Be The Bank
Be The Bank
013 - Why Would You Want Title Insurance
Discover the secrets to navigating the often-confusing world of real estate transactions and title insurance with us, your hosts Justin Bogard and Richard Thornton. Learn from our experiences with title commitments and policies and join our debate on the pros and cons of loans with large down payments and short pay histories versus those with low down payments and long pay histories.
Explore the scalability of newly renovated homes with large down payments and discover why these can be more attractive than notes with a long pay history but minimal down payment. Don't miss this valuable conversation filled with essential information for real estate investors and those looking to build wealth through owning Real Estate Notes!
Resources and links discussed:
- Videocast on our YouTube Channel
- ANB Funds Website - https://anbfunds.com
About the Host:
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Facebook - bethebank
Twitter - bethebank1
Instagram - bethebankpodcast
American Note Buyers - https://anbfunds.com/
Monthly Broadcast - https://youtube.com/playlist?list=PLzc944w1xydt5aLDrrEPHJhdJeDkBjjD4
Interested in real estate. How about wealth? Well, they go hand in hand, and here you'll learn all about it. Welcome to Be The Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, justin Bogard, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note and, most importantly, educate you so you can Be The Bank. This is Be The Bank brought to you by American Notebuyers. Now here's your host, justin Bogard.
Justin Bogard:Welcome to episode number 13 of the Be The Bank podcast, and today I've got Richard Thornton with me and we're going to be discussing a few kind of subjects, one in particular being about title insurance, why you need to get it and what happens when you don't get it, and there's a couple of transactions in between of that. We also want to get into a little bit of debate on what do we, what are the pluses and minuses as it pertains to a loan that has a large down payment with a short pay history, versus a loan that has a low down payment with a long pay history? Stay tuned, hey, richard.
Richard Thornton:Mr Justin.
Justin Bogard:Is it hot out there in California?
Richard Thornton:No, it's not. It is a nice day, but we are having the weirdest summer. I mean it's supposed to be right now 90 degrees and shorts and t-shirts and blah, blah, blah Yesterday. The last two days have been cold and blustery, and when I say bluster I mean 15 to 20 mile an hour, winds that are gusty, and you think you were in the first days of March. I mean like, wait a minute, it's cold out here. That's interesting.
Justin Bogard:Yeah, we've been fortunate enough not to have a lot of wind. It has it rained a few times already, which has been helpful, but overall it hasn't rained that much and we're definitely having around the 80 degree temperature every day, with very low winds, so it's actually good golf weather. If anything, we can take a positive out of it, that's right.
Richard Thornton:You play golf this morning or yesterday.
Justin Bogard:I played last weekend. And how did you do? I did not do very well at all. It was a pretty poor performance, i'd have to say, on my part. If that was a day to play skins, you probably would have taken my bankroll.
Richard Thornton:I see Okay.
Justin Bogard:Yeah, pretty bad, but I will be playing a few more times this week, so Well, that's good, That's you know those of you listening to us babble on here don't forget to check out our YouTube channel, american Note Buyers, so you can see the video stream of this podcast brought to you by American Note Buyers.
Justin Bogard:Richard, i brought up a minute ago in the little opening monologue about title insurance, We're fortunate enough to have our friend Brenda Flatter come on our monthly broadcast that we do live on our YouTube channel and our Facebook page. She talked a lot about kind of the I want to say generics, the basics of title commitments and policies and kind of just give us a roundabout idea of kind of how it works. I kind of requested that that she do that for us in our audience because, quite honestly, richard, i was never really taught about title policies and title commitments. It's kind of just one of those subject matters that they just give you all the documents and you're expected to know what you're reading and understanding it. It's almost like you know I don't know how to explain it, but did you feel that way too when you first got into real estate when someone said here's your title commitment, sir, what do you think?
Richard Thornton:No, i knew it all from the first day. I knew it all. Yeah, no, and I still am, unfortunately. I read through the highlights and then my eyes start to glaze over and I say, okay, mr and Mrs Title Agents, is everything here?
Justin Bogard:And they nod their heads to say okay, fine, What I do appreciate about the escrow agents, closing agents, whatever they call them at whatever title company you use, is that they in my experience they often will just they will give you like Justin, this is what we need to clear. To close, We need number one, number three and number 12 to be cleared. And you look at those items on the schedule and you're like, oh, i get it, that's easy. Yeah, so I like that part of it, but it's nice to have her run through and be like this is the exception, this is what they'll guarantee. This is what they won't insure. Obviously, they're not going to know if anything's not recorded at the time that they give you the insurance. They can't help that right, that's not their fault. How unprofessional, richard. Turn off your phone.
Richard Thornton:Yes.
Justin Bogard:My gosh, it's like you're a marketing person or something Could be an image.
Richard Thornton:Can you imagine?
Justin Bogard:So I don't know if I brought this up on live before, but I'm in the process of trying to get a piece of land for one of our trusts And that piece of land is being sold to me through, i would say, like a land wholesaler Right, and land wholesaler had found this little parcel and was able to resell it on seller financing. So they did a land contract, so they're actually on the deed. And then they created a land contract and the person trying to buy it is gaining equitable interest. They are paying installments monthly until they pay it off in like three or four years. Then they get the parcel free and clear and they get the deed in their name.
Richard Thornton:Right.
Justin Bogard:So in the process of me buying this, especially in my trust, i don't take any chances. I go through very rigorous steps. Even though it's a very low valued opportunity meaning it's like under 10,000. I still go through a title company and I want to get that insurance to make sure the title is clean and clear, right, And I also want to get kind of a loan policy to make sure that the lien is in first position. Again, this is my trust, this is I make sure I dot on my eyes and cross my T's because I don't want any issues in my trust.
Richard Thornton:Right.
Justin Bogard:So I get a preliminary title report from the title company. They list out, you know, several things, and four of which are the last four kind of deed transactions that happened with this piece of land. So I look into it and I read the person I'm buying it from used an LLC, okay, that's fine. The person they bought it from was like individuals Okay, and the person those individuals bought it from was an LLC, and the person before that that the LLC bought it from was another set of individuals. So all those transactions, richard, they happened without going through a title company and without getting title insurance.
Justin Bogard:Now, it's not illegal to not use a title company, right? You don't get the advantage when the deed is changing hands so many times because you want to ensure that title. So, because I want to get title insurance, because I want to ensure that this title is clean and clear and everyone that it transferred for no one, can claim that they own this piece of parcel, this piece of land in the future, i want it to be insured. So in order for the insurance to be clear, to close or to for the insurance title company to ensure the title, we have to go back and figure out how to contact these people to have them sign an affidavit Basically saying like yes, i was president and this is true and accurate. You know types of things And the LLC has to provide. You know some sort of operating agreement that shows that the sign on behalf of the LLC was actually allowed and able to do that on behalf of the LLC.
Richard Thornton:So how are you going to do that?
Justin Bogard:That's a great question. How are you gonna do that? So all this happened within the span of, i'd say, four to five years in this transaction. I think there was four transactions. So you have to make the decision. Are you gonna make the effort and go back and try to hunt these people down, skip, trace them so that you can get them to sign this affidavit? And it's really simple, it's just a document that reads exactly what it says, as I was a grantee or the grantor on this date and this was the parcel that I was in the transaction with. Very simple and they can do an online note rate.
Justin Bogard:But the hard part's finding them right. They were somebody that you know. Oh, yeah, i know this person. Yeah, i can get hold of them. Yeah, it's easy, but when likely you don't. These people are in California or other places across the country, and I'm in here in good old fishers in Indiana. So you just have to make the decision now.
Justin Bogard:A Justin has to if I wanna go through with that and try to figure that out, because the title company's not gonna be able to provide any more help unless it was closed at that title company at some point, which obviously it wasn't, because there wasn't title interns, so they can't really help at all. So it's just one of those things to where you gotta get it done. So if this transaction didn't happen between me and this wholesale land person, they are on the deed right, this LLC and they have a land contract out there with some borrowers that are gonna pay them and they're gonna pay them off in like four years. I think that's what the note term is. So, richard, what happens when they pay them off in four years? Well, you're supposed to give them clean and clear, equitable title at the end of the land contract so you can cancel it and they become the deeded owner. So you're gonna have the same problem then as you ensure that title for them.
Richard Thornton:So you might as well go ahead, and I mean, it would seem to me to be easiest to work the chain and go back to the previous person, the previous person, the previous person, because each one of those people will have the other's contact information right, correct, and, while it's laborious, i mean in actuality, now that you, i hadn't thought about this, but I sold a note to one of my clients that had a defect and it was very. It was stated Georgia, and in state of Georgia, if your notary doesn't, notary statement doesn't say that the person is basically in the presence of the notary, as a bank adjust, it's invalid. So we had to go through five levels of owners to find out who these people were. Fortunately, i knew how to get a hold of all these people And so I sort of became the central person to get it all done. But yeah, it had to be done and it was about a two-month process.
Justin Bogard:So I'm sure this happens way more often than we realized.
Justin Bogard:We're not aggressively in the vacant land business to trade notes or to buy them, but you and I both bought a few And with this one experience it really made me think about it this week and say you know what?
Justin Bogard:this probably happens very often and there's kind of There's kind of a struggle here with the person that is the wholesale land buyer, because I want to be able to defend them and also want to be able to curse them at the same time. Right, sure, because in their running of business, all right, maybe they're buying a couple hundred of these vacant landlots across the country a year And if you get title insurance on every single one, that's a lot of money just in title insurance, right, right, and the transactions are probably really small. Sometimes they're like maybe a few hundred bucks, five hundred bucks, thousand bucks. So I get it that there are small transactions in the cost of getting title insurance totally outweighs the purchase price of what you're trying to do, right, but like you said, at some point you're going to have to get title insurance or maybe someone else does down the line. Maybe it's not their problem and maybe that's how they see it, but it does become a problem, and so I can see the land business having a lot of issues with title because of that.
Richard Thornton:Yeah, and I think also for this reason and I'm sure there's other ones a lot of title companies won't do land contracts because you know there is the owner is some place in the chain that can't be found and you know can. In fact, they can't insure it over it, so they can't do the deal. So you know why bother with a bunch of smaller deals, right, right? So that was my experience and my epiphany this week You are learning more and more every day, my son Young grasshopper.
Justin Bogard:The grasshopper, yes, some days I feel like this is the grasshopper more than the other.
Richard Thornton:Yeah, sometimes it comes with an oh crap, you know, right, i feel like how did I not know that? Let's switch gears to a different topic now.
Justin Bogard:Sure, we have brought this up in the past and we haven't really dived into it super deeply. So let's get into a debate today and let's figure out where we land and what side of the fence that we're on. So in the performing note world, we see notes that have very large down payments, meaning like 20, 25, 30% down payments.
Justin Bogard:And if you're listening to this podcast and you say really it's not uncommon to see those large down payments, it's just you know they're going to be from more or less the people that aren't bankable but they have sizable down payments, right? As opposed to somebody that gets conventional financing on a house in the several hundred thousand dollar range. They probably don't put 20% down, they probably get like two mortgages and stuff. We're talking about the homes that are probably under 150K. So you got those people with a very large down payments with no seasoning buying those notes. And then we have notes that we have very little down payment, like maybe 5% under 10%, but have like maybe a three, four, five year seasoning of pay history on them, right? So the question is, richard, which note do you prefer and what are the pluses and minuses to them?
Richard Thornton:Well, let's put a little more spin on it, which is, i know the ones that we're you looking at that don't have any seasoning are also renovated. So if somebody walks up to us and says, hey, i'd like to sell you a note, there's 25% down but there's absolutely no renovation on the property, depending on the condition of the property, it may or may not give me pause to buy that note. And I'm also going to want to know more about the buyer. Have they been a renter? Have they been a renter along a long period of time In one place? can we get a rental history, payment, payment history from them, be it cancel, checks or whatever? I mean that sort of acts and walks and talks like a rental history, like a payment history.
Justin Bogard:Yeah, right.
Richard Thornton:I mean we all have to keep in mind buying a new note, the old game that Harvard got in trouble with years ago. Right, maybe they would sell a house to somebody who had a minimal down payment and they're going to improve the house with sweat equity And they later found out, as they lost a number of court cases, that those people had no ability to raise the money to do the sweat equity. So basically they were buying a substandard house. So we have to be very careful of that if we're going to buy something that's newly purchased and unrenovated.
Justin Bogard:And so I don't know if I can put an A plus grade on either of them and that would outweigh each other. I would say, kind of, how you dive into some, you know, you put a spin on it on which one would be better. I think they both have their merits and I think they both are good and we buy both of them And it ultimately comes down to I think what you said I'll key in on it was what's the propensity to repay?
Richard Thornton:Right.
Justin Bogard:And what's your risk really? So if somebody puts down a 30% down payment and you calculate what the property value is today and you're at like a 70% investment to whatever the true value is of the property, well, that's a pretty decent discount. You know when you're looking at it and you feel pretty well protected to get your money back if you had to go for closure. Right. So it would take a longer payment history with someone that had a smaller down payment, let's say a less than 10% down payment, so that it looks like there's a lot of equitable interest for the borrower at some point and maybe it balances out to close to same. But it may take more than more than a few years to get to that point.
Justin Bogard:Maybe it takes six or seven years, because sometimes these excuse me amortarizations on these smaller loans are going out 20 to 30 years. So the payments are really small. They might be under $500. Right, so the amount of principal they're actually paying per month is very small and the amount of interest they're paying is a lot. So maybe it's a $500 payment and maybe $50 is principal and $450 is interest. So it's going to take a lot of $50 payments to really chew at the principal balance of the loan.
Richard Thornton:Right. So I guess I'd have to say, all things being equal, if somebody brings to us which we've seen a number of these say a wholesaler or a renovator, a buyer who's putting 20 to 25% down and a house that's newly renovated meaning not just a bunch of slip shot stuff If we get good pictures, interior pictures, and we can see that the kitchen was renovated, do a good standard, the bathroom's already done, the house is wholly painted, probably new flooring, maybe or maybe not, a new roof, and the yard is in good shape, i'd say I'd rather buy that than some of the other ones we have in our portfolio where we've got two or three years payment history and the house has kind of run down. Because if you look at the scalability, that newly renovated house is gonna be a whole lot more salable, certainly for the next three or four years, and by that time you will have established a payment history.
Justin Bogard:Yeah, if there was like the perfect scenario that's how I would describe it too A newly renovated property, that's, you know, everything's up to date, with a really large down payment and a short pay history, that would be the cream of the crop, And I would agree too. The one usually the pay history. Then you see, it's a long pay history and a short down payment. Usually the house is not as attractive as the other. So, yes, i would agree, it makes you feel more comfortable when you have a newly renovated house. Now I will tell you, the marketplace says there is more of an abundance of small down payment long pay history loans out there than there are of newly originated loans that are newly renovated homes with large down payments.
Justin Bogard:Right, so it almost becomes a unicorn for those types of loans Right.
Richard Thornton:so one of the things I find out here, though and actually as we're marketing more in the Southwest is largely Latinos and immigrants who can't get a regular mortgage.
Richard Thornton:but they can put down very large down payments because they're working the trades or whatever, and they're just taking the money and putting it in a bank and they don't really know where to invest it.
Richard Thornton:I think I may have explained to you that I had some help out here doing the renovations of my backyard and got to know the guys really well and really would like to work with them towards buying a house, partially because of a do good type of thing, but when Push came to shove, we found I found out that really, these guys were working hard. they're working about six days a week, but they were making $100,000 to $120,000 a year. Wow, they had like 30 or $40,000 in the bank and they weren't sophisticated enough really to know that they should put it into stocks and bonds and things like that. And they were legal. they were legal immigrants, but they would much rather put that into a house And for somebody like that, i would lend to them all day long, hardworking, you know. they got that much money in the house and they wanna be there for a long time, that's a good loan.
Justin Bogard:Yeah, there's a pride factor to them, right, right, right, you had mentioned something before we got on the recording here, and that was often time you hear people being confused or not understanding the clear definition of what a subperforming loan is versus a reperforming loan.
Richard Thornton:Yes.
Justin Bogard:And I think we wanna set the table here for this, And so the simplest definition that I can come up for a subperforming loan is that you have a performing loan until it doesn't really perform, and then the next category is really subperforming. So if it's not paying every month, doesn't have to pay on time. if it's not paying every month before the next due date, we call that a subperforming loan, meaning they're either gonna get caught up or they're in between a performing and a nonperforming. That's kind of a subperforming category.
Richard Thornton:So what about a consistent slow pay, in other words, somebody who pays, but they're always 60 days late?
Justin Bogard:Yeah, so they're paying two months worth of payments every 60 days and they're getting caught up. That's gonna be a good definition of a subperforming loan.
Richard Thornton:Okay, and so what about I'm trying to be a little bit exact here for and give examples What about somebody who is in our portfolio right now and she doesn't pay for three or four months, and then she pays and comes current and then doesn't pay for three or four months again and then pays and actually pays in advance for two months and then doesn't pay for a month or two and then makes one payment, and so basically it's very erratic. What is that subperforming?
Justin Bogard:That'll be a new category called a subnonperforming loan, because they reach that nonperforming status. So once somebody does not pay for three months in a row and you don't have any payments come in, they get kicked over to what we call a nonperforming status. And that's really when we can accelerate the default clauses in a note into our land contract And so we can try to initiate the foreclosure process or reach out and hopefully do some loss mitigation with them. But that does happen And we do have one in our portfolio to where they do just get caught up all of a sudden and they just kind of ride the wave for a little bit. So they're kind of in between a subperforming and nonperforming. So that doesn't happen very often, but yeah there's. You can say they're either way. you can say it's a non-performing loan or you can say it's a sub performing loan And you can be. you can be really accurate by saying both.
Richard Thornton:Hmm, so what's the difference of pricing?
Justin Bogard:So if, if we were buying and obviously that that pay history, erraticness, is Extremely important to view and look at it over a long timeline. So if you see that happened recently and in the past maybe It was they had a pretty consistent pay history and they paid every month. But all of a sudden you realize something's going on in their life That's causing them either to almost lose their house or they're just in a current struggle In whatever life cycle they're in right now and they just need help getting caught up and they'll probably stay caught up in the future. So you kind of have to take a gamble with that one. So it would be priced lower because you're not, you're uncertain as to what's gonna happen once you buy it.
Justin Bogard:So if someone was consistent and they just this is their MO, like you said, they pay every 60 days, they pay two months worth every, then we know what's gonna happen and we see it being habitual. Then yeah, we're not gonna price that too low, but we're gonna price it a little bit lower. And then if the loan was paying every single month on time, because for those of you that have an experience owning a note, you do get the benefit of getting late fees as well. That's written in a note. So that's those late fees are gonna continue to add up and that's gonna be more money in your pocket as well now.
Richard Thornton:So you're having this note serviced By, you know, xyz servicing company Who gets late fees.
Justin Bogard:It depends on the servicing company. Some servicing companies say that they get all the late fees and you have to accept that and Most servicing companies just do a 50-50 split with you, and there are a few out there that actually give you the entire late fee. I can't think of any off the top of my head, but I've seen it in the past where they would give you the entire late fee to the lender, which would be the note owner.
Richard Thornton:I can think of one that gives you the entire late fee. Okay.
Justin Bogard:So now a reperforming loan. So a reperforming loan is a loan that has gone through a default and They have remedi the default by basically renegotiating the terms with the lender or coming up with some sort of probationary period to say, i Just need to show you I'm gonna make this many payments Consistently in a row, and then I want to alleviate myself from possibly being accelerated into foreclosure. So wait a minute.
Richard Thornton:Go through a default? or what if they just didn't pay for six months? and then they got a job and they started paying, and Now they're? now they're paying, fine, but they hadn't paid you for six months.
Justin Bogard:Yeah, that's, that's going through a default. So the definition of default is when they go beyond 30 days, they're in default technically. So once they reach the non-performing status, as we alluded to earlier about three months not paying They're in non-performing status.
Richard Thornton:They're just not performing Okay and so I'm trying I'm sorry, i'm trying to delineate something there for the other, which is that you are terming default as a time period, as opposed to an actual Notification or certification by documentation.
Justin Bogard:Yeah, there's many different ways. Time is one of them. Mm-hmm, not paying your taxes or your Homeowner's insurance is another way to default. Mm-hmm and then obviously, not making your payment is a way to do a default.
Richard Thornton:Okay. So if you haven't bought your kids any ice cream for four months, then you have defaulted on your ice cream allotment for your kids Was a contract, it was in there and you real big doo-doo, right.
Justin Bogard:Yeah, it's depending on how little they are to okay okay, because they won't forget it.
Richard Thornton:Oh, you know, they won't.
Justin Bogard:Ice cream, that one day That's right. So that's the difference between a sub performing and a reperforming loan.
Richard Thornton:All right, well, that's, that's a good delineation. I hope that's helpful for people.
Justin Bogard:I hope it is too. All right, richard, we are out of time for today's Podcast episode number 13 on season 5, be the bank podcast brought to you by American note buyers. I'm Justin Boecker. This is my co-host, richard Thornton, and we will see you guys on the next episode. Great See you then. Thanks for listening to be the bank.
Narrator:We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus, check out our channel on YouTube and follow us on Facebook and Twitter at be the bank, and on Instagram at be the bank podcast. Be the bank is sponsored by American note buyers. Thanks again for listening.
