GDNIP Ep 29: Open Mic Night: Note Investing Horror Stories
In any business, especially in the note business, don’t count your chickens before they hatch. When you’ve been in this business long enough, you realize that people say a lot of things that they never come through with. Chris starts off with an email from his servicer and a boarded note, and then proceeds to answer some questions with Gail about high-UPB assets, doing partials on a CFD, joint ventures, the difference between a pre-bid and a post-bid, using AVMs, when to BPO and O&E reports, and more. They’re also joined by one of their friends, a full-time note investor, who shared one of his horror stories about a note he bought out of a partnership. Find out how that plays out in this episode.
Listen to the podcast here:Gail Anthony Greenberg & Chris Seveney Open Mic Night: Note Investing Horror Stories
Open Mic Night: Note Investing Horror Stories
I got an email from the servicer. I had a note boarded. It was actually a contract for deed from John Keith and I acquired the CFD for about $9,000. I had UPB of about $19,000 and the borrower had made ten out of twelve payments in the past several months. It’s on the borderline performing and semi-performing. The minute it got boarded, the borrower called in and want to do a short payoff of $12,000. Basically, I was like, “No thanks.” I countered it with $17,000 and I got an email basically saying that the guy appears to have accepted the short payoff, which would be great.
The reason I’m bringing this up is in any business, especially in this business, don’t count your chickens before they hatch. I’m not going to go to my JV partner all excited like, “We’re getting a short payoff,” because when you’ve been in this business long enough, you realize that people say a lot of things that they never come through with. I’ve had borrowers who keep saying that they are going to be making that payment but their father died. It’s the same father who died eight months ago. It’s interesting how that happens but it’s good that this may happen. Before people will sometimes get too excited over things, sometimes you’ve got to sit back and let it play out to see how it ends up happening.
It’s consistent with the theme of under promising and over delivering. Never report a rumor like that to a JV and get them excited. It’s hard enough managing your own expectations so you don’t feel disappointed when things don’t happen. I try to be very accepting of whatever happens and feel that there will be some good results in the end but it’s not always easy.
Similar to your acquisition, I know you’re on the edge of your seat hoping for something good to occur, which it did. I know you’re also keeping that close to the vest.
I literally spent five months not saying anything to anyone. It’s like being pregnant. It was hard because people even would ask, they knew that it was a dream of mine and they would ask me once in a while. That’s my what just happened. I am renovating a house and at a great distance. Unlike the usual CFDs whether they get every detail right, this is very important. I’m renovating a house and caring a lot about how it turns out. This reminds me why it’s so great to be in the note business and where the stakes are lower. The disappointments are not as great. The contractor showed me the long pieces that are holding the wooden house up off the ground.
They’re literally shredded from years of termites gnawing these massive pieces. They’re almost like telephone poles. I don’t even know how this house is still standing up. It’s crazy. Everything is hovering in the air. It literally will be a completely new house. They’re replacing each piece at a time but it will all be new eventually. It’s still cheaper to do that than do a new construction because of all the planning, the architectural and all the plans that would be acquired, a few engineers, Chad and you know all about that. Someone told me they put a container house in the city. All they were doing was creating flooding and then sliding a container house onto it. They had $25,000 in architectural and city required plans.
When we built our house, the architect I hired was $7,500 mostly because we already had the plans and not an architect but we knew what we wanted and it was more. Soft costs and construction are very expensive. It’s not just the cost to build it but all the ancillary costs. As always, we typically do not have a main topic to discuss. Chad, if you want to give a brief description of you, your business, what you do, stuff, you’re more than happy to.
I have known you guys for a while. Around that time we were somewhat disciples of Scott Carson, the We Close Notes Crew. I started into notes a few years ago. I was a passive investor and I’m somewhat switched over full-time into it. Prior to that, I’ve been a real estate investor for a dozen years. I started with rentals, lease options, student apartments. Gail, you’ve got quite the experience with that in the animal houses as I used to call them. Mine housed twelve a piece, you can imagine how it was. I’ve got a very similar background as Chris, I’m a structural engineer. I worked for developers. I’ve actually developed my own commercial properties.
I delved into the note business both full-time. I’m happy at it most days until I am going to share with you my horror story. I’m hoping someone can shed some light on how I should or might handle this. This is probably not one of the worst properties that I’ve ever dealt with but it’s pretty high up there. I’d say in the top five if not top three. I’m not going to mention where it is because it’s still very hot and live and I don’t want to give away in case this ever will or might go to court. It’s in the state of Missouri. It’s our favorite State, Gail.
I’ve had some good luck there. This is a note that I actually bought out of a partnership that I started out with. It was a re-performer, a semi-reperforming note, mostly re-performing. I can’t remember exactly, but I would say the percentage UPB is probably around 70% I picked it up for. That was about 60% of the value of the property. Fast forward probably six months into it, he stops paying. He was arguing about the taxes going up and his payment changing by $25 a month. He stopped paying and I was like, “You can’t do anything about it. It’s the taxes.” He said, “No, my contract says I pay this amount.”
I have the same issue with a guy.
He decided to stop paying. That was basically it. He dug his heels in and that was it. Three months later it’s a CFD, let’s go for forfeiture. That takes three or four months. He’s on the property and obviously, he’s not to not willing to budge. In any event, we get the forfeiture and the day of the eviction, I got the local ground crew to go and have the locks changed and investigate the property. While they were there, the local property manager called me. He said back in the recession he used to do about a month, 50 evictions and turning properties over. He said this is the absolute worst property he’s ever seen. As he’s on the phone with me, he’s gagging and almost vomiting, it was that bad.
Was it like odor or disgusting mess?
Everything. The odor, apparently there were quite a few animals in the place and they weren’t cleaned up. They were with the animals as well because there were also other types of matter in the property.
The borrower was living that way?
Yes, I was going to post this on one of those horror story Facebook groups but this is going to take way too long. I’m looking for advice at the end of this. No one was there when they got there with the sheriff and the property was vacant but it was full to the brim. They weren’t exactly hoarders but there was quite a mess left behind. He called me and he said, “Do you want this place trashed out?” I said, “Yes, please.” He sends me some pictures. The next day I got the pictures and the very last one had a red sign on the door and it was ripped in half. As I was zooming in on it, I go, “This is one of those dangerous, unsafe for occupancy signs.”
Trying to read one-half and put the other half together and this place has been condemned by the city. That’s fantastic. The inspector’s name was on there. I called the city with no response. I googled the city and found the guy’s name, found his email, emailed him, but with no response. A week later, I finally got a response back saying that they put an unsafe for occupancy sign on the property. I won’t get into too many details. They basically shut it down because of the living conditions. It was him and his mother living there. A welfare call was made to go in and check up on her.
When paramedics arrived, they called the police because the place is such a disaster. Then the police in turn called the city and the city went and inspected it. They shut it down and then proceeded to turn the electricity off, power off. When they forced these people to leave, they kept going back in. I was completely unaware of any of this going on until I saw the sign on the property. To the guy that was going to clean it out, I said, “Yes, please. I talked to the city, please go down to the city. Find out what’s it all about and let’s get this place cleaned out.” He goes down there and said, “I need to have workman’s comp.” He was licensed and bonded everything because he needed workman’s comp apparently. He needed that with the city.
The last thing he says and he goes, “Good luck with this. You’re going to get nailed to the wall with people that are licensed by the city because they can charge you whatever they want.” I was like, “I’ve been down this road before.” Any event, I hired an REO agent that’s very familiar dealing with Fannie Mae properties. That person gets a contractor lined up to go and to clean it out. I said, “Whatever you do, you need to go down and get a permit from the city to go into this property.” They get the permit. They gave me a quote and I almost fell off my chair. I was completely shocked by how much they charged. I actually sent in a couple of other people to give me a quote back and they understood the predicament with the city.
They said, “We’re not going to touch this.” I ended up hiring the first crew to clean it out. They said, “The next step is we need to get the air ducts cleaned. That’s a requirement of the city because of the smell. We need to get the electricity turned back on.” I called the power company. They called me back the next day saying that the city has put a moratorium on the property because the meter was yanked and they need to get the blessing from the city. I called the guy from the city and emailed him. He never responded if we can get this back on. I get this blast of an email saying that this contracting company went in without their permission and without a permit to clean this property out. He’s basically the guy on a power trip and going off on the deep end how he is taking everybody into court that entered this property illegally. We’re never going to get the power turned on until all of this is resolved and he’s not giving any instructions on what he needs to be done.Note Investing Horror Stories: In any event, hire an REO agent that’s very familiar dealing with Fannie Mae properties. That person can get a contractor lined up to go and to clean out the property.
Chad, who sent that email to you?
The inspector from the city.
He is watching this place.
Yes, this place got a total stigma attached to it.
He’s sitting outside drinking coffee and waiting for you to do something wrong.
I’m wondering if two of you have ever dealt in such situation or any of your audience might be able to pipe in and see how I should deal with this. I’m tempted to fly down to this particular area and have it out with them. He’s one of these guys that hides behind his mails and won’t pick up the phone. I called him sixteen times a day and he would not answer his phone.
Out of curiosity, how much are you into it? $10,000 to $20,000, $20,000 to $30,000?
$25,000 to $30,000 somewhere in that area.
I had a similar story in the wonderful State of Ohio. You’ve seen some of these pictures with the water and stuff in the basement that I sent. This guy, it’s similar. He moved next door and when I kept sending preservation companies over there, he comes out across the street and says, “I own this property. You can’t come in.” He finally let us get in. When he did, the neighbor was the former deputy of the water department. We first went to go pump the water out and we’re pumping it in the yard and he said, “You can’t do that.” He called the city. The city came out basically threatened to find me and then I said I had to run a hose 200 feet down the street to discharge it into a storm drain.
My guy said, “You don’t need a permit though.” My guy goes and gets the fire hose, 200 feet of it with a decent pump and starts pumping it. The guy calls again the City. The City comes out, shuts them down again saying, “You’re not supposed to pump there. You’re supposed to pump to the storm drain in front of the property.” I was on the phone with the guy and said, “Why would I hire a guy to run a line 200 feet when there’s one we could have done in 20 feet?” Long story short is that took about four months to work through. Finally, what ended up happening is I was getting quotes from mold removal and everything because the house was completely filled with mold at that point in time. I was getting quotes of $10,000, $15,000, $20,000.
I could have had a guy renovate the property and do everything. If I would have, I probably would have broke about even or maybe even made a few bucks. What I ended up doing is honestly, I bit the bullet and sold it. The guy who’s going to do the mold knew somebody who might be interested in it. I ended up selling it to him at a loss. It was one of those things where for me, the time and effort I would have had to take when I took into account how much time I had into this thing, it was not worth it for me. The situation’s different. To give you an idea, I was into that asset for right around about $30,000 and at the end of the day, I sold it for $25,000. It’s not what this is worth or not, but that’s my story.
If this was an episode of Ray Donovan, you would find out something about this guy that could make you crush him and get him to cooperate with you. I can tell by your reaction, no one watches Ray Donovan. He’s a fixer. Whatever happens, he can basically get leverage on people to make them do what he wants him to do. When you said you would go there, what I would personally do and maybe it’s because I’m a girl is I would first of all try to find out what this guy is all about and what his deal is and why he behaves this way. My guess is that probably going down there and having it out with him, when someone’s power tripping, you don’t meet them with force. Just appeal to him on the basis of, “I am here in good faith trying to resolve a situation where you have this toxic house and I’m doing my best to get it turned around so it’s not a blight on the neighborhood. It’s not a nuisance, not causing problems. Can we work together on this?”
That’s definitely a good approach.
Chad, is this in a Metropolis or is it in a more rural area?
It’s in St. Louis City and St. Louis County. Is it in the city?
It’s actually neither.
What I was thinking actually, Chad, was seeing if there was an Investor Facebook in the area or when you post on there, “Has anyone had any good dealings with,” don’t put the person’s name, “Anyone had any good dealings or do you know contractors who have good relationships with the county?”
I have a JV who’s in Missouri and is the sweetest man. He might be somebody who would go have a face-to-face with this guy and find out what it is that this guy wants. It can’t be to bankrupt you. I can’t imagine that that’s his end game. Maybe he’s not recognizing that you can’t help the community if he is trying to bankrupt you. In fact, you’re trying to deliver a benefit. The only possibility is if he’s a total jerk. That’s when the bribery option becomes available.
What is your end game, Chad? What are your exit strategies? What are you thinking?
The property is as is. It’s probably worth mid-40s. I’m not taking a loss on it, that’s for sure. In addition to that, I’ve got a letter. Apparently, before we evicted the guy, there was a bunch of junk in the yard that they sent in their own contractors and happily charged me $1,000 to remove some of it.Note Investing Horror Stories: Don’t be afraid to ask somebody to look at something or double-check a bid.
In the era when it’s so easy to email and text, you forget the power of talking to people.
This guy won’t pick up the phone.
That is a problem. Do you know anybody who knows him who could broker a meeting or even a phone call?
I’m not sure.
You can ask around. I was complaining about a banker who wasn’t getting back to me in a pretty big city. My attorney was like, “I know him and I know other bankers. I’m going to make a call for you right now.” It’s valuable to contact one of those networks.
The one angle I do have on this particular person from the city is they did not actually notify me and I looked up their ordinances. They’re supposed to notify the property owner by either letter or a couple of other different means. They didn’t notify me or whatsoever. I didn’t know anything about it until the original guy hired to clean it out, went and saw the property and I noticed the signs. I definitely have an angle. I’m wondering how and when I pull it out.
Your fellow note investors are agreeing that if this guy’s unreasonable that you can go over his head, but suggesting do it in a nice way like, “I couldn’t get in touch with you, so I just came. I thought I would call someone else.”
I would be careful with that because when I worked on the general contracting side and you’d have issues with inspectors and stuff and you ever had to go over their head, you’re going over their head. Most of these inspectors are best buddies and they’re godfathers of the person you’re probably talking with and stuff. They’ll be like, “This guy called me,” and so forth. You’ve got to be careful because they can also make your life even more a miserable living hell.
Chad, how big of a town is this?
It’s a pretty large metropolis. It’s one of those suburbs of a big metropolis.
Why wouldn’t you consider selling it as is?
They won’t allow anybody in there. That’s the problem. No one’s allowed access to this place because it’s condemned right now. That is the problem.
There might be investors in that area who’ve had experience with that.
It’s funny you said that. I’ve actually had a couple of yellow letters. I’ve talked to them. They’re low-balling me. They try to give me half of what the property is worth.
Good luck. Let us know. Come back and tell us.
The other thing too is like I said, if you talk to some contractors, see if they know if that inspector has a relationship with them and try and hire one that may know or have a relationship. Based on how it sounds, this guy probably doesn’t have relationships with any contractors.
That’s good advice.
We did have one question we can answer, “What’s the biggest challenge facing new note investors?”
To hear them tell it, it’s finding their first deal. I don’t know if it’s finding the first deal or feeling confident enough to do the first deal. It’s the same feeling, jumping off the diving board.Note Investing Horror Stories: You should be actively discussing your decisions with your joint venture. That’s one of the things that keep it from being a security.
The other thing is also not being afraid to ask somebody to look at something, whether it’s a bid. I know someone sent me an email saying, “I’m looking at these assets and I’m going to put a bid on it.” Actually, it’s interesting because when the questions from Casey came up, which if Casey wants to hop on, we can because he asked a good question about the Stair-Step Method. You use people in this business as a resource and say, “Do you have five minutes to hop on a call? I’m thinking of putting some bids in. Would you mind taking a look at it?” If it’s something that I was also bidding, I’ll tell, “I’m bidding on that as well. A lot of this stuff that I get sent, I know who they’re coming from and I bid on those recently. I’m more than happy to help sometimes if I have the time.” Just people in that challenge of being afraid to ask people to assist and double checking. People aren’t going to do the work for you, but people typically don’t mind looking at something really quick and giving you an idea of, “That looks like it’s in the ballpark.”
It’s good that you said that because I think a lot of people don’t think that a lot of people would be open to having a call like that or an email. In the time that we’ve been doing this, so many of our peers have gone into the education business. There’s definitely a feeling like if you want an opinion, you’re going to have to pay for it. We’re here and we’re available.
Casey asked, “When you have assets that have high UPBs of $50,000, $60,000 but monthly payments of only maybe $300 or $400 because they’d been modified at 2% or 4% or 6% loans, can you use the Stair Step Method?” For those people who haven’t heard the Stair-Step Method before, it’s used as an initial analysis for a rough ballpark of bidding of assets under $25,000. You bid roughly 25% assets, $35,000 and less 35%, $45,000, 45%, $55,000 and vice versa.
I just want to ask you, when was the last time you actually got something? $25,000 asset, that’s not uncommon on contracts for deed. Have you ever gotten lately a 25% of UPB?
Also, you use this calculation to give you an idea of where things may start. The answer to Casey’s question, I would throw that out the door. Especially if they’re performing, if you take a $15,000 asset and you’re going to pay $0.55 on the dollar, you’re paying $27,500 for that thing. If it’s only netting you $300 a month, that’s $3,600 a year. That’s going to take you nine years to get your money back. If you go by the Rule of 12, where basically every six years you should be doubling your money to get 12%. That would not be a good return even on a performing loan.
The standard rule was you want your money back in four years, so that’s 25%. It’s not always achievable. You’re buying performers, the pricing is such that you can’t get that.
On a performer though, it shouldn’t be nine or ten years. You still should be in six to eight years before you get that back. That’s one thing that people got to be careful of because I’ve seen people also talk about even on a non-performer saying, “It’s a $50,000 asset, I’m going to pay $35,000 for it. I’m going to get it re-performing and sell it for $40,000 in a year when it’s only paying $300 a month.” When you do that math, the return that someone would be buying it at is less than 8%, 10%, which is difficult to sell in that ballpark. When there are low monthly payments, be careful.
We were taught at the beginning that if you got something reperforming, you can sell it for 75%, 85%, 90% of UPB. That was almost never true because what buyers look at is the yield. You have to pull out your financial calculators and figure out. To give somebody, they’re going to want a minimum of a 12% yield usually. Particularly on a contract for deed, they might even want a 14% or even a little above that because they’re so unstable. It’s logical to assume that you’re not going to have the smooth sailing. There will be issues and it may go nonperforming and you may have to take it back and all these things. On a good quality note, people want at least 10% to 12% yield. On a CFD, they want 12% to 16%. Would you agree?
Yeah. I’ve also seen that the pendulum starts to shift where on performing notes I’m seeing a lot more drop by about two points down to 8% to 10%. On CFDs, that’s floating right around 12%. It used to be at 15%. Everything’s made it shift downward because there’s not as much product and the stock market’s not doing as well. It’s much difficult than other markets to get 8%, 10%, 12%. If you can’t get it elsewhere, why are people going to offer it here? I did see that shift.
I’m getting a lot of people asking to buy partials. Did you see an uptick in the number of people who are asking about?
Yeah. We have a question, “Can you do a partial on a CFD and how does it work with the deed? Would you transfer the deed or park in escrow?”
We don’t transfer them to the partials. If you’re going to have your servicer manage the partial, they are set up to do that. It seems like their expectation is that you are transferring to the buyer. With a CFD, it’s particularly difficult because you’d have to transfer the property itself to the partial buyer. It’s not as big a deal with a regular note because you have to do on assignment. I don’t know if we’re weirdos about this. Our take on partials is, “Let’s get the money in. Let’s get the partials investor paid and let’s keep control of it in case anything goes awry.” We’re involved and can fix it if we turn the thing over to someone who isn’t a skilled note investor. Then some things start to go horribly awry and we’re not involved anymore. We’re not watching what’s going on. It seems it’s much more of a recipe for failure. I’ve had people who are very insistent that they’re not doing it unless I sign the thing over to them.
In that instance, you’re almost splitting it between a first and a second. To answer that question, you hit the nail on the head. Everybody’s agreement is different, but the one Gail and I use is that it’s like a JV agreement. There’s an agreement in place that it’s a sale and collateral assignment over to you. Nothing gets recorded. It’s like a JV agreement, it doesn’t get recorded. My agreement basically states you’re going to get an X amount of payments for X amount of months. If the note goes in default at that point in time, then there are certain things that occur during that occurrence. There are certain remedies within that. Typically on a CFD, on a partial or even on a note, I wouldn’t be recording everything. Personally, I’m not sure you want to have your name recorded on an assignment for note because let’s look at it this way.
Let’s say Gail buys a partial note from me and records the assignment. The servicer does something wrong or I do something wrong where I communicated with the borrower and told them to go pound sand or I was abusive to them or they thought the servicer was. The payments weren’t getting applied correctly. How many borrowers complain about that? They go hire some attorney down the street who works pro bono and gets paid based on what they collect and then sues everyone. If you’ve got that assignment recorded as part of ownership or partial ownership of the note, even though you’re not managing it, even though you’re not involved, you’re still getting sued. Even though you will probably not have to do anything, it’s a fact that you’re going to go have to hire an attorney, you’re going to have to respond to the complaint. You’re going to have to drop a few thousand bucks.
They don’t even have to name you on the suit if they name your servicer in the suit. The servicer’s going to turn around and say, “We’re being sued on behalf of one of your borrowers. You do need to indemnify us and start paying the legal bills.”
The same thing with sellers, when I get a loan sale agreement from a certain seller, I skim through it but I do an exact scan and make sure it’s the same one every time. He could’ve inserted words and pull one over on somebody on any of us, so let’s use a direct source. We all buy from them and it’s the same agreement one from the other. John would never do that. I’m not saying he would, it’s one of those things where it’s a lot of relationships in this business as well, even though it is a business in that aspect, I think you’ve got to be very comfortable with your partner.
It actually goes both ways because when John Keith sends you a PDF of a sales contract, I always turn it into a word document, so that I can paste my signature in without having to print the whole thing out. I can very easily change the language. He’s not looking either, you have to have that trust that we’re all looking out for each other. I think you end up dealing with a fairly small number of people because your circle of trust can’t be that big. It’s not possible.
Follow up to that, it couldn’t be looked at as infraction or notes by not transferring or signing it. You could look at it as being fractional. You could look at it as being a loan that is backed by the asset. You can look at it in many different ways. The way a lot of times I explain it to somebody is it’s essentially, you giving me a loan because I’m paying you a consistent monthly payment, principal and interest for a set period of time-based on payment stream coming from that asset. If you’ve thought about it as you being a bank on a rental property and you lent me $20,000 on that rental property, I’m collecting rent in the door but I’m paying you $300 a month for that to pay off that partial. It’s the same thing. It’s a matter of how you call it and how the agreement is structured from that standpoint.
What people are super interested in is the paragraph that talks about what happens in the event that the person stops paying.
I actually had a 30-minute conversation about that with our favorite attorney as part of doing some modifications to my partial agreement. I brought up the question of, we’re in control of this and if it goes delinquent, there’s a partial and you have somebody acting or acting in a passive role, could that be considered a security? That which then gets into SEC issues, what we want to make clear in my partial agreement is if it goes into default, that partial buyer becomes an active participant in how we are going to work it out.Note Investing Horror Stories: When you get serious about a property, you need to call the utilities, the city, and county on the phone and say, “What else could there be that isn’t going to show up on a title report?”
It probably bears repeating for people who haven’t heard of us talk about this before. In a joint venture, one of the requirements is that you should be actively discussing your decisions with your joint venture. That’s one of the things that keeps it from being a security. We have a question, “Why not make it a loan to you. Wouldn’t that be much cleaner?”
It could, sometimes some individuals might not want it to be a loan. I’m not sure the legal ramifications of if it’s a loan versus not. Here’s the reason why I think you might want to go with the partial. I’ll use the example of this is a property I own and you were the lender on it, if I stopped paying you but I still got the payments, you’re basically on the loan. You’re going to have to come after me. The property may be back as an asset, but then you’re going to have to go after the property in that sense and then try and collect.
If you’re on the partial and I started to default, I think it’s a cleaner path for you to get the property versus it being a private loan with the property backed as the asset. It gets technical. SEC not FCC, I want to clarify, the Securities Exchange Commission. One question said, “Does John let you know if your bids weren’t accepted?” Yeah, typically but you sometimes got to remind him saying, “Do you have an update?” It sounds like nobody’s gotten any response from him on that last round. I’m guessing in that sense it’s the seller.
John’s a man of action.
He only gets paid when he sells, I believe. He’s not going to sit on it for a while. “The last session is a discussion about getting realtors to BPOs. Where do you folks get before bid BPO and during due diligence?” Gail, you answered this one but there’s a difference between a pre-bid and a post-bid. I’ll let you explain what you should be doing and when you should spend money.
When you start to buy a lot and to bid a lot, you start to understand how important it is to conserve your funds. I certainly like everyone else at the beginning as soon as I saw an asset I liked, I would order a BPO. We don’t do that. Chris and I did a whole podcast about how we handle a tape. What do we do when we get it? The main thing we do is try not to spend any money until we’re sure we’re extremely interested. We would send someone from Craigslist usually, a warm body, someone who can drive by the property to make sure it’s standing. That’s surprisingly common that Chris has even posted pictures of houses that sounded great on paper but had no windows, no doors, sometimes no roof.
It’s very important to have someone drive by. You can usually find someone for $25, depending on how remote the area is. It’s in a city where there are lots of people. You can get it for $25. Have someone go over, check out the neighborhood, check out the house, take some pictures. If that looks decent and the other things that you’re looking at like back taxes, crime in the neighborhood, you want to look at an aerial view to see if there’s a toxic waste dump in the backyard. You look at commonsensical things. We do that before we even bid most of the time because you have to know if there are going to be features that will lower your bid before you make the bid.
Although people talk about fading bids, in reality, no one in the world wants to be offered an amount of money and then have you come back even for very legitimate reasons and say, “I’m not offering you that anymore. I’m offering you a lot less than that.” It’s doesn’t work well, it’s not a good ploy. We find out as much as we can before bid, we have someone look eyes on the property. Once you have an accepted bid, that’s when you would get a formal BPO from a realtor or from a BPO company. Chris loves DataTree. Do you use them for BPOs? I know you do the AVMs, is that what they’re called?
Yeah, I’ll use them for AVMs, especially on CFDs. On CFDs, I’m very careful in regards to making sure I don’t order a BPO, O&E at the same time. Sometimes the O&E, like you said the Craigslist person or something because if the house looks decent and then I’ll order the O&E first to make sure that’s clean. There are also a lot of times when you’ll get these O&E reports and that company or the entity might have $50,000 worth of fines in there.
I don’t if it’s just Indiana or a lot of other places but there are places where the company that you buy from. We all have bought CFDs from Harbor and also Window Rock, which is the parent company of Home Opportunity, Flatiron Holdings and all those guys. A lot of those companies in Indiana, after a lien has been on a house for a certain amount of time, it turns into a legal judgment. Code Enforcement Lien, municipal liens will automatically become judgments and once they become judgments, they attach to every property owned by that company. Once a lien becomes a judgment, it attaches to every property owned by that company. I personally own a property in Gary, Indiana that has $20,000 in judgments on it that are from the city of Hammond, which isn’t even the same place. That’s what they do. In case that property ever sells, your mortgage will get paid first. Those judgments will get paid after you.
Home Opportunity in Cincinnati has $50,000 in fines. I was looking at an asset there, it was a CFD and basically it was like, “Throw this one out because of all the fines.” If you were trying to take that property back and then turn around and do anything with it, the fines when attached to the property, especially on the non-performers, you won’t be able to liquidate it.
“What are the biggest differences between due diligence for performers and non-performers?”
I treat them the same.
Every performer can become a non-performer at any moment.
I treat them the same. I look at what’s the property worth? How long have they been paying? What are the numbers, what’s the current UPB? What’s the current interest rate? How long has the borrower has been in the property? I run the O&E report, I treat them the same. I calculate the bids differently but the due diligence, I do them the same.
“How happy would you be to get the property back?” This has become a compelling question to me because I have multiple code enforcement violations on the property in Georgia. The forfeiture has dragged on and on in Georgia of all places, partially due to attorney incompetence so bad that they admitted it themselves and paid a penalty. They forfeited half of their fee. It allowed me to pay the taxes, which was nice. The place is falling apart and it’s getting worse and worse and I don’t know by the time we get this place. I can’t complain that Chad has told his very sad story but thank you, Chad. You did make me feel better if nothing else.
Here’s what I have. I posted this on Facebook and I’m curious what people’s opinions are on this. I paid $1,000 for this thing. It’s a CFD up in Michigan. That property is going to tax sale and needs about $6,000 in taxes due but $3,000 to avoid the sale. The BPO came back at roughly about $50,000 but I discounted let’s say maybe $30,000. The question I post to people is, “Should I pay the taxes and try and get the borrower on a workout?” I can give you $1,000 but not until April. Meanwhile, the borrower hasn’t paid in over a year. One of the things I was thinking was, “I’m going to go pay $2,000 possibly for taxes, then drop another $2,000 for the forfeiture and wait for that process. Take the property back and then have to pay the other $3,000 in taxes.”
I’m in it for $8,000 plus the $1,000 I acquired it. I’m in it for $9,000 and then evict the woman because she’s probably not going to leave. There’s another $1,000, there’s $10,000 and maybe take six months for this process. Maybe I’ll have the $30,000 property best case and get somewhere from that or do I say no? I’m in this thing for a $1,000; do I do nothing? Let it go to a tax sale, bid $7,000 in tax sale which is the taxes plus my $1,000. Everything above that would then be my profit because the first $6,000 would go to taxes, $1,000 comes to me and then everything above it. If somebody bids $10,000 at the tax sale, my thousand dollars turns into $4,000 in the span of a month.
Are you going to bid at the tax sale so that someone else will bid higher?
If I bid it to tax sale and I get it at tax sale then the land contract is already forfeited. I don’t have to go through the forfeiture process. If you bid at tax sale, you would take the deed to the property, the borrower’s defaulted and that agreement is gone.
In Pennsylvania, we have a couple of different tax sales. We have upset sales where the taxes have to be paid. The minimum bid and the amount of taxes due but all the other liens stay on the property. We have judicial sales where everything’s wiped, except for the taxes. You can buy it for the taxes. You’ve done the research on what tax sale list is. It’s not an upset sale.
You buy it and if nobody bids then it goes back to the county and it goes into their land bank. That’s why I want to bid above the tax rate plus my bids. The worst case is I get the property back, I’m going to have to pay the taxes anyways. I could bid in a different entity, take it then I don’t have to go through the forfeiture process. I would go through the eviction process.
I didn’t realize that that would cancel the land contracts. Why does that cancel the land contract? That’s not in the land contract, is it?
They’re in default and the property’s been sold. It’s my understanding and I got to confirm this again with the attorney, who told me it does.
It sounds right in theory but every one of these land contracts says if they miss a payment, they’re tenants and they’re paying rent. I’ve never had an attorney say to me, “You’re fine.” It says that. Their tenants evict them. They don’t say that.
I’ve had one tell me that and it was actually in Pennsylvania, my attorney, Tucker Ellensberg. Jillian Snider, who’s been great to work with dealing with a BK case. In Pennsylvania on a bankruptcy, there’s a formal process where it is a mediation to try and do a loan mod. I have a property in Pennsylvania where the borrower went into bankruptcy, the payoff was here and the arrearages were up here and we worked, instead of having them spread it out over 60 months. We came to an agreement somewhere down here on a new loan mod, which was a win-win situation for both parties. We filed that with the court to try and get that approved and we’ll end up saving the borrower roughly about $800 a month in payments. I’m perfectly fine with that.
That’s something that’ll get paid by the trustee in your bankruptcy.
They’ll pay the trustee. The trustee will cut me a check every month. If that happens, I’ll be very happy. Do you have any last pearls of wisdom as part of our Notes and Bolts segment?
I do want to say to everyone please go to GoodDeedsNoteInvesting.com and sign up for our mailing list. We are getting active about putting out tapes and that’s our preferred list. We want you to have the first look at anything we put out.
If you enjoy these episodes, you could also go to iTunes, leave us a review. You can do it on Stitcher as well. One other question, “You mentioned liens on properties and if you discover those from an O&E report.”
Judgments or liens?
Mostly the things that don’t show up on title reports are current delinquents; sewer bills, electric bills that haven’t turned into liens yet, those are the things you have to worry about. Those are the sneaky silent killers. You can also see no taxes due both on a title report and on a website. Sometimes that means that there are many places where properties go to tax sale, a buyer will pay the taxes and then it will appear that there are no taxes due. There actually could be a lot of taxes due, it could be a redemption situation. When you get serious about a property, you’re completing your due diligence and you have the title report, you still need to call the utilities, the city and county, about taxes, sewer and whoever you get on the phone. Just say, “What else could there be that isn’t going to show up on a title report?” people are generally pretty helpful. I find particularly in the Midwest and the South, they’re nice.
I had a woman call me from Bamberg County, South Carolina because the borrower came in to pay the taxes which are like $200. Like an idiot, I had paid already. We haven’t been able to reach this woman at all and I didn’t want to have to worry about it. She was so excited, she was surprised and delighted to find out her taxes were paid already. I totally ask you have to pay us back. This county woman actually called me on her behalf to find out if there’s any way for us to put the property back in her name, so she can get a homestead exemption. I thought, “I’m moving to Bamberg South Carolina.” This is a borrower that called me also from South Carolina and she was like, “I know the tax people will work with me because I saw the lady in the grocery store and we were talking about it.”
Thank you all for joining us. Gail, any last thoughts?
You do the Pro-Title report. That’s the full foreclosure report.
I thought it was 135 and not 185.
It varies. It’s like 149-ish. They are more expensive in some places.
Thank you for joining us. Go out and do some good deeds.