How do you vet note JV partners?

23 Replies

Working on my due diligence for note investing. I am happy to learn as much as I can through reading, and I also know that the main teacher is actually doing something. 

I've been interviewing potential people who currently invest in notes for JV possibilities. If you were starting off, what would you want to see in a JV partner? A certain length of time in the business? Variety of loans worked? Local networks in areas they buy notes? In a normal job interview I would ask for references, but I'm not sure that works in this world. How would you or did you decide who you were going to work with?

seems to me you could treat them just like your would a tenant.

I mean your going to entrust far more money to them than counting on a tenant pay you rent right the worst a tenat could do is beat you out of a few months rent.

so I would think you want the basics..

credit report and criminal background

after 35 years of lending Hardmoney you would be shocked at what you find..  if you just take a few minutes spend 100 bucks doing the credit and criminal just like you do for any tenant..

I just did this with someone I was thinking about working with. I did a criminal background check, called and emailed a list of references he provided, then cross checked him and his references on social media and professional sites. After all that I felt comfortable with taking the leap of faith... or at least comfortable enough. I definitely think that you should get references from them. Talk to the references too (not just email) and make sure your BS detector doesn't go off. Good luck!!!

@Jay Hinrichs , Thank you! With tenants I can verify employment and references. Do you have a parallel suggestion for partners?

Also, I have noticed that the "normal" thing is one brings the money, the other brings the experience and there is a 50/50 split. What would you think about asking the partner to put some of their own money on the line? I'm not thinking a huge amount, but something so they have skin in the game. Would people think I'm nuts to suggest that?

Pretty new at looking at notes....can you explain what you mean by a "JV" note?....joint ventures?

So you are looking at lending directly to this individual rather than going through a "broker" that acts as the middle man for people looking for investors and people that want to the be lenderinvestor. With a "broker", they do the vetting of the partners they work with and you just have to trust the broker you work with....

I'm still a little confused on how notes work vs being a HML.....

I reached out to @Jay Hinrichs and he put me in touch with someone that I'm working with to possibly start investing in notes..

Hi @Ned J. , yes, joint venture for JV. I guess the question is the same whether you are hunting down a broker or someone who plans to do the work on the notes.
With the JV, as I understand it, I wouldn't exactly be lending the partner my money. I would be using my money to buy note(s) which they would work with me to get reperforming. If I was just looking to buy performing notes, then going to a broker who sells them and connects me with a loan servicer would be logical.

There may be some overlap between notes and hard money lending. If I understand correctly, HM lending is usually focused towards buying and renovation properties, with a short time frame. The property is used as collateral. For notes, you are buying a promissory note that someone else already created. Does that clarify?

Make sure you ask how many note deals they have completed. By completed I mean all the way through the exit strategy. i.e. get the note reperforming then sell the note. Foreclose on the loan, then sell the house, etc. I see lots of new note investors who are raising money from JV partners but they've never completed one note deal. Some of them have just started, bought a few notes are learning to do the workouts but haven't completed the full cycle. It can take a year or 3 to complete the full cycle.

Ask what kinds of problems they have run across, how did they deal with them?  Have them tell you about their worst performing  deals.   Ask them what the biggest risks are.  

I wouldn't give them any money until you see the specific note deal it is going to buy.  As opposed to giving them some money up front then they go find a note for you.  

Ask how you will be collateralized by the note. will you be named on the Assignment of Mortgage?  There are other ways to ensure you are protected.  You need to have some form of ownership of the note so that your investment is protected.  

@Amanda G.   Yes, requesting the managing partner to contribute some of their own funds is not unreasonable, especially if it's a higher value asset.  Some won't do it, but it can't hurt to ask.  I've done it. 

Well... I take on JVs at a set price with a set exit/exits. Say the deal is 35k. I have already figured the purchase and workout with taxes and fees. That 35k might be 26k to buy the asset, 4,000 in taxes, 3,800 for the attorney, City fines on the property of 600, forced placed insurance of 450, O&E on the title 150, you get the idea. All adding up to the 35k that it takes to get into the deal with me. Now if I screwed this up and get it wrong on cost I put my money in to make it happen from that point. I never go back to the JV and say Oops I need more money unless WE together think it better for the deal like doing a full remodel or something like that after we take it back (REO). So far just once on a remodel because we were about to leave to much on the table. Good deal if we left it as is but better if we took it all the way up. What if I overdid it. I don't hold onto it I send you the overage back. Just had one that we thought we were going to talk all the way to REO and the guy calls and catches everything up. I sent my JV back around 7,000 rather than hold it. Every deal is a stand-alone deal with its own spreadsheet.

I give the JV the address so they can look it up on the net, the Figures, the ACV/BPO, the UPB, the Monthly PI amount if I'm planning a Modification on the loan for an exit the interest rate, things like that so JVs have a good grasp on what I'm getting them into and we split 50/50 on the profit.

I made an animation for my JVs to watch "required" about what to expect from me and what I expect from them. It was made to be entertaining and informative. 

It is on my Youtube channel. ( Chandlerfin ) "Joint Venture Partner" animation. 

For you new JVs I hope this helps from the "on the ground" side. I kind of ran on a little. 

All the comments had merit. 

Tim Simmons, good stuff let the newbie learn with there own money, friends or family's and get some history. This is simple but not easy...

Note Investing is Get Rich just Not Get Rich Quick.

GC

Originally posted by : @Amanda G.
, Thank you! With tenants I can verify employment and references. Do you have a parallel suggestion for partners?

Also, I have noticed that the "normal" thing is one brings the money, the other brings the experience and there is a 50/50 split. What would you think about asking the partner to put some of their own money on the line? I'm not thinking a huge amount, but something so they have skin in the game. Would people think I'm nuts to suggest that?

That is the concept of tranche, which is really good. Basically the more money in the tranche under yours, the more secure you are. You aren't nuts, I have done it in some circumstances when the person was on the fence.

With that said, while your due diligence is wise, you have to make it realistic. Someone with any experience would have to be really desperate to be willing to jump through all these hoops unless you have a significant amount of money to contribute. Like if someone came to me and said they wanted to invest a million dollars but they wanted me to go get finger printed? Sure. But for 25k I wouldn't bother. 

The whole tenant analogy is rubbish. You're basically hiring someone to teach you how to buy notes, not an assistant or a tenant (who the heck came up with this..). I would be suspicious of someone willing to say or do anything to get into a JV partnership. The whole concept here is the exchange of knowledge vs money. I would be more interested in what they can teach you and if they are a good fit for you. If all you're interested in is for someone to manage a note and for you to be a passive investor then that is a different story.

Amanda G. I have a question. What are you trying to accomplish while investing in notes or note businesses? As in, trying to learn the business? 

If I may give you some ideas on how I've been vetted from time to time. 

  • Don't be afraid to call references or check their social media.
  • How long have they been in this line of investing? Real Estate Investing years total. 
  • Who do they know that you know and like? Who are their friends? 
  • Start with 25k or less. Would it break you if you lost it all? Test them. 
  • What is their business plan? Do you like it? If they are into 15 different aspects... NO!!!!
  • If you want to learn the business then invest with a mentor. 
  • If you like passive maybe someone with a lot of experience you feel safe with.  
  • Never take abuse from anyone. Life is short and you are important too. 

Best to you... GC

Originally posted by @Patrick Desjardins :
Originally posted by : @Amanda G.
, Thank you! With tenants I can verify employment and references. Do you have a parallel suggestion for partners?

Also, I have noticed that the "normal" thing is one brings the money, the other brings the experience and there is a 50/50 split. What would you think about asking the partner to put some of their own money on the line? I'm not thinking a huge amount, but something so they have skin in the game. Would people think I'm nuts to suggest that?

That is the concept of tranche, which is really good. Basically the more money in the tranche under yours, the more secure you are. You aren't nuts, I have done it in some circumstances when the person was on the fence.

With that said, while your due diligence is wise, you have to make it realistic. Someone with any experience would have to be really desperate to be willing to jump through all these hoops unless you have a significant amount of money to contribute. Like if someone came to me and said they wanted to invest a million dollars but they wanted me to go get finger printed? Sure. But for 25k I wouldn't bother. 

The whole tenant analogy is rubbish. You're basically hiring someone to teach you how to buy notes, not an assistant or a tenant (who the heck came up with this..). I would be suspicious of someone willing to say or do anything to get into a JV partnership. The whole concept here is the exchange of knowledge vs money. I would be more interested in what they can teach you and if they are a good fit for you. If all you're interested in is for someone to manage a note and for you to be a passive investor then that is a different story.

Not sure about rubbish and for sure I was not thinking 25k I was thinking 250k and up.. :) at 25k why bother at all. If a JV partner needs 25k why would you want to play with such a small player in the first place put it in a REIT and call it a day much safer.

Or invest in a quality performing note with a good local lender.. seems to me to be a bunch of risk if you can't know the basics of who your going to hand your money over to.

on that subject.  I was signing into the executive lounge at PDX ( they have a new finger print dealy and your name pops up)  lady behind me says excuse me are you the Jay Hinrichs from bigger pockets.. I said yup.. so I sit to have my coffee and she comes over and starts to tell me how she listened to a pod cast on BP

Wendell De Guzman she did no checking on him no background no nothing just though because of the pod cast and other flowery post that she could trust him.. well she lost over 100k.. a simple credit report and criminal background like you give a tenant.. all you need is their name and SS, you don't need finger, this  would have showed her his name was an alias and he was in all sorts of financial trouble prior to changing his name.. and she would not have lost her 100k.. Or if she still chose to invest with him would have understood the risk.

and as a HML I had a lexus nexus product that I ran all the borrowers SS through it was a great tool.. so in my mind if your giving your money to someone who needs your money they need it for a reason.. they are not doing it out of the goodness of their heart.. to just verify they are good upstanding people seems to me for average folks who really have no experience they are taking a lot of trust and faith and could certainly mitigate that by not investing with someone who is not ready for prime time or has proven to be a poor steward of their own finances..

@Patrick Desjardins on another note I think JV ing notes is highly risky.. fractionalizing interest in notes if they go bad can lead to all sorts of problems ESPECIALLY seconds.. I would no way recommend anyone do that.

better to be in a fund or buy a whole note.. 

and I base this off of a ton of experience .

when I had my HML company in the bay area late 80s that's all we did was JV notes or fractionalize .. we had to the loans even back then were 250 to 1 mil .. so hard to find one investor with that much dough.

but in a foreclosure scenario it can get unwieldy with a hold out or someone does not agree on the exit plan or wont put up anymore money to save it.. etc etc.. a lot of things we don't think about when every thing is rosy.

Hey I agree you on a lot of these, and I had not heard about this Wendell fellow. 

But the typical scenario is someone from BP will contact you and say they might be interested in a JV, and they have between 20 and 40k. That seems to be the sweet spot here.

I don't like 20k mind you, and I advise against it because of the fixed costs and low value of the collateral. But I would rather have them do a JV for 25-30k and have a 1 on 1 learning experience than invest 20k in one of the gurus and start at -20.

Anyway.. As I wrote above doing your due diligence is very wise but has to be commensurate with the size of the transaction. There are some people out there going to Scott Carson's bootcamps and then start blasting you with emails pretending they know about note investing and who you should vet carefully. I caught one not too long ago advertising a JV opportunity on a note that he didn't even have under contract so his webinar was all pretend.

Then there are guys like Gene above which I don't know personally but I know he has done a lot of real deals.

Right Jay, 25-50k is a small amount but a good starting point for a lot of investors. I'm in IN and invest in a 150mile radius. There is plenty of deals with a very good return, far better than what most passive investors are making. Real Estate is risky in any field. You're also correct about the 250k and up... 25k... really, why bother? I find many good little home investments at 25 and less. It is ONE investor per ONE deal. I don't mix money. If you look at it as the ACV was 75k and I just went into the investment at 25 or less would that help?  I have investors with 5 and 6 deals going so it adds up. They started at 25-50k and I don't think anything about it. One of our goals is to protect our investors no matter how small.  

For now, I'm enjoying what I am doing at 25k and up... 

GC

@Amanda G. I think many people have great advice - my 2 cents to add to it is why select one person? Find 2-3 people you would consider and get on their vip list and when deals come through see what deals interest you.

There are many investors who do not put all their eggs in one basket and invest with multiple people. Nothing wrong with that and most investors should not care - there is no exclusive relationship.

Hello @Amanda G. , I'm going to read through comments after I respond as there are a lot of competent people on this thread and want to stay focused on your question.


My immediate thought is to focus on yourself and what you bring to the table.  

- Based on areas of Note Investing, such as Sourcing, Due Diligence, Workouts, Raising Capital, what areas are you proficient in? Even if you are passive, you need to understand the mechanics.

- What resources are you set up with and what level of expertise do you have using them (i.e. PACER, Credco, TLO, etc)?  Or are you simply seeking to be hands off?

- What is your financial situation?

- How would a partner benefit from what you bring to the table?

- What leverage do you have (i.e. time, money, etc)?


I ask these questions with caution in mind as I've seen so many folks come out of the NI gate bypassing this self-development as they rush to get passive money in the door OR use passive money for investing.  The end result is they burn themselves, the passive partners, and the industry as they fade away within a year.  When you focus on building yourself, you will be competent and confident as you vet partners...(i.e. litmus test --- many of which will be coming to you)

Originally posted by @Chris Seveney :

Amanda G. I think many people have great advice - my 2 cents to add to it is why select one person? Find 2-3 people you would consider and get on their vip list and when deals come through see what deals interest you.

There are many investors who do not put all their eggs in one basket and invest with multiple people. Nothing wrong with that and most investors should not care - there is no exclusive relationship.

 Well put, Chris.  That is sound advice.  

Originally posted by @Gene Chandler :

Right Jay, 25-50k is a small amount but a good starting point for a lot of investors. I'm in IN and invest in a 150mile radius. There is plenty of deals with a very good return, far better than what most passive investors are making. Real Estate is risky in any field. You're also correct about the 250k and up... 25k... really, why bother? I find many good little home investments at 25 and less. It is ONE investor per ONE deal. I don't mix money. If you look at it as the ACV was 75k and I just went into the investment at 25 or less would that help?  I have investors with 5 and 6 deals going so it adds up. They started at 25-50k and I don't think anything about it. One of our goals is to protect our investors no matter how small.  

For now, I'm enjoying what I am doing at 25k and up... 

GC

Good words, Gene.  What is left out of your response is the obvious.  You work the phones and pound the pavement for deals.  If I was a passive investor, outside the standard background checks I would seek someone who hustles and pounds the pavement with solid daily rituals.  

what a great post and like @Gene Chandler stated we both did a video on who we would JV with. I am against doing JV deals with most investors as most don't understand what they are getting involved in. Like some others mentioned I am 100% against these new investors who go to a weekend course taking money from anyone when they haven't completed a deal or many deal since to success. It's way to risky. Don't care what you're guru tells you. You need to be servant to your imvestors and protect the theit money better than your own. I always say "Trust but Verify" when I'm on stage speaking and there's a reason. I'm a also not here to call anyone out. If you choose to invest your hard earned money without doing your own checks then you're accepted acceptiNg the risk. It is sickening what I've seen even I've over the past few years in is industry. You also need to understand all exit strategies yourself before asking for any money and most get Into a deal hoping for only the best. I always educate those in the business how to protect themselves In all cases.

Before you give that next newby a dollar make sure you ask them what their strategies are when they need to foreclose and rehab the house. If they don’t have an answer and numbers still don’t work then “run don’t walk”. 

Wish you the best. It’s an amazing businesses if you act as a servant to your investors money and worry about yourself last. You need to crawl, walk and then run. 

Dan Zitofsky

Zitofsky Capital Management 

@Amanda G.

I think I may have emphasized this when we spoke, but you should also ask if they have their own capital into any deals they've done. Most prominent investors should use their own risk capital (or that of close family/friends) on any deal and getting the experience first, prior to reaching out to others or advertising for JV partners. At some point in time, everyone runs out of their own capital and must rely on external sources if they wish to continue and build their book, however should always have some in reserve so they're not scrambling to close a deal. For investors that operate in this fashion, generally the money finds them as they are not reeking of desperation to fund their next deal.

And as pointed out above, if they haven't closed any deals yet then they are not truly experienced yet.  No offence to any of the newbie note investors colleauges who just started within the past year or less, but I see many of them posting on here and I know none have actually done an end to end deal yet.  

Originally posted by @Gene Chandler :

Right Jay, 25-50k is a small amount but a good starting point for a lot of investors. I'm in IN and invest in a 150mile radius. There is plenty of deals with a very good return, far better than what most passive investors are making. Real Estate is risky in any field. You're also correct about the 250k and up... 25k... really, why bother? I find many good little home investments at 25 and less. It is ONE investor per ONE deal. I don't mix money. If you look at it as the ACV was 75k and I just went into the investment at 25 or less would that help?  I have investors with 5 and 6 deals going so it adds up. They started at 25-50k and I don't think anything about it. One of our goals is to protect our investors no matter how small.  

For now, I'm enjoying what I am doing at 25k and up... 

GC

I get it you have to play in your sand box.. my only comment was for someone who has no basic knowledge to hand over money to someone they met on the internet.. it seems logical that they would do just a little background on the person.. to make sure we are not seeing the next thread.. HEY I gave 25k to invest in this note and the guy or gal wont return my call.. or they never actually gave an assignment.. being that these folks probably don't even know what an assignment is.. etc etc. I fully under stand there are a lot of folks out there that play with 25 to 50k investors I know in our whole note business I have done over 1700 notes in the last 5 years ALL one note one investor though and all 25 to 100k in size.. so I get it.. but those transactions are fresh new title insurance and appropriate vesting day one as beneficiary not through assignments or notes with hair on them.. And if something happens to me and we are not there to back stop the investor they are the sole owner and can hire whoever they like for collection and or in the extremely rare event of a water landing having to deal with a non pay.. but when you don't play in the NPN space like we do.. we just don't deal or work in that end of it..

And I personally have what I call my credentials package and its available upon request..  Along with Letter from my personal banker that talks about my liquidity and average balances etc.. so many people in this business when you peel back the layers really have no or very little liquidity.. NOT the investors they have cash I mean the facilitator deal makers.. looking for cash.

I mean just look at the Morris invest threads and the carnage one slick guy did.. and I bet not one person checked this guy out past watching his pod casts.

Great points, Dan. I'm of the same philosophy when it comes down to it all. My particular set of skills, if I'm thinking about growing my money partners' checkbook first, will reap its rewards in due time. Just as with any particular avenue in the RE realm, if you build your network by making everyone else rich first, you're going to have the chance to be rich in the end.