Be The Bank

020 - The Devil Is In The Details

October 05, 2022 Justin Bogard Season 4 Episode 20
Be The Bank
020 - The Devil Is In The Details
Show Notes Transcript

Be The Bank S4 Ep20 - The Devil Is In The Details

On episode 20 of season 4, Justin Bogard and Richard Thornton talk about how emotion can play a big role in finding great deals!

Key Takeaways:

  1. Emotional Sellers and listening to their Story!
  2. Bank Trustee was a shoe in for Richard!
  3. Not Every Deal is a home-run, but it is sure nice when it happens!

Resources and links discussed

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:

Narrator:

Interested in real estate. How about wealth? Well, they go hand in hand . And here you'll learn all about it, about it. Welcome to Be The Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, just in Bogar, 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 , your bank. This is be the bank brought to you by Bright Path Notes. Now here's your host, Justin Bogar.

Justin Bogard:

It is episode number 20 and today we're gonna get into what I call the devils in the details and really discuss how emotion plays into buying , uh, seller finance notes and how you can solve , uh, seller's problem and make it , uh, two your benefit. So stay tuned. You're not gonna wanna miss this Richard Thor and thanks for being on show. Episode number 20 today,

Richard Thornton:

Mr . Bogar. Very , uh, pleased as always. I could say you're sporting quite a backdrop there today. I mean,

Justin Bogard:

Oh yeah, you like this? Oh

Richard Thornton:

Man. The big splash you got the lighting .

Justin Bogard:

Yeah, it's got some interesting artwork behind me. I'm at a friend's house , uh, again , uh, similar to the friend's house, the same friend's house I was at when I was recording and there was all the Ohio State stuff in the background. Mm-hmm. <affirmative>. So I just went to a different place cuz uh , it was just too much Ohio State stuff for me. So he's trying to convert me from a Purdue boiler maker to a Buckeye, but I dunno if it's gonna happen.

Richard Thornton:

I see . Well, you know, so Well I like your artwork in your setting today.

Justin Bogard:

Thank you very much. I appreciate that. And those of you that are wondering about this artwork, you can go to the Bright Path Notes YouTube channel and you can check out the video cast of this , uh, episode number 20 today. So Richard, how are you today? Is it getting cool where you're at? Cuz it's very chilly here in Indianapolis.

Richard Thornton:

It is. You know, I've got my final shirt on and here in Petaluma we get what's called the the morning gloom, which is a marine layer that comes in off the ocean. And it's actually, it's, it's what I mean , we're right on the edge of the wine country and it's what makes , um, this area so desirable for wine and that the days actually get pretty warm. But you've got this cool wet at night, so much so that it's, there's actually , uh, water on the , on the ground in the morning when you wake up . So it's a cool morning.

Justin Bogard:

So dew , That's right, you're three hours behind me. I always forget that sometimes I'm , I wake up and I'm , you know , I'm working after a couple hours and I'm like, Oh, I need to ask Richard a question. It's only about, you know, like nine or, or maybe nine 30 at my time. I'm like, Oh wait a minute. That's really six 30 his time. Yeah , every

Richard Thornton:

Once in a while I get a text six o'clock and I hear it and I go, I'm not answering one . Can

Justin Bogard:

You , can you call me? And you're just like, at six 30 in the morning, you're barely white going on . Jesus. I have like two cups of coffee yet, man. Come on.

Richard Thornton:

That's right.

Justin Bogard:

So , um, today I wanted to get into the , the devils in the details. So there's always some great stories that you have with, let's see, seller finance paper that we buy together. And one in particular that has come up recently and that we've actually discussed within the last couple of days is, is one to where the, you give me the information that you get from the seller, right? You give me the, the terms of the deal, the interest rate, how much the selling price was for the house, the down payment, all the details that I need to kind of underwrite it and the address. And so I look it up and I find some information and, and I message you and say, Hey look Richard, here's what we could offer for this note here. And oh, by the way, I see this little foreclosure information in 2021 on this deal. And of course you didn't know about that. And so you take that information, you kind of go to the seller. And I just kind of wanna talk quickly about , um, how this conversation started with the seller and , and after I gave you this new information, how that kind of cleared up some missing information and , and what we really saw as the story of what's going on to help , uh, this seller out.

Richard Thornton:

Yeah. Well I think in general it's , um, good for the audience to know, as you know, that quite often we will talk to people and , uh, everything's fine. The note is fine, and then you talk to 'em a little bit more and they say, Well, you know, they really missed a couple payments. And then you get a little bit further down the road and you find out, well, they haven't really paid me for the last year and blah, blah, blah. So we, we , you get a lot of that right? In this instance , um, the woman who was a seller was , uh, quite scattered, quite frantic. Um, and she had , uh, actually got a regular conventional loan which had been sold. Um, the payments were minimal, but , uh, she decided that she wanted to sell the property and she sold it at a quite handsome profit and carried back a note .

Justin Bogard:

Let me let jump in real quick. Did she own this house? Or like , I'm sorry, does she live in this house as her own property?

Richard Thornton:

She did. She did at one point. Um, but then she sold it at quite a handsome profit. Somehow the paperwork got messed up though, and the escrows were not being collected. She was supposed to collect the escrows. They were not being paid to her and they were not being paid to the city. So she had to rescue , even though she didn't open the open the property, she felt that to keep it from going into foreclosure, she had to rescue , um, and pay the taxes and insurance herself with no assurance that she was ever gonna get paid back. Um, and now the person who she sold it to is shorting her payments. So she's being squeezed there.

Justin Bogard:

So she, she owned the property, she lived in it and she resold it to someone else that was going to live there. And she carried back the financing for that property.

Richard Thornton:

Right? She wrapped the note that she had been that , that she was , uh, being financed under.

Justin Bogard:

And she currently, she, the seller is currently has a note on the property. So she lived in this property and she had a mortgage on it, then she resold the property as someone else and carried back financing for them. But she didn't necessarily pay off that first mortgage that she had. She kept it and was using the monthly cash flow coming in from this new person to pay off that mortgage payment every month plus keeping whatever's left over for herself.

Richard Thornton:

Right. She, so she wrapped that, but even though she was able to keep some money for herself, the escrows weren't being paid the taxes and insurance. So then she had to take that money and pay the taxes and insurance. So she was really in a double bind.

Justin Bogard:

Right. So she was getting, like you said, she was getting squeezed from both sides. Right.

Richard Thornton:

So going into it, we didn't know that, we didn't know any of this. And you know , on top of this, I think she's a little bit short of cash in general and that's why she wants to sell a note ,

Justin Bogard:

Right?

Richard Thornton:

So her emotions are very high, her need is very high. We don't want to overly capitalize on her distress and we won't, but we still wanna get a good deal.

Justin Bogard:

Okay. So you gave me the information and I gave you a price because our assumption was at that point it was a performing loan and we know no different and the borrower is current. And so we priced it as if we were purchasing a performing loan, which isn't a huge discount, but it's just a discount that makes us comfortable based on what the down payment was and the value of the property is today. And I think you and I both look at the property, I think it's worth, let's just say $150,000 today and I think right , the borrower owed, I wanna say something like $110,000 . Does that sound about right?

Richard Thornton:

Yeah.

Justin Bogard:

Mm-hmm. <affirmative>. Okay . And then so she, she owes on her debt around $50,000 on her mortgage, Is that correct?

Richard Thornton:

Correct.

Justin Bogard:

Okay. And so there is a taxes and insurance on top of the principle and interest payment that they make. So let's just say that's , uh, I don't knows $350 is that sound ? I don't think we know exactly what it is , but Right .

Richard Thornton:

That's, that's enough.

Justin Bogard:

So then the payment that the seller is getting from that, from her borrower is let's say exactly $350 more than what she has to pay on her underlying debt. So then if she has to come up with that money, or if she has to pay it from what that borrower is making, so let's say that payment is , uh, $500 that she owes , uh, this , this bank the underlying debt, and then she's getting , um, $850 from her borrower of just principal interests. So then she's using all of that money to pay. I'm just, these aren't exact numbers, but she's using all that money to pay for that mortgage plus the taxes and insurance. Then she really has nothing left over. She's kind of paying the taxes and insurance for the borrower when the borrower is supposed to be paying extra on top of that to pay for the taxes and insurance.

Richard Thornton:

Right.

Justin Bogard:

So how far does she get behind ,

Richard Thornton:

Um, which one

Justin Bogard:

<laugh> the underlying note since it wasn't being paid for a while and I think she, you said she realized it after a while that it , she wasn't collecting for taxes and insurance or she knew it the whole time and she just kind of Yeah ,

Richard Thornton:

So she was $14,000 short on the taxes and insurance. So that's what she had to come out of pocket

Justin Bogard:

Because this was getting foreclosed on the first mortgage, the underlying mortgage for the seller that was getting foreclosed on.

Richard Thornton:

Well, it wasn't the mortgage, it was, it was a tax lie sale.

Justin Bogard:

It was a tax lie sale. Okay . Right,

Richard Thornton:

Right. Because the taxes weren't being paid.

Justin Bogard:

So that's even more dangerous.

Richard Thornton:

Right , Exactly. Because it primes the , and , and I should, you know, I think some listeners out there might be saying, Well this is kind of complex and , and it is, but this is a good cautionary tale. I think a lot of people , um, really get out there and herald at doing raps and they say, Oh, raps are the best thing in the world. And this is a cautionary tale. Yes .

Justin Bogard:

You've

Richard Thornton:

Got somebody who made a wrap , they've gotta make payments and they're rap and the person that they sold the house to isn't making payments. So they're getting squeezed by not getting the income that they need, plus the taxes insurance aren't being paid, plus they're still gonna make payments out of their , on their, their own primary. So

Justin Bogard:

Right. Yeah .

Richard Thornton:

Take note,

Justin Bogard:

<laugh> , they take note . So in order for that tax lie not to be enforced mm-hmm . <affirmative> , right , they have to pay off that tax lie holder mm-hmm . <affirmative> and have to pay them for a little bit of interest. So that's why that number is, we'll just call it 15,000 out there, right? So this seller is obviously upset, right? Mm-hmm . <affirmative> , they feel like they're squeezed from both sides. They don't have a lot of , um, uh, enforceability they perceive as to move forward to, because as borrowers kind of saying, Eh , I'm not gonna pay the taxes insurance. That's kind of your problem is it sounds like that's what , how they see it.

Richard Thornton:

Yeah. She's abusing the situation for , we don't, we don't know why she's abusing it, but my suspicion is she just thinks she can get a whole away of it. So she's abusing it.

Justin Bogard:

So now we have this story and so this changes the picture and the dynamic of the situation. So if we were just performing note investors only and that was our business model, Richard, we'd probably say, Okay, we understand this really is not a good situation for you, but there's nothing really we can do about it because that's not the business that we're in, but we'll take these opportunities because this is an opportunity for us to really help the seller, number one mm-hmm . <affirmative> . And then number two, we can also get this borrower back on track by just changing the position of really the team that you're playing. Right? So she was going against a team that was kind of like a minor league team, a little bit unsophisticated, not really a professional team, and now they're gonna go up against a professional team and then they don't have a lot of choices because we understand the ramifications and we know how to enforce these rules and stuff based on the deto trust that they signed or whatever land contract , whatever they signed.

Richard Thornton:

Right? So as you know, a lot of the non-performing paper that we find , um, is due to divorces. Yeah . Not divorces that happened yesterday, but ones that maybe happened a year ago or five years ago or , or whatever. And the Xes get into dispute. They're tired of dealing with each other , um, whatever. But , um, one person isn't paying the other one party isn't paying. It happens with brothers and sisters happens with um , all these beneficent people who say, GE , Mr X worked for me for a long time, so I'm gonna make him a 0% mortgage or whatever. Then they , they take advantage of that. So when you change the parties, what, what we are buying is a non-performing loan, as soon as the , the pay or realizes basically that there's a new sheriff in town and a sheriff in town is not gonna take all this stuff, then all of a sudden you've got a very nice performing note on your hands. Voila . Yeah. So you bought, So the arbitrage for us or anybody like this is that you're buying a non-performing note and getting a performing note

Justin Bogard:

And you can, by definition, it's tough to say if it's performing, sub performing , not performing , cuz it's kind of in this nuance error where they're making a payment but it's not a full payment because they're still responsible for taxes and insurance. Because in the documentation of the security instrument that they sign the borrower, they are still in default if they don't make those payments, even if they're making their principal interest payment is what I'm trying to say. Right . If they're not making the taxes an insurance payment or keeping it up in this, in the owner of the note or the note holder has to advance that for you mm-hmm . <affirmative> , we're still in breach of that contract. Right. So by definition this is a nonperforming loan, even though you see cash flow coming a monthly, so it's kind of a unicorn not performing loan .

Richard Thornton:

Yeah. And you don't know really if that person is going to respect the fact that there's new sheriff down . Sure , sure . They may say , well , you know , sorry , and you have foreclose, but your risk of a , of a larger gain , um, is very, very high. And as , as you said, you're taking the , the non-performing No , you're resolving somebody's situation Yeah . Amicably for them, but you're profitable profiting highly from that.

Justin Bogard:

Right. So there is an underlying asset of property that's worth, let's just say three times as much as the first underlying mortgage that the note holder is actually paying on. Right . The borrower still owes, let's just say a hundred, 110 , excuse me, thousand dollars on a property that's worth 150. Okay. So there's a lot of equity they already have into it. So the situation is really good if we're patient and we can just wait it out and go through the proper enforcement clauses that we're allowed to in the security instrument, you know, things will write the ship pretty quickly. And if they don't, well we have a situation to where we, we have , um, pretty low skin in the game versus what the value of what the house is worth and what the borrower owes in general. So it's worth it for us to go through some headaches and , and that's the game that we're willing to play. So we're able to help kind of correct the situation. And then once we have it corrected, which we're pretty confident that it can get corrected , uh, we have an asset that we can sell to somebody that'll be a really strong , uh, performing asset or it's just gonna turn into an REO and we can resell our finance it to someone else locally in that area.

Richard Thornton:

Right. So actually , you know , as we're talking about this, I think we should start a new adjunct business to what we have. We should call ourselves the note therapists.

Justin Bogard:

Therapists.

Richard Thornton:

That's right. So we can work out these situations with people. Right .

Justin Bogard:

We can. Cause that's kind of what you're doing. You're they're on the couch, you're really on the phone. Right. But they're on the couch and they're talking to you and they're telling you their, their story and their situation. And it's sometimes it's unfortunate the person you're talking to on the phone is having financial troubles and they, they foresee this as being a huge problem that they can't, they can't get out of. And then we're able to hear, throw them a safety net and say, Hey look, you know, you can come out this unscathed because it'll fit just about what we need to do based on the, the interference we're gonna have with the borrower to get them to ship righted . And if they don't, we feel like we have , uh, enough money and the deal to where we're not gonna be hurt that much. So we're willing to take that walk with them and and to figure it out.

Richard Thornton:

Right.

Justin Bogard:

Very good. So Richard, you also had another situation to where the seller of a note , um, or the , or the , the borrower of a note was, had a lot of emotion , uh, involved in this in a deal. And I don't wanna spoil it cause I want you to explain it cause I don't wanna butcher it up cause I don't remember all the details of it, but it had to do with the daycare and was this in California?

Richard Thornton:

Yeah. This is a daycare in , in California. And this couple had , uh, taken this , uh, 1910 house, I think , uh, big old Victorian house and turned it into a needle keynote , uh, daycare . And it really looked pretty cool. If you pull it up today on the , on the web and look at it , you go, Wow, I'd really like my kid to , to go there. But the pandemic came along. Um, as you know, daycares all got shut down all across the country cuz you couldn't have a whole bunch of little kids in one room and they had no income. So they very smartly , um, kept their debt service current. Yeah . But they shorted their taxes in insurance knowing that , uh, the city would be lenient with them and the , and the state on their, their property taxes.

Justin Bogard:

Okay.

Richard Thornton:

Okay . So I actually encountered them through the trustee of a bank. The holder of the note died. Okay. And this , uh, trustee had no idea what to do with the private mortgage. And he said, Look, can you help us? And I said, Sure. As a matter of fact, I'll buy it from you. So to make a long story short , uh, cuz it did end up being about a nine month story , uh, I bought the note at a very, very steep discount , um, because it was short on the , on the taxes and insurance. Once the bank realized that they were short, they had to per their trusteeship, bring it current before the note could be sold.

Justin Bogard:

Okay.

Richard Thornton:

So , um, the bank had paid the tax insurance, which was about, I think almost $20,000. I discounted the note. Um, another , uh, $46,000. Okay . And when I got ready to buy the note , um, I had a , you know , potentially a $76,000 gain. Well, un So what's, what's , what's the emotional part? The emotional part is this is just people's livelihood. Okay. They , they've had all, they were known in the community as being the very, you know, best place to go. Um, uh, all this, nobody knew about the fact that the taxes and all this weren't being paid.

Justin Bogard:

Before you go any further, let me dive in and ask a question. So the taxes insurance weren't being paid. Was there any fear at any point that this was gonna be taken from them? Like, I know there's a certain timeline where you need to pay that, that back when you get delinquent on that stuff. I'm not sure what it is in California. So was were you the

Richard Thornton:

Timeline everything was messed up because of the pandemic. Okay . Yeah. Yes. They were coming up close. They were two years behind. They're coming up very close to that in California. Okay . But everybody was being lenient, Matter of fact, the bank wasn't collecting all the debt service for a , a while .

Justin Bogard:

Okay .

Richard Thornton:

Um, because the air had had died. So they had a whole lot of emotion in this. And I had actually offered to refinance the deal for them before I realized all their, their dire straits. And I had an investor lined up and I would've made a nice little brokerage sheet , but nothing close to what I was going to make.

Justin Bogard:

Right.

Richard Thornton:

So meanwhile, they spoke to a local broker who knew the property very well , um, and was able to , uh, arrange private financing for them and paid them off in full. So I held the note for almost two weeks.

Justin Bogard:

Okay .

Richard Thornton:

And had bought it a $76,000 discount. Um, so it was a nice payday.

Justin Bogard:

So how did , how did you get , um, tell me again how you got the note. Uh , how did you sell the note? Did you, once you had it They were reperforming the borrowers Reperforming, again,

Richard Thornton:

I didn't never sell the note . They , they , unbeknownst to me, they arranged to have the property refinanced. So they, they knew that the maturity was up. They had to , and they, they didn't want to deal with me cuz they didn't like my offer, basically. And they had a , a quotes local friend, which we run into quite often, who said he could, he could finance it for him . And he did find a deep pocket investor for them who was local, who knew the property, who had the background, who trusted them and everything. And , um, as we know, real estate is local and so it's much easier to find money for, for local projects. So as far as they were concerned, they were just paying off past due debt.

Justin Bogard:

Right.

Richard Thornton:

And they had to pay off all the taxes and insurance they had to pay off all the past debt service coverage. And when you added all that up, that was far, far in excess of what I paid for the note.

Justin Bogard:

So did you have to transfer a service to a different servicer or it happened so quickly that you didn't even have time to transfer it?

Richard Thornton:

I didn't, I didn't have to transfer it. The , the , the bank was servicing it themselves at the time. Okay . And no, I never even, it , it literally happened in two weeks.

Justin Bogard:

So when did you know that they were getting the loan refinanced? At what point After you bought it or before, Right before you bought it?

Richard Thornton:

Two weeks in a day before I bought it.

Justin Bogard:

Okay. So your game plan became more exciting because you , you had predicted what could happen and it kind of came true.

Richard Thornton:

Yeah. So I had already contracted and I had a , at a had built in a month's review period on the note underwriting period. And I already had a contract with the bank. This was probably two weeks before. Um, they gave us the payoff offer. Yeah . The bank didn't know the payoff offer was coming. I didn't know it was , it was coming. And suddenly I got a call from the bank. Then they said , uh, are you still gonna do this deal? I said , Yes. And they said, Well, we have a payoff notice for, you know, in full. And they were stuck.

Justin Bogard:

Yeah.

Richard Thornton:

They were stuck cuz they had, they had agreed to sell it to me per contract.

Justin Bogard:

So this is a great lesson and this is why you get stuff in writing when you have exclusivity to buy and sell something. So when this , when something like this happens, you're already in the middle of the transaction, so it can't escape from you and you're just sitting in a situation to where it's even better for you.

Richard Thornton:

Right. And the emotions were so high from the, it was so motivated from the , um, daycare owner's standpoint. I mean, they'd put tons of money into this building. It was their business. They had their place in the community. I mean, emotion likely. It was huge in this. Yeah.

Justin Bogard:

That's awesome. Mm-hmm. <affirmative> Richard, thanks for sharing those little case studies here. I know they , um, this doesn't happen on every deal. For those of you that are listening or watching

Richard Thornton:

<laugh> No.

Justin Bogard:

But when they do happen, they're , they're interesting because we do honestly try to figure out how can we help this seller? Um , because we know it will be pass forward to us and sometime in the future if, if we keep continue to help people out with not thinking about the money first. Uh , but the money will come and they come in unique ways. And these two case studies show you how, you know, you can take a situation, you can really help somebody out and, and , and get them going in the right direction. So it it behooved you to network with these , um, this bank trustee. Right. At some point in your career you had , you knew this bank trustee and that's why they contacted you. So you definitely had been forefront in their mind because you do something so unique that they said, Oh my gosh, I got this situation. I don't , we call Richard Thornton to see if, if he could tell me what to do and be nice to him, you know, you were able to buy that deal from him .

Richard Thornton:

Right. So if you want to be a note investor , uh, bank trustees can be a a source. Yeah. But I won't, don't count on it by any means. I mean, you're gonna , you're gonna con you're gonna set a drip campaign to a hundred banks and just, you know, you might get a deal or two a year outta it. Yeah . But what effort did you put into it? You got to know 'em , you put a drip in. Yeah . And so

Justin Bogard:

What's kind of where it is networking in the note business. There's, there's people that I've ran into four or five years ago that may pick up the phone and call me or send me an email and say, Hey, or I remember meeting you at such and such event a couple years ago and I had this situation and blah, blah, blah. Like, I got a phone call yesterday from a guy that I had sold a couple of loans to and he has , uh, several rentals still in his portfolio. And he said, you know what? The , the renter, the tenant , um, came up to me and said, I like to buy this house from you. And then he's, this investor is thinking like, I, Justin, I wanna be the bank on this property that sounds better than being the landlord. So he was talking with me and we were just trying to show him how, you know , you can turn this into a note and then you can keep it for cash flow or you can sell a note or you can sell a part of the note. Like you have a lot of control and you can keep away from that, that nasty word of, you know, capital gains. Right . So you can keep away from most of that as well. Mm-hmm. <affirmative>. So it is always a good situation if you just think about it and you get the story. The devil is in the details. Right, Richard. Right . Right. All right Richard, thanks for being on episode number 20 today. Don't forget to check out the Bright Path Notes YouTube channel so you can see the video cast of this episode today and all the episodes before that. So till next time, we'll see you guys.

Narrator:

See you Justin.

Justin Bogard:

See you bud .

Narrator:

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 Bright Path Notes 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 Bright Path Notes. Thanks again for listening.