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Some things may not deserve a whole podcast of their own, but are nevertheless worthwhile sharing. Dan Deppen takes seven of these topics that came up for him over the last few weeks and condenses them into this grab bag episode. Dan talks at length about a variety of topics ranging from dealing with the various types of realtors and getting REOs sold, to his first “fire” sale. This may look like a random collection of note investing tidbits, but scattered all around are some nuggets of useful information that you might want to get a piece of. Join in and see where it takes you.

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Grab Bag Episode: 7 Little Things Worth Sharing

I’m going to do what I’m calling a Grab Bag episode. One of the things I try to do is talk about the subjects that are on my mind or if I have a deal going on at that time that involves some particular topic that spawns a show. What I’ve got now is a bunch of little things that don’t deserve necessarily a whole episode on their own, but they are things that are worthwhile sharing that I’ve learned a lot. I’ve got seven different topics and I’ll try to cover them without rambling on too much.

Fire Sale, REOs And Realtors

I had something happen that was a first for me. It’s not a first for note investors because I’ve known several other people that have had this. For me, it was new and that was I had one of my properties burned down. They’re on contract for deed. The borrowers were okay. My understanding from the loan servicer is that they’re living with their daughter and plan to rebuild, but that’s got to be horrible to lose your entire house. I can’t imagine that. It’s awkward but fortunately, it creates a mini windfall. It was a contract for deed so insurance paid out enough to cover the payoff of the loan, and then still leaves enough funds for the borrowers to rebuild.

What happens in that scenario is I bought this loan at some discount. I don’t even recall what it was. This was a sub-performing loan. Fairly small one overall, but when insurance pays out, they pay out $1 on the dollar on the loan. I ended up making about an $8,000 profit that came out of nowhere that I wasn’t expecting. It’s an unfortunate situation for the borrowers but to me, I found it interesting as a note investor how you can have a property burned down and from the investor perspective have that turn into a good thing financially anyways.

That was new, although I’ve talked to a lot of other note investors who have had this happen. The takeaway and the lesson learned is making sure that you have verified that either the borrower has insurance or you have forced place insurance running on it at all times. You’ll never know when these things are going to happen from looking into it a little bit. They seem to be a little bit more common than I would have thought, especially when you start owning 50, 60 notes across the country over several years or as people get into portfolios much larger than that. You’re going to eventually have one of these happen. Make sure you have your insurance in place and you’re prepared.

This is an update. If you go to the Fusion Notes website, FusionNotes.com/case-studies, you’ll see a case study subpage at the top. I’ve got around twenty or so case studies now on the website. I’m not going to go through all of these now. I’ve done a few other episodes where I’ve gone through some case studies. I’ll have some more of those coming up as we get closer to the end of 2020. If you’re interested in seeing some of the range of outcomes of some of these deals, you might want to peruse that. They’re simple one-pagers. I didn’t try to write a novel on any of them because I don’t think anyone wants to read that. I talked about what the deal was, what some of the resolutions were, some of the numbers, and then what the returns ended up being. Through sifting those, you can get a good idea of what the norm is and what some of the range of outcomes is. Some of these were home runs or opposite of home runs. I tried to mix a little bit of everything in there.

As a new note investor, that could potentially help you a lot in trying to understand some of the different paths that these things take. Sometimes, when I talk to people who are a little bit new, they’re trying to understand, “If I do this deal, what is going to happen?” Note investments are not like an equation or a formula that you put in Excel, where you put in the inputs and the answer comes out. This is more like a funky quantum mechanics type of a thing, where the outcome is not some discrete thing. It’s those big range of outcomes and they can vary quite a bit. You’re not going to be able to predict them exactly going in.

I encourage people to check that out and see what they are like there. Good and bad realtors, just more of an observation, I’ve got a couple of REOs I’m selling. I’ve got two under contract. This aspect is well known but you’ve probably heard the Pareto Principle or the 80/20 rule. What that generally means as it applies to this is 20% of the realtors are going to do more work than the other 80%. There’s going to be this thin layer of good realtors, and then some others that are not so good. I’ve been encountering both ends of the spectrum.

On one extreme, what I’ve started to do in some cases where I have a realtor that’s not doing much, and I want to test if the market is really that dead or if they’re not just doing any marketing or generating any leads. I’ll have my assistant, Wendy, throw up some ads on Facebook Marketplace and Craigslist. If you don’t have the property listed, you can also do For Sale by Owner on Zillow. It’s amazing how many leads you can generate. I’ve sold properties on my own doing seller finance that way. The other thing I’ve done in a situation where I’ve got an REO and I want to get rid of it but I have a realtor that’s not doing much. I’ll sometimes set up those ads and spoonfeed them leads.

In one extreme case, I found a buyer, negotiated the offer, and then connected her with the realtor and said, “Get this written up. I’m selling the property.” Now, that one is finally moving along. It had been sitting for a few months. I generally don’t jump right in to doing that because in my model, I try to go out of my way not to end up with REOs. When I do get to them generally, I’m trying to sell them off quickly. In my model, I do well when I get the notes reperforming. When I get REOs, it’s a gigantic crapshoot. I’ve had a couple of home runs, and then I’ve had some that I’ve gotten upside down on in.

At this point, if I get an REO, I’m not going to cry if I break even on it. That’s not the worst thing in the world. I looked at a lot of data on my REO sales. I had 10 or 15 of them in there and how there’s a wide variation in selling price. Generally, I tend to average around selling for 50% to 60% of BPO. Usually, if you end up with the property, those borrowers tend to live rough. I’m looking to get rid of them. That’s what I was doing and this one that was in Ohio. I had it listed with the realtor. I said get rid of this. It had been dragging off and now we’re getting close to wintertime here. I decided he needed a little extra help.

That’s where I was able to run my own ads, do the deal for him, connect them and tell him, “Go and get it written up.” I’ve got another one that I’ve started in Illinois that I’m doing the same thing with. The opposite extreme of that is the guy that I have found in Omaha. He’s absolutely amazing. On top of everything, he went into the property, checked it out, gave me a report, talked to me on the phone, discussed the market, discussed the comps, his expected price range, strategy for the listing price, on and on into detail. We listed it, we got an offer within a day. We did some negotiation and reaching an agreement. While this was going on, he had some other buyers lined up. He said, “We’re negotiating this other thing. What can you do?”

We ended up getting an offer for way higher than I expected. In fact, it’s comical. I mentioned I’ve sold some properties on my own. In a lot of cases, I’ve done better than I would have expected doing that because if you do seller finance, buyers were a little more fixated on the payment versus the total price like a cash buyer is. This one, I initially started selling it on my own. I found a buyer. I didn’t reach an agreement. We came within $1,000 of each other, and then in the meantime, I hooked up with this realtor and decided to hand it off to him. He said, “The pricing is way too low. It’s going to be way up here.” Now we’ve got that under contract for a significant amount higher than I was ready to sell it for.

That’s one of my rare REOs that’s going to be a home run. That brings up one of the challenges as a note investor when you have REOs. I found it difficult to get the straight story on the condition. I’ve had situations where the realtor talks like it’s not that bad, and then I find out later that it needs a roof and it has all sorts of other problems. I’ve had other situations where I’ve had realtors look at properties and tell me that, “This thing is a nightmare. I can’t sell this. There’s nothing we can do.” You find out it’s not bad at all. In other cases, when it’s been feasible, I’ve gone out and visited properties myself. Having a good realtor that you trust on the ground is crucial because they’re going to give you the straight story on the condition. They’re going to get it priced appropriately, and they’re going to come up with a strategy to market it and price it to get it sold.

When you have the right realtor, you want to keep them in mind. It also comes into play when I’m bidding new notes. If I’m bidding a note and it’s in a city where I have a strong team on the ground, I’ll be a little bit more aggressive than if it was someplace where I was going in brand new. I did ramble a lot on that one, but the main takeaway is that there is a huge difference in the quality of different realtors. The good ones are amazing. They make your life so easy, and the bad ones do nothing unless you do it for them. It’s something to be aware of and do your best to build a network of good ones. Mine is slowly growing over time, but then I ended up in other places. We’re in Muncie, Indiana where I’ve went through every realtor in the town and none of them were worth a dime. It’s a tough one. When you do find the good ones, try to utilize them as much as you can.

The other thing I learned is I use both Madison Management and Allied for my servicing. I’ve been sending most of my stuff to Allied. I like them because they’re cheap. It’s like $18.50 a month. They’ll even do some borrower outreach for that. The rub is their portal is not that good. The way they do financial reporting is non-existent, but the people are always on top of things. Things don’t fall through the cracks like I’ve had with some other people that I’ve worked with, and the price is right. I’ve been using them increasingly, and then it gets better because I found out that they do a lot of other stuff that I didn’t even know about.

One is they will hold your hard collateral file. When they get it, they’ll go through it and verify the chain of title themselves. It’s a good double-check to make sure there are no issues. My safe is filled up at this point. I’ve been sending files out to them to hold so that I get them out of my safe and it leaves the room. The thing I found out was that if you’re buying a new note, when you send them all the hard files including your assignments or quick claim deeds if it’s a contract for deed, they’ll get those recorded for you. They’ll pass on the actual cost of the recording, any transfer taxes, and anything like that. They do that as part of the service. They don’t charge you extra for that. They’re not going to lose stuff. That was a cool bonus that I found out about. It’s interesting that they don’t advertise that stuff more because I like them a lot, and they do a lot of good stuff. They don’t market what they do.

Bad Notes

Number five, and this was me being a bad note seller. I think it was in episode 39, where I talked about the different types of note sellers. How some are good, some are bad, and how you want to be one of the good ones. I’ve been selling a few notes, closed a couple, and then I had an offer accepted on one. I realized that it had some title issues that I had not cleaned up when I bought it. What happened on this one was it was a note that I bought a couple of years ago. This was before I had all my processes in place.

Nowadays, I use my CRM and Pipedrive. I have to do some stuff on Pipedrive, maybe not a podcast because not everyone watches the video on YouTube. Most people listen to it on audio, but I may put some videos on the YouTube channel. Let me know in the comments or drop me an email if you’re interested in seeing that. I can talk about how I use Pipedrive to keep things organized. Back when I bought this one, I did not. The way to deal with work, this note came out of a portfolio that the loan servicer was buying and I was keeping this one.

Throughout the portfolio, there were a number of chain of title issues. They were hiring a company to do curative title on the entire portfolio, including mine. It’s an unusual deal, but it’s part of the deal when I bought the note. I got this thing, they started work, and I knew it was going to take a few months to do all this work. I forgot to go back and check. There were a couple of things that were at order. Nothing major, we’re getting it fixed. I like the servicing company a lot when everything is getting taken care of, but it hung up the sale.

I felt a little bit embarrassed after doing a show on how to make sure all your stuff is organized then I sell a note where there’s an issue. We are getting that worked out. That’s one thing too as you become a more experienced note investor. It doesn’t hurt to go back and double-check the things you did when you were more brand new to make sure there’s nothing that you have to straighten out. That one tripped me up and blindsided me a little bit. I had done the IMN Conference back in February 2020 in Fort Lauderdale right before the whole world ended with COVID. That was the last plane ride I took.

They did a virtual IMN and I was asked to be on part of another panel. The subject was supposed to be note workouts, but we wandered all over the place and there was a lot of good discussion on COVID. Kyle Zimpleman is there who is on a previous episode, Jamie Bateman. It was chaired by Daren Blomquist, and then also they had Carson Faris on it. Carson knows a lot about the commercial side. There were some questions that came up around that. I got a lot out of that as well. Daren works for Auction.com. It’s something I need to go back in and look at. I took some notes to check out Auction.com as a potential way to sell REOs. That’s on my list of things to do. Kyle from Expand Capital who was on a previous episode, and then Jamie Bateman from Labrador Lending, who I have not had on the show but I need to do that here at some point as well.

The panels are always fun. The main benefit of doing these is you learn a ton and they’re cool. There are a lot of high-level people on there asking questions. I enjoy doing that and check that out if you get the opportunity. This was more of something I knew before but it came up a couple of different points. Number seven here is when foreclosing can be a good thing. This came out of the discussions on deferred principal that I talked about in the past episode. There’s that note that I have with the deferred principal where you’re almost hoping that the borrower stop performing so you can foreclose and capture all of the principal, not that you want them to stop performing. It also came up in a discussion with a note investor who was asking some questions about a deal she was working where there was a deferred balance on that.

As I’ve discussed a little bit before, when you have a deferred principal balance that’s not bearing interest, it can be hard to value because it has some value but it’s not bearing interest. You don’t know when you’re going to capture it. You don’t know if you’re going to get a lump sum at the end of the loan or what’s going to eventually happen to that. You may have to hold it for 10, 15 years before you can see any of it. Both my deal with the preferred balance and the other one that this note investor was talking about.

If you have a situation where you’ve got a deferred balance but there’s a lot of equity in the property, in this case, if you end up having to foreclose, you know you’re going to be able to get not only your unpaid balance and potentially arrearages but you’ll be able to collect that whole deferred balance after the foreclosure. What happens is because of the way pricing on deferred balances works, everybody has different ways of valuing them. My personal opinion is that most people tend to undervalue a deferred balance. If you can buy a loan with a deferred balance, you’re probably getting a good deal on that deferred balance portion.

If the borrower happens to default, you’ve got this home run because you’re scooping all this deferred balance that you didn’t pay that much for. If you can buy one like that, that has a good yield based on the interest-bearing principal, you’ve got this nice optionality built-in. It’s like a positive stock option. In some ways, it’s similar to the fire that I was talking about. Those borrowers were paying. It started as sub-performing and they got fully performing. I was collecting a nice high yield, and then there was this insurance payout. One of the cool things about notes is you can sometimes structure these deals where you’re getting a good return on an ongoing basis, and then you have this potential for some positive windfall down the road. That can be nice in the context if you’re holding these things in a retirement account, where you’re getting that nice yield and your retirement is growing, and then you have the potential to get some windfall, some lump sum at some point in the future.

The eighth thing that I forgot to build a slide before but I thought of it as I was talking about IMN is that Note Expo is coming up. If you’re on my newsletter list, I’ll be sending out a link to Note Expo that gets you a discount that Bob Repass sent me. Note Expo is also going to be virtual just like IMN. Particularly if you’re new, I highly recommend checking that out. The info at Note Expo is a little more intended for beginners. If you’re just getting started, that’s good. IMN is great as well. IMN is geared for people that are more experienced. Beyond the lookout for that newsletter, I’ll send a link and I highly recommend you sign up for Note Expo and check that out.

The other nice advantage in 2020 is there’s no travel required. The price is lower because they’re not renting a conference center. It’s not as good as getting out and meeting everybody face-to-face. It’s not too bad and it’s a much lower price point to get in. Traditionally, they charge $500 to $700 or something like that. If you’re looking at a plane and hotel room for a couple of nights and food, you’re going to be spending $1,500 fast doing that, so check out Note Expo.

That’s our Grab Bag episode. For the next one, I’m going to have Brecht Palombo from Distressed Pro to talk about his take on some of the economy and what’s going on. If you follow his newsletter, he’s got a lot of great economic data. It’s some stuff that’s good to follow. His bread and butter is learning how to buy directly from banks which is the big goal of every note investor. I hope you enjoy the Grab Bag episode. Hopefully, there were a couple of good nuggets in there that you liked. We’ll see you next time. Thanks.

Important Links:

• Episode 39 – Being a Good Note Seller
• Kyle Zimpleman – past episode
• Auction.com
• https://www.FusionNotes.com/case-studies/
• https://NoteSchool.isrefer.com/go/noteexpo/Fusion/

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