EP 504 – Getting Cash Payoffs On Assets

Foreign this is the no Closers 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. Good morning, good afternoon, good evening everybody. Welcome to this episode of the noclosure show. As always, Scott Carson. Excited to be here today with you guys. Hopefully you had a amazing, amazing week, amazing day. Your month is going well for you on this episode. I want to talk a little bit about an exit strategy. It's probably the rarest of the rail, not quite the rarest of the rarest. But with note invest when you're buying non performing notes, you basically have roughly 10 exit strategies. Okay. Obviously one, you can wholesale the note, you know, get under contract and wholesale it off. Okay. Two, you always try to get the borrowers, you know, performing. You know, hey, start, just reinstate the loan. Start making payments on time, doing a loan modification. A trial payment plan is number three, you know, trying to get them, if they won't do trial payment plan, letting them assume or letting somebody come in and assign the loan or assume the loan to a family member is a popular one. A short sale deed in lieu. All right. Is another opportunity. We have another one obviously besides the deed in lieu is then just to sell the house. Okay. Another one is our worst case is to foreclose. Another one's just to sell the note off after you bought the note, if you've done some work onto it. Okay. Or if it's a reperforming note. Number nine is to sell it re performing note after six or 12 months. Well, one strategy that happens occasionally, probably not quite as rare as the assumption that's probably the most common, most rarest of but as a cash payoff. Now what do I mean by that? That's where the borrower owes you money, right. And then either they just pay the loan off. I know they're like, well, if they could pay the loan off, why didn't they make their payments begin with on at the beginning? Well, thing you got to realize is everybody goes through hiccups. Everybody has financial hiccups out there. I don't care what situation you're in. Everybody at some point in their life is going through a hiccup. And that's the reason why most of the time they're non performing to begin with. That we're Looking at, they got fallen out of work, they've been sick, something happens, the economy shifts and they're upside down for a variety of reasons. Doesn't mean I'm making them a bad person. If you've never been behind on a mortgage, you may not empathize as much as I do because I've been there before, over a decade ago. But the thing to keep in mind more than anything else is most people want to stay in their house. Most people want to pay their bills on time. Most people want to follow through and enjoy. You know what we love to talk about the American dream of homeownership. Unfortunately, sometimes that dream turns into a bit of nightmare. Well, in the last couple days in the office, we've had several borrowers reach out to us to get a payoff statement. And usually that works in a couple of fashions. When we see this happening, when we get a borrower request and a payoff statement, one, they're looking to probably move and either sell the house, or two, they're looking to hopefully get refinanced. Okay, now this usually happens most of the time when the borrower's been making payments for a few months. Now, occasionally we'll get request for payoffs on short sales, and that's not that big a surprise. And that's a win win across the board for us, the borrower as well, because oftentimes we bought that note well below what was owed, well below market value, and we end up agreeing for something close to market value to prove a short sale, to get a nice chunk in. Let me give you some numbers roughly on that. So let's say borrower owes 100 grand. A house is only worth 50, 75, whatever. It doesn't matter as long as it's more than what the house is worth. Well, if they get somebody come and say they were willing to pay 45 for the house, we would agree to reduce the payoff amount to roughly 45. My closing costs, considering the fact is that we probably paid somewhere around. It's worth 50, somewhere around 20 to 25 grand or less for that note. Okay, if I can get 40 in on a 20, $25,000 investment, that's a good return on investment to us. Okay, let's say they've been making payments on time. Let's say they've reperformed for six to 12 months. I'm course willing to. They may just go get a refinance at that point. They might be selling the house off. They may be looking to get refinanced out after 12 months on time. And the beautiful thing is 12 months of on time payment especially if people weren't reporting a credit before we bought the note which we see that pretty often. There's no derogatory negative mortgage payments on their credit. So that they hey, now they can go get a traditional mortgage, get out of a cash, you know, get out of a contract for deed if their house's value is increased or if they are what's the word I'm looking for a traditional rate term refi. We're glad to do that. And there's not that many closing costs on a rate term refi. Cause if you're buying contract for deeds often the interest rate somewhere around 9.9% interest rate. Okay that's the thing you gotta keep in mind with that interest rates are usually in contract for DE somewhere between 9 and 10%. So that's the carrot that we like to hang in front of our borrowers a lot of times like listen, hey, you make payments up 12 to 24 months on time. You know, let's look to get you refinanced out with a traditional bank at a point. Or what we'll often do with our TPPs, our trial payment plans. You say hey, maybe payments on time for 12 months. We'll then look at the value, recast the loan or modify the loan so that a if you owed 100 and the house is only worth 50, provided we bought it well below 50, hey we'll reduce and forgive that principal that amount above the value of the property because I'm not really going to capture that anyway, right? I'm not going to be able to sell a house for 75,000 because that's what the borrowers when the house is only worth 50. So that's that extra leverage that carrot we dang like listen, hey, you owe 75, house only worth 50, we know you're upside down. Make payments for 12 months and then we'll forgive anything over the value of the house. The reason I like 12 months is it gives time for that value to increase. Maybe it's only worth 50 when we bought the note, but a year time frame it may get to 60 to 65 or maybe even 70. Depends on the market. Great. We've just appreciated that much that we get to add equity profit back to our things. Less debt we have to give away or forgive. Now another thing that happens too I want to make sure to say is say 12 month deal is non performing. It still falls in where we can categorize it As a long term capital gains, I can use a third party to evaluate that note as it'll be worth the 25 plus the payments we received. I'm not going to get taxed like what the IRS wants to tax you. Oh, hey, you've modified the loan at 75 grand. Hey, you're getting taxed on that 75 grand. No, that's not the case because we didn't receive $50,000 of profit along the way. We bought it at 25. We've only received 12 months of payments and then it's a long term capital gain after the 12 months. That's the important thing that you got to keep in mind. That's why you want your trial payment plans to be at least 12 months. Never do them like three months or six months, but 12 months before you modify anything so you're not getting hit with the higher taxes on that aspect of it. But anyway, coming back to getting short sales, getting paid off, stuff like that. The important thing is that if you want to most of your servicers too, especially your borrower paying on time, you can start paying a nominal fee. I think it's 10 bucks a month. It's pretty cheap to report to the credit bureaus and this is a helpful thing for your borrowers. Now it starts showing an on time payment. So credit line that if 12 or 24 months of payment, stuff like that, it makes it easier for them to go out and get refinanced out with a major bank. Especially provided the mortgage balance is going to be greater than 50,000. That's harder. If it's less than 50,000, it's going to be really hard for them to go out and get a loan to get it paid off the loans at some credit union or something that's do a smaller loan because it's really, really hard to find a traditional mortgage banker mortgage company that's going to do a loan for below $100,000. Just don't make a lot of money. And I only say that as a voice of experience out there. You're limited on the amount that you can charge total for commissions and closing costs and things like that. But anyway, getting back to the thing, when you have lower valued assets sub $50,000, you often have a higher chance though of the borrowers coming back and paying you off and paying you off in a lump sum. Now there's a couple of ways to you can structure this. I've structured payoffs over 30 days, over 60 days, over 90 days. What do you mean by that, Scott? Well, Usually if I'm going to agree to reduce a payoff and forgive some, I'm going to require them to make a lump sum payment. Either hey or yep, we'll agree to this, some of your paid off in two weeks or we'll agree to a rolling payoff. And what I mean by rolling payoff, that means they're paying maybe a lump every two weeks or every 30 days. So if they, let's just say they owe 60 grand, we're probably going to want to pay 20 grand one month, 20 grand the second month and 20 grand in the third month. And there'll be some penalties involved if they don't ever follow through on that aspect of that, say okay, hey, house is worth 60, we want you to pay this off, you owe 80, we'll forgive that extra 20 if you make three $20,000 payments. That's always a nice thing. We have a situation here right now on an asset in Alabama where the borrower owed roughly about $42,000, house is worth roughly around 3,34,35,000. That's what he owes on it, roughly. We agreed to forgive roughly 12 grand so that they can do a cash payoff. And basically two weeks they reached out, hey asked if they got a cash payoff amount, full payoff, they came back, asked if we would, hey, would you accept 30,000? And I looked at the numbers and I said, well if they are asking for 30,000, they can probably squeeze a little bit more. So I said let's go to 35 or 33,400, figure out the exact value of the property and we'll take that. And so the fact that we picked that up roughly somewhere around between 10 and 15,000 means we're going to double our money basically in 24 months roughly. And what's great is the borrower's been paying on time. They reinstated and started making payments on a regular basis, monthly basis. So it's a good win win to do that. Now the thing is, do they owe more on their house than it's worth? Yes, they still owe more on their house than it's worth, but they made payments on time. I would rather take now the long term capital gain, take the money in, pay the investor off and then take our profits and put it into something else. Either another asset, another investment, cashing out, another investor in another deal. There's a whole variety of different things we could do with that stuff. But the fact is now that we've been able to tap into that investment and that loan equity gives us a Nice chunk of change to go do some stuff with. Now what you have to do. Another option to get more cash payoffs. Here's something you might want to consider doing. If you've got a variety of notes that the borrowers owe more on their debt than what it's worth, they've been paying on time for six or 12 months. You might want to send a letter out to them and say, hey Mr. Mrs. Borrower, I want to thank you for paying on time for the last six or 12 months or since such and such state, we realize that you owe more on your house than what's it still worth. We would like to talk about maybe doing a one time selling if you're interested in paying off your loan. Hey, you owe 50, we're willing to accept 40 on a one time payoff. A lot of people don't realize that you can do this as the bank. You could totally reach out being the bank in this situation and reach out and say, hey, you look at the numbers, maybe it's time to get refinanced out. Now of course you could always turn around and try to sell that reperforming loan. That's 80, 85% of the lesser of either the value of the property or the unpaid balance thing. You gotta realize in that most of your note buying companies are gonna want to see a 12 to 15% return on their money. Investors sometimes will want less, usually at least a 12% return or less depending on what they're looking for. Don't get wrong. We've had some investors that are looking for 6% return on their money, some are looking for 8% return on their money. It just varies across the board a little bit. But the thing you got to keep in mind there is if you can get them to come do a cash payoff with it, you're going to get the highest dollar amount versus only taking 88 or 85% because that's what the fund's looking for. So that's the thing to keep in mind. That's an opportunity, that's something you can think about, hey, send a letter. We'd like to offer you up a one time reduction in debt if you come to the table in the next 30 days. The payoff, some people, it'll take you up on it. Other people are like no, I can't do that, that's fine. But you never know if they want to go cash out there. Some people have IRAs, some people have 401ks, some people have friends and family with money they can get paid off. Some may have a relationship with a bank that they go in and get a line of credit or be able to get a rate and term refi on that for the most part. But that's one thing to think about too as an exit strategy. If you've got a bunch of assets, take the time, look at the payment streams, look what's going on and dive into what borrowers might or might not be able to do it. It's a simple letter. Pick up the phone, make a phone call. You know, you may want to draft to do a mail merge and identify the assets in your portfolio. We're doing this specific thing this week. We're identified the assets that have been basically performing and we're sending out an email for those that we have an email address in the bars. But otherwise it's a direct letter say, hey, we're willing to offer up this one time settlement to pay the loan. We know you owe 50, a house is only worth 30 or only worth 40. We'll accept roughly coming in at 95% of the as is appraised value. That way they've got the time, they got a little bit of room there if they need to roll in the closing costs or things like that to get it done. So it's a powerful strategy. Not a lot of people do it, a lot of people get excited because it's like winter and June or July, middle of the year when you get a cash payoff like that, it's a, a great thing. It does create. Some people don't want to have that happen, but it's bound to happen the portfolio. Because people are going to buy and sell, they're going to move, they're going to do a variety of things. Oftentimes your borrowers, people that buy a house are going to move once every five to seven years. It's not quite the case somebody living in a house for 30 years, but it is okay. We've had the same thing happen to when somebody wanted to get out of the house. Hey, well I got somebody who wants to buy the house. Okay, great, let's give them qualify. We can originate a new loan. We'll get. You'll need to get a license, mortgage loan originator to create that new loan or the new contract for deed or whatever it might be. But it's going to be an amount that's going to be as is the value of the property. And the borrower is going to have to bring some. The new borrower is going to bring something down. Okay. As a down payment, 5, 10%. Prefer 10% or greater to get it, depending on the situation and the way also to. Or the way I like to structure these deals, if it starts, I always want to bring something where they're down so they're going to be. I prefer doing a first lien at, you know, 75, 80% and a second lien, you know, at 10, 15% of LTV. That way there's a first and a second. So structure. So I need to, I can sell it first off close to par. They can get refinanced that close to par on that stuff. But if I'm the bank, I'm not doing a loan at 5% or 7% or anything like that. I'm still going to do a loan at 8 to 10% of interest rate because I'm the bank and I'm the one that's carrying the paper. And I want to make that note as attractive as possible in the long run for somebody else to take off my hands. And I take as little of a haircut as possible out there. So that's the thing you got to keep in mind. Everybody is cash payoffs can happen when you start getting payoffs. I'll give you another example scenario. I got a condo in Delray Beach, Florida. Borrower owes a chunk of change on. It's a two bedroom, two bath. Let me pull up the payoff here. While I'm thinking about it. It's kind of funny. Is that the HOA started or did the foreclosure subject to the first lien. And I hold the first lien. Okay, so the payoff on this one in Delray beach, unpaid balance is like 33,000. Okay, 32,918 they owe 49 is the payoff. When you look at back taxes that we've paid 101 months stuff, it's a lower valued asset. The thing is, we knew it got hit in an area that took a big hit. And we've been waiting for the value to come back up. And the value has come back up, which has been really nice. Value of the assets. Somewhere around, based on what realtors are telling us, depending on the interior condition, somewhere between 50 and $100,000. So we'll just say 75 grand. Okay. So suddenly I get an email request from a title company for a full payoff on this unit. I'm like, okay, great. So I look at it, felt the number, send it in and then suddenly later I get a phone call. And I'm sorry, not a phone call, an Email from the attorney for the hoa, and they had done the foreclose. Subject to foreclose. They've already gotten rid of the borrower and they're basically, well, you know, we would like to negotiate some sort of deed, Lieu. We're gonna deed it back to you if you'll make a chunk payment to the hoa. I think you gotta realize this is a condo note in Florida. So if I foreclose, all I'm going to pay, if all I need to pay to foreclose is going to be usually the lesser of 1% of HOA fees or 1% of the original sales price to them as an HOA fee or one year of HOA fees. So let me restate that, make sure I didn't goof that up. I'm going to pay the lesser of either 1% of the original sales price or one year of HOA fees, which are overs less. Now, what's financed is roughly about 50,000 on this note. So the sales price is roughly 50 grand. So that means I'd be paying 500 bucks in HOA fees according to the safe harbor laws of Florida, or one year of HOA fees. Well, we can all agree the HOA fees are going to be a lot higher than $500. So what's funny is the attorney's like, well, we're glad to do it, but there's a. They'll borrow seven grand in back HOA fees. I'm like, okay, I'm not going to pay seven grand, all right? It's going to cost me. If I foreclose, it's going to cost me 500 bucks roughly for safe harbor, plus my attorney fees. I'm like, what kind of conditions the property in? What kind? You know, you guys have been renting it. If you're threatening to start renting it, it tells me you're not renting it right now. I know it needs some work, and I've just been waiting on the value to come back up, which it has. And so we knew the HOA was foreclosing. So I was like, why? I'm not going to speed up the foreclosure. I'm going to wait like the hoa, do the heavy lifting to get rid of the borrower in a junior lien position subject to mine. So now they've done all the work. I could now come say, okay, I'll pay a two grand or three grand, you know, maybe pay them half, 3,500 to the HOA for half what they're owed. Take the condo back, turn around and basically sell the asset off at that point or start making HOA payments and keep it as a rental. The one tricky thing about this asset, it's in a 55 plus community. So I couldn't move into it, I couldn't rent it. It's. I don't know, maybe I could rent it, but it's got to be 55 plus community. I can. Owner. I got to look at the bylaws of the hoa. So the thing is, this was part of a bulk portfolio we bought a while back. Lower valued asset. I'm like, I'm not going to spend a bunch of money taking asset back that I can only sell off. I'm just going to let this sit one sit and ride for a little bit. Something we bought with our own fund. So we're now at a place that's a. I'm pretty excited about it that we've got this asset sitting there and we're negotiating the HOA who's doing all the heavy lifting. So maybe we come back and say, okay, we'll offer you 3500 bucks, start paying the oh off. I've already had like five realtors reach out to me when I posted it in a Facebook group in South Florida real estate who sent me CMAs who are interested in involved. Some of them already have existing listings in the area. So that's what I'm trying to look at is like, hey, what's the. How many listings are in the area to help us with what our exit strategy is going to be? Now, the hoa, they aren't in a position to sell the asset because of my payoff. I owe, they owe, the borrower owes 49. Okay, I think it might need a little bit of work. Not too bad. But it's in a great area of Delray Beach. I've owned some other units in the same complex or nearby that we've made some good money on. And this is one we're pretty excited about as well. So getting a cash payoff is not a bad thing. Would I accept 35 on a sale on this one? Yeah, I'd accept 35 if the HOA wanted to try to sell it. And I'd reduce my payoff to 35. I'd knock 14 or 15 grand off knowing what I paid for the note early on was somewhere around 10. So that's the thing, is there's some great opportunities in cash payoffs that can take place in your note business. You just gotta know how to structure the deal. Or kind of how to wait and see sometimes works in your favor. Especially when we took such a big hit 10 years ago. I didn't want to rush through some of these deals because if I rush through it, then I got to take an asset back. Now could I turn into rental? Yes, but I don't want to own one rental. I'd rather just let it sit there, pay the taxes a little bit, wait knowing especially when you're getting notices, the hoa, especially on condos, a lot of condos that we bought, the HOA is doing the heavy lifting. It's like I'll just let them do the heavy lifting and wait for a little bit. All right. Or wait and see what the values come up on. And like we. But one thing we did another asset recently, couple months ago, is we end up getting a large tax overage of 75 grand. What's that mean? Well, basically we were into the note for 20 grand. It's a desirable area, but it needs some work. And the beautiful thing about Florida is most of the foreclosures you could see online. And this is what happened. He got bid up to 90, $95,000 at the tax auction, which is great. The back tax got paid to the county, the state, and we filed a tax overage claim because we were the first lien holder behind the taxes. And basically we got a check in for 73,000 to us on that deal, which basically is a 300% return on investment. So that's a good deal. And that's the thing you got to realize it's not always black and white. As far as looking at the, oh, I'm going to foreclose on that. So I want to modify. Sometimes you got to look at what's going on with the asset. I mean, every asset has its own, as I like to say, country western song. But if you look at the deal, look at the asset, look at what's going on in the area, look what's going on in values. Values drop. But you know, it's in an area, it's going to rebound back. Hey, sometimes it just makes sense to sit and wait for a little while and let for that asset to rebound to increase in value and then go from there. So cash payoffs are great. One of the things you always want to keep in mind too is just because you get sitting in a payoff letter doesn't mean it's going to happen. Sometimes you have to follow up, say, hey, what happened when this deal? Who requests the payoff? Is this asset trying to be sold, is it in the foreclosure, somebody besides the first lien holder, whether it be me or a company, and then go from there. So I love cash payoffs. They're great. Now you just got to take the money and double down or do something with it and put it back to work. Because that's the most important things is just reinvesting. And that's. We've done a lot of that just taking our profits and reinvesting back into our assets or the new deals take advantage of the market. Because I still believe that the note business is one of the most profitable businesses out there. I mean just look at all the people out there in the REO space that are clamoring saying, oh, I can't find any deals. No REOs at $0.70 on the dollar or less or I don't want to overpay for wholesale stuff. Look, notes are still a great way to make money because the fact is the values are there and you're buying that debt usually below 50, 60 cents on the dollar as well. So have any questions, feel free to reach out to me guys. We also too. If you're looking for deals, if you're listening to this, you just pull out your smartphone. If you're looking for deals, just text the word deals D E A L S deals to the phone number 72,000 and just send a text message. If you've got the ability to send it, you may need to adjust. I think at and T is a setting on their phones. They don't want incoming text message. You may have to do that. But anyway for the rest of the Americans, just text the word deals to 702007 2000. They'll send you the link to opt into our website, opt in one of our things and then as we get deals in it'll ask you to pick your three favorite states. As we get deals in those three states, we'll be glad to send you a list of those that you can take a look at and cherry pick from or go from there. So we hope you are all having a a wonderful day. Go out, make something happen everybody, and we'll see you all at the top. Bye, Sam.