Understanding Second Mortgage Notes & Junior Liens | Real Estate Notes Show

we got a video cool looks like [Music] hey what's up what's up going everyone friday afternoon noon here at eastern time alongside me of course mr nathan turner how are you my man i'm doing well i like that intro music that's cool oh thank you i'm just playing with things this morning have a few minutes so we have a special guest with us today mr sander before we dive into stuff senator has been in the business for a long time as well um i know he's been bouncing around all kinds of things going on he's kind of quiet in most parts uh because he's busy right uh but before we get into his what he does and what he wants to talk about nathan how are you doing this week what's going on with you anything that's come up recently for you we're good i'm actually i'm just waiting any minute now fedex truck's gonna come over here deliver me my check for my deal i've been trying to get done for months and months and then it's almost like it's like you get excited about that kind of stuff our wives get excited but amazon trucks showing up right yeah so i wanted to let everyone know we're gonna be launching uh a mastermind kind of mentorship kind of group we're gonna be doing it um it's it'd be spelled out with the idea of it to be a little different from a lot of them out there the ideas would be meeting bi-weekly sunday evenings uh for about an hour and a half we're doing some education it won't particularly be all about notes but it's gonna be an investment community and then what's gonna happen on the other weeks uh on every week you're gonna meet in small pods four five six people and your ideas are gonna grow as together as a unit so i'm hoping that this becomes something that people lean on each other on an ongoing basis that you guys can help each other and be supportive of each other and in the larger group we'll get together bi-weekly on sunday evenings and do a little education bring some special guests on um and then talk about hurdles that the group has had so we're excited about launching this you'll be getting an email from us this afternoon so keep an eye out for that from troydusk.jkpholdings.com also if you haven't seen our calculators out there you can get photos of the property i know some questions about you know if you need a debt license in certain states that's in there uh we actually added the agents from the resource list that people have done we've added the attorneys who are licensed that state and we also added the servicer so you can find out who can you know service your loan once you purchase it so my spiel's done let's welcome in sunderer how are you doing this friday afternoon i'm great it's a great day to be alive thanks very much dave for everyone out there a somewhat difficult name it's pronounced shondor like sean sean door okay like he walks in the door so you've been in second space which me and nathan are not as familiar with as we are in first so before you go into what's that i was just gonna say before the call we were talking and both of us have bought some by accident but not on purpose no i know we bought some performers they were like thrown at us like okay here take them take them okay we'll buy them yeah so i think the biggest question people have when we get into this space is where were you just before you started note investing how did you get introduced and note investing and how did you transition and why did you just two seconds instead of first that's right so a little bit of background i like to tell people yeah i'm a recovering indie filmmaker i became an indie banker being a filmmaker it's a great way to make a small fortune in documentary filmmaking start with a large fortune and then spend your time and energy on filmmaking so i realized this is this is not going to work out i had to make a drastic change in my life just in 2007 just as the recession was started before we even knew the data wasn't there but it was already happening i came back to the i was living overseas in new zealand came back to the u.s like super broke uh standing with mom and dad in the rv my dad like i mean a grown man like cut a piece of plywood and laid it across the front seat and i just had a phone pad and a sleeping bag there i'm like nice i need to make change read some books they're like oh real estate every other book's like okay you want to make a lot of money have a lot of money and you'll just earn interest on it and make more like that's nice for everyone but so i read real estate riches by dr dolph de roos that subtitles how to how how to make money with your bankers money it's the simplest concept of real estate investing buy a house the right house where the rent pays for the mortgage and more i thought super simple uh and wrote a lot of offers 2007.

no none of them were accepted all of a sudden 2008 these offers start working out a lot better and i've got a portfolio ahead by 2010 i had 48 i think rental units mostly in the midwest kansas city had all these spreadsheets they're like oh this is great cash flow oh here's the rent of all these and here's the mortgage it's supposed to be like double but it's just it's just it's just a piece of paper it could never make up for all the people who cheated out of the rent broke things stole things like i had this just fantasy and no one else is responsible that that these cash cash flowing and hassle-free rental properties it's so much work and being i i live in the great state of oregon on the west coast high property values exceptionally difficult to cash flow with rentals and i just kept looking i knew there had to be another way i read one book about oh how to buy properties at a big discount there's one paragraph that's like oh you can just buy the note from the bank and i'm like what oh and told me about this yeah this is this was early 2013 i just seized on that and i'm like wow i'm gonna read every book about this and at the time there were three i read all of them and uh one of them the author was still alive i emailed her i'm like teach me she's like no go to paper source so i did i went to i went to noteworthy conference went to paper source conference and you know a few months later months later i was handing over 50 000 to some people who turned about out to be like not very trustworthy we did eventually get our notes or seconds at the time from 15 cents on the dollar i know uh but it just made absolute sense right you're investing in these mortgages and and you asked about how i learned you know i learned from going to conferences my number one source that started me out was gordon moss who's still my mentor and guru in this and he it's he's a second guy he explains seconds so clearly and articulately it's just like an option and think of it in real estate world you put down a very small down payment three and a half percent down for an owner-occupied fha loan of which you can have exactly one you do that and if you've got your rental property right you're house hacking and i did this for a number of years when i was getting started i was airbnb at my own house sleeping on the floor at the office and renting out my bed to other people so i could pay the free rent for my tenants in kansas city to enjoy the the benefits but i did what i had to do to succeed and could see no investing it's easy to see this is like oh yeah you get to start licking your traps this is gonna be fast money it's slow money it's like regular real estate investing right a lot of seconds takes time what's your what's your return if you pay ten thousand dollars for a loan and you're one you get nothing two you get nothing three good nothing four you get nothing and you're five you pay 10 you get 60.

that's 100 annualized return but it looks like nothing nothing nothing nothing yeah 100 return so seconds the uh paper stack which i love it's it's a great uh exchange for notes they just published some data today for all their transactions for 2020 that that bears out so well my own experience in the seconds market the price the percentage uh of the unpaid principal balance that you'll be paying for seconds when i started 2013 paying like 15 cents on the dollar yeehaw now you're going to be paying a lot more i i completed a trade this week where i was paying an average of 41 42 cents on the dollar and i i lost most of my bids right when i started i figured out yeah you should lose at least half your bids uh or you're paying too much now i'm losing a lot more than half my bids and and i fully accept that because i'm getting i'm getting a very curated portfolio but the data from paper stack bears out my experience the average price paid for the note as a reflection of the value of the underlying properties three percent just like an fha down payment but unlike the fha down payments if that fha house goes wrong you can't collect rent tenants break something some something disastrous happens you're on the hook for the other 97 percent with the notes you buy a second say you i mean first for round numbers right there is you're buying uh a loan on a 100 000 house there's a 75 000 first mortgage say say there's a hundred thousand dollar first mortgage and a 20 000 second and you pay three percent for the second if it goes disastrously wrong all you're out for is the three percent of the value of the house if you if it goes wrong with your rental property you discover some environmental damage it was a meth house you know there's there's a nuclear waste discovered under the property site it's all on your head gordon moss my mentor hero explains this perfectly it's just like options in stock investing gives you the right to buy but not the obligation to buy you get all the benefits of real estate including all the the simple strategies that i learned from dolph deru's book real estate riches real estate over the long term goes up the first mortgage eventually gets paid down and your mortgage rate and mortgage payment stay the same the united states and i think my best understanding is that united states and denmark are the only countries in the world with 30-year fixed mortgages and now money is on sale mortgage rates boohoo real estate investors mortgage rates just went up to three percent yeah they're giving it away so it's interesting with gordon like that's how i finally understood seconds because i had heard about them and that people were talking about especially early on uh dave van horn was a big advocate and you know i heard a lot about him but i i just i couldn't make them make sense and it wasn't until i read gordon's book and i'm like i get it it's long term and for me that was a completely foreign um mentality because i've always my real estate background was flipping houses so i was always about the quick money so when i started looking at seconds and then i read that and it went oh it's it's long term oh i get it that's why you would want to do that so let me explain to those people maybe turning in what does long term mean why is it long term so in most times when you buy in seconds you're not looking immediate for a cash flow right you may be buying something that may have equity may not have equity and like what what i think what we're explaining is the fact that it's a period of time that you're waiting for it to return your capital to you but once it does the return can be astronomical it's crazy some of the returns i've seen in seconds right but you may shelf it for four or five years so for the record it tends to be long term it can be fast like yes you in every negotiation in the field of business you get things and you give things right if you're buying regular houses you have a great deal of choice you have got a stack of money and you can buy any house you want but you don't control necessarily the behavior of your contractors the costs you don't control how much molds they find or whatever they find behind the walls so you have control over this you got your crew there um you can try and make it go right but it's your timeline you own that property seconds you don't own the property you can't no human being can really make any other human being do anything it is the borrower's house and it's theirs to do with what they want but being in seconds one of the great things i love is creating win wins and to a certain degree have aligned interest with the borrower they want to keep their home it's their house it's they think of this like you got your fha down payment and you got the world's best property manager they take care of it like it's theirs because it is theirs so given can you give an example of a story like that where you're in a situation that give an example give something you know a a case study to kind of say regarding that yeah case study um a win-win win-win example kind of one of our charity cases i i i'm one here in my hometown in portland oregon we we've got a portfolio all over but uh our borrower has a lot of equity bought the house back in the day prices have gone up astronomically but she and her husband are just kind of working class people she makes 10 12 14 an hour at the supermarket forgot all about this second loan this this happens all the time people people stop paying in their session you know most of the loans almost all the seconds out in the marketplace bank seconds anyway originated 2002 to 2007.

people have a lot of problems around 2008-2009 they stopped paying on their loans sometime in the great recession the bank sent a couple letters that said we'd really prefer you to start paying again you had other problems they didn't pay they forgot about it you buy the loan you try and get in touch with the borrowers send a door knocker make some phone calls send letters it usually doesn't work right this kind of marketing they can continue human beings respond to consequences they'll usually continue ignoring it our borrower in portland will call her by her first initial k so we get in touch with her before she's a rational person and she actually responds to us before we have to go start the legal foreclosure process puts in an application and says lisa really sorry takes takes responsibility for her situation she did take this money great that's the kind of people we love to work with and we get on a plan that says okay you're going to pay 200 a month but we got deadlines right there's money and time time time value of money you have two years to sort this out and find another solution right we're here to be a bridge to to something better for you but we're not here to do it forever a lot of people will write their modifications for their second mortgages oh 30 years it's very common practice in the industry i don't want like every monthly payment is a new risk a new opportunity we got two parties to the transaction one party has already provided all their value they took the money they got the loan and the other party has an opport has has an obligation but to make their their payments every month but they can choose every single month to default on that that obligation something can go wrong so we're looking for them to find a better way to deal with this and for most people it's just to refinance two years is plenty of time to rebuild your credit get more seniority your job start making some more money and get a bank or some other private lender to take on that responsibility or or win the lottery whatever but then we get full cash out they get to keep their home foreclosure in seconds and foreclosure in general in my opinion bad terrible for everyone out of i don't know somewhere close to 300 loans in my time in the business i think we foreclosed on maybe a dozen and it works out very moderately well you know you really do this on on ones where there's a significant amount of equity and borrowers are just absolutely refusing to cooperate that's part of human nature there's each individual person's behavior is is unknowable and unpredictable just from looking at a spreadsheet but sometimes it's totally irrational yeah but aggregate human behavior yeah is very predictable some people will pay and some people will refuse all the time some people will put their head in the sand and complain after it's all over oh you never told me and and some people will lawyer up and and try and cheat out of it that's a reality of this business that anyone who wants to get into note investing you don't have to accept it if you don't want to but reality is not dependent up upon your opinion it is how human behavior works yeah what do you think your biggest concern when you first got into seconds what was that uncertainty that you had besides being new of course but what was that thing about seconds that you tell people now that do you remember when you're there this is how you got over that hurdle it was it seemed too good to be true i had to prove it out and frankly you know i was kind of waiting to bear out the results it takes a while foreclosure process takes a while the foreclosure starting the foreclosure process is generally what prompts people to action human beings respond to consequences so it takes a long time to get your notes this one the seller that we bought from in the beginning one of our loans took like 11 months to get how can you invest more money into this thing when you hand over cash to someone they're like oh sorry thank you for the money but we'll get you your product when it's convenient for us they double sold the loan i know i know because i bought it later from the first the other person they sold it to like i recognize this oh yeah so but that's this is also part of all human nature there are many dishonest people for lack of a better world in all aspects of business it's a small minority of the population but in in notes business in real estate business this is a reality that that we're all better off understanding and accepting arguing with reality will never ever change so what seconds your due diligence is different from ours right point if you don't do everything that we do and there's some things that we should do like pull credit report nathan i don't think you do either it's a great idea but it's one thing we don't do how would you say your due diligence goes what are the things you look for and are concerned with the number one thing you're looking you know if you're investing in first mortgages the number one thing you're looking at is your collateral and your security what is the value of this house especially with the overwhelming majority of the market and firsts is low value houses in the south and midwest but if zillow says it's worth fifty thousand dollars there's like at the high and low ends of the housing spectrum there's so much variation in values zillow says it's 50.

if you've got the wrong environmental conditions at this house you might need to pay someone ten thousand dollars to scrape it likewise at the very high end of the market you get a 10 million dollar house the seller's valuation could be a little bit off it's a very specialty product so i like to be in the high middle to high end of the market my specialty really is half a million dollar plus houses in non-judicial states practically speaking that's primarily california which also has a very long statute of limitations which is really one of my favorite things about california you can sit and wait for a long time for the house to gain appreciation but you asked you asked about due diligence so absolutely we're checking the credit report and there's really only one one thing that we're looking for above everything else first mortgage how much do they owe and are they paying if someone is paying two three four five thousand dollars a month on their first mortgage guess what they can probably afford a little bit more on their second if they're not paying the first mortgage uh this is this is quite an indicator to us but also a very changed thing in the world of covet there anyone can just go to their bank they don't they have to attest which is to say not proof oh your honor i've had my life has been impacted by covid is that so tell me why you're special but they can do this and get a free holiday with very limited consequences for their bank and this has worked in our favor in in many workouts we've done this year example another another example in portland borrowers were two sisters musicians we were watching the credit report closely they stopped paying their first mortgage wow and and just as we are beginning our negotiations with them guess what with taking a holiday from the first mortgage they can afford to start paying their second mortgage yeah so they have been writing tight they pay early every month after they're obviously unable to continue their careers as as musicians they went back to school got student loans we're gonna see what what happens when their forbearance finally ends but that first mortgage back to your to your question dave is so crucial it it tells you their financial capacity but it tells you even more importantly human desire how important is this house to them guess what if they're paying four thousand dollars a month on the first mortgage pretty important yeah so do you find that information from their credit report you find that they're paying yeah yeah that that is where um sometimes it won't be reporting to credit and frankly some of my best specialties and favorites are are people where first mortgage is not reporting on the credit it scares people off right human a confused mind always says no yeah the more tricky it is the more confusing it is the fewer people wanting to bid on it giving us greater opportunity it's probably not reporting because it's they've done bankruptcy so they're they're not personally liable for the debt any longer the lien is still on the property you still have the right to exercise uh your your rights to foreclose as a lender you're not pursuing a judgment against the borrowers you're just trying to exercise your right to get your collateral back because they failed to meet their obligations and frankly in almost every case we've seen their lawyer misadvised them on what the consequences of this were so you can figure out there if even if it's not on the credit report there are ways of figuring it out uh checking title as well title it just tells you what liens there are it's not giving you month by month update on whether they're paying but it shows whether or not other parties are foreclosing so you can see if there's been a liz penance filed on the property by the first mortgage or or other lenders frankly and make your your assessments from there but i'm typically i love to bid like 10 cents on the dollar on seconds where the first mortgage is unknown unknown to the seller who's selling a stack of paper and doesn't have time to go through every fine point detail yeah unknown to them but it can be known to you if you do your your property proper due diligence and the other the other main thing we're looking for we're checking credit trying to figure out what their whether they're paying the first uh on on time and on schedule that tells us they have a job or some form of income they like to keep there and you just look at these values of houses that have been going up ever since i started in this business last i checked the market does move in cycles and frankly 2017 i was thinking we're at the end of cycle yeah another market fundamental reality yeah it's just a scarce resource people built so many of these houses in the real estate boom and then stopped building housing was way under supplied before covet hit before lumber prices went through the roof before dramatic decrease in in construction and it's going to be years before the housing can catch up with the population demand for a place to live a strong market fundamental all human beings so just josh asked a question regarding you know do you find that if you're investing long term do you see as a gamble or how do you project out that far and say it's an investment versus a gamble versus hoping appreciation hoping that this bar will come around how do you persuade that understanding if you're talking to another investor that it's not a gamble it's actually an investment and then you must be paying attention much more closely to statute of limitations as well then quite closely yes a much bigger issue you know buying loans in 2013 they're only defaulted recently uh scheduled limitations is a very big deal and sometimes it it forces our hand when i would rather sit tight sure but in okay in regular real estate investing or even first mortgage investing right you've got tight timelines you want to turn this over if you've got borrowers who are not paying you have no idea what they're doing do they live there is it a crack house is it a meth house you have no control and you have no idea seconds investing it does take a long time sign the contract send the money maybe it's a week maybe it's a month before you get the collateral maybe it's another month before you can transfer servicing maybe it's another month before you send a notice of demand it takes a very long time for unknown results and then you have to decide if borrowers are not communicating back whether you're going to press it to foreclosure which in many states takes years in many states takes half a decade or you're going to sit tight for your position to improve or and you can learn so much about the borrowers on their social media too linkedin is my favorite right it's for professionals it's going to tell you where they work and what they do you can google roughly how much someone in that profession in that area makes yeah and if they're a federal if they're any kind of public employee you can usually look up exactly how much they make yeah so interesting far from that yeah yeah you know and typically you know the assets we're i think our average value of house in our portfolio is probably 70 or 80 right but you know we shoot the 200 we have a few that are higher level stuff and then we have those who are our bond level is 50 grand i won't buy a 30 000 first that just won't do it but when you're buying these things are you bidding it through a calculator are you bidding it based on upb how are you typically bidding these um assets yeah yeah percentage of upb i don't use a calculator there are many calculators for seconds out there um maybe there are people smarter than me you know use a calculator but there's so many instinctual variables that it's very hard to break down into quantifiable data for let's face it a smaller investor like me like someone who owns thousands of loans they are using a lot of this this big data to make those decisions i don't know some algorithm that's going to go figure out what percentage of your borrowers can you figure out how much they make you know you go on their social media see how much they whine like inverse correlation between whining and financial success so let's take that into consideration you can see how old they are as well sometimes a lot of some of our borrowers uh sean who's kind of a cupcake older people i might who who retired on a fixed income and clearly have no capacity to pay it might be in your best interest to just sit tight and and let them enjoy your life while they take care of your rental property and pay down the first mortgage on it so we just factor in so many things how much do do we assume the property is going to appreciate how well do they take care of the house uh you know i like to see people who are are in a happy stable relationship with two adults earning adults in the house uh people love to see people with investment properties or other assets that they can call on to to meet their obligations should they so choose people's history of bankruptcies history of litigation we get people who are litigious i i would usually rather pass the cost of proving yourself right is astronomically high i'll give you a real example from the portfolio we had a lien on uh on a nice you know six seven hundred thousand dollar house in la metro and we could see it was listed for sale to ching perfect with enough equity to pay us out we we uh contacted the realtor to say you can't you gotta buy very closely by fair debt collection practices act we just contacted the realtor and said we would we really need to be in touch with uh your clients about a private matter they ignored it and they sold the house without releasing our lane they just convinced the title company to insure over it this is this is nonsense you don't have to worry about this wow so what what are we left to do the borrowers don't even own the house anymore new new owners bought the house in good faith paid good money got a loan but they don't have clear title they paid a title insurance company good money to give them clean and insurable title our only thing we can do is just start foreclosure foreclosing on the house of these poor people who did everything right and eventually we end up in in a legal dispute not with the former borrowers or the realtors who are the ones who cheated out of it but with the title company yep wow who who has who's interested in making sure they don't set case law precedent who has indefinite resources yeah to cheat out of their mistake they guaranteed people something that wasn't true if they were going to do the right thing oh sorry uh what's the full payoff on your lien here's the money apologize for causing all this trouble instead we we ended up going to mediation with them after and spending almost a hundred thousand dollars on attorneys to prove we're right and basically just get back our attorney fees and roughly the cost of the loan that we paid for which was like 20 cents on the dollar at the time so we probably you know we probably would have made 120 thousand dollars profit on it but as rayleigh otto said in a gangster film it may have been goodfellas being right isn't a bulletproof vest yeah you have to plan to lose a few but the great thing about seconds is you just have to get back to your your question is it a gamble or an investment you give up the certainty of the timing in exchange for extraordinarily high returns because you're using so much leverage another a great example of this um we have this house in vallejo california sort of excerpts of the bay area beautiful golf course community at the time we bought it for 10 cents on the dollar for a large second i don't know 100 000 ish second it was way underwater but we could see they're paying four thousand dollars a month on the first they're paying down like fifteen hundred dollars a month in principle on the first in an area that you can just see the prices are going up and up and up so we wait till it's full equity and and and then impress them we can also see you get more sophisticated borrowers they also got sophisticated lawyers to try to try and cheat out of it so we ended up doing a lot of negotiation with their lawyers but but um at the end we got the borrowers to they they filed bankruptcy to try and get out of it they tried to sue us to try and get out of it and then they they they were forced to drop the suit because they had no merits they paid you know something paid maybe ten thousand dollars for and sat and waited for five years then we got a 25 000 down payment from them and like two thousand dollars a month this is a public employee so i look up how much she's making on the public records as as an engineering manager for a large public utility wow and since then all the time every time it's very much a different game it's it's the same game but a different game all together um we're playing soccer you're playing basketball we're yeah we're playing a game with the ball but but fundamentally people want to keep their house and to your point on on on how long you have to wait this is this is a statistic from before the great recession but at the time you know 2006 the average tenure of home ownership in the united states was like seven years people move yup so some loans you try to communicate with people you got to decide how hard to press them foreclosure to start legal action or just sit and wait a lot of loans i mean in in you guys in your in your mastermind you're starting on you're going to talk about other things other kinds of investment i'm i'm a crypto guy as well this model it came from know a term on a crypto chat room someone just mistyped hold on but it became an industry term for hold on for dear life just wait there's going to be a title company eventually property does trade hands and a title company who's doing a refinance they're they're they're selling the property someone has died a lot of borrowers are going to argue oh i didn't buy this it's not fair the title company doesn't argue how much should we owe you send the statement we'll send the wire yeah yeah we're definitely you know i've been pushed to look a little about cryptos myself from my friend jackman and stuff but um it's definitely a different world and a lot of people are scared by it is unknown but it's coming quickly so i posted in the chat box one of the questions came up um that from nico so it was a question about you know how do you reach out to the homeowner what's your typical strategy um you know and how do you wake up that bar where is your strategy you use besides saying demand letters and things like that uh and i've seen i've seen nico's question here too and i mentioned maybe 10 or or less of foreclosures what i mean by that is completed foreclosures and actually took the house back um usually you have to start foreclosure i mean steps steps to it right you have to send and i don't even our servicer allied servicing i who i cannot say enough good things about they take so such good care of us they know all these rules different states and different regulations you have to send you have to get it under their servicing sending a welcome pack make some phone calls that doesn't work next step is send a demand letter it's just first class mail it's a legal letter it says hey you owe this money here's the specific amount and it starts to talk clock ticking in most state it's going to depend on the state laws you might be able to start a more formal foreclosure proceeding where you actually record it at the county as a list penance or lawsuit pending in in judicial states or notice of default typically in non-judicial states we often have to resort to that we hate doing it because this is the more responsive the borrowers are the more options they have we've had it has been baffling to me how many people have been able to refinance straight out of default if they're paying the first mortgage and many times it's been so long since they defaulted on their second mortgage it stays on your credit report for seven years if it's off the credit report a lot of banks doing doing refinances are checking less closely especially if they're refinancing it with another heloc that's that they're really not taking that into consideration somewhat the shareholders of large banking institutions are giving refinances to people who are in default on their current debt close my mind but that's a win-win for everyone if you have to foreclose um if you have to foreclose this is bad news it's not bad news for everyone it's good news for your realtor and it's good news for your lawyer yeah but it's bad it's very bad news for the homeowner and it's not really that good news for you as an investor it's so much so much of the of of the profit is just taken up by transaction costs yeah yeah legal fees all of a sudden all your business partner the homeowner the greatest property manager in the world it's not their house anymore they're probably going to stop paying the lawn they're probably mowing the lawn props probably stop paying utility bills and not only do you have to pay your lawyer it's probably in your best interest to keep the first mortgage current on behalf of the former owners or they're going to start foreclosing undermining your position and get it on more foreclosure radars and get more people interested in thinking of this as a distressed asset so so go ahead they'll just say with seconds though i think what people don't realize versus the first is the onesie choozy buyers of first base is it really what you do in second floor you don't buy a one second off here there you can but typically you're buying multiple seconds in a purchase would that be correct uh i i've got plenty one-offs i would always rather buy buy multiples i love doing bulk buys it's just aggregating your risk if one second maybe more risky than one first but here's the thing for the for one for the price of one first you probably three seconds just basic diversification multiple eggs multiple baskets multiple different local economies markets and and borrowers you can just diversify so much more if you're paying ten or twenty thousand dollars per loan for i mean if you're paying 60 70 cents on the dollar for for firsts even if it's on a hundred thousand dollar house seventy thousand dollars for just one house i would so much rather have that diversified over lots of borrowers lots of houses and lots of people who have already demonstrated as you can see in the credit reports that they want to keep their home and they have some form of income with which they're paying they have they just have a such a greater stake in it you know someone who's got a half a million dollar house has has bled for that they probably went to a good college and have a good job and are capable of of and willing to do what is necessary including we've had many people who uh rented out rooms like you have a valuable asset it has income producing uh capacity i used to go sleep on the floor and rent out my own bed you really want to keep your house that certainly is an option yeah so it's it's interesting though on on the one hand you can buy more assets and spread it out on the other hand one of the things like you're talking about is um and and maybe i'm wrong correct me if i am but i it sounds like you get into more disputes not that it happens all the time but but a higher percentage of those get into disputes with the borrower um because they're a higher value property and they've got a lawyer on speed dial and they've got them on retainer and and this and that and that's kind of been one of my strategies is i like the lower end because they don't you know it's it's very unusual that i'll have a borrower fight me on something where i'm i'm just i'm going to prove i'm right and i'd i don't want to put anyone through that frankly but at in the end i know i'm going to win so it would be just easier and better if everyone just got along and and didn't put up a fight and and it's it's very uncommon that i'll have anybody try to you know put up some kind of a a major offense of trying to trying to take me out but it sounds like that's something that you you encounter more often it does happen though though it's a very small percentage of the portfolio and frankly unless you get a really really aggressive debt or defense attorney yeah yeah the debtor's attorney can often be a great ally for you because human beings are just emotional people of course people are scared and upset they're they're afraid they don't know what to do they call their lawyer all of a sudden you have a rational person who can explain things you know if you're in an adversarial position with your borrower you're telling them you owe me money and they're saying but i prefer not to pay yeah you can say no no this is the law this is how it works it's quite another thing their lawyer says actually you took this money actually you have equity in the house uh you can lose your house pay or you can file bankruptcy in which case you still end up painting yeah yeah yeah interesting i don't know frankly i love it go ahead no no it's interesting because you're saying a lot of stuff you're dealing with is something that we almost feel like a newbie yet right we're not dealing with a lot of stuff you're dealing with um but it's the same game like you said before of understanding that this is still an asset that you have the legal ability to collect on you still that power and most times seconds aren't the one for closing we know that but when you do you have the ability to take that asset back and be subject to and sell the asset rent it out and own the asset even not without having to take the first out position at all which i think most people don't even know about yeah the first generally never knows one time ever we took back property and you know we just start start writing checks to the first mortgage they call us they're like guess guess you foreclosed on it thanks for the money just keep us posted on what's going on okay have you ever been in a situation where you bought a second and it was actually a first uh yes and and we we knew it typically the the bank has got a huge tape of of junior liens some of which depends on the bank are are straight up juniorly second lien here's a specific amount uh straight amortization a great number of home equity lines of credit which are overwhelmingly seconds but if you have a house that you own free and clear the bank would very much welcome you to have a home equity line of credit on that house as well all you have to do is check title and the bank when they originated this they probably did check title but they're just they're getting rid of what to them is is their junk loans and they're not looking too closely it's a lot of work you've got to go check title and you'll occasionally have situations where it was originated as a first you will very occasionally have situations where they had a first and they paid it off i who got an example we're gonna yeah uh without too many details it was a house in the mid-atlantic states i spoke to the borrower he had a second uh he was like a fairly smart guy he bought this house when he was 17 years old right at the peak but like he was a go-getter at the time who was having employment struggles and we could see the house is pretty rough house i think under a hundred thousand dollar house had maybe a seventy thousand dollar first and our thirty thousand dollars a second you could tell i was underwater so we tried to contact him and and without many results and i thought we're just going to let this sit for a while but we keep checking up on the first and all of a sudden it drops off their credit report paid in full then i'm really motivated to talk to the borrower like oh yeah dad gave me some money to pay it off right then oh now all you have to deal with is your new first mortgage yeah which which he didn't like very much didn't want to get a job but eventually did get a job and his boss was so upset about how unfairly we were treating him that is that his boss gave him a loan to cash it out the boss was like oh i can't believe you treat people like this and we treat our customers so much better good luck i hope you enjoy this dealings with this customer wow that's cool i mean interesting you know how often are you calling your borrowers nathan does it a lot um i do it from time to time when i feel jumping in assists the situation how often you get on the phone call your borrowers who are not performing it's a great day when we can get them on the phone i love talking to borrowers uh like you get so much information part of the the most important thing on that call is listening yeah people love to feel validated and listened to that they're never going to get that from the bank they discover quickly this is this is a very different situation they've been facing before someone who's going to consider their individual circumstances we had a borrower in the bay area normally we do you got two years to sort yourself out and figure out this problem this problem which you originated and we are helping you with and he's like listen i got i got my last daughter graduates from college in three years it's going to be hard for us to to make all of her her college payments and get our credit and and savings in good shape can you give us three years because they explain and documented a very specific situation and that the three years was up i think may of 2020 when they called again after making every payment on time every time and before their loan came to maturity and said listen it's a little bit hard to refinance right now uh we're facing pretty uncertain unemployment they have a specific reason they kept up to date with us on what's going on make sure they're still paying the first mortgage and we've got insurance on the property of course we'll extend it you know we're getting substantial like this is like an 800 monthly payment also awesome so don't mind too much that's awesome but i would always rather have them cash out you buy at a discount yep you get cashed out in full wash rents repeat and buy more loans that's awesome i love it me too i love talking to the borrowers you get so much information and you get the story behind the default and if the story really makes sense and if especially if they can document it then yeah for sure yeah i'll work with you absolutely and they are so grateful and they are so you know overwhelmed that somebody actually stopped to listen to them which is a huge deal yeah we feel bad but we can't make the deal happen we administration you just can't the numbers don't work and it's like you feel bad and yeah i think that emotion comes off like i wish i could help you and at least they're appreciative of you giving that effort yeah so i i i would love to talk with you guys about a thing that i've recently discovered yeah for people with a lot of equity there's this a product it's been around 20-ish years shared appreciation mortgages i discovered this this year i found some modifications of the first mortgage i love modified first mortgages right because they got sweet terms you know if you want a good mortgage you have to have great credit lots of reserves to get a great mortgage like two percent for 40 years and some forgiveness you have to default on your loan so you inherit those benefits if you're buying a second on a house where they modify the first mortgage whether or not you take it back the borrower is paying less per month on the first mortgage leaving them more available uh income to pay for other things and god forbid you did have to take it back two percent money i if you guys can go to the bank and get two percent money please advise me on how to make this happen yeah otherwise i i'm going to enjoy these these benefits in my own portfolio so so these shared appreciation mortgages some of the firsts i think they got in a bit of trouble with this and you can see that our defense attorneys might argue with this when it's when it comes to you know when they've received the benefit of something and time comes to pay the cost but the these first mortgages that i've seen modified with awkward they get a cut of the appreciation they say all right here's the value today that we've agreed on and when you sell it refinance you owe us you know 25 percent of the appreciation beyond this point so there are also many companies who originate shared appreciation mortgages usually as seconds and they will just give borrowers cash with no payments some of them go out 10 years some go out 30 years it's the exact same second strategy that i'm talking about you participate in the upside and these companies they have a much lower credit threshold you know i i called one up like i got to see if this is real their credit their credit threshold no bankruptcies or foreclosures in the past five years and you have to have 600 fico and we will send you cash holy smoke do you think anyone would be interested in like getting a lot of money but not making payments this is what uh it's it's difficult to see you know you have to enter every single detail for your own home before they'll tell you how much they're typically taking um 10 to 20 of the appreciation in the future but it's a great system for the investors in that thing too because they're for a fraction of the price of the home you know their proportion of the appreciation they get is is going to end up being more than than what they would get you know just investing at six seven eight percent in the stock market on that same money it's a very long-term investment just like i talked about right you put another 10 000 today you get 60 000 in five years that is 100 rate of return you have to have that staying power right you could and it's like the golden goose right you can kill the goose if you want foreclosed press to foreclosure and collection now when they don't have the capacity to pay or or or get in touch with them you know i lost my job lots of people lost their job there are other jobs you give people a chance to get back on their feet it's better for both of you well i may be persuaded to buy some seconds in my personal portfolio but i don't know that i would do it for my investors but it's very interesting i think you're right i think it's something that you know we've always been stuck with buying performing seconds right we if we bought a second i was a performer because i don't want to sit there and wait for you know shelve it for three years um but you're right if you have long-term money i mean this is good stuff for like even like if you can get into college savings stuff having your kids like sure it's a great method to do that kind of stuff ira money right where you can sit there and get the returns are astronomical if you can hold on for a while and you're right you're buying for cheaper than we're buying first all day long and if you go to sell it you're still going to get decent money right now um and with appreciation still going up which is shocking everybody that still makes it more valuable because you're getting more and more equity and so even if appreciation stops i mean say it tracks inflation inflation i i suspect the inflation counted and documented today is just is not reflecting reality 20 of the dollars in existence in the known universe were printed last year we're not seeing inflation that reflects that which is to say no one's telling us about inflation that reflects that yeah but you make more of something it devalues all the other things that are and yeah and it inflates the value of all the other things as measured in that denomination lumber just hit an all-time high as alongside the stock market and bitcoin yeah you can leverage your portfolio more the same hundred thousand dollars is going to buy you a share of a lot more houses and a lot more of that lumber if you're investing making small investments in multiple seconds instead of putting that all into one first we also have all this concentrated risk in just one property in one area very interesting so i've asked a couple of people what do you see what's your crystal ball prediction for uh covid fallout uh my best crystal ball like the new administration yeah they saw biden was there with obama the entire time they they're going to be a lot of government measures to prevent an avalanche of foreclosures some of which are going to be like asking the taxpayers for more not that popular or just printing more money to solve the problem but also going to be to try and solve the problem you know it's easy to say oh there's all these foreclosures that banks fault if they just wouldn't foreclose we wouldn't have this problem so you can have regulations that make it more difficult that's i states many states are already doing it i just see this as an inevitable reality argue with it if you want but uh agree with reality and develop your strategy accordingly i think is a much better way to succeed wow that's an interesting spin on that yeah let me share this with you guys some of the more questions we've got i'm going to wrap it up in a few minutes but i just want to make sure we get these questions while i'm distracted my bodies [Music] so those two questions we got from rain gray yeah i'm seeing on here on on the chat what was the primary source of your second lanes that you bought one off i've seen pools only we do have uh we have a couple of brokers that we work closely with that are that just they have very good seo for their website center and they're buying seller carry second mortgages you know their bread and butter is the first so they they send them to me um ray also says 10 to 20 appreciation just change my concerns about a lean being a depreciation depreciating asset i can't i don't have exact crystal ball about how much the real estate market is going to appreciate but in inflation it's just a very real thing it just happens it's happened over the entire course of history of the us dollar of every reason to believe it's going to continue and frankly even if the real estate values stayed the same there was no inflation you got your seconds as long as people are paying that first mortgage your equity is increasing because they're paying it down even if the value of the house uh does not but like just timeless fundamentals of human existence and nature people like to live indoors there are not enough houses to house the people of this country that that want their private space uh the value of housing has just also gone up with zoomtown covid i've been working from home office since 2015.

it's pretty awesome i commute i got some really nice slippers very comfy even better than being in traffic people can live anywhere and and many of the best jobs highest paying jobs are those that you can do remotely i would much rather have people who are successful people in finance uh i was about to say law to be honest generally rather not have lawyers in in the portfolio but highly paid successful professionals who can now work and live from wherever they want number one i think one of the number one most appreciating states now is idaho where people are just taking their portable jobs to go live somewhere more affordable with a lot fewer of the of the social problems that that you see in virtually all large coastal cities i do see in new jersey we have a lot of people moving out of new york city and moving into central jersey just for that reason i could sell my million-dollar house in brooklyn move to central jersey buy four or five hundred dollar house work from home save a ton of money and i'm fine and that is happening quite a bit yeah an enormous phenomenon and people are investing more in their in improvements on their houses as well to make it you know this is your home and your office so more nice rural properties are are have increasing cachet because of the zoomtown phenomena after you know the era of mcmansions in the mid 2000s people were building smaller houses just as a place to live because they still had an office to go to yeah seeing a trend in bigger houses again because you need to have comfortable office and working space you're there all the time yeah yeah that's amazing so no i would just say like how can people reach out and you know and get in contact with you what are you doing are you doing any kind of are you speaking anywhere are you doing kind of reach out to people that are investors who may be the beginner or middle level who just want to learn more so i do i'm not really in the education business i the number one way you can go to is notedfinancial.com sign up to subscribe i have a lot of free education materials i have my list of every book that i know in the business that describes it i have hours of youtube videos of case studies and specific examples of how how i do it but i don't you know i'm just not and i'm too busy doing it to really do coaching and education i do it a lot of people have been very generous in teaching me in this business and i love to pay it forward but um i don't really have time to do like a coaching uh coaching program but i have everything of you know my public speaking i just make it free for people it's on my youtube um i normally speak at paper source paper source every year since 2014 and um uh normally i speak at imn conferences so that is where people can reach me at notedfinancial.com and i was going to tell the just a quick gordon moss shout out so i told you i read his book and that's how i understood seconds now here's how i got the book he was at a paper source conference and he says okay i got a trivia question whoever answers right can get to copy the book so the question was who is the greatest boxer of all time any thoughts i'm curious i'm curious what you're going to say rocky or something first name that came to my head was rocky and i'm like rocky wow you know george foreman any of those guys guys thank you very much for the opportunity i i have another meeting that i just realized i am late to yeah well thank you very much for joining in here man reach out let us know post your stuff in the uh box and we'll go from there okay thanks it's been a pleasure awesome take care guys thanks.