just read it, but I’ve read that at least twice.  And if anybody is building a business, an actual business – you need to read that book.

Joe Fairless:  Hey, that’s me. I am going to read that one, too. I will be buying that. And I think 99.9% of Best Ever listeners are building a business too, so there’s gonna be a lot of purchases with that one. What is the deal you’ve lost the most amount of money on?

Nicole Espinosa:  I spent a year and a half helping an ex-husband – it was such a long story, but I lost 15k on it because we spent so much time and money working it and we never ended up closing.

Joe Fairless:  It wasn’t a short sale?

Nicole Espinosa:  It was a short sale, yeah. And we don’t get paid until it closes.  And that was one of those situations where we did everything that we could, and I have such a big heart, I was like, “Okay, we can try this way…” And this is one of the situations where three people had passed away, so the heirs ended up being kids, which — you learn something every transaction. So you need [unintelligible [00:26:23].06] for those heirs, and there just wasn’t any more money to be able to pay for an attorney to do it, and all that.  But we got this short sale approved three times.  So we did what we were supposed to do, we just couldn’t sell because of the title, because everybody kept passing away.

Joe Fairless:  What’s the deal you’ve made the most amount of money on?

Nicole Espinosa:   The most money I made on one transaction was $55,000, and we ended up buying it. I found the deal – this was early on, and I ended up purchasing it ourselves and then flipping it… But there wasn’t much work that need to be done, and the loan was in default for so long that the bank literally told us, “If you just gave us this, you can have it.” And it was just a slam dunk.  It was awesome.  It was a reverse mortgage, and we need more of those.

Joe Fairless:  Since you made a disproportionate amount of money on the reverse mortgage, and you said you need more of those, why not put 100% of your focus on getting of those deals, versus doing the short sales?

Nicole Espinosa:  Well, in that case – it was a very rare case.  Yes, absolutely we could hyper-focus on marketing to reverse mortgages, but… In this situation it was a bad note, and the bank could not foreclose on the homeowner. So the reason why we are able to get them so low – and it wasn’t even us fighting with them, it was us saying, “You’ve gotta do something” because the attorney could not foreclose it — I think it was almost ten years of being in default, where the homeowner had passed away and it was just sitting there.

So it was very rare, but we are focused on maximizing on every deal that we can.  And I told you, my minimum is 5k, but we do make a lot more on a lot of the deals. We just have a minimum that we have to still be able to be profitable and work hard on these deals for the client.

Joe Fairless:  What is the best ever way you like to give back to the community?

Nicole Espinosa: Honestly, educating. Being a resource for investors and agents.  I’ve said this my entire career, I will have people that will call me just to pick my brain, and to help them even if I am not involved. So I do the best that I can to make myself available to professionals, because the way I look at it, I feel like money will always come. And if I can help you to help someone else, then that’s the most important thing, if you want to take it on yourself.  If you don’t, then you are always going to have me to help you with it. So the best way I can give back is with my knowledge and to be able to help you, even if I am not directly getting paid from it, or whatever.

Joe Fairless:  How can the Best Even listeners learn about what you are doing?

Nicole Espinosa:  They can go on my website, thessqueen.com, and we are also on YouTube, The Short Sale Queen. We do videos every week.

Joe Fairless:  Nicole, thank you for being on the show talking about how you scaled tremendously over the last 24 months… And the key is just fire everyone. [Laughter] The key is to…

Nicole Espinosa: That’s gonna be the title, right? Or the caption… [laughs]

Joe Fairless: Yeah, just “Struggling in your business? Fire everyone and start from scratch.” But it’s assessing what your strengths are, it’s assessing “Would you rehire the people you currently have in place?” What a powerful, powerful question that is; that really can get an entrepreneur thinking… And then building the right team members to go along the journey with them.  And it’s knowing your business. If you didn’t know your business, then you wouldn’t know who to hire, how to hire them and what you need. It’s knowing yourself and your business.

Nicole Espinosa:  I think self-awareness as an entrepreneur, as the business owner is probably the most important thing if you want to be successful… Because if you can’t get out of your own way, you can’t grow. Because we always have these blind spots, and I feel like that is then the key for me to keep growing, is understanding “I really suck at this, so I am going to continue to outsource, I am going to continue to try to develop and grow, and put people in place that are better than me, so that instead of being prideful or instead of saying “Okay, I got this..” And I did, for a long time. I was like, “Oh, I got this. No worries.” And it was more of just trying to get it done, instead of taking a step back and saying “I don’t need to reinvent the wheel, I also don’t have to be great at everything.” I can focus on my strength and then outsource the rest.

Joe Fairless:  Thanks for being on the show. I hope you have a best every day, and we’ll talk to you soon.

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JF1770: High Performance Real Estate Investing with Non-Performing Notes with Paige Panzarello

Paige has started and ran multiple real estate investing businesses, and has been investing in real estate for over 20 years! Today Joe and Paige will have a discussion about her entire real estate story, from losing $20 million in cash to getting back in the real estate game and having more success than ever before with non-performing notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“They will focus on assets that are valued over $200,000” – Paige Panzarello


Paige Panzarello Real Estate Background: 

  • Real estate investor and entrepreneur for over 20 years
  • Founded and runs her own non-performing note company
  • Completed over $150 million in real estate transactions to date
  • Based in Simi Valley, CA
  • Say hi to her at https://www.cashflowchick.com/
  • Best Ever Book: Three Feet from Gold


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Paige Panzarello. How are you doing, Page?

Paige Panzarello: I’m great, Joe. Thanks so much for having me on.

Joe Fairless: That is great to hear, and my pleasure. A little bit about Paige – she is a real estate investor and entrepreneur; she’s been one for over 20 years. She founded and runs her own non-performing note company, and she’s also had a construction company. She has completed over 150 million dollars in real estate transactions to date. Based in Simi Valley, California. With that being said, Paige, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Paige Panzarello: Absolutely. Hi, Best Ever listeners. Great to be here. As Joe said, I’ve been in real estate and real estate investing for over 20 years. I started out by default, with some buy and hold properties; I owned a sewer treatment plant and some land. Prior to 2005, and that boom and then bust, I was in my growth spurt. I started out knowing nothing at all about real estate or real estate investing… And I just had to jump in with both feet, and ask a lot of questions, and surround myself with people that were in the know.

Then of course you have to be bold, too. I was very young at that point, so I was somewhat fearless. [laughs] Things have changed a little, Joe, but… [laughter] So I surrounded myself with a bunch of people and I grew really fast. We ended up having 36 employees. I owned my own construction company, and I started it knowing nothing about construction.

Joe Fairless: Wow.

Paige Panzarello: Yeah. We were building our own projects, we were building everybody else’s projects…

Joe Fairless: Where at?

Paige Panzarello: Mostly in Arizona. We had some in California, but mostly in Arizona.

Joe Fairless: Okay.

Paige Panzarello: And we were rocking and rolling. It was great. I held all of our licenses, except HVAC and roofing, and the only reason we didn’t have those is the insurance was too high… And it was prior to 2005, so we were just going crazy with building. Then the crash happened… And I actually saw it coming, Joe. A lot of us did. I foolishly thought it’s not going to happen to me though.

By the end of the day, I was very fortunate in that I did not have a lot of debt. I was only encumbered about 10%. I had a lot of assets that I could sell, and it was really a fire sale… And at the end of three years I was very fortunate that I was able to fire-sale everything and pay everybody that I owed; I didn’t have to go through a bankruptcy dismissal, or any of that stuff. But three years later I lost 20 million dollars.

Joe Fairless: Net worth or cash that was in your bank account?

Paige Panzarello: Just cash that was in my bank account.

Joe Fairless: So you had 20 million dollars cash in your bank account?

Paige Panzarello: Yup.

Joe Fairless: And then it went away.

Paige Panzarello: And it went away.

Joe Fairless: Okay.

Paige Panzarello: Between the cash and the properties that I owned and everything else… Yeah, liquid – it was cash. It went away. But I felt really good, because I was able to pay the people that I owed money to.

Joe Fairless: Absolutely.

Paige Panzarello: To me, integrity is everything. So it was terrible for me, and I don’t like to call that a failure, I like to call that a really difficult learning experience, but I was able to take care of the people that I owed money to, which made it all worth it to me.

Joe Fairless: Absolutely, yeah. And they clearly appreciate that, and you are high on their list of people who have integrity, I imagine, when you speak to them.

Paige Panzarello: Thank you. Yes. I do have investors to this day because of that… And clearly, I went away from real estate investing for a little while; I needed to regroup… [laughs]

Joe Fairless: What did you do?

Paige Panzarello: I was always very entrepreneurial, so I started small, little businesses, but I was never fully satisfied, and my husband said to me “Paige, what are you doing? We need to go back into real estate.”

Joe Fairless: What little small businesses?

Paige Panzarello: For instance, I’m a dentist daughter, so I started a teeth-whitening business, and I actually still own it; I have other people running it for me, but… It was a perfect fit for me, being a dentist daughter… [laughs] But it wasn’t where my passion is.

Joe Fairless: Okay.

Paige Panzarello: So I had to rebuild, Joe. I had nothing when I came back into real estate. Nothing, literally.

Joe Fairless: Well, you had a teeth-whitening business. Was that producing some good cashflow?

Paige Panzarello: It was, but not where I wanted to… And it still is, by the way, but not where I wanted to be in my real estate investing career.

Joe Fairless: Okay, got it.

Paige Panzarello: It was enough to pay the bills and have a little fun, but…

Joe Fairless: There are more zeroes with real estate.

Paige Panzarello: Exactly. So I came back in, and I did what everybody does – I stared out by wholesaling, and fixing and flipping, and I did some tax liens and tax deeds, and all the while I started studying notes. And for me, angels absolutely sang when I got into the note space… And I haven’t looked back. I love the non-performing notes space; I’m actually in a position where I get to help people and do real estate, and those are my two passions. I’m blessed every day that I get to do it.

Joe Fairless: Well, let’s focus our conversation on that, but you’ve mentioned something at the very beginning – clearly, I can’t let that just go by without me asking a follow-up question or two… You said at the beginning you owned a sewer treatment plant?

Paige Panzarello: Yes. [laughs]

Joe Fairless: Okay, so how did you become an owner of a sewer treatment plant?

Paige Panzarello: Okay, so as I said, I started my real estate investing career by default. My grandmother passed away, and she had a very large estate. There was properties that she owned in California and properties that she owned in Arizona. The Arizona properties, which is what I originally started out handling – there were 38 townhome units; we were about 40% occupied, so we were really, really in destitute times… And by the way, the estate was about four million in debt.

And we owned a sewer treatment plant, and we owned land. When I say “we”, my grandmother and the estate, which – long story short, it went to my mom, and then I bought the company from my mom.

But yeah, the sewer treatment plant was a piece of the giant estate that she owned, so I learned a lot about sewer treatment plants, more than I care to share. [laughter] But it was really an amazing experience, because again, I knew nothing, and within three years I was able to turn that four million around and put us back in the black, and we just started rocking and rolling. We did sell the sewer treatment plant to the district, which was great. That’s kind of helped leverage us out of this debt. And then the townhome units, I was able to turn that around, too. I worked with all of my vendors and paid them everything that was due to them… And again, there’s that integrity thing, Joe; I made promises and I kept them… And I’ve built amazing relationships because of it.

Joe Fairless: I’ve never spoken to anyone who owned a sewer treatment plant, so just educate me – how do you turn a non-performing sewer treatment plant around, to be performing?

Paige Panzarello: Like I said, it was a privately-held sewer treatment plant, obviously… And we were only hooked up to about 10% of its capability. The townhome units, like I talked about, were hooked up, and a couple other areas were hooked up, but we were only running at 10% capacity. The district in Arizona where we are – the district was in desperate need for a sewer treatment plant, because everybody was on septic. And we’re right along the Colorado river, so as a result, the Army Corps of Engineers comes in if the septics is running into the river etc. So the county/district was desperate for a sewer treatment plant… So we were able to sell it to them for a decent amount of money, and we also negotiated some irrigation water for a very long time for the properties, which was great.

Joe Fairless: Thank you for talking about that, because I hadn’t ever come across that before.

Paige Panzarello: It is unique.

Joe Fairless: Whenever I come across something I’ve never come across before after interviewing 1,600 real estate investors, I like to ask a couple follow-up questions, because I imagine a lot of people haven’t come across that either.

Alright, let’s talk about non-performing notes. 90% of the listeners know what non-performing notes are, and the general business model… But will  you just touch on it for the minority of us who might not know? And then we’ll get into the meat of it.

Paige Panzarello: Sure, absolutely. Non-performing notes – notes in and of themselves are a promise to pay. So when you buy a car, or you buy a house, you sign a promissory note that you’re gonna pay the bank back the money that they have lent to you in order to buy said asset, whether it’s the real estate, or a car, or whatever. And there’s different types of note investors – there’s performing note investors, which is exactly what it sounds like; the borrower is paying their monthly payments, so you’re getting monthly cashflow being  a note holder, because you’ve become the bank, and you don’t have the headache of tenants and toilets, which is part of what I love about note investing – we get that monthly cashflow and sometimes chunks of cash without the headache of tenants and toilets. Been there, done that, so for me it’s amazing.

Non-performing notes is just what it sounds like – the borrower has stopped paying on their monthly mortgage, so I step in and I will buy that note, meaning I buy the debt; and I’m in the first position, I don’t ever buy second, so I’m the first one tom get paid… I will buy that debt at a very deep discount, and I base my purchase price on the collateral that’s securing the loan. In other words, I do an analysis of the house that is securing my invested dollars. And when I do that, when I can buy it at a deep discount, I’m not building in an equity cushion, and it gives me a lot of flexibility to be able  to work with our borrowers to actually try and get them to stay in their home.

Joe Fairless: What is the discount that you like to buy it at?

Paige Panzarello: Well, like to, or can? [laughs]

Joe Fairless: Both, both. 100% discount, but maybe — what’s typical?

Paige Panzarello: Everybody deserves to make their money and a  little bit of profit, right? My strategy is always “pigs get fat and hogs get slaughtered”, so be fair and be equitable. The discounts that I used to be able to get – we used to be able to pick them up at anywhere between 40 and 55 cents on the dollar. Nowadays it’s more like 55 to 61-62 cents on the dollar. It’s still a pretty big discount, so if the market drops 20%, if you’re a fix and flipper, that’s gonna hurt you, if the market drops that much. If the market drops in note investing and we’ve built in a  45% equity cushion, a 20% drop is not gonna hurt us nearly as badly as some of the other forms of real estate investing.

Joe Fairless: Okay. And on average, how many notes are you buying at once?

Paige Panzarello: It really just depends. We buy small mini-pools. Sometimes we do one-offs, which means we just cherry-pick. Sometimes we buy larger pools. It’s just a matter of what the asset managers have available for us. There is competition in the note space, but I’ll tell you, it’s a very collaborative space and it’s not like scratch-your-eyes-out type of competition, where everybody is trying to climb over everybody else and outdo them. That’s not the case here in the note space.

Joe Fairless: Why?

Paige Panzarello: You know, I often ask myself that question. I think because there’s so much inventory, and life happens to people every single day. And this particular space – like I said, between the asset manager, the loss mitigation team, the servicers – is very collaborative. We all really do help each other, and other note investors. Sometimes there’s a pool buy, meaning we have to buy the whole pool, and us note investors, we’ll get together and say “I wanna carve out this for my portfolio”, and we collaboratively buy the pool, which is really cool.

Joe Fairless: How does that work? How do you structure that?

Paige Panzarello: Each situation is different. Of course, if I’m the one that has brought the tape – and the tape is just basically an Excel spreadsheet of all the assets available for sale; that’s what’s called a tape. So if I have received the tape and I go to the other investor, I will simply say to them “Listen, I wanna carve out all of the Texas notes, or half of the Texas notes. Then we’ll do a lottery on the other half.” Or I will know that they only deal with Ohio, so they want all of the Ohio notes, and we’ll take the Virginia notes. It really works itself out; there’s really not a lot of fighting that goes on, as long as we know what each other’s buy box is.

Joe Fairless: In that scenario, you bring the tape to a group of, say, 3-4 people who are also non-performing note buyers. Do you all ever create one entity that purchases all of them and then you split up ownership based on who puts in what in that entity?

Paige Panzarello: Some investors do do that. I am very fortunate in that the way that my business is structured, I work through a Delaware statutory trust, which most people know through 1031 exchanges, but that’s not the case here. So I work through a Delaware statutory trust, which operates very similarly to a series LLC. So I’m actually able to create series of my DST and give ownership to those 3-4 different investors, so I don’t have to create another entity to do that.

Joe Fairless: Okay. But it functions in the same way, so you all are in one entity together, but you split the profits based on who owns what. Is that correct?

Paige Panzarello: We can do that. It depends on the tape and the assets that we’re buying. Again, if we’re carving out notes where I’m taking all of Virginia or Texas, and they’re taking all of Ohio, we don’t necessarily do that. We just need to have an operating agreement that we’re both gonna put our money together, we go through a purchase and sale agreement, just like you would a house or an apartment building, and then we just divvy up, tell the seller who to make the assignments of mortgage or deed of trust, who to make what entity to make those out to. And that’s just a transfer of ownership document.

Joe Fairless: And the reason why I was asking – perhaps I should have led with this –  is I was wondering if there was an advantage for the person who has the tape, who had that relationship with the asset manager, and then brings it to the group. For example, if everyone invests the same amount of money into the entity that buys all of those notes, then the person who brought the tape would get 10% extra ownership interest because they brought it, and then everyone splits everything else proportionate to the amount of money they invest.

Paige Panzarello: Yeah, there’s so many different ways you can structure a deal, of course.

Joe Fairless: But you’ve never done it that way.

Paige Panzarello: [laughs] There’s so many ways. But again, I think because of the collaboration in this space, if we’re each taking our own separate assets, then there’s no need for me as the person who brought the tape to take an extra 10%. Again, pigs get fat and hogs get slaughtered. I’m just happy that we can collaborate together and buy the whole pool. I don’t need that extra 10%. It’s fine by me.

Joe Fairless: That’s interesting. So if there was a large tape, then the advantage for you to bring it to the group would be that you all would be able to close on it, whereas perhaps you wouldn’t be able to close on it as an individual. So there is the value that they’re bringing to the table. That’s where the collaborative part comes in.

Paige Panzarello: Absolutely.

Joe Fairless: I’m with you now. [unintelligible [00:17:43].12] What type of process do you go through once you have closed on it, and – congratulations, you have notes where no one’s paying on?

Paige Panzarello: [laughs] It sounds crazy, doesn’t it?

Joe Fairless: Nice job getting that one! What do you do next?

Paige Panzarello: [laughs] So we have teams in place… With note investing, I call it  very front-end loaded in terms of your due diligence. The beauty part about once you actually get to the closing table and you close on these – you now take the notes and you pass them off to your team members. I’ve got an amazing loss mitigation team, and they start with the borrower outreach. The beauty part about note investing is that we actually have 23 different exit strategies. And as you can imagine, after 2007 and what happened to me there, I’m very risk-averse. So when I’ve got 23 different exit strategies available to me to dispose of these assets and work with people, I’m in a pretty great place, and pretty happy.

Our loss mitigation team is our point of contact, and they start with borrower outreach. We typically only use four different exit strategies that are typical. We either have to foreclose – which is our least favorite, by the way; we could do a short sale, we could do a deed in lieu foreclosure, which just means that we accept the deed to the house as payment in full for the loan that we just bought, or we get to work with the borrower to get them reperforming… And that’s actually my favorite, because we are able to generate both chunks of money and streams of monthly cashflow, and help somebody to stay in their home.

We have a general idea, Joe, when we are reviewing and doing our due diligence prior to buying the asset what kind of exit strategy we would like to employ… But borrowers are people, so they sometimes tend to surprise us, too. [laughs]

Joe Fairless: Sure, I know. We’ve got some apartment units, and when you have a lot of families living under one roof in a centralized area, then there’s always gonna be something that surprises you.

Paige Panzarello: Oh yes, and everybody’s got a story, don’t they.

Joe Fairless:  Yes, they do. So if you’ve got 23 different exit strategies — by the way, are those written down somewhere on your website, or something?

Paige Panzarello: I don’t want to overwhelm people.

Joe Fairless: Yeah, we won’t go over it on this call, obviously… But is it listed somewhere?

Paige Panzarello: I do teach a workshop and we do go over some of the exit strategies. Again, I don’t wanna overwhelm people, because there’s a lot of information out there and it can be a bit daunting. But yes, if you come to the Building Wealth With Notes workshops, I do teach all that.

Joe Fairless: Okay. But there’s four that typically are your go-to. One is foreclosure – you don’t like that. Two is short sale, three is deed in lieu of foreclosure, so the owner is basically saying “Here, I’m gonna turn the house over to you, and then I’m not gonna get dinged on my credit, or foreclosed on.” And then the fourth is reperforming, so they start paying, whether it’s some workout scenario or not.

So three out of those four are you getting the property, or sales proceeds from the property, whereas the fourth is ongoing cashflow… But then with the ongoing cashflow, the disadvantage is it diminishes over time, because they’re paying down the mortgage. So I just have a hard time understanding – and clearly, it is possible, because there’s a lot of people who do this, yourself included – how you can make a good chunk of money doing this without massive, massive volume… Because there’s gotta be a cost for the loss mitigation team, plus you’re buying it at 40% discount or something, but after the time that’s spent to do this, and then after the foreclosure process, the short sale… How many deals do you need to do to make a million dollars in profit over the course of a year?

Paige Panzarello: That’s a great question. [laughs] It depends on how much capital you have to deploy at any given time. And it depends on the assets in your buy box, what you are looking at. If you only have limited capital and you’re only starting out by buying assets that are lower in value, then yeah, it’s gonna take you a little bit longer to get to the million dollar net profit. If you’ve got a little more capital and you can buy some of the higher-end assets, it’s not gonna take you as long.

There are note investors out there that have a lot of capital to deploy, and they will focus on assets that are valued over $200,000. So if you’re looking between 200k and 500k, if you’ve got capital to deploy that, it’s gonna take you a lot less time to get to that million dollar net profit.

Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Paige Panzarello: Best advice ever is don’t be afraid to fail, really. Successful people are successful because they have failed. If you learn from it, then you can get back up, and hopefully it’s not catastrophic… But so many people are paralyzed, because they’re fearful of failing… And they really need to change that mindset, and look at it like it’s a learning experience. All of us scrape our knees.

Compound that though with doing your due diligence. Due diligence in any form of real estate investing is paramount. It’s crucial. Because when you do good due diligence, you buy your assets well, and that’s when you make your money. You collect it when you exit, but if you do good due diligence and educate yourself about that form of real estate investing, then you really can mitigate your risk and do very well.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Paige Panzarello: I’m ready! Bring it on, Joe!

Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.

Break: [00:23:45].12] to [00:24:27].28]

Joe Fairless: Okay, best ever book you’ve recently read?

Paige Panzarello: A couple of them. “Seven habits of highly effective people”, Steven Covey. Love it. “Three feet from gold”, Sharon Lechter and my personal mentor, Greg Reid. Love them.

Joe Fairless: Oh, I love that. I think I’ve read the first one… I feel like I have. I’ve heard about it so much. But I love “Three feet from gold.” That truly is a must read. What’s the best ever deal you’ve done?

Paige Panzarello: The best ever deal I’ve done was taking one of our non-performing notes and I was able to help a single mom who she and her husband divorced, and they had a couple kids, and she lost her job… And I was able to help her and her two kids stay in their home, get her to reperform, and they did not have to move. It was the best ever. She wrote us a beautiful letter, thanking us profusely. She was beat up by the big banks and we were able to  help her stay in her home. Nothing like that feeling.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Paige Panzarello: Oh, boy… [laughs] I think that the biggest mistake — we all make mistakes, but the biggest one was in 2007 for me, thinking “This is not gonna happen to me.” Because I did see it coming, and I was naive in thinking that I was only leveraged 10% and it wasn’t gonna affect me. Boy, was I wrong… Because it did. It happened to me right on my head, and caused me a huge loss. But I’ll tell you, that shapes you as an investor, and it teaches you who you are, and how you relate to other people, and to money also, and how you treat money.

Joe Fairless: Best ever way you like to give back?

Paige Panzarello: A couple of different things… Again, I’m very about helping people, so I do teach financial literacy in the form of teaching [unintelligible [00:26:04].20] cashflow game, so I do that. People wanna know what I do, and how to build wealth with notes, so I teach a workshop to help people to create their own financial freedom… And I often get the question “Well, you’re teaching people to be your competition.” Like I said, this space is very collaborative, so I don’t look at it that way. I’m very passionate about helping people to build their financial future, and give themselves financial freedom, so that’s part of my giveback.

And then the other thing is that I’m very passionate about our veterans. I donate a lot of time and money to Operation Gratitude. It’s one of my things, and I eventually am going to be taking some of these REO properties that we are acquiring through foreclosure and I’d really like to be able to set up housing for our veterans across the country.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Paige Panzarello: Well, the best way to reach me is to either direct-message me on Instagram, @thecashflowchick. You can go to cashflowchick.com. If you’re interested in scheduling a conversation with me, it’s free, of course; just go right to my website. And if they’re interested in Building Wealth With Notes, then they can go to BuildingWealthWithNotes.com to learn about the next workshop.

Joe Fairless: I loved talking to you and learning about your approach as a business person, and your focus on non-performing notes. Talking more about that, getting into the details of how you make money, exit strategies, as well as the sewer treatment plant; that was fun, too.

Paige Panzarello: [laughs]

Joe Fairless: So thank you so much, Paige. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Paige Panzarello: You too. Have a best ever day as well.

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The Best Show Ever #SkillsetSunday flyer with Jorge Newbery

JF1342: How To Buy Non-Performing Notes & Keep People In Their Homes #SkillSetSunday with Jorge Newbery

Jorge owned over 4000 apartment units before losing it all. He wrote about that experience in his book, Burn Zones. Now Jorge helps people stay in their homes when they can’t afford their mortgages anymore through loan modifications. Jorge also helps other investors do the same thing as him. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Jorge Newbery Real Estate Background:

Founder of American Homeowner Preservation LLC

– AHP utilizes Regulation A+ to crowdfund the purchase of non-performing mortgages from lenders at big discounts

– Author of Forbes Real Estate Council and amazon best-selling book Burn Zones

– Principal in mortgage, property management brokerage firms and have held real estate licenses in nine states

– Based in Chicago, Illinois

– Say hi to him at: www.notebuyerbootcamp.com

Join us and our online investor community: BestEverCommunity.com

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jorge Newberry. How are you doing, Jorge?

Jorge Newberry: Hey. Good, Joe. Thanks for having me on.

Joe Fairless: My pleasure, nice to catch up with you again. I saw you in Denver at our conference a couple months ago(ish), and really enjoyed meeting you. I feel like I’d met you in person before, but if not, then I really enjoyed meeting you in person… But the reason why I felt that is because I’ve read your book, as I’ve told you before, and other people who I come across in life on a – I say this as much as I can, it is a must read for apartment investors; real estate investors in general, but really apartment investors, because it talks about pros and cons of how things can go up and things can go down with apartment investing in particular. The book is called Burn Zones, so I recommend reading that, Best Ever listeners.

Then also what Jorge does now – he is the founder of American Homeowner Preservation. American Homeowner Preservation utilizes regulation A+ to crowdfund the purchase of non-performing mortgages from lenders at big discounts, and also help homeowners stay in their homes.

Jorge has also recently been doing a program where he’s helping others – he’s training people how to do what they do to buy non-performing mortgages, so we’re gonna talk about that, and that is the focus of our conversation today… It is if you are curious about how to do what his company does for yourself, then you came to the right spot.
If you wanna hear his best ever advice, go to episode 1126, titled “Bad Things Happen. Jorge Newberry Helps Families Stay in Their Homes When They Do”, so episode 1126, you can hear more about Jorge. With that being said, Jorge, do you wanna just briefly give a background so the Best Ever listeners have some context? Then we’ll dive into the training.

Jorge Newberry: Absolutely. You touched on it, but I’ll give you the short story. About 15 years ago I owned about 4,000 apartments across the country, had a net worth in the tens of millions, and an ice storm hit my biggest holding and triggered this extraordinary sequence of events where I lost everything and ended up 26 million dollars in debt. That was more or less 2005-2006.

I was looking for a means to rebuild, and then I started hearing about the rumblings of the housing crisis and the mortgage crisis, and I thought hey, I just went through this ordeal and I survived, and now I see all these other families (millions of families in America) homeowners who are facing the same financial collapse that I did… And how can I help them? How can I use my experiences to devise strategies to buy their debt from banks and hedge funds at big discounts, and then we work that debt if they wanna stay in their home, but at much more affordable payments, reduce their delinquency… And that’s how AHP started. We started in 2008, so we’re almost 10 years old, and it’s kind of evolved over the years into an investment fund which is now people can invest online $100 and support the mission.

We buy a lot of loans. We bought more than 2,500 loans last year, over 100 million dollars in debt, at huge discounts, and that’s what we continue to do. We see there’s a big opportunity, and once the market turns the other direction, we’ll see it as an even greater opportunity.

Joe Fairless: Because the worse the market is – to put it crassly – the better your business is.

Jorge Newberry: Yeah, and it’s not like we hope people get in trouble with their mortgage, it’s just a by-product of a downturn in the market, and I guess the way to look at it is that we hope that families will need assistance at that point, and we’ll be able to assist them. And literally, when we work a mortgage, it’s not “Hey, we’re cutting your payment by a few bucks.” We can cut payments in half, we can forgive tens of thousands of dollars in delinquent payments or principal if we want.

We buy these at such discounts we have huge flexibility in terms of what we can do to make it. What you really wanna do is provide a solution so that the homeowner is saying “Hey, this is a great deal. I wanna pay you each month, because my payment is half of what I used to pay”, and you’re delivering a financial transformation, which also ends up yielding you a good return, because these things are sold at such great discounts often times.

Joe Fairless: And do you take accreditted and non-accreditted investors?

Jorge Newberry: Yeah, that’s what’s really exciting in our current fund – we accept both accreditted and non-acreditted investors.

Joe Fairless: And what type of returns have you historically achieved?

Jorge Newberry: We pay our first 12% to investors, and historically we’ve been paying that. And the actual returns, what do we generate – we’ve been generating 20% to 30%; our audit financials for 2016 we were I think 39.7%, so very high returns. It’s gonna drop down; the first year is usually the highest, but it’s still gonna be in the 20s and 30s.

Joe Fairless: And you said first 12% to investors, so is that 12% to investors and then the difference to your company, or is it split? Is there some sort of other performance hurdle?

Jorge Newberry: No, the difference goes to our company. We basically get everything over the 12%, but we don’t get it right away. What we do is in the first years of the fund we reinvest any money that’s over the 12%. That just gets reinvested in new mortgages, so if there’s a downturn, if for whatever reason our returns get low for a moment, then we haven’t just distributed to ourselves; it just stays in the fund and there’s more and more assets in the fund.

The goal is at the end of five years all investors are paid back both their investment capital and their 12% return, and whatever is left is ours. I know the number from mid-2017, it’s accumulated profits… So in our first year of operation in this particular fund we generated around a million and a half in accumulated profits; so that’s profit over and above what we paid to investors, so that money was utilized to repurchase mortgages, and eventually if we were to liquidate the fund today, then that money would go to us.

Joe Fairless: And is that 12% annualized return?

Jorge Newberry: It’s 12% annual return and we distributed it at 1%/month.

Joe Fairless: Sweet. Alright. So now let’s talk about training people – and by people, I mean me and everyone listening, the Best Ever listenters that are listening – how we can buy a non-performing mortgage at the discount where we’re able to then cut the mortgage payment in half to the owner?

Jorge Newberry: I’m gonna tell you two stories which will probably help illustrate this business. The first one is how difficult it is to get into this business. If anybody out there has tried and has not been successful, I sympathize, because when we started… You don’t just call CitiBank and say “Hey, get me to your department that sells your non-performing mortgages.” They’re just like, “Hey, we don’t have that department.” So I could not figure it out, and finally what I did was I read a news story about [unintelligible [00:08:01].13] They were purchased by Bank of America and they laid off the CEO… So I said “Well, that guy probably knows the guy who I need to talk to.” So I reached out to him on LinkedIn, and he accepted my connection, and I sent him a message saying “Hey, can you help introduce me to the people that can sell me defaulted mortgages?” Thankfully, he replied and he made me a proposal, I should say.

Again, he was unemployed at the time, so he said “Wire me $4,000 and then fly to New York and I’ll spend a day with you and I’ll take you to all the sellers I know.” At first I was thinking “This sounds kind of weird”, but he was a real guy; I’d read news stories about him, so I said “Let me do it.” I sent the $4,000, and I flew to New York…

Joe Fairless: Any paperwork?

Jorge Newberry: No paperwork, all LinkedIn messages. That was the extent of our paperwork. I guess it was pretty — well, it was $4,000… So what we did was we ended up flying to New York and he took me around to Bank of America, he took me around to all these different lenders, and it ended up being a highly productive day. We went to a number of big hedge funds, and again, Bank of America, and a month later we were buying loans.

At that point in the market – it was a point where the banks and hedge funds would sell to just about anybody who was willing to buy, because there was such an oversupply of loans.

Now, fast-forward to today, now it’s tough for us to buy from some of those same banks that were willing to sell to us in our first few months. The reason is there’s a lot more competition; just like in the real estate market and the note market, there’s a huge amount of competition for these mortgages, so now they won’t sell them a few hundred thousands or a million at a time, they’re selling them at a hundred million dollar pools, so when we call and say “Hey, we have 10 million bucks or 5 million bucks”, they’re like “I can’t help you.”

But anyways, that was our start. But that is not a scalable, a repeatable start, so what I wanna do is provide that. The other part of your question was “How do these work in terms of buying these, and selling, and then discounts, and providing these extraordinary solutions to families?” I’ll give you an example – we bought a loan… And this is a very common situation. We bought a loan on which the family had refinanced in 2008. Obviously, not a great time to refinance. The property at that point was appraised at $200,000, and they refinanced at $164,000. This is in Maywood, which is just outside of Chicago, and shortly after the crisis in 2009-2010, the breadwinner in the family was laid off from his 20-year job with Culligan water, basically delivering water to offices; he was laid off, so he didn’t have money to pay the mortgage, he fell behind. The payment was more than $1,000/month, and the loan was serviced by Ocwen, so he applied for a mortgage modification; he told us his story – it went for months, and that turned into over a year, and finally they denied his modification, and they scheduled a foreclosure sale on his house.

Now, the good news is the hedge fund that owned that mortgage offered a whole pool of mortgages to us, which included this gentleman’s home. What we did is we did a broker price opinion, which is kind of like a mini-appraisal on the home, and it came back at $33,000. So we offered 30%, $9,600. So just so your listeners understand that, the debt was — unpaid principal balance on this mortgage was $164,000. He hadn’t paid in several years. There were tens of thousands of dollars in delinquencies, and his payment was over $1,000/month. The home was worth $33,000, and we bought the mortgage for $9,600.

Joe Fairless: So the bank loses in that scenario, right?

Jorge Newberry: Well, somebody loses, clearly, because somebody loaned this gentleman $164,000 and now they’re taking $9,600 for their position, so the bank or the Wall-Street-backed investment fund probably took a big hit at that point, but they’re probably thinking “Hey, this home is worth $33,000. If we complete the foreclosure, we’re gonna have to evict him”, and they’re gonna have to sell the property and pay brokerage… The recovery may be 20k, but there’s still a lot more work, so it makes sense to take the $9,600 offer. I’m sure they thought ti was in their best interest to do it, and that’s what they did. But when we contacted the gentleman and we said “Here’s what we can do – if you wanna stay, we’re gonna drop your monthly payment (again, it was over $1,000) to $320.” So he is like, “Well, that sounds too good to be true. Maybe it’s a scam”, but he checked us out and discovered we really did own his mortgage.

We also gave two other options – “Hey, do you wanna settle this in one lump sum? We’ll take 29k (10% less than what it was currently worth). Or if you don’t want the house anymore, we’ll give you $1,000. So you owe us all this money but we’re gonna forgive the debt and give you $1,000 if you sign the deed to us.”

Those are basically the options, and the way that we’ve had a lot of success is by just giving the options to the family, and they get to decide what’s in our best interest, what makes sense for us to do. Do we wanna pay money and keep the house, or do we wanna get paid and just give up the house and get the debt forgiven? In this case, the family said “No, we wanna stay.” So again, we dropped the payment to $3,200; they owed over–

Joe Fairless: $320, right?

Jorge Newberry: $320 from over $1,000.

Joe Fairless: Alright. You said $3,200, just wanted to make sure…

Jorge Newberry: Oh… That would be not good.

Joe Fairless: “We tripled it!”

Jorge Newberry: Yeah, “We tripled it!” No, we went from over $1,000 to $320. They hadn’t paid in several years, so they owed over $20,000 in delinquent payments, and we took $2,000 and we forgave the difference. And the $320 payment was now gonna be the same payment for the remaining term of the loan, which is almost 20 years. So for them it was like “Oh my goodness, this is cheaper than rent, it’s  great deal”, but for us – look at the numbers… We recieved $2,000, and then we got in that first year 10 payments of $320, so another $3,200. So $5,200 on $9,600 investment, so over 50% in the first year.

Then we continue to get $320 times 12 – almost $4,000/year for the remaining 20 years of the loan. So in the first year over 50% return, and then a 30%+ return for the next 19 years. We have all our money back within three years, and then we just have cashflow for the rest of the term.

That’s basically in a nutshell what we do, and I know Wall-Street looks at what we do and they say “Okay, on paper you’re getting these big returns, 20%-30%+, but really Jorge, you’re making like $5,000-$10,000 a deal”, and that’s what it is, $5,000-$10,000 a deal, and for Wall-Street that’s not something that’s worth their while, which creates the opportunity, but here’s where we’ve created a business – we bought $2,500 loans last year, so we make $5,000-$10,000 on all 2,500 loans, so we have a pretty decent business.

Joe Fairless: What is that math? 2,500 loans… How much do you make per deal on average?

Jorge Newberry: About $5,000.

Joe Fairless: About $5,000, got it. So that’s 12.5 million, and you said “make”, so that’s profit after all expenses.

Jorge Newberry: Agreed. It’s just a matter of how soon you make it, but yeah, there’s a lot of money to be made on these things, there really is.

Joe Fairless: Now help us learn how to do this, please.

Jorge Newberry: So this is the challenge – how do you get started? The first thing is to figure out how to buy the loans, and there continues to be a very opaque market, but there are a number of hedge funds, smaller funds that will work with buyers who are wanting to buy just a handful of loans at a time.

A real kind of caution sign is when you’re new it’s very easy to overpay. You can use that situation that I described and said “Hey, the home is worth $32,000. If I get it for 20k, that’s a 12k discount. That’s pretty good.” I might have even thought that 15 years ago, but it’s not very good. You really need a significant discount; you wanna get into the 50% range or less of what the property is currently worth, because if they don’t pay or you don’t come to a resolution, now you’re paying for an attorney to go to the foreclosure procedure, and that can take a long period of time, and your returns as time passes will generally diminish.

So unlike real estate, the longer you hold a non-performing loan, the value will tend to drop, and the reason is the taxes are going up and the property is potentially deteriorating, and just the duration of your investment is extending, so there’s all kinds of reasons you wanna get to a fast consensual solution.

So there’s funds out there, and I can name a few – there’s Granite, there’s Condor, even us, AHP, will occasionally sell loans in one, or two, or three, or four, or five at a time… So I think that’s a place to start. And as you get bigger, if you say “Hey, I can do 50 or 100 of these”, then you definitely go up the food chain and there’s hedge funds and then even banks that will sell to you even in today’s competitive market.
I think the strategy woudl be to maybe learn this while the market is competitive, get your bearings in terms of how all the pieces work, because when this market collapses again – which there’s always a cycle; up, down, up down, boom, bust… And eventually there’s gonna be another bust in the cycle, and that’s where there’s just immense opportunities. But if you decide, “Hey, I wanna buy loans” when all the opportunities are there, it’s gonna take you a little bit of time to figure out what you’re doing.
So I would think it’s a wise time, and it’s the reason why we’re doing this – we’re starting a servicer, which basically — every loan needs to have a mortgage service, so we’re starting a servicer and we’re showing other people how to do this… Because when this crash happens, then there’s no way we’re gonna buy all the loans. We’re not naive, thinking we’re gonna buy every loan that becomes available. We wanna show other people who can find even other sources and other opportunities and do this in a social, responsible manner, which also coincindetally generally maximizes the financial returns.

Joe Fairless: In order to find the non-performing mortgages now, you gave three places: Granite, Condor and your company, AHP.

Jorge Newberry: And I can think of more. I can think of Security National Servicing (SN), they regularly sell loans. Basically, what happens is you’ll call them up… We’re setting up this program called Note Buyer Bootcamp and we’ll add all the resources onto the site. Once you contact these groups, they’ll send out periodic lists of loans. “Hey, we have this one loan available” or “We have these 100 loans available”, and you can bid. Typically, even when it’s 100 loans, they’ll let you bid on one or all 100. Those are a handful, and NoteBuyerBootcamp.com – we’ll put up a list of other sellers in the market and update that as people come and go, which inevitably happens.

Joe Fairless: And once you buy the note, is it just a cash transaction and then you now own the notes? So you’ve gotta pick up the phone and call the people living there?

Jorge Newberry: That’s what you would like to do, but only part of that is true. So it is a cash transaction, so you’re generally wiring the money, you sign a purchase contract… Somewhat similar to real estate purchase contracts, except now you’re buying a note. Then you wire the money to the seller, and they will then send you the documents. What you’re really buying is the note, the mortgage, the title insurance policy and whatever origination documents they maybe have for enforcing this laon – those are shipped to you, those originals, and they’ll also transfer the servicing. Let’s say it’s serviced at Ocwen, and they’re gonna say “Where do you wanna transfer it?” There’s a number of servicers SN Servicing, FCI, BSI, ClearSpring… I think the number one choice should be AHP Servicing, but that’s up to your listeners.

Then you’d like to call the homeowners, but you can’t. In most states, they require that if you’re doing any type of debt collections, particularly on a mortgage, that needs to be done by somebody who has whatever license that state requires. So that means that you usually have to take the loan to a servicer and have them call. This is where you end up kind of having this middle man – somewhat similar to a real estate agent – where they’re the conduit for the interaction with the homeowner, but you can tell them what you wanna do. It’s very simple. You can say “This homeowner wants to stay (just like the family in Maywood). We’ll take a monthly payment of $320. They owe us $20,000 in delinquencies, but we’ll take $2,000. And if they don’t wanna stay, we’ll give them $1,000.”

You can do that, tell the servicer, and that’s basically what they are communicating with the family. The ways they reach out is they can do phone calls, they can send letters, and ultimately they can send people and knock on the door. It starts with phone calls and letters, and then knocks on the door. If the home is vacant, they do a skip trace and they try to find where the people are… And think about it like this – people left, so they probably don’t want the home, but now you’re trying to track them down and say “Hey, I wanna give you $1,000 to find the deed and forgive the loan, so we don’t need to foreclose.” If you can do that and get the deed, and the homeowner is like “Hey, I didn’t want the home anymore and I owe $200,000, so it doesn’t make sense for me to keep it”, but you bought it for $9,600, that’s a big return, and if you can do that in a short period of time, your returns are through the roof… Because the alternative is to go through the long, tedious foreclosure process, which will take time and money, and you’ll still probably make an okay return, but where the returns become extraordinary is where you can reach out to the family and make a deal.

Joe Fairless: I know we talked high-level about this and there are many bullet points underneath each of these, but for the purposes of this conversation, anything else that is a larger point that we should talk about as it relates to buying these mortgages at a discount?

Jorge Newberry: Those are nuts and bolts. It’s so similar to buying a home that is broken in terms of it needs a lot of rehab, it needs a lot of fix-up, or a multifamily property that is in disrepair, has management issues… And then working out a solution in order to fix that house, fix that multifamily, or fix that loan. If you can generate a solution that works for the family, that’s always gonna be your best resolution.

Joe Fairless: How can the Best Ever listeners get in touch with you or your company?

Jorge Newberry: Sure. If they’re interested in purchasing notes, go to NoteBuyerBootcamp.com and you’ll learn about the training program that we offer, which is basically online, and we have some free resources on there as well. You can reach out to that e-mail on there as well, info@notebuyerbootcamp.com.

Joe Fairless: Awesome. Jorge, thanks again for being on the show and talking about buying non-performing mortgages and notes, and how you got into it – fascinating story, about the LinkedIn trust that you had with that gentleman, and it turns out to be a very successful relationship… Definitely you, and he got $4,000, so I’m sure him too.

Jorge Newberry: It was the best $4,000 we’ve spent.

Joe Fairless: Yeah, absolutely… And then just talking about the overall process. Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jorge Newberry: Alright, thanks, Joe.

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Kimberly Fawcett advice

JF1248: Pivoting From Landlording To Non-Performing Notes with Kimberly Banks Fawcett

Kimberly was a landlord but decided she did not want to deal with tenants anymore. Now she focuses on non-performing 1st mortgages. Being in this space allows her to help people stay in their homes, but sometimes she will have to take ownership of the properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Kimberly Banks Fawcett Real Estate Background:

-Portfolio Manager at Inspired Capital Group, LLC.

-Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties

-Raised by real estate investors and bought her first rental property 3 months after graduating college.

-Experience in both residential and commercial investments

-Now focuses almost exclusively on the non-performing 1st mortgage space.

-Say hi to her at www.inspiredcapitalgroup.com

-Based in Plano, Texas

-Best Ever Book: The One Thing


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Kimberly Banks Fawcett. How are you doing, Kimberly?

Kimberly Banks Fawcett: I’m doing great, Joe. Thanks for having me on the show.

Joe Fairless: I’m glad to hear that, and it’s our pleasure. A little bit about Kimberly – she is a portfolio manager at Inspired Capital Group. Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties. She was raised by some real estate investors and bought her first rental property three months after graduating college. Based in Plano, Texas… With that being said, Kimberly, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kimberly Banks Fawcett: Sure. I’m focused on non-performing notes because I spent so many years as a landlord. I did the typical when it was going great went to a REIA, sat in on a meeting where someone told me that I no longer had to deal with tenants, I could actually deal with people that cared about the property as much as I did, and I was hooked. So in 2013 I pretty much stopped being a landlord and became a note investor, and I’ve never really looked back.

Joe Fairless: Pros and cons, as objectively as you can look at it – pros and cons on both sides?

Kimberly Banks Fawcett: Well, I’d say the pros are, again, they’re as interested in the property as you are; that’s always helpful. I also really like the fact that I can make that cliché work, the win/win/win. I make money for myself, I make money for my investors, and I help out the borrowers on the deals that I can actually help them come out on the better side of their bad situation – those are just the home runs for me.

On the con side I would say the regulations that we have to deal with… Not that I have a problem with the idea of taking care of people and doing it the right way, but you hire a servicer to work on your notes, and I can honestly say that you have to be on top of the regulations as well. You can’t count on your servicer always covering you, and I think that’s a bigger burden than most landlords have.

I think also in this current environment there are people that actually train homeowners how to stay in their home without paying their mortgage for longer periods of time. You don’t find that in a rental situation. If you’re not gonna pay your rent, you either leave or you wait to get evicted. There’s no training on how to extend that. So a lender that is doing everything right, a borrower can stall fixing the situation forever nowadays. So I’d say those are pretty much the pros and cons.

Joe Fairless: I’m impressed. I think you did objectively look at that, and I’m grateful that you did that. So let’s talk about the cons first, and then we’ll talk about the pros. Cons – regulations; you mentioned you can’t necessarily count on your servicer staying on top of the regulations. For someone new to investing in notes, what’s a servicer and what are the regulations that you need to stay on top of?

Kimberly Banks Fawcett: Your servicer is the person that has the licenses in the different stakes that you wanna operate in. They have a debt collector’s license, so they are the ones that are gonna stay on top of how things have to be done to treat your borrowers with respect and help them succeed as much as possible, and to keep you compliant. The problem is your servicers don’t care as much about your money as you do, so while they do follow the regulations, they’re not necessarily sharing with you what’s going on, so you’re not necessarily covered.

Let me give you an example. I had a borrower that we were foreclosing on, and finally she got her modification paperwork in and we were gonna look it over. Now, you cannot be foreclosing and actively looking at a loan modification at the same time. That’s called dual tracking, and it’s not fair to the borrower. While they’re doing all the right things, you can’t take their house. But she turned her paperwork in the day before the foreclosure sale, so we immediately stopped the foreclosure sale, started looking over her paperwork, but the servicer did not tell her that we stopped the foreclosure. So she went ahead – she had a little coaching, as I mentioned before… [laughter] She went ahead and got me in trouble with the CFPB. All I had to do was have an attorney write a response and saying “No, no, no, we did stop it. She just wasn’t notified.”

When I went back to the servicer, their comment was “Well, we can’t call her on that, we can’t e-mail her on that. We had to put it in writing.” What?! How long is it gonna take to mail a letter? The sale is tomorrow. So what would have made sense is either to tell me that and I would have called her or had the attorney call her, or go ahead and send her an e-mail and follow up with the official legal documents. So their process, while following probably all the rules, got me in trouble. It only cost me $250 for a letter to explain the situation and it all went away, not a big deal, but that’s just an example of how even hiring someone to take care of this can still be an issue.

Joe Fairless: If you were presented that circumstance again – which you might be – it’s tough because you don’t know if the servicer is actually doing some common sense things. By the book perhaps, but common sense – come on. So how would you approach that differently (if at all) on the next go-around?

Kimberly Banks Fawcett: I would quiz them mercilessly on how they do it? That actually applies to everything you do with a servicer. Don’t assume that they’re doing it logically. I would say “Okay, fine, you’ve stopped it. How does this person find out that we’ve stopped it? What’s the best way of doing it?” If they had said, “Well, we’d have to put it in writing”, I would immediately have had my attorney make a phone call. It would have been a lot cheaper to have my attorney make a phone call, than have to write a letter to the CFPB.

So it’s one of those situations you don’t know what you don’t know, so this is a great example why I think note investors really do a good job for themselves when they listen to different interviews, talk to different investors… Because we all experience different problems, and if you can hear the problem that I had, you’ll avoid it. If I hear about what you had, then I can avoid it. So in that way, it’s a great way to build a collective intelligence in the community.

Joe Fairless: Oh yeah, thank you for sharing that and adding to that collective intelligence. You mentioned CFPB – what’s that stand for?

Kimberly Banks Fawcett: Consumer Finance Protection Board. They’re basically the people that — the organization was put together by the government to deal with some of that robo-signing signing and unjust practices that people were doing to take advantage of some of the lower price point borrowers, some borrowers that might not natively speak English, and were doing all of these loans that nobody could afford and got everybody in trouble. So it was one of their efforts to try and keep that from happening again.

Joe Fairless: What’s another question that you would ask the servicer?

Kimberly Banks Fawcett: A specific question, or just in general how their processes work?

Joe Fairless: Either one. Whatever’s top of mind for you when I ask you that.

Kimberly Banks Fawcett: Well, the one that I am currently struggling with – because I have a few servicers that I use. What I like to do is I have a couple that I like, and then if I buy a couple of new assets and they’re at another servicer, I’ll leave them there and see how it goes, see if maybe I wanna add them or never deal with them again.

A problem that I’ve been having is with force-placed insurance. To explain what that is – if your borrower is not paying for insurance, there has to be insurance on that asset; that’s your collateral. So you force-place insurance upon them as the lender. It ends up being much more expensive, and it ends up not covering as much as the borrower would like it, but my collateral is at least protected.

So for me to be able to charge back that expense to my borrower, I have to do a bunch of disclosures to give them the opportunity to get their own insurance, to prove they have insurance, or all of that. I have found over time that every servicer does it differently. So you have to quiz them on how that’s happening, because ultimately, if I pay $1,000 for this insurance, if I can’t charge it back to them, that hits my ROI pretty hard. Again, I need to look out for my money, I can’t just rely on the servicer making sure they’re doing it in a way that protects me. So that’s a huge question that I ask every servicer.

Joe Fairless: When you ask the question or questions to them about their force-placed insurance, what response is your ideal response?

Kimberly Banks Fawcett: My ideal response would be — there are three letters that need to go out to give them the opportunity to take care of this. We send the first one out as soon as we board; we send the second one out if we haven’t heard from them in a month and a half, and then we send the final one out saying “Hey, you have not done this. You will be charged for this insurance.” That would be the perfect response.

A lot of times I’ve gotten “No, we don’t do that. You’ll have to send your own letters.” Well, that’s the reason why I have a servicer, because I don’t have the license to get that close to my borrower.

Joe Fairless: [laughs] You’ve had this conversation before with someone, haven’t you? [laughs] That’s funny. Okay, and then the other con – and then we’re gonna get into the pros that you mentioned – this actually bleeds into what you were talking about before… There’s actually people out there training homeowners how to stay in their home longer without paying the mortgage, so you’re just having to fight against that.

Kimberly Banks Fawcett: Yes. And some of the things they do raise are legitimate, like you don’t have proof of the payment history. Sometimes when you buy a note, the payment history that you’ve gotten from the previous lender is a little fuzzy, there’s some holes… As an aside, that’s pretty easy to deal with, because you just waive the payments that [unintelligible [00:11:42].05] Okay, sure, you made those. I’m still ahead, because I bought the loan so cheaply. But you have to address that in court. It doesn’t work to just send them an e-mail saying, “Okay, sure, whatever.” And anything that goes to court takes more time, so that’s two, three, six more months they’re living free.

Joe Fairless: Got it. Let’s talk about the pros. You mentioned you used to be a landlord, and then you realized you didn’t wanna mess with the tenants and all that stuff. You said two pros is you have people interested in the property, number one, and you can make it a win/win/win for you, investors and homeowners. Can you elaborate on that?

Kimberly Banks Fawcett: Sure. If someone’s living in a home, they care about it. If the roof is leaking, they’re generally going to get it fixed… If they have the money, obviously. If you have a tenant in your single-family house — I actually had a friend that had this problem; she was tired of calling her landlord, and the upstairs bathroom was leaking. There was like a waterfall coming down from the upstairs when we were at this party, and she’s like “Yeah, it does that sometimes.” [laughter]

When you have someone that cares about the house, they’re gonna fix that. Chances are you won’t have a borrower set off fireworks inside the house, where that can happen with a renter. You’re just dealing with a different group of people, and since you’re not there, peeking in the windows all the time, you just have a better level of comfort that that asset is being taken care of. It’s not a guarantee, it’s just a higher probability.

Joe Fairless: Does it set you up for long-term wealth, buying and holding a single-family home one?

Kimberly Banks Fawcett: Not typically. If you like modifications, which I tend to, they’re a wasting asset. With every payment it’s worth less, because — I mean, obviously, in the beginning it’s mostly interest… But when they’re paying off their principal, there’s less and less value in that note, so you have to be careful how you structure that. You can’t just have a portfolio of modifications and not manage it to make sure it’s not losing value. So it is different in that respect, and I don’t know that all note investors really focus on that.

When you’re buying them, you don’t know what your exit strategy is. You know what you want it to be and you know from looking at your ROI calculator which one looks prettiest, but it’s what the borrower wants, what the borrower is willing to do, what you can make happen. So if you end up with a bunch of mods and then a bunch of REOs, and some of those you rent and some of those you fix and flip, you can blend your business so that it’s not a wasting asset pool. But if you don’t realize that your asset is getting less and less valuable, I think you can end up kind of sunk after a while.

Joe Fairless: Can you elaborate on that last part that you mentioned?

Kimberly Banks Fawcett: Which part?

Joe Fairless: The very last part.

Kimberly Banks Fawcett: Say you have a portfolio of (I don’t know, I’ll just throw out) 75 notes; they’re all modified, they’re all paying. Well, every single month they’re paying off a little bit of the principle, so at the end of the month, your assets are worth less. There’s less that’s gonna be coming in at a certain time. And if you just stayed in that portfolio, eventually they would all be paid off and you would have nothing.

Now, did you take the money and reinvest it? Well, if you’re smart, you did. So you probably bought other assets. But if you’re not paying attention, eventually there’s nothing left. It’s not a “purchase with your servicer and just let sit” and expect it to be worth something after ten years, whatever. Because remember, the average person also only stays in their home for seven years, so then your loan is completely gone then. I mean, you get a nice payoff and all of that, but if you don’t wisely invest it in more assets, you’re not gonna keep your portfolio valuable… Or substantial maybe is a better word.

Joe Fairless: I’m glad you mentioned that. I haven’t heard anyone talk about that as it relates to note buying, and it’s something I should have picked up on but I haven’t, so thank you for mentioning that. So you’re actively managing your portfolio and actively optimizing it as you’re going along, right?

Kimberly Banks Fawcett: Yes. I started out wanting to do mostly mods, and now I have changed it up a bit where there are certain markets in the country that I have a great team, and I really like to — obviously, I wanna work with the borrower; don’t get me wrong, my first choice is to help them out. But if I have to take back the property there, I don’t mind, so I’ll buy some more vacant ones in that area, just in the hopes of taking back the property and going that route.

Joe Fairless: What’s the most profitable approach or exit for you?

Kimberly Banks Fawcett: For me it’s more work, but it’s usually taking it back and doing a really nice renovation and selling it retail. Again, I only do that in certain markets; not because I have problems with other markets, I’ve just built better teams in certain areas. So I love taking a house that’s okay and making it great, and then helping out another borrower. I love to do owner-financing if I can. Some markets don’t support that, or it’s an affluent-enough area that they don’t need to buy it on terms, they can just go ahead and get a regular mortgage… But I think the fix and flips, in my most favorite markets, are probably one of the most profitable.

Joe Fairless: Could you estimate for us in your portfolio now which ones are modifications versus fix and flips versus whatever else, just so we can get a rough percentage?

Kimberly Banks Fawcett: Let’s say over 10 deals, 4 of them are mods, 5 of them I foreclose, and then I’ll have one that I can do like a short sale or a deed in lieu on. More short sales than deed in lieus. I find that people have been dealing with this stress of “What am I going to do about my house? What am I going to do about my house?” It’s hard to really talk to them about, “Well, you know, if you just sign this document, I’ll give you a little money to go away.” I find that a harder sell, it just sounds almost too good to be true to them, kind of thing. So I’d say most of mine are probably foreclosures.

Joe Fairless: Okay. Based on your experience in this industry, what’s something that you see people starting out doing or reading about or thinking about and spending time on, that is a waste of time as it relates to note-buying?

Kimberly Banks Fawcett: Note buying has a lot of rabbit holes. We very often find a new note investor going, “Okay, what if?” then “What if this happens?” Well, I don’t think those are bad questions, and it does depend on your mind – I’m a what-if kind of person – but you have to find out if that’s logical.

For example, I bought this one deal in Pittsburgh, Pennsylvania, and the seller had me — when you’re in that transition of when you’ve closed, your assignments are recorded and all of that… I was getting ready to go to tax sale… So my seller had me pay the taxes to their law firm, so their law firm could pay that.

Well, in the process of doing that, the law firm went bankrupt. They closed their doors, they wouldn’t respond to my e-mails, they wouldn’t respond to the seller’s e-mails and I ended up losing $18,000. Now, okay. That happened. That’s not great. But how often is that gonna happen?

Sometimes if I’m presenting on deals, I don’t wanna talk about that, because I don’t wanna spend that time in that rabbit hole. Yes, it happened. It sucks, it was awful; you don’t want that to happen to you, I get it. But I’ve done close to 200 deals, it’s happened once.

I’ve also had a deal where the house was actually gone by the time I closed on the deal. It had gotten destroyed in a tornado. I still made money on that deal, but now people could be afraid of a tornado, could be afraid of bankrupt attorneys… If you’re getting all caught up in the afraid things, you’re gonna stop yourself. If you wanna listen to these stories and go “Okay, let’s see… Okay, so you can actually get out of that situation and be alright.” “Okay, maybe I don’t have as many things to worry about as I thought I did”, then that’s a useful exercise.

Joe Fairless: What’s something that on the flipside you would make sure you teach any beginning note investors?

Kimberly Banks Fawcett: I think to double-check your vendors. For example, when you’re doing your due diligence and you’re trying to get a value on a property, I will talk to a local realtor or I will order a BPO, but I also use a service called We Go Look, and they go to the property and they take at least ten pictures of the property, they get all four sides of the house, and they’ll make some kind of indication of what they think the condition of the house is based on the neighborhood. Now, they’re not realtors, so they’re not giving me a value estimation, but I now have independent pictures and an independent comparison to put together with my BPO… Because some BPO agents, they don’t wanna get out of the car, they don’t really care, they don’t have attention to detail; they just want their $75 and move on. So I can compare these two and I get a much more accurate picture of the real condition of that house.

So you have to double-check your vendors, and I think the other thing for new investors, especially in this current market, prices are going up and you have to make sure your ROI is going to work on these higher prices… Because everybody wants to get in their first deal. They’re so excited to suddenly be a note investor. But if you overpay going in, you’re never gonna make that money back up. So you have to be careful, you can’t be so ignorant that you end up ruining the deal before you’re ever really in it.

Joe Fairless: Now I’m gonna ask you a question I ask everyone, and you might say “Well, Joe, I’ve just said it…” Well, if that’s the case, then we’ll roll with it. But if you’ve got something in addition to share with the listeners, then please do so. What is your best real estate investing advice ever?

Kimberly Banks Fawcett: I would say focus, but not the focus that most people say. Most people say “Pick one thing, do it and become fantastic at it.” I disagree. I think you need to focus on what your end goal is; what you want to be great at, and then take all of your activities and draw them there.

For example, I wanna be a great note investor, so the fact that I have residential real estate experience, I also have commercial real estate experience, I have experience in firsts, I’ve done some seconds, I’ve done some  contract for deeds, and all that together makes me a better note investor. I am more accustomed to different outcomes, accustomed to different headaches, I’ve taken the nuances and how to do each one of those things and put them together, so that I have a better picture.

So now that I have been doing residential notes for so long, I can build up my commercial portfolio because I have experience in that investing, and I’m gonna be able to bring it together, and the fund that we’re getting ready to put together, at a much higher level.
Some might look back and go “Okay, wait, you can’t do commercial and residential, and first, and second…” I think you can, as long as you’re using them as a tool to learn how to be better at the end.

Joe Fairless: That’s powerful. I’m enjoying that, because it is more of the end goal that we’re focused on, and ultimately what you wanna be great at, and then leveraging that to then get you there, there might be iterations of it along the way… But ultimately, you’ve gotta focus on what the end game is. I love that.

What’s one challenge that you’ve come across that we haven’t talked about already, as an investor, whether it was pre-note buying or no?

Kimberly Banks Fawcett: I think actually a love of real estate is a problem, because you want to do everything. This sounds cool, and that sounds cool, and “Oh, I can make money with that…” And you have the squirrel syndrome that everybody talks about.

Joe Fairless: What’s the squirrel syndrome? I haven’t heard of that one.

Kimberly Banks Fawcett: Well, “I’m on this track — oh, squirrel, there’s a new idea! Oh, squirrel…! I can find properties that way!” You’re all over the place. But that ties into what I was just talking about, focusing on your end goal. It’s okay to do different things as long as they’re gonna take you to one place.

Joe Fairless: You said you’re putting together a fund… What’s the amount that you’re looking to bring equity-wise?

Kimberly Banks Fawcett: Well, we’re gonna start at five million. Everybody tells me that a fund for less than that would be not worth the cost. I’m one of those, I don’t wanna bite off more than I can chew, so we’re gonna start at five million. That will allow us to do some residential, and a nice, sizeable commercial one all in the same place, and I think it’s gonna be great?

Joe Fairless: Where are you at in that process?

Kimberly Banks Fawcett: We have our attorney picked out, and we have brainstormed all of our ideas about how we’ll want it to operate and who we want to be business partners, and all of that… But we haven’t put it on paper yet. That’s for 2018.

Joe Fairless: Okay. We’re gonna do a lightning round… Are you ready for the Best Ever Lightning Round?

Kimberly Banks Fawcett: I am!

Joe Fairless: Alright. If you’re ready, we’re gonna do it. First, a quick word from our Best Ever partners.

Break: [00:24:44].17] to [00:25:32].25]

Joe Fairless: Best ever book you’ve read?

Kimberly Banks Fawcett: The One Thing by Gary Keller.

Joe Fairless: Best ever deal you’ve done?

Kimberly Banks Fawcett: I bought a note in Florida that I was hoping to take back as an REO, and within 36 days they gave me a full payoff. I almost didn’t have to bother boarding. I did, as I was supposed to do, but I got a full payoff, which was twice what I paid for it. So in 36 days I made a little over 100% on my money.

Joe Fairless: What’s the best ever way you like to give back?

Kimberly Banks Fawcett: I enjoy working with the homeless. There’s two different organizations that I work with. One focuses on feeding dinner every night, so that they at least have one really good meal during the day, and then the other one is part of a shelter that offers job training and daycare for the kids while you’re doing your job training. That one gives you more of a hand up rather than a hand out. I like working with a population and I like the comparison of the two organizations.

Joe Fairless: How can the Best Ever listeners get in touch with you and your company?

Kimberly Banks Fawcett: My company’s name is Inspired Capital Group. Our website is InspiredCapitalGroup.com, and then I’m on Facebook too, so I’m pretty easy to find.

Joe Fairless: Well, thank you for being on the show and spending some time with us and sharing your knowledge of note buying and the pros and cons, as I’m gonna say you really did objectively, so bravo on that. It would be tough for me to say that on multifamily, so I appreciate you being objective there. Then also giving us a 2.0 lesson on some things that you’re working through, and that is the force-placed insurance, and some questions that you ask and ultimately what you want to hear from the servicer.

Then the modification process… If you have all of the loans that have been modified and they’re paying like clockwork, then congratulations, but eventually your portfolio is gonna be zero. [laughs] I’ve never thought about that, that’s very interesting. That’s something to keep in mind.

Then lastly, it’s okay to do different things, but you’ve gotta know your end game and what you’re good at… So thanks for being on the show, great stuff. I hope you have a best ever day, and we’ll talk to you soon.

Kimberly Banks Fawcett: You too, take care.

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Rick Allen and Joe Fairless

JF1247: Investing In Notes And Keeping People In Their Homes with Rick Allen

Rick and his company invest in notes, often times the houses are owner occupied. When asked if they would like to stay in the home, most of the time the owners say yes. Rick and his team will work with them to create a new payment that works for them and gets them caught up on their mortgage. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Rick Allen Real Estate Background:

-Co-Founder and fund manager of Cloud Capital Management and the Co- Founder of Paperstac

-Participated in 400 single family homes purchases with price of $25M and a market value of $45M

-Has conducted transactions with large A-list institutions

-Expert experience in investment strategies of the real estate sector, with a primary focus on discounted acquisitions

-Over 10 years experience in real estate investing

-Say hi to him at http://www.cloudcapitalmanagement.com/

-Based in Winter Garden, Florida

-Best Ever Book: Wherever You Go, There You Are


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Rick Allen. How are you doing, Rick?

Rick Allen: Doing great, Joe. How are you?

Joe Fairless: I’m doing well, welcome to the show. I’m so glad to have you on the show. A little bit about Rick – he is the co-founder and fund manager of Cloud Capital Management and co-founder of PaperStac. Did I pronounce that correctly, PaperStac?

Rick Allen: Yup, you got it.

Joe Fairless: He has participated in 400+ single-family home purchases with a price of 25 million and a market value of 45 million – important distinction there. He has over ten years experience in real estate investing. He has conducted transactions with large A-list institutions, and you can learn more about him and his company at CloudCapitalManagement.com, which is also in the show notes page.

With that being said, Rick, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rick Allen: Sure, absolutely. Originally, I was born in Columbus, Ohio. I’ve lived in Orlando, Florida for I guess roughly 30 years now, and I’ve always wanted to kind of help people out, so I went to school and was gonna major in pre-med, and quickly learned that chemistry and I didn’t get along, so I sort of adjusted my course there and ended up getting my real estate license after I graduated, and jumped into real estate. I started with a nation-wide wholesale firm, I guess it was back in 2005. I kind of learned the ropes of wholesaling houses; there was also an in-house hard money source, so it helped source not only deals, but it was sourcing money for some of the investors there…

Until 2008, when I started my own wholesale firm with a couple business partners, and went on to run that. We had multiple offices across the state and several employees, and wound up doing around 400 deals from middle 2008 until the end of 2011… At which time I sold off with another partner and we started just taking a run at just doing the fix and flips and building up our rental portfolio, until I guess in March or April of 2012 I had an REO agent call me and ask me an interesting question – they wanted to know if I would buy a mortgage note.

I’d always heard about notes a little bit, but never got into it, so I said, “Yes, sure, tell me about the deal.” It was a [unintelligible [00:04:47].14] duplex here in Winter Garden. The balance on the loan was $90,000, and I wound up buying it for $8,400. I got in and out of the deal in just under 21 days, and needless to say, I was hooked. So from there, my partner and I – we kind of did a full pivot into the mortgage notes space; we realized it was getting a little tougher to buy houses, to buy real estate, especially at the auctions, because a lot of the funds were coming in there.

So we directed all of our capital towards buying notes. After we did a handful of notes – maybe six to eight of them – we showed what we were doing to somebody, and he offered to give us a million bucks. From there, we started buying notes completely full-time, and have gone up to where we’re managing about six million dollars right now, and we’re in the process of doing our first offering, going to the SEC, doing a  Reg A+ Tier 2, which will allow us to raise up to 50 million every 12 months.

That’s kind of a fast forward to where we are. We also have PaperStac, which is a mortgage note trading platform at its core. It’s a marketplace for people to buy and sell mortgage notes on a one-off basis. In a nutshell, that’s where we are right now.

Joe Fairless: Well, that gives us lots to talk about. Let’s see, the first very tactical question I have for you – you said when you were doing the note buying, you showed it to someone and then he gave you a million bucks to then go deploy that to go do the same thing with his money… How did you meet this person?

Rick Allen: It was somebody I knew that was a family friend. I went to school with his son and went to college with him at Florida. We had a really good relationship with him, and he knew what I was doing and he kept asking me, he’s like “You really gotta go show my dad, you’ve gotta talk to my dad about this. He likes to invest, he loves the real estate space, and from what I understand you’re doing pretty good.” I’d always been – from my wholesaling days, I’d been pretty meticulous about keeping spreadsheets and charting all the deals and the profits and losses and costs and stuff like that, so I already had all this stuff in the master pipeline, so to speak.

So I went and showed him what we’d been doing. We were there for about an hour, showing him the ropes, he asked a lot of pointed questions…

Joe Fairless: What did he ask?

Rick Allen: He said, “I’ll give you a million bucks; do you want it all today?”, and I was like, “No…” [laughs]

Joe Fairless: What type of questions did he ask?

Rick Allen: He was asking deal structure; if he gave us money, how we would structure the deals and what we would do. We wound up setting up and doing a partnership. We actually did an LLC and had a pretty extensive operating agreement. Then he asked other questions about my opinion on the market, on how I thought the deal flow is gonna come, were we gonna continue to get this pricing, how long was this inventory gonna be available… Pointed questions like that.

Joe Fairless: What were your responses to your opinion on the market and were you gonna be able to keep getting that pricing?

Rick Allen: Well, fortunately, I had just come back from a mentorship thing…

Joe Fairless: Which one?

Rick Allen: Eddie Speed at NoteSchool.

Joe Fairless: Okay. Yeah, I interviewed him on the show.

Rick Allen: I would tell all the Best Ever listeners that you’ve gotta get some sort of education. You’re gonna pay for it one way or the other. Either out of your experience, or you’re gonna pay for it by standing on the shoulders of others.

Fortunately, I had gone and sat with Eddie for quite some time and learned really the make-up of the market and what was really going on and where was all this inventory. There had been so many buzzwords around like “shadow inventory”, and I kind of finally learned about it and see how much of this non-performing mortgage debt was really untouched. I was able to answer the questions that he had, and let him know that I felt like – and this was back in 2012; actually 2013 – we’d have another 7 to 10 years of this inventory if nothing really changed as far as the economy, if the economy didn’t take another tank… Which you never know. If it does, I think that there has been this desensitization by people towards the foreclosure process, and people are looking around (I feel) and say “Oh, some stuff went bad, but people came out of it.” So if the market does tank, I think that you could possibly see another big wave of foreclosures coming, or a big wave of default debt, for sure.

Joe Fairless: Let’s talk about each stage of life you had as a real estate professional. First you worked at a wholesaling and hard money lending company. Then you started your own, from 2008 to 2011. You said you did about 400 deals. Why did you switch from that to going into fix and flips, and building your own portfolio?

Rick Allen: It was really a quality of life thing. It’s a blessing in disguise when you start getting bigger and you start creating a company and you start having an extensive amount of employees, because then you have employees, and with that comes problems… And there was some dissension within — we had three business partners, and it just felt like it was the right move. I’m a big fan of if you’re thinking about something, kind of put it out in the universe and see what happens and see where we wind up going with it, and if you push on a door and it opens, it might be a good time to walk through the door and see what’s on the other side.

And then just really wanting to build our rental portfolio, but also take some time and kind of figure out what my next step was gonna be, because I was getting to the point where I didn’t particularly see that the wholesale game — I thought that there was maybe a little bit of an end to it coming. When we’re at the auction and you see a lot of these larger funds, like Blackstone or what have you, that were paying at the time over retail for stuff, it was “Wow, the writing is on the wall.” If these guys are able to come in here, their bankroll is a lot bigger than mine; the margins just started getting a lot smaller, so to me it felt like it was the right time to make a move, to start changing and pivoting and start looking for that next opportunity.

Joe Fairless: From the fix and flips rental portfolio to then the mortgage notes, I imagine, especially in 2012, fix and flips were doing pretty good, and if you were acquiring stuff in 2012 — because it’s different in every market, but relatively it was still depressed a little bit in 2012… So why then switch gears again and then do the distressed notes?

Rick Allen: The real reason was because the speed in which we were getting stuff and able to turn it… When you get into the fix and flip stuff you start cracking open walls and start getting contractors in there [unintelligible [00:11:06].04] there’s just no telling how long you’re gonna be sitting in the house… And the market was good, but it hadn’t really exploded like it did in ’13 and ’14, and we were buying the assets that we were getting in 2012, notes that we were buying stuff for $8,000, $12,000 and we could just simply do more deals with the capital that we had at that time. We were getting in and out of them so quickly…

The first deal we bought we bought for $8,400. There was like $3,000 in liens, but we wound up getting a deed in lieu of foreclosure from the borrower, and we paid her like $100 or something. We put it on the market for 19k and it ran to 38k getting bid up. We were literally sitting at the closing table waiting for our collateral package to come in from the person we bought the loan from so we could close; it happened so fast, and every deal after that seemed to just keep dropping like that, so there was no need to fix anything up. We were selling stuff as is, and we were making better margins than we were by doing fix and flips, so it made more sense for us to make that pivot.

Joe Fairless: Now, fast-forwarding to today. You’re working on — I think I wrote this down correctly, a Reg A+ Tier 2 offering… What does that allow you to do?

Rick Allen: It basically allows us to start pitching people and advertising and marketing to raise capital. Anytime you’re gonna start raising capital, there’s a lot of rules you wanna follow, and this will allow us to raise capital from not only accredited investors, but also non-accredited investors. And it will allow us to raise 50 million dollars every 12 months, which is a lot of money to start playing with.

We were considering Reg. D, Reg. C offerings, and this one is very, very new. It was last year that you could start doing these, so we kind of hit the ground running and said “This is the one we wanna do.” It’s more expensive, but it’s worth the capital outlay just to be able to bring this investment to not only the accredited, but also the non-accredited, which is a big thing. I think a lot of times the non-accredited investor gets passed over and they don’t get to take advantage of ground floor hockey stick type growth curve on companies; they have to wait until something comes out to the public. So this was a real opportunity to let us forward our mission of saving as many houses as possible – or 10,000 houses – from foreclosure and keeping families there, but also to bring a really nice investment to somebody who maybe only has $300 or $400 to invest.

Joe Fairless: You said it’s more expensive, but it’s worth it. How much are you investing in getting this offering?

Rick Allen: Before we hit the advertising, which as you know, the advertising – who knows…?

Joe Fairless: Bottomless pit.

Rick Allen: Yeah, exactly, it is a bottomless pit. But we’re probably gonna wind up being somewhere around $85,000.

Joe Fairless: That’s not as much as I thought it would be. I thought it would be in the half a million mark, but I guess including advertising and stuff maybe you will.

Rick Allen: You never know how high we’re gonna get there in the advertising thing. We were fortunate that we went like one other fund, who we were kind of — we were like, “Look, we wanna model our fund after that fund”, and it’s somebody else who’s in the mortgage note space. We were fortunate enough — we talked to him and we have some working relationship with him, and we asked him who he used for his fund to put it together, and we went directly to that attorney, and fortunately that attorney was like, “Well, the road has already been paved. It’s gonna cost you a lot less than it cost to the gentleman who came before you.”

We were very fortunate in that, to have found an attorney who had done this exact fund and already kind of ironed out all the kinks for the SEC, so we’re hoping that remains true when we submit.

Joe Fairless: That’s outstanding, and for every Best Ever listener – and myself included – there is a tip there, that’s for sure. If we do anything with attorneys, then see who’s currently doing it as an investor, and ask them which attorney they used, and it very well could save you thousands if not tens of thousands, or in this case probably even hundreds of thousands of dollars.

Rick Allen: Yeah. He said it may cost us close to half of what it cost — it very well could have been a $150,000 transaction to get this thing up and running, just on the paperwork and the audits and everything that goes into it. So yeah, that’s a great tip for the Best Ever listeners to kind of take in and really marinate on that.

Joe Fairless: Absolutely. So you’re managing six million dollars right now, correct?

Rick Allen: Yeah, roughly, right around there.

Joe Fairless: About six million. And is that six million in investment dollars or is that six million in the value of the notes?

Rick Allen: No, that’s six million in actual capital.

Joe Fairless: Okay, six million in capital. Approximately how many investors do you have?

Rick Allen: We have a handful… Say, five.

Joe Fairless: Okay, so on average they’re North of the one million dollar mark.

Rick Allen: Yeah.

Joe Fairless: Okay. Of those five investors – and obviously I’m not looking for names or anything that would identify those individuals, but I’m gonna ask his question for the purposes of the Best Ever listeners who are looking to raise capital, and how to find investors for their deals… How did you get to know these five individuals?

Rick Allen: They’re all within our sphere of influence. We literally just stayed within our sphere of influence of people that we know. There’s a lot of people in my sphere of influence I haven’t gone and talked to, just because we didn’t want the capital or didn’t need the capital at the time. So I would say just start within your sphere of influence, start talking about your product.

One of the things that’s been very helpful is that we had already had, from the first time we talked to an investor, and certainly up until now, until the [unintelligible [00:16:52].06]

Joe Fairless: Track record?

Rick Allen: We had a working product, so to speak. We had a proof of concept that we could show, “Look, this is what we’ve been doing for the past year and a half”, or in this case in the Reg A+, “This is what we’ve been doing for the past five and a half years. Here’s our proof of concept, here’s our body of work, what we’ve done. This is what we’re raising the money to do, to do more of this.” So that always helps, if you can kind of show, “Look, I already have the experience in this.” It gets a little more difficult, I think, when you don’t have any sort of experience and you’re trying to raise capital. For me, I wouldn’t be able to raise capital right now and go buy, say, large apartment complexes like you do, because I don’t have that experience yet. So I wouldn’t wanna go out and try to do a syndication, because that’s not my world yet.

Joe Fairless: As far as this “all within your sphere of influence”, specifically how do you know — well, just pick a couple of them, maybe two or three of them; specifically, how was the very first time you met each of those three people; three of the five.

Rick Allen: Whenever we asked them for the capital… [laughs]

Joe Fairless: I know, but how did you get to know them before that, because you wouldn’t just go to some random person in the grocery store to ask him for a million bucks.

Rick Allen: Family and friends of the family.

Joe Fairless: Okay, got it.

Rick Allen: So they were very tight-knit into our sphere of influence. And then even people that are just outside that. People maybe I coached with on my son’s Little League team, who would ask what I do, and maybe I knew that they were a professional baseball and they had some extra cash laid around, or hockey players, or stuff like that.

Joe Fairless: Oh, okay. Cool. So we should all coach our son’s Little League baseball team, there we go…! [laughs]

Rick Allen: Coach Little League in Orlando, Florida. [laughter] My kid plays in [unintelligible [00:18:33].04] Little League, which there seems to be a lot of professional athletes that retired down here to Florida.

Joe Fairless: Got it. Let’s transition a little bit into a typical deal that you do. Can you describe it for us, please?

Rick Allen: Yes, absolutely. I guess I can kind of talk about where we came from when we were buying these, to where we are now. When we originally got into this, we were buying assets that we knew were vacant and the borrowers were alive, so that we could at least get a deed in lieu, and it was just a faster way, a better way for us to get cheaper inventory.

The longer we went on, we wound up buying assets that actually had the borrowers still living in the properties or the assets… So it kind of came to an issue, because we wanted the house back, but a lot of times we ran into — they don’t wanna sign the house over no matter how much money we were offering them, because they have what’s called emotional equity in there, and they wanna keep their house. It’s their shelter.

So once we kind of pivoted, we kept buying notes, but we started targeting owner-occupied loans. So now the typical deal for us is we’re looking for owner-occupied houses that are not really much more than three or four years behind on their mortgage; if they’re upside down, that’s fine. We love to get in there, and the first question we like to ask people when we get a deal is “Hey, do you wanna keep your house?” and the majority of the time the answer is yes, everybody wants to keep their house.

A lot of our borrowers have just gotten bad deals. They’d start filling out lost mitigation packages with the bank, and then the loan gets sold and they have to start all over, and it leads to a very frustrating experience when you’re trying to save your house. It’s like you take two steps forward and three steps backwards.

So we just ask that question, “Do you guys wanna keep your house?” If they say yes, then we start them on a trial payment plan immediately to say “Look, you’ve gotta give me some good faith money to show me that you can actually make these payments.” Then we start just collecting the loss mitigation package, which goes over their financials, their tax returns, stuff like that, so we can establish how much can they actually afford to pay. We give them a discounted payment plan upfront. We give them 70% of whatever they were paying to say “Here, just start making these payments.”

And the residual effect of being able to save somebody’s house has just been — not only are you making a really good return, you’re not spending as much money or foreclosures or deed in lieus, but you’re also able to save someone’s house. And there’s a family at the end of a lot of these loan numbers that people don’t realize that — there’s a lot of families that were affected by the meltdown, and it’s not just people with nefarious intentions who were not paying their mortgage… They’ve got hardships, and that’s gonna happen.

So we’re really proud and really happy that we’re able to start giving back and saving people’s houses and getting taxes paid for the communities, and just making a real dent in repairing the carnage from the meltdown.

Joe Fairless: What if their answer is “No, I don’t wanna keep my house.”

Rick Allen: Then we ask him, “Do you wanna sign over the house, so we can kind of tear this chapter out of your life? We won’t come after you after any past due money, we’ll waive deficiency judgment, and it that’s the case, we’re happy to give you some cash for keys money to kind of send you on your way. We’ll do what we can to help you find a new place.”

At the end of the day we wanna have a win/win, so if we have to take the house back, we’ll take it back. That’s a last resort. But if they don’t want the house, then they don’t want the house. We do what we can to help people out.

Joe Fairless: What’s the most challenging part of this process for your team?

Rick Allen: Breaking down the barrier somebody has when making their payment for four or five years, the prior investor who own these loans, some of their servicing companies just didn’t treat these borrowers with any sort of respect. I’ve heard some horror stories about people being threatened to be thrown in jail, or kicked out of their house… Just some terrible stuff. So breaking down that barrier to say “Look, we’re really here to help. We have your best intentions. We wanna do what we can to help you out and come up with a nice win/win solution.”

Joe Fairless: How do you build that trust with them, other than saying those words?

Rick Allen: One is we do what we say, but two – it’s amazing that if you call somebody… And we don’t do the loss mitigation anymore; we actually have a not-for-profit credit counselor who’s able to reach out to them, who does a fantastic job. And he’s able to just ask the question and listen. I think that’s the biggest key – you’re not learning anything if your mouth is moving. So if you’re able to stop and just take a breath and listen and be sincere and try to help these people out, that immediately is something that is not expected.

So you’re starting off the conversation with a curveball, because they’re expecting what the past four or five investors are doing, who comes in there with a sledgehammer that says “Either pay me or get out”, and “You’ve gotta pay me the full amount and you’ve gotta do it in 30 days, or get out.” So just by coming in there, getting them off-guard a little bit and saying “Tell me your story.” People wanna tell you their story.

Joe Fairless: What is your best real estate investing advice ever?

Rick Allen: My best real estate investing advice ever – I would say keep your head and kind of keep your pulse on the market. Don’t be so down in the deal, every single deal, that you’re not looking to see what’s going on. Just be aware of pivots in the market. You’re gonna have to reinvent yourself along the way. It’s part of it. And it may just be a little reinvention, or it may be a large reinvention.

Some of the stuff that we can kind of see on the horizon is there’s a big opportunity coming up in the seller finance space, where you’re doing owner financing. So that’s still in our lane, but we may have to just do a slight pivot, and that’s money that the fund — it still falls right in line with what we’re doing. So I would say just be cognizant of what’s going on around you and don’t be so stuck in a specific deal that you’re missing something, or an opportunity going by.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Rick Allen: Yeah, let’s roll.

Joe Fairless: Alright, let’s roll. First, a quick word from our Best Ever partners.

Break: [00:24:31].16] to [00:25:20].24]

Joe Fairless: Best ever book you’ve read?

Rick Allen: Wherever You Go, There You Are.

Joe Fairless: Best ever deal you’ve done?

Rick Allen: Best ever deal would be we bought a deal that was a non-performing loan, we wound up getting — the borrower started paying; she had a hardship. We paid 12,5k for the loan and wound up getting 18k from the state to reinstate her loan, and then we wound up getting 24 months paid for her by the state on top of that, and then wound up selling the loan for like 35k. So that was a huge deal [unintelligible [00:25:51].06] It was just perfect.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Rick Allen: No doing enough due diligence on value.

Joe Fairless: Can you elaborate on that example?

Rick Allen: Sure. We did buy a loan — we did the high-level, we took the BPO that the seller provided. You should always trust, but then verify. We kind of did a lackluster job verifying and wound up buying a loan at close to par what it was worth, and it wound up costing us to lose some money whenever we got out of the deal. The value dictates everything. You wanna have a firm understanding of what the value of every asset you buy, because the value is gonna dictate where your price is gonna be.

Joe Fairless: What data point would you look further into if you had the chance to do that particular deal over again?

Rick Allen: I would look at value — price.

Joe Fairless: I’m trying to understand, to determine the value – what do you look at to determine that value?

Rick Allen: You have do your own BPO’s. Don’t necessarily take what the seller gives you. There’s one fund that we bought a lot of assets from, and their BPO’s magically come in at 130% of value, every single time. [laughter] So it’s a smack on my risk for not doing it. I know better than that, so… I would always say get your own data, get your own BPO, so that you know for sure going in there. It might not just be one BPO, you may order two, from two different people, just so you’re 100% if there’s something in question.

Joe Fairless: Best ever way you like to give back?

Rick Allen: We love to give back by saving people’s houses. There’s nothing more powerful for us than to give somebody the ability to keep their shelter and to keep their house, especially if there are kids involved… I love saving a home when there’s kids involved.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Rick Allen: You can check us out at CloudCapitalManagement.com or PaperStac.com.

Joe Fairless: Very impressive what you’ve done, and I’m grateful that you took us through your progression and evolution as a real estate professional, from getting started and being employed, by wholesaling and hard money lending company, to now putting together a fun that has the potential to raise 50 million every 12 months. And the reality is right now you’ve got six million dollars that you’ve got under your belt, that you’re managing that money. That’s incredible.

Thanks for being on the show, thanks for talking about one of the main challenges that your team has, and that is, as you said, breaking down the barrier with the borrower, treating them with respect. And as you said… I’m sure there’s exceptions to this if we wanna really think about it, but I love the generalization – you’re not learning anything if your mouth is moving. I love that approach. Basically, we’ve just gotta listen. People wanna tell their story, so listen to them.

And then lastly, if you want to find a million dollar investor, then go to Orlando and coach a Little League baseball team. [laughs]

Thanks for being on the show. I hope you have a best ever day, Rick, and we’ll talk to you soon.

Rick Allen: Will do. Thanks, Joe. I appreciate it.

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Best Real Estate Investing Advice Ever Show Podcast

JF1029: Making Money With Delinquent Loans

From buying judgement liens to buying distressed mortgage notes, Jay and his partners specialize in bad debt.  If you want to know how to make money in a less popular area of investing, pay attention to what Jay says!  As a previous debt collection attorney for 20 years, he knows a thing or two about distressed assets.

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Jay Tenenbaum real estate background:
-Managing Director at AZP Capital, full-service real estate investment firm
-After closing the law practice, he started investing in judgment liens with a focus on real property
-Company has now bought 211 assets in 3 years
-Was a practicing debt collection attorney for 20 years in Southern California
-Based in Gilbert, Arizona
-Say hi to him at 714.458.6317 or www.azpcapital.com
-Best Ever Book: Lifeonaire

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today – Jay Tenenbaum. How are you doing, Jay?

Jay Tenenbaum: I’m great, thank you.

Joe Fairless: Nice to have you on the show. A little bit about Jay – he is at AZP Capital. His company now bought 211 assets in about three years. Prior to this, he was practicing debt collection attorney in Southern California. He is based right now in Gilbert, Arizona. With that being said, Jay, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jay Tenenbaum: Sure. So I first started as a debt collection attorney from 1990 to 2008. I was in law practice with my wife; we closed the practice in 2008, and fortunately the marriage survived… We’re happily married for almost 27 years now. From there, I transitioned into buying judgment liens in California and executing on the real property, at which point in time that turned into an opportunity to start buying distressed mortgage notes. That was August 2013… So I’ve said — you know, I’ve been “in debt” most of my life; not personally, just in the debt field. This segue, the transition into notes was just chasing a different debt instrument, from  debt collection to judgment liens to notes.

Joe Fairless: Buying judgment liens and executing on the real property – can you elaborate on that for anyone who’s not familiar with what that means?

Jay Tenenbaum: What happens is somewhere along the lines we were buying judgments that were originated from unsecured credit cards; some other attorney had sued the card holder on the defaulted credit card. A lien was attached to their real property that they owned, and most attorneys just let it sit as a dormant, passive collection effort where if the credit card holder goes to refinance or sell the property, then the judgment lien has to be paid off.

What we did is there is a provision in California – most states have a similar procedure – where you can ask the court to sell the property. Not at foreclosure per se, but a remedy that’s more formal, more involuntary than just waiting for the passive opportunity.

Joe Fairless: You made a lot of friends doing that, didn’t you?

Jay Tenenbaum: [laughs] I did and I didn’t… We didn’t sell a whole lot of properties because we just got a lot of payoffs; we weren’t looking to take anybody’s house, we were just looking to get paid off. In that time, especially with some of the older borrowers, I turned them on to some lending sources, including reverse mortgages, and got their lien paid off…

My style has always been one of treating a borrower or a credit card holder etc. with dignity and respect, and I did that in my debt collection space, I did that in the judgment lien space, I do that with my borrowers down in the mortgage space.

Joe Fairless: So then you transitioned from that to buying distressed mortgage notes in August 2013. Can you give a summary of that business model?

Jay Tenenbaum: Sure. You’re buying defaulted mortgage notes from banks to hedge funds, in one-offs (one at a time or [unintelligible [00:05:39].16] pools). Our business model is we’re buying notes that the borrower still lives in the property. We are then working really hard to keep the borrower in the home and work out a load mod. As a private investor, we don’t have the bureaucracy, the red tape to approve a loan mod, or nearly require the extensive amount of paperwork to apply.

Joe Fairless: And you make money in which ways? Because I know there’s a variety of ways.

Jay Tenenbaum: You make money indeed in a variety of ways. You’re buying the assets at 30-40 cents on the dollar, you are then [unintelligible [00:06:09].16] cash flow right away when you’re doing a loan mod with a borrower. Thereafter, after the payments are seasoned a little bit, you’re either able to resell the performing loan to another investor who likes performing loans, or you can encourage the borrower to refinance the property and pay you off.

That’s just one exit strategy, and there’s a variety of strategies in the note business. That’s just one with regards to a borrower that’s in an occupied property, who’s committed to working out a solution.

Joe Fairless: What are a couple others, and then we’ll transition into what you’re doing now?

Jay Tenenbaum: Sure, Joe. I have approached borrowers and said, “Okay, I bought the loan (let’s say) for $20,000 and you owe $80,000. I’ll accept a short payoff.” The property value is probably worth 50k. FHA has got a program where you can get refinanced out at 97% of the value, so even though the property was in the water, I got a check for $50,000 on a $20,000 investment, taking a haircut on what I call “Monopoly money”, because the unpaid balance is higher than the value; it’s just Monopoly money anywhere.

A borrower who just says, “Look, I can’t afford the property anymore” will give you a [unintelligible [00:07:16].27] foreclosure. Now you’ve got an REO to dispose of, fix and flip it or wholesale it, or even we do a lot of seller financing in the REO side of our portfolio.

Invariably, you may have to foreclose if the borrower doesn’t want to cooperate… That’s then the enforcing reality. That’s to name a few…

Joe Fairless: Yeah, that’s good. Thank you for that. Now let’s talk about what you’re doing – how are you making right now?

Jay Tenenbaum: Well, we make money — like I said, we bought 211 assets; we still manage probably around 120, of which about over a third of that portfolio is performing.

Joe Fairless: Okay, I’m sorry… So you’re  buying distressed mortgage notes still. I thought you transitioned out of that and transitioned into something else. So this is what you’re doing right now.

Jay Tenenbaum: Exactly.

Joe Fairless: Cool. So you’ve bought 211 assets. Were they distressed at the time, most of them?

Jay Tenenbaum: Yes.

Joe Fairless: Okay. How do you know which distressed asset to buy and which one to stay away from?

Jay Tenenbaum: Good question. It’s all about your due diligence. You will get a spreadsheet from a bank or a hedge fund that could have 15 assets on it. It could have 100 assets on it. What we do is we just initially make the general filters, meaning we wanna buy occupied – that’s kind of our primary criteria, because of our core business model. We wanna buy single-family residences, one to four units. Typically, we stay away from condos, mobile homes, land, things like that.

We wanna be in our favorite target markets, which is typically the Midwest and the South – Ohio, Indiana, Michigan, Alabama, the Carolinas…

Joe Fairless: Why those areas?

Jay Tenenbaum: Good question. We bought in 24 different states, because we buy occupied assets and get cash from anyone; it really didn’t matter what state the greenback was coming from. But to really do this well, you’ve gotta build your teams around 5-6 target markets. The Midwest and the South are the areas where primarily you see a  lot of inventory on a regular basis; you get your better values. Like I said, I’m buying assets at 30-40 cents on the dollar.

In California, for example, you’d be buying assets at 80-90 cents on the dollar. Florida is okay, there’s still some value in Florida somewhere, but mostly your (what we call) non-judicial states where foreclosures are faster and the prices are higher… So you’ve gotta foreclose in those states that I’ve mentioned. You’re doing it by a traditional closure lawsuit, which may take up to a year in certain instances, but you’re getting good value, plus we work really hard with the borrowers to keep them in their homes, so we’re still foreclosing on less than a third of our portfolio.

Joe Fairless: Okay. Occupied single-family, 1-4 units, South and Midwest… What else to determine if it’s a distressed note that you wanna buy versus a distressed note that you don’t?

Jay Tenenbaum: Again, if you’re really starting to look granularly into that, you’re looking at values of the properties… We’ve cut our teeth on what we call the lower value stuff, where the houses are around 50k. But you don’t really wanna buy — you can pick up a 20k house for probably 5k or less. We’ve done well with that stuff, but that’s where you’re getting in kind of a riskier endeavor.

Joe Fairless: Why is it riskier?

Jay Tenenbaum: Because if you’ve gotta foreclose, you’re gonna spend the same insurance, you’re gonna spend the same foreclosure fees, you’re gonna spend the same servicing on a $20,000 house as you are a $50,000 house or a $150,000 house. And if you take it back, how much can you rehab a $20,000 house?

Joe Fairless: Right.

Jay Tenenbaum: Now, we’ve gotten around that when we’ve missed a little bit here or there with our seller finance platform. That way, we will either sell a property to a buyer as a handyman special, or put a little bit of rehab in it – we call it a haircut and a shave – and put a buyer a in there. You can otherwise qualify for a loan.

We’ve also seller financed to investors who are looking to fix and flip or keep them in a buy and hold rental portfolio.

Joe Fairless: You look at the values of properties… So what is your sweet spot, if it’s not the 50k or less?

Jay Tenenbaum: Our sweet spot is probably 50k-100k houses. Above 50k you’re getting into what we call more the higher value class; a little more competition, a little more pricier just because of the values, but you’ve got a little bit of bigger margins there. My son will characterize that – when you’re buying the lower value space, you are getting three-quarters of a grape, and if you’re buying in the higher value space, you’re getting into recoveries of one-quarter of a watermelon.

I can buy a $50,000 house in Michigan for $10,000, and get a $400/month payment. Those investors who are enamored with the numerical percentage returns do very well on the lower value side. On the higher value side, you are buying that 100k house for maybe close to 65k, but you’re probably getting a $1,000/month payment as well.

The numerical returns are probably high teens, low twenties, but you’re getting more cash in your pocket every month.

Joe Fairless: Why isn’t the sweet spot 100k-250k?

Jay Tenenbaum: It can be, but if you’re raising private capital, the question becomes “To earn a good return, to put good money back in your pocket, it’s all a matter of just how much capital you need to deploy?” When you’re buying a 100k house, it’s 65 cents on the dollar – that’s $65,000. I can buy a ton of those.

We buy about a quarter million dollars worth of assets a month… Or we at least target to spend about a quarter million dollars a month. We don’t always hit that number. We start out with putting bids about that amount, but then things drop out in diligence and we may not end up spending that much.

So the question is “Okay, if I’m gonna buy a $250,000 house, I’m spending close to $160,000 to do that.”

Joe Fairless: I loved your old school calculator noise, by the way.

Jay Tenenbaum: Thank you! $160,000 – I can get two, three properties for the same $160,000. A littel diversity of risk as well.

Joe Fairless: Anything else as it relates to how to determine which distressed asset to buy and stay away from that you think we should mention?

Jay Tenenbaum: Since we don’t own the asset itself – we own the paper, we don’t own the property… That’s a distinction that troubles fix and flip investors all the time… What I’m about to get into is condition, and fix and flip investors are like “What about the condition of the property?” Well, unless the property is vacant, you can’t get inside the property because you don’t own the property itself.

Joe Fairless: Right.

Jay Tenenbaum: So with buying occupied – again, it’s more suited to our core business model, but in addition, being occupied is lesser of a risk the property is beat up inside, number one. That’s key as far as condition. Number two, we do a variety of property preservation – people that go out and do occupancy checks; these are local realtors to drive-by evaluations and a combination of both. So we have an idea of what the outside looks like, with kind of the presumptions, kind of like Blackjack where the dealer shows a 7 as the up card, so you assume there’s a ten there.

So you’re assuming that a borrower who lives there, the house isn’t beat up too bad on the inside. Other than that, from the outside you see tarps on roofs, or you’ve just got war zone neighborhoods… Delinquent property taxes are too high, to where what the seller wants for purchase and the value and the amount of the taxes just may not be a good numerical play…

Your values are key. You can’t agree on the value with any seller, but you’ve gotta know that what you’re gonna get for it and what you believe your values are are such that you can still make money. That’s where you sharpen your pencil and you make sure that your ROI calculators are precise.

Other than that, in your due diligence if there’s any defects in the chain of title, or loans delinquent for too long… Things like that. That’s kind of the priority checklist as far as what we look at and how we determine what makes the cut or not. A lot of stuff drops out because we only wanna pay X for a property, because we believe the value to be X, and the seller says “No, I want this for it.” We know at that price we could make money.

Joe Fairless: I’m glad you mentioned loans delinquent for too long, because that brings up the question “How long is too long for it to be delinquent?”

Jay Tenenbaum: It all depends on the particular state and their statute of limitations, but typically we won’t buy stuff that’s delinquent more than — now that we’re in 2017, probably 2013, 2014-ish.

Joe Fairless: 4-5 years…?

Jay Tenenbaum: Yeah, that’s probably right on the cusp of where we wanna see the delinquency. You don’t wanna buy anything that’s delinquent too much, because the borrower just hasn’t figured out what they’re gonna do yet. If it’s been delinquent for too long, you’re probably looking either at a foreclosure because they just [unintelligible [00:15:54].06] throw in the towel, they’re just living there for free, and you don’t wanna get into some statute of limitations issues that could preclude your ability to take back the property.

Joe Fairless: I wanna switch gears… Do you have interactions with the investors who are investing in these assets?

Jay Tenenbaum: Absolutely, all the time. We are a capital joint venture partners. I think the misnomer is, at least for us — our mission is… Typically, when you say you’re gonna joint venture with someone,  you’re like “Okay, it’s a passive opportunity.” If an investor wants a passive opportunity, that’s fine. But a lot of our investors are coming from places where they’ve had a little bit of education. I speak nationally any place, anytime, anywhere I can, so usually it’s an educational-type forum that I’m speaking at, so the attendees want to just learn as well as invest… So we provide that. I’m all about repetition; learning by doing, by repetition. Our investors – they can be hands-on what we do.

Typically, we start out [unintelligible [00:16:49].04] We start out together, we’ve already selected the assets, we’ve already done the diligence, we’re looking for you to fund them, and then we teach you from “Now that I acquired my first asset, what do we do from here?” The second rodeo would be breaking in on the diligence side. There’s too may moving parts to teach you all at once.

Joe Fairless: Describe your current investor – who they are, what’s their experience, how old are they, male/female? Just to give an idea of your current investor. I ask because this has to be a different profile of an investor who’s investing in distressed assets. My guess is they’re more sophisticated than typical investors, but I want to hear if that’s correct or not.

Jay Tenenbaum: It’s partially correct. I think my investor base – the note investing world is still probably a male-dominated world, although there are plenty of women involved. Two of my business partners are women, and the fourth business partner is my son.

They may have an advantage as far as calling banks and hedge funds to get someone on the phone. An asset manager will return for a phone call for a woman more than he will a man.

My investor base is probably still two-thirds, one third male/female, and I say that in terms of a lot of husband and wife teams as well, so that would be 50/50 there.

Sophisticated investors – yes and no. Again, I find most of them through whatever educational platform I’m speaking at. They had a desire to learn this business somehow, some way, some why first. All I’m doing is filling the need to allow them to get in the business, shorten up the learning curve, get in this business self-sufficiently.

When we were buying more of the lower value assets – an investment of, say, $50,000 would buy three or four lower value assets, and we’ve done quite well for many of our investors in that space… As we’ve kind of — I wouldn’t say we shifted… We’ve bought REOs in that asset class, and maybe REOs in some higher asset class from a particular source, and we started buying some higher value stuff.

I like all three asset classes. As we grew, institutional money started coming to us and said “We wanna throw money at you to buy this or that. We love what you do, we see your track record, we’re scared to death of the lower value stuff that you’re doing, so we want some higher value stuff.” To buy into the higher value class, you’re probably looking at an investment in capital 75k to 200k, to get you more of, say, one asset versus the diversity of risk, but a higher cushion of minimized risk, even though you’re investing in one asset. So that’s kind of where we’re at right now.

Joe Fairless: Based on your experience in the debt space, what is your best real estate investing advice ever?

Jay Tenenbaum: As I just said, my debt collection background is to me my specific skill, quality, expertise that I bring into this space. I believe that everybody has a particular skill, quality of expertise that makes them good for this business. Debt collection just happens to be mine.

My son’s the one that does the acquisitions. I’m not wired to sit in front of a computer and break down a tape. Others that are listening to this podcast are more suited to that, and that’s YOUR special skill, quality or expertise. A lot of what we do, a lot of what I’ve learned in this business – almost the last four years – can be taught, can be learned, except I don’t really believe that debt collection — the moniker is usually “Don’t try this at home.” If I taught you what I know and learned in 20 years, your head would explode.
It’s really something that should be left to a professional, just because of the liability and the regulations. Same when you’re getting into seller financing, and things like that. They’re better left to the professionals, just because of the rules and regulations that we have to deal with.

I don’t do as much of the borrower outreach as I used to. I use a third-party credit counselor to do most of my outreach. I take a different approach than the debt collectors and I’m coming at borrowers saying “We wanna be your advocate, let me help you talk to the lender.”

Funny story – I started using this particular company because when we first bought, my first 65 notes was from a hedge fund that I became closer related to than just a buyer/seller relationship. In that regard, I asked them one day “What was your best borrower outreach in all the time that you managed your hedge fund?” He said it was credit counseling; they had brought it in house out of necessity, and basically they took their debt collector, loss mitigator guys, asset managers and just got them certified in debt collection. They’re on my same page as to what I want, and they do a phenomenal job.

Joe Fairless: Great stuff. We’re going deep in debt collection and just distressed assets, and I’m enjoying it because it’s not an area that we usually go deep in. Are you ready for the Best Ever Lightning Round?

Jay Tenenbaum: Sure.

Joe Fairless: First, a quick word from our Best Ever partners.

Break: [00:21:33].16] to [00:22:30].05]

Joe Fairless: What’s the best ever book you’ve read?

Jay Tenenbaum: Lifeonaire.

Joe Fairless: Life In Air…?

Jay Tenenbaum: Yes. It’s like “billionaire”, but with “life” in front of it.

Joe Fairless: Oh, got it. I see what you just did. Best ever deal you’ve done?

Jay Tenenbaum: There’s so many… Each one is so unique and special… Best ever deal I’ve done – most recent – I bought an asset in Chicago for $60,000. The borrower unfortunately set fire on the second floor. We insured it for $100,000, got a check for $100,000, and then short saled it to an investor friend of our son’s for another 12k.

Joe Fairless: [laughs] Oh my gosh…

Jay Tenenbaum: It’s one of my most recent deals; I’m short on memory here. A lot of the deals rank as best because of the connection and the solution and the help and the assistance that we provide to the borrower.

Joe Fairless: What’s a mistake you’ve made on a particular deal?

Jay Tenenbaum: Overpaying for the asset. The information that we had and our diligence turned out to be accurate. The vendor that we used turned out to be not somebody that we could rely on for the information.

Joe Fairless: Best ever way you like to give back?

Jay Tenenbaum: To work on my joint venture partners to teach them this business.

Joe Fairless: And I’m just remembering – you mentioned the word “tape” earlier… That is a spreadsheet that has a bunch of properties or distressed notes that you get to choose to purchase or not purchase… What is the best place the Best Ever listeners can get in touch with you?

Jay Tenenbaum: Cell phone is 714-458-63-17. E-mail is jay@azpcapital.com. Or visit our website, at www.azpcapital.com as well.

Joe Fairless: Excellent. Jay, thank you for being on the show. Thanks for just being very clear with how to determine which distressed note to buy and which one to pass on, and how you approach that. One, is it occupied? Because it’s less of a risk that the property is beat up, among other things. Two, single-family residence, 1-4 units. Three, Midwest and South – you get better values. Four, the value of the property – 50k-100k is the sweet spot; you talked about why. And then miscellaneous things like occupancy checks, doing drive-bys, chain of title, make sure that’s clear, and that it hasn’t been delinquent for too long. It depends on the state, but usually 4-5 years or longer is too long… Plus all the other wonderful things we’ve talked about.

I hope you have a Best Ever day. Thanks so much for being on the show, and we’ll talk to you soon.

Jay Tenenbaum: My pleasure. Thanks for having me.


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Best Real Estate Investing Advice Ever Show Podcast

JF996: How to Buy, Hold, and Sell Seller Financed NOTES

Seller financing is your creative method to cash flow and huge returns, and our guest is able to create, purchase, and hold seller financed notes.

Best Ever Tweet:

Dawn Rickabaugh Real Estate Background:
– Owner of Note Queen Capital and specializes in owner-carry portfolio and been an investor for 13 years
– Buys seller-financed notes across the country and helps others get started investing in notes
– Consults in real estate transactions that involve owner financing, and buys & sells real estate
– Based in Carson City, Nevada
– Say hi to her at www.notequeen.com
– Best Ever Book: A Course in Miracles

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Buy Seller-Financed Notes


Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Dawn Rickabaugh. How are you doing, Dawn?

Dawn Rickabaugh: I’m doing great, thanks for having me!

Joe Fairless: Well, it’s our pleasure. Nice to have you on the show. Dawn is the owner of Note Queen Capital, and specializes in owner carry notes, and she has also been an investor for 13 years. She buys seller-financed notes across the country and helps others get started in notes. She is based in Carson City, Nevada. With that being said, Dawn, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dawn Rickabaugh: I would love to, thanks Joe. Well, I graduated from college with a bachelor’s in nursing, and I worked in an ER, in an ICU and I raised for babies, and all during that time I would take these courses and think that I think I can be an entrepreneur some day. That day turned out to be 2004, when I put my nursing job on a dime; I still had four kids and two mortgages and three dogs, and I decided “Hey, I’m other gonna think or swim, but I’m gonna go for it.” I fell in love with the note business; I just love the financial calculator, I love being able to work that and figure out how to solve problems, and I just love how private money works; I stay away from bank financing.

Ever since I quit that job, I’ve been doing a variety of things, but what I do most is I buy owner carry paper. That means when somebody offers owner financing and they become the bank of their property, sometimes that want that payment stream, but then sometimes they need cash instead of the $800 or $1,500 that’s coming in per month; they need a lump sum of cash for something, and that’s where I come in with my investors, and we take down these investments.

Joe Fairless: How do you get a deal? Do you usually find it yourself and have the conversation with the owner?

Dawn Rickabaugh: That’s a great question. Everyone wants to know how do you find notes. A lot of people do direct mail, just like you do direct mail to find motivated real estate sellers – you can do that for paper. You can buy lists of people that have carried that paper and want to sell their property. For me, I’ve never done that; it doesn’t mean it’s a bad idea, but I end up attracting a lot of business to me because of my positioning in the marketplace. I’m talking directly with sellers, and I also have people that bring me deals, that are very good note brokers, note finders, and they find them in a variety of ways, whether it’s direct mail, Craigslist… Just other internet-based resources. So that’s the way I find them, and then investors – once you have a good deal, it’s not hard to find the money.

One person gets their friends and family involved, so the private money tends to grow organically, and so do the note leads. But the other thing that I really love is having this understanding the secondary market for private paper gives me a real advantage as a real estate investor, because I understand how to buy with owner financing and how to sell with owner financing, and how to get liquid either way, if I need to, to make the deal work. So to me, the best ever advice as a real estate investor, you need understand the secondary market for notes, because it will give you the edge that most investors just don’t even see.

Joe Fairless: I’d love for you to elaborate more on that in a second, but first, before you elaborate on that, I think what would be good is if you give us a specific example of a past deal, and tell us the story about the individual – how you came across them and why they ended up doing the deal with you in the way that you wanted it to be structured.

Dawn Rickabaugh: Okay, fantastic. I have several I can pull from this week. Here’s an example – it’s not my ordinary example, but it’s kind of fun to talk about… There’s a nice property in Laguna Niguel – a really [unintelligible [00:06:02].22]  of Orange County, California. They’ve been on the market, they need to sell, and they got an offer for their four million purchase price, but the buyer only wanted to put two million down, and he wanted another couple years to be able to pay off the balance. So that’s two million down owner carry, and that’s a very reasonable thing for the sellers to become the lenders and just say, “Hey, yeah, we’ll let him pay us monthly, $16,000/month and within two years he’ll pay us off”, except for they need to cash out because they’ve got an underlying bank loan that’s pretty sizeable that they just wanna get rid of.

So here’s the situation where the note sellers – they’ve got to sell the property for the price they wanted, in exchange for carrying terms; they could have made probably 250k-300k in interest just being willing to do that, but since they don’t wanna do that and they need to sell, they came to me and said “Can you structure this deal in a way that we can sell the note right after we create it?” So that’s what I’m doing in that situation, where they used owner carry to get sold, but they used the sale of the note to liquidate, to get a couple extra hundred grand in their pocket, plus get rid of that underlying bank loan that was making everybody nervous.

So what I get, besides a consulting fee to sort of puppeteer the whole thing, but I get to buy the note and add it to our portfolio, because I’m buying it at a discount. And because they brought me in ahead of time, we could minimize the discount that would be required, because notes can sell for 50 cents on the dollar, or 30 cents on the dollar, or 90 cents on the dollar, depending on how the whole deal is put together.

Joe Fairless: Okay, so you will have the note, and there is already two million paid down on it. It’s a four-million-dollar note, right?

Dawn Rickabaugh: Right. No, four million dollars sale price. Two million down, and a two-million-dollar owner carry note that I’m gonna be able to buy for 1.9. It was a very small discount because I was brought in in the beginning as a consultant to say “How do we cash out of this without being chopped off at the knees?”

Joe Fairless: So it’s a two-million-dollar note, and you bought it for 1.9, so there’s a $100,000 spread, and the best case scenario for you is that you get $100,000 over two years as a result of this person paying down the note.

Dawn Rickabaugh: Right, but you also have the face rate of the interest rate. So between the discount and the face rate that the borrower is paying, it works out about to 9%, and this is a very excellent collateral. The worst case scenario would be the best case scenario where you end up owning for two million dollars, plus legal fees – you end up owning this really killer property in Laguna Niguel. So that’s the best case scenario, if there’s a default. The worst case scenario is that me and my investors get to put almost two million dollars to work and make really a total of about 270k in interest over a two-year term.

Now, the thing that’s interesting about buying notes at a discount versus just I could have made a loan, but the borrower only wanted to pay 5,5%, no more. So most private lenders don’t lend at that. But they could get the owner to carry a 5,5%, but then the owner just has to discount on their side. It’s like the seller has sort of paid the points, in a way, to get liquid out of this, but what they were doing is finally being able to get out of a property that they needed to sell, and this is the best offer that’s come along so far, so it really worked for them on a multiplicity of levels… But here’s the deal – he gets two years to pay off the note, but if he pays it off early, technically on this there’s a $2,052,000, so basically there’s a $150,000 spread. So if he doesn’t ride it to maturity — let’s say he pays it off six months from now, in December, but I still get the whole balance.

So if the balance on the note from him – it still has a balance of let’s say $2,030,000 and I only paid 1,9, that honoring discount that you get when a note pays off earlier than expected, there’s a minimum yield of around 8,5%-9%, but if he pays off early, it will push us over 13% on this really excellent, safe investment. So that’s kind of the beauty of buying discounted paper, versus just making an origination, like a private money loan, or something.

Joe Fairless: That’s fascinating.

Dawn Rickabaugh: It’s about crunching the numbers to make it work. And then I can take it to a real small level too, because that’s out of the reach of most of us. I don’t buy four million dollar homes myself. [dog barking] Sorry about that… Someone let the dog in. [laughter] Okay, that was the best ever puppy in the world, so it actually works for your show. [laughter]

Joe Fairless: Beautiful, nice segue! Good save! [laughter] So on a smaller level…

Dawn Rickabaugh: Yeah, let’s just take it on a smaller level. Here in my hometown of Carson City, Nevada, somebody had a mobile home note. Let’s say they sold their mobile home for $22,000  and they took $10,000 from the buyer, so they ended up with a $12,000 note. Who’s gonna buy a note secured by a little mobile home in Carson City, where the space rent is like $425 and it’s first-lien position…? Well, this kid – he could receive those payments and it could be really well, but the problem was he needed to leave town; he needed to get liquid and just move and never look back. That was a Craigslist, actually. I had created a filter saying “anyone talking about promissory notes, drop it into my inbox.”

I got it while I was at the gym one morning, I called him, and I bought the $12,000 for like $6,000. He was thrilled. So it’s not a huge gain for me… Okay, I’ll double my money in the next four years, but little things like that stacked up really go a long way. So I solved the problem of the guy needing to cash out, and there’s not very much of a market for that. And also, I’m rehabbing and selling mobile homes on owner carry terms. So if someone doesn’t have all cash, I say “Hey, if you can put at least $5,000 down, I’ll carry for you”, so as a real estate investor I have the edge, because I know how owner financing works, and if I get tight, unliquid, I can sell off a piece of my note to get liquid again.

Joe Fairless: Was the actual Craigslist ad “anyone talking about promissory notes” – did you post that?

Dawn Rickabaugh: Yeah, I have this revolving “I buy property, I buy paper”, or anything promissory notes, owner carry – I’ve created filters, so that Craigslist dropped those in to me, and I also have an ad that just says I buy these things. But I keep revolving on Craigslist, and some of the guys that bring me deals, that hustle out there and are good at nailing things down, they find them on Craigslist or they’re just hustling out on the internet, and then others, they spend 5k a month on direct mail campaigns, and we’re able to convert those leads very effectively.

Joe Fairless: How did you get the lead in California, the Orange County one?

Dawn Rickabaugh: That’s all about positioning. I’ve spent my time building my business very slowly and organically, like the turtle approach versus the hare, where I’ve been blogging since 2008, I wrote a book back in 2009. I’m working on my second release this summer, which is gonna be a lot more fun to put out there, even than my first book, and then I did a lot of speaking. So I guess when you position yourself a certain way, then people care about you, they like you, they get to know you, and so they think of your when they have a situation. So a lot of times when a deal is falling apart… Even my neighbor, last year – she’s a realtor and she was double-ending this nice, sweet deal, $15,000 getting ready to drop in her pocket, except for the funding fell through. So she brought me in to save that deal from falling apart, and I know she bought a hot tub with that money and I haven’t been invited over yet to sit in it. [laughter]

Joe Fairless: How did you save that deal? What did you two?

Dawn Rickabaugh: We could have hit it two ways; the reason it fell apart is because the borrower — he had a big down payment, like 30%, but he couldn’t get the loan because he didn’t have the seasoning in the business, because they moved from a California business to a Nevada business, and they didn’t have two years in Nevada yet. So he couldn’t get a loan, which is absolutely ridiculous; he has a great credit risk. He could have gotten hard money, or I could have set him up with 9% or 10% money and 2-4 points [unintelligible [00:14:49].08] expenses. Then I looked at the seller and I was like “They’ve got great existing financing in place. The only problem is they’re 30k behind [unintelligible [00:14:57].08]” so that’s 5% financing. So I said, “Here’s the deal. Buyer has the money to get them all their equity and take over – not subject to, but we did a wrap, so that the people that are on the loan can’t get cut out of the deal by accident; they always have a play. Do you understand what I mean by “a wrap” versus “subject to”?

Joe Fairless: Elaborate, will you?

Dawn Rickabaugh: The borrower actually owes the seller and the seller owes the bank. So we need to make sure that the seller, if they don’t get their money from the borrower, that they have the right to foreclose and get the property back. If you take it subject to, if there’s a default and they start — well, in this case, the credit was crap anyway, because they hadn’t paid for two years, but they had equity still… But anyway, so they couldn’t step back in if they wanted to, because you need to have a way for the sellers to have a play to get back in the deal, so that’s why I use it as a wrap. Borrower owes seller, seller owes bank, and then we have a note servicing company to keep score for everybody. So when the borrower pays the seller, they know that the seller is paying the bank loan because he doesn’t wanna be paying, and then find out that it’s going into default. And the sellers actually want their credit to be rebuilt. So this was beautiful.

The buyer – he brought in a big amount of cash to give them all their equity and to bring the loan current, so then instead of paying 3 points and 10% for a private loan, he’s not leveraging the 5% bank loan that’s still on the seller’s name, and the sellers are gonna win because now somebody is rebuilding their credit. By the time that this is done, they’re gonna have 2, 3, 4 years of perfect payment history and it will rebuild their credit so that when they’re ready, they can go get another loan and start their lives over, and then by that time the guy can get a loan in his own name, because they will have sufficient seasoning of the business here in Nevada. So that’s where it was just like an epic win/win for everybody.

Joe Fairless: Yeah, what a deal… Thank you for this example. These are three examples that are just phenomenal case studies, for different reasons. I wanna ask one last follow-up question about the Orange County deal… You mentioned you put yourself out there, but specifically how did you get in contact with them? You talked about the things that you do, but did they reach out to you via a website, or what?

Dawn Rickabaugh: Yeah, they sent me an e-mail… I guess they’d heard me speak and we must have met years ago. The funny thing is this guy is actually an attorney, but when it comes to this stuff he calls me, because attorneys — it’s really great when they know that they don’t know everything… [laughs] So usually I’m educating attorneys about the secondary note thing. But he’s also a real estate investor, so he knew about this deal and he wanted me involved to help these people that he knew. This is actually the second referral that he’s brought to me, to help create a win/win solution for all the parties. And it doesn’t always involve a note to get sold, sometimes it’s a lease option, or we put a trust together… There’s not one hammer fits all, but when you understand the secondary market for notes and you can do that dance between property and paper, you just become a killer problem solver. And it’s not only fun, but it’s lucrative.

Joe Fairless: Feel free to repeat the secondary note thing, but… I have to mention it, because I’ve got this whole lead-up music too when I ask you, and it would just kill the whole show if I don’t ask you specifically… But you can repeat your answer, that’s fine. So what is your best real estate investing advice ever?

Dawn Rickabaugh: Learn the dance between property and paper. Learn how the secondary market for private paper works and you will have the edge over every other real estate investor that you perceive as competing with you and your market.

Joe Fairless: That is true. Just hearing you talk through these case studies… It’s 3.0 real estate investing, and it’s something that a lot of people don’t know about, and I’m grateful that you’re on the show talking about it, and I’m grateful that you spiced it up that go around… Instead of “understand the secondary markets”, you gave us a little “learn the dance between…”, so thanks for that too.

Dawn Rickabaugh: You’re welcome. I think people need to dance. Dance, and sing, and laugh, and have fun.

Joe Fairless: There we go. Well, are you ready for the Best Ever Lightning Round?

Dawn Rickabaugh: Oh, I have my little paper here.

Joe Fairless: Oh, okay… Well, I might have to ask you some questions that aren’t on it, just to keep you on your toes.

Dawn Rickabaugh: [laughs] Okay.

Joe Fairless: First though, a quick word from our Best Ever partners.

Break: [00:19:43].20] to [00:20:30].21]

Joe Fairless: Best ever music you like to dance to?

Dawn Rickabaugh: [laughs] Well, lately it’s country… Since I moved to Carson City, Nevada, I bought a truck, I bought a Harley, and I can do country dancing now. But don’t tell anyone.

Joe Fairless: [laughs] Well, I think we told a lot of people just now. Best ever book you’ve read?

Dawn Rickabaugh: Course In Miracles.

Joe Fairless: Best ever deal you’ve done?

Dawn Rickabaugh: Buying a non-performing diverse note that was in second position for $10,000 and nine months later getting $80,000 when it paid off.

Joe Fairless: Best ever way you like to give back?

Dawn Rickabaugh: Creating homes for families who are shut out of the system. They don’t have all cash, they can’t get a bank loan, but they still need stability for our communities and they need a home for the family. So that owner carry thing that I help make happen in my own backyard – that makes me feel good. And also sharing information, so people get inspired to do this in their own communities and create those financial solutions just one moment pop to another.

Joe Fairless: What’s a mistake you made on a deal?

Dawn Rickabaugh: Trusting a title company to do the right paperwork, to do it right, and then finding out they didn’t, and then I just wanna hit myself.

Joe Fairless: [laughs] What do you do now to mitigate that risk?

Dawn Rickabaugh: I read things. I take responsibility for all the documentation and paperwork, the due diligence. I kind of read stuff; just sort of reading things.

Joe Fairless: And where can the Best Ever listeners get in touch with you?

Dawn Rickabaugh: NoteQueen.com. And I also have a podcast – Owner Financing & Note Investing Podcast.

Joe Fairless: Alright. Well, we’ve got two ways then – the podcast, go check it out, as well as NoteQueen.com. Dawn, I loved the case studies; that’s one of the best ways to learn. You gave us the case study in California, the case study with the mobile home note, and the case study with your neighbor, and three solutions, all having a central theme of, as you said earlier, knowing the secondary market for notes and being able to structure it accordingly. I learned a lot on this subject in particular.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Dawn Rickabaugh: Thank you so much, Joe. It’s been a privilege. Take care.


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best ever real estate pro advice

JF974: Take Notes about NOTES and Debt!

Taking notes? That’s okay if you’re not, but you should at least buy notes! You’ll hear all about it in this episode! Good debt, bad debt, whatever… Notes are extremely profitable and if purchased correctly, may be one of the most ideal passive wealth generators in investments.

Best Ever Tweet:

Scott Carson Real Estate Background:
– CEO of WeCloseNotes.com and the creator of the Note Buying for Dummies workshop
– Purchased over half a billion dollars in distressed debt for his portfolio and assets in over 30 states
– Note Buying Workshop focuses on the 3 F’s of Note Buying…The Find, Fund and Flip
– Speaker on distressed debt, the 2014 Note Educator of the Year, and featured in The Wall Street Journal
– Active real estate investor since 2002 and solely focused on the note industry since 2008
– Based in Austin, Texas
– Say hi to him at http://www.weclosenotes.com


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Real Estate Note Advice


Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Scott Carson. How are you doing, Scott?

Scott Carson: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Nice to have you on the show, my friend. A little bit about Scott – he is the CEO of WeCloseNotes.com and the creator of the Note Buying For Dummies workshop. He is a speaker on distressed debt, and the 2014 Note Educator Of The Year; he’s been featured in the Wall-Street Journal, he’s an active real estate investor, been one since 2002, and has solely been focused on the note industry since 2008… So guess what, Best Ever listeners? I think you know what we’re gonna be talking about, don’t ya?

You can say hi to him at his website, WeCloseNotes.com. With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Scott Carson: We focus directly on buying distressed debt, only non-performing and first liens on residential and commercial properties all across the country, from banks and hedge funds. We’re buying for our own portfolio, we buy for students, but we’ve been doing that since everything hit the fan in 2007-2009.

My background – I started off like a lot of real estate investors, [unintelligible [00:03:24].15] Flip This House on AMC TV, we decided we could be landlords; I thought that was a cool idea. We bought our first investment property in 2002, the second one in late 2002 as well, and then the market changed here in Austin, Texas.

Dell Computers laid a lot of people off who were ideal tenants, and the market went South for a little bit. [unintelligible [00:03:45].11] and I was a distressed borrower very quickly. I was pretty lucky enough to get rid of those deals and get hooked up with a couple real estate investors here locally, who taught investing, taught the traditional way of doing things, and I was pretty lucky there to learn real estate the right way – options, subject to deals… They also taught [unintelligible [00:04:06].10] owner financing, things like that. So for 3-4 years I got to work as basically an apprentice and sponge up so much quality information from them.

Then when the market went South again with everything in the mortgage industry, I saw the opportunity and stopped focusing on short sales and subject to deals and fix and flips here in Austin, and I started buying debt all across the country.

Joe Fairless: You’ve been focused on note buying since 2008… What are the pros and cons of note buying, compare to buying rental properties, adding those into your portfolio? Because you’ve been on both sides.

Scott Carson: Yeah, I’ve been on both sides… It’s a great question; we get that a lot. First off, there’s a lot more inventory out there. There are still 6-7 million defaulted loans out there right now. Second, we’re often getting better pricing on the distressed debt than people are buying for rental properties. And then the third thing, you don’t deal with toilets and tenants. When was the last time you called Bank of America (if you got a Bank of America mortgage) for them to come unclog your toilet, or to fix your water if it goes out? You don’t have to do that with a bank, and that’s the beautiful thing about buying debt. We’re buying at a fraction of what most people are buying properties, at 50% of value or less.

We’re working to create win/win scenarios with the borrowers, trying to keep them in their properties by modifying the loan, doing a forbearance plan, and we’ve got a lot of exit strategies, but our biggest bang for the buck is when we can modify the loans, keep them in the property, and they start paying on time for 12-18 months and then we just either keep it for cash flow at a high ROI, or sell that loan off to another investor who’s looking for cash flow.

That’s what I like about it – instead of it being mailbox money, it’s wire money. I get an invoice every month from our servicing company telling me who has paid, and if they don’t pay, they don’t stay.

Joe Fairless: Cool. I wanna talk more about the pros, but then I also want to have – as objectively as you can look at it – the pros and the cons. Obviously, there are cons compared to buying rental properties. What are the cons?

Scott Carson: The cons is you’re the bank. There’s a lot more that goes into a distressed note than buying a property that you can put a renter in. When you buy a rental property, you own the real estate, so you can put a renter in there, you deal with all the management stuff or hire a property management company… When you buy the note, you don’t own the property. Now, you control it, but if you’ve got people that won’t pay, the biggest con is gonna be basically that you’re either gonna have to foreclose, or hire an attorney to reach out to that borrower to try to get him to do something.

Like I said before, they don’t pay, they don’t stay, but in some states it can take a little while to foreclose. In Florida it can take 12+ months to foreclose; in New York/New Jersey you’re looking at 2-3 years sometimes. There are states that are fast foreclosures, states like Texas, Georgia, Arizona, Nevada – they are easier to buy notes in, because you can foreclose so quickly.

I always tell people to expect to probably have to put 3k-5k in expenses along for attorney fees, servicing costs when you’re buying a note, because you’re gonna have to take over that bank’s nightmare.

That’s really the biggest con – you don’t know exactly which way the deal is gonna go. We’ve had deals that we thought would be easy modifications that turned into extended foreclosures of 12-18+ months. We’ve had others that we were getting ready to foreclose on that turned into the borrower just signing the property over to us and walked away, and left the property in clean conditions.

It’s the biggest frustration, but some people dealing with notes try to have one business model “I’m gonna foreclose all the time.” Well, it doesn’t always work that way. That was the biggest mistake I made early on – I started buying notes, Joe… I planned to foreclose in everything, and I left a lot of money on the table and spent a lot of money, when I could have modified loans initially, had cash flow coming in, not had to put up repair costs, not had to put up foreclosure attorney costs, and start making money immediately.

Joe Fairless: Can you walk through an example of what a foreclosure process would look like, compared to a loan modification process? Just trying to get an idea of the costs and the people involved in each of those.

Scott Carson: Okay, well let’s start with a loan modification. Once you’re buying out, you’re reaching out to the borrower. Half the states will let you do that yourself if you want to, other states wand you to be a licensed mortgage broker. I always recommend that you have a licensed servicing company do this; you don’t wanna do this yourself. So you have your servicer, they’re making 4-8 phone calls to reach out to the borrower; hopefully the borrower responds. If they don’t respond, they’re also sending direct mail campaigns out – certified letters, “Hey, give us a phone call.”

We’ll hire a realtor or a door-knocking service to go out and make contact with the borrower. Our biggest goal is within the first 30 days to make right party contact with the borrower and find out what their plan is. If they’re gonna tell us to pound sand or go do something else, that’s fine, we’ll send it straight to the attorney and start the foreclosure process.

If they decide to modify, then it’s a matter of figuring out “Okay, what was [unintelligible [00:09:03].02] payment?” What’s market rent for that same type of property is what I like to look at, because that’s gonna basically be what the borrowers are looking at – “Can I move out and rent something similar?”

We use the market rent rates of the property to figure out, “Okay, your mortgage payment is $1,500, market rent rate is $1,800. You should probably just start making your payments on time. We’re not really gonna adjust that down much for you, because if you moved out, you’re gonna go pay more, so it’s better for you to work with us.”

Then we’re sending the documents for him to sign and send back in. The trial payment plans will be anywhere from 3, 6 to 12 months, depending on what the borrower and we can come to an agreement. Sometimes we’ll reduce the interest rate, sometimes we’ll make them pay 6-12 months on time before we reduce principal [unintelligible [00:09:48].00] but there’s all sorts of creativity with those modifications of trial payment plans to really get some home runs as far as ROI.

We’ve had borrowers bringing anywhere from $500 to the table or $10,000 to modify that loan.

Joe Fairless: One question about that process… Who’s doing the negotiations with them? You said “Hire a licensed servicing company to reach out to the borrower.” Are they also negotiating with them on your behalf?

Scott Carson: They are. They’re notifying us, “Hey, I spoke to John Smith today. Here’s what they would like to try to do. Does that make sense for you?” and we’re going back and forth either via phone call, conference call or e-mails.

When I buy notes, I tell the services what I’d like to do, then I give them some guidelines of what I’m looking for.

Joe Fairless: For example?

Scott Carson: For example if the borrower can’t bring at least four months of back payments to the table, we’re not gonna modify. We’re gonna offer cash for keys at that point. If they bring four months to the table, great, we’ll look to keep them in the property. But if they can’t bring that, they don’t have any skin in the game… Any time that you modify a loan or do a trial payment plan and the borrower doesn’t bring any skin into the game, they end up defaulting later on and you’re on to foreclosing.

So I’d rather just “Hey, instead of us fighting over this, let’s just make this a win/win. If you can’t really afford it based on what you’re telling me your financials are, let me just give you some cash to walk from the property and let you start over.”

Joe Fairless: Okay. That’s helpful, thank you. So you said if they decide to modify, then you figure out what the market rent is and then you either charge them that, or if their principal payment and interest and everything is lower than that, then they might as well just pay that, versus the market rent, because they’re gonna have to pay higher if they were to leave. Then what’s the process?

Scott Carson: If they decide to leave, Joe?

Joe Fairless: Yeah, if they decide to leave.

Scott Carson: Yeah, if they decide to leave, then it’s basically just getting to one of our local attorneys in that state or that city, deciding over documents — we always run title reports to make sure there’s not any other junior liens behind ours. If there is liens, then we may have to do a foreclosure, or we’ll get the bar to agree to a consent to judgment to speed up the foreclosure timeframe.

If there’s no other liens behind the property that we don’t wanna negotiate down or are glad to pay off, like weed liens or even some credit card debt, stuff like that – we’ll just pay those liens off to take the property back, depending on what we paid for the property.

It’s a pretty simple process. They show up [unintelligible [00:12:07].00] they leave the keys with our attorney, then our real estate agent goes by and changes the locks to the property, and we follow documents, now it’s an REO to us and we do whatever we want with the property at that point.

Joe Fairless: I know this is gonna be a tough question because it depends on the particular opportunity, but roughly what are the costs involved with the loan modification process? And I’m gonna ask the same question about process and cost for the foreclosure process.

Scott Carson: Right. Modification – I’ll say you’re probably gonna pay about $1,500 in servicing fees and paperwork. You have to pay an attorney to create the modification documents, to get that filed… You’re probably gonna see $1,500 roughly. If you’re gonna foreclose, you’re probably gonna see somewhere between $1,000 to foreclose in a state like Texas, all the way up to $5,000 on average in Florida, which is like 12-18 months to foreclose.

We have had situations where it took longer… I’ve had one asset take two years to foreclose in Florida. It cost me 6k in foreclosure fees, and then I also paid 10k to the borrower to expedite it and quit fighting with him. I was buying the asset at 35k, it was worth 100k, so it made sense for me to pay him 10k to walk away.

Joe Fairless: In that case… In Florida, as you mentioned, it does take longer, but how does it get strung out to two years?

Scott Carson: [laughs] That’s a good thing. One is sometimes they hire attorneys that will drag stuff out. Now, Florida was taking about 12 months or this timeframe, which is you’re just waiting on a judicial foreclosure timeframe. The attorney for the borrower filed a couple delays. My attorney showed up to court one day and didn’t have all the original documents that she needed to have to proceed, so that delayed it 90 days.

Joe Fairless: Oh, gosh…

Scott Carson: Yeah, especially they requested me to fly out there and show up as a witness. So it was a little frustrating, because I had some airfare costs and hotel fees, but it was still a win/win, because we bought the note at such a cheaper price. But you have delays that happen like this… Sometimes you’ve gotta re-file assignments. Now, we’re foreclosing a couple properties in Chicago right now… I call it Crook County, because it’s just taking forever to foreclose, the judges have given the tenants and the borrowers extra time upon extra time upon extra time, the sheriff doesn’t want to enforce the evictions of the tenants… I will never buy another note in Chicago. I’ll buy in other areas in Illinois, but never in Crook County again.

Joe Fairless: Yeah, it’s interesting how different counties and states approach this process.

Scott Carson: It is. Some are really easy, some will do everything online, show up, bam! It’s easy, done. Other times you’ve gotta show up in person and drag stuff out… But that’s what keeps it so interesting, Joe. There’s a lot of great things. I always tell people to start investing in five states, pick up five states. You’ll learn a lot about the different foreclosure laws and things like that, but you also have plenty of opportunity with deal flow, as well.

Joe Fairless: I believe you have access to distressed notes, and you mentioned earlier that you have people who invest, or your students, who go in the process… But let’s just assume your program doesn’t exist. For an investor who’s listening to this and they wanted to do distressed note investing, where do they go to find those notes, and where do they go to get the licensed servicing company?

Scott Carson: Really easy – there’s specific departments inside of banks and mortgage companies all across the country. That’s what I started off doing – calling these banks, and real estate funds and mortgage companies. If people get one thing out of this podcast with you today, they should get this – the individuals inside of the banks, they go by the names of either special asset managers, or secondary marketing managers. They also have a chief credit risk officer… It’s often sometimes the name of the department. So those three names: special assets, secondary marketing and chief credit risk officer.

You’re not going to call customer services. You can go to LinkedIn and search for special assets managers or secondary marketing, and literally, LinkedIn will show you close to 8,500-9,000 special assets managers from banks and lending institutions all across the country.

I like reaching out to those guys and gals because they are the people who handle the portfolio, they know what’s performing, what’s non-performing, they know the nightmares, loans that the bank is looking to get rid of, and that’s a great source to find assets. We do it on a regular basis here, and it’s actually helped us build a large database of bank asset managers that we reach out to on a regular basis.

Servicing companies – all you have to do is google “loan servicing companies.” You’ll find them all across the country, there’s hundreds of small companies that will service loans just in that state, or other larger companies that will service loans all across the country. They’re there to help assist you in getting your loans performing; they’ll also handle performing loans, if you set up on payment plans.

Those charges will run you from $20-$75/month/loan. If you’ve got a performing loan, the servicing company will charge you $15-$20 just to collect the payments and set up the statements. If it’s a non-performing loan, they’re gonna charge you somewhere between $75-$100/month to handle [unintelligible [00:17:11].23]

Joe Fairless: It seems really inexpensive.

Scott Carson: It is when you consider what your time is worth. [laughs] Some people – I won’t say a lot – try to do that themselves, and when the CFPB and the Dodd-Frank laws and all that stuff — you don’t wanna mess around with it. So if you’re not a licensed mortgage broker or a licensed debt collector in a state, your time is better spent finding assets or raising capital and closing deals.

Joe Fairless: What questions should you ask a loan servicing company that you reach out to about doing this for your distressed note?

Scott Carson: Good question. 1) What states are you licensed in? There are some services out there that aren’t licensed in all the states, but they’re still trying to service loans, which is a big, messy thing. 2) Do they have a list of real estate attorneys across the country that you can use? 3) Can you speak to the real estate attorneys that they recommend? Some servicing companies wanna be the go-through, where you’ve gotta deal with an account rep and they’re the middle man to give any information. I will not deal with servicing companies that want to be that filter. I wanna speak to the real estate attorneys directly. I’ll often hire my own real estate attorneys; I use attorneys I’ve been using for years, and the servicing company will just charge me $35/month to board their loan and wing in all the loss mitigations to our attorney’s offices.

Joe Fairless: Do you still look for new loan servicing companies?

Scott Carson: I actually have three different loan servicing companies right now that are managing our portfolio. I do get bombarded with new companies here and there… It depends on the situation. If I’m buying loans from a source that was with a new servicing company that I am not currently using, it depends on where it is in the foreclosure process. If it’s almost all the way through the process of being foreclosed on or less than 90 days out, I’ll just leave it with that existing servicing company.

Servicing companies are a lot like vendors – sometimes they’re good, sometimes they’re bad, like anything else. Sometimes you do start looking for other vendors, especially if your servicing company starts to lag behind, starts goofing up on sending out documents and notices and things like that.

I haven’t had to look for a new one in some time, because I’m pretty happy with the two out of three that I’m using right now. The third one, basically they’re just boarding our stuff and we handle everything with our attorneys on a direct basis.

Joe Fairless: Just to get a sense of the type of typical profits that you’ll make on a deal… Can you give us a case study of just not your best, not your worst, but a typical deal, and the amount of money you make?

Scott Carson: I’ll give you a very simple formula that we look at doing. We buy assets at — I don’t go above 50%-55% of value. 55% is when you add in taxes owed. If I’m gonna be at 55% and I’m gonna end up having to foreclose, I’m probably gonna see another 3-5% in fees, so I’m gonna be at somewhere around 60%.

If I sell it 90-95 cents on the dollar, either a foreclosure auction, or if I have to take it back and sell it, I’m gonna see somewhere around 15%-20% of fair market value profit. Now, that’s often a really good return, because a lot of times we’re doing this in six months or less, so it’s doubling up our ROI when you annualize it. That’s via the foreclose.

If I’m gonna modify, I’m always looking to see around 20%-25% yield on the payments that are coming in for 12 months. That’s what makes it worth my time, that’s what makes it worth my investor’s time, any joint venture partners that we work with, if we’re having to split payments on that stuff.

So we’re looking for a 20%-25% yield on a modified or a potential modification, all the way up to a 25%-30% yield on our money, if we have to foreclose in a 12-month timeframe.

Joe Fairless: You mentioned earlier 3-12 months of trial payments – why only 12 months? Why not 36 months, or something even longer?

Scott Carson: Usually after 12 months they’re gonna wanna change; borrowers are gonna want some change to happen. Either the market value of the property is gonna go back up, or the property value may decline. So anytime we try to do a  36-month trial payment plan, it never succeeds.

Another important thing is once you’ve gotten 12 months of payments on time, that loan is now considered a reperforming loan again, and the value of it is much better or higher now, it’s worth something more. You’ll have people that will pay 85-90 cents on the dollar for a reperforming loan with 12 months of seasoning. If it’s got 36 months of seasoning – that’s great, but after 12 months you can sell that note off at, like I said, 85%-90% of value, pretty fast. Plus, I’ve been in [unintelligible [00:21:42].01] I’ve helped plenty of people modify the loans; 12 months they’re paying on time, they’re taking care of the property, they like it now that they really kind of own that property again and the bank is working with them, especially if they brought some skin in the game; if they brought four months of payments or 5k down to reinstate that loan, then they’re much more willing to work with. They have some private ownership again and they’re taking care of the property, keeping the insurance paid on it, and dealing with some stuff.

If you start looking at three years of trial payment plan, that’s tough for people sometimes. I’m not saying people are always gonna be on time; there’s times people are gonna go late anyway, especially around Christmas or January… What we have built into our modifications is we [unintelligible [00:22:19].23] and forgive the December payment if they pay in advance for 12 months, and I tell them “Go have a Merry Christmas on us.”

Joe Fairless: I have found that with my properties also, with the apartments…

Scott Carson: Yeah, exactly.

Joe Fairless: And then in March the money all comes back, because they get a tax refund…

Scott Carson: Yeah, exactly. It’s always funny — that catch-up usually comes around the middle of February, after they gather their tax returns.

Joe Fairless: Yup, absolutely. Last question and then I’ll ask you the money question… When you have the 12 months of payments that was on a distressed, non-performing note and now it’s performing – okay, you’ve got it; where do you go to sell it?

Scott Carson: Good question! There’s a variety of different hedge funds out there that are looking for just reperforming loans; they like the yield. There are banks that will buy reperforming loans, there’s a lot of IRA investors looking for a solid, steady return inside of their IRAs… We’ve sold our performing loans anywhere from like a self-directed IRA event, like Quest IRA or NewView, all the way to even listing it on Craigslist, say “Hey, we’ve got a performing note that’s been performing for 15 months. We’re looking to sell it at 50k. It would be a 15% return on investment based on the payment stream to an investor, if you’re interested. It’s pretty easy going to local real estate investment clubs, LinkedIn in the different real estate groups, Facebook groups… We’ve sold performing loans in a variety of places.

Joe Fairless: Based on your experience in real estate, what’s your best real estate investing advice ever?

Scott Carson: Best real estate investing advice ever – I would say be focused… [laughs] A lot of real estate investors go to different workshops and seminars and they’re trying to do 3, 4, 5 things, and they can never get any traction because they never focus on one thing. We see that a lot… We see people going “Oh, I like the idea of notes. I’m a landlord” or “I’m a fix and flipper, I wanna buy notes for fix and flips.” Well, they never get around to being focused on one thing to develop those relationships, develop those habits, develop the systems to find success. It’s the whole 80/20 rule – if 80% of your income is coming from 20% of your focus, well if you were to focus all your focus on it, your income would be basically 400-500 time what it is. I think that’s the best advice I can give anybody.

Notes aren’t always for everybody. If you like the tangible side of going out and using a hammer and a nail, you’re rehabbing a property, you like apartments, you like things like that – that’s great, stick to that. If you’re having trouble with that, notes might be a great way to do it if you don’t wanna deal with the headaches and toilets and tenants or the fix and flip aspect.

Joe Fairless: I love that advice. Alright, are you ready for the Best Ever Lightning Round?

Scott Carson: I am, hit me up, Big Ben! [laughter]

Joe Fairless: Alright, let’s do it! First though, a quick word from our Best Ever partners.

Break: [00:25:03].20] to [00:25:44].25]

Joe Fairless: Alright, here we go – what’s the best ever book you’ve read?

Scott Carson: Very easy, Outwitting The Devil.

Joe Fairless: Really?

Scott Carson: Yes! Outwitting The Devil, by Napoleon Hill and Sharon Lechter. It is an amazing book. We give dozens and dozens of this book away to our friends and family [unintelligible [00:25:59].04] It goes in line with what I’ve talked about earlier, my best advice about being focused. The book talks about – if you’ve never read it before – how Napoleon is having a conversation with the devil, and why is he so successful at having people fail. The devil says, “Well, I’m successful because I get people to drift. They get the shiny object syndrome, they’re never focused… They’re never able to achieve that type of success if they aren’t focused.” That’s hands down my favorite book of all time, Outwitting The Devil.

Joe Fairless: Alright. I’ve read that, and there have been multiple people on the show who have mentioned that book. I just couldn’t get into it, but maybe I need to relook at it, because clearly some smart people are enjoying it.

What’s the best ever deal you’ve done?

Scott Carson: Best ever deal we’ve done… Man, I’ll say probably the biggest deal we’ve done individually – we bought a portfolio of 200+ assets that were worth about 12 million that we picked up for just over a million bucks. It’s been great, we’ve been modifying those loans, we had some that we foreclosed on, but it’s been a really growing period, going from buying one-off loans to small pools… That’s been one of our largest pools so far of assets that we’ve bought.

Joe Fairless: What’s the number one risk for an investor? Say you found another 12 million dollar portfolio, you bought it for a million and you brought in one investor with a million dollars. When she asks you “What’s the number one risk?”, what do you tell her?

Scott Carson: The number one risk is not knowing our property values or checking taxes. There’s three things with notes that you’ve always gotta double check. You’ve gotta make sure your property values are accurate – and that doesn’t mean going by Zillow photos; that means literally having somebody drive by the property.

We made a mistake early on in our business where we trusted a realtor to drive by. She took great photos of three sides of the property, but she missed the big, gaping hole on the other side… [unintelligible [00:27:50].18] So using realtors, making sure that we tell them, “Hey, please look at all sides.” We wanna make sure it’s a Blazing Saddles house. That’s the biggest thing, knowing your values.

Second thing is double-checking taxes. You’ve always gotta double-check the taxes owed, and you wanna make sure that the borrowers’ name on the note matches up with who’s on the county records. If it’s a different name, that property was probably gonna [unintelligible [00:28:11].24] and your note is now worthless.

And third thing is checking title. That’s pulling a title report, or as we call it, an O&E report – Ownership and Encumbrance Report is kind of a watered down title report that just shows us what the condition of the lien history is and if there’s anything else on title that might be blocking our ability to foreclose. Those three things are the biggest things.

Having your vendors in place is also critical. If you buy a lot of notes, you wanna make sure you have your systems down, because you don’t wanna sit around for 6-12 months figuring things out while your fruit is [unintelligible [00:28:42].13]

Joe Fairless: The 12 million dollars worth of property, you said over 200 assets, so I assume over 200 homes…?

Scott Carson: Yeah.

Joe Fairless: How long did you have from when you were notified that there was a potential to buy to when you actually wired the money?

Scott Carson: We had 60 days. 60 days to do the due diligence, and then we also wrote into the contract a six-month buyback period. We had six months to finish up our due diligence. This was an end-of-year closing, so we had to fund by December 27th… And we had six months to review the assets. If they were trashed out, [unintelligible [00:29:19].17] We also got a credit for the taxes owed over that six-month period if we had to send them back. That was a really nice [unintelligible [00:29:26].29] this property is trashed out or just an empty lot now, we swapped it out with new assets.

Joe Fairless: And you said you’re still in the process of turning that thing around, so you don’t know what your returns are as of yet?

Scott Carson: Our returns have been very, very positive. The investor got their money back in the first six months after our six-month timeframe. So within 12 months we got their  money back, and we’re splitting profits on this stuff. I still own some of the assets still to this day, and they’re performing; we’ve got some that have been performing for a while that we’ve sold off, others that we have taken down and foreclosed and kept them as rentals or turned them in REO sales. So it’s been a very phenomenal return.

The assets I still own are worth – on my side – four million, and I don’t have a penny into the game. It was all with private money when we funded the deal, so I got basically four million dollars worth of assets for nothing.

Joe Fairless: What’s the best ever way you like to give back?

Scott Carson: Best way I like to give back – we have a big, big passion for two sets of individuals: we work a lot with young kids, we always like to donate to Toys For Tots at the end of the year, along with different children’s charities. We do a lot with a [unintelligible [00:30:31].29] in San Diego where they go out and perform surgeries for children with face deformities, and we also have a big passion for helping past and present military and first responders. We love working with those guys, whether it’s Wounded Warriors or other charities that help out with our past and present military.

We provide education classes for free to those guys, and just really love helping those out because they’ve done a big job in helping us have the freedoms that we have today.

Joe Fairless: What is a mistake you’ve made on a deal, that you would do differently if presented the same opportunity?

Scott Carson: I think probably a couple of those would be with our Chicago deals. We bought stuff and we foreclosed on stuff in Chicago before, around Chicago, Illinois… I would probably have talked to my attorneys a little bit more [unintelligible [00:31:18].02] and what they expected the timeframes to be, and double that timeframe. If they said six months, plan on a year; if they said a year, plan on two years.

We’re still gonna come out making our money back and giving our investors a good return on their money, but some of the things that have happened up there have been outside of our control and outside of our trainees’ control. It’s just kind of ridiculous.

Joe Fairless: Where can the Best Ever listeners get in touch with you?

Scott Carson: The Best Ever listeners can get a hold of me at WeCloseNotes.com.

Joe Fairless: Well, I loved our conversation. I am always educated whenever I talk note buying with someone, and you certainly educated me a lot, from questions we ask loan servicing companies to the three primary things we look for during due diligence, which is the property values, the taxes and the title, as well as the cost implications and timing implications for loan modification versus a foreclosure, and then even sprinkling in some of the states that are more and less friendly to the process.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

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JF936: How to Raise MILLION$ to Buy Notes #SkillSetSunday

Raising money to buy debt, that’s correct… Sounds strange but it pays off! Our guest has been a previous guest on the show and he is a successful investor with many hats, and today he is sharing with us how it’s possible to raise millions of dollars to purchase notes. You don’t want to miss this!

Best Ever Tweet:

Dave Van Horn Real Estate Background:

– President of PPR Note Co., managing several funds that buy, sell, and hold residential mortgages nationwide
– Over 30 years of residential and commercial real estate experience
– Also is a Blogger, national speaker, and founder of Strategic Investor Alliance (SIA)
– Began as a contractor and has done everything from fix and flips to Raising Private Money
– Based in Philadelphia, Pennsylvania
– Say hi to him at http://www.pprnoteco.com


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Chris Clothier and Joe Fairless

Joe Fairless: Best ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We don’t talk about any fluffy stuff, we only talk about the best advice ever. I hope you’re having a Best Ever weekend.

Because it is Sunday, we’re doing a special segment called Skill Set Sunday. By the end of our conversation you’re gonna come away with a skill that maybe you didn’t have before, or perhaps you’ll hone your skill. The skill that we’re gonna be talking about today – I love this topic – raising capital.

We’ve got our Best Ever guest, Dave Van Horn, who is going to raise at least 50 million dollars this year, and has already raised 50 million dollars. Dave, how are you doing?

Dave Van Horn: Hey, thanks for inviting me to the Best Ever podcast, Joe.

Joe Fairless: My pleasure. Well, if you recognize Dave’s name, you are a very loyal Best Ever listener, because Dave was on episode number 39, way back 12th October, 2012. You were one of the first episodes that I did when I started doing this thing daily. I started being a psycho about it, and I was like, “You know what? I’m gonna do  the podcast daily and see how it shakes out.”

In episode 39 he talks about his best advice ever and more of his background. We’re not gonna talk about that in detail, we’re gonna talk about raising money and what he raises money for. He’s based in Philadelphia, Pennsylvania. You can say hi to him at his website, it’s in the show notes page.

Dave, do you wanna give the Best Ever listeners a little bit about your background, just to get some context?

Dave Van Horn: Sure, Joe. The last podcast was more about my real estate background. I started in construction, became a realtor when I was 26, then became an investor, and then did fix and flips and buy and hold. Then I became a lender, and then got into notes. My primary role in the notes space is as a fundraiser. Then I did a bunch of stuff in-between: I sold insurance, I did property management, I traded options, and then I had a wife and two kids, too… But all those things played a role into what I can do today.

My actual fundraising started over time through the real estate side. I started out with the typical real estate investor, where they’re raising money for one deal, or eventually drift into private money or hard money, and then it just morphed and morphed and morphed, and I eventually got into raising commercial real estate capital. I did that, and then off into the notes space. So it kind of evolved.

Joe Fairless: Right now, in your role, you are raising money for what?

Dave Van Horn: Primarily – I wear a few hats, but primarily I’m heavily into the notes space, which is one of the four family residential mortgages nationwide, and we buy from the big players and the banks. We buy large quantities of distressed mortgages mostly, and we don’t deal in commercial and we don’t deal in unsecured or student loan debt, or that type. So we’re in the debt space, basically.

Joe Fairless: Let’s add some context to that for perhaps some Best Ever listeners who aren’t familiar with note buying. I’ve never done note buying, so I don’t have direct experience in it. When you raise a million bucks and you buy a million dollars worth of residential mortgages, it’s different from, say, when I raise a million dollars and I buy an apartment community, because I’m raising a million and I’m putting a loan on it, whereas you’re raising a million and you’re buying the loan, is that correct?

Dave Van Horn: Yes, you’re right. We can’t really leverage like you could. When I raised capital for commercial real estate in the very beginning, I was doing it with mobile home parks, for example. We bought 32 million dollars worth of mobile home parks and we raised 8 million dollars for down payments, closing costs and fix-up. So you can see, you’re able to leverage to financing – whether it’s owner financing or bank financing; in the resident note space, you’re putting it up cash, but you’re buying it at a big discount.

Some loans can be releveraged; first mortgages are easier to releverage for the bank, but it is much more difficult buying distressed assets and saying, “I want a loan on that”, because think about it – they wouldn’t get their mind around “How can you collect on what they can’t?”

Joe Fairless: So you’ve raised money for mobile home parks, and you’re primarily raising money for notes. Who are your business partners who are bringing the equity? I’m not looking for names, I’m just looking for — yeah, I want their social security number, they bank account number… No, I’m looking for how you know them, that’s the root of the question.

Dave Van Horn: It’s funny that you say that, because my fundraising started in the real estate side, and in the very beginning I actually started a group called REING (Real Estate Investor Networking Group), and actually it still runs today. There’s a branch in Chicago and one in Philadelphia. When we first started, it was 12 people at lunch, and over a six-year period, we ended up in five states and six cities, from Baltimore to New York. Obviously, it grew, and we have about 8,000 people in our database. That was before the crash, in around 2008.

We had this real estate group, and one of my roles in the group — we did networking, we had dinner, people would bring their deals to the meetings that we did monthly, and I used to interview the speakers. What would happen over time was people would come to me saying, “Can we present to your group?” and a lot of times I’d get an opportunity to raise capital for them. I had a large network, so they would say, “Hey, would you help us raise money for mobile home parks [unintelligible [00:07:59].15] and commercial offers, condos, and things like that. That’s how it started.

Then one of our speakers happened to be a gentleman out of New York who was raising capital for pools of distressed mortgages. Of course, he came down and spoke, and everybody thought it was a great idea, and of course I didn’t do anything for like three years… But I had a partner who did, and then around the time of the market changing, we were like — my one partner today was a former lender and I was a real estate guy, and we were like “Hey, which side of the fence do we wanna be on in this downturn?” We reached out to the guy in New York and he showed us the collection side of the mortgage space; he knew we can raise capital, because we were doing it for commercial real estate.

So it’s definitely a little bit harder to raise money, especially… We started out in second mortgages, so I’ll give you an idea, Joe… You know what it’s like with an apartment space, for example – it’s much different to raise money for apartments or mobile home parks than it is to raise it for delinquent upside down second mortgages with no equity in bankruptcy. [laughter] If you can raise money for that, you can raise money for anything.

But I was fortunate and really blessed that I was able to learn from this one company who was in New Jersey and they were raising money for mobile home parks in Michigan and Indiana, and they did have one place in Pennsylvania. The beauty of that was by raising capital for them, I was able to learn how to raise capital and get paid to do it. That part was really cool.

It was a situation where the deal was good, but their partnership turned bad. But I learned a lot… The new venture appeared in the REING group with the note space. It was like a blessing in disguise. I think the reason I have the success I have today was through some of the hiccups along the way earlier on.

Joe Fairless: I wanna focus on the delinquent upside down mortgage in bankruptcy raising money part, but I do have a question just to close the loop on the mobile home stuff. How were you compensated? How did you know what to charge them for helping gather everyone to raise the money for their deals?

Dave Van Horn: Most of the time it’s through points or a salary plus bonus, that was typically how we were set up. We have different entities. The one deal was like four mobile home parks, and then some of the other mobile home parks were individual parks, but they were all over a hundred units. Then one storage center sat by itself, and the other storage center was part of a park.

There’s a lot of owner financing in that space. That’s a fundamental difference I see today between mobile home parks and apartments – the apartments are easier to get financing on. It’s kind of the same way in the note space… I said seconds are hard to leverage, but first mortgages are easier to leverage; well, it’s the same way if you compare mobile home parks with apartments – apartments are much easier to leverage (the banks can get their mind around that), whereas mobile home parks, it’s a little riskier, it’s a motor vehicle title, it has all this nuance to it, so it’s a little different animal.

Joe Fairless: Just to give a Best Ever listener an idea of what they could make… An example where you raise money for a mobile home park and you’re part of the LLC and you get a salary plus bonus or points – how much is that? How do you know to say “Yes, I’m worth this much because I’m gonna help you raise a million bucks”, or whatever you did?

Dave Van Horn: Well, I was pretty naive back then. We were typically paid points, or… What we were really doing was a lot of times the minimum investment was pretty high – a quarter million dollars was the minimum investment in some of these vehicles… So we didn’t always have a quarter of a million dollars, so we would start our own entity and maybe create 11 shares at 25,000/piece, but the 11th share is my share, and I didn’t really put any capital up. That was one way.

Then sometimes we were bonused from the company for raising money from them, so it was a combination of things. Sometimes we were paid for our marketing expense, and then on the other side we were paid through a piece of the action by putting the deal together, so to speak. So you can get paid both ways… We were fundraisers and investors as well, me and some of the other people raising capital for the group.

Joe Fairless: Now, I love how you said earlier “If you can raise money for delinquent upside down mortgages in bankruptcy, you can raise money for anything”, and I agree. Tell us what insights have you acquired that help you raise money for the perception of what I just said?

Dave Van Horn: [laughs] It’s kind of like “what’s the best advice on that”, right? It’s kind of like honing in on what you’re best at, and that took me a while to figure out in my life. At the time, I did all these crazy things… You’re like “This guy’s unbelievable, how can he do all these things?”, but it was really like a search to figure out what you were good at. What it turned out was that I was really good at this capital side of things… It’s not so much what I do, but how I do it, and it’s about focusing on my strengths, not my weaknesses. I’m not very good at guitar or speaking French, and I could study my brains out and I’ll probably be mediocre at best…

So it’s focusing on what I’m good at, and it’s really about the way I do it – I think it’s by helping people. In the beginning I almost went down the path of the typical guru at first, and gladly switched gears, because what I realized was it’s really about me sharing and helping other people build and preserve their wealth, that type of thing, whether it’s through education and things like that, or low-cost information, books…

It’s really that “give value first” type of thing. I think if you focus on what you do best… And the typical business of raising money is really “Me, me, me, me, me! Hurray for me! I wanna make a lot of money”, or something like that, whereas if you notice, the people that really are good at raising capital have a bigger purpose a lot of times in themselves.

Even when we were doing the mobile home park thing, they were actually building a Christian academy and they were funding it from the proceeds of the parks. So they had a purpose that was bigger than them. You’ll see that today with some businesses, startups where they’ll be digging wells in third world countries. Actually, my assistant’s doing that – she’s going to Nepal this summer. It’s part of the business model, and the charity is built into it. That’s always a cool thing, if you can do that right at the outset.

I think sometimes there’s some good ways to do things to raise money, because it’s much easier to raise money for charity, for example, than to raise money for Dave or Joe. But it’s really about giving value first and helping others, and I think with all the different experience I’ve had, it’s easy for me to do that. It’s really through this content creation and experience that I share with others, and I think people get to know you and it builds trust and confidence. People start to become more comfortable, they become more confident.

Joe Fairless: Okay. I’m taking notes, and I’m hearing that, and I also want to dig in a little bit deeper, because I would love to know… People are investing in delinquent upside down mortgages that are in bankruptcy… So I hear you that you’re adding value first, you’re creating content, you’re educating people, you’re building the relationship; the bigger purpose – I understand how that can be positioned and hold true, where you’re helping people work out their mortgage so they stay in. You don’t wanna repossess it, so you’re doing what you can there – so you do have an altruistic angle that you can talk about. That being said, delinquent upside down mortgages in bankruptcy – how do you position those conversations specifically when you’re talking to people?

Dave Van Horn: Well, obviously you have to do a little bit of education, because people are only gonna invest in what they know. In the beginning, we would relate notes to real estate, and most [unintelligible [00:16:07].03] an investor, and we have three types of investors. We have an investor who would invest in a note, and then we have people that invest in a fund, and then we have people that need more information, and you provide free or low-cost information. It’s really to get them to understand the investment.

In the beginning it’s kind of simple because everybody’s in the note business already, they just don’t know it. You have a credit card, you have a student loan, you have auto debt, you have medical debt, you have mortgages… The country is just loaded to the gills with debt, but people don’t think about receiving a check, they just think about writing checks every month. I’m talking in general… I’m sure the Best Ever listeners are a lot more savvy, you get the idea.

Joe Fairless: I get it, yeah.

Dave Van Horn: So it’s really about “How do I come across the aisle and start to think like the bank, or becoming the bank?”, and what are the advantages of that. And one of the things that intrigued me from the investment side was if I could buy something at a discount with a high yield that’s backed by a piece of real estate, “Hey, that’s pretty intriguing.” And by the way, it fits one of Maslow’s hierarchy of needs, because everybody needs a place to live, right? So there’s more to it than just equity, for example.

There’s things like emotional equity, for example. With a junior lien, why would somebody stay if their house was upside down, and the reason is because they need a place to live. It doesn’t have to make sense, other than what do they pay monthly and what would it cost me to move from here. Or there’s emotional equity – “I raise my kids there, I finish the basement, I know the neighbors, what will my family think, it would cost me more to move into another place with first month/last month security, pay for a mover… Or do I just figure something out on my junior lien and stay here?” So there’s all that going on.

I always describe emotional equity as “Joe Fairless at his mid-life crisis, buying a red convertible. He drives it off the lot, it drops ten or twenty grand in value, but he looks cool… The girls like it, so he buys it.” Now, does it make sense financially? Hell no! [laughs] That’s emotional equity, right? When you apply that to a house, it’s even more powerful.

Joe Fairless: The number one thing – for a lack of a better word, because I can’t think of a better, bigger word than that – that investors want to make sure of in their investment is they don’t wanna lose money. Studies after studies prove that out, that if you ask someone or do an experiment with someone and you either take 50 cents from them or give them 50 cents, they’re much more pissed off if you take it, than they are happy if you give them 50 cents. And if you give them 75 cents but take 50 cents, they’re still pissed off about the 50 cents. How do you address that with your business model? Because that has to be a question that comes up continuously, or at least the thought process of “I don’t know if I wanna invest in upside down mortgages that are in bankruptcy…”

Dave Van Horn: Well, first of all they’re not all upside down, and they don’t always stay upside down. There are assets that are covered with equity, like first mortgages, and then there’s assets that are partial equity, and then obviously there are some assets that are no equity, but they’re priced accordingly and they have different yields. And then there’s different ways to spread the risk.

One of things you mention is how do you sell an asset that’s partial equity or upside down, and what we found was we listened to the buyers and they were concerned, too. Part of it is track record, and part of it – we actually have a warranty on our performing notes. The warranty puts some people at ease. Now, the warranty is only as good as the company, because if the company goes out of business, then the warranty would be very valid, right?

The other side is some people will go “You know what? I have a portfolio of 20 notes, and 15 or 18 of them all have equity (I feel good about that), but here’s a note with partial equity. It’s a lot cheaper, it has a lot higher yield – maybe I’ll take a flier and invest that. Or I’ll invest 10% of my portfolio in this crazier asset class with more yield.”

Then other things happen too, like for example phantom appreciation. If you had a note that was partially covered by equity, and the market comes back. Maybe it’s a note in Phoenix, or Florida, or whatever, and the real estate market comes back, and now all of a sudden that note I got a great price on, the equity comes back and the property behind that note, and all of a sudden the note’s worth more, and I didn’t really do anything, the market did that. And I was collecting payments all along, and I could sell my note for the same or more than what I bought it, and I might have been collecting on it for three or four years. That’s a neat phenomenon, too.

Joe Fairless: If I buy a note that is upside down, what’s the warranty cover me for?

Dave Van Horn: Our warranty was investment principle minus payments received, and still is, when you buy a performing note. It could be first or second mortgage.

Joe Fairless: When you buy a performing note…

Dave Van Horn: Yes. Now, if you buy a non-performing note, we only warranty the lien position and that it’s a valid lien, and it’s in the lien position as advertised.

Joe Fairless: Okay, got it. So if you buy a non-performing, then it’s…

Dave Van Horn: You’re a more savvy person, usually you should know what you’re doing. It’s a little more dangerous game.

Joe Fairless: Okay, that makes sense. What else, if anything, should we talk about as it relates to raising capital?

Dave Van Horn: I guess it’s really about focusing on your strengths, getting to know your true self, what you’re good at – for me it was raising capital. I think a lot of it is how you do it. When I think about my best ever deal – on the raising capital side it has been where people have invested a couple million dollars or something, and I haven’t really met them yet. That’s just a testament to the systems and processes you have in place as far as your web presence, your profiles, your content creation that you do, the stories that you tell, the experience that you show… Because you know how it might take several touches for someone to feel comfortable, to move forward with an investment; it makes sense, right? But if you can become more efficient at that, maybe…

It’s sort of like a podcast is – a podcast is more efficient than me flying on a plane to a hotel in Ohio, so I can reach more people, potentially. So it’s kind of like that… It’s “What can I do more efficiently to provide information, comfort, advice, everything from paperwork — it’s really the systems and the process of facilitating investors, giving them the information they need in a more efficient way, maybe that’s what I’m saying.

It’s really not a salesy type thing, it’s finding ways for them to get to know you better, sooner. It’s kind of interesting when some people invest with us…

Now, the other thing is we do provide outlets to connect with them, though. We do make ourselves available, whether that’s Q&A conference calls, or actually have events for our ideal customers, so to speak. I run a group called Strategic Investor Alliance, and that group is really a venue for high net worth investors to meet with me and people that I know, and also to look at other investment vehicles and other experts. It’s like a group that I put together — it’s different than what I used to do with that real estate group years ago. I used to facilitate and network with all these real estate investors.

Today, it’s a little higher level group, but very similar in the concept of we just share resources, and we vet investments, and I bring in other investment vehicles, other funds. Some people look at me kind of strange and they go “Well, why would you do that? Why would you bring other investment vehicles? Aren’t you raising money?” and the answer is “Yeah, but my investors – and myself; I’m an investor – like to look at a lot of investment, and I like to vet them”, and we all have different strategies. Our group acts like a Yelp for various funds, investments and other types of alternative investments that we all like.

Then we bring in experts, too: lawyers, accountants, asset protection, legacy planning and all that stuff. We do all these things that we have in common, and I think that by sharing that type of value, that shared values approach – I don’t know if I raise more money from that, but I think people see the value in it. We don’t sell anything at this group, for example; it’s just information and shared resources.

I think a lot of investors like that because they can validate their investment strategy, they can help to build a solid portfolio of investments, and they can see what other investors like them are doing. I think it’s a unique way to do it.

Joe Fairless: Dave, where can the best ever listeners learn more about you and get in touch with you?

Dave Van Horn: Probably the best way is through my site at pprnoteco.com. Anybody can reach out to me direct at biggerpockets.com/users/davevanhorn.

Joe Fairless: Dave, thank you for being on the show, talking to us about the lessons that you apply to raising money in a perceived difficult area of raising money (that’s for sure)… How you help people first, through education, content creation… I love this money quote: “Find ways to get them to get to know you better, sooner.” I think that’s really the epitome of — well, adding value… I think there should probably be an added value part in there too, in that quote. What you’ve talked about before, that’s great stuff.

Also, identifying your core audience – as you said, you have three: an investor who will invest in a note, an investor who will invest in a fund, or an investor who needs more information, and seeing where they are in the marketing funnel, and then giving them what they’re looking for.

Lots of great stuff… If you’re raising money for delinquent upside down mortgages in bankruptcy, then you can raise money for anything, and that’s why I’m grateful that we had our conversation, to share that with other Best Ever listeners who are raising money as well.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Dave Van Horn: Thanks, Joe. Take care!

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JF823: How to Delegate Everything and Become a Nomad While Running Your Business #SituationSaturday

Have you ever wanted to live outside the country while still running your business? Seems impossible doesn’t it? It’s not, it’s a matter of selecting the right team to hire, setting an expectation, and preparing yourself in the business accordingly. Hear how our guest had closed her biggest deal while living in Thailand.

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Micki McNie Real Estate Background:

– Owner, Broker, Investor at 33 Zen Lane, a Denver real estate team that focuses on “investment-minded” clients
– A commercial leasing broker and a residential broker
– Owns rental properties, hold notes, and flip houses
– Based in Denver, Colorado
– Say hi to her at www.33zenlane.com

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JF790: Why You Would Buy an $86 MM Note Portfolio and the 5-3-2 Method

Buying notes can be scary if you don’t know what you’re looking for, especially when you know you are buying a package with some mobile homes in it without land. You’re about to hear from our guest who purchased an $86 million note portfolio for pennies on the dollar and made a great return, you also hear about his 5-3-2 method of selling.

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Troy Fullwood Real Estate Background:

– Owner of Pinnacle Investments, A note buying company for over 20 years
– Author of 25 articles on real estate investing, covering issues on note buying
– Has been involved in over 13,000 secondary mortgage transactions
– Real estate investor in 1996
– Based in Chandler, Arizona
– Say hi to him at www.pinnacle-investments.com
– Best Ever Book: The Alchemist by Paulo Coelho

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JF768: What You CAN and CAN’T Do with Self Directed IRA’s #skillsetSunday

You’ve wondered what you could and couldn’t do, now you will know! Cure all your doubts about this this peculiar little entity and hear why you should have one. You can’t miss this one!

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Kaaren Hall Real Estate Background:

– President, uDirect IRA Services, LLC
– Helped thousands of Americans invest their IRA into real estate, land, private notes & more
– Educating individual investors and professionals is the cornerstone of uDirect IRA
– Based in Orange County, California
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JF572: How to Read a Tape of Notes to Buy #skillsetsunday

Ever wondered how investors purchased NPN’s (non performing notes)? Our Best Ever guests pull thousands of properties from banks and creditors in the form of an excel spreadsheet. They look at key indicators such as Senior Lien Balance, AVM, and Unpaid Principle Balance. This is a comprehensive show, and you will learn how to determine a note purchase!

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Cathie Jeffs & Cathy Cray real estate background:

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JF492: Take NOTES…Then Sell Them!

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You may be tired of tenants and toilets…but never paper. That’s right, paper that makes you cash. Our Best Ever guest is a note buyer with extensive experience is all things real estate. Hear how he is able to acquire steep discounts with high equity!

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