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The 3 F’s – Flipping Assets
I’m going to wrap up the third part in our three-part series about the three F’s of note investing. We’ve talked about finding the assets. We’ve talked about the funding on the assets. We’re going to talk about the exit strategies of the three F’s. It’s the flipping side of notes. Some people talk about the flipping or the flow, those different things. I like to consider them all together. It’s an exit strategy. You’re buying the paper as some sort of fashion and then looking to flip it, whether it’s through one of ten different exit strategies that are available out there. This is all about the different exit strategies that are involved with note investing. It’s a third F in the three F’s of note investing. We’ve talked about finding, funding, and now it’s all about flipping.
Let’s dive into the content that we’re going to discuss with you. We’re going through and breaking down each exit strategy for those that are reading. I will tell you before I dive into this, one of the biggest mistakes I made early on as a note investor, as a real estate entrepreneur is when I got into note investing over a decade ago. One of the biggest mistakes I made for the first two years was trying to foreclose everything, trying to come into the note space from my fix and flip background and my traditional real estate aspect of things, “I want to control the real estate.” You do control the real estate by owning the notes. I was so gung-ho on trying to foreclose on anything that I missed out on a lot of profits that I could have had by modifying or working out some fashion with the borrower. I encourage you, if you’re a real estate investor, you’re thinking about getting notes, you have to come with an open mind. Every deal has its own country Western song. Every deal has its own set of specific things that happen based on the foreclosure time frames, based on what’s going on with the borrower, what’s happened with them.
What’s going on in their mindset? You have to keep that in mind when you’re looking at buying distressed debt. You always buy something and you’d want to try to keep at least two or three of your exit strategies open and options. Vacant assets can have very limited exit strategies. When you’re buying a nonperforming note and it’s vacant, your goal then is to try to get a deed in lieu if you can or have to foreclose. It’s not a modification or any of the strategies where you keep the borrower in the property. You’re going to end up foreclosing and then trying to sell it as an REO. Hopefully, it doesn’t need a lot of work. For every asset that we’ve ever bought that was vacant, 80% of them needed some major rehab. It’s very rarely you’re going to buy a vacant asset and be able to list on the market immediately. That has happened a few times. I’m very blessed to do that quite a bit, especially down in Florida and some other areas. For the most part, you’re going to have to do some work. That’s one of the biggest mistakes I made early on. I could’ve tried to keep the borrowers in the houses because if I get a re-performing, that’s the biggest profit. We start looking at ROIs, time value of money and the velocity of capital as well too.
I got a lot of stuff that we’re going to be diving into. In the three F’s of notes, the flipping includes all different strategies on it, but it’s all about your exit strategies. How are you going to make money out? Maybe you bought something. I bought a non-performing note. How do I make money with it? That’s what most people think. There’s a quick rundown of ten different exit strategies that you can dive into. One is wholesaling the note. Two is reinstating the loan. Three is modifying the loan. Four is offering a loan assumption to the borrower. Five is a short sale. Six is a deed in lieu, Cash for Keys. Seven is a cash pay off. Eight is foreclosure. Nine is to resell the loan. Ten is to sell the re-performing loan. That’s the ten strategies. One of the things we will not be discussing is the Hardest Hit Funds. Hardest Hit Funds are extremely difficult to get. A lot of states are no longer offering that. You should not be buying a nonperforming note in one of the nineteen states that are offering Hardest Hit Funds. One of them did expect to get that as your major exit strategy. That is a big no. That’s how you’re going to end up losing money when it comes down to everything.
Let’s talk about what you do with these things. I want you to close on the deal and we’ll go from there. First thing, wholesaling notes. A lot of real estate investors get into wholesaling notes right off the bat. It’s one of the first things to get wholesaling real estate. You can do the same thing in a note business. You can do wholesaling pools, portfolios of loans. You can wholesale individual assets. You can charge a flat fee. You can charge a percentage. A flat fee could be $500, $1,000 or $5,000. The percentage could be 2%, 3%, 5%. It depends on what you’ve got the asset under a sale for and literally what the deal can hold. If you are buying below 60% in the market now, a one-off higher-valued asset, higher than $75,000, you’re going to have a harder time. You can’t go above 65% when you figure in what you’re getting it under contract for and then what your wholesaling fee is. The better thing is to have it at 50% or less. You get a little bit of room in there and make it to 55%. Also, keep in mind, you’ve got to do some due diligence.
The best wholesalers are the ones that know the deal. They’re the ones that are working through the asset. They know the value of the asset. They know what kind of condition it is. They know the numbers. You have plenty of wholesalers that throw spaghetti against the wall trying to get stuff to stick. That’s not a good wholesaler. It doesn’t make sense. Our buddy started here. He came across a mobile home park in South Carolina on a tape. He spent some driving a couple of hours up to take a look at it. He liked it. He got it under contract for $85,000. He knew it was well over worth $100,000, $150,000. He wholesaled it to another mobile home investor and made a $15,000 wholesale fee. He never took control of the property. The original contract was in his company’s name. He did a one-page wholesaling agreement. He shared due diligence with the buyer. He made the buyer who bought the note from him ultimately sign a nondisclosure agreement. The guy wouldn’t go around him. They should encourage wholesalers breaking deals on a regular basis. They should be happy that wholesalers are making some money because that way they’re making money and continue to bring them deals. I’m glad to work with wholesalers that control the asset.
What you don’t want to have happened is something that has happened on one of the Facebook groups I’m a part of. Somebody has got an asset under contract and they came across somebody on Facebook trying to wholesale that asset off to somebody else. I’m like, “This guy is a joker broker.” You do not want to be a joker broker. What is a joker broker? They get a list in and they send it to somebody. They’re blasting out to anybody trying to get somebody to buy. They may get a list in. They try to send off your list as well and try to do the work between. One way to identify when you are dealing with joker brokers is when he comes back and when you asked what the price of an asset is, they say, “It’s $45,000 plus 3%.” That’s normal. They’re charging a 3% fee on top of it.
When you start seeing $48,000 plus 3%, if they’re not dealing directly with the seller and you’re in a daisy chain, maybe it was $30,000 plus 3%, then $33,000 plus 3%, $36,000 plus 3%, $39,000 plus 3%. The more people in between you and the true seller, the more pain in the ass it is. I always tell people, “Wholesaling is a great way to get started,” but if you’re a successful wholesaler, you can probably transition your potential buyers or buying your stuff into funding partners. It’s like, “I’ve provided some great deals for you in the past and stuff like this. I’d like for you to fund this deal and either partner with me on the deal or give me a flat loan.” That’s one of the things I tell people. If you’re wholesaling, you are leaving a lot of money on the table for people. You don’t want to do that. You’re leaving a lot of money on the table that you could be taking down than letting somebody else get it.
Reinstate The Loan
Number two exit strategy on the three F’s of note investment when it comes to flipping is to reinstate the loan. What’s beautiful is your servicing company, when you buy a note and they start redoing the borrower outreach, this is the first thing they’re going to ask, “Can you start paying the existing loan? Can you reinstate?” You start doing that. That’s the thing that’s important to keep in mind too. The reinstatement is not that difficult. Most borrowers do know that the bank that is lending the loan usually wants the full amount back to payments. They’re like, “I don’t have six months. I don’t have a year. I don’t have three months,” a lot of times for back payments. Keep in mind with that, “It’s all right. Let’s figure out, let’s get you started. Let’s start paying the existing payment. We’ll figure out if you can start paying the existing payment. Don’t worry about the twelve months you’re behind or six months you’re behind. We’ll put it on the back end. We’ll defer these back payments. You put in the amount of loan.”
This strategy of start paying on time usually works better when the rent is higher, when the rent rate of the property is a lot higher than what the existing mortgage payment is because you’re talking to the borrowers like, “If you’re going to move out, you’re going to go pay $2,000 a month or $1,500 a month. Your mortgage payment means $800 a month. Let’s keep you in the house.” The thing that you want to always ask though is you try to want to get some skin in the game from the borrower, not the full twelve months. You want to work to try to have them bring a couple of months of back payments, $2,000, $3,000, something. The more you can get as downpayment or some skin in the game from the borrower towards reinstating, the better off it is. The more likely they’re committed to paying on time. My good friend, Jamie Harrington from Hickory, North Carolina, formerly Taylorsville came across this condo note in Charlotte. He bought about $0.50 on the dollar what was owed, about 33% of the value. He reached out to the borrower. The borrower was able to start paying on time again and has been able to bring $5,000 to the table and sign on.
His total back due was a lot more than the $5,000. She was willing to let him get started with something. He was willing to bring to the table wanting to stay in the house. We find a lot of times the borrowers want to stay. They want to try to work it out if they can, but it depends on their mentality. The more you let somebody stay without paying, they’re going to go in default. I can guarantee you that they’re eventually going to go in default without having some skin in the game towards that. If they can’t afford to start making an existing payment, if they can’t afford that stuff, you get to look to some sort of fashion of either modifying the loan or start with a Trial Payment Plan, a TPP as we call it in the industry.
Modify The Loan
A Trial Payment Plan is a great thing to work on. When you modify the loan, I never reduced the principal right out of the gate. You can do a lot of things in modifying and reducing the interest rate, principal, forgive past due payments, loan deferment plan. You can do a variety of things in adjusting the face amount of the loan to make it more affordable for somebody, but you’ll never modify to begin with. You always start off with a Trial Payment Plan, “Mr. and Mrs. Borrower, let’s get you doing this before I do this. Let’s get you paying and back on the right track before I modify the loan.” I’ve dropped interest rates. I’ve forgiven thousands of dollars off the face amount of the loan. I’ve forgiven back payments. I do a variety of things. “For every $100 extra above your existing payment, we’ll credit $200 or we’ll drop your payment down. For everything extra you pay, we’ll double the payment towards what’s owed.” What you have to realize is you have a lot of flexibility in being the bank. If you modify the loan and the borrower falls back on their loan mod, then you can’t go and foreclose for the full amount if you’ve forgiven $30,000.
This is why a Trial Payment Plan is so essential. Get them started. It’s not going to change the actual mortgage information. It’s a Trial Payment Plan that allows them to get back on track a lot of times. There are also some state and federal programs out there that will help assist your local borrowers with the thing. We’ve got one borrower who got three months from a local government plan there in Michigan. There’s another one in Ohio where they were able to reach out and help them make their payments and get back on the right track we’re pretty good. I’ve got a picture of a borrower’s house. We bought it relatively cheap. The borrower lived in a house for a long time. They wanted to stay in the house. We were able to do what variety of things. They could bring some money to the table. You start paying their existing payment on time. The funny thing was when I got the loan file in the mail, it wasn’t in a FedEx envelope.
It was in a banker’s box. When I got it, I thought we had like twenty files of it, it turned out to be one file. As I’m flipping through the file folder, I see a hardship letter after a hardship letter, loan docs, W2s, bank statements. This borrower has been doing a loan mod for four years. “I’ve been trying to stay in the house as we got sick, as we raised our kids.” I reached out, I picked up the phone and called them myself. If you’re not familiar with talking to the borrowers, you should have your servicers do this. You should have your servicing company. Your loss mitigation team or your attorneys handle what’s going on with the Trial Payment Plan. That’s one of the big things too. When I reached out to him, the borrower was extremely friendly. He wanted to stay in the house. We’re able to come to an agreement immediately. We wrote it up quickly. I sent it to an attorney, they’ve created the paperwork, send it over to them and she signed off. They’re rocking and rolling and they’re going to have the house paid off relatively soon for the most part, which is good.
The thing you got to keep in mind is you should not be contacting borrowers. If you don’t have a license or not taking any classes, let the experts handle it. All you’re going to do is screw up. You’re going to screw stuff up because if you’re reaching out and then the borrower reaches out to servicers, they’re going to play against each other. It’s what they’d like to do, “So and so said this,” and they get extra phone calls. No, this is not we’re going to do. You want to have your borrowers have one point of contact, whether it’s your servicer or your attorney and going from that point. One thing that a lot of people forget about is that since we’re the bank, we can allow the borrowers if they can’t start making existing payments, we get a lot of them to have somebody come in and assume the loan, take over the loan payments. It’s swapping one borrower out for another. You’ve got a borrower who’s unhappy, can’t make the payments. You’ve got a friend, family member, cousin, somebody down the street who wants to take over the loan. I’m glad and allow them if they’ve got somebody that wants to come and take over the loan I’m totally fine with that.
When we have them fill out the loan documents, see if they can afford that as well, underwrite it. Let them assume the loan, so now I’ve got two parties on the hook for the loan versus one party. That’s a beautiful thing. It often allows for your existing borrower to get out of a bad situation or stay in the house. You have this happen primarily with the elderly. They’re in the house with friends, their kids come in and are taking over the payments. They’re getting sick. We have this sometimes happen with deceased where the children will continue to make the mortgage payment. I don’t have a problem with that. They can keep making the mortgage payment paid off. We’ll be fine. I don’t have a problem with that at all. You have the power to do what you want to do. You’re going to help them out, taking a bad situation and turn it into a good situation.
Let’s say they can’t make payments on time. They can’t make a payment. It doesn’t make any sense. They don’t have anybody to come and take it over, but they’d like to get out of the house. I want to do little things that when you’re doing your due diligence on assets, when you’re googling the address, oftentimes we’ll find that the property was listed at some point. I had a pay-off request come in. I see that the condo down in Delray Beach is listed for sale. They’re trying to do a short sale because when I looked at the value of the property, what they owe me, they’re going to have to do a short sale. We’re literally working through this. You buy the note and become the bank. Maybe the borrowers relisted the property or have listed the home in the past. You usually get a realtor involved.
You being the bank and trying to sell it, determine the short. They’re going to tell you, “I got an offer for $85,000 and maybe $100,000 is owed on the property.” As long as you’re way below with the net is, that’s one of the things that we do. It’s okay if you want me to prove taking a loss on this note. I’m glad to do that, but I got to see the final HUD before I sign off on anything. That’s what I look at. Do you need me to forgive $20,000? He goes $100,000, I’ll forgive it to $80,000. I paid $50,000 for that. I’m still going to make a $30,000 profit. I paid for my expenses and then what the net is on the estimated HUD. The house is sold below the UPB. We’ll see this happening. We ended up having this happened about once, twice a month in a portfolio, which is great because we call it short papering. I’m the fastest short sale negotiation company in America. In short sales, people have been through that anywhere in the country. It could take an average of six to nine months or sometimes longer.
At one point, we had the longest short sale in all of Austin, Texas back over a decade ago. It was listed in the market for over four years, working back and forth with that bank, with an offer coming in, and an offer falling through. The most important things when you buy a note and it’s listed for sale like this in a short sale, you want to reach out immediately to the listing agent and say, “We just bought the note. We’re now the bank. Relax, I can approve this quickly. Can you send me over your best offering? Is the buyer still available to close on this thing?” What you have to make sure if it’s not some real estate investor who’s put a bid out to drag out a deal that’s a good listing, that it’s not the best friend of the borrower because they’ll drag that stuff out. If they don’t have an agent and you think the property could sell, they want to move out, I would go ahead and hire an agent to start listing the property for sale. The house is sold on this below the full payoff or below UPB, but it’s above what you paid for the note.
I like to make sure that you’re hiring the realtor. If it’s the best friend of somebody, I appreciate it, but I’m going to have my agent take care of this. One of the big things, if you’re hiring an agent, they’ll list the property for sale. I tell them whether it’s a short sale or a traditional sale, “Let’s list it at 85% of fair market value.” I’m like, “No, I’ll list it at a full 100%. No, that doesn’t do any good. I want to list it to 85% of the fair market value to make sure we get some traffic through it, to make sure we get some offers on it.” If it’s listed at full value, people are going to make offers. If they got to sit around and wait six to nine months to see if they get approval, they want to move into a house. The fact that I can approve this like that, very quickly, allows for us to be attracted to close in 30 to 45 days of the traditional buyer. That’s a nice thing. Let’s go through some numbers on a short sale deal we did here in Austin, Texas. I came across this property that we’re looking at the foreclosure list and saw that this bank that we bought the note from the past actually was the lender on a shortlisted short sale.
It’s a nice looking house, three-bedroom, two-bathroom, three-bay car garage, corner lot, North Austin. The bank was owed $195,000 plus arrearages and payoffs. They owed over $200,000. The unpaid balance was $195,000. The home as it sits was worth about $150,000. It needed some work. It needs some updating. I’ll let people live in it. It needs some updating. One nice thing as well is if you see it listed a short sale, you can often get interior access to it, whether you’d call your local agent or go out and take a look at the property if you’re an agent. You can walk through and see the condition. That’s what we did. We went out, open the lockbox, walk through it and said, “It needs some work. Here are some numbers on this. I wonder if we can reach back out.” That’s what we did. We reached back out our contact on the Special Assets, Secondary Marketing Department, not Servicing Special Asset manager at the bank and said, “We bought these other assets. I see you’ve got one pending short sale. It has been on the market for a couple of years. Would you be willing to sell that note off to us?”
Sure enough, he went back and made me an offer. I made him an offer. First off, it wasn’t accepted at $60,000. We did make an offer at $75,000 and that stuck. We had that offer. He was willing to give us two weeks to close. We immediately went out to our private investor here locally and said, “I’ve got this great deal. It’s a note we’re buying for $75,000. It’s worth about $150,000. It’s got offers on.” That’s one of the great things too about short sales. When you talked to the short sale agent, oftentimes they can tell you if they’ve got a solid offer in place. Oftentimes, they’ll say have a solid offer if they’re not looking for more bids. This was showing, “Pending third party approval required.” When my agent called the other agent, they’re like, “We’ve got a strong cash offering. We don’t want to add anything to the mix. There’s no guarantee you’d get into it. Do you want to back up off? If it gets off all through, is there a number that I can come back?” They were like, “No, the offer is in the $150,000. I don’t think you’re going to beat that.” I’m like, “Thank you.”
I knew they had an offering of $150,000 by that conversation alone. We bought the note at $75,000. We immediately contacted the agent, said, “We’re in the bank. We approve the short sale after getting the paperwork and the estimated HUD.” We ended up netting after closing costs and things $135,000 on the HUD. We made a nice $60,000 profit roughly 30 days because they closed roughly in about three weeks after we bought the note and the transfer is taking place. It was a nice split of profits for our funding partner on that because we went 50/50. I wish they all happen like that. That’s not always the case. That was a great deal that we were able to find because we knew that one bank was selling assets we’ve already bought from them in other parts of the country and we reached out. The beautiful thing is this deal, even if it didn’t work out, we were able to be added on another list for other deals they had available.
Deed In Lieu And Cash For Keys
Sometimes we’ll use each listed short sale as a warm lead into getting on that bank’s other assets or whatever the list they have available. Short paper in short sale, it makes some good capital. Deed in lieu, Cash for Keys, this is a pretty common thing that happens a good chunk of the time. If you look at what you modify, you probably get somewhere between 25, 30, maybe more to modify or reinstate in some fashion. If you’re going to be better at that, the better you get at it, the more you do due diligence and target assets. What will happen, you think an asset is occupied, but it turns to be vacant. The power is on. The power looks like it’s good. The lights are on, but nobody’s home. Deed in lieu, Cash for Keys is our exit strategy number six. It’s basically the same thing. This is where the borrower gives the home back to the bank.
It’s pretty simple. They literally give you the house back. What you have to be careful of always before you accept a deed in lieu of foreclosure or offering Cash for Keys is making sure if there are not any outstanding liens on the property. There are no seconds, any junior liens that are going to take that first lien back for good and the seconds dropping the first. You got to pay them off. In case, there is a large second lien or other things on it, you may want to do consent to judgment. Cash for Consent is what we call it, where we get the borrower to agree to the judgment. That allows us to speed along with foreclosure, to wipe out those junior liens. If there are no junior liens, no seconds, you can set up the property back, let them walk.
In a contract for deeds, you often do a cancellation of the contract to let them walk. What are things that we have done to help speed up this process? If we’ve got a borrower who may be a little difficult, we’re offering Cash for Keys to incentivize them to walk away, “We’ll give you $5,000. We’ll give you $3,000. We’ll give you a $1,000.” I’ve done Cash for Keys anywhere from $500 to $10,000 to speed up the process because assuming you take back the property, you’re going to be good. I’m not going after from the debt. I’m not going to go after them for the debt. I’m letting them walk, “I’ll 1099 them for that and they can go then follow IRS 928 forms, insolvency form. Don’t worry about that.”
Sometimes I won’t even send them a 1099. At that point, if you’ve taken a deed in lieu, Cash for Keys, it’s an REO. It’s a house that you own. You can do whatever you want with it. Whether you want to sell it, you want to keep it as a rental or owner finance it, you’ve taken the property back. It’s important. One big thing before you accept a deed in lieu or Cash for Keys, you always want to make sure that the borrower leaves it in good clean condition. You don’t want them to trash it out. You don’t leave them junk. They leave junk in there, you’re not going to pay. They only leave it in good swept out conditions. I like to say they walk Scott free. Deed in lieu and Cash for Keys happens 25%, 30% of the time, it all comes down if you can get the borrower on the phone. If you get the borrower on the phone, great. It was the right party contact. See if it’s an option they would consider and then go from there. Otherwise, if they won’t do it, move on to foreclosing if you can’t do. We’re not going to go after a judgment for most of the time or doing late pays and doing credit flaws.
Cash Pay Off
If borrowers are willing to work with us in deed in lieu or Cash for Keys, we’re not going to chase them after for other things. If they want to work with us, we’ll go from there. Our good buddy, Tony Miller, he’s a pilot, he travels all across the country. He bought a condo note. He lives in south Florida. It was in good condition, swept out condition. The borrower lived further off. He was able to negotiate a deed in lieu in less than 30 days. He bought the condo note for $30,000, got the deed in lieu in less than 30 days. He had it sold and listed on the MLS. He sold it for over $100,000. This was down in Fort Lauderdale. It’s a great deal. He paid the HOA a little bit for them to go away. Deed in lieu, Cash for Keys, we were negotiating this on a monthly basis saying “Let’s give you some money to walk. If you’re not going to pay, let’s give you some money to walk,” and go from there. Occasionally, you’ll have borrowers that will bring money to the table and do a cash pay off. What is this? This is where the borrower pays off the loan. It’s pretty simple.
You can do maybe structured payments or they’re making payments on the loan over 90 days, 30 days or partial payments here, getting you paid off or they can do one lump sum. What you want to do though is always have this written out and specifically say, “You’re going to bring $10,000 on the table. You’re going to bring $10,000 on the table here. It’s $30,000 on the table here.” Work with them. I’ve had this happen a few times. Maybe the borrower goes and borrows money from somebody. They get refinanced out. Usually, I would be a hard money lender because hard money lenders will not lend to an owner finance buyer. There are some foreclosure bailout programs. Some of these new non-prime lenders are coming in and willing to do a foreclosure bailout or they can go to their 401(k) and do cash distribution off of the bargains of 401(k) to pay it off.
The lower the balance is, the higher hit rate when it comes to getting paid off. It happened because they’re getting scribed together more. That doesn’t mean you can’t have a nice high-end home gets sold. Leslie Shift, our friend from the Austin Transplant from Southern California, she had this happen in Tennessee. A door knocker went out knocking on the door. The wife of the borrower opened the door and was very surprised to see why a door knocker on behalf of the servicing company was knocking on the door. She was unaware that the house was in foreclosure. The husband came home. Leslie told us that two days, three days later, her attorney there in Tennessee got a phone call from the borrower who wants to know the payoff amount, and lo and behold, he showed up with a check. He cashed out his 401(k) to pay off the loan so they could keep the house. He even asked to try to negotiate down and Leslie says she would’ve negotiated a little bit but didn’t even ask, “If you’re not going to ask, it’s your loss.” You’ll have that happen.
Resell The Note
It’s a great story for us when it does. Sometimes it’s a great story for the borrower because they’re back on their feet now. They own that free and clear house and do what they want to. Let’s say you can’t get the borrower to pick up the phones. They’re a pain in the ass. They’re trouble. They won’t do anything with you. You can resell the note. If you’ve bought the note, that’s not wholesaling. The reason it’s wholesaling is you never close the note. You’re selling the paper that it’s on the contract. With reselling a note, you owned the note. You closed on it. Maybe you held it for a while as a nonperforming. Maybe it’s a performing note that you’ve bought for a while. Maybe it’s scratch and dent semi-performing. The thing about reselling the note is you’ve usually bought it cheap enough that you can turn around and sell it. You’ve added value to the asset by servicing a loan and doing something sort of a workout knowing the borrower is not going to re-perform. This is going to be a foreclosure or knowing that the borrower is a pain in the ass. It’s going to take a little while to foreclose.
The thing about this is you want to make sure that you’ve bought it cheap enough and make sure they’re still leaving some value for somebody to take over your troubled assets, take over your problem child. This happens a lot. You see a lot of funds that are buying like portfolios. They send out massive letters to the borrowers. They’re dated for 30 days. It’s like, “This letter is only good for 30 days. We’re glad to modify it. We’ll get you reinstated. We’ll keep you in the house for 30 days.” After 30 days, this letter’s null and void because what’s happening is you’re trying to get the borrowers to reach out, say, “I want to stay.” We’ll keep them in the house. Those that don’t respond, they’re selling those assets off at 5%, 10% to 15% markup because the borrower is not responding. You bought it cheap enough, but if you can make a 5%, 10%, 15% profit in 90 days, let’s say that 15% times four, it’s a 60% annualized return to your investors. It’s not bad if you’re splitting that or whatever.
That’s the thing that you see that happening. That’s why you see a lot of folks are often trying to move stuff. The thing that you’ve added value by you know what’s going on, you’ve got it serviced, you’ve got the paperwork all cleared. You’ve pulled title, you know the value and which way the exit strategy is going to go. There are investors that wanted to focus on buying REOs, so buy it. They have assets in their backyard knowing that they’re going to foreclose and take the property back. They don’t mind doing that. William, a buddy of ours who bought some notes in different parts of the country, bought the one in Lake City, Florida. He was working through it, trying to get the borrower. He decided, “Is it going to take a little longer foreclose? I’m going to sell it off and make my capital back. It’s not a big profit, but at least I have some profit and let somebody else run with this troubled child.” Number nine, if you want to go ahead and go through with it, it’s fine. It happens a good chunk of the time. I knew the investors usually have this 56% of the time.
Seasoned investors, there are ways of working with some of the previous exit strategies of Cash for Keys, deed in lieu or stuff like that. This still happens a chunk at a time. It’s the last option for the investor. You bought a nonperforming note and the borrower is not working with you. They’ve exhausted their options. You’ve exhausted your servicer. You’ve exhausted your attorney, so just foreclose. The point is if they’re not going to respond, get the foreclosure started. Now a foreclosure can ruin a borrower’s credit for seven years versus two years if they filed bankruptcy. It will ruin their credit for seven years, but they don’t know that. Each state has its own foreclosure time from judicial, is going be a little bit longer versus a non-judicial state. Here in Texas, we do everything faster: fast highways, fast foreclosures in 21 days, fast executions.
In other states like New York, it could take you three years to foreclose. You’ve got to hire an attorney to talk to an attorney. I have a tendency to recommend staying away from those longer foreclosure states unless you’re prepared to wait out the deal. Those longer foreclosure states are New Jersey, New York. If you’re interested in Puerto Rico assets, Puerto Rico has a long, 27-month foreclosure timeframe. You can check out the different foreclosure time frames by going to the Fannie Mae website and searching Fannie Mae foreclosure time frames. You can start your foreclosure process basically after 90 days late. A lot of the assets you’re buying, you’re going to be up more than 90 days late. It starts in on that a month later. See about working out, trying to get the modification. That’s the whole point of trying to get the borrower to raise their hands and reach out to you.
A lot of times they’ve gotten away like, “You’re giving me an instrument. Take them off.” It ends with me. You need to either put up or shut up. You need to pay. If you don’t pay, you don’t stay. The important thing is here is get that started. Don’t wait longer to start it. Start to process, get things rocking along. It may take a little while for servicing to get transferred, 30, 40, 60 days. There may be an error in filing and stuff like that. That can happen and drag stuff out, that is normal. You’re going to have people that have been paying for a while that may drop off because of a difference in the servicer, how they get paid. Maybe they had an ACH for the previous bank or the servicer and now they don’t have one, so you’ve got to reset that stuff up. Keep that in mind everybody that each state is a little bit faster. Each state is a little bit different then you got to know what’s going on. Always hire an attorney to handle this. 21 days to 36 months of paying an attorney may cost you $750 to $1,000 to foreclose here in Texas and $5,000 or more to foreclose definitely in Florida. It’s a lot more than probably $10,000 in New York, New Jersey for sure.
You’re going to have higher foreclosure rates on vacant properties than you would occupied assets. Occupied assets, you have a full strategy to keep them in the house of either, Trial Payment Plans, reinstatement, loan mod, loan assumption, even short sales or Cash for Keys. Vacant properties, they’re pretty much gone like the wind. You better expect to start stuff. You have to go through that. I can say $750 to $5,000 to foreclose in most of the states we’re buying. I like selling the property at the auction. I’m going to take it to foreclosure. I want to try to price the property to sell the foreclosure auction if I can. The thing to keep in mind with that is I listed that at $0.85 of the dollar. What’s our opening bid going to be? You listed it for the full value. If you want to take the property back, you like the house, you wouldn’t take it back for your own. Keep it as a rental. That’s fine. List it for the full pay off as long as it exceeds what the real value of the property is. If you want to try to sell it and be done with it, incentivize people to bid on it.
Let’s say 80%, 85%, get your 85% as long as well below what you paid, what you’re into it for. Be happy because then you get a check versus than having to go out. Clean up the property, change the locks, do any redemption rights, be done with it. I don’t like buying first liens in Alabama and Minnesota for the most part because they do have a longer redemption, where the borrower has a year to come back and pay me off before I can sell the property off. Other states don’t have that. Once it’s going to foreclosure, it’s gone. You have to be careful with redemption rights. You may want to reach out to the borrower. If you know you’re going to foreclose, maybe there’s a junior lien, you’ve got to foreclose that up, go and have the borrower if you can pay to release redemption rights. If not, you’re going to have to hold on that property for a while. If you’ve got a year redemption period, we can’t do a lot of heavier rehab to the property because if they do come back, you’re not going to get reimbursed for that.
One of the things you can do is turn it in. If it’s in decent property, turn it into a short-term rental, Airbnb it for a while. Keep that in mind in those states. If it’s a contract for deed, you’ve done a cancellation or do it to go to foreclosure, depending on the state. The contract for deed, it’s an eviction for the most part versus the foreclosure. You’ve got a foreclosure and go through that. The average timeframe across the United States is six to nine months for the most part so keep that mind. Some states are shorter like Georgia, North Carolina and Missouri to begin with. You’ve got some of the longer ones, like Illinois. That can take a while to foreclose up there.
I’m not a fan of buying in Cook County. Don’t ask me. Be careful. I like to say get everything started within 30 days. If you get everything like servicing and transferring, give the borrower 30 days and if they won’t respond, if they won’t reach out to you, then move on. One of the things that I like to do, we teach this in our different workshops, is for us to send out our own hello letter. You don’t wait three weeks or a month for your servicer to send out the hello letter. I’d like to send it out a week after we fund. It does direct the borrower not to call us. It directs the borrower to call our servicing company, to call our asset manager, to call our attorney. Contact them directly so that they can avoid the foreclosure. Keep them in the house if they want, but if they won’t deal with us, if they won’t pick up the phone and call us, we’re going to move on.
Resell The Performing Note
Number ten is resell the performing note. We talked about reselling the nonperforming note. With re-performing notes, somebody reached out to me saying, “Scott, I’m trying to sell a re-performing note.” I’m like, “It was non-performing, to begin with. How many months do you have it performing?” He said, “Fifteen months.” I’m like, “Great.” A lot of banks, investors, even funds out there are looking for performing notes that have six months of seizing. What do I mean by seizing? That means basically they’ve collected on-time payments for six to twelve months and it’s should be through a third-party servicer. If you’re servicing your own notes, you probably going to end up holding onto them. If you’re collecting checks or money orders and you don’t have a third-party handling on that for you, you have to expect to hold on to that. I don’t trust that paper as performing.
You always want to have to go through a third-party servicer. The beautiful thing is most servicers, if they’ve got three on-time payments, they’ll move it from the nonperforming portfolio to a performing portfolio. It’s a lot cheaper for you. You’re not paying that $75 to $95 a month. You’re paying $25, $30 a month, which can save a lot of money and go that route. How do you resell the note? A lot of re-performing notes, performing notes are selling somewhere between the twelve to fifteen yield, 12% to 15% ROI based on the cashflow. I need to look at if it’s a re-performing loan at 4%. The seller is trying to sell his re-performing note and you want 12%. That means you only pay in 33% of the UPB based on things. That’s probably not going to fly. You have to look at what’s going on with the asset. You’re probably not going to foreclose. They paid twelve months of on-time payments. It puts some skin in the game. It doesn’t mean they’re not going to have a hiccup later on. They will. A lot of borrowers do.
The point is that you’re probably going to hold on to that note for cashflow. I’ve seen this. I’ve sold assets this way. We sold re-performing notes at 80% to 85% of the unpaid balance. The interest rate is usually a little bit higher than like four or five especially with a contract for deeds. They’re usually at 9.9%. You can sell that off at twelve to fifteen. You can sell it at 80%, 85% for performing notes or use your own funds, which a lot of people are using their own money. They’re using their own self-directed IRA, whether with a Quest Trust. If it’s performing and you’ve got a third-party servicer, it’s collecting payments and handling that. It’s hands-off note investing for the most part. The whole goal, the whole game plan in buying nonperforming is to get your borrowers to get to performing and then you have the option of reselling off. If you bought it, you can sell that payment stream fully. You can sell a partial.
A lot of people like to buy partials or you can stay involved. Sell off a part of the balance and stay involved. If somebody is looking, we got $50,000, they want to make $500 on their return. While the note is $75,000 and is bringing in $800 a month, I’ll take your $50,000 and pay $500. I’ll arbitrage and keep that $300 difference between the $800 and $500. I’ll retain that difference in case something happens. I’ve got some cushion to come back and foreclose at the borrower or go from there. The big buyer of nonperforming notes is FNAC USA, First National Acceptance Corporation. They’re out of Lansing, Michigan. They have a satellite office here in Austin, Texas. Fred Foot is the principal over there. Daniel Malcolm, Jay Daniels, and Andy Lemons work over there. We’ve had them on Note CAMP and our virtual workshops before. They do a great job. They’re one of the biggest buyers. What’s great is they have a portal, FNACUSA.com, where you literally get online, type in all the information as a performing note.
You can do this for owner finance. They are a big buyer of owner finance notes, performing or re-performing. They’ll look at stuff with seizing on that stuff. Go on there and put a bid in. They’ll come back with either a full purchase price of the note or even a partial. It’s sometimes both, sometimes either or. Check out First National Acceptance Corporation, it’s FNACUSA.com. There are a lot of hedge funds looking for performing notes as well. A lot of hedge funds have raised capital at very cheap prices. I know several funds have gone out and created mutual funds without paying 1% in many markets and stuff to investors. They’re taking that money at cheap interest rates and they’re glad to pay, buy something that’s yielding an 8% return because they’re making 800% return on their money. What’s not to love about that? The cheaper you have, the better it’s off. That’s a strategy we’ve talked about before on one of our Note Night in America webinar. We’ve also done an episode here on the Note Closers Show as well too.
If you see some performing notes that are paying 12% to 15%, you’ve got people you’ve talked to want to make 4% to 6%, 4% to 8% of their money. Why not use their cheap money to purchase a performing note and arbitrage that difference in for you? I can remember my friend and mentor early on, Jaime Kayla, used to love doing this. It’s like free money. He’d take in one person’s money that they want. They’re able to give them that for 6% or 8% return. You’re making that difference between their money and a 15% or 14% that’s yielding, they’re making a good return on the money. You’re doing a good thing. It’s a win-win-win across the board. It’s a win for you. You’re making some money. It’s a win for the person that wants to make a return on the money where it’s making zero or one or less in their certificate disappointment, they want to make 4% to 5%. It’s also a win for the seller who’s selling that note off at 12% or 15%. That’s a great thing to do.
One strategy that pops up, a lot of people always ask me about this, “What about bankruptcy loans? Is that a good thing or a bad thing?” I know most traditional real estate investors, bankruptcy is not a good thing because “I can’t take the property back.” They got to deal with bankruptcy. In the note business, it’s a good thing for us because the fact is if it’s going to be either a Chapter 13 or Chapter 7 on residential. Chapter 13 is going to be a payment stream. When a borrower files bankruptcy, you’ve got a PACER.gov. You can download the whole bankruptcy report, the bankruptcy filing. It’s like eight, nine pages of great information. It tells you what the borrower owes. It tells you what they think the value is. It tells you what else they have. It tells you what they have in for income. If it’s the BK Chapter 13, the bankruptcy courts are going to try to give them a five-year plan to get back on track, so that turns into loan mod.
Bankruptcy Chapter 7 is liquidation. You would take the property back at that point. You can still negotiate a deed in lieu. You still negotiate if the borrower was filing bankruptcy for other reasons. Maybe it’s for medical bills or credit cards. You can always have the mortgage removed from the bankruptcy filing and negotiate a loan mod that way. You should not fear bankruptcy Chapter 7 or Chapter 13. You’re going to hire an attorney to file a claim for you. I love bankruptcy loans especially Chapter 13. The biggest thing is that you have an attorney to talk to now. It will either be a payment plan or any of the asset back.
Most bankruptcy either becomes either a loan modification, the borrower doesn’t fall through in the payment plan of the Chapter 13 or you can always foreclose. That’s a good thing. Jack Croupy out in New York has been running a large bankruptcy fund for over the last couple of years. He made $150 million fund and focused on bankruptcy Chapter 13s. They chased because they like the payment streams. They liked the cashflows coming in off that stuff. You got to be careful. Oftentimes, funds that have BK 13s are going to sell that loan off higher or closer to a re-performing note rate because it is a bankruptcy Chapter 13, so be careful that you’re not overpaying. When you pay an $80,000, $85,000 for a new BK Chapter 13, there’s no guarantee it’s going perform.
There are lots of information. This is not meant to be a complete education obviously on all the different exit strategies in notes investing. I highly encourage you if you’re interested in getting more information, go to www.NoteBlueprint.com. It’s our online training course. It got a lot of great stuff in there. Deep dive in there. We have Joel Markovitz from California. He’s on the loan source, he’s on the exit strategies. He’s on the different ways to make money out there in the note business. I highly encourage you to check that out at www.NoteBlueprint.com. You’ll get some great stuff out there. You can always connect with us on LinkedIn, Facebook, Instagram, Google Plus even still Twitter by looking for either one, Scott Carson, YouTube in We Close Notes or our Vimeo account, by looking for our WeCloseNotes.com channel out there.
We’ve got a lot of stuff that we covered obviously in the exit strategies. We have a question, “Do you know anybody that has bought up after the seminar and what their experiences have been?” I don’t know what you mean by that. A lot of our students that are buying assets on a regular basis. They’re buying for their own portfolio. They’re doing some great stuff. It all depends on what they’re focused on. Some people aren’t focused 100% on buying distressed debt fulltime. They do it as a hobby. I need a little bit more clarification in that question from you. We got a lot of people are buying assets and make it some stuff happen. One of the biggest questions we get is, “How do you focus on one exit strategy?” That’s the thing you have to be careful of. If you try to focus on one exit strategy, like, “I’m just going to take foreclosure,” that’s one of the big mistakes that you can make. The biggest mistake that you’ll make is trying to focus on fixing flips or you just want to focus on buying these for rentals or you just want to buy on the performing side. I like performing assets.
This is why when we buy nonperforming notes, we’re always double checking to see what’s going on. Is the borrower home? Are they working? Is the power on? What’s going on? Is the house being taken care of? Is there looking like somebody who’s living in? We’re peaking in windows. We wouldn’t necessarily recommend walking around the property if you think somebody’s home. You might get shot doing that. The thing that you got to realize too is you got to be a little flexible. Some of the assets that I bought that I thought that we can turn into performing notes or re-performing turned into foreclosures. Others I thought were going to be foreclosures, turned into re-performing notes. You have to be ready to rock and roll quite a bit and be able to be flexible when things change because things are going to change. That’s a given fact that things are going to change with your assets.
I’ll give you an example, we’ve got several borrowers that got their loan completely up to date because when you got their tax returns, it was a sizable lump sum. It’s like put it towards a mortgage payment and got back up when we were working through the foreclosure process. We’ve stopped that. You have people that get sick or they get laid off. Life doesn’t stop happening because your mortgage is in default. You have to keep in mind too is that you have natural disasters and things like that. Some of the things that have worked out well for us is having an insurance on properties, especially on the loans that when we did buy the asset and we walked in and it’s covered in black mold, we’re sitting okay. It’s the fact that when we came in and were able to repair things if the borrower trashed the property on their way out.
Be a little flexible on where you want to go with the assets. Every asset is a country Western song. By this time, I should be better than George Strait or Hank Williams Jr. with all the country Western song best hits I’ve had with the different types of deals that we’ve done over the last couple of years. Everybody, there are multiple strategies. The more you know about the strategies, the better prepared you’re going to be. When you’re making bids, when you’re looking at the due diligence, if the power is turned off and the property is vacant, it’s probably not going to reinstate. You’re going to lose those chunk of performance-based exit strategies. When I’m doing my due diligence, I say, “What’s it going to look like? I’m going to run the numbers if I’m going to reinstate provided it’s occupied.” If it’s vacant, I almost always kill the deal because I like stuff that’s occupied unless it’s here in Texas somewhere or in Florida, God’s waiting room. What it’s going to look like if I have to foreclose or do a deed in lieu. I usually will chuck up what I would pay in foreclosure costs is the money I would have used to pay for deed in lieu, Cash for Keys.
If I can get the asset down six months faster than foreclosing, it’s a win-win for me. What’s my exit strategy if I take the property back? It would more sense for me to sell it as an REO, keep it as a rental, owner finance it. Oftentimes, most of the time, it’s going to be better for me to sell that asset off, get back my equity of the deal, and then go back and double down. There’s nothing wrong with owner financing, but you’re going to end up tying your equity up for another twelve or eighteen months that you can’t tap into. There’s nothing wrong with rentals except I don’t want to create another job, and especially if you’re buying in multiple states. That can be tricky in trying to do rehab or a rental from across the country. That’s what I’ve got. Hopefully, this is valuable for you. Check out our website, www.WeCloseNotes.com for more information. Thank you for reading. Thank you for sharing this as well. Go on over to iTunes, if you don’t mind, and leave us a review. We’d appreciate that as well. Otherwise, go out and make something happen. We’ll see you at the top.
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