Everybody likes a good deal, but often in the excitement of seeing what seems to be a great opportunity on paper, we forget to comb through the finer details. Eventually, when it’s too late, all the red flags suddenly start popping up, and it turns out your note deal was actually a dud. Scott Carson breaks down how to identify a genuine note deal from a dud. He goes through the laundry list of things to look for when reviewing different lists or tapes of notes from lenders. Remember: Not every asset on a list is a deal depending on the whole situation and due diligence of the note, so it’s imperative that you stay vigilant.
—
Watch the episode here
Listen to the podcast here
Separating The Deals And The Duds
I am excited and happy to be here with you. It is a gorgeous day here in Austin, Texas. As I’ve been looking through emails, answering questions and looking at some lists of deals that have come in, I’ve been hit up by people who have got some lists of distressed notes or nonperforming notes, but they don’t know what they have. The stuff that they’re sending me on a couple of occasions are not deals. It doesn’t make sense. We see this happen with a lot of wholesalers and with different brokers. We’re going to see an influx of those two types of personalities in the note and real estate space. Wholesalers have always been a big deal. I have no problem with wholesalers. I have no problem with people trying to put something together. I get and understand it, but you have to know what you’re looking at and if it makes sense. Otherwise, you’re just slapping spaghetti against the wall. If I want to eat spaghetti, I’m going to cook it myself.
What I’m trying to get at here is everybody’s got to learn first and foremost of what they have and what they’re looking at and that’s what this episode is all about. We will talk about when a note deal isn’t a deal. When you get a listing, does it make sense or not make sense? That’s what I want to talk about because I’ve had this experience happen a couple of times. I had a guy who sent me a list of nonperforming mezzanine and bridge loans. If you don’t know what a mezzanine loan or a bridge loan is, it’s a short-term financing instrument. Usually, a lot of hard money lenders are doing this. Mezzanine is a bridge loan helping you go from where you’re at, get to maybe property or house that needs work. It’s providing the financing on a first or second lien position to help you to bridge that gap to the properties until you can get refinance out into permanent 15, 20, 30, or 40-year financing of whatever you want to do.
I got to listen to these first-lien mezzanine loans for two great properties. They’re beautiful properties, a million-dollar asset in Fort Lauderdale, a $600,000 unit in Houston, and a couple $100,000 units in San Antonio. I’m looking through these and I’m like, “These are not bad. I see what the underlying value is. I see the underlying debt. I see the full payoff if they’re in default or not default.” That’s what I wanted to take some time because you’re going to see lists. If you’re in this space and you start reaching out to banks and asset managers or if you’re a note investor on your LinkedIn public profile, you’re going to get hit with people asking, “Do you want to buy my debt? Do you want to buy my notes?” Here’s what it comes down to. You should see it already kicking in on the owner’s finance side of things. If you’ve been around longer than six months, you’ve probably already had people reach out to you, “I’m going to finance my property, would you buy the note?” “I’m financing the property, will you buy the note for me at par the closing table?”
I had a buddy of mine in Utah reached out to me and said, “I’m doing these mezzanine loans at 12% interest. Will you buy them for me at the closing table?” I was like, “No, I don’t want to buy them at the closing table.” He was like, “Why not? It’s a 12% return on investment.” I said, “It is now, but what happens when that goes south?” Somebody’s got to fork out money to get it fixed. They’ve got to fork out the foreclosure process. I know the value of the property is quite a bit above where the loan is at, provided it hits that ARV or After Repair Value. After repair value is if you buy a property and it needs work and it looks like crap. If it’s worth is $100,000 and you put $30,000 into it, now it’s worth $200,000. That is the after repair value if that $30,000 goes into. What has happened and what we’ll see happen more is we’ll see unfinished projects. We’ll see people take draws to finance the repairs, but then they don’t finance it. They use it on another property. They buy the supplies and go back and refund them.
I only say that because that’s happened to a number of people. It’s happened to a ton of people and investors years ago. As contractors, as work started to dry up, as people started struggling to pay things. Contractors would get aggressive and they think, “I’ll buy it.” No, they went and returned it and put it on in cash or on their card. You’ve got to be careful about that. What I’m trying to get at is when you see a list of deals, and that’s what’s going to come across the board, let’s first start with a mezzanine financing piece, the bridge loan. The first thing that adds value is you want to make sure a one-year in a first lien position. You’re only buying first liens and not second liens because that’s going to be dangerous as the first lien starts to default. Second lien investors may be excited because they’re going to start seeing some more stuff at the market, but it’s dangerous behind a first lien.
If you’re buying a second lien to avoid getting wiped out, you would need to either make the payments on the first lien or foreclose and hope that there’s still a ton of equity above the first lien and above your amount that you’re doing in the legal balance. Always make sure you’re buying a first lien. It means there are no other liens or loans in front of you besides taxes. Check the taxes and stuff like that. What is also important is to see who the borrower is on the assets. I looked at this one list that was sent to me and I immediately showed the borrower information. It was an LLC, not a person, so I immediately started searching for access to this one property. I’m not going to tell you the name, but I found they filed bankruptcy. This deal is going to be dragged out quite a bit in bankruptcy court. Someone might ask me, “Scott, you said BK is good in the note business.” It is.
It can because you get reperforming. I need the asset return back to me but I don’t want to have to drag stuff out because the longer this asset gets tied up with is not being worked on, the repairs not being done because I don’t know the exact condition of the property. While I see these things, I have to assume based on the numbers that we’re showing them. Most of these mezzanine financing will show you, if there’s been approved for financing or there’s been a draw where maybe the borrower took out a $180,000 loan, where $130,000 was for the finance of the property and the other $50,000 was for repair draw. We see a $20,000 or $25,000 has been pulled off the draws. Where did that money go? Did it go into the repairs? Mezzanine financing, on the front end, this is a little bit different than buying a true first lien from a bank or an institution. You should put eyes on the asset beforehand.
It’s important to do because the last thing you want to do is, “This picture looks great,” and then suddenly, you see later on, “That property doesn’t have a roof. The property doesn’t have walls. The property is completely demolished compared to what the online photos look like.” That’s an important thing we are looking at bridge financing or mezzanine financing. It’s making sure its condition. You don’t want to buy a note on a property and realize it’s a shell of a house. There was a property in Dallas on this list I got and it’s a fourplex. I was like, “A fourplex in a nice part of Dallas.” I got it and I did search for the address and it popped up and showed that it was listed on Realtor.com. It was a complete shell. What you don’t want to get into is getting into the fix and flip side in a downward spiraling market. I only say that because I’ve had some deals in the past bite me hard as I was working rehabs and stuff continued to fall, as foreclosures increased and days on markets went through the roof.
I am not saying, “It’s the finished property. Somebody can’t sell up because the market is slowing down.” If you find a property has been rehab completed, then it’s a different story. You have a true solid value in that asset. You’ve got to look at, “Is the value way above what is owed on the asset?” That takes us to the second half of evaluating the tape. You need to know the as-is value, not after repair value. If the repairs been done, then the ARV is as-is at this point. If the repairs have not been done, then the ARV would be higher than the as-is value, knowing the true condition of the property. If the property has been completed and maybe the loan was for 6 or 12 months, I got enlisted where the balloon came due on the mezzanine finding. You can have a balloon on a commercial note.
Note Deal: Wholesalers have always been a big deal in the real estate industry.
If it’s financed to an entity, you can have a balloon all day long. If it’s not a residential or an owner-occupants, it’s a different story. Look at, “Is the borrower making payments? Has the default rate kicked in? Has usury kicked in?” That’s an important thing. Most hard money, most mezzanine loans will be somewhere between 11% and 14% interest rate, sometimes 15% or points charged. Looking and knowing what the true balance is, “Have they been making payments or are they six months behind? Are they twelve months behind? Has it been without any payments whatsoever? Is the property vacant? Is somebody living in it? Has the rehabber moved into the property?” Other things that will pop up with that is, “What’s the default rate?” I saw one asset and they said that the default rate went from 12% to 24%. I was like, “That’s getting usury pretty close.” You may have a difficult time foreclosing on that asset because you’ve got usury kicking in and you can’t be charging that high in interest rate.
I don’t want to see default rates above 18% to 21% on a default amount like that. I know credit cards will charge 24% or 27%, but I don’t think you should be that. I think you’re going to get into problems with that as the market, as aggressive predatory lending, even though it’s within an entity investment property versus an owner-occupant primary residence. You’ve still got to realize that you may not be able to foreclose and collect it all on usuries. That happened to me years ago. We took out and then I provided hard money financing with a friend of mine. We financed a second lien position on a big $400,000. It was existing first that the investor was able to take over subject to. I completed the rehab, marketed the tank and it was dragged out. We adjusted the interest rate based on the clause we signed off on. We had to remove and re-enroll that rate back after six months of legal because the judge and lawyer said, “You’re charging usury on this stuff.” That’s the thing to keep in mind. Just because it says 24%, doesn’t mean you’re going to get the 24% thing.
Make sure you look at that and realize if it says that the borrower has the right to do that just because they may have the right to do what you want to do. You may want to look and say, “Let’s recalibrate this at 18% versus the 21% or 24%.” If they defaulted, if they’re more than six months and more than 90 days to default, that interest you’re probably not going to see. That takes us to the third phase. If there is value there and you look at what is owed on the asset, the full legal balance as far as unpaid principal balance, any draws, any back payments have not been made and then any other late fees, what does that balance equate to as a percentage of true as-is value? There’s a lot of equity there. Let’s use the numbers. Most hard money lenders aren’t going to lend above 70% of ARV. They may land at 90% or 100% of the purchase price and 65% of repairs. If the property’s complete, you’re probably going to be somewhere around 70% to 75% of asset value. There’s equity there.
Are the lenders going to take a big haircut? Are they going to get a buzz cut? They’ll probably not. Maybe they will. You’ve got to keep in mind, what’s the foreclosure timeframe? Have they started legal? Have they accepted any partial payments? If you accept partial payments from a borrower, it says that you are giving relief to that borrower and not intending to foreclose. If you’ve taken payments or a partial payment or even a lender has taken on a monthly payment, you’ve got to restart that statute of limitations or that timeframe to foreclose. I maybe six months behind, but you just took a payment. You’re going to have to wait and see if they fall behind and wait until they hit that 90-day period again and start all over the next month. What you have to realize is these things are going to be showing in columns. If you get these lists in, don’t fall in love with an asset if it looks cute or great because of the location. “I don’t find anything in Houston, but I finally found a beautiful property.”
It’s okay to make some offers, but realize what the seller is looking for. This is the thing that frustrates me the most is when I get these lists in and I can go back to the guy that brought it to me, the broker, the Wall Street guy and I ask him, “What’s the pricing point?” They’re not giving me any color. What does color mean? Color does not mean green, blue, yellow, the flavors of the rainbow, black or white, your skin color or your eye color. Color is simply, “What’s the discount? Can you give me any insight into what type of discount that the seller’s looking to get rid of?” To understand that, let’s talk about the days in default that you have to see take place quite a bit. Most lenders are not going to start looking to do anything until the borrower hits 90 days late. They will send out letters and phone calls. They don’t want to sink in that $2,000, $3,000 or $1,500 in the retainer of attorney fee to start the legal process unless they have onsite counsel or in-house counsel.
That’s the important thing to look at, how far default is the borrower? Give anyone a list, look at when is the last payment date when they’re defaulted from. I’ve seen lists that they were seven days late and they’re starting to move the asset and I was like, “You’re not going to give me a big discount in this asset,” especially if there’s equity above the legal balance. You’re sitting at 60% to 60% if you’re 90 days or less. That lender, whether it’s a mezzanine, a private institution, anything less than 90 days, they’re not going to give you that big a discount. They’re not going to give you that big a haircut. When I saw that it was a year in default, I was like, “I offered 50% of the unpaid balance, which equals out to about 40% of the value because the seller told me, ‘They’d probably take 10 to 15.’” I was like, “I doubt that because we’re not quite in 2008, 2009 and 2010 numbers yet,” but I offered $0.50 on the dollar. It came back and they didn’t accept it, which is no surprise. That’s it. That was the one before I get too bogged down in looking at the other 20 to 40 assets.
That’s the thing. If a seller is 30 days behind, that note has a $0.90 to $0.95 value. They’ve lost 5% to 10% and you see this happening. You’ll see somebody makes a payment, then they’ll make double payments the next month. That’s why they’re not going to take too big a discount. It gets to 60 days behind. That’s why it drops it down 15% to 20% from $0.80 to $0.85 on a dollar value. You get to 90 days, $0.70 to $0.75 on the dollar unless there’s a ton of equity and they’re going to squeeze that in there trying to still get as close to the unpaid balance as possible. That’s the thing to keep in mind. That’s why we as note investors get excited because if it’s an over-encumbered asset where they owe more than the property’s worth, then you start seeing the bigger discounts that the 90, 120, 150, 180 days in default and beyond. Provided they’ve not made any payment providers that they owe more than the property than what the asset was worth. We’re making a percentage of the value whether being upside down.
Those are important things to look at. What are the days on the market in an area? How long has it been listed for if it’s finished? Do they owe more than what it’s worth? In case they owe more than what it’s worth, you’re often going on the lesser of the number. Can we do a short sale or are they willing to walk? If it’s an entity, what’s the situation with the other assets and the entity? Are they in bankruptcy? Does the borrower have other assets? Maybe if you take the property back, you can file a deficiency judgment against the other assets for what you’re not calling them back into the real property. That’s something to think about. That’s a little bit more than just, “I’ve got a list. I’ve got a deal.” That’s why that note is not a deal. It is important to keep that in mind. Another important thing is checking taxes and zoning code enforcement. Have they gotten the proper permits from the city? Has the city come out and given a certificate of occupancy? That’s another thing.
These are things you’re not going to see a lot of times on spreadsheets. Sometimes they will. Some great mezzanine bridge finance companies will have a column for all of that. CO or Certificate of Occupancy is often the title of that column. It will give you a date of it’s been done or percentage of draws. The thing that I’m always concerned about when I see that draw is halfway or only like $10,000 and a 50 drawn. It’s usually not done. Some of this stuff could be paint, carpet, appliances and fixtures. That’s not the big thing. What I dislike is to start talking about bigger things. They’ve added a room where they knocked out a wall or they’ve still got sheetrock or air conditioner to put in there. We’ve got a roof to put on. Back to 2008, I was out in Phoenix, Arizona in the Camelback Mountain area outside of Phoenix. I had an investor I was working with. She was all excited because she had found this little nook on Camelback Mountain, 27 or 30 homes, all worth $500,000 to $750,000 that was in default.
Note Deal: If it’s an over-encumbered asset where they owe more than the property’s worth, then you start seeing the bigger discounts at 90 days in default and beyond.
What had happened is a builder came in, got to all these investors, 30 borrowers to go out and get individual loans from the bank and individual mezzanine loans on the financing and built these homes up to about 80%, 90% complete. They were missing the ceramic tile or the Mexican Adobe tile on top of all these houses. It’s very famous out in Arizona. Paint, carpet and then fixtures, most of the work was done. When we started finding out what was owed, it was over $50 million. It was in each individual asset. The lender, First Magnus Mortgage at the time, flew in there, I jumped the fence. I was walking around the housing department in a green suit I had and taking down addresses. She didn’t want to jump the fence with me, but I said, “Let’s go and take a look. Let’s pull up these addresses so we know what the street names are.” Lo and behold, 45 minutes later, as I’m walking out of one of the houses with a notepad, the cops pull up with the lights blaring.
“What are you doing?” I explained, “I pulled up my car. I was walking around here. I’m trying to find information.” He was like, “You’re a real estate investor.” I had a police escort around the neighborhood there for the next twenty minutes. I said, “Was there a forerunner out in the front?” He went, “We saw him leaving as we pulled in.” I started laughing. I was like, “Okay.” She got scared but I didn’t get arrested and she left me high and dry. I said, “Can you do me a favor? Can you go ahead and put the cuffs on me and we’ll pull up to her house?” Sure enough, they did. They pulled me out, but they let me. It was all good fun. That portfolio of $50 million in debt when everything was said and done and calculated up was in bankruptcy court and it’s sold for $4 million to a private institution who bought it. We finished the foreclosures, the balloons and then sold the properties. They held the properties for a little longer and fixed them all up and stuff.
They picked it up for $0.33 on the dollar or less than that. They had a lot of flexibility to finish the property because they had to bring in and evaluate each property. They’re trying to list it for $0.50 on the dollar originally, which was a little high at that point, but they still made a chunk of money. What I am trying to get at is you need to know more than what’s on the spreadsheet. Knowing where that property is, knowing what the condition is that requires you to put in eyes and requires you to maybe spend $50 to $100 to get a realtor to drive by the property. If you see it’s been listed, pick up the phone and call a realtor. “I’ve seen you listen to this property before. What’s the situation? Is it a good property? Is it completed? Is it trashed? What’s the real deal?” That’s not going to come from you if you’re not making a phone call. It’s not going to come from you if you are not doing a little bit deeper dive, checking the county taxes and seeing what’s going on.
With the market being like it is, I can tell you, values are not going to stay at where they’re at. They’re going to slowly start coming down, slowly dropping a little bit each day. We’ve already seen this happen as a variety of price reductions across the multiple listing service in every city and state has dropped. As people have dropped their prices, it is dropping the values and continues to drop. Not just in listings, but as people are giving up concessions or, “Give me $0.90 on a dollar, we’ll make it close.” The thing that you have to worry about when you’re going to see the most amount of price reductions, especially in a neighborhood where rehab is going on. Are there any other distressed properties on that property? Are there any other pending foreclosures, short sales that can affect the value of your property?
Some appraisers didn’t want to use that years ago, but you’ve still got to keep that in mind where everything’s at. If it is your property and you’re going to take this property back, it’s okay, you’re going to do partial repairs, but the property down the street at your same pricing did extreme repairs and up and above repairs, that’s going to require you to pony up some more money on the table. A very common practice that I’ve seen this done. This may be something you have to look at. I’ve seen the fixture alone. The fixture of your paint color, your carpet where people are taking these properties back and they’re putting a package together. “Here’s the 1, 2, or 3 packages. Here’s the price of property A, B, or C.” I’ve done this in South Florida before where we sold properties before we had the paint, the carpet before we had all the fixtures in because we priced it appropriately to make it a value.
Let somebody take that over. You don’t have to pass inspection as long as the toilets are in it. You don’t need appliances in there. You need a fridge, washer or a dryer as long as I can check the water that it’s on the sink and that’s connected. Check the electricity. There are some things you get away with. You need the AC and water heater. This is something you may have to take a look at. What you don’t want to do is fall in love with something and say, “I’m going to try to get the most amount of value.” These days, as real estate investors, especially note investors, you need to look at things and probably say, “Am I going to be okay if I come out at $0.90 on the dollar? Am I going to be okay if I come out at $0.85 on the dollar? Am I going to be okay if I come out at $0.80 on the dollar to net after I sell this thing?”
The closing cost commission is going to be 6% to 10%. Other expenses, you’ve got to get some concessions because you’re going to a competitive market. We are going to be in a buyer’s market than where we’ve been in a seller’s market. It is changing. It’s transitioning in front of our eyes as markets are changing across the country. Some states are still going to be a sellers’ market. You’re going to see that in your major markets, California, San Diego, LA, San Francisco. You may see a little bit of a dip, but not nearly. Everything where it’s at, it’s going to stay pretty much the same for the most part because of the demand in those areas. You still have plenty of people that have money they’re willing to spend and stuff. We are going to see the biggest amount of effect on price reductions. We talked about this in an earlier episode in the outline markets, the secondary markets or there’s not as much demand.
Is there something that I think would do well? I think your affordable housing, you’re going to see an increase in the inquire for bumble homes. That’s not a bad thing if you were into affordable housing, tiny houses. If somebody is in areas outside of major areas where to find some land and turned them into smaller houses, tiny houses brought together small communities with one big main community center. I think you would do well to rehash that to rebuild something like that in an area. It’s a matter about being able to get zoning and if the city and everything are set up for that. That is an opportunity in helping people for various reasons. One, not only those that are facing a downturn and facing difficulties. Give them an opportunity someplace to get their feet under them. I thought that would be a great opportunity. We’ve seen it happen here in Austin, Texas already where community put together smaller houses, tiny houses for the homeless or the people that are struggling financially or getting out of hospitals or getting back into the workforce.
That model is ideal. What we’re going to see too is some of the modular buildings increase back up as people are looking for homes and the need to get homes built and rehabbed or put together faster on markets. Even the smaller like storage community building. We’ve seen that happen here in Texas and Arizona. Our friend John Keith has done some of that too in Arizona and Montana. The need for affordable housing is going to increase dramatically as we see things happen, as people are laid off out of work. Does that mean we’re going to see an increase in owner finance notes? Yes. I think that we’ll see an increase in owner financing notes. You are seeing an increase in potential owner finance deals where it’s a subject to deal with or a wraparound mortgage deal. Some people call it an assignment, loan assumption. You’re going to see more of that, but you still got to know what you’ve got on your books and what you’re looking at. You’ve still got to know the interest of the C’s of looking at a type of debt. Is it the mezzanine or bridge financing if there are a lot of moving parts?
Note Deal: On commercial deals, you’re not going to be able to pull the trigger and make a bid unless something is completely vacant and done.
It’s the same thing on the commercial side of the ball game. I had an apartment complex sent to me in Kansas City that I was looking at and I was like, “I see there’s a sold three years ago. It’s on a mezzanine financing on a loan that expired twelve months ago. What’s the real situation? Do you not have rent rolls that you can provide?” The mezzanine finance companies should have a full loan file and a full collateral file on the financials of the property before anything happened, especially if they were to approve a loan on the mezzanine finance. What’s the situation looking at this asset? It doesn’t look it’s in the best of areas. It might be a little rougher a class C. They’re trying to bring a class B, but maybe it’s got a bad situation with crime or other issues in that neck of the woods such as drugs. I’m waiting for that information to come back. On commercial deals, you’re not going to be able to pull the trigger and make a bid unless something is completely vacant and completely done.
We’re going to see our fair share of vacant properties. If you stick around, you’ll be able to cherry-pick some decent property, some strip malls. If you want to focus on the big bucks side of things, you can do that. We talked about, re-gentrifying these big department stores are going out of business. I was watching an episode of Upload on Netflix. Bloomingdale’s was down to a small best buy to go. It was like a vending machine where you had specific things available. Otherwise, you’d order stuff online. I wouldn’t be surprised if Lisa Fairfax of Conglomerate comes in and they take one big box or one of Dillard’s and turn that in where you’ve got Dillard’s, Macy’s and a bunch of other things in there all in one spot or micro-stores like some of the other bigger brands or the brands have been toying with over time. You’ll see more of that in the malls.
If you don’t have the online presence in your commercial business where you’re on, especially on the retail side, that’s the kiss of death. You’ve got to develop that stuff, but I don’t think you’re going to be seeing a lot of those deals we picked up by big conglomerates in bigger hedge funds, bigger reefs. You may see some smaller stuff, some smaller locations that handle that, but you’re going to see a lot more for lease signs on retail than we’ve seen in a while. Even though some of the commercial places were starting to hurt. We looked at offices here in Austin and there was still plenty of space available. The executive suites that we’re at have had vacant space and I guarantee there will be more vacant space. Take the time to look at where you’re at. Look at your database. If you can reach out to your database and find out, “What are the top three states that are investing in? What are the bigger markets looking for? What’s the price point they’re looking for?”
You can start putting together your buyers list so that when that comes out from the banks and hedge funds, you can make your money in between as a wholesaler, as a deal generator or as a deal architect, putting buyers with the sellers and making your piece in the middle. Those that are effective in marketing and using tools like email, LinkedIn, Meetup groups, video and can talk about the deal. Even putting the PowerPoint together on something on what you’re working on, that will have value well beyond what you will ever believe in the future as you start getting stuff in. Those are the things that you have to be looking for. If you’ve been investing in a market, maybe try to pull back in that market.
I’ll give you an example. Florida is something we’ve not been into for years because it got overpriced. I’m reaching out to my realtor down the neck of the woods and saying, “Are you ready to go shopping here in the next 6 to 9 months when stuff starts hitting the fan?” I’ll reach out to some of the funds I know that have huge portfolios of loans in the Southwest Florida market, which is a big desire. Obviously, Miami, Tampa are always going to be the hit for the most expensive markets, but Fort Lauderdale, West Palm Beach, Martin County, all up the Atlantic Coast. If you go to the Gulf Coast side from Marco Island is the most expensive real estate roughly in Florida at the very tip or Key West would be more expensive, but coming up the Southwest Florida Gulf Coast side, all the way up to Tampa in Clearwater Beach, Bradenton, even up to Westin at the armpit there.
Look at your markets at what’s hot. Look at the price points on some of the stuff. What are they wanting? They start wanting way too much as I said, above that 70% to 75% of the as-is value, it’s not a deal. Move on. If it’s less than 90 days in default, it’s not a deal yet. Are they going to be around? If you waited 90 days or another 30 days or 60 days and came back the price. The people that are going to make a lot of money here in the next couple of months are those at A, buy it right. Sometimes it means no offered a low ball price to see where they’re at, what that pain point is, what they want to let something go for, and then waiting for another two months. Go back like, “I know you want this. My price at this point is still at this.” Keep that in mind. “You may make 40 offers and maybe only get 4 or 5 approved, but if you follow up in 30 or 60 days, you may get another 4% or 5%, 10% to 20% of your bids accepted by doing a follow up and knowing what’s going on in that asset.”
Don’t be afraid if you get outbid, if you fall back up in 30 or 60 days and then asset falls back into your lap because a seller overbid based on the market and comps and you know what’s going on in the market. Hone your skills and craft, and diving into the spreadsheets you get before you make an offer is one of the most important things. It’s great to see stuff floating around. Don’t get too excited. Don’t get too over-exuberant in your bidding process. Wait and take it easy. You’re going to see a lot of sellers waiting for loan level pricing. If you don’t know what a loan level pricing is, that’s where they sent a tape out of 40. They want you to make ten offers. They are not going to say, “I’ll give you a million dollars for these ten.” No, it means they want you to bid it out on an asset by asset basis. I guarantee lenders and mezzanine financiers, hard money lenders are getting phone calls from their investors. “I will lend you $50,000, $100,000 or $200,000 and it’s time to start pulling that back.” You’re going to see programs have gotten dropped off.
I may have talked about this where we’ve seen the reserve requirements going to be a lot of hard money lenders weren’t requirement reserves. That means, “Do you have six months of payments in a checking account somewhere that we can tap into? Do you have twelve months of reserves?” I guarantee we are going to start seeing that across the board in about every mezzanine. You’re going to have 6, 12, 18 months of reserves sitting on account that you can’t touch that’s got to be sitting there or you’ve got to pay that upfront to us. We pay six months of payments upfront, whether that was something we saw years ago. One of the things which is a big aspect here is you’re going to see assets that are in that 150 first time buyer range where the values drop below a 100%. It’s where you can’t get bank financing and you may see an increase in a contract for deeds reappearing like they did a decade ago.
That’s a little further out than maybe in the second wave once we get through some of the stuff in the next couple of months. We’re going to see an increase in that as well. Talk with your people. Talk with your servicers. If you’ve got a servicing company, talk with your asset managers. Talk with the people like, “Anybody who’s looking to sell? Anybody who’s looking to move stuff? Thinking about moving stuff, would you put a feeler out?” It might be one of the best things that you can do for your business by staying connected, reaching out, and knowing exactly what you have and what you don’t have, then following up. One of the best things that we have done over the years is to follow up with different bids, 30, 60, 90, 120 days out from one main original bid, so track your bids.
Note Deal: You’re going to see a lot of sellers waiting for loan-level pricing.
If you have deals that didn’t get approved 90 days ago, follow back up. Our friend is working on a large portfolio with 200 performing notes. If they’re not performing, the values for those have dropped. I advised her like, “I know you’re working on this. You might want to pull values and you want to double-check servicing records to see dates paid because if you’re buying a performing note, it needs to be still performing and as is dropping off for 90 days forbearance. I understand that, but there’s no guarantee either that borrowers will get back on track.” Do yourselves a favor, look at where it’s going. If it says it’s performing, make sure to ask, “What’s the situation with? Did they pay on time? Do they have reserves? What’s the situation with that borrower more so than anything else?”
We are going to see a feast of deals here. Don’t give up on it. Keep plotting. Please keep making phone calls. You can start making phone calls. You can start doing email blasts. If you have not done that in the past, do yourself a favor, start doing those activities. Start taking action, reaching out to the contacts at asset managers or funds or places maybe even spoken to because they didn’t have anything. Reach out and touch someone but make sure you’re 6 feet away from them. Social distancing, you’ve got to love it. I had a friend of mine reached out to me that I had on the show beforehand. He made a lot of his money by buying gym equipment. He reached out when he saw that a gym was going out of business or foreclosing the stores. He reached out to the bank that held the note and said, “I’d like to reach out and tell you I’m interested in buying the workout equipment. I’ll buy the equipment for you for $0.10, $0.20 on the dollar,” because a lot of these banks don’t know what to tell you. The last thing you want to do is have twenty ellipticals assuming their room.
Oftentimes, we let stuff go for pennies on the dollar. He made his money originally by buying gym equipment, turning around and selling it. He sold it at $0.50, $0.60 on the dollar. Somebody else kept who wanted and had a nice gym at home but made money that way. If you’ve got opportunities like that to come in and step up, buy some, buy the supplies, buy the furniture, buy things like that, you may be able to pick up a sweetheart of a sale, of an investment that you can turn around and move relatively quickly. I think back where a deal that came to me from the Bank of Georgia, Synovus Bank. It was a parent company. It was 55 buses. Not like school buses, but the nice banned buses. There was a company out of Georgia that was one of the biggest leasers of these buses to bands like Nickelback. Do you remember the Madden Cruiser from John Madden on NFL? The big buses that show up with a black tune. I’m not going to say party buses, but it’s, “I’m with the band,” buses.
They were in default and we were about an hour away from getting approved on a sale on this when the bank went with a little higher offer than we were willing to go with. You’ll see weird stuff like that. Boat loans will be a big thing as people aren’t paying their dock fees. They’re not paying their dry storage fees, picking up boats, motorcycles and RVs. You may have some of that happening taking place so think about some of the ways outside the box. Do you want a repo with RV? Maybe not. Maybe you do if you can get it cheap enough. Think about that. That’s the most important thing I can tell you. I look at what’s going on in the market. There’s a lot of money made in the paper business besides on single-family home, the commercial property. Know what you have and know if it’s got a deal. Sometimes getting creative, thinking outside the box will net you a deal that you will be chuckling about for years. Go out, take some time, pay attention, do some due diligence and we’ll see you all at the top.
Important Links:
Love the show? Subscribe, rate, review, and share!
Join the Note Closers Show community today: