How to Borrow Money to Buy Notes | Real Estate Notes Show

Episode: How to Borrow Money to Buy Notes | Ryan Hughes Dave's Goals and Plans: - Dealing with an eviction in Chicago that is almost complete - Taking daughter down to school next week - Teaching at a youth camp for entrepreneurs put on by the Rotary Club the week after - Receiving inventory tapes from different lenders including nonQM and seller finance people Nathan's Goals and Plans: - Currently in a different location, not in his office - Home for a week in Chicago during summertime - Met Ryan Hughes approximately 2-3 years ago to discuss notes in the lending space Key Recommendations: - Go to experts in the network (Nathan or David) to validate notes before presenting to banks - Call the underwriter to ensure compliance with Dodd-Frank regulations - proper compliance actually allows better pricing for notes - Consider the 70-20-10 structure for note creators: create a first and second lien, sell the first lien to get capital back - Join a fund for completely passive note investing if you want to be hands-off - Don't approach banks directly for note financing - use a broker or intermediary to facilitate the loan Topics Discussed: - How to borrow money to buy notes - Dodd-Frank compliance and its benefits - Note buying vs landlording as an investment strategy - Capital recycling and leverage in note investing - Bank awareness and interest in the seller finance/note space - Alternative lending solutions for note purchases Guest Insights: - Ryan Hughes has 7+ years in alternative asset space (401ks, IRAs, notes, tax deeds) - Banks traditionally work in trunks of 50-100 million and don't understand the private seller finance space - Most profitable divisions within large banks are often hidden from mortgage divisions due to regulatory scrutiny - Banks historically have not been interested in lending for note purchases - viewing it as a heavy lift - Retirement account non-recourse lending is a major part of alternative note financing solutions - Banks lack awareness of the massive opportunity in the seller finance note market Episode: How to Borrow Money to Buy Notes | Ryan Hughes Guest: Ryan Hughes Summary: This episode explores how note investors can secure financing to purchase notes, featuring lending expert Ryan Hughes discussing funding solutions and the advantages of note investing over traditional landlording.

Main Topics: Borrowing money to buy notes, Funding solutions for note investors, Dodd-Frank compliance in note creation, Note buying vs landlording comparison, Passive investing through funds, Lending industry background and experience Key Takeaways: Borrowing to buy notes is possible and represents a new funding avenue beyond traditional friends and family lending | Compliance with Dodd-Frank regulations actually allows note sellers to receive higher prices for their loans | Note investing is more profitable and less labor-intensive than traditional landlording | The 70-20-10 strategy involves creating first and second liens, then selling the first lien to free up capital | Passive note investing through funds offers completely hands-off wealth building | Note buyers should consult experts before presenting deals to lenders to avoid blacklisting Keywords: note investing, seller finance, owner finance, borrowing, Dodd-Frank, passive income, note funding, real estate notes, alternative lending What if I don't know notes and I go to you and I have money and I sing you a note that's terrible.

Can I use you to bounce an idea up and say, "Is this a good note?" I mean, or would they get blacklisted? >> No, I I don't know. They if they go to the bank, they're not then the banker's not going to, you know, it probably won't even listen to them and they'll never get a chance to probably you present that again. I would say go to Nathan or go to David, you know, you know, go to the experts, you know, the you know, the network that you you you've created. Hey everybody, Dave Puts here from JKP Holdings. Alongside me as always, Mr. Nathan Turner. What's up, my man? >> I'm not in my office today.

>> Oh, no different. That's a good thing. >> We'll see. That has yet to be seen. >> This is true. Live things always crazy things happen. So, uh hopefully it works out okay. I'm sure it will. So, >> yeah, >> let's, you know, summertime is amongst us. We're just diving in, doing all kinds of fancy stuff in the summertime, spend time with the family, eating it up for us northern people that aren't from the south, right? So, the summertime's like a a new thing for us, it feels like. So, >> yeah. Yeah. I We've got some great stuff. I I get home. I'm in Chicago right now dealing with this eviction that you've heard me talk about before.

If you haven't, go look it up. It's It's not done yet. We're We're almost there. Hopefully today. We'll see. And then uh I'm home for a week and then we take my daughter down to school and then the week after that uh I'm gone at a it's a youth camp for entrepreneurs teaching kids how to become entrepreneurs about that put on the by the Rotary Club. So that's going to be really cool. So fun stuff. Looking forward to it. >> That's awesome. I'm glad to hear that. That's something I think is underappreciated with everything, right? Yeah. >> Um getting kids involved. They don't listen to parents. So, >> I know.

>> So, that's awesome. Um, >> hopefully the kids enjoy it. Hopefully, they do well with it. Um, I know that they'll get excited. They've been at the DME and stuff like that. >> Yeah. >> Um, >> yeah. >> And for those who don't know us, we've been in the note space for 15 plus years. I own JKP Holdings, Nathan Ernest Investing, different companies, same idea. So, we put this show on for weeks and weeks and weeks. episode like 139 today and we bring on different guests. So, if you're in the seller finance, owner finance world, we're for you. If you're buying notes, we're here as well and we try to collaborate that kind of stuff on different shows.

>> Uh, this will be recorded. It'll be YouTube and podcast. So, please check it out. Today's show, before we dive into it, will be about borrowing to buy notes. I think that's a big thing people want to know about how to do that. Is it possible? Well, we're going to find out from Ryan today. But before we do that, um, we're seeing a lot of inventory recently. I'm I'm getting tapes from different people, some nonQM stuff and some seller finance people who I recently thought to >> didn't want to believe DoddFrank existed, which is interesting. Sorry if I call Yeah, I won't name names, but it does.

>> It does. And it's important and and not just important for the borrowers and being compliant and all that. that's that's already important, but the reality is it it does exist and if you abide by those regulations, we can actually pay you more for your loan. So, it it really is important for people to do this the right way, the way that it's been spelled out. Whether you agree with or not, that's it doesn't matter. Uh the point is it it's there and it's a way that if it's done correctly, we can pay you more. So, it really is beneficial for you to go through the right steps. Do call the underwriter.

Call the underwriter and and he'll get you figured out and make sure that you're doing it correctly. >> Absolutely. Shout out to Dan. Um he's not sponsoring the show this week, but he will be in the future, I'm sure. So, guys, you know, if you are creating notes, feel free to reach out to us. We'll structure a way that you can buy notes better. >> Um we have some videos on doing that. We have some ideas of how to do that. >> Um those are looking to buy notes. This is an we're looking at a a different curve right now than we did 10 years ago. >> People who are who created notes are really interested in what we're talking about because sometimes defaults happen.

They're trying to buy more. I have a guy in Texas saying, "I want to buy a whole lot more. I can do more stuff. Can we just structure a way that we can buy things?" And for that guy, we talked about was the 70 2030 kind of idea, right? Sorry, 702010 idea where you create a first and second lean and then you sell the first lean and get all out of it. If you want more information, let us know. But with this said, for note buyers out there are saying, "Hey, listen. I want to get in, too. This sounds like a great idea." And being a landlord is a a much better place than being a landlord. >> It is.

We've done that. We've both done that where we've been a landlord. You know what? That's hard work. Why would I do that? I can make more money and and having a much easier Yes. >> um process that not that it's no work, but it's a lot less work than being a landlord, I'm here to tell you. >> So, it's definitely worth it. If you want to be totally hands-off, you do something like join a fund uh where you can be completely passive and uh and just watch your money grow. >> Yeah, absolutely. So, one of the things people run into is like landlording, your capital is only as good as you can be, right? And that's the problem with it, right? Is if you buy you have a hundred grand and you spend it, >> what do you do next? >> Yeah.

And then what? And then you're you're going to run out of money eventually as we all are. And then what? And then that's the question with notes for years. This has been like the golden goose, the unicorn that we've all been looking for is funding for notes. And up until now, uh it's been very difficult to find, especially when you're talking to banks. Some private lenders maybe, a big maybe, but it's been very difficult. Uh the best way that you can get that done is is you, you know, borrow from friends and family or you start a fund or something like that. Traditionally, that's been the way that you get funding to buy more notes.

And then we're going to talk to Ryan today and see there's another way. >> Oh. So, let's bring him in without further ado. Summer time's getting long. What's up, Ryan? How are you? >> I'm good. I'm h I'm hot. I I am in the south, so but it's hot everywhere. So, >> yes. I think Jersey is getting 95 today. Holy goodness. >> Well, we have AC here, so I don't know. >> That's awesome. Well, Ryan, you've been around for a few days in this space, and I think your experience is awesome. um you spoke some really high words at DME um a few months ago back in May and it was intriguing. Can you share a little about how you got into this space and your journey to today? Well, the notes in the lending.

I mean, just in terms of lending, I've always been in lending. Some some form of lending, whether it's, you know, consumer and direct, bank, you know, bank, you know, banking, auto, you name it. Subprime, alt, you know, that's a we don't want to talk about that anymore, but, you know, any anything from any type of different lending solutions, MBS, you know, the mortgage back securities, the commercial mortgage back securities, anything with assets, right? you know whether it's but typically mostly real estate you know up until I met Nathan I don't know probably three two three years ago you know he's you know was talking about notes and I and honestly I mean I'm familiar with notes right we we trade them we sell them we buy them from a you know banking perspective you know bankto bank mostly right you know they don't they don't typically buy from you know private sellers that's that's that that's the issue and so it's something about you know having having a solution for that and that's you know Nathan mentioned it and something I've been trying to put together, you know, you know, we do uh alternative lending for or you know, different structure lending for retirement account, you know, so non-reourse, you know, which they they do buy notes and that's a big, you know, big part of it.

So that's where I was really interested in, you know, all right, let's figure out why not do this product or put this product together for banks and be able to facilitate it and just it's just about explaining, you know, how to how to, you know, handle it. And so that's that's really what we you know what I you know been putting together just because of the fact that there's a huge opportunity and I wasn't really aware of that. I think a lot of banks they're not aware that there's a massive opportunity out there because they really don't care. >> Yeah. I think you're right. I think that you know but banks are really big right? They just don't get this space and they buy in trunks of 50 100 million.

They don't understand the seller finance world. They just That's too weird. They're more lazy than we are. Let's be honest here, right? >> And we're pretty lazy, >> right? >> So, it's >> Yeah. They don't want to figure it out, right? You know, it's just kind of we'd rather not. >> Yeah. >> Yes. >> So, I think for us taking advantage of the opportunity just like sell financing bridges the gap between a bank and a person who really can't qualify for the bank loans. So that bridges that gap. We're trying to bridge the next gap of how can we borrow money. But before we get into that, give us a little bit of your journey how you got here.

Did you start as a private hard money lender? Then you got into the self uh self-directed IRA. What was the story? >> No, for me I was always underneath institutional banks, you know, the big boys, you know, in inside their division that no one knew about, right? the most profitable division which is t you know which is a lot really like what we were doing. I mean, we were it was products that typically mortgage didn't do. Uh the regulators maybe they they had they scrutinized a little more. So it was a it was a kind of a hidden they're always a hidden gem and you usually like I said most one of the most profitable uh within the big banks and you know it's a consumer division and they call it consumer finance and they keep it away from mortgage because other regulation it's always around corporate institution never really I I've dabbled in some notes myself you know and just some private stuff but that's it's always been around institutional debt that's that's always what I've just where I've been working with different banks s, credit unions, you know, credit facilities, warehouse banks, and then um getting into the this alternative asset space was really about seven seven years ago when I got into the started learning about 401ks and IAS and what what are they and how do you buy all you know notes and tax deeds, leans, whatever.

>> Yeah. >> And um so that's really where it started and this question came up a lot you know you know can you leverage it? Can you can will you help us? And typically the bank I worked at was like, "No, we just we're not we're not interested. You know, it's just something we're not going to do." >> Sure. >> Just it is it's a heavy lift, right? It's a it is, you know, just something that typically banks don't want to lend anyways. They they have to, you know, it's part of the requirement. You know, they really need to lend, but we all know that it's a it's a pain to get banks to lend and to explain to the credit officer, the you know, whoever you're dealing with at the bank.

I tell I tell all clients, you shouldn't come to me directly as if you if you're trying to do a loan, you should you should use a, you know, a actual expert, you know, you know, broker, bank, you know, someone that understands how to put the the package together >> before you present it to me. >> And so that's it's it's so important because otherwise we're probably going to turn it down. >> So, real quick, explain why are notes so difficult to borrow money for, right? And let's be honest, for those who may not know, and there's plenty of them out there, notes is a lean against a property. That's what it is, right? You can't and and what you have to do is put a lean on a lean, which sounds very duplication like.

And that's the heartache we have is that you're really hypothecating against that note, which means you're borrowing against the collateral and you have to foreclose basically twice if something goes bad. And that's the heartache of borrowing money and experience, right? So, when you're trying to borrow money to buy notes and you're a first- timerr, you have very little collateral to borrow against. Um, you know, people would like to borrow money from Nathan to go buy notes, right? And that's really a fund model kind of thought process versus other ways. And we've done a show on how to raise capital fun level or not.

And that's buying first your own note is the key here first, guys. Pump your brakes. Don't borrow until you buy your first note and work out and figure it all out. And then you can start looking at borrowing money. Um for those who have done five or 10 deals that had quarter of a million, $500,000, they didn't run that roadblock of what can we do now? I want to go I have this great deal that's going to leverage me 14% yield on it 16% whatever it's performing or not but then they get stuck and they're going well I don't have 80 more grand I can either go raise that money but then what happens if that person runs into 10 deals >> right and then they're running out of capital constantly >> what is the first Nathan did I explaining incorrect there that the the the heartache we're having with borrowing to buy notes.

>> No, I think that's it. You you go to talk to a bank and they I think that's the first reaction is like you want me to lend on debt and it automatically just doesn't compute and that's that's the conversation I've had with banks over the years and can't and and what you have to do is put a lien on a lien, which sounds very duplication like. And that's the heartache we have is that you're really hypothecating against that note, which means you're borrowing against the collateral and you have to foreclose basically twice if something goes bad. And that's the heartache of borrowing money and experience, right? So, when you're trying to borrow money to buy notes and you're a first- timerr, you have very little collateral to borrow against.

Um, you know, people would like to borrow money from Nathan to go buy notes, right? And that's really a fund model kind of thought process versus other ways. And we've done a show on how to raise capital fun level or not. And that's buying first your own note is the key here first, guys. Pump your brakes. Don't borrow until you buy your first note and work out and figure it all out. And then you can start looking at borrowing money. Um for those who have done five or 10 deals that had quarter of a million, $500,000, they didn't run that roadblock of what can we do now? I want to go I have this great deal that's going to leverage me 14% yield on it 16% whatever it's performing or not but then they get stuck and they're going well I don't have 80 more grand I can either go raise that money but then what happens if that person runs into 10 deals >> right and then they're running out of capital constantly >> what is the first Nathan did I explaining incorrect there that the the the heartache we're having with borrowing to buy notes.

>> No, I think that's it. You you go to talk to a bank and they I think that's the first reaction is like you want me to lend on debt and it automatically just doesn't compute and that's that's the conversation I've had with banks over the years and it it comes to a a very quick standstill every time I've had that conversation. So, I I more or less gave up and then met Ryan and I don't even remember how it came up, but I I said something about maybe I mentioned how it was difficult to get lending and you're like, "Oh, we could do that." I'm like, "Say what?" >> Yeah. >> Maybe I spoke too soon.

>> Yeah. Exciting times, right? Um but I think for most people, they don't realize why borrowing capital, unlike for real estate, is not easy to do. It's the structure of that note, right? So people out there who are brand new to this space who may came from landlording say, "Well, I'm just going to do what I did for landlording. I'm going to go to Bank of Ryan, tell I'm going to buy this house. I'm going to get a loan for, you know, 70% of ARV or, you know, situation with rental numbers or DSCR loan. Why can't I do that with banks?" Ryan, from your experience with the hedge funds, why does that not make sense for the typical note buyer who have bought one or two deals to go and go nuts and go crazy and leverage up? >> So, yeah.

No, great question. And, you know, the the one the biggest part about when you're doing this and and what we're the difference, right, when you're you're just originating the loan or you're you're buying, you know, if you're trying to buy that or it's collateral, right? It's all about the collateral. And even when you're doing a regular just a regular typical loan, you see it all the time. There's there I mean, well, we see it. There's buybacks. There hasn't been, but banks, you know, lenders will there's a buyback clause, right? They they have a buyback clause. And typically, it's around fraud or misrepresentation.

But now there's always something you can find. Oh, you know what? You didn't have this this document signed correctly or they didn't notoriize this. They typically you can always or you know a serer can you know who services you know pretty much buys the you know and servicing the debt and you know there's you know we can get into that later but they ultimately it's about is the package good that does it does it meet all the requirements you know you know and that's that's number one when a bank's doing it it's their package right their attorneys reviewed it their attorneys approved it there's no issue when you're buying from someone else that collateral that note then it's you're taking it as as it is And you have to and you still have to validate it.

But I think that's one of the problems is there's so many different structures and a lot of them especially seller finance. >> They may or may not have done it to to the to code or to what's required and then so then the bank has no collateral >> so or lender you know you know doesn't matter bank lender. >> Without getting too particular what does a package mean for those who have no clue what the package the special package that you're talking about? Give me some examples what would be inside the package the bank would want to review. I mean there's you know that you know make sure you know obviously the the title right title that you know the deed the note the actual note itself um you know make sure the recording of their signatures they're u that the customers they have an application that's signed you know the you know just you know normal that you would buy actual real estate had just a regular property you everyone probably is mostly has gone out and bought a primary home or investment property themselves so you you know you have to sign all those documents right the the difference is that's regulated, right? There's a requirement.

There's a package. There's a doc set with states with you know the you know so it's it's standardized. It's easy to review that like you know that this is required. These documents are required where when you're doing seller finance notes or it's all over the map >> and so that's that's the I think the challenge right is there's not there's no there's not a consistency or structure around this. >> Yeah. Listen, if you're seller financing, underwriting is required, right? You got to underwrite if the borrower occupies the property. Talked to someone just the other day and says, "But listen, I mean, why?" I mean, I I did it.

I look at their income and said, "It worked out well, it's not proper under rating." And the fear is if you don't do proper underwriting and it goes bad, what happens? Right? Listen, we can't predict things will be future. And some people say, "I do the best underwriting in the world." And I said to the gentleman, "Listen, you could be the perfect underwriting tomorrow. Something can happen." >> Yeah. >> That's outside anyone's control, even the borrower's control, right? So, you got to make sure if you're doing underwriting, that has to be crucial. The docation has to be right. The note has to have all the different things in it.

We've done a show on that before, too. So, those are crucial things. Not even if you're not looking to sell. It's if you're creating and something goes wrong, that's what happens. >> Now, let's take it a step further. Nathan, did you want to add anything to that at all? >> Yeah, like it's, you know, at the end of the day, is the note enforceable? So, if if they quit paying, if there's something that happens and we ended up going to court, uh, is is that note going to be able to go through the whole process and actually complete a foreclosure? That that's at very end of the day, that's what we're concerned with is can it actually do what it's supposed to do? And sometimes the answer is no.

Like if when we see those onepage notes, I'm telling you right now, that is not good enough. That is not going to cut it. If that gets in front of a judge or or a halfdeent lawyer on the borrower side, that's going to get destroyed and and then what? You bought nothing. >> It's marked by nothing and try to collect on that. That'd be tough. >> Yeah. Well said. So, we flip it over. Right now, you've seen all the issues with creating these things for you to be able to borrow money, right, on a note that you're going to buy. Ryan, what's the first step that I I have 100 grand, I bought two notes for 50 grand each, and I want to buy two more from Nathan who's sell me a killer deal.

Could be performing, could be none. What are some of the things that I got to make sure that I'm looking for in the beginning to be able to borrow that capital to buy those two notes? >> Like Nathan said, you know, you have to make sure that you actually have collateral package will will stand up. And I think before you buy it, like you know, let's review like a sample just like buying a property, you don't go typically at least if you want to lend on a property, you send the property to a lender and and they review it and make sure that collateral works. that note, the package you're purchasing is the clatter, right? That's it.

It's not the I mean, the house, yeah, it's out there, but you're buying the the the note, the package and and the debt >> and that's ultimately what so you're that's really your that's your appraisal. That's your house that you're buying. But it's >> so Nathan's collateral package is perfect. It's everything we needed to do. What is my first step? Am I just am I using my existing portfolio? Am I using the portfolio of Nathan's that I'm buying? is my leverage what am I using to borrow money? >> Yeah. So, so no, you're no you're I mean you're typically if you would have well if we're purchasing right we would the what we would do is we'll lend you know Nathan will put down say from his fund or you know personally you're going to put down say and and I'm going to say the notes 100,000 let's say you're buying $100,000 note we're going to lend typically you know we're going to give a 60 say 60% leverage you know say you know it's 50 to 70 let's just say 60 for you know round numbers so we're going to give 60,000 on that $100,000 note.

Nathan's going to put, you know, come with the other 40,000. And that's so that's what we're going to and we're going to have first lean position, you know, we're going to actually well, we're going to have the the note, you know, the as the as the collateral. Nathan would be in second behind us. Um, of course, so that's that's ultimately what we're that's our collateral package. it it's important to be to make sure it's assigned correctly that we you know we that we can actually assign that to us like we're protected like you mentioned about you know the ability to repay there there was an MLO uh on on the actual that they pre you know on the original lending you know when they when they originally did the loan >> even more so now that that's important that's a what h there's no issue right when people are paying and things are great we don't we're not even talking about this it's it's when there's starting to be buybacks and We're seeing that like we talked about at DM DME, you're starting to see the the shift, you know, appreciation, you know, the values are going down.

We're, you know, in different markets. So now it's so easy and I see it on commercial, residential, it's easy, but once >> no one cares about this until it goes to court and they stop paying, right? Then then it's like, oh, let me see your proof. You know, how are you going to, you know, and that's exactly what you said, the judge, you know, how do you prove it? So, how do you make sure that you actually own that? >> So, I think it's really interesting. Two months ago, two and a half months ago at DME, you were part of that panel where we're like, we're seeing cracks, like big-time cracks. And just in the last week or two, I've been starting to see news articles, which is about right.

They're about two, three months behind, generally speaking, and they're starting to bring up these kinds of issues that, oh, we're starting to see defaults increase and we're starting to see these problems and these cracks and things. They're like, "Yeah, yeah, we said that already." >> Absolutely. And then and that's why it's so important to have, you know, the proper package. And it's and it's different when when I say like every, you know, if I put I put together different credit facilities, you know, and I go to these bankers and, you know, and try to say, "Hey, this this is this is an opportunity and I have to, you know, have to put it together for them ahead of time, right? I'm not saying, "Hey, I have this." I'm saying, "All right, this if I I bring you this, will you buy this? Will you buy this this this package?" And it's it's it's different across every bank is has their own appetite.

They have different footprints they want to buy in different areas, you know, so they all have different requirements from not just notes, but in we all know every bank or credit union you go to, you're going to get a different answer. Oh yeah, we can do that or we can or we're going to do 90% of the deal or 60%. It ultimately depends on their bucket, what's full, what the, you know, you know, if they want to expand that in that area, if they need CR, you know, you know, the credits. So it just kind of depends on it really depends. It's hard to there's not a a set like this is going to work which is I think was what we need to do for this is you put a little more structure around it.

>> Yeah. So we have a couple questions coming in now. Um an example what percent of a note purchase of use up UPB what percent of it can be borrowed against or leveraged against? It's to you're going to save number I'd say 50 but up to 70. So you're you're looking at that 50 to 70 range on that on that action. Never above 70 at least. I'm not saying that. I mean I'm not saying it's not out there from private lenders but from a banking perspective. They're going to want to be really more closer to that 50 to 60 uh range. >> And are we assigning that note to the bank? Is that note getting assigned to us? >> Do we does the purchase sale agreement go into our name or the bank's name? that purchase sale agreement that we're buying from Nathan.

Does that purchase sale agreement get signed to us or to you the bank? >> No, that that no it will be assigned to Nathan typically more and then it's there's an assignment clause in there to for us you know for for the actual security. So Nathan's selling me an asset that Simon a mortgage will be assigned to me. That personal sale agreement will be my personal sale agreement. And then does Nathan know that I'm using you for leverage? >> So there there's two ways to look at it. So yes and no. So yet you could there there's there's that structure. So where you're where Nathan's really the serer like a subser and then there's >> so he's a l he owns the note.

He's a seller of the note >> and then he's and I'm assuming that you're collecting that you're servicing it. You're not if you're selling it. So sometimes the we'll actually take it completely over and you're just getting the leverage so you go out and buy more where we're not we're not and then otherwise you're actually servicing it yourself. So if he's using >> but if he's using a serer third party serer like Madison or FCI right and he's a just a a note originator or a note buyer like we are and he sells me that note right does the note seller at all know that I'm leveraging to buy this note >> they and that in that circumstance they wouldn't um you know they're not going to know now if we when we take some sometimes we'll need to take over depending on the situation we would take over servicing.

So then they would know that hey we're now worth taking that note. Doesn't mean that they would know where there's leverage out there. So so in reality they wouldn't necessarily know that. >> Gotcha. >> Interesting. >> So what are some things that matter to you? Like like I know when I buy a note one of the first things I look at is what's the interest rate on the note? Is that something that factors in for you how much you'll lend on it? >> Uh not not that. So no >> that's but we are going to lend to you. So basically, we're lending to you your p and you're going to, you know, typically personally guarantee it in some circumstances.

We definitely want that, >> but we're going to lend. So we're in essence, we're giving you almost a line of credit, >> okay? >> Against against against your against your collateral. And so that's an easier way to look at it. And it's going to be a a line of credit that 8% or seven seven and a half 775. And you're So we >> don't as long as it covers, right? >> It's we're not too concerned about that. So if it if it's below that, then it's probably not going to work. Um there's just that's where we're at on terms of the the rate on the actual to you to the to like the line of credit per se. >> So what we do is you uh you're going to fund me 50% of that note purchase, right? Do you and we'll get into a second performing or non-performing.

Basically, I buy it. I kind of sign it to you. All the servicing gets held by you. I don't have a third party serer. you are my serer, you're doing all the letters, all the information for the borrower and you send all the respit letters out. All that's good. We then work together to continuously do it. Um, does it change? Um, I'm just reading another question we had. Before I get there, uh, Cody asked over on Facebook, what are the three to five items a lender must uh, see when evaluating a collateral package? I think we covered that, Cody. Um, it's what are the key items? I mean, correct me if I'm wrong, the note, right? The collateral from the beginning, the HUD, everything else, the underwriting of the borrower, making sure the origination packet was solid, uh, the note, the deed, as well as any kind of title work that was done up.

Would that be the key items? >> Abs. Absolutely. And Nath you can add to that, but that's that's what we're we're that's the main that's what we're looking at, right? That's ultimately, right? you know, we're going to look at the property itself and just make sure the collateral is there. >> Sure. >> So, we'll do, you know, the BPO, like typical, you know, appra, you know, virtual appraisal just to make sure that actual collateral is still there. >> Got it. >> Are you guys are you guys using Zillow or like how you like what kind? >> No, we have a third party appraisal management company that that goes out and they have a and they they actually do a sat they have a satellite view of the property.

So, Gotcha. Okay. >> that drills down. It's a it's a pretty slick system. Okay. >> Because if you lend on this estimate value, we're in business. >> Right. >> Ultimately, we're lending on the we're lending on the note itself, not necessarily the right, you know, the hard ass. >> Yeah. Yeah. >> And do you care if it's performing or not? Does that affect you at all? >> It does. So, we typically we're not Right now, I don't have the really the solution for non-performing to for for leverage. Now it would be if we did it would be much significantly lower um leverage. >> Yes. Yeah. Sure. Makes sense.

>> Talking 25% of the UPB. So >> yeah. >> So you have to have some capital guys, right? This isn't a 100% financing menu to do. If you want to do that, take a look at our raising capital episode uh with Steve Lloyd bunch back a bunch of episodes ago. Um and Cody asks, "Is this like a warehouse line?" Um yeah, it's it's similar to it. Um, but I don't think you have a set number of, hey Dave, you have a million dollars you can go buy. >> Yeah. >> Are you giving me a million dollars or am I leveraging against the collateral whatever it's worth at that moment? and and we do so so I so one thing so we we do this right and I typically I've done you know when I'm at banks running the you know the actual credit office we do it for certain clients but they have you know they have experience they have you know we we know what they're doing and we'll give them a million- dollar line of credit so they can go out and do exactly what we're talking about but that's a different situation if it's the first time or you're you're getting started you're you're going to look at least 50% um you know down on that actual note And then as you get experience then you can get up to more of the 70 you know you can you can go up maybe even 90.

So it's it just kind of it it varies. Um so from that perspective. >> So I'm going to ask the the the beginner question here. What if I don't know notes and I go to you and I have money and I send you a note that's terrible. Can I use you to bounce an idea off and say is this a good note? I mean >> or would they get blacklisted? >> No I I don't know. they if they go to the bank they're not then the banker's not going to you know it probably won't even listen to them and they'll never get a chance to probably you present that again I would say go to Nathan or go to David you know you know go to the experts you know the you know the network that you you you've created is I would say >> no matter what you're doing I don't care if it's notes buying real estate go investing in syndications cryp I don't care what you're doing you should when you start out you should go with an expert first you know learn it you know it's it's okay you know be a passive investor put some money in and and then do your own.

So, >> well, >> so you Dave, I just we've been seeing more and more assets coming up. I just had one the other day just as an example of if you're going to structure a note, if you're going to if it's something that you're creating, come and talk to us first. >> Yes. >> Where's that light moment? >> Oh, this poor lady, she she put together a note. It's on raw land at 4% interest. Uh, and it it's got a balloon set for next year or in 2027. And I'm just like, oh, that's you. So, I had to write her back and be like, okay, first of all, I don't I don't buy raw land notes, but this is going to be a really tough one to sell.

You're going to take a really huge discount because of this and this. had someone approached us beforehand, I'm more than happy to sit with you for a half an hour and just say, "Okay, so if it's got this and this and this and this," and it's I wish it was a formula. It's not necessarily a formula. There's always going to be compensating factors. Um, but have a conversation with Dave or I or somebody else that knows something about notes before you structure the note so that if you're planning on selling it sometime in the future, we can help you upfront and make it much much more valuable. Anyway, that's my pitch on that.

>> Similar thing, random guy, he told me, we always order finance above market value, which I totally understand. I said, why you do that? He said, "The reason we do that is because these people have no other option but to go through us." I said, "Great." And he says, "My notes are at 7%." I said, "Why would you use seven?" He said, "Well, we can't really, you know," I said, "The banks are six, six and a half." >> Well, you know, we don't want like I go, but you just said on the other side that you raise your prices because you're a private thing. Why are you doing it seven? So, yes, owner finance people reach out to us.

even if we don't buy it, we're gonna help you structure in a way that you could possibly sell it. Um, you're doing a favor to borrowers. But to back to Ryan, that's the pieces that Ryan needs to be able to give you the leverage, guys. >> Right. >> He can't leverage a 3% note >> at 50%. I'm telling you, he's not going to do it, >> right? >> I mean, you're gonna I mean, unless you want to be negative. I mean, >> we we'll do it. I mean, if you're going to be negative on it and paying paying every month, I mean, it's and and the biggest part what you mentioned about when you're doing this is we hire an hire an attorney do a doc attorney.

I mean, have someone review your docs. We we we as a as banks, we we have third party doc attorneys for a reason to protect us to make sure it's done correctly or reach out to David or Nate. Yeah. >> You go and you do it free will and you go on Google Sheets or whatever and you know, even have someone review it. It's worth it's worth the extra 500 bucks or whatever. >> And make sure it's a foreclosure attorney. I just talked to somebody the other day and oh, I got a transactional real estate attorney. Look at it. >> Listen, they probably haven't done a foreclosure in their career and they should have said no to you.

So, >> first off, talk to a foreclosure attorney because those are the people who do day in day out and they may see something new that you didn't know about a week ago, two weeks ago. Things are always changing. Josh on over on LinkedIn watching us asks is what is the servicing fee um from the bank when servicing a what is your fee for servicing a note? >> Good question. >> That that is t typically most service fees are you know and we're not going to pass on normally if a bank's servicing it they take it and they say and they and it's in their price. >> If you're like truly hiring like a third like a third party serer it varies but you want to figure a quarter a quarter point you know is typically a typical servicing fee.

It could be higher, but that's that's pretty steep. >> It's different from our world. We pay $30 a month flat. We pay a flat fee. >> It's a percentage. Yes. >> Yes. Well, you guys are more percentage wise. So, that loan's only 50 grand. You may not pay a lot compared to what our flat fees are. Good question, Josh. Um, when we're doing this kind of stuff, you know, what happens if a default happens? Obviously, we have to come up with the capital to to do the whole foreclosure. How does that affect our relationship when you're borrowing money from us? And is there anything in the beginning to put up as additional collateral to protect you guys if something bad happens and we just walk? >> No, there that's that's a good good Yeah.

So, there's typically a reserve requirement. That's that's why the banks typically do any type of lending like they want to have some form of, you know, they're looking for deposit. They're looking for so they can have deposits so they can do more lending and make money. And you know that's there's you typically a anywhere from a five to 15% reserve requirement of the actual so we're lending 100,000 on that note. We're going to want to see you know 5 10 you know up to 15,000 in a reserve account for that for that rainy day fund or if it's a default and um but typically you know there's also a clause in there to be put on notice if there is a foreclosure.

So the so us as a bank you want to you know you'll get notified right but we're going to get notified as well. So, so we're not we're aware that this is happening. >> Gotcha. >> And then we're gonna reach out to you. Sarah, what's you know, what are we doing? >> Yes. >> Or we're going to call the note. >> Yeah. >> Sure. Yeah. >> Um, when it comes to states, do you guys have a preference of what states you are or aren't? And if it's in Cook County, are you saying no to it completely? >> I am. >> That's that's a possibility. No, we'll we'll we'll look at everything nationwide, you know, you know, major metros, you know, you get into rural, it's it's all about, you know, you know, comfortability and there's, you know, so, but we will look at, you know, nationwide, you know, so no, there's not really a restriction there, but certain areas might be a more limited what we're going to do.

>> Gotcha. How about do you ever looking to see if the borrowers ever um >> We're echoing off you, Nathan, I think. >> Is that me? I don't I hope it's not me. >> What happens if the borrower the the buyer of the note is not um >> licensed in the state? Doesn't have a debt license. Does that affect you at all? >> If the you said they're not licensed that >> with a debt license, they don't have a debt license. >> No, that No, that >> No. >> Okay. >> So, I mean, you know, now I would say case by case, but Yeah, I got you. Okay. Okay. >> Hey, you know what? I am so sorry, guys. I've got an emergency that I've got to deal with with this eviction.

They just file filed an emergency motion and it's in court currently. I got to go beyond that. I'm so sorry. >> That's okay. We will talk to you soon, Nathan. We'll continue real quick on this. >> All right. >> All right. >> Thanks so much, guys. We'll talk to you later. >> Awesome. So, let's continue with this real quick. Right. So when we have this going on, we're looking at the fact that the um the buyer of the note really has to be in a position where they are seems enough to know what they're doing, that they're also understanding what the collateral looks like and that the um the note seller is has everything they need to have, but also understand why a note is priced the way they're priced.

would be accurate. >> That I'd say that's accurate. I mean you and it's if it's um Yes. I mean I would say that's accurate. Yeah, absolutely. We're >> Okay. >> Yeah. And I think that's perfect. So >> Okay. Awesome. Um with that, we had a question from Cody over on uh Facebook. Um how do you uh talk about how you light lightened to a fund? Do you lend to a fund? >> We'll we'll look at it. That's th those are that's a different structure and it's it would just depend on the fund structure itself and we we have to do a little more due diligence on how how it's ran but I would say right now probably that's going to be pretty limited.

>> Okay. Okay. Um >> us us personally. Yes. >> What if they use if they hypothecate against loans they already have? >> I'm we're fine with that. So actually that's that's something that if they're Yeah, absolutely. if they want to go and they they're capped out and they want to go out and and get some leverage against what they have currently and yes, we would definitely look at that. >> Okay, awesome. Um what are things other things that we may have missed that people should be aware of? Um gotchas later on thoughts uh disposing of the asset or even selling the asset is any of that affected in this process? >> Not so much.

I think the biggest thing is, you know, work with a a licensed, you know, MLO, you know, up upfront, you know, when you're doing this, you know, if or make sure that that was done up, you know, if you're well, obviously if you're if you're doing seller if you're doing seller finance, but if you're buying one, make sure that know that was done correctly. You know, do your own due diligence. you know, ha have your docs, you know, go with an actual attorney, you know, put put together your doc package that we're okay with or whoever you're selling the loan to that that you know that they review that and so they can give you feedback.

And then just when you're dealing with the you and that attorney, make sure they're licensed in those states. Make sure they understand the state laws because every state's you know, you know, they have nuances. >> So that's um I think you know from that's where we get in trouble. >> Yes. When they it's just they don't it's just not done correctly per that state. Gotcha. Do you guys also open to collateralizing if someone's doing hard money lending? Is that at all helpful? >> Oh, yes. That's I mean that's if they're doing that's typically what what we were doing before is we were lending to um we were doing against hard money, you know, for hard money lenders and they would go out and they would lend money and they would put the whole package together and we would lend against that package.

>> That's awesome. >> And that's exactly what that's a lot of what we already were doing. >> That's awesome. Awesome. Before we disconnect, I'm gonna ask Nathan's $10 million question we always ask before we can disconnect. Unless there's someone with some other questions before we do, we're going to put a crystal ball in front of you. And it it has to work. It's been plugged in. It's Bluetooth. Whatever capabilities it has, it's chat GPT on steroids because it's your brain. Where do you see six months a year with housing, inventory, notes in general? What's your crystal ball looking like? >> I thought I knew before.

I I tell you, I I I if crystal ball I I still believe we're going to see some improvements in rates. We have to uh I think it's it's a good opportunity to position yourself for that for the what's about to happen. We're seeing opportunities out there and and prices, you know, they're coming down a little bit. So, you know, it's it's not maybe not 0809, but but there's still an opportunity to go out there and acquire and and invest, but I besides that, I just I just you asked me in May, I would say, "Oh, yeah. I'm I'm very bullish now." It's And you know, I knew there was something that was going to happen, but you know, we were going to have a big dip, which we are.

We we called it when we were on the panel in and back in May and >> Yep. >> and we're having it right now. We're having that correction, but it's going to come back and it may not be until the first, you know, first of the year, but we'll definitely >> Are you seeing days on market change? Are you seeing house the p values kind of just flattening? It >> it's all above. Uh banks calling notes. They're asking for more liquidity, capital requirements. They're they're not extending the, you know, these three-year deals are coming up on on renewals. They're asking, you know, all that. We're we're asking for additional collateral, you know, pay paying down your current note even if even if it's not required.

Banks are calling, you know, the lenders are calling notes. >> Wow. >> And or saying, hey, you got to put another 20% in our bank, you know, reserves or, you know, we need audited financials. All the above's happening. So, that's it. 100% we're seeing it. We saw it on commercial already and now we're starting to see it on on residential. It's we're starting to see some of that. So >> I do see a question over LinkedIn. Do you guys give funding for wrap note people who are creating wrap notes who want to give some money to the underlying borrower? >> It's difficult. That's I would I'd be very cautious of that.

How about that? I mean I think that's something that you know we get that question and it's >> especially the lenders are are are really looking at those. They're digging into that and they're going to we're seeing I'm seeing more of that in the market. they're calling those especially those those wraps >> because they didn't get approval up front and >> and did you did you qualify the borrower >> you know so that's I would be cautious. >> Yeah, absolutely. Well Ryan, it was a pleasure having you live always has surprises. Um hang out for after hours for a minute with me and we'll just round up some stuff.

But uh for everyone else, thank you so much for tuning in. Um I'm sure Nathan and I will be back in a few weeks. We have a few shows planned. uh be taking some of the summer off, but we'll be back on. Find everything you want on the podcast, on the website, um and as well as on the Facebook groups. Have every have a good Friday, everyone. Enjoy the weather and we'll see everyone soon. Take care, everyone. [Music].