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Real Estate notes can be a bit like the wild west sometimes. You can run into some wacky, weird deals that can be remembered as your weirdest note deal of all. In this episode, Dan Deppen talks about his craziest note deal yet. It involved a foreclosure and a cash for keys, a police report, a career criminal, and lots of other twists and turns. Tune in and hear more about Dan’s wacky and weird deal and learn about how crazy the note space can be.

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My Weirdest Note Deal

I’m going to talk about my weirdest note deal. This is a case study and it’s one of my strangest ones that had more twists and turns than any other deal I’ve ever encountered. Before I dive into that, I want to talk a little bit about what I’ve been up to. I’ve gotten some questions I know I haven’t put out a show on a regular basis, but been busy. I closed my biggest note deal ever and moved into a new house. I bought my dream house. This place is amazing and that’s kept me pretty busy for a while. I’m planning a lot of new content. I’m going to have a number of shows, some YouTube videos, a lot more free stuff to help folks learn about notes.

My Weirdest Note Deal

Let’s talk about my weirdest note deal. This was a contract for deed. It was in Lima, Ohio. Ohio has always been one of the sweet spots for notes. I know some people have become a little afraid of it because of threats of some different laws being passed but I’ve had good experiences in Ohio. I’ve bought a lot of notes there. I’ve continued to do that. This I picked up for $15,500, which was about a little less than 50% of UPB.

UPB was like 32.5%, and the payoff was about $37,000. The borrower was fairly far behind. Strangely enough, there were no delinquent taxes. Usually, when borrowers get that delinquent, they’ve got some delinquent taxes on there but we didn’t have that here. Buying the note for $15,500, pay off the amount of about $37,000. There might be a PO value that came in at $65,000 for a 30-day quick sale or $75,000 for 120-day lists, so it looked like a decent bit of equity.

One of the things I liked about this deal was that even though it was pretty delinquent, the borrower had made five payments. That’s not great, but the thing is, this was still owner-occupied and it had what I like to refer to as signs of life. There were some payments going in. Usually, when I buy loans with this profile, I’m getting these to reperform generally about 2/3 of the time. However, this was my first foray into Lima. I did not have a team on the ground going in. If you don’t know anything about alignment, the population is about 36,000. It’s located South of Toledo, way North of Dayton in the middle of nowhere land, like this intersection of Columbus, Dayton, Fort Wayne, Indiana and Toledo.

The First Twist And Turn

What it’s known for is it’s got the last remaining M1 Abrams tank plant. They’ve been building tanks there since World War II. That seems to be about all that goes through Lima. Not a bad town. I did pass through there years ago when I was doing a tour through Indiana and Ohio and checking out a lot of these different cities, so not too bad. I bought the note and the first twist and turn was a pretty big scare.

The guy that I bought this note from, who I had known because I was friends with, turned out, he was defrauding investors on a big scale. He had some big scams going. He stole in the order of at least a couple million dollars. All of this broke loose in between the time that I had funded the deal and before the loan transfer and before I had received the hard collateral. I was freaking out because this was out of the left field. I wasn’t sure what this guy was going to do.

I knew he had talked a lot about retiring to the islands. I didn’t know if he’s going to keep my money and flee the country. He was taking a lot of heat from several people. This guy off himself like, “What the heck is going to happen here?” That about gave me a heart attack when all that happened. Fortunately, he followed through on the transaction. I got the hard collateral. The loan got transferred. There were no problems but there was a little window of time there where I wasn’t sure.

An Unusual Borrower Situation

That was something new for me. I never had that before. That was the first element of weirdness, but don’t worry, there are plenty more. Talking about the borrower a little bit. The borrower’s situation was a little unusual here, too. The original borrowers were a married couple. The wife was deceased, passed away. The husband, who was the other borrower, was living in the property, but with his former mother-in-law, which was weird.

I was never sure what the relationship was. I received this letter from the mother-in-law apologizing for falling behind, saying the heater broke and they were using electric heaters because they couldn’t afford to get the heater fixed and that was running up large electric bills. It was a weird letter, but you at least had people in the property, some level of payments, some indication that they were interested in staying and paying. A positive sign, overall.

I attempted to do a workout. At the time I did this loan, this started a couple of years ago because I was in this deal for two years until it was all said and done. I used to use a company called Polaris. That’s no longer in business anymore. Those guys moved on to other things but they were a great third party that I trusted to go out and contact borrowers and try to work out deals. They were able to get ahold of the borrower. It took some doing. This guy was not responsive. Communication was a huge challenge. There was all this back and forth that drug out for weeks. Eventually, the borrower did agree to a trial payment plan and forbearance agreement, which was great.

The structure of that deal was borrower makes a down payment, makes a certain number of trial payments, and if he follows through on all of that, then I modify the loan to make the loan current. Take the remaining arrearages, roll those into the balance of the loan, stretch out the term, then make the loan current. However, nothing was easy with this guy. He wasn’t hostile. He would talk for a little bit and disappear, then never quite follow through, which is not unheard of. It’s not the first time that I ever run into that. I ended up starting the foreclosure process. He didn’t want to get foreclosed on. We talked some more, and after much more back and forth, he finally agreed to cash for keys deal.

The cash for keys deal, what he’s doing is signing a cancellation of a land contract, then I’m giving them cash for that and an additional amount for when he moves out and leaves. When you set up these cash for keys deals, I always like to set them up in that two-step process, where they get some of the money when they sign the cancellation of land contract or sign the papers to terminate the mortgage, then the rest of it when they’re finally out. The nice thing about that is once they signed the papers, if they then don’t follow through on moving out, now you’re looking at doing an eviction versus having to complete the foreclosure. It is a much easier process. That we were able to get through and we’re able to get him out there. Now I’ve got an REO on my hands.

In my business model, what I like to do when I get an REO is turn around and sell it as soon as I can. There are a lot of people who will do notes as a low-cost stereo acquisition strategy to maybe do rehab and flip or turn it into a rental or do a turnkey rental or something like that. Those are all good models but that’s not my model. Anyhow, the house was in pretty rough condition. Various things were broken. There were foundation issues or issues with the roof. There were issues with this funky-looking chimney. It was in pretty rough shape. Again, another thing that’s not unheard of. When I get REOs, it’s always a big roll to the dice. You never quite know what you’re going to get.

Some of them I’ve gotten back in great shape and they’re home runs. I had other ones where they were super rough and I ended up getting upside down on the deals. Someone might ask like, why would I give him cash for keys if the REO was in rough shape? I did. Part of the conditions of the cash for keys, too, is I always want them to allow my realtor to come in and take pictures, so we can see what we got. It was not a lot of money for the cash for keys. For me, net-net was a better deal than completing the foreclosure and ending up with it.

Finding A Buyer

I got it listed for sale, found a realtor locally. Dickie Baldwin helped me out with that. I can’t recall exactly. I had a number of bites, got some offers but none of the buyers followed through. This is something that happened from time to time, too. There are a lot of flaky people who put offers in on these and don’t ever make the deposit, the earnest money or don’t ever follow through. This sale process was dragging on for a bit. Finally, I found a buyer through Craigslist that was willing to buy it on seller finance. One of the tricks you can do if you’re having trouble finding a cash buyer is you can create a new note. You’re selling it to the buyer and you’re creating a new note that you’re now going to hold.

The Next Problem

That can be cool because now you’ve still got a deal. You can hold that note for cashflow. You can turn around and resell the note. You have a lot of flexibility. The problem we ran into was when we tried to close this, this is the next problem. The title company said there was a title defect related to the deceased co-borrower. Remember, you had the other co-borrower that was passed away. They never did probate and closed everything out properly. Even though the other borrower signed a cancellation of a land contract, this deceased person’s state still had an interest in the property. She’s not around to have her sign the cancellation of land contract, so I was stuck.

I went back and forth with my attorney and said the only real way to fully clear the title was to complete a foreclosure. That stinks, especially to the co-borrower who made cash for keys agreement, which he followed through and I was going to get foreclosed on, which is going to show up on his credit. Not that his credit was great anyways, but it seemed like a crappy thing to have to do but there was no choice in the matter if I wanted to be able to sell the property.

A Bad Situation Gets Worse

I put a rental agreement in place with the seller finance buyer as an in-term solution. I said, “We got this title flaw. I will get it cleared. I will pay to get it cleared but this is Ohio, so it’s going to take 6 to maybe 9 months to get this done.” She wanted to do a lot of work on the property. I said, “We can put a rental agreement in place. I can rent this to you and we can close the sale after the foreclosure is completed.” What I wanted her to do was close and add some agreement where I would pay to finish the foreclosure and she was dead set against that. She wanted the title completely clear before we closed. This is the way we’re going.

This lady turned out to be a career criminal herself. She never followed through and paid any rent at all. She had all these excuses. We went back and forth. She was very nice and friendly and had started doing work on the property. My attitude at the time was, “This property is messed up. You can’t make it much worse.” If she does work on the property and doesn’t follow through on the seller finance deal, I’m not going to be any worse off. Maybe it’ll be a little better, but anyhow, she never paid, so then I needed to get her out of there. One day, after having some pictures taken a few days before, the whole property was stripped of copper and wire. This is the next weirdness.

Thank The Lord For Insurance

If you remember, during the financial crisis, stripping copper was pretty common, like in the 2010 timeframe. Apparently, that’s back to some degree. At least, I had that happen early in 2021, it was around February. Completely stripped everything out. My assumption that she couldn’t make the place any worse was pretty flawed because it got a lot worse from there. I’ve got this shell of a property. Fortunately, the lady across the street saw what went on and saw that it was this renter person and a crew of folks. We knew what it was and who it was. I filed a police report. I don’t think the police ever did anything, but this was all very helpful when it came to the insurance claim.

Having a neighbor who witnessed things, getting a good police report was very helpful. The other thing that helped was, by coincidence, I had some photos taken of the property a few days before this happened. I had photos right before, right after, a police report, a witness, and was able to send all of that to the insurance company. This was the second force place insurance claim I’ve ever attempted. The first one got denied. I’ve talked to many different note investors who’ve had a variety of times to where they had a fire flood, some other catastrophe.

In the first place, the insurance didn’t pay out because of nonsense technicality fine print that they would pull out of anywhere. I was not real hopeful that I was going to get the insurance money, but I had about a strong case as you can make. Fortunately, insurance paid out. It paid out $25,000, which I had how much insurance I had put on it. That was huge and an unusual occurrence to get paid out in full.

Had I been insured for more? I could have gotten more. That brings up a good discussion topic of when you’re getting forced placed insurance on a property, what amount should you get it for? Different note investors will have different philosophies on this. My theory of forced place insurance is it is just an insurance policy. This is something to protect you if there’s a disaster. I try to size the policy so that if doomsday happens and that thing gets paid out, then I get made whole in the deal and can break even. Some people want to insure themselves for the unpaid balance. Some people want to insure it for the BPO value. Those are all legit things to do.

A Buyer Pulls Through

You’re going to be spending higher premiums over time, so it depends on how many properties you’re going to lose to disaster, but I still had this property on my hands, this shell. The next goal was to sell it for what I could. I found a cash buyer that followed through this time and sold the property for $8,000, which selling a house for $8,000 sounds absurd. Considering how messed up this place was, I was happy to get anything. At the end of that sale, because I did have a realtor that was helping me, I netted $4,264 from the sale of the property. I had that plus the $25,000 from the insurance. Net-net, I was happy.

The thing that was weird, too, is when I had that title problem. I remember I still had this foreclosure going on. As I had solicited different advice before I decided to start the foreclosure, there were some people who said, “Depending on the title company, they might let it go.” This whole title issue was in a gray area, which I find strange because something like title should be black and white. The title company that we use for the sale never questioned the issue with the deceased borrower, the sale closed. I got my proceeds and I was able to go back and stop the legal process. A crazy deal with a boatload of twists and turns.

What We Made From The Sale

Let’s look at some of the numbers. I bought the note for $15,500. My total expenses in the deal, when you add everything. The legal fees from starting the first foreclosure then stopping and all the expenses related to the cash for keys. Expenses for the second foreclosure, all the carrying costs and insurance. There were a number of different things that happened. That ended up being a little over $13,000.

I had about $28,700 in total expenses and cut about $29,200 back. I broke even. I was a little bit positive. There was a total timeline. It was 24 months on this deal. I had a JV partner and the deal to where we were doing a 50/50 profits split. There was a little bit of profit to share. After the split, he ended up with a 4.4% ROI and an annualized return of 2.1%. Not great obviously, but given all the insanity, I’m happy to get out without taking a loss.

Honestly, I’m fortunate that things worked out the way they did. The fact that the lady stripped it of copper and wire helped out because I was able to get the full insurance payout. If that had not happened, I probably would have been underwater on this one. The other thing that was good about this deal, too, is my JV partner on this one was a real pro. As this is going on, I’m giving them periodic updates and we’re talking on the phone every now and then.

I kept waiting for him to freak out because this was such a crazy deal, but he hung in there like a champ. He’s like, “Thanks for letting me know. What are we doing next?” We would talk about things and proceed. I’m thankful to have a partner that understands that. I’ve shared a lot of case studies on the show and other places that were like home runs, 100% of them don’t go that way. That’s the way it goes sometimes. That’s what I have for you.

If you want to learn more about how to do this, you can reach out to me. You can find more information at FusionNotes.com. Also, check out my YouTube channel, Youtube.com/FusionNotes. I mentioned I was working on a lot more content for the end of 2021. One of the things I released earlier in 2021 was the Note Launchpad training course. This has a boatload of videos, downloads, templates, checklists, calculators for pricing, performing and non-performing, and a lot of other resources.

What’s cool about it, it’s all an online course. You can do it with your own pacing, go fast. If you want, you can go slower. We’ve got our Note Ninjas private Facebook group where you can ask questions and get help. There might be a Black Friday sale coming up at some point for the holidays. If you might be interested in that, I highly recommend, go to FusionNotes.com and sign up for my email list. You can get information on that when that becomes available. Thanks a lot for reading.

Important Links:

• Youtube.com/FusionNotes
• Note Launchpad
• Note Ninjas – Facebook

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