Be The Bank
Be The Bank
012 - Cruisin' for a Bruisin'
Are you navigating the tricky world of real estate investing? Join Justin and Richard as they dive into post-closing processes and share their experiences with successful investments that seemed like failures at first glance.
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:Hey, it is episode number 12 of Season 5 on the Be The Bank podcast. I'm Justin Bogart. Today, Richard and I are going to be talking about just some post-closing processes to be aware of and maybe some timelines that you are unfamiliar with or maybe kind of set your expectations on what should be. We got some fun little seller finance stories on some successes when they look like they could be failures. So stay tuned, Hey, Thornton. How's it going? dude?
Richard Thornton:Mr Justin, pretty well today, thank you. It's nice and warm outside and summer is upon us.
Justin Bogard:Yeah, It's been very dry here in Indiana. It's been so dry I don't think we've had rain for, I want to say, like three weeks. And so now there's some air quality issues going on. There's construction for a lot of commercial stuff that's being built around where I live here, So the ground is very dry. So now when the big equipment is rolling through they're just kicking up dust everywhere and just kind of blowing all around. So, like you know, cars are all dirty and like the air has all got a lot of dust and pollen that's kicked up but it's not able to settle without any humidity. So we got a little bit of struggling going on here.
Richard Thornton:So it's really dry, so you haven't put on any moisturizer.
Justin Bogard:Yeah, exactly Yeah, i don't know when it's going to rain.
Richard Thornton:I looked at the forecast for a couple of days I noticed those crowfeeds are starting to come in around your eyes.
Justin Bogard:Yeah, that's why I got the brightness dirt up so much on the camera So you can't see it.
Richard Thornton:You can't see my real Yeah, Yeah. That's why we do this right?
Justin Bogard:Yeah, for those of you that want to check us out on YouTube, just go to our YouTube channel at American Note Buyers. You can see the live stream, not the live stream, the recording of this podcast as well. This is episode number 12 brought to you by American Note Buyers. So, besides the weather, is there anything exciting going on out there in good old Petaluma, california?
Richard Thornton:Well, you know, what's interesting is the local real estate market just continues to confound me out here, because you look at the stats and they say, oh, things are, San Francisco Bay Area is down by 12% and blah, blah, blah. Well, we're in the North Bay, Okay. So we're still fairly close to San Francisco and we're on the older side of town. So a lot of the houses are built in the I don't know lots in the 20s. It has slowed down a bit, but we're still getting houses that are going at $200,000 and $300,000 over asking here. I mean, it's just amazing to me that you think that the market would be falling out of the bottom for a lot of these houses, but we're still getting in a lot of instances and I'm not saying last month, I'm saying last week over asking $200,000 and $300,000 over asking prices.
Justin Bogard:That's incredible.
Richard Thornton:It's crazy.
Justin Bogard:Yeah, i haven't been paying attention this past week on our market here so I don't have any updates for you there, but I guess I am surprised to hear that. I'm surprised that so it's happening. I think you mentioned a stat to me not too long ago. I want to say it was today, when we talked today, that you said 40% of the Bay Area is vacant with commercial right, yeah, downtown San Francisco.
Richard Thornton:Yeah, it's got the highest vacancy in the country. San Francisco. The city is cruising for a bruising because of the ripple effect. It's not just the commercial businesses or building owners themselves. It's the hotels that don't have the people to stay in them. It's the sandwich shop on the corner, it's the shoemaker, it's the guy who repairs your shoes, who people aren't taking their shoes anymore because they're not down there. They're getting the guy who's at home to do it. The rollout of that's going to be interesting. We're just on the very cusp of that, i think.
Justin Bogard:A little funny side note there. You said cruising for a bruising. It made me laugh in psych. That's what my mom would say to me when she was mad at me, but she wasn't always serious. She goes Justin, you're cruising for a bruising. I'm just kidding.
Richard Thornton:Most of my parents are from the Midwest. Of course you're in the Midwest now. I've had a lot of people look at me and go are you from the Midwest? I go no, i'm a Californian. I've got Geeta, my other half, constantly kissing me because something will happen. I want to go with Jeepers. She says Jeepers is that the strongest word you've got is Jeepers? I'm not used to say that all the time It sounds like that's from Idremo Genie, Yeah or something like that. You just go okay.
Justin Bogard:That's funny. You never lived in the Midwest, correct?
Richard Thornton:No.
Justin Bogard:I guess if I had known that you were from California, i wouldn't peg you from being in California.
Richard Thornton:Yeah.
Justin Bogard:Not that being California has its own moniker to it, but never know.
Richard Thornton:Tell us about The hidden things that are going on in the back rooms of loan and note buying these days that you're finding.
Justin Bogard:So what I find interesting is that there are people in the note industry that teach about investing in loans and maybe some processes and kind of how it works, and it doesn't seem to pan out exactly how reality is meaning. Not saying this in a bad way, but what is taught in the classroom sometimes really isn't reality. And so you have a situation where you might not surprise General in any subject matter, right.
Richard Thornton:It's not just real.
Justin Bogard:So when you get into the application of the environment and you buy a note and I'm not talking about, you know, documentation as far as recording stuff, because we've talked about that before I'm talking about actually that transfer of service from who is collecting the payment to the new person that's collecting the payment. It doesn't have to be the actual note owner, it can be the third party servicer. So, like we service all of our loans through a third party servicer, richard and I do not collect on any of the payments personally or professionally. We always use a servicer. So sometimes we buy or invest in notes that are serviced by the individual, that is, the bank, and we call that owner finance, paper seller, finance, mom and pop paper. So that paper is fun to buy because obviously we get a pretty good discount on that type of paper. But also we do have to make sure that it's set up correctly. So when we get this paper and we go to the transfer of service process, i have to prepare these.
Justin Bogard:Certain letters at the government or the federal agencies say that we got to send this stuff out, meaning you got to let the borrower know that the notes been sold. Duh, right, it's pretty obvious. And then you also got to let them know where the heck do you send the payment now. And so they have what's called a TILA T-I-L-A form that goes out to Truth and Lending Act and just says hey, your note has been sold to XYZ company, so expect something from them. Oh, and also they get a second letter that comes in the mail that says it's a good we call it a good buy letter. It's basically an RESPA letter that stands for I can't remember the exact name of it, but basically it's saying hey, i was collecting on your note and now this company is going to collect your note And here's the date that they're going to start collecting on your note on. So if you need to make a payment and you have to do it before this transfer date, just make it to me. And so if you're going to be surprised if it's on this date, then you start using this company And then the new company that's collecting the payment is going to send out their welcome package, which includes you know, hi, i'm this servicer, i represent this.
Justin Bogard:You know the person that owns your paper Well, so that information needs to be sent out. So oftentimes that process can take a little bit of time. So, for example, we just bought a package of five loans for our company And when I bought those loans I bought them from somebody that was using not a loan servicing company but more of an escrow type of company. So it's almost like a glorified bookkeeping thing to where they can collect the payments and they know how to collect payments and they do a good job of it, but they're not technically a licensed, fully licensed servicer, so they don't aren't required to send, like you know, the teleforms, the goodbye letters and that sort of thing. So then the responsibility falls back on me or you know the person that sold us the paper. But since we're the professional in the business, right, we obviously know what to do. It's quicker for us to do it, so we just provide that as part of the closing and it's kind of packaged into the closing cost, if you will, of what the expense is to do that.
Justin Bogard:But you have to get it right. So the new servicing company will want things done a certain way And then you have to make sure that you adhere to that. So this one of the services that we use is really good, but they're also very picky, i guess, or I guess they're really strict on following these certain guidelines And if you don't have XYZ ABC MNLOP done before the transfer date, then you know they're not going to approve of the transfer letter that you sent to the borrower. So you kind of have to go through these hoops and it's like it's pushing and pulling and tugging in And with the previous owner, the previous owner's escrow company, the new servicer, and then you know, get these pieces together. So it can be very time consuming, especially when you're doing five at a time, if you can imagine, to make sure like everybody's got their ducks in a row.
Justin Bogard:On top of that wrinkle Richard, this certain escrow company that was collecting the payments for these five loans that we bought. They have an exclusive right to collect the payment from the borrower. So in order to break that exclusivity with the borrower, the borrower has to sign and notarize a special document that says I want to release the servicing of this note from you to X1, the new servicer. So there was another layer that I had to go through and make sure that all those borrowers got into, let's say, a title company or someplace close to where they could execute that document. So that actually took three or four weeks to get all that stuff lined up and all the information the new servicer needed, and so the transfer service actually took, i want to say, closer to 50 to 60 days, as opposed to typically we would get this done in like three or four weeks. It's for the transfer service. So those are the things that kind of can delay things.
Justin Bogard:You also have to keep in mind there's payments that are probably coming in and out of this process, meaning I got five loans. They're going to be making a payment at some point. Where are they making the payment to? and then, wherever they made that payment to, if it wasn't with my new servicer, well, i got to go find it and collect it or at least tell somebody like, hey, just forward the payment to me. So right there you can see. There's five loans with five different issues and characteristics about it that you have to monitor. So that window of time from when you buy the loan to the next 60 days is really important that you stay on top of your game. Now I haven't even mentioned going over insurance, but that process as well. We have to update all the insurance policies that we are the new mortgage holder.
Richard Thornton:So a small example of that would be and this goes into the if you're not really careful, it falls through the cracks category. Oh, yeah.
Richard Thornton:That's a technical term, of course. So I bought a note recently that was serviced by XYZ servicer. They wanted the tax bills sent to them so that they could escrow for the property taxes When it was transferred over to the new servicer. They did not want the tax documentation sent to them, they wanted sent directly to the borrower and then they would go to the county directly to find out what the tax bills were. And what happened in that process was that somehow somebody said all right, since we're doing it that way, that means that we, the new servicer, are not going to collect, are not being requested to collect taxes and or escrow for taxes and insurance. And when I finally realized this, because tax bills were coming due, i now have to pay $175 fee to get the new servicer that I would not have to have been paid earlier to start collecting taxes and insurance Little things like that.
Justin Bogard:Yeah, there's always these situations that we find out that kind of annoy you that there's not a blanket policy across all servicers. You really have to understand what's going on and kind of dive deep into it. So I wouldn't have known about these borrowers having to sign a release form to release them from an escrow company having the sole right to collect from them, and unless you either read the entire agreement, the servicing agreement that that person had, or they just hold up their hand and say, hey, look, you know you don't have the right to collect the payments until they release the servicing. So you would have to get an account with us in order, you know, to start receiving the payments from the borrower. So it's just. It's just good to understand, especially when you're dealing with owner finance and seller finance paper, if it's not being serviced by a licensed professional loan servicer, you may have to go through some extra hoops and wrinkles to in order to get this thing to be serviced with a licensed servicing company.
Justin Bogard:Most people are buying loans where the loan is already serviced professionally, and so that's not an issue. They just do all the talking back and forth and it's easy and you, as the new note owner, don't have to worry about it. But when you buy the mom and pop paper, it's just another wrinkle, which is why you know we have to buy it a bigger discount because we know Justin's going to spend a lot more time trying to figure all this stuff out and getting it boarded with a new service. But once it's boarded, hey, you know it said, forget it. These performing loans, you know, do great, but it's that. That interim process, richard, those 60 days, it's really important to document what you're doing, have a good checklist, making sure you're pushing and pulling, because this stuff, as you know, richard, can drag on for three, four, five, six months sometimes, because you just forget us now.
Richard Thornton:You're much better at keeping track of that stuff than I am. I keep ticklers and whatnot on it, but it just drives me nuts. I have to go back. Like you say, when it drives. When it goes on for three or four months, i have to go back. I have to look at my notes. I have to see what the issue was, because you don't have just one of these. You've got five of them up in the air all at the same time.
Justin Bogard:Yeah. So this business can be really active really quickly in performing loans. When you're buying in bulk like that, if you're just buying one or at a time, it's usually not as much work to do If you're buying a non performer. Obviously you better be paying attention to what's going on, because you can lose out on your ROI pretty quickly and things can go on for eight, 10 months And you not realize. I could have solved that six months ago, you know. So that's the reason why we pay attention and we have a good process and a clean process, so that we nothing Falls through the clack crack easily. I'll say not everything we catch, but it's definitely. We have a good safety net.
Richard Thornton:Yeah, and I mean an example that I gave with collection of taxes. The borrower came back and said look, i thought you guys were. We're doing all that. So since you weren't, you, pam and I'm going Wait a minute.
Justin Bogard:Yeah, look one. Guys, when you're the no owner, you got to take the horse by the reins and you got to just command the ship. You got to know exactly what a party a is doing and party B is doing and either be the middleman or to say, look, the receivables are this, your deliverables are that, make it happen, and then check up all it and follow up to make sure it's being done at the at the timeline that you get done by.
Richard Thornton:Right, that's the advantage of investing. Investing in Selenica fund? Yeah, because all that's taken care of for you.
Justin Bogard:It's all done for you. It's the white glove treatment, as our friend drew would say done for you done for you.
Justin Bogard:I've got some other Interesting stories that I wanted to share, if that's okay sure so We buy loans that have problems with them on purpose, because we know we can get a good discount for them And we also know that We've been through enough to where we can work our way out of them and we feel pretty confident. Mm-hmm, we had bought Several loans like this. Some of them are performing But they have problems with it, and some of them are not performing and they got problems with it. A Couple of the ones that are not performing that we've bought. We've had really good success with them And it's because of the story. That's the underlying story to it.
Narrator:Mm-hmm.
Justin Bogard:And so we look at the traditional ways to do due diligence on a note and we see things and we go, okay, we can assess the value of it and we think it's this but hey, that's great. But let's look at the other emotional factors here. Let's look at What the communication has been like with the borrower. What is the borrower side of the story? What is the lender side of the story and how? How can we see this going further? and what do we see is the propensity for them to start repaying again or them to pay off the loan.
Richard Thornton:Give us an example.
Justin Bogard:So Richard and I we've mentioned this before in the broadcast We've had a lender and borrower who actually relatives to each other, close, close relatives to each other and They basically had like a falling out. So over the course of many years they've kind of had this let's just call it this dislike towards each other. But one of them was a lender and one of them was the borrower. So obviously the the lender is trying to get payment from the borrower and the borrower saying I just don't want to give you a payment Because I don't like you. So that's the truth of the matter. The lender is, you know, hard-pressed not to go through a foreclosure action because it's their relative and, quite frankly, they just see it as this doom and gloom type of process and they just don't want to deal with that and have all the family drama. So they kind of let things go. We kind of jump into the picture and we're like, hey, we'll buy this note. And we dig into the story and we're like, wait a minute, this person has been paying, wait a minute, they're this far behind this and that. So I go and interview the borrower and say, hey, look, we're thinking that we're in the process of buying this debt that you owe to your family member XYZ person. We're just letting you know and we wanted to confirm with you, like, this is what they're telling us the balance owed is, and all that stuff. And I said, oh, that sounds right. But no, i think I've made these XYZ payments. And we would say, hey, great, just show us you made those payments and then when we buy this debt, that's gonna be your new balance. That's great for you. You know, we'll take care of it. Okay, that's awesome. Don't hear from them. Don't hear from them. Don't hear from them. Finally, hear from them. I don't, i don't have any receipts of that stuff. Mr Mrs Barber, you understand that we can't just go up your word. We have to have hard evidence. Do you have a check stub? Do you have something in your bank that shows a draft? No, i don't have a checking account. Okay, i don't know any other way that we can prove this. She's like yeah, i don't know either. Okay, well, unfortunately, you know, when we take over this debt, it's gonna be this. Do you accept that? Yeah, i guess I have to, because I have no way to prove it. Okay, great, we're on the same page. Sign something Awesome.
Justin Bogard:So we buy the debt, we get it boarded with our servicer, we start communicating to them and they are more than willing to do a modification with us. So we go through and we say, hey look, you know you owe this much money, you have this much in interest or rearage, you have this much in your late charges, you are behind in your taxes, you don't have insurance on the property or your lapse on insurance. Like, how are we gonna fix all this stuff? And so we come up with a solution. They ended up being a landlord to this property and they were actually renting it out. So we said how much rent are you getting from this thing? Blah, blah, blah. Seven, eight hundred dollars, whatever.
Justin Bogard:Okay, so if we garnish, not garnish, if we assume that when the renter makes the payment and you take that entire payment and you put it towards this loan, this is what's gonna happen. Within a year of doing that, you're gonna basically wipe out all this back arrears that you owe and then you'll start having your normal payment of I don't know what is, richard, like $400 or something Mm-hmm, and then you'll have free cash flow and you'll be all caught up. Does that sound good to you? Oh, yeah, that'd be great. Yeah, because I love the property, i like the tenant there, i want to make money on it. Sure, no problem. Boom. Year later, things are going great, the borrower is paying my clockwork, they're making all the payments they were supposed to, everybody's happy, and then we make a really great return because of our extra layer of due diligence that we found out about the story of what was going on.
Richard Thornton:So the real story was going on. It was two siblings and they got into a squabble. One had made a loan to the next and when they got into the squabble, one said, okay, screw you, I'm not gonna make my payments anymore. And then it went downhill from there, right.
Justin Bogard:Yeah. So the person's more than willing to make the payments. They have the money to make the payments, they just didn't want to make the payments to that person. Right, new person steps in and then boom, there you have it. Things change, right, everything changes. The emotion changes Everything.
Richard Thornton:So we should create a whole new category of loan and call them spite notes.
Justin Bogard:There you go. I like that.
Richard Thornton:They're not being paid out of spite.
Justin Bogard:Around the same time we bought a little loan. That was a very similar situation, where there was a condo and the person we weren't sure if they lived there or not, but they hadn't been making payments and they'd been going dark on this person for a while. This lender was fed up with it and they just they said they didn't want to deal with it anymore. They don't know what's going on. Can you buy it? Blah, blah, blah. So we look at it, we bought it. We didn't have any idea of what the person was doing. As soon as we bought it. We bought it with our servicer, we sent out information and the red flag came up and I said, hey, wait a minute. You know I don't know what's going on, but I had been in jail for so many months Let's just say eight to ten months. Okay, well, that makes sense. You know they've been in jail. They probably can't communicate with anybody, so and I said Yeah why was he in jail?
Justin Bogard:We don't know. So. So we communicated with them and said Hey look, do you want to sign a modification so you can get caught up? Yeah, same thing. I got money. I want to put more payments down towards this mortgage. I actually want to pay it off quicker. So what do I need to do? So we laid out the back taxes, the insurance stuff, the interest or re-reads account, said Here you go, here's everything that's owed on it, here's your payment. You know, start spreading this out over a couple months. And boom, we don't have to go through foreclosure. On you. Sure enough, the guy, within three months of us taking this over and having it boarded, started making these large payments to get everything paid off. And they're 100% caught up and paying that clockwork. Now on, boom, once again we make a great purchase because we just, you know, look at the underlying situation. We saw that there was an opportunity just to start foreclosure to see if we can get the person to respond to us. Sure enough, they did. We found out the story and then they have it.
Richard Thornton:So we didn't really in that case. We didn't really know if he would make the payments or not, but it was a win-win for us either way, right.
Justin Bogard:Yeah, it was a win-win. We saw an opportunity and I said, hey look, you know, we don't know, we don't really know the borrower story because we couldn't reach out to them like we did in the other scenario. We could reach out to the borrower and find the story, This one. We said, yeah look, if we get this property back, it seems to have great value, It seems to be in great condition. You know, it doesn't appear that anybody lives there. Turns out somebody was living there, It's just they just didn't have a. You know, it was hard to determine if they actually lived there. Let me step back a little bit, because this was a condo in a condo building, so they can only the photographer can only take a picture of, like kind of the front window, if you will, and it was an upstairs condo. So they couldn't really tell what from their point of view. Like, well, you know, it looks like somebody's living there or it looks like someone's not living there. I think they told us someone is not living there.
Richard Thornton:Right. So for us, if we had to foreclose and I should say I don't think I know we may not know exactly what the fellow was in jail for, but I don't think it was like Arm Robbery or anything. It wasn't really.
Justin Bogard:No, no, I don't think it was anything.
Richard Thornton:Yeah, some domestic issue or something like that. But so the analysis for us was that if he starts to pay, we've bought. this is such a deep discount that where it's a home run And if we have to foreclose and sell it, it's a home run.
Justin Bogard:Yeah, right, we were very well protected because of the motivation of the previous lender. Right, they had had it. We were the right spot, the right time And we said, yeah, we'll buy it. It was a very low value note I want to say. We paid under 20,000 for it And maybe it had $40,000, $50,000 in debt owed on it, still adding up all the arrearages and everything. So we, you know, after paying that money, we obviously had to put money back into it, but then we were reimbursed pretty quickly for what the borrower needed to pay us back for. So it's around to be very nice. So we took a gamble on it and educated guests and said, hey look, this looks like a good opportunity. Like you said to Richard, either way, if he starts paying, hey great, it doesn't start paying, we can foreclose quickly. because we think it's vacant, hey great, you know we're able to move on this action pretty quickly.
Richard Thornton:So the key on both of those is to ask the right questions and try and get into the covers and really find out what's going on right.
Justin Bogard:Yeah, Sometimes the previous lenders on the seller finance paper that we go after. they don't tell the truth all the time.
Richard Thornton:And we find.
Justin Bogard:Yeah, we definitely find out during the pay history what the truth is, because when they have to put you know pen to paper, so to speak, and they have to prove to us like Hey, here's the checks, here's the bank accounts, here's the receipts of these payments Because we ask these questions like you have to prove the payment, otherwise the payment didn't happen.
Richard Thornton:Right. So one thing we're doing, though, i think, is I'm going to say we're taking advantage but I don't really mean that in a negative factor way is that we're taking advantage of the fact that a lot of these lenders are not sophisticated and they're just tired of dealing with this, whatever the situation is whether it's the sister, it's the, you know, it's the guy that was my best friend that I made a loan to, and now the relationship is sourced, so he's not paying me And he's jerking me around, or whatever it is, and we're able to step in as a more professional group, and a lot of times the borrower will pay attention to us more than they would that other begrudged party.
Justin Bogard:So both of those lenders and those two scenarios that I talked about, those two actual real applications that we did, they both said you're never going to get the borrower to pay you, right? They both said that Right, and I knew at that point when they said that, that we had a good opportunity to figure out something.
Richard Thornton:Right, right The fun stories.
Justin Bogard:Yeah, we got plenty more of them, but that is about all the time we got for today. This is episode number 12 on the Be The Bank podcast brought to you by American Note Buyers. We got Justin Bogart and Richard Thornton on the call today And, for all of you out there, don't forget to check out our YouTube channel, american Note Buyers on YouTube, and you can see the video stream of this podcast as well and all the ones before. Sounds good Talk to you later. Well then, see you all later. Bye.
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 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.
