Succeeding in this industry takes being in the know of the market. In this ever-changing environment, keeping track of all the movements can be challenging. Good thing we have tools and experts who can make the process easier. In this episode, Scott Carson has the perfect guest! He sits down with Michael Jimenez, the CXO and co-founder of Xchange.Loans—the online marketplace for non-performing loans. Michael’s focus is sourcing lenders with distressed commercial notes and OREO to sell. In today’s show, he shares a presentation discussing the current market conditions in the distressed commercial note markets. He then shares some of the ways he finds asset managers who can further help you navigate the industry.
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Keeping Up With The Current Market Conditions For #CommercialNotes With Mike Jimenez
We are back with another rock star on the show, a guy we’ve had on for the last episodes before. This will be his third appearance because he knows his business. This is a guy who is up to his elbows and sometimes his shoulders every day in the commercial note space. Who are we talking about? We’re talking about the man myth. He is MJ@Xchange.loans out there. We got Michael Jimenez on here, folks. If you don’t know what Xchange.loans is, check it out. He’ll talk about what they do there. Mike, we’re glad to have you at the show again for the third time.
What a wonderful intro. You got my name, nickname, and email address because it’s MJ@Xchange.loans. Exchange.loans is the marketplace where you buy, sell and value nonperforming loans. It’s strictly commercial. We’re very active in the single-family rental portfolio markets. That’s why I got involved here with Scott. Thank you for having me. You are correct, third year. Thanks for having me here. As Scott said, I try to focus on all things commercial real estate related to NPLs or Nonperforming Loans or OREO or REO, as some others say, and CRE finance.
Let’s break down Xchange.loans, the online marketplace for nonperforming loans. This is what we’re going to go over. It’s a brief intro and background on me, my company, and my plug here. We’re going to be talking again about the distressed debt market. This is where you’re going to see most of the updates if you’re with us in 2021. I’m going to show you where we are now, then I can throw out some Easter eggs there. When we’re done and get into some fundamentals, we can explore that side more.
I’m going to teach or show you a little bit about sourcing CRE NPLs. We’ll be covering this pretty quickly. If you guys want to focus on that towards the end when we open it up, I can show you how I do that. Buying CRE NPLs. I don’t buy too many. I’ve bought a few. They’ve all worked well. We have about 60,000 investors that we eBlast our stuff out to. We only send you deals. We won’t send you any junk. No fluff. I’ll go through with you folks what we deal with on our end buyers, any advice or tips and selling your loans, loan sale, fundamentals, timeline, process, and buyer profiles. We can chat a bit about seller profiles, too, but I’m going to focus on trying to get through this.
I’m going to try to focus on getting through this in a fairly brief manner. I know we got a limited time, so I’ll try to get through this a bit faster so we’ll have that time to open up to questions. Anything you folks want to know about commercial loans, I’m your guy. I’ll do my best to answer it or tell you that I don’t know, then we can always look at stuff. About me, I’m Michael Jimenez. I’m the Founder and CXO of Xchange.loans, your loan sale marketplace. The name of the company is the URL as well. It’s https://Xchange.loans. We have a marketplace where we focus on helping investors, lenders, special servicers, and intermediaries buy, sell, and value their nonperforming loans.
Distressed debt cycle, where are we now? You probably had dejavu from 2021 if you were on for that one. This one’s updated. You’ll see new numbers. Essentially, there are four cycles to the economy and the real estate market. They all move a little differently at a little different pace between the overall economy, jobs, employment, and inflation, which is a big thing now, CRE, traditional real estate, then equities.
Everything moves in cycles. This is the overall cycle for the economy. Our focus is going to be on CRE. Now, where are we? There are four stages, market cycle recovery, expansion, hyper supply, and recession. We are technically in a recession. It’s been acknowledged and disavowed by some. A recession is when you have two consecutive quarters of negative GDP growth. It’s when it stops growing so quickly. Here’s another thing we can touch base on later. I don’t want to get too down the rabbit hole on fundamentals because I know we’re all deal junkies at the end of the day.
What we’ve seen is called yield curve inversion. It’s not Tom Cruise from Top Gun, which we were inverted. Yield curve inversion is when the standard slope of yields on the different, varying maturities of bonds or other fixed-income assets inverts. Now, it’s more expensive to borrow shorter-term debt than long-term debt. As time goes by, more things can go wrong. Typically, that longer-term debt, like a 30-year or 10-year mortgage, which most commercial mortgages are ten-year mortgages with 25 to 30-year amortization tables, is supposed to be expensive because it’s further down the road, and more things could happen. You want to be compensated with a higher rate. When the yield curve starts inverting, that means something’s up.
That’s the bond market. That’s not equities that go up and down daily. The bond market trumps all markets. When it moves, it’s a big market, and the people tied to it are very serious, and nothing gets by them. We’re seeing all these signals saying that we’re in a recession, and there’s going to be a larger correction. I don’t like to say bad or worse or anything like that. We’re also seeing those things come to light, that we’ve experienced saying things that we’ve experienced back in prior cycles. This time is different.The bond market trumps all markets. Click To Tweet
Why is it different? We got here because of hyper-supply. What was the hyper-supply? Everyone’s saying, “It’s not going to be 2007 and 2008 again.” It’s like, “It’s not because it’s 2022.” Hyper supply wasn’t in residential buildings because everyone was saying, “There’s not enough housing.” It’s not going to be like it was in 2007 or 2008. Correct, but what we had, even more this time, was a hyper supply of debt and a hyper-supply of free money because of COVID.
Back in 2019, I was calling the next recession because we had yield curve inversion, but then COVID happened then the Federal government sold the moratoriums on foreclosures as well as evictions. You’ll see some of that. We had them print a massive amount of cash, a 40% increase in the overall monetary supply. It took us about 100-plus years to print off that much money. We did it in a couple of months. We had the PPP and the EIDL loans, which smoothed out any spike because everyone was thinking back in 2020 and up to now, “Where’s all this stress debt?”
Everybody had their cash. They’re ready to go, but it didn’t happen because of the free money, the deficit spending, and the moratoriums. There’s a lot of stuff there in the shadow of inventory. We’ll get into that in a bit. Now we’re seeing it come to the surface where people are paying a lot more for their standard things like groceries, healthcare, gas, and rent. That’s what happens. Like every good party, you pour out too much booze, and you’re going to have a hangover. That’s the phase that we’re waiting to enter in now.
We left officially hyper supply phase, and now we’re going into recession. Opportunities are going forward, the same as it ever was. There’s CMBS Bank, Small Balance Loan, which is SBL, C%I, Commercial and Industrial. The hotel has been the number one retail, single-family, rental, and small mom-and-pop multifamily house. Those are the folks who maybe own a few units, and their tenants are still not paying. They extended the foreclosure and eviction moratoriums a bit further in LA.
You’ve got some folks who haven’t collected rent from their tenants in over two years. It’s crazy. Secondly, short sales as well. You’ve already seen some increased velocity of defaults. Short sales are going to be huge this time around. If I were you all, and if you can’t get the loan because that takes a while, the short sales are going to happen first. When things get repriced, everybody is on Zillow. They bought their house. No one can refi out. It’s going to be tougher. What’s the new value?
If they start defaulting on their home loans, that’s where you can go look at your pending list and things like that or your local stuff and offer them a short sale. The short sale is going to be pretty big. Next is LSA. What is an LSA? It’s Loan Sale Advisor. I am a loan sale advisor. Our firm, me, and my cofounder, Andre Cuadrado, we’re some of the best loan sales advisors in the country. If you want to be a loan sale advisor, it’s a higher standard of knowledge execution and consultation because your clients are lenders.If you want to be a loan sale advisor, it's a higher standard of knowledge execution and consultation because your clients are lenders. Click To Tweet
On my side, my clients are commercial lenders. It’s a lot different than being a broker who’s a bit more transactional. I was a broker as well. I’m trying to get people to sign this lease. I’m trying to show this property, and I’m glad I don’t have to show properties anymore, but it’s a bit different. You’re there to consult with your client and give it to them straight. Another thing with the LSA is it’s the way we work and the way, if you’re a buyer, you’re going to want to work. If you’re going to want to win these deals and get them closed, you’re going to want to be all cash. Simple as that. Always have your cash ready. NPL fundamentals that’s probably where most folks get a bit hung up.
You’re going to see more folks do this and start already. They’re going to try to switch from brokerage to distressed assets. Number one, know your NPL fundamentals, your role, the jargon, and the official terms. What does that mean? What makes an NPL? What’s the process? What’s the process in your jurisdiction? Are you in a judicial foreclosure state? Are you in a non-judicial foreclosure state? How hard is it to get a receiver? These are the terminology too. The biggest thing about NPL fundamentals is knowing what the actual note is worth and where it stands now, regardless of where it is in the default and the path to the title process.
Also, for NPL fundamentals, know your role. What do you want to do? Do you want to be a loan sale advisor? Do you want to be a distressed debt consultant? Do you want to work for a receiver? Do you want to sell foreclosures and pre-foreclosure so you can stay more on that brokerage side? What I do as a loan sales advisor is sell loans. I’m here to sell loans. I do REO sometimes. It’s tougher for me. Figure out your role in the distressed marketplace. This is going to focus more on LSA, but figure out your role and stick to that.
There’s one bit of advice I can give you for trying to find deals or grow your business, know your role, stick to it, and become an expert. Stay off the daisy chain. Everybody knows what the daisy chain is. It’s like when someone’s trying to send you an unsolicited tape. Data tape is usually what it is. You don’t even know who this is. It’s usually on a daisy chain. That’s the third rail of reputational risk. I don’t think there’s anything you can do to damage your credibility more than show deals that someone’s already seen that you have control over.
You don’t have control over it, or you’re sharing and throwing stuff against the wall that isn’t the real deal. I’ve had my own list sent back to me that we were trying to sell. Somebody is trying to sell me back my own deals. I would love to know, Mike, how many people you call that tells you that they’re a buyer’s rep?
That’s the first thing. That’s why we have all cash. I can show you guys a bit more about our process. If you don’t have cash, you’re not even going to see the deal. You can see our marketing. You can look at the data tape. You’re going to call Andre too. You don’t call me. I focus on chasing down these lenders and finding them. Andre runs our trade desk. He proofs everybody up. We have a very firm proof of funds requirement. That’s why the buyers love our site because they don’t want to compete against guys who aren’t for real. You don’t get many shots with a lender. Let me tell you what, did you ever go to a lender, and he said no to giving you a loan?
Did he change his mind? No is a lender’s favorite word, typically. That’s one thing I learned when I was a lender. I skipped a bit over my background part, but I don’t think it’s too important. You can check me on LinkedIn. No daisy chain, know your fundamentals, your role, and your strategy, and focus on all-cash buyers. If they don’t have cash, they are not going to close. It’s the same thing with the daisy chain. If you don’t control the deal and can’t talk directly to the lender, you are not getting paid, so don’t touch it. It’s the third rail. Know whether you’re a broker or LSA. Know your role again and know the difference between the two being a broker. You don’t want to be a broker. You want to be a loan sale advisor. It’s about consulting. I hope that was extensive enough.
We’re going to go back over this because this fits back into that greater overall macrocycle of the economy. This is the micro cycle, and it changes from jurisdiction to jurisdiction. Most foreclosure processes or foreclosure jurisdictions are by county. The states will have their laws, but you got that judge in that county in those cases. That typically follows for a variety of reasons. I would rather close in wherever Syracuse was up in Upstate New York. I would rather close in that county than ever go to Brooklyn, like Kings County, New York City, New Jersey, and Cook County. Cook County is very difficult to get.
It is difficult to foreclose there if you don’t live in Cook County.
Chicago is one of my favorite cities. I’m there numerous times a year. We will be there too for the IMN Bank Special Assets West Conference on October 28th at the Renaissance Hotel. That was the crown point of my career as a lender. I financed the old IBM Plaza, 330 North Wabash. I love Chicago. It’s a beautiful city, but it is very tough to do business there if you’re out of towner. We get a lot of folks. We’ve sold a few notes in Chicago and Cook County. Illinois and Cook County may be one of the epicenters of commercial real estate distressed assets.
If I’m a lender, I’m bailing because you’re going to be stuck in that process for 3 to 4 years. Back to this, what is that process? Every time someone closes, some mortgage broker and some realtor get paid on another transaction. You now have a performing loan. It’s post-origination. I don’t want to focus on anything pre-origination.
It’s originated. The lender gave you that money. You exchanged that loan. You said, “I’m the mortgagor. I’m going to exchange this loan for liquidity with this financial institution.” I give you the loan bank, or the lender gives me the cash to go close and buy that asset. I get the lumps of cash. I’m sending him a little monthly payment. Every month, he’s marketing it on the books.
You usually have a default rate of 0% to 2% for most financial institutions. Once you get over 2% default rates, something’s up. You make 100 loans, and one goes bad. It happens. For reasons, that may not be the lender or the bar necessarily. Things go bad. Once you get over that 1%, you go over 2%. That’s when you’re in trouble, and we’ll take a look at that later. Most mortgages, especially now with so much liquidity and financing available in the marketplace, most mortgages are performing. The overall mortgage default rate for banks is around 0.5% default rate for what I designated. Sub-performing, that’s the next stage. It’s a variety of things. Typically, you’re 30 to 89 days past due on your payment. You are in a sub-performing loan category due to potential or current past due/you’re on the road to monetary default.Most mortgages are performing, especially now with so much liquidity and financing available in the marketplace. Click To Tweet
As long as you’re under 90 days, you got to be more than 30 days past due. You are considered sub-performing. There are other things too, which are monetary sub-performing. You can also be technically nonperforming in commercial real estate. Unlike commercial, when they make this loan, this line is going to say, “You’re running a business here. You’re collecting rents. If your income levels, your NOI, or your rent or your occupancy drops below a certain thing,” but usually below 1.25X or 1.25 times DCR or DSCR, Debt Coverage Ratio, Debt Service Coverage Ratio.
If you drop below this line, now it’s getting close to you can’t pay your loan. You’re in technical default. They’re going to put you on the watch list. Good services will typically see it before it happens and move you to the watch list. You better start talking to them if you’re a borrower. You can also have other things borrower. You can commit a felony, and your credit score could change. There are a bunch of things that could designate you as sub-performing. The 30 to 90 days past due missed payments or late payments is the key indicator for those. I hope that was long enough.
You have officially been nonperforming or when it officially gets designated, NPL. For most commercial assets, it’s 90-plus days past due. What happens at 90 days? Ninety days is the magic number. That’s now where in every jurisdiction in the US, as far as I’m aware, as a lender, you can file a notice of default. Depending on what your process is in that jurisdiction and you serve your borrower, you record the notice of default then you can begin the foreclosure process.
Some states are great, 30, 60, and 90 days non-judicial, and some are tough, like Cook County. Ninety days is the key there. Once their 90 days past due, that’s a monetary default. NPN versus NPL, that’s for your designation too. If you say NPN or NonPerforming Notes, that’s going to refer more to residential and owner-occupied four units or less. If you say NPL or NonPerforming Loan, it’s more synonymous with nonperforming commercial real estate. You’re talking five units plus non-owner occupied on the residential side. On the commercial side, there are your main groups and a bunch of other crazy stuff, too, that you wouldn’t even believe people finance.
Regarding the foreclosure process, we touched a bit on that judicial versus non-judicial. Do you have to see a judge? Maybe have a jury or something like that. It depends if you’re a buyer and what you do, your strategy, and your niche in the distress field. In mine, and especially when I invest, I don’t want to go to court. I don’t ever want to step forward into court. The only people who win in court are the courts and the lawyers. I look to working things out. I look for the triple win where the lender’s happy, and the borrower gets a sweetheart deal, usually cutting him loose. If I get a deed in lieu of foreclosure and I’m unhappy. When I get the title, I sell it off. If things go perfectly, I can sell off that deed in lieu and the title, then I’m never on the title, so I have no lender or ownership liability.
That’s what I typically look to do, that special forces sneaking into that balance sheet in the middle of the night, grab my nonperformer, get the borrower off of the note, then flip it to somebody who wants the fee. Post foreclosure, that’s after foreclosure. Typically, you have to go through a sharer’s auction or some foreclosure process. That’s when the lender is going to record the title in their name. I can’t think of too many cases.
Typically, when the lender forecloses and records the title, that’s going to wipe out other liens other than the tax. There are new wide green loans. Folks know about that, which I’m always interested in learning more about. Those are the only ones. Anyone who’s not in superiority in the claim to title or in lien theory, they’re going to get wiped out on foreclosure. It’s like, “You could have shown up to the foreclosure auction. You could have bid and taken the property back.”
This is good stuff. I’m glad you brought up the fact that people can be on the watch list even if they are paying the payments on time because their numbers change, and the DSCR or the Debt Service Coverage Ratio should reduce below 125%. We saw a lot of that with people and businesses shutting down, especially the commercial space. Tenants are leaving. Alice asked, “What is an REO?” That’s not an REO. That’s a foreclosure, a real estate owned.
When you say REO, it’s typically going to be from a non-bank lender. OREO is Other Real Estate Owned. That’s what the banks call it when they foreclose or take an asset back that they formally had a lien on to a third party. What does that mean? Why is that? Does anyone know? It fudged me up for a while because I started on the Life Co, Fannie, Freddie, and CMBS side on the commercial side.
Why would it be other real estate owned? Banks typically own their bank branches. When we look at their balance sheets, and they own those branches, that’s on their balance sheet as an asset. Technically, it’s liabilities if they put debt on it. I don’t know if they could. That’s why it’s other real estate owned. If I’m a bank and I have 1,000 branches, which we see all the branches consolidate now, that’s my real estate owned. That could be worth a couple of million or even billion of dollars. That’s an asset.
I can appreciate that. Cut down my tax burden and everything. That’s why banks are OREO. If you talk to a banker and want to look at the deals that he already foreclosed on, you have to say OREO. If you say REO, he’s going to know. He’s like, “This guy probably doesn’t talk to the bank. He probably doesn’t close with many banks.” That’s a little intricacy. Guys like me pick up on this, but that’s because I’m a data junkie.
That’s what makes you good. It’s knowing the data and going from there. David asked a question, “Does that diagram apply equally to commercial versus resident?” It’s going to be pretty much the same time frame for you, David.
I’m glad you folks are asking good questions. It’s the same process, whether it’s residential or commercial. Sometimes you’ll have different judges allocated to certain things, but it always blows my mind. It’s like, “Why?” I always use this analogy. It’s the same process for the widow and eight orphans living in the shoe to get foreclosed and eventually evicted as it is for the multi-billion dollar multinational corporation that said, “I don’t feel like paying my lease. I don’t feel like paying my mortgage.” It’s the same process for two.
That’s horrible. The overall real estate, finance industry, and government foreclosure laws should do a better job separating the two interests. One’s commercial, and one’s like the lifeblood of our economy, our economic freedom, and the American dream. The other is the evil greedy corporate interests like myself here. This was a slide from 2021, when we were in the hyper-supply phase. I know we’re in a recession from the economy, but real estate tends to lag pretty significantly.
When you see the equities tank and see that yield curve inversion, it’s usually 6 to 18 months until you see it in the greater economy, meaning commercial real estate. It’s always been historically accurate. I believe it’s the only primary indicator that’s been 100% accurate in predicting recessions. Where are we now? This looks a lot like 2021, except it’s a little bit different. Loan originations, this is where we were back in 2008. Here’s where we are now. That’s bank and thrift. That’s another key difference between the last cycle and this cycle. In the last cycle, CMBS was the major culprit last cycle because CMBS, which is Commercial Mortgage Backed Security, is synonymous.
All you CMBS securitizers, sorry, but CMBS is where you go when you want to take a risky deal. When you want to play a riskier game with commercial real estate finance, you go to CMBS. There are a lot of reasons for that. That was the primary culprit in the last recession or the Great Recession, which blew up. Doesn’t this look interesting? This is huge. This is big stuff here. The banks picked up where CMBS left off. There, I said it. I’ll own it. The banks picked up where CMBS left off, and the agencies Fannie, and Freddie, everyone says, “Multifamily is doing great.” They’re an overdrive too. We are at record origination yet again. We have well surpassed what we did prior. There are a lot of arguments you can make about supply, pricing, rates, demand, and inflation.
This looks like it’s outpacing inflation. I am concerned, and I’ve been focusing my business on serving banks because they have much more regulations or many more regulations than other lenders. Especially, CMBS has handled a lot differently. This was very concerning. Why? It’s because you have the new CECL requirements that are going to be in full effect come January 01, 2023. You have the transition from LIBOR, London InterBank Overnight Rate, to now SOFR, which I can’t remember what it stands for because I don’t originate anymore.
Now, those adjustable rates for adjustable rate mortgages, those rates are going to be set here locally in New York. BNY Mellon is setting those. You may look at talks of the recession and all the banks putting reserves on their balance sheet. That’s so they can stay in compliance with CECL. The FDIC released some statements about what they’re looking for going forward for working out and going through distress loans. To me, it sounds like the banks are full on CRE. They’re starting to cut back lending now.
You’ll see that this one will be dipping in a few months because all this information always lags. They’re going to be pulling back the credit, so it’s the old rug pull that leads to the recessionary event in the greater market. They’re going to be cutting back on originations, rates have gone up, and they’re going to be pinned down with more requirements. The FDIC floated this out there, which will potentially become a regulatory requirement.
It doesn’t look good for them. The good news is they have a ton of cash, so that’s good. Here are the commercial real estate and multifamily housing DQ or Delinquency Rates. There’s always an information lag. You’ll have a yield curve. The CRE market and bonds are very slow to move and react, which is a good thing because it gives them more stability, but eventually, they will.The CRE market and bonds are very slow to move and react, which is a good thing because it gives them more stability. Click To Tweet
In 2007, we had a big-time market slowdown. Ben Bernanke, Mr. Helicopter Money, did seven quarterly FOMC meetings with 25 basis point increases, jacked up the rates. When the liquidity and the cycle were going full bore, he wanted slow it down. He put his foot on the brake a little bit too long, and a year later, it takes off, ready for lift-off. That’s when Lehman collapsed. That set off the systemic risk that we were all concerned about and did a $500 billion bailout. This time, they did like $1.5 trillion or something.
It didn’t stop or didn’t hit its peak until 2011. If you were in real estate in 2011, that was the peak of distress. It’s all the way through 2011 through 2012, then down to 2014, when the market started coming back because they put more liquidity in the marketplace and credit standards eased up. This was the heyday, but we had that initial slowdown event like we’re having now. In 2007, the market didn’t take a dive or spin out of control. It didn’t spike until almost 2009, so a little bit more than a year later. We didn’t get through that until 2015.
If you look at 2008 from the Lehman collapse, 2014 was when the market came back. There were still deals because they were very slow to move them. You’re talking about a six-year period where there was a lot of distress out there. I don’t have a crystal ball. I don’t try to call it. I try to serve my clients as best as I can. We’re in for a significant correction. Remember when I said 90 days? I lied. CMBS is a little bit different. They call it delinquent once it’s 30 days past due. Once it’s 30 days past due, they’re marking you delinquent. That’s why theirs is a bit quicker to respond.
Carson said earlier that we saw that spike. You didn’t see it as much in the banks because they have a lot of other loans outside of CRE. They were hit with a lot of those foreclosures, moratoriums, and everything. Everybody was, but they were also the ones giving out that PPP money to the borrowers and the businesses that they had the loans with to pay the loans. That’s why you’ll see that the DQ for banks is much smoother through the pandemic versus CMBS like, “You’re 30 days late. We’re marking you delinquent.”
They don’t pull any punches when it comes to dealing with those borrowers. They’re not going after anybody’s houses, either. That’s why I see that spike. Here’s an important part. It’s been going down ever since there’s tons of stuff in there, even from the last cycle. The spike still isn’t all the way down. We can look at some other stuff too. The big thing is with CMBS, they’ll mark you late after 30 days. GSC, that’s Fannie and Freddie. That’s 60-plus days. Once you’re over 60 days late, they’re marking you DQ or delinquent or past due.
Mike, let me ask you a question here to give folks a bit of an idea, price or note-wise. We’re talking a lot of the CMBS stuff, and GSC is going to be stuff that’s usually greater than $5 million in a lot of cases. It’s not a $100,000 loan. It’s been more of a multimillion lot of cases. Right, Mike?
Yes. Trust me, I thought a lot about this as well. When it comes to CRE or commercial mortgages, $1 million is the fork in the road. This was a few years ago, so numbers may have changed due to inflation. Roughly, $1 million or less on commercial real estate mortgages is about half the market. Half of the entire commercial real estate market is comprised of loans and assets at around $1 million or less. The other half is $1 million more. In my career, I’ve sold a loan. You said you bought one for $70,000. That’s a good one. I don’t have one that low.
I got it for free because the seller had one condo I wanted to buy. I said, “I’ll take that condo at that price but throw these other three in for free.” He’s like, “I can’t list into the contracts zero.” I said, “I don’t care. All four add up to the one price.” His one was $7,000.
Sweet deal. I like that ROI. I did one. We sold one for $10,000 or $15,000. It was a random piece of land in Chicago. I don’t tell a lot of people this, but we did a $600 million portfolio deal for Fannie and Freddie in an online auction a few years back. That was when I was at a former company, which I won’t name. If they want to come to sue me, that’s fine too. We did a $600 million loan sale for a mixed pool for the agencies. Fannie and Freddie, why does that look so different? It’s how one’s spiking and the other isn’t. Fannie is a lot of smaller deals. Like those $1 million and around there. It’s all multifamily, so four plus units.
Fannie, not only are they doing smaller deals with less institutional clientele. They also do lower income and lower credit demographics. You’ll have your LIHTC or Low-Income Housing Tax Credit and things like that. I look at it like Freddy’s a bit more blue-collar. When that pandemic hit, those people had a tough time paying their rent. Fannie marked it as such once they were 60-plus days past due.
Freddie, that’s the work-from-home crowd. You’re in a nice Freddie Mac, typically Class B and higher. Freddie has an SBL program that they started a few years back. Before that, they were $7 million and up for a very long time. It’s different management ownership and sometimes tenant profile, but it could go either way. I believe Freddie Mac wasn’t as quick to market DQ because they were working with a lot of these borrowers. Maybe they did a better job getting them their deferments and forbearances. I believe Freddy did not do that and not on a wide scale. That explains that huge differential, that delta between the two. There’s a lot there. It would be pretty tough to measure.
You want to figure out how that Delta came about and what drove it. That’s like a PhD project. We’re seeing some of this stuff build up. Some of this stuff comes to the surface. You see the DQs come up. Where are we overall? Where are we versus historical? This is a great chart here. This is the latest delinquency rate. The MBA data is Q1. That’s all we get. Sorry, they haven’t released the Q2 data.
MBA is Mortgage Bankers Association. If I had to pick one source for everything like commercial real estate and finance, it would be MBA. Trepp is good. They focus primarily on CMBS, branching out into banks, and things like that. You also have CREFC, the Commercial Real Estate Finance Council, who has a lovely event every other year in Miami. These are the numbers where we are now versus where we were since 1996 in defaults.
I assume you can see that very well because it’s blown up here. Not all lenders and mortgages are created equal. At its peak, which was back in 2007, 2008, or through 2011, CMBS had a default rate of 9.5%. Let that sink in for a while. 1 out of 10 loans went bad. It’s not just late. It went to 90 days plus past due and had to either get worked out, modified, sold, or taken back by the lender. It’s 1 out of 10 CMBS deals.
That’s incredible. Where are they now? They’re at 3.5%. I got something else on the next slide that’s going to tell you where it might be going. I’m a life company guy. I never made a bad loan. If you go to life companies or life insurance companies, they typically have some of the most aggressive rates. They will have the best structure because they have much more flexibility and focus on non-recourse lending.
Non-recourse loans mean you can’t be held personally liable for default unless you break what’s called a bad boy carve out or your guarantee clauses. Life companies peaked, and I was there. They peaked at 2.5%. That’s not that bad. Now, they’re basically at 0%. Here’s the deal. Life Co is also like conservative loans, so they’re not going high up that leverage level. Most life companies have a default. That was when I first started selling loans when I was out of Life Co. They pay me off. If there’s equity in that deal and that guy has non-recourse, I sell my loan off. They’re almost always going to be able to get their full value back unless something hairy is up. Life companies are my favorite. Fannie Mae is a little higher now than Freddie Mac. This is the default, not just the late page. That’s 60 days plus. Remember, CMBS is 30. It’s always going to be a little bit higher.
Life Co is typically 90 days as well. Fannie did a lot better historically in terms of default, which is 1% versus Freddie Mac. I don’t know exactly why. Like I said, that’s a PhD assignment. There’s probably something going on here that’s skewing this. As you saw, those defaults weren’t as bad on the last slide, but the historical average is they hit a peak here. That was a bit higher but still only 3%. Banks and thrifts are at a 4.5% default rate. That was most likely through the savings and loan debacle. It’s probably in the early 1990s.
I could be wrong because I wasn’t into finance then, but here’s where they are now, right about 0.5%. I was on the money with that. More importantly, where is the industry? Where’s the commercial real estate finance industry? There’s a lag effect and shadow inventory. There’s a whole bunch of stuff. This looks like, “We’re not doing that bad,” and we’re not currently.
The indicators are flashing. If you know this market, you’ve been through more than one cycle. I’ve been through one. You have an idea of what’s coming, but not all data is created equally as well. Like we saw, we have those different 30, 60, and 90 days past due until we hit defaults, including the loans. I’ll include this as a DQ, late pay, or past due. I’ll include this as a distressed loan even though they’re using government funds to keep it current.
Not all data is created equal. It’s very tough to get a very clear picture out there. That’s what we’re doing, and I’m hoping that’s what you folks learn here as well. This is a good quote, and I’ll read it. This is from Jamie Woodwell. He’s one of the head honchos there at the Mortgage Bankers Association, “Commercial and multifamily mortgage delinquency rates that were elevated by the onset of COVID-19 pandemic continue to come down during the first quarter.”Not all data is created equally. Click To Tweet
No surprise there, “Given the strength and fundamentals and valuations for most property types, delinquency rates are at the lower end of the historical range for most major capital sources.” As of Q1, everything’s doing good. It will come down for the COVID spike. Here is another way to look. It looks like we’re watching one of my favorite movies of all time, Predator, with Arnold Schwarzenegger’s, “Get to the chopper.” It looks like we see that infrared. This is a good chart showing the 30, 60, 90, and DQ for the different product sectors or property types.
The thing that probably sticks out immediately is this one right here, lodging. Lodging got hammered due to COVID. A lot of them aren’t coming back for a variety of reasons. Hotels have been having a tough time. There’s been a massive change. A lot of guys sold out, and you have a lot of people selling the properties. I was at a Hotel Pinole down in California. The amount of portfolios that were sold and transition changed hands. I believe it’s a record.
The reason is because hoteliers are very sharp. They and commercial real estate developers are probably the slickest guys out there in terms of the borrower. They know when they’re out of money. They are watching those numbers every day. They got to sell those rooms. They got to book those rooms and put heads and beds every single day. They know their business very well if they’re paying attention.
They know when they’ll have problems way before everybody else, so they know when they sell when they’re out of the equity position and rates are going up. Everybody in CRE and CRE Finance knew rates were going to come up. As soon as things opened, they took out their loans, refi, or sold the property. You had a lot of guys in hotels. You got a lot of adverse selections. “I own five hotels. This one’s in Downtown New York, and it used to be a business travel hotel.” That guy cut it in half.
He’s going to sell that one, and I’ll keep the one in on South Beach because I’m able to charge double the room rate. I’m almost 100% occupied. You had a lot of folks picking and choosing their winners and losers in the hotel. You saw a lot of trades there. You saw a lot of defaults as well. Retail has been having a tough time, but they’re pulling out of it. The office is going to get rocked because of the work-from-home or the remote work revolution, which is great. You can save on rent and save the world from climate change at the same time if that’s what you care to do. I don’t want to state my opinion on that stuff.
The lag effect, remember that last slide? Everything’s great. Everybody’s getting money for their buildings, and this is great. This was on a few pages later. Driven by record-high originations for the first quarter, the amount of outstanding commercial and multifamily mortgage debt climbed to a new high at the end of March 2022. It’s a bit more recent, even though it’s still the Q1 one.
Here’s the key. The recent run-up in interest rates and drop in broader equity values will, without a doubt, affect commercial and multifamily markets in the coming quarters. They’re relatively strong fundamentals for most property classes and should serve as a stabilizing force. What does that mean? That means we hit the peak. We hit peak value and peak market cycle. I don’t know how else to interpret that. That’s the head of the Mortgage Bankers Association.
We had that awesome run-up after everything got closed up, and all that demand got tamped down. We have shifts in the hotel and office. Now, this is probably it. That was probably the peak of this market cycle. It’s been a great run. We first went down to tubes in 2008 when Lehman collapsed. Now we hit another peak in 2022. That’s a pretty strong bull run. To give you some indication, remember that the CMBS delinquencies went up and came back down. Those are the official delinquencies.
Remember, I said a watch list report. Those are the ones that the servicers are paying attention to. Why? It’s because they know there’s a lot of money in the system. Those are the ones that they think are at a higher risk or an elevated risk of default, monetary default, maturity default, or technical default. They’re watching them. They’re on the watch list. When you call lenders asking if they have a watch list, a troubled assets list, or something like that, the great thing to throw around there is to strike up a casual conversation because there are always things on the watch list.
This is from Trepp, which is the big CMBS data and analytics firm. The percentage of loans on the servicer watch list fell 128 base points to 21%. It’s the lowest reported rate in 2022. Remember, we said, in the peak at the bottom of the market, CMBS had roughly a 9.5% default rate, 1 out of 10. Now you got 1 out of 5 on the watch list.
Let that sink in for a minute. That’s significant. Now rates are up. Equity peaked. How are they going to get refied out? All those hotels and offices, where there’s a flight-to-quality in office too, where if the workforce can work from home instead of going into the office two days out of the week or call it split, you cut office demand in half. It’s just like that. Now rates are higher, values are coming down, and everyone’s going to start giving this stuff back.
I believe 50% of office CMBS loans are going to mature between now and the end of the year 2025. You got half of those loans for all CMBS office maturities. That means their loans are payable in 5, 10, and 15-year terms. They’re coming due within the next couple of years. The office is the new retail. What happened to malls is going to be happening to offices in weak submarkets, primarily suburban offices, because no one wants to do a very long commute when gas is between $4 and $7 a gallon.
If I’m an employer, “They’re all complaining they need more money for gas. How about I tell them to work from home?” The problem is solved, and it’s better for the environment. Let that sink in. This is a fundamental shift. You can say, “Office demand will come back.” The population grows. It gets recapitalized, restructured, and repriced. The office square feet per employee ratio has shifted dramatically. Especially, we’re going to need less office square feet per employee.
It’s probably going to end up getting cut in half. I saw a good stat that said only 40% of office workers had returned to the office. It is from a big data firm that tracks who’s punching in with their key fob. They said 40% of all. That means you lost 60% of your workforce reporting to the office. That is going to show through on these balance sheets. It’s going to start happening toward the end of the year, and it’s probably going to pick up over the next few years.
I know we spent a little bit of time on that. We can go into sourcing CRE NPLS. I covered this a bit more in-depth in 2021. I like the rule of three. In terms of personnel, you want to know the asset manager. That’s your lead. The person you’re going to call, email, ask, and stay in touch with is the asset manager or the decision maker. Typically, SVP, Senior Vice President, or higher. It depends on the size and the organizational structure of the institution whether you want to talk to the CEO.
This is my general rule of thumb. I don’t think I’ll ever write this down anywhere. If you’re tuned in, get your notepad. Typically, if I’m looking at banks, $1 billion in assets under management and lower, you want to go up higher on the organization or the titles. You want to talk to the CEO and the CCO executives. $1 to $5 billion is where they typically will have a special assets group or someone who’s like, “Jim handles the special assets.”
Once you get 5 billion and up, they typically will have special assets group or special assets manager, troubled loan, or loan resolution. That’s when you don’t have to go to the guy on the board voting or something like that. Look for an SVP. Know what type of lender you’re talking to. Are you talking to an agency, Life Co, or CMBS? You saw through that stuff. We spent a lot more time on that. They’re not all the same.
When a CMBS guy says, “I’ve got some things on the watch list report,” you’re like, “There’s 1 in 5 loans.” That means he hasn’t defaulted yet. You are going to ask, “Are they also default?” You know that they’re defaulting at 30 days plus. You know this stuff. When you’re talking to a bank, know it’s OREO. When you talk to a Life Co, know it’s REO.
CRE, multifamily, NPLs, and REO, know what you’re looking for. Like I said, I like to buy nonperforming loans, first mortgage, nonjudicial foreclosure states, or judicial foreclosure states that don’t have a bad rep, like Cook County. I want to focus on commercials and where I can get a deed in lieu. That’s what I focus on because I can get my money in and get it out with as little risk as possible. I never have to have my name on the title.
That’s the best trade-off in terms of speed of execution, certainty of execution, ROI, and lender liability risk. The lead is the person you’re talking to. The account is the lender, whether it’s Bank of America, JPM, or Fannie and Freddie. The opportunity is specifically what you are looking for. That’s how you make your money with the opportunity. When it comes knocking, make sure you got all your ducks in a row. I don’t go through too much of this too much more.
I will repeat very quickly here. The main thing is that NPLs and loans are very illiquid. It’s our job to exchange those loans for liquidity. People like us, the specialized distressed assets guys, we’re the ones who can make that timeline for recovery speed up. Know that you’re not buying the property with an NPL. You’re buying the loan. You got to claim the property, but you’re not buying the property.
Also, figure out what the lender’s going for here, whether he wants to do a quick and quiet sale and his motivations for getting the loan or working out. Try to think through the lender’s shoes when you’re talking to him when you’re looking at a specific opportunity. It’s about relationships. The biggest piece of advice I can give you if you’re a buyer is to have all cash, have your proof of funds, and know what you want to buy.
When you talk to a lender and say you’re a buyer, you can say, “I’m either residential or commercial.” Tell him what you’re looking for. Do not be specific. He has no idea what’s going to default next. You have no idea what’s on his watch list. If he sends you a loan or a deal, give him an offer. If you don’t, he’s probably not going to send you another one. Say, “Jim, not my cup of tea. I usually focus more on the things I want to take back REO but here’s your offer,” because they have a job. Every time they do a loan or short sale, they need to prove a market. If you help him do his job, he’s going to help you do your job.
That’s huge. Always submit an offer because that’s what they’re looking for. If they take the time to send you something, and you never respond back or send an offer, they’re like, “I’m moving on to somebody else. I need to get something.” This doesn’t mean a ridiculous lowball offer but still something that makes sense for you and stuff like that.
I’ll tell you what, the highest offer doesn’t always win. The highest offer does not always end. It’s about what that lender, that key thing that they want. It’s the certainty of execution, a quick closing, and whether they want a confidential closing or if they’re fine marketing it. That’s what they want. Certainty of execution is number one. Pricing is good, and they also care about who they’re selling it to.
They don’t want to see bad publicity at all. It’s also dependent on how close they are to the community. They want to be the bad guy a lot of times.
They don’t want to sell off everybody’s homes to some evil corporate Wall Street Fund, but if they can sell it to the guy, they don’t want to sell it to Gordon Gekko. They’d rather sell it to Sam Zell. Know your strategy and pricing and tell them why you’re paying or offering that price. Also, if there’s something else they could do, such as documentation like, “Did you get it a deed in lieu?” It’s my favorite way to add value. We added $1 million in a single transaction because we could negotiate a deed in lieu of an $8 million UPB.
We ended up recovering 95% of the feasible value of the real estate. I won’t tell you what we sold to discount UPB, but the borrower wrote a check for $750,000 to get us to rip up his full recourse guarantee in exchange for a deed in lieu. The buyer came up on pricing of $50,000. That one document, that simple like 2 or 3-page letter deed in lieu of foreclosure, made the client $1 million.
These things are very important. Source qualify and underwrite. Take a good look if you’re making an offer. If you’re serious about it, make a strong offer. Be quick closing. Be very detailed in all the items you need but lay it off on the table because, like I said, the highest price doesn’t always win, and know your strategy. I tell him like, “I seek or envision to do a loan workout with this guy. I’m taking this guy’s property. That’s me. I’m taking it. He’s out. I’m in.” Make sure you close it. If you don’t close to the lender, you are done. If you don’t close with me, you will never win a deal on my side. I promise you that.
I got a couple of questions, Mike, real fast. Let me go with this stuff here. David asked, “Why is it so important?”
To me, it’s important because if I never take the title back that I never own the property, it typically moves much quicker. I also don’t have lender liability. Why would that matter? I don’t have to worry about paying if the taxes aren’t due or if there’s some snafu down at the courthouse. They can come back to me, “You didn’t pay your taxes.” It’s like, “What do you mean? I never owned a property.”
There are less things you have to worry about. When I do commercials, we work with a great fund. There was one of my best clients when we were first starting off back in 2015 or 2016. Phoenix Investment Funds, Carson Faris, he’s a CEO there. We hung out with him down at Dana Point. He specializes in remediating the environmentally contaminated property. If you’re pulling heavy metal contaminants, if you ever read a phase two report, it’s fun.
We had a situation where they built a Walmart-anchored power center atop a former landfill in Ohio. Do you want to be on that title? No, you do not. Lender liability is endless. The best way to avoid owner liability after you foreclose is don’t get on title if you can avoid it. It’s a little bit less costly for the legal fees too.The best way to avoid lender liability is owner liability. Click To Tweet
Are you talking about putting the property into a land trust in a lot of cases or holding an escrow with the owner’s name? You’re working on behalf of the lender and helping them sell the asset on the stuff too. You’re working as a rep for the most part for the lender in a lot of cases.
That is an interesting statement. Here’s one of the things that helped me get fast-tracked through the lender or vendor onboarding process for some of these larger institutions. My top clients are PNC Midlands, KeyBank, and about four dozen other bank and non-bank lenders. I do not represent the lender in a fiduciary capacity. When you’re a broker selling property, you represent that seller in a fiduciary capacity.
If someone makes an offer, you have to deliver to them. I don’t. I’m not your fiduciary. I’m here to market and sell this loan, for which there are no real regulations so long as it isn’t a qualifying mortgage. I’m just here to sell the loans. I’m never on title or anything like that. That’s what I like to do. These are dark, deep waters, and that’s where I like to swim.
This is good stuff. People are loving this. I have a question for you, Mike. Are you seeing any banks, maybe in smaller regional banks or smaller banks, willing to carry financing on an NPL sale or willing to move it?
For the rest of you guys, it’s a bit different because you’re like, “I like this one.” He’s like, “I got three more at the same borrower. I could get financing for this.” You can do financing. If you’re doing commercial, there are certain situations where I will allow financing, and you can go to note-on-note financing. We have our contacts. I know them. I trust them. I’ve closed with them. They’ve bought and sold with us. If there was an instance where I could drive value for financing, then you can do that.
If you’re going to make an offer, you’re like, “This is my best all-cash offer in a quick close.” You usually want to be ten days or less close post due diligence. You can go hard. We do all of our due diligence upfront. Our typical close is three days, as simple as that. We’re marketing it 4 to 6 weeks, and it’s gone three days later, wired funds directly to the bank. I get paid by a buyer’s premium. I do not represent the seller’s fiduciary. I don’t store any of their data on my servers, and they do not write me a check.
It makes it much easier for them to work with me. If you’re an intermediary, that’s what you want to focus on. “Here’s my offer, all cash.” If you can give me a little bit of time if you need it and allow me to have a contingency or non-contingency, and if I can drop out because my financing couldn’t come through and you’re going to get financing, whatever documentation you have to show that you got that lined up, whether it’s a term sheet quote or whatever, you got to let them know who the lender is. You always want to do things that drive value and certainty of execution.
I agree with that. If a bank got a $1 million plus note on their portfolio that the property owners are ready to walk away, will the existing bank will carry financing 80% of note purchases?
I’ve done that before as a lender. It’s like, “This deal isn’t that bad. This borrower can’t get it done. He can’t get the ship into the harbor, so I’m going to switch out the captains.” That’s what they’re doing. It’s not going to happen a lot. They’re going to be motivated to do that typically when they want par. “I can get you par. Let me sign the note. Here’s my down payment.”
For you, that’s a good strategy. On the commercial side, when the lender decides he wants to sell the commercial loan, he’s like, “I want this gone.” There are a lot of times maybe he wants to keep the bar and he wants to sell it off because he doesn’t want to ruin that relationship. Maybe he’s like, “I’m taking this bar in every loan on my books, and I’m selling it. I’m disposing of the credit.” It’s a great question. You got to be careful with that. It’s more likely to happen on the REI side than on the commercial side. It’s not going to happen on my side.
We’ve seen it happen more in the commercial sub $5 million for the most part. It’s $1 million to $5 million local banks. We were able to get a couple of banks here in Austin to carry financing, where the par walked away and partnered with us. They provided the rehab funds to rehab the property and convert the apartment complex. Synovus Bank is a big bank. They own their loan sale agreement. They’re like, “If you’re looking for a joint venture, let us know.”
We were able to negotiate them carrying financing or note purchase, and the bar was willing to deed in lieu. We negotiated the terms, stepped in, and swapped out one captain for another. Andre mentioned something here. He mentions, “One thing that’s important to mention is different residential NPNs and non-NPN versus commercial NPNs. If you win the bid, a bailee letter hard document review, is a quick claim a non-starter?”
Maybe you’re in that $500,000 or $1 million category and have closed on plenty of notes. We have this happen a lot. Resi folks try to come on our platform and try to run all their process. They’re closing QM and also non-QM resi. It doesn’t work with the commercial guys. Like Carson said, he got some financing on some stuff in Austin, which is crazy. You found a nonperformer in Austin. That’s nuts.
It’s a few years back, but it’s still right there.
Andre is my cofounder. He’s our CEO. Thank you, Andre. Non-QM and QM resi, you’re going to do those bailee letters. That’s not going to work on the commercial side. On our side, all the due diligence is front. They’re not going to verify anything for reps and warrants. A CMBS lender isn’t. A special servicer isn’t. You get it’s as is where is. You have to be very cognizant of that. If you’re trying to win commercial assets and try to close it, offer, and negotiate like a residential loan, you are shooting yourself in the foot.
The thing is, you’re never going to get the hard docs before closing anywhere these days. It’s all 30 days after. They’ll show up 45 days later. We were buying an apartment complex from Wells Fargo multifamily a few years back. I had to go to San Antonio and book ahead of time to review the hard collateral file. They wouldn’t scan it. I had to go down there and book ahead of time to take a look at it and look through the file in person. It was all secured. It was an interesting situation. I bring my own stuff to scan if I want to take anything back with me and still sign an NDA that I couldn’t in a lot of cases.
That’s wild. I know stories. We’ve got some colleagues and clients that remember the old RTC days where they were like, “There are the files. It’s a heap of papers. Go dig on through,” which the deals were better for an investor. It’s a little bit more work, a little bit more elbow grease, and a whole lot more shenanigans. We do our best to avoid that on our site. I can show you folks some of our site. We have a lot of new software.
Let’s talk about that.
Here is the website, Xchange.loans. We have some of our featured assets. This one’s available for sale now. This is an active listing. We’ve got what we call an open-secure marketplace. It’s open listings. Anybody can see it. Anybody can snoop around and figure out some basic details. It’s secure, and we’ll give you all of the friendly foreclosure overviews of property details.
We have the ability to run time call for offer events. It’s not an auction, but you still get that sense of urgency with the countdown timer. If you say, “Give me some offers,” they’re never going to send them in. You got to hold their feet to the fire. Due diligence is coming here. Tier one is where we will keep the marketing information. Typically, an offering memorandum. This is a Citrix ShareFile. That’s a very high-level digital rights management software that we’re fully integrated with.
You come in here. You can look at the loan sale offers. We typically do this on everything that we offer, Excel exclusive. This is one. You have our full concierge loan sale advisory services, which walk you through everything. If you’re a broker, this is what you’re going to want to do, and if you’re a loan sale advisor. You have the data tape, which is the same information in Excel.
You’ll have tier two. This is all the hard due diligence here. BK dismissal, appraisal, historical, so this is the real stuff. This is the stuff that, with us, it’s in the data vault, secure, full digital rights management. You can control access anywhere in the world, like log IPs, watermarks, and dead switch it so you can kill it. After the event, you kill everybody’s documents and ship the originals.
This is why we speed up our closing and offer processes because all the due diligence is here. You got to have certified proof of funds. How do you get proof of funds? Let me show you the sell, which is what’s your loan worth. Let’s throw in 100 East Main Street and go to Lakeland, Florida. We did a deal there. I’m going to general info, specifics, details, and valuation. This will give you a very quick rundown of what the loan is potentially worth. You’ll also see our strategy value calculator. I am pretty close. I am pretty quick at filling this out. This is free. All you got to do is sign in.
You got a commercial loan. You want some semblance of what it might be worth. It shows up here. Dre did this. He’s awesome. We’ve used this same exact model or the math that’s behind this. We typically have over 100 fields. We condensed it down to 15 or 20. We’ve underwritten over 10,000 deals with that saying, with that same underwriting model.
This is huge because as we’re reaching out to asset managers, we’re giving in tapes or individual assets. Being able to put this in there with fifteen cells, to give you a bit of an idea, is great. It’s not a hard fast final offer, but it’s a rough AVM for an offering.
We haven’t had to change it up a lot. We’ll usually go on there because someone’s always going to break the model. That’s what we love too. We’re like, “We’re engineers. Let’s go figure it out.” Summary judgment received. That’s huge. I could probably say deed in lieu possible, but everybody would be like, “It’s possible.” We say summary judgment.
We’ll generate a report. See how long this takes. It spits out value automatically. Loan value, that’s $2 million loan with those metrics, $1.4 to $1.660 in Florida judicial foreclosure state. The percent of UPB is 70% to 83%. You can download it. This will be quicker because the design for our report is a bit graphic-intense. This was all done instantly. No hocus pocus here. We will not always recommend a loan sale. I promise you that. Like I said, we want to give people great advice. Cost savings for a loan sale is what’s recommended. You’re going to save about $337,000 at $383,000 and write on the money for 22 to 28 months. What does that mean? We go through all this then we have our strategy calculator.
Here’s the loan sale and reinvestment. The reinvestment rate for this is the coupon rate. We’re assuming you can go sell that loan and then go reinvest that money if you’re a lender and reinvest your capital for that same rate. We’ll probably add more functionalities later. There’s standard foreclosure and contested foreclosure. Standard foreclosure means it’s going to go through the process. It won’t be contested. You’re not going to have anyone fight you or no BKs, things like that. Contested foreclosure means exactly that. This is the time value of money playing out through your different strategies. There’s sell the loan and contested or uncontested foreclosure. What am I looking at here? If you sell it now, you’re better off. That’s why it’s recommending a loan sale.
Is that figuring in with every state being a little bit different in some cases?
It’s every single jurisdiction. If you say, “I’d sell it for 83%.” This is lender direct. If you are a lender, on our software, we use it to run our process. You can use it to list your own loans. It’s $199 a month with no commissions and fees. We haven’t released that to the greater market yet. We’ll probably be doing some trial stuff here to try to capture some of that end-of-year. There’s asset info, a note overview, and property details. You put your photos in there, and you will make a wonderful listing. You’ll go up here to your dashboard and have your asset. You’ll see draft assets, Excel value. This is the one I did, 100 East mainland. It’s a pretty slick.
That is slicker than snot. That’s awesome.
You’ll see your due diligence requests. I showed you the favorites functionality. You can add them. You can add them to your favorites. When you’re selling, you’ll be able to see everybody that adds them to your favorites and who signed the confidentiality agreement, and you can use our standard form or upload your own. You’ll see everybody who requested access to the tier two due diligence fault, and you’ll be able to see their proof of funds as well as when they proofed up.
We confirm proof of funds, so you don’t have to worry about holding people’s bank statements or anything like that. You can also track your offers. I don’t sell. Andre does, so he’s got all the stuff. If you want to take a look at what those dashboards look like or if there’s something else, I could help you real quick on how I source leads and what I look at on a bank balance sheet.
Let’s talk about a couple of bits here about how you source your leads.
It’s LinkedIn. It’s so much different than brokerage. In brokerage, everybody’s at every opportunity, every piece of property. That’s on the public record. You can triangulate the lead, the account if there’s a corporation, and the opportunity. That’s what I used to do when I was a commercial mortgage broker and commercial investment sales guy. I’ll be gone through there and cold calling.
Here, it’s different. You’re not going to find out who the actual lead on that specific opportunity is. It’s so much more fragmented. You might be able to find, “There’s a foreclosure in the media.” I can find the lender. Good luck trying to find the guy who’s assigned to that loan. He needs a reason to answer your call and respond to your email. That’s what I look to do. I’ll look at my leads list. I have a Sales Navigator. Get a Sales Navigator. I use G-Suite. High-touch outreach is going to serve you much better than low-touch mass emailing and mass spamming all that stuff.
Lenders are busy. Their inbox is always overflowing, and they don’t have time to waste with people they don’t know or people who don’t know what they want or, “I only want to buy this A, B, and C,” to say, “I buy resi loans. I buy commercial loans. I buy both.” Give them an offer when you find them. I like to look at the account. You try to identify an account or an opportunity. I focus on the accounts, and I usually focus on the larger institutions now.
We’re going to do Synovus here because we said Synovus. You’re going to look up here. I’m going to look at their decision-makers and then see the chief analytics officer. Synovus is pretty large. I’m not going to go for the chief financial officer. They’re going to have special assets folks. Let’s search for special assets. This has been Sales Navigator. Director of special assets, I’ll look him up. This is a random guy. I haven’t talked to him. I’m sorry if he reads this. I’m not trying to blow you up.
You can message him, ask them to follow you, connect, and view your profile. If you reach out to them, try to demonstrate your value. Give them something of value. I can say, “I understand you work with nonperforming loans. I have an awesome tool that’s free. You don’t need to give me your email address,” or I think you do. Say, “I bought a note for par. Let me know when your next sale is.” Think about how you want to message and demonstrate your value and introduce yourself.
Since he’s only been there since 2020, “I used to work with Jonathan beforehand. I see you’re the new person in charge.” Something like that is always a good word.
You can always add him to your list. You can say, “I got a pretty good leads list, which keeps piling up.” I got a couple of asset management. Those are guys who probably aren’t CXO. They’re not executives. I got my C-Suite right here. Partnerships, VCs, Bank, M&A, that’s one of the targets I’m looking for because we’ve had a lot of success there. They’re more likely to want to sell stuff off, but it’s a pressure cooker. It’s like if they’re under pressure and need to get a certain amount of dollars, are they going to trust you with their M&A? That was a tough one. Save your leads. Make sure you do your research before you call them. How do you research an institution? I love this one. A lot of people use Distressed Pro with Brett.
No, Brett sold it off. He’s no longer there.
I know. He’s doing stocks now.
BankRegData is good. BauerFinancial is also good.
I love BankReg. I used this site to find. I know what I’m looking for. I always go to Loan 2012. This guy who runs this site, Bill Morland, I believe he’s out of Texas. He might be out of Florida. He’s awesome. He’s the guy that runs this, and he puts together amazing newsletters every quarter. I’m looking for these NPLS, and I want CRE. You see here that there are different categorizations of CRE, owner-occupied, non-owner-occupied, and multifamily. Know what you want to go for.
Here are all the nonperforming loans. There’s about $3.6 billion, which isn’t a lot. It’s 0.59%. You can see the defaults right here. In one of the family junior-liens, those are second loans that are pretty high. Overall, we’re doing great, but we’re at the peak of the market, that’s why. You can sort by nonperforming. Here are the top 100 lenders by the amount of nonperforming CRE loans on their balance sheets.
You’ll notice that it’s all the usual suspects for the mega banks. It also shows you the nonperforming dollar and percentages per type of bank. You see how many banks are under $1 billion. That number blew my mind. There’s a difference between the guys over $1 billion and those under $1 billion. Guys under $1 billion are going to be more likely to talk to you. They’re going to be more likely to talk to someone that is a CXO, CFO, or whatever. They’re going to be more likely to speak with you.There's a difference between the guys over a billion and the guys under a billion. Guys under a billion are more likely going to talk to you. Click To Tweet
They’re probably going to have some tighter constraints, or they’re going to be more worried about reputational risk and headline risk when selling their deal. Those are going to be the guys more likely to help potentially finance you. You come to Wells Fargo with like, “I need to get financed.” They’re like, “We have 3,000 of these to sell this year. I’m not doing that.” It could be like, “I’m an SVP. I don’t have the authority to do that. I’m dumping this.”
What I typically do is get this, then start putting together my leads list. I’ll find these accounts. I’ll look for them like we did for Synovus then I’ll look for those special assets people. This is how I make my leads list. This is the bank. These are the CRE I combined, owner-occupied and none owner-occupied. I’ve got my whole list here. I’ve got about 700 contacts that I got to start calling and emailing.
I like to use LinkedIn on URLs too. I got you on phone, email, and LinkedIn. For the phone, the biggest tip I can give you guys is when you cold call the person that answers the phone, if they tell you their name or even if they don’t, find out their first name. It humanizes them. They have a tough job, which is shooting you down all day. If you say their name and ask them how their day is, you’re going to double your consistency and get past the gatekeeper.
That’s awesome, Mike. As always, you overdeliver. We could go on longer, but we’ve got stuff to do. It’s great nuggets there. Thank you so much for sharing. You folks have come a long way in years, and you keep kicking asses.
We’re self-funded. We’re going to see if we can start scaling this and maybe have to get some investors. That’s what we’re looking to do in the next year.
Thank you for speaking. We’ll talk next time.
Thank you for having me. Anybody, hit me up at MJ@Xchange.loans or shoot me a message on LinkedIn.
- LinkedIn – Michael Jimenez
- Phoenix Investment Funds
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About Michael Jimenez
With over 20 years of expertise and as the marketplace for non-performing loans, we specialize in maximizing the recoverable value of non-performing CRE loans for lenders, special servicers and asset managers.
We designed our awesome software from the ground up so that it is easy to use, virtually the first open marketplace for NPLs and top of the line security for lenders.