How to Correctly Calculate Note Bid Offers | Real Estate Notes Show

Episode: How to CORRECTLY calculate Note bid offers with Joe Kennedy Dave's Goals and Plans: - Dealing with basement leak that needs fixing once weather warms up - Submitting offers and winning some bids on note deals - Coming from real estate background like Nathan Nathan's Goals and Plans: - Went into contract on two deals last week - Received due diligence this morning, supposed to close today but debating pricing with seller - Property valuation dropped from $80,000 in July to $50,000 currently due to house damage - Currently in negotiation to potentially pass on deal if numbers don't work Key Recommendations: - Don't try to force deals that don't have sound economics - there's always another deal - Don't get emotional about deals or let it damage relationships unnecessarily - Come from a finance/numbers background rather than pure real estate focus - this business is fundamentally about finances and numbers - Learn by doing - pull the trigger on deals to gain practical experience beyond theoretical knowledge - Understand multiple return calculation methods (ROI, IRR, XIRR, yield, NPV) rather than relying on a single metric Topics Discussed: - Proper calculation of note bid offers and returns - Differences between simple and complex return calculation methods - ROI, IRR, XIRR, yield, and NPV formulas and their applications - Valuation challenges and BPO (broker price opinion) discrepancies - Non-performing vs performing notes - Due diligence process for note acquisitions Guest Insights: - Joe Kennedy comes from 30-year background in oil and gas finance and international operations - project economics experience translates well to note analysis - Started with wrong joint venture partner nearly 5 years ago, had to take notes back to avoid lawsuits, then learned by doing - Note space is a niche group of professionals who work collaboratively despite competitive bidding - The return on a note is not simply the interest rate - must account for actual purchase price, legal balance, arrearages, and other factors - Return calculation methods exist on spectrum from simple (backward-looking) to complex (accounting for timing and multiple variables) hey everyone dave putz here from jkp holdings good afternoon always beside me mr nathan turner how are you sir hey very good thanks how are you doing good hopefully the weather is kind of being a little bit better for you guys we're getting like 60 degree weather here i mean kind of impressed right now it's been above freezing just the last couple of days uh where we discovered we've got a little bit of a leak in our basement so we're trying to [Music] once once it warms up and we can dig it's an easy fix but uh anyway we're having to deal with that right now lots of fun yeah um so hopefully things are working out things are kind of turning in um for those who don't know dme is around the corner um there's a couple more conferences our due diligence portal actually has a list of all the conferences coming up so definitely take a look at that um this is being recorded being youtube and i'm telling the pre-gaming talking i guess the green room is they talk on tv we have some cool topics um this could be a phone with joe um he gave me he'll give him one more for us at the end of uh march so we'll talk about that later i don't want to give it away but we have a bunch of stuff coming up i'm sure you see the feed in the facebook events um we have a bunch of new topics coming up on fridays and be cool so nathan i know you we're talking offline as well you're been submitting some offers we're doing some offers too things are kind of opening up a little bit um winning some bids buying some partials selling some deals yeah i went into contract on two last week i just uh i got my due diligence back uh actually just this morning i'm supposed to be closing today bpos are not fantastic and so i'm i'm actually debating or negotiating i'll say with the with the seller right now or seeing uh if we can do something a little bit better on the pricing because that's with with you know i know you're not a huge fan of bpos but but with the values that i'm getting versus what they think it's worth we're not on the same page so we're trying to figure that out but uh but some other bids in aside from that as well so is it the fact that the values of the area are bad or the house itself is not advocating house itself yeah one there's there's some damage to the house we already knew that um last july they got a valuation of 80 000.

today i'm getting a value of 50. so that's that's a big difference so i that's uh we're in negotiation we'll see if that closes or not but this and what i tell people all the time is you don't try to make the numbers work don't don't try to force something that isn't going to go because you'll just you'll be sorry don't don't get emotional about it right no no and there's always another deal and if you need to pass on this i you know as much as i want to keep the relationship and and it won't damage the relationship in this case but uh but don't try to force something if it's not there that's that's kind of what i'm getting at can you give the background where you came from real estate wise how did you get to notes how did you come across this crazy thing and what was your learning curve what was your background here sure well i came from my mother um a long time ago no after that i had a corporate career uh i spent uh i spent about 30 years doing oil and gas finance international operations and so i actually lived all over the world doing finance for oil and gas and operations so doing project economics is a very familiar thing with me you know we would we would do that for all these different projects you know all over the world um so that part of it was you know when i when i left the corporate world it was it was kind of just intuitive for me um and so i uh i had invested in real estate in the in the early 2000s mostly rentals that kind of stuff um and then i i heard about notes and i thought well it's kind of interesting you know what are they how do they work you know the first impression is well you know the banks are the only ones that hold the notes um and so i started doing some research and got involved with some different groups and started to learn kind of what they were and how you could access them um kind of the difference you know like there's performing non-performing and and then you get into the nuances between those two because they're completely different type animals um as you guys know uh and so i uh about i guess it was four almost five years ago i took my plunge and and and got my first note um and started i actually started off um i wanted to to learn with somebody that i thought knew what they were doing so i jumped into joint venture um and i jumped in with the wrong person and so that didn't turn out well at all um i well it ended up with me having to basically take the notes back to avoid lawsuits and all that kind of stuff so which i did but then you know i started working through them myself and with um you know listening to a lot of different people like this uh and and other people other professionals you know you learn a lot and once you start doing it you know i can't emphasize enough that you know you learn by doing a lot you know when you start doing it just you got it you got to pull the trigger and so anyway um i started moving forward i i really enjoyed it you know doing the economics on these things were easy for me uh that kind of stuff and so it's a matter of you know finding them evaluating them and seeing if they're a good fit and then understanding kind of what you're buying and where you should and shouldn't be buying and you know all those kinds of things that uh you basically learn as you go along you know you just don't wake up in the morning and know all this stuff at least not me i takes me a while to absorb it so that's kind of how how i got to notes and uh you know the other thing i find is that kind of once you get into space you know it's a it's it's kind of a it's a niche group of people um and you once you get to know them and they get to know you uh you know i really enjoy working with the people in in the note space they're really i mean there's obviously some exceptions but they're really a good group of people that you know i enjoy interacting with and working with and you know even though you may not be able to agree on a particular note that you're selling or buying or whatever you know that that's just today you know tomorrow you'll be working together again because that's that's what you do it's not it's not like it's something personal uh because if you start making it personal then you're going to be making the wrong decisions for all the wrong reasons yeah my experience so that's kind of where where i got to today um and so uh so it was kind of forced upon you but but you took it on and and just took the bull by the horns well yeah i mean i i learned because i was i was sitting watching nothing happen you know yeah you know some they were non-performers and nothing nothing there was no action being taken and so 18 months later i said you know hey i'm done just sitting here watching nothing happen you know we need to take some action and so that's that's good how you how you move along anyway yeah no that's good and then coming from a finance background we talked to everybody uh i think dave and i included we all came from from a real estate background right so coming from a finance background in a lot of ways is a huge plus because that's really what this business is about is is finances and numbers numbers and people getting his face like i don't want to mess with numbers i just want to buy real estate it's like right you're doing both yeah yeah yeah if you want to donate money it's a good place to do it sure yeah yeah it's it's a shame because it's a lot of people get into this stuff because of landlording right and they just get banned they get bored of tired of it their struggles their headaches yeah and it's a little bit it's it's still real estate but it's just not dealing with the tenants right but there's more than just the house right you're not doing reo rehabs it's there's numbers this is a bank versus being a real estate owner right yeah yeah right it's a different look at the numbers and then you say so you've got a preparation you've prepared a presentation for us on numbers yeah if you want you know this is this is a cure for everybody who has insomnia problems you know uh because we're gonna talk about numbers uh and i i have to say that um this isn't the introductory course you know it's just kind of a little more advanced that we're going to be talking about so you know hopefully if you have some exposure to to doing some notes or whatever this might be a good fit for you we will get into some some things that are normal when you get into buying notes and stuff so you know it's some things you should know uh so if you want we can jump into that let's jump in so joe's going to bring it on to learning about the differences right this idea here today is there's multiple ways to calculate your returns now there's some simple ways and more complex ways you may say well i just want the easy way sometimes the easy way is the wrong way and gives you a fake return sometimes the easy way can give you a roundabout idea right and there's some ways that are just a lot more complex that can be overwhelming so hopefully that kind of helps right so so i'm going to start out about you know talk about understanding the returns on notes and kind of a good good way to calculate that because that's what it's all about um so a lot of common questions you know some people say well isn't the return just the interest rate on the note i mean you know if it's five percent no didn't that my can that my return well if you paid the full unpaid balance yeah that would be but i know i don't think a lot of people want to pay the full unpaid balance plus you know you have all these other things that jump in like you know what the legal balance because you know that's another part that you need to consider um depending if they're behind and all kinds of stuff and so you know then the other question is you know well you know they have all these acronyms what what do they mean what's roi and irr and x-i-r-r and yield and npv and x-npv you know golly your head just swims with all this stuff and you know so okay how do i know which one is the one i should be using when i'm looking at this particular note well kinda i'm gonna just quickly go down i'm not going to go i thought about actually showing the mathematical equations for these but then we would all be asleep myself included okay so we're just going to talk about what what these particular formulas do and how they apply most of these not all of them most of these because i like to use excel a lot of these are excel functions that you can use in an excel spreadsheet so you know you can use them there but the the roi return on investment is just a total net profit compared to your cost tends to be backward looking and it includes asset appreciation well asset appreciation doesn't really apply to a note because your note doesn't really appreciate now if you're talking about real estate doing you know looking at arv values and all that kind of stuff you know that's another dynamic but if you're just looking at the note it you know it doesn't appreciate so um that doesn't really apply here and there really isn't an excel formula for roi um let me make sure people understand it you can use your calculator the fancy calculator everyone uses but you can also use spreadsheets to calculate the same returns so that's what i'm saying is that there's people there push the calculator right yeah like there's a calculator you can use that you can drop a calculator but what joe's talking about is you can also use which i use spreadsheet formulas to equate the same numbers so that you can put this alongside of any asset any tape and get the returns right on the spreadsheet in a quick formula sorry joe go ahead yeah so dave who has a calculator that can do that many people many you've been treated yes so many of the people who are been in this space for a while or old timers use the calculator right and we have one and it's great on the fly so yes we have them yeah yeah no you have a good one i know i'm not talking about the handheld calculator i'm talking about the excel spreadsheet did you know how many people use the spreadsheet but you and i both do and it's easy for us to calculate deals yeah oh yeah yeah that's that's you know i only use the calculator if i don't have my computer handy otherwise it's always excel you know for me anyway irr is a term for internal rate of return and it's for a series of cash flows which relates a lot to our notes because that's what we're looking at we're looking at a series of cash flows um to do irr they have to be equal in other words you're getting the same a payment each time and it has to be at the same interval so you have to at least receive one every month or every quarter or every year to be able to use this particular function now the x-irr that's the internal rate of return it's for a schedule of cash flows that aren't necessarily periodic now we tend to have more periodic ones i mean if you just strictly look at the note but if you think that you're going to get multiple payments at a certain period of time or you think you're going to get an early payoff or whatever that's when this comes in handy my only problem with it is that's hard to forecast when you're forward looking i mean you don't you don't really know my expectation on most of my notes is that you know they're a monthly note but you can use that and you can also use it in a backward looking because these are the kinds of payments that i ended up getting rate function rate function is just the interest rate per period of loan that you've received on periodic equal basis um probably one of the most used ones that i use is the rate function um all of these four they're gonna they're gonna give you a percentage so you're gonna end up with a percent that says okay this is the percent return based on these particular criteria that you put into that equation you can all use also use a the npv or is the net present value and that will tell you what all those cash flows are worth today and a whole lot of this is based on um basically that the present value of money you know it kind of goes back to the principle of the dollar today is worth more than a dollar tomorrow and i think we know if we look at the news the dollar today is seven percent less than a dollar was last year because of inflation and so that's what this is trying to tell you is what the value of it is today based on whatever you know you it happened we're seeing on the news at seven percent but you can put any figure in if you want your discount rate and determine what the current present value is and the net present value function that's for just a schedule of cash flows that's not necessary periodic you know maybe you get one today and one in two months and you know however we in my corporate function we would use this a lot because we were looking at projects and projects have you know a lot of varying cash flows over time depending on your expenses and your revenue and all that kind of stuff whereas notes tend to be you know more consistent now you can have some notes that you know have some nuances and and that's where you can play with those also uh but those in at least my experience tend to be more of the exception than the rule so when do i use them like like i said roi i kind of use it i i always after i sell a note i like to see how did i end up doing you know did did i get this one right or did i miss something and so i do kind of a post appraisal if you will and an roi is is one way to do it um after i sold and after i sell a note i can see well how did it perform you know and i take into consideration you know my purchase expense my due diligence expenses my servicing fees if i had first placed insurance my legal expenses the payments i received sales expenses and all that to see you know what kind of return did i end up and what what i like to do is because when i buy a note and i think most of you guys do you you calculate what you think your return is going to be on it when you buy it and then when i sell it i go back and i calculate to see what did i really get you know and did i get more or less you know what was it was it about on target uh or were there some surprises then you know there's always surprises and you know there are some ones that are kind of standard but there's always some surprises that pops up so i do that kind of for you know a backward looking purpose the irr and rate they're the ones i most often use when i'm preparing to a bid and so notes like i said they're based on periodic consistent payments and you know if they're all the same you can use the rate function but that doesn't mean that i don't take into consideration servicing fees i don't know i do take that into consideration i do take into consideration things like my due diligence expenses and i also take into consideration the purchasing costs the boarding costs all those kinds of things um when i go through that calculation yeah and uh so joe just just i don't typically interrupt but one of the questions was what do you mean by rate what is it rate rate rate basically it's going to give you a percentage it's your rate of return if you will angle rate returns your return you've figured out some roi is a simple one right over five years your annual term based on an annual basis right some people you know it's interesting some people call it yield some people but if you if you go and you look at the xl formula there's an excel formula for yield the yield formula on excel basically is structured to determine the yield on a bond and a bond is a little different than what you get because a bond you end up it's it's got to pay off at the end and the variable and the price what you paid for it so that the components for it a little different than for a note so what i find is that the rate formula in excel is a better application for calculating this so when i say rate it a lot of times people use that term interchangeably with yield and what that means is it's your rate of it's your annual rate of return yeah you can also use the the i on the calculator right for those using the calculator is the i where these correspond in the time value calculations they respond to the there's actually letters on the calculation that there's i there's n there's npr concept with that so you know what you're using rate is a term we use because it's an equation in our spreadsheets right we're on the calculator it's an i function so it's a return angle so yes so you can use the word yield but what we're looking at the fact that the angle return can be a yield could mean ir which are completely different calculations we're going to get into that in a few minutes and then like i said x-irr that's just but you know like the ir it's just with if you have inconsistent payments so um what i did is put together a little little sheet to say okay what's what's the difference between these things uh and what are the parameters that you have to have in order to be able to calculate that so yield or rate if you want to calculate that you have to have equal payments at an equal interval and then that will give you a percentage return if you want to do irr you'll look it doesn't have to be equal payments so the payments can be whatever let me make sure meaning the same time same month same amount right it could be different amounts that means it's irregular or different clockwork yield is the same the first of every month right right that's what the with you on the yield one yeah you've got the first of every month and you've got the same dollar amount now if you have if you have a situation where um i'm trying to think where you where you don't have equal payments um i don't know there probably are some um some loans that might have variable interest rates and if you know what they're if you could predict them and you know okay the rate the the rate or the payment is going to go up at a certain period of time you know but it it's going to be every month the payments are going to be made then you can use that to calculate what your return is or payments or every other month the borrower is not consistent you can use the ir yeah exactly yeah the problem i have is i can i can never forecast that yeah correct so internally we use ir for another way is that payoffs right yield goes to a maturity date where we're using ir to say i'm going to sell a loan in three years or if there's a payoff in five years it's not gonna go to maturity d so we use ir to say i'm not gonna hold this for 20 years where you calculate to maturity bonds right to that to 20 years down the line says what's your return every single year until the maturity date yeah right right yeah because i i use something similar like that because i you know one of my exit strategies is if you you take a a non-performer you get it re-performing and you sell it that's a potential exit strategy for my non-performers and uh i also then calculate well what price can i sell that at based on what i think the buyer is going to want as a yield and based on that i can calculate the sales price yeah and then you can put that in to determine what your rate of return is going to be so you're right you would have consistent payments until the time you sold the note well it's non-performing you won't necessarily have consistent payments but you hope you would after a period of time payments and then you'd have the lump sum payment when you sold the note and then you could calculate your return and so it was just kind of a i just kind of put it together i hadn't really looked at it from this perspective this i mean but it kind of makes sense where what you can use in a particular situation to give you your return either in dollars or the percentage amount right you know when i first started out i was so i was exposed to some people that were suggesting that you ought to just bid as a percent of upb just you know make that your basis for your bid and um kind of always thought why why that doesn't sound uh it sounds strange but i wasn't i was a newbie and you know i thought well maybe they had some other things some experience or you know there's always shortcuts that you know people have and figured this was kind of a nice shortcut so um i thought it might might be interesting to kind of look at some examples of of a comparison of if i bid based on upb percentage or if i bid based on what i want my yield to be or my return okay so um i thought i'd put you two guys to a test all right so here's here's what we're gonna do here's the the basic assumptions for the for a bid okay all the notes that are going to be presented they're performing okay so you can put that category there right all the upb upb bids are going to be bid at 90 so i think does that i think that sounds kind of like what a lot of people who are bidding upb bid for performers yeah and as as a yield bidder somebody who wants a return you're going to be somebody who wants a 12 return it might be a little high you know i think some people have lowered it a little bit but not high for for this exercise we're going to use 12 so all right here's what's going to do we're going to do we're going to have three notes that are come up bit upbeat bid is going to be 90 and the return is 12.

now here's the first one the upd is 50 000. the interest rate's 9.5 percent and it's got 163 payments left and the payment is 546.56 all right there's okay you're cheating i'm a calculator guys so we already know the upv bid on this one ninety percent of forty five five fifty thousand is going to be forty five thousand right so boom you didn't need the calculator for that one that's an easy so the question is the yield bid the 12 yield is that bid going to be higher or lower than 45 000 let's see it in the audience i know that probably a little bit delayed but so the question is will the yield go up or will the yield the return will they go up or we'll go down right because the return you're going to bid on our 12 return yeah so is your 12 return gonna be a higher or a lower bid than 45 000 if you want 12 what i get is if you want 12 you're gonna have to bid lower than 45.

okay you say lower you you agree dave you're gonna have to bid lower okay let's find out yes you are you're gonna have to bid lower if you want a 12 return so the good news well okay so now let's look at what what is the yield on the upb bid when you do the calculation if you bid forty five thousand i'm not you can tell do you know the answer nathan you wanna guess of course i i also included cost for the okay servicing and all additional costs so that might but if yeah if i just put in just a straight 12 percent yield without any additional additional expenses in there uh the bid's going to be 43 860.

right 22 cents but that's without any additional expenses yeah because this bid that i did it includes about the net yeah it's a net bid after 30 servicing after close to 500 in expenses when you consider you know the cost to acquire it you consider your due diligence you consider regis you know recording fees all that kind of stuff but anyway so the yield that that upb guy is going to get is going to be 10 make sure you guys all know this this is based on zero the servicing fees right this is a gross yield this fyi no no no no this is another this is this is net this is a net yield oh this is okay this is after servicing after your acquisition costs all that kind of stuff so um so they're apples and apples with the 12 return and the upb return of 10.

right so this bad news in this situation is i lost the bid because i wanted a 12 return i only bid 40 568. the upb bidder bid 45 000. they got the bid but they're going to get a 10 yield they're not going to get to 12 which i was hoping to get okay so i lost that one let's go to the next one sorry we knew the return yield was 12 because that's what we based it on yeah right all right loan two it's got the same upb as the first one okay 50 grand interest rate's three percent it's got 104 payments and the payment is still the same five forty six fifty six now we know that the upd bid is gonna be the same still ninety percent of fifty thousand is forty five thousand so is my bid to get my twelve percent gonna be higher or lower than forty five thousand it's gonna be a lot less give it a little pause for uh facebook catch up so again joe just saw people who were kinda lost explain it again what are we trying to figure out what are we solving for for those people right we're we're comparing for those people that just bid on a upb you know as a percentage of upbeat because some people do that i mean i was originally taught to do that yeah we all are as opposed to how you would bid if you base it on a a given return your what your required return is okay and then in this example i said okay well we'll look at a bid based on a 90 upb bid as opposed to a return that i want 12 i want to get a 12 return so i'm looking to see how this upb bid is going to compare to my bid that i want to get a 12 return on and will i win or lose the bid and if i win or lose how does my yield which is i'm mine's based on 12 how is that going to compare with the yield that the person got when they won the bid like in the first case when they won the bid for their 90 upb right and in that first loan like i said you can see that to get my return i had to bid less they did 45 based on the 90 upb i only bid 40 568 because that's a 12 yield but at the end of the day when you compare well what yield did they get compared to what i wanted to get what they would get a 10 and of course more than likely because because more than likely they bid strictly on percentage upb they probably didn't calculate the return no they didn't they didn't no they just did it and so yeah my objective was to see well what return would they get what do you really get you know and they're going to be that was totally frustrating loan number one was so loan number two is the same scenario only what you're seeing is you're seeing a lot lower interest rate you're going from a 9.5 interest rate on the note to a 3 now i still want to get a 12 return on my note and they're still going to bid 90 percent so what do you think 45 000 what do we have to bid so they're hitting 45 000 and we have to bid here based on our 12 return right i'll do a little you know circle thing right on that 12 what do we have to bid to to win to get our return right yeah what do you have to grow that's what you have to be that's what to get that return that's what you did yeah you did 32 461 and the reason why that's so much lower is because the differential between the interest rate and your return yeah you know this this note only has a three percent interest rate that's nothing you know relative it's something but it's not much so in order to make up that differential and get my 12 return i have to bid a lot lower you have to get that return so understand that you can look at two loans identical numbers and with that interest rate changing we talk about this in our weekly mastermind group that changes your bid dramatically no matter what the upbeat stays the same right right understand that the interest rate you can't ignore it you have to look at it that's why in all these examples i kept the upbeat the same and i kept the payment the same right it's gonna be the interest in the number of payments are the ones that are gonna going to wobble so you know what what does what kind of return does that upb bidder get so we're going to say what did the return the person who bit 45 were solving for the i or the angle return right what am i getting they're going to get a 3.7 return and what what would we get if we won the bid well we gave 12 because that was what the whole thing was based upon so so far i'm not doing very good bidding i'm not getting any of the big kids but by the same token you know i'm not ending up with a 3.7 return either right guys so i i think you're right go get the third case this one yeah let's do it so now the guy that's getting that 3.7 unfortunately they're going to find out that they're they're very frustrated with notes as a as a investment and going well this thing is stupid and it doesn't even make any sense i'm not making any money you're right exactly exactly exactly i think i can help your problem i'll be just like you and i'll buy it from you right [Laughter] so here's the third one this one's a little trickier oh the upb is just a little bit larger it's 51 000 211 the interest rate's 12 and a half percent there's only 12 payments left because this is a five-year balloon it was amortized for 360 30-year amortization with a balloon at the end of five years of 50 0102 so basically you are going to get 12 payments at of the 546 and then after that you're going to get the balloon payment so now we know the upb bid is again 90 of the 51.2 so that's the 45 341.

now what are you going to bid higher or lower what's the reason for delay you're bidding higher or lower than the upbeat bidder we'll give it another yeah yeah more than the 45 000 341 or less than the 45 341. dun right we're solving we're putting our interest rate in we're putting in the payment we're putting in the balloon right right we're solving for what is the pv right or rate equation or the pv the the formula for pv so we're going to pay higher than the upv be bitter all right i hear one higher you nathan higher yep yeah you definitely are going to bid higher time value of money you're going to be getting that balloon payment early you've got a 12 and a half percent so the interest on the note already is higher than what the yield you're looking for yeah you know so you could bid 49 781 and you're going to win the bid compared to the upd person and you're still going to get your 12 the upv bid if they got it they'd have like a 20 return which is nice i mean you'd like to get that one but all day if you've been against me you're not going to you know and of course our our return is 12 so that's just kind of a examples of different types of notes how the interest rate definitely has an impact on what your return is going to be and how the present value of money because you're getting a balloon much earlier than waiting next 20 years to collect these payments are going to help your return that all affects what you want to look at and and how you calculate it using these different uh parameters so yeah congratulations guys you passed with i have to give you each one of you guys a star for the day i like it a little sticker i like it so um what did we learn from the situation right we're learning the fact that if you're bidding based on bpo or upb and ignoring all the other numbers your return is dramatically different let's say if you use math and why it's essential to use math because if you don't you could end up with a 3.7 return right because you didn't calculate it so you may not understand it but you must understand it if you want to be successful ernie yeah so let's keep that on the screen for a few minutes um let's let's talk about a little bit more about real quick about the balloon right can you explain joe what is a balloon for why is it there and how does it change the number like what does it do right no mathematically but why is it changing if that was a zero would be totally different situation because it's different alone right right right well you know a lot of times the the practical application is a lot of times what i've seen is you can see some balloon notes or situations where people who maybe they don't have good credit when they're getting a loan so they end up getting a loan that has a higher interest rate that you know lender will lend them a higher interest rate and they'll agree to a balloon because um what they want to do is they want to improve their credit rating which will then allow them to get you know more of a commercial type loan uh at a lower rate so they're going to refinance it so they'll pay off to pay it off pay off the balloon and refinance to the lower interest rate and i've seen that you know happen with a lot lots of different situations there's also the situation where they get to the balloon and say no we can't do it can you extend it and so then you have you know recalculate okay we'll extend it and see what the what the payoff is and that's another exit strategy you need to reconsider i think in one of these because uh you need to see what your return would be if you did extend it but the benefit of the balloon that's theoretically that means in 12 payments they're supposed to pay me 50 102.

um so that means in 12 months i'm gonna get that 50 102 plus i'm going to get that 546 56 every month for that 12 months well the fact that i'm getting that so early is very beneficial and so that's the reason why i can bid more because of the present value of it is greater than if i had to wait for you know 280 more payments um and again it's it's the time value of money the further out you go the less that money is is worth is basically what it is and the fact that you're getting it earlier means it's more valuable that's great money today is worth more than money tomorrow yeah absolutely that's a really good lesson for everyone to learn yeah you cannot just look at a percentage of upv it's that's i think you know if you go back 10 years ago when everything was underwater right even then it didn't make sense but but i think that that what we heard a lot back when up back then was bid on a percentage of upv or or whichever is lower so it made a little bit more sense back then but only kind of and i think it made sense because we couldn't screw up i think that's what it comes down that's really what yeah you couldn't when you're buying it so cheap that yeah you're wrong but you know who cares they're all getting strong returns right sure yeah that's true that's great that's a great point you know today i mean i i jumped in after the 2008 and all that kind of stuff so you know i don't have quite that experience that you guys do but um yeah now you need to you need to figure it out the good thing now though is and and i heard this oop i think we're losing his audio i think we're losing his audio coming back oh come on we can do it in there when you're when you're buying notes we lost you for a second youtuber man yep so so i wanted to show people right we did i did something similar but i wanted maybe you can kind of see let's see if i can find real quick world we're on the fly here um let's see if we can so cody asked a question there about um are we finding that sellers are more looking at a percentage of upb or are they actually looking at yield calculation i'm not sure about you guys my my experience is uh they're more you're looking at yield calculation i don't know about you guys yeah yield competition and or well i'm kind of seeing a mix you know i'm seeing i'm seeing some sellers wanting to have um particularly on performing you know it's like oh we want 100 of upb yeah yeah dave and i looked at a couple a couple weeks ago where they wanted a premium they wanted 101 percent or 102 and we ran the numbers and they just really didn't make sense yeah so let me share i'm going to share with you guys so so for those that may be a little confused a little bit i'm going to show you a side-by-side comparison of what and i'm sure i've shared this before with you guys but me um [Music] hopefully we're going to see that okay so we have a situation where we have a coupon rate of three right ubb if we bid 60 percent right look at the difference in returns right because of the interest rate on the coupon the original coupon we bought it at 30 the change is dramatic we treated payments it changed dramatic right so the uvb say the same you change this number or this number the change is dramatic of what it is so we got to be careful being simple with things so yeah so let's let's open for some questions here um let me uh bring this and i like simple i'm a big advocate it's simple however you do need to know what you're doing um [Music] i agree with simple too yeah but you know even i've had people ask me before well do you need a financial calculator but if you're not using a spreadsheet then yes you know you do need to know how it works and and how to plug the numbers in and solve for x uh and if you don't you better learn it because you'll you'll get yourself into a real world of trouble if you're just using a regular calculator to try to figure stuff out so one of the things cody i think we've talked before about this is that sometimes sellers are not selling based on yield or roi big funds do right but some people hey joe i have a i'm going to buy an asset from you or whatever i'm going to bid this and you're not skating investor you may look at your bit your bases and say hey i'm in i'm here i'm doing greatest loan i owe owe four thousand dollars to break even and you want to buy for 20 done deal i get out and i'm moving on to a different deal right i may be in that position where that was what we did at one point is we went based off our basis and if we could sell it if we're completely in the black here and we're in infinity return and you want to buy it for 10 grand it just heads our thing right so some sellers do that i don't agree with it but they definitely can do it right so beacon sure when you bid on things and you can put this formula inside your spreadsheets when you get them and run it down the entire list and then that could be a filter right i tell my mastermind guys every time you get a tape some of the best filters is just to take away the low interest coupon rate balloons take them out because you're probably not gonna turn a two percent into a ten right you're not going to yeah um so you know another thing that i've noticed too besides the low interest rate is a lot of times loans that have a small monthly payment when you start deducting servicing fees from a small monthly payment you know that becomes a significant percentage reduction of what you're going to receive you know 20 bucks as a percent of a hundred dollar monthly payment as opposed to a five hundred dollar you know that that's a significant impact on your return absolutely that's another way to filter right we all talk about exceeds all stuff you may filter by interest rates above six and any payment that's above 200 and eliminate anything else because if you're paying 20 bucks a month or if it's not performing you're paying 95 whatever you're paying it's crazy so yes you may be able to filter doing this process which and sometimes i do if i see two pers if i get a tape in and it's all two percent i'm not gonna buy it no neither no no the math won't work right that's one way of doing it you end up listening unless you have a seller that you know really has to sell yeah yeah otherwise you just take them off because they're like what is this what is this garbage bin well yeah so i don't know if you know the answer cindy asks a good question and this is hard because this fluctuates too much can we accurately account for inflation i don't know of a way of doing it that's over in my head no i mean i i i would i would tell her that if you could let's talk because we can make a lot of money oh i like that so uh yeah someone asked in the group about how what the formula in excel is for rate for those who will be listening to podcast later equal sign rate open parentheses and it actually tells you what to put in additional spots exactly yes it's it's nice and simple and i'm gonna tell you guys i used to use a formula called datedif i'm gonna encourage you guys to use the mper formula to calculate how many payments are in the loan right right the number of periods inside that situation so it gives you an accurate because if the upbeat is wrong it's going to give you an error and you may go back to your seller and say hey listen the numbers aren't making sense oh it's a balloon oh okay right so all these formulas have it yes you can use a calculator or you can use a spreadsheet i'm a spreadsheet crazy person because i can process 100 loans in a minute using a formula where a calculator takes a little bit longer yeah and i'm only looking at you know if i'm looking at 20 loans i don't mind doing that by by hand i could get all fancy and use your spreadsheet but for 20 loans it's not a big deal i don't mind going through and plugging in the numbers and and just seeing what they all work out to individually so this is a good question um the answers if you use a formula inside excel right and i'll put it into the chat so you guys can see it too well the future value always equals zero so i want to make sure clear futures value is a balloon value right but you may be talking about something a little bit different so balloon value doesn't always equal zero it depends on if there's a balloon or not however there's another function right after the fv the future value zero one meaning is it the beginning or the end of the long so there's a blue in the beginning or end so most likely i don't know if anyone i've ever bought where the balloon is the beginning right use that balloons at the end so hopefully that helps blues are not super common um especially if you get anything established after dodd-frank there's they're not common at all so don't get too hung up on it it's important to know how they work and and when to use those calculations but yeah you don't see them a ton if you do a balloon make sure you record any mods you do with them because that right it can change your maturity and stuff so yeah but yes good question so yes you can do a raid form in excel google sheets is sure you know i use all the time same idea and i run this calculation i have a spreadsheet for those who bought the beginner series i actually have a yield calculator that i can share with you guys you can run through assets through that way so awesome if any more questions feel free to let us know joe when you came into space and roi was what you did in your percentage of upv did you have an aha moment where like holy crap i'm not getting the return i thought was there a story that came along with like oh um well i mean like i said based on my career experience not i didn't really have that um i guess the thing that when i first got into jv the thing that bothered me more than anything was because of the the lack of action on a dealing with it you know the clock is ticking and the longer and longer the things go on the more and more your return is reducing yeah so um what you know what i i knew but kind of reinforced is that you need to take action you just can't sit there and hope something's going to fix it because the longer it goes on with not being paid no action being taken you know the the worse your return is going to be yeah yeah yeah it's a shame so guys awesome information from joe well laid out too i i do a terrible job laying himself out but it was a very well organized situation to show you the comparison and the effects of it right in a different different way is a bit roi versus irr now those are occurs about the xir vs ir it's a very similar function again still in excel but it really kind of tells you you know xir is it compares payment to date where ir is a simple payment string right and it just takes a payment stream where xr takes the dates and uses the formula to figure out if it's been skipping months and all that good stuff so awesome stuff joe yeah thank you i think a lot of sellers understand this and a lot of new investors don't and unfortunately for the most part by and large i don't think sellers are trying to take advantage but at the same time if they're getting that bid that's at 10 of upb and it's you know five or ten thousand dollars more than your bid they're probably going to go with that higher bid and you know they the seller honestly they have to assume that the buyer coming in at that bid is doing it for a reason so you know not that they're out to try to screw anybody over but if they get offered a higher bid they're probably going to take it yeah absolutely and i think you know some courses don't teach it some courses do they don't emphasize it enough um it's not hard to do and you don't need to understand the exact math behind it just understand that it's your return and you look at bank statements your bank account if you look at your mortgage state you can calculate your mortgage as well your personal mortgage with this stuff yeah absolutely yeah yeah yeah so then joe what do you see coming down the pipe here you've been around long enough that you've you can see things as they are what's your crystal ball prediction here you know i'll be honest my crystal ball to be politically correct is lacking i actually thought that we were going to see a turn in the market last year and i think that you know the um continuance of you know the moratorium that we had on foreclosures i think that you know the payments that went out uh all those kinds of things uh protracted it but yeah i was expecting us to be honest to see a lot of non-performers start to hit the market basically in the last quarter of last year it didn't happen um and now when i listen to people which is most anybody that's smarter than me uh talk about the forecasting and stuff they're seeing and i tend to agree unless we have some more economic easing or whatever going on that there there is this pool that's sitting out there that's just kind of waiting to kind of filter its way down uh and you know it's before it gets to little guys like me it's got to go through the hedge funds and you know kind of filter down et cetera um but i i think there's some coming it's got to be you know yeah um i think the stock market is going to correct too but you know don't don't don't bet your money on that you know and and and i mean we had the question about inflation earlier is inflation the trigger i mean who knows right but maybe maybe hopefully it doesn't get too crazy um but there have been talks about this thing started going up like the early 80s right and that's much younger right um that's scary here and for those maybe even younger than i am we're not talking like eight nine ten we're talking double digit inflation yeah right so yeah so we shall see yeah yeah it's well thank you very much joe we're gonna disconnect from the facebook live and hopefully uh we've given some tools resources to those people who were newer or just didn't know about this so joe again thank you for presenting coming on and chatting with us on this friday afternoon thanks guys it's a pleasure spending time with you you bet thank you all right y'all take care you too hey everyone dave putz here from jkp holdings good afternoon always beside me mr nathan turner how are you sir hey very good thanks how are you doing good hopefully the weather is kind of being a little bit better for you guys we're getting like 60 degree weather here i mean kind of impressed right now it's been above freezing just the last couple of days uh where we discovered we've got a little bit of a leak in our basement so we're trying to [Music] once once it warms up and we can dig it's an easy fix but uh anyway we're having to deal with that right now lots of fun yeah um so hopefully things are working out things are kind of turning in um for those who don't know dme is around the corner um there's a couple more conferences our due diligence portal actually has a list of all the conferences coming up so definitely take a look at that um this is being recorded being youtube and i'm telling the pre-gaming talking i guess the green room is they talk on tv we have some cool topics um this could be a phone with joe um he gave me he'll give him one more for us at the end of uh march so we'll talk about that later i don't want to give it away but we have a bunch of stuff coming up i'm sure you see the feed in the facebook events um we have a bunch of new topics coming up on fridays and be cool so nathan i know you we're talking offline as well you're been submitting some offers we're doing some offers too things are kind of opening up a little bit um winning some bids buying some partials selling some deals yeah i went into contract on two last week i just uh i got my due diligence back uh actually just this morning i'm supposed to be closing today bpos are not fantastic and so i'm i'm actually debating or negotiating i'll say with the with the seller right now or seeing uh if we can do something a little bit better on the pricing because that's with with you know i know you're not a huge fan of bpos but but with the values that i'm getting versus what they think it's worth we're not on the same page so we're trying to figure that out but uh but some other bids in aside from that as well so is it the fact that the values of the area are bad or the house itself is not advocating house itself yeah one there's there's some damage to the house we already knew that um last july they got a valuation of 80 000.

today i'm getting a value of 50. so that's that's a big difference so i that's uh we're in negotiation we'll see if that closes or not but this and what i tell people all the time is you don't try to make the numbers work don't don't try to force something that isn't going to go because you'll just you'll be sorry don't don't get emotional about it right no no and there's always another deal and if you need to pass on this i you know as much as i want to keep the relationship and and it won't damage the relationship in this case but uh but don't try to force something if it's not there that's that's kind of what i'm getting at can you give the background where you came from real estate wise how did you get to notes how did you come across this crazy thing and what was your learning curve what was your background here sure well i came from my mother um a long time ago no after that i had a corporate career uh i spent uh i spent about 30 years doing oil and gas finance international operations and so i actually lived all over the world doing finance for oil and gas and operations so doing project economics is a very familiar thing with me you know we would we would do that for all these different projects you know all over the world um so that part of it was you know when i when i left the corporate world it was it was kind of just intuitive for me um and so i uh i had invested in real estate in the in the early 2000s mostly rentals that kind of stuff um and then i i heard about notes and i thought well it's kind of interesting you know what are they how do they work you know the first impression is well you know the banks are the only ones that hold the notes um and so i started doing some research and got involved with some different groups and started to learn kind of what they were and how you could access them um kind of the difference you know like there's performing non-performing and and then you get into the nuances between those two because they're completely different type animals um as you guys know uh and so i uh about i guess it was four almost five years ago i took my plunge and and and got my first note um and started i actually started off um i wanted to to learn with somebody that i thought knew what they were doing so i jumped into joint venture um and i jumped in with the wrong person and so that didn't turn out well at all um i well it ended up with me having to basically take the notes back to avoid lawsuits and all that kind of stuff so which i did but then you know i started working through them myself and with um you know listening to a lot of different people like this uh and and other people other professionals you know you learn a lot and once you start doing it you know i can't emphasize enough that you know you learn by doing a lot you know when you start doing it just you got it you got to pull the trigger and so anyway um i started moving forward i i really enjoyed it you know doing the economics on these things were easy for me uh that kind of stuff and so it's a matter of you know finding them evaluating them and seeing if they're a good fit and then understanding kind of what you're buying and where you should and shouldn't be buying and you know all those kinds of things that uh you basically learn as you go along you know you just don't wake up in the morning and know all this stuff at least not me i takes me a while to absorb it so that's kind of how how i got to notes and uh you know the other thing i find is that kind of once you get into space you know it's a it's it's kind of a it's a niche group of people um and you once you get to know them and they get to know you uh you know i really enjoy working with the people in in the note space they're really i mean there's obviously some exceptions but they're really a good group of people that you know i enjoy interacting with and working with and you know even though you may not be able to agree on a particular note that you're selling or buying or whatever you know that that's just today you know tomorrow you'll be working together again because that's that's what you do it's not it's not like it's something personal uh because if you start making it personal then you're going to be making the wrong decisions for all the wrong reasons yeah my experience so that's kind of where where i got to today um and so uh so it was kind of forced upon you but but you took it on and and just took the bull by the horns well yeah i mean i i learned because i was i was sitting watching nothing happen you know yeah you know some they were non-performers and nothing nothing there was no action being taken and so 18 months later i said you know hey i'm done just sitting here watching nothing happen you know we need to take some action and so that's that's good how you how you move along anyway yeah no that's good and then coming from a finance background we talked to everybody uh i think dave and i included we all came from from a real estate background right so coming from a finance background in a lot of ways is a huge plus because that's really what this business is about is is finances and numbers numbers and people getting his face like i don't want to mess with numbers i just want to buy real estate it's like right you're doing both yeah yeah yeah if you want to donate money it's a good place to do it sure yeah yeah it's it's a shame because it's a lot of people get into this stuff because of landlording right and they just get banned they get bored of tired of it their struggles their headaches yeah and it's a little bit it's it's still real estate but it's just not dealing with the tenants right but there's more than just the house right you're not doing reo rehabs it's there's numbers this is a bank versus being a real estate owner right yeah yeah right it's a different look at the numbers and then you say so you've got a preparation you've prepared a presentation for us on numbers yeah if you want you know this is this is a cure for everybody who has insomnia problems you know uh because we're gonna talk about numbers uh and i i have to say that um this isn't the introductory course you know it's just kind of a little more advanced that we're going to be talking about so you know hopefully if you have some exposure to to doing some notes or whatever this might be a good fit for you we will get into some some things that are normal when you get into buying notes and stuff so you know it's some things you should know uh so if you want we can jump into that let's jump in so joe's going to bring it on to learning about the differences right this idea here today is there's multiple ways to calculate your returns now there's some simple ways and more complex ways you may say well i just want the easy way sometimes the easy way is the wrong way and gives you a fake return sometimes the easy way can give you a roundabout idea right and there's some ways that are just a lot more complex that can be overwhelming so hopefully that kind of helps right so so i'm going to start out about you know talk about understanding the returns on notes and kind of a good good way to calculate that because that's what it's all about um so a lot of common questions you know some people say well isn't the return just the interest rate on the note i mean you know if it's five percent no didn't that my can that my return well if you paid the full unpaid balance yeah that would be but i know i don't think a lot of people want to pay the full unpaid balance plus you know you have all these other things that jump in like you know what the legal balance because you know that's another part that you need to consider um depending if they're behind and all kinds of stuff and so you know then the other question is you know well you know they have all these acronyms what what do they mean what's roi and irr and x-i-r-r and yield and npv and x-npv you know golly your head just swims with all this stuff and you know so okay how do i know which one is the one i should be using when i'm looking at this particular note well kinda i'm gonna just quickly go down i'm not going to go i thought about actually showing the mathematical equations for these but then we would all be asleep myself included okay so we're just going to talk about what what these particular formulas do and how they apply most of these not all of them most of these because i like to use excel a lot of these are excel functions that you can use in an excel spreadsheet so you know you can use them there but the the roi return on investment is just a total net profit compared to your cost tends to be backward looking and it includes asset appreciation well asset appreciation doesn't really apply to a note because your note doesn't really appreciate now if you're talking about real estate doing you know looking at arv values and all that kind of stuff you know that's another dynamic but if you're just looking at the note it you know it doesn't appreciate so um that doesn't really apply here and there really isn't an excel formula for roi um let me make sure people understand it you can use your calculator the fancy calculator everyone uses but you can also use spreadsheets to calculate the same returns so that's what i'm saying is that there's people there push the calculator right yeah like there's a calculator you can use that you can drop a calculator but what joe's talking about is you can also use which i use spreadsheet formulas to equate the same numbers so that you can put this alongside of any asset any tape and get the returns right on the spreadsheet in a quick formula sorry joe go ahead yeah so dave who has a calculator that can do that many people many you've been treated yes so many of the people who are been in this space for a while or old timers use the calculator right and we have one and it's great on the fly so yes we have them yeah yeah no you have a good one i know i'm not talking about the handheld calculator i'm talking about the excel spreadsheet did you know how many people use the spreadsheet but you and i both do and it's easy for us to calculate deals yeah oh yeah yeah that's that's you know i only use the calculator if i don't have my computer handy otherwise it's always excel you know for me anyway irr is a term for internal rate of return and it's for a series of cash flows which relates a lot to our notes because that's what we're looking at we're looking at a series of cash flows um to do irr they have to be equal in other words you're getting the same a payment each time and it has to be at the same interval so you have to at least receive one every month or every quarter or every year to be able to use this particular function now the x-irr that's the internal rate of return it's for a schedule of cash flows that aren't necessarily periodic now we tend to have more periodic ones i mean if you just strictly look at the note but if you think that you're going to get multiple payments at a certain period of time or you think you're going to get an early payoff or whatever that's when this comes in handy my only problem with it is that's hard to forecast when you're forward looking i mean you don't you don't really know my expectation on most of my notes is that you know they're a monthly note but you can use that and you can also use it in a backward looking because these are the kinds of payments that i ended up getting rate function rate function is just the interest rate per period of loan that you've received on periodic equal basis um probably one of the most used ones that i use is the rate function um all of these four they're gonna they're gonna give you a percentage so you're gonna end up with a percent that says okay this is the percent return based on these particular criteria that you put into that equation you can all use also use a the npv or is the net present value and that will tell you what all those cash flows are worth today and a whole lot of this is based on um basically that the present value of money you know it kind of goes back to the principle of the dollar today is worth more than a dollar tomorrow and i think we know if we look at the news the dollar today is seven percent less than a dollar was last year because of inflation and so that's what this is trying to tell you is what the value of it is today based on whatever you know you it happened we're seeing on the news at seven percent but you can put any figure in if you want your discount rate and determine what the current present value is and the net present value function that's for just a schedule of cash flows that's not necessary periodic you know maybe you get one today and one in two months and you know however we in my corporate function we would use this a lot because we were looking at projects and projects have you know a lot of varying cash flows over time depending on your expenses and your revenue and all that kind of stuff whereas notes tend to be you know more consistent now you can have some notes that you know have some nuances and and that's where you can play with those also uh but those in at least my experience tend to be more of the exception than the rule so when do i use them like like i said roi i kind of use it i i always after i sell a note i like to see how did i end up doing you know did did i get this one right or did i miss something and so i do kind of a post appraisal if you will and an roi is is one way to do it um after i sold and after i sell a note i can see well how did it perform you know and i take into consideration you know my purchase expense my due diligence expenses my servicing fees if i had first placed insurance my legal expenses the payments i received sales expenses and all that to see you know what kind of return did i end up and what what i like to do is because when i buy a note and i think most of you guys do you you calculate what you think your return is going to be on it when you buy it and then when i sell it i go back and i calculate to see what did i really get you know and did i get more or less you know what was it was it about on target uh or were there some surprises then you know there's always surprises and you know there are some ones that are kind of standard but there's always some surprises that pops up so i do that kind of for you know a backward looking purpose the irr and rate they're the ones i most often use when i'm preparing to a bid and so notes like i said they're based on periodic consistent payments and you know if they're all the same you can use the rate function but that doesn't mean that i don't take into consideration servicing fees i don't know i do take that into consideration i do take into consideration things like my due diligence expenses and i also take into consideration the purchasing costs the boarding costs all those kinds of things um when i go through that calculation yeah and uh so joe just just i don't typically interrupt but one of the questions was what do you mean by rate what is it rate rate rate basically it's going to give you a percentage it's your rate of return if you will angle rate returns your return you've figured out some roi is a simple one right over five years your annual term based on an annual basis right some people you know it's interesting some people call it yield some people but if you if you go and you look at the xl formula there's an excel formula for yield the yield formula on excel basically is structured to determine the yield on a bond and a bond is a little different than what you get because a bond you end up it's it's got to pay off at the end and the variable and the price what you paid for it so that the components for it a little different than for a note so what i find is that the rate formula in excel is a better application for calculating this so when i say rate it a lot of times people use that term interchangeably with yield and what that means is it's your rate of it's your annual rate of return yeah you can also use the the i on the calculator right for those using the calculator is the i where these correspond in the time value calculations they respond to the there's actually letters on the calculation that there's i there's n there's npr concept with that so you know what you're using rate is a term we use because it's an equation in our spreadsheets right we're on the calculator it's an i function so it's a return angle so yes so you can use the word yield but what we're looking at the fact that the angle return can be a yield could mean ir which are completely different calculations we're going to get into that in a few minutes and then like i said x-irr that's just but you know like the ir it's just with if you have inconsistent payments so um what i did is put together a little little sheet to say okay what's what's the difference between these things uh and what are the parameters that you have to have in order to be able to calculate that so yield or rate if you want to calculate that you have to have equal payments at an equal interval and then that will give you a percentage return if you want to do irr you'll look it doesn't have to be equal payments so the payments can be whatever let me make sure meaning the same time same month same amount right it could be different amounts that means it's irregular or different clockwork yield is the same the first of every month right right that's what the with you on the yield one yeah you've got the first of every month and you've got the same dollar amount now if you have if you have a situation where um i'm trying to think where you where you don't have equal payments um i don't know there probably are some um some loans that might have variable interest rates and if you know what they're if you could predict them and you know okay the rate the the rate or the payment is going to go up at a certain period of time you know but it it's going to be every month the payments are going to be made then you can use that to calculate what your return is or payments or every other month the borrower is not consistent you can use the ir yeah exactly yeah the problem i have is i can i can never forecast that yeah correct so internally we use ir for another way is that payoffs right yield goes to a maturity date where we're using ir to say i'm going to sell a loan in three years or if there's a payoff in five years it's not gonna go to maturity d so we use ir to say i'm not gonna hold this for 20 years where you calculate to maturity bonds right to that to 20 years down the line says what's your return every single year until the maturity date yeah right right yeah because i i use something similar like that because i you know one of my exit strategies is if you you take a a non-performer you get it re-performing and you sell it that's a potential exit strategy for my non-performers and uh i also then calculate well what price can i sell that at based on what i think the buyer is going to want as a yield and based on that i can calculate the sales price yeah and then you can put that in to determine what your rate of return is going to be so you're right you would have consistent payments until the time you sold the note well it's non-performing you won't necessarily have consistent payments but you hope you would after a period of time payments and then you'd have the lump sum payment when you sold the note and then you could calculate your return and so it was just kind of a i just kind of put it together i hadn't really looked at it from this perspective this i mean but it kind of makes sense where what you can use in a particular situation to give you your return either in dollars or the percentage amount right you know when i first started out i was so i was exposed to some people that were suggesting that you ought to just bid as a percent of upb just you know make that your basis for your bid and um kind of always thought why why that doesn't sound uh it sounds strange but i wasn't i was a newbie and you know i thought well maybe they had some other things some experience or you know there's always shortcuts that you know people have and figured this was kind of a nice shortcut so um i thought it might might be interesting to kind of look at some examples of of a comparison of if i bid based on upb percentage or if i bid based on what i want my yield to be or my return okay so um i thought i'd put you two guys to a test all right so here's here's what we're gonna do here's the the basic assumptions for the for a bid okay all the notes that are going to be presented they're performing okay so you can put that category there right all the upb upb bids are going to be bid at 90 so i think does that i think that sounds kind of like what a lot of people who are bidding upb bid for performers yeah and as as a yield bidder somebody who wants a return you're going to be somebody who wants a 12 return it might be a little high you know i think some people have lowered it a little bit but not high for for this exercise we're going to use 12 so all right here's what's going to do we're going to do we're going to have three notes that are come up bit upbeat bid is going to be 90 and the return is 12.

now here's the first one the upd is 50 000. the interest rate's 9.5 percent and it's got 163 payments left and the payment is 546.56 all right there's okay you're cheating i'm a calculator guys so we already know the upv bid on this one ninety percent of forty five five fifty thousand is going to be forty five thousand right so boom you didn't need the calculator for that one that's an easy so the question is the yield bid the 12 yield is that bid going to be higher or lower than 45 000 let's see it in the audience i know that probably a little bit delayed but so the question is will the yield go up or will the yield the return will they go up or we'll go down right because the return you're going to bid on our 12 return yeah so is your 12 return gonna be a higher or a lower bid than 45 000 if you want 12 what i get is if you want 12 you're gonna have to bid lower than 45.

okay you say lower you you agree dave you're gonna have to bid lower okay let's find out yes you are you're gonna have to bid lower if you want a 12 return so the good news well okay so now let's look at what what is the yield on the upb bid when you do the calculation if you bid forty five thousand i'm not you can tell do you know the answer nathan you wanna guess of course i i also included cost for the okay servicing and all additional costs so that might but if yeah if i just put in just a straight 12 percent yield without any additional additional expenses in there uh the bid's going to be 43 860.

right 22 cents but that's without any additional expenses yeah because this bid that i did it includes about the net yeah it's a net bid after 30 servicing after close to 500 in expenses when you consider you know the cost to acquire it you consider your due diligence you consider regis you know recording fees all that kind of stuff but anyway so the yield that that upb guy is going to get is going to be 10 make sure you guys all know this this is based on zero the servicing fees right this is a gross yield this fyi no no no no this is another this is this is net this is a net yield oh this is okay this is after servicing after your acquisition costs all that kind of stuff so um so they're apples and apples with the 12 return and the upb return of 10.

right so this bad news in this situation is i lost the bid because i wanted a 12 return i only bid 40 568. the upb bidder bid 45 000. they got the bid but they're going to get a 10 yield they're not going to get to 12 which i was hoping to get okay so i lost that one let's go to the next one sorry we knew the return yield was 12 because that's what we based it on yeah right all right loan two it's got the same upb as the first one okay 50 grand interest rate's three percent it's got 104 payments and the payment is still the same five forty six fifty six now we know that the upd bid is gonna be the same still ninety percent of fifty thousand is forty five thousand so is my bid to get my twelve percent gonna be higher or lower than forty five thousand it's gonna be a lot less give it a little pause for uh facebook catch up so again joe just saw people who were kinda lost explain it again what are we trying to figure out what are we solving for for those people right we're we're comparing for those people that just bid on a upb you know as a percentage of upbeat because some people do that i mean i was originally taught to do that yeah we all are as opposed to how you would bid if you base it on a a given return your what your required return is okay and then in this example i said okay well we'll look at a bid based on a 90 upb bid as opposed to a return that i want 12 i want to get a 12 return so i'm looking to see how this upb bid is going to compare to my bid that i want to get a 12 return on and will i win or lose the bid and if i win or lose how does my yield which is i'm mine's based on 12 how is that going to compare with the yield that the person got when they won the bid like in the first case when they won the bid for their 90 upb right and in that first loan like i said you can see that to get my return i had to bid less they did 45 based on the 90 upb i only bid 40 568 because that's a 12 yield but at the end of the day when you compare well what yield did they get compared to what i wanted to get what they would get a 10 and of course more than likely because because more than likely they bid strictly on percentage upb they probably didn't calculate the return no they didn't they didn't no they just did it and so yeah my objective was to see well what return would they get what do you really get you know and they're going to be that was totally frustrating loan number one was so loan number two is the same scenario only what you're seeing is you're seeing a lot low....