Deep Dive into Valuable and Compliant Real Estate Notes | Real Estate Notes Show

Episode: Deep Dive into Valuable and Compliant Real Estate Notes | Call The Underwriter Dave's Goals and Plans: - Running JKP Holdings and buying/creating notes for 15+ years - Recently attended Note Expo and Tony Robbins conference - Shifted from non-performing notes to seller finance world and owner finance notes - Planning to have Dan discuss underwriting as a key topic for note creators and seller financers Nathan's Goals and Plans: - Running Earnest Investing and buying notes for 15+ years - Currently selling a couple of notes including one going to First National and another in St Louis Missouri - Working on funding for a different promising project for 2025 - Made new funding partner connections from Note Expo that require follow-up - Called everyone he met at Note Expo but hasn't received emails back from attendees Key Recommendations: - Always follow up with conference attendees via email within days of meeting - Use physical business cards and write notes on them about what was discussed - If sharing digital contacts, add tags and notes to contact cards so you remember context later - Use Google Keep app integrated with calendar to track conference contacts and create follow-up checklists - Underwriting borrowers is critical when transitioning to seller finance notes to prove ability to repay and protect against foreclosure complications Topics Discussed: - Conference follow-up strategies and the importance of not losing connections - Shift in real estate note industry from non-performing bank notes to seller-financed notes - Evolution of due diligence requirements when buying different types of notes - Borrower underwriting as differentiator between bank notes and owner-financed notes - The niche and underserved nature of real estate note investing market - Information opacity and barriers to entry in note investing Guest Insights: - Dan Deppen discovered notes 8 years ago while seeking investment diversification outside stocks - Was attracted to notes due to family background in loan business and MBA studies in fixed income/bond analysis - Note investing is attractive due to small niche market with limited individual competitors compared to other real estate investing - Information scarcity and extra moving parts/hurdles have historically kept the note market small - Many people spend years trying to learn notes but never feel comfortable enough to execute on their own [Music] hey everybody Dave puss from jkp Holdings welcome back for another real estate note show alongside me as always Nathan Turner how are you doing well better better than week it's been a rough two weeks I guess we had not Expo I got back from that and then I got we went to a Tony Robins and I got home from that and then my body just crashed yeah so I was in bed for a few days but glad to connect for a few minutes man before we bring our guest on and for those who don't know us um I run jkp Holdings and Nathan run Earnest investing we've been both note buyers for 15 plus years um we've created notes we bought notes we've done everything in that whole world um spoke Nationwide conferences all that good stuff and we just bring content to you guys um as we learn you guys learn alongside of us um this will be out recorded could be on YouTube our podcast and everything else but with that said tell me about what you're doing lately Nathan I am doing a few things um looking at buying a couple more new notes uh I'm actually selling a couple as well if anybody's interested I got actually one looks like it's going to go to First National I got another one though nice up for sale if anyone's interested it's just a little guy out in U St Louis Missouri but uh yeah selling some stuff reing um some other notes and working on some funding for a different project that I'm doing that looks really promising awesome line about that it's interesting uh but yeah it's going to set up 2025 to be a very interesting year um awesome it's gonna be really with that said Nathan what would you get when we got back from note Expo what was your next steps what did you do after getting back from no Expo followup followup followup followup there and I see this happen all the time uh where and you and I have talked about this where you go to a conference you meet some new people uh you've collected information whether it's business cards or or their contact information or whatever and then all too often people don't do anything with that information and you you just had this great introduction you've had this great you know initial meeting with somebody and you're you're excited to go do something and then just BL and nothing happens yeah um and that is such a shame um I've got some new funding partners coming out of node Expo I've got some people coming to DME from node Expo um sure I mean there's there's lots of great stuff that's why we go to these conferences it's not just for the weekend it's for the weekend plus everything that comes after the connections that you made at the conference so follow up follow up follow up send out the emails make those phone calls whatever you got to do absolutely I think people lose that I'm G tell you right now I'm going to call it everybody who met me at do Expo I have not got one email at all anyone from no Expo I'm sure you all got emails from me right it's something we first do when we go to conferences so if you've never been no conference I'm GNA tell you to stand out is follow up with an email for everybody you've been hey it was a good talking to you and Nathan I's biggest trick it's not our trick but we use it all time business cards physical business cards card s bring them and write on them and just write on them what you guys talked about right and figure that kind of stuff out so so yeah real quick we talked about that while we were there because a lot of people are are not carrying business cards anymore so we talked about a little bit but what's your strategy now like if somebody says oh I don't have a card here's my contact information I mean if it goes into my contacts I will never see that again I you know I've already got hundred some contacts I won't remember that I put you in there from that conference I won't remember so what's your strategy how do you how do you deal with that I think for me is I I I try to take a quick note inside that contact card and tag them um and write down a little bit about what that is so that I can get a better understanding of it when I go back to it but it's really hard when people share a contact it is literally impossible for me to do yeah I'm I'm never going to remember you know we meet dozens of people at a conference I'm not going to remember that one that I put into my contacts so I'm I'm I'm with you I'm still a fan of business cards I think there's a lot of value in that um same I make notes on that card this is who that is this is what we talked about barring that if if I don't have people just the last couple conferences I've been to I get out uh I use Google so on my phone there's the Google keep it's just your like to take notes and I get that out uh so I'll write down the person's name and a little bit about what we talked about uh that's where I keep everything and then when I get home right beside my calendar app I can pull up the Keep app uh and it becomes part of my calendar so I can integrate it right there into my calendar um I can turn it into a checklist so once I've contacted that person I can just check it off uh it's it's very very handy but there's got to be something else because if it goes into the context it's lost forever yeah absolutely so for those who've been to conferences and you haven't done the stuff start doing it if you haven't been in conferences I would definitely encourage you guys to attend with that said you know being a note buyer for 15 years we've seen a huge change in the industry um things just seem to change constantly and you have to adjust with it um but we've seen a lot of stuff over the 15 years of buying notes from all we did was you know short sales to buying Bank notes buying non-performers then buying and then reperform it and foreclosing on it REO sale things like that um and then we turned around and said okay what's next and we realized that we couldn't buy notes that were typical notes in the world of um good yield good returns um and things like that which I fully understand right so in the market yeah so when we do do that it makes us adjust and when we adjust you have to learn yeah and for me I we knew where we had to go right we knew we had to adjust to understand the seller finance world who they are what they do how they do it and what makes them good or not good the new due diligence we learned right um again I apologize my voice is cracky from being sick for the last couple and so Nathan we're getting uh just coming over it but we're energized because this call today we're going to have Dan talk about it was one of the first things we had to learn in regards to the owner finance world what would you say that what would you say the biggest difference was when you bought a note from a bank you didn't worry about underwriting yeah totally because when we both got started it was all about non-performers so I did some um note creation before that but but but the bulk of both our careers has just been non-performing notes so with that firstly non-performing note uh my interest in the borrower on the due diligence side is minimal I I pretty much didn't care who the borrower was or or what their background was or anything like that uh there was a little bit of due diligence that went into that but hardly uh the bulk of it was on the property and just checking it out so yeah underwriting the borrower and figuring out who they are and and their ability to repay and all those kinds of things that didn't make it I mean it didn't really play into a lot of what we were doing uh for a long time so that's been a big shift is trying to figure out the borrower and how we can work with them and making sure that we can underwrite them properly and know you know with some accuracy um what the pay history has been and and therefore the pay uh future if you will what that's going to look like sure sure so I think that is the key here right for those who are creating notes and those people who are looking to seller finance underrating is the biggest key that you may not know about um and why is it a big deal the reason the big deal is if you have to foreclose or when you have to foreclose you got to do in a spot where the borrower doesn't look like you're being taken advantage of them yeah and that's what underwriting does it proves the ability to repay so let's without further Ado let's bring on our buddy uh Mr Dan deppon how are you my man I'm doing good good to see you guys again yeah absolutely yeah I got to hang out at the conference a little bit at not Expo it's good to see you yeah so Dan can you share a little bit about your past save our voice a little bit how did you get involved with notes how did you get involved with now taking over Paul the underwriter how those two things happen yeah sure so so I discovered notes about eight years ago and I found it originally when I was looking for I was looking to diversify my investments outside of stocks so I um when I was 19 I started buying stocks and I was always like into that and I had traded those throughout the.com boom and bust and the financial crisis and you know I didn't want to move out of stocks but I wanted to move some of my money into real estate and even back then the real estate market in the Denver area where I am uh the cap rates on rentals were real tough you know it's kind of a challenge and so I was looking for Alternatives and somewhere along the line I came across notes I don't remember specifically where I first saw it but I was attracted to that because I had my dad and my grandfather worked in the loan business not specifically this what they did was different but I had kind of grown up around loans and then when I was doing my MBA I took a elective and fixed income which is different than that but it's all Bond analysis it has a lot of similarities and that was one of my favorite courses and so that kind of Drew me into it and then I stuck around because I like that it's a nichy market that not many people participate in right so the the size of the mortgage market and the seller finance Market is vast but then the number of individuals like us running around doing this is really tiny so it's kind of nice versus other forms of investing where you're competing with everybody and their mom for for the same deal so yeah it's amazing I I explain to people that there's as many note buyers Nationwide than they're probably a quarter of the Real Estate Investors in New Jersey the fact it's so small it it is great it's amazing factor for us to to understand that it works because it's such a small niche market and if you understand it you can take advantage of it tremendously yeah I mean the reason it's small is information is hard to get there's there there's some extra moving parts that you have behind Beyond other forms of real estate investing not that it's that hard but there's like some extra hurdles that tend to stop some people and then like getting the information in how to do it has historically been fairly opaque and and hard to come by so that that's kind of kept it sort of small yeah I was talking to somebody just yesterday and she was saying she's been trying to learn about and and trying to buy notes for several years and she just never really felt like she quite got it or where to find the notes or you know how they worked never to a point where she was comfortable enough uh just jumping in on her own and which is valid that's fair and especially if you're yeah you're somebody who's you know working a full-time job and trying to do this on the side there's a lot that goes into it I know we all talk about it like you know it's so easy and anybody can do it and to a certain extent yes um can understate that there are things to learn and you can't just jump into this yeah and it's hard to do because because I spun up doing it alongside you know pretty demanding W2 and so when you've got that and kids and life and everything else like yeah it's it's not it's not always a straightforward thing right right it's also nice that it's a small enough group we don't often compete with each other uh but even when we do it's pretty friendly uh yeah we're pretty you know relaxed about you know if Dave will be bidding on something I'm bidding on the same one and we've compared notes afterwards he want it I want it and then we'll say hey so what did you bid on that and why did you bid that and it's pretty you know relaxed competition it's pretty nice so Dan how did you shift gears from being the note buyer Focus to becoming an underwriter yeah so well I mean I still bu while we're doing before we do that real quick for those in in the chat if you have used uh called theator just put in the chat let us know youve used them go ahead Dan sorry oh no that's all right yeah so I mean I'm I'm I still buy notes and I'll continue to do that but I I got interested in the underwriting piece because if you look at the seller finance market for for one it's very large right so if you look at the the numbers that Fred and Tracy ruy have put out it's at least 90,000 transactions a year it's probably more because probably those numbers probably don't capture everything um and there's not really an easy way to do it necessarily so you know the the seller finance Market as big as it is it would be bigger if people even knew it was an option like there's a lot of people that don't even know it's an option and then there's like another set of people that they're like well I know it's an option but I don't know how to do it or it's not that easy so you've got this large Market that's that you that could grow if people knew how to do it the traditional mortgage Market doesn't touch it right like like it's funny I just talked to a guy this morning from what I would call like the traditional mortgage world and like like all of this stuff like just does not compute for them right and and so if you look at the way you do it now I would guess that the majority of the people are sterle doing it what I call like wild west style which is just let it rip like it's 1980 you know and you're in Houston and whatever um but then if you want to do keep up with all the the latest compliance rules and we can talk about that you know you can go get an rmlo but depending on the state you're in they might be hard to find it's probably a oneman shop right and so it's just not that easy so I got interested in underwriting because I just saw the opportunity to broaden that out and make it a lot easier and more accessible to people so actually prior to buying called the underwriter I had spent several months I was working on actually spinning up a competitor and then I found out that Max was interested in selling so I was excited because that saved me a lot of trouble Yeah by by by doing that but I was already pretty deep down the rabbit hole um before that and just teasing through like all the rules and you know the licensing and different things and it's another we can talk about it's um so before you get too far with that use a term that maybe be P may not know rmlo what is it what's it for and is called the underr in rmo yeah so that's a residential mortgage loan originator so that's somebody who originates loans on owner occupied properties right so a lot of the compliance rules we talk about like there's a big difference between creating a loan for somebody that it's going to be their residence they live in and then if they don't pay and get foreclosed on they're going to be out of their home versus say like an investor loan like a loan that somebody's going to have on a rental property or you know a hard money loan on a Fix and Flip or something like that um so what call the underwriter does in in the call the underwriter transactions the seller lender is the originator and so we act as an agent for that originator and we help them through the compliance piece right so so the cfpb allows you to originate up to three loans a year without a license beyond that they consider you a actually word like habitual loan originator but you still have to follow you still have to validate that the borrower has the ability to repay the loan that you're sending out loan estimates and closing disclosures on the appropriate timeline so the consumer has the ability to review all the documents beforehand and so what we help Originators with is the um all of that consumer protection gotcha piece and and what they're really and what they're getting out of that are are two main things one of them is if you're originating a loan well you want to make sure you have a good borrower so if you're going to hold a loan like I want to make sure I have a good borrower that they have the ability to pay I'm not going to have to wheel around and foreclosed I want to be able to rely on that cash flow and then even if I plan on selling the loan or I sell the loan at a future date I've now got this whole package that I can give to the buyer because like you guys were just commenting on earlier right when you're buying seller finance paper you kind of want to know has this been underwritten is this compliant like is this going to cause me an issue down the road and then the big one on the compliance piece the the nightmare scenario you need to avoid is you create a new note the borrower defaults maybe you know early on especially with no significant change they didn't you know have a medical issue or a job loss or something like that so they default you start foreclosure and the borrower shows up in court and goes hey uh I never had the ability to pay this I didn't know what I was doing Dave here was a a predatory lender he took advantage of me yeah and then the judge said says oh well did you validate they have the ability to repay h no did you send them all the disclosures no you could get into dark territory right but if you've got that underwriting package you go no we followed all the rules we did all the stuff here's everything we had well then you know then you're going to be able to foreclose on that line and just to get clarity right this is number three is floating around like crazy can you clarify what the three a year is referring to yeah so so as an individual or or or an entity you can originate three seller finance loans per year without having to get licensed do you have to do the underwriting as well well yeah you still need to do the underwriting yeah which I mean if you're doing a one-off right I mean yeah you could go figure out the underwriting but I I can tell you it it it takes a little bit to figure out to make sure right like like all these laws are not always as clear as you would like that's why it took me like months to get these fingered out and I've talked to a number of attorneys and it's funny like I've had scenarios where I've talked to two different attorneys that would give me two different opinions on how to do something and I had a a really great I had a fantastic long conversation with a gentleman who actually helped create a lot of the state specific rules here in Colorado and as I was going through everything with him because I was asking him too like is it okay to act as an agent right on behalf of the seller and he said yeah no problem and in the midst of the conversations at one point I told him like yeah I wanna I want to make sure whatever we do we're not operating in any gray zones right it's all black and white and he laughed at me and he was like oh yeah he's like I I don't care what you're I don't care how mainstream or vanilla an orig an origination you're doing he's like there will just be gray areas it's the way the laws are written so he's like if you're not okay with that like take your ball and go home like it's just kind of the way it is so so that's why when you know especially if you're doing a one-off deal or even you know a handful of them it's really challenging to tease through and validate like okay what exactly am I supposed to do here yeah sure so what would you say the biggest factor to prove the Billy repay is you know we've talked to many people and some people say a checkbook and 30 Grand in the bank is proof enough no I mean you need it's not just one thing I mean the if you had to like really distill it down it's validating that the borrower has enough income to pay the loan so like what's their debt to income ratio and then what does their credit look like so you know if they've got the income to pay the loan they should be good provided they're not you know led up with other DS I've seen some wild credit reports you know now that I've been ping these right I mean so you know I I I've seen some where the borrower like I had one just yesterday where I told the lender I'm like this borrower doesn't make enough to pay this like even if they have no other debts and everything's good it's like they they can't afford this and then you see other borrowers where they have plenty income but they have literally like seven or eight accounts that are in collections and old accounts where the lenders have given up and you know just charged them off and it's like so so I I kind of in my head like like the law talks about D Frank talks about the ability to repay in my mind there's there's the ability to repay and then there's like the willingness to repay the likelihood and you actually and one of the elements is their credit right you do have to consider that now one all too common thing that that I don't think is a great idea is to say okay as long as I get a big down payment I got this big down payment and so even if the borrow were defaults I can just foreclose or you know maybe I did a land contract and I think that's going to be easier um and I'll just rinse and repeat like attorney general what's wrong with that take my money take down payments over and over again take 20% yeah look up the take it back was it the I think it was called was it Colony Ridge okay outside of Houston I think there was a a company that Texas Attorney General just went after they had a 12% foreclosure rate and so right now in the country I think I forget what the the publication said I think the the Foreclosure rate is like 0 two or three or something but basically like they had a foreclosure rate that was like 50x wow the standard foreclosure rate and they went after him and and you know I understand what people are thinking when they say oh I'll just get a big down payment and I'll be covered but you know the the reality is borrowers can fight for closures and if you didn't follow the rules and they get an attorney like they could really fight you they can file bankruptcy and drag it out um and God knows what shape the property will be in um when you get it back like you guys I've done a lot of non-performers and I've had some horror shows that you get back so like even if you can quote even if it is a quote unquote like non-judicial foreclosure or a forfeiture on a land contract it's not necessarily any picnic so I don't know that it's really like in anybody's best interest to do that and it's it's flat out like considered predatory you know in the eyes of attorney generals so it just makes everybody's life that much more difficult yeah I don't think it's in anybody's interest yeah how do you verify income because that's one that comes up often is uh you know we've got to make sure that we're making sure they have the ability to repay what about somebody who has um what if they're like a waitress or or something like that and they get paid in tips like how do you how do you what counts what doesn't count how do you verify that yeah so if they're um if they're a W2 employee you're usually looking at the two most recent pay stubs and a W2 uh maybe tax returns okay if there's self-employed you're generally looking at bank statements or tax returns tax returns tend to understate because you've got deductions yeah in there so there's some different ways to do it where people get kind of hosed like there are some people who do everything in cash and it's kind of like under the table or it's tips that are not and and that's tough like like if it's like cash income or stuff you're not paying taxes on then you can't really document that you know and that's tough so like you as the lender you wouldn't be able to say hey I've documented their ability to repay so that that's one of the the downsides of earning money that way so we had a question from Candace uh on Facebook can you clarify if the three per year limit is only for owner occupied buyers yeah my understanding is it's it's owner occupied so if it's not like let's say you're making a loan to somebody and they're going to have it as a rental the different set of rules all the Dodd Frank stuff doesn't apply where it gets a little squishy or gray is if you're talking about like land or what if it's land they could build on it or it's land they plan on eventually doing something that that's one area where where I've heard um differing opinions on although the other week actually before not Expo was talking Eddie speed and uh he was saying yeah like you need to follow the rules on those if they plan to occupy and I trust his opinion a lot but but there are some cases where it's a little bit unclear but I think even if it's an invest because actually we underwrite a lot of investor loans I think it still makes sense to understand like like even if like say it's a rental like you can take an income based approach and you can go okay you know this is going to produce enough rental income to pay the loan I think it still makes sense to screen the borrower because you're like is this the kind of guy that pays his bills or are they going to rent skim me you know yeah on there as well or I kind of like the Bel and suspenders approach okay this person's going to rent it but if it goes sideways on them and they've got it vacant they've got enough income that they can still pay me either way and it's nice to have because if you go to turn around and sell the loan now you can make it really easy for your buyer you're like here's all the info on this here's all the homework we did yeah you know just go what one of the things that always surprises me in the industry is that I think it whether you're a buyer or a seller of a note it behooves you to make it as easy as possible for your counterparty don't just give them like half baked info and go okay go figure it out buy or beware like yeah do it all for them and say here you go and make it like super easy if you want to do a transaction you know and I think people in the last five years haven't cared about the ability to pay because loans are performing things are working out real well it's when it goes bad is when these things are hugely important go in front of a judge tell him you never did a biller pay and you want him to give you a a a judgment that is to Grant you the money that's owed to you um any bar will play the fiddle and will get out of it if you don't have it there's so many reasons that get for a bar already get out don't give him another one right exactly yeah so so when you guys are getting this done you know could someone present some to you and say listen I'm looking to do a modication or any kind of term like that could you provide to A lender what the top dollar per month that person can afford is can we provide you documentation and go hey we're looking to do this I want to see if it's you know 400 a month or 500 a month can you determine what the top dollar per month that person can afford yeah you could back into that I haven't actually done one specifically like that yet but you could take the application and the income information from the borrower you know and and like look at their total monthly income and then say okay I'm going to be comfortable with a debt to income ratio of X and then back in to what they would be able to afford I wouldn't necessarily want to just take it to the max unless maybe you were talking about like a non-performer where it's like okay we're going to do a trial payment plan and they're going to like catch up for a little bit and then and then it's going to drop down gotcha um but yeah you you could definitely you know kind of back into to what somebody could pay and that's a good but we're doing that right now we're looking with a borrower that owes a bunch of money to us and we're saying listen Maybe we make it a 12% but maybe we make it a 20 year or we do a 25y year reduce that term to make it more attractive to US versus make it a 30-year if they're able to for it let's make it happen right think for me that makes sense um what's the rule of thumb for DTI D income in your world in the you know creation time so so so one of the really interesting things about the dodf Frank rules is they don't give you hard numbers yeah this is one of those gry zones right so what you're supposed to do and this is what the guy that created the Colorado rules told me as a lender you create your set of Standards you stick to those consistently and you doent it and if you start to see a high foreclosure rate you adjust them but that's kind of how it goes so a lot of times we use the um some of the standards from the government programs and so a lot of times we'll use 57% debt to income which to me as a lender is pretty high yeah like and if I was like buying my own residents I wouldn't feel comfortable go into 57% you know like a lot of people want to be down in the 42 43 range or lower I mean a lot of it's what you know you're comfortable as as the lender what one of the things I've got on my list of things to do so historically call the underwriters giving people kind of like a thumbs up thumbs down is this okay this is not okay but I'm going to start to at some point next year I'll start to give them more of a chart where they can see these parameters like where exactly does the debt to income stand uh where's the credit you know all that information is in the underwriting package today but I was going make it a little more clear like yeah you're you're green and then here's where you fall on the range of parameters well that's cool then you can start to get creative and say okay well what if we adjusted this or we adjusted that and you can kind of work out some of the parameters and see what's gonna help that's cool exactly and and one of the things people need to realize too and the other thing I'll call out that's like important when you're finding a borrower is you like so let's say you go out you find a borrower they get a contract in place we start the underwriting and then you find out what you've got later right and so it really behooves lenders to have a conversation with the borrower up front and I've got like a little cheat sheet on on the call the underwriter website that I condensed to get an idea that where you're going to land because what I've seen happen a number of times already just in the last couple months is somebody goes out they find a borrower they agree the terms they put a purchase contract in place start doing the underwriting it takes a little while to get the B Wars info you get through it and you get all the way to the end and you're like oh this has some problems or oh This Is Not Great by a little bit and you know then people are like oh do I start over with a new borrower and sometimes people go I'll just kind of roll with it which is not yeah great so I've also been noodling on how to um make it easier for people up front to to kind of V that stuff so you don't get into this like ugly Choice Downstream of taking a non-compliant borrower or you know starting over because that's what call the underwriter right like we do the underwriting piece for the seller I can't stop them you know people you know they're they're the seller I can make recommendations till on blue in the face but people are going to do what they're going to do so I'm trying to think about how I can prevent people from getting painted into that corner yeah so two things I wanted to double back when you said is that you're just make recommendations A lender can turn around and go I'm creating a loan anyway right you don't have the authority to stop it from doing it and be is there some paperwork you provide from a note buy point of view saying oh you originated oh you called the underr to a bill your pay is there a bilar pay certificate yeah there there there's something we give of them now that that I'm going to be changing um one of the things a lot of the buyers want though that we also provide is the loan estimate in the closing disclosure so that shows that you follow the other consumer protection rules and disclosed everything properly on the timeline so like if you're selling to First National Acceptance in particular right so like if they're willing to buy stuff generally they pay top dollar what what one of the things they're really looking for are those disclosures so those are super important to have like I said because there are these gry zones like yeah you can create like a certificate or a stamp but in reality because there aren't black and white standards you're saying like me as a lender this is my opinion of it if that makes sense yeah so so the approach we take is you look at what some of the government programs do and say okay if you fall within these standards that these other programs do well then you know you should be good so let's flip this around just a little bit and I'm going to Dave um so why is it important to you when you're buying a note to see that it's been properly under why why do you care so for me is the fact that I don't want to be in a foreclosure position where the judge looks at it and says you bought a note that has never been underwritten that the borrower has not been approved the ability to make the payment and you're asking me to get for clothes on a house that they bought that you decide to put a loan on them that they couldn't pay and that deal for me the judge can throw out that whole situation out the window and go you know what you're done remove the lean what they could remove the lean said listen nope that loan is free and clear you just lost all your money yeah even if you were not the one originating it you bought it after the fact yep yep because the judge doesn't care the judge cares about the consumer that's in their home you're the the the Speculator that bought the loan they're not super concerned about you this is all coming out the do this is all coming out of the financial debacle 0708 when they were giving out loans like candy and people got foreclosed on because a lot of them couldn't afford the houses I was one of them right couldn't afford my first house but I got a check and said great I'm buying my house yeah and that's what the problem is now is you can't buy that loan and go well it's not my fault it's their problem no every loan we buy that has a seller finance part of it I'm asking for some kind of documation some kind of proof from an underwriter or an armal Lo saying yes this person's the ability repay and and maybe I'll buy that note like the the more that this kind of becomes the norm and it is becoming more the norm I believe um the more important it is for any no buyer so I might create one sell it and then it gets sold again and sold again at any point in that chain somebody's going to bring up oh wait a second was this done with an AR has this been properly underwritten and and it could affect your ability to even sell the note and certainly at a at a reasonable price so it can have all kinds of effects it can be just really a disadvantage to not do the underwriting properly up front so it just soone had a question what's the paperwork called when the Billard pay has been done what do you call a certificate well there there isn't like an official like like with the loan estimate and the and the closing disclosure I call it basically like a statement on the ability to repay it's like a summary of here's what we did but there's not like but there's not like an industry standard form that the government has for that yeah once you do the evaluation they should have in their collateral a doation from you stating that you evaluate it and called it under rare determine that this borrower has stability p and also the 108 transmitt file that has like a summary of the loan and then the underwriting notes that's where like more of the detail is underneath it that says here's our monthly income verified this way here's their credit blah blah blah and that kind of stuff that the 108 is probably the closest to like an industry standard sort of form which which we generate as well so Sydney made a comment on Facebook um that would Fina the disclosures have to have a three-day spread between the issue date of the disclosures and a date of the data of the loan if the issue is three days they view the loan is non-compliant yeah so so this is it's a little confusing the way that the rules are written so bear with me what so so first you need to send out the loan estimate okay the loan estimate has to be sent out at least seven business days before you close Saturdays can count not Sundays not holidays and the day you send it out counts okay orer doesn't have to sign it they just have to have been have it available to them okay then there's a closing disclosure that goes out after you finalized everything now it you know because a lot of times like like what happens with me is the lenders come back and they go oh wait a minute the because every fees that the lender charges are a little different so like maybe the fees Chang I've even had people come back and like change terms so I if it's if like the fees have increased or the terms have changed in a certain way you may need to send out a new loan estimate which would restart the 7-Day clock okay assuming you're good to go and like the borrowers confirmed and the lenders confirmed then you can send out the closing disclosure the closing disclosure can't go out on the same day as the loan estimate and the closing disclosure has to be sent out at least three business days before you close so there's the 7day clock and the three-day clock it's really not that hard but it's it it ends up getting confusing in the midst of it especially when you have and this is matters is this only for non for occupied borrowers for owner this only applies to owner occupied because because what I have happen a lot is somebody sends me a file you know on Wednesday and they're like hey can I close on Friday it's like well no not compliantly because even if I instantly wheeled around with a loan estimate um you know you wouldn't be able to make the seven business day window now the other thing go ahead yeah so just real quick so Clarity guys when we see owner occupant mean the fact the borrower resides in a home also known as Homestead so if this is an investor property or rental property kind of thing it doesn't apply it's only when the borrower is going to live in the home so if the buyer is any kind of entity this all goes out the window right yeah yep and then the other thing that happens often with the loan estimate you might have loan conditions so like let's say that the borrower um uh I'm trying to think of a good example but like there are some cases let's say their credit's kind of low like like usually we're looking for a 620 credit score and above you can mfate that with the verification of rent so they could you could ask them to produce a letter from their landlord saying hey they' made their last 12 rent payments on time because then you're saying okay their credit's kind of low but we're mitigating that by the fact that okay we validated that this borrower has demonstrated their ability and willingness to make um to make rent to make housing payments or they could have a derogatory account right like they could have a credit card account that's 6090 days overdue and you could say okay well you need to send in something showing that you've either brought that current or paid it off or you've got like a payment plan in place with the lender so a lot of the issues that cause it to be non-compliant can be cleaned up right and those are the conditions so if you're sending out loan conditions they can go out with the loan estimate and you can also send out the closing disclosure if the conditions aren't all cleared but you need to clear the conditions before you close on the deal now what happens you know so if it's so the way I've been handling it if the loan conditions are fairly straightforward and they're going to be easy I'll just send them out with the loan estimate sometimes I get them where you're like okay this is really nasty like yeah the borrower could technically clean this up but even if they clean up their 10 derogatory accounts like I wouldn't lend to them so sometimes I'll just send the loan conditions to the lender and be like do you want to proceed with this like how do you want to handle this and I kind of leave it up to them and then there's some like it that that would just be a flat out no like they've had a you know bankruptcy forclosure or if they've been 60 days late on a mortgage payment and the last year it's like nothing you can do to to mitigate that and we encourage people make sure you know I get the fact you want to sell home I get the fact that you have a pre of property do you want to put someone in and make payments so maybe you can sell the note or whatever you're going to do I'm telling you right now spend a few extra days even a month and find the right buyer we're in the spot where we're trying to put people in homes not putting people in houses right we want a long-term buyer I'm telling you it's no buyers performing notes are boring but they're awesome right if I can buy a good solid performing note um we encourage you to do it and me and Nathan talk about all the time on our show we encourage you to create two notes 70201 kind of strategy where you create that first lean 70% of the value of the property you take your 10% down plus and then you make the second lean the balance the difference and that allows you a to sell the note right if you chose to sell the first lean have an Infinity return but also put you in a great spot that it will also pay off whatever debt if you have underline debt on the property as well and then you don't care how many loans you're creating do you what do you mean if they're going to create two loans 8020 or 7030 you know kind of note does that yeah no oh no not at all no a lot of people do that no I mean and and that's a pretty good strategy right because then like you were saying depending on how somebody acquired the property they can often architect the deal so that they own the second free and clear y but then because and like a lot of people do like an 801010 and so now you've got more equity in the first so like you just made your first more valuable because now the first has 80 or 70% loan of value instead of 80 or 90 yeah um so yeah that that's a pretty good way to do it yeah you know it's it's an interesting field as we learn it right because none of this to any of us I'm sure after to 2019 cared about the stuff yeah right we're buying Bank stuff why is Bank stuff not they're underwritten automatically it's part of their process yeah and and I gotta talk to some older people about this and I don't know what you guys think maybe I'm off in the weeds but like I've got kind of a theory that you know back in the day like in the 80s and stuff Eddie speed and all those guys were buying mostly seller finance paper yeah and that maybe the financial crisis where everybody was buying distressed Bank debt that that was kind of the anomaly and and we're just coming back to kind of where things were buying yeah seller finance I don't know I I could be off on that I'm interested I need to I need to talk to some people who have been through all those Cycles to to Suess that out but yeah the financial crisis definitely brought a lot of us to the game but I agree with you that we're going back because Bank debt is not easy to buy I know there's been people out there promoting it um I'd like to see if they close on it and if they do close on it I love to see their numbers no they won't and I and I can talk about that because like if you're buying Bank debt you're competing with large institutions that have ultra low cost of capital yeah and then that's why people are always like oh my God how did they buy that loan at that small yield well if you're borrowing at 4% and you're buying debt at 6% it's free money it doesn't matter yes that it's low right but but if you need some return in your self-directed IRA or you you're using outside investor money well then yeah of course you know you you're never going to be able to touch that the the common like like whenever anybody like discovers the note world and they look at it like where their brain goes instantly and it's reminded is okay where would I go to buy mortgages oh I would go to the bank because that's where they're created it's just common sense yeah but the reality is that's pretty tough and so yeah I think some people promote that because it it's like what con artists do right like they they want to sell somebody a story that that's already in line with kind of what they believe so it's like an easy sell oh yeah of course I would go to the bank it makes sense but the reality is it's not an easy go and and that's okay yeah because there's plenty of other Finance paper moving around out there to buy and and a relatively small number of us chasing it so yeah you don't have I was one of the I was one of the smart people that went to my local branch Bank Nationwide Bank and asked the teller can I buy your notes and they looked at me with three eyes right and I I thought I was smart I thought I was a question no one asked them and I sat down with a desk person and said the same question they said we have no clue you're talking about this is 2011 2012 and what you don't realize is the way it structures differently right you're not g to buy directly from Bank of America it's not gonna happen right you may buy some Regional small Regional Banks possible right and like I said even if Bank of America would sell to you you're G to be getting a really low return because you're bidding against people with ultra low cost of capital so you know it's just it's just kind of a losing losing game absolutely so what Dan's sharing on this call today guys is that not only does this loan make it valuable we're selling it right because to us it becomes either a yes or no why I can't go back in time and go back to reproving the borrower after the notes created I can't buy and fix it I can't do that right it's a yes or no so it becomes valuable not becoming more valuable it becomes Val valuable by doing the underwriting process right and on the flip side when you create this it prevents you from being a spot that looks like a predatory lender walking in front of a judge with your attorney or your attorney probably won't even take the case and you're going to be in a really bad spot so I get the fact there's teachers out there to say just do this just do that we're telling you from a legal point of view yeah and if you've talked you know if you don't think that if you weren't the originator but you bought a piece of paper that had problems talk to anybody who bought a harbor land contract in Pennsylvania like on one of them that's a that's a whole story for another day but yeah yeah that that was not fun I had that too that phone call from the attorney general that was not my most favorite phone calls ever I had many calls with the attorney general and and the problem I had was I was like you know they wanted me to restructure Le I'm like cool whatever fine but then the borrower wouldn't cooperate and so yeah it became this whole thing yeah I got through it but yeah it wasn't great yeah me too it worked out okay but yeah different call we we'll go over that one day so so Dan it you know it's a pleasure always talking with you um and it's amazing what you've done caller is something that we all appreciate Max and previous owners you taking it over what could we see in the future will call the underr for those who are using you currently that may be a change moving forward yeah I mean I think one of the changes you're going to see in the coming months is the underwriting report you're going to get is going to be a little different it's going to be more simple yet more detailed and usable and there's going to be more of a focus not just on saying hey is this compliant or not but teeing you up to have a more valuable loan that that you can go and sell yeah so and then the other thing you're going to see is um rmlo Licensing in you know a number of states through the first half of how about automation you know you and I both love automation yeah so so I I've I've got my first set of standard operating procedures in place and I'm going to be doing the second set here and then I'm going to be hiring some loan processors to turn the crank because like one of the one of the things people have told me that they've sometimes bumped into with rmos they tend to be like one man shops right so like if that person's busy that person's on vacation that person gets sick right um that can be rough and and so where whereas a lot of times these deals are fairly time critical so I don't have it yet but you know in the coming months I'll have people like on call during business hours that that can keep pushing these things and working them so that we can do more that that's the other reason like all the origination shops tend to be pretty small because one person can only do so much as I've learned like firsthand with this whole transition process the last couple months like there's only so many hours in the day so you got to you got to be able to hire people to to scale it out but then you got to have the systems in place to be able to do that so I've got a big backlog of things to do for next year absolutely that's exciting though lots of uh lots of cool stuff coming up yeah for sure we did have a question there um I'm gonna suggest that you uh sandre to reach out there's a link inside the chat on how to get a hold of Dan I would suggest you doing that um and go for more of a specific questions for that that'd be awesome um yeah and I'll go back to the question later I don't have Facebook and Linkedin up because I didn't want to like goof up call so so I haven't seen the questions but I'll go back and check those later yeah so Nathan you want to finalize our call here yeah looking into that question interesting question be a good one all right I'll be interested to hear kind of the answer that yeah so it seems to me like you're you're barely bullish on uh seller finance being a thing going forward uh what do you see coming down the pipe here economy wise housing wise what see oh gosh like historically my economic predictions are are really bad um you know seller finance is already a very large Market I I think it'll grow at some rate um I don't in fact this is another thing I had a conversation with um Jeff Watson about um you know I don't see the scenario where it would really shrink you know I think it's a question of whether it's like a slow growth rate or a high growth rate but as far as as the underwriting part since a lot of people creating stuff are not at doing any of the stuff they're supposed to be doing like like there's a big opportunity in helping people create better paper you know part of the reason they do it is they don't know yeah so yeah there's plenty to do we're happy to help you get the word out the better the notes that are created the more we can buy so people out there may say why are you guys helping them and the reason is all of us can buy the loans there's plenty of loans right um like I said there's in the chat there's a link a bitly link so you can fill out the form uh that will be sent to us as well as Dan and Dan's information will be sent to you um Dan also has a great podcast too if you want to check it out um that will also be part of that thing but um and I just realized I got a message from uh one of my assistant that there is a h best of notes so make sure you vote for Dan call the under oh yeah that's right best of notes uh for that uh choose one of us for the podcast um it's a friendly competition um but it's awesome right uh Dan someone we've known for many years now a lot of respect for him um little jealous he to be kicking butt with the old s Finance dudes but uh real proud he's doing it and uh making Headway with it so Dan I appreciate you joining us on this Friday afternoon as I'm losing my voice here and uh it's been a pleasure having you on and talking for a few minutes no appreciate you guys having me on enjoyed it definitely absolutely hang on for a few minutes and uh for everyone else we'll see you soon our next show is GNA be in a few weeks we're gonna be talking about um got on the schedule uh we have uh coming up on uh sourcing deals through list uh scar rpan will be joining us yes sourcing notes so hope all is well guys have a great weekend we'll talk soon thanks thanks guys take care.