Ep 165 – Due Diligence & Turnkey Note Investing with Dan Zitofsky

NCS 165 | Due Diligence

NCS 165 | Due Diligence

Scott interviews real estate and note investor Dan Zitofsky on his business model and due diligence practices for his note and turnkey rental business.

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Due Diligence & Turnkey Note Investing with Dan Zitofsky

We’re pumped up to have the big guy with us, our good buddy Dan Zitofsky, joining us this morning. What’s going on, Dan?

Thanks for having me on the show. I appreciate it.

For those that don’t know who big Dan is, why don’t you tell them a little bit about who you are? Who is Dan Zitofsky and why are you important?

I wouldn’t say I’m important at all. In all honesty, I’m in the business now for 28 years. Like Scott’s had started, I started through wholesaling fix and flips, a lot of land deals, apartment deals, everything, to lending. About seventeen years ago, I became a private lender and I enjoyed being the bank a lot and got into non-performing note space awhile back as well. What I do is, my specialty is I actually take a non-performing asset, turn it into a performing asset, and creating long-term wealth. I’m all based on exit strategies. My thing is if I’m not willing to own that property, I’m not willing to buy the note. It’s a little different than anyone else. Everyone has a different exit strategy. Because I’m willing to own that property, I actually enjoy the property. Not that I want it, we’ll do everything in our power to actually work something out with the borrower, but as I do that, my exit strategy is, if I own that property, it obviously needs to work for me. I’m looking at every deal like that. I’m probably a hawk in looking at every deal. I look at it a lot harder than most people I would say, maybe over analyze it, but I need to do that to protect ourselves and our investors’ money.

What’s great about what you do, you take on an asset, hopefully get it reinstated, which is great. That’s a home run off the bat if you can do that if that makes sense. Then you foreclose, Cash for Keys, what are you doing with the assets? You’re looking to just sell it off as an REO real quickly? Talk about more about that for those that don’t think about that.

NCS 165 | Due Diligence

I’m looking to turn them into a turnkey rental opportunity, create wealth for myself and for my investor.

Probably, 90% plus of these assets I’m not looking to turn them over. I’m looking to turn them into a turnkey rental opportunity, create wealth either for myself and then for my investor, we probably have a pretty large investor group that we help build up their portfolio. A lot of investors want to own properties. They don’t want to own notes. Your investors are the very passive investors and from tax benefits on a passive investing, they’re like that. The other ones that are active investing, they want to build up their own portfolio so we help them do that. For me, it’s properties. With the note, I’m only willing to buy the non-performing debt if I’m willing to own that note in my portfolio and a lot of this I keep in my portfolio. I don’t put them out there for sale. You really don’t see me put my assets out for sale. What I do, when I have an investor that comes to me and it meets their goals, because every investor I work with, I actually sit down with them or have a call with them, and make sure I’m meeting their goals. I don’t want to sell an investor a property that’s worth $20,000 in great condition, because there really is no exit strategy for them. Their only exit strategy is to rent it in a Class B type condition, maybe government type lending. It really knocks out maybe seven, eight other exit strategies that we have.

We get a lot of questions from people like, “If I’m going to use my own funds, how do I get my own funds to stay in the deal?” You’ve been using your private money for years, just like me, and you’ve got a great track rate, everything as well. What’s a tip or two that you can give to somebody out there about getting their funds out and getting it reinvested and how to talk with investors to get their money in?

Biggest thing, I think you’ll probably do the same thing, if you want to get your funds in the deal and stay in the deal, you probably want to work on a joint-venture partnership with somebody. Make sure you’re working with somebody who really knows what they’re doing, who has some experience in this game, who has done it themselves. There’s a lot of newbies and it’s not a bad thing with newbies especially if they get trained by the right people, but there’s a lot of people out there training people for the wrong reasons. They might be training people just to sell off assets to them. I know that you have a phenomenal program, I’ve been at your program for many years and you really teach people on due diligence. Even with me, you’ve told me, “Stay away from that asset. They’re asking too much.” Things that we don’t see, there’s a second pair of eyes.

Even with all the time I have in this business, I’ll be honest with you, when I do my due diligence on a deal, not only do I go through when I look at collateral, but I’ll send it off to a third party, either my attorney or a group that watch and look at my collateral, because you can’t go wrong. When you start out especially, I would say joint venture with people. It’s the best thing you could do, especially if you could joint venture with somebody with experience and let them help you through the deal. Getting your money into deal, that’s a great way to get your money in a deal. Go out there with experience and go through an investor and say, “This are the deals I’m in,” and you’ll be honest with the investors. Tell investors, “I lost my money on this deal and this is how I lost it.” I’m lucky enough to say I’ve never lost money for an investor. I’ve lost money for myself plenty of times unfortunately, but if you haven’t, you’re not an investor. That’s how we come over with due diligence and that’s what it’s all about, learning from your mistakes.

You mentioned something really good. Having a second pair of eyes, your attorneys or a collateral view company like Richmond Monroe or something like that, that will look at your collateral, “This is a red flag. This is missing. You might want to get a little bit more information on this. Let’s dive deeper into this to make sure you’re not buying something that you end up just pouring your money down a hole versus actually controlling the asset.”

One of the things I learned from you, I was doing notes well before we’ve ever met, but sitting in one of your classes and just seeing how you’re teaching the newer investors out there is some of due diligence that I was doing. I was almost getting lucky in just getting it done the right way or I had good attorneys. From the realtors, from the due diligence companies out there, from calling on taxes, things I never used to do is I never called on utilities out there. I always call on tax but I never thought to call on utilities. Until you said, “Check the utilities. That will kill the deal for me.” That’s the things that people aren’t doing out there.

We have seen a lot of stupid things happen out there. There’s a lot people that just don’t have common sense. They’re more excited about doing a deal versus being a deal. I reached out to you a couple of weeks ago when you went off about a Memphis asset and the stupidity of whoever ended up buying this. Let’s get a little back story. Talk about that deal because you actually found this deal and you made an offering on it and your offer was well below with the final sales price.

I’ve been doing a lot of business with one of the funds I work a lot with and I really respect them. I always tell them, I said, “Their thing is buyer beware.” That’s great. My thing is just ethically, I know I can’t sell a deal to somebody that doesn’t make sense. It is buyer beware, sell the deal for the most you can possibly sell it for. The deal in Memphis went something like this. The property was worth at max $65,000 to $70,000 and that’s brought to me not by a BPO company. Like you teach people, I have realtors. I do a lot of business in Memphis. I have six areas I do a ton of business. Memphis is one of those areas where I have realtors, I have contractors, I have property managers that are on my team. They actually went out, rented a property, and took a ton of pictures for me on the property on the outside because somebody was inside. The outside was in pretty bad condition.

We estimated that at best, we’re going to be at about $18,000 on rehab, worst we could close to $30,000 on rehab, just from the outside. HVAC unit was gone, missing. The roof was decrepit. The outside was torn apart. I have some pictures inside the windows. We’ve done some of this property. We know what the good and the bad are. The property is worth about $65,000 to $70,000. We called up taxes. Taxes they had about $7,200 on back county and city taxes. There’s no way I was called on because that alone, without any rehab, nobody would have been on this property at that price. It’s about $1,200 in utilities, utility liens too. I put a bid in and I think my bid was $26,000 on it, which is actually a pretty good bid. It was probably more than I even should have bid. I just needed a property in that area, of course I had an end game investor that wanted a property. I won’t buy stuff in a Class D neighborhood, all my stuff is B plus to C plus, in that range, blue collar working class area, great rental market.

Memphis is full of that. It would have been an 85% rental market. I think you just posted something a couple of weeks ago about how Memphis has the number one upsides in rental markets as well. Detroit was number one, but Memphis had been steady for the last fifteen years of being in the rental markets.

Memphis is a great emerging market. I have a pretty good legal team out there. My foreclosures usually are done within three months, believe it or not, start to finish. I’ve had some deals where I’ve done workouts, I’ve done Cash for Keys, I’ve done deed in lieus. Overall, I’ve just did very well in Memphis. I have a great attorney out there. I just have a very good team, it’s my comfort level. Everything that came back to me, I think I bid on this property $48,000. They came to me and said, “If you could come to $50,000, you could have it, because we already have a bid at that price of $48,000.” I sent the pictures. I sent everything I had, and he said, “Buyer beware.” This is somebody who is very experienced, took down a decent amount of assets from them, and is taking that asset. I basically said, “I don’t blame you. If you can get more for it that’s great. In the future, I’m not even going to probably bid on your stuff because it cost me money.”

I pay my contractor to go out there. I don’t ask them to go for free. They actually go and take pictures for me, so I pay for this stuff. It takes time and it takes money and I’m getting deals all the time. I’m looking now at 60 contract for deeds in Indianapolis direct with the lender. I don’t have to deal with this crap. I tell people, “You want to deal with someone real.” I’m going to check taxes. Let’s take away the whole rehab part of it. If you just check taxes on this thing, it’s worth $65,000 maybe and you have $7,200 on taxes, $1,200 on utilities, we’re almost at $9,000. Let’s say legal fee is $3,000 to $5,000. Where are you going to make money on a $50,000 bid? How would you make any money? Then you have servicing, force-placed insurance, loan boarding, soft cost. You know you’re going to do some work or even if the person is there, you’re going to give Cash for Keys or you’re going to have to evict.

I just don’t see how this people have been taught. It’s a shame because the barrier to entering this business is so easy right now. I saw you teaching, I’ve seen your students come in. I’ve been with them, and they know what to look for. They know what kind of due diligence to look for. If they don’t look at due diligence after you teach them, that’s their problem. I remember you told me a couple of deals, “Don’t bid on that,” because I knew you knew the area. “Let’s stay away from that one. Stay away from that one,” and that’s where the respect comes in.

First and foremost, we all need ROI calculators. Some people get so bogged down into the numbers, they don’t let the asset or the area tell a story. We had somebody in California in twelve months getting offers on twelve assets and I’m like, “Why the heck did you bid on these in these little, small ass podunk, one yield sign town?” Not even big enough to have a stop sign. They’re like, “It looked good on the ROI calculator.” I’m like, “There’s nobody there.” You’re not going to get a rehab approved out there. You’re not going to get renter in there ultimately. You better hope you could reinstate because the borrower is going to move. There’s plenty of other options for them to go to.

That’s what you teach people in the beginning, is doing your due diligence on markets. I’ve had a student come to me and they bought eight assets in seven different markets as a brand new student. They have one asset that was good with over $100,000 BPO but the rest of them were $15,000 to $30,000 BPOs. They had no team set up. They don’t know the market. You need to know the market. I had a great conversation with Wayne on here in and Natalie. I had great conversation with them and one of the first things they do is they just look in the market. They look at the census of the market. How many people are there? What are their jobs? We put out videos on emerging markets. What is an emerging market? How do you pick a market? I just think people sometimes take a dart and throw it against the wall.

NCS 165 | Due Diligence

You need to be able to explain to an investor what kind of research you’ve done, why you invest in there.

The reason I teach people is because I’m lazy. Let’s be honest. I’m lazy. I don’t want to do the work. I want to find somebody who is very good that I could give my money to when I’m ready and just say, “You do all the work.” I’ll sit down and I’ll take my passive income and live on the beach. You need to be able to explain to an investor what you’ve done in the market, what kind of research you’ve done, why you invest in there. Every time somebody sends me an email and ask for money on a deal, there’s couple of questions I ask and most of the time they can’t answer them, because they’ve done no research. They don’t know what the population is, what the median income is, what jobs are coming into the area. You talked about Michigan. I do some stuff at Michigan. “Do you realize what’s going on there? You realize what’s happening? You realize what’s happening in Ohio, Alabama?” You have no idea what’s going on and you’re in the business. Do some research, because a good investor or lender should be asking you those questions. They shouldn’t just be handing you money.

What’s so great about Alabama? What’s so great about Michigan? What’s so great about Ohio? You got a lot of gentrification area, a lot of growth. They’re not primary markets but those are secondary markets that people are moving into because of affordability of housing.

Rental alone are huge. If you look at Fortune magazine, if you look at getting Inc. 500, they’re talking about those areas and that’s why we run buyer stores too. I do a couple of buyer stores here for that reason alone. Investors buy rental properties from us all the time, but I want them to actually see the area. We do those on rental properties for the same thing. Once we bring investors into that market and they see what’s going on, everything changes for them. Their view changes, they understand the market, they meet the team, and that’s what it’s all about. It’s setting up systems, processes, and people.

Stay in five markets. Put a team together. Go visit those people. Go visit those assets. Sit down with your property management company. Ask who is the best contractors in the area. What can I get for a rent? Are you experienced managing this properties? Here’s the problem, how many people have come to me and said, “I’m buying in Ohio because they have Hardest Hit Funds.” I’ve never gotten Hardest Hit Funds. I must have bought 300 assets in Ohio, not once I’ve ever had Hardest Hit Funds. I don’t know what it is, maybe it’s my name they don’t like. I can’t get them. My poor borrowers can’t get Hardest Hit Funds.

You got to realize this, Ohio’s Hardest Hit Funds closed down for a while. They shut down by the time LeBron came back. Not saying anything, but they’ve shut down. They run out of money when LeBron James came back. Maybe the stakes helped incentivize that. Even so, they shut down, out of business for a while, and then when they get the new funds for Ohio, they started back up but nobody starts up overnight. They had to lay people off. They’re going to rehire those people back, retrain new people. This is one of the things we talked about with The 11 Biggest Lies in the Industry, about Hardest Hit Funds. Don’t get me wrong, I’ve had a couple of Hardest Hit Funds hits in Tennessee, one in Ohio, a couple of other states as well. But you never, ever buy asset in a state with Hardest Hit Funds being your primary exit strategy.

That’s the problem. That’s what people are doing when I ask them. “Why are you buying in that state?” They’re like, “It’s a Hardest Hit Fund state.” “What else?” These are the things that are being taught to people. That’s why I love what you do. You are just no holds barred. You will tell people how it is. You tell them the real deal. I think that’s where I’m coming at it with. I have about nine exit strategies, Hardest Hit Funds is one of them. If it hits that, that’s just the bonus. If the borrowers re-performs, that’s a bonus. If you have a performing borrower, just give it some time, they will be a nonperformer. My biggest exit strategy is I have to own that property. When I say that, I was emphasizing, “I’m here to help people out but really with me, you have to foreclose on yourself.” I can give you every opportunity in the world. If I’m not willing to own that house, and if your numbers do not work on a rental property with the rehab and paying all the taxes and paying the insurance, if that doesn’t work, it’s not the deal for me.

My thing is when I sell off my properties a lot of times I sell them on a note. Here’s the goal, I have a performing asset, fully occupied, fully managed, equity in the property, borrower’s skin in the game, not owner occupied, serviced, I could sell this note. I’ve been offered 100% of the par pricing on it, or I could sell a partial and just rinse and repeat my money. I’m in a bit of a situation where I really don’t like selling them off too much, so I hold them. My contract for deed stuff that I take down direct, I might sell that off. I like to be in a higher price point. That’s what I look for in my exit strategy, but I know a lot of people out there right now are not doing the due diligence and they don’t have an exit strategy. Their exit strategy is, if they’re looking at do something or sell a property for retail that value is $20,000 to $30,000 in a class D neighborhood, they’re strongly mistaken. The only people you could sell it to is another investor, and that’s pure yield investor, that’s it.

It’s not a very smart investor. It’s more of a speculator at that point, not knowing the due diligence, not doing any stuff. If you’re listening to somebody from a friend and had taken 100% of what they say without you making a phone call or checking a couple of things, you are going to lose your money. We do these note drafts on a pretty regular basis and we’ve had a couple of funds that send us some stuff and I’m like, “Your prices aren’t accurate.”

I was at one of the Masterminds of yours and I think I put in a bunch of bids. You came back and you said, “Sorry, you didn’t get anything but you didn’t get anything because I’m not letting anyone pay for this crap that they want.” When people are looking on them fast, investing with someone like yourself that says, “I’m going to look out for your best interest on a deal.” We’ve been on deals. You look out for our best interests. That’s what it’s all about. If you ever get started in the business, it’s all about the due diligence. Let’s be honest. Trust me but verify me. I always tell people, “Check out what I’m saying. Don’t believe anything I tell you. Everything I’m telling you is a lie. You should never believe me. You should go out there.” I’m just reading off my attorney’s note, his documentation on my disclosures that said, “Don’t trust him. He’s a lie. You could lose all your money. Do your own due diligence.” You should do that. You should always do due diligence.

We have a question, “Do you ever get a partner in on an acquisition of an asset and then refinance or cash them out with other longer term money?”

What I offer my joint venture partners is probably a little different than most. I have three opportunities. When they start into a rental property, what I do is I give them the opportunity. We get the two appraisals, we’ll average out the two appraisals, and the joint venture partner or funding partner will pay for those. We average out the value and then what they do is they get all their money back and then they’ll pay me half of the equity. They have first right of refusal to buy me out. If they don’t buy me out, which usually doesn’t happen, I have the opportunity to buy them out, which I’m most probably going to do. It’s the same thing. I would return all their money plus 50% of the equities, based on those two appraisals. The third option is, if either one of us don’t want the property or can’t buy each other out, then we’ll sell off the property. What happens generally on these properties is either a joint venture partner will buy me out or I will sell this to a turnkey investor holding a note and then they’re happy because that’s what they want. They want that long-term passive income, where they don’t have to deal with the tenants’ toilets or trash. We create our own goals. It’s essentially what we do.

Basically, an easier numbers, you’re buying the asset at $35,000 that’s worth $75,000. There’s basically $40,000 between what you paid for the asset $35,000 and it’ll be worth $75,000. Two appraisals, you got expensive money, which is going to get half the profit. That’s expensive money, much higher than a 12% ROI. If a borrower wants to get bought out at $55,000, you’re going to go out, find somebody, bring in a cheaper money somewhere 10%, 12%, 8% on an IRA?

Honestly, my money is coming in from six to eight right now.

Let’s figure that number there. If you got $55,000 times 0.08, that means it needs to be $4,400 in a year. Divide that by twelve months. That means you’d want somebody coming in, who’s going to pay a lot more than $366 a month in rent, because that’s what you got to pay out to your 8% investor, right?

Exactly, but you have taxes, you have insurance, you have property management.

That’s why if you got a renter in there at $1,000 a month minus your expenses, let’s just say $800, you’re still arbitraging and doing well. Your IRA investor’s happy because they’re getting a return on their money that they wouldn’t get anywhere else. Your rental JV partner is happy because they got half of that frontend and then you will take their money and go buy one or two more assets as well and work for it, right?

We sold to somebody at $70,000. They put 30% down, a $21,000 down. We also collected a rent for a year, so when made almost whole and then now we’re holding a note at 7.99% to 10.99%. Our returns are just ridiculous at that point. I never said there’s no risk. I always tell people, “If somebody tells you there’s no risk, you better run” The worst that happened is somebody pays me back. Because if they don’t pay me back and take that $70,000 on asset again and I would only have out maybe $5,000 or $10,000, I’ll keep doing it. When you have a performing asset with an investor, not owner occupied, where they actually have skin in the game, 30% down at $20,000, if they don’t have that, they’re not an investor.

We have the gold because now we can turn around. We can sell that partial off. We can get all our money back. A whole other course is on partials, that’s just game changer right there. There’s a lot you could do at that point. The answer to your question is, we don’t really go to banks and get financing on these. The only time we go to banks is we take a portfolio of half a million dollars and up and we’ll take ten to twenty properties and we’ll refi the whole thing through a commercial deal.

I would call it the onion strategy, it has layers. We have a question. “These people that who get you high without doing any due diligence are the reasons why note prices are going sky-high in many case.”


I’m jumping on this one. There’s two things, a lot of people are going for that very low-hanging fruit, where they don’t have to do any work to find deal flow. That’s where a lot of those prices are getting over bid because it’s all this low-hanging fruit. If you’re going to cherry-pick from low-hanging fruit, you’ll experience higher pricing. That’s the law of supply and demand out there. Dan mentioned something very early on, about being direct to a bank and being direct to direct sources. Your 100 CFDs that you’re working through in Indianapolis. You’re not going with low-hanging fruit. The source on there is not something that somebody came across. It’s probably either you found them during your own work, or they came to you based on your relationship with other investors or you’re scanning in a real estate community. Right, Dan?

Exactly. That’s the stuff that we’ll bring you out there. You and I will turn around and say, “You want good stuff? This is good quality stuff.” Like I said, I only work if I have exclusivity with the banks. If you’re looking for what everybody else is looking for but you don’t want to do the work, I know you’ve done some courses on how to get out there and call the hedge funds, call the banks yourself. I know there are good hedge funds out there, but they’re sending you to everyone out there, everyone on their list, so you’re competing with everybody. It’s like the fix and flip guys out there that are now paying 85 cents on a dollar for a rehab property. You’re going to get stuck. There’s not much out there at this point. It’s newer investors that don’t do the due diligence that want to deal so bad that they’re willing to do anything it takes to get that deal. The hedge fund is out of the game, the sellers are out of the game, and you’re stuck. We’re not even talking about the market shifts at all. We’re talking about right now you’re stuck. You’re absolutely right, Scott, that’s what’s coming down.

We have a question, “What’s a BPO?” I answered a Broker Price Opinion.

NCS 165 | Due Diligence

Just get on the phone, get a relationship with a real estate agent and have a real relationship with them.

You answered that perfectly. I tell people how to get a BPO, how I get them is I go direct to a realtor that I deal with. I don’t particularly like to work with BPO companies. I know some people might make it easier. If you work with a BPO company, they’re just going to send it to a realtor that’s probably new or sitting on a desk and not going to do the work anyway. Just get on the phone, get a relationship with a real estate agent and have a real relationship with them, and don’t waste their time. If you keep having them through BPOs and you don’t buy anything, at least do something for them. Go buy them a gift card. Do something to appreciate their time. Don’t waste people’s time in this business.

We have one more. “What is typical three-bedroom, one-bath property rent for in Memphis?”

They can rent for $450 and they can rent for $1,100. When you talk about Memphis, Memphis is a very high rental market. It’s block the block in Memphis, just like Cleveland is, just like Alabama, just like Detroit is. You really want to know the area. That’s why it’s so important to get a good property manager in that market that’s somebody you trust. My recommendation is get out there, have a meeting with two or three property managers. That’s how I teach people, build your team. Property manager will give you everything. They will tell you where you should rent, where you shouldn’t rent, if it’s going to be section 8, if it’s going to be cash pay, if there’s any yield to government programs, who your contractors are, who the handymen are, what you could expect for rent, how long the vacancy is. They’ll tell you everything.

Most of my properties in Memphis, I’m in the $850 to $1,000 range because I’m more class B and C areas. If you get in the lower markets, you got properties worth $20,000 and you might get $500 monthly. The yield looks great, as long as they pay every month and they don’t steal your coffer. It’s hard to say what is the rent in Memphis. If you have the address, hit a property management company up. There’s a couple of them out there. Hit somebody you like, talk to them, and ask them what would his rent for. They’ll help you out because they want your business.

If it’s a rental where it’s below $500 a month, it’s probably not good to go. What’s the rent? Never mind, too low. It’s not worth it. By the time you send somebody out to collect and stuff like that, while yields look good because you’re buying something cheap, they don’t look good if they don’t get paid.

You can go on Rentometer. You can go on Zillow. Zillow’s values, I don’t trust them, but the rent seems to be pretty point on. It really is. Those rents are pretty damn close to what they are.

What I like about Rentometer is it gives you the map and it shows you where they’re pulling the comps from. If it says the average is $800 but three around you are at $700, you know it’s probably close to that $700 than the $800.

I know it’s hard for a newer investor. The other thing I’d recommend for a new investor, I look at a street, I’d know the areas, I can tell if it’s something I want to look further into. Pull up Trulia, that’s one of your first things, look at the crime map there. That’s a pretty good idea of it. If that thing is not in green, I don’t even look at it any further. It’s just not for me. Not to say you can’t make money on it. The other problem in newer investors is they don’t understand what their business model is. They don’t know if they want to flip, they don’t know if they want to have rentals, they don’t know if they want to do workouts. Really come up with what your number one goal is. My number one goal is do a workout, my number two is to get that property, which for everybody else that’s usually the last goal because they find this asset’s worth is $20,000. Understand what your goal is.

Trulia is something I look at a lot. We have given you three or four different things you can look at to help you out for free. I know Scott talks all the time about how to find realtors, where to find them. There’s so many ways you find them: Realtor, ActiveRain, or whatever you use. Zillow, they have them listed. Just pick up the phone and call. You got to get on the phone in this business.

Another one says, “Do you get more than one BPO per asset?”

Me, because I buy in areas that I really like, I have a trusted team that I know. My realtors have been working for me for a long time, or my property managers. If you’re going to use a BPO company, I would probably check somebody else. Like I said, if anything come off this call, due diligence, get on the phone with a realtor. You might want to get two or three realtors. Some of them, you can’t really say, “Can you give me a BPO?” because the realtors aren’t really allowed to give BPOs. They could get themselves in trouble for that stuff. You could talk to a realtor tell them what you do. “I’m a note investor. I’m looking at investing in this area. I’m looking to buy this asset. We’re going to probably want a foreclosing and rehabbing it. What would you sell this property for if I rehab it? If you do the work for me, I’m looking to work with somebody out there.” Like I said, don’t waste their time. I hope that answers your question.

If you’ve got a good team, they can tell you a value relatively quickly. I’ve got a buddy, Brent Garrett down in Southwest Florida. He’s a phenomenal guy. The guy takes a little while. He can’t give me something right on the spot because he’s going to take the time to drive by, pull the numbers, he knows that market. He’s a phenomenal rehabber as well, too, and he can give you a true number. That guy’s priceless. I’ll pay that guy bonus out of every deal because he’s well worth it.

He is worth it. That’s a guy who’s actually doing some rehabs himself, so he knows what to look at. He has the eye for what you’re doing and that’s phenomenal. That really is, to do that. For us, you can almost sell me a block in an area. If I’m used to that area, I can look it up online, see the property and, “This is going to be the best range.” I’ll still call my property manager. Usually, I call my property manager first because he’ll know if there’s any boarded up properties, he might run by there during this stage, snap some pictures, throw them on Basecamp or Dropbox for me, and I could see from my own eyes what’s going on.

If you’re reaching out to realtors and they’re not responding, they say they’re going to do something and they don’t responded within 48 to 72 hours, don’t wait around on them to do it. You need to go get somebody else do it.

Build a team in no more than five markets until you get experience. If you’re in three to five markets, even at being new, you can build a nice team there without going crazy. That’s the recommendation that you give, that’s the recommendation I give. It’s where you need to be.

You’re investing in Alabama?

Birmingham market. It used to be Montgomery in Huntsville. It’s getting a little expensive now. Birmingham is a big market for me. I’m doing Memphis, Tennessee and Cleveland, Ohio. I’m doing some stuff now, I’m playing around in the Detroit area, the suburbs of Detroit. Then my backyard right here in Delaware. That’s really where I’m focused on now. A lot of my turnkey stuff is coming in those markets. Carolina’s great as well if you find stuff in there.

The faster foreclosure markets get bid up because people like that especially having what I call the REO refugees. “I’m going to make a bid off an ARV instead of as is.”

We talked about my markets. I have this contract for deeds that are going to come over, there will be sixty to a hundred contract for deeds, all of them doing very well. It’s not my market. I don’t have a team set up there so I’m not going to jump in there right now without a team. I know Indianapolis is a freaking phenomenal market. I want to have a bank come on to me and say, “You’re going to have exclusivity on this.” That’s why we talked about possibly offering those out because I don’t have a team. Can we call somebody? Yes, I can raise the money, take down the whole package, it might be a $2 million deal, it’s nothing. We can raise the money and take down the packages, and just have these things perform. I like to stay and have a team in place, I have my property managers, I have my realtors, I have contractors. I don’t have that in Indianapolis. It would take me a couple of months before I set up something the right way for myself. I’d have to give them a deal or two. I call them an all-star team. I get everybody a deal or two and see how they do, and then I put together that all-star team.

We get a lot of people asking how to raise private capital. What would you give as the best way to raise private capital in today’s market, Dan?

The best way to raise private capital is, and we’re definitely teaching that because that’s a big problem in the industry, you have to do a few things. One is you need to put together a resume of who you are. Who is Scott Carson? What is he about? What’s his business model? Once I know his business model and his focus, now I have some interest. What markets are you in? Who is your team? What type of deals are you looking to do? How much are you putting in the deal if you’re putting any in? What’s your experience level? How are you protecting me? How is my money protected, and how much am I making? These are the things you want to put together. When you do that, that is your business formula or your business plan.

After that, you’re going to give him due diligence. “Here’s the realtor comps. Show me three comps in the last six months of this asset. Show me your due diligence. Who’s your property manager? Who are your contractors? How much rent are you getting? Show me proof of what the rental market is. That could be anything like Rentometer. Print out a Rentometer, put it in the package. Show me pictures if it’s vacant, show me pictures that you’ve gone in there and taken pictures, what the contractor’s estimate, scope of work with a draw schedule. If you put together a full package, you’re going to have no problem raising money. The one thing I don’t ever do is I’ve never asked for money. If I just show people what I’m doing, money just comes. They see you’re an expert and it just comes.

Let’s break those down because those are all really great things and a lot of people will be like, “That seems like a lot.” That’s not really a lot of stuff to do for the most part. Because you’re talking about your resume, really an executive summary that we talked about doing is a very simple resume. Here’s who I am, here’s what I’m all about, here’s what I’ve done. Two pages, a little bit of bio on you. Talking about your team, who’s your team? The name of your attorneys, the name of your foreclosures, your servicing company, all of the vendors that are doing the work, your foreclosure attorneys in the five markets you’re working with, the name of your realtors, their contact information. That’s a very easy thing to pull together.

We all have vendors that we use on a regular basis. Using that will add to your experience. Here’s your game plan, and then here’s the types of deals that we do or have done, and here’s the deals that we’re looking for, and here’s the breakdown of those previous deals.

If you come to me in the Shark Tank, that’s exactly what I’m going to ask you. I know people are going to present the deal to me and I’m going to need to ask him, “Who is your attorney? Who is doing the work? What is your exit strategy?” The first thing I’m going to ask is why you invest in this market. For us as an experienced investor, why would you invest in somebody else’s deal when we can do our own? For us, money is unlimited, and I can say that because we a pretty large hedge fund behind us. Even when we do our lending, I’ll be honest with you, because we are short-term lenders for fix and flippers, we’ve been doing that for seventeen years. I get requests probably five to ten a day of people around the United States that want hard money from us. I send them out an application. I sent them out what we need, and I tell you what, if I get back one out of twenty it’s a lot.

I didn’t have this opportunity as a younger investor, I wish I did. You know what I had to do? I had to beg, borrow, plead for money. I had to make my own money, save my own money. There was no Shark Tank. I sat on the Shark Tank at a group once, and it was for fix and flippers, and it was twelve of us. Every one of us had at least $10 million at the time that we can put out there. You’re talking about $120 million or more. There was a fund out there that go for $1 billion. We saw about fifteen different deals, and not one got funded because nobody did their due diligence. I was pissed. I told the guy at that group, “Don’t ever invite me here again, because unless you bring me here to actually teach people how to do private lending, how to raise money, I’ll do a boot camp for them. They’re going to pay for it. I’ll teach them how to raise private money. Unless they do that, they’re not able to go to step two.”

Many people want to get a home run before they actually hit those things. If you can learn how to raise private money without asking, that’s when we teach, that’s the game-changer, that will change your business model. You see it all the time, money is the easiest part of this business. It’s finding the right deals and selling yourself is the right way to do it.

Those that have money, kudos to you. If you’ve got your own money, that’s kudos. I know a few people that are watching or asking questions like that, they’re trying to pull the trigger for the first time.

They should be doing the due diligence and a little nervous, it’s fine.

That’s when you grow to get outside your comfort level. Just putting the deals together, having a good photo of the property, not some crappy grainy file. I go to real estate clubs all the time across the country teaching and I hear the haves and wants, and people get up there and they talk about the deal. Who’s telling you? Those deals make no sense, you don’t have a flyer on the asset. If you take 20 minutes or 30 minutes before you go to the meeting to put a flyer together with a decent picture and a breakdown, people flock to you.

They’re dying to spend their money. Look how much they’re spending on these notes? They’re dying and they will overpay. You’ll make a lot of money because they’ll overpay if it looks good. Imagine if you just put together a little due diligence instead of slapping something against the wall and hoping it sticks.

That’s unfortunately where a lot of people out there, we see a lot of wannabe wholesalers who are just throwing shit out there but doesn’t make any sense whatsoever. That’s the thing that just drives me bonkers. I want to go, “Why did you offer that? Why does that deal make sense? Tell me why it makes sense?”

NCS 165 | Due Diligence

if your offer doesn’t make you shake a little bit when it’s offered to a seller, your offer is probably not the right offer.

They don’t know because they’re told by somebody else or most of the time it’s a daisy chain. If you knew a direct wholesaler, a lot of times they’ll have a better idea, but usually it’s a daisy chain. I always say if your offer doesn’t make you shake a little bit when it’s offered to a seller, your offer is probably not the right offer or you probably offered too much. Many people just feel like they’re successful if they get a deal. I’ll be honest with you, there’s a lot of new investors in the note business, and I hear that they’re doing 40 deals at a time. If I buy 30 deals, that’s a lot for me for the year, I just don’t find them. I deal direct a lot of times. That’s why I do what I do. I play in the note business but I also play in the turnkey and rental business. Everything I look to take down is turn it into a note. People out there, I’m sure you have investors out there that turn rental properties. Turn them into notes. Do solo financing. The other thing is if you’re solo financing the right way.

Instead of being a landlord, become a lien lord. Some of the best deals that we have ever done, we took an apartment complex a while back. This crazy deal, we converted it for $5,000 basically. We pre-sold the units because these were all down by the University of Texas law school. We went down and knocked on all the doors and said, “Would you like to buy this place? Would your parents like to buy this place instead of you paying rent? We’ll carry financing for you if you bring 5% or 10% down.” It was a total score. They brought the money in, they felt great. We were able to sell them on an individual basis at, instead of $30,000 a door, $70,000 a door because we converted it. First and second mortgages, we’ve sold off the first, got 85 cents in the dollar. We kept the second for cashflow. It was creating money because you got creative on it versus some people, “I just want to hold on to that. I’m going to hold my apartment complex,” and you go from there. That’s a whole other animal. How overpriced the apartment market is right now?

It’s funny you say that because I’m getting hit up. I own a couple of multies as well, not a ton. For multies, I have a right around 200 doors. I have 152 units outside of Atlanta. I have two in Cleveland, a twelve and a ten-unit. I got people hit me up all the time. It’s the same thing, people won’t take action. I’m not out actively selling because they’re making me money. Why do I need to sell it? They’re willing to pay five or six cap on these markets. We’re buying these at $13,000, $14,000 because we’re buying tax liens and distressed sells. We could sell them at a ten cap, give people have great deal on it. Those people are ten cap that have hit me up and said, “You have anything in this area?” “We have these two units in Ohio.” They don’t even come through. They don’t even answer. Some people aren’t taking you seriously, but yet they are overpaying.

Multies were great about four years ago. Now, I see people jumping around like crazy and you’re seeing a lot of vacancies. That’s a whole other hard cash here. I’ve seen a lot of vacancies, there’s a lot of class A developers out there. Some people have moved in from yours to ours with a ton of amenities. It’s the same thing, the investors are out there. They’re going to these courses that they have. I made a couple of big liens out there that I know very well. They’re selling their courses because they’re selling these multies. For me it’s not the right play, multies, right now but same thing, people are paying five and six caps in emerging markets where your five and six caps used to be like New York, L.A., Chicago, Philadelphia, those markets. Tax is huge for multies. My first multi was out in Texas. I think we bought it at a nine cap, and we sold it at five and a half.

Almost doubled your money on that, after you put some work into it and raise the value up. If you’re buying an apartment complex, you may be buying somewhere in the teams, preferably twelve or greater cap rate and then settling somewhere between six and eight cap. What’s unfortunate is a lot of people are looking at, “We’re going to buy the apartment with our own money. We’re going to raise private capital. In three years, we’re going to get a traditional loan, cash out all the investors, refinance this out, and get most of our money back, and then we’ll have cheap interest rate money at somewhere around 7% or something like that. People don’t realize, those commercial loans aren’t guaranteed to be there in three years, especially with what the market is doing right now.

We know we’re going to see a downturn the next twelve to eighteen months that’s not neither here nor there. I don’t think anyone disagrees with that. It’s just how do you position yourself in the right place. I know you’re positioning yourself hot right now. I’m positioning myself hot. If I have to sit on cash, I’ll sell them in cash. I have no problem doing that. That’s why Matt’s so great. I always tell Matt, “Matt, be ready because I’ll be buying these things at short sales.” We’re just stock piling cash for these short sales. Like this deal in Memphis, there’s no way that anything is happening with that deal.

We can find it later at the discount when somebody can’t make money on it.

We could probably short sale right now because that’s what’s happening out there.

You’ve expressed something’s going on in your neck of the woods there. Are you going to be running for public office, I hear?

I don’t want this to be my coming out party.

Then we’ll keep it in the closet for a little longer, Dan.

Yes, that is true. I’m at the point. In all honesty, I’m glad you brought it up. There’s a couple of things I’ve always wanted to do. I’m passionate about politics and helping out my community. I’m not going to do anything big, it’s going to be a local rep position. I always said I didn’t have the time because I was always trying to earn enough money to do what I want to do. I’m fortunate and blessed enough right now that we make enough passive income from everything we do. We’re not halfway there. We don’t just teach this stuff. In fact, I teach it very little. That turnkey rental operation that we do, and everything we do into the turnkey rental operation, allowed me to say, “I’m ready at this point.” Because they asked me the last election to run. I just didn’t have the time. I said, “I’m going to run this time.”

The other thing I’ve been trying to do for a long time is do education in our public schools, in the high school level, for entrepreneurship course. I have a bachelor’s degree and 20 years’ experience, but they want you have a teacher’s license or they don’t have the budget, which is crazy they don’t have a budget for an entrepreneurship course. My daughter’s in school and they teach her how to change a tire and to knit, they have a course for that in a private school, but they don’t have this. I always say when I get to the point where I don’t need the money, and obviously we all want money, but I make enough passive income, then I’m going to go out and I’m going to teach an entrepreneurship course in high school or I’m going to run for office. It’s funny how I travelled all the way to Texas, that part, but yes, that’s true. It’s coming. Next summer, I might be off the map a little bit. I’ll be knocking on doors and kissing babies and shaking hands.

That’s not a problem at all. That’s the beautiful thing about being a business owner versus a self-employed person. You got staff working for you is you can take the time to travel, especially spend a lot of time at softball games in the last few months which is great.

It’s all full travel. I try to take the beach boat, I try to take off all summer as much as I could. You ask for it. You ask to take off all summer, and then something always comes up that is pressing. You’re in the same boat. We have our stressful times here and there. I just don’t feel we’re actually working. Sometimes I always feel guilty, I have to do something. I need to deal because I don’t feel I’m working. I don’t know if that’s the hardest thing for an entrepreneur to do, but that’s the hardest thing for me to do, just to get that feeling like I’m not being lazy.

We get to do this every day. We don’t have to do it.

That’s a great way to look at it.

I was watching Gold this weekend with Matthew McConaughey. They talked about at the beginning, his father said, “I get to do this every day. I don’t have to do this every day.”

It’s huge. I’m not out there looking to be a millionaire. I’m a big-white-Camaro type of guy, I think we know that. At one point in my life, I was big on things, my watches, my boats, my cars. Now I’m to the point I just love the experiences. Like you, you’re sitting there with a World Series shirt. For all the people they can’t, they have to worry about their vacation and stuff like that. Giving up on buying those expensive cars which I’ve always had and the boats, and the watches, I have a nice collection, but I’m able to do all those experiences. It’s just what your exit strategy is. Can I flip houses and make $50,000 a house? I flipped houses, we just flipped one last week in Maryland. We make good money on the flips, but our flips all turn into passamento. I don’t take that money and spend it. I spend it on a performing asset that allows me to buy my non-performing fun stuff. A note is a great way to do that, especially if you do it the way we’re doing it.

I think that’s probably a good spot. I want to thank you not only for joining us. Also for those that don’t know, Dan is a long-time police officer at New York City, the big blue of New York City. Thank you for your service, police officer. Thank you for all those police officers, for the first responders. We wouldn’t be where we’re at today without you guys, and our past and present military.

Thanks for joining us.

That’s going to wrap it up for this episode at The Note Closers Show podcast. Shoot me an email at Scott@WeCloseNotes.com and we’ll be glad to take into consideration your thoughts and comments. If you have a topic you’d like for us to cover or speak of, let me know. We’d be glad to talk about them or have you on potentially as well. As always, if you’d like to get more information on notes, text the word NOTES to the phone number 72000. You’ll get over 80 hours of education in to the palm of your hand.

Have a great day. See you all at the top.


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About Dan Zitofsky

NCS 165 | Due DiligenceA true inspirational and motivational supervisor and Real Estate/Mortgage Note expert. Dan has over 20 years managing and leading staff and organizations to Inc 500/5000 companies. Experience launching start-ups and delivering award winning solutions. Entrepreneurship is his true passion.

Dan Zitofsky is an accomplished strategist, business developer, Real Estate Investor, Coach and Note Holder. Dan has also proven himself as an accomplished leader.

Dan has an intuitive understanding of the Real Estate and wealth environment. Currently having more than 25 years of success, Dan thrives on taking companies to the next level either from start ups, failing or launching new platforms.

In 1990 Dan started investing in real estate. Dan has been involved in more than 1,000 Real Estate transactions from Wholesaling, Fix and Flips, Land Acquisitions, Hotels, Multi Families, Turn Key Rentals, NPN and Performing notes and now educates thousands of investors every year both at speaking events and one on one coaching how to create wealth and the velocity of money.

Dan was a instrumental in growing Weichert Financial Mortgage Division as well as his own Brokerages which he sold in 2004. He led all of the company’s operations and overall strategic development.

Early in Dan’s career, he’s held positions at a Wholesale and Retail Mortgage Banking Firms, leading the vision to rectify failing branches. Dan’s also Purchased and Rehabbed close to 300 properties and continues to do such as well as Lend money privately for himself and others seeking a Higher Rate of Return.

Dan Zitofsky is known for his outside the box mentality, lightning fast and productive imaginative thinking, his positive and spot-on consultation in the toughest of business relations, and his uncanny ability to raise businesses from the ground up and into long lasting successful companies.

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