BUYING NON PEFORMING LOANS AND MORTGAGES FROM GRANITE OR OTHER SELLERS
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July 17, 2017 Granite Pool discussion and Evaluation and Bidding Strategies
Steve Hodgdon: All right. So that makes me have to learn how to do this. Here we are again. Okay.
27 accounts. $2.7 million in UPB, $2.9 million in BPO. In the middle column, C and D, a combined big price of $1.6 million for a 58% price point compared to unpaid balance. These are non-performers. Dion adds in all the servicing fees that he can think of. We carry things to the very bitter end and we go over here on the right-hand side. And he said if you bought the whole file, you have a chance of making a 34% [inaudible 00:01:52]. Dion, I love you, but I’d kind of throw that number away because that’s later.
So you have two things. You have a pool bid sheet that we should probably start with. And we have a seller ask to bid sheet. So we have an asset level bid sheet. So there were two that have been asked to dive into and one is line 24. And the other is line two. So let’s jump in. Do you want to talk about the one in Texas? Line 24?
Dion DePaoli: Yeah. Yeah, okay. So let’s just start by looking at the data tab. So the data tab is what Granite’s supplied us with. It’s just pre-formatted into our template. Fort Worth, Texas, single-family residence, $93,000 BPO value as of February this year. Looks like we’re at about 90% LTV. They’re looking for a pretty high execution here at $60,000, which is about 65%.
Steve, it sound like you’re eating Cheetos. There you go. Is that your sound? No.
All right. So the loan was originally taken out in 2005. We have an unpaid principal balance of about $84,508. We’ve got a total legal balance of $119,188. Just to cover that for a second. So playing with the legal balance or playing with the total due, which a lot of sellers have recently started this trend of trying to get non-performing loan bids on total due. So what this total due, or what this total legal balance should represent, is the total amount of arrears and advances that are being submitted for the foreclosure process.
There are some times when it’s okay to play with this and there are some times when it probably doesn’t make sense. Generally speaking, if you do, you’re going to have to dig into all of those numbers and due diligence. So in other words, whatever that interest arrears is, whatever those advances are, you may have to defend those. And that’s where it becomes a little risky to play with those numbers. So in this particular case, we’re talking generically $40,000, $35,000 here in fees on top of this loan. And they’re looking for, as I mentioned, they’re looking for some pretty high execution on this. So we want to be a little careful with how much of that legal balance we try to hang our hat on. They’re looking for $60,000 here, which is like I said 65%, which is about 72% of the unpaid balance. So that’s a little high. That’s a little rich.
I’m going to go over to the comment portion of this particular loan. There’s not much there-
Dion DePaoli: So we’re over on … Oh that’s all the way over there. So we’re on the far right-hand-
Steve Hodgdon: Hang on, hang on. So we’re talking about this Texas loan?
Dion DePaoli: Yeah.
Steve Hodgdon: Okay.
Dion DePaoli: Texas loan. Line 24. We’re over on the far right-hand corner of the data tab. So there’s not a bunch of notes here. There’s simply the loan is being referred to foreclosure. So what we would take that as is the loan is just now starting in foreclosure. So let’s talk about that.
So this is one of the problems that we’ve had. We’ve broke down Granite’s pools before and we broke down … I think when we did a condo pool. That’s really ambiguous. What does that even mean? What does it mean to refer to foreclosure? What I would take that to mean is the file has not yet been sent to a foreclosing attorney. And if that’s the case, then what we could presume is, that if this is a primary residence we can’t issue a notice of default until that loan is at least 120 days past due. So we’re going to check the last payment due date. So this is pretty far out. 2011 was the last payment. That’s not exciting. Somebody’s been sleeping on this file for some reason.
And so we know that from a regulatory standpoint, we know that we can begin the process because they’re so far back. But now the file has to literally get put in a package and be shipped to the foreclosing attorney. And the foreclosing attorney’s going to then draft the demand notice or the notice of default. And once that notice of default gets drafted, then it has to be sent out to the borrower. They have to be given time to cure.
So literally where we’re at is we are at the very, very beginning of this process. And the state of Texas is an interesting beast when it comes to newbie folks. A lot of these trusteed states are. It’s that we’re often quoted these foreclosure timelines that are excessively quick. And those don’t necessarily include all of this preparatory time frame. And then that doesn’t include actually getting REO and marketing it and selling it.
So for this particular loan, we’ll take a look at our bid. I want you to go to the asset bid tab, and it should correlate to the same row number that we’re on. So we’re on 24. So we’re going to be on 24 here. And there’s the Texas asset. So we put this at 15 months. And our bid … Where’d it go? Our bid is about $51,575. So we’re about $8,000 or $9,000 shy of what they were looking for. And much of that has to do with the amount of time that we’ve plugged into this. So we’re saying, “We need about 15 months.” So instead of it being about 65 cents, we’d be looking for about 55 cents. And that’s because we’re saying, “Hey look, Granite. You haven’t really started this. There’s zero seasoning on this.”
And so what will literally happen here is we would have to buy the loan, it would have get boarded. So watch the time frame here so that everybody really understands: this is really how you have to start thinking about it. If we go bid this loan, and let’s just say that we bid and buy this loan and we have every intention of purchasing this by the end of the month. We’re going to have an interim servicing period for the month of August. So call that no progress. So all of August is now toast.
Now we’re into September. Now in September, you’re going to take your file, you’re going to ship it to your foreclosing attorney. Or maybe you’re going to engage this foreclosing attorney. You’re going to approve the notice of default. So notice of default goes out in September. Now you have to give them all of October to respond. They don’t respond, then you’re going to be drafting stuff in November. And once that is drafted in November, you’re going to be issuing it in December. Start to see how we just lose months at a time? And I think what happens is, Steve can relate to this: he’s got some assets, he’s been in collection. But I think a lot of the newer folks, when they’re hearing stories and they’re looking at these one-off asset potential trades is that nothing in this industry happens overnight. So I often say there’s 12 days a week for this industry. And it’s January, February, March, April, through December. And that’s usually how you gauge things.
Steve Hodgdon: Absolutely.
Dion DePaoli: Yeah, there’s not four weeks, none of that stuff really works out in your favor. Plan on stuff taking months. And so what we’re saying is it’s going to take 15 months. And that’s going to include us starting from the very beginning, taking it through foreclosure, and then actually marketing that REO through sale. And so generally speaking, we have about 120 days on market to realize what the seller’s BPO is. So we’re saying, it’s going to be about a 12-month cycle to get through the foreclosure process.
Now look, if that happens a little bit quicker, great. Our bid at this point in time would protect us from that. If it happens slower, then we’re going to shell out a little bit more money than probably what we have already.
Steve Hodgdon: And the way you build this is you build your pro-forma based on everything taking too long and costing too much.
Dion DePaoli: Yeah.
Steve Hodgdon: There are all the other exits that could come up. And they could pay, they could sell, they could give you a quick claim, they could walk. There’s all kinds of things. But likely in, I don’t know, 80% plus of cases, you’re going to have to fight to the bitter end.
Dion DePaoli: Yes. Well you know this is power of sale here. So I think one of the interesting takeaways is that six years ago, this guy defaulted. Let that sink in. Six years ago. So the state of Texas, fast foreclosure, if you will even for all intents and purposes, and all of the owners of this loan have not moved this through foreclosure. And you’ve got to scratch your head and say why? I don’t know what the answer is. We can’t necessarily glean what that answer is. But I would tell you that six years sitting around, waiting for this guy to catch up is a little concerning.
So I’m going to switch views to our system here. And actually I need to get them all over here a little bit.
Steve Hodgdon: And after you give a little of what we’re doing internally with this, I want to take the screen back and bounce through websites to just try to say if you got this thing for $53,000, would you want it? So you’re doing the numbers, and I want to try to look at it from the asset side.
Dion DePaoli: Yeah, okay.
So let’s just look at the original information they shared with us. So we had an original out-balance that’s just shy of $75,000. That kind of tells me that fundamentally, it was probably a refinance back when. 4.75% in 2005, probably not the right rate. So that’s probably a modification somewhere. I’ll tell you that looking at the original asset graph, that’s what a modification looks like. So we’ve got something that happened with-
Steve Hodgdon: I can’t see that.
Dion DePaoli: Can you see that?
Steve Hodgdon: No, I’m still on the Excel page of the list.
Dion DePaoli: Oh do I have to change it like that?
Steve Hodgdon: Yeah, you’ve got to change your screen share.
Dion DePaoli: Oh okay. Does that work?
Steve Hodgdon: Yeah, yeah, yeah.
Dion DePaoli: Does it follow it if I … Can you see me change screens?
Steve Hodgdon: Yes.
Dion DePaoli: Okay, then I have to do it like that. Okay.
All right. So …
Steve Hodgdon: For the new folks, the blue line is …
Dion DePaoli: It’s the principal.
Steve Hodgdon: Okay. And the-
Dion DePaoli: The red line is the interest.
Steve Hodgdon: The red line is interest.
Dion DePaoli: Here’s the loan. And the 0.6-
Steve Hodgdon: That’s where we are today.
Dion DePaoli: This is where we area in time. Right?
Steve Hodgdon: Mm-hmm (affirmative).
Dion DePaoli: This is where we are in time. And this is where we are in balance.
Steve Hodgdon: And where should we be?
Dion DePaoli: We should be … I’ve got to get back to there. Sorry. That’s never happened before. Hold on. We would expect to be down … The first problem is this is not the original loan. We can tell that by this distortion down here. This is a balloon. We have interest kind of just cutting off, so something’s been treated in this loan. We should be down here according to time.
I did it again, damn it.
Steve Hodgdon: Okay. Well you made my point, which was what a marvelous quick picture to tell you what have I got? I’ve got something wrong.
Dion DePaoli: Right.
Steve Hodgdon: That’s not been discovered yet.
Dion DePaoli: We should have a balance of about $44,610. And we should be 146 months into term. And we’re saying here that’s there 273 months of total term left. So we should be two thirds of the way through this and obviously we’re not. We’re at $84,000 so the distance here is $40,000. It’s $40,000 behind in what’s going on. And what I was pointing to earlier was, so we had an original loan amount of $75,000. That’s $74,825. Not really a number you’d used to buy a house. So it looks more like a refinance number to me. Original interest rate in 2005, that vintage, that year, which we often call vintage, rates weren’t 4.75%. They were a little higher than that.
So this looks like a modification. I expect to see some modification information. We weren’t given any modification information here so we’re gleaning that now. So we’re looking at this saying this loan is modified. Whether that, and I guess the other way to look at that too is in 2005, 2041 isn’t a typical maturity term. And that’s why you get this balloon-looking … This is what a balloon would look like. You get this little flat-line at the end of the loan.
So I think the takeaway there is that there’s something, something has held this up. For some reason, this hasn’t been dealt with for one reason or the other. So let me let you take that back, Steve. And we can take a peek at, so we can keep this going, so we can take a peek at some of the stuff online that we want to look at. And so on and so forth. So go for it.
Steve Hodgdon: All right. Now go with, now I’m going to show a screen. All right, what am I doing? I want to get that out of the way. Dion, would you help me and read me the address?
Dion DePaoli: Yeah. I just have to figure out how to do that now once I …
Steve Hodgdon: Do you want me to go find it? I can go find it.
Dion DePaoli: No. I got it, I got it.
Steve Hodgdon: All right.
Dion DePaoli: So it’s 3204 Runnels, R-U-N-N-E-L-S, just like it sounds.
Steve Hodgdon: Two L’s?
Dion DePaoli: Yeah. Two N’s. Runnels Street, yeah. Fort Worth, Texas.
Steve Hodgdon: This is Due Diligence Pro from the kids over at NoteMBA. It was $97 and all it does is just pop up a bunch of websites right away for you. So throw Zillow up there. It says its estimate is $90,000. Bring this up tax record. And if they have a link to the tax site … You have to do a property switch. Property [inaudible 00:20:42]. The appraisal record for that time for right now says, I’d say a $70,000 appraisal. History of tax here. All right. This may not be the page to find the past few taxes. All right. Anyway.
Eppraisal says it’s worth $70,000. So they pull Zillow, they thought it was worth $90,000. It’s in a neighborhood, so I like that. This is it. So it’s in poor shape as of 2014, but the grass is cut. Let’s walk down the street. The street’s decently paved. Neighborhood’s clean. Similar to other houses in the neighborhood. In my view it’s the ugliest house on the block, so that makes me wonder about the BPO.
Dion DePaoli: Yeah, that picture looks a little rough.
Steve Hodgdon: Yeah. Let’s see. They tell you realty tract. It gives you foreclosures in this zip code. You can look to see if this address is there. It’s not. So you’re seeing stuff in that zip code for $4,000 to $70,000. Here’s a $50,000.
Dion DePaoli: All right. So we’ve got an issue with aligning to that BPO value because there’s a strong chance it’s going to fade out. What else should we be looking at? What else could we be looking at?
Steve Hodgdon: I look to look at Trulia. I’ve got too many things on my screen here. Get down there, see what happens. I like Trulia as opposed to Zillow because I get this crime indicator and it tells me lowest crime relative to the rest of the county. I just don’t want to be in those kinds of places. You quickly go to Zillow and from here you could go … I want to go down here. I don’t want to scroll too fast and make people sea-sick. And there’s no historical transaction data that Zillow is able to grab. But you would look for recently sold. We’ve got one. I got nothing in “For sale”. So I’m not seeing a lot of activity.
We were at 3204 Runnels. Here’s 3100 Runnels. Corner lot, a block away. Three bed, two bath. The estimate is $67,000 with a sold price right here of $48,000 a year ago.
Dion DePaoli: Okay. So let’s top this bad boy off and maybe move on to the next one. So I think we’ve gleaned what we can glean from the data that the seller’s provided us. We’ve gleaned what we can glean from some online research. It looks a little bit … If that’s an $80,000 neighborhood, it looks like it’s going to need $10,000 to $20,000 worth of work. Probably closer to $20,000. And bear in mind again, when we judge those things it doesn’t mean that we as the mortgagee would run out and capitalize those repairs. It just means that we would probably have to discount from the value in order for somebody to be able to have enough room to step in and do those repairs.
So where we were to begin with was what? I think, $80,000 down. Let’s see. What is that? $24,000?
Steve Hodgdon: I stopped sharing my screen. So they’re looking at you.
Dion DePaoli: I’ll re-share. Desktop, there we go.
So I went to … I don’t know if everybody has this, but this was the work-up, if you don’t have this just let us know. We can flip it over to you. So the last tab was just a comparison. It’s just all the loan data lined up. It was just easier for me to look at it. So here’s the loan. The asking price from Granite was $63,092. And we came in at $55,458. So we’re about $8,800 off. That’s pushing about 15%.
The problem that we have now is this is predicated to some degree on there being some BPO value left, that the equity in this asset is supposed to be there. So this would be a bid that after glancing at some of that information online for the real property, I would put them on notice that this is probably going to fade. This bid probably won’t survive. This is a bid that I would venture to say that this thing is probably closer to $60,000. And if we were to update that in our system, which I can do here in a couple of moments, then we would actually lose some money here. So lets just assume that that’s now $60,000. And boom, the math is done. And so now we’re talking $29,000.
Now notice our system doesn’t change the timeline, it just changes the value. So we’d be pushing closer to 50 cents of this BPO value if that was the case. So if there’s somebody out there that’s interested in this asset … Because I don’t think … Look just because there’s difficulties, there’s a butt for every seat right. So if there’s somebody out there and you’re interested in this asset, what I would do based on this information is I would pick up the phone, find a local realtor, get eyes on this thing, get a good idea how dilapidated it is.
One of the things I was looking at while Steve was speaking was what they gave us as occupancy. And they’re saying it’s occupied. I have a hard time believing that with the picture from 2014. So the picture from three years ago. So I’d be curious if it is occupied or if it’s not. And if it’s not then I think we have a little bit better support for what our interpreted value is. But get some eyes on it. Get an email from whoever it is you get to go look.
And when I say someone, I mean an agent. If you have a brother, sister, uncle in the area and they go look at it that’s not going to help support the argument. And we have a good relationship with Granite, I can have the conversation and say, “Look your BPO, it’s going to fade. It’s off and here’s the supporting proof that we have. Here’s an email from a local agent. Based on that, here’s an updated bid. We would use that new BPO number so that the bid doesn’t fade.” So that’s how you would do that. And that’s the right way to do that with a seller so that they have a good idea of where that thing’s going to end up. And look, this thing happens. It’s not malicious, it’s not whatever. They’re buying a lot of loans and sometimes you get some stuff that maybe it’s not valued right. It is what it is.
All right. So just for the record Steve, are they allowed to ask questions anywhere?
Steve Hodgdon: Yes. There’s a chat.
Dion DePaoli: Okay.
Steve Hodgdon: And so if you want to jump into the chat, now’s the time.
Dion DePaoli: Does anybody have any questions while we’re here?
Steve Hodgdon: Also, I believe you can unmute and just ask.
Dion DePaoli: Hello. Can you see my hello?
Steve Hodgdon: Yes.
Dion DePaoli: So questions: going once …
Bruce: Yeah, Dion can you hear me now? This is Bruce [inaudible 00:31:01].
Dion DePaoli: Hey Bruce.
Bruce: Dion, is there any statute of limitations on these loans in terms of if you wait too long that you cannot collect on them?
Dion DePaoli: There are statute of limitations that you do need to be concerned about. And those range from 5 to 10 to not present. And so a lot of that argument, I’ll give you a great example: Florida it became a very, very big contested concern. So in the state of Florida, borrowers were using statute of limitations as an affirmative defense. And the counterargument there was every new default date is a new set of time. So in other words, as long as you defaulted 150 days ago, I can’t possibly run out of time to foreclose on you. And so it goes back and forth, and generally what we see is as long as there is some form of continuity of collection. And I’ve said that in some of my posts and stuff before. As long as you are attempting to continually collect the debt and that collection attempt doesn’t go stale, then you should be able to not have to … You shouldn’t have as much to worry about in terms of running the statute of limitations.
It’s when you leave the borrower alone for 5 years, 7 years, 10 years, whatever the state-specific statute is that you’re going to give them more firepower in that defense. And then depending on the state, you’re also predicating on whether or not … If it’s judicial, you’re going to file a complaint. The borrower’s going to file an answer and maybe create a counter-claim in that answer saying you’ve ran your statute of limitations and so on and so forth. So yes, you should be concerned about it.
When you get into due diligence in a situation where Bruce is obviously asking because it’s six years old, right? In a situation like this, we would expect to see some form of continuity of collection through servicing notes, mortgage coupons being sent, default notices being sent, so on and so forth. If we got into this file and we didn’t see any of that from the current previous servicer, that would be a concern. And we generally tend to see those go stale in second lien files where they’re a little bit more sanitized. That was a great question. Any other questions? All right good.
And I guess just one more follow-on to that. If there was, if this did have a … If this was approaching running at statute of limitations, then this look a little bit more like Steve’s old world where you’d want to trade this as an unsecured, you’d really start to zero it down. And that doesn’t mean the seller’s going to sell it to you at that price, but that’s probably it’s value in regards to its risk.
Steve Hodgdon: And in terms of statute, again it’s state by state. But it’s also the difference of you’re trying to secure the property and not demand payment at some point. At some point you don’t even bother asking for money anymore, you just proceed.
Dion DePaoli: Yeah. All right. What’s file number two?
Steve Hodgdon: It was the first line. It was the one in Mobile, Alabama.
Dion DePaoli: Mobile, Alabama. This place haunts me. We used to own a subdivision there. It’s not anything to brag about. Bless your heart if you’re from Mobile though. Nothing against you.
All right I was just going to start another data tab. So again, this is the raw data that they issued us. 2605 Ward Road, Mobile, Alabama. We’ve got a single-family residence. Broker-price opinion: $135,900 as of February. We’ve got a LTV of 115 cents. And they’re looking for about $92,000, which is 68% on their BPO value. 59% on their UPB. We’ll come back to what we bid here in a minute. Original note was $161,994. Again, that’s a little odd. Looks like a refinance. That rate is in the church. We’ll come back to that. We’ll look at our system here in a second.
We’ve got what looks like a typical term, all right, 30 years. So it’s looking like … Based on what we’re glancing at right there I would expect to see this loan look like a typical graphed out loan and there was no modification in the recent past. So we’ve got an unpaid balance of $156,000. So they paid all of $5,000. We’ve got a legal balance of 2.-
Steve Hodgdon: Nine years.
Dion DePaoli: Yeah. Right. We’ve got a total legal balance of $221,000, call it. And here we are back with payments from 2011. I don’t often spend a lot of time glancing that these two columns other than on a loan by loan basis, but this seems to be a growing trend here, right? We’ve got most of these are ’11’s and ’12’s. So there’s a little staleness in some of these collections. They say they’re owner-occupied and I’m going to go ahead and switch to our view right now because it’s just easier for me to play with.
All right. So we reviewed most of that. And this is what we would expect the loan to look like. So we’re $156,000 and we should be $136,000 or about $20,000 behind. Okay. So we bid this out and there’s a couple things here. So as everybody knows, if you don’t, we always bid our non-performers to 20% IRR. I added some extra marketing time here because Mobile, Alabama.
And this is, if we believe this BPO value to be true: $136,000, it’s not like this is lower bandwidth. This is not a bad value for a southern state, but the concern I would still have is that we’re going to need some additional absorption time. And with that absorption time, you’re going to be spending money on taxes, insurance … You know, just because you’re not necessarily capitalizing taxes, you’re still going to have them come out of your end-game. You’re going to be capitalizing insurance because you’ll have your vacant hazard insurance on the REO that you need to maintain. Maybe some lawn-mowing, some property preservation stuff, so on and so forth.
Anyways, so you’re going to have some expenses. And I’d rather us figure that there’s a little bit longer of a marketing time. And so I don’t spend a lot of time explaining these graphs, but this green is the foreclosure bid. So it’s flat-lined here because I’m saying you literally couldn’t do anything until you got to this point at which point in time, then you’re going to market it to here. So in other words, it’s impossible to get a fore-closed asset until it’s foreclosed. You can’t sell it, so it’s foreclosed. That would be some other strategy. So that’s why it’s flat-lined. This is not a flat-line because it’s a different strategy. And that’s as much as we need to go into that.
So I think that was pretty straightforward. That was pretty quick. Do you want to take a glance at a new line, see what you think? I can’t hear you.
Steve Hodgdon: Hang up your screen share. Oh you did. All right. I should have gotten this done ahead of time. Sorry, folks.
Those of you that are coming to the meetup when Dion comes to Los Angeles on July 29th, please please please don’t sit in silence while we’re talking.
2605 Ward Road, Mobile, Alabama. All right. This is a picture of the house in 2013. So you really don’t know what you’ve got. That’s a large lot. Nice broad street. Like kind, so I’m getting a comp. It should be fairly trustworthy. I’m imagining that that’s a faded roof so it’s not going to be in … It typically will, almost always the home is in the same shape as the mortgage. So Eppraisal thought it was worth $110,000. They say Zillow says $138,000. Homesnap gives you a value of $143,000. So it’s 1972 construction, 1884 feet. Last sale price in 2010: $63,000. So that was in the crash. It’s not in foreclosure.
Dion DePaoli: So I mean, let’s pause there for a sec. That’s worth talking about. Look it’s Mobile, Alabama. Do we really believe that it doubled in value since 2010? I mean that’s actually more than doubled in value, so it’s 1 point whatever. 1.1, 1.2.
Steve Hodgdon: Thank you, thank you. I should have teed it up a little higher for you. There’s $63,000 to $143,000. I can’t jump from $63,000 to $117,000 unless the people that bought it in 2010 did a complete re-model and et cetera, et cetera. But again my picture was 2013. So anyway. It’s a nice low-crime area.
Dion DePaoli: I mean, asset-wise, the outside of it doesn’t look like it’s in bad shape. And I’d be inclined to think that having been in Mobile, Alabama and having had some Alabama loans, I’d be inclined to think and I would expect to see a little bit more of a $60,000-$80,000-$80,000 valuation in that area than I would north of $120,000.
Steve Hodgdon: So here’s the Zillow public record. This house is traded for $90,000.
Dion DePaoli: So it was $90,000 in ’04. Six years later … Is this the same subject? I was looking at something else.
Steve Hodgdon: Yes, it’s the same house
Dion DePaoli: So it was $95,000 in ’04. Six years later it dropped $30,000 because of the market, which is what we would expect. But we don’t expect that to be a two times multiple now. So maybe it’s $80,000.
Steve Hodgdon: So that’s right. So I’m thinking all fixed up and pretty, maybe I’m doing this but I’m not all fixed up and pretty. I want to look at sales in the neighborhood. A piece of land paid for $500. I like that. But I see $120,000’s, $104,000. Either side, $104,000, $107,000.
Steve Hodgdon: And that’s … The issue I have with BPO’s is it’s typically a retail, real estate agent quick opinion based on he or she is going to pull on a quick glance at the MLS and those are going to be FHA borrowers. I’d love to get BPO’s that were strictly cash transactions.
Dion DePaoli: So let me address that for a second because there’s a lot of BPO misunderstandings. When you order a BPO, you can order a BPO that uses an agent that goes out and does the actual grinding work. They go to the property, take pictures. They go to the comparables in sales and listings and they take pictures. And then they go back to their office and they sit in their MLS program and they bring up those sales and they comp them out in a quick and easy comp grid. And they do human-level work. And those will tend to be a little bit more accurate in my opinion.
So when we get … It’s no secret, we use Clear Capital as our vendor. And Clear Capital: that’s the way those BPO’s are made. And there’s a reason why we get those. It’s because there’s human interaction. So the BPO agent is involved, does the work, and then that report goes up into quality control at Clear Capital. And they review it.
Now another way to get a BPO is through what’s called AVM, which sometimes they sell them just as AVM’s. But AVM is an automated value model and that is a logarithm that simply does some math based on the address input. And those are often cheaper than full-fledged BPO’s. So an exterior inspection only is cheaper than an interior. And then an AVM is often cheaper than an exterior inspection only. And so one of the things that you have to be concerned about is that everybody calls a valuation a BPO. It’s like Kleenex at that point. You’re talking bad about a BPO, but a real BPO should have … I mean it’s a broker price opinion, it’s not a robot price opinion is probably the right way to say that, right.
Steve Hodgdon: It’s also not an appraisal.
Dion DePaoli: No, true. But opinions are opinions. So I would argue against that too.
Steve Hodgdon: Sure.
Dion DePaoli: And the difference there with the opinion is often times when you start looking for a BPO to an appraisal is the appraiser had interior access. They had interior access, so they were capable of making more judgements. But my point there is many sellers, especially if the intention is to liquidate the pool, many sellers will pursue the lesser expensive version of the BPO, AVM as opposed to getting the more expensive one. I don’t know if we have that here. Sometimes agents can just do bad work. But I just want to deflect one off the chin for the real estate agents that are there. I’m also a licensed broker. I just want to deflect one off the chin for them. Because I’d like to say that I can evaluate real property pretty well, and sometimes it’s the robot not the human. So anyways-
Steve Hodgdon: I’ve left the screen up because I want to tell you what I do. And so this is the comp that I found that is the cheap one down the street. This is the one that sold a year and a half ago for $59,000. When I’m looking for a real estate agent to talk to, this is the guy I want to talk to.
Dion DePaoli: Yeah.
Steve Hodgdon: This was sold in ’05 at the peak at $121,000 for [inaudible 00:50:23]. The bank took it back, they tried to sell it at $88,000 and they finally dumped it. It sat around for a long time, but they dumped it for $59,000. So I’d be calling Jimmy to tell him if I buy this house around the corner, what are you going to do for me. Because he’s active in that neighborhood and he’s going to know better than me just going to Google.
Dion DePaoli: Yeah. Okay. So now let’s … We’ve probably got to speed this up a little bit.
Steve Hodgdon: Yes we do. Yes we do.
Dion DePaoli: So moral of the story is we’re looking through this, we’re having some discrepancies, there’s some evaluation issues that we’re bumping into. In trading terms, the concern there is that bids will fade in due diligence. And this is one of the things that as a seller, you’d want to protect yourself against. In other words, you’re putting out information, people are relying on that information. As due diligence carries itself through, and that information proves itself to be incorrect, there’s going to be price adjustments from the indicative bid to the final pricing. And that’s a fade because … So for instance if we said, “Hey you said this was worth $135,000 and it’s coming back at $60,000.” There’s going to be a significant price change there.
And what I think that entails is having a conversation with the seller and figuring out a way to protect everybody. You want to be able to protect them, you want to be able to protect yourself. Because it doesn’t do anybody any good to go into due diligence, spend money and find out that things aren’t going to survive and you’re going to have a lousy pull-through ratio on whatever the trade is.
So I think … So based on that, and I see we’ve got a question. I think there’s some conversations that I can go back and have with Chaz over a couple of these concerns and figure out how to best address some of those. And it isn’t, just for everybody to understand that, it isn’t we just go and we strong-arm the idea that, “Hey you said it was $135,000. We say it’s $60,000.” That’s of no consequence. Really, at the end of the day it’s: does he have any room on his price? Because if he paid $80,000 for it, $90,000 for it, if we say it’s $60,000 there’s just nothing to do. It’s over. Conversation’s done. We’re going to have to move on.
So when you have these discussions if you don’t have guys like us helping you out, don’t waste your time and don’t waste your energy in talking about things that aren’t going to matter. But we will address that. I want to see how I can get to this question. Questions. Oh, that was you.
Steve Hodgdon: That was me.
Dion DePaoli: Okay so while that’s happening, somebody can just chime in. Because what I want to do is I want to talk a little bit more about the whole pool for a minute so that we kind of cover that. Because I think there’s still some opportunity in here because we found a couple ones that we have to be concerned … I think in general there’s some concerns about the pool. I’d also, just real quick, I know that this pool has been out for a minute. And I know a couple of the folks that we have online have seen it, played with it, looked at it, so on and so forth. You touched it before we did.
It’s interesting that for all intents and purposes, it doesn’t look like a lot of assets have traded. What’s been the barrier? Why didn’t you trade? You know, you probably touched it before we ever came into contact with it. Was it because they were running you through a fire drill? Or I know I’ve chatted with one or two of you guys on it, but just curious why like what’s been going on here? Did you feel like some of it was aggressive in terms of pricing? Or what? It would just be interesting feedback.
That said, what I want to point out here are just some of the assets that I do think have some potential to do well. So the easy ones to identify, and again I’m on the sell or ask to bid, so these black numbers are where I’m saying we would potentially easily hit their asking price. So I think they’re in the church. So that’s the one in Jacksonville on line 13. And then we have this condo in Ohio on line 21. So I think those are a couple easy, breezy assets.
There was another one down here. I’ve got to look at my other page, hold on. Yeah, the other that I had pointed out was this Virginia asset. So we can kind of say it like this. I think there is some value in this cluster of Virginia assets. So I’d take a glance at those. I think there’s some value in these Florida assets. I would take a look at those. And I say that because these innately priced out well. So if you look at our pricing, we’re off by less than two points. So that’s nothing to make up. That’s $1,200. Anywhere that you see us call plus or minus 10 cents is probably worth looking, depending on how big the asset. If it’s a big asset, then obviously 10 cents is a lot of money but most of these are smaller assets. So I’d take a look at those because a month here, a month there managing something right really makes up that gap.
Now one other asset that I just wanted to bring forward because it was an outlier to the pool was this asset here, which is a … So it’s on line 17. This is an active Chapter 13 bankruptcy. The TOC, transfer of claim, already filed on behalf of Granite. Plan and confirm trustee to pay pre-petition arrear and post-petition payments. So what we needed to understand there was what was going to get paid? So what we have in this loan … The nice part is we have a trustee that’s going to make payments now.
But what we don’t fully understand is what does that look like in regards to this PNI? And when I originally landed the inquiry, I got some information that implied that the trustee was going to make payments and the borrower was going to be responsible for payments on top. So in other words, trustee makes pre-petition payments and the borrower makes post-petition payments.
We’re not getting that unfortunately anymore. I did run the inquiry for the plan. They did send me the info over. I’ll just show it to you, here it is. I’m not going to go through the whole thing right this second. But there isn’t much increase in this 542. I was doing the math earlier. There isn’t any increase in this 542. So the unfortunate part about this is when we bid this at, when we bid this to a 12% IRR I was really sort of incubating this a little bit. The only benefit that we would have here, and I didn’t have enough time to peel through the plan, is that this may not go to term. So we may get a lesser term and that may boost this bid. But-
Steve Hodgdon: Change your screen. You’re not showing me what you’re looking at. So it’s how do you improve the yield? And you improve the yield, you lower the price. Yeah, there you go. You lower the price a little bit. But you said there was the new bankruptcy plan where the note said that there was going to be money coming for the continuing mortgage outside the bankruptcy. Now you’re saying that it’s not. So you’ve got to-
Dion DePaoli: Fill it up.
Steve Hodgdon: Before the month is all you’ve got.
Dion DePaoli: Yeah, we’re not seeing that. I didn’t have time to read through the whole bankruptcy plan that they sent over from-
Steve Hodgdon: But they’re not cramming down the arrears. They’re not lowering interest rates.
Dion DePaoli: No, but you’re essentially getting what the PNI is supposed to be. They adjusted the escrow payments. So what I was pointing to earlier was whether or not there was some maturity cram-down, which isn’t unusual in a loan. So that would be the next thing I’d go and peel through. I just didn’t have enough time to get to it while we were talking.
But if they did, you might realize a little bit better of a yield. However, you also may not. And the reason that would happen is the trustee should be sitting on a couple bucks. That’s going to take us from 280 to less than 280. So the problem with this was then when I kind of glanced at this, and I think I mentioned this to another couple folks as well, is when we originally glanced at this … On line 17. When I originally glanced at this, they were looking for about $56,000, we were about $45,000 or $12,000 off. My knee-jerk reaction was that we’d be able to make up that gap because there would be some excess cash and a little bit better cash flow coming from the bankruptcy plan.
So if the bankruptcy trustee’s going to give you a couple hundred bucks a month and the borrower still has to pay 562, it’s not a bad day. Unfortunately, that’s not the case once we started to dig in. And so in this particular case, I would probably go back, just so that everybody understands this, I’d go back and increase this because 12% was me anticipating it. And I probably pushed this thing back up to 15, 16, which is going to drop this bid even lower, which is probably going to make it less acceptable. So I just wanted to follow up on that.
So look from my side, in closing, I am anticipating having a conversation with them today this afternoon. It’s about noon my time. So call in the next two hours, three hours. There’s been a couple folks that I’ve chatted with that want to deliver some bids. I’ll be reaching out to you individually to update any of that information. If you have some interest in delivering a bid on anything that we’ve talked about, if you want to talk in detail about any of these assets, email me immediately and we’ll have that conversation this afternoon.
The point here is to be able to aggregate these bids together and get some bulk-level pricing. But obviously, we’ve identified some concerns in the trade that we want to go have a mature conversation with the seller on. And look, some of that may be a barrier to trade it all. We don’t know. But I think that with the relationship that we have with them, I’d get to the bottom of that, we can put our best foot forward and create trade parameters that are mutually beneficial for everybody that protect everybody so that we’re not just running off spending money on due diligence. And they’re not taking loans off the market that have a low likelihood of being sold. So what we want to offer them is good, solid counterparty mentality. And I think that’s what we’re doing.
So the call is at somewhere around 3:30 pm, 4:00 pm my time. So about three and a half, four hours from now. I plan to be on the phone with them. So if you’d like to get in on this trade, we’d like to hear from you immediately. You can reach me at dion, D-I-O-N, at sdxs.us. Just so you can see that. There you go. firstname.lastname@example.org.
And then you obviously know Steve’s email if you have to rely on that because he invited you into the … What did you do there?
And so that’s all I’ve got. What do you got, Steve?
Steve Hodgdon: Let’s see. Chad asked a question: “Do we trust Granite? It seems like they’re inflating.” Well, let’s take that from a different perspective. It’s a marketplace that is not particularly transparent. It’s got a lot of [inaudible 01:04:55] activity to it. And you can go to 20 Ford dealers and get 20 different prices on your usual Explorer and then it becomes less to do … I trust Granite in that they’re experienced, professional counterparties who stand behind what they sell. Their job is to sell as at high a price as they can. Our job is to buy for as low a price as we can. At some point, you get too far apart in the bid ask that you know you’re not going to close a deal. But I’ve seen, again we’ve talked about showing an asset that was the BPO and the neighborhood didn’t match. So you’ve got to go do your own homework.
So I wouldn’t worry about … I’m more interested in buying stuff from people that I can trust that they can produce. And they’re more interested in working with people that are going to pay. Is that about right?
Dion DePaoli: I’m going to add a different angle to that. Do I trust Granite? Yes. I trust Granite. I’ve known Chaz for a very, very, very long time. It’s just for the record, when Granite was first starting out, SDXS was one of the first consultants they ever spoke to. So I trust him an awful lot.
Now the second part of that question is really where that issue is. Is Granite less trustworthy because they have inaccurate reports? No. They just have bum reports. It is what it is. Did they choose to buy those reports? Yeah. Do we think they did those maliciously? I don’t think so because I would you tell you what: Granite is an investor just like you guys are investors, just like we’re investors. So they put money out. So there’s money sitting in these assets, and you better bet your bottom dollar that they need to recover that. And I think that’s the difference. When I talk about being able to have that level of a conversation with this type of a counterparty, that’s the real benefit.
When you’re a newbie or you haven’t been around a lot, you don’t have those relationships developed, we call it negotiated trading. When you can’t have these solid-level friendship conversations with these counterparties, you stand to be shuffled into the line and pushed through the register as fast as possible because who you’re talking to is just a trader. Somebody probably sitting at their desk who’s taking orders from somebody up the food chain there. And I could see how that could be frustrating.
But when you get into a little bit better relationship trading, you want to have these conversations because everybody wants to get in a trade that is successful. And nobody wants to buy assets that they’re going to lose money on. Are those unscrupulous institutions out there or players out there? Yeah, but those folks tend to not … So this would be how I say to differentiate those types of people. Those folks tend to not take a position. So those folks are trying to broker you something that they don’t have control of, they don’t have knowledge of, they haven’t done work on.
Granite owns these loans. They’ve put capital into these loans. So that speaks to their intent to buy and sell good stuff. So yeah, I think we can trust them. And I think we just have to go and have an honest conversation. Steve, you and may look at it and we have, we’ve done it before: we’ve looked at assets and we’ve said, “Ah you think it’s X, I think it’s Y.” What does that matter? Again I always bring that point up. “You think it’s X, we think it’s Y. None of that matters, what are we going to pay for it?” And that’s what matters.
Don’t waste your energy on things that aren’t going to take you to the finish line. And so the real conversation with Granite is, “Here’s some assets. We think we could put some bids on them, but our bids are not going to be close to your ask because we’ve got some valuation issues. And I’d rather be up front with you right now then get into a trade and fade those.” That doesn’t do anybody any good. And what he can do is go look at his book and figure out if that’s going to make sense. And that’s what we want him to do. We want him to look at his book and say, “Hey, can I figure out a way to make this make sense?” If they’re right and I’m wrong, I need to get out of these and I need to adjust my book. And that’s the real value in that kind of a relationship. But it was a great question, Chad.
Any other questions? Bueller? All right.
Steve Hodgdon: All right. So I think we’re good. This will get recorded and put up for folks to look at later. Again, this is a trade that’s in the market right now. And if we want in and we want Dion’s help, we should ask for it straight away. Looking forward to seeing those of you that are going to be with us on the 29th. And …
Dion DePaoli: Yeah, so real quick on that too. I’m just full of extra commentaries. So if we do pick off some loans and you’re in the area, we’ll try to work on those loans because we should be at the end of due diligence or thereabouts by the time I get there. If not, I’m going to try to get another active loan pool to dig into. So we’ll look at some active loans from a management standpoint that we have servicing history on. But we’ll also take a look at some new loans for bidding so that this is a fun-filled workshop full of a bunch of work. Believe me when I tell you I could be through a loan pool in 20, 30 minutes. So we will have plenty of time to get some stuff done. So come after you eat breakfast and be ready for a day of work. All right?
Steve Hodgdon: Absolutely right.
Bruce: Hey Dion, Steve. I had a quick question.
Dion DePaoli: Sure.
Bruce: So the loan pool is as it is, meaning that this thing’s been out there for over three weeks now and as you’ve said nobody’s bid on them or there’s been only a few that have been picked off. So what is the benefit to, or is there a benefit, instead of rushing to throw up numbers here to them, what’s the problem with waiting? Would we get better pricing the longer we wait? If we don’t do something today, how do you envision this and how do you view dealing with them on these assets?
Dion DePaoli: Yeah, I’m glad you asked that that way. So I’m going to defer that into what I called … I have a phrase for everything. Sooner or later, you’ll all find out. So I call this the eighth-grade girlfriend problem. It’s like who kissed it first, who touched her first, does she have cooties now, or whatever.
At the end of the day, it is what it is. It’s been out in the market, it hasn’t had a lot of action. There’s probably a couple of reasons why: a) pricing’s a little aggressive, b) who they’ve shopped it to hasn’t felt comfortable because pricing’s aggressive and they’ve been comfortable.
It’s not this thing where it’s like real property and I think that’s where the idea of the way you’re going to deal with this deals a little bit more like something in MLS or out in Joe Public real property sale. You want to get on the phone. You say, “Hey look, there’s some assets in here.” You know, like I said, there’s a butt for every seat. You don’t have to get irritated. There’s 30 some-odd loans in here. We just need to figure out what the right price is. The right price is the price that the asset can be purchased and dispositioned, and still make a return where we take on some relative risk and we relieve them of their relative risk for a decent price. And that’s the approach.
The approach is we’re not setting out to starve them because they made some bad decisions if we think that. If we think they bought these loans and they overpaid or whatever, we’re not going to vulture-bid them in that sense. But we want to do is we want to create a mutually beneficial trade. That’s the way you get trades done. And that’s why trades are hard work. I think a lot of times you lose that in some of the public discussions in what it means to buy a loan.
Loan trading’s hard. It’s difficult because you’re often times negotiating a loss with somebody. In this particular idea, this genre of velocity trading has evolved where investment firms go out and they buy these loan pools and they downstream trade them. And obviously their expectation is they’re going to make a couple bucks. We don’t necessarily know how much a couple bucks is in that sense. Is it a point? 10 points? 20 points? Whatever. But they can make mistakes and they can lose money too.
Often times, velocity trading, in my experience has not been overly successful. But I think the approach here is we call a spade a spade. I have a brutal brain of honesty when it comes to dealing with the folks that I play with in this space. And I think they appreciate me for that. Loan pool’s been out there. We’ve looked at it where we’re a little white on where their pricing was. So I already had that discussion with them. And as we kind of did some scrubbing, as we just did today, we have some concerns about collateral value fading. That’s the conversation.
So now the next half of that conversation is: “Look you still need to get rid of these. How do I help you get rid of these? How do I put together parameters to trade that protect me and protect you from getting in, spending money, wasting time, and getting nothing done?” And so those are the caveats to structuring a trade. And so for instance, if we look at that Texas asset. Like I said, the way to approach that would be if you have some interest in that, get on the phone, get an agent. That’s a particular scenario where I would take that agent feedback over to them and say, “Look, it’s not $83,000. It’s impractical to think that’s $83,000. Look at it. Here’s a local agent. Here’s where they’re at. If that’s where we think that the value is then here’s our trade.”
And the counterarguments there go a couple different ways. Maybe they go get BPO’s. Maybe we make an agreement on that number being the BPO number. And if it fades from there, we get another BPO. There’s several different ways that you start to handle that. But you’ve got to bring those concerns to the forefront under the intention of creating a solution. Because I think often times, you want to approach and be like, “Ha ha ha, I’m going to win.” You’re not going to win if the seller can’t sell. So you don’t want to let them be in the dark with all of a sudden showing up and you’re not going to be anywhere close to their bid number. And they’re not going to be able to get a signature on their book.
Big firms like this, just so everybody understands, it’s not one person making a decision. It’s going to a committee. And there’s a couple people sitting around a table that all have to sign off on these trades. And generally you probably need everybody’s signature. So you don’t want surprises. You want to give them the tool. You want to give whoever you’re trading with the tools to do the job so that you can get the trade done. And again, this is why trading is hard work. It’s because that’s not always easy.
So did I answer your question, Bruce? Or did I start it?
Bruce: No, you answered it. I guess I just wondered what happens to some of the assets if they don’t trade, and of course they fade not just by price but by the consciousness of the potential buyers. Where do these assets go? What would they do with them?
Steve Hodgdon: So I’ve been looking at Colonial Capital’s file, which comes out every month. And I’ve seen some of the same assets on there for month to month to month. And they will continue … Granite is an active investor. They’re going to continue to work these accounts if they don’t sell them. They’ve made a decision that it would be better for them to move them and focus their attention on others. If they … Again like I said, I follow Colonial Capital. Their stuff has been out there for months and months. They just want too much money for it. So okay. And then you can improve the loans by pushing the foreclosure forward and you can get more value.
Dion DePaoli: Yeah, so you’re getting-
Steve Hodgdon: They closed down one a month ago that was three weeks from foreclosure.
Dion DePaoli: So that’s exactly the answer. They’ve got loans that they own that they work. And they’ll start working through these a little closer to foreclosure. And this is always the issue: if you buy a loan and you do nothing, does it have an innate value increase? No. You buy a loan and you get it closer to REO, then of course it does because it’s closer to the finish line. Non-performing, obviously.
So yeah, they’re going to work these. And then look, there’s other methodologies that are used from when you have a larger portfolio, how do you dump some of this stuff? If you end up with a tail, how do you mix a tail into better assets? You go buy some new assets, and start mixing some of them in. There’s definitely ways to get rid of that.
Certainly, the other thing I would remind us all of is that selling one-off loans to the street, while it has become very popular, is very demanding and tough. And it leaves you with unpredictable results. And that’s why, a little bit more like institutional trading is still a little bit more desired with bigger firms. Because this stuff gets put into a bigger pool and it’s of no consequence because there’s $10 million worth of other assets that are going to perform a little bit better, so on and so forth. So there’s ways to get rid of those. And just to read into that. Don’t try to starve your seller.
That’s why I’m saying, we just go and have an up front conversation. We’re not going to go try to starve them. Like, “Hey you’re never going to get rid of these. And we’re your only hope. And you’re going to be lost at sea forever.” No you won’t. We’re going to go have a conversation and say, “Look, I know you want to get rid of these and I know you want to get rid of these now. And we would be a willing and able counterparty. But we’ve all got to come to the table and talk about the right parameters, price, and characteristics that will end up purchasing this bid.” And that’s how you get the trade done.
Bruce: Great. Appreciate it.
Steve Hodgdon: All righty. That will cover us for today. And I said this will go out in an email and you’ll get to listen to it later. But I look forward to … I think I’m going to see all of you on the 29th. So thanks for your time.
Dion DePaoli: Thanks everybody.
Steve Hodgdon: Bye bye.
Bruce: All right. Thanks guys.