Session 9 - Raising Capital, Due Diligence, and Avoiding Bad Deals

All right. Before we got a little interrupted there. Yes, servicing companies, definitely you need them. They're all going to have advantages, disadvantages. The more notes you have them, the better off you're going to be. Performing notes. It's usually best just to keep them with existing servicing company. You don't want the bar we're using that it's changed a new servicing company to give them the opportunity to not pay. Right. That's what happens is a seller, when you buy a note, a seller, their servicing company is going to send out what's called a goodbye letter. Hey, thanks for paying us. Now you need to call this company and pay this pay them. Right. And your servicing company, since you're the buyer, should also send out what's called a hello letter. Hey, thanks for paying so and so in the past. Now you got to pay us here at this address. Okay. And that can lead to a, you know what happens is a seller isn't going to transfer servicing immediately. They'd have to by state law give the borrower 14 days to correspond with them. Okay. So that's why it's often better just to keep it the same servicing company. So there's no type of hiccup. The ach, if they've got that in place, will stay in place and go from there. Okay. What we have found, not performing where they're not paying. It doesn't really hurt to change servicing companies because if they're not paying, they're not paying. You know what I mean? But you want to do this still can take 30 days a lot of times for a servicing company to transfer servicing. So keep that in mind. If you're buying, you're funding by the 27th a month and a borrower pays by the seventh month, that payment should be yours. Okay? You should get credit. They probably won't get it immediately, but there should be a credit that comes in. The servicing company will probably send you a check for that payment. Plus any escrow that's been collected already, any taxes or insurance has been collected on behalf, you're going to put that escrow check back in to your servicing company. So when it comes time to pay the property taxes and the insurance, you'll do that. Part of one of the things you also want to do is monitor the property taxes, monitor the insurance. Your servicing companies will do that for you as well for you. Just someone will monitor it. Someone will collect. I always say if it's a non performing note, it's probably best to start collecting escrow. It may not be required it depends on how it's written into the mortgage, whether escrow is required. If somebody's got a ton of equity they can get out of, you know, you may not collect, but if it's brand new note, I think it's smart to collect escrow, taxes, insurance and keep that in there. So that, and also making sure that the insurance updated to show your company is the payee or the servicing company is the payee in case anything happens. Because the last thing you want to do is have a insurance get canceled. You not know and then something happens, a fire, hurricane, a flood, tornado, whatever it might be coming through and wipe you out. Okay, same thing, property taxes, it's good to double check those, make sure those are paid up to date, paid at the end of the year. You have the right and you may want to do that. If the borrower is not paying the property taxes and doesn't pay in time. You have the right to advance pay those to avoid any type of foreclosure and then force the borrower to start paying those on a monthly basis back to you and stuff like that. Same thing. If they're not paying for, if they're not putting for property insurance, you can get force place insurance. Oftentimes servicing companies will have a vendor they use. They can just add that in and you're getting reimbursed from the borrower for that on a monthly basis and then it'll be a little bit more expensive than they get it. And that's the thing is you're getting reimbursed for you paying for it. If they go get it, you can then just show that they started paying on it and to get that month or two months that you've paid in advance reimbursed, stuff like that. But that's the thing, making sure these things take place. We'll talk a bit more about that. But it's a conversation you'll have with your servicing company about getting set up. They'll ask you to fill up, you know, seven, eight pages on some information and make it pretty simple for you to set the stuff up. And then it's all about. You can either a get an ACH deducted from your account or credit card charge for the payments or they can take servicing costs out of the monthly payments that come in. I usually just say, hey, if it's a performing, just take your servicing costs out of that mortgage note and then we'll go from there. Okay, but where was I before I had a plan of action? Rock and roll. Before we get A little bit of that blip of the power going on here. But that's okay. We're back back on track here. So let's start diving into it. Like I said before, raising private capital, and I mentioned this a little bit yesterday, on day one, it's really a mental thing and a lot of people have mental blocks. They get that six inches between their ears and they get blocked. Okay, look, if you've got your own capital, I don't care if it's 50 grand or half a million or more, that's great, that's awesome. But do not fall into the trap of only looking at that as the amount the fund deals with. Okay? I tell my coach, he says, like, if you got 50 grand in an IRA that you want to use, that's great. Make a half million dollars in offers. Because remember we talked about closing ratio being about 10% yesterday afternoon. If you're making 10 offers, you're going to probably get about one or two accepted. But if you only make one offer, it's on the best looking asset, you're probably going to get outbid, all right, and end up with nothing. So bidding on multiple assets works in your favor. Not only do you have a much higher success ratio getting something accepted, but two, it's going to force you to raise capital and start marketing for deals. Okay, now I'm going to share my story, how I overcame the mental block. Like a lot of folks I was coming out of, like I said before him, when I started working back in the day, sort of diving into notes in real estate, I came from where we almost lost our house. You know, there was a period of time we were facing foreclosure. We got rid of two investment properties. We kept a primary forbearance. And it was taking a little bit of time, you know, of getting back my asses out of sling. But when I was working with E mortgage company with Boyd and then learning from Bob Lee and Annie and Jamie Kayla, I started doing like a lot of folks do. I start going to my local real estate club to start networking, start talking to people, listening, getting educated, right? And one night I walk into the Austin real estate club here in town and there's a couple guys there, one from down Corpus Christi from where I grew up, and then two other guys here locally. And these three guys were pitching a deal. And the deal was, it was a 29 door basically deal. You have an apex, a two story aplex, a couple duplexes and then some a triplexer here and there. Basically it Was. And then I think there was like one or two single family homes. I remember it's been a few years. Okay. So anyway, they're pitching this deal and they're saying that it's worth fair market value as is about 1.1. We're looking for 550 on it. I was like, oh, well, I didn't see a lot of steals out of Corpus Christi coming to Austin. And I still had family down there, still had friends. I was like, oh. So they handed out a flyer. I grabbed the flyer, took it home with me. And I was looking at a little bit. I was like, well, this might not be so bad. And I walk into the office the next day on a Friday and I run it by the deal by Bob and Jamie and they're like, yeah, it's not a bad looking deal. Can you verify this stuff? So I made a couple phone calls and verified that, you know, you look pretty easily online to find values. I'm like, yeah, the values were there. Now this is not a note deal. This is just a traditional purchase deal. And they're like, yeah, go ahead and make an offer. Once you go and make an offer, I'm like, huh? Yeah, we'll help you raise the capital. I'm like, oh, awesome. So I make an offer. I was like, oh yeah, let's do 500, not 550. Let's be the shrewd negotiator and make an offer at 10% less than what they want. So they want 550. We made an offer at 5. I made an offer at 500 a day. And I was like, okay, great. Well, Monday morning I get a phone call and it's from Dan and Will and these three guys, like, hey, Scott, we got your offer. You're the winning offer, but we really need you to come up to 515. Could you come up to 515 from 500? I'm like sitting there thinking like, well, yeah, I don't have 500. What's 15 grand more going to make a difference? Sure, I can come to 515. And they're like, okay, great, awesome. You're the winning bidder. We're going to send you over the contract, stuff like that. I said, well, I'm not going to assign anything to drive by the properties. I want to inspect the properties first. I'm going to be driving down there this weekend, like, oh, we're going to be down there this weekend too. It was like a three day weekend. I was like, awesome, great. So I walk in the Office. I'm all excited. I got this, you know, offer accepted. And I go to Bob. Hey, man. I got my offer accepted at 550. And they're like. They're like, that's awesome. Congratulations. I was like, how are you going to fund it? Like, we're not going to fund it. You're going to fund it. You've got all these connections and you've talked to all these people. Just start reaching out to people. If it's a good deal, start reaching out. So I was like, oh, shit. I was excited. But then I had like the. Oh, crap. Now I gotta. Now I gotta do something, right? So like I said before, when I started traveling the country, I started putting people all their business cards into a spreadsheet. So what I do, I started dialing for dollars. I started calling people that I knew that had money that I'd met from my year of traveling. So I had this spreadsheet and I started calling. I did a little email blast out to them, said, hey, I got a deal. I had some people respond about it. So in basically about four hours time, I had four people that said they were interested. And I was asking for 600 grand because they said they need a little bit of work on some of these properties. So I said, well, let's 600 grand. And like I said, I had three, four people respond to me. So they would fund the deal. They're like, yeah, we got a phone call. Yeah, we're definitely interested. You know, I told him I was gonna drive by and take a look at it this week. And like, that's great. Yeah, if it turns out, we'll help you, we'll fund the deal. And, you know, I was thinking I was offering like a 12% return based on the cash flows that they provided. And so I was off and running. It's pretty excited. So I got my buddy Boyd and I, we drove down Friday. Cause I didn't have the money to write an earnest money check for two grand or whatever it was, was at that time until Boyd came along. So we go down to look at. We meet the guys on a Saturday morning at a Bill Miller barbecue down there. And right across the street are these two. This is duplexes, the first of two. So we go look at. And. And the exterior looked really nice. Fresh coat of paint, white paint, blue trim. Just as the photos showed. We walked into it, it was complete polar opposite. All right, The. The roofs were sagging, there was cobwebs in the corner. The. The stove was a stovette. You Know, it wasn't a full size stove. Like a three quarter stove was all rusted out and all this grease hadn't been clean in a while. The floors were warped. It was just horrible. Like, yeah, these are probably the two rougher ones. I'm like, oh, okay. That can happen. All right. They said they need some work. I was like, okay, these need some work. So we proceeded to go to another duplex. And it was just as bad. The third property we stopped by was the two story aplex. Had four units on the bottom, four units on the top. The whole building had a lean on it. Not a mortgage, a literally lien. It was leaning like this, okay? To get into the property, they had already cut the doors because you couldn't open the doors because they would stick. So they had to cut the bottom of the doors off so you could open it up. The stairs was like this. There's dead rats all over the place. I mean, some. There was people living in the four units on the bottom, but there was nobody above because it wasn't structurally sound. Right. And I'm like, yeah, this doesn't take a whole lot more than 65 grand to fix. And two other guys were surprised because they were viewing the property for the first time. And the guy that was down there. Yeah, all right. Yeah. I was all excited about it. Like, I think out of all 29 doors, only, like, four were nice. Four were nice. The others were just absolute horrible. And I asked the guys, I said, do you have insurance on this? Oh, we can't get insurance on this. I'm like, well, okay, great. And I'm getting more and more pissed off because this deal is not what was represented on paper. Okay? 65 grand in repairs is not what it was. So we end up going back to Bill Miller. And this big guy, Dan said, all right, y' all ready to sign the contract, earn this money? I was like, yeah, we're not going to be signing anything today. And he got all mad big old blustery. I'm like, listen, man, this deal is not what you guys said on paper. I'm not going to write a check for somebody. And it turns out they finally let after we told them, well, we're looking for somebody to just get back our earnest money check. I'm like, I'm not going to just write you a check to get your earnest money check so that you guys get out of the deal. It's your fault. You were trying to wholesale flip this deal. And I'm not going to buy it sight Unseen. I'm like, you can get as mad as you want with me. Not going to happen. All right? And so we walked. And I felt very disappointed. I remember driving back from Corpus Christi to Austin and I was so excited. Driving down there, I was like, oh, we're going to buy this. These tenants have been there long term. We're going to offer owner financing, get a little bit down. We're going to sell the first off. We're going to keep the seconds for cash flow. I was already cashing checks in my brain, like we all do, right? And like I said, I felt like a dog with his tail tucked between his leg. Driving back Monday morning, I pick up the phone, call those four investors, and you know what they all say? Well, thank you, Scott. Appreciate it. We knew you would look into it. Call us on the next deal. And that's the magic in what you're doing. You all will be doing the same thing. You're going to be looking at deals that make sense. When they don't make sense. Guess what? Whoop. You're pulling the punt, the rip cord. You're getting out of the deal. You're not going to be putting people into bad deals. All right? Some of your deals will need a little bit of finagling. And depending on how big a discount you're getting it. Yeah, there's multiple ways you can go. But that's why we do due diligence. That's why we go through that whole process of evaluating the values and looking at the, you know, the numbers, looking at the collateral file. We'll talk about later on here for you guys in a second today. But that's the thing when it comes to raising capital, you're not begging for money. You're offering people an opportunity. So many people out there aren't making 6%, aren't making 8%. They're making zero on money and sitting on the sidelines. They're making 1%. Okay? You are offering people an opportunity to go into a deal for a short period of time of 24 to 36 months. Okay? They want to stay around longer. They can. If. If you end up selling the deal off before then, guess what? That's a great thing. You have the right to do that. Right. But you're going to make sure and take care of your investors. Is every deal going to go smoothly? No, every deal is not going to go smoothly. Will you get sued at some point? Yep. You'll have somebody that you promised them at 12% and the deal happens. And you only were able to give them 11.9, or you're going to have a foreclosure. Drag out longer than expected. Those things happen. All right? This happened to me. All right? Deals drag out longer than expected. People get angry because of COVID Not much you can do. What are they going to do? People are going to sue. You just have to work your magic to make them whole. And understand communication is key. But still, some people are just going to get angry no matter what. I'll give you a great example. We had a lady who actually came to my class, came to my workshop. She attended one of my mastermind networking events as well. And she came over a couple weeks later, said, hey, Scott, I got 70 grand I'd like to put into a deal with you. I went, great. Okay. I got two deals in Florida. One's in Tallahassee, the other one's not too far from there. These are non performing notes. I need 70 grand to fund these two deals. They're worth over 100 each. Okay? We're gonna buy them at a discount. It's gonna be about a year process to foreclose. Are you comfortable with that? Oh, yeah. And the lady taking like all these Ron le grand classes and all these other educational classes. And so she wires the 70k into our escrow account, stuff like that. We fund the two deals. We get the assignments to show that, hey, it's 50% interest to our LLC and 50% interest to her LLC. She's not getting half the profit. She just has an interest in the property. Okay. And she was set to make 12%. We weren't going to be making monthly payments to her because a, it's not performing. And what we structure in our agreements, if we're not getting paid, you're not getting paid. All right? If we're not getting paid monthly or quarterly, we're not going to pay you a monthly payment. We will just put that interest to the lump amount of the sum. And she was completely fine with it. She checked all the disclosures, all the things we talked about. Boom, rock and roll. And she filled out the investment questionnaire that we like to go through. And I'll talk about that in a second here. Well, seven months goes by, okay? We're communicating. She's in an online portal basecamp that we use. She's getting updates, stuff like that. Seven months later, I get a phone call from her, and she's upset. I'm like, what's, what's wrong? Well, I need to get my money back. I'm like, I can't give you your money back. They're already investing these two deals. I'm like, why do you need your money back? Well, I'm going to lose my house. Well, why are you going to lose your house or something? She's well, I got to pay $700 a month of the credit cards that I took this cash advance off of. And I'm like, are you kidding me? You took a cash advance? She was like, it was zero percent for six months. I'm like, but I told you the deal was going to be 12 to 24 months. Well, I thought you'd be done with it faster. I'm like, did you not see this is going to be a 12 plus month deal to foreclose on? Yeah, but I need my money back. I said, well, you're going to lose 25% because we put a clause in our agreements. If you're going to pull the money out, you're going to take a 25% hit. She didn't like that. She was yelling at me. I was like, I'm sorry, this is how it is. I have to now go raise other capital, take money from other deals to go pay you back because you're an idiot. I didn't call her an idiot, but I really was thinking that, you know what I mean? So I'm working through that in my clauses. 90 days to refinance somebody out. Well then about a week later I get a letter, I get served, certified letter, stuff like that. And I'm being sued by her and I'm like, I'm like calling the attorney, like, why, why are you suing me? I've disclosed all this stuff. We've worked well, she wants her money back. She doesn't take a 25 hit. I'm like, well, did she give you the agreement that she signed? Yes. I said, well, did she fill out, did she send you her copy of the investment questionnaire that she filled out? No. What do you mean? So I sent over investment questionnaire to the attorney which shows exactly, hey, this is a 12 month deal as outlined in the agreement. She wasn't as truthful as she was planning. She had actually tweaked the agreement a little bit, which is not accurate, which is, that's fraud basically. But I, and he called me back, he's like, yeah, I see that you've disclosed this. It's all discloser and I like it. One of the things I said, investment question too is I asked people what other types of real estate investing education have you taken? She filled all this like all this extra stuff out. I'm like, okay, great. Showing that she was not stupid. She knew what was going on. She was claiming fraud. Then I didn't disclose it was going to be a year. She was just throwing all this stuff. I was like, it says very clearly in the funding agreement, very clearly in questionnaire and stuff like that. Are you comfortable tying your money up for where's the money coming from? And she didn't circle credit card or line of credit. She circled cash, which, that's fraudulent, you know, she didn't disclose that. And he came back to the. She said, yeah, I understand that says you're going to lose this if you want to take this for. She's like, you know, I'm, we're withdrawing it. Is there anything you can do? I said, yeah, 90 days and she's going to take a 25 hint, there's nothing. And he's like, okay, do your best. And we refinanced her out and then blacklisted her and made sure all of her coaching students knew who she was so she didn't do deals again. Right. Unfortunately you're running people like that that just don't understand sometimes no matter how much you disclose, people do have a funny way of doing things when they're financially stressed. Are there stressed people out there financially right now? Yes, there is. When it comes to raising capital, you start talking about note investing for first and foremost, people want to know why would you invest in a non performing note? Well, a, you're buying that note at a huge discount that gives you the right to collect on the full amount or collect on the property. So you're getting a bigger, usually a bigger discount on the deal than your traditional fix and flippers. Right? You're building cash flow. That's what people are interested about, cash flow. You're in a first lien position. You're secured. You're putting insurance on the property in case an act of God. You're making sure the property taxes are paid. All right? You're buying at 70% of value or less. Okay. You're using licensed servicers and attorneys to handle the heavy lifting and you're validating of the property, but the borrower and the collateral file. These are all things that are working in your favor. It's not you going out and having to buy the property to fix it up yourself to mow the lawn, to put the for sale sign, to sell it, to close it, to manage it. No, you're not doing any of those things. Okay, okay. You are buying the debt because they're servicing companies now. Will you end up taking the property back? Sometimes, yeah. But you're buying at a bigger discount. There will be some hiccups. You're not going to get into your views of the property. So that's why you buy at a price point that makes sense. And you can also tell a lot of things how borrowers are. That's why we like occupied assets because they're usually in much better condition. Are you going to have new paint, carpet and appliances? Yeah. Nine times out of ten you're going to have to do that. Okay, but you're not knocking down walls, not doing big heavy rehabs. I don't want to do that stuff. It's not my best use of time. I like buying the debt, getting the cash flow coming in, you know, getting a great return whether it's performing or even bigger return. If it's a non performing, we get borrowed back on track and making money to keep people in their property. All right, but those are the things we'll talk about a little bit more. You'll hear me talk, but these are the six things that we like to only buy in first liens, buying it, setting percenter value of less so that we have plenty of room. Okay. We're making sure you're not funding with me, you're funding to our title company and stuff like that. Or sometimes funding directly to the bank, the lender on stuff like that. We're using servicing companies and attorneys. A, we're putting insurance on the property in case of act of God. And six, we're making sure the property taxes are paid so we're not getting wiped out in a tax foreclosure. Okay. That's what we're A great thing about buying first liens is those are the things that protect you and leverage it. It's not on you. It's not me, Mr. Buyer going out and trying to collect. It's big bad servicing company is doing this for 6,000 other loans right now. Oh, it's not me foreclosing. It's big bad attorney who's closed on 60,000 foreclosures over the years or whose firm has done that. You start seeing the difference in that aspect of things. So I. And once again you're approaching people. You're not going to be pooling money where if you got to close on a deal it's 200 grand. You're not going to have four people with 50 grand. Dude, that that would be pulling. That's not, that's no, that's not kosher. That's illegal. Okay. You're also not going to be giving people a split of the profits. If somebody's coming in and funding a deal, you know, if they're not putting 250 grand a deal, it's not worth setting up the structure of an LLC to have them partner with you on the property. That way then you could legally give away split. If somebody's just giving you 50k of their IRA, you're just going to be doing flat, flat loan agreements. I'm going to give you 6, 7, 8, 9, 10, 11, 12% for two to three years. Okay? If we sell the asset off sooner through one or two different things or different ways, we're going to give you back your investment plus the interest on it. If they start paying, we're going to pay you interest on a quarterly basis. Okay? Pretty simple aspect of things. And I want to go through that because there's plenty of private investors out there. You just got to know where to look. All right? Obviously going to your local rea clubs are one of the most valuable things, but you're going to find a lot of other investors like yourself looking for funding there. The best time to go to your real estate clubs, go to the December meetups. Go to the January, the February, the marches. You're going to see more people attending the REIT clubs in January, February, March than you will year long. Because that's when a lot of people decide they wanted their New Year's resolutions, they want to get into real estate in some sort of fashion. So they started attending and networking. Okay. We always see an uptick in our YouTube videos, our podcast, episodes of downloads. People listening more about wanting to do something and they get all excited about it by January 1st, 2nd, and they filter all start fading off by February, you know what I mean? It's also when people start getting their in January, they start getting their statements, account statements on their IRAs or 401ks and realize they want to start doing something different. Okay, so attend, show up, network, take business cards. Get up and talk about your past deals. Talk about deals you're looking through, you're working through. Such a great way to do it. Get out and network at BNI groups across your area. Business networkers international b and I dot com. Most major cities or most cities will have a BNI group, maybe one chapter, maybe like 50 chapters like it is here in Austin. Go and attend all of them that you can either morning or afternoons go attend. You'll walk away with business contacts. Sometimes the whole list of the Register of the. Not only just the membership of the list, but also other people that show up to the event as well too for it. And that's a great database to start creating for a warm market because most people attending BNI groups, especially members, they're making money and they've got money to invest. They just don't have the time or experience. And that's where you step in, is you help solve that time issue and that experience issue. All right? They don't understand how it is to buy notes or buy real estate. They don't have the time to go do it, to learn how to. They're good at being a plumber, a insurance guy or an attorney, whatever it might be. They need somebody to help do that. And if you can solve time and money issues, guess what, you have that, you have the expertise. So it solves the time. They don't need to understand it. And then the money and the return issue, you're allowed to give them, you're giving them a double digit return or above average return, however you want to say it depends on. I don't go in promising interest rates. I say we're going to give an above average return. If somebody's got money sitting on the sidelines, not been doing anything, I'll offer them a 6 to 8% return to start off with. You know, sometimes you get a deal done, you got to go to 12%. You know, if you're raising capital, real estate club, you're going to have people looking for that double digit return. If they will do that, great. You can be more savvy over time depending on where your network is. Okay, does that make sense everybody? Kind of what we're getting into here, it's, it's raising capital is all about mental and then the marketing aspect of things. We'll dive deep into the marketing side of things, how we go about it or simple things that you guys can do to do this. Some of the relationships or resources that you can use to, to help you raise capital and close deals in a target rich environment, as we like to say. Okay, so hang on to your horses. Let's go deep dive into finding IRA investors that you can dive into. All right?