Making a Living in Mortgage Note Investing

Hi. Thanks for joining. My name is Steve Hodgdon and I run a little business in Laguna Hills, California called Modern Asset Management, and we’re here today to … The title we put on this this afternoon was Making a Living in Mortgage Loan Investment. There’s the required disclaimer. You can read all this that says all the things you would expect it to say. I’m not an expert. I’m not a lawyer. I’m not a CPA. I am not soliciting investments in a security, although we will talk about money, won’t we?

My story. In December of 1980, I was a bill collector for a department store chain in northern California, worked my way in that business in the credit and collection side, wound up working at a large bank and getting a lot of good training there, and then in 1989 I bought a small collection agency in suburban San Francisco, and by the time I sold that company 17 years later, we did $30 million a year in collections for our customers. I’ve been an active debt buyer, as I was filling this out, for 20 years now. I’ve been buying and selling delinquent credit cards and auto loans and that sort of thing.

I’ve been a commercial real estate investor. The last project I exited was a 45,000 square foot C-class shopping center in Denver, Colorado, and when I left that asset, I decided I was going to take some of that money and try to be more passive, as we’ve all heard about, and I started buying notes in the middle of 2016. I’m also a licensed lender in California. I have what’s called a CFL and I provide hard money loans and installment loans for a variety of different types of unsecured paper.

This came across my desk yesterday, I think. When I talk to people in this space, the people will always talk about the assets and loan to value and BPOs and discounts and all of that, and the thing that people don’t say out loud is the biggest risk in this business, is counterparty risk. The biggest thing that you can do wrong is get in bed with the wrong folks. This story is somebody who was running a franchise for the We Buy Ugly Houses group, so he had a big name behind him and lots of marketing, and it’s straight up a Ponzi swindle, so I have a post that was over on BiggerPockets that got some negative feedback from some people that I’m actually friends with, where I suggested that you don’t enter a joint venture deal with anybody until you’ve swapped tax returns.

People were like, “I’m never going to give anybody my tax returns.” You can have my tax returns. At the very least, you should see a history of what people’s performance is. For example, when I hire a real estate agent to sell an asset, I don’t want to see the days on market in the community for that price range. I want to see the days on market for that real estate agent. I want to know what they’re doing in that market because they’re my entire market. If you haven’t seen this story, this isn’t even a big scam. This is only $24 million. Just a few months ago, the guy that runs American Note Warehouse is out of business after his swindle was a 15 year sentence, $15 million or something like that. We’ve had a couple more folks join us. I want to say hi Jeff and hi Edward. I’m going to keep moving on.

Why do I do this? Well, one, I like to hear myself talk, but I believe that investing in real estate and notes is a team sport. I’ve tried to be the lone wolf off and on over my career and I’ve always found that working with others comes out with a better result. I want to learn from you and from other people, and the way I do that is to be open and honest with what I’ve done to date, and that helps develop trust. Maybe in these relationships and these calls, we find trustworthy partners among ourselves and we can all help ourselves do better.

When I sell a loan or put somebody in a joint venture or do any of the things that lots of us do, I put first you’ve got to get a better return than you could get some place else, otherwise, you shouldn’t do it with me. I’ve found that I’ve really liked this little niche, and so I’m trying to be part of the bigger community and make new friends. I’m going to Paper Source at the end of April, and so if any of you are there, I’d sure like to shake hands, and the thing that I bring is I’ve made a lot of mistakes and I want to tell you about them so that maybe you don’t make them, too.

What I promise to do I promise to talk about what I was doing and look at real numbers, not sales pitches. I currently own 23 performing subprime mortgages that I bought at discount, bought them in … That’s the bulk of what I own. That’s a pool that I bought at the end of June of 2016, so I’ve got 16 months experience with them. I own eight nonperforming loans that are in some stage of either an attempt at a work out, or going through the foreclosure process right now. They’re scattered around the country. I’ve ventured into seller financing about a year ago, in Pensacola where I was doing some fix and flips, and we’ll talk about that. I provide hard money loans to builders and flippers here in California. I’m part of some joint ventures in some apartment buildings and a mobile home park, and my day job is I manage with a small team 400 subprime unsecured small balance loans, typically $3,000 loans for elective surgeries, dentists, gastric bypass doctors, that kind of thing.

I’ve done everything else under the sun around financing money. Most of it in the deep subprime world. I wanted to show you the mortgage portfolio that we put together. I think we closed that deal the end of June, so like July in 2016, I worked with a man named Dion DePaoli of Secure Debt Exchange Systems. Dion’s in Indiana and he’s been in the mortgage, in the private mortgage space for more than 15 years, 16, 17 years. He was part of a fund that blew up when everything blew up. Oh, there’s somebody new. Welcome. He was part of a fund that blew up when everything blew up, and I found him through working through forms on BiggerPockets, and he is a prodigious poster and the most pessimistic investor that I could find on that group, so he and I hit it off.

I’ve made lots of mistakes over the years, and I’ve found that the best way for me to start an investment is to start with, what could go wrong? We bought this pool of accounts. It was 26 loans and we sent them over to Security National, which is supposed to be the cream of the crop of loan servicers. They handle Fannie and FHA and big banks, and they’re the right folks. For those of you that are coming on late, this will be recorded, and you can get a copy of it and share it, I hope. So again, I bought 26 loans. The unpaid balance at the time of purchase was $739,000. They were performing, reperforming, subperforming. There were non-non-payers. There were sporadic payers, but in the bulk, they were making monthly payments, so I’ll go into what these loan mods were in a second.

The average coupon was 10%, so these loans were rewritten in 2012, so someone bought some of that big short junk, and then it worked through a couple of buyers, it wound up with a company called Siphon Draw, and they were getting rid of the low balance accounts and keeping the mid and higher balance in their own portfolio. Currently, the portfolio unpaid balance to broker price opinion is about 35%, so what I was trying to do, I’m 61 years-old, and I was trying to build that set it and forget it kind of retirement income stream, but I’m not a retirement kind of guy. It was a way to get all of my bills paid and not worry about it so that I could go gallivanting around and start up another business, which I did shortly thereafter. That’s how I wound up in Pensacola, Florida flipping houses, doing construction projects, and generally having fun.

This portfolio pays me net each month about $10,000, so those of you that are new and wondering if you can make a living from a new portfolio, the answer to that is yes. If later you want a copy of this file and want to talk about any of the accounts in detail, Dion’s email address is right here. Dion@xdxs.us. Not .com, .us. I’ll give you a minute to absorb this. This is the portfolio as it sits right now. Whoops. I’ll go back a page. There we go. Five in Michigan, four in Florida. It’s in all the usual states that you see. There was nothing special about this file. What was special was that I paid up in value as a percentage of UPB, which was contrary to what we were taught in the space. What we’re taught in the space is that we should be buying for the lowest percentage of BPO that we can, and the lower the percentage of BPO, the more risk is in the file.

I paid up. I paid a premium to get pairs that had a good coupon rate, and with the discount that I paid I’m getting a return that you couldn’t get in any other type of asset with this kind of coverage. Things that are of note. If you look at this column here, the original note, so you see where these notes were written, ’05 and ’06, some of them were written much older. This one in 2010 is actually a mortgage that was converted to a contract for deed. The average age of the file is 2004. You’ll remember what happened in lending criteria in ’05 and ’06 where if you could breathe and lie to the mortgage broker, you could buy whatever you wanted. For example, these two loans in Arizona. The original notes that were written were $251,000. The principle balance remaining today is $47,000, so the $251,000 original notes written in 2005 based on the current, although I don’t have it. Oh, the BPO is the next column.

Based on the current BPO that I got a year and a half ago, I’m at a 20% loan to value, so I think no matter what happens, I’m safe and there isn’t a reason on the planet will any of these people, except maybe this guy down here that’s at 81%, which is questionable, but it’s an Alabama loan, is going to walk away from that asset. They’re never going to let this thing go. This is simply just a chart of the gross cashflow. Again, people were looking to make a living, and switch to this type of world, and I just wanted to show that if you have a financial freedom number, and my financial freedom number was $10,000 a month, if I have $10,000 a month coming in, I always have change left over at the end of the month. I just can’t spend any more money than that, even with two kids, one of them still in college.

This was the income that comes in month by month and it does not include the servicing fees. This was the gross return on a $739,000 unpaid balance. I like this chart just because it’s a straight line up. In the last six months, I’ve collected over $80,000 on this portfolio. This is a chart that I can understand. I think I recognized one or two of the names, people maybe we’ve talked before. There’s a lot of people that are out pitching themselves as experts or they’ve got programs or masterminds and all kinds of different ways to learn. I’m not selling something here. I have a chat request. Hang on. Oh. Jeff wants to know were these purchased initially as performing or nonperforming? These were purchases as performing loans. There were 26 purchases performing. There are 22 left in the pool. I sold two and two others are now working through foreclosure. There were three bankrupts that I purchased, and from having spent 30 years as a bill collector, I like bankrupts on secured assets because you get paid and the borrower doesn’t have any other credit card bills or any of that going on.

My belief was I was after cashflow. I was after income, and I didn’t think starting by buying a non-income producing outcome, a delinquent, an NPL, was the right way to go. I have bought delinquent accounts as old as 20 years-old in my life as a bill collector. I have bought literally hundreds of thousands of accounts. Oh, and a question from Edward to everyone. Does one of those loans show a balance of $2,000? Yes, that’s Mr. [Lininger 00:17:35]. I love Mr. Lininger. He’s going to have this account paid off. He’s so mad at the prior servicer, he’s been doubling and tripling pay. He’s been throwing so much money at this because it was at Statebridge and this guy, he’s a curmudgeon, and they were withholding … They weren’t posting money to principle. They were holding it against late fees. He’d direct them to take the extra payment, they wouldn’t take it. They were holding things in suspense. It was just a mess.

So I bought this loan in the middle of a huge fight, and we patiently, with the folks at Security National, unraveled it, explained it to him, and he’s paid that balance. I think his monthly payment is supposed to be like 450, and I got a $3,000 payment last month from him. It’s not a mistake.

Ways to play in this world, and it is again, the first thing is know your partners, know the sellers, know the brokers, know their reputations, get experience, just all the problems come from bad actors on the front loan. Like I said, I was buying basis point paper. I was paying five basis points, 5% of a penny for ancient Bank of America accounts. I paid lots of what I bought was three, five, ten cents. The most I ever paid for a delinquent account was a dime, so I decided I wanted to buy payers, not nonpayers. I had spent 20 plus years working with nonpayers. I think the best way to get started is to buy performing assets because that way you get paid to learn. If you buy a nonperforming asset, you’re going to be writing checks to attorneys and that’s how you’re going to learn.

You can enter the space by joint venturing. You can buy a whole loan. You can buy a pool of loans like I did. You can invest in any one of the number of funds. I’m in some funds in hard assets. I don’t know. I wanted to get my hands dirty, so I wanted to own whole loans. In the couple of years that I’ve been in this space, I’ve become really enamored with partials. I think a partial is the best way for someone to get started. A partial is where you buy a part of the cashflow, so the other fancy word for it is they hypothecate the loan, so if there’s, let’s say, 12 years to go on a mortgage, you may want to buy the front five or six years of it. That’s typically a deal that I like to do. I’ll sell the front end of a loan and I’ll keep the back end.

What happens is if you have a loan that’s, say, 70% loan to value, they owe $70,000 on $100,000 property, and you buy the front six years of a 12-year term or the front seven years of a 15-year term, you’re going to pay about half. You’ll pay $35,000 and for that, you get an amortization over seven years, and you get all of the payments. That’s typically the way it is. If it’s a $70,000 loan, say his payment’s $700 a month, you’re going to get 700 times seven years. You’re going to get a $49,000 return on a $35,000 investment. Your loan to value is 35%, and so your chance of getting hurt is really low, even in the event of default, and the partials that I sell, we have a mutual buy/sell inside, that in the case of a delinquency, I will either take over the payments and complete the foreclosure myself, or I will buy out your note at that value.

And a question exactly where I was heading. How does a partial work? Okay. We got two questions. The first is how does the partial work if the loan goes to foreclosure? So me being me, and being a bill collector, and not altruistically, I need to protect my back half of the loan. I don’t want you in the way messing up the foreclosure. I know how to foreclose. I would much rather give you back your money and go chase down the property myself, particularly on the assets where I’m remodeling the houses in Florida because I know the house inside and out, I know my guys on the ground, know the borrower, and I’m very, very likely to just work into a cash for keys transaction or refie or remod or do something. You will find there’s partials that you can buy that you can ride along through the whole foreclosure, or in the way my loan contract says, my partial sale contract says, you can buy me out. You can give me what my basis is and you can go take on the whole thing yourself.

Let’s see. Elise wants to know, why would some of these borrowers with a larger loan balance not attempt to refinance at a higher rate? I tried. I tried. I went to Guaranteed Rate and we had them go through the file and see who they could qualify to take out a typical FHA loan. There were a handful, and those people frankly didn’t want to do it. I’ve heard, “We don’t trust banks. We don’t want to change to another servicer. We want to just stay right where we are,” or the property is of such low value that it doesn’t qualify for an FHA takeout. Typically, a property has to be worth 50% of the median in that area, so if there’s nice houses and this is the crummiest house, the house may not be able to qualify, or many of these folks are on government assistance and they can’t make the W2 requirement.

What falls into this world for us are the people that don’t fit into the standard box. They just don’t. Again, if you’re new, I’d suggest trying a partial because that gives you a shorter timeline, you’re not going to own an investment forever. It is marketable, sellable back to the seller. There’s all kinds of things that can be done with it. What you’re buying is a cashflow stream, which is really what I was after in the first place.

The next thing I have, I keep coming back to this. Joint venture only if the operations partner has a track record and can prove it. I sought out somebody who had gotten his butt kicked in the downturn. I didn’t want somebody who’s been a success since 2012 or 2014. I didn’t want somebody who thought their job was collecting OPM I didn’t want to be somebody’s cash cow. If you’re coming into the note space as a hobby or just to dabble, you will fail. Period. You would have to just be lucky. If you’re coming into it to try to create yourself a new job, it’s eh. I’ve been a bill collector for 37 years. I’m used to it, but it’s not exactly glamorous. You’re not loved. You’re the bank, or if you’re doing what I was trying to do, is have it pay for my retirement that I didn’t want to take, it worked out to be just fine.

Risk is everywhere, everywhere, under every rock, so I’m suggesting that you do exactly what you’re doing here today and not be stupid money. Where do you go to source these kinds of deals? I like using the FCI trading platform to only understand what the market is. The prices posted on the FCI market are retail prices, so think about it like you’re walking into a car dealership. I have a question about loan servicing. I’ll circle back to loan servicing for a little bit because I’m doing a couple different things. You can buy paper Gemini, Condor, Garnet, Sherman Arnowitz up in New York, Dave van Horn in New Jersey will sell some accounts. [inaudible 00:27:24] will sell accounts. [inaudible 00:27:30] is looking for JV partners. There’s all kinds of people that make fairly big businesses out of this.

I don’t need more than a couple of partners. I really don’t because I don’t have that much money. I don’t want hundreds of mortgages. I have a drawer in a file cabinet that is my entire inventory. There’s 34 folders in there. That’s it, and I don’t need to go look for anymore. It takes time to build these. It takes time to buy and sell them. It takes time for mortgages to mature. That’s why my file, the accounts in my file, some of them are available. They’ve gotten better with age. They’ve got another year and a half of seasoning on them, and now they’ve been paying six years on time, and so that further increases your value.

People will collect three payments on a re-performer and call it a performing loan. Again, I’ve been bill collector since … It’s my whole life. Three payments does not make a loan not stick. In fact, there’s often a serious dip in loan modifications at a year. The homeowner thinks they’ve got their act together and they’re holding on, they’re doing everything they can to keep the house, and then another life event hits them and they collapse because there is no safety net. The people that you’re going to see where you can buy these loans, they don’t have a savings account. Statistically, they don’t have $400. Period. If they get laid off, they get hurt, something happens, they’re not making their mortgage payment.

I’ve got a lady in Florida who went dark because she lost her cell phone. It was turned off, and she was two months for sure. The loan servicers are calling dead numbers, sending letters, not getting any responses. Her phone was dead. Her husband’s phone was dead. He works as an electrician’s apprentice. He’s a non-English speaker in I think Homestead, which is a pretty rough neighborhood in central Florida outside of Miami, and they were off the grid for a couple of months. $600 a month plus fees adds up, adds up, adds up. They were all set to foreclose, and I did a little skip tracing because that’s what I know how to do. I got ahold of somebody who got ahold of her. She called me back, and she’s paying $800 a month to catch up. It’s fine, but we had to get all the way to attorney letters and all this crisis stuff.

Ways to play. You see lots of people talking about nonperformers buying entry level contracts for deeds, buying seconds, buying bankruptcies. If you’re new, take a breath. There’s money in all those things. There’s really good money in some of those things, but there’s an awful lot more risk, and unless you’ve got money that you want to set fire to, and I’ve done that, just stupid, stupidity, you just let it go. I was looking at some property, I looked at some houses in Gary, Indiana where the house wasn’t there anymore. The house was gone. The city bulldozed it, and there were people selling the lump. Back to know who your sellers are.

There’s a quick touch on loan servicing because it’s up here as a question. This portfolio of loans is at Security National. I’ve got four loans at FCI and I’ve got four seller-financed mortgages that I’m self servicing. I can self service because I’m licensed, because I have really good software, and because I’ve got 400 other loans, so I’m in this business. I know how to do this and I’ve been doing this a long time. If you’re going to self service a paying loan, you’ve got a whole set of rules you have to comply with, and I would recommend that if you’re self servicing a payer, you get that placed with one of the cheaper services, AFTS I’ve seen, AFTS. I sold a loan to somebody who has it there, and I thought they did a great job boarding it and they do a great job of followup. That’s one recommendation.

What have I got here in this slide? I’m going to say this politely. Where am I going to get the shaft? Where am I going to get screwed? That’s how we should start all of this. We should start with what could go wrong and walk through all the possible scenarios. What are the things that kill deals? Taxes. Oh my goodness, the taxes eat me up on two deals. Oh my goodness. Then county liens, water bills that had not been paid and didn’t show up on a cursory title search. They didn’t show up, but they were there on the property, and $2,000 had to go out on the assets sold for $26,000, so a bit percentage of money went out that way. There’s abatement fines, abandoned properties get heavily tickets. There’s HOA dues and they can be in your way, but it’s …

The next is eyes on the property. Taxes is a big problem. Blight is a really big problem. Thank you to Google Earth that you can look at any address, and don’t just look at the house. Virtually walk up and down the street. Back up in space a little bit, look around. We’re going to look at an account in a minute. I’ll show you the things that I look at. Always assume that the inside of the property looks how the mortgage has been treated. If they haven’t taken care of their mortgage the way they’re supposed to, assume that the house on the inside is just as neglected.

Being sure of where you are in title. In California, there’s a program for getting solar panels put on property. There’s this big save the Earth thing going on here, and the way you get that financed is you use a company that comes out and does the contracting work, and it’s a quasi-governmental loan agreement that’s kind of like a bond measure, like a Mello-Roos bond measure, and that solar panel and whatever other work they put into it, you’re going to have an addition built in your house, takes a priority over the first mortgage, so you’ve got to know.

You got to look at it. It may look like it’s a first, but it may not be, specifically for HOAs and super lien places like Florida. I think they changed the rule in Nevada. Often, every time, you will see a BPO presented by the seller. The BPO is invariably based on a full retail valuation of what this house would sell for if it was in good shape. Assume that you’re getting the wrong valuation, and when you do your own comparable valuation, make sure you’re asking for an REO valuation. People, we got pulled into doing notes on discounted mortgages or in nonperformers because the price of REOs continue to increase. As the price of REOs continue to increase, nonperforming prices are inching up closer and closer.

The difference between the REO price in the marketplace, just going and buying a foreclosure, and buying the nonperforming note is time. It’s how long does it take to make it an REO? The magic of, “I’m going to convince this person to pay their bill,” one out of five times, so if you’re really close to what the REO price is, just buy the REO. Let somebody else buy the note because their price, after they incur their costs, are going to rise above what the REO price is.

Understand where the property is, and I should’ve put in here understand the full chain of title. Who’s owned this? If it’s been in Harbour Portfolio, you could be buying a loan that isn’t legal, so you need to know what the chain has been, but where’s the property? Really look at it. Is there an economy in that town? I bought a note in Alexandria, Louisiana. There’s nothing going on there. This has taken me a year. Might be okay by the time I’m done, but it’s a year and there’s no real estate market. It’s a house literally on the wrong side of the tracks and it’s just trash. It just is. That’s one that I’ll break even.

You’re going to get the shaft by not knowing state licensing rules, not knowing the local collection rules. You have to have standing in many states, for example, in Ohio I’m a registered debt buyer in Ohio because that’s how I got into court to do a foreclosure. Simple as that. The last was the magic that people talk about in nonperformers that you’re going to get them on the phone and you’re more flexible than the bank and you’re going to make them a better deal and they’re going to love you and make their payments. They’ve been living in the house for free. They’ve been living in the house for free. In 2010, the country was taught that it was okay not to pay your mortgage, simple as that. The debtor who wasn’t paying $600 a month, when you make a $400 a month settlement with him, a $400 a month modification, will make some payments and then he’s going to go, “Why bother? It takes a year to foreclose on me here. I’m just going to go back to camping.”

If you think you’re a better bill collector than Bank of America and all their attorneys, where’s your proof that you are? I’ve been at this my entire life. I’m not a better bill collector than Bank of America.

I’m going to switch a little bit and talk about where I’ve been focusing a big chunk of my time, and it’s on … I bought some notes that when we got the property back, it was just astonishing how badly people live, right? So I decided that because I had family boots on the ground in Pensacola in the trades, in the real estate business, that we would start buying some entry level houses and turn them into rentals with the intent of selling them on lease option contract. We’ve done four of them, and it takes some time. It’s not a six-month in and out process. It’s four months to identify, clean up the property, get it tenanted, maybe five months. Then you’ve got the borrower that they need time to gather up their down payment money. You need to get a year of rent payments before I’ll convert them to a mortgage.

You’re 18 months out typically, but the returns … There’s two things. The returns are good and I like the feel good part of it, that I price my properties, that a three-bed, one-bath house has the same monthly payment as a two-bedroom apartment in Pensacola, so we’re taking people that are little families that are crammed into two-bedroom, one-bath apartments, we’re giving them a three-bed, one-bath older home with a backyard, and they’re just tickled, and I’m not gouging them on price. I’m selling them at appraised value, so this one here is an address, 7025 Woodly. I was in for about $40,000. It was partly rehabbed when I got it. We finished the rehab, so between my $40,000 in closing costs, I’m into it for about $60,000. I collected 18 months of rent at $700, so $12,000 would come off of the top of this, and the after repair sale value was $83,500, so she made an $8,000 down payment, I got a $70,000 approximate mortgage, a coupon of 10%, so I got a $70,000 mortgage for about a $45,000 buy price.

Now we’re looking at that split of what you’re looking for at a discount to BPO. This I’ve eliminated, is the BPO valid? I know the property. I know the agents. I know this is a house that we fixed, and we got an appraised value, I didn’t just pull a number out of the air. I have the realtor pull a number out of the air, and I have tenant now, owner, that I’ve known for a year and a half, or my folks there have known for a year and a half, and this woman runs a little home care business for seniors. She has people who go out and take care of people when they’re trying to age in place, and she can’t qualify for a mortgage because of some fast credit mistakes and that she’s self-employed, so she doesn’t qualify.

This is a mortgage that’ll get sold, and I’ll take that money and go buy another house, go do it again. There’s just another picture of the Woodly one. I’ve come to the end and we can start taking questions. I was going to show you some stuff on some spec build stuff that I’m doing, but that’s another conversation. We can talk about building houses from the ground up and the excitement of that.

What do I think you should do next? Again, I’m trying to give you advice and things that I didn’t follow. Decide where you’re going. What’s the quote? Decide where you’re going, or otherwise, any road will take you there. I have spent a long time chasing different ideas and trying to figure out what works and testing, testing, testing, and I’ve settled into two things. Well, one thing. I lend money to subprime borrowers, and then seriously, why are you doing this? There’s so many easier things you could do. There’s lots of reasons that I do it. I enjoy it in some weird way. I know it so well. I like the community that I’m getting to meet. I really like the idea of every time we’ve made a happy homeowner, and these folks that are paying this 10% coupon, they can’t get it anywhere else. They can’t get money any other way, and they would just go out and rent anyway.

So while it may be a 10% coupon, typically their loan terms are 15 years or less, so they’re going to own their home outright in half the time that you and I are going to own our home outright with a 30 year mortgage. These mortgages actually see a conclusion. People own their little %50,000 house outright in their retirement years and that makes life pretty simply. Why talk to me? If safety and above average returns are your road, then we should talk. If you’re a gambler, I’ll see you at Paper Source in Las Vegas, and I want to say thank you for them to [inaudible 00:45:13]. Now I’m going to start to look at some of the questions.

I was asked, do I do these rehab deals? Am I investing with my self-directed IRA? That’s my first question. I’m using an HSA right now because an HSA has this beautiful no tax on the way in, no tax on the way out, so I’m loading that up pretty heavy for myself and my wife and my kids. I’m running everything through a C corporation, which is now taxed at 22%. I’m not a republican, but I’ve got to say thank you. That’s where most of the capital gains will be, will be there. Next question was, do you typically do those rehab seller financed deals with cash or financing? They’re small ticket. I do them in cash. You could borrow money on them at 10, 12 percent. I do them in partnership. I’ve got a couple 50/50 deals. We’ve got one now. It’s $30,000. We each put in 15,000 and it’ll come out the backside at 50, but it’ll also collect 500 a month.

One of the first ones that I put in, my wife’s health savings account was a little $24,000 short-term loan to one of my Pensacola crew, that he wants to start to be an investor, so he’s got a little property that will rent for $500 a month, and he’s got a $400 a month payment to me, and we put a $24,000 note, but paying note, in my wife’s health savings account, again, tax free, for $16,000 all in. We took $16,000, instantly turned it into 24. If it goes the full seven years, and it probably won’t. It’ll upgrade to better property, or not, it’ll pay out $33,000.

The other value of an HSA versus an IRA is I can touch that HSA right now to cover a wide variety of medical expenses. I’m 61 years-old. I’m a cancer survivor. I go to the doctor. I have a $7,500 share of cost on my $1,000 a month insurance premium, so I can easily use $7,500 of that. That was the first one we put in there. We’re going to put a couple more in during this year. Let’s see. Another question. I have a JV partner, and you are only making 10%. You’re splitting with them. That would give them 5%, and you only make 10%. Right. If a deal goes bad, and it’s just not working out, what do you do?

I do a preferred return. We do a preferred return that says that the other side gets 8% no matter what. The first 8% goes to the cash partner, and then we account for the 50/50 revenue share, and there’s some work that has to be done in there because you have to consider the monthly payments and all of that, but my flips in Florida are 25% ROI. The notes, my note pool is, again, this is a 30% loan to value, steady-Eddy payers, that’s running 12, after costs.

Right. So then the question from … This is a really good question. Getting your feet wet versus jumping in the pool. I got my feet wet by purposely buying a problem, nonperforming contract for deed, so I looked for … Again, I’ve got 30 plus years of collection experience. I run a legal department. I processed thousands of court cases and judgments and foreclosures and evictions and all that, so I bought for $13,000, I bought a Harbour Portfolio, two year nonpaying contract for deed, and I want to just get all the problems out of the way because I wasn’t going to go get some guru guy, $25,000 to tell me how to collect bills, so there’s a little bit of arrogance there. I tested, figured out, “Okay, this is the same as collecting other stuff. I know how to do this,” and then I went out and repositioned this portfolio, the money out of this shopping center that I sold into this portfolio.

If you’re looking to get your feet wet, we’ve got to go back to, decide where you’re going and figure out what’s the road to get you there. Riding along with somebody with experience, me or somebody else, that you trust is a really good way and you could say you had $50,000 and you could say, “Well, I want to put 25,000 in two deals, and I want to walk along and find out more problems,” and get as many of the hiccups out of the way as you can.

That’s kind of along the line of what I did. If you’re going to jump straight into the nonperforming world or you’re going to go buy seconds, have enough money to buy five, even after doing all the vetting, because if you’re buying delinquent seconds, two are going to be worthless. Two might give you a little bit, and ones going to be a home run. That’s pretty much how that math works.  That’s how collecting accounts works. If I buy unpaid Visa accounts for five cents on the dollar, I’m trying to collect ten cents on the dollar, and I only need one out of the ten to pay to get me there.

I can take more questions. I don’t know that I’ve … Oh, I’m going to change screens here. Hang on. I forgot. I got all excited. Look. It’s all your blocked faces. I was wondering what that was going to look like. I’m going to share a little deeper detail. Can somebody wave a hand and tell me that you can see this spreadsheet?

Speaker 2:                          Yeah, [inaudible 00:52:32].

Steve Hodgdon:                Oh. Hey. Somebody. Thank you. Okay. This is this pool of accounts, and I’ve gotten all distracted. I like hearing myself talk and I get distracted. Let me get this out of the way. Let’s see here. When you look at a tape, as they’re called, it’s an Excel file that’s going to look like this. It’s going to tell you where. It’s going to tell you who. It’s going to tell you in this case, the broker price opinion, when that was formed. This was the opinion that I paid for. The current loan to value, which is math between the BPO and the current balance, because the modifications, they’ve got original, so this one here, which we’re going to look at, we’re going to look at Mr. [Forhan 00:53:40], very nice gentleman.

He had $94,000 broker price opinion. he had a $51,000 note that’s due, was going to be due in 2033, so when they rewrote his probably 5% loan or 6% loan, what they did is they gave him a discount and they shortened the term, so they raised the payment amount and shortened the term. This loan has another nine years to run. He owes $32,000 against a house worth 94, and why would he pay 11%? Because he got a great smoking deal on the house value because he refied it in 2012 when the house was worth half of what it is now. You get a payoff number. You get a last payment. This tape is a month old, so this is older. There’s been a payment since.

You’ll often see, and what you’re going to want, is you’re going to want to see payment history that looks like this. I have the Zoom bar that I’m working around here. This is truncated, but what you’ll see is this month, last month, the month before, and you should get the whole 12. We shortened this to say, “Here’s the sum of the money in the last six, the money in the last 12 payments.” So remember, if you’re buying notes, you’re trying to buy cashflow, not property. If you want to buy property, let’s go buy some REOs.

This is the kind of data that you’re going to look at and you’re going to need to analyze. I’m going to switch screens again. When I go looking for a property … Oh, I see a couple of hands up there. I’m going to look at those. Why do I like real estate notes over unsecured loans like the Visa loans I mentioned? I used to stay away from big balance accounts like mortgages because I like the law of large numbers, that I would rather buy 1,000 little loans than one big loan because my odds of collecting are better. I’m 61. I ran a collection agency for 20 years. That’s a zoo, and I didn’t want to die at my desk, so I built 26 mortgages that send me $10,000 a month whether I come to work or not. I have my day job as an unsecured portfolio. I’ve got 400 now, coming up on 500, loans that I own, $3,000 loans I own myself.

Balancing my portfolio, some big and safe, some small and risky. My favorite states to invest in, the next question, is California. California paper, it’s like the real estate. It doesn’t make sense. You’re going to pay 85 cents on the dollar for a nonperforming loan. If you’re going to play in California, play in seconds and learn all the tools that are that. I know some people that do great in seconds, turning second mortgage foreclosures into rental properties. They just do a wonderful job with that, but again, now you’ve gone and created a whole other job. Now I’m running a real estate property management business. I did that for awhile, too. That was terrible. It was in ’09 and ’10. It was just awful.

My favorite states to invest in. My favorite state to invest in right now is specifically Pensacola, Florida because I have a brother-in-law, because I have a builder with 26 years experience, and because he has a crew of people that are related to him, and we’ve just got a little cottage thing that we’re turning over. I’ve done eight projects there in the last 12 months. I’ve got two larger spec builds going on right now, but we’re going to do our darnedest. I’m heading down there in a couple of weeks, and we’re going to do our darnedest to get 10 of those little flips to seller finance done in the next year, and that’s a two-year project. If I bought the house today, I’m not going to convert you to a homeowner for 18 months, so you’re going to be in the landlord business for a little while, and I’d rather be in the landlord business for a little while than in the foreclosure business for a year. I’d rather collect rent payments for a year than pay attorneys for a year.

The other part of the question about California is what kind of yields that I’m seeing. It tracks the same as everything, as property values. You’re seeing stuff traded at five caps, residential at three, four caps, mobile home parks are trading at eight or nine, so that’s a 9% interest rate on bottom end stuff. I can get in the high teens in Florida without getting my hands dirty. The other state … The other question is the other state. I really should have a script. Dion DePaoli, who you saw on an earlier chart, is in Indiana. He’s in northwest Indiana outside of Chicago, near Gary, and they’ve got a machine going in Gary for inner city stuff and Dion and I are working and we’ve got one fix and flip right now where I bought a pre-foreclosure for $110,000. 2,500 square foot house. It’ll sell for $100 a foot. I have a joint venture with the Gary, Indiana contractor, property manager group, and I brought the house to the table. They brought the labor and all of the materials, and we’re splitting the upside.

That’s a way to do that. I’ve known Dion for a couple of years. I know his history. I know people that know him. We all think he’s a curmudgeon and a pain in the butt, so again, I trust him. I wanted to just quick show you a property, when you’re going to go do some due diligence, what you can do from your couch. Some of you may recognize this little symbol here. This is a little piece of … It’s an app, I guess. It’s not really even software, called Due Diligence Pro that’s sold by the folks by Chase Thompson over at Note NBA and I like Chase a great deal. I really enjoy his podcast. I’m not selling this at all. It’s like, I don’t know, $100.

You put the address in, and it pops up all of these windows, so what you … The first thing that you do is, like I said, I walk around the neighborhood, and having chased a lot of foreclosures and evictions and all that, at first, you want to look at the date of this picture. This is 2012, and you want to look at the age of the cars, the conditions of the curbing and the streets. That tells you what the town … Is it pretty cracked? Tells you what the town is like. My mortgagor lives here. This is a duplex and he owns half of this duplex, and owes $30,000 on a property worth 90. It’ll also pop up RealtyTrac. You can put that address in there. You can get Rentometer, which is a lovely thing and it puts in a search for two beds in this area.

I don’t know why it’s not coming up. I’m going to keep moving. Here we go. I had a little bandwidth problem, which is funny because I’m the only one in the office. I like Trulia, in particular, because you get this magical button, and if you haven’t looked at a crime heat map, you should. Lowest, lightest; highest, darkest. This little corner is in this little nice neighborhood, which tells me that there’s probably a big street here that delineates this other side of town. I would much rather have this property be over here, but anyway, it’s such an easy way to do this. Good old-fashioned Zillow. 910-foot townhouse, has two bedrooms. Again, I’m clicking this box. It should close. There you go.

The rule, the simple rule in appraising property is like kind, so I don’t like to buy stuff that’s in the country. I don’t like to buy stuff that’s remote. I just want boring, simple, this house is the same as the next. If it’s available when you put the address in Property Radar, it goes out and gets you the county feed, goes into the county website. They’ve built a bunch of that, and you get to see the history of it, and so this is … I looked through all of this. This last item in 2015 was them abandoning the foreclosure effort on this property and rewriting the loan for the borrower, and this county actually lets you see the documents, so that’s a wonderful thing. That’s what I wanted to do there.

That was the end of what I had to talk about. You can unmute your mic if you want to ask a question. Hi, June. I hadn’t looked at the list of names. How are you? I hope you’re good. I’ll see you at the end of next month. If somebody wants to type a question, ask a question. Okay. The rest of the question from Elise. Do I have teams of agents, title companies, and attorneys? Oh god, I don’t want to have that. If I have to do all of that, now I’m full-time chasing debtors and that wasn’t what I bought these loans for, so if I limit, again, I’ve got limited capital, a couple million bucks, and if I keep plowing that back in the cities of Pensacola and Merrillville, Indiana, are just fine. I can’t possibly use up all my time and attention, and in that one town, then you wind up, yes, with an REO agent, with one title company, and with one attorney.

My Alexandria, Louisiana account got me this marvelous lawyer who’s going to just charge me through the nose. Louisiana has this special set of French laws about succession in property, and I bought an asset that was going into foreclosure, that was for sale, and I thought, “Oh, that’s the clever thing. I’ll buy this while it’s for sale.” It turns out the house is trash, not going to get what they think is market value, but in the succession order, they were able to avoid identifying and notifying the mortgagee of the property, so the kids inherited the property, and they’re just camping because they don’t have a responsibility to the debt, so we’ve gone and now are suing all six heirs and trying to enforce against five little pieces of property that the father left.

All they had to do was come up and make a deal, and I would’ve been fine. They could’ve gotten out of this thing for $60,000, and instead it’s going to be 90. Anyway. June says, “Where did you say to source notes?” Well, you live right in the neighborhood of Condor. Condor makes me crazy because people who sell notes tell you only the good stuff because they’re selling. Most of the stuff that you’re going to see from Condor and Granite is they’re operating on the model of trying to find the next fool who will pay their price. Again, they use the retail BPO evaluation and they won’t come off of it. They say, “If you don’t like my BPO, I’ll go to the next guy who will like it. The next guy won’t do his own due diligence and he’ll get beat,” and they don’t care. They’re not interested in long-term relationships. They’re one-off, make a commission, move on.

I’m not going to Note Investor Summit this year. I’ve been down to some of the last several events down there, and it’s just too much sales pitch and not enough work, and yep, I’m taking a beating. To that, that’s another thing. Thank you. I owe you a cup of coffee. If any of you folks have notes, having a problem, want some help, I’m not charging, because if I can learn by helping you unravel your problem, then I’m not going to make the same mistake, and we share it with other people, too. I think I know the answer to that. When we saw each other in San Francisco, there was one that I was shaking my head about. Anyway, I want to help. I want to help. I want to help. I want to help. I want to help. I want to help. If I buy one of those assets that you’re taking a beating on, you’ll have taken some of the beating, and I’ll take some of it and we’ll see if we can move on, but yeah.

Elise says, “I’m in [Nevado 01:09:38].” Yes, I am in Nevado. Is this Elise from rotary? If this is Elise from my rotary club of like 50 people, that would be really funny. Yeah. Jeff brings up a point about using the HSA. Hi, Elise. Santa Rosa is right up the street, right? The HSA is just a marvelous investment tool and a tax avoidance tool. I’m really happy with Nathan Long over at Quest IRA. They’ve been great to work with, and again, I’m not getting anything, but I think they’re there for the long haul. He’s second generation now running his father’s business, and they’re an old-dog, seller-financed, private lender guys, and they really get it. It took me a little while to get my CPA to get his head around it, and he’s a smart guy. Well, actually not him, it’s the CPA who’s doing my wife and I’s return.

What’s a trend that I see experienced investors doing that makes me uneasy and concerned? This paper that’s available to us now was available for 10 cents on the dollar in 2012. That $13,000 note that I bought … The $13,000 Harbour loan that I bought was actually a $10,000 purchase from Harbour and a $3,000 broker fee. That’s one thing to pay attention to. That $10,000 asset that they sold, Harbour bought from FHA for $500 in 2012. They then proceeded to sell that asset for 60,000 and have it foreclosed for $45,000 and have it foreclosed, for $40,000 and have it foreclosed, and that’s where I bought it. I resold that house to the tenant, to the owner, for $26,000 because that was the right price to sell that house for. It was in bad shape and he’s tickled. I got a $25,000 at 8 3/4 percent interest for I think 180 months, and he hasn’t missed a $204.80 payment yet. He wound up with my cell phone number. He sends me texts. Where in the world do you think you could get your own home for $200 a month, right?

If I’m not servicing my own loans, who am I using? I’ll go back to the trend question. Security National is very expensive. They do good work. I have accounts at FCI. They’re inexpensive. You get what you pay for. You have to know what you’re doing. I’ve got a client, now friend, who uses AFTS and I forget where they are, but they seem to be modestly priced at like $19 a month. Evergreen is another good resource, but all of those require you to actively manage your delinquents. People that are self servicing, nonperforming, seconds typically, if you’ve got collection experience, if you’ve got mortgage experience, you can do that just fine, but it’s a job. You’ve bought yourself a job.

If I don’t want my money tied up for four or five years, buy a five year partial. Buy a five year partial. To fix and flips. Do the Pensacola front-end seller finance deal that I’m doing. Come share in one of those deals. Come do your own deal with folks. Go to Dion and say, “Land homes.” Yeah, land homes is good. I say, “I want to be in this game for three years. Let’s build something appropriate to do that,” and then I think you make a play for some appreciation, and not passive appreciation, hold it and let it go up, but hold it, improve it, and help it go up.

The trend question that makes me concerned. Because prices are where they are now, because real estate’s launched as much as it has, the medium boys are putting their paper out and recapitalizing and moving into better assets, and they’re moving back, they’re holding better rentals, they’re letting lower end stuff go. I won’t take an account … I won’t take a loan now, a secured loan now, that has a mortgage payment less than $400. The fees eat it up and typically, the borrower is problematic. I’m making some money lending money to flippers, so I have this short attention span, too, so I’ve got some 15 year mortgages that I’m holding. I’m lending money to flippers for two years, and because I’m trying to keep cashflow going a little bit, but also I’ve got a subprime unsecured portfolio that’s got lots of action in it, so I’m looking for more steady-steady.

If I have a neighborhood of $100,000 houses, I’m looking for $50,000 asset in that neighborhood, and that’s what you have to do when you go through a tape is you want to buy … What would I want to buy if I would just make a rule? I’d want to buy second-tier MSAs, 30,000 population and up. There has to be a positive immigration into the area, not an emigration out, so that puts me in warmer states. It has to have a varied economy. Chamber of Commerce site will tell you that. It’s just like you’re buying a rental, and where do the people work? Nature, luck drew me to Pensacola, Florida. Largest Navy base in the country, Navy Federal Credit Union, three universities, on and on and on, and the whole beach community, the whole tourist thing, and so that fit all of those things for me.

The downside that everybody tells me is it takes so long to foreclose in Florida. It does not. It used to take four years in Florida. It’s back to being a year and a little bit because the Florida courts and politicians had to protect their constituents because they were getting bulldozed by the banks.

[inaudible 01:17:32] was talking about having money in for four or five years to be liquid. I’m doing the same thing and kind of building a ladder. I’ve got a bunch of one year and two year small money loans. I’ve got 15 year mortgages and stuff in between. If you want to see that spreadsheet, write to Dion and he’ll send it to you, and you’ll see on the terms when those notes are expiring, that they’re … I’ll go back and look at it real quick. I’ll go here. This I bought as my pay my bills into the sunset. I’ve got one that’s coming out in … It’s a couple months behind. It’ll get resolved, but 2023 up to 2034, with the bulk of them, were 10 years to go when I bought them, so I bought a pool of seven 10s and a couple of threes and that kind of thing. I was doing the same kind of thing.

A couple more questions before we call it a night? I pegged this for an hour and a half and we’re coming up right on that. If we’re good, I’ll say, “Going, going, gone.” Are we all right? Remember, begin with the end in mind. Our primary end is to not lose money, and June and anybody else, please let me know, and I’ll be happy to talk to you about any files we got and do whatever we can to help you. Yeah. June, yes, I’m going to miss you at NIS. My new partner, Nick Curry, may go, and if he does, I’ll make sure that he knows to look for you. Elise, you’re in Santa Rosa, and I’ll see you at Bay Area Wealth Builders or something like that, I bet.

Thank you all. Any kind of feedback, anything else you want to hear, see, do? Clearly, I love talking. Thank you all very much for hanging out with me for an hour and a half and letting me spout off. All right. Thank you. Bye-bye.

 

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