One key factor to sell reperformers is to understand that it is still a note which is often based on its yield. Never sell something that you wouldn’t buy yourself. Find out how people looking to make an above-average return can help in selling your note. Learn how seasoning can add value to your paper.
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Selling and Buying Reperformers
It is good to be back in Austin after being out of town for the last couple of days. I was actually up in an uncharted territory for myself. I was actually up in the Greater Cincinnati area for the first time speaking at the Ohio REIA Expo put on by Vena Jones-Cox, the real estate goddess. It was a really nice event. They had 540 attendees throughout Thursday, Friday, Saturday and Sunday. Talk about an expo; they go from early morning, like 8:00 in the morning to sometimes people network until midnight. They had VIP receptions. They had a banquet. They had a panel that I as on. Don’t get me wrong, I always enjoy speaking, I actually have really nice speaking spots and the room for full both times, great audience. It’s always nice to run into your peers, and by peers I mean fellow speakers, people that I admire, and get to hang out with them. It was really nice getting some nice compliments. It turns out with what we’ve been doing the last year, we actually have a lot of envious people who love the fact that we no longer have our road warriors for the most part. Don’t get me wrong, I still travel quite a bit but it’s really nice when you work on something, you go against the grain and it works out. Then the people that you respect respect you for what you’re doing as far as doing all the online stuff that we do and all our marketing. Sometimes I think we get a little over carried away with a little bit but then people are like, “No, you guys are rocking, kicking butt and taking names.” That’s always a really good thing.
Today’s topic is something that I think a lot of people have a lot of interest in who’s in the buying and selling of re-performing notes. I’ve seen a lot of questions on Facebook, on LinkedIn, in my email about, “Somebody’s offering up some re-performing loans or performing loans. Where should we bid at? What should we buy at? Can I resell this note in twelve months?” I thought I’d take some time to go through that. I don’t necessarily focus on performing notes. My goal is to get our non-performing to re-performing and then hold on to it for a while, twelve to eighteen months of performance and then sell that note off.
Performing notes is all based about yield, whether you’re buying a performing note or selling a re-performing note. There are a couple of things you’ve got to keep in mind. First and foremost is the seasoning. By seasoning, that means having payments come in on a regular basis. Regular basis does not mean once every three months. The guy makes up for three months of payments. It means literally every month on time. They’re not coming directly to you. They are going to a licensed servicer. I literally cannot tell you how many people I’ve talked to who have a performing note, they owner finance the property and they’re collecting payments, but it’s going directly to them. There’s no third party servicer, even if it’s FCR or whoever it is. A third party servicer adds value to your paper. It adds value to either you’re trying to buy or trying to sell. If you still want to buy a note that’s not going through a licensed servicer, you’ve got to make sure that the collateral is good, that you have the payment stubs from every month? If you’re the owner, make sure you collect all the information that’s very valuable. The $20 or $25 you pay a servicer would take a lot of those headaches off your head later on. Some people want to be cheapskate. That’s one thing if you originate a loan too, make sure all the collateral is there, that goes without saying anything, but we’ll just go ahead and bring it up anyway if you’re brand new to the podcast. I want to thank you today. I think we just over hit the 35,000-mark, pretty good for less than 90 days. I’m pretty excited. We’ve still got about a week left with our 90-day mark.
Seasoning means twelve months or more of season. That does not mean if you get something modified, the reason they made it three months that you try to sell it is re-performing note. This is a little thing that some hedge funds do that I think is the shittiest thing out there. It’s also very shammy. The borrower has expressed interest on loan modification, so we’re going to sell as loan modification. That doesn’t make any sense. If you wouldn’t but it like that, don’t sell it like that.
One thing to keep in mind too is if you’re buying a performing note and you’re selling a performing note, you have to look at the yield that you’re selling off of. How do you calculate yield? I had a buddy, a student of ours call me, dropped me a message. It was Friday or Saturday. I was in the room working on my presentation for the weekend. I jumped on online he’s talking about a list of some contract for deeds. He was trying to sell these at 90% of UPB. I’m like, “What’s the interest rate on the loan?” He’s like, “I don’t know.” I said, “Let’s take a look.” He sent me all the spreadsheet. If you want to figure out yield, what you do or your ROI on what you’re paying for, take the existing principal and interest payments, PI, times twelve. Principal and interest payment times twelve, that gives you a year of payment. Divide that by the purchase price of the loan or the sales price of the loan. That should give you a percentage. That should tell you roughly if you buy it at 90% on what your yield is going to be.
Let’s say your monthly payment is $300. The principal interest payment of a loan is $300. That times twelve is $3,600. Let’s say they’re selling a loan for $25,000. That’s what their sales price is on a performing note. Obviously, the unpaid balance is going to be high. You never overpay of what’s owed on a performing note; don’t ever do that. If they owe $30,000 and you’re offering to pay $25,000 for this note that’s paying $300 a month, so $3,600, that’s $300 times twelve, divided by $25,000 comes to a 14.4% yield. Most re-performing loans or most performing loans are going to sell or be sold somewhere between a 12% and 15% yield. If the seller is selling it at a higher yield and has the seasoning and all the documentation and the servicing notes to prove it, those are not bad deals. Let’s say instead of selling it at $25,000, they want to sell it at $20,000. $3,600 divided by $20,000, that’s an 18% yield. That’s not bad.
When we talk about educating, when we talk about reselling a note off in somewhere between 80% and 90%, it all depends on what the yield is at. There are some HAMP loans out there, some HAMP modifications that have been performing on time for five years, but they’re literally at 2% or 3% interest rate. You can’t buy those at 90% because you’re only going to get a 10% discount, you’re only going to see a 3% to 5% yield on those. You have to take into consideration what you’re looking for. If you’re looking for a 15% yield, then take the cashflow with the principal and interest payment times twelve, and divide that by your interest rate that you’re looking for, 0.15, 0.2, 0.12, 0.08. That will give you the offering price off that without looking at the interest rate.
Somebody mentioned you’re actually on the contract for deed. Somebody mentioned that you need to have 24 months. I think my buddy, Joel, mentioned that. I don’t agree with that. I think if you’ve got a down payment from a borrower on a contract for deed and they paid on time for twelve months, I think that suffices. Twenty-four months is great if you can get it, if you want to. Often, if they’re paying on time and they’ve got some equity, they’ve got some skin in the game, you can sell that note off as re-performing for 12%.
Who’s going to buy your re-performing notes? If you either created some loans or either through origination or you’ve bought some non-performing stuff and then converted them into performing notes through your due diligence and loss mitigation or workout strategies. Where can you sell a non-performing note, especially if you want to get a high return in the mid-80% and 90% of unpaid balance and selling it in 8% to 10% interest rate where you’re capitalizing on a large chunk of profit? The best way to sell your performing note is to hire people, people that are sitting on 0% interest, people that are wanting to make an above-average return, people that have a certificate of disappointments. How do you meet those people? You go out and network and say, “I’ve got some performing notes. I’m looking to sell. They’ve got twelve plus months of seasoning. I’m willing to sell it at somewhere in 8% interest rate.” Find out what the people you’re networking with are looking for, “Anybody looking for performing notes?” “Yes, I’m looking for performing notes.” “Okay, great. Let’s talk about that.”
If you’re at a Quest IRA event, if you’re on a webinar, if you are out at the local REIA or the expo that I went to. One guy was walking around with a sandwich sign, “What are you looking for?” We were at Fright Night and some older gentleman was walking around with T-shirt, “I give 8% loans,” or whatever. He’s probably looking for a return on his money about 8%. That’s the thing to look at. You’ve got to have this, “Here’s this. It’s been with FCR, it’s been with Madison Management, it’s been paying on time, the borrower put $3,000 or $4,000 down or reinstated. Here are all their financials. Here’s the market rent tenants, that’s why they’re going to stay on time.”
There’s no guarantee that re-performing loan will stay performing. We can agree that life happens. We can agree that people lose their jobs, people get sick, hours will be cut down in places we’ve got to work for our business. That’s the biggest thing to keep in mind that on-time seasoning is one of the strongest factors in the value of a note, and then having it with a servicer. If you come across a performing note that’s got twelve months plus of seasoning and there’s still some loan equity between what you’re paying for the note and the payoff of the loan. In our example, let’s say $30,000, what’s the unpaid balance of a loan if you’re paying $25,000 for it? You’re paying 84% of the UPB. At $25,000 on a $30,000 loan, that’s roughly 86%, which is not bad. It gives you a little cushion in case you’ve got to do some workouts.
Personally, to make it very attractive on the way you’re selling a note, you want to be at least probably a 14% to 15% yield, so leave around 10% difference between what you’re selling the note at and what is owed. That gives the buyer ultimately some room in case they do have to foreclose. They do have to absorb one or two missed payments that they can reach out to the borrower and say, “Let’s get you back on track.”
There is also the idea that you arbitrage your money out but you stay involved in the game. What do I mean by that? I’ll give you an example. Let’s say back in our case study, let’s say the person is paying $500 a month. That’s the principal amount. Let’s say we bought the note at $25,000, that’s what we paid for originally. Let’s say we pay $0.50 on the dollar for it, let’s say the actual unpaid balance is 50% on this deal. We paid $25,000 for the deal and they’re paying $500 a month. Let’s say we want to make some money out of this. Unpaid balance is 50%, we paid $25,000, P&I payment is 15%. We won’t talk about interest rate right now. We’ll just talk about those being the numbers roughly. If we take some of these easy numbers like this, if we take $500 times twelve, that’s $6,000; $6,000 divided by $25,000 is at 24% yield. If you were to bring somebody in to buy completely out of the note with that $25,000, based on the cashflow at $500 a month, that would be 24%. You’re giving away a ton of profit.
Let’s switch the number around. Let’s say, “Mr. and Mrs. Smith, I know you’ve got money sitting in IRA.” Let’s say they got $35,000 sitting in their IRA. What kind of return would Mr. and Mrs. Smith make if their money is making them nothing? Let’s start with 10% and work our way up. So $35,000 and they want to make 10% in a year, so times 0.1. That means we need to pay them $3,500 in a year. If we divide that by twelve, that means we need to pay him $292. How much is our loan paying? The loan is paying $500. Now what you do is, ” I’ll pay you your 10% on $35,000.” You’re going to bring in the $35,000 to you. How much money did you just make right there? Remember you paid $25,000 for the note. They bring in their $35,000, you cash out your $25,000 and put how much more into your pocket? $10,000, and you’ve only got to pay him $292 a month to help them justify their 10% return on $35,000. How much is the loan paying them? $500. You’re still netting $208 in monthly cashflow to stay involved in this deal. Not bad, right?
Let’s say you have somebody else. Let’s bump it up a little bit. Let’s say somebody had $40,000, “$40,000 and I want to make 10% of my money.” That means you’ve got to pay him $4,000 a year in interest. Divide that by twelve months, that’s $333 a month. Let’s talk about that. You find somebody to buy your note at $40,000 and they want to make 8%. How much money did you make when you sell them a note at $40,000? $40,000 minus $25,000, that’s $15,000 in your pocket plus another $167 a month in cashflow. What we’re not counting is if you bought it at $25,000 and it takes a year to season, we’re not counting that year of payments. That’s nice, that’s extra that we talk about. We talk about a little extra. You’re going to get $500 a month times twelve, that’s $6,000 in cashflow if you’ve got it re-performing relatively fast. Bought at $25,000, sold at $40,000, that’s $15,000. Plus the $6,000 you’ve got on that first year, that’s $21,000 plus $167 a month, that’s another $2,000 a month in cashflow you’re making off that deal to stay involved in the deal with your IRA investor.
One weird thing we were talking about in Ohio, as a side note here, is that Toledo has enacted a thing with investors if the property has any lead, they’ve got to have a lead removal, which is totally stupid. It makes it even impossible to invest in Toledo. This is one of the things that we’ll be discussing coming in the Virtual Note Buying Workshop or Virtual Note Buying we used to call it For Dummies workshop, December 15th through the 17th. We’re tweaking up some of the education. It’s going to be all brand new in December and then rolling into next year, a total revamp actually. I’ve already been working on the manual as a revamp of the new manual for it as well too. If you’re a Note Buying Blueprint, we will be editing and re-filming the 30 video series for note marketing as well. I’m pretty stoked about that. There will be an update between now and the end of the year. If you’re a Note Buying Blueprint client, you’ll get those updated marketing videos thrown over to you.
When we’re talking about our scenario, let’s say the unpaid balance in only 40%. You’re not going to go 45%. Some of the 45%, they get a higher yield. You have to leave some skin on it. You have to leave some stuff between what you’re selling the note for and what the unpaid balance is. You want to leave some of that there. You’re not going to overpay. It’s the same thing you have to keep that in mind too. You won’t go to a dealership and say, “It’s worth $35,000, I’m paying $40,000.” You’re not going to pay over, you try to get it down below the $35,000 and say, “I’ll give you that for $30,000, $35,000, $38,000, $40,000.” Make sure there’s some separation between what you’re paying for the loan or getting them to pay the loan and what the ultimate unpaid balance is.
Robert Beryl said, “First, no shame in my game. I was the dummy you helped this weekend with figuring out ROI. Thanks, but even performing and I was thinking 90% was high. It doesn’t give much wiggle room. Your thoughts? Thanks.” The deals that Robert is talking about, when you figure it in at 90% purchase price, the ROI is between 18% and 28%. That’s not bad at all, especially for some of those higher-end value homes that was on that list that you’re looking at.
We have a question, “If they give you $40,000 and then want out after a few years, what’s the exit strategy?” If they’re going to give you that loan, you’re not joint-venturing with them on that deal. That’s when you’re right to JV for two years, three years, or as long as the deal goes through. What would likely happen in five to seven years if the borrower’s paid on time, most people sell their house after five to seven years. When they sell the house, let’s say they still owe 50%, they’re going to pay you off, you give the $40,000 to the investor that funded that deal. They’ve been getting their interest rate on it every year. Move on to the next deal. There’s a little bit difference from that $40,000 and $50,000. Hopefully that makes sense.
Performing notes are great. We have a lot of people that dive into performing notes. You just got to be careful that you don’t swallow the Kool-Aid that some of the hedge funds tell you about a performing note. You always have to double-check the payment stream. If they say twelve months of seasoning, I want to see twelve months of payment coming in on a regular basis. I don’t want to see three months or six months. The only time I will even look into a performing note at six months or really less than twelve months is if the borrower put down a substantial amount of money to reinstate. By substantial, I’m not talking four months. I’m talking about a large chunk of change, not four months but much greater than $4,000, $5,000, $10,000 and $20,000.
We have another question, “When figuring out bids, if someone is just over 90 days late but not in charge-off?” That’s a non-performing note at that point. One thing to look at when you are getting tapes from banks, banks will send you notes that are 30 days, 60 days, 90 days late. One thing you have to keep in mind is there is a gradual deduction there. I’ll give you this example. If a borrower is 30 days late, that loan is worth about $.090 to $0.95 on the dollar of the unpaid balance. If they are 60 days late, it’s worth about $0.80, $0.85 on the dollar. If they’re 90 days late, it’s worth roughly $0.70 to $0.75 on the dollar. I don’t like to waste my time looking at loans that are less than six months in default. Remember, I’m buying non-performing first. I want it to be truly non-performing. Most of the time the banks are not going to take a substantial write-off or give you a big discount if it’s just less than 90 days late.
We have another question, “What percent of bid would be good?” Like I just said, most of the value and for every month they’re late, the first 90 to 120 days, you’re only going to take 5% or 10% off the true balance. I would not waste my time with those. I would wait until I see something that’s at least a year in default. That’s the most important thing. If they want some $0.90, $0.95 on the dollar in loans, we’re at 6% or 7%. That doesn’t really make sense for you. You want to see a 5% discount off that. Your money you’re going to put into that may only get you a 6.4% yield but that’s not really good return unless you’re making nothing. Keep that in mind. If it’s 90 days late or less than 90 days late, I would literally just remove it from your spreadsheet. If you’re getting a spreadsheet that says 30 days, 60 days, 90 days, 120 days, I would literally just get any less than probably a year, just go ahead and remove them.
The bank’s not going to be bleeding enough on those assets yet to really want to give you a substantial discount. That’s not saying they won’t, there are always those examples where they will give you some discounts on that stuff. For the most part, unless they’re really motivated to get rid of those notes, they’re not going to give you a substantial discount. It’s not worth beating your head back and forth against the wall there. A lot of times those loans that are 30 days late or the borrower’s 31 or 40 days late to make it up. It’s ultimately called a scratch and dent loan. If you’re reaching out to banks, you may hear this, scratch and dent. Scratch and dent means that somebody’s consistently 30 days late but they make it up, or they go 60 days late and then make it up with the payment a little bit and they caught up, or there’s other deficiencies in the loan file. What I mean by deficiencies in the loan file is that there is either an assignment missing or something that didn’t get signed or it’s a disclosure that didn’t make it to the file folder. In some situations, the borrower’s FICO is changed between the time that they closed and before the mortgage banker sold the loan off to the parent company, which was on a warehouse line.
I’ll give you an example. Oftentimes the banks will run your credit right before closing to make sure you haven’t gone out and gone to Rooms To Go and filled up the whole house full of furnishing. You’ve got them a $60,000 line of credit, which if they do that, that’s going to affect your credit. Banks will fund but they want you to be at a specific FICO score. If they want you to be at, say, 700 FICO and a mortgage banker that has a warehouse loan, that’s making a loan on behalf of a bigger bank. They fund that with their warehouse loan. The idea is to sell that loan off in the first 30 days to the parent bank, the bigger bank.
If you’ve gone out and ran up your credit and your credit scores have dropped below the 700 FICO score that the bank is looking for, the bigger parent bank isn’t going to buy that loan anymore. It doesn’t mean they are underwriting qualifications. Then this bank that made a loan on their warehouse line or their line of credit, they’re going to start shopping that loan out somewhere else. That’s where they will maybe start taking a discount, drop it at a couple of percentage points, maybe sell it at 80% yield because it’s still a good loan. The borrower is still a decent borrower. A lot of times they haven’t made the first payment yet but the FICO score is now 680. They’ve going to find somebody that’s looking for that loan, that LTV that will accept it at a 680 FICO versus a 700 FICO. Hopefully that makes sense.
Performing notes can be a great investment. If you’re looking passively and don’t want to do a lot of work, 12%, 15%, 18% can be really phenomenal for people, especially using your own funds. If you’re using other people’s money and you’re trying to split a 12% return, you better hope your investor’s happy with 6%. That’s doing a lot of work for not a lot of return. That’s why I like non-performing because we can buy notes and get them re-performing. The fact that they’re non-performing to begin with allows us to get a much bigger discount, versus of just being 30, 60 or 90 days late.
What’s great too is if you have a performing note, your servicer costs are extremely cheap. There are a lot of servicers out there that will do it for $20, $25 a month just to collect payments and send the statements out. That’s a really nice thing with performing notes. If you bought a non-performing and converted it to performing through loss mitigation, your monthly fees shouldn’t be $75 to $95. It should drop down to $20 to $25 a month or $35 is not bad at all. It makes it extremely cheap for you. If you’re using other people’s money in your arbitrage, say somebody wants 8% or 10% return, and you’ve got somebody that’s paying you 20% return, that’s great. Arbitrage it but make sure that if you miss a payment, you’re taking care of your investor’s money on that if it’s a true split on the performing side. The last thing you want to do is have somebody invest in a performing note that you’re supposed to be managing and not managing it. That’s not a good, good thing to be doing.
Performing notes can be very profitable, I’ve said this before. Great returns, it can fit in especially if you’re working full-time or retiring and you don’t want to do a lot of the work. There’s nothing wrong with performing notes. It’s great. I talked to quite a few people, “I’m semi-retired, I don’t want to do any work.” I’m like, “Then why are you doing fix and flips?”
A quick reminder that our book of the month, the first one here, that we’re going to be discussing the first of December after Thanksgiving, is Dan Fleyshman’s book here. This is a great book, How To Set-Up Your Business for Under $1000. We’ll be discussing this first part of December as our Note Nerd Book of the Month Club. What’s awesome too is I’ve got a couple of recommendations. We have a couple of other speakers that are going to be talking about they’re launching books who want us to bring on their books. I think it will be valuable for our Book of the Month so we’re excited about that. This is a great easy to read book. It gives you a lot of information and answer a lot of questions about some things.
We had a really good turnout for our Banking Blitzkrieg from our Monday Note webinar. I’ve had a few people that responded since then so pretty stoked about that. We will have that launching in January as well. We are literally two and a half weeks away from our Note Mastermind taking place December 1st, 2nd and 3rd here in Austin, Texas. I’m really stoked about that. Steph’s working on the final headcount. We’ve got some great fun stuff planned and in store for those that are attending.
Other than that, I don’t have anything else for this episode of the podcast. First and foremost, thank you so much. If you’ve enjoyed this episode, please make sure to share them with your fellow real estate investors or fellow colleagues. As always, we would love it if you went on to iTunes or Stitcher and leave a review. That helps us tremendously and lets us know that we’re doing a great job. If you’d like to see a topic discussed, send me an email. Glad to look at what you’re looking for and see if we can cover that on the podcast. Some things are easy to cover on a podcast and other things need a little bit more in-depth in going to our Note Night in America webinars. If you’re listening on the podcast and you want to get registered for Note Night in America because we do have a really great topic in hiring assistants on Note Night in America. If you’re listening on the replay on iTunes and Stitcher, you’re not going to be able to catch it live, you can catch the replays of the webinar by going to WeCloseNotes.tv, will get you to all of our replays, all of our live video recordings of The Note Closers Show and all of our recordings of Note Night in America as well for everybody.
Looking forward on hiring assistants. I know that a lot of people have been talking about that or trying to hire somebody on Fiverr and they flaked off. I tried to hire somebody on Upwork or Craigslist and I cracked up because I see them post one day and then four days later, they’re complaining. This is not just one person. It’s multiple people I see across different Facebook groups and different things. It’s got to be a longer hiring process than just four days or three days or one shot. If it turns out that way, you’d probably get a bad job on the frontend of hiring or describing what you need. We’ll discuss a lot of that here on Note Night in America on hiring assistants: what to do, how you want to hire more than you need initially because people will flake off. You also can, especially if you’re hiring virtual assistants, hire more people than you initially need and give them the same chores and see who does the better job. It will often help you eliminate wasted time by having to go back and retrain one person then one person then one person.
Training and labor is always the largest overhead in business. It’s better to take the time to train people than it is just to expect them to learn things. I know that I goof up from time to time. What I’m saying is when you give somebody a task, spend some time, sit down with him, go through it and edit it. Not everybody is a mind reader. If you hire somebody, you have to expect the first time that you give them something to do, it’s probably only going to be 50%, 60%, 70% of what you would expect. You guys spend the time to hone them, teach them, coach them, give them constructive criticism, “No, we need to focus on this, need to focus on that. Tweak this a little bit and go from there.” Over time, especially in the first 90 days, they will understand what you’re looking for and you’ll be able to coach them a little better. I’ll be going through what to post, where to post it, and what to expect and what you should be focused on doing after you bring somebody aboard. If you want to get registered for any of our Monday Note webinars, all you’ve got to do is text the word NIGHT to the phone number 72000. That’s good for everybody. If you’re listening on the podcast on Stitcher or iTunes, you can always register for any of our webinars by going to 72000 and text the word NIGHT and you get a link directly to your cellphone to register for all of our Monday Night webinars.
Go out and have a great day. Go make something happen. We look forward to seeing you all at the top.