EP NC 10 – Connecting Money with Meaning from Rick and TJ with Paperstac.com

NCS 10 | Connecting Money With Meaning

 

NCS 10 | Connecting Money With Meaning

Rick Allen and TJ Osterman talk about how they connect a meaning with their note fund to try and help keep borrowers in their homes. Rick and TJ met when they both worked for a nationwide wholesale firm. Sharing a common goal, they hit it off and have been partners ever since, starting their own wholesale company in 2008. In 2012, they got into notes, when they stepped into a big pile of notes by accident. Rick and TJ are focused on helping create sustainable homeownership for the underserved market, primarily the lower middle income borrowers, so that they can start to concentrate on being an active member of society again. They discuss a couple of different strategies they’re doing in their business that focuses around connecting money with meaning for both parties to benefit.

Listen to the podcast here:

Connecting Money with Meaning from Rick and TJ with Paperstac.com

Welcome back to Note Camp day two. We are launching the first session of the morning with Rick Allen and TJ Osterman from Paperstac.

Hi, everybody.

We’re glad to have you.

We’re glad to be here. We’re super excited we were on Note CAMP 4.0. We’re happy to be back again and love what Scott does and love what you guys are all about. It’s an honor.

Thank you guys for having us again this year and we’re excited. Give some views on stuff and see what happens.

We’re excited to have you back and we’re also excited to see what’s up and what’s new with Paperstac.

We’ve done much development on that. We released it and we took all the feedback we’ve had. We’ve rewritten the entire platform already.

I am happy that we got feedback because people are using the product.

We’re seeing a lot of traction right now. It’s going to help move a lot of inventory throughout the space.

I will go and turn that over to you guys.

Thank you. The title of our little discussion here is Connecting Money with Meaning, which is our tagline. Rick and I have a little bit different of an investment thesis that we’ve taken on for the past six years that we’ve been 100% investing notes. A quick little background of myself for those of you that do not know me. I’m originally from Chicago, Illinois. I’ve been in Florida now about eighteen years, moved down here to be a teaching pro in golf. Sold my first house, flipped it and made a bunch of money and said, “I’d rather golf for fun and not for a living and get into the real estate game.” That’s what I did.

I’m a husband, a father of two. Dylan who is four months old and Reagan who is four years old and they’re the sparkle in my eye and they’ve made me a better man. I’m surrounded by all women and I think that’s a wonderful thing, even my dog, Savannah, who I can’t forget because she’ll get angry at me. We have been six years investing full time in the note industry and it’s organically grown into something major in my life. I think that Rick’s also, to where it’s shifted our investment thesis and how we look at things and the opportunities that it’s presenting. We’re really excited about what the future holds. We’re excited to continue our development with Paperstac, which is the technology piece of what we’re doing to help lower that barrier of entry into investing in notes, making it a little less scary.

I’m Rick Allen. I’ve been in Florida for 30 years so I’m pretty much natural Floridian. I am a husband and father of three. I jumped into real estate right out of college. I didn’t know what I wanted to do with my degree, which was the Communications degree which I found was just piece of paper. I got my real estate license and jump into selling timeshare as a way to cut my teeth. I give those guys credit because that’s the Marines of sales. You learn at a quick pace, have thick skin and to not accept no. You’re going to hear a lot of nos in timeshare.

From there I jumped into wholesale, where I met TJ. We worked for a nationwide wholesale firm and I say love at first sight. We had a shared goal so we hit it off from there and have been partners ever since. We started our own wholesale company in 2008. We did about 400 houses over three years. We had 25 employees, couple of offices and decided at the end of 2011 we were like, “Let’s get out of the employment business and have employees and start doing the fix and flip and the rental thing.”

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: You have to connect with the borrower and not to rely just on that service or think you’re going to set it and forget it.

In 2012 we stepped into a big steaming pile of notes on accident. We had an REO agent call us and said, “Do you want to buy a note?” We were like, “We have no idea what it’s about but let’s give it a whirl.” Fast forward now we’re managing about $6 million. We have a Redgate plus fund. We’re on the on the eve of submitting to the FCC which will allow us to do $50 million every twelve months in funding. That is going to be obviously how exciting it is to be able to spend that money but to have a bankroll of that much money to focus on saving someone’s house.

We’re going to be one of the only real institutional size investors with that type of capital to take down the type of file like that that we’re taking down which is the low balance, small balance low income type stuff.

It’s going to bring us to what we want to talk about today. We’ve got a lot of a lot of stuff that we want to share not only about the underserved part of the market or the lack of affordable housing. We’re definitely going to dive into that and show you the opportunity that lies there. I think we want to touch on different perspectives and how we’ve taken that and how it’s opened up doors. It’s propelled us in my opinion, it’s given us our mission which is we manage a good amount of money right now. This is our North Star beacon which allows us to then start raising funding and everything we do. That’s the core. It allows us to make all of our decisions around that one core. How can we save 10,000 people’s houses?

That’s the main mission is to save 10,000 families homes. That’s our moon shot. We’re going to touch on some different stuff like loss mitigation strategies that we’ve come up with which lowers that resistance to the borrowers when you’re speaking with borrowers. We have a different type of outlook when it comes to loss mitigation. We believe that is the key in operating in the NPL spaces. You have to connect with the borrower and not to rely just on that service or think you’re going to set it and forget it. You really have to get in there. We’re going to discuss a couple of our different strategies that we’re doing.

Our business focuses around connecting money with meaning. That topic, that theme and that thesis is woven in to every aspect of the of the business, whether it’s loss mitigation, whether it’s raising capital, whether it’s modeling out how we’re going to approach our buying.

The effect that all you guys that are note investors, what else that you’re doing good to pat yourself on the back for? You have to understand there’s a huge lack of affordable housing out there. There’s a bunch of inventory sitting out there vacant, hung up in what I call the purgatory of debt mortgage space. Nobody’s doing anything with because nobody wants to put the ball in their court on that, and the ability to measure the stuff that you’re doing. In our space right now, nobody’s measuring what impact we’re having. Everybody looks at us and says that we’re investors; we’re vulture investors trying to take advantage and make as much money as possible. In retrospect, if you go back and put in some metrics in place to measure the impact that we’re having on buying a single note in a community and paying back those back taxes is huge.

We’re a company that manages for impact and profit at the same time. We’re able to still show double digit returns doing that. Honestly, it works out where we found our returns have been greater when we’re managing for impact in profit. We’re currently invested in the small balance mortgage note space, primarily NPLs. We have been peppering in RPLs to increase cash flow as we’re scaling, which is the best thing there is out there right now. RPLs we trade in much higher place. We think we’re helping create sustainable homeownership for the underserved market out there but the primarily the lower middle income borrowers that are out there, with the hopes of removing that looming question of, “Will I have a house tomorrow for my family,” gone, they can start to concentrate on being an active member of society again. Maybe start concentrating on doing more family things or opening up a business. In my opinion, when you’re super taxed on having to worry about, “Am I going to have a house to live in?” We’re trying to reinvigorate the middle class or lower middle class. You’re not going to concentrate on anything but trying to save that home. The tactics used in the past to how it’s been done, I think can be disrupted and changed for the better. I think all of you note investors out there, if you look at what you’re doing is helping you. Everything that we’re doing, we’re now scaling we’ve been doing this six years. We’re going to be doing a structured fund with a five year time horizon on it.

We look investment like the thesis that we’re working on, “Are we investing in something that will positively affect the world for our current generations and generations to come?” We’re looking at sustainability and nobody looks at it in that aspect. All you guys out there doing mortgage notes really look at it you are doing some good stuff. We’ll help you, ensure you different ways that we’re looking and measuring stuff and what we’re trying to implement to improve our business, especially for the new millennial generation coming. If you’re looking at building a sustainable business or some hobby that you’re doing, you have to be able to cater to what the investment landscape is looking like.

If you’re not taking into account the millennial generation, the transfer of wealth that’s going to happen from the baby boomers to the millennials, you’re missing the boat. You can’t just think about today. You have to think about tomorrow. You have to think about five years from now; you have to think about ten years.

It’s $30 trillion to $60 trillion is changing hands. Baby boomer generation to the millennial generation and women is a statistic. You have to look at the behavioral psychology of the millennial generation. We study that. I’m a behavioral psychology nerd. I love behavioral psychology and I tie that in with our strategies and how it affects behavioral economics in our country. It is amazing that it’s changing big time. If you don’t have some sort of social mission attached to what you’re doing out there, you’re not going to be fishing in a big enough pond for investors out there.

Toms, they were way ahead of their time. They’ve been out for ten years. Every pair of shoes that you bought, we sent a pair to somebody who needed them. What a fantastic way to do it and we’re looking at that that same idea but how can we start helping? What little things can we do to start chipping away? I remember when we got into the business, I wish I could say it was great and we’re here to help everybody. We were here to buy houses at a cheaper way. It was 2012. People were coming into the market, totally eating up the inventory. The Blackstones were paying over par to foreclosure auction. Maybe let’s offer somebody a loan modification or short pay off that you, the rewards started coming in.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: Loss mit is the most important thing that you need to work on if you’re in the non-performing loan space.

The rewards mentally that I felt were really great when you got that borrower on the phone and they actually were crying and saying, “You guys are the first people,” and I said, “Maybe we have something here.” Let’s look and see is there a different type of thesis that we can go after?

How do you think that’s affected our loss mitigation? What has been the biggest key that when we go to reach out to somebody? In your opinion, what do you think like, “This is how we’re implementing, connecting that money with meaning.” We talked it loss mit.

I think loss mit is the most important thing that you need to work on if you’re in the non-performing loan space. We’re optimizing a distressed loan book is what we’re doing. What we do is we’ve chosen our strategies using a not-for-profit housing counselor to do our first outreach to these people. We don’t want to come across as somebody that is after they’re home. We want to lower the resistance one, because we know that RPL, if we turn it reperforming, it trades on the secondary market. If you’re in it just to make money, that’s fine, no social. You don’t want to have any positive social stuff that’s fine to you but you have to understand the NPL. It’s not as easy to sell compared to a reperforming loan. It makes more sense to do that. We use not-for-profit which helps us reach out to that borrower right away. There’s that cooling off period.

Taking the social side out of it, if you’re looking at the mechanics and the engineering side, there’s a 45 day cooling off period. You can’t reach out to these borrowers.

That is a key time. The borrowers are getting letters saying no mortgage is sold again. Any work that they’ve been doing with the previous loss mitigation manager or whoever is gone, out the window. Believe me this is why people go dark and you need to be able to reinvigorate those.

The loss mitigation process as it sits today with most institutions is the equivalent, in my mind, of running a marathon. Imagine running a marathon. Going through all these trials and tribulations and getting to the last 0.2 miles, and then they started all over again. That’s what it’s like whenever their loan gets sold. You wonder why some of these borrowers get frustrated, they get bitter, they don’t want to talk to anybody. With this addition of the not-for-profit, you can reach out to them as soon as you buy the loan, as soon as those letters start hitting and say, “You don’t have to start over. We’re here to help.”

I think the vague thing that we did was we said we looked at things and this is part of my behavioral psychology background of looking at things and say the conditional welfare system that our country is in now, you’re putting people that are already taxed on their mind to where now you have, “I wanted to give you this money but you have to do this, this, this, this, this, and if you forget one little step, we’re going to pull that all back from you.” We want to underwrite these new borrowers and basically rip the page out and get to know them from day one. We look at our previous servicer notes and everything to try to get the story but we do not hold back to what that borrower is all about. We give them a chance to start over with us. We set right off the bat, “Do you want to keep your home.” “Yes.” “All you have to do is pay 70% of that principal of interest right from the get go on condition. That’s it. That’s what you need to do.

Do you want to start doing this? To start the show and during that six months, what that allows us to do is underwrite them, drill down deeper into what their situation is in life, what their situation is financially. Then we can realistically put together a plan that we can modify their loan, not just recapitalizing the back end and putting it on there. People are not going to continue to pay. You have to give them equity. That’s where when you buy these things, you’re buying them at a discount. Majority 90% plus people back in the money by reducing your principal by almost half a lot of the time, putting them back in that equity state and we’re going to build and bake a cake that’s going to continue to perform.

Flipping back over the mechanic side is you’re immediately taking in an asset that was non-performing and you have it cashflowing something. Some cashflow coming in is better than cash going out and that was one of the biggest a-ha moments. It was one of those things that we really learned when we started connecting this money with meaning and having more altruistic investment thesis was, “Not only are we helping somebody out, we’re helping our business out too,” because now when you get an NPL and your goal is to take the house back, what do you do? You’re either going to get them to sign the house over or you’re going to file foreclosure. It’s going to cost you a lot of money. You start getting cashflow coming in immediately and that’s better for your business but it’s better for the note because then it starts that slow payment history. It starts laying the foundation to your exit. If you can start building your exit the day you get it, that’s so much better than waiting 45 days or for the cooling off period. That’s the loss mit two days. It is 100%. If you don’t have a handle on your loss mitigation, you’ve got to get a handle on it quick.

To tell you the truth, there’s still 76,000 people every single month affected by foreclosure. We have a lack of affordable housing issue going on in our country right now. Why are we kicking people out of their homes and putting them out into somewhere where there’s a lot of those people have families, majority of them displacing children. The amount of crime that happens when a home is sitting there after being foreclosed upon. I understand sometimes you have to foreclose to exit out. There is a big time chance that you do not have to foreclose. You could do a Cash for Keys. You can make that exit a little bit easier for that person and still come out smelling like cherries. What’s the cash for non-foreclosure?

We’re in Florida, it’$15,000 to $17,000. We have one right now that’s in Kentucky, and this little rascal keeps filing bankruptcy on us. I think he’s about to file his third. We’re into that one for about $25,000 in legal fees. The judgment was already entered when we got it. The constant battle and it’s been about a year and a half to two year battle. Knock on wood we got a short sale offer today.

That is good news that’s why we’re smiling. This is a huge amount of money out. I think it $300,000 something sitting out there, burning. Sitting there not working for long enough.

You can’t save every house. You can try. You can do everything in your book but you also have to be smart. Understand this is going to be one that’s going to fall into the foreclosure bucket. Sometimes no matter what you do, you can almost give people a house and if there’s nobody there to give the house to, you’re going to have to foreclose. Don’t think that we’re saying that we’ve never foreclosed or we’re never going to foreclose. It’s going to happen. That’s the nature of this business. It’s a dirty side of it. It’s nice to know that you can come out clean on the other side by saving somebody’s house.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: Not only are we helping somebody out, we’re helping our business out too.

What’s an interesting statistic is that the US Census Bureau categorizes around five million homes, sitting there categorized as other vacant, meaning there are no other vacant. Because of that tax break that the corporations got from 35%to 21%, that was a main fuel source for low income housing tax credits that these corporations would buy to decrease their tax burden which would then in turn fund developers to build low income housing. That is a major thing that’s already there and that’s affecting LIHTC which is Low Income Housing Tax Credit Business in and of itself. It’s going to result in probably 250 million homes or 250,000 homes not being built because of that brink in the low income housing tax credit. All of us sitting here in the known industry, we’re getting tapes and tapes and tapes of stuff. The low income stuff, we have thousands of homes sitting there possibly able to turn into rentals on their finance deals.

There are a lot of different strategies that we can we can do. We’re not trying to make a huge impact in any huge space. We’re trying to make a huge impact in a lot of small spaces. All of us in this mortgage note industry deserve a little bit of a pat on the back even if you don’t know what you’re doing.

It’s also encouraging to see a flood of people coming into the asset class. When we got started in this it was certainly new to us as is when you get started with anything but also the long we went right now what a great investment class this is. As our investment thesis changed we’re like, “This is this is a great investment class that everyone needs to know about.” It’s stuff like this Note Camp that’s really bringing out the word to people. It’s getting an army of people out there. We can have $50 million if we have a whole army of people that we could give loans to, then they can start working on these. You guys can buy loans from Scott or Note Camp or anything like that. That’s when we have the army of people working together. Many hands make light work, as my grandpa used to tell me.

One of the most important thing for anybody out there managing an NPL book of loans is understanding people and how they act. I was reading the Scarcity Effect, it’s Sendhil Mullainathan. If anybody wants a great book it’s called Scarcity. It basically explains when people have a limited resource of capital or whatever it may be, time, how their brains operate. What it shows is why are these people not paying their mortgages? What’s going on? You’re not going to fight the battle upstream. It’s called mental bandwidth. Unless you’re a multimillionaire right now, you don’t have to worry about money. Everybody knows that mistakes are made and you cannot make judgment. Good judgment calls when you’re worried about, let’s say money, when you’re worried about time. You make mistakes and that is what’s happening in our society. When you’re going after somebody trying to recoup money on a non-performing loan, you better know how that person’s brain is acting. You’re not going to be able to get them to start paying if you’re totally disregarding what’s happening. You make it as easy as possible for them to move forward. Housing to me is the biggest thing before those next steps. Our plan with our new fund is not only going to stop at, “We’re going to save this person’s home,” but we’re teaming up with a new not-for-profit tool to help follow that person through depending how much help they want reviving their credit. Do they want to start a business? What type of help in consulting can you give them? Who can we reach out to and connect these borrowers with?

Let’s look at the systemic effect that once you start doing that, at that point you’re investing in people. We’re not investing in assets, you’re investing in people. When you start investing in people, when you start helping people better themselves, you improve their credit, get a job and you modify their loan, you’re helping that person but you’re also setting them up for a point where maybe they’re going to refinance their loan. You’re helping yourself by understanding and doing the good thing. By helping and understanding that person you’re going to put together a good re-performing loan that’s going to benefit you for as long as you hold that on your book or resell it to exit, whether you sell it on Paperstac, which is our platform or whoever else you use. You have to be able to put together a good story for this. It’s a very esoteric type of discipline when you’re dealing with low income borrowers. That’s why big institutions cannot do it well. It’s cyclical, loss mitigation and non-performing loans are cyclical in a big institutional space. That’s where our niche is. They will not allocate a bunch of man hours and capital to something that comes around every ten years, fifteen years or twenty years when the market turns.

That’s what they’re dealing with. Why would they put off? Because their shareholders on a bank are going to go, “Why are you putting all this good talent towards loss mitigation when it only comes around every ten to fifteen years?” The type of resources at these low income borrowers are getting are not the best by far. What we see now is a result of that, by all this low income stuff that you see on tapes and why hasn’t anybody been doing this stuff for five or six years? They’re a product of the system that’s been put in place. I’m not blaming big institutions. That’s how they restructure it.

That’s where the beauty of our opportunity and our niche lies is being able to lever that for banks. Being able to go to them and say, “What we catalyze you guys, you guys make money on fees. You make money on lending out money. You don’t make money on helping cleared up issues,” because they put those things on the back burner behind the curtain. Because number one, a bank, let’s say a big institution, has shareholders. They don’t want to know on their books there’s a bunch of distressed loans. They transfer those off and it makes sense when you look at it. That’s the different perspective that we have brought to this business, which is an interesting thing for me because it’s then the strategies that have come out of that has increased our bottom line also by a lot more of them than what we were initially doing by trying to get that property back, resell it, fix it up, which is a good fight but you’re not going to have many.

As you’re talking about that you’re talking about what is it like if we’re investing in people. When you talk about you’re helping yourself because it creates more marketable asset. If there was other people doing that, many other people doing that and everything is, for instance, maybe they be listed Paperstac. How nice would it be then for somebody who’s a large institutional buyer to come in and they know that there’s a certain community inside Paperstac where everybody modifies their loans and the investment people that way. How much more valuable are those loans?

How much more investment are you going to get?

This is something that’s probably going to be a new feature that I just kind of thought of. Could all those loans be aggregated into one giant pool whether it be from five, six or seven different sellers that have those quality loans? One of the secrets in the re-performing loan is the more you have, the higher they pay. You don’t buy on a discount when you’re buying re-performers. The more you can aggregate together, if we can get a lot of people doing the same thing, have the same mentality, it’s not only going to help their business it will help our business, it’ll help the community and then you sell those assets for more.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: You can’t manage what you can’t measure.

We do not measure anything besides financial return on our portfolios. Real estate investors does the same exact thing. There’s not anything put in place to measure what you’re doing for the community, what you’re doing for the borrower. We’re all investors. You need money to buy these things. You’re not getting financing so investors these days will only be attractive. You can’t manage what you can’t measure. If you’re going to a big institutional investor, an endowment, somebody that has a lot of money they’re going to want to know, “What did you do besides put a return in the pocket of your investors? While we pay back $10 million in back property taxes to local communities over the last year as a group.”

I’m talking guys as a group, if we can come together. That’s my ask of everybody is how can we come up with something where we can start to measure with stock. Somebody that’s a good app developer or something where it’s easy, you can do for metrics, you could say, “I have a bunch of them written down, how much property tax have you paid back for your last year of doing business? How much energy did you save? Can you go green on that rental? Can you reduce your carbon footprint?” When you have all of that measured and you’re able to put that together, then when you go to an investor for money you’re not leading it just, “We make a bunch of money.” They’re like, “Yes, so does a million other people.” What else do you do? Headlines are big for big investors. Headlines are good. They know they’re getting something to somebody’s money. Even an investor will give you $1 million and say, “Now we were able to show you double digit returns but we’re going to pay back local communities and drive another $500,000 into their tax coffers,” because they need it. The low property taxes that are not paid directly affect police, directly affect community centers, directly affect public schools.

They also directly affect other houses. A bunch of houses not getting the taxes, they got to come up with that money somewhere.

The idea of being able to measure something and the metrics is lacking in a lot of industries, especially in the mortgage note industry. You are doing some really good stuff if you buy one house here and you pay $10,000 back in property taxes or whatever you did. Start tracking that stuff, whether it be writing down or not. Start doing it now if you’re new into this business because we have to go back now and redo all that stuff. We’re going to have that metric in place. All those metrics that we want to measure and be able to track that because when we’re seeking in capital raising, the investors, the people that we want to go to. If you’re talking millennials they don’t care about just bottom line anymore. You have to say, “This is what else we’re doing. Okay guys, we like it.” There’s plenty, a lot.

It’s becoming the way it is. Whether you look at the family offices and the family offices are all looking for not just, and that’s if you’re going to raise money, family office is a good spot to go but they’re not just looking at the return. They’re looking at what’s the social return? What’s the social good you’re doing?

It’s headlines. Like the Rockefeller Foundation, for instance a lot of money that they’ve put into the social impact investing. If people want to start researching impact investing and what it actually is, it’s been around ten years since the actual coining of the term impact investing. Mortgage note investors that are helping society by putting affordable homes out there because that’s what you’re doing in the core of it, and of all the other types of things that you’re doing. Look at what you’re doing and having a different perspective on what you’re doing, you really promote that to people and they ask you, “What do you do?” If you start to say, depending what your audience, it’s sometimes a different conversation that you’ll have. Those types of conversations and that a-ha moment for a lot of people we’ve talked like, “A-ha, I didn’t even know that was done that?” What convention was it that we were at where somebody from HUD was out in the crowd?

It was IMN Convention.

We were talking up there and I was talking about how we want to save and someone went down would say, “I don’t care, just give me my money. That’s all that I care about at.” She came up to us after and said, “I didn’t realize that there were people in this space that had been looking to do good for these homebuyers.” That’s what we’re perceived as. I think we can start to change the headlines of what we’re doing. When you do that, what happens is you get more patient capital. You get more catalytic capital to help move your business forward and invest in this stuff because that’s the way that it’s happening. That’s a little bit different perspective of what we do and what’s been happening. I don’t if anybody’s heard about which would be a good thing for people to find out. There’s something called opportunity zones that are there coming up, and it’s called the Investing for Opportunities Act, which it lets investors temporarily defer taxes by investing their capital gains in distressed areas designated as opportunity zones.

Such capital gains taxes can be reduced if such investments are held for five to seven years. What they’ve realized is there are $6 trillion sitting in unrealized capital gains. There are $6 trillion in unrealized capital gains that is not working out there because they don’t want to hit that. They don’t want to get taxed on that stuff. What they’ve done is they put these opportunity funds in place to take advantage of these opportunities in their low income areas of the community. There’s $6 trillion there, just opportunity funds that are popping up all over the place. When you realize this, you’ve got the guy Sean Parker that did Facebook. He’s a big advocate on this. Obviously, he’s one of those guys in Silicon Valley that has all these unrealized capital gains that wants to be able to put this at work and not have to take a tax hit for that stuff. Some of that stuff you guys can start to tap into, too.

When you’re talking credit scores, do you use just the primary equifacial credit score that you’re using? To me it was always like why that six months while we do that loss mit stuff is because we want to use alternative data, and that is becoming a little bit more with technology.

That’s what we always say because people are going to have hardships along the way. Everyone has hardships. When you go to start underwriting a borrower, you have to look at more than just the credit score. We love looking at servicing notes. When we go to purchase something and we’re trying to apply that money with meaning thesis to it, one of the first things we ask for is a servicing note. Why? What can you read about the story? What can you see about the borrower by reading the service? When we will buy something as long as they’re in there, it doesn’t matter how long it’s been paid. I want to see what their service is about.

In Paperstac, we’re going to be able to start to pour in that data. When people are looking at a note, you’re able to not only look at the stuff that you generally look at. The first thing we do is we look at the house. Is there is there a house sitting there? A lot of the times you don’t know. What’s this look like? From here we do the Google Maps and drive around the community and then what I want to see is I go back to the servicer notes. I want to see what they did from five, six years ago and how long has that borrower gone dark for a period of time? What have they said to it? You can get the full story. You can start to put your business plan together per loan. You have to put a business plan together, each asset before you go into it so you can forecast out what you possibly think you’re going to make.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: You have to manage your servicer if you’re the one that’s doing the asset management. They have thousands of assets to do.

When you look for the trigger words, you’re looking for somebody who has tried to get in there and they said they want to have a loan model. Borrower states they got so many borrowers. We’re not opening up and discussing their hardships with the servicer. There is an indicator right there they’re like, “Now might be a good time to modify this person’s loan. Let’s go ahead and talk to us. Let’s go ahead and this may be a good asset that we want to look at.” You obviously have to make sure that the economics work. The economics of it has got to match up with helping somebody out. Those indicators of, “I want loan model,” or, “What can you do for me? Can you work with me?” Trying to work something out forbearance agreement. Those are all key indicators that we use that would let us know that, “We can buy into this asset and we have a high probability.”

How much do you pay for servicing loss mit if you don’t have an asset manager doing this stuff? When you’re looking at five years of somebody not picking up the phone and you see a consistency, a trend, you have to retrench a trend of somebody not picking up the phone at 3:00 in the afternoon. You tell your servicer, you have to direct them, “Don’t call at 3:00,”you’re going to be wasting your time and it’s going to go back on the bottom of that file. You have to be active when it comes to managing this. You have to manage your servicer if you’re the one that’s doing the asset management. They have thousands of assets to do. They’re not going to do as much as you are able to do. You have to utilize that servicer but you have to police them and so if you see a trend of every time they call at 2:00 nothing happens, then try something different. The door knocks, they don’t answer the door then don’t order a door knock. What we can go into now because we’re talking about how you can raise capital.

One of the things that we’ve done is we went into looking at different structures of funds. Reg C, Reg 503(C) or all the different types of funds that you can do. We settled on a Regulation A-Plus fund, one of the most expensive ones to file. The big thing is to be able to generally solicit funds from accredited and non-accredited investors. If you are able to crowd fund that, you can drive traffic for any guys that are out there that are good at driving traffic to a web site, and put together a good story and drive all that traffic to us that they can invest directly from their underwear in their house. They’re sitting there and they’re able to invest. To me, you’re tapping into a huge amount and committed investors are 1% while the other 99% of the country they can invest.

You’re tapping into the whole country. You can raise capital from anybody and you can generally solicit. It gives you so much freedom to go out there and start leaving your footprint of, “We’re helping.” It’s expensive, though.

You’re going to have to spend $75,000 easily, and you have to get the SEC attorney. If anybody wants to reach out to us on our journey for the last almost year of just the paperwork, there’s an offering circular, it’s a legit thing. That’s what I think we need to bring to this industry, legitimacy, a little bit more transparency. What’s happening? We want more capital pushing into here and that’s what we have to do. We can’t be behind the behind the curtains the whole time just doing stuff. Another big thing is there’s the $14 trillion question, I call it, is the self-directed IRA market. That is so much money and capital. These people want to invest in stuff. They’re sick of mutual funds.

I can tell you that in 1981, President Reagan, the Economic Recovery Act. What happened was is in ’81, the 401K was born out of an Economic Recovery Act. It is more of a tax loophole. Now the 401K retirement vehicle came in place right when that mutual fund came in place. If you go back and look at the statistics of what it did for that was unbelievable. That 401k allowed a vehicle to invest in these mutual funds, and mutual funds have been the biggest investing vehicle for people today. It’s huge how much money you just find. WhatI think today is happening is this non exchange traded alternative asset, like our Regulation A-Plus, because they’re buying shares in our company, which in turn we’re able to invest into notes.

We’ll modernize the self-directed IRA vehicle. With a modernized self-directed IRA vehicle, we’ll basically be a rocket ship for investors out there. If you’re looking for capital and you want self-directed stuff besides just selling them single RPLs, if you do a structured fund, these bigger money managers and people that can maybe place bigger chunks of capital are looking for something, a vehicle, to where no self-directed IRA investors. Like an alternative type of asset that can earn a double digit return they’re looking at in a Regulation A-Plus. That’s why they chose that route. It’s going to be a huge source of money. For the last six years, prove the concept before we even dove down into putting the money into scaling at this level because it’s going to be a five year time horizon.

Also infrastructure, that goes to your business. You have to have all your infrastructure set up for the loss mitigation we touched on. Definitely recommend having the non-for-profit setup and have your plan of attack on how you’re going to handle your borrower. Don’t have to be the same as our as ours. We love the 70% thinker that gets money coming in.

It’s just a different perspective that you can have instead of that one focused and a lot of people have, which is the bottom line but moving off that I like to speculate in the future what we’re seeing in this space and what’s happening. I think notes, I think Blockchain are going to disrupt the mortgage industry big time. That technology in Blockchain distributed larger. We were just at the Mortgage Conference Five Star, the Mortgage Technology Conference, their inaugural conference. It was amazing the technology that’s coming to the mortgage note space. For us it resonates as mortgage note space and the email going on and how that’s going to disrupt our industry. You have to start looking at that because you have to start creating a new business around them, how you can penetrate that into that market. That’s some of the stuff that we’re speculating on and what we’re looking in the future. Yes, we want to show you what we have coming up for Paperstac.

Going back real fast to when we have these nonprofit groups that reach out to borrowers, their interim which is so key. We all go down the track, but not all of us, a lot of us go down the track that it does help multiple homeowners, the actual people that were trying to keep in their homes. Just like you guys, I’ve got three versions of an elevator speech that when people ask me, “What do you do? Are you a realtor?” “No, not a realtor. I love realtors, they’re great, but I’m not a realtor.” When you say we buy defaulted debt, there’s multiple ways to say that. Usually I either preface it or follow up with, “We’re not the assholes,” for want of a better word. We’re not to come in and say we’re going to automatically foreclose and get you out of your house. Some people start off with that model but they evolve, they change whatnot. Some people don’t start out that way at all.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: Blockchain are going to disrupt the mortgage industry big time.

One of the things that we’ve noticed with those similar groups cutting in on lost mitigation, they have been successful. The borrower looks at them as a neutral party. It takes them off the edge a little bit, which is helpful because at the end of the day, we’re both human. We’re actually trying to help you. We don’t want to foreclose on you. It costs money. You don’t want to. Even on our on our investor side, if we have people that are JB partners, then you’re not losing however long your agreement is set for. You’re not losing 30 to 45 days just waiting. If you have to foreclose you’re like, “We’re already a month behind.” That’s not advantageous to anybody. It does help on both sides. All of you.

Big time, and I think that different elevator speech is a huge thing. Distressed debt, in and of itself, people make a lot of money just investing. In the past it’s always been known they are going to suck the juice out of that orange as much as possible. Put a different lens on it and you can still make good returns but it’ll put a little bit different of a title on our industry.

You click on the button to start demo and this is what you’re going to see. This is going to be the new transaction platform for Paperstac, this is how it’s going to look. This is what will happen once you’re out of the part where you’re looking for assets. You’re on the current site and you see all the stuff listed there; right here you can go for sale. Once you start to get into a transaction with one of these, you may click on it. You message the seller and start talking to him. You end up in something like this and you can leave comments like hello. I want to play the role of buyer. I am Amy Buyer and John the Seller. If I submit this, seller will know this is happening, so it’s happening. If I’m the buyer I cans say, “I’m going to look at this asset.” I like that house, I’m going to negotiate and say my counter at $21,000.

The seller will get an alert either by text message or however they want to be alerted. They’ll say, “Someone’s looking at your asset. You want to see if you want to accept this price.” You say, “It’s only $2,000 off. Good to go.” At this point the buyer will probably go out and do due diligence, if the docs are there. If there are any docs here, you can just click and share a file. That will show up so you can just click and drag and all of that will show up. You just grab that and you’re ready to go. Anyhow, this starts showing up here. As the seller, I can say, “I like this, I’m going to go and approve the closing.” Once the buyer some of your due diligence, they can go over here and say, “I approve the closing.” Once this happens, all the negotiations are off. This will turn green. There’ll be more stuff for the buyer and seller to do here. You start to see this will show up in the timeline.

As the buyer, I know that I have to start providing vesting profile where I want this asset to be sent potentially. If you click this, I can pull this information out. If, however, I’ve ever done a transaction before on Paperstac, all my data will be saved here. I just use the drop down, choose a vesting profile I want to use for this asset. Fill that in. They’ll provide a shipping address. Again, I’ve this before. I can provide you where I want the collateral file to be shipped to. Put the drop down, that shows up. Now as the buyer, you can say, “I don’t have anything to do.” I’m going to go this much or something. I’m going to wait for the seller to do what they have to do.

The seller comes over here and says, “I’ll provide my vesting profiles.” I need to provide a return address just in case after the collateral view, something’s not right. That’s all done for the seller. The seller needs to sign the MLSA. Click that and you know ideally I’m going to do this, it’ll come over on your phone. Quickly sign that and the buyer will have something to do as well. You do have to do the exact same thing. Click there and sign. At that point you both have signed. This is the point where you’re going to start seeing everything showing up on the timeline. You start to see all the documents being generated. You can see everything start to pop in and you can just click and either do it from this way or you can find it on your to do list. As the buyer, I need to wire the funds to a holding account and this is how that will happen. You have the routing information and what this will do is integrate with a third party APS service we’ve created. It’ll be held in that location until everything’s done.

At that point, you’ll see as a seller, you had two more things you need to do. Acquire the information. I’ll go and send the allonge. I sign the allonge. After they do that, now the seller needs to get something notarized, which is the assignment of mortgage. They click that. The notary pop up on your screen. Either you’re on the go you can go from your cellphone or you have the website open. They’ll ask you some banker questions like, “Did you own a Toyota 90s?” something like that. You show your ID and after that’s done they’ll stamp the screen. Your stuff will be digitally notarized which is legal now in every states, for some laws that were passed in Virginia. As all that stuff is happening, stages still popping up on the timeline and all of this should be shown up here. If at any time you ever needed to change something since your vesting profiles, you can do that from the metadata tab. This will have your vesting profiles, you can do that and change it to something else, you’d be able to come in here and make those changes. It looks like it’s hard but it’s not.

As the seller, I can see, “I got all this done.” I need to ship the collateral file. Once I click this, in this demo it will ship out on USPS priority mail express. It should be able to come off and you can go put this under collateral file. Send that to the third party auditing system and third party auditing company have their own version of Paperstac and will review the docs. Make sure what the seller said that it was is actually what it is. You’ll see the shipping label and tap the light one but if you clicked on you’ll be able it through USPS and see where does that transit. You can see that once the third party auditing company gets the information, they’ll review it, will update things and it’ll show up in the timeline that the collateral audit report has been done. You get sequencing done by the actual company. If the buyer agrees, “I like this, this is cool. I accept.” Buyer says, “I’ll take it.” You click and sign it. At that point, the buyer’s job is done. The seller goes, “He signed it. I’ll sign it.” The seller will go there and he’ll sign it and where we got a signature.

At that point, what happens is that the shipping label will be printed for third party auditing company. They will start shipping it as soon as they get a tracking number that shows up from USPS like this. It says it’s in transit. As soon as that has changed on USPS’s website, we will send a wire to the seller. At that point, everything’s done. Those things will turn green. You just completed an entire process of buying or selling mortgage online without ever having to do anything else like that. It’s all done digitally. That’s everything.

We’re going to have private communities that if you’re a seller you can set up your own community and invite people to come there. That way if you have your own book of business that you’re trying to sell assets to, you don’t want to broadcast every single note on Paperstac to them. You can have them go there to conduct the transaction or to run due diligence.

We want to be able to provide a place for brokers that are doing business in this industry. We understand that there are good brokers just like there are good actors and bad actors in anything. The brokers are a very valuable piece to our industry. Good brokers are very valuable.

Broker tools are something definitely we’re going to have in there. Pooled assets to where you can buy a pool and you’re right now currently on the Paperstac transaction. You can really only do one asset per transaction. You’re going to have the ability now to add multiple assets and do one transaction with the seller that it maybe has five assets so you do not necessarily have to balance back and forth. There’s going to be bulk editing. If you have assets listed under you can bulk list them. Stuff that’s making it more efficient not only us but for anybody who’s running a trade desk to the person that’s doing just the one off. Those are definitely our goals and the stuff that we have coming out in the new Paperstac.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: The brokers are a very valuable piece to our industry. Good brokers are very valuable.

How in-depth is the DD done for collateral files?

By EdgeMAC they’re going to go through and they’re going to look and see what is original, what is not. That’s to the extent of what you’re doing you’re so you’re going to know if you add the original note, the original mortgage, what allonges are original, what assignments original? Remember that seller is stating. They’re not going to go through and do your DDs for you. They’re not going to do the due diligence and say, “You need to fill in a gap collateral or a gap assignment here or this assignment look for it.” That’s not the extent of what they’re doing. They’re going through to go and verify that what the seller said is authentic and original and what ink is original and what ain’t. You’re not surprised when you get a collateral file they said, “They told me it was original. This is a copy of it.” Now I’m going to go get a lost note affidavit.

The nice thing is about that timeline is that you’re able to see what the buyer and seller both said, so that seller say, “Yes, this is all ready, I got the original note,” and then it comes back from EdgeMAC saying that it’s not. You should go back and say, “Here’s what you said. Here’s what’s going on. What’s happening? The deal’s not dead but there might be something to work out here.” That’s why I sell on Paperstac and I constantly have people asking me here can we move this offline or maybe do something like that. Maybe they don’t know that I’m one of the Co-Founder of Paperstac. I like to have everything done there just so there’s a record. It’s not just for my safety and security, it’s for somebody else’s, my counterparty. That’s the biggest thing is you want both counterparties to be on a level playing field.

If anybody knows out there of a good tool to measure stuff, like with those metrics and how we can do that, reach out to us. We’re trying to put something in place for an app for measuring besides just the bottom line on stuff. Anybody is out there that does get apps.

Somebody asked, “Where can we learn more about impact investing?”

ImpactAlpha. Just type in impact investing in Mr. Google and dive in. There’s so much information on there. You just have to follow the rabbit hole down.

We had a lot of different white papers that we’ve collected over the time. I don’t know if people, we can create a community Dropbox or something like that where peopled ump it in there and just send it through mail or however you guys want to work and we can say, “Here’s access to the white papers we have there.”

If you’ve got something that you can share into Base Camp, it’ll post the file and everybody on Note Camp can access it.

That’s what we’ll do. We got much stuff on there and I really think Basecamp a good lens to look through.

Once you dive in and you start looking through that lens you’ll see an economic difference, you’re socially responsible, and it’s different all the way around. You feel better, you sleep better, you’re healthier.

We currently do transactions on Paperstac right now. The new release is coming out in May. Officially it’s out to the public now.

After our launch which happens in May, in the summer our next development plan is to bring a mobile app. You could be able to wherever you’re at.

We’re doing a mobile app. We’re also doing a round of funding. I don’t know if there’s anybody out there looking to invest in Paperstac but we just finished our pitch deck. We are putting out a round of funding to bring more features, hire more developers. Anybody interested that please feel free to reach out. We’d love to get you our pitch deck and let’s take a look at it.

If you know any passive investors that aren’t really looking to work in note business but want to invest in fund, our MWMFund.com is coming up too. We’ll put all that in Base Camp and be happy to help anybody that reaches out to us on anything.

We’ve got people trading a lot, actually starting to do a lot of training on there, they are not our loans. It was great. We had one of our users reach out to us and say, “There’s somebody wanting to take a transaction offline.” He’s like, “No, I’m just going to leave it on Paperstac.” It makes more sense. It’s easier, it’s safer and for a couple $100, why would you not do it?

Thank you for doing that because we’re trying to bring some more transparency to this. We can’t police it all but we’re thinking of what we’re bringing this technology. This is blood, sweat and tears. This is six years in the trenches and we’re still in the trenches everyday digging into this stuff and that’s where this kind of came from.

NCS 10 | Connecting Money With Meaning

Connecting Money With Meaning: Once you dive in and you start looking through that lens you’ll see an economic difference.

If somebody tries to take something like that, and the reason they were going to do it is because they wanted to cut down on their fees. If somebody do that and try to cut somebody else out, they put a deal again, that’s not somebody that I’m work if bad things could happen. Thank you for all you guys are out there who are using the platform. I’ve seen a lot of familiar names in the Note CAMP. It’s been fantastic and thanks for reaching out. Have somebody to track me down and how they got the number at the office. They reached out and they said they saw us last year. Then they heard us when we just did a little podcast with Scott.

I guess TJ and Rick, we will say salute. Thank you.

Thank you, Scott. Thank you, Stephanie. We appreciate it.

We’ll look forward to hearing from everybody.

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 About Rick and TJ

NCS 10 | Connecting Money With MeaningFor over 10 years Rick Allen has been an active investor. As the Co-Founder and fund manager of Cloud Capital Management and the Co- Founder of Paperstac, he has conducted transactions with large A-list institutions. Rick has expert experience in investment strategies of the real estate sector, with a primary focus on discounted Acquisitions and distressed assets. He has participated in the purchase of over 400 single family homes with a purchase price of $25,000,000.00 and a market value of $45,000,000.00.

When presented the opportunity to purchase a mortgage note 3 years ago, Rick jumped at the opportunity and has not looked back.

The past 4 years have been spent raising capital and managing a multi-million dollar portfolio that focuses on socially responsible investing. With capital efficiency and preservation at his core, Rick infuses data analysis and technology into his business acumen to foster efficient and secure capital deployment into successful investments.

“When you can help a family stay in their home while showing very high returns for investors, you create win-win scenarios that feed the soul.”

He has gained experience through mentorship from an industry giant, that has traded more than 30,000 notes and been in the industry for over 25 years. Moving forward, his focus is to bring transparency and liquidity to the Investment Mortgage market by allowing private investors to gain access and participate in a safe and lucrative investment vehicle.

As a husband and a father of three, Rick enjoys spending his free time with his family. Whenever possible, he will certainly sneak out to play 18 holes of golf.

NCS 10 | Connecting Money With MeaningTJ Osterman is a Husband, Father, Entrepreneur, and is interested in positively impacting society anyway he can.

His current project consists of helping the underserved, the low to middle-income families in this country with affordable housing situations.

Tj and his company Cloud Capital Management currently do this by investing in Troubled Mortgages. They have currently deployed over 6 million dollars into this effort and are managing 100+ mortgages right now.

2018-Launching a New Fund with hopes of driving 200+ million in dollars over the next 5 years into affordable housing situations and saving 10,000 families homes. MWMfund.com

2018-Launching paperstac, this is the first fully digital online place to invest in mortgages. Paperstac.com

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