Scott interviews Bill McCafferty regarding his second lien investments.
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Second Liens with Bill McCafferty
I’m out here in Southern California a couple of days before the upcoming Distressed Mortgage Expo that’s taking place in Orange County. Excited to be out here hanging out with a couple of hundred other note investors. One guy could be missing in action this weekend because we’re on an opposite coast and that’s my good buddy, Bill McCafferty.
Scott, how are you doing today?
I’m doing great. You are a busy man, you’ve got little ones, you’re out rock and rolling closing deals and making things happen. We’re excited to have you.
I appreciate you having me on. I look forward to sharing my experience, what I know about the business, what has happened over my life in the last ten years, and how powerful real estate is and really looking forward to diving into it today with you.
Everybody knows that I love first liens and stuff like that. What’s so beautiful about this business is there are so many niches. I honestly think you are the most underknown guy in the notes space because you do a good job of chilling in the background, closing deals, making things happen. For those that don’t know who you are, tell us who you are and what you do?
I’m Bill McCafferty. I’m a 43-year-old father and husband. I have two kids, been married seventeen years. Back in 2006, I was working at a school, taking care of athletic fields, and just digging more out of life. I saw some info commercials about real estate and it just really got my mind spinning. In 2006, I dove into local real estate investment groups. I really wanted to go out and find out how all these people were making money in real estate. Leading up to that, I was a little bit of a savvy guy with just saving money and doing certain things but never really pierced the real estate market. In 2007, I was in the right place at the right time with a local group of investors that were very successful in all facets of real estate. They were coming together and they were pursuing delinquent second mortgage notes. This was about 2007, 2008. From 2006 to 2008, I didn’t have the best experience with real estate. Bought some stuff, attempted some rehabs, actually attempted property stuff up until about 2011. I actually only own one rental right now on my own primary. I actually owned fourteen houses before I discovered the world of notes, what it could really do for me.
In 2011, I left my full-time job to pursue this thing full-time. I was in a partnership for about two years but since 2013, I’ve been on my own. What the power of an individual like me is not only do I offer a service of an asset manager, but I do this in my own portfolio and that’s what my portfolio is. I call it the double dose. I can bring that experience into my own portfolio. I’ve managed about 500. I think you’d be really impressed if you look at my numbers on spreadsheets in my data. I’ve worked 567 of these files, all second liens.
If one individual hires me to work a few assets and they’re new to the business, they’re getting all that experience that I’ve already encountered with all these other clients and my asset management company. To fast forward where we are today, I work for myself. I work out of my house. I have two companies. The asset management company that we’re going to talk mostly about because that’s my service. I do the same thing in my own portfolio. I have People’s Debt Relief Solutions, which was my original company and that’s my asset. What People’s Mortgage Relief II, LLC really does is they offer an asset management service to investors. I think the big power of me is I have the real numbers and I’m not working for a big hedge fund. I don’t have a lot of money backing me. Those 567 files, I have no money in the deals.
It’s all other people’s money that’s helped you take that stuff down, correct?
I’m a 1099 contracted asset manager. They buy the asset. They pay for the servicing. They pay for the legal. They either like my system or they don’t. We don’t do business with everybody. I’m very aggressive in this space. I believe it’s a true numbers game more than anything. It’s getting tougher out there. When it is a true numbers game, you have to know what you’re up to and what you’re looking for.
That’s what so beautiful about the note space, is there are so many little different niches. What I love, when I’m visiting with you and talk with you, is I know you’re doing the deals. I know you’re running 500 files. You’re doing a variety of different things. You’re phenomenal when it comes to that, Bill. I have a lot of respect for somebody who’s done that many files and has carved out their niche. There are some differences between first and second liens. Let’s talk about some of those differences. Seconds definitely is a numbers game. You want to talk a little about that?
One of the main reasons I dove into the seconds early on was it was definitely a price point entry, availability. With it being a lower price point entry, you realized that it was a numbers game sooner than later. What I mean by a true numbers game is you just have to put yourself in a very good position when you’re buying an asset with your due diligence. With the second liens, you could really over analyze these things because some of the exits you just will not see in any of the due diligence. We can talk more about that, how I force people to pick exits and funnel them down the path and just got them out and get paid.
I always say, “When you buy second liens, it’s a three-year play.” Everywhere from buying one non-performing second to buying ten non-performing second liens. It’s a numbers game everywhere from getting them to work out to getting a performing asset. A lot of the funds do three years and that’s why. It takes a little bit to turn. Sometimes, you can turn things a few times and it just makes the system work better. One thing I found out early on is how to get the emotion out of the deal. What I mean by the emotion is, I’m dealing with investors that have capital in. I’m dealing with stressful homeowners. I’m dealing with attorneys that know what they’re doing but don’t know what we’re up to. I’ve learned how to manage all that to get paid. One of the things I realized is it’s definitely a true numbers game. As I track my data, I find out that deals where there’s no equity in it, you’re still getting a really good deal done. Whereas maybe a deal with equity in it, you’re not getting a great deal done. We get tied up on so many variables. It just don’t get you paid and make you spin your wheels. When I say it’s a true numbers game, I absolutely look at it as a numbers game and I make my decision based off that.
I build portfolios. If you give me five notes, I’ve got to make my decision based off those five assets, nothing else. I don’t care if you give me ten second liens and say, “Bill, I have all the money in the world backing these. Go to town.” It doesn’t matter. I’m making my decisions based off those ten assets. I always say, “A homeowner that comes out when I’m getting nothing done will get a great deal. A homeowner that comes out when I got a lot of activity, I know how to play my game and I’m going to stretch them out and get a better deal.” As much as I can take the emotion out of it, I also see when I start getting a little emotional sometimes. You just look at the factors and the factors say there’s two deals going on. They’re getting good deals. You got twenty deals going on. It’s not that they’re not going to get a good deal. It’s a game of patience with this numbers game. It really does test your patience.
Some of these deals that take two to three years to get done, those are the best assets that will come out in being a re-performing asset for the long run. We jump into this space and think, “Stuff in six to twelve months are going to be these humongous paydays that will carry us for the next 30 years.” You just build it. Some of these ones that come out early on, maybe you take a discounted payoff and it’s more to put your other assets in a better position to get to the finish line. I do a lot of that. As much as I manage assets, I do take pride in building portfolios with people. It’s a numbers game. The more numbers you have, the better and easier it is for you to make decisions on bankruptcy, on short sales. I hope I hit that with the numbers game.
I think the biggest thing is when you’re buying seconds, as you said, you’re not going to have 100% that get worked out immediately. You’ve got to put some time into it. What are some of those factors that will drag the deal out a bit some, Bill?
One thing I do a real good job of is putting everything down my system and processes and really taking that emotion out and allowing my system to let us know where we’re going to go on the deal. It’s just some things that happen pretty quick and upfront when I board a file. I’m making sure the collateral is 100% uptight and we’re taking care of that early on. Most investors go wrong there. They point fingers and they play the blame game instead of just getting it fixed. That’s the most important. We’re chasing homeowners right off the bat. I don’t chase them. They come to me eventually. That’s what my process does. It makes them come to me when they need me and I just get the deal done because they need me. I know they need me at that time and I know this business is real. In that first 45 to 60 days of me actually boarding a file and working a file, I want to make sure the collateral is good. I have all my stuff boarded. I have it with the servicer. I have it over with my attorney who’s sending out a 30-day demand letter. I’m not even hesitating. Everybody fears the word foreclosure and sheriff’s sales. That is a very common word in my business. I love it. Sheriff’s sales mean I’m getting paid somehow. I actually like looking at my calendar on a monthly basis and seeing three to five sheriff’s sales coming up. If I look at my calendar and I don’t see that, I need to work my systems to fill my pipeline. It’s a very clear vision there.
After 60 days, at the end of that demand letter, we have a real good idea of what the status of the first is. If there’s any other things going on that we didn’t realize because now we’re on title, we sent out our letters, attorney sent out a demand letter. Maybe we find out the property is vacant. Maybe we find out there’s a family member. We can then make our decision based of the information we found and not all these stuff that we’re thinking about. Real estate numbers like flipping a property, took me a long time to comprehend what it really means to exit a no equity deal through the borrower and fully get paid by it. That’s where I go.
With my asset management company, I have to relay the information to the client and let them make a good decision. I’m very active on this legal process. I do push it just because I have the data and the numbers to back it up but everybody’s different. If you give me ten notes, you might not be able to press ten right off the bat. Fast forward my 60 days on all ten files, you and I are just going down making decisions where we want to go with everything. There’s one thing I do, I know my exits but I don’t pick my exit before the deal. You give me a delinquent second, I’m going to get us paid off it or it may blow up and it might not get us paid. But I’m going to found out. I will guarantee I find out if you let me spend the money.
With those ten, we may decide we’re pressing forward on six of them and four of them we’re not pressing forward on for whatever reason. Maybe the first is out in front foreclosing and we don’t want to play that game. We’re going to let that pan out and see what happens because maybe the first does get modified and it comes back into play as a good second. Maybe the first makes them file bankruptcy, now we’re in play. There’s a golden nugget for you right now. Everybody is missing out on those. There’s a lot of delinquent seconds where the first is banged up and they’re moving forward on foreclosure and everybody is scared of those and there’s equity in there, buy those things. Homeowners are filing bankruptcy. Those Chapter 13 delinquent second liens that did not look good are now good because you’re covered with the equity. In a state like New York, it may take me $9,000 to foreclose. On a deal like that, maybe I find out in the first 90 days that I’m now included in the bankruptcy plan and I bought a very cheap asset.
A lot of people talk about don’t buy seconds behind non-performing first. You always want to buy second behind a performing first because you don’t want to get wiped out in foreclosure. That’s not always the case based on what you just said, correct?
Absolutely. It’s not you want to go buy ten loans where the first, they’re out in front in foreclosure and play that game. You’re making decisions as you’re moving forward on these things in real time based off your portfolio and what else is going on.
You’re doing due diligence on this to make sure that you’ve got the equity in there so that there is that flexibility. Equity is a funny thing that borrowers have. Sometimes they think they got it when they don’t necessarily have it. If they’ve got equity, they’re going to fight that foreclosure because they think they’re due that. It’s a different story if they’re over encumbered. They owe a lot more than the property’s worth. Correct?
Absolutely. That is why it’s so important to remember that majority of my exits are through the borrower. What I have found out is a very big misconception in this country is people with no equity don’t have any money. People that are overleveraged on their property with a delinquent second don’t have any money. Absolutely, it’s so false. That’s what I have done with my systems and processes. I take myself out of it completely and I force a hand. I have three buckets if these things fall: they’re going bankruptcy, they’re going to pay me, or they’re going to make me get the keys/sell the house with them somehow. Early on in this business, I had no idea how to handle bankruptcy and I had no idea how to handle when they gave me the keys. It was all about that first one of getting the normal workout payoff. After a while, I found out that was easy. That was the easy part of the business. They were always going to happen. Early on with the current first, those numbers were probably 60% to 70% worked out with the current first. As I move forward, I started managing a lot of different assets. My numbers from 2014 on have consisted a wide variety. I don’t really track that data anymore exactly.
At the end of the day I always say, if you buy three delinquent second liens, this is actually what will happen and what you want to happen. One’s going to work out normal. One you’re going to get a huge education piece off of and make the money of it. The other one, you might get wiped. You’re going to write that off. That’s business. I lose out on deals all the time. They go to the bottom of my spreadsheet. I don’t think twice about them. I made my decision and I move on. I’ve learned how to cut the emotion on my own deals real fast. That’s what I like about this numbers game and the price point entry. If I’m $12,000 in a deal, it’s not that I want to walk away from $12,000 but it’s easier to shell the $12,000 deal down and put my $10,000 into another deal instead of trying to fix the $12,000 deal. If the $12,000 deal could work out at some time and come back into my favor or I get wiped and then I’m going to write off my expenses and my deals.
The other two buckets where I really have learned and made some really good money in the last three or four years is the bankruptcy and the whole short sale avenue. No doubt, if the equity is there, the investor is more comfortable and you know at the end of the day that if you truly have to liquidate, the numbers are there. The reality in this business is when you’re a second, even when I foreclose on a property, I foreclose subject to a first mortgage, I can’t just go walk in that house. I still have to evict somebody and get possession of it. I found out there’s a whole world of paydays in between the sheriff’s sale and me locking somebody out of their house. I call it post-sale. I foreclosed on 83 houses. My post-sale numbers, 45 of those have been resolved in some type of payoff or we rescinded the sale or I recreated a new mortgage in note. However, 44, 45 of those are paydays moving forward where we got paid off. I have been bought out at ten of these sales by a third party.
My numbers now tell me that when I get the sheriff’s sale, one out of eight, I’m going to get bought out. Those are the numbers that I share with clients and investors because that’s what I make my decision on. I’m very thankful and blessed to be put in a position to get those numbers, create those, and track them. One thing my mentors told me early on is that numbers don’t lie and the data will tell you where you’re going. I’ve tracked and tracked. I’m an Excel freak. That’s the deal. There’s a lot of money to be made with short sales. There’s a lot of money to be made in bankruptcy. It becomes a game of patience and learning not to waste money in some of the avenues. Like a first mortgage, when you’re in bankruptcy and they’re not dealing with you and you want to file relief from the stay and be able to go after the property. You get a lot of respect as a first. As a delinquent second, you don’t get much respect if you’re going in, looking for relief from the stay.
One of my good experiences early on was some investors throughout the country that hired me that were students of another educator in our business were actually sent to me. I managed their files and later on I found out I was a little bit of a test. What was cool with these two guys is they put so much trust in me to manage their delinquent second liens but they were seasoned, skilled investors. I gained so much knowledge just through my clients and I have plenty of clients that I’m a little bit of a mentor for now. It goes both ways. That’s how I built this thing through my clients teaching me and me teaching them.
Let’s talk a little bit about some of the numbers. You’ve got some great numbers. I love it that you keep track of stuff. You’re an Excel wizard like me. The numbers don’t lie. What do you see the average payoff behind your short sales? I know it varies obviously depending if there’s equity or no equity, stuff like that. If there’s equity, I’m willing to bet you get almost close to full payoffs. Is that correct, Bill?
Yeah, in all absolutely. Once again, in order for me to get a short sale done, it all have to start with my system and me letting them pick that bucket and we go down the path. Let’s just say a homeowner comes to me and they already have somebody in place that’s handling the sale of the property, a broker, a realtor, an attorney, that’s all good. I want contact with them. If they don’t have anybody, I make suggestions. If I have anybody in my network that are in locations, which I do, I funnel them in that direction. At the same time, I don’t like to know the person on the other side because how I get paid is being a little bit of a strong armer at the end of the day. When a first mortgage is accepting less than what they’re owed on the short sale, they are going to dictate what my second gets off of the settlement sheet, absolutely, all day long. It took me years to figure out that I can’t pierce that and I tried to pierce it. Other people may tell you, you can pierce it but it’s a waste of time. It’s all about technique and strategy. I’m getting anywhere from $2,000 to $15,000 off of settlement sheet. It’s the most I’ve ever seen from a second.
What’s that as far as the percentage of owed, 5%, 10%, 15%?
5% to 10% with a 15% cap. I’ve seen crazy stuff. I’ve seen a $90,000 house in Florida to be sold and we got $12,000. I’ve seen $700,000 houses sell and they’ve given us problem trying to give us $8,000. It’s wild how it works. As I maneuver through a short sale, I position myself. I play like a little guy in a big company, “We’re going to work with you. I just, at the end of the day, need to see that settlement sheet to get final approval.” A lot of these we’re moving forward with foreclosure on and that’s why we’re either forcing the hand where the first is or we both are. When that first is getting less than what they’re owed, I got no say anywhere else. If a first is getting a full payoff, I can play the game as hard as I want with what’s left, commission, anything. It’s all open. What I like is actually a lot of these, there’s no equity. The first is accepting less. A lot of people put work into this to get this done. From my end, I gave you the Florida example where it was $12,000 on that $90,000. When I’m looking at commission on something like that, realtors aren’t getting a lot. On a deal like that, when I’d show you my little technique and strategy that I do, I didn’t feel right doing it on that. The homeowners weren’t getting any money. Realtors were getting a small commission. I like that $300,000 to $1 million short sale range.
As we get above there, what I do is play the role of, “I know I’m going to get this. I’m going to get this. Try to get me the $15,000,” and everything gets approved. They got us set up closing out 30 days and they come to me and say, “Bill, I got it approved. Here it is. Everybody is ready to go.” I see $30,000 of commission. I see a homeowner getting $10,000 to walk. I’m getting $12,000 off the settlement sheet. Instead of blaming people, I got a pretty carbon copy email down and I have two agreements. One’s called a short sale agreement and one’s called a pay down agreement. We need to pay down my lien. Pick your number, whatever you want. You’ve got to pay my lien down a $1,000 or $20,000 before I sign off on the short sale. I’m out of the transaction. It’s very uncomfortable. That’s why I love email in this business.
I place that in front of the decision maker. It’s all about the decision maker. What my email says is, “I know all the rules. I know all the regulations. I understand everything. I’m not looking to gouge anybody’s commission but you’re getting a good commission on a deal, we’re agreeing and a homeowner’s walking away from everything with the money. There’s an end-buyer that’s getting a great deal.” This has to happen. I call it a pay down agreement. It’s another one-pager that I sign. It doesn’t go to closing. It’s totally out of the transaction. New realtors and brokers get real nervous but the experienced ones get it. You give them the wire information. I don’t even talk to them. I don’t even want to be on the phone. I don’t want to email, nothing. “Here it is. Here’s my wire information. If you want me to sign off on the short sale, $10,000 will end up in my bank account in the next 30 days.” It’s an amazing thing. It happens a lot.
You’re basically playing the point where the motivation to get paid in 30 days outweighs the pain of not getting paid or paying you an extra $3,000, $5,000, $10,000, whatever it is. You don’t care where that money comes from or which pocket it comes from, from the realtor’s commission or it comes from the borrower just walking with some Cash for Keys or stuff like that. It’s either they get something instead of nothing, correct?
You got it. On deals like that, to build a portfolio and be smart, we’re looking to get our money out, make some money. In my asset management company, I get a $500 administration short sale fee, my client doesn’t get all his money out. I try to at least get the money out, get my fee and move on and be smart. I’m not looking to gouge people. I usually go between $1,000 and $10,000 on my pay down. If I’m getting $12,000 or $15,000 and I can get another $5,000 or $10,000, that’s a slam dunk.
You don’t get what you don’t ask for. That’s your free dessert you’re basically asking for.
I’ve got that nugget about three years ago and that has really changed my portfolio, my client’s portfolio. It’s what I told you with those bankruptcies. If I’m in a second mortgage deal with $5,000 to $10,000 and I’m not even pressing legal and all of a sudden I’m being asked to do a short sale, I’m doubling my money all day long.
That’s the good thing about bankruptcy, is once somebody has filed, you can pull all that information off of Pacer.gov. It’s a treasure trove of information not only on the asset but on the borrower itself, correct?
100%. Bill McCafferty has stuff sitting in his LLC and his IRAs that are just back, waiting for a short sale call or a bankruptcy. I’m not pressing them. As aggressive as I am with legal, IRAs are a whole different ballgame in my space. It’s a true numbers game. You may be successful on 50 notes in an LLC and you buy five in your IRA and it doesn’t go right. Now you lost money in your IRA. If you left those five with the 50, you’d still be fine.
We were exchanging messages back and forth in how you’re funding that IRAs. You‘re getting deals done there. You don’t mind putting a few notes in an IRA that’s going to last long because you can’t really touch that money personally anyway. You don’t mind if it’s deposits there for a year, two years, three years or more, while either the values coming back and your note that you bought maybe had zero equity, now starting to get paid off based on the equity growth of the property, correct?
All day long. This business pays and it’s real so I buy a lot of debt. I’m either working it or I’m sitting on it. I have three main buckets. My one bucket is my company and I’m very aggressive on legal. When I left my job in 2011, one of my main goals was to get all my money away from everyone else. I did a few rollovers that ended up in my own self-directed IRA with CamaPlan, which is in Pennsylvania. Even a year later, I took a pension buyout from my old employer that I was at for fifteen years and rolled that into the IRA. That bucket became my second go-around because I had the experience. I also realized you can’t get crazy aggressive with legal. I was looking for more good deals with re-performers, maybe buying some junk second liens just to let them sit there and see what happens. It is an act of business. Everything changes. Something bad right now may be good later on.
In 2015, my wife left her job and we did the same thing. I took a 403(b) and rolled it over into CamaPlan self-directed and I took her pension and put it into CamaPlan. I control my whole dashboard. The only thing I don’t control is about $70,000 in stock market with Northwestern Mutual who is a pretty decent company. My financial guy, I do trust him. But I don’t put anymore in there. That was already created in the stock market and I don’t put anymore in it. He has it, he gets it, and he knows what I’m up to. You know you’re in the right business when your financial advisor tells you at the end of the year, it’s better that you put your money in your self-directed account and keep buying what you’re doing than to give it to him to go put in the market.
One of the coolest and the most proud things I am is this last bucket. It’s my years of experience. It’s my wife putting a lot of trust in me with her retirement amount. I was able to take a certain amount and double it just on my purchase price. They were five re-performing assets. $0.50 on the dollar and now I’m getting paid whatever that is, the return, everything is beautiful. I call that the Cadillac. What the Cadillac does is, the Cadillac will get five assets and it’s going to sell two partials. Those two partials are going to help me buy five more assets. I’m not going to leverage myself crazy. There are small seconds. A partial on a second maybe $10,000 to $20,000, and they’re nice. You can pay them back in three, four, five, six years. There’s a whole business right there amongst investors that are struggling to do things amongst themselves trying to compete. Stick together. We’re selling partials to each other. Maybe I’m about to go buy an asset. One of my friends know that. They’re looking for a partial. Nobody’s taken offence that I’m getting a good deal. They’re teaming up with me. They’re taking it down with me. They’re getting the first four, five years of payments and I’m getting the rest of it.
That’s the beautiful thing about the note industry. It’s a lot more of coopetition. People working together but they’re all competing to get the good returns. Sometimes it works better just to work with people versus working against them.
That’s why you and I are on the phone today. I take a lot of pride in my name out in this marketplace. There’s a lot of crazy things that happened in the second liens space. I stomach a lot. I’m very thankful that I’ve learned how to limit the risk with my strategy and I know it’s real. An investor gives me four or five notes, and you know they went out on the line to buy those assets. Now in fourteen months and I don’t have any money coming in for him. I know it’s common but they’re starting to question it and get nervous. That’s why I always say, “It’s just about filling the portfolio.” Even though you bought five notes and in a year and a half not worked out, sell two of them and just stay the course. Don’t get nervous. Somebody might say, “Bill, why are you selling a non-performing note? This is your niche.” Because this is the asset I need to move right now. I got windows I got to put in my rental property. Don’t ever do that. Don’t ever buy a rental property with seventeen windows. What the hell was I thinking? I’ve got to sell a non-performing note just to make that happen.
That’s what I like about the note business. I never looked at somebody and said, “Why are you selling this?” It’s always about their need. I found out early on, the hedge funds need to sell to carry their money. They may have an average of legal fees but it’s because they’re selling everything and working on a handful. They’re not doing what I’m doing. They’re not getting the bottom of the barrel. That’s what I’ve learned to make my money on over the last five to six years.
We should create a movie called Note Dogs instead of War Dogs. The guy says, “I make money off the crumbs in the middle.” There’s a lot of crumbs, right?
Absolutely. The best part is I’m in the middle of it all. The coolest thing that I found out about this business is I’m in the middle of seventy clients. All their bad experiences happened outside the note business. Anytime they’re successful within the note business, they got to pull it out to clean up the outside. Maybe I’m there to buy a re-performer or maybe I’m there to shift the asset to another client so I can keep working it and make sure my client gets a fair deal. That’s the power too. I didn’t go to build that, it just all happened and one day I realized, “You’re in the middle of all this stuff.” It’s pretty powerful to take advantage of that.
I get a lot of people that come to me looking for seconds. Where are you finding the majority of your second deals? You’ve got a network and you’re in the middle building those relationships between, back and forth, but outside of that, where else are you seeing deals? Are you dealing with a lot of hedge funds? Are you dealing directly with banks on seconds? Where are you seeing the vast majority of your inventory these days?
It’s definitely a relationship business. The days of calling somebody up and looking for a spreadsheet and thinking that you’re going to have time to look at it and do whatever you want is over. Right now, I’m in a little bit of a network where some of these funds or maybe some of the educators do drop a spreadsheet out, and you just have to be ready. Maybe there are 50 notes on it and there are a lot of people looking at it. You’ve got to start thinking about these stuff I’m telling you because I’m telling you, majority of the people aren’t looking at it. From my end, I position myself around the hedge funds that are in the education real estate industry, plus some other smaller ones that are in my business that all of a sudden I realize they got a lot of stuff in my business because I’m seeing their names on assignments. That’s big in the second liens space, assignments. I’m always looking at assignments to see who’s active and where it’s coming from and who stamped it.
About six months ago, I got a second mortgage note deal done in Indiana; no equity, Chapter 7 discharge, seven assignments in the chain, only one of them re-recorded, everybody in our business touched it. Seventeen months later, I got $15,000 upfront and we got a real nice performing asset moving forward.
There are two nuggets to that one. One you just said, but the second spot is something that I’ve shared with people as well, is that everybody comes looking not only just for seconds but they’re also looking for first source, “Where can I buy sources from?” Just go run a search for assignment on mortgages in your local county or popular counties, right?
Absolutely. From my end, I’m not looking to push anybody’s name or anything or any of the educators, but you position yourself around guys maybe like a Foo Kwan, when he’s ready to release them, or a guy like Sherman when he’s ready to release them. My ex-partners, they’re not in the education industry but they’re investors and even as they shift out of this marketplace, they also understand the need and the power of this stuff. Silver Bay Capital, Joe Robert, Lindsay Gordon, they’re my ex-partners. When the three of us separated as a partnership, everybody thought something crazy was going on. Joe and I were real good friends. We looked at each other and realized the power of this thing. He understood I wanted to go home to my family. I was an older guy and I knew my niche and what I can make my money on. They were young investors, note kids, real motivated. When I left, we misutilized each other. We’re looking for notes, these guys have assets. I’m just trying to position myself like that. I know they have some seconds right now. PTR released some second liens. You just have to be there and look at it and learn what not to look at. It’s an information-based business. The credit report is very important. You could talk yourself out of every single second deal by looking at the credit report.
Why is that?
Because you don’t know if Bob’s next-door neighbor has money. When he goes over and asks them for a $40,000 because you’re about to take his house and he gets it, they’re the ideas that I put in homeowners’ heads. A Pennsylvania deal, the guy’s an auto mechanic. He’s been at the same place for 25 years, same boss, it’s his friend. “You’ve got to go ask that guy to either pay it off or buy the second.” It’s just giving people ideas like, “There’s no equity in this property.” “He doesn’t have a lot of money, he’s an auto mechanic.” It was just giving them the ideas and that’s the stuff you don’t see on the credit report.
People are very, very funny when the game of chicken is pressed on them. An example is I just got a $62,000 payoff out of New York in nine months, legal pressing. Legal is expensive, it was me convincing my investor to spend $9,500. Not only it convinced my investor to spend $9,500, also it convinced him that another asset manager that worked it without legal for two years. I hear all those stories but I don’t want to hear them because there is no legal move and then everybody’s going to jerk your chain without pressure. It was funny to watch over the course of the nine months and this guy to come out, and me hearing all this stuff about how bad he was, and he’s just talking real nice to me, thanking God, thanking me. He played his little games with me, but I controlled him and $62,000 payday. If I didn’t have legal going, he was a New Yorker and he would have definitely just talked me away and there’s no way I would have got that from him.
That’s a very important nugget, whether it’s first or seconds, it’s good to press the legal most of the time. I understand it’s a little bit different in the seconds but especially with the first, the borrowers will drag things out as best as they can unless you keep that foot to the fire. Sometimes you just have an attorney start stuff and force that, put some pressure on so it’s not one of those, “This is my friend.” “No. This is my bank. I’ve got to do something.” Right, Bill?
100%. There are only two states that I make my decision on legal off of equity in the property rather than other variables. New York and Illinois are the only two states that I make a business decision because they’re very expensive. A guy like me, I had four Illinois notes and all four of them filed Chapter 13 and stripped my lien. That’s the worst scenario with the second. Getting stripped in a Chapter 13 is the worst scenario or getting wiped out by the first are the two scenarios where I say the deal is done. A lot of people will say, “Is this a good or bad deal?” I have no idea. A second is not a bad deal until it’s wiped.
Seconds are all about the purchase price. They’re different than what you’re doing with the first, but it’s so much more. Even as the market shifts, you’ve got to stand firm with what price you’re comfortable with. I know some investors out there that are very successful in the second liens space and will pay $0.50, $0.60, $0.70 on the dollar for a second covered in equity because they got the skill and they know exactly what they’re doing, and they have the capital. You just have to be comfortable with what you’re up to.
I see all this, “Does Bill McCafferty know what he could do if he went out and raised $1 million from people?” Yes, but I know I’ve got to pay it and I don’t want that, so I found the most little comfortability in this whole thing of slow and steady. My ex-partner Joe, good friends with him, he’s always pushing me a little bit, which is a good thing, but I always remind him I’m just slow and steady sometimes. It allows you to make good decisions. Even when I’m ready to buy, it’s not that I back off but I slow it down for a fifteen to twenty-day period just to see if anything funny happens. People might say, “What are they doing?” It’s like, “Whatever, man. I’m not jerking anybody’s chain around. I’m just letting it progress and doing business the correct way.”
Let’s talk a little bit about that stripping aspect of that. Let’s talk about what happens in New York and New Jersey when it gets stripped in a BK Chapter 13. Talk a little bit about that.
Just a quick refresher, we’ve got two bankruptcies. We have a Chapter 7, which is a discharge. Homeowner files Chapter 7. Three or four months later all their unsecured debt and all their secured debt gets discharged from them. They no longer owe the money. A Chapter 7 borrower is not personally liable for the lien anymore. One thing that I found out and I love is Chapter 7s because there are a lot of them in this space that have already happened and will continue to happen. I think Chapter 7s put homeowners in a great spot, whereas when we talk about Chapter 13, it’s freaking disgusting what goes on. It’s about the attorneys and the courts over there. Chapter 7, it’s a great thing for homeowners to do that, but if they want to stay in the property, they do need to address the liens because the secured liens do stay on the property.
My whole approach to this business is all my paperwork, all my documents, the way I talk to homeowners, I never tell them they owe the money. It’s always about the lien on the property. I don’t even worry about who’s in there. I will find out who’s in there but with these, you’ve got divorces, you’ve got people getting remarried, you’ve got family members. I don’t care who’s in there. Whoever’s going to pay on my agreement will sign it because it represents the original mortgage in note and it’s a lien on the property. I’m not telling you you’re personally liable. If you want to walk away, that’s great. Majority of them won’t because it’s like a free loan basically. That’s Chapter 7.
Now, Chapter 13 is reorganization of debt. In my space, the reality of Chapter 13 is a homeowner is most likely doing it because they’re going to try to strip your lien. A normal Chapter 13, if there’s equity in the property, your second should be included in the plan. Bankruptcy plans last for three to five years, and even when the bankruptcy plan is done, it doesn’t mean they’re done with the debt. They still owe the money but they’re addressing the debt. They’re reorganizing their debt for three to five years until they can get back on track.
In our scenario, you’ve got attorneys and homeowners realize that a Chapter 13, and it probably cost about $2,500 for a homeowner to file, that they can strip my second mortgage because there’s no equity in the property. Just on a quick note, some quick numbers, let’s just say a house is worth $100,000, first mortgage is worth $100,000. Same value of the house first mortgage, $50,000 second. There’s no equity above the value of the house. I have a right to fight that if I want to. How that actually goes down is when a homeowner files Chapter 13, it takes about three to four months for the whole plan and exactly what’s going on to develop.
If your homeowner files a Chapter 13 and you own a second, don’t act like you got to wake up the next day and figure this thing out. When one of my borrowers file it, I don’t check PACER for two weeks, I’m not wasting my time. Even sometimes when you go in two weeks, you might not get the info. Same thing with a proof of claim, I’m not getting crazy on filing that because I just want to see what’s happening, and some of these homeowners may fall out right away. What they’re going to do is they’ll file a motion to strip my lien and the court will set a hearing for that. They have the right to bring in an appraisal or any proof that they have of the value of the house and I can do the same thing. Early on with this stuff, a lot of my clients wasted money just throwing it at the bankruptcy attorneys, throwing it at the bankruptcy trying to get us out, trying to prove that there’s equity in there. At this point, you have to make a pretty good business decision on where you want to go with it.
Back to the example of value of $100,000 versus $100,000, and my second $50,000, they file the motion to strip, court sets the hearing for 30 days out, we decided that the house is worth $120,000, $130,000, it doesn’t cover our whole mortgage but we think there’s equity in it and we want to fight it based off of some quick early research. We have a right to get an appraisal inside the house and fight that value. What stinks with these appraisals is they serve independent parties. When I’m looking to get a high appraisal for a nice house that somebody is living in and there’s a bunch of REOs or investor activity around it, my appraisals are coming in low and it’s stuck. What ends up happening is, let’s just say in that scenario, I can’t prove it. The courts say, “The house is worth $100,000. You lose. We’re granting the motion to strip.” That homeowner has a five-year plan. They actually have to complete the bankruptcy plan for the strip to actually happen. The strip is granted and they’re moving down the path and in three years they fall out of their bankruptcy plan, that lien is still valid and they still owe the money.
The numbers used to be one out of four actually might complete the Chapter 13 plan, but I think the landscape has changed in the last four years and the numbers are different. The real numbers are probably saying one out of two. It’s one out of two if they’re addressing the first. If they’re taking ownership on the first, it’s only a small second that they’re looking to not deal with. That’s where I make business decisions. On a deal like that, if we really thought the value is $100,000 or $110,000, I probably would not have spent any more money, but filing my proof of claim on my own and just watching what happens with the bankruptcy. I’d put it on my spreadsheet and I’d file it. If we did fight it and we proved that there’s $130,000 in it, the judge could say, “You owe the whole $50,000 or you only owe $30,000.”
Let’s just say the house is worth $115,000 and they’re trying to tell you it’s worth $100,000 to $105,000, the judge sees the value and sees the first mortgage. I’ve had judges do this, “You guys get out of here and try to figure it out on your own before I cram or start stripping and see if you can get something done.” If you give me an opposing attorney in this space, I’m getting a deal done all day long. It’s just a matter of me gaming the credibility and playing my little games, because they want to get paid and solve problems too. You’ll find people that don’t want to do it but they definitely do. From that end, if you get a deal done there, a judge could say you’re owed $30,000 or you’re owed the whole amount. It just becomes how important your capital is there to really fight these things, knowing that it’s still in your court that it could come out. That’s why I said I’d rather just let that take course, go play the game more, and see what happens with these. If they fall out, I work on it. If they get wiped, I write them off. That’s the Chapter 13 game.
That’s a beautiful thing you said about the judges, almost forcing them on or forcing a settlement of some sort. It’s a great thing when that happens, right?
Absolutely. It seems like with the second liens, like the judicial states, the more money you spend and the longer you go out on these deals, the better deals they become. As much as we’re over here being real impatient, nervous, and in the best of mentality, we’re beating people off for two or three years and not realizing how much stress they’re going through and what they’re really dealing with. If I have a client call a homeowner a deadbeat in an email or something real negative, I’m all over him. I actually will pick the phone up. I don’t play that role or game at all. There are no deadbeats. They’re playing the game like we’re playing the game. Everybody keep it in check, remember what you got it for, where you’re at, what you’re doing, and there’s a real person on the other side. That’s why it’s so much about my system and making them come to me, because when they come to me, it’s me steering the whole shit, they need me. My skill is manipulating people through this whole little game and getting the best deal done for everybody.
Create and ensure win-win scenario for everybody.
That’s how you get paid in real estate. That’s the best thing about this. Stock market, there’s winners and losers. In real estate, there are only big deals or win-win for everybody.
We got a question for you. “Do you JV or use private investor money to fund your purchases and workouts?”
I have my own company and I wanted to keep that low expense-wise, meaning investor capital, after I left my company and really try to utilize my skill to take that capital and continue to build my own portfolio. Slow and steady. From my end, I do. I have about $90,000 out against my portfolio. I have two collateral assignments. I have one partial. I have the one partial going in my wife’s RIA. I do have about $90,000 of other people’s capital. My second mortgage is the collateral on the collateral assignment. It gets recorded in the county as cloud on title, it’s not an ownership document. Let’s just say I have a $30,000 second mortgage owed to me. I may be able to do a $15,000 collateral assignment, depending on the equity and accountability of the investor and everybody else involved. In a collateral assignment, you’re borrowing the money and you’re doing a promissory note for a specific amount every month and then you owe the whole amount back.
On that note, I’ve had two collateral assignments, the same two people going since 2007, a $45,000 and a $35,000. That is what really has allowed me to get where I’m at in my own portfolio. You get one or two deals done with your own capital and start leveraging slow and steady, it’s pretty powerful. As I got deeper I realized I still owe that capital back. I like the concept of partials just because you’re putting the money back long-term. That is what I’ve done. I like two-year notes with my investors on my collateral assignments. Back in the day of 2007, 2008, I gave them 15%. Now they get between 10% and 12% from me. They’re my slam dunk go-to and they’re just passive investors with me, they would go to 8%. I’ve been making them money since 2007 and I’ve never missed a payment with either of them.
Where do you see the seconds market going? If you have a crystal ball and based on your experience and we see what’s going on in the market, Bill, where do you see this seconds space going?
It’s not going to be the same market that was in 2007, 2008, 2009, and 2010. It’s just like any business, there’s opportunity everywhere. If you really want to make money, it’s out there. A guy like me buying a pool of twenty second liens, it’s really about the network. There’s a lot more money and it’s just like every other facet of real estate. Here comes the main money in Wall Street. “How come a guy like Bill McCafferty can make a $1 million off this business in five years? Why can’t we do that?” I think it’s more about the relationship and the network. I still think there’s a lot of resetting with these lines of credits that people aren’t going to be able to afford. I don’t think it’s going to be the 80/20s. I think there’s still going to be a lot of that. I just had a line of credit on my primary term out. I went from $150 a month to $450 a month. Not a big deal for me, but $300 a month for somebody is a big deal.
One avenue I never went after, usually I position myself around all these funds as what you guys do. What do all these banks have still? I have a bank right down here in Coatesville and I know they’ve got to have tons of second liens. They were giving them out and then I just know the economy around here. In a place like that, they’ll bury them in the vault and be scared to death to do anything with them. When is the time right for them to move them?
We do a lot of research using Distressed Pro and tracking stuff there. I pulled up second lien investors and it was a pretty large list of people still providing second liens and second mortgages out to people. Another thing that’s been very big, especially in California and other areas where they had a lot of appreciation, there’s a lot of hard money lenders or mezzanine lenders coming in on seconds, providing seconds for the rehabs and things like that. When the market changes, which I think we all know is going to change at some point, those are going to still be left out on the lend. It’s not the same market as it was 2007, 2008, 2009 where for every five first liens, there was a first rating at least, 80/20 happened at least 20% to 25% of the time. There are those niches out there that I really believe. I don’t buy seconds unless they’re behind my first. There is that opportunity out there that people have to dive into. Then you still have the same strategy, same thing that you’ve been going through. Instead of buying from the major players or buying from the hedge funds out there, I think the bank play is so much more viable and I don’t see that many people going after that avenue. Even though when I talk to bank managers, they’re sweating on the seconds stuff sitting on their books.
One of the funds I know that just took down a pool, it took them a while and they were very active buyers. It’s just regulations are tighter, people are scared to do stuff, people know what happened over the last five years, and people are getting scrutinized. They’re dissecting the hedge fund. They’re not just, “You’ve got money?” They’re looking into your past, your history, they’re pulling a hundred-page reports on you. It’s staying patient and just knowing it’s real and positioning yourself. That’s what this whole thing had become and is about. It’s amazing what social media and the internet has allowed to do just like the world in this business alone. The art of my business is I don’t want to talk to the homeowners on the phone. Early on, that’s what you want to do. They’re going to call and we’re going to talk, but I’m going to shift it right to email and let them play my game. I just found out homeowners rather read an email at the end of the day than talk to me at 3:00 harassing them at work. It’s a whole different ballgame with that. Early on, we would call people’s work, we’d be a little more aggressive with door knocks. My whole system now is I don’t really send anybody to the property, I don’t harass them, I reach out a little bit, but I truly let the legal. When they’re ready to make a decision, it’s time for them to come out.
I bet you’re using one of the social media stuff today too to see what people are doing online. I know we do. We find a lot of information on the borrowers, if they’re living on the same property or if they had a kid or divorced or job loss. Has that helped you with your due diligence on a lot of your borrowers? Have you used Facebook and some of the social media stuff to research your borrowers?
All day long. I use TransUnion. I get the TLO reports, which basically you can pull a comprehensive report, but the asset reports for $2.00 is great. I always say this wherever I’m at with people and they just look at me and I’m like, “I can pull a 90-page report on you in two seconds. Don’t piss me off.” I’m only joking. I would never abuse my privilege and my business stuff, but absolutely, I pull that up and from there, I like email and I definitely look through social media. I’m not going to attack you on there but I’m real nosey. Even anybody in the business that emails me or sends me a message through LinkedIn or anything, I’m swooping on them real fast. I’m not pulling a report but I’m swooping just to see the connection, where they come from and who they are. Just on social media you can tell what type of money people have and what they’re up to.
I love how you left your job, you left what you’re doing, you got your wife to basically leave her job. What’s Bill McCafferty, the individual, doing? Are you spending time with your kids coaching football and other things like that? What are you doing when you’re not working?
I live my life. I do exactly what I want to do. I’m all about the cashflow. The cashflow creates what I want and it’s about financial freedom. It’s about security to me and it’s always been about security. I could do a whole presentation on life insurance, both term and whole, and cash value and the leverage of that. Why I’m building that up is to put back into the note business someday. It’s all coming back into the note business. A guy like me, I love the flexibility of being at home. I do what I want. I have to get my stuff done. I actually beat myself up during the week sometimes and make myself sit at my desk.
I love sports. I have a fourteen and twelve-year old. My son is in his ninth year of football right now. He just went into high school. He has a game today that I want to go over to. One of my crazy true passions is I’m a live music junkie. I see a lot of live music. I actually just saw my 169th Fish Show two weeks ago in Colorado. My wife likes them, it’s our little getaway. We have other friends I’ve been seeing for 24 years. It’s a little bit of everything. As a business guy, it’s amazing thing to watch four individuals create a business like they did and where it’s at 33 years later. As an older guy, I appreciate travelling, a band like Fish gets me around the country. When we are in Colorado, we are right in Denver, we’re able to go up in the mountains. That’s my true passion. I’m very blessed to be able to see the same band for 24 years. That’s what I like to do. I like to have a good time, but I’m a responsible guy, I know when to buckle down and when not to buckle down.
This business is so powerful. My system is Dropbox and Excel all day long, folders, Dropbox and Excel. I can access any document that I’ve ever touched in fifteen seconds. It’s all about efficiency to live that financial freedom lifestyle. As much as I don’t want to sit at my desk, when I do I call laser focus daily activity. I know exactly what I need to do for four hours. I put the phone off to the side and I just get it done. This business is my life. I could just manage it at Adam’s game today, wherever I’m at. This morning I went and I took a walk and then I gave you a call. It’s not like I wasn’t working but I need to let my mind relax, I’m digesting some emails. One thing I’ve learned to do real well is not answer emails right away, sometimes the emotion is rolling. That’s who I am. I’m a pretty simple guy. I just want good security. My wife and I have our master blueprint and game plan down on where we’re going and what we’re doing. I have a fourteen and twelve-year old and when they’re done, I have a business that I can run from anywhere, so a lot of good things going on.
How can people get a hold of you if they want to talk to you about managing portfolio, bringing you on to their team to help create win-wins? What’s the best way for people to get a hold of you?
I want to thank you for joining us on this episode here. I know you’ve got a busy day and you run around with your kids and having fun, but also making things happen. Thanks for being a part of the show today.
I really appreciate it and always good talking to you.
Matt Kelly says #verified, #billislegit, #crazybutnotcrazy, #likesfishtoomuch.
Matt is an awesome guy. There’s a perfect example, the reason I have a relationship with Matt. Matt is definitely a friend but he’s also a mentor of mine. It wasn’t like I went out and said, “Matt, will you be my mentor?” I went into a business and created a lot of business for his business. All of a sudden, the relationship was there and the credibility was there. I wasn’t trying to prove it or flaunt it, it was just there and it just happened and it was cool. You meet people in the business, it’s neat to see what they’re doing. Matt’s out in California. One of his hobbies is he’s a surfer. We joke around with each other like that, but it’s cool. This is what this business allows you to do, live your lifestyle. It’s so cool to see the different people that are in it and interactions.
You go have a good day. Thanks for being a part of the show, Bill.
Be safe. Thank you.
As always, make sure to leave a message and give us a review. If you like more information on note investing, you can always text the word NOTES to the phone number 72-000. For our back catalogue of episodes, you can check us out on the podcast as well or also check out the live video versions at our website, WeCloseNotes.com. Hopefully you go out and make something happen. Be like Bill. Plan your financial independence, put something in place, and then work that plan as you can go. Trust me, it’s a whole lot better to have fun and live life on your own terms than to help support somebody else who’s not going to support your dreams. That’s all I’ve got for you guys today. Go out, make something happen. We’ll see you all at the top.
About Bill McCafferty
Bill found the inspiration, as an Asset Manager for other Note Investors, to help Homeowners across the nation. He assists Homeowners through a process to help them stay in their house and afford payments that fit their budget. Through this effort he has allowed many residents across the United States to keep their home. Bill is consistently looking to expand his relationships with Note Buyers and Note Sellers from all around the country.
Bill’s true skill is in building & managing Portfolios of Performing & Non-Performing Assets. He’s always looking to grow and expand his Network. He really enjoys assisting other Note Investors in the business, in whatever way possible.
- Northwestern Mutual
- Silver Bay Capital
- Distressed Pro
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- Bill’s LinkedIn account