Ep 151 – Business Models For Your Note Business

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NCS 151 | Business Models

NCS 151 | Business Models

On this episode, Scott discusses the preferred business model that note investors should be looking to focus on, especially if they are coming from a rehab or rental business model.

Listen to the podcast here:

Business Models For Your Note Business

 

It is episode 151 today. Today, I thought we’ll do it a little bit different. We’d add a little bit of spice to the next podcast episode and get into answering questions about business models. Literally five e-mails this morning came in from different individuals asking about our business models. What does that tell me? We always get a lot of emails from people asking about our business models. I like to ask people is, “What’s your background? What have you done as a real estate investor?” If you’re brand new, great. If you’ve been a real estate investor for years doing other things, whether it’s rentals or fix and flips or wholesaling, there’s no problem with that. It’s just that you have to understand the business is different. Especially the note business is completely different from a lot of those things.

It’s great having that background, but what a lot of people struggle with, I call it the whole left brain and right brain thing; your traditional real estate investor aspect of it versus the note investor side, your left brain versus right brain aspect of it. As a note investor, you’re the bank more so. You control the real estate by building the first lien position. That’s all that we focus on here really, is first liens. You also have to keep in mind that you’ve got a variety of different potential exit strategies that you’re working through or working to obtain. A lot of people like the note business because they can come over and then can get cashflow, and that’s our biggest goal. First and foremost, if you’re going to be note investor and you’re not looking to modify or reinstate as your first exit strategy, you’re going to end up leaving a lot of money on the table.

NCS 151 | Business Models

Business Models: A lot of people like the note business because they can come over and then can get cashflow, and that’s our biggest goal.

Let’s talk about some of the business models before we dive into the note aspect of this. Rentals. People are paying what for a rental property when you look at the percentage of the fair market value? A buddy of mine over Houston is wholesaling property for 85% of After Repair Value. It’s an empty property. He needs about $36,000 and he’s selling it for 83% roughly. I sent him a message, “You’re going to wholesale a property at 83% of After Repair Value, not As-is value,” and he goes, “Yeah, because ranchers are buying up at 85% all day.” Sure enough, he had 20 people that responded, “We’re interested in the property.” It blows my mind. I get it, they’re looking for cashflow. When you start looking and you’re that extreme and you have one error in your rehab, an AC walks off, copper goblins show up. Copper goblins had not appeared yet and I think the AC is still attached to the house. It wasn’t a bad looking property, just the inside. I think we can all agree, if you’re going to buy a property to put a tenant in there, you’re probably not going to do as many high-quality upgrades as you would if you’re moving into it or selling it as an REO, right, everybody?

Right.

You’re going to go and put cheap carpet in there, cheap tile in there and some paint. Greg, with your rental history, what was the big things you guys were always replacing? I know you guys had some really great tenants that lived in there for years your dad was talking about.

Yeah, but it’s also Houston. We stopped putting in carpet for that reason. We put that linoleum floor because it’s a little more durable, it’s cheaper, not the carpet but cheaper than putting laminated or hardwood floors. That’s one of the big things.

They put that throughout the entire house?

Yes.

Linoleum through the entire house.

One of the houses burned to the ground. We had a little extra insurance money to rebuild.

People every year, two years, three years have to replace the carpet versus the higher end investors that are doing a lot of rentals. They put in nicer stuff because they replace it less. It’s a little more expensive on the frontend when putting a ceramic tile or laminate flooring and decent countertops and things like that. But when they start looking at the preexisting schedule over 27 years, it makes a little bit sense for the long run, but still when you look at the cashflow coming in, how much is it? Is it 100, 200, 300, 400, 500 a month that’s coming in off of the bases of your cost, your mortgages, your tax and insurance? Then you’re also having to actively manage those rentals. Some people get long-term tenants, two years, three years. That’s a different story versus somebody who has to put a tenant there every nine and twelve months. If you are having to replace tenants every twelve months or ten months, you start adding commissions and it takes away from your profits.

The point, we see a lot of lazy landlords who get tired of that fix and flip strategy, or fix and rent strategy when it comes to note game, because when you’re a note investor, you’re not fixing the properties. You’re trying to keep the borrowers in the property. You want them to stay. You obviously will look at what market rent is in an area because that will help you determine if you reinstate or if you modify or if you’re going to make them pay a little bit extra. If the existing mortgage payment’s way below rent like, “You’re way behind, let’s have you make an extra couple $200, $300 a month payment,” to keep you on track or get you back up. If the rent rate of the property is less than what their existing mortgage payment is, I can guarantee you, if you try to get them to reinstate, it’s probably not going to happen. You’re probably going to have to look at doing a modification or forbearance agreement where you start off that payment at a lower amount to try to keep them in there.

The other major factor that separates really a lot of renters or landlords versus the note investors is we’re buying assets a whole lot cheaper. When I saw 83%, 85% yesterday and found out that another good buddy of mine already bought it, I was like, “Quit drinking that Kool-Aid,” because we’re not paying really more than 55, 60 cents of a dollar for most assets. We prefer to be below 50, 55.

Quick question. KC Lang says, “So you can sell to these guys at 85%?”

Yes, if it’s an REO. That’s what it was. My buddy Chris Johnson who had the posting on Facebook, it was a deal that he negotiated with an out-of-town owner and he was wholesaling the property. He was just wholesaling the property to an end-buyer, which that just still drives me bonkers though. 83%, 85% of After Repair Value just blows my mind. Hopefully, the values are good, but come on. When somebody’s trying to sell a property, do they really go middle of the road value wise or the lower values or do they always go, “It’s worth 105. That’s the best come-up ever.”

Going back to the business models for the most part, what we see most known investors that are in this long-term, business-wise or individual note parameters is when they have a business model to reinstate, to modify first versus the foreclosing thing. I can speak as a voice of experience here. When I first started back in 2008, 2009, one of my biggest mistakes is I came from the fix and flip on the rental side here in Austin. I was like, “I’m going to foreclose everything. We’re going to need to sell this as an REO, we’ll turn this into rental.” I don’t want to deal. I didn’t want to reinstate those deadbeat borrowers. Damn them. Do I look like a run a charity? No. I have changed. I’m a nicer, kinder Scott Carson these days.

I was leaving a lot of money on the table because what happens when foreclosing? What am I paying? Attorney fees, servicing fees, taxes. Are there any money coming in? No. After I foreclose, if I didn’t sell the property at the foreclosure auction, what do I got to do next then? I’ve got to get the property in good shape or to rehab it. When you’re buying in different markets, you may have foreclosures that are taking 3, 6, 9, 12, 15, 18, 24 months in some cases, especially when I bought lots up in Florida, I had a lot of foreclosures dragging out. There’s a little drag out. It just is what it is. The beautiful thing though, if you can get them reinstated though, now you have cashflow coming in without the attorney fees and the huge servicing costs and then the rehab costs later on. You have coming in the first twelve months that will often really blow your rental profits. All you have coming in is rental out of the water.

Whenever you run the numbers down between what’s money cashflow for the first twelve months versus cashflow as a rental the first twelve months? Usually, first three, six, nine months if you’re trying to get that property a rental, you’re not going to see anything. Unless of course, you did Cash for Keys or a deed, that’s a different story or you’re in a faster foreclosure state. The thing to keep in mind is it doesn’t always work out that easy. This is why one of the biggest things I tell note investors is you have to look at your business, not get so blogged down into one specific asset. This is a numbers game.

If you look at the fact that I’m going to go out and buy one, let’s use some generic numbers here. A $100,000 property, I’m going to buy based on the numbers they told us, I would pay $85,000 for it. That just hurts. It’s going to rent for, let’s just say market rent in Houston is $1,000. Even in Texas, will it be in a faster foreclosure state? You’re in at 85. You’re still going to have about a grand in foreclosure cost. You’re also going to have some repair, upgrade costs, eviction costs, other things like that. Let’s even say it’s just in pretty shape. You’re still sitting at 90 cents on the dollar.

A normal mortgage payment for a $100,000 mortgage, let’s just say that, is probably about $750 a month. $100,000, $750 a month give or take. If you’re going to reinstate though as a note investor, we’re now going to be paying 85 cents a dollar for that. Even if it would be in Texas, we would come in at somewhere in the mid-60’s for that. You don’t have to be a genius to figure out, “I bought it at 60, I can get it reinstated at $700, $750 a month.” Your numbers immediately work out a whole lot better. Take $750 times nine months. That’s going to come out to what? 6,750, which is awesome. Take that number and divide it by our cost. Let’s just say $65,000. Basically about 11% return, right? 10.4%. It’s not the greatest ROI, but still not bad at all compared to a certificate of disappointment.

Let’s run some numbers. You’re at 90 cents of a dollar. You’re going to say $1,000 a month. Let’s say it takes 60 days to get it occupied. Let’s take $1,000 times 10 is $10,000. Then you’ve got some management fees and expenses along the line. You’re at $8,000. $8,000 divided by 90, what’s that come to? What’s the difference of the two? 8% has you managing the thing. You have to stay on top of them. You have to collect because they get done. We’re using just very generic numbers here. It’s not a very advanced ROI calculator here. We’re not figuring taxes you’ve got to pay when the properties are rental. If you get it reinstated though on a modification or get the borrower to pay on time, who’s going to pay the taxes? The borrower. Who’s going to pay the insurance of the property? The borrower. If you have a rental, who’s paying insurance on the rental? You are, being the landlord.

As you start seeing your expenses start to creep up, taking away your ROI versus the note investing side where ultimately the borrower’s responsible for that. I guess it could be wrong. About 50% of the time, you’re going to end up foreclosing anyway. If it’s going to be a reinstatement though, you’ve got some more flexibility with the payments paid and then after twelve months settlement note off after cashflow, there’s a whole lot more flexibility with an owner-occupied asset that you could reinstate or modify. Rentals take longer. That’s in Texas.

If you’re buying in other states where it’s a six-month, nine-month process to foreclose, now you’ve got to try to figure what your income is going to be over two years as landlord. That then cuts the number down dramatically. I know there are some people that love rentals, “I want to hold a property, I want a depreciation,” that’s great. It’s a great philosophy to have. When you compare the two philosophies, it makes much more sense to either get it reinstated, modified, get the cashflow coming in. If it doesn’t do that, foreclose and then sell the property off. Get rid of it. You don’t want to be managing properties in five states, 10 states, 30 states; maybe one or two markets.

I always say a couple markets because I do have a couple rentals in Florida. They were very cheap condos I bought. My cost on these, you would not believe. It’s very, very small. I’m at less than 30 cents of the dollar value there right now if not less because I bought stuff cheap at the bottom. I timed the market right out there. For something that I paid like $10,000 for, it’s bringing in $1,000 a month. That ROI is pretty damn good. I don’t mind paying the management fees and stuff like that.

NCS 151 | Business Models

Business Models: My acquisition price was so much cheaper as a note investor versus a renter or being a landlord that’s buying a property to keep as rental.

My cost, my acquisition price was so much cheaper as a note investor versus a renter or being a landlord that’s buying a property to keep as rental. I get it, some people enjoy that aspect and enjoy going out and fix and flipping and that’s great. You also have to keep in mind that a lot of people, at some point you don’t want to work too much. If you’re handling the management stuff yourselves, you aren’t really ever going to be able to take a vacation. You aren’t really able to ever turn the things off. If you hire a property manager, great, but then those are also more expenses. Unfortunately, most property managers just suck ass. They’re glad they’re making that 10% fees but they’re very slow to getting out to talking to people. If you’re doing stuff in multiple states, honestly, the rental strategy just doesn’t make sense.

There was an interesting article that came out last week about the top 25 markets. Dan Sitowski posted something. He shared an article and I cracked up. It came out Monday because I saw it pop up on my Facebook feed as I was wrapping doing Monday notes or the Note Night in America webinar we do every Monday nights for those that are listing on iTunes. It was funny because literally in about twenty of those markets are great note investing markets. The yields, Detroit I think was number one yield and Memphis was down near the bottom. The rental yields that they were talking about were like Detroit’s at 17% cash-on-cash return we’re talking about. Detroit’s been a very, very popular rental market over the last few years because you could buy assets so cheap.

I’ve got a buddy who is a foreign investor and he owns 800 rentals in Detroit. He bought $5,000, $10,000, he bought five or six at a time because he’d slap around and turn a renter in there for $700 to $800 a month. Those returns are really good. He’s written an appreciation train back up that mountain a little bit. If people are paying 80 cents in a dollar in Detroit and they’re renting in a 70% return, what happens if they were to actually buy the note and buy it at half price or less? Then their rental returns go through the roof even if they have to do all of that work.

I know a lot of people out there are like, “Scott, what are you trying to get at?” What I’m trying to get at is a lot of people are going out there, going to events that are hearing all these people that are doing amazing things. They’re driving their shiny car, they got the big house and stuff like that. Business models change. The note business has changed over the last 10 years. It’s gotten a little bit more competitive but still not nearly as competitive as I would say the apartment complex or the fix and flip side or the wholesale markets out there. We still have a tremendous amount of opportunity when you dive and look in at things. As far as there’s deal flows out there and there’s also shadow markets. Shadow inventory that’s hitting the market that was something different a few years ago. You start looking the contract for deed market aspect of things, huge amounts of opportunity there too. We’ll get to that in a second. We’ve got a couple questions here. What’s the first question?

The first question is Christina Fuller, “How much time do you give a borrower to come up with the reinstatement or modification when you go that route? I see six months of trial period payments here locally on mods.”

That’s a great question, Christina Fuller. One of the big things is you should not be spending more in really probably 60 days. You’re going to borrow more in 60 days to come up with something. Christina makes a good point. You see a lot of, there are more buying assets from banks and hedge funds and servicing companies. We see notes that are in Trial Payment Plans, TPP they call it, the Trial Payment Plan model. It’s a forbearance agreement. It’s not a true modification. It’s a Trial Payment Plan.

Once you do modify that loan permanently, the borrower owed 120 and you’re going to modify their balance out of 60 and they default on that kind of plan, you can’t go back and foreclose on it for the 120. You’re stuck at holding 60 now. That’s what a forbearance or Trial Payment Plan is, is giving the borrower time to come up with some payments but you’ve got to do that and say, “I’m not going to wait six months for you to come up with your first payment.” You’ve got to come up and do something in the next 60 days or 60 days from the time.” I prefer 30 days.

You need to do something and do it now. We’re having an adult discussion here. You haven’t been paying your mortgage for six months, twelve months, two years, three years, whatever it’s been, you need to do something. I don’t care if you lost your job or you were sick. Crap happens to everybody. I get it, awesome. We’re here trying to reset that American nightmare that used to be the American dream, everyone owned a house. Now, that’s not the same dream we see out there. A lot of people are like, “I don’t want to own a house. I just want to rent for my life,” which that just drives me bonkers and look at things but that’s okay. You just have to get people listen. I know you’ve had a bad thing as you’re behind and stuff like that. Let’s not worry right now about what you’re behind on. Let’s talk about what you can start paying now moving forward. If you can’t pay, you can’t stay.

You no pay, you no stay.

That’s exactly right. Do we have any other questions from people there following up?

No. That was it.

One of the biggest things that always everybody asks me is, “Do you do a lot of the loss mitigation yourself?” The answer is no. I try to always have professionals help out with that. Especially if you’re a brand new note investor, you should not be doing the work out yourself. Sometimes things will happen. I’ve got a text message from my buddy, Chris Moton, who’s over in Afghanistan. Go military. His wife, Katie, they’re new investors. They bought two assets and they were asking me some questions about six or seven assets they’ve had now. Chris asked me have I had a borrower show up at my house or my office. I was like, “No, I never have had.” I take that back. I’ve had a few people show up but I already own their notes. It was a good thing. Robby Woods would be an example. Six months after we bought his note, he became a student and gave the property over to us, ended up buying the property back.

NCS 151 | Business Models

Business Models: That’s a good thing if they’re calling you because then what you want to do is get as much information on the phone.

Anyway, I don’t usually. I’ve never had any, but I’ve had some people call me when they get the servicing transfer letter. Sometimes people will pick up their phone and try to track down. That’s a good thing if they’re calling you because then what you want to do is get as much information on the phone. If they’re calling you, what you want to do is like, “Okay, great, awesome, you need to talk to my servicing company who’s handling this.” You don’t want to collect payments over the phone. You always do it with the servicer but get as much information as you can. “What’s the property? What’s the address? What happened?” Ask them what happened. “How did you fall behind?” It gets you a couple minutes while they’re telling you their country western song for you to get your composure because it’s not always the most prepared thing when a borrower calls you out of the blue.

This doesn’t violate the right party contact either because you have the notes, right?

Yeah, exactly. You own the note already but that’s the thing, they’re contacting you. It’s a different aspect if you don’t want to be contacting borrowers before you own a note. That’s a big CFPB violation. You’re right. Right party contact before you own the note is big and you can do a lot of diligence, which we do a lot. What do we call that?

Borrower research.

Have we made phone calls to the seminars we found online to see if they’re working?

Yes.

Yeah, we did definitely, just to see if it’s working. We don’t talk about, “We’re buying your note.” That would be a violation. I just got an email last night from my servicing company. A borrower that we’ve modified before and had paid on time for a year, had gone on default for three months in Illinois reached out and said, “We want to get back on track. We’ll make a full payment here and then a half payment; a full payment this week and a half payment in two weeks to come back up in the next 90 days. I’m like, “By all means, for sure, glad to work that out. Glad to approve that.” That was actually a borrower that I communicated originally.

When we bought the note, we reached out to them to see what they want to do. If you got a little more experience, great. Like my buddy Jay Tenenbaum, an attorney, he did great. He can do a lot of his workouts. He has even offset his workouts to special servicing companies like the Law Office of Daniel Singer or the guys at Polaris who were a lot of more aggressive. He has remain focused. He doesn’t like paying for that. This is the thing that always cracks me. People say, “I want to do a lot of workouts.” No, you don’t. You don’t want to do a lot of the workouts. It’s not the same thing as going out and rehabbing a property and getting your hands dirty that way. Rehabbing a note, you’ve got to have professionals to do that. That’s why you pay your servicing company $75 a month or a special servicing company $100 a month for the first 90 days to make things happen.

When it comes to business models, that’s why we try to get the point focus on why you’re really in the note business. That’s why banks have made so much money. They’re not in the rehab business. We can agree the biggest companies in the world are banks. The biggest building in every damn town is usually a bank, a financial company. How did banks and financial companies make money? They make loans. They’re in the paper game. They get their cashflow coming in. It’s a total continuity program. They’re not in the habit of going out and buying property and fixing them up and flipping them and selling them. Don’t get me wrong, they have to do that. Banks have had to add those departments to accommodate those mortgage errors and those mortgage defaults, but initially, banks don’t want to do that.

When you talk to a small town bank, this is a great example. A small town bank has to be very conservative with their borrowers’ funds or their clients’ funds. They’re going to be very conservative on what they lend. They’re going to do A, pay-per-lending. They’re probably going to do 90-95 cents of the dollar. Some of them give credit scores, 700 or greater or occupied. They’re going to make sure their appraisal goes back but the borrower’s not buying something that they’re out of line or sometimes overvalued, those kinds of things. They’re very conservative to make loans because they realize money coming in every month on the get-go is going to be better than going out and trying to find a property themselves and open a business. People don’t realize that.

People think you can kidnap business models initially. That’s where I see so many real estate investors fail is they get sold a bag of goodies, they’ve gone to a two-hour seminar that sold them to a 30-day seminar that sold them a $40,000 coaching program and they’re just not capable of doing it because they’re not going to put the market in. They don’t have the business, not only the business concepts down, really or the business sense in some cases, they just want the resources.

My buddy, Jason Bible, Houston House Buyers and Right Path Real Estate, a great buddy, they bought hundreds of houses. Who does he have as his partner? Tom Perry. Tom is the number one buyer at Home Depot every month. He runs a roofing company as well. He’s got that experience. That’s why those guys can churn and burn a hundred properties a year. They’ve got a wholesale aspect side, they’ve got a fix and flip side because they’ve got the business down and they have the resources to do it. Unfortunately, most investors, most real estate entrepreneurs love the idea of fix and flip or flip this house or whatever it is, renovation road or good bones. They love that idea but they don’t have the same resources that everybody else has. “You don’t need any money down.” Trust me, in real estate you’re going to have to have some money.

As a note investor, you’re going to have to have some money for servicing cost and foreclosure costs and things like that. You’re going to have to have some resources. Otherwise, if you don’t have any money on the sidelines, you probably just need to wholesale. You need to really spend your time marketing to build your list than to find a capital to help you fund those things. That’s where I see so many people, they’re running around trying to do twelve different things and they’re focused on one specific business model. They end up at home on a Saturday night complaining, drinking their 151, taking shots to drown their miseries.

Questions from anybody out there? Anybody got any questions on our Facebook live, it’s running right now there for you. If you’re listening to this in iTunes, as always, feel free to drop us an email or questions regarding the show. It’s Scott@WeCloseNotes.com. We’d be glad to help and answer.

I know that they can learn all of this at the Virtual Note Buying Workshop that we’ll have in a couple of weeks, right?

They can. Yes, we do have our quarterly Virtual Note Buying Workshop coming up as well. Three days of find, fund and flip of nonperforming notes. We’re pretty excited about the quarterly workshop. A couple hundred people that are on there. If you would like to find more information on our upcoming virtual workshop, you can go to NoteBuyingForDummies.com and it will take you to the website for the virtual.

We do have a couple of questions. KC Lang again. “What is the minimum amount of money you should have to start?”

Great question, Kacey. I get this question a lot from people. If you’re new to real estate, you don’t have a marketing bone in your body like a lot of people, you’ve got to have to have a little bit of money on the sidelines; $5,000, $10,000 to help cover your costs along the way for probably the first three to six months. I always tell people when you’re buying your notes to figure in $3,500 for foreclosure costs, attorney fees, $1,100 to $1,500 for servicing cost. You need about $5,000 extra. That’s if you’re buying a clean asset, something that is occupied, something that’s going to make sense for you. You’ve got to figure that in as an expense on top of your purchase price.

He said, “As far as servicing and not buying.”

Servicing, that is covered within that. Servicing costs roughly will be $1,500 for the first year. You’re going to have to get it in foreclosure. Depending on the state. Some states are longer than others but we always try to budget. We just throw in $3,500 across the board. If you’re buying in New York, New Jersey, you might want to triple or quadruple that number. If you’re buying in Florida, Florida foreclosures can cost you $5,000 or greater depending on what’s going on, depending on the borrower’s situation. If you got somebody who’s cooperative, it could be less than that.

If you’ve got somebody who’s international, like I had an international borrower in Germany, serving that person foreclosure documents was not the easiest thing to do. Mr. Hans Detert was busy at Sprockets on a Saturday night in Germany, “I’m in Sprockets.” The beautiful thing about that though is we bought that asset properly. It was worth only $100, $110. When we first bought the note, we paid 55 for the note. We’re at 50 cents on the dollar. It appreciated over the twelve months it took for us to foreclose and serve the guy. It actually took one to foreclose but it still appreciated to basically 130 as is. We put $25,000 into it in repair costs along the way. We rent it for basically 80 and we sold it for 150. We still made really good money on it, the ROI. We had that in because we bought it properly.

NCS 151 | Business Models

Business Models: The one big thing about smaller value assets is you want to make damn sure it’s occupied.

The one big thing about smaller value assets, especially if you get something at $50,000 is you want to make damn sure it’s occupied, especially if you’re looking at a contract. You’ve got to make sure it’s occupied. Some people said, “Why? What if it’s vacant?” If it’s vacant, you’ve got to make sure it’s really in good condition. If it’s in good condition, that’s a great story. I can guarantee you this, if an asset has been occupied for six months, twelve months, you’re going to see vandalization, vandals going. Greg, you just went up to South Bend last week and you looked at a couple properties. A couple were good, a couple were ugly.

One was but it is in the rougher part of town but it’s still occupied.

It’s occupied but looked ugly?

It didn’t actually look ugly but just in a rougher part of town. Actually it’s just been painted, lights were on. The yard was maintained. It even had little flowerbeds and stuff but I didn’t get out the car.

You and your dad who is a retired Houston PD. Did your dad get out the car?

No. He tried to. I was like, “Dad, don’t get out the car.”

Was it during the day, in the evening?

It was during the day.

People were just having a house party basically, chilling out in South Bend?

Just in their cars and people were camping out in their cars on the porch.

We have another question from Raul. How hard is it to transition from rental to the note business?

That’s a great question, Raul. Very easy because if you’re used to having to do all the work, when you start buying notes and start getting some of the hits and start getting modified or reinstatement, it’s easier. Now you’re understanding the cashflow model. You’re like, “I don’t have to put so much work in. I’m getting this stuff cheaper,” and you’re turning it into something. Target buddy Dan Sitowski does a really good job. That’s why he loves buying notes because he’s buying assets cheaper, cheaper as a nonperforming note. He doesn’t foreclose. He’s doing better off because he’s buying it so much cheaper than buying as a traditional fix and flip. He can turn around and put a turnkey investor in there, bring some of his money in, arbitrage and pull his money out. Having his investors, it’s a great return with a good, solid renter in it and also with a great condition property.

You see a lot of our fast track students come from the rental side.

Yeah, that’s so true. We do get a lot of tired landlords on the side like, “I like the cashflow. I don’t want the work flow. I want to avoid work flow and have more cashflow.” That’s one of the big things I think that sets this apart is, if you’ve got a financial number you’re looking for, a number you’ve got to have monthly coming in to cover your expenses so you can live and tell your job to go shut it or tell your boss to shut your job. Start looking at what that number needs to be. If it’s got to be $6,000 a month then if you’ve got notes that are bringing you $400 or $500 a month, that means how many have you got to do, twelve to fifteen deals? That’s very feasible to get to a point now where you’ve got $5,000, $6,000 coming in every month that covers your bills. Twelve deals is not hard to do in the note business. Twelve deals can be done pretty easily if you market properly.

If you don’t have the funds yourself, you’re going to have to market. You’re going to have to network. You have to go out to events like what Quest IRA is hosting this Saturday with the Self-Directed IRA boot camp. They host these events on a regular basis. Those are so good to go out and network because you’re going to come across 100, 200 IRA investors that are looking to put their money to work, that their money is making them zero to 4% or less. They’re losing money. They want to put their money to work, bring in a good return and knock it out.

Let’s talk a little bit about that. Nicole, you’ve done a great job yesterday putting some stuff together. Let’s talk about with our business model, what are some of the things that we’re doing that we’re taking with us down to the event? I’m lucky enough I’m speaking for basically 50 minutes at the event and then we’ll have a booth out there for the rest of the afternoon. What are some of the things that you worked on yesterday and we need to pick up this morning for us to take with us?

We did your executive summary and then on the back has our mastermind pictures on the back to show how many people will actually come to it. We also have our upcoming events with some of the recent assets that we closed on in the last 30 days.

We got two flyers?

Yeah, two flyers.

I actually have a third piece there. What an executive summary is, this goes into your business model mindset, one page, front and back. Is it black and white?

No.

Some good bright green colors?

Bright color with your picture on it.

Glossy paper, right?

Yeah.

It looks really nice. It stands out. One side is my executive summary. It’s three paragraphs. What is We Close Notes? What’s Inverse Asset Fund? Who is Scott Carson and what do we do basically? Backside has pictures and some of our recent Mastermind groups. The one in Austin we had and the one we just had in Cape Coral. That gives people a little bit bigger sense that it’s not just me, we have a bigger group that we work with on a regular basis. I think it’s a little bit of my bio.

Also on the other page, current events and people, how they can get plugged in. The back side of that which is the biggest waste I see from people when I go to networking events. They use one page. They don’t use the back side of a paper. That’s the difference if you’re using a PDF. You only need one. You’re only going to see their front. You’re not going to see the back of a PDF. We had FedEx print both sides colored. A couple hundred bucks to print this one for couple hundred flyers. That’s what we did. Nicole and Greg and Jim had pulled photos of all the assets we’re closing. We simply put photos of eight or nine properties on the back there.

Plus an infinite number more than what we already have.

There are eight photos and then one photo to say 50 more in the last month. It gives people an idea of deal flow. I see so many investors they don’t put in their business model, they don’t start thinking about how to share the deals that they’re closing with potential funders as a business model. Every business has got to have a marketing budget and your marketing budget should be one of your bigger budgets besides labor cost for the most part. Unless you’re a solopreneur then your labor costs are whatever you are, unless you have assistance or VAs or employees or things like that. You always got to be marketing and that’s your business model. Share your business model. Give people something to take home with them so they can see what’s going on. Not everybody is going to make a snap judgment right there, “This is great. Awesome. Here, let’s do a joint venture for $50,000 or $100,000 or $25,000, or half a million dollars.” You’ve got to give something for people to take home so they can actually look at things. Do we agree to that, everybody?

Yeah. We have a couple questions. George Crocker, “Don’t you figure the possibility of extra costs for a note when you get a JV investor and what they should invest?”

Yes. We do figure it a little bit extra. If we’re buying the note at 20 and we know we probably have $3,000 to $5,000 in expenses, we’re going to figure in and we could try to get that borrower to fund $5,000 on top of the purchase price. Buying at 20, $5,000 in costs, we’re going to try to have them fund 25 so that we’re not having to come out of pocket for a lot of expenses. Don’t get me wrong, we still come out of pocket occasionally for stuff especially if you have any extra funding on a larger percentage base for the most part. At some trades, we will have just a little bit extra funded. The more due-diligence we do on our side and the more comfortable we are on the asset, then we’ll only have 1,000 or 2,000 added because we expect based on our borrower due-diligence, our stalking what the likelihood is that borrower’s going to reinstate with us.

Does that always happen? No, but it allows us our dollar cost to average out our overdues if that makes sense. If you’re buying 20 assets, you aren’t going to have every one of them get foreclosed on. You’re not going to have everyone reinstate but you want to add $5,000 for each deal if you’re buying it like you are individual note. You can drop it down so it makes more sense. Sometimes you have extra costs that happen. You’re going to have the one off where the borrower does get upset or has the AC get stolen or the copper goblins show up. At those points, that’s when you’ve got to go back to your investors and talk to them about, “We need to get this fixed. Can you either bring in more money or can we split the cost or go from there?” That’s a big thing to keep in mind. Hopefully that answers his question.

Another one, “What is a good cash and cash good number to assume for calculation? I understand there are a bunch of things performing, nonperforming, etc.”

Raul has a question, “What is the good cash and cash good number?”

I think he’s just asking, what’s a good number to assume for a calculation?

When you start looking at your expenses versus your incomes and stuff like that. A couple of things that I focused on business model-wise and these are not hard fact ROI calculated numbers. When I’m doing due-diligence, I’m going to take the borrower’s existing payment.

He meant, what was the good ROI?

That’s what I’m trying to get at. I don’t look at anything below 25%. That’s what I want to see coming in, 25% and greater when I take the existing payment times twelve divided by the purchase price of the asset and holding costs. That’s what I take. I take twelve months divided by a purchase price and acquisition but I want to see something 20-25. One thing when you’re going to get a reinstatement, one thing when you’re going to do a modification or a forbearance plan or Trial Payment Plan, you always want to have the borrower bring some skin to the game. Three is great. Three in four months or I like to get 5,000 if I possibly can. One thing in my rough estimate is I don’t figure in any extra. I do twelve months divided by purchase price plus holding costs.

Let’s run some numbers here. Say mortgage payment’s 500 a month, I’m going to pay 20 for the asset, 5,000 in servicing foreclosure costs. I’ve got 500 times 12 comes to $6,000. $6,000 divided by 25,000? It’s about 24% yield. I’m right on with that. Of course if I can take the borrower to make $100 extra a month, my yield goes up. I can bring $5,000 to the table and my yield really goes up. If I can get them paying on time for six to nine months on time to make sure I’m looking to sell that note off as a re-performer after that timeframe at 80, 85 cents of the dollar then my ROI goes up dramatically through it. There are some things you do. You can’t answer it all when you’re on one thing. You’ve got to look at the numbers and the assets. Literally 25% is really what you want to look for or roughly right around there. Sometimes 20, preferably 25% or greater on the rough end.

NCS 151 | Business Models

Business Models: You’ve got to know your markets as far as having good realtors, doing the rental rates.

One of the big things too that you have to keep in mind is you’ve got to know your markets. You’ve got to know your markets as far as having good realtors, doing the rental rates. I avoid markets where rent rates are at $500 or less. That’s a good filter. If I see rents $400 a month, it’s too rough an area. $500 a month is low too, but that’s a pretty decent area for Ohio or Detroit and areas like that, $500, $600 a month. I base that stuff essentially off of my contacts and my teams in Columbus and Detroit. They’re the ones who tell me, “If you start seeing rent rates being at $500 or less, you probably need to avoid that.” That’s a great little filter for you guys to keep in mind. Rent rates are low, it’s probably rough. Not saying that you can’t make money at $450 a month for rent, it’s just going to be a rougher neighborhood and you’re walking with Flapjack and two AKs.

Like I said before, business model-wise for you, your business model aspect of this is going to want to be as a note investor to be in the note game. Not in the fix and flip game and not in the landlord game. You could be a landlord turnkey after the thing but you’re going to make the most amount of money if you approach the deals you’re seeing as something that you can reinstate. One big thing too, I was talking to Katie Monton yesterday when she called me about those bids. She makes some offers for a fund and they came back at $0.75, $0.85, $0.90 of value and was like, “Soon as it make payments on time for six months.” I’m like, “That doesn’t make any sense.” The yield on that is about 14.5% return based off what the cashflow would be, what cashflow has been divided by the purchase price is 14.5%, but they’re at $0.80, $0.90 of value.

What happens if that borrower goes in default? You’re going to foreclose. Now you’re upside down. Now you paid too much for the asset and you can’t recoup your the costs. Don’t make that mistake of only buying off of, “I’m just going to buy off of that they’re going to reinstate. It’s a re-performing note. In six months that’s performing.” Don’t buy a performing note unless it truly has twelve months of re-performance for the most part. That’s the only way to really justify a higher purchase price on the asset. Important to keep in mind on that, everybody. That’s such a big deal. Make sure you’re not overpaying for the asset. Don’t fall in love with a property. Fall in love with the numbers. Don’t fall in love with the property. Avoid the OTSC syndrome as we’d like to say, “Oh, that’s so cute” #OhThatsSoCute. Avoid that. I don’t know if I had said this earlier but big shout out to David Masteri.

He closed on his first note yesterday.

He closed on his first note yesterday, the day before, in Alabama. Great looking little white house. It looks like it’s going to be a good re-performer for him. David actually took the workshop about six months ago. I was looking through some of our stuff seeing where he’s been. He’s been through the workshop. He’s also been through Note Camp, which is our big online convention that we have twice a year. For those that are listening out there or watching, our Note Camp dates this year are October 12th, 13th, 14th and 15th. I’m excited about that. We’re less than 90 days out. You can go to NoteCamp.live and get signed up. We’re pretty stoked about that. We had 700 plus people last time in April and we expect to have over a thousand people this time. It’s my goal. Tentatively, we’re already over a hundred people signed up for it. I’m pretty stoked about that. An amazing event, three and a half days of content, 30 plus speakers, so excited.

I saw an article on Facebook via, I will say, a professional athlete being financially savvy. Smart, doing great things, reached out to him, reached out to his wife. I found them on Facebook and they’ve agreed to come on the show as a guest. I’m really, really excited to have this guy and his wife come on, talk about some of the things that they’ve learned. They’re also real estate investors besides just being an ex-football player or actually current because he’s in training camp right now. I’m pretty stoked about that and we’re working to finalize a date to record that to have them on a future episode, just to star so many great guests.

Our guest tomorrow morning is going to end up being Aaron Young with Laughlin Associates. Pretty stoked about that. Aaron and I go back a long time. If you guys heard episode 150, Aaron’s like my brother from another mother, just a great guy. I love hanging out with him and just sharing a lot of great passions and overwhelming. He’s just an amazing guy with a big heart for us and about the people in the business. Look forward to our interview with him here on the Note Closing Show podcast.

Everybody, thanks really for the great questions. We really appreciate you thought that you’re watching us live on Facebook every morning, and everyone that are listening to the podcast on iTunes and everything as we rock and roll. Once again, if you’re listening on iTunes, make sure you go on and give us a good rating please and leave a good comment and we really appreciate that. We’re going to drive up viewers on that, so we’re pretty stoked about that. Once again, from everybody here in the office at the We Close Notes war room, we want to thank you for listening to episode 151 of the Note Closing Show podcast. Go out there. Have a great day, great evening, great afternoon, and go make something happen, and we’ll see you all at the top.

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