When Is a Note Deal Too Skinny?

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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.

Good morning, good afternoon, and good evening, everybody. Hey, welcome to this episode of the no CL Show. As always, Scott Carson. Excited to be here with the day and today's topic. I want to talk about when is a deal too skinny to pursue? And I think I get this a lot. Hey, is this a deal? Does this make sense? People email me questions and, you know, they've run some numbers, they've taken our, you know, some of our spreadsheets or us working through some tapes and us sending actual raw tapes out with our formulas on it, and they're making offers on stuff. Look, if. If we go through a tape and we identify assets that we're gonna make offers on, yeah, you can make offers on those if you want. But you got to understand the math behind the math, because one of the questions I'm always asking people, okay, what does your money cost? If you don't know what your money costs are, that doesn't mean you make offers. All right? You got to know what your money is going to cost you. You gotta have at least some people lined up to talk to you that could potentially fund your deal. If you're not talking to people about funding your deals or having a list of people have your own money, then you're gonna get in a bad situation having an offer accepted, people send you due diligence, and then you having to cancel your bids and walk away. And that's not a good deal to be in. I mean, that's a bad place to be. Without having any logical reason of why you can't put the odd, you know, I didn't have any money race. Well, you gotta kind of do some marketing on both. Everybody loves making offers on deals. We love the numbers about buying the stuff. But if you're scared to have those money conversations, then. And you don't know what your money cost can be, then that means the deal's too skinny, right? Because you're not running on numbers. Okay? And I want to. We had. I had a student sent me a deal this weekend, and he's looking at, and he's like, is it a good deal or a bad deal? And I'm like, well, I don't know what Your numbers are right. So he literally text me all of his numbers. Right. And so I'm like, okay, so he's making an offer on a first lien. There's some equity. The unpaid legal balance is 78. He's making offer at 65. Okay. And it's still got a few months to go to foreclosure. All right. It's in about a year long foreclosure process state. I don't know where they're at in the foreclosure process. I just know that the bar is quite a bit behind value is above the, the legal balance. Right. Well, there's only really about $13,000 in there. So if he's making an offer at 65 that's accepted me, let me be specific on this. I believe it's 78. Let me just go back through the numbers here. I got it. The text pulled up that he sent me to. Let me send you the whole like BPO and the title. I'm like, I'm not going to go through that on my phone. All right, if you want to do that, make a phone call with me. All right, so the BPO value is 120,000. Okay. All right. Current UPB is 68, 578. Total payoff is 78. So I was about right. Purchasing for 65. Okay, so let's go through this. Let's just say he's using his own funds. If you're using your own funds at $65,000, your money costs you zero. Right? Okay. If you take it to foreclosure in the foreclosure, and this is in Oklahoma, this is a reverse mortgage. Now I do recognize that it's a, it's a reverse mortgage. So the bar is not going to fight. So you have two things happen. One, it's either going to sell at auction and Oklahoma is a relatively faster foreclosure state. Does it give me the foreclosure state on here? Doesn't give me. It's post judgment. Okay. So that means it's basically the judgment's been filed, it's baiting with basically probably 30 to 60 days for a foreclosure auction. Okay. So I mean that's a pretty fast aspect. So is it worth him making an offer at 65 and then getting 78,000? The auction sells at auction, that's 13,000. Now if you're using your own money, that's a pretty good return. That's a pretty good day. All right. Now, I don't know the interior inspection of this it's not a bad looking property. From what I can tell online, it's worth e. Zillow gives it about, oh, 120,000 in the middle somewhere around there. Okay. Now if it doesn't sell at auction now, you take the property back and you have an asset worth about 120, 000, right? 118, 119. But how much repairs? Now most of these reverse mortgages do need paint, carpet, all right, and appliances in most cases, you know, you think you're gonna clean out and then I don't know what the roof is in, stuff like that. So every reverse mortgage bought, the minimum we have is at least 25 grand just for a refresh. Right. So it was a little bit more, so a little bit less. But most of the time it's always 20 to 25. Okay, so if he's buying at 65 and it sells at auction for 78, 13,000, just say 90 days. Is that a pretty good ROI? That's a phenomenal ROI. Okay. Does it make sense to do that if he's using other people's money? Yes and no. It all depends on what that money costs are going to be. Now an investor may want name, may not want their money being out only 90 days. Okay. And some do. Now if you're using your own funds, by all means, that makes sense. But for me, that's probably too skinny a deal at that aspect of making 13 grand. All right, because you're paying 6, 500. And an investor, let's say an investor wants one year of a, you know, interest as a prepayment for the money going out. Well, 6,500, you know, at 10%, that's 6, 500 bucks. You're not at City too. That's a pretty skinny deal to be that way. Now if they want their money out for a year and you foreclose, it doesn't sell. And now you got to put money into it for the rehab. It might make sense depending on what the rehab costs. I haven't looked at the interior inspection report and stuff like that at all. So it's not so bad. Another skinny deal niche I would look at would be the P and I payments. If it's an occupied asset, look at your principal interest payments. Now reverse mortgages will confuse some people because it'll say it's a dollar. Of course, a reverse mortgage, the borrower's not making mortgage payments, okay? They have to put something in. A dollar is usually what they put out. So that's separate. But when you Start looking at monthly mortgage payments and you start getting that point where they're at 400 or below. Those kind of tend to be a little skinny, especially if you've got to pay out monthly quarterly payments to your investor on money or a split of the cash flow that's coming in from getting the bar back on track. Now there's pros to cons. You have to decide what's too skinny. I always say that really $250 and below, if you're using your own funds, really gets a bit too skinny. Especially if it's non performing and you're paying $90 a month towards a servicing company for not performing, that's 160 bucks left over for you. That's not a lot of money coming in when you start figuring another expenses along the way. All right, now if you get the bar back on track, okay, it might make sense to do that if we modify for a higher payment. That might make sense. But if I'll give example, we had another student that was buying a note in Pennsylvania and the PNI payment, he bought it with the idea that he was going to foreclose. The bar is way behind. I think the original balance is only 50. The borrower owes over a hundred. Okay. Property is worth 85, something like that. He bought it at a pretty cheap price. Suddenly the bar comes to the table. Oh, I can pay some money to reinstatement. Well, or no, he doesn't. He has some funds and he wants to reinstate the loan, but he doesn't have the full amount of 130. Well, it would be a good yield based on the money that the guy told my student and supposedly said to the court that he's got to reinstate it. It would be a good ROI in year one. After year two, it gets down to below 9% ROI based on the payment stream. If the guy keeps payment. Well, the guy pays a lump sum and then stops making payments. Guess what? It resets the foreclosure clock all over in Pennsylvania. You gotta go through that ride again. Okay. It also, I think he's also dealing with the statute of limitation on some of the stuff that's collectible. So my student is running is, is running it. Well, do I accept a lump sum payment? It resets the statute of limitations. I can go after the full amount, but if the guy pays beyond a year, it's good for only year one and year two. Year three, I'm losing money because my money costs are 10% and it's only returning 9% at that point I said well you got to figure out you're going to have to hold some money over from that down payment to potentially pay your investor. Now of course after 12 months could you sell it as a reperforming Note, probably get eh, 80, 90 cents a dollar of what the balance is. Yeah, you probably could potentially get that but it's kind of a skinny deal. So that's the thing that you have to look at is know what your money costs are and, and and be upfront. If you're making offers and you don't have any money raised, tell me. I'm glad to give you some ideas but you got to be coachable and going out, getting there, going to your local real estate clubs is the first place to go. But you also need to be doing some outbound marketing to IRA investors. You also have to understand the process. It's not just a fill out investment questionnaire and that person is going to fund your deal. Right. You have to build a relationship. It takes skill. If somebody says they've got money, you still got to make them a fill out investment questionnaire, B get a proof of fund, C a pledge letter and still be talking about the process of going along what is going to happen. And yes, you've got to pitch the deal. It is what it is. The networking aspect of it, the sending out letters to IRA investors. This is an ongoing process that everybody has to do. If you're not willing to do that then I'm sorry, you're not going to get any bits accepted and you're just wasting your time and you probably need to spend some time on the marketing side. I mean that's what's so great about our one on one coaching is helping you eliminate the skinny deals but also helping you raise capital with your marketing, helping you with raise capital with the pitch decks and stuff like that. And over the next week or two we'll be having more some refresher videos on the pitch decks and the things like that to help you get the most out of your note investing. But when you look at how skinny deals you've got to figure in A money costs, what's coming in potentially on P and I payments, what's not coming in. I know repair costs will drive bonkers, I mean people bonkers because they can't estimate it. But you can figure in paint, carpet, even if the interior inspection peak in the windows looks pretty decent, that's going to probably be 20 to 25 grand if not more on a simple clean out and get, and get the property ready for marketing on the MLS now, the property's in pristine condition. You know, that's great. Sometimes that happens. We have had that happen where we bought a note and we didn't have to do anything on the inside. The place was completely clean. All we had to do is like put three or four bags of mulch outside to boost the curb appeal, you know what I mean? But when it comes down to everything, there's things that you're going to want to get rid of. There's assets on tapes that you want to get rid of. And that's why we have that aspect on our due diligence spreadsheet, our due diligence checklist. Start getting rid of things that are too skinny. First and foremost, you obviously can get rid of the states you want because some states take forever to foreclose. That makes your deal very skinny, with foreclosures costs and things like that increasing. All right. You really have to understand the market. Like right now, Florida is a great example. Florida's got a lot of defaults, a lot of stress, a lot of issues in insurance, a lot of issues. Wakanda associations, HOA association, stuff like that. You've got the Airbnb meltdown down there where a lot of stuff is coming on the market and you and stuff's getting discounted. But it doesn't mean that discount's a good deal because it's all about what somebody will pay for an asset. Right? So that's the thing. I kind of avoid Florida right now. I mean, I. Keeping an eye out for a few areas, stuff like that. But for the most part, Florida is just a no go right now for a period of time till everything kind of hits bottom and it gets collected a little bit. Unless you can buy it really, really cheap. I would kind of post up now, is it going to be like 2010? I don't know. But that's the thing you got to keep in mind is there's. There's three things you're looking at, P and I payment. What if it gets reperforming? And then that difference between the legal balance and what you're buying it for, and then that equity above what you're paying for the note. Now, obviously in this example I talked about earlier down in Oklahoma, 120 is quite a bit above 78. All right, that's was it 50, 42,000, 22, $42,000 above the legal balance. That's a lot of equity. But you don't get that equity until you take the Property back. Now, is he likely to foreclose and either sell it at auction? Maybe. Would he take it back? Maybe. I would say it's a 50, 50 chance he takes it back and then can sell it as an reo or B, he sells at auction. It's bit of a skinny deal if he's using other people's money. And I don't know the terms of that money, if he's using his own funds. A, it might be a pretty, pretty way fast to make 10, 15 grand and move on. Get the money in in 30 days, get it out. Depending on the foreclosure process, let's just say 90 days, start to finish. And then if doesn't sell at the auction, then you've got an REO that you could fix it. And then that's the thing you gotta look at too. What are the days on market? What's the time frame in those neighborhoods? It's a very important thing because if you start seeing assets right now where they're running beyond 120 days, 150 days, 180 days in market, that means your value, you've got to drop your value down. And that can compress your profitability, compress the equity and turn what you thought was a pretty good deal into, into a medium deal or a skinny deal if you've got to move it. And that's one thing to look at. You've got to really expect if you're taking property back to fix the property up in a pretty decent condition. Almost like move in ready in a lot of cases. A lot of buyers don't want to be especially new home buyers, especially as you get into, as we get through the summer here. Don't want to be looking at heavy rehabs. Yes, there's a little bit of minor rehab, maybe change up some paint, you know, tweak of the carpet, some fixtures, stuff like that. But you really need to have the property ready to rock and roll and move it, ready to be most to get the best price for your asset and get the best possible outcome of getting that asset moved. And that comes from talk to your realtor and your realtor understand what's going on with the property. You know, if you listen to the previous episode with Cal Ewing Talking about his 100k profit, one of the most things that made that deal marketable the most is a curb. Looks good. I mean those properties and huge shrubs. I know because I was there. So Kurt Peel was. Curb appeal was nice and he did a lot with new carpet, new paint, new appliances. And a good cleanout job and that helped out dramatically. And there's also some nice little features too in that from the previous borrower. Previous owner had some nice light fixtures, had some nice like light switch plates. Were all upgraded, light switch plates, little things that add to it that were pretty nice Wisconsin some nicer ceiling fans than normal. So that helped that plus it was also you had a used fridge that was clean. You had a new stove, new dishwasher, new disposal, existing washer, dryer that would add to it. So that really helped move that market up. So it was actually you could move in ready and be rock and roll. And that helped. I think it helped move it within nine days and get it a full price. Basically a full price offer. It could have gone a little bit higher but it probably would have dragged things out. So that's the thing you got to understand too looking at that days on markets, not just looking at an AVM but looking talking to a realtor, what's it look like and then determining your numbers is making 15 grand good for you? Yes. Me I like to make 20. Just because you have. Oh there's always hiccups along the way, things that take a little bit longer, things that pop up that you might have to replace. Okay, like I'll give you, you know even Cal talked about that a seventeen thousand dollar roof cost, you know, luckily it was already on the MLS luckily had a connection that was able to put that 17 grand on the HUD and it was payable at closing. He didn't have to come out of pocket for the 17 grand to make things happen. And so that's. That's some stuff you got to look at too. And I get it, you're not going to know interior repairs. You're not going to know everything with a being a vacant asset or even occupied as the unit. But if it's occupied you can kind of take some thought and everything should be running pretty good inside the house. Right. But you're going to clean out costs, stuff like that. But look at those numbers. I like to be at 20 plus or more on a foreclosure that way gives me a little bit aha nuggets even if so I'm getting a little bit cheaper price. Like I'll give you on this example. I would want to be at 58 versus 65. Now could I meet in the middle? Yeah, I could ask for that meet in the middle one. Can we get done maybe at 60? Yeah, that's better. The more the little bit a thousand goes to Go a long way. A thousand is your basically appliance budget. Because for, you know, stoves and dishwashers are not cheap. Like average dishwasher is 400. The average stove is about 600 these days. It's crazy how expensive a lot of appliances are getting. So look at that stuff. Once again, look at your P and I payment. Look at the difference between what you're buying the note for and the legal balance. And then also looking at the difference between if there is equity above the legal balance or there's a big enough chunk of profit between what you're paying for that note and then what 90% of value is. Because 90% of value, remember, you still got closing costs and commissions that come out. So 120, if he sells it at 120, he's going to net 108. That still could be pretty good. But, but keep that in mind. Knowing what your market is, talking with realtors, looking at BPOs, looking inspection reports, that's the big things. For some people, 50 grand is too skinny. It's not worth their time to anything less than 50 grand. They've got more money, they want their money moving. And we all kind of move up that level depending on where you're at money wise. Okay, and that's the thing. I had one guy out of New York, oh, I don't get out of bed unless I'm making 50 grand. Like, okay, that's fine. There's plenty of people that do the deal before below 50 grand. So know where I get started? Do something, pull the trigger, get something accepted, get something working through. But know your numbers. If you don't know your numbers, I mean all your numbers, what the profit is if it does turn into reperforming, does it make sense to do that to keep it to work with a bar or not work with a bar. All right, I got another student that had a non performing note in Houston. Bar hadn't paid in a couple years. Out of the blue, he offered the borrower 50, I mean 25 grand. If they brought 25 grand to the table, he modified. Well, lo and behold, she brought 25 grand to the table. He's kicking himself. I'm like, he should have just said, you got to bring the full amount due. I know you want to have a heart and you want to be friendly with this person, but that's the problem talking to borrower sometimes is you agree to things he probably shouldn't do because you had, you want to be nice, but you got to run a business. And now that deal is a skinny deal for him and if it runs be beyond 12 months. So hopefully that was helpful for you guys. Understand your spreadsheets you're looking at. And as always, if you have any questions, please don't hesitate to reach out to me at talkwithscottcarson.com Our next three day note buying workshop is upcoming July 25th through the 27th. You can get signed up for that at Note buying for nummies.com and as always, if you're looking to take your note investing business to the next level, hey, feel free to reach out to me. Let's talk about our one on one coaching programs. We've got the best in the business because we have the most amount of success, highest amount of success rate with instruments because we show you how to actually close deals, not just talk notes. All right? It's much more different closing deals versus being educated and talking theory. And part of it is I'm going to kick your butt and boost you along with my butt to make you banking offers. You could be the most educated idiot out there. But if you're not closing on deals or haven't closed on deals or just talk about notes, what are you really doing? All right, so go take some action, buddy. Love you all. Have a great day and we look forward to seeing all the time. Bye everybody. Sam.