Be The Bank
Be The Bank
014 - Beyond Face Value
Have you ever thought about how hidden costs could impact your real estate investments? In our latest episode, Justin Bogard and Richard Thornton unravel the mystery behind non-performing loans, revealing the true implications of owning a real estate note and the importance of correctly pricing a loan based on exit price, yield, and cleanup costs.
If you're a non-performing note buyer, then this episode is a goldmine for you. Our conversation highlights the importance of having an extra pair of eyes to analyze a deal and how having local insights can be a game-changer for your investments. We discuss how crucial it is to have a strong network and trusted local partners to maximize your investment potential. Additionally, we touch on the risks of not having local knowledge and experience, and how it can eat into your profits. We also share more avenues where you can find local insights, such as realtors, city planning departments, and fire departments. Tune in to our captivating conversation and arm yourself with these insightful tips and tricks!
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 Bogart, 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 Bogart.
Justin Bogard:Welcome to episode number 14 of season five of the Be The Bank podcast. Today we're actually going to be talking a little bit about hidden costs with non-performing loans and the information that Richard and I will discuss with us, So if that sounds interesting to you, I would like you to stay tuned for more. Richard Thornton, you are in the same virtual room as me right now. In your presence. How often does that happen? Yeah, and I think, are we actually here? We're here.
Justin Bogard:Oh wow, look at that. We're not a virtual clap. This is the first time we've been in the same room recording together, so this is quite different. So anyways, richard, how have you been?
Richard Thornton:I've been good. I've been a little bit jet-lagged at the moment, since I'm out from California. One does not sleep as well as one would like. Plus, when you're getting up, you're taking red eyes. It is what it is.
Justin Bogard:Yeah. So Richard has flown out to Indianapolis to kind of hang out with uh, with me, go a couple events with me here the next couple of days, and so we decided to record this podcast together, since we were in the same room. We hadn't really done that before, so fancy that anyways.
Justin Bogard:Yeah, the weather is is nice here, it's high 80s and getting humid, so it's the traditional july weather in indiana, yay, um.
Justin Bogard:So today, richard, i know I mentioned that we were going to be talking about Hidden costs with npls, and so I think this is a great topic to kind of get into With folks that have never invested in non performing loans npls, just so you know, as our little acronym we say for non performing loans.
Justin Bogard:And what is a non performing loan? Well, basically, it's a loan that hasn't paid in about 90 days or longer, and we consider that a non performing loan and those we can buy at a Bigger discount because they're not performing, they don't have any cash flow. So you're assuming that the borrower is just not going to pay you, or you have to work With them to get them to start paying or remodify the loan, or, lastly, you would go through a foreclosure process. And so when you are Buying a loan that's already performing or already non performing, richard, what are the some of the things in your experience now that, uh, in your own words, that you can kind of tell us Basically? how are you going to price it and what you kind of looking in the back of your mind going Yeah, this, this could cost x y z right.
Richard Thornton:Well, obviously, the biggest thing you always want to look at is what do you think your exit price is going to be? Are you going to renovate it or you're not going to renovate it? and, uh, you know, before we get down this road too far? one thing I'd like to mention is that, uh, a lot of people think that there's a lot of npls, uh, post covid, coming down the line. Um, i agree with that. I think there are going to be more. I don't think we're going to get this tsunami that we thought we were going to get, due to some of the federal programs, but we are going to see more of this product, so it's it's all um Beneficial for us to know about that.
Richard Thornton:So, when I'm looking at something, i'm really pricing Uh what I think I can get for my eventual sales price, um, and what I think is a good deal on yield, uh, but I guess, now that I've been through a number of these Uh, i'm starting to really lower my price. Actually, um, you're you're going to hit the home run. Hopefully, the home run is going to come at some point, but you really have to look at Um, and this is tough because, more times than not, you're not at the site. Uh, you have to look at what your cleanup costs are going to be. How much are they actually going to charge you if you have to clean the, the property out, if it's been trashed, if it doesn't sail, sail right away, which you're not going to know You may have to clean it out two or three times. So that just happened to one on me. The fellow I had looked at it to start with said well, the cleanup cost will be About $3,000. And it came back and I said well, gee, there's a whole lot more stuff going on in the with mold and whatnot in the in the basement That we thought your initial clean out's going to be out be about $10,000. Oh, geez great. And then I had to before we finally got everything along as well as possible.
Richard Thornton:Um, this was a deed and loo. You know there was no Uh Big problems there, but I found out that I had to get the yard and all that cleaned out twice because the local neighbors were now using it as a dumping yard And I had a new toilet in the front yard. Oh, wow, yeah, lots of fun, right, um, and I had to get my Deed and Lou drafted And so there was actual legal costs there And taxes, back taxes, unpaid taxes, unpaid water bills, unpaid electric bill, electric and gas bills. Now I probably spent $5,000, $6,000 on just those right there And I thought there would be some.
Richard Thornton:I just this borrower up to that point and this was a very friendly instance where she called me. She said look, i've had a disabled lady. I can no longer make the payments. Basically, here's the keys and I'll do everything I can. I got into it and I found out that she was living in what most of us would call squalor, on a house that Zillow and everybody else said was worth $130,000. And I ended up getting $22,000 on the sale. So I took it in the chin quite heavily on that. You have to factor as many of those things in as you can and still try and be competitive.
Justin Bogard:Yeah. So you got a lot of great information in there, so let's unpack that and back that up one detail at a time. So the things when you go through an unperforming loan and you're bidding on the loan to buy it. Obviously, if you had the magic number of exactly what it's going to cost to fix it, this would be easy and everybody would be do it. However, that's not the case for non-performing loans because, a you know what condition the outside of the property is and, b you don't know what condition the inside of the property is, unless you have somebody that has recent photos of what that looks like, which is pretty much slim to none if that's going to happen. So you have to anticipate about what you think it's going to cost to repair the house or what you think it's worth today. Based on just the outside pictures, you can look up liens on the property to see what's against it like property taxes. So you'll know that You can talk to the building enforcers or the codes for the building enforcements or any liens. That way You can find out from utility companies about how much that stuff costs. Some places are harder to get that information than others, so you have a good idea of what they're behind on. There's also some hidden things, like Richard mentioned. When you get inside you don't know if you've got a $500 cleanup or you've got a what you said about $12,000 cleanup with the yard and everything. So you just have to kind of put your real estate investing hat on and just understand some of those things.
Justin Bogard:Taxes are greatly different in different counties and different states. Here in Indiana we were having a discussion this morning at a networking meeting with Richard and I were talking about how taxes in California, property taxes, are different here in Indiana. Indiana is pretty mild as far as property taxes are concerned. Typically it's a few percent of sales price is what taxes are. Then we have some exemptions on top of that. California obviously is much different and I can let you speak to that. So what is taxes in California property taxes?
Narator:That was my lead in my segue.
Richard Thornton:I was teeing it up. How did you still let you hang there?
Justin Bogard:I was gonna let you, just let you hang, i think. Richard fell asleep on me. I think that jet lag really took you out, buddy. I need to get some more coffee in you.
Richard Thornton:Well, i mean, you actually bring up a very good point in terms of California, because you've got a lot of homeowners who have been in their homes there for years. There's a proposition called Prop 13, which is near and dear to a lot of homeowners' hearts, because it limits the increase to 1% per year. Well, if you're taking over a house that somebody's lived in for 30 years, the taxes, very well made, triple. And so if you go into it and say, oh, the taxes were only $4,000, even though you're owning it a short period of time, they may be triple what you thought it was gonna be. And if you're doing any improvements, they're gonna do a reassessment And they're gonna say, hey, look, it was worth this, now it's worth this, and so you gotta pay taxes on that interim period. So that can really bite you.
Justin Bogard:So what I think people would be best to understand during their due diligence and trying to bid on a non-performing loan is taking this stuff into consideration of what you know. obviously you have to spend some money to really dig into exactly what's going on. So you make what's called an indicative offer and that offer is subject to further due diligence, meaning you've done all your free due diligence and you feel like this is what I think it's worth, and then you dive into specifics after that to figure out exactly right. what are these liens? You're gonna run specific lien reports and title reports to know exactly what's going on And so you can kind of subtract those numbers if they were worse than you thought from your bid. So that way your net price is really where you wanna be, which is probably 65 to 70% of what as is value today is what your goal is, just like if you were fixed and flipping a house.
Justin Bogard:that's kind of the golden rule is. you wanna be kind of 70% of value minus kind of expenses and repairs. So that way you can have a profit in there, as we're all in this game for a profit. We're not in the game to lose money, like you know. unfortunately, that's happened to you, unfortunately, it's happened to me. It's happened to many, many people as well. even in the note space, sometimes things just pop up that you just you didn't catch during your due diligence process and you definitely learned from it. So I know I have learned from it. It sounds like you know you've learned a few things from your St Louis asset that you were just mentioning, so it's interesting how you have to bid on these things.
Richard Thornton:So yeah, you also have to look at the timing factor. I mean, don't be fooled by the people that say, oh gee, this is Texas, it only takes you 30 days to foreclose, or oh gee, it's you know whatever. I mean in this instance that I just went through. The borrower was very nice. She called me up. They said look we're. You know we can't make the payments. We'll be glad to sign it over to you and D to Lou. And by the time I got the D to Lou draft, it got them to sign. It got everything papered, you know, sold yada yada soup to nuts. We were looking at 120 days. So you can say, well gee, that's really fast. Well it is, but I had to pay the taxes for 120 days.
Justin Bogard:Yeah.
Richard Thornton:You know and carry all those other things, And so if you're not careful, your profits could get eaten up very quickly.
Justin Bogard:Best advice I can give somebody Richard, i'll let you weigh in on your thoughts as well is you really want to have somebody else that's done? at least you know 20 or 30 of these kind of look over your shoulder as a second set of eyes and just saying, hey look, i would be looking out for this, i would watch out for that. I don't know anybody that's done, anyone that county. Maybe we ought to ask for somebody that's done a non performing loan in this county of this state, because it really does help to just know that information. So just you know, continue to grow your network And I would say that's the best advice for first or second time. No, no, non performing note buyers is really to tether yourself to somebody.
Richard Thornton:Yes, and or have boots in the ground that you really trust. That's true. You know somebody. Maybe you want to say focus on Omaha or maybe Kansas City or wherever, so you have a local partner or a local trusted partner. Maybe it's going to be a contractor that's potentially going to get the deal, so he likes working with you or something like it, he or she, to go, actually go out and look at it And, if necessary, peek in the window and find out what the condition the kitchen is in and all this type of stuff And do what you can.
Justin Bogard:That's legal. Obviously, don't do anything illegal, but do what you can. That's legal. Once you own the property, obviously you can get in there and you can secure it. If it's vacant, it's non performing, like. There are things you can do as a lender. Don't feel like you can't have control of the property. If you need to winterize it and no one lives there, you are able to do that by the statutes inside of the mortgage or deed of trust agreement. Whatever you're using, you're allowed to do that. So you mentioned a couple of things about boots on the ground. So what are some other sources for boots on the ground that somebody may not have? think of that say, hey, that's actually a good source for a person I could find locally there, because I would say, no one's going to know everything and or everybody in every single city or town, right?
Richard Thornton:So you know, i usually call a couple local realtors and I'll say, look, do you have a presence in XYZ market, this neighborhood, whatever it is? So it's not just if it's Kansas City. You can't just call up a Kansas City realtor. You've got to say, gee, are you familiar with the Linwood neighborhood, or whatever, so they really know that. Another thing is it doesn't hurt to call the city and the city planning department. I came very near to buying a house outside of Des Moines, iowa, for $40,000. I was going to buy the mortgage for $40,000. I called the city and was chatting with some family planning department and they said where is this house? I questioned it and they turns out they had a program that they were going through and buying up houses that had been vacated because they had so many in the area and they're only paying $12,000 per house and my house was the house that I was looking at was actually going to be demoed within the next couple of months for $12,000. I would have taken a huge loss on that.
Richard Thornton:So, somebody who just knows the area.
Justin Bogard:Yeah, that's a good point. I don't think I've ever talked to a city planning person. Fire department they have a lot of those guys are volunteer firemen and so their full-time income is not to be a volunteer fire person. They also do handyman work. It's very common for somebody in that business to do handyman work, so they also know the street that their fire department monitors and takes care of that neighborhood. So it's always good to reach out to the local the closest maybe police department or fire department.
Justin Bogard:Just ask the question, say, hey, i'm looking to buy this property in this area. I'm just curious do you have a lot of calls in this area? If it's police department, are you getting a lot of crime in that area? Like, just ask some questions. It doesn't hurt, especially when you're buying one at a time. You can be very detailed as to your due diligence on what to do When you're buying in bulk, when you're buying a tape of loans. It's the shotgun approach. You can't be that detailed on every single one, otherwise you'll be spending months doing due diligence and you'll not get very far right. Someone else will take the deal out from underneath you.
Richard Thornton:That's true, and I think if you're buying in bulk, if you're lucky enough to buy in bulk, you've got to pretty much assume that you're going to have to be in and out as quickly as possible. In other words, you're going to do as little renovation on the property as possible, you're going to get in, you're going to assess it, you're going to find out just what it takes to bring it up to salability and get rid of it as soon as possible, which is a whole different attitude of doing it And you still have to be careful for all the things that we mentioned. You know, on paper, the house that I talked about earlier Zillow realtorcom they all said the house was worth $130,000 and my basis was $30,000, and I thought, hey, i'm easy here.
Justin Bogard:I'm cool, right, and you're not looking at the Zill price going. It's definitely exactly $130,000. You're just going. Okay, they're saying it's $130,000, what's to say, conservatively, it's like $80,000 or $90,000. Right. And then you're like I got $30,000 into it. Okay, i feel pretty good about this, even if it needs some work, and sure enough, that's not the case.
Richard Thornton:Right, so that's where boots on the ground really help, yeah.
Justin Bogard:Yeah, all right. So with non-performing loans there are. The question I want to pose to you is do you attack the due diligence or the pricing, i guess I should say when you know that the loan is like going through foreclosure process with the current note holder, or the loan is just non-performing and you know you're going to have to go through the foreclosure process Like, do you look at those differently and weigh that into your calculation?
Richard Thornton:Yeah, i mean a lot of people will say if it's in foreclosure, that's a whole lot better, right? Yeah, because you know what your timeline is going to be, hopefully, unless they're playing you somehow Yeah, and I've got one of those going right now too. That's a whole different story if the borrower is just playing the court. But yeah, you have to look at those factors when you get into it.
Justin Bogard:So you mentioned the borrower. You know playing the game and one of the games that they can play and legitimately they can do this and unfortunately sometimes they have to. For them or sometimes it's a saving grace is bankruptcy, and so they can go through bankruptcy court and the court can decide whether excuse me the mortgage can get thrown out or not. Now that's kind of the worst case scenario. I don't think I've seen many where the mortgage debt was thrown out. Typically, if they're able to get some income, they you know the mortgage is like the for sure thing that they have to pay. Maybe they can get their credit cards and stuff wiped out or possibly car loans. Typically not. But yeah, the mortgage stuff is typically always going to be there and somebody's going to make sure that the person gets their money garnished and it goes towards paying back the mortgage company, so that that can be like a five year process to have that stuff paid down to go through the bankruptcy part.
Justin Bogard:But the cool thing about bankruptcies that a lot of you may not know is that there is extra money on the back end that you don't, that you might not know about on the surface. As to looking at the bankruptcy number, because we have we've had a couple and we currently have one now and one of our portfolios And there's like two or three thousand dollars left at the back end of it that are still owed in, like the post petition type of stuff. Not only do they owe on the unpaid balance, they owe, you know, in the late charges and any advances that you make, but there's also like this back end money as well. So look into that when you're looking at bankruptcies. They can be actually really sweet deals for somebody looking for some cash flow.
Richard Thornton:Right. So the one another one that I've got going right now when I'm saying playing, i'm not a lawyer, so I don't know all the ins and outs of this at all, but my understanding is is is that they can the borrower can let it be in bankruptcy, let you be get to a certain degree of distress, and then come in and bring a current just before you would for actually foreclose on it and then not make payments and keep doing that again and again. They can do that like three times or something like that, which can greatly increase the amount of time that you're not getting any return on your money.
Justin Bogard:So ultimately, richard just to go back to the MPL stuff, after we sidetracked the MPL is in general in my experience I've had a lot more successes and I've had failures and I think it it stems down to how adamant you are about doing your due diligence and just checking for how you're doing the basic things, but just kind of digging just a little deeper and finding out the story. We've we've shared loans on this podcast about how we've had private lenders that their borrowers are just refusing to pay them but they're more than happy to pay us.
Justin Bogard:We've had situations to where all we had to do is reach out to the borrower and work out a deal with them and they're happy to pay and they're willing to pay. They just couldn't work with the previous person that was a note holder. There's many different reasons why if a loan looks bad on paper or if it sounds bad from the note seller, it could be a great opportunity for you. Just dig just a little bit deeper on your due diligence and just find out what's going on. do your own research, get the facts. That's the key to non-performing loans. Ultimately, you should have more successes than failures. You can't bet a thousand in this business with non-performing loans I don't know anybody that has unless you're just able to get literally pennies on the dollar for deals, then you can take a swing at several of them like that without doing much due diligence. But ultimately you should have more successes and failures.
Richard Thornton:I agree.
Justin Bogard:All right, that's about a wrap for today. This is season number five, episode number 14, the V2Make Podcast brought to you by American Notebuyers. We got Richard Thornton and Justin Bogard on the show today. We will see you guys on the next one, which we'll be recording in a couple of weeks. Everyone have a safe hope. you have one. how to safe 4th of July and we will see you later. All right, take care.
Narator:Thanks for listening to Be The Bank. 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 Notebuyers. Thanks again for listening.
