AIPIS 82 - Buy and Sell Mortgage Notes Successfully with Abby Shemesh of Amerinote Xchange

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds. It's my pleasure to welcome Abby Chemesh to the show. He is founder and managing partner of Ameri Note Exchange located in San Francisco. And we just want to talk about note investing and selling notes that you might own. Also the broader real estate market and paper market, I guess I'll say as a whole. Abby, welcome. How are you?

Hey, very good, Jason. Thank you for having me. I appreciate it.

It's good to have you on the show. So first, first big topic, of course, everybody always wants to know, you know, where's the housing market going? I mean, where you are, I would say, and I don't know if you're going to agree with me, but I would say it's got to be a bubble. I mean, San Francisco prices are absurd. But you know, what do you think?

Yes, sir. Absolutely. Cor. As far as San Francisco, we are seeing unprecedented above asking sales happening right now in the Bay Area, but specifically in San Francisco county and the surrounding areas. But as far as the national market, obviously you have different climates and micro markets throughout the country. But I got to say, especially in the bigger cities, it is what I'm seeing and what I'm doing hearing is that 2015 is the year of the seller. I mean, it's really going to be a seller's market and it's really roaring back. Specifically in California.

Yeah, yeah. But I mean, there's a lot of talk that California is a bubble and it's softening in some places. I mean, we've, you know, it's the typical cyclical versus linear market scenario. Right. You know, we're certainly seeing the area, you know, the hybrid markets like Phoenix, soften up. We used to do business in Phoenix, you know, a couple times in and out over the years, and it got too expensive. It always does. And then we come back in when it starts to drop again or hopefully hits the bottom. Actually, that's the perfect timing. But you think California's got some gas still in the tank and it's got a ways to go still?

I don't know about a ways to go. I definitely think it still has gas in the tank. I mean, there are certain areas and what we see typically is, you know, many Californians may be familiar with, you know, west of the I5 or Interstate 5, which goes up and down the state, closer to the coast, you're going to see obviously a lot more real estate traffic and sales and prices holding. Whereas on the eastern part of the state or the more rural part of the state, obviously you may see it softening up if it has not already. But yes, to answer your question, I do think it still has gas in the tank. Sure.

I mean, the housing affordability numbers are just so out of sync in some areas. Not at all. Obviously, average price in San Francisco or median price, I mean, is like over a million bucks. It's just crazy.

Over a million bucks. That is correct. As a matter of fact, what we're seeing and what we're hearing is when folks are listing the average median home, 1.2 million, you have investors and homeowners that are coming in and just going 4, 5, $600,000 over asking immediately. It is something that I've never seen and quite frankly, I don't have the investment appetite to engage in.

I would agree with you completely. And I don't think think that should even be called an investment appetite. It should be called an appetite for gambling. So, you know, gambling and speculation, that's all that is. I've seen that cycle repeat too many times. What about interest rates? You know, the Fed is definitely making noise about rates and starting to push them up, you know, or saying that they're going to. What are your thoughts?

Well, to be honest with you, I mean, at this point, where else can they go but up? You know, you have interest rates that been at record lows, slight fluctuations over the course of the past decade for sure, but specifically, definitely on the lower end. And it's definitely a good time, if you have the credit worthiness, to go out and to get a traditional loan for the purchase of real estate. But in my industry, the note industry, I guess you would say, specifically the seller finance industry, there are a lot of folks out there that cannot meet the criteria of a lot of these lenders, whether it be small business owners that have too many tax write offs and they don't look good on paper, but they have a nice down payment and decent credit to the ones that have good income with poor credit or a very poor debt to income ratio. There's definitely a myriad of different scenarios that could occur here that would either allow or not allow someone to get a loan. But I think the rates are just going to go up. I mean, where else can they go?

I guess the only way I would answer that question is to say look at Japan, right? And now Germany. Negative interest rates on what? German bonds. I think I read an article about that a couple of weeks ago. That's startling. I mean that's just so illogical, it's crazy.

It is. And Japan is a very good indication or a very good example of, I guess, what could happen. It's definitely a unique time in the real estate industry here as far as the mortgage, but it's definitely going to go up and interest rates are most certainly going to go up along with the, hopefully a laxing criteria. We'll see if that occurs.

So my contention was during the financial crisis, of course beforehand the banks were just being stupid. They were loaning money to anybody who could fog a mirror. Day out of prison, day out of bankruptcy, no job, doesn't matter. I'm sure you remember that crazy time. But I think they've overcorrected. I just think they're being too strict now. Would you agree with that assessment?

I would absolutely agree with that. The pendulum has swung in the opposite direction and very, very much so the opposite of what we were seeing pre 2008. So that is exactly what is happening now. And I'm hoping, as a lot of investors and borrowers are, that it's going to even out here a little bit, hopefully in the near future.

It's definitely since the worst time when they overcorrected the most. It's definitely come back a bit and it's gotten a little more rational in terms of the ability to, to borrow. But I don't think it's come back enough, especially in favor of the investor, oddly, because, because the, the investor, at least they get income from their property or you know, at least, hopefully they should actually get more desirable loans than homeowners, if you ask me. The history has shown us different things in different scenarios. But you know, when, when a property produces income, it seems like the financing ought to be better for that than a home in which somewhat buddy lives. You know, I've always kind of thought we have that backwards a bit, you know, but, but we, we can move on to other subjects. So on the flip side of this equation, the interest rates one can earn on an investment and you, you can't earn anything in the bank. I mean, it's a complete joke. Even if you have, you know, $99 million, you're, you're going to get almost nothing from the bank. So. So, you know, but one of the really secure good ways to earn good returns is, you know, of course I love income property, I love owning the actual asset, the physical asset myself. But you know, it's not as scalable and it requires management and attention and if you don't have the tolerance for that, sort of the next best thing is investing in the paper, you know, in my opinion. And you can earn some great returns on the paper, right?

Oh yes, absolutely. And to your point and what you were saying about owning the actual asset in real estate, that is a fantastic mode of investment for sure. But you definitely, especially if you're owning more than one property, and let's say you own property, income properties out of state, you have to have the infrastructure in place to service the tenants and the maintenance and so forth. Whereas owning the paper, you don't have to worry about the air conditioner going or anything like that as far as landlording, because again, you're just in it for the paper. And really the bulk of your concerns at that point is servicing and default. But it definitely is a very, very lucrative way to earn a decent yield with putting your money to work.

Sure, absolutely. So tell us about what someone should know about buying notes. You buy a lot of notes and I'm sure you've been burned on a few over the years. What lessons have you learned that people should know about?

Sure, due diligence. The most important, it is very important that if you are going to pay out money, your hard earned money on a mortgage note, that you want to perform all of the diligence and not take anyone's word for it. A lot of investors and brokers as well I've seen have cut corners in the sense of not kind of skimming out on the appraisal or the valuation and verification of what the property's condition is and the worth of the property or the collateral securing the note as well as obviously clean title. Most investors do take that into consideration, but you want to make sure that there's no actions or any kind of clouded title, so to speak. My Biggest point of being burnt was purchasing non recourse loans or corporate borrowers where there is no personal guarantee. And then once the corporation goes belly up, they stop making payments, they dissolve the articles of organization because they don't have any real debt attached to the LLC or whoever it was that was paying the note. You're really in a hot mess there. You can definitely get the property back, but it takes you a heck of a lot more time, especially in judicial foreclosure states, which are in fact nightmare.

When you said a corporate borrower, I mean, I would assume that's mostly on a business loan. And I know you do business loans too, so we're not just talking about real estate. But you had a corporate borrower on a real estate deal.

I did. Not only on a real estate deal. On a mobile home though transaction, believe.

It or not, on a single mobile.

Home or a big park on a single mobile home. Yes sir. And this was, you know, luckily for us this was in a non judicial deed of trust state so we had an easier time doing it. But this was an investor who purchased a mobile home, wasn't a large investor, it was a local investor and they just fell short and defaulted and they gave us the runaround for quite a bit of time. It was a unique situation. But that was my biggest learning experience as an investor is to make sure that there's always a personal guarantee or if the corporation of course is a publicly traded company, that's obviously good enough for us.

What about just on single family home type deals?

The biggest item that we've seen as far as problematic situations for us, especially over the course of the past three years has been what we've been talking about earlier, which is that real estate market, a lot of the properties were sold, excuse me, a lot of the notes we were receiving were secured by properties that were sold underwater. So we drilled down and did our diligence on this. But keep in mind, most of the time we'll do just broker pricing opinions or drive by appraisals to keep our costs down. But in certain markets, specifically in my opinion, I guess we refer to it as the Rust belt, but western Pennsylvania, Ohio, Michigan, parts of Missouri, parts of Illinois, it's very important in those particular areas where market has seen a little bit of a dip, and then in parts of the south as well, southeastern part of the country, it would be wise to splurge and get a full blown appraisal done if possible. That way you can really gauge the characteristics of the collateral that secures the Note that you're purchasing.

Where should you order that appraisal? Probably not. Not from a referral from the seller or the owner, I should say. Or maybe a broker who wants to see you do the deal. Necessarily an appraisal management company. Does the public have access to that?

Absolutely they do. There are many. Especially in the wake of the 2008 market crash. You had a lot of non performing loans hit the market specifically. Really in the past three, three and a half years out of this has a lot of these companies that now provide REO solutions or real estate owned property solutions also servicing the non performing loan market as well where they will do multiple drive by appraisals. The public definitely has access to that. But it is a big no no to ever go with a suggested appraiser by either the seller of the note that you're purchasing it from the borrower in which the person that's going to pay you if you do acquire the note, or, or a note broker that brings you the deal. You want to make sure that you independently review and investigate all of your options. You can take suggestions into consideration for sure. But I would never ever go on the word of any party that could gain from the transaction. In that sense. We want to keep it neutral, we want to keep it fair.

And how about checking title and so forth? Any particular tools you want to mention there? Web websites tools that you use that maybe the listeners would love to know about?

Yes, actually. Well, I wish the actual checking of title would be a little bit easier but unfortunately with us we do it kind of the old fashioned way. Typically speaking what we do is a lot of these seller finance transactions, I would say about 75% of them are closed or handled at a title company at the closing or the origination of the note. So what we, what we typically do is we'll go back to that same title company because that title company is familiar with the file and so forth and so on. It just makes life a lot easier and it kind of speeds up the process in some cases up to a week in turnaround time. It may save us especially if we can do like a policy endorsement versus a fresh title search in some cases. So we typically go back to the same title company. But as far as any tools to be used for realtors and investors.

I.

Don'T really, I'm not really aware of any pertaining to the title search process other than, you know, our preliminary diligence, which is county website searches and so forth.

Anything else you want to say about buying notes before we Move on to selling mortgage notes.

Sure. I mean, as far as buying notes are concerned, it's not for. I mean, if someone is buying or considering purchasing a mortgage note, you definitely want to make sure that if you are going to purchase, especially if you are new at it, that you a consult an attorney, you want to make sure that you have all of the legal parameters within the state that you are planning on purchasing. In addition to that, I would also recommend that you talk to your accountant for taxability purposes and any taxable events that can occur if and when you purchase a note. And more importantly, I wrote an article about a year ago talking about can I get scammed in the note business? And the real part where you.

And the answer is definitely yes.

Yes, the answer is definitely yes. But it doesn't happen in the selling of the note. It happens when you decide to buy notes and then you go to someone and they say, oh, I can promise you 18% and so forth and so on. You just got to watch out. You got to make sure that if you're going to give someone your money, especially in a fund, that they're a legitimate fund, you do your research on them. In my opinion, the best way is just to go out there, roll up your sleeves and cultivate and harvest your own seller leads so you can determine what's good for you and what's not. Especially for a savvy investor.

Yeah, I'm not a fan of funds by any means. I think being a direct investor is the way to go. It seems like you agree with that, right?

Oh, absolutely.

100% in terms of selling notes. Any advice there?

Yes, selling notes. I have much experience in this realm. If someone is planning on selling a note, first and foremost they should understand and know that selling a note is not for everyone. People sell notes and I always say we shouldn't be. Selling a note should not be your first line of defense, it should be your last line of defence. So if you need to generate capital and you want to do it maybe through a bank or a traditional lender. If you can go that route and you can get a decent interest rate on the capital that you want to borrow, so be it. When you do sell a note, you are going to sell it at a discount. As most note transactions are conducted, that discount typically can range anywhere between 35% of the unpaid principal balance as high as just 10%, maybe in some very rare cases even 5%. So between 65 cents and 95 cents on the dollar. And this is typically.

You really mean that's that's the discount. So you mean you might buy it for as low as 5 cents on the dollar?

I beg your pardon? No, no, no. We would buy it for between 65 cents and 95 cents on the dollar. So the discount could be anywhere between 35% or 5%.

Okay, but see, I thought you were throwing in there and why the range is so big is because, you know, when you deal with non performing seconds, I mean you really can buy those incredibly cheap sometimes.

Absolutely. And non profit. I was actually just referring to performing first in that sense.

So a 5% discount up to a 35% discount?

Typically speaking, yes. And that will all depend on the characteristics of the loan and the characteristics of the collateral securing the loan.

So how does a buyer or seller, you know, I mean we're both, you know, probably going to be on each side of the table at some point. Where can they, I mean, is there a formula? There needs to be a piece of software that will rate what that note should price at. How do you do that? For example? Because notes have such varying characteristics. Look at, I mean think about all of the data points here. There's the geography, the type of property, the amount of seasoning, the rate, the term, how many, you know, how many payments are left, the credit worthiness of the borrower. I mean there's just a, you know, the loan to value ratio there. There's a such an array of characteristics. It's pretty complicated.

It very much so is. And that's probably why there is. I mean, I'm not saying software wouldn't be able to do it, especially in this day and age, but as of right now that I'm aware of, there is no particular software that can accurately predict what the offer would be. It really does require human interaction. So if a seller, just to answer your question, wants to know what their notes worth, typically a seller will, will reach out to multiple note brokers or note buyers and they'll fill out a submission form and they'll get a soft bid on the note that they're trying to sell. Now usually this should take with us it just takes a matter of minutes. In some cases up to maybe a couple hours, but others it may take a couple days. So it really depends on the bandwidth and the size of the company that the seller reaches out to. Yeah, I mean it's really done the old fashioned way. The note business unfortunately is a very unsophisticated low tech industry.

Yeah, yeah. But you know, if it only takes you a few minutes, for example, in that example you gave. Someone calls you up and says they want to sell a note. And they say to you, Abby, what will you pay me for this note? How do you figure that out? I mean, do you have a great worksheet or something that can just leave you through that formula?

That is exactly right. There is a mortgage note submission form. We have forms for residential, commercial, mobile homes, bare land, but that's exactly right. We'll get the property address and that's really all we need because in this day and age, we can just go online and find out more about the property. Just with the address. We'll also get the sales date, the sale price, the down payment, the interest rate, the amortization, if there's any balloon payments, how many payments made, first payment date, and from that we can figure out how many payments remaining. So there's a lot of people out there that may have all this information. Some other people may say, well, I have this, this, and this. And then we got to play detective, of course, and we basically give them an offer predicated on the information that they gave to us verbally. If they like that offer, what would happen then is we would ask for the documentation to verify the info that they gave us. And at that point we would begin the process.

Yeah, good stuff. Okay. Anything else you want people to know about selling notes?

If you are selling notes, it's very important that you do your research. You want to make sure you're dealing with a reputable company, preferably one with an Internet presence. In addition to that, there are a lot of folks out there that say that they're note brokers or note finders. Again, you just want to make sure that you can find them online. You can research them a little bit and just really drill down in your research and. And more importantly, try to get them on the phone. I mean, usually if they sound like they don't know what they are talking about, 99% of the time, it is probably true. So you just want to make sure that you are dealing with the right person. And that is my biggest piece of advice to any note seller out there.

Yeah, good stuff. Good stuff. Abbey, give out your website if you would.

Sure. Our website is www.notenote hyphen buyer b u y e r.net and that will take you to our company website, which is Amerinote Exchange LLC, located in San Francisco.

Okay, so that's note-buyer.net note-buyer.net Abby, thank you so much for joining us today and explaining some of this. We appreciate the good insights.

I really appreciate you having me Jason. Thank you.

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