Are you struggling with where to start and what to look for on bidding notes? This episode of Note Night in America is going to help you! Detailing all the things you need to know, Scott Carson breaks down what to consider when making a note offering. What percentages are selling in today’s market? What items and costs do you watch out for when calculating your note bids? Scott answers these while also sharing his different formulas—from calculating a reperforming note, completing a deed in lieu of foreclosure, foreclosing on an asset, selling a note, keeping a note for 12 months of payments, and then selling it to calculating a note into a rental ROI! Finally, Scott breaks down what goes into the stair-step method of bidding if the seller doesn’t give you pricing guidance. Don’t miss out on this thorough discussion.

 

You can download his slides at https://bit.ly/NoteBidsNNA

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Watch the episode here

 

Listen to the podcast here

 

#NoteInvesting: A Step-By-Step Guide On Calculating Your Note Bids

It is the Dog days, the summer is kicking in. We are expecting 9 to 10 days straight of over 100-degree heat. It’s hot outside. We are cooling off inside of the note deal. Glad to have everybody here. If this is your first time on Note Night In America, we are honored to have you. There’s a lot of great content. Make sure you check out the show. I’m a little behind in getting those episodes from the last few months up on there but they will be up. We host this every Monday night for the most part unless I’m traveling or it’s a holiday.

Hopefully, you all had a great Memorial Day weekend. All you got to do is go to WeCloseNotes.tv and click on that link. It will take you directly to our channel and allow you to subscribe to our channel. We encourage you to do that because we are always dropping a lot of great content there. Not just Note Night In America but we have been uploading note terms of the days and episodes. We’ve got a variety of things. The show is on any of those major podcasting platforms where we like to consume content. We also encourage you to check out the Note Closer Show Podcast, which is our main one, and then the Note Camp Podcast Live. This was from the 2021 Note Camp Convention.

We have another one upcoming here, so stay tuned to that. There are plenty of opportunities for you to learn about the note business. We are glad to be the 50-watt mega blow took. We are proud to be the largest YouTube channel when it comes to delivering Note Camp for you. Number of subscribers, number of views, number of watch views every day, subscribers, that good stuff. I’m honored to be here.

There are lots of great stuff to cover for you. If you want to, you can always connect with me on LinkedIn. If we are not connecting on LinkedIn, do so with me because you will see us posting stuff there as well. We posted a link to our slides on LinkedIn and along also on our Twitter, something that you will want to grab. If you are not connected on LinkedIn, pull out your smartphone, open up the photo thing, scan that code, and connect with me.

If not, you can always go over to LinkedIn and look for @1ScottCarson and see me there. Scott “The Note Guy” Carson is on Linked as well. I encourage you to join me there. Lots of great stuff there. We had over 520 registers last time I checked before going. I still see some people join us live here as they are opening their email, which is great. This has been a hot topic. I get a lot of people that reach out to me. “Scott, I don’t know how to bid on a note. I’m not sure where to begin and what to look for. I’m scared of my own shadow when it comes to bidding.” I’m going to tell you, ladies and gentlemen, this episode is going to help you.

Ultimately, you have to submit bids. Every seller is different. Every asset is unique. Some sellers are smoking a lot of cracks. Some are motivated to sell. Some are somewhere in between there. Some are looking to get out of the business. Every seller of notes is completely different. You have to know what their hot buttons are. Sometimes brokers have a preconceived notion of bidding amounts or bidding percentages, and that’s why they are there. You have some websites out there that are stupid because they don’t have a lot, if not major stuff over, price.

That’s why we don’t shop there. We go direct to sellers. This episode is all about helping walk that minefield, what to look for, how to avoid the mines, how to not step on your toe or blow your leg off when you are looking at performing or nonperforming, contract for deeds, and owner financed notes. What are you looking for? How do you determine that stuff? What do you look at?

I guarantee you are probably going to want to grab my slides. If you haven’t, you are going to want to grab it because I included some great formula slides that you can download my slides. I put 5 or 6 slides, and 1 of the stair step method, and 5 formula slides for you to probably want to keep as you are calculating your reperforming, your modification, your REO or your rental ROIs.

What Are You Looking For?

If you are going to sell a note later on, how to calculate that, how to sell it, how to buy a note, hold onto it for twelve months and then sell it and get the cashflow out of that. It’s great stuff for you to take a look at the slides. We will cover that stuff. There are no dumb questions. I will ask you, please keep your questions relevant. Don’t ask me some oddball question that we are not covering because I will delete it. That will be a stupid question. There’s plenty of time for you guys to ask questions at the end. Once again, everybody, I’m glad to have you here on the show. Anyway, let’s get to this stuff. Here’s the first question. This will determine a lot of different stuff and no matter what you are looking for.

Rick, you are watching on YouTube. Hopefully, you are looking for nonperforming notes or performing notes. Crystal Marcia likes nonperforming notes. I know that she can get reperforming or sell them off. John, Frank, Ken, and Larry Pearlman like stuff. Laura Miller likes nonperforming that she gets reperforming. Matrice likes to buy nonperforming cheap ones that he holds for rentals. RJ likes to sell some stuff. We all have a different variety. T Miller says nonperforming. Thank you, T. You decide what you are looking for. What are you looking for? That’s going to determine your strategy because you can’t be a Jack of all trades.

What do I focus on? I focus on primarily nonperforming notes that I can get that are occupied, that I can get reperforming or nonperforming stuff that’s vacant that’s usually in a pretty fast foreclosure, so they get on sale. Like my boy, Demetric, looking into a deal in Indiana. It’s a vacant asset but its value on it is lower. It’s in pretty decent shape that he can take around and either buy the asset cheap enough and sell it on the retail market and finish the foreclosure doing a deal. This is all that you are comfortable doing. It all comes down to what’s your focus and what are you looking for. You are looking for performing notes. Are you looking for that cashflow that comes in every month when you don’t have to do anything, and you just buy a payment stream?

 

It’s like buying in. You are going to get paid on a monthly basis through a third-party servicer. You don’t have to do a lot of work. There’s nothing wrong with that. Are you looking for nonperforming where you can buy debt or assets at a substantial discount well below what people are paying on the REO side these days and then you look to get it reperforming and make a great yield or take the asset back? There’s a variety of things you can do with nonperforming assets.

Are you looking for reperforming stuff that was once nonperforming that’s now reperforming so you can step into a payment stream but at a bigger discount than a performing note because there has been some trouble in the past that those rough waters have calmed now? A passive aspect but you are still buying it at a bigger discount because the borrower wants some trouble. We have plenty of those from the last couple of years obviously. Maybe you are looking more for a rental. I had a person call me, “I’m looking for more ways to find rental properties at bigger discounts. I’m thinking about the note business.”

I’m like, “Yes and no. You may not want to do the rental business after diving into the note business because if you are tired of toilets, tents, and trash outs, we don’t have that a lot of times.” Do we take some masses back? Yes. Could you turn them into rentals if you want? Yes, you could do that if it’s in a specific area. I buy in about 30 states. I don’t want to own a rental, and it’s here in Texas and maybe Florida or there’s onsite management. That’s my personal opinion.

Maybe you want to REOs. Maybe you want those big checks. That’s going to happen with what we see on the nonperforming side. We are probably going to foreclose. We are going to deed in lieu from the borrower probably about 30%, 40% of the time. Especially if you are buying vacant assets, you are going to get a foreclosure deed in lieu of a big chunk of the time. We are also seeing reverse mortgages where the borrower had to reverse mortgages passed away. Those are basically REO places.

Is It Your Money Or Other People’s Money?

I’m seeing those pop ups. Lots of opportunities at some decent discounts before you, guys. Here’s the thing that you have to look at and ask yourself. With the money that you are using, is it your own money or are you using other people’s money? If you are using your own money, then all you have to determine is, “What kind of ROI do I want my money to make? Do I want it to make at least 8%, and I’m happy? Do I want to make it 12%, and I’m happy? Is my money bleeding away at 7%? If I make 7%, I’m 14% ahead.”

Needing to be. I don’t have my own funds to buy deals but I’ve got my friends, family, colleagues, people that I know, OPM or Other People’s Money that I’m giving at 6% to 8%, I need to make 16%, so I’m at least making 8% to 10% for me and paying my investors, people that believe me, happily back their ROI. You have to identify that aspect. Here’s the thing, you are not going to be a Jack of all trades. Me, I like buying nonperforming and then getting them to reperform. That’s my big cup of tea. I don’t mind REOs as long as they are usually in faster foreclosure states, I will buy if I get a big enough discount and my money costs are cheap.

Those are some things that you will have to determine that I can’t answer for you. If you don’t have any money and you are not marketing for money, then you might as well log off, go back, and watch the NHL playoffs or the NBA finals. Marketing for deals and marketing for money go hand in hand. There are a lot of the same activities. We are always constantly marketing for money and deals but you have to know which facet are you looking for. More importantly too, what kind of timeframes do you have? What are your money costs? Are you using your own money?

Are you using OPM and having that nailed down? If your money costs are 12%, you are probably going to be harder to find any performing notes or reperforming notes that are going to help with it. You probably need to be on the nonperforming side so that you can get at a bigger discount. If you get cheaper funds, the cheaper the money is, the more options you have available to you.

 

We are not talking long-term, 30 years. We are talking short-term, 12 to 36 months, for you to borrow that money and pay your investors back an above-average return. We talk more about that in our three-day classes. Anyway, here are some costs that you need. It’s not just coming in, buying the note, and getting the asset. I had a guy call me. He was like, “I want to buy more real estate. I want it in Dallas.” I was like, “This is not for you.” He goes, “What do you mean?”

I said, “The cost for distressed debt in Texas is going to be a lot higher because it’s a faster foreclosure state. What kind of money are you using, your own money or other people’s?” He goes, “I’m using my own money. I got quite a bit of money from being an investor for 30 years. I don’t care if it costs me a little bit as long as I get the desired return.” I’m like, “That’s great. You’ve got your own money.” If you are like Rick, that says, “I need to market for the money.” That’s not hard to do. Check out our classes. We will probably help you out with it, Rick.

There are other costs besides money costs. You got to figure out your due diligence costs. What’s it going to cost for you to do due diligence? That’s pulling BPOs, and O&E reports. There are marketing costs like emailing out to the database. If you get several, you probably got emails from me. There are marketing costs and posting to different things. Canva to create images of your deals. There are a lot of little different things that go. Not too expensive. The average due diligence is less than $500 per asset, $250. When you start figuring average marketing costs and things that you are going to make more offers than you close, that’s figuring that in along the way.

Servicing costs that’s the continued maintenance of the loan. That could vary from as little as $15 a month for a performing note like with Covey Financial, all the way up to $90, $95 per month for a nonperforming note. That’s per month per asset. There are going to be some more costs along with that like legal and foreclosure costs that could range from $1,000 in Texas here to $10,000 in New York, and New Jersey, depending on the state and the foreclosure timeframe. You got to figure that into your costs, too. Figure that that’s going to get paid out of your profits. You got insurance, taxes, utility, and maintenance. Those are holding thoughts. The taxes aren’t behind.

If the borrower is paying them, great. That works good in performing notes. If they are not behind, you are going to make a decision if you are in the middle of foreclosing, “Do I go ahead and pay the taxes? Do I go ahead and foreclose and pay the taxes out of the proceeds of the auction? Is the borrower paying or is the borrower not paying? The borrower should be paying these deals. Otherwise, you need to deduct that cost from your cash loan.

If you are going to take the property back, that’s one of your things. I’m going to take the proper back and fix and flip it. What are your costs going to be to have an REO? Does it need to clean out or major repairs? I like light-sanitized stuff that’s easy to begin out of. Rentals, you are going to have onsite ongoing repairs and maintenance along the back.

You are going to have management costs, too. You are going to pay commissions that are going to be paid on if you take it all the way to an REO and sell it traditionally. If you got a rental, you must pay commissions to get it occupied. Stuff like that. These are things that are not going to apply to every deal you do but the more niche you get down and focused, then you get to know what costs are associated with each niche.

If you are brand new to this, we are not going to go through that. That’s a different episode for a different night. This idea here is that you got to know what you’re looking at. It will vary asset by asset. Taxes will vary by an asset. Insurance will vary. Foreclosure costs will vary. You could buy ten notes and think you are going to foreclose on all of them and end up only foreclosing on 3 or 4.

You may end up thinking that you are going to get borrowers back on track and you get 3 or 4 but the other 6 or 7, you got to foreclose on or you get a deed in lieu from half of those folks. I hate to say this but it’s like a choose-your-own adventure unless you are dialed into what your exit strategies and due diligence are. That’s part of what we will talk about long-term payment.

Is This Deal Worth Your Time?

Some of the things you need to consider are, is this deal worth your time? We mentioned about that before. What’s your cost? What’s your ROT? Not ROI, but what’s your ROI on your Return On Time? If you are working a full-time career, if you’ve got working 60, 70 or 80 hours a week, you may not have a lot of time to put into doing something new. Is this deal going to be worth your time?

Is it a low-paying note that’s going to take a lot of work to get it back on track? It’s probably not worth it. Looking at the interest rates. People have 2% interest rates. When I see that and it’s on a 40-year or 50-year mortgage, I’m like, “I don’t even want to waste my time with it because it’s not going to be worth my time. It’s too spread out.” We talked about this, looking at your taxes, insurance, repair, and labor costs.

You are taking foreclosures back. What’s it going to cost to get somebody out there? How rural is the property? How close to labor is it? What are the repair costs with increasing costs these days? Servicing foreclosure costs, obviously. You may literally look at this and realize it may be better for you to invest passively versus actively. If you are like, “I want to be passive,” that’s great.

Reach out to me. We’ve got a fund that we are putting together. We are excited about it. We love to talk with you about that and some of the different ways we can help you put your money to work passively for you if you are active, great. There’s nothing wrong with that. Active is great. There are plenty of opportunities out there for everybody.

The thing you also want to consider avoid rural assets. Rural outside of major towns. I’m not talking like it’s in Cedar Park, Texas, which is North of Austin here. I’m talking like an hour and a half out in the boonies. I was looking at a deal in Wisconsin. It’s 80 acres for $79,000. I was like, “That’s less than $1,000 an acre but it’s two hours from Duluth and out in the middle of nowhere.”

Great hunting in the winter but not near a lot of amenities. You may also want to avoid small properties and small balances of what’s owned in the loans. Specifically, we will talk more about this. Small payment amounts and small monthly payments can get eaten up in your servicing costs, and you end up with a negative ROI. Remember that your bid amounts have to make sense to you when you are comparing them to the unpaid principal balance, the legal balance, and then the as-is value.

There are cases where there’s negative equity where they owe more the legal balance, where the UPB is more than the property’s worth. Make sure that your offering is coming in a number of as-is value, a percentage that makes sense to you. If there’s a ton of equity, make sure that your percentage of UPB or legal is still going to leave plenty of room for you to make some profit if you’ve got to take it to foreclosure and only bid on the legal balance.

 

The important thing to keep in mind making sure your bids will make sense. Don’t get in the habit of throwing formulas into a spreadsheet. You got to take some time to go back and look at those assets and piece together what’s going on with the deal. Does this make sense? Does this not make sense? There are a lot of things. It’s like a good soap opera.

A lot of times, you feel a little bit like Sherlock Holmes, trying to figure out what’s going on. When you’ve done this as much as I have, I can help you out and make things happen. Here’s the thing, too. Straight up, some nut sellers out there are smoking some serious crack pipe. I was looking at a portfolio of some performing and some REO with my buddy, Dee, here from Armstrong Consulting.

The seller, on a low balance note, wanted more than the UPB. It’s $11,500. They wanted $12,000. I’m like, “What? That makes no sense for us to bid on that.” Laura Miller says, “This is true.” They are. There’s still a gap in a lot of cases. A lot of the banks and lenders got nonperforming notes that they are looking to sell but still value more than a lot of investors want to pay for.

There’s still that gap between them in a lot of cases. For others, that gap is getting narrower and narrower depending on the number of nonperforming notes they have and what’s going on in the market. Let’s face it. Increased interest rates, increased inflation, people getting laid off, there are a lot of environmental factors that are going on, not only locally but domestically across the country.

Maybe your unemployment rates. Your days on the market may be a whole lot different in Royal Oak, Wisconsin or O’Brien, Texas, than they are here in Austin, Texas. You have to know what’s going on. Sometimes the sellers don’t know what the hell they are talking about. They want something for an asset, and they need to be told, “Your asset is not worth $100,000 or $200,000. It’s worth $120,000. This might be worth $200,000 completely fixed up and repaired but as is, it’s worth $120,000 as it sits.” Don’t be afraid. You are smoking some crack. The whole idea with this too, ladies and gentlemen, is that you are making offers. If you are going to get better at making offers, the more offers you make. This is not something like blasting. You got to get working through the numbers versus running performing notes.

 

Stick your numbers but don’t lowball. If you are one of these guys or gals that $0.50 on the dollar or $0.60 on the dollar would make sense for you but you get scared to make an offer at $0.30 on the dollar, it’s a performing note. Unless it’s at a 1% interest rate or 2% interest rate, it doesn’t make any sense to make such a lowball offer. You got to know your numbers.

Stick to your numbers but also don’t lowball. Don’t be scared. We’ve got a couple of investors that do that. They submit bids. They are always way below $0.50 on the dollar. Come on. If you need to know about a vacancy, pick up the phone and call the county to see if the power is on. If you need to know taxes, get on the county and check. Do your numbers.

What will happen is if you consistently lowball and then you are making offers, and they are not getting returned, you are not getting countered back or being told what they are, you are facing the fact that your bids are no longer being valued. He or she is consistently lowballing. It’s not even worth looking at it. If you are close and your bids missed out by $500 or $1,000 or a few grand, it’s okay, and it didn’t get approved, follow up with the sellers in 30 days or so, because the deal may not have closed during due diligence.

The person that won the bid may have made a ridiculous highball offer, and you are like, “There’s no way it’s worth $200,000. It’s worth $130,000.” They realize, “It’s only worth $130,000.” They canceled their bid. Don’t be surprised. Make sure you follow up if your bids aren’t accepted the first time around. One of the biggest things that have helped us close a lot more deals in the last several years is that we follow up with a lot of our offers.

Rules For Performing Notes

Let’s get into the nitty-gritty a little bit. Performing notes is where everybody wants to end up. Performing notes are pretty easy compared to nonperforming. A monkey could collect, a chimpanzee. Bobo, the Monkey, could collect on a performing note. It’s not hard to collect but you also have to realize that performing notes is not always going to work for you.

We got to go back to that question. “What kind of ROI are you looking for or need to have to cover your money costs for you to make some money?” If you are looking at a portfolio of stuff that originated in the last couple of years, it’s a 2% or 3% interest rate. Unless you are happy making 2% or 3% interest rate or you’ve got money at 1% and like the fed does, and you can make 3%, and that’s 300% return on the money, that’s pretty good. Most of us don’t have that.

Most of us need to make something, have a return of at least 6%, and make it worth our while or double that from around 10% to 12% to pay off our investors if they are doing well. If a bank has a performing note that has been paid on time religiously, they are not usually going to sell these performing notes at below par. They are going to usually sell them at par. What does that par mean? It means that it’s the full unpaid balance.

They are not going to take a discount off it. I had seen it happen occasionally when they were selling a portfolio on a loan program. They had some nonperforming stuff in this one loan program. Some of the borrowers were paying at times. They sold the whole thing off at a discount, which is great. If you are buying, you are trying to go to Bank of America, Chase, Wells Fargo, Citibank or any other major bank out there, and they send you a list of performing notes, they are probably going to want them at par.

The lowest they may go might be $0.95 on the dollar. You can always ask. It doesn’t mean that they will do that but we’ve had sellers come to us and say, “We want par.” I’m like, “It’s nonperforming. It doesn’t make any sense. If it’s performing, I can understand that but nonperforming, no. We are not going to play ball.” If it’s performing on time, there’s no need for them to sell discount. That money-making monkey, that monkey is collecting money on a monthly basis. There’s no need to.

It’s a low-interest rate for you. To them, if they’ve got money, cheap money at the fed, they are making 200%, 300%, there’s no reason for a big discount. You also got to keep in mind that if it’s a government-backed loan like a Fannie, Freddie or if there’s a Private Mortgage Insurance, PMI, attached to it, those things will cover default rates. They may still not sell those government-backed loans at a discount.

They might not sell them below $0.85 on the dollar. Why? It’s because if they foreclose, they are still going to have the government insurance kick in and pay them off in full. I don’t like to spend my time bidding on government-backed loans. It doesn’t make any sense because there’s that big dysfunction. I’m not going to pay par for something that’s a low-interest rate, especially when I got to cover my money cost by at least 6% and go from there.

The one exception to that is there’s always the exception of the rules but hard money lenders. Half-performing notes. They may be looking to sell at par. Those loans are usually at higher interest rates, maybe at 12%. I got the phone from a big hard money lender in St Louis. He’s trying to sell $12 million to $14 million in performing loans, short-term loans. They have a higher interest rate, 12% or greater.

This is great if you’ve got cheap money, you could come in and arbitrage. If you’ve got an investor, say, “The hard money lender’s got a $100,000 loan, a hard money lender’s only going to be roughly at 70% of the fair market value less.” If it’s $150,000, they are probably at $100,000. That’s the loan. At a 12% interest rate, it’s what’s paying. If you got somebody who’s got $100,000 and is happy making 6%, why not buy that loan? Give them their 6%. You make 6% on that loan for $90,000, $120,000, $180,000 maybe twelve months. That could be a possibility for you. If you got someone like that, you like the short-term kind of high-velocity aspect of it, and you got money burn a hole in your pocket, we’ve got some opportunities for you.

Moving on. Performing notes there are some rules when it comes to performing notes that you want to take a look at. These are not just my rules. There are a lot of other rules out. Performing note, it’s got to be with a third-party servicer. Otherwise, if it’s not with a Madison or even FCI, Land Home or Covey Fin, there’s a variety of different third-party servicers out there. It’s got to be the third-party servicer. It can’t be Jimmy Bob collecting a check, and then part of his proof of payment is sending you a copy of the canceled check. That happens, don’t get me wrong but you are always going to get a higher value when it’s a third-party servicer.

The loan has got to be Dodd-Frank compliant. I put that in there. Especially on the owner finance stuff, people will do a onesie or twosie here and there. They may not be Dodd-Frank compliant, which is okay, but you are going to have to make sure it’s with a third-party servicer, the paperwork is still good, and it’s got some other things like twelve months of seasoning. Seasoning doesn’t mean we are throwing salt and pepper on it every month as we throw it on the grill. Seasoning means basically the loan that you’ve gotten twelve months of payments. The borrower has been paying for it for twelve months.

You’ve got some payment history means seasoning. You want some down payment. You never want a borrower to come in, and basically, it’s 100% financing with no down payment. That’s a high default rate. Especially if it’s a newly originated loan, it doesn’t have twelve months of seasoning, and you have a 0% down payment, there’s always probably going to be a default to some sort. I prefer on owner financed notes that we see at least an 8% interest rate or greater, contract for deeds notoriously being at 9% to 10%.

Those are great to buy performing if you like capital like that. We will talk about reperforming stuff in a second. On a newly originated note, I usually want to see a 6.25% or greater unless there is a large down payment, usually 10% or greater. They have equity. If they didn’t put a big down payment but let’s say the house they bought, they put 10% down, finance 90% but the house appreciated in the last year to $120,000, $130,000, now they got $40,000 in equity. That’s 30% equity. That’s not so bad.

We will not look at the 6.25% cost so much. Look at that stuff. You also want to make sure you’ve got a clean collateral file and a true solid appraisal. Not a, “Let’s look at Zillow. I’m the bank, so I’m going to value the property myself. I don’t care if the appraisal says $50,000, I’m valuing it at $80,000 because I’m the bank. I’m going to sell it at $80,000.”

Nobody gives a crap about that. That will devalue your asset. Don’t do that. I don’t buy anything else like that. It’s got to have an appraisal when it originated in some sort, or have a couple of BPOs, I’m fine with it but not anything way crazy above. Here’s another thing, I don’t want more than two borrowers, a borrower, and a co-borrower. I don’t want four borrowers. I don’t want five borrowers. Sometimes we will have vacation homes or property, stuff like that, where there are 4 borrowers, 2 spouses or 2 husbands and wives. Not that they are slingers but you get what I’m saying is that’s a huge opportunity for them to file bankruptcy and delay making payments for 2 to 3 years.

Non-Performing Notes With No Equity

I don’t like four borrowers. Co-borrowers, no more than two. If they got more than two, I’m not interested, especially if it’s in the same family or different spouses, friends, or names that can drag stuff out. Do not do that. “Eight years.” Thank you, Tony. Moving on, let’s go on here. Nonperforming notes with no equity. This is where they are upside down, the underwater. We need a yellow submarine to get to it. You always want to review the unpaid balance plus the arrears to figure out roughly a full legal balance and make sure that that full legal balance is more than the property’s worse, so it has negative equity if they owe $150,000 when the house is only worth $100,000.

When it’s that case, you are going to bid off a percentage of the asset’s fair market value because the fair market value number is less. I don’t care if they owe $150,000. The house is only worth $100,000. I’m not going to bid 80% of the payoff. If $150,000 and 80% of that would be $120,000. Why would I pay $120,000 for a $100,000 asset? It doesn’t make any sense.

I might pay $80,000 on a $100,000 asset if it’s in a fast foreclosure state and legal is already done but I usually want to be below 70%. If it’s occupied, you always have to prepare for the potential that they are going to repay. If it’s a modified loan, you got to look at the terms for the loan mod. If it’s a forbearance agreement, look at the terms of the forbearance agreement.

You don’t want to be people that bought a loan that was modified and paid for 12 months, and then for 3 years, they didn’t make a payment except for once a month. You don’t want any of those. What I do, if it’s still the traditional loan that has been modified, is I will look at what the P&I payment times twelve and divide that number by what I would like my desired ROI to be.

That’s going to give me my offering. Obviously, if there’s a loan mod or there are some reinstatement terms, I’m going to adjust that a little bit but that’s going to give me my offering. If it’s $800 a month times twelve, that’s $9,600. I want to make sure that whatever I’m paying for an asset is to get me a 15% return.  I’m going to divide that number, $9,600 divided by 0.15 to figure out what my offering would be.

I’m going to take a look at an offering, whatever that number gives me, and see how that number matches up to the fair market value and make sure I’m trying to be no greater than $0.70 on the dollar because I’m making a 15% of the reinstate. The next thing I would look at is I got to figure out, “What’s it going to be like to foreclose you are going to be on?” You may want to take a look if you will come and go off somewhere within 50% to 65% of the fair market value. Depending on what I find out as far as the condition of the property, if it looks good online or if there are crappy photos with doors hanging off it and the roof caving in. I got to look at the condition of the property.

I got to look at the state it’s in. If it’s in a longer foreclosure timeframe, I’m going to reduce my bid to 50% or less. If it’s a fast foreclosure, I would probably increase it up to 65% of the fair market value. Keep in mind, I got to take my offering, plus servicing costs, foreclosure costs, and taxes, and subtract that from 90% of the fair market value. If you take 90%, because that’s probably what you will sell at the auction or what you would net after selling tax commission, 90%, purchase price plus cost, legally your net profit, and then take your net profit and divide it by your offer fee plus servicing, and that will give you your estimated ROI. I want that to potentially be at least 20% or greater on the nonperforming side with no equity.

If your money costs are at least 6% to 8%, you want to at least double that, sometimes triple that. If it’s vacant, you are not going to get the borrower to come back to the table. If they are deceased, they are not going to come back, and they are ghosted. Bob crashes and starts paying on time. Go to 50% or 60% of the fair market value, depending on the condition, and that’s what you are offering us.

What I do is I will run three columns of my spreadsheets, one to reinstate, one if I can get a deed in lieu in 90 days, and I figure out, “My foreclosure costs are going to equate to my deed in lieu numbers.” I’m not going to go above that because, why? I’m running into those three formulas down to see if A, B or C makes sense. To get them reinstated if it’s occupied, it’s always going to make sense to foreclose the loop on those three.

Look at your numbers. If it’s occupied, put a deed in lieu as your primary strategy. Like reverse mortgages, you are not going to get the borrower to reinstate. It’s more of a foreclosure. Look at what your deed in lieu costs. Look at what your foreclosure costs are. Timeframe for the states if it’s there. There’s no equity. In negative equity, you are always going to go at the lower number, which is the fair market value. Make a percentage off of that.

Stair-Step Pricing Method

There’s a thing out there called stairstep pricing. Some people are like, “Stairstep pricing is a lie. It doesn’t work.” This is meant to be a tool. If the sellers don’t give you any type of pricing specs, you got to go off of something. The reason the stairstep pricing method is out there is to protect your assets.

You are going to adjust stairstep pricing plus or minus, increase or decrease on a variety of factors but it starts at the top. If you are looking at assets that are $60,000 or greater, let’s say they are in pristine condition, it’s the best asset in the portfolio, six months to foreclose, then you are probably going to come in around 65% of fair market value. That’s any assets over 60% and above.

The higher value gets 65% into the bigger checks. Let’s take it down a step. Let’s go below $60,000. You have $50,000 assets, from $50,000 to $59,999. Same thing. If you are not getting any pricing, you probably want to be at 55% of the fair market. This is with the fact that they owe more than the property’s worth.

 

Yes, we see assets underwater still now. Assets in the $40,000 range, 45% of fair market value. Assets in the $30,000 range, 35%. Assets below $30,000, 25% of the fair market. Why? It’s because you are not going to pay $0.65 on the dollar for a $30,000 asset. You are not going to pay $19,500 if you have to replace the roof. You are now negative or the ACs walked off in protest of the summer degree. Stair-step pricing, it’s a guide for you. There are things that will adjust. You will increase your bid or decrease your bid on a variety of factors.

What are those factors? Here are some of the rules. Increase your offering by 5%, 10% if it’s in a fast foreclosure state or legal is almost completed. You got less than 90 days to finish the foreclosure. It’s 30 days from the auction. I would pay $0.70 on the dollar for an almost scenario. I would go out and do that because I know, provided it’s not trashed out, it’s off of as-is value, not after-repair value.

It’s in decent condition, I pay $0.70 on the dollar for a property I can take back, and I can sell it at the foreclosure auction. You also want to increase your offering. If your asset was in pristine condition, you could sell it tomorrow. You get even off the floor. We’ve run into some situations like that where the borrowers this was in great condition. We will increase our offering because it’s in good condition.

We also will do it if it’s in a prime location. If it’s in Austin, Texas, I know I probably need to be at 75%, maybe 80%, based on the appreciation going up. Miami, I probably need to be in 70% or 75%, with appreciation going up as long as it’s not being swallowed up on the coast by the increasing tides. Looking at where if it’s in a good location, it’s downtown, something like that, you are going to pay a little bit more for it. That’s okay because demand will speed up your sales and increase your ROI.

Increase your offering. Also, if it’s a one-off bid and the seller wants you to make individual bids and loan level pricing, you are going to need to increase your offering, for the most part, closer to 70% probably to get in the ball game.

You can always decrease your bid. The values come back last or due diligence. If you try to come in at $0.50 cents on the dollar for the premiere asset type, they are going to laugh at you and not accept your offers. One of the things you can do, let’s talk about decreasing your bid. Decrease your offering if it is in a longer judicial foreclosure state and longer timeframe. If it’s in Florida but not Miami, let’s say Tallahassee, and it’s the beginning of the foreclosure process. Tallahassee is, go ahead, Florida State, give me the whole Seminole. If it’s in a longer foreclosure state, maybe it’s a rural area, it’s outside of town, smaller thing, you want to decrease your offering if it’s in a longer state.

If it’s rural, with less than 50,000 people, I start worrying about it unless I have cardinal knowledge of that area or I’ve got assets already in that spot. Also, look at the taxes zone. You can check the taxes zone before you make an offer by going to the tax appraisal office or call in the tax office, and say, “What’s owed on this?” Reduce your bid by the taxes owed.

Also, if you are dealing with crappier assets or if you are buying this asset, they are pristine but you are trying to buy some other assets, throw in some of this other fertilizer, some of these other crappier assets for not much, then decrease your offering a little bit by what you would pay for those crappier assets. A mini-bulk offering is always more value than the one-off pristine asset because you are buying some of the junk that’s eaten up the costs, eating up the profits of that hedge funder or the seller.

Non-Performing Notes With Equity

Those are also increasing, decreasing stuff like that. You got to know what’s going on with that asset. That’s the adjustment to it. The stairstep method has been a guide using these things. Sometimes it works. Sometimes, it doesn’t work. Sellers want to smoke that heavy crack pipe, move on, and wait for some more deals. Let’s talk about nonperforming notes with equity. Here are a couple of things. My transitions here got a little goofy.

Nonperforming notes with equity, let’s flip this around. House is worth $150,000. They only owe $100,000. Most sellers out there on nonperforming notes with equity are still going to come in at 80%, 90% of the unpaid balance or the legal payoff balance, depending on the equity percentage. Right off the bat, if you are paying 80%, 90% of UPB, or legal, it’s probably not going to make sense to reperform.

 

Here’s the thing, Tony. These days are valuing off a UPB, that’s what we would normally do but when they have all these notes with unpaid balance and legal balance when you have all this equity, you can’t go off of UPB. $0.50 of UPB might be $0.25 cents on the dollar. They may go 50% legal. It varies on an asset-by-asset basis. You got to take a look at each asset. That’s the thing. Some are going to want 80% legal. They may not have paid for five years so that legal balance may be extremely high but you got to take a look at it. It’s an adjusting market out there. In some cases, it will work off of UPB. In other cases, you got to look at the legal balance. This is with equity.

Without equity, you are going to go off the fair market value, which is less. Pay attention. Here’s the thing. When you are looking at a portfolio or a state, and it has all these values, if the valuation that they give is a Zillow value or an AVM, an Automated Valuation Model, they didn’t pull an appraisal. They didn’t pull a full BPO, their value is not going to be accurate. Especially if it’s a rural asset, you can expect the values to come back less than what Zillow says, at least $20,000, if not greater. Keep that in mind. We were looking at a deal that they valued at $200,000 on Zillow and we were like, “That’s probably $150,000.” It came back at $160,000. $40,000 difference from what we thought.

They wanted $138,000. We are like, “We are not going to offer $138,000 and $160,000. If you want to figure out the number, 69% of $200,000, we will go 69% of the $150,000 and call it a day. You got to look at that stuff. Those numbers are not accurate. It may be low. We bought assets where they value the asset on the Zillow value, and that value came back $30,000, $40,000 higher.

We didn’t tell them that. We even said we will close on this thing pretty quickly. Keep that in mind. Another thing, if it’s vacant for six plus months, it has been vacant for a while, expect to rehab something. We are getting these tapes, and the sellers are sending over their inspection reports, BPOs that are six months to a year old, and it’s already vacant.

We know it’s going to need some work. It has been through a win or two. We may need to fly there. It has to go by and walk the asset to see what condition it’s in. It may make sense to make an offering at their number and then fade the bid down during the due diligence. If they are like, “No, we are sticking to this.” “Okay, great. We will make it at your price point but I have the right when I pull my real numbers that I’m going to fade my bid if it comes back lower.” Every seller will appreciate that. They can understand that.

You got to realize that a lot of these sellers may have 1,000 or 2,000 assets that they are working on. They are not going to pull values every year or every six months. They are going to use some of the same tools to try to modify or manage their assets. They may be waiting for somebody to pull values on their assets to come up with stuff. If you are using OPM, Other People’s Money, probably when you are calculating your ROI, either getting to reperform with equity or buying it as a nonperforming note with equity, you got to probably see at least a 20% ROI at least that hurdle. Why?

It’s because probably half that return is going to go to your investors. The other half is going to go to you but you’ve got some costs you get to consider along the way. If I’m going to buy a note with equity, I got to make damn sure I’m going to make a decent return on investments. I’m not going to pay above $0.80 on the dollar off the legal balance. I prefer to be at $0.70 on the dollar, if not less, because of taxes, foreclosure costs, and things that can drag out.

You got to make sure that your money is cheap enough for you. If you are at 12% money cost, it’s going to be harder for you to make money on equity deals. You want to have a cheap money cost for the equity deal side of things. Another thing to look at look at your P&I payments, your Principal, and Interest payments. If the P&I payment is below $250 a month or at that number, maybe even $300 or below, you probably want to avoid it unless you are using your own funds.

If you are going to use your IRA to fund a deal and it’s a low P&I payment, it is performing, and servicing costs are $15 bucks a month with Covey, it may make sense at that point, depending on what you are buying. As you start doing this and getting things rocking and rolling and using other people’s money, you are going to probably want your payments to be $300 or greater unless you are using your own funds. Keep that in mind out there.

My rule, when it comes to these, is to only bid on equity bills at 70% of the legal balance or less. If you have to foreclose, you got to realize you are only going to get the legal balance. You will not see the equity side of the deal. You are only going to see the legal balance slide. If it sells above your legal balance, that goes to the borrower or anybody else that’s behind first. You are only entitled to what you owe on the first. Keep that in mind.

 

Reperforming Notes

Reperforming notes, it’s a great asset class. I like reperforming notes. This is where somebody has bought a nonperforming note. They got a service or attorney involved, borrower outreach, and they borrowed back on track. Most reperforming notes are going to sell in the 80% to 90% of UPB range, reperforming depending on the underlying interest rate.

If it’s a 3% mortgage, I’m not going to pay $0.90 on the dollar because then I’m only going to see about a 3.3% return. The same thing. It’s got to make sure that my ROI is still good. If it’s at an 8% mortgage rate and it has been reperforming for a while, it may sell at a decent ROI. Contract for deed, 10% they are selling at that $0.70, $0.80, $0.90 on the dollar depending on what the rate is and what the yield is. Here’s the thing about reperforming. For it to be truly classified as a reperforming note, it needs to have twelve months of on-time payments, not 6 months, not 9 months to the 12-month period, not 10 months. It’s got to have twelve months of on-time payments.

If a borrower is going late this month or they are two months late, it’s no longer performing. I don’t care if they paid 36 months straight after they were defaulted or behind, and they got back on track. They got to be still twelve months straight. They could still be behind. They make a payment. They made twelve months straight but they are still a year behind initially because they fell away behind. If they are getting caught back up, I’m okay with that. I want twelve months of straight on-time payment, so I know that the borrower is back on track.

Here’s the thing too. The borrower’s got to be paying taxes and insurance. If they are not paying the taxes and insurance and I got to pay that, I got to deduct that from the annual net cashflow. This is a question. If you are looking at reperforming, you have to say, is the seller or the borrower paying taxes and insurance? If they are not paying that, you got to pay that. You got to do that from the cashflow to figure out what your true ROI is. Some people forget about that. The same thing, calculate this. We take the P&I payment times twelve minus servicing costs, and that equals roughly our annual net cashflow.

Divide that annual net cashflow by your desired ROI which will equal roughly what your bid amount will be on it. The lower UPBs and the lower P&Is, you are going to pay lower than 80%. If somebody wanted $0.85 on the dollar because that’s what they are going for, that’s great if it was a decent deal but this is a smaller balance, a smaller payment amount. Servicing costs are going to eat up a chunk of my payment. I got to do that.

Also, lower UPBs, P&Is, balances, and lower values too. You want to keep that down lower, almost a stairstep method. Avoid P&I payments below $250 unless you are using your own funds. It’s a good thing to do to make sure because if you do have to go back and start foreclosure, you’ve got to lease some equity between what the payoff is and what you bought the note at so that you can make up that and at least get paid in full if you have to foreclose.

Calculating Return On Investment

I want to open up for any questions, any questions yet. This makes sense so far on the performing. The performing with equity or the nonperforming with no equity, negative equity. Nonperforming with equity, the reperforming are four different classes you are going to come into. One of the things that I did, I created these slides. These next couple of slides are basically the five formulas we use when calculating return on investment. When we get a spreadsheet in, everybody always asks, “Scott, do you have an ROI calculator?” “No, I don’t have an ROI calculator.” “Why not?” “There’s no reason for me to run a deal through an ROI calculator in the front end if I don’t know my bid is accepted and haven’t pulled the due diligence and stuff like that.”

I like to run formulas. I know my percentages. I will narrow those percentages down as we get closer. I know where I need to be at. There are specific numbers I average in for my deal but here’s the thing. If I’m going to get it reinstated, pretty simple, based on a reinstatement, P&I times twelve divided by purchase price plus servicing costs plus taxes. That’s if taxes are owed, I have to add that in there.

Same thing if insurance is not being paid, you need to add insurance, too. If I reinstate or if we mod, say we are going to go with their payment. The normal payment is $400, we are going to bump it to $600 for twelve months. What’s my ROI going to be for the first year before we drop it back to $400? That’s the formula for that. If we are going the second round, we are going to do a deed in lieu or foreclosure.

This is assuming that if we get a deed in lieu, we are going to use the foreclosure costs as our deed in lieu money. The same thing, we are going to check taxes and see what’s owed on taxes. We are also going to annualize returns. If we can do this in six months, we are going to double it to annualize it. If it takes us two years, we are going to divide it by two to figure out what it is.

The same thing is the sales price fair market value times 90% minus our investment, which is the purchase price plus foreclosure plus tax vote. That would give you your net profit. Take your net profit and divide it by your investment. That’s going to give you your rough estimate ROI if you get a deed in lieu foreclosed. If you got $5,000 in foreclosure costs but you are going to use $5,000 for the borrower to get it to move out and take that, great. If it takes you six months, then to start to finish, great, then you would double that number by two. We annualize that.

This is all assuming one year as it goes. Here’s another one. That’s a deed in lieu foreclosed. Here are the major three numbers there for you. Let’s do the next one. If you want to take it and keep it as a rental. “I want to buy notes at a discount and take them back as a rental.” When you start comparing ROIs to either reinstate, deed in lieu, foreclosure, or rental, you are going to be seriously disappointed of the rental numbers.

We assume it’s going to take you one year to foreclose and then one year to get it up and rent and that stuff. You are always going to have commissions on top of your rental stuff. I say commissions of vacancy. We are only going to determine that you are going to see nine months of rent. Take your rent, whatever your monthly rent is, times nine months, divide that by your investment, purchase price plus foreclosure plus taxes if it’s owed, and then divide that number by two years. That number’s almost always going to come out somewhere, maybe 12%, because rents have gone up quite a bit but usually in the single digits. Take a look at that.

Let’s go to the next one. Our next formula is our note sale. How do we figure out how we sell a note to a note buyer? You take your P&I payment times twelve months to divide that at 85% of UPB or the fair market value, whichever is less, is equal to what your note buyer is going to roughly see if they buy it from their ROI. Another formula here is a note sale if you are basically keeping it for a year and then selling it. You take your payments, the P&I payments times twelve months that you’ve gotten for a year plus, if you sell the note, what do you sell the note for? If you sold it at 85% or whatever the amount you sold the note for minus your investment purchase price, servicing, and taxes.

Payments plus your note sale profits, divide that number by the investment account. That should give you roughly your note sale ROI. Obviously, the payments side of this is your front end, your note sales is your back end. I’m having a 16% return while I’m getting payments on the first year, at twelve months, we are going to sell the asset off and see another 35% profit.

Those are the five formulas that we use a lot in our marketing here when we are evaluating a deal. What doesn’t make sense? If you would like a copy of the slide, you can once again pull out your phone and capture that capture. That will take you to SlideShare, where you can download it or you can go to my LinkedIn and look at my updates because I posted them there as well.

If you follow me on Twitter, @1ScottCarson, you will see that we shared that link on the Twitter handles there for you too as well. Any questions, comments or concerns from you guys before we let you go? Is this helpful? Did this help you, “I understand that? Things I have to look for.” You are not going to understand how to make a bid in an hour on the show but you will, by breaking down assets by starting to work through some of these things and individual deals. One of the most valuable things that I did as a new note investor years ago was, and I was lucky, our office initially back in 2010, we had an office inside of a bigger building. It had a training room and dry race boards on all four sides.

I would spend time in there going through individual deals one at a time, running scenarios, and going through specific things. That helped me close a lot of deals by working through them, and then I made a bunch of offers. That’s the thing you have to look at out there. Let’s see here. Comments from you. Thank you, T Miller, “It’s good to see Scott out of Dallas. Good buddy. Helps with the good stuff. Helps in layers of the process. We will talk some more about this later during your one-on-one coaching, Scott.” K Hellman, “It’s helpful to get the overview of how to begin to analyze. Scott, you rock.” Thank you, K. I appreciate it. Laura Miller, “As always, thanks. I have learned from you.” We will talk to you at noon, Laura, to go through that tape that you got in, which is great.

Dom, “Good stuff. We went through your tape as well too.” It shouldn’t be scribed. The download link should take you directly to my SlideShare. SlideShare is free. It didn’t cost anything. You probably do. Go there and download it, Tony. We got a lot of presentations on here and a lot of tools that you may want to follow through on there. I had to sign up. No problem. It’s a free account, SlideShare. It’s part of LinkedIn.

Check out some of the other things in there. We had some slides from different things, 30×30 Marketing Matrix or top stuff there. If you are part of the WCN Crew, the formula slides are already in your base camp group. For $97 a month, you already had those. You got access to tapes. You’ve got also access to all of our online virtual training out there as well. I’m glad to help out.

Hopefully, this is valuable for you all. If you are interested in more of our coaching and events, if this is your first time here, feel free and drop me an email at Scott@WeCloseNotes.com. We will be glad to talk with you and talk about what you are trying to do, what’s your goals, and what you are looking to accomplish. Hopefully, we can put you on the right path to success. Once again, thank you guys for being on the Note Night In America here in 2022. Go out, and have a great evening. We will see you all at the top, everybody.

 

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