EP 414 – What I Love About Note Investing

NCS 414 | Note Investing


NCS 414 | Note Investing


Most of us here are in the industry because we have come to love real estate or note investing in one way or another. As we continue with this deep relation, it helps to remind ourselves of where the market is at to make sure we don’t fall out of love of it really fast. Just as notes can be jaded, something sudden could happen that might stab us in the back. Keeping these realities in check, Scott shares what he loves about note investing and what we need to keep in mind.

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What I Love About Note Investing

I thought I’d share about some things that I love about the note business. I titled this, What’s Love Got To Do With It? You can love real estate, you can love note investing, but there are some specific things you have to keep in mind when it comes to where the market is at to make sure you don’t fall out of love really fast. Notes can be a jaded, evil jerk sometimes that can stab you on the back if you don’t watch out. You have to realize too that the industry has changed quite a bit over the last several years. If you took a workshop several years ago, there have been quite a few changes to it. It still comes back to the three things. Three things that I love about note investing. One is we see deals that nobody else sees. We’re seeing deals six to twelve months before the REOs, the fix and flippers, all those people fighting each other for scraps. The foreclosure auctions who are trying to buy off the MLS, they never see our deals. We see stuff six to twelve months ahead of time. That’s the first thing that I love.

The second thing I love about the note business is we get better pricing. We’re getting a lot better pricing than what those people are paying out there as well. If you’re paying retail or paying above 85% or greater, you’re overpaying. By all means, go right ahead. I had a great interview on The Titanium Vault podcast, my buddy, RJ Bates. He has seen it happen and he’s seen a lot of people overpay. They’ve overpaid in some cases just to try to do a deal and trying to put some capital work. Those are two things. The third thing is the multiple exit strategies we have. We’ve got a variety of exit strategies especially buying nonperforming notes that you can make money out of; performing, you can get reperforming, you can modify it, you can do a trial payment plan, you can wholesale it, you can buy it and then sell it really fast if you need to make things. You could do a short sale, you can do a loan assumption. There are a whole variety of things that you can make work here.

I’ve got my first workshop and we’re always excited about that. I am seeing some things out there in the world that I want to make sure and share it with you. I love note investing. I love being the Lien Lord. What’s love got to do with it? There are specific things happening in the market that are going to stab you in the back. I have seen people talk about, “You’ve got to make sure you’re buying performing notes at 85% or greater.” I’m like, “Why is that?” If you want to buy and use it for your own funds, great but there are people out there teaching them, “You can’t buy performing funds. Not for me anyway at less than 85%.” We’re working on a portfolio well-below 85% of some performing notes. There are deals out there if you’ll go to work.

That’s one of the biggest things that I dislike. There are a lot of people out there that have popped up as educators who don’t know their elbow from their asshole. They’ve never lived through a downturn. All they’ve ever seen is their asset values go up. If you’re going to really love something, you’ve got to be ready and prepared if the market goes up or goes down. Make sure that you’re leveraged properly. Make sure that you haven’t over-encumbered the property. Make sure you haven’t overfunded the deal and overinvested in the deal. If it does take a turn or it drags on, you’re not going to lose money on things.

I joke about this a little bit and that’s what the whole title is, What’s Love Got To Do With It? It’s a story talking about how she was beaten up by her ex-husband and things like that. You guys can get beat up pretty good at nuts. I’ve been beaten up pretty good at nuts from time to time. I still love this industry, but it drives me batty on some of the stupid things I see out there. There’s a fund out there selling some stuff off at 80% of UPB, nonperforming stuff. I’m like, “Yes, there’s a lot of equity and things like that, but that still doesn’t make sense.” You start running some numbers and it just doesn’t make sense. You’re seeing some funds that are moving assets. You saw their bottom of the barrel stuff. We’re seeing that with condos, “We’ve got a bunch of stuff.” I’m like, “I don’t even want to waste my time with that because the fact is it’s so much nasty stuff.” You’re not going to sell it at a price that makes sense. You’re hoping that is what is happening out there. There are a lot of funds. There are a lot of people trying to sell you stuff that isn’t going to make good. They’re selling a box of chocolate, which is a box of crap.

If you’re reading this, share this. There are things that are happening in this market. I’m getting more phone calls from banks. When I’m going to a networking event in Dallas and commercial brokers who have notes are walking by there and finding some stuff, that should tell you some stuff. What does it tell me? Banks have stuff on their books they are looking to get rid of. I’ve got a deal that we’re working on through in Alabama that we got the paperwork on and we got another stuff on a bit of a greener industry out in California right now on a couple of deals that we’re looking at. The thing you’ve got to realize is if anything, if they’ve never been more important, make sure you stick to your numbers. Make sure you walk through, make sure the deal that you’re bidding on is common sense underwriting. It makes sense.

You have to realize there are some institutions out there that don’t really give a rat’s ass about you. There are some educators out there that don’t care about you. You have to realize that there are people out there that just want your money. They’ll take it and say, “Screw you.” That’s what you have to realize as a note investor. It’s a buyer beware area. Nobody’s going to give you your money back. If you don’t do the work that you need to do, I had somebody who bought a couple of assets, not from me, they bought it from one of our sources. Then they never reached out to the asset manager. They never reached out to the servicing company. They never reached out to the collateral company. Six months go by and they were like, “Where did any of my stuff go?” I was like, “You’re supposed to reach out to these things. These are things we taught you. Call this person. What did you tell? You told literally the lender to send this stuff here and then you didn’t reach out to the person that you’re having it sent it to. Then they send the stuff back and they can’t find it. That is not on anybody. That is on you solely.”

NCS 414 | Note Investing

Note Investing: If you’re going to really love something, you’ve got to be ready and prepared if the market goes up or down.


You have to realize that just because you love the idea of being a note investor, there are some of you that aren’t cut out to be a note investor. There are some people out there that are doing things that I’m like, “What are you doing?” It’s a different world these days. It was a couple of years back because pricing has gone up a little bit. I told a bank, “You’re smoking a lot of crack on some stuff that’s been defaulted for over a year now, two years. He went, “Do you want $0.80 on the dollar?” I said, “No, thank you. I appreciate that but I’ll pass.” Be smart these days. Our buddy, Chris Seveney, posted on one of his groups. It was funny. He saw a joker broker talking about deals and then seeing the people that opt into that or post to that, all these joker brokers that we all know are starting to opt into the same thing. “Send me a list so I can send it all around.” I have to laugh. There are some joker brokers that are like, “If you get it approved, you’re going to get a 10% nonrefundable deposit down and close in two hours.” What kind of smoke are you smoking out there, jackass?

I’m trying to shout out to you. I had a conversation with three people. We were at the booth at the DFW REI Meetup. It was a great meetup, several hundred people were there. A lady comes up to me, “I’m a note investor.” I was like, “What are you doing?” I said, “I’m originating notes.” I’m like, “Tell me what you’re doing?” She said, “I bought a house and I rehabbed it up and I offered a note on it saying ‘Great cash limit.’” I was like, “How much of your own money do you have in the deal?” She was like, “I’ve got quite a bit. I fund the whole thing.” I said, “You’ve got all this profit you’re going to tie up in the notes for another ten years. It’s going to get cash but wouldn’t it make more sense for you to sell it traditionally, take the capital back and go buy two deals? Then would it make more sense to take those two deals and turn into four deals and turn those four deals into sixteen deals or eight deals?” She looked at me blank. People are not running the numbers. They fall in love with an idea of owner financing and I think it’s a great exit strategy if you can’t sell the property traditionally. If you’re over-encumbered or if it’s got some title issues. I’m not bashing owner financing, what I’m bashing are the jackasses out there that aren’t sharing all the information. If you’re an investor, you’re based off of a number.

If you borrowed money from people, you don’t have the flexibility to owner finance a property a lot of times because of the deals that 12% or 8% or 6% but it’s a twelve-month deal or eighteen months or 24-month deal. You owner finance it, you’re screwed because it’s going to drag stuff out. You’re not going to realize, “I’m going to get $800 a month for the next 12 to 24 months. I can sell a partial off.” Who wants a partial? I don’t want to work just to have somebody else take advantage of my deal. Be careful out there on who you’re learning from. Be careful out there on what to listen to what they say because there are always two sides.

I’m the first one to say a lot of people just need to focus on performing notes. A lot of people need to focus on a flat pass. You’re not going to do the work. No offense, you’d probably end up passing return. If you want to be a little more aggressive, fine. You have to realize there are risks involved with that 12 or 24-month deal. There are risks involved with foreclosures. There’s some of that stuff that’s going to happen. You want to make sure you’re still priced right so if the market does drop south, you’re still sitting where you can liquidate that asset, sell that asset off and still be sitting aces high.

I’ve seen three or four people at this event and it really bothered me because I’m like, “You’re going to go do all this work, borrow other people’s money, your family’s money to rehab the property and then turn around and offer owner financing without even offering it for traditional sale?” That makes no sense numbers-wise. I’m like, “Could you sell it all?” “I could sell it. I’d probably get 90% but that’s why I can sell it at 110%.” I’m like, “Go ahead, try it. The numbers still don’t make sense. Learn to run your numbers on your calculator. Learn to look at things.” Even if you took a 5% and sold it at 95% or even $0.90 on the dollar value right now and you’re into it at 60%, that 30% is basically a 50% return. $30,000 profit divided by $60,000 in what you invested in rehab and stuff like that. That’s a 50% return. If you did that in less than a year, great, you go and do it another time. If you tie it up for a while, you’re not going to see $30,000 come back. You’re going to see $800 or $900 with what the monthly payment is. That’s the most frustrating thing that I see out there.

I see people talking about Subject-Tos and taking over a property. I’m like, “This is the worst time for taking over 72 properties.” We make a caveat, unless you’re getting something that’s got a very low-interest rate and a ton of equity, that’s different. If you’re taking over an asset that is full value right now and the market is starting to dip south, you’re the idiot who is going to get stuck on the hook for it. Maybe it’s in somebody else’s name, but you can’t do anything with that for the most part. I talked to somebody like, “I’m doing this deal.” I’m like, “What are you making on?” “Nothing.” “Why are you doing it then?” “I want to provide a service.” “A service that you minimized your value. You gave yourself a negative value, not just zero but negative because you’re doing all this work for free.”

That’s not smart investing. That’s not something you should be bragging about, “I’m going to work for free.” Screw that, we’re investors, entrepreneurs. Maybe you should be called a fake-preneur. Not a douche-preneur but a fake-preneur. I’m a little fired up just because I have talked with so many people that have been brainwashed on some things. I’m like, “Have you run the numbers on that deal?” “No.” I’m like, “Run the numbers. Let’s work through this really fast. See why this doesn’t make sense for you.” Unfortunately, not everybody gets it.

NCS 414 | Note Investing

Note Investing: Be careful on who you’re learning from. Be careful on what to listen to because there are always two sides.


It’s great. I love being a note investor. I love it because there are deals that make sense and there are deals that don’t make sense. Not every deal makes sense. If you’re trying to put a round peg in a square hole because you’re trying to go to your tool belt for something, do yourself a favor and don’t bother reading this blog anymore. Go on to something else because this is focused on direct notes space. I was going to do a podcast where we’ve talked about Sub-Tos and things like that. You have to realize, please do not drink the Kool-Aid. Please run the numbers. Please ask, “What if this happens?” Especially if you’re in a workshop somewhere, don’t be afraid to ask, “What if this happens?” Then you go this rep and then you go that rep. What you will find is oftentimes things won’t always be the same. Sometimes, especially some people out there, won’t like that you’re actually rocking the boat by providing truth. Be careful out there.

I love the note business. I love what we do. I love helping you make things happen. Be smart, don’t be stupid. Use some common sense. Make some bids. Look at the bid you’re making. Make sure they make sense number-wise. Don’t just throw them on the board or throw them against the wall and see what sticks. Be smart in what you’re doing and be focused on things. I think Jason Bible posted something about that huge amount of the United States which is already three months behind their car payments. If you start thinking about that, that’s going to affect mortgage default rights. It’s going to screw some things. A lot of people are way too optimistic about the market. I may be a Debbie Downer but I’m trying to prepare you out there when something does happen, which it will, that you’re okay and ready to go. That’s what I’m trying to do.

I’m not perfect by any means. I’m far from perfect and we have our peaks and valleys like anybody else does. You’ll always know that I’m going to shoot you straight. Be careful out there. Don’t drink the Kool-Aid that everybody’s running around. This is the best thing since sliced bread. Notes can be great if you know how to do it right, but if you don’t do it right, you’re going to get screwed. You don’t want to get screwed at all. I leave you with that. I might just be a Debbie Downer myself here. I want to see success from everybody. I want to see people that are really doing good things and people have worked so hard to be able to put their money to work and help them get above and beyond where they need to be. Go out and make something happen. We’ll see you all at the top.

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