GDNIP Ep 6: What Does It Take To Be A Note Investor?

We are all made to fit into something that brings out the best in us. In note investing, there are just some people who are made more perfectly for the job than others. So what does it take to be a note investor? Should you be one or not? Gail and Chris reflect on these questions and give great answers on how to be a note investor. They identify some categories of people who may not be a good fit while tackling the characteristics that one should possess in order to survive in this industry. They put forward the value of knowing how to take risks and being comfortable with guessing, to not have everything be exact and calculated. Learning as well how to recognize that our fears are not always real, pushing forth how investors should seek to take that jump and overcome them. Rounding it up with talking to a mentor, they show how constructive criticisms are part of the job and that to win in the game, you have to stick through it all.

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Gail Anthony Greenberg & Chris Seveney What Does It Take To Be A Note Investor?

What Does It Take To Be A Note Investor?

Gail, what do we want to enlighten everyone about on our podcast?

We’re giving ourselves the gift of a day of venting here because we have both just had a lot of people on our last nerve and it’s really caused us to reflect on whether some people really should be note investors or not. We started identifying categories of people who maybe should not be note investors. With your permission, Chris, I will start. Unlike the usual top ten list where we worked up to the big one, I’d like to start here. I’m just going to put it out there with apologies to some of my very good friends who are in this profession but engineers. Engineers are very attracted to notes because they are a number people. Although all real-estate investing involves a lot of number work and figuring out if you could make money on a flip or whether you can make money on a buy and hold and what it’s going to cost you to get there. Note investing has even more numbers because we always start with a big spreadsheet full of numbers when we’re trying to decide what to buy.

To tag along that, Gail, as an engineer myself and a number cruncher, there’s a second component to note investing, which is the art behind it. We can all crunch numbers and come up with numbers that make a deal either look good or bad. The reality of it is, the moment you hit enter on your keyboard, you’re wrong because whatever it is you put in for your pro forma is not correct. It’s a guess. That’s where engineers struggle because engineers don’t guess.

They like to measure things and analyze things. A lot of people in our business have an ROI calculator that will look at all different exit strategies for a note and tell them what the worst-case scenario will be or what they’ll make depending on the purchase price. We have our friends who could have sent a mission to Mars with the complexity of her ROI calculator. I feel a lot of sympathy for engineers even though I make fun of them because I understand the real motivation behind all the craziness and the dizziness is wanting to be sure. Trying to reach a level of confidence and security about an outcome that in reality cannot be achieved. Would you agree?

We tend to try to reach a level of confidence and security about an outcome that in reality cannot be achieved.CLICK TO TWEET

I would absolutely agree and trying to overcome that is the biggest challenge and some people can and some people can’t. An example is, as an engineer I know out there, Chad Urbshott, who you know.

No, I didn’t know he was an engineer.

Chad is an engineer like myself. He’s very good at his systems. He’s very good at his calculator and he’s somebody who I respect in this business as he continues to grow, but he also has learned to understand that. If it is a numbers game, the numbers game comes down to having multiple notes because there is going to be times when you have a deal that doesn’t perform as well as expected. Typically, if you buy right, you have more deals that do well versus ones that do not as well.

This is the background of what I always think when I’m in one of these conversations with someone who’s trying to get down to that no less than 1% risk before they do a deal. There are certain things in the world that we all accept that actually aren’t really true. One example is that my husband has all his IRA money in the stock market. Not the part of the stock market that boomed and everyone made a lot of money in the last couple of years but invested in a very supposedly balanced way in the stock market so that when it crashes, nothing terrible happens. That also means when things go well and nothing happens either. Basically, nothing has happened for a long time in his portfolio. I upset him by calculating his return in the last couple of years. I’m not going to embarrass him by saying what it was, but I’ll just say.

Note Investor: The real motivation behind all the craziness and the dizziness is wanting to be sure and trying to reach a level of confidence and security about an outcome that in reality cannot be achieved.

I have a plan for our children and a 529 plan and I got a statement. Year-to-date, it has returned 1.6%. I sat there and I just started shaking my head because we are talking about this and people getting into note investing and people trying to manage risk because the reality of it is the higher the returns you search for, the higher the volatility, the higher the risk. When you’re trying to achieve a 20% to 30% return, it’s going to be a lot more fluctuation than something that’s at 3%, 5% or 7%.

You could still rally in their accounts and get it up to 1.2%.

Have you been watching the markets, Gail? What’s been going on?

I’m a contrarian. I always think the rain is going to fall up one of these days. I’m not sure that the risk and the reward are always in the same proportion. To get a good reward, you have to take incredible risks. I feel like the note business, we are able to study the notes and study the properties. There is a lot that we can know. There are big things we can’t know. I feel comfortable with it compared to handing over my money to somebody. The point I was making is the world looks at investing in the stock market as a safe bet thing. In my husband’s case, his parents had a broker, so we got a broker. We thought that is what you do when you’re a sensible person. For most people, that’s really all they can do. They don’t have a broker who’s probably going charge them a lot of money or they can just be in a mutual fund on their own, but there aren’t really a lot of obvious places to put your money when you’re not an active investor and don’t have the skill to do it yourself.

The higher the returns you search for, the higher the volatility and the risk.CLICK TO TWEET

We just developed this. It feels normal to have a broker and put your money in the stock market because so many people do it. Does that mean it’s not risky? It’s incredibly risky. In 2008, anybody who had money, I don’t know if they all did what I did, which was nothing when it fell. Suddenly your account is worth half of what it was suddenly. When people say to me, “I don’t like to take risks, I just give my money to my broker.” I was like, “Do you hear yourself? Can you hear what you’re saying?” I think people feel discomfort with certain things and to them, that translates into that’s risky versus they do other things that they think are not risky.

There’s a lot of personal reflection that goes into understanding your own reactions to risk and whether it’s valid or not. When you feel scared of something, you really have to ask yourself, “Am I just reacting this way because this is new to me and I haven’t done it before? I question my own ability to do this, to make the right decisions and to take responsibility for whatever happens.” They act like there’s this abstract external thing called risk, risk or not a risk. What they’re feeling is very internal and very personal to them. Why they perceive some things as being risky and other things as not probably has more to do with how you grew up and the experiences you’ve had in other areas of life than it does with the actual risk of the things you’re contemplating doing. Does that make sense?

It absolutely does. One interesting component with it is it’s the only asset class where knowledge is not evenly distributed. In the sense of if you’re investing in a stock, the information that’s available is the same information available to everyone. If it’s not, then it’s insider information and illegal. In real estate, especially notes, that’s not the case. The case being a hedge fund may sell an asset not having paid attention to it in six months. You have somebody drive by and realize somebody just renovated that property. The hedge fund may not know that information that may have happened or some other type of information that you have and knowing that information isn’t something you have to go back and share what the person selling you that property. When we talk about risk and either risk aversion with notes and with real estate, there is that component to knowledge is actually more power. That’s where I view sometimes less risk in real estate from that perspective if you do your due diligence and do a thorough job with it because you may find things out that the seller may not have paid attention to or took the time to pay attention to.

I once almost bought a contract for deed where the house had been lost in a tax sale and had been sold. This is in Michigan where there’s a redemption period. Even after the house was sold in a tax sale, that company must have received multiple notices that they had X number of months to redeem the property before the sale became final. They just somehow managed to ignore and miss all of that and lose a house. It was very sad when I had to tell them about that. You’re a big knower too. You missed your calling as a private investigator/stalker. I’m amazed. I thought I knew places to go and find out things, but you put me to shame.

Note Investor: Having some kindness to people, you attract more bees with honey than you do with vinegar.

I’ll be honest, part of it was just Googling stuff, but I’ve learned a lot from someone who we both been taught by Scott Carson at We Close Notes, listening to his podcast once in a while between him or somebody else. They always throw out some little idea tidbit, whether it’s calling the neighbor if it’s vacant to see how long it’s been vacant or calling the utility company. Every time I ever call a utility company, I always start out by talking with them, “How’s your day going?” Striking up a conversation with them before even asking them what I’m calling them for because then all of a sudden, here’s the information. I’ll be like, “How long has it been shut off? How long was this?” By having some kindness to people, you attract more bees with honey than you do with vinegar as they say. You can get a lot of information from people that you just call up and say, “I’m John Doe. I wanted to know when the power was shut off.” It’s not people like, “This date,” and then hang up the phone on you. Whereas if you strike up the conversation with people, sometimes you can get more of that story.

I love calling government offices in the Midwest. Those are the nicest people ever. The South also. They are super sweet. It’s always some nice lady usually working the desk and they are just awesome. You and I both live on the East Coast. It’s not quite the same here. Speaking of which, you find out things on the negative side too. You helped me not buy something, although I would have figured it out on my own too. I have under a contract for deed in North Carolina and I sent someone there to take a photograph of it. It’s a mobile home, which I didn’t use to invest in, but I’ve warmed up to them because I’ve got some nice ones in the Carolinas and as long as hurricanes can’t take them away, they’re very profitable and pretty nice too. Because the lot was deep, the person who took the photograph didn’t want to go tramping on their property, he could only take a picture from the front. It looks gorgeous. It turned out that they had a fire two months ago and it was considered a total loss. Even though the insurance isn’t going to cover the entire repair, the borrower’s going to try and fix it, but then he had to move out because it wasn’t livable in there. While he’s been away, there was a storm and a tree fell on it. Now there’s a massive hole in the roof. Talk about the universe telling you it’s time to move. It was the saddest thing, but I’m super relieved that I didn’t buy it. What’s going to happen?

That will be an interesting one, but make sure on our Facebook group, Notes and Bolts, that you go put that in as a red flag property so other people don’t waste time.

In our crowdsourced information of toxic assets.

To get a good reward, you have to take incredible risks.CLICK TO TWEET

For other note investors out there, Gail and I have a Facebook group called Notes and Bolts where we put a list together of toxic assets, which are either burn downs or have major title issues to try and save people from spending the money on a BPO or O&E Report. It comes in handy and it saved I know myself and many others a lot of money, especially on this one asset in Ohio that I think every single note investor I know has looked at it. The property is beautiful but unfortunately, the land contract was issued before the borrower or the lender took title to the property. It’s an invalid land contract.

They might have sold that one because I haven’t seen it on any lists. I think it has been sold. We won’t say who bought it, but I will look it up for you. For all of us who have spent money buying title reports on things that we couldn’t buy because they had some horrendous title issue or other problem, being able to put those on this list and spare other people’s spending the same money to buy the same title report, it gives meaning to my suffering that I’m going to spare someone else spending $150 for no reason.

One thing I want to get back to, Gail, is we started out the conversation with why engineers shouldn’t be note investors or rephrase that in the sense of engineers need to adapt to become note investors. What are some of your recommendations you’d put out there to engineers or people who are in the sciences or real number crunchers to overcome the fear or the analysis-paralysis that they go through in trying to buy either the first deal or make it through some of these first deals?

Like everything else, the first thing is to admit you have a problem and it’s not really a problem. It’s obviously a normal and important survival thing to have fear. The only way we can learn to live in the world and to be risk takers in order to do exciting things like notes or other kinds of real estate investing is that you have to be much better. You can’t have fear and think because you feel it, it’s real. You have to turn those analytical skills on yourself and ask yourself, is it really legitimate not to be so fearful? What are the possible downside risks of taking an action you’re not totally sure will bear fruit? You have to be reflective and I don’t know that everyone has grown where it’s easy for them to catch themselves behaving in a way that isn’t helpful and then ask themselves why they’re doing it and can they do something else? You can’t wake up one day and say, “I’m going to stop being a fearful person and I’ve got to stop worrying about taking risks.” It doesn’t really work that way, but you can start taking little steps where you think, “Is there something I can do to make myself a little more comfortable? Can I get myself closer to a place of peace with this decision?” That’s a really important process if you don’t habitually do that.

Note Investor: Make your peace with the fact that you are not going to always know the right thing and you are occasionally going to step into a quicksand.

One of the things I’d recommend as well to other people is asking your mentor. If you’ve got a deal that you reviewed, share the information with the mentor and say, “Does this look like a decent deal?” At the end of the day, it’s still your decision because they can look at it from numbers and maybe review an O&E or BPO report or something along those lines. One of the things I do is every deal before I’m buying it, I keep a journal and I write what I think the outcome is going to be. When I close my deals, I go back and I look. Here’s what I thought was going happen and here’s what actually happened. I talk about what exit strategy I thought would happen, how long it would take, how much money was going to go into the deal? I keep that as little history as a playbook for what I thought versus what happened.

A lot of times what you think is going to happen doesn’t, but it doesn’t mean that’s bad. I’ve had things that I anticipated and a lot of times had been better than what I anticipated. If you have a mentor take a look at it and they can say, “Yes, this looks like a decent asset at a decent price where you’re paying industry price for this asset. You’re not overpaying for it.” It really comes down to whatever outcomes, but if you run every exit scenario in your numbers and everything comes back with a decent return, at the end of the day, your goal is to make a certain return. I don’t want to lose money on the deal and what is the chance of me actually losing money on this deal? That’s what I view as my risk or safety factor is what would have to go wrong for me to have to lose money on this deal? It’s usually something catastrophic.

I love the idea of you and a journal. I’m picturing you, “Dear diary, I’m thinking of buying this asset. I don’t know if it will like me or not.” That’s a great idea to keep track of your wins. Someone told me years ago, they just keep a file of everything that they did right. Every time someone says something nice to them or says something nice in an email, they printed it out and they put it in a folder and when they have a bad day, they pull it out and they look at all these things. People telling them how important they’ve been and how great their achievements are. This is really great. Obviously, to be able to talk to a mentor, you have to have a mentor and it can be a little difficult to find a mentor when you’re brand new. People don’t necessarily want to take you from kindergarten on. They’d rather wait until you’re in high school. That’s what’s so great about groups like Scott Carson’s Facebook groups in addition to our own. There are just so many people on there and people are so willing to discuss your deals with you and give you opinions. People love giving opinions.

The challenge a lot of times is people don’t like constructive criticism, but you’re right. I would challenge you a little bit on the mentor component because I think there are a lot of groups out there and I do view the note industry much different than other industries where fix and flippers are typically very territorial and they don’t help each other because they’re always in competition. Note investing is not as much competition because a lot of us invest in multiple different places. There are a lot of assets. We invest in different asset classes and I find it much friendlier than other groups or investment. Between our Notes and Bolts Group or Scott’s WCN Crew or some of the other groups out there, there are plenty for people to go out there. Don’t post a deal but just say, “I’m looking at a deal in this location. Anyone want to spend ten minutes with me on the phone and walk me through as a double check?” I guarantee you if someone did that within ten minutes, they’d at least have five people already responding to them. A key to that is making sure that people are responding and are knowledgeable enough to answer that question.

You cannot have fear and think because you feel it, it's real; because the only way we can learn to live in the world is to be risk-takers.CLICK TO TWEET

I think the other thing too is you have to some degree make your peace with the fact that you are not going to always know the right thing and you are occasionally going to step into a quicksand. I think at a certain point, particularly if you’ve felt stuck for a long time, you have to ask yourself. The things that we buy are so inexpensive. They’re spending $10,000, $15,000, like worst-case scenario if you lost the money, could you survive it? Really think about how hard would it be? How bad would it be? Oftentimes, it’s people’s psychological need to succeed and to look perfect to other people and to avoid criticism from people who maybe are naysayers in their lives about investing in real estate, much more than it is the impact of actually losing that amount of money that concerns people.

I would tell you if you’re investing money and I don’t care what you’re investing in, one of the first steps before you invest in anything is, “If I lose this money, is it okay?” People will be out there thinking, “There’s no chance.” A little story I’ll share is when I graduated college a few years after, I was in the tech boom and I invested some money in WorldCom. I think it was the late ‘90s, right around 2009, that timeframe. WorldCom was a giant in the telecommunications industry as you probably know, Gail, but WorldCom pulled an Enron and they went belly up. I had thought, “WorldCom, they’re just going to keep growing and going by all these companies. I got stock. It’s probably going to go through the roof.” No. It went belly up and it went down to zero. I lost $5,000 or $7,500 at the time. I was two years out of college. That was a lot of money.

I mentioned that story because even investing notes, real estate, whatever it is, you invest and you got to have in the back of your mind, “If I lost this money, am I okay? What would happen if I lost this? Can I recover?” If you can’t, then you really need to consider, “Should I be doing this?” Are you comfortable investing? For some people, the answer could be no. I know a lot of people want to get in as young and as early as possible, but you also need to make sure that you’re taking care of yourself and you’re doing the right thing, not just jumping into something to jump into it.

I think we’ve both seen a lot of examples of people who have lost a lot. When people lose a lot and then they bounced back, even if it takes them a long time, you’re never as scared after something has happened to you. Oftentimes, it’s the anticipation of something that is so terrifying. Once your worst nightmare comes true and you survive it, you are just never scared like that again. Nobody wants to wish bad luck on themselves. I’ve told the story before that this year for the first time, I lost money on a real estate deal.

Note Investor: If you’re persistent, everything will eventually fall on your feet.

As much as people have always told me if you’re not striking out, you’re not doing enough. I laughed heartily with everyone else at that. I didn’t really believe it because I thought that I could be careful enough and conscientious and look at enough things and do enough due diligence. Other people might get their foot caught in the door, but I wouldn’t and then it happened to me. It was like a very vulnerable feeling and very confusing. I’m not used to failing and I’m not used to making mistakes. You can do everything and still have something happen to you. If you can’t stand that idea, you need to not do this.

We could have talked a whole other episode about when to get out of a deal because if a deal is bleeding or losing money on a deal. I know a lot of people try and grasp at the last straw for every little nickel and penny. A lot of times it ends up costing them a lot more in the long run. When you talk about losing money and so forth, I’ve been involved in the commercial real estate for twenty-plus years and I have somebody I know who was a developer up in Massachusetts. The gentleman was a landscaper and ended up doing a development company. At one point in time, it was worth over $100 million. Two years ago, he filed bankruptcy. He had lost everything. He lost over $100 million. He had a $5 million home lost and everything else but he is trying to recover from it. When people talk about losing $5,000 and $10,000, there are also people who have lost a lot more money as well. One of the things for me that helps me with the risk is being involved in the commercial real estate side and I’ve been on construction projects and development deals that did not fare very well and lost. They were on the losing end. It wasn’t me personally. I have had a note as we discussed that has gone into the red on me.

Seeing that even the largest, the biggest and the best developers and real estate people in the world, people with billions and billions of dollars also don’t make money on every deal. It’s the reality and something you have to overcome. You just got to make sure you do the proper due diligence on your end, review everything and focus on what are the outcomes and what’s the probability of the outcomes. If you’ve got a vacant property and you run through your calculator, getting the person reinstating, you’re wasting your time. If you’re looking at it from an REO to sell it or to rent it or for closing, that’s probably the highest probability. You’re not going to get that person reinstating probably 98% of the time.

Everyone can throw all these numbers onto a fancy spreadsheet, which I have a super fancy spreadsheet I admit. It’s also looking at the art of the whole process of what are the probabilities of each one? “If this was me, what would I do?” In this mindset of certain things and that’s playing the odds. A lot of times that will happen. You have borrowers. I’ve got one right now who doesn’t want to deal with something where basically I offered them Cash for Keys and it’s foreclosing in a month. They’re like, “No, just go foreclose.” I’m like, “I would have given you money, but if you don’t want the money, fine. We’ll just finalize the foreclosure.” That was always in my game plan. Put yourself in these people’s shoes because a lot of times I see people post deals. We’re going to foreclose on this deal and the person owes $40,000, but the house was worth $100,000. I can tell you, I would bet the chances or probability is 80% or higher that that person is going to file bankruptcy and let you file foreclosure because of an equity and they’ve been there for twenty years. It’s things like that.

You're never as scared after something has happened to you.CLICK TO TWEET

It helps to be a good student of human behavior. People will still really surprise you. We talk about stuff every day. You bring up a good point. I think that wishful thinking is one of the greatest enemies of any real estate investor. When you’re doing a flip, a lot of people lose money on flips because they are overly optimistic about what they can sell the property for when they’re done and they super underestimate what it will cost in renovation to get it to that place. Being realistic about what people are most likely to do and what’s most likely to happen. You’ll still be surprised a lot.

The advice I’ll give to other note investors out there is when I see the videos of, “The person’s made three payments in the last twelve months. On day one, we’re going to get them repaying for twelve consecutive months then in a year, we’re going to sell it to another investor at an 8% return.” That sounds great, but the reality of it is day one technically is when you fund the deal and it’s not boarded for another three, four weeks after that and unless you’re doing the actual reach out, your service is like a Madison Management probably hasn’t even done any of that reach out yet to them. Once they finally reached out, it takes on average I would guess two to three months before you can even get some type of repayment plan. Then getting somebody pay for twelve consecutive months when they haven’t for four years is probably not a very high probability. You want to try and get them to six to eight or whatever it is but base your scenarios in your returns off of what I’m saying.

Don’t base it off of day one, twelve months in that at an 8% return. Take it and say, “Maybe we’ll get eight payments or seven payments for the year and we’ll sell it at a 15% or 18% return.” What do your numbers look like? Because that could happen. If I was talking to another investor to work on a deal with them, that’s the question I would ask them, “What’s this deal look like if you did this or that? What is the risk in something along those lines?” Sometimes that’s the worst-case scenario where you caught in the conundrum of they’re not far enough behind sometimes to foreclose or every time they fall to three months behind, they reinstate. I have a borrower that does that. Every time he gets a demand letter, he waits until day 89 and he reinstates.

If you are not striking out, you are not doing enough.CLICK TO TWEET

I have one like that too. I can’t stand that. You and I decided to introduce a new feature to our talks here and that’s one where we’re going to give a tip every time. If I may take the lead here, Chris, I actually have a tip based on my experience of almost buying the burned-out house. My tip is when requesting information from your note seller, you’re going to get the collateral file, but always ask also for an updated payment history and the servicing notes. When I looked at the payment history for this, every month for the last four months, there’s no payment. Then suddenly there was a $13,000 deposit. I thought that’s interesting. Go to the servicing notes to see if there’s some explanation and sure enough, that’s where I found out about the fire that has destroyed the house that I almost bought.

That is a great tip because a lot of times people will get collateral and it’s the deed or the land contract and the assignments. You want to see the pay history, you want to see the servicing comments to try and again get a sense for what is going on with the borrower, so you can understand what their mindset is. I found so much great information on a lot of this information. One time, I remember I found a realtor’s number on a vacant property that I called up and they had photos of the inside of the property for me and they emailed them to me. It’s doing that extra, asking for it. Typically, I’ve never had somebody tell me no on getting that information. I’d be shocked if a seller told you, “No.” I would be skeptical of buying from them if they said that.

They dragged their feet, that’s the body language version of no but if you’re persistent, I think they’d give up and they give it to you. You find in there usually valid phone numbers because they will put the phone number, incoming or outgoing, where they actually reached the borrower. That is really invaluable too and very easy to get.

That is a great tip for everyone out there. Anything else you’d like to share, Gail?

No.

Thank you for joining us. We hope the audience enjoyed the episode. Continue to follow us on all our social media.

Please go to GoodDeedsNoteInvesting.com and sign up to subscribe to our newsletter and to see our cool videos and other things on the site. You can see old episodes of the podcast on there as well. Thank you, Chris. Everyone, get out there and do some good deeds.

Take care.