On this episode, Scott breaks down the initial due diligence that you should perform on tapes to help you identify the deals that you should spend more time with.
Listen to the podcast here:
Due Diligence for Dummies Part 1
We totally, totally love the feedback we’re getting from people on the show; the good, bad and ugly. Definitely appreciate the criticism we’ve gotten from a few people. Some people want a little bit more structure. Some people want us to go through a little bit more of the nuts and bolts aspect of it. Other people like the fact that we have a lot of interviews going on. This episode is going to be designed more on the nuts and bolts of due diligence, the ABCs. There’s no way to properly teach due diligence via audio alone. It’s hard to go through enough of it on recording where you can’t ask live questions. You’re going to have more questions. We totally understand that. Feel free to drop me an email directly at Scott@WeCloseNotes.com. We’ll be glad to reach out to you and answer your questions.
One thing that we have that we are going to go through today, the very, very simple sheet, is a one-page due diligence checklist. This is the checklist that I provide in our Virtual Note Buying For Dummies Workshops. If it’s your first time looking at tapes, you might be flipping out, “Oh my god, I got 100 assets. What will I do?” You’re flipping out and that’s okay. It’s going to happen. I’ve seen some of the most intelligent note investors or real estate investors literally have breakdowns and start crying and having panic attacks because they think they’re missing out something. This one-page checklist, if you’d like a copy, all you got to do is email me at Scott@WeCloseNotes.com. I’ll be glad to send you a PDF of it. Just let me know where you heard it.
The idea with due diligence is a couple of things. This is so important when you’re looking at defaulted notes. It’s a different mindset than being a real estate investor. What I’m getting is you put a different mind on when you’re a note investor. You’re going to look at as is values because there’s three really huge things that are involved with due diligence, on the frontend and a little bit on the backend. We’re primarily going to cover the frontend side today and we’ll do the backend side a little bit later on in a different episode. Frontend side, you’ve got to double check your values. You’ve got to know the value of the assets. That means different than just using Zillow, Trulia, Eppraisal or a desktop CMA. What I mean by desktop CMA is having a realtor just pull comps. I see people all the time on Facebook, “I got my own MLS access.” That’s great if you’re in a local area and you know it and you’ve done it, but if you don’t know the area, turn it over to a local professional to help you out with that. Get a local realtor involved. You always, always, always want to have that realtor drive by the house before they pull the CMA. Nine times out of ten, the CMAs they’re going to pull are all going to be nice, clean, pretty properties. Unfortunately us as note investors, a lot of times, our stuff is not the prettiest. Sometimes, it’s not even the average. Sometimes, it’s downright doggish. That’s what you need to keep in mind.
We’ve made this correction too in the office as well. Somebody was like, “We’re going to have one realtor pull CMAs on five properties.” I was like, “Did they drive by all five properties?” “No. They’re just pulling an NARRPR report.” It’s a website out there for you if you’ve got a real estate license. If you have a National Association Realtor’s license, you can have a number for that, you can log in to it and pull basically pretty decent property reports from across the country, as long as that MLS is linked into the NARRPR. A lot of them are, I think 90% of the MLSs are. We found it to be pretty accurate if it’s a pretty property, because it’s more an online valuation, the AVM or automated valuation model. It will give you a star rating. It will give you a feel of low to high. You’ve got to figure out where that assets fit in. Is it in good condition? Is it in low condition? Are the properties it’s pulling from a small enough geographic area to give you an accurate value? The bigger area that comps are pulled, the more off your values are going to be.
First thing you’ve got to understand is you’ve got to know value. Then within $5,000 to $10,000, if you’re dealing with higher value assets, $10,000 is not a big deal but there is a difference between a $40,000 asset and a $30,000 asset. You’ve got to know value because that’s going to protect you the most. You can mess up on a few other things. You can mess up on a few other things, you can miss a lien on the city as long as you’ve got value working on your side.
The second thing is really just as important, is the taxes, calling to find out how much is owed on taxes. This is important for a couple of reasons. One, you need to know what’s owed. A lot of times sellers of assets who have tapes will provide a comp and throw a tax number on there, what they think tax is owed. You don’t know when that number’s pulled from. Was it pulled from last week or pulled last year? This is why it’s important to literally pick up the phone or get online and call the county to find out how much is exactly owed on that property. The reason you want to call, not all county websites will literally have access to it. Sometimes, you got to call and talk to Pearl in Cook County.
The reason you call and talk to somebody, there are a couple of reasons. One, how much is owed currently. This is the most important thing, this is also a bit red flag if this isn’t accurate, if the person they list who owns the property has to match up with the person on the list who says they are in the mortgage. You want to make sure that’s the same thing. The only exception to that would be if you’re buying contract for deeds. When you buy contract for deeds from Harbour, it lists them as the owner of the property because the contract for deed hasn’t relayed title of the property to the borrower until they have that loan paid off. That’s the one exception. Contract for deeds is going to be whoever the seller of the asset is, they’re not the borrower. Whereas non-performing first, seconds, you always have to make sure that the person on your mortgage is the person that show as the owner. If it doesn’t, if it’s somebody else that shows Bob Smith and it’s supposed to be Jean Sinclair as your borrower, that’s a big red flag and I will be willing to bet, your property has gone to tax sale.
That’s the second aspect of calling on the counties, is you want to ask, “Is there a tax sale schedule? Has there been a tax sale schedule?” If there has been one scheduled, is there a redemption period? If there’s no redemption period and it’s gone, is there a tax overage? By tax overage, a lot of times we see that happen where maybe only $5,000 was owed to the county and the tax sale got bid up to $20,000, $30,000, $35,000. If the county takes a $5,000 there’s still $30,000 in tax sale proceeds sitting there waiting for the first lien holder, us, to file a claim to collect on that. That’s why it’s important to check on that; if there’s a redemption period, is there a tax overage? Oftentimes, one phone call will lead to you having to make a second phone call to the County Comptroller’s Office to find out on the tax deeds. Always, always, always check your taxes. Not only is it important to make sure what’s owed, back payments and stuff, sometimes you’ll find out that the taxes were paid. Who paid them? That can often be a really good sign if they say, “Yes, Jean Sinclair actually paid her taxes this month.” What does that tell you? That tells you you’ve got somebody who wants to stay in their house and can be a potential performing note. That’s a good thing.
Sometimes you’ve talked in with county, if you’re going to end up taking that property back, it’s good to know how much is owed so you have to figure that number into your ROI calculator if you foreclose. If you take the asset back, foreclose and sell the asset off, you’re going to have to pay the taxes at closing. That’s good to keep in mind. If you keep that as a rental, your monthly tax bill is basically for you to deduct that from your income. Just make sure you are making money on the deal. There are situations where I have called to find out how much is owed in taxes, it killed the deal. An asset that was worth $90,000 in Sacramento, I called one time, there’s $30,000 in back taxes owed. The city and the counties often won’t negotiate down the tax. Not saying it won’t happen occasionally, but most of the time it won’t happen. That means if it’s a $90,000 asset and I’m paying $50,000 for it and there’s $30,000 owed in back taxes, my $10,000 offering, that means I’m into it at $40,000. That’s still not really a great deal. That’s a no deal basically. It’s a deal killer. That’s why it’s so important. Never, never slip off on calling the phone on taxes.
Another thing that’s often easy to do is get a phone number to local utility department while you’re calling to find out what’s going on with the utilities as well. That’s a sign that we use when we’re calling to see if it’s occupied, if power’s on and things like that. We talked about values. Always, always have realtors look at your asset, pull numbers for you, and drive by the asset, put the eyes on the property, and tax is the second thing. Third thing that’s really the most important thing is your title aspect. This is going to come into play more so after you make an offering and it’s accepted. You’re going to want, at that point, to order a title update or as we all call it an O&E report, an omissions and errors report. The best company to do that will just be ProTitleUSA.com. You can go to ProTitleUSA, talk to Alex Goldovsky, the whole staff, they’re phenomenal people, easy enough to work with. What Ownership and Encumbrance report shows you is more of a title update. You don’t need to pay for a full title report going back to when the property was created. You don’t need that. You only need a title update from when that loan was created, a true note was created. That way, you can see if there are any new liens on the property behind your first lien or your first and second lien. We’ll bring Alex Goldovsky on to talk about it actually as a guest in a future episode.
There are some other things on our one-page checklist here to help you guide your due diligence. The most important thing besides values and taxes is you’ve got to find out, and a lot of people don’t ask this question. They get a tape in, “Oh my god. They’re like a new puppy dog with a bow.” I’m like, “What’s the price?” “I don’t know what the pricing is. I have no clue what the pricing is.” I’m like, “You’ve got to ask what pricing is.” You don’t want to waste your time doing all these numbers, checking all these websites, just to have the price be stupid. If a seller wants 80% of value and it’s a non-performing asset, you’re not going to buy that asset. You might as well just nip it in the bud and go from there. If it’s a performing note, 80% of value may not be a bad thing, but you’re still going to want to do due diligence on performing notes, very similar to what you would do on a non-performing. At some point, that performing note may become defaulted and you got to foreclose and go that whole route again. What I always do, I get a spreadsheet in, if I know the pricing, after I’ve filtered the tape, it means re-order it by states and then cities, I’ll enter in basically the price point if they give me a number. 45% of UPB is what they’re looking for. I’ll just insert a column in, run a quick formula. Let’s say D2 is the UPB, D2 times 0.45, that will give me roughly what they’re looking for, if that’s what they want. Then I’ll just copy that formula down and it gives me a starting point.
A lot of times sellers, especially larger banks, larger hedge funds, they’ll give you just a number. In some of those cases, that number is not going to make sense. If UPB on one asset is $100,000 but it’s only worth $50,000 now, you’re not going to pay 45% of UPB, that’s $45,000 offering on a $50,000 investment. That doesn’t make any sense. That’s why you want to have that column and another column in where you start figuring in what your values are. This is before you start waste your time on pulling values. I like to get rid of mobile homes. I like to get rid of raw land, manufactured homes. If they’ve got a rough BPO value in there, I’ll look to start getting rid of houses below $25,000. Just not really worth wasting our time on those assets that are non-performing. Performing asset will be a different story but we’ll focus on the non-performing. The reason I say get rid of below $25,000 on a non-performing asset” is you’ve got to replace a water heater or an AC which if it’s vacant, you’ll probably going to have to do that. That’s going to eat up a good 20%, 25% of your profit. That’s not really worth wasting time on it.
We filter by states. Another thing that we also like to do is we’ll filter by last payment date. Most of the time, and you better see this on your spreadsheets, the seller will list when the last payment was made. If it’s less than 90 days in default, usually the bank’s not going to take too big of a discount. We will often remove that newly non-performing stuff or more so scratch and dent stuff that’s 90 days or less. You just take that off and not to waste your time on. There are a couple other filters you could run on your spreadsheet to help you identify and narrow down your list. If your list is at 400, if you get rid of below $25,000 value, that may only be a small chunk. If you get rid of mobile home, this is small chunk. You’ll probably still be looking at 360 assets. There are still a lot of stuff and a lot of states that maybe you don’t want.
The next step is, I will just go ahead and get rid of states that you don’t like. Go ahead and remove them. You filter form, pull them up, and delete those rows off. Just don’t waste your time. I do a lot of these with New York, New Jersey. Those are states that I don’t keep. I get rid of them right off the bat. I don’t waste my time. I also will filter for Chicago and Illinois. I get rid of Chicago, primarily Cook County. I’ll look in other parts of Illinois, but I’ll look for the ones that are in just Cook County and go get rid of them. It’s difficult to work within Cook.
I will then pick the states that I’m the most happiest with. I love Florida. I look at the states that I like. I try to narrow my list down. Let’s just look and we’d say it’s non-performing. We do have another thing that we do as well. I’ll narrow it down to the states that I like and then I will use a website called BatchGeo.com. It’s a free website. I will take and copy my column headers and the information below and dump it in there. Copy paste in the BatchGeo and BatchGeo will map it out with Google Maps for me. We can then look at street views, find out if it’s an ugly piece of crap and that helps us eliminate, “That’s not a good piece of property. Picture was taken two years ago.” There have been times we’ve seen drug deals taking place that were mapped by Google Maps. We’ll go ahead and just identify those properties and get rid of them.
We have a question, “How do you feel about Alabama?”
I don’t buy non-performing notes in Alabama because of their long redemption period. Not that it’s a bad place. I will buy contract for deeds there because there’s faster evict. The exception to that rule will be assets in the Gulf Shores area along the coastline, different story. I know a lot of people like in Birmingham, other areas of that neck of the woods like where Auburn’s at. That’s your own personal opinion. I’m buying enough in other areas.
The next part of the filters that we do is we try to get rid of small towns. If the name doesn’t ring a bell, that’s probably the first sign to get rid of it. If it’s below 10,000 in population, you probably need to get rid of that asset because the fact of couple of things. One, if you get a Podunk town of 1,000 people, who’s going to move into your asset when you foreclosed? Who’s going to list that property? Who’s going to work on it? You’re going to have Billy Bob, the sheriff, and the judge or probably relatives of Billy Bob who you’re evicting or foreclosing on. Not a good sign. Try to stick in areas that are larger. I like the university, it’s got a major university, Division I university and something in that area that usually gives you plenty of good population. I get rid of rural properties. I’m not a fan. That’s something on the outliers of town for the most part. I prefer something in the housing development.
Along with using BatchGeo to find real properties, we get rid of other negative features. If it’s right next to a freeway, that’s not always a positive thing. If it’s boarded up when you’re looking on street view, that’s a deal killer. If it’s next to three boarded up houses, that’s a deal killer. If it’s in a flood zone, it’s hard to tell because flood zones are going to be re-enacted here, especially in Houston. You probably want to get rid of it because you don’t want to be putting something in every three, four years. Car lines, train tracks right next to it, not always the most positive thing. It’s not a deal killer but sometimes it’s a negative feature.
After we’ve done a quick look with virtual eyes, online eyes, that should help you narrow your list down quite a bit. You may want to go look at that most recent paid. If your goal, like mine, is to have as many re-performing assets or to reinstate the borrower, I like to look at when their last paid date was. If their last paid date was in the last twelve months, those will probably identify my choice, my bids, the ones I want to work on. We do that pretty often. We look at, “Who’s made a payment in the last twelve months?” That gives us a good chunk. Let’s say their price expectation is $0.45 of UPB. If they made payments in the last twelve months, that usually identifies that somebody wants to be there and we’ll look at taxes. If they haven’t gone to tax sale, great.
We’ll include another formula next to values page. Remember, we’re still pulling values. That’s going to be the longest thing, it takes the most of my time, is pulling values. What we’ll do is take their existing principal interest payment, multiply that times twelve months. It tells us the total amount of the monthly mortgage payments we get. We’ll divide that number by what their estimated pricing is to see if that makes sense initially. If it makes sense, say that UPB is $50,000, we can pick up about 45% of that and that would be $22,000 and some change. If they’re paying $500 a month in their P&I payments, $500 times 12 is $6,000. $6,000 divided by 225 is not a bad return. It’s about 27%, 28% ROI. That will get highlighted and we will look more at that asset especially values and condition of the property, identify if a paying is still worth $50,000, or if it wasn’t worth $50,000 then we’re going to kill it. Initially, that helps us with that due diligence checklist to start identifying. It will carve out the chunk of assets we’d like to look at.
We have a question here, “What site do you use for flood zones?
I’m just going to talk to local realtors. Every county should have a flood zone thing and list specific zip codes and things like that that are in a flood zone or floodplain. Talking to insurance companies is another way as well. We’ll take a look at that as well. I don’t really worry so much about flood zone on the frontend. That’s more on the back-end. My idea is I want to get bids within 24 to 48 hours in to the asset manager. If it pops up in there when we pull up the O&E report and when we talked to insurance company. You’ve got to remember, note investing is different than your fix and flip side. If you put a property in contract as investor, oftentimes you’ll only have five to seven days to do inspection reports and things like that. You have that option period so that if something pops up then you can counter back and after that you’re stuck with it. With notes, we have shit that pops up all the time. Taxes owed, due diligence, a realtor takes sometimes forever to get by the property, there are stuff that shows up on title. We walk away from bids all the time. We may initially submit 100 bids, 40 get accepted. What we do, we may counter 40 of those bids or kill half of those off as we dive in to the due diligence.
Once we’ve basically identified those numbers, run in some formulas to see what makes sense, if it’s going to be a re-performer or making sure that the estimated pricing point makes sense from that aspect. Now, it’s all about getting values. We’ll jump on Zillow, Trulia, Eppraisal initially to get a rough value. It’s not going to be a hard value. We’re just going to use that AVM, automated valuation model, as a guide. If we want to get a bid in within 48 hours, we ain’t going to have 100 realtors getting values back to us in 48 hours on 100 assets. Here’s what we think it is. If we get the offer accepted, great, then we’ll really look at what the realtor says. If the realtor comes back and says it’s not worth $100,000, it’s worth $50,000, then we’re going to either fade our bid or we’re going to cancel it, or we’re going to counter back to the asset manager. Zillow, Trulia, Homes.com, real estate for Yahoo, Google Real Estate, RealtyInfo.com, I like to look at the sold comps. This is important to keep in mind, sold comps, and I use the low-end estimate. I want to under value my assets unlike most asset managers or most hedge funds which they want to over value and they go to the high-end. I want to under value the assets on the low-end. Look at recent solds. I will look at days on market if I can find that. How long did it take for that asset to sell? Some realtors you’ll get comps back relatively quickly and that will help you tremendously, “It’s worth $70,000 but if you need a 30-day quick sale price you may have to sell it at least at $25,000and get sold in 30 days.” I don’t want to do that because I’ve given up $45,000 in profit. I don’t mind holding on to it for 90 days once I foreclose to get sold.
When I get the online values, I want my fair market value to be above $25,000. I don’t really want to focus on the high-end homes because you start getting over half a million dollar-valued homes in some areas, you start running into difficulties to foreclose because those borrowers will have attorneys, they’ll have friends, they’ll drag stuff out because they have more resources. Ninety percent of lien I’m buying is in the $125,000 range or less. There are specific areas of the country that I don’t mind foreclosing, doing rehabs on stuff and increasing stuff, but I usually keep that to Texas assets or I’ll keep that to Southwest Florida area where I have a great team down that neck of the woods, great realtors, who do a tremendous job out there.
If there’s no sales activity in the area, if it’s over a year timeframe to sell a house, it’s probably desired you kill that asset. It’s probably a really good idea to get rid of it. Don’t get bogged down with the numbers. “The numbers better make sense. They’re willing to give it to me cheap.” There’s a reason they’re giving it to you cheap because they can’t make money on it either. Get rid of it, move on and go from there.
You always want to look at market rents. Zillow will sometimes give you a pretty good spot-on rent number. We like Rentometer.com as well. Rentometer gives us a pretty good map of the market, the highs and lows. I will usually take the 80% title number, but I want to make sure that number that it gives me as an 80% title number is in line with what’s popping up around the assets. If you look around the comp on Rentometer, it will tell you, you’re high or you’re low, here’s what the numbers are, averages. It will give you colored dots right around it, so you click on it and see, 80% tells us $900 but there’s four properties around my asset at $700. I’m going to say my rental market is more $700 instead of $900. If there’s a bankruptcy status, we’ll jump on Pacer.gov and spend some time going through that. That’s a great resource to pull a lot of information about the borrowers if they filed bankruptcy. You can find all sorts of information about that.
Initially, on the front-end due diligence, it’s all about let’s look at values, let’s look at a couple and rents and numbers on our ROIs. If we’ve got to foreclose, what’s our foreclosure cost going to be based off what we’re buying off of the estimated value? If those numbers make sense for us to reinstate and then to foreclose, we like to try to get an offering in ASAP. I do run numbers, rental ROI. I’ll take nine months of the market rent, divide it by my purchase price plus foreclosure cost, and then whatever that number is, I’ll divide it by two. The reason I divide it by two is, oftentimes, it will take you six months to a year to foreclose, rehab, relist the rental to get twelve months of rent income come in. Then you’ve got another year of that, a year to foreclose, fix up, and a year to rent. Not always that case, but the only reason I’m figuring nine months is there’s going to be vacancy and commissions paid on that stuff as well. I low-end estimate my potential ROI for rental. I figure in taxes in there as well, and go from there.
We got another question, “You mentioned comparing their payments to their local rent. Do you use their PTI or their P&I?”
I will look at full PITI, but I’m going to look at principal and interest. The way to keep in mind is they’re going to look at the expensive thing. If they’ve got to move out, if it’s a 1300-square foot three-bedroom, two-bath house, and they want to move into that, that’s what I’m looking at. If rent for that is $1,300 a month and their PITI is $800, I’m like, “To stay, you’re coming up with a month or two months of payments, that’s $2,600 plus moving cost. Why don’t you just stay here and start making your $800 PITI payment to me? Let’s add $400 to it to help you get caught up, or $300 to it, something to it, or that first and last month of payment. If you’ve got $2,000, let’s put that $2,000 to it, and let’s keep you in the property.” The times that it does concern me is when rent is below PITI. I don’t like that because then I’ve got to adjust the payment down to make sense. That’s rarely the case, rarely is rent less than their PITI.
Most of the time, it’s cheaper for people to buy a house than it is to rent because it’s cheaper per square footage for the most part. I see that in the lower valued houses. If I see where a market rent for a property is $500 a month or less, I’m probably going to kill it. I’m not talking per room, you see that in a lot of college communities where they rent out a room of $400 or $500. I’m talking about the whole property that’s $500 a month or less. You’ll see that in Columbus, Cleveland, those are rougher areas, and rough parts of Detroit. If I see something that’s less than $500 a month, I’ll go ahead and pretty much just kill it off. It’s not worth it. I could probably make some money, but it doesn’t mean I want to get that money and make up and pay myself for having to buy bullets and shotgun-proof jackets and that kind of stuff. Hopefully that makes sense.
The biggest thing is on the front end, always, always get values. We know we’ve talked about getting a bid in within 48 hours. You’re not going to have realtor values. Don’t sit there and flip out that you don’t have a true realtor value. Get your bid in, especially if you’re bidding on multiple assets. Get your bids in and continue to reach out to the realtors. Does that mean some cases you’re going to pay a realtor $50 to do a drive-by and you’re not going to get a counter on it? Yes, sometimes it is. Sometimes it’s going to happen. It’s just the cost of doing business, the cost of due diligence. That $50 may save you $50,000, may save you $10,000, from investing on some assets that’s just shit. Front-end due diligence is critical for that.
What’s great though, if you’re using systems like Pipedrive or Podio or some things like that. We had our previous guest Adam Adams on. He’s got it setup where he can just drop a spreadsheet in, it filters through all of the stuff for him, it pulls up the APIs from Zillow, Trulia, and gives them a rough estimate on the frontend so that he can make his bids in eight minutes flat. The more assets you break down, the faster you can get out of it. At some point we’re going to have our good friend Liz Brumer-Smith on from NoteInvestingClub.com or Tape Techs. Liz got a whole cast of virtual assistants who she has trained. She’s got VAs that will basically pull all the online due diligence for her. They’re not going to do any drive-by for you, but they’re going to do all that online automated stuff as best as they can for you at a very reasonable price at $7 an asset.
I want to see at least a 30% rough ROI when I’m doing my PI times twelve, divided by potential purchase price. I want to see at least a 30% or greater aspect on that. If they have made payments in the last six months, I’ll look at those numbers down about 24% yield, but I don’t want to go below 25% for the most part, because at some point you’re going to have an “uh-oh” happen. You’re going to miss something. You’re going to forget something. That could be a costly “uh-oh.” Keep that in mind. If you use your own money, it’s a different story. Maybe you want a 12% return. You’re fine making that and paying for an asset to get that. That’s fine, that’s your decision. I don’t necessarily think it’s the right one because I think there are plenty of opportunities out there to make higher returns, make higher ROIs, but that’s totally your prerogative.
If you like something in that specific neck of the woods that I’m not buying, say Alabama, that’s fine. You’ve got boots on the ground, maybe you’re tied in with Maureen McCann, my friend over at Titan Properties. I think they’re one of the best turnkey providers in the country. They’re doing a lot in Birmingham and that neck of the woods. Or you’re in Cleveland buying stuff and having Dan Zitofsky manage it. That’s totally fine. Maybe you’re dealing stuff in Detroit with my buddy Michael Jordan up there.
We got another question, “Since Rentometer has a maximum amount of searches, do you have a workaround for that?”
It’s called login-logout or pay for the service, very simple. Write your bud a check. It’s not that expensive, it’s $99 a year. It’s pretty cheap. They’ll let you pull twelve addresses and they want you to start looking at it. If you’re a real note investor, it’s worth it. That’s about $8 a month, $2 a week. That’s less than a cup of coffee at Starbucks. We use it ridiculously here.
On the frontend, it’s the most important thing; checking your values, checking taxes, and literally getting realtors to put eyes on the assets for you. That’s the biggest thing. You can use some tools like NARRPR, I get that. Still though, there are times when NARRPR said it was really good, and then I had my own person drop by and like, “The condos look nice, but this one is trashed out. There’s no drywall. ” Always valuable, put your eyes on the asset or have someone put their eyes on the asset before they give you a CMA or a BPO.
We got another question, “Is it a deal killer if the sell and the loan servicer cannot produce the social of the homeowner on a contract for deed?”
That’s a better question for your real estate attorney. It depends. If it’s vacant, just go ahead and cancel the contract to move in. If it’s occupied, then you’re evicting. I would have you talk to your real estate attorney in that particular state to find out about it. I don’t really think it’s that big a deal honestly. That’s one thing I will be checking in the collateral files, which we’ll go into more so on the second half. The next step is we’re doing a due diligence here about looking at collateral files and looking at this stuff. You get a collateral file on a CFD, there should be an on-boarding sheet that the borrowers filled out to qualify for a CFD and that should show. We got a lot of information. We have the Social Security numbers, phone numbers, where they’re working, relatives, spouses, and that information as well. Social Security number is not the hardest thing to find too. There are some skip tracing websites out there that can help you find stuff relatively easy.
Another website that we use to see if there’s a working phone number on an asset or to find neighbors or potentially roommates or housemates is WhitePages.com. Some people use Spokeo. I like WhitePages because a lot of times, it gives us one or two phone numbers for the tenants or our borrowers in the property. You can do just by typing the borrower’s name and it will pull up or you can do a reverse address search. Let’s say my borrower’s name is Gene Brown. “I’m looking for Gene Brown.” “This is Gene.” I’m not going to go, “I own your note. I’m looking to buy your note.” “Are you the guy that went to Ingleside High School in 1995?” “No.” “Sorry, I’m looking for somebody from there.” I know Gene Brown lives there and that’s all I need to know. It’s a working number. It’s a valuable number enough for me to basically then forward that information over to The Law Offices of Daniel Singer and things like that to take a look at. Always, collateral is a big aspect of it. If they provide links to that in the frontend and take a look at it. Take the time to take that collateral and ship it off or email it to your attorney or a collateral review company like Apollo or CSC or Richmond Monroe and have them take a review at it. Just want to make sure everything’s in there.
Values and taxes, two of the biggest things, and then the occupancy. If you can determine that by making a phone call or two, great. If you call the city and they tell you that the power is on or the gas is on or the water’s on, great. We’ve had the city tell us, “They were here last week and made the payment. They’re on a payment plan.” If you’ve got the borrower’s information, a little internet sleuthing, a little Facebook stalking, borrower research, can be very helpful as well to identify the opportunities out there for you. That’s the beautiful thing about that. You can hire companies for skip traces on stuff like that and they will often have a plenty of information. They’ll often find the last four of the person’s Social relatively easy. It’s not that hard to anymore these days. If they filed bankruptcy, they’ve got to provide that in a bankruptcy case, and there you go.
Let’s do a quick review on some of the websites we talked about. We talked about NETR Online. Another thing that will give me APN number for the property to help me with tax lookup is just to use 411.com. It’s a great website as well.
The one question we get a lot of from people is HOAs. How do you find out what’s on an HOA? A lot of times, especially in condo association, you can find another condo that’s been listed before, find that MLS listing. That will tell you how much the HOA is or the HOA management company is from that point. Then that’s when you pick up the phone and call the HOA management company and find out. If they’re not paying taxes, they’re not paying HOAs. If they’re not paying their monthly payment, they’re probably not paying their HOAs before their taxes. Keep that in mind. If HOA is on the asset you have, you’ve got to expect that as an added cost, even if you don’t have to pay the full amount. In Florida, they’ve got the Safe Harbor laws. If we buy a note and foreclose, we’ve only got to pay 1% of the original sales price of the asset or one year of HOA fees. We keep that in mind, and our ROI calculators is the second level to it to keep things going.
Most of due diligence you guys can do pretty inexpensively on the frontend, BatchGeo’s relatively free, Rentometer‘s relatively free, NETR Online’s free. A lot of these websites we’ve talked about is just free. You’ve just got to spend some time diving to it. I can understand if some people aren’t great at Excel. The only way you get better at Excel is to spend time working it. You can go find an Excel for dummies or an Excel cheat sheet That usually your FedEx office or office supplies will offer you a cheat sheet for Excel to help you filter things and identify some Excel tricks to make things easier. You can YouTube it too. Excel, just embrace it. You’re going to live in it all the time with spreadsheets in what we do in the note industry.
Initial due diligence, I’ll be glad to send out the full checklist for you. Just drop me an email at Scott@WeCloseNotes.com. We’ll send you out the one page short checklist. I’ve done a 21-page checklist, that’s an engineer’s wet dream. I’m not going to go through that. If you want that, put that in your title, “Engineer’s wet dream of a due diligence checklist,” and we’ll send you the 21-page and the seventeen-page checklist out there for notes. That is overkill. By the time you get through that, the deals are going to be sold and foreclosed out by the most part.
The biggest thing I can tell you: checking values, checking taxes and asking pricing. I can’t tell you how many times we get tapes in from people and they have no idea what the seller’s looking for or they send a tape that’s sanitized. By sanitized, it means they pulled the addresses off. All you have is the city, state and zip. I can’t do due diligence on assets that way. If it’s sanitized, you’re probably dealing with a joker broker. It’s not a legitimate tape. If it takes you forever to get information back from the sellers or your potential joker brokers, just kill it and move on. It’s not worth you wasting time on something that doesn’t make sense.
A couple of little tricks on the frontend, pre-due diligence; when you get a tape in, when I get an Excel sheet in, I always check a couple of addresses by searching it in my emails or my files because I retain every spreadsheet I get. Literally, I have thousands and thousands of spreadsheets. Jen comes in, “Can you check on this address 325 Edison Street in Dayton, Ohio?” I’m like, “That sounds familiar.” Sure enough I found it up. It was on this spreadsheet, “We’ll go ahead and buy that one.” If you store your spreadsheets, eventually you start seeing when it pop up. Another little trick you can do with Excel spreadsheet is you can go to Save As and it gives you the details on the right-hand side there on your screen, like who created it, when it was created, who’s modified it last. If you see a spread sheet that’s created more than six months ago, it’s probably been shopped around and it’s a joker broker you’re dealing with. Another thing that is common for joker brokers to do is they’ll take different spreadsheets and combine them together. One of the things I look at is I’ll look at the loan numbers. Usually it’s the first one or two columns. If you have loan numbers that are all the same, nine to ten digits, that’s great. If you’ve got something like AL-3567 versus a nine-digit number, you see it’s all over the place, it’s probably a chop-chop list.
We’ve got another question, “Is it common for a tape not to have a borrower’s name?”
It’s very common on contract for deeds because the borrower will see that it’s from the owner that we’re basically buying the property. Sometimes you’ll see no names on spreadsheets from hedge funds where they pull information off of. That’s not the killer. I always then want to go back and ask, “I need the borrower’s information. Can you provide the borrower’s info before we finalize on anything?”
You’ll see a lot of contract for deed tapes, you’re not going to get the borrower’s information on that until after you get approval and then they’ll send you a collateral file of over dues. It’s not that big a deal when it’s a contract for deed. If it’s a non-performing note deal, the thing you’ll want to look at is, if you’re looking at calling the county checking taxes, is you want to see that name is changed in the last 12, 24, 36 months. Oftentimes, just going online county appraisal district by typing the address, it will pull up the borrower’s name. You can just go a year or two back and see if the name’s still the same. If it’s changed, that should be a red flag to find out more information.
That’s the first part. We’ll dive a little bit more into the backend due diligence that we do after we get a bid acceptance. If you’ve got enough information, you’re making an offer, you get the bid in, and you’re like, “What do I do now?” Always don’t sit on your thumbs waiting for the bid. Get your realtors out there. Oftentimes, you’ll get bids back within a couple of days or a week. Always ask, “How soon do you expect bids by?” especially when we do the Note Funding League Drafts here at We Close Notes. People make bids on a Monday, they want answers on Tuesday, or they make bids on a Friday evening at 5:00 and they send us four emails before Monday at 7 AM. The important thing is find out and have a realistic time for, “When should I get bids back?” We’ve taken bids and it’s been weeks, sometimes a month, before we get a bid back, counters. That drives me bonkers. Always ask, “When will I get bids back? How many people have seen this tape?” Along with, “When do I need to get a bid in?” If you get a bid in on Friday, it gives you a little more time to do more due diligence, they’re going to want you to be a little bit more accurate on your bidding and your values. If they want something within 48 hours instead of five days, then you’ve got to be fast and they realize you’re going to have to adjust those numbers some a little bit.
One last question, “Is it best to have a borrower’s name before the bid?”
It doesn’t matter. It’s not a hard thing. Check the County Appraisal District, see who’s on the asset it’s at if it’s a non-performing note. Great, you can have it but sometimes they won’t tell you until once you’ve accepted, then you pull the name. The County Appraisal District will look what was on the name from 2017, who was on from 2016, who was on from 2015, 2014. If the name is changed in the last three or four years, as long as your note wasn’t written in the last three or four years, that’s okay. If it has changed though in the last 24 months or so and your note was written six years ago, that’s a big red flag. Often it will tell you what are the reasons, if there’s a deed or a quitclaim or something like that. That’s not that hard to check out. You just got to get into the process of looking through it and going from there.
The biggest thing is if you’re asking questions, and it’s not directed to anybody at all, if you’re asking questions but not making offers, just get in the habit of making offers. I can tell you right now, you’re probably only getting about 10% of your initial offers accepted. If you’re making ten offers, you may get one accepted. I’ve never known anybody in this industry make a hundred offers and get a hundred accepted. If they did, they paid too much. You have to realize, if you’re cherry-picking or doing carve-outs, make ten offers and get one accepted. Make twenty offers and get two or three or four accepted. You can’t rely on your money. This is the big thing, make offers and then market the same offers, the same stuff you’ve learned doing your due diligence, then you pull BatchGeo and you get a great street route. Do a screen save on that photo. That becomes part of your due diligence. You see that rent rate is high, save that information. You pull your Zillow numbers, save that. Because that becomes valuable information to share in your database, to share on your social media account that you’re working for a deal. I see people that will post a BatchGeo map where it’s the full United States and they will shrink it down to ten assets, but they don’t talk about any of those assets.
Share some photos of the properties. Some people are scared. Never share the address of the deal you’re working on unless it’s one-on-one. Never post the address. Somebody went out there and did a deal video of a specific deal and they shared the full address. I’m like, “You can’t do that. You’ve got to kill that video off. We hadn’t bought the note yet, we hadn’t contacted the borrower yet and we didn’t foreclosed on it yet. You’ve got to kill that address.” Never share the address via public information where everyone can find it. “1621 Northwest, 21st Lane, Cape Coral, Florida,” don’t share that address. Share, “I got a Cape Coral deal. If you’d like more information, I’ll share the full address with you for those that are interested.” Not hard to share photos of properties. It’s not hard to share what you learn about the numbers. You can always disclose the property address later on as part of your marketing. On the frontend, you can’t do due diligence without full address.
We’ll cover more into after the bid’s accepted due diligence in one of our near episodes. Hopefully this was helpful. Once again, drop me an email at Scott@WeCloseNotes.com if you’d like our one-page checklist to help you guide you on your way, and we’ll be glad to email that out for you. If you’d like to get more information on notes and some of the different training and recorded webinars that we do on a regular basis, all you’ve got to do is text the word ‘NOTES’ to the phone number 72-000, and you’ll be sent a link on your phone to be able to download over 80 hours of videos and plenty of information to help you kick start your note investing career. On behalf of me and everybody here at WeCloseNotes.com, thank you for being a part of the Note Closers Show podcast and we’ll see you all at the top.
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- Dan Zitofsky
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- NETR Online