Whether you are looking into something to invest on for your retirement or simply considering a good investment to put your money on, then try looking into buying notes. To help us learn more about note investing, host Dan Deppen talks with real estate investor Justin Bogard of Bright Path Notes. Justin discusses his experiences in the business and offers some tips on buying notes in different states he already went and shopped at. Don’t miss this episode to discover why real estate investing could be the best way to grow your money.
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Getting Into Note Investing With Justin Bogard
I’m joined by Justin Bogard from BrightPath Notes. Justin, how are you doing?
I am pretty well, Dan. Thanks for having me on.
Thanks for coming on. I appreciate it. We met when I was out in Indiana. A lot of times when I travel, I look to see if there are any Meetups going on nearby. At that time, you had one where I could get off the plane and show up there. That was pretty nice. Talk a little bit about your Meetup and your business and what you’re up to in Indiana?
It was over a year ago when you came up to that Meetup. That was cool because I had started my Meetup earlier in February of 2018. I started getting a following and getting a feel for how I wanted to have this Meetup, either monetize from it or get some education out there and get people to understand the note market and secondary market and how to buy loans, why you want to buy loans, and why you want to build your wealth that way. Fast forward, we now definitely have a larger following and we’re able to get a lot more exposure. We’re able to get a lot more branding selfishly for our company. Also, bring in other vendors and other partners that we use as well to showcase things about notes that I can’t speak to, as well as a person that does it full-time, like a CPA. With notes, having your portfolio, accounted properly and with bookkeeping and stuff and these little things like that with our Meetup that we do now.
It was a good Meetup. There was a good turnout there. It is cool to mix of experience levels.
That’s what I like about it is that I always have a few people that have been there a lot, a few people who have been there a couple times and there’s people that have never been there before or even been involved in real estate. It’s fun to see that dynamic. I usually take the time to go around the room quickly because it’s usually not a large group. It’s less than twenty people. We say our name, our company and what they do in real estate if they do anything. It helps me tailor the conversation to talk to them at a certain level and then talk to more experienced people on the level and able to control it, where everyone feels they got something out of it. Sometimes it can be challenging to do, but it ends up being fun. There’s a lot of dialogue back and forth. I let the other people in the group that have been around in the note business for a while to get engaged in the conversation to help out. It’s not all coming from me. It’s coming from other sources as well.
It was definitely a good discussion. There was a guy, who was a property manager. I ended up talking with them for a long time afterwards in the parking lot. He was giving me the whole map with the Indianapolis City area and what was going on with different parts of the city, which was part of what I was trying to do on that trip. That was pretty awesome.
It is because you invest a lot in Indiana and Muncie.
Not as much in Indianapolis. I want to do more there, but I have a Muncie and Evansville and places like that. It is pretty good. You are in business too. You said you focus a little more on the performing side of things. Talk a little bit about what you got going on with performing notes.
I started out like everyone else in the note business wanting to do nonperforming loans. This was about several years ago, I discovered quickly how challenging it was for me to do it in a timeframe to get cashflow. I transitioned over to performing pretty quickly. I liked being in performing a lot. Our personal portfolio and our retirement accounts and stuff like that, it’s all performing loans until we see a shift in the market. I think you probably know the reasons why. When we are courting investors, we’re getting them to understand, “You might want to go to a performing first to get the feel of it to understand the cashflow and go through the process of boarding it with the servicer and things like that and receiving that first hit in your bank account.
If you feel more comfortable, go out and partner with somebody that’s done several nonperforming deals and have them walk you through it.” We’ve done it before with some people, but it’s best to go with somebody that does it full-time every day. We typically don’t sell out nonperforming loans. If there’s an investor that we know that can handle nonperforming loans, we’ll definitely sell to them if we see them come across the tape or with the hedge fund that we work with, but I don’t like to sell nonperforming loans to people that haven’t been in the space before. It can be a bad experience for them.
It’s definitely dangerous. That was the way I learned. When I started, the first note I bought on my own was a performing note because I wanted to learn how the transaction worked and the paperwork because there’s enough new stuff there. When I got more comfortable, I took on the nonperforming, which has a lot more degrees of freedom. I also joint ventured with somebody on nonperforming so I could look over their shoulder and get a better idea of what was going on until I dove in.
That’s the best way to learn is to partner with somebody and give up any of the profits so that you can get the experience and understanding of how they do things.
I had actually met with someone. The note that they bought was performing when they bought it and now it’s nonperforming. They don’t know what to do with it and want to get the heck out of it. I’m taking a look at that to try to figure out what he can do to weasel out of that one. It’s a tough situation with somebody and it’s not what they do full-time. They didn’t want to have a nonperforming note. I would be daunting.
It happens though. It’s investing and something unfortunately is going to happen when you start buying a lot of loans. I don’t know what your experience is with performing, but every like fifteen or twenty loans, you’re going to have a hiccup here and there. The hiccup may correct itself quickly or it may turn to a habitual late payer or to a habitual 60 day behind payer to a habitual, “Now, they are on a nonperforming status,” and you got to figure out what to do, defer payments or whatever our strategies are going to be to help get them back right the ships.
For the most part, I’ve had pretty good luck with performing notes. I did the same thing in my IRA, where I have a bunch of performing notes in there. Luckily, that’s been pretty low maintenance for the most part. I have one here that’s been falling behind. I’m trying to figure out which direction this is going to go, whether they’re going to start paying again and be lagging behind 60 days or so. Whether this is going to turn ugly, I’m going to have to go through the foreclosure process on it.
That’s what’s fun about it. I preferred the borrowers to pay all the time, but one guy has sold a couple of loans. He has a people come to him and be like, “Why do you invest in notes and stuff?” I always tell him like, “What do you do when the borrower doesn’t pay?” He’s like, “I make more money. If you buy them right, it’s not as risky as it looks.” You may have to wait a while to get your judgment and get paid at the foreclosure sale if you want it to go there. In the end, it’s the return on investment just because you don’t have cashflow for six to seven months or eight months or ten months, but you get that big hit at the end. If you get your money a lot sooner and most of the time you make a profit as well.
You can really cover yourself as long as your property value is where it needs to be. You can do fine if they don’t pay or even better, especially with contract for deeds where you keep all the equity, if it’s in there.
There’s a lot of those in the Midwest.
That’s a lot of what I’ve been buying. A lot of things have to stack up against you. The borrower’s got to stop paying and you’ve got to go through the process. You’ve got to get surprised where the value isn’t where you thought it would be. Maybe because there are issues on the inside or something like that. A lot of things have to go wrong to get sideways on a performing note.
That’s what I love about notes is that there’s always a safety net at some sort. The worst-case scenario isn’t that bad of a scenario most of the time. There always those horrific experiences, but those are few and far between assuming you’re doing your due diligence upfront the right way or have somebody helping you out.
If you do all of that, a lot of things have to go wrong to where you can get into deep trouble. Occasionally, they may, but if you do a lot of them, unfortunately, that’s not true too often. What are some of the things you look for when you’re buying performing notes or as you go through that due diligence process? What are some of the things that you key in on?
What's best about notes is that there's always a safety net to where a worst case scenario isn't that bad of a scenario. Click To TweetIt’s a great question because every note investor is different. My number one criteria is the pay history and it tells me the whole story that I need to know. If I get a couple of years of pay history, I get a good idea if they’re going to continue paying on time. Sometimes they even find that they’re even able to set up ACH payments on these low-balance contract for deeds as well, which is cool too.
It’s always nice when you can get on that. That’s always a huge bonus. What are some of the risk factors that you look for? What are some of the things that cause you to steer clear of certain notes?
I look at the pay history strongly first and that gives me the story. I’ll look at the collateral second. I’ll get some photographs that may be real-time or look and see what the neighborhood’s like. I’ll check out the car crime pretty heavily with maybe like a Trulia or some free local police tool that they have with the local municipality. That tells me if this area is trouble because the worst-case scenario for me is I have to turn it over on a reseller the property as opposed to renting it out or be able to flip it to a wholesaler there. I look up the collateral next.
The things that scare me are boarded-up homes in the area. If I see several of them, that scares me. If the home itself has a couple of windows boarded up, it doesn’t scare me too bad. As long as I feel like there’s a little bit of value more there. If I’m getting something for maybe $0.60 or $0.70 on the dollar, as far as the value today versus what the unpaid balance is or what I’m paying for the unpaid balance, I feel comfortable with that one because I mitigate some risks there. That’s how I’ll start and I’ll be able to filter out stuff from there. There are certain states that I won’t shop in a portfolio because the worst-case scenario is foreclosure. Some states are a lot longer than others and some states require licensing and you’ve had some episodes on that as well.
Those are some of the states that I stay away from are probably the Eastern states like New York and New Jersey. We’ll shop in Illinois to a certain extent if the deal is good. A lot of people don’t like Illinois, especially Cook County, but depending on how good the deal is, I’ll still pull the trigger on it. I like the Southern states and the Midwest. These are faster foreclosure states. The primary thing, as far as collaterals is concerned, I look for deeds of trust, trust deeds and then I move to mortgage notes and then contract for deeds lasts. Most of the time, I think in your experience spread, probably the same thing under $60,000 is traditionally a land contract or contract for deed. It is very rarely do you see note mortgage. You can easily convert those to note mortgages once you have them. There’s a process to it.
I haven’t done any of those yet, but I’m getting ready to look at that, especially my Ohio stuff and contract for deeds. Do you buy a lot in your backyard in Indiana? That’s been one of my favorite states.
I bought a lot in Indiana. We had probably 20 or 25 that we bought this year from Indiana, mainly the Indianapolis area. I had some good relationships with some of the bigger wholesalers here locally. They are looking to offload some of their inventory so they can recoup their capital and go out and buy more houses. We’re able to come up with a deal so I can get some of their inventory for our inventory. Also, they sell some of their inventory to some of our investors as well. We had quite a bit through Indianapolis. It’s nice to have it in your backyard but at the same time, I don’t want to feel like I need to drive by it every day. I was shopping for a note on an exchange site that I liked. They have one in the city that I live in right now and I’m like, “That’s funny,” because it’s a small town where I live in. It probably has 3,000 people. I said to my wife, “Where’s the street?” She’s like, “It’s such and such over here.” I was like, “That’s two streets away.” This is crazy how your neighbor can be a loan that you can actually purchase.”
That would be cool. I can’t do that in Colorado because you don’t see much. You see a little bit of stuff down in Pueblo, but that’s a couple of hours from where I am. I don’t have that. There was one time a friend found a note that was about 30 minutes from me and I drove by for him and took a look. Unfortunately, in my way, it is pretty few and far between. There was one I saw in Denver that I bid on. Somebody ended up buying the whole tape at this outrageous premium for a few million dollars for the whole tape. There was no chance of getting that one. We may talk a little bit more about Illinois because that’s one that I’ve looked at. There’s a lot of supply there. I haven’t bought it there mainly because I’ve heard some of the Cook County horror stories. My impression of the state is that some areas are known for corruption and things like that. It always scared me and I stayed away, but I never had a valid reason for doing that.
That’s what’s great about this business is that there are 50-plus other states that you can shop in if you want. You don’t have to shop in a certain state and you don’t have to shop in a certain state. If Illinois isn’t comfortable for you because of licensing and regulations and debt collector stuff, that’s not someplace you should shop. I don’t prefer to shop there but if the deal is right, I’m willing to wait twelve-plus months if I need to get the property back.
That’s a good point. Everything can make sense at the right price as long as there’s not $40,000 in liens like water liens, which I ran into one that I had the nix. I do a similar thing where I have my bread and butter model and then I’ll go outside of that all the time if it makes sense on a case by case basis.
Sometimes I get a little gunslinger in me. I see a deal and I’m like, “That looks pretty good.” Some people are going, “Why would you buy that?” I was like, “I have a feeling about it.” You’ve got to mix in. You don’t want to get analysis paralysis. I mixed in a little bit of gunslinger too thinking, “They paid for twelve months. I like it.” I bought one. They get paid for a one month, but I had a good down payment and I was like, “What?” I don’t see the downside when they put down 40% down on this deal. It’s like, “I’ll roll with the note mortgage.” It ended up really well, but that’s the first time I think I’ve bought one with one month seasoning on it.
As analytical a guy as I like to be, when you get down to the end, it’s always very fuzzy and qualitative. You think you are licking your thumb and hold it up and be like, “How does this one seems?” Going with that gunsling a little bit isn’t a bad thing because it’s a numbers game too. At least on the nonperforming side, there is so much variability in outcomes. You can’t predict it that well either way on one individual deal.
I’ve seen that with one of our investors. They bought one in New York. It was a performing loan. It was sub-performing, performing and on the cusp of being sub-performing. It was in New York. I don’t think it was in a preferred area. It was in an okay area. The house was boarded up, but they’re making some good payments on it. It was a very low-cost note. I want to say it was less than $20,000. The guy buys it and within 60 days, he gets a payoff statement. There was something about this deal to where the pay history was strong and someone kept on making payments and the guy pulled the trigger on it. I’m glad he did because he got paid off within 60 days of buying that note. It was a pretty good return for him.
That’s one of the nicer things too about a lower balance note is your probability of getting paid off can go up because it’s easier for people to do. I had one of those in my IRA earlier where it was a small note and a small payment. It wasn’t one that I would actually normally buy, but it was a package of six. It was good enough. I was like, “I can stuff this in my IRA.” I ran into a similar thing where the guy paid off several months later, but it was a really small balance on it. It was less than $15,000 or something like that.
People come into money. Whether you are in a working-class neighborhood, they come into money and they pay off their debt.
I also like it where if they get sideways, they’ll have enough equity. If they wanted to, they could sell the house and pay off.
The equity is always tough for us to value what the properties are. We look at them, but typically there’s some price point where I say like if it’s below $60,000 or $70,000, what I believe is there’s no point in getting a BPO. Just go out there and get a property inspection and roll with it based on rent comps and stuff.
I’m heading your direction. I’ve always typically pulled BPOs and a lot of times have another realtor go by, take some pictures and give me a quickie estimate so I have two data points. What I’ve found, especially in some of these lower-priced ones where I’ve taken them back, there’s so much variability and so much crazy stuff going on. BPOs aren’t that accurate anyway. I can look at some comps and get photos. I haven’t been doing that so much so far, but I’m definitely leaning in that direction.
I get pushed back when I suggest that to investors. I always revert back to them and say, “Look at what the comp data is. Are those conventional financing comps? They’re cash comps traditionally.” That’s the main thing. You’re trying to compare a value based on as-is cash value when you want to compare it to what is it as a seller financing value, which is different once you have to go through an income approach with a rental analysis. I rarely get a BPO unless it’s required for some reason with the capital that I’m using. We get a property inspection and I actually like property inspections better because they’re a lot cheaper. Number two is they give you a ton of detail that you would never see in a BPO. They are doing that a lot. Proper inspections are the way to go unless the property value is high like over $70,000. I would definitely order a BPO because then I know there’d be some conventional financing comps in that area at that point.
I’ve had so many BPOs be way off or sometimes I’ve pulled more than one and the two values you get are all on the map. They can definitely get shaky for sure, but what’s nice though is a lot of times, investors want to see them. Also, they can come in handy if you go to resell the note. Let’s say, “Here’s the BPO that I pulled and things like that.”
We all like to have some value with it in a BPO. When I buy loans, I look for the last BPO that was done on it so I could see what the value might be. It’s funny because we had an investor that has a note in Illinois. When we went to update the status of it, we ordered a BPO. It came in like really low, like $30,000 or $40,000 lower than we thought. We’re like, “This is ridiculous.” We had another company go out and they were like $30,000 or $40,000 higher than that person. It’s funny how it’s like, “Aren’t you guys getting the same data?” You come up with these odd numbers. A BPO is worth its weight in paper. It’s subject to somebody’s opinion and we just have to roll with it. We make sure we vet heavily on the rent data and make sure we know what the seller financing comp comparable would be.
How much did you do a lot of seller finance to sell REOs?
You either want to invest in notes selfishly for your retirement account or you want to make a business out of it. Click To TweetWe’re starting to get back into that now to where we’re creating a lot of notes. That’s one of the processes that we’ll be implementing in 2020 to get some more inventory here. In 2019, we didn’t do very much. We had one or two but that’s what we’re heading towards because we see that’s where the next niche is going to be is creating seller finance loans, creating the right way. The Dodd-Frank can see if it’d be compliant that way.
What are the things that you do to find buyers when you’re looking to sell on seller financing? How do they find you?
It’s weird because I got a business partner of mine that we thought the same thing when we started getting into this. I was like, “How do you market to these people?” We’re thinking of the traditional things like Craigslist or Facebook Marketplace and things like that. He started having random conversations with people and somehow it turned into affordable homeownership conversation. He’s like, “What if I found a property for you and I was the bank, would that work for you?” They’re like, “I’m paying $1,000 in rent.” If they could make their principal interest payment and much less than that. I’m turned on by it. It’s funny how he’s having random conversations with people and he’s already pulled up 8 to 10 borrowers by happenstance. Those people know other people that are looking for seller-financed deals or people to provide the financing for them to be the bank financier. There’s no scheduled way to do it. You have to get out and talk to people and be in the neighborhood.
They are culture-specific, if you haven’t noticed that. There are pockets in the Indianapolis area that has different cultures and ethnicities. Those people will all try to stay and live closer together. It’s easier once you have the culture there when you get a property. There’s a Burmese Community here in Greenwood. A lot of the Burmese people will end up living there because they’re with their local people. It’s easier once you discover who the cultures are and typically they like to not have debt and they traditionally put down large cash payments. It isn’t out of the ordinary to have 20% plus down payments for homes that are in the $89,000 range. They like short-term deals, too.
You mentioned that you have to be Dodd-Frank compliant. What are you having to do now to comply with some of the new rules when you originate those?
There’s a couple of national-level vendors that we probably both know that underwrite and originate the paper for you. That’s who we use. We have a third party guy that’s in Arizona. He does all the ones we need to do. It’s a really simple process. He does most of the work. It’s a very modest cost to do it. You’re looking at spending anywhere from $500 to probably $1,000 to get somebody do the underwriting process and creating a proper note and mortgage and stuff. That’s typically where the range is going to be depending on what state you’re in and how interesting you’re making your note mortgage.
Hopefully, we try to keep them fairly simple and not too unusual. What are some of the things that the newer note investors that want to get into performing notes? What are some of the best ways for them to get started? What kind of things should they be thinking about as they start out?
I always tell people that there are two things you want to do. You either want to invest in notes selfishly for your retirement account or you want to make a business out of it. You have to decide which one you want. Obviously, we have made a business out of note investing. That’s the route that we went down and most people want to invest with their retirement account. That tells you where your risk should be with your money, depending on what pool of money you have. I always tell people, “Go out and buy a deal for yourself. It doesn’t have to be a $200,000 note. It can be somewhere in the $50,000 price range for a performing loan.” Find a good place to start because the collateral was probably decent enough. When you buy the loans that are lower in unpaid balance, you’d have to be selective and careful which ones you buy as I’m sure you know. That’s what I tell people. If you have $50,000, you go out and buy a performing loan. You need to get education about this first. Either you go to the local Meetups like I have or I’m not sure. Are you going to Meetups in your neck of the woods?
I’m not. I tend to piggyback off of one that Beth Hale runs here in Denver. I go to some of them, but it’s been on my list of things to do. I haven’t had the bandwidth quite set that up.
It takes some time. I don’t know if you like educating people, but it’s a nice feeling when you’re able to give somebody information. They’re able to act on it and it creates themselves wealth. It’s a nice feeling. That’s what I like about the Meetup as well.
They’re definitely fun. People like getting information on this stuff, especially if they’re new to it because it’s an eye-opener. It’s like, “I didn’t realize a lot of this stuff was even possible as an individual.” Most people assume you’ve got to be like an actual bank.
They think there’s an SEC or some compliance that you have to adhere to or some licensing. That’s what I like about it. You don’t have to have a license, technically not that license. Maybe some states if you’re originating, you may have to have license. It is pretty much you either need to work together with somebody that’s invested in notes before to mentor you through it. I tell people I’m not a trainer. I don’t have a training program. I don’t want to get into the training business yet. If I do in the future, I’ll probably have a lot more deals under my belt. I always defer people to the people that I got training from like Eddie Speed of NoteSchool. There are trainers out there that they broadcast themselves and stuff. They’ll have different price points and I tell people, we either need to get the education or you need to have somebody walk through a deal with you, like myself or like Dan or whoever is in your area that you know, like and trust.
I haven’t done the NoteSchool stuff myself, but I’ve heard a lot of good things about it. A lot of people have. I’ve had Bob Repass on from Colonial, but I’ll need to get some of the NoteSchool people on here at some point and talk about what they have to offer.
They have the full gamut of note investing. A lot of people have specific niches in their training in note investing. Maybe they’re specific in seconds or maybe they’re specific in non-performing or the owner finance paper. The NoteSchool does the entire gamut, which I’m glad I ran into them. I felt like I have a robust knowledge of the entire note business as opposed to maybe one specific area of it.
That’s probably a pretty good stopping point so we can definitely do it again another time. For people, who aren’t familiar, how can they get ahold of you if they want to learn about performing notes and do some deals?
Our website is BrightPathNotes.com. My email address is Justin@BrightPathNotes.com. Feel free to reach out to me. I’m always answering questions and helping people out with that thing. If you’re ever in the Indianapolis area, we have our Meetup once a month. We scheduled you to be a guest on our virtual Meetup. I don’t know if that’s January or February but we’ll definitely announce that and get out to your audience as well.
That sounds good. Thanks again. I appreciate it.
Thanks for having me on. I look forward to having you at our Meetup as well.
Important Links:
- BrightPath Notes
- NoteSchool
- Justin@BrightPathNotes.com
- https://BrightPathNotes.com/
- https://www.YouTube.com/channel/UCMbYrRJksu3G2tmDh62QVNQ?
- https://Vimeo.com/showcase/6263283
About Justin Bogard
Justin first began Real Estate Investing in early 2000’s. While other young professionals were renting fancy apartments and putting investing far off into the future, he saw the advantages of making his dwelling place dollar grow quicker via property turnover.
His first venture was the purchase of a foreclosed home. Using sweat equity, he sold it for a profit. Although his full-time job was not in the real estate world, he developed an affinity for the purchase and resale of homes during this period. Justin used his profits to invest in himself by getting professional training in Real Estate Investing. Justin’s next phase was to quit his full-time job and start a fix and flip business. He purchased blighted homes that had lots of potential. Some even turned out to be rental property. The success of this phase of his real estate journey allowed him to get specialized training in discounted real estate note investing.
Over the past several years Justin has networked with thousands of other investors in real estate and traveled across the USA to consult with the most successful people in the note business. He has become a successful note investor and continues to speak about the subject. Concurrently to this activity he has successfully started 4 businesses including BrightPath Notes and developed a “Power Team”.
Justin is a firm believer that discounted real estate notes have always and will continue to be the best way to build wealth.
