Buying notes is one thing; taking them through its life cycle takes a whole different skill. In this episode, Dan Deppen lets us in on some of the systems and processes that he uses in his notes business, particularly on the twelve stages of a note deal. He breaks down each of these stages and how he uses his CRM to track the status of a deal. By grouping notes in these stages, investors can get a nice dashboard view of the business at all times. Join Dan in this conversation as he takes you on a step-by-step guide on taking your note to the exit you desire while reminding you of some of the important things to think about during a particular stage on your note deal.
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The 12 Stages Of A Note Deal
I’m going to be talking about the twelve stages of a note deal. We’re going to be talking about some of the systems and processes that I use within my notes business. One thing I’ve noticed from looking at some of the podcast downloads and YouTube video views, and some of the questions I’ve gotten, is people seem to want me to talk more about systems and processes. I’m going to try to do that in this episode.
One of the main things I use in my business is my CRM. CRM is Customer Relationship Manager. In my notes business, I use Pipedrive for my CRM. I don’t really use it directly as a CRM. I bastardize it as more of a project management tool than anything else. Pipedrive is originally created for salespeople and it’s got this idea of a sales funnel and different stages. The point is a salesperson will have a prospect and they’ll move them through the funnel, through the other stages until they actually become a customer. That’s not really what I’m talking about at all in this notes business. I’m talking about the different stages that a note goes through from the time that you buy it, throughout the time that you’re working it out or holding it, to when you actually either sell the notes or your note turns into an REO and you sell that or whatever your exit may be.
I use twelve different stages in Pipedrive to track where my deals are at. This is great for me because I can go to the screen with all of my deals and see what’s in what stages. I get this really quick, a dashboard view of what’s going on in my portfolio at any given time. What I’m going to do is I’m going to run through each of the twelve stages and talk about what they are. You may or may not use this in setting something up similar in your CRM. Maybe if you’re not using a CRM or if you’re just starting, I think it would be helpful to help folks get their heads wrapped around the different life cycle of a note.
A lot of times when people are starting to get focused on buying notes, but then there’s not as much focused sometimes on what you do after you get them. I hear very little discussed about when you actually sell them and position them on the backend. No matter where you are in your note investing journey, I’m hoping this will help you a lot. One key thing to keep in mind is as notes progress through these twelve stages, unlike the salesman funnel I mentioned, they’re not necessarily going linear. Your note isn’t going to go stage 1, 2, 3, 4, up to 12. Most of the stages is never even going to touch. Sometimes deals go forward and then they go backwards and they can take all sorts of twists and turns.
Due Diligence
What I’m doing in my dashboard view is I’m trying to understand at this point in time, where all of my deals are at. Pipedrive does give the ability to go in and look at the history of them, but usually I’m just intimately familiar with everyone. I don’t need that because I know what they are anyways. Let’s jump in to talking about the stages. Stage one, the first one I set up is due diligence. For each of these stages, I’ll talk about how I use them and how I define them. For me, the notes that I put in a due diligence stage, these are ones where an offer has already been accepted by the seller. A lot of times, I’m doing early due diligence, somebody sends me a tape and I’m doing my fast filtering and putting in offers.
Most of those never go anywhere because most of those notes either don’t make it through my filters or I make an offer and it’s not accepted, or we don’t reach a price or whatever. I don’t put a note into my CRM and put it into due diligence stage until the seller has actually accepted an offer. What’s happening in this stage is the offer has been accepted by the seller, but I’ve not actually closed and funded the note yet. This gives me a good way to keep track of how many notes I have in this stage at any given time. Usually for me, I’ve got a couple in this stage this time and then I close. I might not have any of the due diligence for a while. Notes tend to be feast and famine. I seem to go through phases where I’m buying a lot, and then I seem to go through months where I’m not buying at all. That’s why I like to start getting everything loaded in the CRM and start tracking it.
Sometimes deals go forward and then they go backwards. They can take all sorts of twists and turns. Click To TweetBoarding Stage
The next stage is after I’ve closed, after I funded the deal, then I move to stage two, which is the boarding stage. This is the stage where I’ve already funded the deal, but the service transfer is not complete. This is a waiting game at this point. Depending on the loan servicers you’re dealing with, whether it’s moving to a new loan service, a loan transfer can take anywhere from a couple of weeks. I’ve had them take two months–plus depending on who the servicers are, and you really need to stay on top of them during that process.
While this is going on, you’re mostly waiting at this point for the loan to get boarded. I like to keep track of the deals that are in this stage, so that if it starts taking too long or longer than it should, then I can start following up with the servicers. A lot of times, you’ve got to hound the servicers to get things going. I’ve also had situations where I bought a note and the transfer was going on. I checked in with them a month later and they had dropped the ball, nothing had been happening during that time.
One of the things I like to do here is Pipedrive does, and other CRMs do this as well, but you can create these cool automations. Within Pipedrive with each deal, you can have what they call activities, which are really like tasks or to-dos. With these automations, I set it up so that if I move a deal from the due diligence stage to the board stage, then it automatically creates a bunch of activities and to-dos that are going to happen later. For example, it will create tasks for me to verify that the seller shipped me the hard collateral or I’ve had situations where sellers have forgotten to ship the hard collateral. This can be a tricky thing to keep track of once you start getting a lot of notes. If you’re doing your first or second note, you’ll be able to keep track of that in your head, but when you start getting a bunch of these notes in all various stages, it becomes tricky. It may be a week or two until you receive the hard collateral for the seller. If they never send it and you don’t have some system in place, you may not notice. It’s really easy because you’ve moved on to trying to close the next notes, you’re dealing with foreclosures and you’re selling our REOs and doing all kinds of stuff. It’s really easy for stuff to get lost in the shuffle. That’s why I like this automation to set up a lot of those things.
The other one that I find handy is it also creates a task to pay any delinquent taxes if there were any on the deal. One thing that happens commonly is if you’re buying a note and there are some delinquent taxes. I’ll work with the seller to negotiate that off the price. Let’s say there’s $2,000 in delinquent taxes and the seller agrees to lower the price by $2,000. After I closed, I still need to go back and pay those delinquent taxes. I don’t want to pay those until I get the loan transferred and everything set up and the loan is actually mine. That can be an easy thing to forget about down the road. A lot of these activities are really key to stop things from falling through the cracks. The purpose of all my systems and processes is to keep things from falling through the cracks as they tend to happen in notes.
Loss Mitigation
After we get the loan boarded and the previous services send out their goodbye letter, and the new servicers send out their hello letter, if it’s a non-performer, this is where we get into not every note is going to go through all these stages. If it’s a non-performer, after I get the loan boarded, I move it to stage three, which is loss mitigation. Loss mitigation means basically your outreach to the borrower to try to come up with some resolution to this non-performing loan, that’s not a foreclosure. Obviously sometimes that works, sometimes that doesn’t. This is happening once you‘ve got the loan fully boarded because you don’t want to do any outreach to the borrower until the loan gets boarded and those hello and goodbye letters have gone out because then they know there’s been a change.
Generally speaking, it’s best if you let your loan servicer handle the borrower outreach and loss mitigation. I do some of it myself. A lot of some people do all of it themselves, but I’m not going to do a deep dive on how all of these stages actually work. I’m more identifying what they are at some point, but generally your loan servicers are going to be doing that. This is a point where we’re trying to do the loss mitigation, but we’ve not reached a signed agreement. I leave it in this stage until we actually have signatures on paper and everything is official. If your servicer reaches out to the borrower and they say, “I like to do a deal. I can do this. I can do that,” that doesn’t really mean anything until the deal actually gets implemented.
Forbearance/Trial Payment Plan
If we do get a deal implemented, then I’ll move it to stage four, which I call forbearance/trial payment plan, or you could just call it like FB/TPP, Forbearance Trial Payment Plan. This means an agreement was reached and the borrower signed it. At this point, I’m tracking the agreement in my forbearance tracker spreadsheet. I like this in a separate bucket because this is a little different than my loans that are maybe just performing. I watched these loans a little more closely. One of the things I need to do as well is note in my CRM. If the borrower fully complies with the agreement, usually the way these are structured, there’s a modification at the end if the borrower follows through. I’ll have a note in my CRM to check when this is supposed to be done, “Did the borrower comply with the entire agreement? Do I need to kick off a loan mod?” The last thing you want to do is set up a trial payment plan, borrower falls through and you forget to set the loan mode. It’s on you to initiate that with the servicer.
Deed In Lieu/Cash For Keys
Stage five is deed in lieu. You could also call it deed in lieu/Cash for Keys. This means the borrower has agreed to some deed in lieu/Cash for Keys arrangement, and we have an agreement that’s signed. This is the stage where that deed in lieu agreement is signed, but it’s not been fully implemented yet. Typically, the way I like to set up Cash for Keys arrangements are in a two-step process, where the borrower gets some of the money when they sign the paperwork, and then they get the rest of the money when they actually move out.
There’s always going to be some span of time between when the borrower signs the agreement and they’re actually out of the property. I shouldn’t say always. If it was a vacant property, that might be a different situation, but most of the ones I do are owner–occupied, so we’ve agreed to some amount of time before they move. I obviously want to watch that closely. This is one where we know we’ve got this agreement in place, but it’s not quite an REO yet. I like to do these in that two-stage process because sometimes I’ve had borrowers go back on deed in lieu agreements or they say they’re going to sign something, and then they don’t. By doing it in the two phases, by getting them to sign the deed in lieu first, if they don’t follow through and move out, you can at least do an eviction instead of a foreclosure. I like doing it that way better. If you set it up in these two stages and they drag their feet on signing the first set of docs to actually do the deed in lieu, then that’s obviously a red flag. They may have gotten cold feet. They may have been doing this as a stall thing for a little bit, hoping you’ll give up. Who the heck knows? That is stage five, deed in lieu.
Foreclosure
Stage six, I call it foreclosure or FC in my CRM. I call it foreclosure to make it generic. You could also call this legal process because sometimes on contract for deeds, I’m not technically doing a foreclosure, I’m doing a forfeiture in that case, but in my mind I refer to it all as the same thing, even though the technicalities of the legal process can be a little bit different. If I’m moving a deal into the foreclosure stage, then this means that basically I’ve made the decision to start the legal process. The demand letter may not have gone out yet. There’s the whole process, you’ve got to get pay off the reinstatement quotes and send it to your attorney, have them send out the demand letter.
Once I’ve said, “I’ve given up on the loss mitigation or the loss mitigation has failed. We had an agreement in place and the borrower didn’t come through on it. We need to start legal now. I want to move the deal in my CRM over into this bucket,” this is when I really start watching things much closer. This is one where I’ve made the decision to start. It’s either in process, but we’re not all the way through yet where I’ve got an REO. We’re going through some phase of that legal process.
Rehab
Stage seven, I call this REO or rehab. This is the stage I hate the most. I’ve had some great deals that had been REOs. I’ve had some home runs and I’ve had some nightmares. This means that I no longer got a note, now I actually own a piece of property. This could have happened through foreclosure. It could have happened through deed in lieu. It could’ve happened a number of ways, but now I’m dealing with a piece of property, not an actual note, definitely my least favorite stage. I find that deals in this stage require an outsized portion of my time and energy. It‘s hard to explain. Some people I talked to think, “There can’t be much to do when it’s at the stage where it’s like death by cuts.” It seems like there are all sorts of little things that happen with getting the property secured and dealing with utilities. Sometimes you secure properties, they don’t always stay secured. I’ve had attempted copper thefts and floods and all sorts of stuff.
One of my sayings is nothing good ever happens when a property is vacant. Sometimes too, I will take on rehab work. Generally in my model of note investing, I try not to end up with REOs. If I do, I generally want to sell them as is, as fast as I can and get out of there. Now and then when it does make sense, I will do some rehab work, but I try to stay away from that because all of my deals are remote from where I am. Unless I’ve got a good team in place and it really makes sense, I try to stay away from the rehab portion.
One example of when I did last year 2020 was the borrower had dogs and it reeked of dog crap through the whole thing. I had some special paint, had the ducts clean because I wanted to get that dog smell out before anybody looked at it. You know how repugnant that is, that’s going to make even the hardest of cash buyers. It‘s going to slow them down a little bit. When you do take on rehab, there are all kinds of risks that go through that. There’s the risk of getting a bad contractor. There’s a risk of them tearing into things and finding more stuff that you then have to fix that you didn’t plan on. In my plan, I like to deal with notes, that’s why I try to stay away from REOs and when I get on them, I try to get rid of them as fast as I reasonably can and still get to a good exit.
Performing
Stage eight, I call sub–performing. What this means is this is a little bit of a nebulous term. Different people will have different definitions of it, but basically it means it’s not performing. There aren’t payments coming in every month, the borrower is not current, there’s some level behind. However, unlike what I would call non-performing, this means that the borrower is making payments. It could be that they’re making payments every month but they’re behind, or more commonly what I run into is the borrowers that will be called spotty payers. They might make a couple in a row and they miss one or two and then make a double payment, then make some more, they miss, they’re all over the place. The bottom line is the loan is not current, but the loan is actually cashflowing. The cashflow may not be a single payment coming in every month like it should be, but there’s definitely cashflowing in there. There’s no real definition that I know of for this, but generally these loans tend to be 30 to 120 days delinquent. They start getting a lot more delinquent than that, I put them into non-performing category.
This is my favorite loan to buy, I think I’ve talked about this before, but what a lot of new buyers do that I believe is a mistake is they put notes into two buckets. They’ve got performing notes and non-performing notes. They have these rules of thumb in their head where it’s like, “I like to pay X percent of UPB or value for non-performing. I like to pay X percent of UPB for performing.” Those are both terrible ideas, but I’m saying what a lot of people do. When something is sub–performing, they look at it and go, “It’s not current, it’s not performing, so I guess that’s not performing. I’m going to offer $0.40 on the dollar or something.” A lot of these loans when you look at the cashflow over time and how well they’re yielding, you can buy these at better prices, then they end up with high yields. The rub is they’re going to require more time and attention than a performing note. You might be coordinating loss mitigation with the servicer, sending more letters to borrowers, dealing with delinquent taxes more often, all those sorts of things. Overall, I like them because I find I can get good deals on them, more often than I can get deals on other types of loans.
You’ve got to keep in mind though with some of these borrowers, if you do buy a loan that’s sub–performing, some of these I’ve been able to get fully performing, but a lot of borrowers in this category are never going to fully perform. There are some borrowers I’ve had, I don’t care what the situation is, they’re not going to make the exact payment every month on time, gun to their head or whatever, it doesn’t matter, they’re not going to do it. They’re going to make some payments here and some payments there. A lot of these borrowers are not going to lose the property, they’re not going to let it go, but they’re never going to fully perform either.
These can become a little bit tricky to exit if you went into it with a plan of, “I’m going to get this fully re-performing and sell it at some higher price.” You might be able to do that but sometime you just can’t. Some borrowers will tread that 90 to 120–day delinquent line to where they’re never going to quite lose it in foreclosure, but they’re never going to pay reliably and consistently either. It’s the way it goes. This is funny, if you search sub–performing notes on Google, I did a show on this and it actually comes up on the first page. That was Episode 39. I think it was September 8th or 9th 2020. If you want to go back and read that show, I go into it a little more depth on sub–performing loans.
The purpose of systems and processes is really to keep things from falling through the cracks as they tend to happen in notes. Click To TweetPerforming Loans
Stage nine is everybody’s favorite and that’s performing loans. This means, as it sounds, the loan is current and the borrower is making payment payments every month. What’s not to like about this stage? I like to have as many loans as possible obviously in this stage because they’re cashflowing and we’re probably getting a good return. It’s not a heck of a lot of work as a note investor. There’s not a whole lot to keep up with, other than the normal blocking and tackling of periodically making sure taxes are okay, insurance is okay, all the payments have come in, taking care of some of the basics.
Bankruptcy
Stage ten is bankruptcy. I put this in its own category because I like to be able to pay a little extra attention to this. In my CRM, I refer to this as BK, and that’s what most people in industry do. I put notes in this stage that are only actively in bankruptcy. If the borrowers had a bankruptcy in the past that was discharged or dismissed, I will put it in this category. The bankruptcy could be BK 7 or BK 13. I put them all. I don’t have separate stages for those in Pipedrive because I generally don’t have that many at bankruptcy at one time. I don’t want to have too many stages. However, these loans are in bankruptcy depending on what’s going on, the borrower may or may not be making payments.
Typically, the loans that I have that have an active bankruptcy is generally BK 13, where they’re paying per the plan. Most of my loans in the bankruptcy stage are actually cashflowing, paying, performing notes, but that’s not always necessarily the case. Because there can be some extra legal work and other things you have to take care of, I’d like to keep these in their own bucket, so I can keep an eye on them. As the borrower is going through this process, you might have to do things like file a proof of claim or if it’s a BK 7, you may need to have a reaffirmation agreement. There are all kinds of little things potentially that come up, so I like to have these guys in their own stage.
Selling The Asset
Stage eleven is when I’m selling the asset, so that could be selling the note or selling the REO. I move a note to this stage when I have some sale agreement in place, either a sale agreement to sell the note, or if it’s an REO, a sale agreement to sell the REO. Usually, I don’t move them here when I’ve listed it for sale. If I’m really confident this thing is going to sell fast, then I might move it into this stage. It doesn’t really matter one way or another. Sometimes I have performing loans that I like that I list for sale. If they don’t sell, that’s fine because I’m happy staying in the deal. Sometimes I might move it into this stage if I’m more motivated to sell like let’s say I have an investor on the deal or something and they want to get their cash out to put it into something else, or something like that.
Once I’ve got sales pending, I like to track those in their own stage, not just so I can pay attention to them, but it’s a way of tracking revenue for me. If you look at how the economics of a note investing business works, you’ve got regular income from your loans that are paying, and then you’ve got this lumpy gain on sale, either a sale of an REO or sale of a note. A gain on sale can vary wildly and they come at random times. I like to have these tracked a little bit separately, it’s just the way of me and my business. I can track what’s coming down the pipe, so having this in their own stage helps me a lot. If it’s a note that I’m reselling, for the most part these days, I’ve been listing them on Paperstac. Sometimes people contact me directly and I do private sales, but generally if you’re out shopping for notes and you look for anything that I might sell, just search for Fusion Notes on Paperstac. That’s where I’ve been putting most of my stuff.
Exiting A Note
Stage twelve is the final stage. This is where I put the deal when it’s been exited. This means that the note or property has been sold, and I received the proceeds from the sales. You might ask, “Dan, why don’t you just close it out of your CRM once this happens?” The reason is once I get the proceeds from sale, I’m not actually done. I don’t want to actually close the deal in my CRM until everything related to the deal is buttoned up. What happens a lot of times is I’ll get invoices after the sale. It could be invoices that hit from the loan servicer or taxes or sometimes vendors. I might have had a property manager helping with the REO. A lot of times too if I had to turn utilities on and put them in my name, they want a deposit, so I’m waiting for the utility deposit to come back, which could be several weeks. I also need to make sure the investors are paid out.
I leave the deal in the CRM in the stage for usually about two months or so before I actually close it out because it never fails. I’ve done this before where I closed out a deal in my CRM and in QuickBooks, and then I’ll get some random miscellaneous bill or I’ll get a check from the electric company. It’s a pain to go back and close it out. The way I handle this with investors too, since it takes a while to get everything closed out, I don’t want to hold their money for all of that time. At the same time, I don’t want to close it out and then I have to go back and ask them for $80 to pay a bill or something like that.
What I do is after I get the proceeds from sale, I pay the investor the bulk of whatever is owed to them, then I hold back a couple hundred dollars in case any of these incidentals come in. Once a certain amount of time has gone by, 6 or 8 weeks, when I’m confident that everything has come in, then I do the final close out and I send the investor back a couple hundred bucks or something at that point. That way, I’m not tying up the investor’s money needlessly for a long time, but I’m also not closing out prematurely and then creating all this extra churn in my system.
The other thing I do within my CRM at this stage, I talked about the automation that I have at the beginning when I board, I also have a deal exit automation because there’s a lot of other stuff that’s easy to forget to do after you close out a deal. For example, if you had forced–place insurance turned on, you have to cancel that policy. I added this one in when I forgot to turn FPI off on a deal and I realized that six months after I sold an REO, I was still carrying insurance for that. I have other reminders too. Usually, when I have an exit, I like to create a case study, put it on my website. I do some financial metric tracking and return analysis and things like that. The CRM automation is nice because once I move something to the stage, it kicks off all of those reminders that I’m not necessarily going to do the same day, that the proceeds come in.
Nothing good ever happens when a property is vacant. Click To TweetThose are your deal stages. This content is based off of a very tiny part of the Note Launchpad Online Training Course that’s coming out soon. That training course, which is not available yet, it’s been an interesting process putting this together. What I’ve tried to do in the launchpad is document everything in my business and gathered together all the templates, all the calculators, all the step-by-step, all the checklists, everything. When I originally got into this project, I thought I’d take me a couple of weeks to put everything together. I underestimated how much work it was going to take by a factor of three. This will be coming out hopefully. I’m not making any promises as far as dates. I am going to have a webinar and more of a dedicated podcast on this coming out sometime soon. We’ll leave that generic.
If you like these systems and you want to get all the nitty-gritty handled with a step-by-step process of how to do it, then this is something you might want to check out when the time comes. For now, those are the twelve stages of a note deal. I hope you enjoy that. I hope that helps you learn a little bit more on how to track your notes business. If you’re not at the point where you’re doing that yet, hopefully, that helps you understand and gives you a broad brush of some of the various stages and phases that these deals go through. I will see you next time. Thanks.
Important Links:
- Pipedrive
- Episode 39 – previous episode
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