There are many note market opportunities out there that you can take advantage of. All you have to do is learn how to invest well from the right people. Scott Carson talks with Tom Boren from Aspen Funds about the current note market opportunities that they are focused on in the second and first-lien performing note spaces. Tom discusses the hurdles that second lien investors see today and the common mistakes they are making. With managing portfolios, he puts forward the importance of delegating some of your tasks and offers some tips for anyone starting part-time or looking to move full time on notes investing.
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Current Note Market Opportunities with Tom Boren
I’m excited to be here with you. I’ve got Tom Boren to join us from Aspen Funds. I’ve known Tom several years now. Tom is Cali-Texan as I like to say. He is somebody who’s moved from California here to South Austin, joined the reduced property prices and the bigger bang for the buck. You’re getting the fewer crazies, but you live in South Austin where it’s Keep Austin Weird everywhere.
I’m out by Dripping so I’m okay if I was any closer than yes. We have a good mix of both here.
Dripping Springs is booming like crazy. Tom, why don’t you share with people your background and where your journey is as a note investor, a real estate investor in the last few years?
Mine probably starts as many people and a lot of people don’t plan on getting into this. They fall into it from somewhere else. Going way back, I was with corporate, Marriott. It was great until 2007, 2008 hit the hotels hard especially in wine country where I was managing some hotels for them out in California. I decided to leave that and came back down to LA and plan on getting into a nice another big paying hotel job. Unfortunately, everybody else was out at the same time I was. I had to reevaluate that. I always wanted to get into real estate. I started working for a guy down in Redondo Beach and started doing short sale negotiations for him.
I was on the phone with banks and getting that done. We started doing settlements directly for borrowers, which was a cool program. I heard him in the back doing this note buying thing. I’m like, “What is this guy doing?” He’s back here buying notes. He finally led me into that and realized that my strengths were probably better suited to the other side of that rather than negotiating short sales. I started doing that. That’s where I met you on Noteworthy was the first time when you still have your megaphone back then or you had a buzzer or something you were walking around with. It was great. I got into that. On my second week of getting immersed into note buying, I was at Noteworthy for the first time. It was huge and big in Vegas and I was blown away with what was going on. I’ve gotten to that.
Fast forward a couple of years later that was going well and it wasn’t with that company. I decided to go elsewhere. I took my family’s personal capital and moved it into another company called Aspen Funds, which I did because I was selling all the loans I was selling out of the old company into Aspen. I was selling to a guy named Jim Maffuccio, who was one of our principals. I’ve called them up and said, “What are you doing with these loans? I know what I’m selling to you before. What can we do?” He told me about the funds. It was a good fit. I was an investor there. I got a call probably a year after that and said, “We want to start scaling this thing. Would you be interested in coming on board?” I did that and came on first initially completing up some cleanup projects for them and doing that. It’s moved into now I’m the director of all the acquisitions and trade desk. I’d been doing that for a few years with these guys. I was employee number four or five may be up to twenty now. It’s been a journey.
Jim is doing a tremendous job over there. We had some time to sit down at the Quest Expo and pick each other’s brains for a little bit. It’s amazing to see some things and seeing you do a rock star job as well. Let’s talk a little bit about the junior lien, the second lien market. I know you are buying stuff, but you are a little bit different type of buyer than your traditional note investor out there who are getting the game. You’ve been on both sides of that aspect. We were talking a little about where the market is going for, where you guys are seeing, but it’d be some of the hurdles that second lien investors are seeing out there right now.
There are a few things. One, the market has definitely shifted. There are a lot more people out there, the internet has expanded this along as some of the conferences. It’s brought some new buyers on, which is great because it’s always good to see new people in there. It also creates a little bit of a challenge with pricing. We’ve had a shorter supply over these last couple of years up until quarter one and two. 2018 was a difficult year for second lien buyers. We closed a couple of decent trades, but nothing substantial that allows us to grow. When you have a bunch of new people coming in at the same time is that it affects pricing. We had that issue. Plus, some of the stuff was getting older too. We saw a lot of statute of limitations issues, collateral issues always run rampant in this space. Some of those things come into ahead was made a little bit difficult towards the end of 2018.
What difficulties do second lien investors have with the statute of limitations that you see out there that you’re struggling with or dealing with?
There are a couple of different things. You have first off maturity dates statute of limitation. If you’re past the maturity date on loan and you get to the point where your certain year has passed, these are all real estate specific so you have to know in each state. I can’t speak to each one of those. We’ve come to cases where we’ve found in some of the loans we purchased and large pools are uncollectable due to maturity date statute of limitations, which is something we didn’t need the check on a few years ago. We didn’t see a lot of those older loans that were maturing priority of buying them. I had a few of those and the more usual cases with the statute of limitations where you have to advance the due date, make sure you’re not collecting on a portion of those arrears that are outside of statutes. Each state has its own little fun thing. Washington is a fun one. Be careful about buying there. There are a few different states. New York is always fun. There are some other states that are relaxed on like Florida. Florida has relaxed on their SOL issues with that. There have been some cases that have helped set some precedent that has loosened the bell a little bit for guys like us.
You’re not buying one-offs for the most part. Are you buying usually pretty good-sized pools?
Typically, we still will buy one-offs, but our larger purchases are where we’re scaling and deploying most of our capital. We’ve gotten to a point where we’re bringing a lot of capital into our funds and it’s hard to deploy that on smaller trades. We rely on those larger trades to make sure that we can keep that going.
We won’t get into some of that stuff there, but do you see a lot of your stuff from bigger banks, other sellers or other institutions where you see most of your practice coming in?
Both of those things you’ve mentioned. We do have some direct lines into some large sellers and some bank direct. Also, we’ve seen a lot of larger sellers and going through some of the large advisories, which are mostly brokers. When you get that big, they’re called advisories. They’re sending them out to other people like Deutsche Bank. There are a couple of others that have been putting out some product that won’t sell directly to most people, but they will go up to these advisories. You’ll see a lot of that.
That’s a beautiful thing because it keeps the pricing down for you versus dealing with weekend warriors that are overbidding and overpaying for deals.
It does help although there are some people that are larger in the space too that are also paying some higher than the expected price that has bumped that up. It’s much better than buying one-offs definitely.
Can you share maybe some of those things that you see, not giving away specifics for the most part, what you paid for assets, but what you saw maybe previously in the market to where you’re at?
I can speak in general terms. When you’re buying larger pools, you’re paying across the spectrum, but there are some asset classes that have increased tremendously. For example, California high equity seconds. You have two issues there. One is general pricing because of supply and demand and people’s thought of buying those coastal states. The other thing too is that someone like us, we’re in the business to do workouts, modifications and help keep the borrower in the property. Sometimes it’s hard for us to compete for price-wise against somebody that’s looking to take the property through maybe a foreclosure action if they have large arrears on the back end of the loan that they can collect. That creates some issues there and that’s created some pricing. I’ve seen pricing anywhere between 60% up to upwards of 80% of UPB for nonperforming seconds on some of those.
Note Market Opportunities: It is ideal to have a mentor and be with like-minded people in order to get through with your investments.
Behind performing first?
Yeah, performing first extreme equity, 300%, 400% coverage.
It makes it difficult if you’re trying to get the bar to reinstate, what your primary goal is to try to keep them in the house and reinstate them.
Modifications mostly, it’d be great if they reinstate it. Civilly modifications, but we prefer not to foreclose. We’ve foreclosed on less. We worked about 1,600 loans. We’ve taken back less than twenty properties.
Let’s talk about that because that’s less than 1/10th of 1% roughly out there. Is that because you’re doing a variety of things of either Cash for Keys or trying to come to a true number that makes sense to modify that loan?
All of that so anything that we can do as foreclosure prevention and alternative. We’ll do our best. Some people simply should not be in the property. That’s what we will bring up, deed in lieu or things like that. If it’s a loan we’re not comfortable with proposing on, we will sell it to somebody else that maybe wants to do that. It’s not that we wouldn’t have to foreclose more than twenty of them, but we choose not to take that path.
That’s a good thing because it allows for your capital to be moving. You get yours out of something that may drag on longer, especially in states that have that longer foreclosure timeframe like a homestead in California is judicial foreclosure, for the most part, these days and all the tricky stuff that goes along with that. You guys were also buying first liens too. Do you want to talk a little about what your focus is on the first lien side?
Right now, we’re only buying first that are either performing or re-performing. We’re not buying nonperforming first. As of right now, we do buy re-performing and performing first. We buy based on yield when you’re buying performing loans. Our costs of capital have been brought down enough with some institutional capital we brought on as well that has allowed us to get competitive in that space that we have been buying these first liens. We have an interesting purchase. Two of them, but one was borrowers and lease options for a few years. It had great payment history through that and the seller realized that it’s not valuable to sell that, to recapitalize on that.
They converted them to notes and brought them to us. We were able to buy that even though they only had a few months of the season on the note that no terms are better for the borrower than they were when they were in the lease. They have three solid years of payment history. When we look at that, absolutely. That’s the type of stuff we’ve been moving into with first. We can only buy so many firsts compared to seconds because we do have to hit our hurdle rate for our funds but at the lower yield house, you have to be careful.
Are you buying specifically in Texas or buying in a variety of different states when it comes to the first side?
It’s nationwide, but we see a lot in Texas. We love Texas for a number of reasons. We are careful in states like New York and New Jersey than the other ones.
That’s the thing you’re blending your stuff, your blending results. You’ve taken advantage, performing or re-performing. How many months a season are you looking for on the re-performing side of the business?
It depends. I’ve bought some first payment re-performers, which will do based on good faith or down payments there. As far history, we look at each one as individual files. I don’t have a seasoning requirement for loans we purchase.
It can’t be some of these 0% down, low-interest rate, no payments, common sense underwriting, but not everybody has common sense. You aren’t buying CFDs, let’s make that a clear thing. You will maybe look at somebody if they’ve got payment history and converted to note versus a CFD. That’s good stuff out there. You’ve been around for so long, what are some of the common mistakes that you’ve seen investors made? You’ve started and where you’re at now, helping acquisitions to Aspen Funds. We were talking about investors. What are some of the things that you think are the most important things? If somebody is relatively new to the business, what are some things that they should probably avoid and some things they need to focus on?
I can say some things I’ve seen that have worked well for new investors. It’s pop up of these buyer groups. You’ll have these people that are usually geographically-centered. There are some good ones out of Colorado with some people I know. A few of these smaller investors that say they have $100,000 or $50,000. They’ll join these exclusive groups that they have and they’ll use that power to leverage themselves into larger trades, which has been good. It’s a little tougher for guys like us because it does create some pricing variances than we’ve seen in the past. If you’re able to get through and partner with other like-minded people that have been doing it, you have to have a mentor when you’re working on this stuff.
I always laugh. People are trying to go for the jugular. They go in and they want to call the big banks and get loans. It doesn’t work like that. It comes through relationships that you would be shocked in the craziest places that you find. I used to belong to a BNI, Business Network International group, to meet other professionals in Orange County when I was there. I’d never thought it would have come down to a large note purchase. I end up closing our FDIC note deal, $5 million purchase price on that thing through a contact that made through that. Don’t discount anything, any connections you make. The conferences are extremely key. Your conferences are awesome and there are some other ones out on the industry as well that go in there and you’re going to see who the players are pretty quickly and stay in the top of mind.
That’s a big thing is never burn a bridge if you can help it and meet anybody, show up, it’s half a thing.
It is seeing guys like Eric Hyde and seeing what he’s done over the last couple of years. I remember when I first met him and he was asking me the questions. I first met him in Dallas at a conference. It’s incredible seeing what a guy like that has done over the last couple of years.
Note Market Opportunities: When you hire somebody good, it doesn’t mean you do not have to follow up on them.
We’re very proud. He’s one of our mastermind students. We were joking before, one of our Carson Knights. Go ahead and do some big things. We are proud of what Eric has done, how he’s leveraged relationships and doing that. He started off partnering with another mastermind member of ours to fund a couple of deals, to learn the ropes before he dove in. He’s bought close to fifteen, twenty deals and some stuff like that. He does it all part-time because he’s still a full-time sergeant in a police department out there.
That’s exactly the type of thing there. It is partnering with someone that’s already doing it. The proof’s in the pudding right there.
Where do you see the market going? If you had a crystal ball, based on what you see, it could be on the firsts, seconds or what you hear. Where do you see the market going maybe in the next few months?
I’m traditionally a realist or slight pessimist to those people that are optimists. I will say for the first time, I’m extremely optimistic about the deal flow that we see. These quarters one and two have been incredible. I don’t see it slowing down too much. The banks seem to be loosening their belts as well some larger funds that have been holding these loans for years. I have been doing that as well. Some of the players are shifting a little bit on who’s selling the loans it seems. It looks good. I’m extremely optimistic.
It was a little slower the previous year as banks are trying to figure things out. We’ve seen that more. The phones have been ringing and emails have been coming in from banks. Relationships I’ve made online asking, “Are you selling? Are you moving?” Our students are having more luck with regional banks and other sellers reaching back to them with specific terms, trades and pools that nobody else has seen yet because they’re looking to either move the stuff off their books. They’ve gotten to a point where now they build enough reserves at the banking level, they can move some of the stuff. More deal flow means good things for all of us. The biggest thing is you’ve got to have your systems in place. Would you agree with that, Tom?
You need to have your internal systems, but you also need to make sure that you have strong partners out there, vendor partners as well. We’ve gone through a lot of them. We’ve also had ones that we’ve had the entire time through this journey of ours. It’s lifesaving when you’re going through this and you do have to have the processes down and all your systems set up in order to deal with this. I see the one where people sometimes have the best opportunity to improve is their follow-up systems. A lot of times I’ll have some amazing conversations with some people that have met their family or me through LinkedIn or whatnot. They’re great. There’s a handful of them that were good about follow up, but most of them are not. It always surprises me. I’ll do maybe a small loan sale or something. We don’t sell a lot, but I do sell. I’ll think about something like, “That would’ve been a great fit for so and so and realize that they didn’t follow up with me.
That was a huge nugget that we talk about on a regular basis. If you’re making bids on stuff and they get turned out, a lot of the deals that we get is because we simply followed up 30 and 60 days later with people. Did it fall through or following up on a regular basis. The power of dropping an email, “What’s going on?” Staying in front of people’s minds so that you’re on their mind when something like that pops up. One of the things I like asking people, your Aspen has grown quite a bit over the last couple of years, but as you guys have grown, you’ve added staff. Do you think an individual investor by him or herself can grow if they’re not bringing on assistance or things like that? Do they hit a glass ceiling because they get to run around doing some other things, but you have people doing a lot of the workouts or the follow-up stuff? What do you think about that?
I don’t know what the threshold would be. For me personally, if I were to go out and do this on my own, I couldn’t imagine managing more than a portfolio of maybe 30 to 40 loans and doing it well as long as they’re in different stages of working it. You have to rely on veterans. One of the most difficult things is you have to make sure you’re managing your attorneys too. You hiring somebody good doesn’t mean you don’t have to follow up with them. If you’re not following up with them, someone else is. That means that they’re the squeaky wheel. It’s things like that and that takes time. I’m in the middle of six re-performing trades. Anywhere from one loan up to about 25 on each one of these pools. I’m full all day long doing follow up on those six purchases, which we need to do a ton more than that to keep the business going. If I didn’t have the staff to support me in that, there was no way.
That’s why I tell people, you can’t be a control freak in this business and be successful. You can’t do it all yourself. You’ve got to rely on people. You also got to empower staff and other people that help you out with following up on a regular basis. You paid the retainer doesn’t mean they’re retaining business. There are some great attorneys out there like Shawn Mills, for example, in Florida. He is an incredible attorney. There are some very good ones. If anything else, any other vendors the same as servicing, you have to make sure when you’re in servicing transfer, it’s so easy to fall out of servicing transfer because you’ve missed a document. All of a sudden you passed your transfer date, RESPA letters and now out of compliance you have to start over. I’ve been guilty of that myself for not following up. Now we have systems in place to handle that, but that can be a rocky road. It’s difficult if one person is doing that.
You can’t be a one-man-band. Listen to what Tom is saying here because it’s funny, I’ve gotten a rash of phone calls from people like, “I’m trying to do this and do that.” I’m like, “Why are you doing a $7.50, $10 an hour job when you should hire somebody to do that for you or empower a vendor to do that for you?”
I even know someone that has a call center outside of the country that they use for contacting borrowers and convert them over. That’s pretty advantageous, but it works for them. You find out what works for you and try a couple of different things.
Without giving away any names, that’s off overseas, the Philippines, with good English, cheap hourly and knocking some things out there. That’s a great idea.
It’s Mexico.
That’s even better. One of the things too, you’ve got a young one too. How old?
I have two. I have Landon who turned four and Asher, who turned one. That was part of the reason for the move to Austin. I love growing up in California. It was great. I loved it, but it’s not a place I want to raise my kids. It was time to get them out of here before school started. It’s great. I love my family. It’s the reason I do what I do.
You’re still able to work remotely. What part again?
It’s in Kansas City, Missouri. We have another brick and mortar in Edgewood, Maryland where all of our workout staff are. We have some workout staff in Kansas as well. Our main workout operation is out of Edgewood run by a guy named Steve G. His industry is servicing debt collection tight. We were very lucky to have him. He’s going on this for a long time. I work from Austin here. We have a principal who works out of Colorado, but everybody else is in brick and mortar between those two.
That’s what I try to have there talking to people across the country, communicating and working going together. You’re going to the acquisition side and also trading side of things like that. How have you seen that change over the last couple of years as far as trading assets and selling assets? What are some of the biggest changes you’ve seen over the last several years as you guys have grown?
Note Market Opportunities: Bring new loans so you can always be working some fresh product and something that can back up your system.
There’s a lot that’s happened. There have been some positive and negative things. Starting with the positive, people have gotten used to trading in a certain manner now. You’ve gotten rid of some of the BS issues you have to deal with before, some of the collateral type issues, expectations of what people are going to have to accept, things like that. I’ve seen a lot of that go out of the space in the last couple of years. On the other side, you’re also paying for the higher quality transaction and higher quality loans as well. The pricing has also gone up as well. It’s been good. We still have some of the old players in the space, but there are a lot of newer guys too that operate under a little bit of a different philosophy as well on how to conduct themselves in a trade. It’s helped the industry.
What are some tips that you would give people that are trading and things that they should be doing or should not be doing?
One, always do what you say you’re going to do. That’s a given, but make sure you don’t burn any relationships. You never know how you’re going to cross paths again in the future. There are also some things you need to check. Make sure you have collateral cleaned up. I think collateral, a lot of people will try to push some dirty collateral, but at the end of the day, that’s not the norm. I wouldn’t say anymore, even in seconds, not performed. The large banks seemed to understand that certain things need to be done. Make sure that you take a firm stance on collateral because it’s not helping your trade, it’s helping everybody else in our space set that bar higher for all of us on this collateral. I’ve seen that happen in the last couple of years. Make sure that you’re always prospecting for new deals. You’d be shocked by where they come from.
By collateral, you mean you have a good clean assignment chain on launches with every assignment, making sure all the loan documents are in a file folder.
There are certain states that are worse than others like New York, for example. If you’re going to foreclose in New York, you need to have parallel chains. They need to be original launches, things like that. You can get away with it maybe sometimes, but a lot of attorneys only pick those bottles anymore until you have that. Going into it, if you don’t have clean collateral, do you want to take that to an attorney, spend a bunch of money to come back and find out that you’re about to whiff based on missing one document that probably could have been handled initially. It’s some of that stuff, slowing it down and make sure you have all your ducks in a row before you pull the trigger.
With you buying seconds, non-performance stuff, what’s been your ratios? There’s been talk about if you’re a second lien investor, you’re probably going to have half that you get some resolution. The other half you’ve got to put in a file folder. Is that still the case or you’ve seen a difference in your workouts?
I’d say that’s pretty accurate. What we see right now, which is great, is that because of the economy doing so well, people are refined. We’ve been getting a lot of payoffs on notes that I probably should have sold before, but we didn’t. We’ve held onto them and put them on the shelf and some of those guys are refined now. We see some of that. Those are going up a little more. I’d say foreclosures, in general, are down. Deed in lieu and things like that are mostly down anything where the borrower is going to lose their property. I’d say it is on a downward trend at least through our funnel at the moment.
We’ve seen an increase in stuff that we started foreclosing on, started eviction stuff and people coming to the table, whether they’re looking at their tax returns or giving back to the job market or freeing up some cashflow. We had three or four get modified. That worked out well and a couple of cash, deed in lieu, keys picked up by realtors and list the property in the market after cleanups and stuff. It’d be interesting to see what happens here next with the election and some other things going on too.
You’d have to keep the velocity up. If you buy by 100 loans, 25% of those are going to be difficult. It doesn’t mean that you’re not going to make money on them, but instead of working through the whole bucket, try to turn to that money quickly so you can bring in another pool of loans or even if it’s four or five, it doesn’t matter what the number is, you scale it accordingly. Bring new loans so you can always be working some fresh product and getting that low hanging fruit because you’re always going to have ones that are going to back up the system. Don’t focus on some of that stuff. You shelve it if you’re having issues with it, move on to something that you can work on.
That’s good advice because a lot of people get so bogged down. “I’ve got to go this one route with this loan.” It’s not always the case. Sometimes you’ve got some stuff in. There are going to be troubled borrowers, it’s going to go the longer foreclosure route, sell the loan, make a quick 5% or 10%, go that route and get the velocity of your capital moving quite a bit. I was talking with Jim, we were talking about some of the different ways to raise capital. Do you have any advice you want to give people when it comes to raising capital and not for fun but for their own individual deals out there? Anybody you’ve experienced?
Transparency and if you’re starting out where we’ve gone through the motions of starting out with one font and moving to several. It’s changed our game a little bit, but if you’re starting out new, you better make sure that you do well in that first time with that investor capital. There are a lot of people out there that are willing to partner as long as they can sell that. Going back to those processes and systems you were talking about, make sure you have some stuff in place. I don’t see an issue of people raising capital at the moment. It’s harder when you’re new, but when you get to a certain tipping point, the problem is going to be fine with the product, not the capital. If you speak to anybody that’s a little bit larger, they always have more capital than they have products to deal with.
The network is one of the big things to help out and follow. You don’t have to put a fund together, but you build a little bit of experience to get rock and rolling. It’s always easier when you had that experience enrolling your favorite to take big things to a bigger level.
For ours, Jim started an initial fund. It was our friends and family fund. It was Sam and our other principal, Bob Fraser, who’s with us. They’re a great team, but he was an original investor with Jim. That’s how we wanted to proof up this concept to see if it works. That now started a company later that turned into Aspen and allowed them to partner together. They can go out and raise from their spheres independently and bring the money together. You get to a point where kicking a snowball down the hill. He’s got to make sure you take care of everybody on the way down and be super transparent with everything you can. It’s okay to give a little more when you’re starting out to some of your investors because they’re taking a risk, but you can dial that back. You don’t always have to do that. Make sure it’s fair.
That’s the biggest thing to them. We’ve seen a lot of money hitting the market here in the last couple of years too. People are looking for returns. It helps reduce money costs because it is flooded with a lot of capital if they’re looking for meals. What’s one thing you’ve done in Austin that you feel has made you a Texan in the time that you’ve been here? Your brother was living here beforehand. It’s not that you were brand new to Austin in this area for the most part. Maybe it’s drinking Lone Star beer. Have you bought a pair of boots? Anything that’s stuck out for you?
There have been so many things. You’ve got to have the boots. I’m not going to pull the boots out, but I definitely have the boots. I haven’t started saying y’all yet, so I’m still saying you guys, which I know is terrible grammar in English. I need to move to y’all soon but getting outdoors. Honestly, the secret that Texas and living a happy life with a family out here is, and I swear to come from California, the restaurants here have playgrounds for the kids, good restaurants, actual legitimate restaurants, not McDonald’s, not fast food. I’m like, “Why does nobody do this in California?” What is wrong with them?
Because of all the lawsuits, the actual costs of the property and the land, but in all seriousness, everything about Texas is part of our family. It’s who we are. My dad put down a deposit to move into our neighborhoods. My brother lives half-a-mile away. My dad can be three quarters a mile away in the same development here. We’re moving the Borens out to Texas, but I promise we’re not those Californians coming out to take over Texas. We’re good ones.
Texas, we have a great marketer. You were talking about beer buying since owner finding stuff in Houston. What are some of the things that you love about buying loans that are in Texas here? Let’s throw some high points out there for those that are across the country.
The leverage that you have because of the foreclosure process. If someone doesn’t come to the table, you have a very real threat of taking their property if you need to. That threat alone is enough to get traction for Texas owners. I wish there were more of them. There are not a ton of nonperforming seconds in Texas that float around out there.
Note Market Opportunities: If someone doesn’t come to the table, you have a real threat of taking their property if you need to.
That’s because of a couple of things. One, the previous lending laws, we should be extremely difficult on home equity loans or you used to have to sell the house up until ’95 when they finally changed the laws here because of the state constitution as far as lending laws were written by realtors back in the day. That’s what they want. They didn’t want you to be able to cash out. If you wanted to have equity, you had to hire a realtor to sell it for you. It is smart. It’s not the greatest thing, but we’ve been very blessed here. We haven’t had as much depreciation. We didn’t go through it as big a downturn a decade ago. Markets are going back strong although we’re starting to see a softening in the market in Dallas, Houston. I worked with a couple of agents who make a lot of short sales. They’ve seen an increase in short sales in the Dallas, Houston markets. We’re not talking like intro housing. We’re talking the greater than $350, $400. Some of the SPEC Builders houses are now trying to sell that stuff because the market has been flooded. It’s the days of marketer dragging stuff out. I’ve got one friend, Nicole, who’s got about 100 short-sale files between Houston and Dallas. Is that a foreshadowing of what we’re going to see? Maybe it’s the first sign of things to come.
I hate to say it, but a little correction in the housing market wouldn’t be a terrible thing for us.
The market is overpriced. We’ve seen a comeback. People that are buying at retail. You’re the ones that are going to get hurt the most because if you see a 5% or 10% correction that can be going from in the black, in the red relatively quickly for a lot of people.
That’s what I’m careful about buying. We will buy California and part of a pool, but we don’t go out seeking California like people do or any of the coastal states. We might buy a ton of stuff right in the middle of the US because they already have a ton of coastal states. If and when that time does come, it’s going to soften that blow.
Is that where you’re seeing the footprint of a lot of the pools you’re buying? Isn’t that Midwest, middle part of the country area?
Yes. A lot there and northeast, unfortunately. Still, it’s a lot in the Midwest.
Are you talking up in New England area, New York and other areas of the northeastern?
Yeah, a ton in Pennsylvania. Part of that is because of some PNC trades. They have a lot there as well. New Jersey, a ton in New York, but people are always trying to shed in New York. I always laugh New York attorneys, they probably sit there, watch and have a running list of all their clients that have been on the same file. They’ll have a file for a couple of years, restart the clock and it’s time for a new buyer to come in.
We laugh about it, but honestly 95% of what we’re saying is true. It makes for a tough time out there definitely. You’ve talked about people coming together and working together, not like a buyer’s club but kind of like that. What’re some other things that you would recommend to people out there, maybe they’re starting part-time or looking to move full-time?
It depends on what their strategy is. There are a lot of people that are bond and non-performers working out on their own. How many people out there buy re-performance of good yields? That’s another good place to start because some of those are undoubtedly going to turn nonperforming. You’re going to get your hard knocks to that. Looking at those individual places, there are also some good things like Paperstac, for example. Brett and his team out there, they’re starting to get some serious stuff loaded on their platform there. I’d say check some of that stuff. We’re going to be putting some stuff on there as well as I know some other larger sellers are going to be putting some things through those types of platforms as well.
In the past, maybe some of those platforms got a bad name because a lot of people are sending out their trash through that. That’s not the case anymore. There’s a good mix. I would certainly check those as well. You don’t have to have a secret note seller to buy a good loan. There are tons of good loans that they’re being sold all the time. You’ve got to be ready to move and be ready to run your due diligence. I buy loans all the time. Those emails you see go out that says, “10% rate on this note in Texas,” I’m a buyer on probably a quarter of those emails that you see. They’re one-off deals and you’d love buying those. We don’t need a secret seller.
It also helps you’ve got some cheaper capitals because you have marketed and raised capital. You’re able to have that cheaper capital that’s important versus trying to get somebody to lend you money at 12%. That’s a harder thing to follow, especially on the performing side. Somebody posted, “I’m going to my meetup group and get 12%.” I’m like, “First of all, take the 12% off your flyer. Talk with people,” have that conversation, follow up with them, “What’s your money performing?” It depends on where that money’s coming from. IRA’s making nothing or CDs that are a certificate of disappointments or it’s an old 401(k) that’s now 101(k). If it’s three or four, if I doubled that 6% to 8%, would you be happy? You saved yourself a third of money cost there. Do you have any horror stories? Everybody always has stories about a deal or a borrower that drag stuff out. Do you have a borrower that was difficult, that went the way of the Dodo bird? Are there any horror stories you want to share?
I don’t work on that side of it. The ones that I hear of are bad if they make it to me. We did have a borrower one time that we purchased one of our loans. She happened to be with the UN. We had started foreclosure on that. She knew the deputy director of the FDIC and went in through our file on their desk. There was a knee jerk reaction that happened from the FDIC with that. It opened up a large audit that came to us and our main servicer. Fortunately, we partnered with great servicers. They will handle that. We had all of our ducks in a row. We’re very conservative, work and operations, so that’s good.
If we weren’t, we’d be in trouble. That borrower was difficult. It made us rethink a little bit, “How do we go through and minimize an issue like that?” You never know. Some of the borrowers are difficult, the statute of limitations issues too. All of a sudden, you’ll have someone come out and they’re holding an acceleration letter. The loan was accelerated years ago. You don’t have that in your file. You never would. There are certain areas where they can go back and request the documents from the original lender that we can’t do that. Our counsel could, but we’re not going to go in and say, “Do you have an acceleration lender and bring that to the table?” That happens also. We’ve had some borrowers with that as well. That’s been difficult.
You have to take the hit and move on. You have to stop and remember, it’s like, “What are we doing on these things? We’re making multiples of returns in the space. At the end of the day, you can’t focus on those. You have to be careful when you’re spending a loan that we bought as partners, the large pool was $174,000 purchase price on a nonperforming second. That’s scary that we bought it because we ran every document we could make sure that thing is good. At the end of the day, take a hit like that would be tough, even though it’s over with the other loans.
The fact that you’re buying in bulk or you’re buying is, “Risk is spread out across the whole portfolio a little bit more versus this one asset there.” We’re all going to have those weird one-off. I’ve been sued in federal court from a tenant in a property that we bought the loan and we even offered to renew his lease and even want to do anything. You have those weird stories. Luckily, they’re weird because they’re unique. When you look at the mass amount, when you say 1,600 loans, you guys have bought. We’ll work through or bought and sold in a variety of things in your portfolio and having less than 28 to foreclose on it. That’s impressive. It also knows when to cut those trouble children loose and move on to somebody else who’s local or ones that deal.
On the other side of that too, I can think of a good success story. It was crazy. Jim Maffuccio, he’s super granular with his due diligence. That’s one of our principals. If he sees something happens with a file, he’ll question it and look at it and see if maybe there’s some opportunity for him to work on it. We had this one stripped the BK, done deal, everything dismissed, all done. Jim was looking at it. He said, “This property value should never be accepted on this.” Long story short, he retained an attorney, which all the attorneys told us this would never happen. He found the right attorney to go back. He had the BK overturned and that had our debt revalidated against that borrower and the property because of the fair market value that was fraudulently entered by the borrower through the BK even though it was already dismissed. I can’t speak too well to perfect details on that, but it’s a crazy thing. That also means too, if you have something sitting on the shelf, make sure you explore all angles because that ended up being a huge profit on that thing. It was all said and done.
The power of brainstorm with other people because sometimes we get so bogged down in our day in, day out stuff. We missed some things and sometimes you need a second set of eyes to look at some stuff and go from there. Where do you see the market going in the next few years?
Note Market Opportunities: If you have something sitting on the shelf, make sure you explore all angles because that might end up being a huge profit.
Every year that we’re coming up to the end at least in seconds because seconds and firsts are different. It’s always going to be first. With seconds, I always think that we’re running out of loans or that we reached the track and honestly, I don’t think so. We’re going to continue to grow. Depending on what happens with the election that’s going to make a difference. Hopefully, everything remains the same. It’s going to keep growing. We’re going to have more and more of this product become available in the marketplace. There’s more capital behind it to go through and purchase it as well, which is going to allow them to loosen their belts to let it go.
We’re going to see some loans from some different people and some different entities that we haven’t in the past. For instance, a Blackstone type company that may have bought massive portfolios a few years ago with back then saying their intention was to hold those for a few years and not do anything with them. Where are those loans? Are they coming out? We’re starting to see some indication that maybe some of those are, so we’ll see. For the first time in the space, I’m cautiously optimistic for the future of this space, as far as to deal flow.
I can remember this when we first met and a lot of us were like, “This is a three to five-year market.” We said that for several years now.
The difference is it was a three to five-year market at that pricing. That’s what it was.
Pricing has changed, but it’s also pricing changes. Values have changed. That’s the thing to look at. If your values go up, your pricing can go up versus when things are upside down, you’ve got to look at those things. When there’s equity, prices go up as well too on different markets. Markets change too. Florida was a huge market for me many years ago. I haven’t bought much stuff in Florida in the last couple of years because it’s been overpriced for the most part. I moved more into the Midwest where I wouldn’t buy anything. I’ve bought stuff in Michigan for years, but I stay away from Michigan, now I love it. It’s the land of milk and honey for the most part.
It changes. It moves around. It’s like us. We love California, the coastal areas. We’ve pulled that in a little bit. We still buy, but it doesn’t fit our model as much as it used to.
Do you have any personal or big goals for you for the second half of 2019?
We’re hoping as far as business goals, we’d like to hit $50 million under management with Aspen. It’s possible to do that. We’ve got that and we’re working towards huge acquisitions. It’s been good.
I want to say thank you for coming on the show. If people want to reach out to you, maybe get on your buyer’s list of stuff you may be looking to move or other things like that, what’s the best way for them to reach out to you, Tom?
Email is always the best for me. If they want to send me an email to Tom@AspenFunds.us would be the best way. If they want general information about what we’re doing and they can go to AspenFunds.us.
Tom, as a friend and I’ve known you for a while, I’m proud to see the growth that you’ve come. You’ve blossomed up and done like a lot of people wished they did. You got started in doing some things and grown and your career has grown and blossomed so kudos to you. I’m glad to see good things. I’m glad you’re now a Cali-Texan versus just a Californian.
Thanks for having me on.
Thanks. I appreciate it. Tom said a couple of nuggets there. Follow up some of the greatest deals that he’s closed on, I’ve closed on with people. It’s come from a follow up of people. It may not have something now, but no doesn’t mean no forever. It means I don’t have something right now. Follow up, big key network like crazy. You never know where your leads are going to come from. Also, do due diligence, put your systems in place, empower your vendors to make decisions and manage your people and you’ll do well. Go out and make something happen. We’ll see you at the top.
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About Tom Boren
Tom has been in the real estate note industry for nearly a decade. He is primarily responsible for note acquisitions, note sales, and developing key relationships to create and maintain deal flow. Tom has a vast network of relationships with buyers, sellers, and vendors in the industry.
Prior to working in the secondary real estate market, Tom spent nearly a decade at Marriott International. Tom was an Area Director of Sales and led sales teams for several hotels in the California market.