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When Good Deals Go Bad
I want to talk about a touchy subject. It’s something that needs to be talked about because it’s something that happens enough in the industry that you’ve got to be able to call an audible from time to time. It’s all about what happens when good deals go bad. Not every deal is a slam dunk, home run or touchdown, goal or whatever your sport is. Not every deal is always going to be a winner. Every deal has a different country or western song, especially within a non-performing debt side. It happens in the industry, not just in note, but also in fix and flips. It doesn’t happen that much in wholesale deals because wholesale often don’t have anything invested in the game, except the contract and their ability to pull the plug. New note investors often get in and end up making a mistake. I know a lot of people are scared to make a mistake because they’ve been snake bit in the past or they’ve had things happen to them or they don’t know what they don’t know.
Three Things Of Value
Let’s cover some of the things that could go wrong. Let’s talk about the three biggest things that you really need to make sure of. You always got to make sure that value is accurate. It’s by making sure you have eyes on the property, have a realtor drive by the right property. The second one is calling and checking taxes. It’s not just jumping online and looking at what’s owed but checking taxes. This means calling the County to see if there’s a tax sale pending or there has been a tax sale. The third thing is title. Pulling an O&E report to make sure there’s nothing too crazy behind your first lien or making sure that your first lane is a first lien.
Acts Of God
The fourth one is acts of God and that can be storms and tornadoes. It can also be vandalism, people breaking into your property and doing things like that. That’s why insurance is so valuable for what we do. Let’s say you buy a note, for instance, an investor in the Mastermind who bought a couple of notes right off the books. Unfortunately, the realtor drove by the wrong property, took a picture of the nice property, and didn’t look at the address. When the note that such and such was looking at was the trashed-out property next to the nice property. Unfortunately, the investor accepted the wrong picture from the realtor and bought an ugly asset. Fortunate enough for him, he only paid a little bit of money for it and he was able to move the asset to the next-door neighbor and sell him some lot with the owner financing. That’s an audible. Luckily, he used his own money on that deal which was not that much.
More Deal Scenario
One of the things you have to look at is when you buy something, and the value is not there because it’s trashed out inside when you didn’t have somebody look at inside. This is why I try to avoid vacant properties at the utmost. It avoids us looking at or seeing stuff or if it’s trashed on the inside. If it’s an occupied asset and somebody is living there, it’s usually in a pretty decent shape. If it is trashed out, you have a couple of things that you have to look at it for. Hopefully, you bought the asset cheap enough that if you do rehab it and put some work into it, you can either sell it as an REO and make your investor whole or sell it as is to the local fixer flipper just to get your investor cashed out and moved on. The thing to keep in mind is that you want to try to communicate this stuff as best as you can on the front end. If the deal’s not going to pay off the investor, what you have to, and this is one thing a lot of investors struggle with is the more deal scenario. Go out and do more deals. If you’re doing one deal and the one deal go south, you’re stuck. If you’re going out and buying multiple deals, your risk is leveraged across the three, four, five, ten, 100 or whatever of the assets you’re buying.
The opportunity to be able to repay back investors and said, “I’m going to get this taken care of. I’m going to get you paid off as best I can. In any interest or extra they don’t, we’re going to make it up in this other deal.” You have to realize when a deal goes bad, you have to have a solution. One of the worst deals that we have done is some of our Chicago assets. They got dragged on, longer than expected for closures, evictions and rehabs. We’ve had a property vandalized three times. Luckily, I’ve been doing other deals to get my investors paid off. They weren’t getting paid off all in whole immediately, but we were making payments to them to get paid off.
Some investors have been very flexible with us because they know that we’re doing other things. Then they know that we will get them taken care of because we are doing deals. It did not help that our smart partners bailed on us and I got stuck holding the bag. We’ll make it happen and we’ll make it work. We always take care of our investors. When things drag out, you’ve got to try to get things done. One way that has been very helpful for those that struggled as they go out and buy other assets. They learned from their due diligence mistakes. They’ve learned from the mistakes they’ve made, and they’ve learned to avoid that. They can pay a little bit more for somebody to drive by and make sure the realtor takes a photo of the street number on the house. Making sure that they peek in the windows, call the utilities to see if the electric meters are on the house. Those are all obvious clues. If the electric meter is gone, it’s probably not good.
In Michigan, I was looking into an asset, not in town, but outside of town and they said it was owner-occupied. It was a contract for deed. We drove by the house and it hadn’t been mowed. The electric meter was still on, but when you peek in the windows, you can see that it’s vacant. The owner had done some work at the property and expanded it. It wasn’t bad, but it was a vacant property that had not been mowed, although it said, Occupied, on the spreadsheet. I would have assumed immediately by seeing a photo of the realtor to drive by further that it was vacant, but when I was up there, I got out, walked around and took photos. The electric meter is on and it’s running very slowly, which is okay. If I called and they said, “Yes, the power’s on the property,” I’ve got to have those eyes and ears to take a look at that stuff. If I’d have bought that note, it wouldn’t be reinstated because it was unoccupied. There would have been plenty of room in there between what I would pay for the note and the value of the property. If I foreclose or did cancellation of the contract, I can turn around and sell the asset and make some money as is, if I wanted to put a bit of work into it and get it up a little bit until it off sites.
I’ve got one asset right now, we finished up the eviction on it and it took forever to get to there. This is in Chicago. It’s a two-story house and the bottom floor has mold in it. We were ripping all the Sheetrock out, removing all the black mold. The second floor is fine but ripping all the first-floor stuff out. My realtor was like, “What do you want to do?” I was like, “Will you give me a bid? It’s $30,000 to rehab the property and I can get $150,000 for it, I may do that. If I can sell it right now as is to somebody who’s interested at $50,000 or $57,000, I would do that.” I’d rather take that now because there’s no guarantee that my property won’t be vandalized when you’d been in the area, you try to avoid it. The thing is you have to have is clear communication with your vendors to find out what are your options.
In some cases, and we’ve had this happen before, investors bought a property with the idea to get reinstated and the borrower moved out. They didn’t want to stay, they left. When the borrowers moved out, the values did not come back in what they expected the values to be. It came in quite a bit lower. The key thing from that is that he didn’t hire the local agent to pull CMAs. He just did an online valuation. When he had the opportunity. It wasn’t a bad property. He missed the tax bill, there’s a $5,000 tax bill. He didn’t call to check taxes. The tax bill hurt him. I said, “You have the opportunity, you can turn into a rental. It’s in a decent area in Hammond, Indiana. Turn it around. We’ll hold it for rental for a year and pay off that tax bill. In a little bit of time, the city will let you put it on a payment plan and work through it or you could sell it off and bust even right now.” He decided to bust even. You want to have communication on a preregular basis. You want to make sure that you have solutions lined up for your investors, “Here’s the solution. Here’s what it is.”
You also want to make sure that you have the clauses either in your funding agreement or your joint venture agreement. If something does go wrong, you’ve got some time to fix it. If somebody wants to refinance out of a deal in twelve months because the foreclosure is taking longer, make sure you buy 90 days if you can. If they want to get out of their money early out of the one year, there’s got to be an early withdrawal penalty. If they had an annuity or a CD and other investment, there would be a penalty as well. That gives you a little bit of flexibility and some opportunity to get that deal taken care of. Just have solutions. If you have a problem, don’t hesitate to pick up the phone and call somebody. I got a phone call from an investor student of ours and it’s like, “I bought these two notes from this fund. It’s been over 60 days and they still don’t have the collateral. The money that I borrowed from my investors is getting antsy because I still don’t have the collateral files, the hard files yet.”
I said, “What’s outlined in the agreement?” The agreement is like, “After fifteen days, if they don’t have the hard collateral file, I have the right to ask for a refund.” I said, “It’s time you asked for a refund. You need to call that due diligence or the file due that if you don’t have the file folders in seven days, you’re going to request a refund and talk to your attorney.” He was like, “Should I draft it up or should it be my attorney?” “Don’t have your attorney draft it, just send a very strong written email right now and then see if it fixes.” A lot of times that will solve the story because a lot of these funds will be a one-off or two-off by and they’re used to selling in bulk.
Sometimes the one-off guys get pushed to the back. I only say that because that’s happened to us in the past. It happened to us with a bigger trade too. We bought 60 assets and we followed up with another 70 assets roughly about 60 days later. The collateral files had not shown up yet from the first trade and I told the seller, “I love you guys and I know you can get these going, but I’m not going to fund this $500,000 trade until the collateral files show up because we’re beyond the 30-day timeframe.” Suddenly, all my collateral files showed up a week later, that’s something to keep in mind about. Don’t be afraid to push back, “If I haven’t got my collateral files yet, I’m not going to fund you until you get some new ones. I need to get these things taken care of. I need to get these things fixed or whatever the problem or the issues are. I’m glad to control this, but I need you to fix this. I need you to fix this assignment. I need you to get this deed recorded. I need to get the updated assignments.”
Those are things that should not be difficult to just fall through the cracks. There are little things that happen all the time. I don’t like paper myself either, so I understand that. These much bigger funds are used to train and stuff like that. It’s difficult to go back. It’s not that difficult, but it’s time-consuming to stop what you’re doing and go forward. You have to push back a little bit, “I need to get this done. I need this fixed and I need to work my way through it.” You can always look if you’re marketing on a regular basis, if you’ve got expensive capital in the deal market and refinance out that expensive capital with cheap capital. If you take a property back, it becomes an REO, maybe you can get a hard money loan to pay off your investor as best you can and then you’re dealing with a hard money lender and use your investors’ money on another deal.
Those are the couple things that we’re working through right now. I’ve got some REOs we’ve taken back that we’re working through. We’re getting some financing on those and help with the rehabs on those. I’m not financing the whole thing out of my own pocket and making things happen. It’s a little bit cheaper than the money than splitting the profits 50/50 with investors, but it’s all about the deal. Luckily, I bought the deals where if something went wrong, I’m still okay. If I didn’t, the big thing is I’d go out and look for more deals, “Let’s find another deal.”
One of the guys that I learned the note business from, Bob Leonetti, and his business partner, Jayme Kahla, they ran a company called Success Mortgage in Austin. They closed their doors during their peak, but they ended up owning their creditors, their warehouse line lenders $1 million in bad debt that they could not get back. They said, “After you give us the opportunity, we’ll get these things paid off over the next year or two by doing some real estate deals.” They had a solution. Their creditors or their warehouse lenders said, “That’s fine, let’s do it. We’ll set that up for it.” Bob and Jayme worked their butt off and I learned a lot from them. They would buy a property to get it fixed up, sell it off, take a little bit of them on a deal, and then take the big majority and put it towards that balance.
Over a couple of years, they had it paid off. You have to have a solution for when things go bad. If you don’t have a solution, you pick up the phone and call someone, “Scott, I have a friend of mine who is a note dealer.” It’s all going to happen. What you have to do is make sure you don’t continue to bang your head against the wall. You come away and you need somebody to shake you up a little bit and go forward. At some point, you’re going to have a deal that goes bad because not every deal is a homerun. There are things that happened in this industry that are weird. Collateral files get lost, value is given different, people break in and violate stuff. Sometimes you have insurance, sometimes you don’t put insurance on stuff. You should put insurance on most of it, but some of the low balance up, it doesn’t make sense. You’re buying low-value assets in Detroit by the time you would pay your deductible, the insurance company’s not going to fund a $5,000 or $6,000 valuation.
Those are some of the things you have to keep in mind. Insurance company, a lot of times, don’t want to go from a non-performing note to a vacant asset. They don’t want to cover that for vandalism in an area that you’re in. It happened to me and Robby Woods on a couple of assets up in Chicago. Initially, when you’re starting off to condense where you’re looking at assets, you can help build your team to help avoid those types of errors. I know a lot of people want to do everything themselves and you’re barking up the wrong tree when you do that.
Questions From The Audience
We have a question, “When you finance your partners, do you move the money to another deal or do you pay the partner back? Do you pay anything extra for the use of the money?” When you finance your partners, usually there’s an agreement in there and some interest rate. It’s up to you and your negotiation. Usually what happens is, “I want to make sure we’re going to take them clear this out of the deal and move the money out. I’ll refund and wire back and have them wire it back to me on a new deal.” That way it’s clean paperwork. Money was returned, and they can roll it back in towards something else. “Do you pay anything extra for use of their money?” No, you have a flat interest rate in the deals or when something drags on or you may not. It all depends on how good negotiation skills you have.
One of the first flips I did was sending out postcards and yellow letters in borrower in Round Rock, Texas in 2001. It was a gorgeous three-bedroom, two and a half-bath, red brick house. I said, “When we called, we were taking over 72.” We’re behind by a few months, about a year. When I called them to check the taxes, the taxes were a little balanced. What I did not realize with one extra question is that when I called to check the taxes owed, Chase had just paid off the tax. It was literally the day Chase decided to pay off the taxes to avoid tax foreclosure. I’d already had a balance from Chase a couple of days earlier that I didn’t call it to double check on the bounce. We’ve got to close a rehab on this property. We brought in $20,000, $25,000 in and it dragged on longer than expected. We dropped the value. We had to replace the AC, we have a ceiling caved in the bedroom because the AC drip pan over flooded. Looking back, it was a great flip to learn from other things that could have gone wrong. We expected to make $10,000, $15,000 on the deal and we didn’t make anything because the taxes were paid, the balance was a lot higher, the closing costs are more. It totally sucked. Basically, we could not pay back our investor.
We were lucky that the investor was my buddy’s mom who funded the transaction and we paid her back in the next six months over several for other deals that we closed on. She made her money on a 12% return over the year and she was happy. I paid her back with my half of it, my partner paid back his half, but you have to realize, things are going to happen. There are a-ha moments that are going to happen. This is why it’s so important to double check your values, have a realtor check the values and drive by the property. The same realtors pulling values need to drive by. Two, calling on taxes, checking taxes, making sure of that stuff. Third, pulling O&E reports, and fourth, acts of God. Getting insurance.
If you used Madison Management, you literally have them slap insurance on your properties across the board very easily when you purchase. It’s one of the nice things that they can do. It’s done through Ross Diversified Insurance and is easy enough, addition free, relatively inexpensive for the most part. It is definitely helpful to have on your books, so you don’t need to consolidate it into one kind of vendor area versus you have to do extra things, the easier it is. The best thing you can do when anything does go wrong is to face it and find a solution. Sometimes the solution is longer than you want or initially hoped for. You have to work your way through the deal. Work your way through the thing. If things are taking a little longer, then they take a little longer but at least you’re making money. At least you’re taking the time to get some stuff. This is why it’s so important to underpromise and overdeliver. There have been times we’ve done deals and it took a little bit longer and when it came down to the split and expenses, my investor wasn’t going to make a return, “I’ll eat the expenses. We’re going to split the profits above that. That way you still get to see about a 15% yield versus a 7% yield. I’ll be fine on my end.” My return was still good off the split that I get even after I’ve covered my expenses. That’s one thing to keep in mind.
We have a long question, “I have a sub-performing note in Birmingham, Alabama. The borrower still lives there and wants to stay. He has made three payments, but it’s fourteen months behind. My servicers had allotment signed but he only made three payments. This is CFD. The value of the house is about $30,000 but that hasn’t been verified yet. I don’t have a decent realtor in Birmingham. I have about $20,000 of the note already. Should I evict or try and continue to work with the borrower?”
First and foremost, the fact that you don’t know true value is disturbing because you had this for a while. The fact that he made three payments this year, but it’s fourteen months behind, it’s time to evict this guy or gal. Whoever it is, you’ve got to get rid of it. It’s a contract for deed and Birmingham’s a strong enough area. You need a decent realtor in Birmingham then get on the phone and call Realtor.com and find a realtor in the area. Jump to the WCN crew, “I need a good agent in Birmingham.” You’ve got $20,000 in the note, you’ve got to do something with it. If your servicers let them make three payments and you’re not doing anything, the problem falls on you because you’re not being aggressive on that deal. He’s fourteen months behind, it’s time to get rocking or get going, “You no pay, you no stay.” Get on the phone and find an agent or get on Facebook and ask there. There are so many ways, “I don’t have a decent agent,” get out there and ask somebody. That’s a big thing out there for everybody. You should be able to find an agent in every market. There are no excuses not to find a decent agent. I want to say thank you first and foremost for sharing but get on the phone.
“Servicer is not effective,” you have to realize too that you are in-charge of your servicer, you dictate how often you communicate with your servicer. Did you go the cheap route and try to manage it yourself? While there are some services that are horrible and every one of them stinks in some form of fashion, it’s about how effective you are at communicating and driving that force. We’ve got several investors who are investing in the Birmingham, Alabama area. If you’re in the WCN Crew, you can reach out to Chad. Chad is from that neck of the woods. He moved to Houston. He may know some good down there and he’s done a couple deals that are in Birmingham. You can reach out to Maureen McCann, a Titan Investment Group. She’s a phenomenal resource out there that got a realtor group out there. They do a lot of turnkeys down that neck of the woods. Her group may help you get better value on that stuff. To do it for $20,000, I don’t know what you paid for it, but you probably paid too much, to begin with. “I hate to say that it was only worth $30,000,” hopefully, you’re incorrect on your values because if you don’t have something that you gave me true accurate values, that’s the big no-no to begin with.
For a lot of us, when we get into the note business, we’re like, “This is cool.” If it’s not your full-time gig and you do something else besides notes, it’s more of a hobby, “I’ll get to it.” Someday has to arrive at some point. Michael said he paid $9,000 for it then it means you paid fine for it, but your $11,000 that you’ve got into it otherwise, what’s that from, taxes, servicing? “It’s a nonperforming CFD.” That’s not bad, $20,000 for 30 days, that’s less than $0.30 on $1. It’s about right for a $30,000 asset based on the rough stair-step method. “The value was $45,000 per BPO when I bought the note, I just don’t think the value is accurate.” You have to call the realtor up on the BPO and have them rerun the numbers. Oftentimes you can do that, but give them a phone call and say, “I need someone to drive by the property and take photos, and come back with the number.” If your age 45 then you’re still sitting okay, you’re not going to make a lot. If your age is over twenty, you still got some opportunities to money there. You have to turn around, sell it, flip fast and get some money. You tried to evict already. I don’t get where the tried comes from. Either you did or you didn’t.
He says, “He tried to evict and already spent $1,200 in attorney’s and $1,000 on taxes.” It’s a cost of doing business. If you tried to evict already. I don’t understand how you tried. Was it not successful, they’re not going to go through? Did you decide not to do it and decided to do the payment plan with the borrower? With a CFD in Alabama, you’re talking of maybe a six-month process the most. Michael says, “The borrower started paying again. The servicer said that I had to stop legal.” That’s correct if you accepted the payments. This borrower is fourteen months behind, start the legal action again and make it where he or she has got to pay for the full fourteen months. The minute you accept one payment, you have to stop the legal because then you’re basically allowing them to stay. They can send in a payment, you can have your servicers not allow online payments. If they get a payment, it’s rejected back, “We are requiring the full fourteen months due.”
You did accept payments and you got excited, “I’ll take the $300.” It’s not the servicers fault at that point. That’s a very honest mistake. “They want to start paying,” keep them in there because the numbers should work out. Three months later, obviously, they’re not paying again. You need to restart legal on it and say, “You’re not paying. The only way I would let you pay as we started paying on time and you come to the table with a lump sum.” You would be able to get at least $1,800 or $2,000 a year of the payments. You’ve got to get caught back up. The borrowers, if they come to the table with the full amount of due, you can’t evict them but they have the right to make up their loan and then go from there.
Hopefully, Michael, you’ve only used your own money. The first step will be to confirm value. You have to confirm the value and get your legal started. If they have not started, call the servicer and start eviction again. This time we don’t want to accept any payments unless they come to the table. Michael says, “It’s almost been two years.” It’s time and dragging on, things will happen. Luckily, it’s your own money into the deal, which is fine, but reach out to Titan Investment Group and they can put you in touch with a good realtor in the neck of the woods.
The beautiful thing is the biggest mistake I made early on was that I tried to take everything in one way. I tried to take every deal in one way and I would bang my head into the wall as things would change. You have to keep in mind that with no achievable exit strategy. Sometimes when things happen, it doesn’t always work in the way you want. You’ve got to go the way or the path of least resistance. If you can get the borrower reinstated, then you can get started being paid on time. They can start to do a short sale or subject to, or Cash for Keys or lump sum pay off, whatever’s going to work. That’s why it’s important to say, “What do you want to do? Do you want to stay or do you want to go? If you want to go, that’s fine. Let’s talk about getting you signed over. Stop the judgment, cancellation of the contract and move on. If you want to stay, you got to pay.”
If you’re working with a deal that’s stuck, struggling and dragging on, feel free to drop me an email at Scott@WeCloseNotes.com or go onto Facebook and send me a direct message as well. We’re glad to help out anyway we can. I’ll get on the phone with you or we’ll talk it through. If you have your stuff available, don’t send me a text message or email and let your emotions take away from the information. We’ve had people contact me before to look for help and they’re talking through the deal and going in circles. It’s not making sense. What they sent me originally was not accurate at all what they need help with. If you’ve got a problem with an issue, “Who’s it with? With a vendor? Give me the full information.” I can help you as best I can if I have all the information. If I don’t have all the information, it’s hard to help.
I know people that have bought notes and then walked away. I’m like, “Why did you waste your money?” They bought notes, they funded. Two weeks later they tried to get the wire reverse, which is stupid. That was the first time and then they disappeared. The servicing companies call me, “This guy is one of your students? Do you know this person?” “Yes.” I’m sending emails and there are no responses and I’m like, “If you have an issue, don’t freeze up. The worst thing you can do is freeze up.” You have to pick up the phone, call somebody for some help. There’s often a solution to making things happen. There’s often a way to get out of trouble if you will face it, not be embarrassed, and work your way through it. We’ve had some deals in Florida that were dragging on the investors like, “Can I take it over? Can I buy you out of the deal?” I’m like, “Yes, buy me out of the deal. Just get me out of here.” “Here you go. Run with it.” I don’t have a problem with that.
There are three things that will help you always get a value. If you don’t trust the BPO, get another realtor, don’t wait around for this. It’s easy to go to Realtor.com and knocking that out. Don’t blame things on your vendors if you’re the one not communicating with them. If you told them the specific of what you want to do and things dragged out, then it’s up to you to reenact it. Your vendors work on behalf of you. They’re sitting there waiting for you to direct them down the path that you want to go because they can’t make the decision for you. The only time they can make a decision is if you’ve given them clear and written precise instructions of how you want things to be handled. The more you can be precise, the more you communicate with your vendors, the better off you’ll be to get things rock and rolling.
Time waits for no man, it waits for no note. Go out, take action and make something happen. You’re going to learn more from your mistakes than you will ever learn from your successes. I’m glad to help out in any way we can. You’ve got us, you’re part of the WCN Crew Facebook page, take advantage of that. It’s a great resource. Our private group for students is a wealth of knowledge there. We’ve got 860 some odd members of that group. Not all of them are our students, but a big chunk of them do join that and it has a wealth of information with a knowledge. To join, send me a message on that. If you’re not a member, just say, “I listened to you on the podcast,” and we’ll make sure you get added to it as well. Go make something happen. Learn from your mistakes. I’ll see you all at the top.