EP 374 – Upfront And Back End Note Costs

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for pennies on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Notes, Scott Carson. Hey everybody, Scott Carson here. Hope you're doing well. It's a nice, cool day outside. It's actually crisp in the 40s, so fall is arriving basically very rapidly here with the first part of November. So one of the things I thought we'd talk about today in this episode of the Note Closer Show. Once again, thank you for all for watching. Thank you for all listening. If you're watching this on Facebook, do me a favor and hit the share button. If you're listening to this in itunes, Stitcher, all of our podcast platforms. Once again, thank you so much. Feel free to go on over and leave us a review. Would really love it. Or click the subscribe button so you get alerts of all the newest episodes that we have available when they become live on itunes or Spotify or any of our podcast platforms. But one of the things that I would talk about today is the note costs and all I mean by that. I mean things that you have to pay for before and after you buy a note. Because I think a lot of people forget to put this into their calculations. They forget to consider this. It's just not a simple, hey, buy it and then I'm going to sell it. You've got costs along the way. And I've had conversations with people all week long that are doing this incorrectly. They're not adding these costs in to their ROI calculators or figuring in their back end costs or the front end costs of purchasing the note, and they're wondering why their numbers are off. And it's just simply because they're not putting the right things in. So what I thought I'd first do is start with talking what you need to focus on beforehand and just kind of run through some of the costs. Some of the items you want to consider definitely on the front end before you end up purchasing the note. And obviously when you're buying a note, you're going to take a look at a couple things. First of all, you have got due diligence costs. Let's talk about some of those due diligence costs that are important. Obviously marketing. What I mean by marketing, there's marketing costs on the front end, polling numbers, paying for a BPO or Realtor drive by. Those are costs. O and E ownership encumbrance reports from Pro Title usa. Those are costs that are going to run you. You know, it's not a full title report, but that's like 85, 90 bucks depending on where it's located. A BPO could cost you 1, 25, 150. A realtor drive, right, could be like 50 bucks. Take some photos for you. Other marketing costs, like links, you know, if you're going to use Canva for marketing images, you know, that's a buck a photo. Or using some of those things, software, your website, cell phone bills, making phone calls, email, CRM tools, those are all little things that add up throughout the month. So you want to keep that in mind as well. If it's gone to the bankruptcy note, you got to go to PACER and pay for pacer. That's a few bucks. If you're going to have the collateral review by somebody, that could be relatively cheap. If you're going like from a Richmond Row or something like that. Just the timing or, you know, 100 bucks to 50 an hour if you're having attorneys look at it. So those are upfront costs initially that may not be covered. So you've got to keep that in mind when you're looking at the ultimate funding amount. If you're going to be funding this stuff yourself. Okay, keep that in mind. And that's going to vary across the board whether you're funding itself and you're able to, maybe you have some relationships that don't cost you anything to do, that maybe you know a Realtor, maybe you know somebody in the WCN crew that can drive by for you. All right, those are different things to look at. But your costs, like your BPOs are going to be cost, your owners are going to cost, your doc review is going to be cost for sure. And then the PACER and paperwork stuff aspect of that is going to give you a little cost as well. That's front end cost. Time is another thing that we're not putting in here as a cost near front. It's your time to do due diligence, your time for, for marketing out. That all adds a cost to your overhead, your business and stuff like that. Because obviously, hey, look, if you'd rather be out at the movies, that's great. Nothing wrong with that. You're just not gonna find any assets. You got to keep that in mind with your marketing and, and stuff like that. Like my CRM, my email system that we use, Infusionsoft runs me about 400 bucks a month, 500 bucks a month. Because we have a big database, we run a lot of things through it. For those of you who have less than a 25, 000 person database, you know, mailchimp may be the best thing for you. And that's still going to cost you 35, 50, 150 bucks a month depending on how many more contacts you have as well. So that's something. That's an overhead cost that's running the business. If you have an office, you'll throw that in there. Your cell phone bill, 100 bucks a month, whatever. You got to keep that in mind as well. Now let's talk about once you fund, there's cost associated. Once you bought a note, what the hell do you do with it now? Right? First and foremost, your taxes. If there's taxes owed that you've got to pay before it goes to tax, foreclosure, that's important. Number one of the most important amounts that you need to know is right off the bat, what's the situation. Taxes they paid, they don't have to pay, stuff like that. Obviously you want to protect your asset with insurance. So you got to get a quote and insurance is a. We're going to have a couple insurance guys on the show here to talk about that with insuring your assets here over the next couple weeks too. So you got to know how much are you insuring it for? Is it for what you pay for the note? Is it insuring it for the full upb? Is the replacement cost? Is the market value? Is there a percentage of that? You've got to know that based on what you end up funding and going from there. That's an important aspect of things there for you. Servicing costs. You have boarding fees, you've got monthly servicing fees. A performing note is a non performing note. Are you doing workouts? Are you having Madison handle the workout for you? Like 90 bucks a month or is it performing note to drop it down, save you 20 bucks a month? Are you going to have a special servicing company like Polaris or the Singer Law Group handling the file as well? That's going to cost you for a la carte fees. You have to keep in mind, all right, you're going to add that into your cost of doing business. Utilities, if you take the property back, you're going to have to pay to get the lawn mow, get the utilities, water power turn on. Those are costs along the way as well for you. Foreclosure costs. If it's In a judicial state, that's going to cost you more than a non judicial state. If it's in Florida, it's probably going to cost you five grand to foreclose. Others, maybe 3,500. If it's a non judicial state, maybe less than a grand like it's here in Texas. Filing fees, you got to file documents, you got to get stuff recorded at the county. Those are costs associated with that stuff as well. Once again, marketing costs on the back end too. Paying to get photos taken, paying to post it in other places. Maybe you're paying to do a video on the property. You know, those are services that make cost to help that you've got to help move it. That are just overhead costs. But then let's not forget title costs. And I mean by title costs to close, you're still on the asset off, you've hit the foreclose and take the property back. You got some fees for title costs, closing things, Realtor commissions, I mean, that's great because those will come out of closing on the number. But you want to keep that in mind. Like if you're buying a note at 25 and the value is 50, you're not going to sell it at 50. Okay? You probably sell it at 45 and then you got to remove your commissions off of that, especially in the last two with closing costs, Realtor commissions. If I expect to sell an asset at $0.90 on the dollar to get a fast sales price, I have to take another 10% off of that for commissions. So I'm going to figure roughly my net, as long as there's not a lot of taxes, it's going to be at least probably about 81% of what my value is listed at 90, going to net 90 of that. That's 81. 90% times 90% is 81%. And then I got to figure out, okay, what are these costs along the way? You know, the legal cost, that cost me five grand, it cost me another grand to get this utilities on and those paid up to date, stuff like that. You know, one thing you've got to keep in mind too, that's not even listed in here. My buddy Dan Zatowski used to have a discussion when it comes to notes is the repair costs of things. If you have to put any repairs into the property, what's that going to cost? I know, like my buddy Wayne Stone likes to talk about, you're probably going to have to replace at least one major thing. Electrical or air conditioning or plumbing for the most part. One major function of the house, Plumbing, electrical, maybe the roof too, you know, never know. So you have to keep in mind that if what you're going to put into it, you're going to make more than enough to to replace that, make it worth your time. If you're going to go back and remodel the house, you got to make sure that, hey, if you're going to go from selling it from 100 is be worth 150 at least and that you're not putting really more than 25 grand into it. This is why I don't like heavy repairs. It's also why we like occupied assets. Occupied assets have less chance to be major repairs because they haven't gone vacant. Somebody's there to watch the air conditioner every night. Somebody's there to make sure the copper goblins don't show up. Somebody's there to make sure that the pipes don't burst in the middle of the winter. And you have an interior ice skating rink or interior water feature. Those are very important things to consider. And some of these things you figure on the front end. One of the things you got to keep in mind on the front is that make sure that you're buying right now. This is the thing that drives me a little bonkers. A little bit. I see people complain about pricing overpricing because they're buying one or two assets. Look, if you're cherry picking the best assets out of a tape, you have to expect to have extreme pricing because you're going to leave the seller with a bunch of crap. So keep in mind that if you're buying something pristine, pricey, you want to make sure it's clean. Make sure if you add in these costs, it's still going to be profitable for you. Because if you're going to pay over 70 cents a dollar, you might as well just wait and not buy any notes anymore. I might as well just buy an REO for the most part and figure that aspect out and go into the full fix and flip market out there. So the thing is, look, you got to figure out what these costs are. Now obviously, don't be like other people. And not every deal is going to have these all added in because if you start adding all these costs in on the front end or the back end and stuff, a lot of times it's going to kill your ROI calculator. And it's important to have an RI calculator. I know that doesn't make sense sometimes, like, oh my God. Well, every deal I run by these numbers first and Foremost the thing to keep in mind as well is the occupied asset. You got an opportunity to get reinstated or modified. If that happens, you're going to not have as much in legal fees, you're not going to have as much in repair costs. Hopefully the borrower is paying their taxes and insurance. You may not have that. That's why I kind of say scale a little bit. Yes, extreme this way. But as you start doing in and start doing some, you can take away some of these features. Now, are there assets that we've bought that were occupied that we thought would get reinstated and modified that turned to a foreclosure? Of course, totally agree to that. Other assets that we thought we'd foreclose that turn into modifications and reinstatements? Yeah, totally agree to that. This is why it's important in your marketing, in your due diligence of the asset to really take a look at things. You can get the comments, the servicing comments from the servicer or from the seller that will help you to tell you what the borrower would like to stay. If the bar sold a service to go pounds and you're probably not going to get it reinstated, but they've sent in hardship letters, they've sent in loan modification packages or short sale packages that tells you that the borrower is probably ready to roll. If you look online and see that the property was listed for sale in a short sale within the last 12 months, the borrower is probably ready to move on. That could be a deed loan. If you're going to avoid a lot of the legal costs, you can often get the bar. What I would do with deed and lose your cash or keys is make sure the borrowers leave it in pretty good shape. It doesn't have to be eat off the floors clean, but it can't be trash everywhere. That's the important thing when you have the left side before and then after you close. So upfront costs and this is why you're going to want to always paddle what you buy. So if you're buying an asset at 20, you don't necessarily want to go have 20 funded. You want to make sure and add some money to that to help cover your back end costs, to help you recuperate some of the costs. I know people that add on management fees to their funding amounts so that they cover some of their costs along the way. You can either a put those in say hey, like on your joint, your funding agreements or your JV agreements, things like that, that we're going to have an extra five grand Per asset funded. Some people, well that's kind of extreme. I said, well what it is. So I don't have to come back to the well, I don't have to come back and ask you for more funds for legal. It's there, it's okay. Some of the funding agreements we put. Okay, we're having you fund extra because of this 20 grand is going to the note. We're going to have you fund 2,500 towards legal costs. There's 1,000 bucks in servicing costs we're going to put in there and then another 1500 bucks in miscellaneous fees like utilities and marketing and title, those kind of things. Those are all completely legitimate expenses. And you want to add that in. Now if you don't have to pull title because they reperform or you don't have to get paid 150 bucks or 250 bucks for a BPO because you got a great realtor drive by. Great. Still have that stuff funded though to pad to your numbers because at some point you're going to need those funds. I can tell you right now you get five grand for the per asset. You probably maybe only use five grand every other asset. The other stuff will come in handy and it's there to help you with the oh oh when you have the unexpected expense like having to replace an air conditioner twice because the first one gets stolen. That's not fun. It's not a fun time at all. Like I said. And I'll do a repeat of these here real fast for you. So on the before side, the due diligence side, you always got to check taxes. Sometimes you may hire a company to do that for you. You're going to pay for BPOs, pull values, O&Es, PACER document review and then any other marketing costs. Those are the basically the 6 upfront costs that you're going to look at. Now if I forget something, don't flame me on stuff like that. That's just the 6 upfront cost. Now before you find you should know some of your back end costs if you're going to have to pay taxes or you want the taxes, right? We flip flop. Sometimes we'll pay the taxes, other times we won't pay the taxes because we're going to have to foreclosure. Insurance is the second thing. Servicing costs. Your servicer should be able to provide that legal foreclosure costs. If you're going to have a special servicer like Singer Law Group or Polaris come in, that's another thing. Filing fees, you Got to file the city, you got to file the county. You get your documents filed to transfer ownership marketing costs to market that asset after you've done the workout. Another thing I didn't throw in here, which I kind of consider kind of legal, is your cash for keys. But I always figure that if I go in legal and I offer cash or keys, I'll offer two grand right off the bat a lot of times to the borrower because that'll end up saving me five grand in the long run. That makes sense. That's where I kind of get the cash or keys number from. And then of course, any repair costs along the way, you're always gonna have to probably clean out a property, have a make ready team go through if you take the property back before you sell it off, and then of course closing costs and realtor commissions on the back end. So you obviously have more costs on the back end than you on the front end, but that's okay because you're hopefully buying and making your spread on the back end. That's what the beautiful thing about buying on the front end is. If you're buying at 50 cents of the dollar or less, you hopefully have enough as long as you're buying, you know, assets in the 50 grand range. This is why it's very important that the, the, the lower valued assets below 50 grand you buy. You've got to be very, very careful of what condition they're in. That's why I would not buy any vacant assets at all below 50 grand for the most part. Try to keep the occupied aspect of that because you don't have to do as much repairs if you can get them modified or we can stay down that stuff. And that's the thing is you can't add all these upfront costs to your due diligence. But you have some ifowars, you need to know the numbers. Again, if it does go, this is what's going to happen. But does go this. Here's how we're prepared. And this is why speed of liquidity is important. Because while sometimes if you close an asset out and then sell it, it may not be a huge payday, but the ROI looks good. And that's just as important sometimes to your funding partners and investors as well. Money costs are important too. If you're doing a split, you got to keep that in mind versus a flat return on investment. So you want to figure in your money costs on the back end too. I forgot to mention that. So if you got a flat ROI, you know, 6, 8, 10 12, whatever your investors figure out what your money costs are gonna be on the back end, see if you actually walk away with any money on that aspect. One of the things I would highly recommend obviously too, if you're buying in non judicial states, your foreclosure costs will be a lot cheaper. Judicial state, it's gonna be a lot longer. Like some of the most obviously New York, New Jersey, that's going to cost you the most there. Chicago, Illinois could probably be the next most. Florida. Florida's got a lot faster over the years, but it can still drag on. Especially when you have things going on like right now, especially if you're in a hurricane area, you want to double check your insurance costs because your insurance costs can often go up. Another thing that's not figured into here on the back end side is HOA fees. If you've got homeowners association fees that be paid up in case you're foreclosing. If you're in Colorado, Florida, you've got safe harbor laws that can help limit the amount of HOA fees you're paying. So it's good to know that when you're looking at that cost as well because that's going to be paid at closing to the HOA as well. Those are some things to keep in mind. You may want to make a running list of that. Like I said before, not every one of those costs are going to be paid, but it's good to know about them so you can check them off your list. How much is owed? Do we have to worry about anything like that? And then the more you do, the more that you'll be able to realize, okay, we can figure out stuff like there as well. One of the things that I see people kind of screw up with a lot is they start getting to rehabbing. They don't have a clue of what it's going to cost them. So I what I would do before you look at rehabbing, you figure out costs and stuff like that is reach out to the local hard money lenders, look at, talk out to the local rehab and say, what's it cost to put a kitchen in these days? What's it cost to put paint and carpet? You're in three different levels. You're in the low level, the base level, cheapest, middle and high end. If you get into rehab and a property, one of the best things that I like to do, get the exterior looking nice so you get foot traffic. You definitely want to highlight the kitchens and the bathrooms. Don't worry so much about bedrooms Unless it's the master suite. The other bedrooms can just knock out the last minute because nobody really cares about the other bedrooms. It's those big things, kitchens, bedrooms, curb appeal. If you can have something unique in the living room, you know, whether it's a fireplace or something like that, that'll help with people identifying imagine themselves living there. But a lot of times I try to sell the asset before we ever finish up so that people can pick out their own appliances is what I'm trying to get at. Christina asked a question here. What's the question? Does an O and E catch city utility or mechanics lien judgments? They catch it as long as it's filed. Christina? Yeah. An ownership and encumbrance report is like they say, it's an ownership, it shouldn't check. Whose ownership? Any encumbrance. Any encumbrances. The title, as long as they are filed. Now what happens sometimes, this has happened to me a couple times before, is how we foreclose the time we get around to sell the property in 90 days. In some areas of the country you'll occasionally find some unscrupulous people that will go around slap liens on properties hoping that you'll pay them versus filing suing them because the cost amount costs more to hire an attorney done versus just paying off, which is kind of. I will tell you, that's a really crappy thing. We've run into that. So in a couple of places over the years, it's not as widespread as it used to be, but you'll run into that occasionally. Mechanics, liens, you gotta be careful. This is why it's important for you to keep in mind if you're rehabbing a property when you take the REO back. When you take the property back as an reo, if you don't sell at the foreclosure auction, put a lien on the property to your investor for the amount to over encumber what the property's gonna be worth. So that way before you start bringing on a rehab crew that maybe does a crappy job or doesn't do anything, they can't go and slap a mechanics lien on it. That ties up that equity you wanna encompass. If the house is worth 130 when it's gonna be said and done, put a lien on it for 150. That way the mechanics lien, you know, the unscrupulous contractor comes on and slaps lien for ten grand, is in a junior lien position that has no equity, that you can actually wipe that out via foreclosure. So doing a friendly foreclosure, that's advanced asset protection strategy out there. Good question. Thank you for asking that, Christina. Awesome. One thing else, if you're in the Austin area, one of the great things that we'll be doing here if you're watching this live is we'll be doing our next episode live from the Quest Trust offices here in Austin, Texas on Monday, November 5th. So we're excited for that here locally in the Austin, Texas area. Feel free to come on out while refreshments kick things off at 10 o' clock is when it'll get started with a lot. The show going live at 10:30, from 10:30 to roughly about 11, 11:30. Come on out, have some tacos and coffee on Monday morning courtesy of ourselves here at the no Closer show. And Quest Trust be doing that and broadcasting that live across the country. Otherwise, go out, have some fun this Friday night and this weekend, go make something happen. For those up in Dallas, the no Expo. Have a great time, travel safe, and we look forward to seeing you all at the top. Everybody. Bye.