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.
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 firstname.lastname@example.org. 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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