Six Risks To Watch Out For When Buying Notes

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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 Panties 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 Nodes, Scott Carson.

Hey Note Investors. So you want to dive into the world of note investing but no know how to get started or you don't want to pay 30, 40, $50,000 for a one on one coaching program that just completely does not deliver the deals or the funding or the access that you need to take your note business to the next level. That's why we have our one on one coaching program. I'm Scott Carson. I've been buying notes for 20 years. I've helped thousands of investors buy their first note direct from banks using either their own funds or other people's money to buy non performing, reperforming or performing notes yielding them an above average return. Now what's involved with my one on one coaching program? It's unlike anybody else's because guess what? You're working with yours truly. Not some paid student, not looking at some recycled list of stuff. Now what we do is differently than anybody out there and that's why we have such a huge success rate with our one on one coaching program. What's involved? Well, once you take in our three day class or not Buying for Dummies workshop, sign up for our coaching. You get 10 weeks of one on one coaching calls. These are on zoom in the morning, the after the evening. What works best around your work schedule. We accommodate this to help you start looking at stuff. And during those 10 weeks we focus on finding deals, making offers, getting your website, your social media stuff set up so that you are a lean note buying machine after spending 10 weeks of Zoom calls with yours truly. That's right, live not somebody else will spend two days one on one. And usually people come to Austin, Texas to hang out with us on a Thursday, Friday or Saturday, Sunday. And those two days are focused on whatever you are still lacking and need the most amount of work. One Sometimes it's making offers like Larry came In, we made 50 offers that he got 20 approved in a weekend. Other people came in to raise capital so we help them find IRA investors to fund their deals so they're able to raise hundreds of thousands if not millions of dollars for their note deals and other investing stuff. We're also going to give you a list of asset Manager contacts for you guys to dive into. That's right. This will be your LinkedIn profiles, emails, phone numbers, names, all for you to start reaching out to people. No, you don't need to buy notes directly from me. We're going to show you how to go to banks and contact them directly. We're also going to make introductions to our top 12 hedge fund managers that send us deals on a weekly or monthly basis. That's right. You go straight to the front of the line and guess What? There's no 10, 20 or 30,000 upcharge for the deal you buy direct from the hedge funds. Because we make the introduction, that's why.

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You being a note investor for the rest of your investing lifetime. Good morning, good afternoon and good evening, everybody. Welcome to this episode of the Note Closers show podcast. Glad to have you. On today's episode, I want to talk about the inherent risks involved with buying non performing notes. Because I get these questions all the time. I think it sometimes becomes old hat when we're debunking these myths, but these are the ones that kind of pop up the most. And I'm just going to start. There's basically six.

Seven. Yeah, seven.

Six that are realistic.

One.

We just never know what's going to happen. But I'll, I'll start with the first one. The first risk associated with note investing is interest rate risks. Now what I mean by that, well, that means you've seen it. This is actually what kind of caused Silicon Valley bank to struggle. They had money sitting on the sidelines that they need to invest. Well, they couldn't lend in money out with historically low rates. They had to put into something. So what they do, they bought a lot of bonds at a low 1 to 2% interest rate. Well, when interest rates go up, the value of those bonds decreases. Right. Because instead of making 6% a new bond. Right. They're making one or two. Right. It's the same thing. We've had that happen the last couple of years. Historically low interest rates. When newly originated notes were created and we were seeing these deals or having them shopped across our desk for us to make even a 4% return on a 2% mortgage, that means we're only offering 50 cents on the dollar even for a performing note. And a lot of banks don't want to take those huge discounts. And it's really hard to make money on low interest rate loans. Now that's the biggest thing. If the interest rate's going up, it's great for us because now that our loans that are originated out at 5 or 6% and we want to make an 8%, we don't have to offer 50% discount. We're offering a 20% discount or 30% discount on performing paper. So as rates go up, it means more opportunities for you and me if your owner. Financing stuff, yes, you can finance stuff at a little higher rate anyway if they can't get bank qualified. But that's the first risk is interest rate risk. If it's low interest rates. You've got to make sure that your money's not tied up as something that's going to be paying you a low interest rate for an extended period of time. You'll be very careful and I'm gonna throw term in with this because we have seen a lot of now 40 year and even 50 year mortgages being mixed in with these tapes. You got to make sure that if it's got a lower interest rate and then it's a long term, your PI payment is going to suck and your ROI is going to be blowing up. Okay? Not in a good way, in a bad way. So your interest rate and term length is one of the first big risks. And that's why you want to look at it. It's why we get rid of short terms, is also why we there's only a few years left out of a 30 year mortgage. That's not a good thing. We also get rid of very low, low monthly PNI payments and looking at stuff. So that's the first thing is basically we call it interest rate risk. Second one value risk. What happens when you buy a note and the property value drops because of foreclosures? The market corrections? That's a great question. This is why we buy at a discount and this is why we're usually only gonna be buying it 70% of the market value. If the property is over encumbered, it means the borrower owes more than the property is worse. Because if it does drop 10, 20%, we know markets market's changing for the drop 30, that's a huge, huge drop. You should hopefully be paying attention with the market so if you need to, you can dump that ass immediately. Still get your investment out of it, still get your money. Cost may not make a huge amount of profit, but you can still get the assets sold. We saw funds that invested in BK Chapter 13 loans run into this. They purchased notes at 80, 85 cents a dollar with the idea that these borrowers would be in five year payment plans. Well what happened when the borrowers did not follow through in their BK plan? Well, they were discharged. And then you had these funds are trying to sell a non performing note at 80, 85 cents a dog.

There's no room there for a non.

Performing note investor to take that asset back. So really the only play for those BK funds was to finish the foreclosure and sell the assets themselves. Unless of course it was in an area that somebody had a lot of carnal knowledge of that area. They knew the borrower knew the kind of situation but you had that happen with values represent paying too much for note. That's why you need to stick to your guns and really know is there equity, is there negative equity? And that's why you always want to have a realtor pull a true comparative market analysis. So you know days on market you don't. I don't like to buy stuff where days in market are longer than 180 days. I prefer 90 days or less once we take the property back that we can actually get it moved. Of course if you're getting the borrower back performing that's a great thing but still if you've got a foreclose and it's non performing that's why you're not going to pay more city cents. What you can't do if it's bar has been performing for a while you can't, you can't give them a huge discount or off ask for a big discount because if they've been performing for 12 or 24 months, a lot of equity. Yeah you're not going to get that at a big discount performing note you'll probably be paying 80, 90 cents of the dollar. This is why you do due diligence. You can't have both of both. Best of both worlds. It's not performing, yes you're owed a discount but performing and performing for a while skin the game equity, stuff like that. You're going to pay the premium but you still got to make sure that your return on investment based on the payments and the term makes sense for you and your money costs. That's why it's always important to know what your costs are going to be for your money. If you're using other people's money besides your own borrowers, oh they dreaded I'm going to have a bar to go through and trash the house out. Pour concrete down the drains. You know like the place on fire. This is why we have a thing called insurance or force place insurance. Part of your due diligence prior to closing is to make sure that the borrowers have insurance on the property and that the current bank is the payee. And if they know who's the lender, whoever the lender should be is the payee. If they don't then one of the things that you do is to buy force place insurance for the assets so that if they borrow does get nasty, you're covered. They could trash the property and then all you're going to pay is basically the deductible and then have the insurance company come in and pay off the repairs. And this is. You also can be careful the insurance because with I throw this out here too is in some states, some areas insurance is through the roof. Like Florida. Florida be used to be much more affordable whether the hurricanes in there. Insurance is not always affordable in an area in different areas of God's waiting room as I like to say. So make sure you check your first place insurance costs before closing because that may just eliminate the profitability side of things if it's like that. But you need to have that. If a bar goes in has insurance on it, that's a good sign. If they've got some emotional equity, they're probably going to trash it. You know, in all the properties that we've had and anyone that we had to take back in foreclosure, we we've only had a few that vandalize the property. Most of the time you know you're going to replace paint, carpet and have a clean out crew and probably have to replace at least one sort of thing, appliances or plumbing or something like that just because or electrical if it's been vacant for a while. But that's also too why we don't like to buy a lot of vacant properties been sitting vacant for a while. Because if the borrowers left you may not have a risk of the bars, but you may have riff raffle homeless kids come into the house, you trash it out, stuff like that too. So keep that in mind. But that's why force placement insurance is so a critical part of your note investing strategy. So that you avoid the risks of that. You could have taxes, taxes can wipe you out. If you're not checking taxes. Always check taxes out, always pull title report and see what owed. You may also want to pay for a tax certificate to make sure that property taxes. We have some properties that are in a city but they land in a different school district or they land in multiple school districts. So just because you check the taxes in one area doesn't mean it's the full taxes that we just saw that happen recently on a deal. But not too big a deal. This is also why you would deduct what's owed in taxes provided it's 500,000 bucks more. A big difference from your offering. So always jump on the county records, check what taxes are owed, see if there's a tax sale. Because if you're buying first liens, the only really thing they could wipe you out if you're doing the right thing would be a tax sale. And you Know there's some opinions to if there is any taxes of payment at all off your current. I'm a little bit more of a hey, there's not at least three years back taxes. Oh, I'm not going to pay. I'm going to let it ride for a little bit and that way I don't have to come out of pocket for a year or two back taxes. I'm going to pay a penalty. I might as well let it sit there and pay a small penalty versus using that two grand or five grand to pay the taxes when I may need that money for repair or something like that. And anyway if I sell it, money is going to be deducted from my profits at the foreclosure sale or at the title company as well. But make sure you're not losing it to a tax sale. Then you do need to pay it. Okay. Then you have an act of God. This kind of goes into the insurance aspect. Godsends. The hurricane Gabriel to wipe out the whole coast of Texas or the coast of Florida, New Jersey. This is why you have force place insurance in case of an act of God. In case a tornado rains down from above or an earthquake swallows up your house or a sinkhole.

Look, things happen.

That's why we have insurance. Okay. Just gotta make sure you're taking care of that stuff and your evidence costs.

It's.

It's an important thing. But yeah, that stuff will happen. When it happens. It's usually happen everybody else out there. There's whole areas of country we have disaster zones, stuff like that. And there's special things that go in helping businesses and entities in that neck of the woods to offset costs and things like that. So, so keep that in mind. If you know the bar does trash the property out and you get an insurance check. It's up to you. Hey, do you want repaired? I just want to take the insurance money and run. That's totally up to you. Usually repaired legal risk, what happens? The borrower drags the foreclosure out. Well, you have to understand each state is different when it comes to the foreclosure time frames. Judicial foreclosures are longer than your non judicial states. This is why to avoid the legal risk we don't buy in New York, New Jersey for the most part we no longer buy in Chicago because those are the longer ones that are harder not only to foreclose but harder to evict. So avoid areas of the country where it's damn near impossible evict. There are areas like Portland, Oregon, Washington, State. Some of those areas, even California's got difficult to evict. So places see a lot of investment money getting out of the residential side. They're either going to commercial in those areas or go on the opposite side and going to other states that are much more lender and landlord friendly. Okay. So you need to know that as an investor, what's the foreclosure time frame, what's the eviction time frame? And then also people are worried about what if they help file bankruptcy. Now bankruptcy is going to want it two ways. If they file bankruptcy, want to go through with, there's going to be a payment plan that you as a lender can approve or decline. They can't just come to say I want to pay 50amonth. Well, you need to double check and look at the bankruptcy filing. If you're buying a note that's already in BK chapter 13, what's the monthly payment plan? Are they going to be making their existing payment or they found just on the rear? Just that kind of stuff. You need to know that stuff. Okay, if they don't pay, then it's discharged and then you finish the foreclosure. Then you need to know the time frame of the foreclosure process. You need to know where the existing lender is on the existing judicial foreclosure or non judicial foreclosure process. If it's here in Texas or Georgia or another facet like Missouri, Virginia and other places like that, it's, it's pretty fast to foreclose. So you're more likely to get a bankruptcy filed the week of or the day of and they may drag it all out. You know, if you're buying in Florida and you're taking back an owner occupied or you're taking back an asset, really I'm going to tell you this right now. Any assets over 300,000 most time you're going to have that bankruptcy filing take place. Because those individuals that can afford a house, that can afford that monthly payment, maybe they can't afford it because they haven't been paying for a while, they at least afford the 1500-2000 dollars to pay their attorney to file a bankruptcy or do a TRR temporary string order to delay the foreclosure. So keep them. But that's why if it's a non performing note and say like that, that's why you're offering 50, 40, 30 discounts off of the value of the property, what's sold, just depending on where it's at. And then of course the last risk is the unknown risk. Unknown risk. Now what I mean by this, the unknown risk, there are factors at play here like Covid, like pandemics that can shut everything down. We've had that happen obviously where they delayed foreclosures for basically 24 months. Tom, we had this happen in the last recession where states stopped foreclosures overnight and delayed foreclosures for a year. We saw that happen in Vegas. We saw that happen in South Carolina in 2008. That's the unknown. Okay. This is why I tell you to buy in multiple states. So that your risk is spread out across the board. Across multiple states. It also that works in your favor for insurance. If you have properties in multiple states, your insurance risk on a blanket policy is much cheaper. And just buying in Florida, Texas. Okay. It's also good to have instead of taking one note for a million bucks, spreading your risk out over 20 or 30, what you buy with that asset can't be wrong. We've bought the high end notes. We've had investors that were fund that we knew it was going to be at least a 12 to 24 month process. It happens as long as you understand the risk. As long as you're buying right, so that your investors are taken care of. You got to know that stuff. Other risks that you can offset, I would say more personal risk like you could do key man insurance policy. You could do a policy on you in case you get sick or something like happens so that an act of God happens to you or you feel over sick or get, you know, unable to apply. This is also why you have vendors and attorneys and servicing companies to help carry the heavy lifting. So that you're basically just originating or not originating, but finding these deals and looking through them and then putting it in the hands of your servicing company or attorney to handle through the process to get it to the finish line. The finish line could be either the bar starting to pay on time again in a reinstatement, a trial payment plan or modification. They're turning the asset over to you in a settlement or cash for keys or deep balloon or you're selling a short sale or they're doing a payoff or worst case, you're selling off to other investors. So it's important. One of the things to do I would highly recommend you do is having a power of attorney with somebody that you trust. Understand the businesses that in case you get sick or in the hospital for a certain period of time, you got somebody who can act on your behalf to make decisions for your your portfolio to make things good for you. So those are the things once again, interest rates risk value risk, borrower risk, tax risk, God risk of God and then legal risk. And then of course the other aspect of anything can we could happen to you. So those are the risks associated with note investing. Some of the things you'll see across the board, all types of real estate. Other times are just associated with the notes side. But if you have any questions, feel free to reach out to me@talkwithscottcarson.com and I'll book a timeline schedule for you. And I encourage you, we'll cover these risks and other things in our classes that we teach on a regular basis. So check out weclosenotes.com and check out our one day class, our Note weekend training class that we have basically every month, every third Saturday and then our three day virtual note buying workshop at Note Buying for Dummies.com is our three day class and we cover a whole slew very intense A to Z nut and bolts training that we've been teaching for now 13 years. So go out, take some action. Thank you for listening. Make sure you leave a star, make sure you hit that subscribe button and we'll see you. Off topic buddy.

Bye.

Sam.