Fixing and flipping properties may be very different from note investing, but you can always do both without making major mistakes. In this episode, Scott Carson breaks down the seven biggest mistakes that fix and flippers make when jumping into the defaulted note game as they transition from fix and flipping properties. Fixing and flipping should not be your primary strategies in the note space because time is too valuable to waste greatly on these things. Modifications and doing loan modifications for a payment plan should be the top two strategies. As Scott breaks down these mistakes, he also shares some ideas on how to avoid them with education being a priority.
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The 7 Biggest Mistakes Fix & Flippers Make As Note Investors
Our topic is something that I’ve probably covered in our 480 plus episodes, but I thought I would share and bring it back up and do a throwback episode. I’ve been on the phone talking with a lot of people getting into the note business. They’re coming from buy and holding, landlords, fix and flipping and wholesalers. On this episode, I want to talk about the seven biggest mistakes I see fix and flippers getting into as far as trouble when they get into the note business because it’s a whole different ball game. A lot of fix and flippers want to evaluate deals the same way as they’ve done before. Let’s face it, note investing is different than fix and flipping. It’s different than wholesale. It’s different than being a landlord for a variety of reasons. I thought I would share this because I’ve answered these same questions or had these same discussions probably ten to twenty times.
What it tells me is a lot of people are like, “I’ve had a hard time finding deals. I’m excited. I see this note business. I want to jump into it.” I’ve answered some variation of this question from fix and flippers, wholesalers, realtors or investing or trying to invest, do some things like that and people with general knowledge. They’ve watched Flip This House or attended a couple of other things out there. It’s not necessarily a note convention or taking a class from somebody. They’ve taken their weekend thing and they think they know it all because traditional investing teaches you a couple of different things. You’re basing your whole exit strategy on the fact that you actually own the property. Either buying the property at a foreclosure auction, picking up on a subject to deal or having a deed to you in a variety of way or just buying it and fix and flipping it. That’s the big first mistake.
One of the first big mistakes that I see people making is the whole overbidding. They’re overpaying for assets. They’re jacking the price up because of one simple formula gone wrong. We had our friend Chris Naugle talking about if he’s in a fix and flip situation, he’s taking the ARV, the After-Repair Value times 70% minus expenses and holding costs. The after-repair value does not exist for the most part as a note investor, especially if you’re buying occupied assets. You’re overpaying, you’re not going to go off of after-repair value, you’re going off of as-is value. There’s a big difference between ARV and as-is. The difference, as-is is exactly how the property is in its current condition. Not adding granite countertops, not adding an extra bedroom or bath, it’s what is it worth exactly as it is.
This is an unfortunate thing because how are fix and flippers making money? They are adding value add to the properties. Price lifting as I often like to say. I’ll buy a house that needs to be updated or go and drop money to update it. Add an extra bedroom, baths, extra square footage or tweak some things. I may have now better comps at 4/2 versus 3/1 or 3/2 versus a 3/1, 3/2 versus a 2/1 or 2/2. That’s one of the biggest mistakes that people make. Why is that? Especially if it’s occupied, you’re probably not going to get the property back immediately. It’s going to take some time. That’s another big thing that a lot of fix and flippers get wrong. Fix and flipping should not be your primary astray being in the note space.
Longer Foreclosure Timeframe
If it’s a vacant property, it’s okay but you still have to make your bid off of the as-is value, not the ARV value. If it’s vacant maybe you can get a deed in lieu but if it’s in a state that has a longer foreclosure process and you can’t track down the borrower, you have to look at the foreclosure time frame. This brings me into my second thing. Foreclosure timeframe is you’re all going to be getting out in 90 days. No, it’s probably not going to happen. That’s also why you have to deduct your costs down on the number one thing and overbidding. Not going off of ARV times 70 months costs. That’s overbidding most of the time, especially in a longer foreclosure state.
Trying To Foreclose Then Fix And Flip
You want to be lower because you’re going to have more holding costs before close. Also, what happens if the borrower reinstates. If they’ve got a low-interest rate and they reinstate or start paying on time, what does that monthly P&I payment look as far as ROI to you, especially if you’re overpaying? Number one and number two are associated. Longer timeframes are number two and number one is overbidding. ARV minus repairs are something you need to remove from your vocabulary. I know all these fix and flippers are like, “I can pick this up and it’s going to fix and flip it.” I’m like, “No, there’s somebody living in it.” You may end up reinstating and that takes us to number three. This is one of the biggest mistakes I made early on is the fact is trying to foreclose anything. Foreclosure should not be your primary strategy. That’s actually the worst strategy you can have, besides turning something in a rental.
If you look at the ROIs and what we calculate, that’s not the saying you will end up with rental or end up with some stuff that you may want to turn around. That’s fine. You just have to make sure you buy them on the right side. You’re buying it at a premium price, it doesn’t make sense on a good ROI, especially if you got a foreclosure then fix it up and then try to put a tenant and give them a lower ROI compared to getting it reinstated and hold it for cashflow. That’s the thing you have to reinstate. Reinstatement and starting to pay on time should be your number one priority. That’s a mistake I made early on. I tried to foreclose them. I came from the fix and flip side like, “No, I’m not going to modify. I’m going to foreclose.”
Attorney costs, foreclosure costs, servicing costs can eat up a big chunk of your profit if you’re not buying right, especially if you’re buying it at a 70% of ARV minus repairs. You’ve got foreclosure costs and you’ve got holding costs. That’s the biggest thing. That’s the number three rule. You have to change your mindset. You’re a lien lord, not a property lord. You’re not coming in to take these properties over REO. If you’re in the note space, you should be a note investor. You’re becoming the bank, so focus on that aspect when it comes to everything. One is overbidding, two is longer timeframe than 90 days turn your money aspect of things.
Calculating Hard Money Numbers
I meant to touch base on this on the number two thing, fix and flippers often look at 90-day projects. They will take the property down. We’ll get it fixed up, rehabbed and sold it back on the market, get it listed on the MLS and get it sold. That’s not the case. Rarely do we have deals in the note business that are going to be 90 days or less. Usually, you plan for twelve to eighteen months. Be careful. That takes me to number four. Your finance costs, your money costs on note investing. Many people calculate hard money numbers. What is hard money? That’s a loan where it’s based on the value of the property and they’re going to lend you somewhere around 60% to 65% of ARV at 12% to 15% in a couple of points.
That money works if you’ve got a fix and flip, which is quick. That number does not work if you’ve got a twelve month or greater deal. It can take you a while to foreclose and a while to evict, get it fixed up and then sold. Those numbers will not work because if in a year and you’re paying basically somewhere between 15% and 18% on payments, that’s going to eat up. Not including the fact that you’re going to have foreclosure costs and other miscellaneous costs along the way. Your hard money lenders, this does not work. A lot of times hard money lenders aren’t going to lend on a note deal anyway. They want to be in a first lien position. What’s funny is I don’t understand the fact that they don’t understand funding note deals because they’re creating paper. They’re creating notes out there for everybody.
Hard money lenders just don’t get it. I’m not saying some of them don’t get it and some will change up things behind debt. I get that, especially if you’re buying stuff at 50% of as-is value or less and the numbers make sense or they get reinstated. Some lenders will do that. They’re few and far between. They usually like to have a personal relationship and some sort of history with them. You’re not going to see the interior a lot of times. Fix and flippers often have the hardest time with this. I get it. You come from a fix and flip side. You’ve bought some crap where you’ve had a hole in the sheetrock. You’ve had toilets you got ripped out. There were some science projects sitting on the toilet bowl, some alien growing in there. We’ve all been there. What I’m trying to get at is, as a note investor, you should probably stick to occupied assets. Why is that? First and foremost, if you’re going to go after vacant assets, you might be able to use a size thirteen or fourteen boot hammer to get into the property.
Those that are vacant will often need more repairs. That’s not always the likelihood that you’re going to get into a vacant property. They do need work. The flipside, the 180-degree angle side of this, if it’s an occupied asset, you can learn a lot about the asset and the borrower by simply doing a couple of things. One, having a realtor drive by and take some photos. Calling the utility department so you have utilities on. Looking at the payment history. What kind of car is the borrower driving? If you’re looking at the collateral file, you’ll be able to see what they do as a job. Facebook sleuthing them is often a good thing. You’re going to learn a lot about the borrower. They have kids. Is the neighborhood nicer? Those are some important things to look at when you’re looking at your occupied asset. If somebody’s decent and they’re living in the house and the power’s on and water’s on. The sewage is more important than the water being on, what kind of conclusion can we come to? They’re probably taking care of the property.
They may not be like you or I would take care of the property and there still may be some mess in the property. They may have some wear and tear, but if somebody is living in the property. They are decent individuals and they’re mowing their yard and they’re taking care of their stuff. They’ve got kids in a decent neighborhood. For the most part, the interior may just need some lipstick. They may need paint and carpet. This is one of the things that I love about buying occupied assets. Most of the time if we can get the borrower on the phone, make a right party contact in the first 30 to 60 days, oftentimes we’ll get that loan reperforming at a substantial ROI to us when you annualize it out. We don’t have to put in a fix and flip costs. We don’t have to go in and handle the foreclosure costs.
We can actually have somebody start paying on time, work out a solution and go from there. The thing I want you guys to think about here is I know a lot of people get in that aspect. They start looking at deals. They start looking at the after-repair value. They start looking like, “I’m going to lose $50,000 if this person stayed in the house.” If you can’t make a good ROI and then reinstating off of what you’re paying for the note and if it’s below a 10% or maybe a 12% ROI on a reinstatement, you’re probably paying too much for the note. The rare exception on that is if it’s already performing. For performing notes, I want my money to be making 12% to 15% if I’m using my own funds on a deal. It’s a pretty common thing there. A lot of people are like, “I’m going to buy this deal. We’re going to foreclose and make $100,000 of a deal.”
What happens? The borrower starts making payments. It’s in a longer foreclosure state and the borrower comes to the table somehow and reinstates the loan or does a loan mod and they have a low interest rate. I’ll give an example. I had a guy that’s over BiggerPockets. I think all he does is sit and read BiggerPockets and comments there. One of his associates contacted me and had a list of performing notes. I’m like, “I’ll look at performing notes.” The guy wants $0.95 on the dollar for performing notes off the UPB. There is a lot of equity. He wants 95% UPB off a weighted scale of like 85 assets. Only three or four over it that is 10% interest rate loans, which that would’ve been okay, but most of them are at 8% or 6% or below 5%. 5.21% was the average coupon when you blended them all together. What does that mean I’m going to make?
5.7%, 5.8% if I bought it that way. That doesn’t make a lot of sense. There is some equity and that takes me into our next thing. If I’m not going to buy an asset then I’m not going to see at least a double-digit return on. If you’ve got low money cost, it’s great. If you get cheap money 4%, 5% and 6% from CDs, certificate of disappointments or people that have money in a bank or a money market fund and you’re getting them three to four times if you’re making that. That’s cheap money costs. That’s a little different story. That’s the story of what banks are doing. They’re getting money in paying low-interest rates and arbitraging that. They’re going to make 6% on a deal when the money only costs them one person. They’re making 600% returns on the money.
For us as real estate investors, I want my money working hard for me. If I’m going to use something in my own funds, I want to be making at least a double-digit ROI. That’s one thing I keep. If I’m going to buy a note and they’re paying, I’m going to take the P&I payment times twelve divide it by what I’m paying for the loan and that’s going to give me a quick number. That’s not exactly what you want to work through your financial calculator because you’ve got a percentage of P&I, that’s Principal and Interest but those are the numbers you want to work at. If I’m going to make less than 7% or 10%, I’m definitely not going to waste my time.
That’s the thing you keep and look at. Making sure that your bid on a performing note is going to make sense cashflow-wise. You cannot be looking at what’s behind what you paid for that note. That takes me to my next biggest thing of my seven is we see people get so excited about equity deals. In the note business, most of the time equity deals don’t make sense. Let me preface this. What do I mean by equity deals? Let’s say the property is worth $150,000 as-is and they only owe $75,000. People are like, “That’s awesome.” A traditional fix and flipper at 70% of ARV, let’s say the ARV is $150,000 even on the value. 70% of that means you’re paying somewhere around $100,000 if it’s in good condition, less than that, if it’s got cost.
If the guy only owes $75,000 on a deal, you’re overpaying for the asset. What happens if he reinstates and you’re paying basically $75,000 and the bank calls the part? I guarantee the seller of the notes is not going to sell that equity deal at something that makes sense. They’re not going to give a huge discount off the unpaid balance. That’s what you see. 90%, 95% of UPB with equity deals. Why do they say this? Oftentimes while you’re going to get paid off to foreclose, you’re going to get off in full. There’s all this equity you can get behind the deal and I chuckle about that. I’m like, “No, I’m not going to pay $0.90, $0.95 on the dollar for equity deals because if it does start paying, I’m going to get left with a single-digit interest rate. When you buy the note and foreclose, you don’t get the equity. Let’s say $150,000 value house, they owe $100,000 and you’re paying $95,000 because you think you can take it over. If they don’t pay, your maximum bid at the foreclosure auction is going to be what you’re owed. That’s the payments plus the UPB, late fees and that’s about it. It’s bid at the foreclosure auction over what you’re owed does not go to you, the bank.
It goes to the borrower. Think about this. If I have a house and it’s worth $150,000 and I only owe $100,000. I sell the house and it sells for $135,000. Does the $35,000 profit if I owe $100,000 go to the bank? No, that would go to me. It’s the same thing in the foreclosure and a lot of realtors, a lot of investors, when it comes from the side or new to the note business, they’re looking at, “It’s only got $60,000 owed and it’s worth $120,000. Let’s go in and buy that note.” I’m like, “No, that’s a very slippery and dangerous slope to be overbidding for the asset, especially if it gets reinstated or if you have to foreclose.” Let’s face it, could you give the borrower some money, Cash for Keys, deed in lieu and take the property back? Yes, you could do that. It doesn’t mean could, it doesn’t mean it would happen. There is a big difference between could and would. That difference in that first letter means a lot of different exit strategies.
That why I’m like, “If it’s equity deals, I’m not going to go off of the extra equity.” I’m not going to get excited. Will I pay a little bit more than $0.50, $0.60 on the dollar of the UPB? Yeah, I’ll pay a little bit more, but if I had to foreclose on the payoff and that’s one thing you have to look at. Hopefully, the payoff is more than the property’s worth when it’s upside down. That’s what I want to focus on is upside down assets where the borrower owes more on the property than what it’s worth because then I can get the bigger discounts. I build in my equity with a lower purchase price on the note. If there’s a ton of high equity, low UPB, the seller or hedge funds are not going to sell them at a cheaper price for the most part because they’re going to get paid in full.
You have to look at a difference between what you’re paying for the note and what your payoff would be if you got paid off in full at the foreclosure auction as your profit market. If that makes sense, great, but don’t go counting your chickens before they’re hatched because you’re likely not going to get that. If it’s a tax foreclosure, your overage is going to be only what you’re owed. If you’re owed more, great. If you only are owed $110,000 is what your total payoff is from the borrower and it sells for $135,000, that’s $25,000 difference isn’t going to go in your pocket, the banker’s pocket. It’s going to go back to the borrower’s pocket or a second lien holder or anybody else. That’s the big thing why equity deals don’t make sense on the note side, for the most part. Steeper prices as far as percentage of investment to value, investment to UPB and then also you’re not going to get the overage. The equity is still the borrowers until you take the property back.
That’s not saying we haven’t paid $5,000, $10,000, $15,000 to do a deed in lieu or consent the judgment to the borrower to be able to control that asset and then take that equity back. It’s a harder process. Your borrowers can be the most sophisticated people out there. Where are they going to value their house? We’re going to go to Zillow and type in their property or they’re going to say, “My friend and the neighbor down the street sold his house for that.” That was pristine, rehabbed and updated. Yours looks like something of a 1970s porn disaster who’s got the heavy shedded carpet. Your white walls are now yellow with the cigarette smoke and it’s still got some weird funky cabinets. There is definitely a weird odor coming from the bathroom. They’re like, “It’s worth $150,000 because that’s what the first down the street sold.”
I’m like, “No, it’s not.” You and I both know that’s not the case, but unfortunately, borrowers are going to fight for equity. If they’ve got some equity, they’re going to fight you. They’re going to drag out the foreclosure. They’re going to drag out the payment plan. They’re going to drag out the timeframes to try and protect. They’re going to try to hire attorneys or call their friends with Esquire in their last name. Avoid them if you can. That’s not saying you won’t find them occasionally. We’ve got our friend Logan who’s working phenomenally. He’s in the first lien position. He’s buying his first lien at a substantial discount, so he’s happy paying $0.70 on the dollar for a first lien that’s only at 25% of the full fair market value.
He’s got a doozy of a deal. He’s going to make a nice chunk of change of at least 25% if he’s able to foreclose or gets paid off one of the two. If the borrower refinances, he can get paid off that amount. That’s the thing to keep in mind. Equity deals don’t make sense for the most part. They’ll often drag your money out longer. There are some rare exceptions. Always talk to a professional about a deal before you make any bids. That takes me to the next thing. Most of the time, fix and flippers are overestimating repairs. I know our good friend Dan Zitofsky likes to talk about having to rehab the property so it lasts longer. “I’m going to put in granite. I’m going to put in tiles so it lasts longer so I don’t have to repair those every year if somebody moves out. I don’t have to repair the carpet.”
This is what you have to look at everybody. If you’re going to end up buying and owning a property, especially if you’re buying a market below where you’re living in, don’t rehab the property up to your standards. Fix the property up to the neighborhood standards. There is a big difference. I’ve seen way too many fix and flippers get into this game. They take a property back. They over rehab the property. I’m like, “You’re doing something in the neighborhood that it makes no sense.” Laminate flooring is all you’ve got to lay down and bare paint from Home Depot. Don’t list the property. Don’t expect to sell a property at 100% of the value. What I always try to do is list the property and expect that I have to take the property back and have to do some work. I’m going to list it at $0.80, $0.85 on the dollar off of what the true value of the property is or where the property’s going. I try to sell the house ever before I end up having it listed. I’ll let people pick out their paint colors. I’ll let them pick out their carpet.
Going After Vacant Assets
I often do a 10% discount if they can close before I have to put it in the appliances, the carpet and other things. Some people will come in and I’m like, “I bought this at $0.40 as-is value. I’m selling it at 85% of as-is value.” I don’t need that extra 15% and extra headaches. They list it and then they lose it to commissions. It doesn’t make sense. Overestimating the repairs is a huge misstep by fix and flippers getting in the note business. Another thing here too, if you’re taking a property back and it’s vacant, you’re going to have to replace something at least one major system. Whether it’s the plumbing, the electrical, maybe the foundation or even the roof or air conditioning as well.
Those are things you’ve got to keep in mind. Try to double-check those. It’s important that you try to keep your costs down low. That’s why I like occupied assets because if a borrower is going to start paying on time, I’ll work with them so I can have a good return. Good cashflow coming off of what I paid so I don’t have incurring or expenses along the way, fixing it up and then trying to sell it. When if you look at the number and the time value of money, the velocity of capital. If I can get a deal done in six months, it’s twice the amount of return than I would if I was making the same return in twelve months. I can flip my money and get my money back and then double down.
Q & A
I always love seeing what kind of questions we’ve got on Facebook. There’s a lot more education on a fix and flip. There’s a lot more glamorous, A&E TV or HGTV about fix and flipping. I get that. “That’s so sexy, Scott Carson. I want to be a fix and flipper. I want to hang out at Lowe’s and Home Depot. I want to get paint on my nose. I want to wear my stylish sports bra while I’m rehabbing a property, not sweating at all.” I want to sling a sledgehammer and sheetrock once or twice. I’m going to tell you something, you don’t want to fix and flip. Trust me. Your time is too valuable. I know too many fix and flippers that are working for less than minimum wage doing rehabs when they could be doing and make a whole lot more. They’re working way too hard. You heard from our friend Chris talking about it. He’s like, “The fix and flipping side, if I can wholesale a deal and make $3,000 now, the time value of money and my ROI is a whole lot better than that. I don’t have a lot of pain in the ass on the back end.” You never want to overpay. That’s where we’re seeing and I think you’ve heard from him, you’ve heard from other experts talking about how fix and flippers’ profits are getting squeezed because of the lack of inventory that makes sense for them.
You have a lot of weekend warriors getting into the game, overpaying, over rehabbing and that screwing up for the people that run a real business. You’ve got to evolve. Fix and flippers come to the note space. You’re evolving, you’re looking for different deals. Don’t make these seven mistakes. We’ve talked about overbidding. ARV times 70% minus costs don’t work. Equity deals don’t make sense. Hard money doesn’t work to finance it. You’re going to raise private capital at rates well below the 15%, 18% you are paying. Longer foreclosure timeframes, foreclosing, fix and flipping should never be your primary strategy. It should be the reperforming side and overestimating repairs. The other one we talked about, you aren’t going to see the interior. There is some rare situation where you might see the interior. If you’re buying an asset, the bank is sending out insurance too and they’ve taken some photos and that’s in the collateral file.
We’ve had good luck with that happening every once in a while. Sometimes you’ll see previous listings, listed short sale. You may be able to go see the interior. That’s always a nice thing. We’ve had Nicole Espinosa on talking about that, The Short Sale Queen and some of those workouts. Sometimes you’ll just see the previous listing, previous rehab. They may be rented the property or previously trying to sell it and they took it off the property. Those are some things that are helpful for you, but you can’t count on those. Those are the seven biggest things that we see on a regular basis of people screwing up in a variety of ways when it comes getting in the note space.
It happens all the time. You don’t want to do that. It’s one of those things that you do not want to do when it comes to evolving. There are a couple of things you want to take into consideration. You’re going to need some education. You’re going to need to spend some time going through the different strategies. There are ten different exit strategies in the note business. It varies. It’s going to change from time to time. I saw somebody posting about there’s no Bitcoin, there’s no MLM, there’s no offering the loan $5 million with a Gmail account. The numbers change. If the market starts to go south, then your numbers are going to have to be even different. You’re going to have to be even cheaper. I think we have to agree that the market has recovered more than it was ten or twelve years.
Pricing a decade ago was $0.25 on the dollar. I used to offer $0.40 max of as-is value in Florida a decade ago. I was paying for the note plus taxes owed at 40% of the as-is value. You saw the increase in where it’s been now. Life is going to change. Everybody likes to jump into the game when it seems like everybody’s making money. When that’s the case, you’ve got to pull your money back out and wait for the market to turn south. What’s going to happen? We already see this. Our friend, Jason Bible has talked about how he’s been the weekend warrior hard money bailout company. Where he’s gone in and bought some debt on some hard money loans that were on a fix and flip where the time just ran out. The fix and flip didn’t take as good. There were weekend warriors who should not have been doing this thing in as well.
You have to realize it’s not the same game. This is the note game, not a fix and flip game. The banks are not in the fix and flip market. They didn’t get this big by fixing and flipping houses. They got this big by being in the note game. It’s cashflow. You are figuring out your numbers. Don’t get me wrong or will you end up fix and flipping some houses? Yes, you will. It’s just going to happen. I wish every deal that we bought nonperforming got reperforming. I wish every performing note that we bought stayed performing. You need to know some of those things, but you also wanted to limit your risk by what you’re buying by buying better-qualified assets. Better-qualified being occupied assets where you can check the payment history. You can call and see if the utilities are on that are decent-looking properties. You don’t want to get in and buy assets that are low, $30,000 or less. Even sometimes $40,000 or less depends on the market.
In Akron, Ohio or Gary, Indiana, you can think about a nice big house for $40,000. That’s not a bad thing if it makes sense as long as you’re not getting shot at. When you compare it to buying in like San Francisco, California, you’re not going to get anything for less than $1 million there. Are you going to go in there and fix it up and turn into a $2 million house? Not necessarily. My friend Tom Beckers, a previous mastermind student, he used the note business to get a list of REOs from banks and asset managers. He got $1 million houses and he’s able to go and put in good money on those and fix those up because the market recovered. It’s lifted. That’s not the case. We’re at a premium as far as the value of assets.
Look at what’s going on in the market and this is where we’re seeing the most amount of softening in the market. It’s the higher value, the $500,000 houses are great. I’d say anywhere from $350,000 or up or greater. Anything below that, $250,000 that’s still staying strong, but it’s the higher valued assets and that’s where a lot of people get into the fix and flip side. If you’re a builder, it’s a little bit different story because if you’re building at $0.50, $0.60 on the dollar compared to what the ARV is, that’s a different story. Our friend Curtis Warden out of Houston does a good job with custom builds. He’s building from the ground up. He’s not coming in and buying something, overpaying for an asset for the most part. He’s buying his value by buying it cheap and he’s building these discounts because he’s got a system in place to build.
That’s a big thing to keep in mind. Make sure you’re looking at a deal and honestly when you have a deal, don’t sit there and just run with it to the hard money lender. Don’t run with it to a bank because the banks are not giving you a loan. You need to be speaking to note investors. You need to be speaking to other people that had been in your shoes before. That’s why networking in your local REIA clubs are so important or networking in Meetup groups where a lot of investors are at is a valuable thing. We’re going to be heading to Dallas for the Propelio Meetup where they’ve got 700, 800 investors that you’re looking to meet. A lot of them are fix and flippers and are wholesalers. We’re going along to network, to visit with people and say, “Here’s an alternative.”
If you can’t find a deal in Dallas. You’re tired of sending out thousands of yellow letters or postcards. Wasting your weekend putting out bandit signs or drawing on the bandit signs to get phone calls or then having the city zoning department stalking you with the notice department, then come on the note side. We’re not doing the direct mail. We’re not doing postcards. We’re not choosing and putting out bandit signs. Our biggest thing is we want to go direct to the source and that would be number eight. Fix and flippers, “We’re going to have to do a lot of marketing. We have to drop 35,000 postcards.” We had our friend Jason Bible, Mr. Texas Real Estate on talking about his marketing budget to find deals. They had billboards and they were dropping $35,000 postcards every month just to find stuff in Harris County.
We don’t do that. We’re reaching out to asset managers. We’re reaching out to bankers to get to not one deal from an end-user but to get one list that comes on a regular basis. One list that will feed us on a monthly, quarterly and annual basis of deals. I’m taking all the debt. I was here in the office working on some stuff and I found another amazing thing that I’m going to share with some of my coaching students about how I found a list and some contact information of some people I’m excited about. Literally, over 400 people and I’m like, “Capital markets, secondary marketing managers.” All I’ve got to do is jump on LinkedIn, track those people down and send a message. The worst case is I can call the bank or the institution and leave a voicemail or leave an email out to people.
Those are valuable things. They’re going to have stuff on a regular basis. They’re going to have stuff every quarter. I’m not having to fight every Tom, Dick and Harry who’s sending out postcards and yellow letters and door-knocking and bandit signs and stuff like that. I don’t have to do this. That’s one big thing. I’d say it’d be number eight mistakes that we see from fix and flippers as they go into a whole lot more. They think it’s the twentieth century. It’s the 21st century in the note space. You don’t have to do that. The whole idea is to work smarter and not harder. That’s what I love about notes.
Once again, a quick little recap on the seven. Don’t overbid. Don’t use 70% of ARV minus repairs. You’ll hear that. Fix and flippers will hear that. That’s not what we do in the note business. Equity deals don’t make sense. Don’t be buying notes and overpaying for notes where there’s a ton of equity after the UPB. The seller’s going to want to close the UPB. If they do, you end up foreclosing and you’re not going to get a big return. You don’t get all that equity. It goes back to the borrower or lien holders. Hard money doesn’t work. Paying 15%, 18% for money doesn’t work. That’s too big of chunk on your note deal, especially if you’ve got a year-long process to foreclose to get the property back, let alone, that’s a big chunk of your profit right off the bat. You’ve got to be smart and work with private money and often get yourself some better deals on that.
It’s a longer timeframe for the note business. If not, I will buy a deal now and fix and flip it and sell it in 90 days. It doesn’t work that way. In 90 days, you’ll barely have servicing transferred and be in the first 60 days of call out. That doesn’t mean you can’t get stuff reperforming in that timeframe. We’ve been pretty lucky that way with some of the things that we do, but you’re not going to own the property in 90 days with a note deal. It’s very rarely you will do that. Some states, Texas, Georgia, North Carolina with our fast foreclosure in Arizona, Utah and Nevada, it’s got some faster foreclosure rules and stuff like that, but faster foreclosure laws lead to increase the price for the note so it doesn’t make sense. I like the states that will take six to nine months to foreclose. I often see the best discounts there.
Foreclosing and fix and flipping should not be your primary strategy. It should be getting it reperforming. Modifications should be your first and number one and number two. You are trying to get it reperforming or do a loan modification for a payment plan. Those should be your top two strategies. Don’t make the same mistake I made the first couple of years or a lot of fix and flippers make coming in and like, “We’re not going to modify. We won’t take the property back.” Do and go see the interior of these assets most of the time. Realize that. It’s why you want to target owner-occupied assets and do some due diligence on the property and the borrower through either loan files, social sleuthing or seeing what’s going on in the call logs and what’s going on with the borrower or that aspect of things.
Another mistake is overestimating repairs is a big no. If you can get the property back, that’s great, congratulations. Make sure you didn’t overpay, but the biggest thing is don’t over the repair. Just get it in and sell it off to somebody else. Don’t try to rehab the property up to your standards. Make it up to the neighborhood standards. You’ll often save a lot of money and a lot less heartache by being smart when it comes to under rehabbing or selling the property partially rehabbed and letting the homeowners come in and get a little bit of a discount. That 10%, 15% discount may have been a wash based on your repairs, costs of your money and then the time on the market. Of course, let’s not forget closing costs and commissions as well too.
The higher the price, the higher the commission. It’s not saying we don’t love realtors. We do love realtors. It’s one big lifeblood of what we’re doing, but be smart. Number eight, a lot less marketing. Don’t overbid. ARV is not in the note space. Equity deals don’t make sense. Hard money is too expensive and it doesn’t work. Longer timeframes. No to foreclosed notes. No interior views. Don’t overestimate repairs and number eight is less marketing. Hopefully, this is valuable for you out there. There are lots of people making mistakes. There are lots of people getting in the note business and they are not taking any education. They’re not understanding that. They’re just trying, “I’m going to buy a note and take the property back.” That’s not the case. That’s a recipe for failure, not a recipe for success.
Take these points to heart. It’s up to you whether you implement them or not. Guys and gals, if you’re looking for more information to learn more about note investing, you can always check out our online education at NoteBlueprint.com. It’s our online home study course. Take advantage of that. It’s great information. Thank you to everybody for all the well-wishes on that and how much they loved that. It’s got a lot of great cases. People are taking advantage of that and using the step-by-step training. It will walk you through and avoid those big hurdles or potholes that other people are making trying to wing it. A loan will save you six months or greater in ramp up because it will tell you exactly what you do or what you don’t do.
We’ve got a whole special servicing side and foreclosures and workout. A whole thing on marketing and a whole thing on the basics as well too for you. Take advantage of that or if you’d like to get on our email list or text messaging lists, pull out your smartphone and pull up the text messages and send me a text message. Send the word Notes to 72000. You’ll be in our database and we’ll alert you as we have new episodes, new videos, new training and new classes coming to a calendar near you. Go out and make something happen. Take this advice to heart. Do something and we’ll see you all at the top.
- Nicole Espinosa – Previous episode
- Propelio Meetup
- Jason Bible – Previous episode