Strategies Of Note Investing From An Expert Standpoint

Hey, it's Mark Podolski, the land geek with your favorite niche real estate website, thelandgeek.com and on this week's podcast, we have a very interesting guest. Unique. We haven't had a lot of the guests like this, but I'd be remiss if I didn't properly introduce my co hosts. You know you love them. Scott Todd from Scott Todd.net landmodo.com learn anything about anything. Investor ninjas.com Scott Todd how are you?

Mark I'm great. How are you?

Pulse is still normal. Respiration is fine. I want to talk about something we don't talk about a lot, which is note investing. So our guest today is Martin Saenz. And Martin is The founder of NoteInvestingMadeEasier.com started in 2009 with the vision of creating colleagues one student at a time. And he's renowned as a thought leader in the mortgage note investment industry. He's owned and operated multiple successful companies prior to launching Note Investing, made easy and successful entrepreneur and real estate investor for over 15 years. He really knows what he's doing. Martin Steinz, Welcome.

Mark, thanks for having me on. Appreciate it.

So, Martin, let's just rewind the tape. How did you get into note investing and then teaching others?

So I started out with after getting a graduate degree, obtaining a corporate job, and I realized pretty quickly that I hated it and I wasn't any good at it. So after getting fired a few Years later in 2004, my wife and I were really just rethinking how we needed to approach life and kind of do things for ourselves. So we started a small business and along the way, in the 2000s, we accumulated a healthy portion of commercial and residential properties in the Washington, D.C. area. However, what I found with landlording is it just didn't move the needle enough for me. It's a great annuity play, but it wasn't delivering the desired cash flow to meet my aspirations. So we sold the company that we started the small business in 2013. I still own and manage the properties. However, I was really looking for something new to do and that's when I stumbled upon Node Investing. And actually in 2013 is when I found Node Investing.

Okay. Scott Todd, so when you're talking about.

Node Investing, can you like go a little bit deeper with that and explain what it is that you're actually investing in and sure.

So we purchase distress mortgage notes nationwide and we work with the homeowners to help them stay in their homes with payment plans they can afford While making a profit for myself and our investors. So that's pretty much what I've been doing in a nutshell for the past eight, eight, nine years. And so, you know, the purchases have grown in size over the course of the years. However, the mission for the organ still has remained the same. We'll buy a mortgage loan whereby the borrower hasn't made a payment in four or five years. We'll work with them, figure out what they can afford. And because we purchased that loan at a deep discount, we're able to make some concessions to help bring them back on track with a financial plan that they can actually afford and keep them in their home while delivering a return to ourselves.

So if they haven't made a payment in like four or five years, how are they still in the house? That makes no sense to me.

It makes no sense in general. Not just to you, but in general. However, banks and hedge funds have allowed this to happen over the course of many years. There are, you know, there are banks that hold this distressed debt on their books. They do internal charge offs, they pull up these loans and sell them off into the secondary market space, which is where we purchase these loans from. And so the timing and such sometimes attributed to the banks having to over collateralize those loans to keep them on their books and keep them in a securitized status. There's a variety of reasons why banks just let distressed debt sit on their books and also why hedge funds in the secondary space, they actually some of them are in business to flip this paper versus actually work with the homeowners as we do with our company. So time can elapse. Four or five years can happen in the blink of an eye.

Interesting. So Martin, could you, could you walk us through a case study? What you paid for the note and then how it cash flows and how that all works and what's the risk?

Yeah, so the risk is obviously when you're performing due diligence, we're looking at a property valuation lien validity. We're delving into the borrower situation and understanding their ability to pay prior to purchasing that asset. However, there are times when you purchase the asset, the borrower decides they don't want to stay. They may do things to the property upon exit. Nothing that a tenant situation, nothing that a tenant wouldn't do, so to speak. However, when we're not investing, we're looking at properties that have a higher property valuation in the 150k plus all the way into the millions. And so that helps protect us against properties getting Stripped out copper bandits and things like that. But that is one risk that exists in our industry. Not understanding title reports, you know, you could get caught on lien positioning, you could get caught on encumbrances, tax, lien sales. You know, there are some pitfalls you have to look out for. So the more sophisticated one is with their due diligence process, the more they mitigate risk. Probably just like in any other line of business.

Yeah, makes sense, makes sense. So from a number standpoint, can you walk us through just a typical deal?

Absolutely. So we primarily focus on the junior lean market. That's our niche. That has been my niche for many years. I'll just give you the why in two seconds. Seconds. It's basically in the secondary market, mortgage market space, the senior lien mortgages typically are associated to lower fair market value properties. And so banks typically hold those higher dollar properties back more so. But in the junior lien space, we see healthier property values, borrowers in much better situations to make payments and come back to the table. But to give you an example of a note, very typical, let's say $100,000 is owed as a legal balance on that debt. And so we may purchase that from anywhere. Let's say 30, 40,000. And so that's the discount that we'll pay and what we'll do because we have full equity coverage of our position, we will make contact with the borrower, work with them to lower the interest rate, get the monthly payment down, figure out what they can afford comfortably, and then we'll do a loan modification at par. So we'll create a loan modification for 100,000 at whatever interest rate they're currently at, 7, 8%. And so, you know, that's, that's the play from an internal rate of return perspective. You know, we're looking at, you know, pretty healthy returns on, on average, if we're doing what we need to do correctly.

Okay, makes sense. Scott. Todd.

Okay, now, now I see why they're, why we're buying four and five year old stuff. Because on the secondary market, how, like on the secondary market, so I buy the secondary lien and they stop making payments. What am I going to do? Like bump the first guy off? Like, you know, like what, what is my recourse if they stop making payments in the secondary market?

So when you purchase the loan, you assume all the rights and responsibilities of the original lender. So you can foreclose, you can foreclose in any lien position on a property if you're a fifth lien lien, holder, then you can foreclose. So we'll foreclose subject to the first. And on these loans we're purchasing, we're purchasing loans where they're purchasing, the first is performing. So they're paying their first, they're paying their taxes, they're paying everyone but us. So we just want to get into the equation. However, with that said, if they, if they're not paying us and we have legal remedies, you know, through foreclosure, to go and force their hand to come to the table and work out a deal with us. And that's, that's what we do. So we're, we're very compassionate. We do everything in our power to work with the borrower to get them on their payment, get them to the table with a win win scenario. However, if that's not the case, then we do have to exercise legal remedies at our disposal.

So, Martin, and I'm asking because I don't know, but like, if I go and I foreclose on, you know, for, I'm in your position, I'm in the second position, I go to foreclose on the first one. How does that work? Like, because I don't know, like, how does that work? When you said, you know, foreclose subject to the first mortgage, what happens? The forced mortgage was going to come in and say, no, we're going to protect our loan, so they're going to buy me out. Is that what would happen or what would happen?

So you're not actually foreclosing on the first. You're foreclosing on the property. So you can go through the whole foreclosure process, take back the property, take back ownership of the property at the sale or sell it third party. And everything's subject to the first. So let's say that we take back the property at auction and we take, take back possession of the property. What we'll do is we'll work to, you know, do cash for keys, help the bar, you know, get moved from the property, and then we'll sell that property through an REO realtor and then we'll, the first will get paid at settlement. Now if, if the, if we sell it to third party at the auction, then, then the individual that purchased that property will be responsible to satisfy the first.

Okay, and so then, so let's say that I get it back. I get it back and then all of a sudden I've got this for first. Do I have to make the payments on the 1st? Is that just still on the creditor.

So if you, you can, you can or you can't, it's up to you. I mean, it's up to you whether you want to or not. The first has a, the right, the same right you do to foreclose on the property that you own, that you took back so they can go through the whole foreclosure process and foreclose on you as the junior lien holder, now slash owner of the property.

I see, I see. So, Martin, there's a lot of moving parts.

No, there's a lot of complexity to this industry. It's taken, I mean, it's taken me some time to get to the point where I have systems in place that I'm very comfortable. They mitigate a lot of risk. You are going to get burned. You know, still, you know, everyone does. No matter how sophisticated your systems are. You know, eight, nine years into this, I'm still learning every day. There are so many nuances to this and, you know, coupled with the fact that, you know, compliance is also an ever growing factor in the equation as, you know, states and more regulation comes down the pike.

Dodd Frank is, is that involved.

So I'm referring more towards the nmls. So it's a national mortgage licensing platform by which certain states require various licensing, mortgage servicer, debt collections, licensing to operate in various states. And so there is an added level of complexity when operating in the space. So one just has to be set up with a business versus being a novice investor. It used to be you could just be dip your toe in the water, buy a few notes here, a few notes there, and make a run at it and see where it goes. But those days are really behind us given the amount of complexity out there.

So who is this right for then? And how much capital do you need to get started?

So I wrote in my third book, Note Investing Fundamentals, the deal flow is king. And that's what I believe in my heart of hearts. And what I see within this industry is it's not about cash or cash flow. And so one can come in and if someone's dedicated and committed and they have 50, 75,000, something like that, just to get kind of kick started, they can make their way through the process. There's plenty of people with very deep pockets in this industry. So if someone just really sets themselves up as a business and focuses on deal flow, then they'll be fine. So on the flip side, I've seen people with a few million dollars. I'm going to talk to someone in two hours. They reached out last night. I get people to reach out with the books all the time. He says, I have a million bucks, I'm ready to do something in the space. And I see that, I see people with 12 million dollars and they'll go nowhere. And it's not because they have 12 million, it's just that's because in many industries, 1 to 2 million may buy them their way through. But in node investing, no, it doesn't.

Do, doesn't do it. So the deal flow is what cuts it, education is what cuts it.

Yes, starting with the foundation in place, you know, building your. If we're talking from a student perspective, someone coming in, becoming a student of the industry, learning the fundamentals, forming an identity, getting your due diligence systems down pat, you know, getting set up to be an asset manager on the back end where you're doing all the work out and really just putting all the pieces together and, you know, hiring as you need to hire and doing all those other things as you're running a company, building an operations manual, all these things that's required to really just kind of, to really be taken seriously in the space.

Scott Todd, what are your thoughts?

No, I think, I think the other thing too, and Martin kind of hit on this too, is just because you're throwing money at the problem doesn't solve the problem. Right. Like I think you also have to have that burning desire he talked about deal flow. You have to have that burning desire. We see this over and over and over again, Mark. If you don't have a burning desire, you are not going to like power through the, through the challenging parts. You have got to have that burning desire. Without it. It's a hard road, man. It really is.

I mean, how many people do you meet where you know they want to be a real estate investor, they want to rehab, landlord, whatever. And you ask them why and when you get to the root of it, they just see the grass is greener on the other side. They see they can make money, they're not happy where they're at financially and they see this as the way to cross that bridge. And that's just not enough.

Yeah. So Martin, what should I have asked you that I didn't ask?

I think perhaps we run an income fund, so we have a legacy play that we put in place last year. So up until last year it was really just a modification operation we were running. So we'll bring, put 100 distressed mortgages into the funnel and then out on the other end will come Payoffs and loan modifications, and then we would prosper as a result. And so what myself and my partner that I brought on a few years ago, what we decided is we wanted something more of a legacy play. So we created Bequest Funds, which is a 506C Reg D fund set up for accredited investors. And so we wanted a fund that would house and manage performing seasoned mortgages that meet certain underwriting criteria whereby those mortgages in the fund would sit there for 20, 30 years paying. So then that way we would receive monthly payments in from the borrowers, and then we would pay out our investors monthly payments that equate to 8%, an 8% annual return. So we feel like we're really capturing both sides of the fence. On the distress side, where we're helping the homeowners stay in their homes, and then on the bequest fund side side, where we're doing a legacy play for ourselves and our investors, where people can park money in there and receive monthly payments for the rest of their lives. So really, the key is on the performing side. One question that is probably weighing on a lot of minds is Covid and are people making their payments? That's probably a good question. When you watch the news, all you see is that forbearance requests are up and all the folks in the media are telling you, just call your mortgage company and tell them you want a forbearance plan. And that's kind of like a popular theme that's out there. But with that said, we do field all calls and we are compassionate. We do walk people through the forbearance process if they need it. But what we're finding is our collectability percentages are above industry standards, which is at 90%. And so we've been, we've all, throughout Covid, we've been 90 to 93%. And what we're finding, and it's not so much just to pat ourselves on the back, what we're finding is that people are valuing their homes more than they've ever valued, more than we found them to ever value their homes before. So we found the opposite effect of what's out there predominantly in the media, and that people are fixing up their homes. People are doing their lawns, you know, they're in their home office staring at their house all day. So we're finding more of an appreciation for their house. Houses.

Now that's really interesting. That's really interesting. Before we get to the tip of the week, Scott Todd, any final thoughts?

I would just say if you have Nowhere else to go but home. All of a sudden, man, that place is even more places, even more important to you. Like, makes sense to me.

Yes.

Well, Martin, this has been fascinating and your mentorship has been invaluable, but now we're going to ask you for your tip of the week. A website, a resource, a book, something else actionable for the art of passive income listeners to go improve their businesses, improve their lives. What do you got?

Yeah, so I learned this the hard way, but in 2003, 2013, I made a commitment to only invest in assets that cash flow and that I have control over. And that's how I live my whole life, by the properties I manage, the notes we purchase, the notes we work out. And I did it the other way where I invested in tech companies and things and I had no control over it. And I'm not technical, so it's just every time I went away from control and cash flow, it always.

All right, fantastic. Well, Scott Todd, before we get to your tip of the week, I just want to give a shout out to our sponsor flight school. Learn how the next 16 weeks can literally transform your life. Start building that passive income without renters, rehabs, renovations or rodents. And have Scott Todd take you up that mountain of land, investing quickly, safely, efficiently. He's done it thousands of times. He will be your Sherpa. Guess what? It's guaranteed you will make back that tuition. 180 days or less. Just show us your work. Learn more. Go to langeek.comtraining and schedule a call thelangeek.comtraining Scott Todd, what's your tip of the week?

Hey, my tips for Martin. Like, maybe you want to buy some GameStop with me? I don't know. Just kidding. Look, here's my tip. My tip is this book. My tip is this book. It's called the Psychology. Psychology. Oh, hold on. I just lost it. There it is. The Psychology of Money. Timeless lessons on wealth, greed and happiness. It's worth a read, Mark.

Really? All right, I'm on it. Buying now. Morgan Housel. Wow, it's got 4907 ratings. A lot of people read this thing. Holy cow. How come I've never heard of this?

Well, because we just gave us the tip of the week, that's why.

Yeah, exactly. Now. Now I have. Well, my tip of the week is learn more about Martin and his strategy. Go to note investingmadeeasier.com. i love that. Noteinvestingmadeeasier.com we'll have a link to it and you can learn more there. Martin, are we good?

Yes. I appreciate things. I appreciate you guys having me on. Mark and Scott.

No problem, Scott. Todd, are we good?

We're good, Mark.

All right. I want to thank the listeners. Just remind them the only way we're going to get the quality guests like Martin signs is if you do us three little favors. You got to subscribe, rate, review the podcast. Send us a screenshot of that review to supporthelangic.com we're gonna send you the $97 wholetailing course how to double your money 30 days or less for free. So please do it. All right, let's do this. 1, 2, 3. Let.

Let freedom ring.

Got it. All right. Not bad. All right. Thanks, Martin. Thanks for listening to the Art of passive income podcast. Start your journey at www.thelandgate.com and www.scotttodd.net.

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