Podcast – Distressed Pro

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In this episode of the Distressedpro.com Professional Podcast series, Bill Mencarow will teach you how to get started with note investing for retirement and long term wealth building. Bill is an experienced note investor and in this interview, he talks about how you can approach note investing to maximize your returns for your retirement.

Brecht Palombo:              Welcome back everybody to another episode in the DistressedPro Professional Podcast Series. Today, I’m very happy to have Bill Mencarow.

Brecht Palombo:              On the podcast, he is, as far as I know, the authority on notes and note investing. When I first started … Geeze Bill, how long have you been in business with Paper Source?

Bill Mencarow:                  Paper Source was started in July of 1987.

Brecht Palombo:              Wow.

Bill Mencarow:                  Yeah I had just left Capitol Hill at that point, I was working as a congressional staff in the U.S. House of Representatives for quite a few years and realized that you get old in that job real fast and I had done everything I wanted to do on the Hill.

And so I was kind of between jobs, didn’t know what I wanted to do and so I had been investing in, I bought a piece of, a single family house when I worked on the Hill, as an investment. And I had all sorts of trouble with tenants. I didn’t know how to be a landlord at all and didn’t have very deep pockets. So I started reading all I could and going to seminars on landlording and I met people there who invested in notes. And this was all new to me, so that’s how I got started in the early ’80s.

And then when I, going back there for a minute, when I left Capitol Hill, I thought, well there’s no newsletter on notes. A lot on real estate but nothing about notes. So I started that with my wife Allison, out of our guest bedroom and it kind of took off. I thought it would just be a temporary thing, just to have some fun with and try to figure out what I was going to do when I grew up. And it just took off from there.

Now we have a monthly publication, we’ve published every month since 1987. It’s about a 14-page publication on notes. It covers all aspects of it, new laws, court decisions, legal things going on, how to negotiate, what to do, how to find the notes, all those kind of things.

And we have an annual convention. The first one that was ever started for the note industry and that’s at the end of April every year in Las Vegas. And we sponsor another seminar, a small boutique kind of a seminar on notes each year.

In fact, we have one coming up in June in San Antonio, Texas. Tom Henderson, who is a very well known, very well respected note teacher, is going to be teaching a two-day class for us. So if people are interested in that, that’s at papersourceseminars.com and we can talk about that later if you want.

Brecht Palombo:              Great. Well so when I first even learned that an individual could purchase a note, which is probably 11 or 12 years ago now, and I set out to learn a little something about it, your site was one of the first things that I found and I immediately subscribed to your newsletter. In fact, kept a three ringed binder with all the back issues so I could go back in there and read through them because it really is… You know the panel of experts that you have there and the fact that it reliably comes out every month and always has good information and it really sets a bar, I think, for note investor information. You really provide a lot and it’s very very reasonably priced. It’s 100-something bucks a year, maybe, or something like that for your-

Bill Mencarow:                  I wish it was that much. It’s $79.

Brecht Palombo:              $79 a year. A steal at any price. It is excellent. So, I thank you for providing that and it was really one of the first places where I, like I said, where I started to learn anything about notes. Having come from the real estate side and of course, my initial experience with notes was mostly foreclosing on them and cleaning them up.

And so that’s not what we’re going to talk about today though. I think what I’d love to hear today is, as somebody who’s been investing in notes and has been in this industry for as long as you have as really a pioneer in it and an authority, I’d be interested just to talk with you a little bit about how my audience can get started with note investing. Because the way a lot of folks find us, sometimes they find us because they are, they’ve already been introduced to notes and they’ve heard something about nonperforming notes and now they want to pursue that.

But sometimes what happens, in fact probably the majority, are out there looking for real estate. They’re looking for rental real estate. They’re looking for discounted property and this sort of thing and then along the way, they discover that there’s this thing called notes that’s kind of like real estate and you still get payments but for a lot of folks it seems abstract, like even hard for them to get their heads around.

And so as an experienced note investor, I’d love to talk a little bit about how to do this in sort of a long-term disciplined way and create wealth and even retirement from that. Because I think that’s probably the goal for most folks who end up finding this as a cash flow opportunity and want to learn more about it. So I’d love it if you could sort of take us inside that.

Bill Mencarow:                  I’ll be happy to. Let me preface it by saying I took my two day introduction to notes course and boiled it down into eight email lessons, fairly lengthy, and I offer them for free on our website because I want people to go into this with their eyes open. I talk about the good and the bad, what can go wrong, how to protect yourself, and that kind of thing. And I just want people to take that before they do anything else and really make a decision as to whether this is for them. It’s not for everybody. So that’s available at papersourceonline.com. Okay, that’s a preface.

Okay then so we’ll start with the basics. We’re talking about seller financing when we talk about notes. A note is an IOU. And the note owner becomes the bank, and I’ll give you an example. Let’s take a Mr. Smith sold his house, and the seller financed, and let’s keep it real simple and with low figures, $10,000 note that’s secured by the house and let’s say it’s the first lien.

Obviously, it’s going to be more than that, but let’s just play with the numbers because I have memorized the $10,000. It’s advertised for 10 years, so the buyer of the house Mr. Jones will pay Mr. Smith, the seller of the house, a monthly payment just like he would to the bank, only in this case the house seller becomes the bank. That comes out to $132 a month for the next 120 months at whatever interest rate that is.

So Mr. Smith is rocking along getting the $132 a month from his house buyer. His note is secured by the house. And you can come along and offer him cash for that note, a lump sum of cash, so you could offer $8,000 for it. Now he might say. “Well, why should I take $2,000 less?” And you say, “Well because Mr. Smith, I’m buying your risk. There are no guarantees what’s going to happen in the next 10 years with Mr. Jones’ life, that he’ll make his payments on time, or I might have to work to get them if he defaults. I’ll have to go through the expense of a foreclosure, the time, and the headaches, which could take months or, depending on the state, could take years,” as you know Brecht.

So when you say Mr. Smith, the owner of the note, once foreclosures completed, how much damage will been done to the house. It’s not uncommon for people to damage houses when they’re foreclosed on. So if you were Mr. Smith and you needed some money because people sell notes for only two reasons, they either need money or they have a problem they want to get out of.

So if you’re Mr. Smith and you have a problem you want to get out of, you’re afraid that he’s not going to pay or you need the cash right now for whatever reason. Would you rather have $8,000 now or would you rather hope that Mr. Jones sends his $132 every month for the next 10 years and have to deal with the consequences if he doesn’t?

So that’s what we’re talking about and you become the bank whether you’re the seller of the property that holds the note, or whether you’re the note investor that buys the note. When you end up with the note, you become the bank, you have a lien on the property. You have to make sure you have enough equity and there’s a number of places, number of things you have to do to make sure that you have due diligence, your proper due diligence. I call it the three Ps, the payer, the property, and the paperwork and you have to do your due diligence on all three.

But if you’re well secured, somebody wants in, I wish it was me originally. But somebody I’d like to credit them if I knew who they were. You should only invest in a deal, like a note deal, if you hope that they won’t pay you because you’d get so much equity in the property, it would be a great payday for you if they stopped paying.

So that’s basically what note investing is all about in a nutshell. There’s a lot more to it, there’s due diligence on the payer, on the property, on the work, then you’ve got a good investment. But that’s the basics of it. Do you want me to go into any more of that, I’ll be happy to do that?

Brecht Palombo:              Well I guess I’d like to talk a little bit about if today’s chat is sort of an intro to note investing and I’m somebody who… A lot of the folks I hear from, they have some retirement funds but it’s not quite where they want it to be. A lot of them took a pretty good hit in the last crisis, and maybe it hasn’t recovered. Maybe they’re gun shy, they didn’t get the run up like they would’ve liked to over the last 10 years with the S&P and all that. So now they’re discovering this and so I guess, could we talk about how they would get started? If you’re just at a cold start today.

Bill Mencarow:                  In investing in notes?

Brecht Palombo:              Yeah.

Bill Mencarow:                  Well, I don’t want to sound self-serving, but I think that somebody ought to take my free e-course.

Brecht Palombo:              Yeah for sure. I have taken your free email course. Actually, when I first signed up, and cause you’ve had it out there for a long time, it’s been available.

Bill Mencarow:                  That’s right. I do revise it. A couple times a year I go through every word and revise it but that-

Brecht Palombo:              Oh that’s good.

Bill Mencarow:                  That’s one way to get started.

Brecht Palombo:              Yep.

Bill Mencarow:                  Another way to get started is to… There’s a couple of good seminars out there, about how to get started in notes. And if somebody wants to email me, because I don’t know, this podcast, once it’s on the internet, it’ll be around forever and so I… But if somebody email me I’ll be glad to tell you my current recommendations for a course.

Brecht Palombo:              Okay.

Bill Mencarow:                  If you can find a book on the used market called Invest in Debt, by Jimmy Napier, and if you can overlook the way it’s written, it’s got tremendous information in it. I’m sure you’ve read it. Correct?

Brecht Palombo:              Actually I haven’t read that one, but I’ll look for it.

Bill Mencarow:                  Oh, well Jimmy has a very folksy style, but it had a great influence on me in understanding how discounted cash flows work and how to figure out yields and things like that. So it’s called Invest in Debt, by Jimmy Napier.

Brecht Palombo:              Most of the folks you’re talking to today, are they investing with retirement funds, or are they investing with extra capital, or how are they approaching that?

Bill Mencarow:                  Actually there are several different approaches. Your own capital, after-tax capital, you can certainly use your IRA to buy notes, and I can go into that in a little more detail in a minute. You can also if you don’t have the cash, you can broker notes.

Brecht Palombo:              Okay.

Bill Mencarow:                  You don’t need a license in almost… There are a couple of states where you need a license, California being one. You need a real estate brokers license, but in every other state you don’t need to be licensed to be a note broker. It’s different from a mortgage broker. A mortgage broker originates home loans or property loans. A note broker finds notes and gets an investor for them and takes a commission.

Brecht Palombo:              Right.

Bill Mencarow:                  We also teach that on our website, papersourceonline.com, so if you don’t have the funds that’s a great way to do it, and again I go more into that in my free e-course. If you want to talk about the retirement aspect of it, I think notes are a very powerful tool to have in your retirement plan. A lot of people put money in notes and real estate in their retirement plan. Let me go back to our example. So our little $10,000, Mr. Jones, Mr. Smith example.

Brecht Palombo:              Sure.

Bill Mencarow:                  Let’s say you bought that note and you paid $8,000 to receive $132 a month for the next 10 years, 120 months. So what is your yield on that? Expressed another way, what kind of interest are you getting on your $8,000. Well if you plug that into a financial calculator, you get %15.63, which is a pretty darn good deal for a well secured first mortgage.

But, let’s take it a step further. You contact a note investment firm. There are about, I don’t know how many. We have a directory of them. I think there’s probably 30 or 40 around the country. They’re small companies or mid sized companies, a couple of them are banks, that are in the business full time, investing in notes. So you contact one of those firms and you ask them, “I’ve got this note that pays $132 a month, how many payments of $132 a month would you buy for $8,000?” Now, if the firm is currently investing at, let’s say, %9.6 for that kind of note. The answer is, to get that kind of return, for them, on $8,000, they have to receive 83 payments of $132. Okay?

So you assign them… You know, do the paperwork. You assign them the next 83 payments. The firm pays you $8,000. Mr. Jones then, mails his payment to them, the note payer. Now he mails it to this firm. Now what’s your out-of-pocket cost for that transaction? Nothing, right? You paid $8,000 for the note, you got $8,000 for the note from the investment company. At the end of the 83rd month, the firm has received all the payments that they contracted to buy, so they’re out of the picture. Remember, the note had 120 payments on it. Mr. Jones has agreed to make 120 payments. So who gets the remaining 37 payments? You do, and you have nothing invested in that.

Brecht Palombo:              Yeah.

Bill Mencarow:                  So, don’t try to put that in your calculator, it’s going to break.

Brecht Palombo:              So there’s a real delayed gratification strategy there, but the IRR is incalculable. It’s so high.

Bill Mencarow:                  Exactly. Exactly. Well, what you can do, is once the investment firm pays your $8,000, go out and find another deal, another note. Another $8,000 deal.

Brecht Palombo:              Well maybe we should talk about that for just a minute because I spend a lot of time talking about working with institutional sellers and navigating your way through your special assets departments, and your secondary marketing and all that. But what you’re talking about here with Mr. Jones and Mr. Smith is a whole other avenue. Maybe you could… I know it’s not something we can touch on in the next six or eight minutes, or complete in the next six or eight minutes, but maybe we can just touch on finding these kinds of deals that you’re talking about.

Bill Mencarow:                  Sure. There are a lot of ways to find them. One of my favorite ways is to join and attend real estate investment groups. In person preferably, but if you don’t have any in your area, like my little town of Kerrville, Texas, as I’ve mentioned to you Brecht, our town is so small, we don’t have a town drunk, we all have to take turns. So we don’t have any real estate group here, but larger towns do. There’s also online groups. Let people know that you buy notes, that you’re interested in buying notes. I have cards printed up, flyers printed up. If the people that run the group are amenable to you putting out flyers. You can network with… If you start thinking about, well who comes in contact with real estate notes? Real estate agents.

Brecht Palombo:              Right.

Bill Mencarow:                  When they have clients who do seller financing. Who else? Accountants, title company people.

Brecht Palombo:              Yep.

Bill Mencarow:                  Real estate attorneys. So if you start thinking in those terms, so who should I be networking, who do I need to tell that I buy notes? And you’ll start thinking of more and more people like that.

Brecht Palombo:              Yeah.

Bill Mencarow:                  Also, look at the MLS, Zillow, look for property sellers who are offering owner financing, or if you could see a deal where you could talk to somebody about seller financing their property. I like the networking part of it. You can advertise, you can direct mail, which is very expensive and your return is very small decimal percentages on direct mail. I don’t necessarily recommend that. There are people who do it very successfully but they’re real experts at it. There are courses that teach you direct mail. I wouldn’t just try it myself, see if it will work. So those are some of the ways to find notes, again in my e-course we talk about that.

Speaking of courses, I did want to point out that we’re having out annual boutique seminar, coming up in San Antonio, Texas, on June 21 and 22, and it’s Tom Henderson who is very well known in the note business. He’s been doing notes for much longer than I have, and he is called the note professor, and Tom’s course is called The Complete Live Course on Acquiring Wealth with Seller Financing and Notes.

You go to papersourceseminars.com and you can check it out. See what Tom’s going to teach. One thing he’s going to teach is how to get %18 yield safely and he’s been doing it for years. The course is $695, it’s two days, Friday and Saturday, June 21, 22, but we have a coupon code for your audience.

Brecht Palombo:              Wonderful.

Bill Mencarow:                  If anyone goes to papersourceseminars.com and signs up for Tom’s course they’ll get $100 off if they use the coupon code “distressedpro”.

Brecht Palombo:              I appreciate that. Thank you for doing that.

Bill Mencarow:                  Oh, absolutely happy to do that.

Brecht Palombo:              We’ll make sure we get this out in time so folks can get there. So I guess we’re coming up on time here, but if you could just touch on, you know there’s a lot of things happening out there right now. I’m not expecting you to have a crystal ball, but the future of note investing, is this something you think that is going to be available to investors for a while? Is this something that’s a sustainable thing that people can get involved in today and they’ll have it. It’ll be something they can do for the next decade? Or what do you see happening in

Bill Mencarow:                  Well I think… No doubt. I mean I’ve seen different cycles. You know, sometimes it’s better than other times. You know, we just touched on it. Don’t necessarily think about single-family houses. Sometimes with low-interest rates, an environment which we’ve had for a long time, we don’t have as many seller finance notes available, but that’s only true with single-family houses.

If you look at other types of real estate transactions, farmland, commercial property transactions, businesses. Sales of businesses are almost always seller finances and there are buyers for business notes, and we can put you in touch with those buyers if you want to be a broker for those buyers. Or if you want to learn how to invest in other kinds of collateral that’s secured by notes, or rather notes secured by other types of collateral. We can teach you about that.

So yeah, there’s a tremendous thing. A tremendous opportunity. I will say, I know we’ve only got a minute or two. Let’s go back to the $10,000 note if we could. I said you buy it for $8,000, you sell some of the payments for $8,000, then you get the back end of these payments, or the last, whatever, 37 payments. Yeah 37 payments of 120 a month. Well what if you had bought that note and you

Roth IRA? I was thinking about this not too long ago, and I contacted two CPAs, mine and he contacted another to make sure he was right. I said, “Wouldn’t your Roth keep those back end payments that cost you nothing? Wouldn’t the distributions be tax-free?” And they both said, “That’s correct.” Those distributions would be tax-free to you. If you held them outside your Roth, you have to pay tax on those payments. But inside the Roth, when you take them as a distribution, they come out as tax-free.

So can you imagine stuffing your Roth IRA with a bunch of those notes and having those back ends start flowing in and you take the distributions tax free?

Brecht Palombo:              Yup. Yeah. That’s exciting stuff, and that is the kind of stuff that folks learn at this seminar that you’ve got coming up?

Bill Mencarow:                  Yes sir. Yep.

Brecht Palombo:              Wonderful.

Bill Mencarow:                  June 21 and 22 in San Antonio. Just go to papersourceseminars.com. Papersourceseminars.com and you can read all about it and be sure to use the coupon code distressed pro and get $100 off the already low price. This is not like $10,000 seminar, this is like $700, the price is going to go to $795, still, it’s a bargain, but you’ll still get $100 off even then.

Brecht Palombo:              Wow. Really appreciate that. That is a bargain. So if you’re listening to this, you’re interested in investing in notes, you should go to papersourceseminars.com and get involved in this June… June 21st is it?

Bill Mencarow:                  That’s correct. 21st to the 22nd.

Brecht Palombo:              June 21st.

Bill Mencarow:                  In San Antonio.

Brecht Palombo:              And learn how to do it, and we’re going to save you 100 bucks when you use the code distressed pro, already a steal, at $695. Bill, I really appreciate you coming on here. I appreciate all the work that you do there and all the information that you put out. It’s one of the first things I recommend to folks, is your website and your newsletter when folks are just starting to dip there toe in here and trying to figure out what they should do. It’s a wealth of information in the note business.

Bill Mencarow:                  Well Brecht, it’s been an honor and I appreciate you guys. Distressedpro.com is a tremendous resource and I hope people take advantage of everything you offer because I think it’s just a great service to investors. It really is. So congratulations to you for that as well.

Brecht Palombo:              Thank you very much for that. So that’s it. Thanks for being here. Everybody go to papersourceseminars.com if you want to get involved in that June 21st, 2019 seminar, and use the code distressed pro to get 100 bucks off.

What do I do next? That is the question that a lot of new note investors ask themselves somewhere along the process of completing their first project.

Well, Brett Burky, co-founder of Paperstac, is on our podcast today to show you how Paperstac will not only improve your current working model but they will also save you hundreds of hours of back and forth with agents and lawyers as you close the deal.

On today’s podcast Brett will be talking to us about the origins of Paperstac, how he got into the business of mortgage notes and how Paperstac can help accelerate your buying and selling process. Paperstac is a hassle-free marketplace that helps you efficiently buy and sell notes online. They have created an easy to follow step-by-step system that will guide you through each phase of the transaction.

Transcript:

Brecht Palombo:     My name is Brecht Palombo and welcome back to another episode in the distressedpro.com professional podcast series. Today I’m really happy to have Brett Burky on. Brett is a co-founder, and he’s in charge of business development at Paperstac, which is a new note trading platform and so I wanted to have him on here to share with us where this platform is going and how you can use it in your business. With that, Brett, thank you so much for agreeing to be here today.

Brett Burky:        Well thank you for having me, appreciate it.

Brecht Palombo: So I’m hoping what we can do today is dive into Paperstac. I forget how I found you, but do you guys have just one of the most gorgeous, modern sites in this whole space. I really think it looks great. I know that you’ve been working really hard to grow it over the last … How long have you been working on it?

Brett Burky:         Well first off I’m blushing because that’s a great compliment, appreciate that very much. Well, see it’s been in … The origin started in 2014. Really just running into my business partner, current business partner, Rick at the grocery store, but we launched officially in 2017. We tried something where we outsourced it, and that just did not go right. We scrapped the entire thing.
That was, you know, tens of thousands of dollars down the drain. We’re doing it where it was outsourced we’re always talking across the world, so I was up, at like, the weirdest hours, and, once we had it launched we’re like this is not what we want this is not what … We rebranded everything. And that’s when Paperstac was born, in really 2015, June 2015.

Brecht Palombo: Cool. So tell me a little bit about how you arrived at building this company and this platform.

Brett Burky:         Sure, so, my business partners Rick and TJ, they’ve been in real estate for over 15 years. They started as wholesalers, and they worked that world for a long time and then, they started to see the market change.

This is back in 2012, when things were getting a little tougher to do and somebody came to them with the opportunity of purchasing a mortgage note. And they didn’t really know much about mortgage notes, they heard about. But they got such a great deal they bought it for eight-thousand, and I think they sold it for thirty-thousand, within like two weeks.

Brecht Palombo: That’s not that bad, I’ll take that.

Brett Burky:         That’s a pretty good return. So they did that for a little bit and, they were really just playing the route of real estate investor, where they would take it and get the real estate back and try to either, you know, like flip it or turn it into a rental. They were having success with it because they found this little area where other people hadn’t found. And they went and formally got educated and then really dove deep into it, and that’s what they pivoted into.

And so at that point, they realized they had one … A couple major scares where somethings were, just like it’s very wild west for them, in terms of they had wired a large sum of money and they didn’t know if, they didn’t hear from the guy and they were getting pretty worried. And they were doing other things where they, they just didn’t know the process as well.

They just thought this is a great investment class I wish there was a better way to do this. And there are other platforms out there, and they were doing it on there and they really liked it but they’re like, we can do something a little bit different and use a little more, focus more on the technology and see what we can create there.

Brecht Palombo: That really does sum up a lot of folks first run experience with notes because it is the wild west out there. It’s not like residential investments where … That’s a very defined process. How the homes change hands, and what happens along the way, and who can sell them, and you can’t, and who gets compensated for it, and all that.

Not so, in notes, and so I’ve heard more than a few stories of folks ending up in a place where they run in headlong without really vetting their sellers, or they end up in a place where they’ve wired off some money and they’re wondering what happens next. And that can be a scary place to be depending on how big that wire is, right?

Brett Burky:        Yeah, that wire was in the hundreds of thousands and it was family and friends money. So they were pretty scared because this is family and friends and their … They said it was like two weeks of just sleepless nights.

Brecht Palombo: Yeah, totally.

Brett Burky:        The guy had said, “I’ll put it in Box”, and they thought he meant Dropbox and … No, but there’s a company called Box.com and everything was just really screwed up and the deal ended up working out fine but it was just a process where they were just like, “Oh my gosh that was scary”.

And then they did other things where they didn’t know they had to have different types of insurance, like force-placed insurance, and other things where they’re like, “Well I wish I would’ve known that”, some of these other things where like I wish there was a process that just walks you through it. And so, that was where I came in. I just ran into them at the grocery store ironically. And I’ve been a technology…

Brecht Palombo: Really?

Brett Burky:         Yeah. Well, we had been friends in college. And so, I was just at the grocery store and Rick was there, and I saw him … I also knew he was in real estate and we had done some … I was going to do some work for him previously when he was a wholesaler doing like SCO’s, marketing, stuff like that, he’s like, “Why don’t you come in and see what we’ve got? See if you can maybe consult for us or do something”, and I was like oh okay cool. So I went over to their office, then I heard about the opportunity and what they were trying to do, and I said, “Well okay I’m going to go back and kind of research this market”.

And I went back and I was like, oh my gosh, this is huge. There’s a whole … There’s a problem here that needs solving. And I was like, this is what I’ve been looking for. I’d really been trying to find something where it wasn’t consulting work, I was getting tired of doing stuff like that because it’s always just like a round robin, you get one client … And especially in marketing, you make them successful and then you work yourself out of a job.

Brecht Palombo: Totally.

Brett Burky:         So I was like, I need to fix this somehow. So when I came back the next day, I said look, I don’t want to consult, I want in. I was like, I want to be your partners and so they said, “okay”, and so then from there, we started doing some stuff. And then it was later that we got a developer that was … He’s just a ninja, he’s just really good. Because we try to have a couple people … We went to go try to pitch different developers at investment startup conferences and stuff like that … startup meetups, not conferences.

But, we just couldn’t find the right guy. We interviewed a bunch of people and you just want to make the team mesh. It’s got to be a tight knit. And so it was like … Rick’s like, “This guy named Mike, he designed a website for us back in 2009”, and I was like let me see it. So I looked at it, I was like, this guy’s using … this is 2009? I understand a lot of code, the different type of code that he was using at that time, I was like, this is very forward for 2009. A lot of jQuery, we’re not going to go that route, but it was good. So I was like, wow this guy is really good.

So then I reached out to him and basically the story goes, is I guess I … My enthusiasm sold him on the opportunity and we’ve just been knee deep in it ever since. We’re just been at that point. We didn’t realize how big this is. So there’s one thing where you have it where you list the properties. The listings can be done, but the whole process from everything from negotiations to signing all the documents, having an online notary pop up on your screen, closing, sending the collateral files, wiring money, doing it all digitally where you can do it from pretty much your phone? It’s a big thing.

And so it’s one of those funny things where friends would always say, “Are you still working on that? Is it not done yet?”, and I’m like yeah it’s not exactly just an ecommerce store. People don’t just go there and click one button and buy a note, it’s a lengthy process, it’s a put it into a system, it’s just a … Some of those ideas of how do you do it to a way where it’s not tedious. The whole goal was for us to not give people more work. This has to be something that it’s not … People are already doing business the way they do business and what we need to do is make it easier or it’s not an option. Why would they do it on Paperstac if they can do it just as well in a different manner? So the goal had to be that it has to be ten times better, ten times faster, and ten times safer, than what’s going on.

So that’s what we’ve been shooting for and that’s been our goal the entire time. So far we’ve done pretty good with it. It’s sort of being launched in September, we went to an event out on your side of the country, out at IMN, which is out in … I think the island was Dana Point. It was really, really … Dana Point is gorgeous. So that was what we officially launched and then we started having transactions, I think that was last September. So October things started to go and then had a couple more November, things sort of slowed down for December.

We’ve since then just had tons of feedback. So tons of people saying, “Wow, this is great. I love it. I wish it did this”. So it’s one of those things where we really listen. So it’s like, okay it needs to be able to take pools, people need to be able to use their own documents, just all these features and to the point where I actually went to our data base and I called people on the phone, sent them personal emails, come complain to me, what would you like to see? And so we have meetings and we’ll run those things and see which of the most common things that people want. And so, we’re calling version one, which is going to be out next month, is everything that was asked for so far and a bit more. So, that’s where we’re currently at.

Brecht Palombo: So tell me a little bit about who your target customer is with this. Is it hedge funds? Are you targeting banks? Are you looking at private investors? Who’s using your platform? Or who do you intend to have use your platform?

Brett Burky:        That’s a good question. I mean, currently what we’ve had is we decided that we needed to focus on the current note investors. But there’s a lot of people that we’ve seen going to different conferences where people … They might have been in the industry for a little bit of time and they just haven’t pulled the trigger on anything.

And we were kind of like, what’s holding you back? What is it, if the note meets your buying criteria, what is it? So we’re trying to get to the regular everyday note investor that is managing these things, maybe they just have a small fund and there’s just ten, fifteen assets, to people that are managing hundreds of them. Our main goal is to focus on the current note investor and provide a solution for them.

Brecht Palombo: As opposed to expiring you mean?

Brett Burky:         Yeah. The second weight would be more like … So real estate investors seeing this as an option but just not knowing how to go through the process. Later when I demo the thing you’ll see it’s basically … We’ve had people, not to say my parents couldn’t buy a note, but it’s just the process makes it so simple that pretty much someone that’s not familiar with it, just go through the steps. If you just check the steps and you do everything right, you’re not going to get hung up on something where you accidentally do something wrong.
The problems where people … There’s things that go, “Well what happens then? What happens then?” you don’t have to guess. It’s just like, just go to the next step.

So we’re starting with the current note investors and that’s where we wanted to get the best feedback cause we’re basically dogfooding this product because Rick and TJ are active investors with a multi-million dollar fund, and so when we say, “Hey what about this?” they say, “Well it should be done this way. It would make it a lot easier”, okay. So we do it that way instead.

And then with other note investors like, “I really wish it did this”, so if we make it good for the people that are currently in the trenches daily, the other people that would come in, which would be the second wave, would be more real estate investors, maybe … We call them stock market refugees, people that are sitting on the side-lines kind of scared of the markets, looking for a safe investment with a good yield, maybe like an RPO. This might be a better avenue for them and if we make it safe and easy for them, then we’re hoping that there’s a likelihood that they’d say, “I can do this. I can do this with this software, it seems easy enough to do”.

Brecht Palombo: So it sounds like the big difference for you guys and what you’re focusing on is kind of two-fold, and correct me if I’m wrong but, for one thing, sounds like you’re talking about really having it be pretty comprehensive in terms of how you manage the transaction, right? Did I get that right? Or would you agree?

Brett Burky:        Yeah. Yeah, we’re trying to cover all the bases. So there’s things like right now when you get people to the end of the transaction, it’s like, “Would you like us to record the mortgage for you? Or do you want a mortgage recording done?” oh yeah, I do. So it’s just another thing they can click and then we do it. So it’s things that people might not have done. Did you know you need … who are you servicing with? I don’t know, who am I supposed to service with? Well, there’s options out there. We’re not going to tell you who to service with cause there’s a lot of great ones and we don’t want to be biased to any of them, but to say you need it with a servicer is probably pretty important.

Kind of hard to do it by yourself. So people sometimes think that the newer people might not know … Maybe forced-placed insurance, hazard insurance, stuff like that they probably want to get they just … Those are the things we’re trying to do. And some of the things in the system are going to be automated for people and sometimes, currently, it just kind of … We have an internal chat where we’re kind of watching … Not watching, but at the end of the transaction, you can see, okay this has been sent. This has been done. So then a lot of the times I’ll reach out to the buyer, is there anything else we can help you with to make this easy for you?

And if they have questions at that point like, well what’s the next best step? Well here’s some suggestions. We can’t give investment advice because that’s not what we are but we can say, look, most people will service their note. That’s important. And most people will get this,this, this, and this. So we don’t provide those services, we just want to make sure that they have a happy service with Paperstac and realize that, oh wow, they’re actually trying to help me once this is even done.

Brecht Palombo: Yeah, so tell me about the seller side because a lot of folks who are using our platform are out there digging up deals, you know that’s really what our software is all about, and all our training is being able to go out there and actually find the deals. What’re your rules or who makes a good seller customer or client for you?

Brett Burky:       Well anybody who’s managing their portfolio that’s a seller that has notes they want to get rid of we are doing an integration into servicers, so usually we want to be able to get the most up to date information. So just any seller that’s … We also say, or at least Rick and TJ always say there’s a for sale sign always in the front yard. So if people want to sell their assets and they want to put it on something where they can manage it, that’s what it’s for. We see a lot of synergies with you guys here where they can find them through your software Distress Pro and then be able to, maybe if they find one, maybe turn an R into RPL, or if they want to get rid of it as a non performing, they can put it on the Paperstac.

So we’re trying to make that process really simple cause right now it can be difficult. There’s a lot of fields that you need to fill in. There’s all the different things, and ONE’s and DPO’s that you want to provide so that a buyer can actually see that. You know, we always try to tell the sellers to provide as much that you’re really willing to provide without providing any sensitive data to just anybody. But a lot of times when they’re in the negotiation stage, we usually say, “Hey, if you have updated BPO’s it’d be nice to maybe share it with your buyer so they can at least see”. Those are the type of sellers … A lot of the sellers we’ve worked with so far have been people that, honestly have been personal relationships, because we’re trying to really grass root it where …

We want to eventually scale to where we can take on a lot of people, but we want to make sure in the beginning we have the right people so that the reputation stays pure. And so a lot of these people have been met at different conferences, phone calls, private Facebook groups where we know that these people are active.

We know that they’re not somebody that’s going to come on and, not anything against most brokers, but some people can do some bad stuff and waste people’s time and we’re trying to not have that happen because that would really reflect badly on us cause then they can say, “Oh well it’s just filled with a bunch of brokers”, well that’s not what we want.

Brecht Palombo: You’re much nicer about that than I am. Business is full of the joker broker, I mean it’s an inexcusable sort of thing where they’re … Maybe they know a guy who knows a guy, who knows a gal, who knows the seller, who had the tape a year or two ago. I’ve had friends who’ve had their own notes in this business shopped back to them where someone who knows a guy … But then comes the, “Hey you want to buy these?”, no I’m selling those notes, you idiot. So it’s definitely … and I think part of that comes with the territory of it being the wild west. I mean, on the one hand, that’s one of the reasons why it can be so profitable is that it is the wild west and so we don’t have all that stuff that we have to deal with when we’re talking about single-family residences, or whatever. But on the other hand it does make for a bunch of chumps out there who don’t have any product and that’s the last thing you want to do is get folks involved with going down the road of due diligence only to discover that they’re not really talking to anyone whose authorized to sell the thing.
Yeah, so that’s definitely a huge problem in this industry and I like to see that you guys are taking a stand on that.

Brett Burky:       Yeah we try to address that the best way we know how cause Rick and TJ have a lot of their assets on the platform. We have other sales on there too, but we’ll get a lot of bids and we’re doing a lot of things in the new system to where you’re going to have a rating score. So it’s going to be a rating score where sellers can say things that say, “Hey this person wasted my time”, or something like that. We’re starting to see people christmas-treeing the site, putting up 50 bids within 30 minutes, which is not feasible. How would you know without doing any … Bring up the due diligence to know that this is the right asset for you. We’re putting those things into place because we want to make it so that Both sides are very important. Building a platform is extremely hard. This is the hardest marketing thing I’ve ever tried to do. I’ve done a lot of other stuff and building a platform, I didn’t know what I was getting into cause you have two different markets. You have the buyers and you have the sellers and you’ve got to make sure you cater to both. But it’s kind of the chicken and egg because if you don’t have one you don’t have the other so.

Right now my focus is a lot on sellers because we want to make sure that it works for them cause their time is valuable … You know so is buyers, we value their time as well. But we want to make sure that if a seller’s willing to put their assets on there the bids that their getting are not wasting their time bids, bids that are just not realistic and they’re bids that don’t get held up in what we’ve seen, I’ve got to check my legal department. What legal department? And then we’re like, you’re shopping this around aren’t you? So you got it for this and now you’re checking with your legal department? That’s a first.

So different things like that and then the new system we have it where sellers can basically have a private community where they don’t want to accept you if you haven’t met these criteria. You can’t get in. So we’re trying to do some things where it’ll basically be exclusive. It’ll be exclusive in that it’ll answer some questions … We have a list that we’re trying to whittle down, it’ll basically make it so that these people are people that you’d like to do business with. And it’s not saying that you don’t know this guy, that you might see him at every conference, the reason why you’re using Paperstac is that the transaction process is a lot faster. So it’s more of an efficiency tool at that point and not a platform for finding new buyers. It’s more this is an efficient way of doing it, and I can fly through these things a lot faster, selling pools, whatever. So that’s what we’re trying to do.

And we also are … There are some really good brokers that … There’s both. We’ve met some people that do the right thing. They’re right next to the principal, something like that, the principal’s just … He’s too busy. And he knows the brokers will hustle for him, and we know that they put in work. So in the new system we have it where they can set up the deal. So it’s like a … They spin it up, they basically make this little community, and they can put their fees in between, and they bring the buyer, they bring the seller, and they make sure they don’t get cut out of the deal, and we build it for them so that …

We want to kind of make it for all, cause we go to these conferences, and we’ll meet some, and we want to be inclusive. So we were trying to figure out the best way to include everybody and not exclude everybody but make everyone happy. And I’ll tell you what man, it’s a math problem. But it’s a fun one, and we’re really close to solving it in the way that we see will work. And it’s coming next month.

Brecht Palombo: Well that’s cool. So, I’ve got a couple of things that I … And I don’t want to blindside you here, but I see if you go right to your site, you’re very transparent about your pricing. Pay $250 plus a half a percent of the sale price when you close a deal. Is that something you’re taking forward with … In your new version?

Brett Burky:        We’re changing the pricing because it’s kind of confusing. People are like, $250 plus a half a percent, it makes you think, and some people are like, “I thought it was 5%”, no, no, no, it’s not 5%. So really the $250 is a lot of the hard costs, so there’s a lot of hard costs that we put into it such as, we pay for your third-party auditing … So we have a third-party auditor that will view the collateral and make sure that it is what the seller says it is, we pay for first class shipping labels back and forth, we pay for the notarization process, and then we have the upkeep of staff.

So, that really wraps in … That $250 is basically just a wash. It’s basically just to cover the cost to get the transaction done. And so at that point it’s … We’ve gone back and forth but I think it’s 1%. So it’s … Gosh, don’t quote me on that because we just recently changed that in the last meeting. But it has to be something that … And that’s one thing that we’ve been going back and forth on too because we have some assets that are lower priced, and it’s like, well is it 1% if the assets $1000? What do you do with this when you have some guys selling a million dollar asset, okay well is it 1%?

So there’s a lot of things that were trying to take into effect. Especially, also too, if a broker puts together a deal, and they’re taking, whatever points or something like that, where they’re making 1%, now they’re adding … So that’s still in the works. We’re trying to make it so that it’s … Really our goal is to make sure that you’re getting the value and the price is justified cause we don’t want people to say, “Well I love it but it’s expensive”, because that’s the last thing that we want. We want people are like, “This is saving me hours of time, it’s worth the price”.

So we’re getting rid of the $250 and we’re just going to throw it into one thing so that it’s easier to understand cause it has been something people have just … If you go to the web server right now, actually I shut down my chrome so nothing popped up, but if you hit that little thing in the corner, that’s my face, and I get that question quite often. And so, as well we got to nip that in the bud.

Brecht Palombo: Well I’ll tell ya, in this business I’ve made anything from 10% to as low as three-quarters of a point in terms of commissions, depending on the size of the deal usually. So 10% down in a couple hundred thousand dollar type deal and then 3/4’s of a point on like, ten to twenty plus million dollar kind of transactions and so I don’t know how that translates to what you’re doing here, especially … That’s like a full-service sort of a thing.

But it makes sense that you’ll sort out your commissions or your fees or whatever as you go forward and you start seeing what kind of deals are going through there. I guess what I was going to ask you here, where I was going to blindside you additionally was, have you got a deal that you can offer our listeners?

Brett Burky:         Oh yeah. We’ve got a … Yeah, I’ve got ten deals that we just got all the ONE’s and BPO’s back from. We’ve got a mixed bag, so I don’t currently have a … I’m waiting from … So what we’re trying to do is write the story for each deal because we found that it sells better that way. If people can’t see … What’s the exit on this? We had it where … We had over a hundred assets on the site at one time and we found people just wouldn’t … It’s almost too much.

It’s almost too much where they’re like, “Well I don’t know which one”, and it was … If they didn’t know what they were looking for because of the way it’s listed, it’s in like a … You see, they’re all listed right there, it’s not in a spreadsheet format so it’s hard to run your calculations on everything, which is also changing in the new one where you’ll be able to see it like a … You can run your calculations on whatever your exit strategy is. A lot easier but, we had to start putting these assets out and just like, ten at a time, mixed bag, some non-performers, some re-performers, different states, different strategies, and then write the stories, and then put them out by email so that people can say, “That’s the one I want”.

But yes we do. All that long-winded to say I have ten and after we finish here I can get the story and I can send it over, and they’re all great. A lot of them are … They’re all Midwest, Ohio, Illinois, Indiana, Michigan, those areas. But they’re some of the best ones that we think that would sell the fastest.

Brecht Palombo: Well here’s what I’d love to do it, it’s one thing for you and I to get on here and sort of talk about this whole other thing, if people can’t see it. What I’d invite people to do now, and what I’d love to do with you is we’ll jump off here and get on recording a quick demo that people can find for this episode. It’s going to be at distressedpro.com/paperstac so just drop the ‘K’ and otherwise just like you would expect it.

So distressedpro.com/paperstac and over there what we’re going to have is a demo, a little walk through where we’re going to show you the site and some of the features behind it, and maybe, of course depending on when you see this, any of the deals that are on there may or may not still be available, probably not, but there’ll be other deals there for ya. So I’d encourage you to do that go to distressedpro.com/paperstac. P-A-P-E-R-S-T-A-C, and there you’re going to be able to see a full demo, and you’ll be able to get a transcript to the show, and Brett, does that sound good to you?

Brett Burky:        That sounds awesome. That’s great.

Brecht Palombo: Well cool, I appreciate you coming on here. Folks if you’re driving you just want to remember one thing, you can go to paperstac.com and check this out. Again, P-A-P-E-R-S-T-A-C.com. Today I’ve been speaking with Brett Burky and if you come on over to distresspro.com/paperstac we’re going to show you a demo so you can see exactly how this thing works. So thanks so much for listening to another episode of distresspro.com professional podcast series. Thanks Brett.

Brett Burky:       Thank you.

Raising capital for your next note investment can be hard, that’s why on this episode, we have Paige Panzarello to teach us how she finds funding for herself and her clients.

Brecht Palombo: In today’s episode of the Distressed Pro Professional Podcast Series, I speak with Paige Panzarello. Boy, that’s a lot of Ps I just had in that whole sentence, about raising money, about raising capital.

Paige has raised a lot of money and she’s been through the whole cycle. Started back early in the late ’90s and so has been in real estate and in notes for over 20 years, Went through the global financial and housing crisis here in the US. She emerged with a very big healthy business, and in this episode today, she walks us through a lot of the considerations, including some tactics and strategy for raising money.

Brecht Palombo: We go deep in on that, I hope this is going to be really helpful for you. I think you’re going to learn a lot and just pay attention to what we talk about in here, because if you are thinking about getting out there, doing the work to find the deals, and you’re going to be raising some money. Then this episode is for you. All right, so enjoy and here’s Paige.

Brecht Palombo: Welcome everybody to another episode of the Distressed Pro Professional Podcast Series. Today I’m very happy to have Paige Panzarello here from CashflowChick.com.

Paige is going to talk to us about raising money. Who reached out to me over there, somebody reached out to me a little while back, and its taken us a while to connect, but I’m really happy that we did. Paige I understand you raised a lot of money. Is that right?

Paige Panzarello: I have, I have. Yeah, I’ve been really fortunate Brecht because I have over my career as a real estate investor, but specifically in the last, you know, since I got into the note space. I’ve been very blessed that I’ve been able to raise quite a bit of capital.

Brecht Palombo: Yeah, cool. Tell me a little bit about your trajectory as a investor. What brought you here today, and if you could just walk us through. I know a lot of times, people here this and they think, “Oh, well she was able to do this, because she had this sort of benefit that nobody else that. You know, that’s why she’s special and I can’t do it. That’s going to be my excuse.” If you could just take is from what your beginnings, so that people understand how you’re here today.

Paige Panzarello: Absolutely. Okay, I’m not special, I can tell you that. In that, I didn’t have any … I started my real estate investing career over 20 years ago. And kind of by virtue, by default. I was thrown into the deep end of the pool by knowing nothing about real estate investing. My grandmother past away and she had a very large estate. She had some commercial property, she had some townhome units. We had a sewer treatment plant, and then we had some land.

Paige Panzarello: Of course I was quite young, and I went off to Arizona ’cause that’s where a portion of the estate was. The townhomes, the sewer treatment plant and the land. The estate was about four million in debt. I actually started my real estate investing career in the hole. If I can do it, anybody can do it, no excuses.

Paige Panzarello: I literally knew nothing. I very quickly realized, that because I’m a very helpful person, I love to help people, that’s one of my passions. I realized very quickly that I was not a good property manager, because I have a really big heart and everybody has a story. I put property management in place, and then I really started surrounding myself with people that had the answers that I sought. I was able to kind of parlay all of that, within three years we turned the properties around. I got us out of the whole, we were back in the black in three years which was great.

Paige Panzarello: Yep, we sold the sewer treatment plant, we leveraged. And then we started selling the townhome units. I realized that I really want to build on the land, and my family really wanted no part of that. I ended up buying the corporation, and I started my own construction company knowing nothing about construction.

This is the late ’90s, early 2000’s, and we started expanding and growing. I brought in a qualifying party, we grew in three years to 36 employees. We were building everything, we held all of our licenses except HBAC and roofing. And we didn’t hold those because the insurance was too high.

Paige Panzarello: But you know, we were rocking and rolling, we were really building. As you know Brecht, that was you know, the ramp up to 2005, 2006 and then 2007 happened. The crash, you know, I was looking at it and then I saw it coming.

But I was very fortunate in that I thought to myself, well this isn’t going to happen to me because I’m only encumbered about 10%. I was wrong, it happened right on top of my head, and it took me down because the people that owned me money didn’t pay me.

Paige Panzarello: I was very fortunate that I had a lot of assets, I had a lot of liquidity. I had big commercial and construction equipment that I was able to fire sale. But at the end of the day, you know, at the end of three years, I ended up walking away from Arizona, having paid everybody what I owed them, but I lost $20 million. That has a tendency to change you as an investor and shape you.

Brecht Palombo: It does. Yeah, yeah, no, I’m forever changed. My perspective on investment and everything is forever changed from that same period. And I know a lot of the folks here feel the same way.

Paige Panzarello: A lot of people, a lot of people. And because of that you know, I walked away from real estate for a little while. But when I came back in, I came back in in the direction of the note space.

You know, I was doing some fixing and flipping, I was doing wholesaling, ’cause I had to rebuild, right? But all the while I was educating myself on notes and I was starting to invest in notes.

Paige Panzarello: I love the fact that there is so much control. I invest in first position, non-performing primarily. And so, that gives me a lot of ways to mitigate risk and a lot of control over my own investments and over my own destiny and profit margins. I have never looked back, and I just I love it, and I love that I get to help borrowers, you know, my goal is to try and keep them in their home, to get them to re-perform. But I get to not only help borrowers, but I also get to help my investors. There are investors back from 20 years ago that are still investing with me today.

Brecht Palombo: Wow, that’s great.

Paige Panzarello: Yeah, I mean, because I did what I said I was going to do, so I’m very fortunate of that. And then word of mouth of course spreads. You know, and that’s part of-

Brecht Palombo: It’s funny how, or not funny but, what you just said there, it seems more and more rare but it is like the most crucial thing in this business. Because you are kind of your representation aren’t you?

Paige Panzarello: Yes.

Brecht Palombo: I mean, and if you don’t have that, you really don’t have anything at all.

PaigePanzarello: Anything, exactly.

Brecht Palombo: It’s so critical.

Paige Panzarello: It is, it is critical. And you know, sometimes it’s not always … You know, there’s not always lemonade, we have to sometimes take the lemons and make lemonade, right? It’s not always unicorns and rainbows, there are things that happen because life happens to people every single day.

And as long as you’re honest and forthcoming about it. You know, that’s something that I really pride myself on, but I’m human too, you know? I fall down and skin my knees sometimes too, and as long as I can own up to it and be honest about it, and not try to pull the wool over somebody’s eyes. You know, that’s just so important in this business, and your reputation absolutely is everything.

Brecht Palombo: Yeah, yeah. Maybe you could walk us through, talk a little bit about … We went through the crash, we had this terrible experience. Is it terrible? I guess if I was going to be really Zen about it, it wouldn’t be terrible, it would just be an experience that we learned from. And then from then to here, you’ve raised a lot of money. What did you do?

Walk us through that a little bit. What I’d love for our folks to come away from this video, this call today, is that they have some idea about how they would begin and some confidence that the things that you do in order to raise money like that aren’t you know, magical things, they’re like actual you know, these are real like strategies that you can accomplish in order to do it.

Paige Panzarello: Absolutely, absolutely. Okay, so first of all, you need to educate yourself. That’s the first thing. And you have to have integrity and responsibility because when you’re dealing with raising capital from other people to use them for investments, not only to benefit them but to benefit yourself as well, that’s a huge responsibility. You have to walk into it with a knowledge base.

You don’t have to know everything, but you do have to have a fairly firm grasp of the direction of where the investment is going, right? You don’t want to fake it till you make it, because you know, you hear that a lot in real estate investing, “Fake it until you make it.” I don’t subscribe to that school of thought. This is other people’s money and you have to take it very seriously, there’s no faking it.

Paige Panzarello: Educate yourself to the point that you’re feeling somewhat comfortable. Surround yourself with other people that are going to help you along the way, those are crucial elements.

Brecht Palombo: When you talk about educating yourself. Let’s just put a little bit a finer point on that. Are there specific things that you feel like before you’re going to go out and start talking to people about their money that you really need to have down?

Paige Panzarello: Yeah, I think you need to know the risk factors. You know, you need to know how you can mitigate risk for people. You need to know the general strategy of the investment. For notes, for instance, you know, because that’s our business. There’s a lot of front end loaded due diligence. And if you haven’t educated yourself to know what those due diligence steps are, you’re really putting other people’s money in harm’s way.

Paige Panzarello: If you can at least educate yourself to the point that you understand what those main due diligence steps are that you need to take. And then have your loss mitigation team and other teams behind you, that they can take the ball and run with it after you buy the asset, then you’re going to be in good shape.

Brecht Palombo: Yeah, okay. Take us forward from there then.

Paige Panzarello: Yeah, so after your education and taking this very seriously. It really is just there’s no magic wand secret, right. There are two things that everybody wants in real estate investing. The two biggest things are deals, which Brecht you can help with, and then money, right? Money, when you’re seeking to raise capital, the most important thing is that you need to remember this is not about you, it really isn’t. It’s about the person that you’re talking with. What are their needs? And it’s your job to really ask questions to find out what they need. And honestly not everybody is going to be a fit for you, and that’s okay.

Paige Panzarello: You’re not asking for money, you’re seeking to help somebody to better their life and better their retirement, and you benefit from it as well. If you go into it thinking along those lines, as opposed to, “Oh, I’m asking for money.” Because most people freeze when they think, “Oh, I’m asking for money.” You’re really not, you have an opportunity that you’re working that you can bring people along with you that’s going to benefit them as well, so that kind of takes the pressure off.

Paige Panzarello: And if it’s not a good fit, if they’re looking to make chunks of cash, and you’re investing in performing assets you know, where you just have monthly cash flow. That’s not a good fit. The job is yours to find out what their need is, and then see if it’s a good fit.

Paige Panzarello: It also requires you opening your mouth, literally. Most people when they get into the real estate investing sphere of any medium, buy and hold, fix and flip notes, any of it, they get very tight-lipped about what they’re doing.

Because they don’t want to feel like they’re going to be judged or you know, listen to the naysayers. But if you don’t open your mouth and tell people what you’re doing, money is literally not going to fall out of the sky and into your lap, you need to tell people what you’re doing.

Paige Panzarello: You know, again, surround yourself with people that are in your team and leverage their experience and their expertise. I actually have a funny story, Brecht, that I kind of would like to share. This is literally opening my mouth and opening my mouth, both figuratively and literally.

Paige Panzarello: A couple of years ago I went to a real estate conference. And I’m a dentist daughter, by the way, my father was a dentist, and I had a little pain in my tooth, right. I knew what it was, and I got back home and I made an appointment with the endodontist, he’s the guy that does the root canals, right? I went to his office, and I sat in the chair and I explained I said. He said, “Well why have you waited so long.” I said, “Oh, I was at a real estate convention.” And he says, “Oh, you’re a realtor.” And I said, “No, I’m an investor.” And he says, “Oh, is there a difference?” So I explained that.

Paige Panzarello: And he said, “Oh my gosh. I really had been thinking, you know, after I’m planning to retire in a couple of years from doing what I’m doing now, being an endodontist.” And he says, “I was thinking about going into real estate, and I was going to start studying for you know, to become a realtor.” And I said, “Well, what are your goals, what are you looking to accomplish?” And he told me, “Well, I’d like to take the money that I’ve earned and leveraged it to create some passive income.” And I said, “Well, your realtor license is going to allow you to sell houses for people, is that what you’re looking to do?” And he says, “No.”

Paige Panzarello: I explained what I did and he said, “Oh my gosh, that’s really interesting.” I said, “Well, you know, would it make sense.” This is very key by the way, you need to kind of ask permission, “Would it make sense for us to have lunch or coffee and kind of discuss some options for you?” And he said that would be great, so we did. About two weeks later we had lunch, and it ended up that he had a million dollars to you know, invest. You know, in my circle of friends we kind of call it the million dollar root canal, right?

Brecht Palombo: Yeah, got the right side of it, that’s for sure.

Paige Panzarello: Exactly. I literally opened my mouth and opened my mouth.

Brecht Palombo: Yeah. Tell me a little bit about how that begins. Did you start off with like a PPM in pooling funds, or did you start off doing JVs? If someone’s thinking about their … You know, maybe they’ve got some due diligence, maybe they went through your training and they understand that part, what’s the next thing for them to do?

Paige Panzarello: Yeah, I think it really just depends on what their goals are. I don’t suggest going directly into a PPM because setting up PPMs can be quite costly.

Brecht Palombo: Oh, maybe we should tell people what a PPM is. Sometimes I do that, you know, we just say things there and I don’t.

Paige Panzarello: Sorry, yes, Private Placement Memorandum, it is for a fund. And there are different types of funds, so if you’re looking to invest with somebody who’s doing a fund. Then you know, figure out what kind of fund it is and all … I mean, there’s a huge stack of papers of disclosures that you get when you sign up to invest through a PPM, through a fund. But you know, those can be quite costly to set up, and I certainly, you know, if your goal is to be a hedge fund then certainly you know, go that route.

Paige Panzarello: But when you’re first starting out in note investing, I strongly urge people that want to do this, that you know, they start with their own money and maybe a joint venture. And then they surround themselves with other people that are in the know. Right, because the practice is always when you’re actually doing it, the action behind it, that’s where you learn and that’s where you grow.

Paige Panzarello: You know, do a few of those first, and then you know, with joint ventures, with people that are experienced. You might not get as much return initially, but the value of the experience you’re going to gain is exponentially more valuable than the actual ROI that you’re going to get back in terms of dollars, right?

Paige Panzarello: And then you know, go into you know, perhaps continue that way for a long time or go into a PPM. Or decide you know what, “Hey I don’t want to do this myself, but I do love the medium.” Meaning, you know, I love the ways you could mitigate risk, I love helping people, I love making money doing it, but I don’t want to do the day to day stuff. Invest with other note investors, there are so many different options. Definitely you know, start out small and don’t try and bite off more than you can chew.

Brecht Palombo: Can you talk a little bit about what a structure might look like for somebody who is just going to work with their dentist to you know, to buy a couple of notes. You know, without putting together a PPM and all that. What would just a JV, like a basic JV structure look like for you?

Paige Panzarello: Yeah, our basic JV structure, you know, we’ve grown considerably. But our basic JV structure, when we started out, it really didn’t change from that point, is our funding partner. We call them our JV funding partner, so the person that came in, to partner with us, brought the funds.

And we put in the sweat equity and they were able to leverage our team. You know, they did participate, because you really need to know your SEC regulations, you can’t just JV with anybody. They need to be a part of your sphere of influence, you need to have a relationship with them, otherwise, you’re selling security. You need to be really, really, careful with that.

Paige Panzarello: But you know, as long as you get to know the person, and I like to call it marriage. You know, because when you talk about people and emotions and money, it’s very much like a marriage, so date first before you get married.

Brecht Palombo: Good advice.

Paige Panzarello: Yeah, our funding partners will bring the funds, we put in the sweat equity. They do participate on a weekly basis, sometimes a monthly basis. They do help us to make decisions.

You know, we include them in decisions. But they bring the funds, we bring the sweat equity. When we exit a note, 100% of the funds, the original principal amount goes back to them, and then the profit is split between us 50/50.

Paige Panzarello: If we get a note to re-perform, then 100% of the principal portion of the payment goes to the JV partner toward the original principal amount that gets reduced. And then the interest is split between us 50/50. It works out well for everybody.

Brecht Palombo: Yeah, and so do you put together a special entity for that kind of a thing? Are they one-off LLCs? Is that what that looks like?

Paige Panzarello: I actually operate through a Delaware Statutory Trust, which functions very much like a series LLC. I always encourage any investor that I’m speaking with to invest under an entity. There are certain protections that are afforded, there are certain deductions that are allowed. Because when you’re investing in notes, it’s largely the income that you get a straight income. Very rarely are we subject to capital gains, but sometimes we are. Again, I’m not a tax professional, so you know, take everything I’m saying with a grain of salt.

Brecht Palombo: Yeah, we’re definitely not providing legal or tax advice today. That’s for sure.

Paige Panzarello: Exactly, exactly. Nor am I a lawyer. Definitely, seek the advice of your professionals. But I always encourage people to have to invest through an LLC, it protects them in a number of ways.

Paige Panzarello: Agreed.

Brecht Palombo: If somebody’s listening to this, maybe they’re starting to get a little bit of a … You know a couple of ideas, somebody they can talk to, you know, some of the folks who they know. What are some of the other ways that you find the investors out there who you’re working with? Other than in the dentist chair.

Paige Panzarello: Sure, exactly. Well, you know, honestly Brecht, there’s money all around there. There are so many people that are out there that have 401Ks, they have IRAs. Self-directed IRAs are huge. I mean, anybody that’s in a self-directed IRA, they’re looking to earn and generate higher returns. And they’re just looking for the vehicle to do that, so that’s a great way.

PaigePanzarello: But you know, of course, you want to talk to realtors, you want to go to REO meetings and talk to those people. You want to go to everywhere. I mean, when I was doing fixing and flipping, because here in California, we’re not allowed to … We have to have reusable grocery bags, right? What were my bags? What did they say? It said, “We buy houses.” And I can’t tell you how many referrals I got from the checker. You know, they took my card because they saw my bag.

Brecht Palombo: That’s fantastic.

Paige Panzarello: Yeah, I mean, it’s literally everywhere. Accountants, attorneys, gosh, medical conventions, that’s another one, go and work the lobby. You’re not a doctor, that’s fine, but doctor’s are there at medical conventions. I have been known to go in and you know, have a drink at the bar, or have lunch in the lunch room. It’s a great place, get creative, but it’s everywhere.

Brecht Palombo: Yeah, for sure. Well, I think we’re coming up on time here. Is there anything else we want to talk about before we sign off here, any last tips you want to leave for folks as they think about raising money and getting into notes?

Paige Panzarello: You know, again, I like to challenge people, everybody’s got their why, you know. You hear about, “What’s your why?” That’s a very personal thing. I like to challenge people, what is your what? What I mean by that is, what do you need right now? And your what will change as you grow as an investor. But you know, if you need chunks of cash right now, you know, maybe choose a vehicle that’s not a long term play, meaning buy and hold properties, rentals is not your vehicle if you need chunks of cash.

Paige Panzarello: The converse is true, you know, if you need monthly cash flow, don’t go into fixing and flipping. If you need a little of both, then maybe do look at notes, because you can create both chunks and streams of monthly cash flow in the same investment vehicle which is great. But you need to define who you are as an investor first, and then educate yourself and kind of stick with it.

Paige Panzarello: As you know Brecht I do teach a workshop. It’s called Building Wealth With Notes. It’s a three day hands-on intensive. If you’re interested in learning how to invest in notes, that might be a great place for you to start. There are others out there that do the same. I just highly encourage you to educate yourself and then proceed with integrity, and really take that responsibility very, very seriously.

Brecht Palombo: I agree with you. The idea of … I think another way to say what you said there is to begin with the end in mind. Which I think you know, a lot of folks, they might get hot on something, or you know, find something you know, looks sexy to them or whatever. But is it going to be a vehicle to get you where you’re going? And you don’t know unless you know where you’re going.

Paige Panzarello: Exactly, exactly. If you don’t have a road map to get there, then you’re going to be in trouble, and especially with other people’s money. It’s just dangerous, don’t do it.

Brecht Palombo: Yeah. Tell us how folks can reach and reach out to you if they want to learn more about how you do this?

Paige Panzarello: Yeah, absolutely. You can reach out to me and schedule a call. If you go to cashflowchick.com. There’s a little tab there that you can book a call with me if you’re interested. If you’re interested in the workshop, you can go to buildingwealthwithnotes.com.

I have one coming up here in Orange County in a couple of months. Yeah, but just reach out, or you can reach out, direct message me through Instagram @thecashflowchick. Any of those vehicles you can get in touch with me.

Brecht Palombo: Okay, awesome. Thank you Paige, thanks so much for coming on.

Paige Panzarello: Thank you.

Brecht Palombo: I really appreciate it, those are great tips and hope that everybody really takes a lot away from this, so thank you for that.

Paige Panzarello: Thank you so much for having me, Brecht I appreciate it.

Brecht Palombo: My pleasure.

Junior mortgage notes or seconds can be a cheap way to source notes in the current frothy market if you use the right buying criteria. On today’s podcast episode, Sándor Lau will be sharing his strategy for buying junior liens and a few tips on what to avoid when looking at seconds.

Podcast Audio:

Get $50 Off The PaperSource Symposium using the coupon code: “SANDOR”

Transcript:

Brecht Palombo: Welcome back everybody, to another episode of the DistressedPro Professional podcast series. I’m here with Sandor Lau. Did I say that right?

Sándor Lau: It’s Sándor. Like Sean Connery walks in the door. Or, you can remember Sándor, Lord of Gondor, if you’re a Lord of the Rings fan.

Brecht Palombo: Oh, okay. All right. Sándor Lau.

Sándor Lau: Yes.

Brecht Palombo: Now I’ve got it. All right, thanks. And I asked Sándor to be on here today because it was a Tuesday before Thanksgiving, and I had this wild spike in my traffic. We had our organic traffic tripled, almost quadrupled on a single day. And I said, “Wow, everything I’ve been working on has finally come to fruition.”

But in fact, what had happened was I looked, and you were written up in the Wall Street Journal. You were in the Wall Street Journal, and whatever keywords were in that article, people went to Google them and searched them, and just blew up the traffic on my site. And then I had to … I actually didn’t have the membership, I had to buy a subscription to the Journal, just that day, to get in there to read your article.

Sándor Lau: Rupert Murdoch and the shareholders thank you.

Brecht Palombo: Ought to thank you, I guess. And so I went and I found Sándor, and invited him on here to talk to us about what all the buzz was about, there. And hopefully to educate us a little bit on how he’s doing what he’s doing and why.

Brecht Palombo: So can you tell us a little bit about your background in this, and how you came to be featured in the Journal?

Sándor Lau: So, yeah. It was 2007, beginning of the recession before really the data had come in. I had come back to the United States from New Zealand, where I had gone to grad school and had a career as a filmmaker, and realized, “Oh!” The artist part is really great. The starring part, not so great.

Brecht Palombo: That was good, yep.

Sándor Lau: So I read up, tired to figure out what I could do to build a financial future, and I realized: Real estate. This is it. I read all these investing books, I tried to find one that told you about the stock that pays rent, but I couldn’t find a single one. So I realized, this is my thing. I got a regular job, so I can get a W2 and invest in real estate and get loans.

Brecht Palombo: Yeah.

Sándor Lau: And realized that collecting rent is a little bit harder than it was described in the books.

Brecht Palombo: Right.

Sándor Lau: So I said, “Okay, there has to be a better way.” Changing the world and changing other people is way too hard, but changing yourself in adapting can yield great results. So I’m a voracious reader. I’m always reading books about business, investing. And I read this book that had one paragraph in the entire book. It says, “Oh yeah, instead of … ” It was about buying foreclosures, or you could just invest in those. Then I’m like, “Oh, doin’ that.” I read all the books I could find, publicly available, at the time, which was three.

Brecht Palombo: Yeah.

Sándor Lau: And one of ’em had the author’s post office box in Florida, and one of ’em that’s got an email. I’m like, “I wanna learn. Will you teach me?” He was like, “No, but go to the Paper Source Conference and learn from the people there.”

Sándor Lau: And I did. That was 2013. I was still in a rough spot myself. I had to pay all these mortgages, fix things when tenants break and steal things, mess with the electrical, and then called the city and said, “Oh, look at this. Slumlords providing substandard housing. Look at this electrical that’s all broken.”

Brecht Palombo: Yeah.

Sándor Lau: Among other shenanigans, microwave out the window, naked people running down the hallway.

Brecht Palombo: Oh, perfect.

Sándor Lau: Bodily fluids off the balcony onto the other tenants.

Brecht Palombo: Ah, nice.

Sándor Lau: I gotta admit, not something, what my first real estate teacher called intestinal fortitude for this. No, frankly, the very deep pockets. Real estate is still the most amazing business, but to be rich, the best way is to already be rich and get richer. Starting with very little, it’s that building at the beginning is the hardest thing. And real estate, it’s a long term play. You make your money in decades, not days.

Brecht Palombo: Yeah.

Sándor Lau: So, that was still my plan, but I had to find a different way. Learned about note investing, and the first time I saw videos on YouTube from my mentor, Mr. Gordon Moss, who was all about the seconds. I’m like, “I’m completely in.” And here’s … Second mortgages, in the simplest way I can find, second mortgages with a performing first mortgage. It tells you most of what you need to know.

Brecht Palombo: Yeah.

Sándor Lau: This is a person who wants to keep their home?

Brecht Palombo: Yep.

Sándor Lau: They have a job or some form of income?

Brecht Palombo: Yep.

Sándor Lau: And it’s like having the best property manager in the world. They take care of the house as if they owned it.

Brecht Palombo: Sure.

Sándor Lau: Because they do! So, in some senses, you’re like a business partner with the borrowers. If the market is good, it’s good for you and for them. If they do positive behavior, namely staying current on their rent, it’s good for you and for them.

Brecht Palombo: Right.

Sándor Lau: So here’s Sándor’s theory of why seconds come first, and it’s the sandwich theory of notes.

Brecht Palombo: Okay.

Sándor Lau: You have Sándor’s sandwich theory of second mortgage investing. Right? If you have a chart, real estate … Here, this chart, the lower part of this sandwich is the value of real estate over time. Right?

Brecht Palombo: Yeah.

Sándor Lau: There can be blips up and down in the short term, but over the past 10,000-ish years, real estate has gone up. People don’t grow tired of living indoors. There is, unlike a lot of companies in the marketplace, there is an inherent value to it. It’s not a speculative value. People need places to live, places to work, places to exist.

Brecht Palombo: Yeah.

Sándor Lau: This is the rising value of real estate over time. People need a place to live in.

Brecht Palombo: Yeah.

Sándor Lau: Top half of the sandwich. The bottom half of the sandwich is the balance of the first mortgage over time. We’ve chosen and carefully and underwritten in our purchasing, for borrowers who are paying their first mortgage. It is eventually going down. And eventually, may be paid off.

And the filling in the middle of the sandwich is the equity securing the second mortgage. The second mortgage, which, if it is being paid down, that’s great, you’re getting paid. But if it’s not getting paid, ultimately the debt of the second mortgage is rising up, so you’re secured by a bigger and bigger slice of that equity in the middle of the sandwich.

Sándor Lau: A lot of people will invest in notes with the intent, or … In the first mortgage, what’s the intent or goal of foreclosing on the property? Of taking back that security?

Brecht Palombo: Yeah.

Sándor Lau: But, from my very limited experience in first mortgages, and frankly, my experience in low-end rental properties is there are such great risks. $500,000-ish house, a borrower or tenant could do some damage to it, maybe it would lower the value of the property by 5%, maybe 10%, maybe 15%.

But something in a $50,000 or a $100,000 house, a borrower or tenant could do catastrophic damage to their property, lowering the value by 50% or more, or maybe, the property is so worthless, it would … Just getting it off your hands so that someone could scrape it off with a bulldozer as a control for the environmental hazards there, is the best solution for that property.

Sándor Lau: So we’re looking, investing in second mortgages for responsible homeowners who want to pay, who want to keep their home. And you can check the credit report, you can see their payment history on the first mortgage. The second mortgage has defaulted, and we’re virtually always invested in bank paper.

Brecht Palombo: Okay.

Sándor Lau: Written by very clever lawyers, secured by some of the finest words that were ever printed by great legal minds.

Brecht Palombo: Yep.

Sándor Lau: That second mortgage is an obligation, and borrowers will often pay not based on their equity. The Wall Street Journal Market Watch publication published results from, I think it’s their Federal Reserve study, showing that the overwhelming majority, more than 70% of underwater homeowners who pay, it’s not because of moral hazard.

Right? It’s not because they feel a great moral duty. It’s not because it’s an investment. It’s not because of protecting their credit. It’s not because they’re worried about getting sued by the bank. It’s ’cause they wanna keep their home.

Brecht Palombo: Right.

Sándor Lau: That’s it. So, a most basic human desire. Individual human beings have a lot of variety in them, but overall, human nature is fairly static. People’s desires, over a large group, over time, are very consistent. People pay their mortgage ’cause they wanna keep their house.

Brecht Palombo: Right. So that’s what you’re looking for. So you’re solely in the band of where you’re looking for seconds, where that’s non-performing, but the first is performing. And I assume, as we’re drawing the lineup and to the right, you’ve got some targeted geographies, also, that you’re pursuing. Do you have filters for that, or how do you approach where you’re buying and what other criteria goes into it?

Sándor Lau: So, that’s a great question. I mean, I have … My preference is half a million dollar house with a smaller second, say $50,000. If you get into the $100,000 range for most people, even people with a half a million dollar house, if it’s $100,000 it may as well be $100 million. It’s so much that people feel like it’s overwhelming. And seconds, you can diversify your risk over more properties by investing in smaller loans. If something goes wrong with this one, that one, you have a diversified pool.

Sándor Lau: So we’re looking for nice houses and non-judicial states, where it doesn’t go in front of a judge. Do a lot of states where there is mandatory mediation, which borrowers and frankly, mostly their attorneys, are gonna take great advantage of. Borrower refuses to communicate, refuses to work with you, doesn’t pick up the phone, doesn’t respond to anything. Foreclosure is a great motivator. People who didn’t pick up the phone, don’t respond to anything, all of a sudden get engaged.

Sándor Lau: But I’ll give you a great example from the portfolio. We had people in a state in New England that will go unnamed, they say, “Oh, oh, oh, hang on. We want mediation. We’ve ignored every community for two years, but we really wanna mediate.” They don’t show up to the mediation. They would have to pay their lawyer to be there to represent them.

We get a notice, mandated by the court, says, “Oh,” they didn’t feel like comin’ to the last one, but they really want another one. Okay. We have to pay our lawyer to show up to that. They don’t show again, and three times after that, they filed bankruptcy.

Brecht Palombo: Wow, yes.

Sándor Lau: So you asked about geography. Yeah, my preference would be half a million dollar houses, paying the first mortgage, in non-judicial states, but I would rather be picky about price than geography.

Brecht Palombo: Hmm, okay.

Sándor Lau: So like my mentor Gordon taught, there are no bad loans, only bad prices.

Brecht Palombo: Yeah.

Sándor Lau: And frankly, some loans that we had thought to be worthless turned out to be excellent. Bought them at a very low price. And frankly, some loans that we put a lot of money into didn’t work out that well, so…

Brecht Palombo: Yeah.

Sándor Lau: There are great statistics out there somewhere that is probably very proprietary. There’s a certain amount of science to it, and a certain amount of alchemy and intuition. I mean, running much more of an artisanal shop than any large institution would.

Brecht Palombo: Yeah. So there’s sort of two follow up things I’d say from that. One is that I wanna go back to bankruptcy in a minute, but the other thing I wanted to ask you about is the valuation, ’cause that’s one of the primary things that people ask me all the time.

They’re like, “Well, what’s the value of the note?” And, “How do I know what this thing’s worth?” And what I really try to communicate is that it’s a matter of what you need for a return, or what kind of return you’re willing to take.

Brecht Palombo: So talk a little bit about, if you could, how you think about what you need to pay when you’re buying. Does that make sense?

Sándor Lau: Yeah. That’s a great question. So I certainly think about the market rate. And there are very different market rates, based on geography, is a lot of it. Most people in the second space have the same preferences that I do, non-judicial states, nice houses. I don’t wanna have to take a property back. I think I’ve foreclosed on 10-ish properties out of more than 200 notes in the last five years.

Brecht Palombo: That’s pretty good.

Sándor Lau: I would rather not.

Brecht Palombo: Yeah.

Sándor Lau: They don’t work out nearly as well as finding a positive, cooperative solution with the borrower. But, if they don’t respond, you can accept not getting paid, you can sell the note, or you can press the foreclosure.

Brecht Palombo: Yeah, yeah.

Sándor Lau:
Brecht Palombo: So in terms of valuation, when you’re thinking about how are you gonna put a value on a note, is there a return that you’re looking for? If I’m gonna invest in this, I need to get at least X out of it in order to come up with your strike price?

Sándor Lau: So it is so very difficult to even estimate what you will get out of each individual note, and there’s very … To talk about pricing, retail pricing on an exchange or a one-off note is drastically different than bulk pricing, where you’re buying a pool and you might get a big spreadsheet of loans. Dozens or hundreds of loans, you need to bid, probably quickly, probably sometimes in a week or less, and say what you are offering. You kinda need to buy at a can’t lose price.

Brecht Palombo: Right.

Sándor Lau: I mean, the overall portfolio return that I need to make is a number, I’m not gonna say it on the public record, but it’s a number that most people who are familiar with stock or regular real estate investing would say is unrealistic and can’t be achieved. Okay, you’re welcome to believe that. But the returns in this business, done right, outpace anything else in real estate that I’ve ever heard of. And it’s partly because of that leverage. Right?

Brecht Palombo: Right.

Sándor Lau: Typically, what I like … Here’s a good metric that I think I can answer in a more transparent way for you.

Brecht Palombo: Okay.

Sándor Lau: I like to think of it as a stock option, or as a down payment on an FHA loan. Over time, fairly consistently, I’ve been paying somewhere around the down payment for an FHA loan as a reflection of a value of the home rather than a reflection of the unpaid principal balance of the note. Right?

Brecht Palombo: Yep.

Sándor Lau: So if you buy a regular house with an FHA loan, you buy that $500,000 house with an FHA loan, three and a half percent of the value of that house, it’s a small down payment, but you gotta make all the rest of those payments until the end of the loan, or you’re in a lot of trouble.

Brecht Palombo: Right.

Sándor Lau: You don’t have the option of, “Oh, sorry. Tenants didn’t pay rent. No harm, no foul. Right?” No, that’s not how it works with the bank. But if you’re the investor in that loan, you paid 3.5% down, what’s half of $35,000? $18,000, something like that.

Brecht Palombo: Right, yeah.

Sándor Lau: If it goes right, you’re owed a multiple of that. I can tell you the lowest end, the lowest I’ve ever paid on a note in a bulk pool was a dollar.

Brecht Palombo: Wow.

Sándor Lau: The highest, as a percentage, I paid $0.60 on the dollar once, and still did great once, it was actually in your hometown, Bend, Oregon.

Brecht Palombo: Oh, nice.

Sándor Lau: Brecht, and I don’t do that very often. You’re concentrating a lot of risk in that one loan. There are other loans you could buy that might be cheaper. They might be less desirable, might be in a judicial state, might be protected by less equity.

The borrower might have a sketchier pay history on the first mortgage, but seeing that opportunity, seeing through that opportunity and risk that other people can’t see through and getting it at the right price opens you up to a whole world of opportunity. You have so many exist strategies once you have that note, that you really got for the option price, for the 3.5% FHA down payment.

Brecht Palombo: Right.

Sándor Lau: And if it doesn’t work, you get to walk away. And also, if it doesn’t work, you have the option to sit tight. You’re not obligated to press collections. You’re not obligated to start foreclosure. Maybe something’s not working now, and maybe over time, the borrower’s situation changes. The real estate market changes.

I have, sometimes, also bought seconds where the first is also non-performing. I can tell you, in the marketplace, those are not really that desirable. People are not really looking for a note in second position, where the first mortgage is foreclosing, and you would only get paid if there’s money from the auction left over after the first gets paid, and after the first destroys a great amount of equity in the house, just by the manner in which it’s sold.

Sándor Lau: Cash buyers at the courthouse steps are a very limited market compared to all the people on the multiple listing services.

Brecht Palombo: Yes.

Sándor Lau: So you buy that. The first mortgage not getting paid? Of course, it does spell trouble. There’s something going wrong, but just like with us, that first mortgage foreclosing often spurs the borrowers to action. So often times, it’ll spur them to modify the first mortgage and get … Every first mortgage, regular bank modification is highly favorable to the borrowers. And we have the borrower in LA Metro who’s got almost a million dollar first mortgage. His payment is $2,500 a month.

Brecht Palombo: Wow.

Sándor Lau: You can’t get that kind of loan by applying for it.

Brecht Palombo: Yeah, no.

Sándor Lau: To get a good loan, you have to have great credit. To get an incredible loan, you have to have horrible credit, default on the bank, and that’s the only other life, and then you say, “Oh, thanks for not making your payments. How would you like 2.5% over 40 years?”

Brecht Palombo: Right.

Sándor Lau: Uh, yes. So if god forbid you should have to foreclose on that house, you would own it subject to the first mortgage, and there’s nothing stopping you from continuing to pay that first mortgage on a monthly basis, and hold the property as a rental, sell it subject to that first mortgage, on those incredible terms. That’s kinda the only situation where a luxury property would pencil out as a rental.

Brecht Palombo: Yeah. So tell me about bankruptcy, because that’s one of the things, as my background, back starting 2006, I’ve conducted … I was an auctioneer. I’ve conducted hundreds of foreclosures. Mostly commercial, but not all.

And what I’ve found is that not everybody, but a lot of people file bankruptcy. And I think that scares folks off, as investors on the second. Well, what happens in that situation, and how do you approach that, or what’s your hedge for that, and what’s your take on how that’s dealt with, or how do you deal with that?

Sándor Lau: So bankruptcy, we’re screening very carefully for past bankruptcies when we’re buying notes. So if there would be bankruptcies, you knew about it in advance. And some bankruptcies start while you hold the note, usually as a result of your actions and collection on the borrower.

I’m usually looking for bankruptcy notes because one, people are afraid of it. There are complexities that can be solved, and I know how to solve, so it drives the price down, though you can still have a great outcome of the borrower paying.

Sándor Lau: Chapter seven bankruptcy means neither the first nor the second mortgage is a personal obligation for the borrower, meaning you can’t sue them personally for the debt. Basically, I assume everyone in our portfolio’s judgment-proof, anyway. Even if you could get a judgment on them, it’s probably worthless, anyway. Collecting on that would be harder than collecting on the mortgage. So chapter seven bankruptcy, in the past, the lien stays on the property.

You have the right to foreclose, and borrowers pay for the exact same reason that everyone pays. Not because of moral hazard, not because you are gonna foreclose, not because of their credit, not because they think it’s the right thing to do, or ’cause it’s an investment. They wanna keep their house. That [inaudible 00:21:34] bankruptcy doesn’t change that.

Brecht Palombo: Yeah.

Sándor Lau: Borrowers will file bankruptcy while you are the note holder, and frankly, as long as you have equity, it can be a good deal. And frankly, even if you don’t have … If they file chapter seven, that means they’re getting rid of what probably brought them in the first place: Credit cards

Brecht Palombo: Medical bills.

Sándor Lau: Medical bills.

Brecht Palombo: Yeah.

Sándor Lau: That take people down, and by getting rid of those, all of a sudden they have that same income that they could use for the things that do remain. It’s not a personal obligation, but maybe they don’t keep their house without it. If they file a chapter 13, if you have equity, you could be in a very good position, because they have something even more to gain.

They don’t just have keepin’ their house, they have … Chapter 13, it’s a payment plan. Over time, usually three to five years, they don’t get rid of all their debts, but there are two buckets they have. You’ve got the secured debt bucket, and the unsecured debt bucket, in bankruptcy.

Sándor Lau: Secured debts are in a priority position. People will typically be paying a small fraction of their unsecured debts over that time, and the rest will go away. The secured debts they’re gonna typically need to pay both the regular monthly payment amount for the mortgage and a proportional amount of the arrears, all the back interest that have accrued over time since they defaulted.

It’s kind of a way that a borrower can get an automatic payment plan. And, they have even more to gain by keeping their word on this. If they don’t, and frankly, most chapter 13 bankruptcies, ask different websites. They’d say only 10%, say a third, will actually complete their bankruptcy plan.

Brecht Palombo: Sure.

Sándor Lau: But, people who are paying that first mortgage, who are homeowners, they have a more powerful motivation. So if you’ve got equity in the property, it’s a pretty reliable way to get paid on a monthly basis. If you don’t have equity in the property, they can strip the second mortgage. If the balance of the first mortgage is equal or more than the market value of the house … And market value of the house, again, a fairly debatable subject, in court with the judge.

If there’s no equity, then yes, they can strip your second mortgage. They can make it go away after they complete three to five years of the plan. During which, probably, just like the sandwich theory, the value of the house is going up, and the balance of the first mortgage is going down. So if they don’t complete the plan, you could be in a more advantageous position in this instance, that you are protected by more security. God forbid you should have to foreclose, you’re in a better equity position for that to happen.

Sándor Lau: Not only a better equity position but god forbid you should have to take that back, we’re looking at first and seconds, most of which, at the bank paper, most of which was originated in the real estate boom, 2003 to 2007-ish.

Brecht Palombo: Yeah.

Sándor Lau: If you got a house subject to a first loan that’s already seasoned since 2007, it’s 2019, now. If it’s a 30-year loan, you only got 18 years left to go until that’s paid off and you’re deeper into the amortization schedule. So you are paying down more and more principal every month on that loan.

Brecht Palombo: Yeah. So I didn’t tell you I was gonna ask you this, but I feel like this is a natural way for us to lead into what we’re gonna tell people how they’re gonna find you after this. But so we’ve talked a little bit about where we were and how you got here. What do you see going forward from here? What are you expecting in the note business over the next one, three, five years? And I know nobody’s got a crystal ball, we won’t hold you to it, but if you could look out a little bit, what do you think you see out there?

Sándor Lau: I’m not an economist. Here’s what I see: We’re getting older and older … That critical mass of second mortgages originated ’03 to ’07 or ’08, is diminishing.

Brecht Palombo: Yep.

Sándor Lau: And many of them are coming to maturity. A lot of those loans were written as 10 or 15-year loans. So banks are going to need to unload more of these, and are gonna be pressured to do so in the next two, three, five years. What’s that thing, Brecht, that history does over and over again?

Brecht Palombo: It doesn’t repeat, does it?

Sándor Lau: Oh yes! It repeats itself! A new recession is always coming. If you’re a Game of Thrones fan, the Starks are always right. Winter is always coming. It’s a question of when.

Brecht Palombo: Yeah.

Sándor Lau: So that is going to mean difficulty for many people. And it’s not something I’m happy about. Yet, at the same time, is going to be a great opportunity, both to acquire regular real estate which has … One of the biggest advantages of regular real estate are the tax advantages that you don’t really have in notes. And ultimately, for someone who’s paying a mortgage, there’s gonna be a day where it’s paid off, you don’t get to collect payments anymore. There’s no such thing as last rent payment.

Brecht Palombo: Yeah.

Sándor Lau: So it’ll be a great opportunity to acquire property and to buy notes at a bigger discount. When people think the sky is falling, that is a great opportunity to invest. So for people who are learning the business now, here is what I would repose to you: Notes are selling at a higher price than I’ve ever seen in my limited time, in five years, in the business.

There’s still great money to be made. Skilled people can make money in any market. Build those skills now. Learn now so you can identify and take advantage of the great opportunities and the people’s problems that you can solve when the next recession does come.

Sándor Lau: People have been defaulting on their debts since there was debt. The Code of Hammurabi describes how to secure a loan with real estate and what happens if people don’t pay. This aspect of human nature and finance is not changing.

Brecht Palombo: I totally agree. So lets’ talk a little bit about how people can find you, and what they should do next if they’re listening to this and … ‘Cause I think we just gave ’em a fire hose. Right? And so if they wanna go unpack this, and get deeper into it, what should they do?

Sándor Lau: So I put a great deal of free educational material on my website. It’s notedfinancial.com, N-O-T-E-D financial.com, where I have YouTube videos of my past presentations. I have articles that I’ve written. I have links to other people’s educational materials. I have an Amazon reading list, of every book that I know that is written on this subject of note investing, and is publicly available on Amazon. I think it’s somewhere, 10 to 15 of them available.

Sándor Lau: We live in a grand age where I do recommend people find a mentor, take a class. But before doing that, invest more than 100 hours of your time reading and studying so you know enough when you’re trying to evaluate who to learn from, whether to know whether they know what they’re talking about.

Brecht Palombo: Sure, yep. I agree with that.

Sándor Lau: I have one other educational thing. On my website, people can subscribe to my updates or follow me on social media. I’ll always post coupons for any of the conferences that I speak out. The next one coming up is the Paper Source Note Symposium. It’s April 11th through 13th in Vegas. The coupon code …

The test is spelling my name right. It’s S-A-N-D-O-R. It’s pronounced Sándor. That is on my website at notedfinancial.com. The cost of that education is the cheapest investment with the greatest return you will ever have. That’s not only education in learning facts, but investing in relationships, which in this business, are … Frankly, someone with great relationships and an okay grasp on the industry will do much better than someone with an excellent grasp and poor relationships.

Brecht Palombo: Yeah. All right, well I appreciate you comin’ on here, Sándor. That was just … I really appreciate you taking us through that whole thing. I think if people … Probably, people are gonna have to slow this down a little bit and listen to it a few times, ’cause we did just give ’em a ton of information in there.

Brecht Palombo: But the other thing that you should do is go over to notedfinancial.com, where you can get some of his free information and definitely show up to the Symposium. Are they calling it a Symposium?

Sándor Lau: Yes. Paper Source Note Symposium.

Brecht Palombo: And it’s a very reasonably priced thing, a few hundred dollars. It’s not an expensive thing to attend. You just gotta get yourself to Vegas and all that. Right?

Sándor Lau: That’s exactly right.

Brecht Palombo: Yeah, well thanks for comin’ on here. Sandor Lau, and this notedfinancial.com, and make it a great day, and well talk to you soon.

Sándor Lau: Thanks for the opportunity.

Sorry, this offer is now closed.

Podcast Audio:

Transcript:

Brecht Palombo: Welcome back everybody to another episode in the Distressed Pro Professional Interview series. Today I have Liz Brumer-Smith and if you’ll just give me a moment, I’m going to get her profile right here. She’s the principal at Seasoned Funding, LLC, a privately funded real estate investment and note buying company, who specializes in finding first lien, residential, non-performing notes for the company’s portfolio. They purchase one-offs and small and mid size pools nationwide with preference in Midwest, Southeast, and Florida. Liz, you’ve been doing this for how many years?

Liz Brumer-Smith: We’re going to seven years pretty soon.

Brecht Palombo: Wow. Going on to seven years, and over that time, Liz has developed some systems for her business, like any good entrepreneur should. And today she’s going to share one of those with us. In fact, she teaches more about this, and we’ll talk about that in a little bit, but she’s going to share with us how to automate your due diligence. And I don’t want to hold everything up here. I’m going to ask you, Liz, if you would just go ahead and let’s dive into it. I’m really looking forward to this. We hear a lot about folks who are looking for due diligence information. It’s one of the things they think, “Well, geez. If I … ” We really focus on helping people find the notes, but a lot of people get nervous and say, “Well, after I find it, then what?” And, hopefully, this right here will help to answer that for them. I’m really looking forward to it.

Liz Brumer-Smith: Yes. Thank you so much for having me. I’m excited to be here and to be able to share the systems I’ve created for my business and hopefully be able to help other note investors improve their systems, especially in regards to due diligence.

Brecht Palombo: Cool.

Liz Brumer-Smith: I’m going to share my screen with you guys, and this presentation will be available. We’re gonna have lots of information that I’m going over. As you’re watching or listening to this, please make sure to take note, and at the end, I will also give you more resources for a place you can get more information about this entire process.

Brecht Palombo: Cool.

Liz Brumer-Smith: Great. Okay. Today I am going to be talking about automating your due diligence. I have two companies that weren’t quite mentioned in the intro, and that’s because we were going to introduce them here. Note Investing Club and tapetechs.com are both of my due diligence support systems, or the programs that help you and other note investors with their due diligence. I’ll be talking about the difference between the two, but just so you understand what those two companies are, they are companies for due diligence.

Liz Brumer-Smith: This is me, Liz Brumer-Smith. I am the owner of Note Investing Club, Tape Techs, and I obviously am a note investor myself. I purchase non-performing notes and have purchased them for about six years, almost seven years now, and like he mentioned before, like Brecht mentioned before, we do purchase nationwide.

Liz Brumer-Smith: I am a full time note investor. I was previously a kindergarten teacher. If a little of my old teaching habits come out in today’s presentation, forgive me, but hopefully it’ll actually be an advantage, making this easy to digest and understand as I move forward. I do now also teach how to invest in non-performing notes. We offer an online program with two fellow note investors, Kimberly Banks Fawcett and Chase Thompson, at Note Investing Academy. Let’s get started with due diligence.

Brecht Palombo: Let me just say … Let me jump in here for one minute, Liz, and just say that I’m going to go ahead, I’m going to put my side on mute so we don’t have any background noise. I want to bring up … Liz, is it okay that we mention that you’re traveling the country full time?

Liz Brumer-Smith: Oh, of course.

Brecht Palombo: I think this is something that we should just bring up here because a lot of times, people start thinking about the note business. I get a lot of questions like, “Can I do this from anywhere? Can I do this from home? What if I don’t have any experience?”, and that sort of thing, and one of the things I think is so attractive about the note business is that you can do it, like you’re doing it, from anywhere in the world, as long as you have a phone, a computer, and an internet connection. As someone who traveled full time for more than a year, I can say that the rewards of having the kind of business where you can be wherever you want to be at any time is really something special. Tell us a little bit … Where are you today?

Liz Brumer-Smith: Okay. Today I’m in Bainbridge. I’ll do a little spiel and build it up.

Brecht Palombo: Okay.

Liz Brumer-Smith: Okay, okay. Something that’s noted here is actually that I am a note investor and I have all these companies, but I actually live on a RV full time. I’m able to invest in mortgage notes throughout the nation, no matter where I am on my RV, and my business is running for me as long as I have an internet connection and a phone connection. Currently right now, I’m actually in Bainbridge Island, which is just a small, calm, beautiful island across from Seattle, and yesterday I took the day off from doing notes and went into the city, and today I closed on a new deal all from my couch in my RV. If you’re interested in note investing, or maybe you want to travel, this is a business that you can totally do from wherever you are. It is definitely attainable and achievable.

Brecht Palombo: Yeah. Cool. Well, thanks for sharing that with us. Now, for the impatient folks who want to get right down to business, I suppose we should do that and talk about due diligence.

Liz Brumer-Smith: Yes, yes. We will.

Brecht Palombo: I’m going to put my microphone on mute here so I don’t mess anything up.

Liz Brumer-Smith: Okay. Sounds great.

Brecht Palombo: Alright.

Liz Brumer-Smith: Also, just to kinda add to why we’re talking about due diligence is whether they started traveling, or as I actually had a full time job beforehand, I got really tired of doing due diligence myself. It was a really time consuming aspect of my new business, and if I was at work, or maybe I was an example, yesterday in Seattle, and I got a tape and I needed to go through it. If I wasn’t physically the one doing it, it wasn’t getting done.

Liz Brumer-Smith: As I go through due diligence, I just want you to keep in mind that you can choose to do this yourself a hundred percent, but the reason I created a system for this in the first place is because it is time consuming. It is extremely important for your business, and time is of the essence. If you could have someone else do it for you and do it well, there’s no reason you should have to do it yourself.

Liz Brumer-Smith: I’m sure you guys know what due diligence is. It’s not just a note investing term. Due diligence is done for businesses across the world in all different fields. It just means that you’re actually taking a really fine toothed comb and looking through whatever it is you’re purchasing, whether it be a not, a first lien or second lien. Maybe you’re investing in a company. Whatever it may be, you should be completing your due diligence, and doing a very careful audit investigation of the asset itself just to make sure this is a good investment for you.

Liz Brumer-Smith: There’s actually two types of due diligence with notes. You have preliminary due diligence, which is the beginning phase where you’re actually going through a tape or looking through an asset and gathering all the information that you can to tell you what to bid. Then there’s the second stage of due diligence which is called your formal due diligence, and that’s actually after your bid has been accepted and you’re going to be purchasing a loan, and that’s when you shell out a lot more money, possibly for an O&E, have a realtor go by or pull a BPO. You do much more of the hardcore investigation of the asset itself; verify what you found in the preliminary phase.

Liz Brumer-Smith: Unfortunately, there’s lots of systems for the formal due diligence stage, but not so much for the preliminary stage. What I’m gonna be talking about today is what goes into preliminary due diligence, that first process that you go through when you get a tape or an asset.

Liz Brumer-Smith: The most important, I think personally, the most important thing is the condition of the property, and that’s because you’re buying, technically, the paper behind the asset. But if the asset’s not quality, or in a condition that’s worth purchasing, then why are you even looking at the note? Verifying the property condition is important, and you’re going to have someone go by and take a picture, or do PBO if you get it accepted. But in the initial stage, you don’t really wanna pay anyone to have to go out there. That would be a lot of money shelled out for a lot of notes not being accepted. It’s not sustainable.

Liz Brumer-Smith: We gather the property condition as best as we can with the information available to us, and that is Google Street View. I know that sounds ridiculous, because a lot of times Google Street View can be very outdated, but it does give you good information. This examples is actually a picture from about, just now, about two years to go. Overall, the property looks like it’s in rather good condition. It’s that brick home right in the center. The roof doesn’t look bad. The lawn’s clearly being more or less maintained. At least the yard is mowed, which for some properties is not the case.

So I can tell that someone is likely living in the property. I do notice it’s two years old, but at least it’s worthwhile for me to continue forward. Now if I looked at a Google image and it was a complete wreck, why would I continue moving forward? Because, if two years ago it was a complete wreck, it’s probably gonna be in even worse condition now. That’s why we like Google Street View. If it’s available, this is 100 percent the way that we like to gather our initial property condition assessment.

Liz Brumer-Smith: The next thing we look at is the crime or the neighborhood, and this includes, actually, demographics for the zip code or the county. I wanna make sure it’s in a neighborhood, or an area, that is growing or potentially already thriving. We wanna make sure that there is motivation for people to live there, there is jobs and businesses that are growing and employment opportunities. If that’s not met, then we probably wouldn’t be looking into the asset further, but there’s a few websites you can use for this. The one we really like to use is actually Trulia.

Liz Brumer-Smith: They have a heat map, or a crime map, that if you go to your asset that you’re looking at, it will actually tell you the type of crimes that are in the area. Now, a lot of the time the heat map will actually show you the total. It’s red if it’s a really high crime. It’s green if it’s low crime, but what they’re actually analyzing is the amount of crime reported with that heat map. While the heat map or the colors is great, it doesn’t actually give you what you’re looking for. What you really want to see is the type of crime.

Liz Brumer-Smith: So you can see to the left where it actually tells you the different types of crime. I’m looking for really high, intense crimes like murder or rape or drug use or robbery with a weapon. So things like that tell me it’s a higher crime area, even though it may be green. So when you do use Trulia, just know to always look not just at the colors but at the actual crimes, and you’re gonna determine what crime neighborhood you’re comfortable with. That’s different for everyone. If it’s a really high crime like murders happening like everyday, I’m probably not buying in that neighborhood, but that’s totally your choice.

Liz Brumer-Smith: The next thing you wanna look at is the actual asset itself. If you like the property, you like the neighborhood, you’re moving forward to find out more information, and you’re gonna wanna find the actual property card, or property appraiser’s information for this. You don’t wanna just go off of Zillow or Trulia, because a lot of the time, that information is incorrect.

Liz Brumer-Smith: So you’re gonna actually verify the bedroom and bathrooms of the property. You wanna see the build type. That means if it’s wood frame, brick, whatever it may be, the square footage and the year built. We like to gather this information, cause for us personally, there’re some assets if it’s under 1000 square feet, unless it’s in the neighborhood I know that it’ll sell like hotcakes cause I know that market well, we typically don’t buy anything under 1000 square feet. It’s a personal preference. It’s a personal choice, but this information helps us move forward in if we want that asset or not.

Liz Brumer-Smith: Next you’re gonna wanna find the current market value, and this is, I’d say, as equally as important as the property condition if not just the very second most important thing, is making sure that your value is on point, and you’re looking for the current market value not the after repair value, or the ARV, which a lot of people talk about. You want now, and it’s hard to estimate right now, because one you can’t get inside the property, and two, you don’t exactly have the most updated picture of the property. Whenever we value our properties, we typically assume the worst, and if we get inside, if we do take it back after foreclosure or whatever it may be, a deed in lieu, and we find out it’s in better condition, awesome. It’ll sell for more, but we almost always price current market value considering that it’s probably not in great condition.

Liz Brumer-Smith: And we love using Zillow for the current the market value, and I know you’re probably thinking that this estimate is ridiculous, and you’re right. It is so far off so many times from the actual property value, and what we like from Zillow is the map, the ability to search with certain parameters -excuse me- for comps, and when I say comps I mean properties that look like they’re in similar condition. They’re in similar bedroom, bathroom size and they’re similar in sold range.

I’m looking for something that’s sold in six months or more recent, typically within about a half a mile to a mile from our property, and what I love about the map too, is if you see there’s a big highway, or possibly a railroad track or something like that, that is blocking a major part, and maybe it cuts your one mile radius in half, and you can tell one side of the railroad tracks is really nice homes and then your side of the railroad tracks are not so nice. You don’t want to take the just arrogate of all of those comps within the six months. You really wanna find something that looks like yours and is in similar condition and area.

Liz Brumer-Smith: You can do that with Zillow. We like to just look around the map. There’s ways to filter all this information, and you can find the at least three comps that appear to be as similar to your property as possible, and just really take into consideration the condition of the property again. And then we just average that out and that’s really what we go off our current market value for, and again if your note is accepted in that formal due diligence stage, this is where you’ll verify that information, but this helps you get a pretty good picture right away.

Liz Brumer-Smith: The next thing you’re gonna do is identify the annual taxes and the unpaid taxes. A lot of times, if you’re buying a non-performing note, you’re going to realize quickly they have not been paying their taxes either, and this is very important for you to know, because not only if you do take the property back you’re gonna be responsible for those taxes, but there’s also potential tax sales that can happen that can jeopardize your position as a first lien or second lien note holder, and this is important to know if it’s already in that process of a tax sale or not.

We locate the actual tax collector or tax assessor’s website, which typically can tell you how much is owed, and we also take into consideration the annual tax rate. Because if you do go through foreclosure, not only are you gonna have to pay the unpaid taxes, but you’re also going to be responsible for the current tax rate. If it takes you a year to foreclose, that’s a year of taxes you’re now responsible for. It’s definitely important to take both of those into consideration.

Liz Brumer-Smith: Okay. Here’s an example of some past-due delinquents. Obviously this is an example from a while ago, cause 2015 was the most recent tax year due, but often times the websites make it very clear as to what has been paid or what is currently owed.

Liz Brumer-Smith: And then you’re going to identify possible liens or judgements in public records, and now this is a really tedious part of due diligence, and I know there’s a lot of investors out there that invest in notes that don’t actually research this up front because it’s something that they can discover in their O&E or their title search in their formal stage, but for me, I find it very helpful to see if there’s other liens or judgements that would make that note unappealing for me, because sometimes, if there is, let’s just say, there’s an IRS lien that was recorded before my mortgage.

That can actually jeopardize my position and they have the right to claim if I do sell any overages. While I suggest talking to an attorney about all of the specific details about that, there are certain liens that are important for me to know about, and may make it so that I have to adjust my bid to a lower amount because I’m going to have to pay a judgment or a lien, and I like to gather this information beforehand if possible.

Liz Brumer-Smith: Public records are not available in every county or every state. It’s not always something you can do, but if it is possible, I suggest always looking in public records for anything that may impede your title. I say this is tedious because typically, if it’s a common name, you may have hundreds to thousands of results for this, and you’re gonna have to figure out by looking at the legal description, which I have highlighted here, how to make sure it matches your actual property that you are researching so that you’re only finding liens or judgements that are applicable to your property. So this shows you here there was a Lis Pendens on this specific property, but there’s also a lien and a judgment specifically tied to that property as well, and this is a great example.

Liz Brumer-Smith: I mentioned the IRS lien, and this one here is the internal IRS lien that’s recorded here. So, these things matter, and if you can find this beforehand, it helps you weed out deals that just aren’t worth while, or at least make an educated bid so that you’re not having to fade out on the back end.

Liz Brumer-Smith: The last thing that you’re going to want to research in your preliminary due diligence stage is bankruptcy. We use pacer.gov. It is a paid membership. You actually have to go on and register with them if you aren’t already registered now, and I believe it’s ten cents per page view. If you are below, I believe the threshold of like ten dollars per quarter, they do not bill you. If you’re not doing an extensive, extensive amount of research, you probably won’t be billed from pacer. We do do a significant amount of research each quarter. So we actually do receive our over bill, but it’s pretty insignificant in the bigger picture.

Liz Brumer-Smith: But you’re actually gonna log onto pacer.gov, and you’re going to make sure that you search for the borrower’s name in whatever county or area of the state that they are in, and it’ll tell you if they’re in active bankruptcy. You can see all different documents on the bankruptcy. You can see if they’ve surrendered their property, if they’re keeping their property. If they’re on their plan, you can see their plan. It’s really useful information, and we found that a lot of times the seller’s information about in the tape is not always accurate for this. Even though they may have a column that said BK and yes or no or if they’ve been discharged or not, I always verify this, because we’ve found I can not tell you how many times that it’s inaccurate. Trust but verify all of this information, and this is where you’re doing that in that preliminary due diligence.

Liz Brumer-Smith: You may be thinking, “Holy moly, that is a lot of stuff to do.” Especially if you are like I was when I first started off, possibly with another job full time and you’re just doing this as a side gig in the meantime until it can be something that replaces your full-time income, or maybe you are traveling like I am and you just don’t wanna dedicate this much time to doing all of that for, let’s say, possibly one asset, or you could get a tape with 50 assets that you have to do this on. It can be a lot of work.

Liz Brumer-Smith: When I first started off, I was spending a huge bulk amount of my time on due diligence. I mean, you can see I was equally contributing my time to finding sellers and raising capital which really those two should be the bulk of, I think, your effort, because that’s where you’re gonna be getting that money from, and once I outsourced that entire process I just talked about, I now am spending a very small amount of my time on due diligence. Really I have my virtual assistants, that now do this for me, do all of that research and then I just actually just look at the tape, and say, “Okay, I like this asset.” Put it in my calculator, and then I make my bids based on that, but it really doesn’t take up a ton of my time like it used to.

I can actually focus my efforts and my business on getting more deals, getting more money and obviously working out the deals to make my profit. That’s why I love outsourcing. It’s why I’m here to talk to you guys today, not just about due diligence, but about how to accurately outsource that entire process, because it is a lot and you can’t just hire someone and say, “Here you go. Do it.”

Liz Brumer-Smith: Because due diligence, especially preliminary due diligence, it takes a skilled eye. They have to know what they’re looking for. They have to know how to look for it, and sending a few emails with instructions may work. If it does let me know, because that would be amazing. I’d love to hear someone’s success story on that, but normally you’re gonna need something much more involved to accurately train someone to do this well.

Brecht Palombo: I’ll just support your statement there a bit. We’re an entirely remote team, and I have some people overseas and some people here in the states, and whenever I’ve hired sort of the more low cost data finders, people who do contact gathering and that kind of stuff for us, I can’t agree with you enough about how essential it is that you have your process and your systems really well documented where you’ve got a standard operating procedure where you’re not giving them an idea of what you want them to do, but you’re really spelling out exactly how you want things done and why, and often we’ll do it internally with videos and checklists and screenshots and full court press, because there’s really nothing, I don’t wanna say there’s nothing worse. There are lots of things worse, but going through hiring somebody to do the work and then paying them to do it, and then paying them back and having it not be satisfactory or up to your own level of quality is a very frustrating thing.

Brecht Palombo: And when you consider the difference in the value of time, of your own time, versus what is available out there in the world market for people to do this kind of work for you instead, really makes a lot of sense but only if you’re doing it right. It can either be a real investment, and you’re getting leverage out of more people, or it can be an expense where, if you don’t do it right, where you’re just blowing money on things that don’t work. That’s my two cents.

Liz Brumer-Smith: You hit the nail on the head there. It’s so true that we know from actually our first virtual assistant. We kinda tried to do it just figuring it on our own where we just sent lot of emails. I didn’t really do the detail process like you mentioned, and it ended miserably. Luckily, it wasn’t with due diligence. Thank God. That would have been even worse, but we tried outsourcing another task, and that’s when I realized: Okay. If I’m gonna outsource due diligence, I need to do this right. Because a lot of the times, if you do get something where it’s unsatisfactory, a lot of the times the misconnection there, or where there was an error, was from how you portrayed the information to them. There was some miscommunication there that caused them to not be able to perform to the standards you were expecting.

Liz Brumer-Smith: So, automating and outsourcing. The first thing you’re gonna wanna do, if you do decide to do this yourself, it’s 100 percent achievable if you do do it yourself. I was able to do it myself. As Brecht mentioned, he was able to do it from his own systems with his business that’s completely remote. So it’s … No matter, even if it’s not due diligence, if you do wanna create a program in general, this would be what you go through. Luckily, I’ve done it for you, if you are interested in due diligence, but you’re gonna create a training program, and you need to create the content for this. So he mentioned screen sharing earlier, making sure that you are actually doing detailed checklists where you are giving step by step guides. We love doing all of those things in addition to recording videos.

Liz Brumer-Smith: So instead of just doing a screenshot, we actually do screen shares where I go through the entire process of going through a tape so slow and so detailed, and I give them every scenario that can happen. Especially with due diligence [inaudible 00:24:35] since every county has a different website. It’s not one of the things that you can outsource. I show them if it’s a difficult county what does it look like, how to get over those hurdles in my videos so that they can live up to my expectations of completing my assets.

Liz Brumer-Smith: And there’s lots of different websites and softwares that you can use that record or screen share for you. One that I like is EasyVideoSuite. They actually, you do have to purchase them, and they’re on the more expensive side compared to others. If you’re not gonna be doing this for on a large scale, it may not be worth your investment. Another one that’s much more affordable is Camtasia, and I think they even have a free version that allows you, if you’re just doing this for your own internal use, or you’re doing it from a smaller scale, this could definitely be a good way to screen share.

Liz Brumer-Smith: I record every single thing that we do, that we’re outsourcing. I’m sorry, Snagit is another one. They also have a free version I believe. And we just screen share every single thing that we do, so detailed, and we try and use a slower pace as well, just because if you are hiring, sometimes they might be English as a second language. We try to be very clear and we enunciate and we just go at a slower rate to make sure they really understand.

Liz Brumer-Smith: We also do visual guides because some people like to listen and watch. Other people like to be able to read. It’s easier for them to understand that way. We like to give them both opportunities, and it spells out and just gives them one more way to check something before they actually have to come to me asking questions.

Liz Brumer-Smith: Here’s an example from one of our guides that we use for our due diligence program. I actually show them where to click. I highlight examples. I show them where I got the perfect comp. I give them examples of past due taxes. We highlight the areas in net or online that they should be looking. I give them the links to the websites that they should be using. It’s all right there for them.

Liz Brumer-Smith: The next thing you do once you’ve created your program, is actually finding your assistant. We like to use Upwork. It used to be, I believe, oDesk is what it was called, and they’ve switched to Upwork not. They have the largest platform and the largest number of virtual assistants available, and I think you can find an extremely highly qualified virtual assistant that you can put in your preferences for where they might be location wise. You can put in your preferences for how much you want to pay, any prior experience, all of those things. That’s our suggestion for who to use, and you’re gonna create a job post. You’ll receive tons of applications right away. Some of them will be really good candidates. Others are not so great, and you’re gonna have to review them and figure out, based on their qualifications and experience, who seems like they’re gonna be the right fit for you.

Liz Brumer-Smith: We do have a special process that we use when we find and hire our virtual assistants, and if you do end up becoming a part of our program, we actually give you the job posting and we tell you what our secret is for finding out or weeding out, rather, the ones that aren’t gonna be the best fit for our types of business.

Liz Brumer-Smith: And then you’re gonna interview your best applicants, and I like to narrow it down to just three, because if you keep too many, it just becomes overwhelming and it makes your decision harder. I interview them either with Skype or you can use Google Hangouts, and you can virtually chat with them if possible. I think that’s best. You get a feel for their ability, their english language, their ability to understand and speak, and in addition to asking them questions to get to know them better and really see if they’re gonna be the best applicant for you.

Liz Brumer-Smith: Then we like to start a contract on Upwork based on a trial basis. One of the questions I ask the applicants in my interview, is if they’re willing to work during their training period for a lesser amount then what we actually contract them to pay once they’re trained, and most of the time we haven’t actually had anyone say no to that, but it gives them a way to still have them paid off, obviously for their time and effort of learning, but that we’re not paying top dollar for … I mean you are gonna have to work with them during a learning basis.

Liz Brumer-Smith: Alright. You’ve created your program. You’ve found your VA. Now you have to train them. As you already mentioned before, detailed instructions are key. If you can house this all in one place, those videos, all those download guides, and checklists with the detailed instructions, you wanna do this once so that you don’t have to do this over and over again. If you do have to hire more virtual assistants. Rather than having to recreate this every single time, we do suggest housing it all in one location. So you can either put that on a training platform or a free website like Wix.

Liz Brumer-Smith: This is where we house ours. We are on a platform called Teachable which we absolutely love. It makes it really user friendly for our students, our clients, and it also make it really user friendly for the virtual assistants. As you can see, all of these are different modules that teach the student different aspects of note due diligence, and it gives them all of their guides and checklists in one location, and the videos are embedded right there in the website. That’s what we use. We love it, and it also has a spot for people to comment and ask questions. If your VAs have questions, they can get their answers there.

Liz Brumer-Smith: And we even give them opportunities to practice. If you’re gonna do this on your own, we highly suggest actually giving them real time tapes or real time assets to do what they’ve learned. They need to actually prove to you that they understand how to do this, and we give you a practice tape, if you do join the program, that has an answer key for your virtual assistants to go through. That way you’re not having to do the work yourself. We even give you the email templates to send to them with the practice tape and things like that. We really make it as easy as possible for you. You will still have to make sure they’re following through with things. They are your virtual assistant, but we give you everything you need to make it as simple as possible. There’s an example of a practice tape that we would send them.

Liz Brumer-Smith: And then the answer key will have everything inserted into it directly including the links, images, everything you would expect for them to provide for you. What you’re really having to do, when you have your own virtual assistant, is you will … I’m sorry that we can’t do this for you, but you’re gonna have to give them feedback and make sure that they’re following through with their tasks with you. It’s an essential part of having a virtual assistant. You have to keep that communication open and be very clear with what you expect, the timeline in which you expect things, and also give them feedback based on the results. If it’s not up to your standards, you need to explain exactly why and how they can improve upon it moving forward. So I’m sorry we can’t do that for you, but that’s on you.

Liz Brumer-Smith: Oh, I don’t know why that was there.

Liz Brumer-Smith: Okay, so the … Oh, that must’ve been … Okay, yeah. Here’s an example of an email I sent back. That’s why. I’m sorry. Here’s an example of en email I sent to one of our virtual assistants. Here’s some things I noticed if you’re having trouble. Based on this example for property number nine, this is where I found this information, and adding up the total. This was before I had the complete program when I was still doing it kind of step by step for each VA I hired, and figured out that’s not the smartest way, but being concise with what you want and what you’re expecting is so important.

Liz Brumer-Smith: Alright. Then you get them working. Once you have them hired, and once you have them trained, they’re ready to do due diligence for you, and that’s what you hired them for, to have more time to be able to work on your business instead of in your business. Maybe you just wanna travel or be with your family. I mean, the time opportunity that utilizing what you can actually pay someone else to do this work for you. Your time is more valuable than that, and now that you’ve trained them on this process, utilize them.

Liz Brumer-Smith: Note investing club, as I mentioned before, gives you all of this. It’s the only, I’ve found, it’s the only virtual assistant training program specifically for due diligence. We give you everything you need to not only find, hire and train your virtual assistant, but to give you that feedback we talked about. We give you the job posting we talked about. We give you all of those videos and guides and checklists so that you don’t have to create them yourself, and you can get them hired and trained on this entire preliminary due diligence process in a really short period of time.

Liz Brumer-Smith: Well, I already just went over all of this. We pretty much just give you everything you need. If you’re thinking, “Well I’m not sure. I’m not ready to have my own virtual assistant. Maybe I don’t have enough assets to support the need for having my virtual assistant quite yet. I’m still just growing my inventory list. I’m just starting to use Brecht’s program.” Whatever it may be that you’re not ready for your own virtual assistant, we actually have two companies: Tape Techs and Note Investing Club.

Liz Brumer-Smith: So Note Investing Club helps you if you want your own virtual assistant. We give you everything you need to make it as easy as possible to tain them, but if you’d rather just upload your tape, or upload your one asset to be scrubbed, you can have my virtual assistants do it for you, and my virtual assistants, at this point, I hired my first virtual assistant back in 2014. I’ve had her now for four years, and she’s the same one I had from the beginning. She’s incredible, and if she leaves me now, I’ll be so sad. But, I now have four virtual assistants who help us with the due diligence process, and they are extremely experienced. They’ve done thousands and thousands of assets at this point in time, not just for myself but also for clients. They know what they’re doing, and how to look and how to research, and they know the preliminary process from start to finish, and you can pretty much upload the tape, and we will give you everything that we talked about, in addition to the picture of the property right into the tape. We give you the link to the property appraiser’s website.

Liz Brumer-Smith: Here’s actually a video that kind of shows you an example of a client’s tape.

Video: Tapetechs.com is an asset research company that saves you time by outsourcing the preliminary due diligence process to a highly trained virtual assistant. When you go to tapetechs.com, you are able to upload your inventory to be scrubbed by a trained virtual assistant.

Video: First, you’ll choose if you’d like the tape to be completed in 24 hours or in 48 to 72 hours. Next, you can choose to filter the tape to your specific buying criteria or choose to have the VAs research the entire tape.

Video: Our goal is to make the bidding process as easy as possible. We provide you with all of the information you would want to make a quick and informed bid all in one location.

Video: The spreadsheet. Here’s an example of a completed tape for a past client. Our virtual assistants start the research process by providing you with the property’s county and population size. They then find, or verify, the borrower information and evaluate the property condition. We even provide links to the property appraiser and Google images right into the spreadsheet. So there’s no additional searching on your end. This helps you save time and submit your bids faster, beating out the competition.

Video: Virtual assistants know how to verify taxes, search for potential bankruptcy cases on Pacer, and search for liens or judgements given the information is available to the public or available online. You will receive the property information such as the bedroom, bathroom count, age of home and property type, square feet, as well as the area’s crime rate.

Video: The best part about Tape Techs is the current market value. Our virtual assistants have been trained to find a true evaluation, not just use estimates from Zillow or Eppraisal. Our VAs know how to find similar, nearby sold or for sale homes in similar condition and area in order to derive your value. Not only do we give you our value based on real comps, but we back up our value by linking those comparable properties directly into the spreadsheet so you can easily access the properties that helped our VAs come up with that number.

Video: Our virtual assistants have been highly trained using an extensive training program from our sister company, noteinvestingclub.com. They have completed asset research on hundreds of assets and have been tested with challenging properties to ensure they are able to find the best and most accurate results. What are you waiting for? Free up time by outsourcing your due diligence to tapetechs.com today.

Liz Brumer-Smith: Alright. That’s actually an older video. Obviously, we’ve switched platforms in this past year. You can see that if you go to our actual website at Note Investing Club. That’s the old platform. We redid everything when we switched. We figured if we’re switching platforms, we might as well update all of the videos and content guides to make them even better for our clients.

Liz Brumer-Smith: If you do go to Note Investing Club, I just wanna let you guys know it is completely revamped. We’ve added more videos than we used to have when we first started the program, and we have a lot of clients that signed up when we first started the program, and we got feedback from them, and we’ve improved the systems based on their feedback as well. It really is a brand new program, and it’s an amazing amount of content that’s in there if you are deciding to outsource your due diligence.

Liz Brumer-Smith: If you do wanna do Tape Techs, you’d rather just upload and go, these are the things that we actually research for you. We put the property picture directly into the tape for you, which the video didn’t show you but that’s something that we’ve added based on feedback from our clients, and you can either do it in 24 hours, which is seven dollars per asset, or if you’d prefer 48 to 72 hours, it’s five dollar per asset. There’s really no other program out there that will do this for you. There are some click and go due diligence programs that you can kinda download where it kinda gives you aggregated results based on … it just finds like the Zillow’s estimate and puts it into a spreadsheet for you, and that information’s good, but it’s not the full picture. It’s not gonna be able to always find liens and judgements. It’s not looking on Pacer for that information, and it’s not just using the real estate website’s values. It’s actually, I think it’s more through information than you can get anywhere else.

Liz Brumer-Smith: These are our programs. We offer both to note investors like yourself. If you want to outsource your due diligence, I highly suggest it. It is changed our business. It’s changed the amount of time that I have to focus on my business. We do have all of this information and more. If you actually go to this link right here, bit.ly/DistressedPro . You can actually get a foolproof guide to outsourcing your due diligence to virtual assistants in your note business. We don’t just talk about due diligence there. We also talk about other ways you can utilize virtual assistants in your note business. I go into more details on the processes we use for finding and hiring VAs. We talk more about different ways that you can create these programs and how we created our first program. It’s a ton of free information there. If you go, we will also give you a discount if you do decide to join Note Investing Club. The discount will only be if you go to this link. I suggest if you’re interested, it is well worth it, and this discount is not offered anywhere else. This is just because we are a part of this program here today.

Brecht Palombo: Well, I really appreciate that, and I know anybody who’s getting started would really appreciate that as well, and I think I said at the beginning of the call, I really get a lot of folks who ask about this, and so I expect you’re gonna have a lot of clicks on that link. Can you tell us what the discount is?

Liz Brumer-Smith: Yes. I believe you’re gonna be getting 75 dollars off.

Brecht Palombo: Okay.

Liz Brumer-Smith: I believe it’s 75 dollars off, if it’s not, write to me and I will make sure that you get 75 dollars off, and yes. The program is 499 normally. If you actually go directly to the website, there’s no place that you can find a code or anything like that. The only place you’re gonna get this is through ** Sorry this offer is closed **.

Brecht Palombo: Cool. I appreciate that. Well that was really insightful for us, and so you’ve, it sounds like you’ve really nailed this and you’ve done a lot of work to get your systems and your processes in place, and it sounds like you’re, on Tape Techs there, it sounds like you’ve probably had thousands and thousands of assets go through there. Yeah?

Liz Brumer-Smith: Yes. We were actually even, for a short period of time, scrubbing them for a hedge fund. The hedge fund ended up using Note Investing Club to start then training all of the new assistants that they hired. They started using the Tape Techs service because they had access to our other program.

Brecht Palombo: Yeah.

Liz Brumer-Smith: But, so yeah. For them, we were scrubbing hundreds to thousands each month for them.

Brecht Palombo: That’s cool.

Liz Brumer-Smith: Yeah.

Brecht Palombo: As somebody who has been able to achieve enough success in this business to be able to leave their job and travel the country and all that, what would you say to somebody who is just now sort of investigating the note business and trying to make some decision on whether or not they wanna go in on this and do it?

Liz Brumer-Smith: I would say it’s going to be a challenging ride. Nothing you ever do that’s out of the norm, it’s just gonna be super, super easy the whole way through. So there will be challenges, but it is a hundred percent worth it. It is totally attainable and totally achievable if you’re willing to put in the work and be able to get over those challenges, those hurdles, and keep moving forward, because so many times I see somebody starting off, and everyone make it sound like it’s this big easy complete process and there is a lot of work that goes into it, and you have to be able to put in that time, but also be able to … gotta have a little bit of grit to get through some of the tough times, but if you focus on it and you learn and keep doing it at a hundred percent, it is attainable. I’m living evidence of it, going from a kindergarten teacher to now living in an RV doing this full time.

Brecht Palombo: Well that’s awesome. Well Liz, I really appreciate you coming on here and sharing your knowledge and laying that whole process out for us here. I’m fairly confident you’re gonna have a lot of clicks on that link, and it was insightful for me and really helped me kinda get my head around some of the ways that you’re doing things over there. I appreciate it, and I know anybody who’s listening to this today appreciates it too. Thanks very much.

Liz Brumer-Smith: So glad I could be here. Thank you so much for having me.

Brecht Palombo: Yeah. And enjoy your travels.

Liz Brumer-Smith: Thanks. Bye.