Scott Carson has a special treat for you in this episode. The meat and potatoes of today’s discussion is his note due diligence checklist. In this episode of Note Night in America, Scott breaks down his upfront due diligence to help him identify which assets to bid on. He also discusses what to remove and keep when looking at occupied and vacant assets. Take from Scott’s insights and implement them on your spreadsheet. If Scott can, anybody can do it too, so go out and take action to be on top. Tune in now!
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Scott Carson’s Upfront Due Diligence Checklist
I’m glad to have you all here. We’ve got a lot of stuff to cover in this episode. Our topic is a hot button for many folks and investors who are looking to dive into the note business but I’m going to be honest with you guys. In note investing, you will end up making your own checklist and this webinar is to help you with that upfront side. This is a short checklist and if you’ve ever seen me break down a tape or go through a list of assets as I did in the last virtual workshop we did, which a lot of folks attended and enjoyed, you’ve seen me break it down. That’s what this episode is all about.
Taking Scott’s mind and breaking it down step by step of what I end up focusing on, what I look at and what I start calculating. Throwing some initial formulas in there and we’ve broken that down for you. It is by not any means a full due diligence checklist and we’ll get into that more. We’re going to split this up into two channels. This is the upfront, before you make an offer and as you make an offer. The second half is after it’s accepted, which route do you go next?
This is all about the upfront due diligence checklist and we’re glad to have you. We had a lot of people register. People from all across the country and we know that all sorts of individuals watch from not only all across the United States but also internationally. We’re always glad to have you. If it’s your first time, please let me know where you’re from and where you’re going because we’ve been hosting Note Night in America for quite some time now.
Also, you can check out the other two shows, the Note Closers Show podcast along with the Note C.A.M.P. Live podcast. I wanted to talk a little bit about the Note C.A.M.P. here before we dive into the content. We are excited. We’re going to have over 30 speakers. It’d be 3.5 to 4 days of content all streamed live. It’s one awesome event. If you want to get an extra early bird ticket here or the cheapest price you can get, which includes the replays, go to NoteCAMP.live and register there.
If you register for the replays last year, you would’ve gotten a ticket. It should have been included. If you signed up prior to it, you got Note C.A.M.P. 2021. If you signed up for the replays after the event or you’ve signed up in one of the bonuses, I’m glad to have you here, but I know that we already have over 150 RSVP-ed to attend and that’s not including the speakers and the vendors. I tell you this right now because Note C.A.M.P. is quickly becoming and has been before the largest note event of its type. It has always been the largest online note event of its type. We have not done one in person and it’s all Zoom. It’s all recorded live. You get to talk with the speakers. We had a great turnout last time and a lot of great content.
As always, probably half the speakers are going to be unique. We’ve made a lot of connections here in the last few months with different asset managers at banks. We’ve got a lot of those pending. We’re probably going to have more asset managers talking about the market and where everything is and what they’re looking at than we’ve ever had before. We’re excited about that. If you’re not signed up for Note C.A.M.P., do so by going to NoteCAMP.live. It’s $99 for the ticket and that includes the replays and then any bonuses that come along with the conference.
Let’s get into what you’re here for. The meat and potatoes of this episode are our note due diligence checklist. I guarantee you, you’re going to have speakers. You’re going to have some questions about what we discussed. We’ll go through them. I’m going to ask you to hold your questions until the very end because most of the questions are going to fall in line with what we discussed in the next slide.
I’m not going to be breaking down a tape. We’re going to go through this in-line item for you with this and then we’ll go from there. The most important thing you guys should do is to pay attention. Listen to what I’m saying. If you don’t know the answer to that, you can always book a call with me by going to TalkWithScottCarson.com. The Note C.A.M.P. is sponsored by Baldwin Advisory Groups. We will have Dickie speaking on there and a few others.
Here’s the thing too. I wanted to open this up and when I’m thinking about it, if you’ve closed on a deal, you’re one of the many note investors out who’s closed on a nonperforming or performing note, owner finance or if you bought a note or sold one, please message me. We want to have quite a few people coming on talking about their case studies. If you’ve closed on deals, please let me know. You may be able to speak for 15 to 20 minutes at Note C.A.M.P. and share your case study and show us about your business. Once again, thanks to the Baldwin Advisory Group for being a sponsor and a speaker at Note C.A.M.P. 2022.
Let’s get into the due diligence checklist. I’m not going to go through vendors. If you need a vendor to help you pull some stuff or to pull true values or BPO, that’s always going to come after you get an accepted offer. Rarely are you going to do a lot of your paid due diligence like BPOs, O&Es, and stuff like that on the frontend. This is about how you get down to the point of the assets that you’re making an offer on it. How do you get to the point where you’re actually submitting bids back to the seller?
Here’s what you start with. What do I do when I get a tape? This is going to be a little funny for some of you, but for some folks, I have seen people do nothing because they’re so confused about what to do. I don’t know what to do. I’m overwhelmed. That’s normal if you’ve ever felt that way. When you get a list, it’s like, “Where do I begin? What do I do?” That is 100% normal. You have nothing to be embarrassed by.
You don’t want to have a meltdown. I’ve seen some people have a realtor’s meltdown. Mortgage brokers and people are like, “Oh my God.” They get so stressed about it that they think they’re going to miss out on something, they have a meltdown or they’re overwhelmed by so much that they never make an offer on it. We don’t want that. We want you to make an offer because that’s the whole point is closing deals. It is making money by buying notes. We want to help you with that.
What Is The Pricing?
The first question that you’ve got to ask yourself is going to come when you get a tape from somebody, “What is the pricing or what’s the color? What pricing point are you looking for?” Color doesn’t mean orange, red, yellow, or ROYGBIV, sunrise, sunset, or a rainbow. It means what kind of discount are you looking for? When you ask what is the price, you are not saying a bad word. If they tell you the highest and best, you give the highest and best, but if they give you the price points that we’re looking for, great. That is going to help you because there are times that they come back and say they want par or they want full payoff on it. That’s just not worth wasting your time.
I will tell you that right now. If they come back and say par, just let it go but you’ve got to ask yourself as you’re looking through the tape, are they performing or non-performing? Those two things will have a vast difference in pricing models. Another big thing that we’ve seen a lot of is a lot of government insurable notes like Fannie, Freddie, and Jimmy Mac stuff. In a lot of those, the bank or the lender’s not going to take a big discount. They’re going to take a very little discount on anything. It’s not even worth wasting your time going after those government-insured loans.
Unless you’ve got cheap money, it’s not worth you wasting the time on that. Those are the reason why you asked. Another question you ask is, “Are they newly originated? Are these owner financed?” The newly originated notes have less than 90 days of seasoning or they’re only 1 month or 2 old. That’s going to affect your price point as well.
Are they in the states that I buy in or where I have relationships? What do I mean by that? Many of these tapes that we get are going to have assets in 20, 30, or 40 states. If you don’t know where to look at first, the first thing is going to be easiest. It’s looking at the state that you live in. Are there deals in your backyard? I’m in Texas. I don’t see a lot of big discounts when I look for stuff here in Texas. I’m looking at other states like Ohio and Michigan. I have my top 3 to 5 states that I look at. That’s what I tell people.
If you get a tape in, look in a couple of states to start off with. Focus on those couple of states where you’ve got relationships. In that way, you can reach out to people or if you know people there who can help you out. If anything, start looking and if you don’t know a market or anything like that, now’s a great time for you to start researching. Become the note samurai and start slicing and dicing as John Belushi did on Saturday Night Live. It’s Samurai Deli and Samurai Dry Cleaners. “I slice and dice.”
That’s the important thing. You get a big tape in. Let’s get rid of all the stuff on there that you don’t want. Let’s slice and dice. The first thing you got to do and I’m not going to teach Excel. I’m not an Excel teacher. It is up to you guys, but you should be able to filter each tape you get and sort it. You want to sort it alphabetically by state and then by cities like Alabama or Arizona. You want to start sorting it by state so it’s easier to do because that’s going to help you get rid of the states and cities that you don’t want to waste your time on.
My biggest thing is then you want to delete them. Don’t just hide them but delete the states that you don’t want to invest in or don’t want to look at. I’m a big fan of getting rid of New York and New Jersey right off the bat. You might as well get rid of Kentucky because they have a license requirement. They want a $500,000 personal bond if you’re a person or a $1 million bond if you’re a company. You might as well just get rid of it because you’re not going to see a lot of stuff there that justifies paying for that bond. Also, get rid of Illinois or Cook County. I am predominantly off the Illinois stuff.
If it’s in Cook County, I get rid of it because it takes forever to foreclose. It’s hard to foreclose there if you’re not in the state. If you live in Chicago, it would be a market for you to take a look at but if you’re out of state and you’re unfamiliar with Crook County, go ahead and take it off. The next thing is that once you’ve gotten rid of the states that you don’t want to look at, look at the cities. I don’t care how traveled or untraveled you are, but if you don’t recognize a city, it’s probably small. If the city doesn’t fall within the top 100 media markets, it’s probably too small for you to begin with.
I always like to say, “I’m limited on my list,” and I like Ohio. Let’s say something comes in like Mansfield, Ohio. It’s a smaller city, but I know where it’s at. It’s on the coast of the lake. I would buy it there because I’m familiar with it. If you don’t know where Mansfield is, then just do a Google search. How big is Mansfield, Ohio? If it tells you less than 25,000 people, it’s probably too small. Especially if you get less than 10,000, get rid of those small cities. As I said, if you get down to where we have nothing, you can always go back. Having nothing on the tape doesn’t mean it’s a bad thing. It’s a tape that you’re not going to see a lot of stuff.
I will also look at the asset type and I’ll get rid of mobile homes. I’ll get rid of land and rural assets. Rural assets in the address might say FM for farm-to-market road one. It used to be rural route one before the GPS day. You start seeing stuff on the outskirts of towns or you start seeing it where it’s over an hour away from a major city, it’s pretty rural.
If you narrow down your list and you still don’t recognize the cities with stuff and you map it, then you can see how rural it is but I’ll get rid of mobile homes. That’s my decision. You may like mobile homes. I’ve got a student who loves mobile homes and he likes buying lots of mobile homes and that’s fine. That’s his decision and if that’s your decision, I cannot make that decision for you, but I get rid of it so I slice and dice.
After I’ve gotten rid of the city and states that I don’t like, I get rid of the property type that I don’t like. I then want to start looking at the tape specifics, a little bit more of ROI. I re-sort the tape by P&I payment. I’m going to go from smallest to largest. I’m going to get rid of any P&I payment below $250 per month. For somebody that is using their own funds, you can go less than $250 per month. When you start realizing that a non-performing is going to cost you around $90 a month for servicing or workouts, you probably don’t want to waste your time with any below $200.
If you’ve got to pay an investor and their money’s going to cost you 6% to 10%, $250 a month is going to get low and you probably not make much at all. Keep that in mind. $250 a month or less, you probably don’t want to get right below that because it could be too small in ROI. After I have eliminated the very low P&I payments, I’ll turn around and re-sort it again by values. I’ll do some high and low. I’ll get rid of values below $30,000 for the most part. It’s too small a deal. I’ll make an exception if it’s in a market that I already have stuff in and if it’s an occupied note that I can get modified, okay, great. If it’s a vacant asset, I’m going to go get rid of anything below $30,000.
I also say remove high values. What’s a high value? I don’t want to get into a $1 million asset for the most part. It depends on the state that it’s in. Because if you have $1 million in assets, you’re going to borrow a little bit of it. It could be a pain in the ass too for you. I got a tape and there is a $1 million-plus asset in Washington, DC. I got rid of it. There was a $900,000 asset in Washington State. I got rid of it. I like to be at $500,000 or below for the most part. That doesn’t mean I haven’t bought million-dollar assets. That’s fine. We have done that in the past but for the most part, starting off, you’re going to get rid of those low-valued assets below $30,000 or anything above $500,000 or greater.
If your goal is that you want to buy cashflowing assets and return cashflow to you, then you probably don’t want to look at anything over $300,000. That was going to probably be your cutoff, but if you’re fine foreclosing and taking some assets back, then $500,000 would probably be that benchmark. After I re-sort by values, I’m going to go back in. If there is no payoff or legal balance. It only shows the unpaid principal balance, but there’s no payoff balance or legal balance, I have to calculate that. I got to figure out what my legal balance and my payoff balance are.
That’s not too hard to do. You figure out when their last payment was and when is their next due, which is usually going to be months or years before that. You figure out how many payments they’re behind on and you take that principal and interest payment. Put the normal P&I payment would be times the number of months they’re behind. That’ll give you roughly an estimated legal balance. You can add 5% of that amount in legal fees and late fees necessary and then add that number to the UPB. There’s your legal payoff.
It’s your current UPB and then your P&I payment times the number of months behind. If they haven’t paid since August of 2017, I would take, “That’s 60 months they haven’t paid, 60 months times their P&I payment. That’s $300 a month times 60. That’s another $18,000 in back payments. I can add 5% on top of that for late fees. $18,000 grand plus 5% of that plus the UPB would give me my legal balance.” The reason I need that is so I need to know if they do have any equity or they don’t have any equity because the next things I’m going to look at are the values.
If they have a low payoff amount or a mortgage on there where the payoff is less than $25,000 we talked about, the values of $30,000 that we get rid of but if their UPB payoff is $25,000 or less, we go ahead and get rid of that. It doesn’t make sense to target those in a lot of cases. I got to be in at $0.25 on the dollar in those. That’s not saying you can’t get those in a lot of cases, but you just got to keep in mind that the low balance is not going to have a very good P&I payment most of the time and it’s going to be mostly principal that’s sent back. Not a lot of principal and interest back to the environment.
That’s the thing. If you start looking at small balances, especially below $10,000, you got to calculate the number of payments left and what you’re paying and analyze those payments through your financial calculator. I get rid of those. I sliced and diced. I got rid of the low values. I figured out what the value is. I figured out what the payoff is. We moved it by city and state. We’ve got rid of the rural one. We’ve got rid of the asset types that we don’t want. Does this make sense? Do you feel like you have sliced and diced enough so far? It’s a good start.
Slice And Dice
I just want to imitate John Belushi. I pulled out my samurai sword and sliced. That’s how I do it. Slice and dice. Here’s the thing. You get to do this and you have nothing left, then take off a level. Adjust your numbers. Go back, “There was a bunch of low-valued assets on this. Let me take this down a little bit. Let me get rid of anything below $15,000 or $20,000. Let’s see how this works out for us.” Maybe $200 is okay for you. It’s your own personal opinion.
Let’s start calculating. Remember, if you haven’t figured out your payoff or legal amount, go ahead and calculate that as we showed you and insert that into a column. The basic format as I said is the number of months behind times P&I payments plus the UPB. Also, if there’s any escrow advance, you often will see a column a lot of times of escrow balance. If it has a negative escrow advance, that means the bank is either advanced taxes, advanced insurance, or advanced for other things. They’ve paid on their behalf. If there’s a negative escrow balance, then you want to go ahead and add that amount to your payoff.
We got to also figure out the amount and the percentage of equity if they’re underwater or not underwater. We’re going to insert two new accounts. We’re going to take the estimated value minus the payoff or the legal amount that we just calculated. That number, if we take the estimated value that’s on the spreadsheet. It may be Zillow value. I get it. just go off of there because realize that this doesn’t do a lot of good and start researching a ton of value off the top. Because if they have those estimates, they’re not going to take any opinion of what values are until they start getting bids in for the most part.
If you see that bids are lower or if you see that the value’s way up, that’s good for you to know and make a note of it but run your percentages off of what they’ve provided. Take your estimated value, and use what they’ll have on the spreadsheet minus your payoff or legal amount. That’ll give you a number. That’s the equity dollar amount. You want to have that one column and the second column, it’s figuring out your equity percentage. Take the equity and divide the equity dollar amount by the estimated value and that will give you the equity percentage. Taking the amount that we calculated by the estimated value will give you roughly, “They’ve got $20,000 equity. $20,000 divided by the estimated value of $80,000 that’s 25%. They got 25% of equity on this.”
If I start seeing large equity deals, anything over $50,000-plus where there’s a ton of equity like that, I get rid of it. On a $500,000 house, that’s not much. It’s only 10%. I’ll bump that number up. Usually, I’m staying at $500,000 assets or less. If I start seeing where there’s more than 10% equity, I’m going to remove it because the seller’s not going to give me a big discount off what’s owed if there’s a ton of equity. If there’s negative equity, I don’t worry about that. If there’s $100,000 in negative equity where they owe $100,000 more than their property’s worth, I’m going off for the property value so it doesn’t really matter.
Keep that in mind with any large equity deals that are $50,000-plus because values will change. Maybe they only have $25,000 in equity. Maybe they have $10,000. It all depends on the values but that $50,000 I have found can fluctuate. Here in Austin, our house has fluctuated $50,000 in value based on people dropping their values and the sales changing in the market. We live in a nice area here in Austin, Texas. It’s not a $1 million house, but it’s still a nice area. Those are things to keep in mind.
The next thing, now that we’ve eliminated the assets we don’t want to waste our time with and we’re starting to calculate numbers, we want to see which ones we’re going to make a bid on. We’re going to start slowly calculating our assets. I’m going to lose some in here. Don’t be embarrassed if I lose you. Sometimes, we’re a better visual. I know I’m a better visual. Keep in mind that you are okay. The seller gives you a pricing percentage. If it’s not on the spreadsheet, then insert a column and put the number in. They say, “We want 65% of FMV.” Write a column, 65% of their estimated value or whatever they think their estimated value is. That would be what they’re looking for, 50% or whatever.
Go ahead and put that in there. Calculate that number and that’s going to help you figure out what they are looking for. You’re going to start looking for potential modifications and re-statements. We want to look at where there is that big opportunity for that because that’s what we’re looking for. I usually insert a column. I’ll calculate twelve months times the P&I payments to figure out, “What’s the cashflow if I get them to start making payments on time again here in the first twelve months?”
I’ll also do it because I always want them to bring a little extra to the table on the trial payment plans. I do the same thing. Principal and Interest payment times sixteen months is its own separate column. I’ll say this is the potential reinstatement ROI or this is the TPP ROI or mod ROI. They bring four extra months to the table or a chunk of payments to the table to do it or they start paying over again. How does this calculate out?
I’ll then re-sort the tape by occupancy type. I’ve got those two columns in there. If it says it’s tenant-occupied or owner-occupied or occupied, that’s great. I’ll want to get the occupied altogether and the vacants altogether. Why? Because it’s two different types of assets. Next is the occupied assets. I’ll insert a column and I’ll take the twelve months that we figured. It’s two columns, but the first column is twelve months of cashflow divided by the pricing. Remember that the pricing point that they gave you is in a column. I’ll say, “What’s it going to be like if I get them straight up performing again? This will be my recent amount and then I’ll do the same thing with the sixteen months.
I’ll take the column that I calculated and then I’ll divide that by the pricing point to figure out, “If I can get them to reinstate and bring in some extra to the table through a trial payment plan for the first year or at least four months extra in the first year. That’s why we say sixteen months. This is going to figure out what my ROI is. My ROI is going to be a little higher with sixteen months divided by the pricing versus the twelve months pricing because we got a little extra amount. It should be at least 33% higher. If it’s at 12%, we’ll reinstate it. It’s probably going to be at 16% because that’s 33% higher but you need to know those because those are important for you. If they come back and adjust or you bid less or if you see that the ROI, if you get them to reinstate, it’s at 7%, that’s not worth the time.
This is important. If you’re looking at that spreadsheet now and you’ve got your ROIs to get them to reinstate, you want to make damn sure that the estimated ROI is going to be at least twice what your money costs are for the most part. Let’s say Bob is going to give me money at 6% interest. I want to make damn sure that on the front end of this I’m seeing at least a 12% cash-on-cash return because if I got to pay Bob 6%, I got to make sure I bring something up. Let’s say Bob wants 10%, I need to make damn sure my ROI is 20%.
This is only on the front end. We’re only running some numbers on this stuff but this is where you’re going to get into, “Maybe I need to adjust my bid amount to a price that makes sense so I’m making at least 12% to 15%. The reason we put these spreadsheets, these extra columns in there is so you can adjust these things and see, “I need to make my offer a little bit less.” It’s okay where it’s at and what they want. It still makes sense.
If the bidding instructions are not stated, they tell you, “I don’t know. Give us your highest and best.” I hate that. Besides asking what the bid point is, I’m always going to ask, “How many people are seeing your stuff? How many people are on your list? How many people have seen this deal?” If you’re the only one that has seen it, that’s a good thing. If it’s with Paperstac or SN or somebody else and a ton of people have seen it, then you’re going to have to come in higher for the most part versus being the only one that’s seen it.
Upfront Due Diligence
Here are some rules to go by. Upfront due diligence, upfront pricing model, and stuff like that, it’s all based on the spreadsheet. Look at your assets with equity. Remember, we ran that formula, which is the P&I times twelve divided by whatever the fair market value offer was. When there’s equity, most sellers are going to want 80% of UPB or even 80% of the payoff amount if there’s a lot of equity above the payoff amount. Look at the numbers. If they don’t give you a payoff, then 80% of UPB and figure that out.
Usually, you want to make sure that number is still going to leave you with a 20% profit margin potentially. If you’re making an offer at 80% of UPB, you want to make sure that the ROI is whatever the payments are if they reinstate that still come in at a point that makes sense for that double-digit return. The assets with the negative column, negative equity where they owe more than the property’s worth, you can’t go off of UPB or payoff. You got to go off a fair market value.
We then insert a column and start calculating based on the fair market value, their estimated value. We re-sort that column by the market values from smallest to largest. If it’s an asset below $30,000, if it’s $29, 999 and below, the most we’re going to offer when there’s negative equity is 25% of the fair market value. What we’re going to do next is we’re going to divide that number by 12 months of P&I to figure out roughly, “If we bought it at $0.25 on the dollar and we’re going to reinstate, what’s that ROI going to look like?”
The next step up is anything below $40,000. That’s between $30,000 and $39,999. We’re going to multiply it times 35% and divide the 12 months to that figure out a quick ROI. Up to $50,000 is going to be 45% divided by 12 months of P&I. Anything at $50,000 or more should be FMV on there, fair market value. You would multiply at times 55%. If this is a one-off asset, a lot of times, they may want a little higher but here’s the thing to look at. If it’s in a fast foreclosure state like Texas or Georgia, which is the two fastest in the country, you’re probably going to have that at 65% or 70% of value no matter where it’s at because it’s a fast foreclosure state.
If it’s a state that is a longer foreclosure process like Florida, which can be 12 to 13 months right now, if they’re a year into it and they’ve only got 1 year left or 1 month left or 2 weeks left, less than a month roughly, then you probably need to be at the 70% or high 60% because it’s a one-off asset with that. Keep in mind looking at the foreclosure time there. There should be an estimated foreclosure sale date. You can ask, “Is it legal to start on this already?” We’ve seen tapes where it’s 60% and they hadn’t filed the notice of default to the lis pendens. If it’s not started, well then you got to wait and this means you’ve got a year before you finish the foreclosure.
The states that have that long foreclosure timeframe like Illinois or Florida. You can even look at Nevada having a long foreclosure timeframe where it’s usually fast. Those would drop it down. I’d be offering 5% to 10% less than what I have on here because of the fact that you’d have to hold onto it for a while. Don’t be afraid to ask because the deal started with me. Go back to the seller and ask.
Vacant assets have their own flavor. I’m not a big fan of you buying new vacant assets all the way across the country. If it’s in your state, that’s a different story because you can get to it usually pretty fast but for vacant assets, your major strategy is not going to be to modify or reinstate vacant. It’s going to be to foreclose or deed in lieu. Get a dead in lieu from the borrower and then hopefully, look to foreclose.
If you’ve narrowed this down, remember we’ve talked about you have your vacant and your occupied assets you’re looking for to modify your vacant assets is a tale of two takes. I’ll take those vacant assets and I’ll match them using BatchGeo.com. You can map up to 250 assets at a time but I wouldn’t do that on the frontend. I would take until you’ve narrowed down your list and mapped those.
As you’re looking through these assets, the first time you should be looking at is what the assets look like. If it’s ugly or it’s got an old photo or it’s a rural property and they haven’t had a photo in 5, 6, or 7 years recently, they haven’t had a photo anytime soon. It’s because it is rural. They may not be there anymore. I don’t waste my time. If it’s older than three years your photo, I don’t want to look at it. I prefer to be a year or less for the most part but what I’ll do then with vacant assets is I’ll insert a column and I’ll multiply the estimated value by 90%. My column is like if I foreclose on it. I’m probably going to net 90% of what the value is based on closing costs and commissions. We’ll just say $0.90 on the dollar.
We’ll take that 90% of fair market value and subtract what the bid is plus roughly $6,500 on foreclosure costs. That’s a little high in some states. It’s lower than others, but that’s servicing and foreclosure mixed together plus taxes. We’ll talk about taxes in a minute. If I’m getting a $100,000 asset and I’m going to get it for probably 90%, that’s $000 what I’d sell it for. If I had to bid $65,000 plus the $6,500 foreclosure costs, I’m at $71,500, which means I’m making 19,500 provide there are no taxes. My math is right off the top of my head.
That is skinny especially when you start figuring out, “I got to pay 10% in money costs on $70,000 or whatever I borrow, then I probably need to back my bid down to $50,000 versus $60,000. The gross profit is divided by what you invested in the asset. Take a gross profit and divide that by what you’ve cost. The bid was $65,000 plus foreclosure plus taxes. That should give you the rough ROI estimator and that you want to shoot for 20% with that number.
If I make $15,000 on a $65,000 investment, that’s somewhere around 22%. Now, that’s worthwhile. I want to try to at least make $15,000. If you are looking at your numbers, you want to get rid of low ROI foreclosure. If you’re making less than $10,000 on the front end, it’s probably going to be too skinny a deal for you. $10,000 is not bad to me after I paid my investors, but if that’s $10,000 before you’re paying investors, you’re not going to make much at all. Going back here as I said, we’ve looked at the tape. We’ve got rid of the bad cities, the locations, the values, low UPBs, and low payments. We now have either a potential list of assets that we get performing and potential vacant assets that we are probably going to take deed-in-lieu of foreclosure.
You’re going to technically have two tapes on there. It’s better for you to divide the tape off into performing, potentially performing, and then potentially non-performing that’s because you modify potential notes that you could do deed-in-lieu of foreclosure on. As I said, we’ll get rid of the low ROIs. The low ROI, if it gets reperforming, it’s below12%. The 15% is the lowest ROI you probably want to shoot for the reinstatement and then on the deed-in-lieu of foreclosure, probably 20% is where you want to be at. It’s different extracts.
ARV “After Repair Value”
I prefer a 25% ROI so that could be $20,000. That 25% is going to give you enough room, even if there is an a-ha or even if you’ve got to put some work into it, but your values should go up. You are never going to take the values that you make an offer on as ARV, After Repair Value. I was going to be off of it as it does. We always know that paint and carpet and a little cleanup can boost your value to 10%, 20% to 30%. Cleaning up a kitchen will make an asset pop. A fresh coat of paint, fresh carpet, new appliances, and new knobs in the kitchen can help accelerate your value. It doesn’t have to be a lot, but that’s what we want to do. We want to get rid of the low ROI.
As I’ve said before, I like to try to make at least $20,000. It’s my benchmark for what I’m going to net on the deed-in-lieu of foreclosure. As I’ve said before, I also get rid of ugly properties below $50,000 and this is why BatchGeo is so important. If you’re looking for an asset it looks good but it needs a little bit of work, just look next door. If the two properties are crap next door to them, I guarantee that photo is a couple of years old. I guarantee the photo of the property you’re looking at is going to need more work.
Try to stick to just 1 to 2 states when it comes to doing rehabs in the states that you’re familiar with. I’ll do a rehab in Texas. I’ll do rehab in Florida. I’ll do rehab in Indiana. I’ll look at a few others, but for the most part, those are the three states I’m most comfortable with because I have the teams, the crews, and the experience there. Now, if you don’t have any experience in Florida and you don’t have any experience in Texas or stuff like that, you want to start connecting with investors in real estate clubs in those areas trying to find the right people to help you out.
Start off. Don’t get into doing an ugly deal just to do a deal. That’s the fastest way to get rid of money. You’d be better off spending time getting the coaching to help you avoid that and raising capital to make some things. If you don’t have money for a deal, do you know what you need to do? You got to start raising capital so you can start doing things. Before submitting your bids, you’ve flipped through the tape quite a bit. You’ve done some good stuff in identifying the top 10% of the tape that you want to make an offer on. One thing you got to double-check always before submitting your bid is to check the taxes owed. This is not hard to do. Most of you can find the taxes on NETROnline.com because you’re going to reduce your bid by the taxes owed.
You may have to call the county in some areas of the country. They won’t let you do a search by just the address. They want you to have an APN number or something like that. That’s okay or they won’t let you get onto their website for free. Wayne County is famous for doing this. In Michigan, you’re going to have to pick up the phone and call. If you need an APN number beside the address, go to Zillow.com and search on Zillow. They’ll usually give you the APN number and it could be anywhere from 5 to 11 digits.
When you call the county, use the AP number. The AP number goes directly to what you’re looking for and you may need the AP number on the NETR Online, but check the taxes out. Pick up the phone and call them, especially if you see that they’re a year or two behind. You want to make sure that there’s not an upcoming tax sale because that can affect your bid. That can affect the motivation of the seller quite a bit. “There’s a tax sale coming up next week. Are you going to pay the $4,500 in back taxes owed?” “No.” “I’m not going to bid more than this. I would’ve bid $9,000 but now that there’s 4,500 in back taxes owed, I’m only going to offer $4,500.”
Check your rental rates. It’s important to know that because I guarantee you, people, borrowers have been looking at their rent rates of them having to move and do some other things. Zillow or Rentometer are my two favorites to look at for rental rates. We’ll give you a copy of that. Check the crime map. If it’s in a bad area, Trulia no longer publicizes the crime map so you have to go to Homefacts.com, which does a good job.
It’s one at a time which is a little tedious but still, check it and it tells you how many sex offenders are, what’s the rate or is it above average for that area? It’s good to know what type it is. Is it burglary or vandalism or stuff? It gives you an idea. One hundred is the average. It should be ranked above 100. It’s a higher primary, if you are less than, you are under a better area. Map your assets. We’ve talked about this before, but take your assets and map them on BatchGeo.com and start looking at the assets and what the neighborhood looks like. Is it in a current photo from the last six months or last year? Okay, great. If it’s not, then you need to do it. As I said, remove the ugly properties. Check the dates of the photos.
We’ve bought notes before where the photo was from four years ago but the note I bought was originated three years ago. That tells me that somebody moved into the property or bought the property, fixed it up and that the photo online is not accurate so we got to look at that. Keep that in mind. That might often can be a great way for you to find a deal that looks decent that some people are avoiding because of the fact it’s got an ugly photo online.
Here’s another trick. Most people don’t do this, but call the county and tell them that you’re the bank and you’re calling to see if the utilities are on. Call on the county like the gas or the water or the septic or sewer or whatever. Call to see if the utilities are on or if there is a balance owed. They may not be able to tell you how much is owed, but they can verify if it’s on or off. If there is an outstanding balance. I’ve had some counties tell me, “They’re $5,000 behind or they’re in a payment plan or they were in here getting to an argument.”
Sometimes, you’ll get some talkative turkeys from the county and they can give you some great information. When you’re submitting your bids, remove the assets you aren’t bidding on. Delete them. Don’t hide them. Some people will just hide them. You still have the original in the email that was sent to you or however, it was sent to you. Save your original tape in a file folder from whom you got it. That way, you can go back and take a look at it.
I hate it when people hide columns or hide bids. If I go to copy and paste it, I copy and paste the whole thing. You want to make it easier for your investor or whoever is taking the bids to be able to copy and paste your bid into a master spreadsheet. If your pricing is going to be below the reserve, what they’re looking for, make a note of the reason and why. “I would’ve made an offer at $9,000 but there’s $4,500 in back taxes that go to the foreclosure next month or next week. Also, the property is trashed out. It’s missing a roof. The air conditioner’s no longer there,” or something like that. Anything that you can add shows the seller that you know your stuff.
For some of them, it will matter and for others, it won’t matter. Others are only taking and collecting bids on behalf of others. They are trying to collect their point. They’re not doing a lot of good work in collecting that information because the sellers want the highest and best. The brokers want the highest and best to get a higher commission. If you’re dealing with a direct seller like myself or something like that and you tell me, “It needs work.” “Okay. I got too many assets to note the exact story of every deal that I’m working on.” Submit your spreadsheet via email. I always ask the person I’m submitting the bids in, “Can you reply back that you received it?” and they’ll say yes.
There’s no doubt you’ve got my bids and I’ll ask them when again. If they haven’t told you this, ask when are you making a decision or when are you spending bids. They tell me they’re spinning bids by Friday and then it’ll probably be 1 week or 2 after that. I’ll mark my calendar 30 days after bids are due. If I don’t hear anything back, I’m going to follow up. “What happened with those? Was I not the highest bid? Did this even close?” They’ll tell me, “It didn’t close. It fell out or, “Yes, you didn’t get bids high enough.” I’m like, “Do you know where they want it?” They wanted it at $0.80 on the dollar and not $0.60. I’m like, “That’s like smoking crack. They need to pack a crack pipe.” If it’s not performing notes, you’re not getting $0.80 on the dollar.
I mark my calendar and set an appointment with myself and say, “Call David, call Jim, call Derek, call Rick, or call Val 30 days after I submit bids.” If I didn’t get the bid, ones I did not win, I want to follow up back up because that’s one thing that most people won’t do and it’s where we end up seeing probably 50% of our accepted offers come in. It’s 30 days later.
Part of this during your due diligence is that you can be collecting the things that you’re looking at are helping you with marketing. If you’re looking at an asset, you’re making a bid on it and it looks decent, you might as well have saved the picture because you start marketing while you’re waiting for a bid to come back. You start marketing your case studies or the deals you are working on. You can take a screenshot of the properties. The street views look good.
Look for images from past sales and past rentals. You might find a picture of the property on the county website. We found that for one in Muskogee. The street view picture doesn’t look the greatest so I went to the county and was checking taxes and lo and behold, there is a great-looking photo that the appraiser did. I’m like, “I’m going to use that photo.” It’s new. It’s dated sooner so I’ll use that. When you look at your tax, print that website of the county appraisal tax authority showing you how much in taxes are owed. Save it. It can help you in your due diligence.
While I’m also in the NETR Online or the county appraisal district, do you know what I do? I do a quick search after I type in the address. I hit the back button and then I type in under the owner’s name, equity trust to see how many people that have a self-directed IRA in that county are because those are going to be potential buyers for that property that I have to foreclose on. They are potential people to fund the deal that’s in their backyard too. I’ll save that list as well.
We haven’t talked much about condos, but if there’s a condo, when I’m looking at the value and stuff like that, I will remove the unit number a lot of times because if I put the unit number, it’s going to screw some things up. What I have to do is I am typing in the address. I’ll type in the address without the condo unit and it’ll pull up the full list of every unit in the condo. What do I do? I go find my units to match it. I make sure the name matches up with who’s on the spreadsheet but then also after I found the unit number of my due diligence, I will go back and look and see if there are any LLCs in the condo community or any LLCs that own units in there.
I will also look to see if there are any condos that have been foreclosed on that the HOA is taken back. It is not a common area, but the unit numbers and the condos foreclosed on because those can become great deals for you to buy first or you’re looking at buying one note can lead into 2, 3, or 4 others in units. I’ll run it on Rentometer and see what kind of rent rates are in the area and what the rent is. That’s a good thing and I’ll save that screen. Rentometer lets you do so many at a time. It’s sometimes worth getting it. They were a sponsor of the Note C.A.M.P. the last time and I think they’re going to end up sponsoring again. I’m waiting for them to come back with me on the sponsorship because they got a lot of good stuff out of last time.
Another thing is when you submit, I will also look at Whitepages or Spokeo.com and do a quick reverse address search for the homeowner to find if there’s any other contact information or any other phone numbers or relatives that live there to be able to start tracking them. If you’re going to make an offer, I’ll save that one spot to see if they got any numbers to help you out with your due diligence. That can make it valuable when you buy a note. If you know that AI can get ahold of the bar pretty fast because it’s a working number, then I’ll save that and go from there. That’s it. You submit your bids and that’s your upfront due diligence aspect.
We’re not getting into verifying the value. We’re using the estimated value. I know that Zillow is way off, but you have to start at some point in kind. Even if they have pulled the BPO, it may be way off depending on when that BPO is pulled. Always trust but verify. That’s what we always say but we don’t pay for anything. You’re not going to call Baldwin Advisory Group until after you’ve got an approved offer and a loan-sale agreement is signed most of the time. You’re not going to call them for a title report. You’re not going to call Dickie for a skip trace until you’ve got an approved offer back and are going to contract.
Do you have any questions on this? Was this helpful? Larry is asking a good question. “Scott, you don’t use a CRM for follow-up. You just use a calendar. I was thinking about using Pipedrive or the calendar would be great.” Pipedrive and all those can be fancy, but what I do is I’ll set an appointment. I can set an appointment in my CRM like Keap.com or I can go in my Outlook and I usually look at my Outlook and set it in my Outlook, or I will put it in Calendly as well. Calendly and my Outlook are the two easiest things to do. Make it simple so it shows up. You got to remember this Larry, KISS, Keep It Simple Stupid.
Somebody asks, “Scott, don’t you want to run your spreadsheet and your offers through an ROI calculator?” No. I don’t need to run it through an ROI calculator and all those different things on the frontend, because often ROI calculators will double dip on expenses. They’ll double dip on cost. You’ll end up not seeing where everything is truly at.
There’s no reason to overanalyze an asset if you haven’t gotten the offer accepted. If your offer’s accepted, then yes, you’ll run it through an ROI calculator of some sort. Everybody has their own. On a Note Night in America in 2021, we talked about creating your own ROI calculator and a lot of people showed up. I highly recommend you check it out but the idea of this is to keep it simple and make it easy for you and that’s one thing.
If you start putting in different things than what you’re used to looking at, you’re going to miss out on them. I’m looking at my Outlook and my calendar. Those are the two things I’m looking at because everything is one of those things and I’m going to be notified for both of those. Those are the two calendars I look at. Most of the time, they’re overlapping, which is good so I can track them out.
Larry says, “I swear every webinar you do, I learned so much. Thank you so much for everything you do.” Thank you, Larry. I appreciate that. Thank you so much. “I appreciate what Larry said.” Thanks, Linda. I appreciate that truly. I do appreciate your feedback on things. I’m to help you guys get rock and roll. Somebody says, “I guess it’s all in the details of the asset purchase agreement.” What do you mean by that, as far as the times to close or the specific numbers?
Usually, if your offers are accepted, the seller’s going to come back and ask you, “When can you close? Is it 7 days, 7 weeks, 7 months, or whatever?” Depending on what type of asset classes, it could be anywhere from 7 days to 6 months in some cases. We’ll talk more about the loan sale agreement and some of the things you worry about. We’ll do that in a later episode.
If you’re making an offer and they come back to accept it and they send you the loan sale agreement, there’s still going to be time for due diligence. There’s usually a date outlined in the listing agreement when you can cancel it. Cancel that deal off of the contract or cancel your offering on that based on due diligence. Most of the time, you have the right to reject it up to the point that you’re going to close it.
The only thing about this is if you’ve got a deposit if they want earnest money, most sellers don’t, but they are going to ask you, “Let’s make sure you’ve got due diligence for ten days, and then you close five days after that.” If you don’t do your due diligence in those first ten days and you find something after ten days, that’s on you.
This is why we talk about checking taxes before submitting because if you submit a bid and you didn’t check taxes, they’re going to accept your bid as your bid. They’re not going to reduce it by the taxes owed because you didn’t do that in the frontend. If the value’s different, that’s different but everybody can check taxes on the frontend. If there’s an issue with the title and stuff like that, you have the right to cancel it. No questions asked. That’s what’s so be about the note business. You’re not limited to 6 or 7 days for the inspection period like on traditional real estate. Any other questions, comments, or concerns about this episode? Did this help answer some things for you guys? I hope it did.
Take all these to start implementing them into your spreadsheet. Start looking at it and going from there. Go out and take some action. That’s what it all comes down to. You could have all the best systems and best strategies in place, but if you never implement them, never take them out of the box and never get out and walk that dog, you’re never going to find a deal to bark at. As I said, take some action and apply it to your business. Keep it simple. That’s what we try to do. Keep it as simple as possible for you. It’s not rocket science. It’s note investing. If this guy can do it, anybody can do it. Go out, take some action and we’ll see you off the top.
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