Abby Shemesh shares helpful tips on what mistakes to avoid when buying and selling mortgage notes.
Abby Shemesh of Amerinote Xchange has overseen countless of buy and sell transactions in the mortgage note business. Abby talks to Jason on why purchasing mortgage notes is the best thing next to generating yield, key mistakes to avoid, and the importance of getting a third party property appraiser.
Key Takeaways:
[2:00] San Francisco’s real estate is becoming a big bubble.
[7:15] Banks are being too strict in lending money to potential investors.
[10:10] Do your due diligence when buying notes.
[14:45] Don’t ever go with a recommend appraiser by the seller, burrower, or broker.
[16:40] Get an attorney and consult your accountant before you purchase a note.
[18:00] Selling notes are not for everybody. You still have other options.
[20:15] There’s still no software for to accurately calculate note prices.
[22:30] Make sure the company you’re dealing with has an internet presence and get them on the phone.
Mentioned In This Episode:
www.note-buyer.net
Tweetables:
“I think the rates are going to go up, I mean, where else can they go?”
“It’s definitely a unique time in the real estate industry as far as the mortgages go.”
“You can’t earn anything in that bank. I mean, it’s a complete joke.”
Transcript
Jason Hartman:
It’s my pleasure to welcome Abby Shemesh to the show. He is founder and managing partner of Amerinote Xchange located in San Francisco and we just want to talk about note investing and selling notes that you might own also the broader real estate market and the paper market, I guess I’ll say as a whole. Abby, welcome, how are you?
Abby Shemesh:
Very good Jason, thank you for having me, I appreciate it.
Jason:
It’s good to have you on the show. First big topic of course, everybody always wants to know, you know, where’s the housing marketing going? I mean, you are, I would say, and I don’t know if you’re going to agree with me, but it’s got to be a bubble. I mean, San Francisco prices are absurd! What do you think?
Abby:
You’re absolutely correct. As far as San Francisco. We are seeing unprecedented, above asking sales happening right now in the Bay area, but specifically in San Francisco county and the surrounding areas, but as a far as the national market, obviously you have different climates and micro markets throughout the country, I gotta say, I mean, especially in the bigger cities, it is what I am seeing and what I’m hearing is 2015 is the year of the seller. I mean, it’s really going to be a sellers market and it’s really roaring back, specifically in California.
Jason:
Yeah, yeah, but I mean, there’s a lot of talk that California is a bubble and it’s softening in some places. I mean, it’s the typical cyclical versus linear markets scenario, right. We’re certainty seeing the area, the hybrid markets like Phoenix soften up, we used to do business in Phoenix a couple of times in and out over the years and it got too expensive, it always does, and then we come back in when it starts to drop again or hopefully hits the bottom, actually, that’s the perfect timing, but you think California’s got some gas in the tax and it got some ways to go, still?
Abby:
I don’t know about a ways to go. I definitely think it still has gas in the tank. I mean, there are certain areas and what we see typically is, many Californians they’d be familiar with, you know, West of the i5 or interstate five, which goes up and down the state, closer to the coast, you’re going to see obviously a lot more real estate traffic and sales and prices holding where as on the Eastern part of the state or the more rural part of the state, obviously, you may see it softening up if it has not already, but yes, to answer your question, I do think it’s the last gas in the tank, sure.
Jason:
I mean, the housing affordability numbers are just so out of sync in some areas, not in all, obviously. Average price in San Francisco or median price I mean is like over a million bucks. It’s just crazy!
Abby:
Over a million bucks, that is correct. As a matter of fact, what we’re seeing and what we’re hearing is when folks are lifting the average, you know, median home 1.2 million, you have investors and home owners that are coming in and just going $4-5-600,000 over asking immediately. I mean, it is something I’ve never seen and quite frankly I don’t have the investment appetite to engage in.
Jason:
I would agree with you completely and I don’t think that should even be called an investment appetite. It should be called an appetite for gambling. Gambling and speculation, that’s all that is. I have seen that cycle repeat too many times. What about interest rates? The fed is definitely making noise about rates and starting to push them up or saying they’re going to. What are your thoughts?
Abby:
To be honest with you, at this point, where else can they go but up? You have interest rates that have been at record lows, slight fluctuations over the course of the past decade, for sure, but specifically, you know, definitely on the lower end and it’s definitely a good time if you have the credit worthiness to go out and to get a traditional loan for the purchase of real estate, but in my industry, excuse me, the note industry, I guess you would say, specifically the seller finance industry, there are a lot of folks out there that can not meet the criteria of a lot of these lenders whether it is small business owners who have too many tax write-offs and they don’t look good on paper, but they have a nice down payment and decent credit to the ones that have good income or poor credit or poor to debt to income ratio.
So, there’s differently a median of different scenarios that could occur here that would either allow or not allow someone to get a loan. I think the rates are going to go up, I mean, where else can they go?
Jason:
I guess the only way I would answer that question is to say, look at Japan, right? And now, Germany, negative interest rates on, what, German bonds, I think? I read an article about that a couple of weeks ago. That’s startling. I mean, that’s just so illogical, it’s crazy.
Abby:
It is and Japan is a very good indication or a very good example of, I guess, what could happen. It’s definitely a unique time in the real estate industry as far as the mortgages, but it’s definitely going to go up and interest rates are most certainty going to go up along with the, hopefully, a lax criteria. We’ll see if that occurs.
Jason:
So, my contention was during the financial crisis, you know, of course, before hand the banks were just being stupid. They were loaning money to anybody who could fog a mirror, day out of prison, day out of bankruptcy, no job, doesn’t matter. I’m sure you remember that crazy time, but I think they’ve over corrected, you know, I think they’re being too strict now. Would you agree with that assessment:
Abby:
I would absolutely agree with that. The pendulum has swung in the opposite direction, you know, and it is, it’s very much so the opposite of what we were seeing pre-2008. So, that is exactly what is happening now and I am hoping as a lot of investors and burrowers are that it’s going to even out here a little bit and hopefully in the near future.
Jason:
It’s definitely, you know, since the worst time when they over corrected the most, it’s definitely come back a bit and it’s gotten a little more rational in terms of the ability to borrow, but I don’t think it’s come back enough, especially in favor of the investor, oddly, because the investor, at least they get income from their property, at least hopefully.
They should get more desirable loans than home owners, if you ask me. History has shown us different things and different scenarios, but when a property produced income, it seems like the finance ought to be better for that than in which somebody lives, you know, I’ve always kind of thought we had that backwards a bit, but we can move on to other subjects.
So, on the flip side of these equation, the interest rates one can earn on an investment and you can’t earn anything in that bank. I mean, it’s a complete joke. Even if you had 99 million dollars, you’re going to get almost nothing from the bank.
So, what other really secure, good ways to earn good returns is, you know, of course, I love income property. I love owning the asset, the physical asset myself, but you know, it’s not as scalable and it requires management and attention and if you don’t have the tolerance for that, sort of the next best thing is investing in the paper and you can earn some great returns on the paper, right?
Abby:
Oh, yes, absolutely. So, your point on what you were saying about owning the actual asset in real estate. I mean, that’s a fantastic mode of investment, for sure, but you definitely, especially if you’re owning more than one property and let’s say you own income properties out of state, you have to have the infrastructure in place to service the tenants and the maintenance and so forth where as owning the paper, you don’t have to worry about the air conditioner going or anything like that as far as land lording, because again, you’re just in it for the paper and really the bulk of your concerns at that point is servicing and the faults, but it is definitely is a very, very lucrative way to earn decent yield with putting your money to work.
Jason:
Sure, absolutely. So, tell us about what someone should know about buying notes. I mean, you buy a lot of notes and I’m sure you’ve been burned on a few over the years, what lessons have you learned that people should know about?
Abby:
Sure. Due diligence. The most important. It is very important that if you are going to, you know, pay out money, your hard earned money on a mortgage note that you want to perform all the due diligence and not take anyone’s word for it. A lot of investors and brokers as well I’ve seen have cut corners in the sense of not, kind of skimming out on the appraisal or the evaluation and verification of what the property’s condition is and the worth of the property or the collateral securing the note as well as, obviously, clean title. Most investors do take that into consideration, but you want to make sure that there’s no actions or any kind of a clouded title, so to speak.
My biggest point of being burnt was purchasing non-recourse loans or corporate borrowers where there is no personal guarantee and then once the corporation goes belly up, they stop making payments, they dissolve the articles of organization, because they don’t have any real debt attached to the LLC or whoever it was who was paying the note. You’re really a hot mess there and I mean, you can definitely get the property back, but it takes you a heck of a lot more time especially in judicial foreclosure states, which are in fact a nightmare.
Jason:
When you said a corporate borrower, I mean, I’d assume that’s mostly on a business loan and I know you do business loans too, so we’re not just talking about real estate, but you had a corporate borrow on a real estate deal?
Abby:
I did. Not only on a real estate deal, on a mobile home note transaction, believe it or not.
Jason:
On a single mobile home or a big park?
Abby:
On a single mobile home, yes sir, and this was, you know, luckily for us this was in a non-judicial deed of trust, so we had an easier time doing it, but this was a investor who purchased a mobile home. It wasn’t a large investor, it was a local investor, they just fell short and defaulted and they gave us the runaround for quite a bit of time, so yeah, it was unique situation, but that was my biggest learning experience as an investor to make sure there’s always a personal guarantee or if the corporation, of course, is a publicly traded company, that’s obviously good enough for us.
Jason:
What about just on, you know, single family home type deals?
Abby:
The biggest item that we’ve seen as far as problematic situations for us, especially over the course of the past three years has been, what we’ve been talking about earlier, which is that real estate market. You know, a lot of the properties, excuse me, a lot of the notes we were receiving were secured by properties that were under water, so we drilled down and did our diligence on this, but keep in mind, most of the time we’ll do just broker pricing opinions or drive-by appraisals to keep our costs down, but in certain markets, you know, specifically in my opinion, you know, I guess we refer to it as the rough belt, but western Pennsylvanian, Ohio, Michigan, parts of Missouri, parts of Illinois.
It’s very important in those particular areas where market has seen a little bit of a dip and in parts of the south as well, south eastern part of the country, it would be wise to splurge and to get a full-blown appraisal done if possible, that way you can really gauge the characteristics of the collateral that secures the note that you’re purchasing.
Jason:
Where should you order that appraisal? Probably not from a referral from the seller or the owner, I should say, or maybe a broker who wants to see you do the deal, necessarily, an appraisal management company? Does the public have access to that?
Abby:
Absolutely they do. There are many, especially in the wake of the 2008 market crash, you know, you had a lot of non-preforming loans hit the market, you know, specifically really in the past 3-3.5 years and out of this has been grown a lot of these companies that now provide REO solutions, real estate owned property solutions also servicing the non-preforming loan market as well where they will do multiple drive-by appraisals.
The public definitely has access to that, but it is a big no-no to ever go with a suggested appraisals by either the seller of the note you’re purchasing it from, the burrower in which the person is going to pay you if you do acquire the note or a note broker that brings you the deal. You want to make sure that you independently review and investigate all of your options.
You can take suggestions into considerations, for sure, but I would never, ever go on the word of any party that could gain from the transaction in that sense. We want to keep it neutral, we want to keep it fair.
Jason:
How about checking title and so forth? Any particular tools you want to mention there? Websites? You know, tools that you use that maybe the listeners would love to know about?
Abby:
Yes, actually. Well, I wish there was an actual checking of title would be a little bit easier, but unfortunately with us, we do it kind of the old fashion way. I mean, typically speaking what we do is a lot of these seller finance transactions, I would say about 75% of them are closed or handled at a title company at the closing or the origination of the note.
So, what we typically do is we’ll go back to that same title company and because that title company is familiar with the file and so forth and so on, it just makes life a lot easier and it kind of speeds up the process in some cases up to a week in turnaround time, it may save up to, especially if we can do like a policy endorsement versus a fresh title search in some cases.
So, we typically go back to the same title company, but as far as any tools to be used for realtors and investors, I don’t really, I’m not really aware of any pertaining to the title search process other than our preliminary diligence, which is counting website searches and so forth.
Jason:
Anything else you want to say about buying notes before we move on to selling mortgage notes.
Abby:
Sure, as far as buying notes are concerned. It’s not, I mean, if someone is buying or considering purchasing a mortgage note, you know, you definitely you want to make sure that if you are going to purchase, especially if you’re new at it, that you A) consult an attorney, you want to make sure that you have all the legal parameters within in the state that you’re planning on purchasing. In addition to that, I would also recommend that you talk to your accountant for tax-ability purpose and any taxable events that can occur if and when you purchase a note and more importantly, I wrote an article about a year ago talking about can I get scammed in the note business and the real part where you..
Jason:
And the answer is definitely yes.
Abby:
Yes, the answer is definitely yes, but it doesn’t happen in the selling of the note, but it happens when you decide to buy notes and you go to someone and they say oh, I can promise you 18% and so forth and so on, you just got to watch out. You gotta make sure that if you’re going to give someone your money, especially in a fund, that they’re a legitimate fund, you do your research on them. My opinion the best way is to go out there, roll up your sleeves, and cultivate and harvest your own seller leads, so you can determine what’s good for you and what’s note, especially for savvy investors.
Jason:
Yeah, I’m not a fan of funds by any means. I think being direct investor is the way to go and it seems like you agree with that, right?
Abby:
Oh, absolutely. 100%.
Jason:
So, in terms of selling notes, any advice there?
Abby:
Yes, selling notes. I have much experience in this realm and when someone is planning on selling a note, first and foremost, they should understand and know that selling a note is not for everyone. People sell notes and I always say we shouldn’t, selling a note should not be your first line of defense, it should be your last line of defense. So, if you need to generate capital and you want to do it maybe through a bank or a traditional lender, if you can go that route, you can get a decent interest rate on the capital that you want to borrow, so be it.
When you do sell a note, you are going to sell it at a discount as most note transactions are conducted. That discount typically, you know, can range anywhere between 35% of the unpaid principle balance as high as 10%, maybe even some very rare cases even 5%. So, between 65 cents and 95 cents on the dollar and this is typically..
Jason:
You really mean that’s the discount, so you mean, you might buy it for as low as 5 cents on the dollar.
Abby:
I beg your pardon, no, no. We would buy it between 65 cents and 95 cents on the dollar. So, the discount could be between anywhere from 35% or 5%.
Jason:
Oh, okay, but see I thought you were throwing in there and why the range is so big is because, you know, when you deal with non-preforming seconds, I mean, you really can buy those incredible cheap sometimes.
Abby:
Absolutely, a non-preforming – I was actually just referring to performing firsts in that sense.
Jason:
So, a 5% discount up to a 35% discount.
Abby:
Typically speaking, yes, and that will all depend on the characteristic of the loan and the characteristics of the collateral securing the loan, so..
Jason:
How does a buyer or seller, you know, I mean, we’re both probably going to be on each side of the table at some point, where can they, I mean, is there a formula? There needs to be a piece of software that will rate what that note should price at. How do you do that for example, because notes have such varying characteristics. Look it, think about all the data points here, there’s the geography, the type of property, the amount of seasoning, the rate, the term, how many payments are left, the credit worthiness of the burrower. I mean, they’re just, you know, the loan to value ratio, there’s such an array of characteristics, it’s pretty complicated.
Abby:
Very much so and that’s probably why there is, I mean, I’m not saying software wouldn’t be able to do it especially in this day and age, but as of right now, that I’m aware of, there is no particular software that can accurately predict what the offer would be. It really does require human interaction, so if the seller, just to answer your question, wants to know what their notes worth. I mean, typically a seller will reach out to multiple note brokers or note buyers and they’ll fit out a submission form and they’ll get a soft bid on the note that they’re trying to sell.
Now, usually, this should take, with us, it takes just a matter of minutes in some cases, you know, up to maybe a couple of hours, but others it maybe take a couple of days, so it really depends on the bandwidth and the size of the couple that the seller reaches out to. I mean, yeah, it’s really done the old fashioned way. The note business, unfortunately, is a very unsophisticated, low-tech industry.
Jason:
Yeah, yeah, but you know, if it only takes you a few minutes in the example you gave. Someone calls you up and says they want to sell a note and they say to you, Abby, what will you pay me for this note? How will you figure that out? I mean, do you have a great worksheet that can lead you through that formula?
Abby:
That is exactly right. There is a mortgage note submission form. We have forms for residential, commercial, mobile homes, bare land, but that’s exactly right. We’ll get the property address and that’s really all we need because in this day and age we can just go online and find out more about the property just with the address. We’ll also get the sale’s date, sale’s price, the down payment, the interest rate, the amortization, you know, if there’s any balloon payments, how many payments, first payment date, and from that we can figure out how many payments remaining.
So, there’s a lot of people out there that may have all this information. Some other people may say, well, I have this, this, and this, and then we gotta play detective, of course, and we basically give them an offer predicated on the information that they gave to us verbally. If they like that offer, what would happen then is we would ask for the documentation to verify the info that they gave us and at that point we would begin the process.
Jason:
Good stuff. Okay, anything else you want people to know about selling notes?
Abby:
If you are selling notes, it’s very important that you do your research. You want to make sure you’re dealing with a reputable company, preferably one with an internet presence. In additional to that, there are a lot of folks out there that say they’re note brokers or note finders, again, you just want to make sure you can find them online, you can research them a little bit, just really drill down in your research and more importantly, try to get them on the phone. I mean, usually, if they sound like they don’t know what they’re talking about, 99% of the time it’s probably true. So, you just want to make sure you’re dealing with the right person and that’s my biggest piece of advice to any note seller out there.
Jason:
Yeah, good stuff. Abby, give out your website, if you would?
Abby:
Sure, our website is www.note-buyer.net and that will take you to our company website, which is Amerinote Xchange LLC, located in San Francisco
Jason:
Okay, so that’s note-buyer.net. Abby, thank you so much for joining us today and explaining some of this, we appreciate the good insight.
Abby:
I really appreciate you having me Jason, thank you.
Announcer:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.