The biggest mistake that newbie investors make is not properly doing their return on investment calculations before jumping headfirst into anything. Return on investment (or ROI) calculations should be the yardstick by which you measure all potential investments in order to properly assess their worthiness in the long term. David Putz, a Managing Member at JKP Holdings, joins Dan Deppen to discuss the nature of these calculations and what techniques to incorporate in order to perform them thoroughly. ROI calculations can be tricky and vary from person to person, but at the end of the day, once you’ve sunk your teeth into those fundamentals, you could be on your way to a bright investing future.
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ROI Calculations With David Putz
I’m joined by David Putz. David, how are you doing?
I’m doing well. How are you?
I’m good. I know you’ve got a lot of experience in the industry. You’re one of the first people I met in the note industry. Why don’t you tell us a little bit about your background and what you’ve been up to?
I was in rentals back probably ‘06 or ‘07 ready to ride the market. I got into a bad situation with some landlord. I needed some definite change. A very popular friend in the space got me into notes in 2010. He started a small fund at that time. He brought me on to do valuations. That time we’re looking at a couple of thousand assets at one time. All I did is evaluate them and decide what the value was, what kind of market it was in, if there are bars in the windows or not. We went ahead and process the asset list. He went ahead and do due diligence on it and bought it in the fund.
I did that for about two years from 2010 to 2012, and then I went on my own and started buying privately. I buy notes small and surely, it builds up over the years. In 2015, I started my company when I was buying privately. I started the company up and started buying through the company. I started to use some JV work and then got into a situation where we had enough funds to do it privately. Our company now is a private equity fund. We have the capital and we buy. We sell a ton of assets. We’ve met amazing people in that space like yourself. I enjoyed the ride over the years. I learned some good lessons and made some good profits as well.
What was it like looking at assets back in 2010? Had a lot of them hit the market yet?
It was a lot of assets. Our tapes are a few hundred big. It’s a couple of thousand. You would go through 1,000 to 2,000 assets. You would try being the first because there were many you could buy. The crazy part back then is that they’re priced at $0.35. Before I knew it, I couldn’t understand why we buy them when there were no bars in the windows for anything. Not knowing valuations back then, I was surprised we’re buying these assets. What I found was that even if I was 50% wrong back then on value at $0.35, you couldn’t go wrong. It was fun back then. I didn’t realize, I wish I appreciate it, but we wouldn’t buy $0.40 on a dollar back then, even equity deals and whatnot. There were a lot of assets.
Were you buying those directly from banks or was that from hedge funds?
We have to bid on items based on the return. Click To TweetWe bought a lot from Granite back when it was popular. A lot of the hedge funds are still around now. We were buying back then from Fannie Mae, Freddie Mac and whatnot. We were buying some from Green Builders, Condor at times, but ultimately we’re buying a lot from Granite, to be honest with you. The pool was so much bigger and there weren’t as many investors back then as there was now. We buy a pool and we’d be at $0.36 on a dollar. Things were cheap. It was great and fun.
Unfortunately, I missed that part of the market.
We talk about what percentage of value. We’re stuck at $0.35 and I’m sure we’re going to talk about stair-stepping. Back then, it was easy to do, but now it’s not as easy to use a stair-step method because the numbers don’t work out as they did back then.
The stair-step method for those who haven’t known it, it’s a rule of thumb that says based on the BPO value of the property, assuming there is no equity, you’ll bid a certain percentage of BPO and then that percentage increases the higher the value. It was good for beginners because it’ll keep people out of trouble. If you’re buying it at 35% and you’re off by 50% on the value, you can still come out okay. The big problem with it is if you bid at that and you get accepted, it’ll keep you out of trouble, but you’re never going to get accepted.
If you create that stair-step up to 50, 55, 60, and you use that method to buy, you miss a lot of the factors. At $0.35, $0.40 back then, that stair-step method was a real quick calculation and the expenses would never kill you. If you’re buying at $0.60 on an equity deal, it could kill you. If it was an underwater asset, the stair-step method worked great when it wasn’t that big of a deal. We don’t bid based on a percentage of anything. It’s what we call the byproduct of our bid. We bid based on the return. Someone said, “What are you buying at? I can buy at 90% of value or UPB for 20%.” It’s a byproduct of what my bid is. It’s not driving my bid. I shoot for return and run through a calculator to figure out. If it’s 20%, 40%, 80%, to me that doesn’t matter anymore because, at the end of the day, you don’t put your percentage of BPO in your bank. You put your return in the bank.
The challenge for a lot of people, especially when they’re starting out, is the rules of thumb are nice because they don’t necessarily have the time or know-how to build a fancier spreadsheet to take into account all those factors. They don’t even know what factors need to be included.
We’ve been asked a million times, and I’m sure you as well, “Can you help me build a calculator?” That’s difficult because every person’s situation is different. The returns are different. The JV partners if they’re using them still are different. The capital limits are different. There are a lot of factors that go into a calculator that I can give to you. Unless you build it yourself and understand how it works, it’s hard to use and adjust it. I also think that unknowing what your goals are and you don’t know it as a beginner, that becomes problematic.
I’ve always been surprised by things and deals, especially a contract for deeds where you get hit with random water bills and other things that you’re never going to have in a model.
Models are there for a reason. We’re trying to be conservative with our model. It won’t flake here and there just to be careful. You don’t know what’s going to happen. You don’t know when a letter’s going to hit or a BK situation is going to happen and get a $5,000 claim. You don’t know those things. You want to inflate a little bit to a point, but it’s hard to be exact because you can’t predict the future. I’ve heard a lot of people say, “Why don’t you go through an exit strategy and go for that?” It’s not up to me to figure out what the exit strategy is, it’s up to the borrower. If I want to modify and I can’t get ahold of them, there’s nothing I can do with that. It’s tough.
You’ve built some pretty fancy tools to do some of this. I’ve seen some of them. Talk a little bit about that.
I’m big on automation. I make the joke of if I could automate taking the garbage out, I would. I’m big on not doing the same task over and over again. There are some tasks that you have to be able to do. BPOs, evaluations and phone calls can never be automated. What can be automated is the process of getting the bedrooms, bathrooms, square footage and the annual tax amount. Data points can always be automated. Those things, just go to the internet and graph. We’ve all gone to Zillow and grabbed some estimates and put it in our spreadsheet. If you do it over and over again, you can automate that. We created a ton of automation from bulk emails to gathering data to getting REO agents and automate that process to the point where we can do it.
We then made the step to automating, emailing out investors who are local to a market and assets. We don’t trust BPOs as much as most people do. From the fund level, 35% of BPOs were completely wrong. My best strategy was to reach out to lien note investors and ask them, “Can you tell me about your local market? Is this house what we feel the value is?” We need the next step up and we built a calculator. In 2014, I built the process of taking my calculator and automating it through multiple assets and run them through the calculator. We’ve talked to other investors who manually do that, where they plug and play every asset into the calculator and it spits out something.
I can run through 50 assets in minutes and shoot out a bidding number based on the return of the exit strategy depending on the exit strategy that it falls into. The return I want for exit strategy calculates a bid number that I can go ahead and quickly give out to a seller within minutes. It’s great. I think automation in that facet is awesome. It’s what you do over and over again. If you’re doing it over two times, you can more likely automate that process because there’s no reason to email 50 people individually anymore. Use Mailchimp or whatever. Automation became something I use a lot for time, but also efficiency because errors can be made quickly and that’s the scary part.
It is, especially as the margins get tighter where there’s less room for error in that.
Most people drop their returns, “I’m not getting assets won.” Don’t drop your return to the point where you don’t like it. We talked about reinstatement being a big concern. A lot of people are going factor in taxes for the year when you have a situation where the borrower can reinstate and that coupon rates at 3%. If they reinstate and nearly put down $3,000 or $4,000, your return could be 5%. You don’t need to factor it in. Those are the things that some people miss in their calculator if they do build one. It’s like what happens if they reinstate and the reinstated amount is a year and a half behind? They put down $3,000. They’re back to the original coupon rate and you can’t modify that.
You can’t modify it up. That would be hard to do.
If you can do something over and over again, you can automate that. Click To TweetI wish. If you’re in a situation where they can’t reinstate and you offer them modification, if they choose not to take it, that’s on them. If they reinstate, there is no modification. They’re back to square one. Your purchase price is minus the reinstated amount and that’s it. People got to truly look at that when they’re bidding on stuff.
I don’t want to be in a position where if they reinstate, I’m unhappy. Usually, I always like to be able to reinstate if possible because what I find was when I end up taking the property back, the variability in the returns goes through the roof. That’s where to your point of you don’t know exactly what’s going to happen. There’s a lot of uncertainty in the costs. You can’t model everything ahead of time. That variance shoots through the roof when you start doing foreclosures, even deed in lieu and stuff like that.
You piss off the borrowers. You get a house you may not want. We don’t buy anything under $50,000 because one kitchen repair can kill a deal. A one-bathroom model, one roof can kill a deal at that price range. You’re right, when you take that asset back, a lot of your variables open up. You don’t know what’s behind that door. We try getting private presentation reports when we buy an asset. I only got sellers for that because I want to see what happened. What do they know about the property that I may or may not know? Product presentation pictures are amazing to see. It’s an awesome insight. Looking through the servicing notes to see what’s in there. If there’s something that’s presented to me, I’m asking for it. Those are some of the things that beginners don’t realize they can ask for it. It tells you what’s going on with the deal and make that part of due diligence.
There are some gems in there. I’ve read some in the call notes where you can understand why the borrowers hiccup and why it’s okay. I feel a lot better about it. I’ve seen other things in the call notes where the borrower called in and said, “The heater broke and it needs a roof. I don’t like this.” Sometimes they’ll list things that are wrong.
It tells you everything wrong with the property. They’re arguing with the servicer. That’s a sign of something I may not want to get into. I’m going to price it accordingly to make sure if I’m buying a problematic situation, my returns are adjusted to deal with that risk level. We’re coming out soon with a calculator that other people can use. We always target our worst-case scenario because if you perform and modification happens, that’s a better situation. I don’t want to cap the easy, quick, best scenario. I want to know what my worst case is. I don’t want to bid hoping something would happen. I want to bid knowing that if all goes wrong, I’m still on okay position. I don’t bid performers based on truly only yield.
I run it through the model and it says, “If I have to foreclose on this thing, even if performing, what is the situation like?” Because if I buy it performing and it’s a great yielder, if I have to foreclose three months later and I’m on the best spot, I don’t get to buy that even if it’s a great yield. It doesn’t make sense. Everything runs through the calculator to automate that so I can get away from the emotions out of it. We can quickly calculate the yield. You’ve done some great videos on the ROI versus yield and we can quickly do that, but there’s more to it than just the yield number.
If you don’t have any equity in it or there’s a difference between high yield, one of the things I always like to look at on performers is what happens if this goes sideways? How can I recover? If it means you’re going to take a beating, then I need a way higher yield.
A lot of people look at equity and they say what’s wrong with equity? If you go to auction, you can’t sell it for equity. You can’t get that equity out if it sells at the auction. If it sells third party, you’re only getting legal balance. If you’re calculating that you’re taking auction, you’re going to take it back and the REO and you’re excited, someone can outbid you at the auction and all you’re getting back is what your balance is. You want to put more money into it and it’s fine. That’s another one of our exit strategies that we’re building out that allows users to figure out, make sure that if they bid in the auction and sells third party, what return do you need to make you happy? That’s a great situation where we’ve argued with hedge funds, “Why you bid so low on this? You take it back, it’s a great equity situation.” What if I can’t take it back? What if someone else outbids me at the auction? How often does that happen? It doesn’t matter how often if you’re buying 100 of them. It’s not a big deal, but if you’re buying a pool of 3, 4, 5 or 6 of them and 3 of them go sideways, you can lose your shirt versus a hedge fund who might buy 1,000 at a time.
It will be a lot easier if I could buy 1,000 at a time. It also opens up doors with sellers. As I’ve started to look at some smaller pools but several hundred thousand dollars versus onesies, twosies, there are a lot more people who will sell to you the more that you can buy.
We talked to a lot of new investors, I’m sure you as well. They wanted to know how to get in. My advice to these new people is to always learn these things but do some bartering. Give me a skill that you have that I don’t have and get into it that way. We see a lot of the brokering situations where he’ll pass the tape along. I encourage people to be careful with that. Passing tape along doesn’t add value. More likely we’ve seen it and I don’t know if you know the seller. Take an asset, understand how to calculate the risk level and then send it to me as an asset.
If you can find an asset that I haven’t seen before, you calculate it out and you understand all those parts, I’ll work with you. I think beginners needed to know more about the functionality. The best way of doing that is to barter your time, your experience and your knowledge. If you’re great at spreadsheets and I don’t have time to do it, wonderful. If you’re great at marketing, if you’re great at content, broker that for experience and knowledge. For me, to get on the phone with somebody or yourself, I need to get something in return and not just share my experience and knowledge. That doesn’t work for me.
You do have some tools out that people can use. Tell us a little bit about your pricing tool that you were showing me.
What we’re coming out was a full calculator that takes an input, we call it spreadsheet tape, and runs through any asset that you choose to want to evaluate. What you’re going to set are your variables. What return do you want? If you foreclose, rehab, and sell, what is your estimate rehab? What are all your scenarios of returns? What’s going to happen is you’re going to say, “I want to evaluate this one, this one and this one.” You go ahead through the process and you’re going to run every asset based on your projected returns and expenses. If you’re going to run a BPO, what are your servicing costs? Because we all use different services. We’ll evaluate that based on your numbers and allow you to in turn get a bid number based on our mathematical formulas. We’ll give a bid number that will give you the worst-case scenario bid so that you can go ahead and quickly and efficiently reduce errors and come up with a bid number within minutes. Those factors are amazing. Using the experience in spreadsheets you’ve seen, our big cap is very similar. We’ve put a lot into that and for a newbie to understand the mathematic part of it is sometimes overwhelming.
I know there are a lot of people that get stuck, but that’s pretty cool that people can use that because pricing is the dark and mysterious part of note investing. Even in very expensive training courses and things, we’ll not include any big calculators or anything like that. It’s a rare thing to be able to get.
We added into it, I’m sure you’ve seen our Facebook group. We have a bunch of resources from servicer fee schedules to what states are involved with, to agents, to attorneys. What our calculators can include are those resources that people have shared with us.
What’s the name of the Facebook group? You’ve got one of the bigger note investing Facebook groups out there. I know the name is long and it’s a mouthful.
Don't drop your return to the point that you don't like it. Click To TweetIt came from a local meetup we had here in Jersey a few years ago. We started it as a small thing and it blew up. It’s East Coast Distressed Note Investing. It’s nicknamed “Jersey style.” I’ve thought of changing it over the years but people knew and recognized it so we didn’t change it. It started back in 2014. It’s a place where I didn’t find any Facebook group for note investors. I started for that facet. What we do differently than a lot of groups is it’s not about me. It’s about everyone sharing knowledge. I’m not looking to make it only about certain people. We always encourage people to not bulletin board post it but share information, share knowledge, and ask questions. We have no problem people advertising it as long as there’s any content.
What we did then is we create a spreadsheet of all kinds of different things, including a group directory. If you want to meet someone in your local market, go check the group directory and see if there is somebody there. Better yet, if you have an asset in a certain city, go check the group directory and find out note investors that are local to it and reach out to them. We have a bunch of resources there. It is a Google spreadsheet. We’re big Google people. I know you’re more on Excel, but we use a lot of Google sheets to assist people to go to different links. We’ve talked about having an Excel versus Google’s sheet competition because you just have to find your niche. Our spreadsheet allows people to utilize all the resources we’ve made available from our asset list. We have over 140 assets available. They can go get that list from our spreadsheet.
That’s a good point too because the other thing people are always looking for is where to buy assets. I don’t want that to get missed by people because they list assets on there. That’s a good place to go.
You can buy assets or list assets there. We’re getting big on sharing content and blending with investors. If you’re looking to buy or if you have an asset to sell, we do charge a very small fee just to list it. What people get overwhelmed with is seeing this quantity of assets. Give questions, reach out to us and ask. We’re open honest with everything. You just have to sign an NDA and then we give you access to that list. That’s available to anyone. We love to add new measures on there for buyers and sellers. If you look to buy yourself, feel free to reach out to us.
It’s a good Facebook group. That’s where I post a lot of my stuff. Yours and Chris Seveney’s are the two where I put the most stuff. People have asked me if I’m going to create my own, but there’s enough out there. I don’t know if we need another. I hang out on the ones that already exist.
It’s tough because those groups are splitting up and you lose that facet of where to go. If you have too many groups, I always felt that people start splitting up and you lose attention from different people. The new group may have posted something and the other group doesn’t see because they didn’t check it out. I agree, starting another group is difficult. I encourage people, all the groups are amazing. They’re great content and a lot of stuff is free out there, but there is certain knowledge that we need to reach out to other investors and either pay or to consult with them like yourself and say, “Dan, how do I do this?” The groups are great for small content stuff. I want to make sure we stress on the fact that new investors get nervous and what we encourage people to do is talk to Dan. Talk to people and reach out to them. We have a lot of new investors that feel that they’ve lost and I was there. We’re both there. It can be difficult.
It’s a challenging industry with a lot of nuances and you don’t know what you don’t know. It’s easy to get overwhelmed. I know for me a couple of times early on I hit a point where I’m like, “Is this worth it or not?” I follow through but a lot of people get stuck. A lot of those tools you provided, being able to have a place to go to buy notes, or some of the ROI calculator stuff makes it a lot easier for people to get unstuck. It’s a cool market. Once you crack the code on it, it’s very worthwhile. It does take a little bit to get there. It’s not quite as dirt simple as some of the gurus will tell you or some of the BiggerPockets posts like, “This is great. You just buy a piece of paper and you don’t have tenants to worry about and it’s an easy street.” It’s not quite that simple but it’s worthwhile.
We’ve bought a lot of assets with individuals who’ve just jumped in because that’s what they were encouraged to do, go out and buy. We bought a lot of assets from those people who just bought who didn’t know what they’re getting involved with and they were scared about it.
I haven’t run across too many of those people. I went across to the people when I’m selling, they get scared and they don’t follow through at that point because they’re worried about messing something up.
To wrap up what’s going on, definitely take a look at our East Coast group. Stay plugged into our calculator that we’re coming out with. Stay tuned-in to all the groups we have. We have a Facebook page as well for our business. Reach out to us and talk to us and see what’s going on. We have a lot of automation tools that we don’t share with a lot of people. I can pull REO agents. We have a whole scraper that we can trade data from. There are a lot of things we don’t share because it can overwhelm people. I’m looking forward to being able to share things like that but there are some nuances that we can’t add to it.
You didn’t want to tee people up to get lost in the details. I’ve talked to some people as well who enjoy the minutia of their stuff they’re diving into, but it doesn’t necessarily lead to them getting a deal. You don’t want to get stuck that way. Do you have any ways to pull delinquent taxes? That’s one of my bugaboos because I like to look at that before I bid. For me, it’s been largely a manual process. There are some services and things you can do but they get pricey if you’re doing it. You’re not necessarily going to pay Black Knight or there are some other people out there for a whole tape unless I know I already have them.
We encourage people when they make an offer to not be scared when they make their initial offer because everything is subjected to the due diligence period. Get your offer out there and make it contingent on a bunch of points, O&E’s, all those things. To pull automated situations, we’re looking at a few APIs. We’re manually doing it through the process of using some VAs and some technology to do that. We’re talking to some API people to create that a little bit quicker and easier. Some sources that we’re using were not there yet to share. Once we do, we’ll incorporate it with our calculator. We can hit a button and grab delinquent, grab taxes and grab all that stuff. It reduces people’s need to manually capture that.
It’s amazing what that technology can do, but I would encourage people not to get stuck on, “I don’t know what the back taxes are when I put my bid in.” Make it a part of your contingency plan or your due diligence part of it and tell the seller, “Part of my business is the fact that I’m going to pull O&E. If there are back taxes, my bid is going to be reduced based on that.” Be open and honest with sellers and more likely they’ll be like, “That’s fine.” Unlike typical real estate, we have that already the upfront. To do diligent notes is so much broader where you put a bid in and it’s subject to everything from O&E to BPO. We have a list of thirteen different items that we asked the seller for.
David, thanks so much. I want to have you on some more and we need to get into using Google versus using Excel.
I’ve been doing it. That would be great.
Important Links:
- David Putz
- East Coast Distressed Note Investing – Facebook Group
- https://www.Facebook.com/groups/EastCoastDistressedNoteInvesting
- https://www.Facebook.com/groups/EastCoastDistressedNoteInvesting/learning_content/
- https://www.JKPHoldings.com/
About David Putz
David Putz, Managing Member has been an active Real Estate Investor since 2010. Has worked on with rentals, fix & flip and with a large private equity fund where he completed the property valuations due diligence on properties. At this time Mr. Putz runs JKP Holdings where he evaluates, controls deal flow and raises funds for the purchase of mortgage notes nationwide.
