Note Partials vs Hypothecation | Real Estate Notes Show

Episode: Making Money Note Partials vs Hypothecation Full Video Dave's Goals and Plans: - We are merging owner finance people and note buyers more and more - We want to get into notes with 9-11% interest rates instead of 3-5% - We are looking to participate with seller financiers and help them cash out their notes - We ran a webinar to learn about hypothecation versus note partials because we didn't know enough about it Nathan's Goals and Plans: - I bought partials and sold partials - Once I got a better understanding of note partials, it's difficult for me to get a deal done but it makes a lot of sense - Note partials make a ton of sense especially when dealing with your own cash for juicy returns - The conversation about what the terms mean has been confusing even in private weekly calls Key Recommendations: - Start talking to people more instead of just doing mailers to seller finance lists - Work with attorneys who specialize in and are confident about note sales and assignments - Tailor note sale agreements specifically to your situation regarding representations, warranties, and recourse terms - Understand the specific legal implications in your state (Sean noted his answers are specific to Texas law) Topics Discussed: - Definition and mechanics of note partials versus hypothecation - Ownership and management responsibilities in note partial transactions - Default scenarios and who is responsible in each structure - The rise of seller financiers doing owner financing as a business model - Interest rate opportunities in owner-financed notes (9-12%) versus traditional notes (3-5%) - Legal representations, warranties, and recourse in note assignments - Subject-twos and wrap notes in owner financing Guest Insights: - Sean is a Texas-licensed real estate attorney with 15 years experience specializing in real estate finance - Note partials involve assigning ownership of the note and lien, while hypothecation involves using the note as collateral without taking ownership - In a note partial, the new partial owner typically takes management responsibility and handles defaults unless otherwise specified in the assignment - Statutory warranties under Texas Business and Commerce Code are included in note assignments unless specifically disclaimed - Note sales and assignments require experienced attorneys to properly address representations, warranties, recourse terms, and other specific deal structures foreign [Music] selling what exactly what it sounds like a part of the note you're selling a part of the payments right so if I want if I'm selling 10 of the note and there's 300 payments left then do the math I'm selling those payments in a note partial I'm assigning not only the note in the lien in Texas um but that's the ownership right so that's the point of a no parts whether you're doing a full sale or a partial sale I'm taking over ownership of those portion of the payments which is different than a hypothecation which we can chat about here [Music] hey everyone Dave putz here good afternoon I'm joined as always with Mr Turner hello you Nathan hello again this Friday afternoon it's been a fun week I think things have been progressingly forward with some of the stuff we're doing internally I'm looking forward to the coming weeks some stuff's been really happening on our sideline I haven't even told you yet about since you've been off the grid hiding for me uh for the last couple days uh tell us about that where were you at for the last couple days I mean haunting you down I had a great time so I get to take advantage of Canadian holidays and U.S holidays so it was great so Friday um Friday's normal but then anyway we went out uh on Tuesday so July 4th started out with a camping trip started with white water rafting uh in the Canadian Rockies and man that's fun if you've never been I highly recommend it it's just a ton of fun um went out with uh with our church group and did that first and then just in the mountains no cell service no anything so it's just completely off the grid gorgeous surroundings really really nice I'm a little I got a little bit of color I think so looking good oh man I I'm a little jealousy we've been heading about 90 degree weather here in Jersey for the last week oh yeah just random scattered thunderstorms out of nowhere like Florida weather um no we just skipped the rain so we're okay all that good lucky so it's amazing that you know what we've been talking about lately has incorporated more and more of this idea of having owner finance people and note buyers merging we're doing this more and more so if you guys haven't tuned in recently to us please go back listen to podcasts watch YouTube videos because everything we've been doing lately has been outside the typical note buying space all the hedge funds these hedge funds are buying and selling assets great but it's hard to play with these assets that are three and four five percent interest rates we want to get into the nines and tens and elevens and a lot of people reach out to me even this past week saying I'm buying these seller finance lists and doing mailers and got zero results and I challenge them to start talking to people more and more I think what we're finding is I mean seller finances has been around forever for forever and ever um but uh I well I think we've seen in the last year especially is there's more and more people that are doing seller financing as a business where they're going out and acquiring properties and then selling them on terms maybe they're doing a wrap whatever they're doing but they're doing it more as a business and so a lot of those guys are looking to sell their notes so that they can turn their Capital around and and keep doing it which is perfect for us and we're more than happy to participate with them and help them cash them out but there's been some questions that have come up that we don't know so we're trying to figure out how how it works and why it works and what we can do to make it better and before we introduce Sean uh Nick's comments on Facebook I don't know how to edit this feed but he's been doing around for five he said no it's a seller finances around for 500 years thanks Nick can Cindy said hi uh Coleman who's a regular on our program so I was this came out I've heard we've heard about buying Parcels which we I bought partials I've sold parcels and I've heard about this thing talk about this hypo hypothecation versus no collaborization versus pledging a note and I said listen I don't know enough about it and as most of the time when we don't know something about it we run a webinar on it so we can learn and you can learn alongside of us um so this came out and what I found was I had a hard time finding an attorney who would a talk about and be new enough about it that felt confident about it even at the DME somebody turns and said just not our bread and butter yeah and it was difficult but what do you what we all know about no Parcels is this Theory out there and not a lot of people are doing it do you think it's because they still understand it I think that's a big thing um I know that was the case for me for a long time now that I've gotten a better understanding just with the setup that I have it's difficult for me to get a deal done uh but it makes a lot of sense and especially when you're dealing with your own cash it makes a ton of sense it's a really great way to get some really juicy returns um but again it's still relatively unknown and a lot of people just don't know how it works or if it works and all that kind of thing so we're we're hoping to kind of learn more about it ourselves and help other people learn about it as well that's a great strategy um in in most circumstances yeah that's awesome so what we we talk about in our space is the buying of notes and the seller fines people are creating these things and they want to get their Capital out we've been talking about buying rap notes and then the headache of it was if we bought the wrap note what do you do with the underlying debt how do you handle with the borrower um and how do you take over the power of attorney part in the subject too but these notes are rated you know created at 10 11 12 interest rates I want to get my hands on some of this stuff and right they've acquired the property for a low enough amount that they're not trying to squeeze out every dollar when they're selling the note which is great news for us that means we can Jazz up those returns even more so yeah we're very excited about that and we want to do more but we need to know all that we can so that we can do it correctly yeah absolutely so let's uh without further Ado and let our guests sitting there looking pretty Sean we appreciate thank you for joining us this Friday afternoon thanks for having me guys it's been great so we always start with a background how did you get first started with doing attorney work as well as doing this type of attorney work which is really specialty good question I mean my back's I've been a real estate I've been an attorney 15 years started with a large law firm in Texas I should say I'm a Texas licensed attorney uh in Texas doing representing title companies Builders developers buyers sellers banks financial institutions really anything in the financial world in the real estate world after a few years I thought and I gotta I'm just gonna go out on my own and do this myself so I ended up starting a title company and I started my own Law Firm that specializes in real estate finance and corporate uh legal work and so uh years ago probably 10 years ago started really getting into this I mean as you guys noted owner finance has been around a long time subject twos wraps it just wasn't understood and to be candid it had a pretty negative stereotype for a pretty long time but I've been doing them for at least 10 years and and then sort of that just evolved into note sales and assignment and Publications and you name it and I touch it so to speak good interesting interesting it's it's funny you say all that right because there's very few attorneys who a do this type of work and B understand the work confidently enough to talk about it now we'll preface this with saying not everything we're going to ask today we're going to get an answer on right there are some things that depends on your specific situation and we don't want to try to get into specific deal structures today because it just with everyone on the feed and watching it and everything else and then this will be recorded on Youtube it'll be on our podcast so please go to the website and find the information but we want to go over some of the generalities as best we can um even on our private call we've been having our weekly Wednesday called privately the conversation about what the terms mean has been a little bit confusing right we all pretty much know what a note partial is but for those who don't know can you give a kind of a 30 second what is it no partial what happens in that kind of process who takes ownership of the note in that deal yeah I mean and you know this would be sort of the generalized version today as you know that everything is pretty specific and in my answers today are going to be specific to Texas law since that's where I'm I practiced but I know partial is essentially selling what exactly what it sounds like a part of the note you're selling a part of the payments right so if I want if I'm selling 10 of the note and there's 300 payments left and do the math I'm selling those payments in a note partial I'm assigning not only the note in the lean in Texas um but that's the ownership right so that's the point of a no parse whether you're doing a full sale or a partial sale I'm taking over ownership of those portion of the payments uh which is different than a hypothecation which we can chat about here in a few minutes but I'm selling a portion of the payments that are remaining on the on the loan itself and usually in the note in the note purchase world in the partial world you usually see that be from anywhere from three years to five years but it just depends and he said this so that was an important thing you said in there you're taking ownership of those payments for those for that amount of time you're managing the note right so you're taking you're taking ownership of it and managing a note and where where's the Hop application I'm just I'm just merely taken out a loan and using the notice collateral and I'm not taking ownership okay and that's an important distinction because that's what that's one of the first things that comes up is like okay who owns that note during that partial time is it you know the original note holder or is it this new partial note holder and you know who's in charge and what happens if there's a default is usually how that question comes out then what yeah I mean and those that's where you start to get really specific in in any sort of in any actual note sale or assignment of the note in the lien itself right because you get into the types of representations are you know how limited are the representations and warranties in the assignment what's the scale of them is it re is it with recourses it without recourse so there's a lot of really really specific things that need to occur in a note sale um that that an experienced attorney needs to address or somebody that's it's experiencing note sales need to address because you can really tailor them however you however you want yeah and that that's one thing actually so from what I've seen and again I I haven't bought or sold any partials but I've been around them a lot um this can like it can vary from sale to sale so in this case you're taking over and the new partial owner is in charge of whatever if something goes wrong then they're in charge I've seen it the other way as well where the it flips back to the original holder in case of default I mean I I you can kind of tailor it like you said right Taylor just about any way you want I mean there are certain statutory warranties under the Texas business and commerce code that are included unless you disclaim those warranties in an assignment of the node and the lien itself um so outside those statutory warranties which there's only about five uh you can create or disclaim or modify it however you wish and that's where it becomes that's that's where you see a change in the value uh and the purchase price of notes right if I'm if I'm purchasing with a significant with an Indemnity provision because the assignor or the seller or the note wants an Indemnity provision um if I'm if I'm the buy note buyer the assignee or the assignee and I want multiple representations and warranties it's going to affect the price of the note and that's why I think no purchases no sales are so hyper specific that they're going to depend on your transaction because ultimately the representations the warranties are tied to in my opinion the price right so if you have a secured note or if you have a in Texas we have negotiable instruments and we have non-negotiable instruments so I can have a note that's not a negotiable instrument under the Texas business and commerce code those are going to be deeply discounted notes um if it is a negotiable instrument under the Texas business of Commerce code you're probably going to pay a little bit higher on the value of the note so there's so many factors in determining the price to pay for the note and what type of representations the warranty should give so when we talk about these no Parcels in I love Nathan pointed out the fact that the ownership is what is everything in a no parcel but it's also the negative for a lot of people right they don't want to deal with the situation whether they have to do the foreclosure process some sellers will buy you out some won't it depends on the structure of the contract and if it don't buy out if it's even if you understand the note space and you've done foreclosures like me and Nathan have done for years if I'm doing with a Roth IRA and I got six grand I buy six thousand dollars worth of no parts from Nathan anything started for closure and he didn't agree to buy it back I'm in a bad spot now I gotta either lend money my IRA or do some finagling where that becomes a problem and if I'm a note seller and Nathan you know sells to his grandmother who doesn't want to deal with anything he has to either jump in or sell to a friend and then he has to jump in it becomes kind of problem-some but some kind some people say listen I want to take control of it newer investors Ira investors typically want to be more passive and learn that process so we're going to flip the script now and we've heard words such as hypothecation pledging a note collateral assignment are they the same are they different I mean qualification is just a is just a fancy word that people throw out for saying using your Note is collateral for a loan I mean right that that's it's just a fancy way of saying I'm going to use this performing asset this asset that's hopefully not in monetary or non-monetary default and I'm gonna go out and get an investor and get in a loan to use that notice collateral and then I'm going to take the cash or the loan I'm going to start making the payments to the lender and I'm still going to keep ownership of the of the note and I'm going to keep getting payments and you hope that the payments are relatively even right in this traditional hypothecation they're pretty close but you can have a higher payment on your on your hypothecation or your loan or a lesser payment in the actual income stream that you're bringing in for the note uh so it really just depends on how what you work out with the investor that's going to use your notes collateral would you say hypothecation is similar saying pledging your note and a collateralization and all that is the same it's all really love together I mean and it's all it's all simple I mean the concept is the same I mean the country lying concept is that I'm using a performing asset a note as collateral to secure alone that's what I'm doing yeah so when we we've talked about the differences right and then the pros are doing hypothecation side of the space is you don't own the note right if Nathan sells to me and I'm a new investor and he doesn't really want to deal with that problem going bad he can sell me the the payment string it could be a year could be 10 years and it's really alone against the node versus buying the note and if it goes bad Nathan can replace the notes with a different note he can keep paying you while he's foreclosing it's really an IOU would that be accurate yeah I mean IOU is a legal term David but no but you're right though in a typical hypothecation or a loan you you have a few different ways that they're taken but one of them would be substituting collateral right so I could go out in theory substitute additional collateral or new collateral with the lender on the note that was originally pushed if it ends up being about me and so what are the pitfalls then like why why doesn't everybody do hypothecation versus just selling a partial I mean [Music] right I mean what what is the interest rate that you're going to pay for the the lender the investor that's going to collateralize against you know uh versus what's the sale when you know how much money are you getting up front on a sale um are you keeping the asset I mean it's all boils down to me from me to numbers because legally you can structure out of one of them I mean you can collateralize a note you can do a partial note sale um once you get into the nitty-gritty of the documents the assignments where you start dealing with representations the warranties that's that's a that's a pretty important thing why that's one of the reasons you need an attorney but for me it's always a numbers game do you know do you know what the hypothecation of usury law comes into play here where the you know the the maximum you can charge interest rate does that come into play with the hypothecation where the partials that there isn't any ruling well you do you always have to be conscious of the user laws right I mean if you have a note that you're serious then it could be considered illegal um so and certainly in Texas uh you've got to pay attention to that so I would I would even argue that if I go out and I loan you uh I wanna I give you an a loan can I collateralize your node and I'm charging 25 interest that could be you serious in my opinion so you have to be conscious of that in any time an interest rate is taken out because you don't want um the the collateralization against the node that brings up another point is to with the lender going to ask for right what type of documents are they going to have are they going to have a note for your note right are they going to have a loan agreement and if so what's the interest are you going to be in there so you still have to comply with the usury laws um so you said loan agreement versus note I'm presuming that is a saying documentation is that different no they're different and so I should have said this at the start of the podcast but the presumption here and when we when we talk about note sales when we talk about hypothecation um everything that I'm talking about is based on the assumption that there is no separate alone a loan agreement that was done with the underlying note because and I'll give you an example in in the commercial world for uh in the commercial world you have not only notes but you have loan agreements right there are two two different documents and in the loan Agreements are rather restrictive on what you can or cannot do so in the commercial world uh you you will have loan agreements that lay out items like this node can't be sold it you know and so you have to you have to read those so when today for the purposes of this discussion when we're talking about no partials no hypothecation it's on the Assumption for me that there is no separate loan agreement that's been signed with the underlying note it's a standalone note and generally on owner finance transactions wraps a basic note there isn't a separate loan agreement you'll see loan agreements signed up for sure on Commercial transactions and possibly if there's been some sort of construction loan that was taken out but you don't usually see those in wraps seller finance transactions awesome so one of the things we wanted to talk about too is in addition to this is the idea and there's a question about tax repercussions I would talk tell you to talk to a CPA about hitting an attacks part of this um we're gonna say part we're going to stay focused on the legal side of it um but I appreciate questions too isn't um when we talk about this stuff to one of the things that me Nathan came up with this concern is could you technically sell me a publication on a note and then hypothecate again with Nathan without me knowing it depends on the underlying agreement right I mean it depends on the note I mean that's why the preparation of the documents is so critically important because what the documents are going to control the note is going to control right um the assignment's going to control so you have to it all goes back to the documents what they say what they allow what they don't allow because they can be tailored in a certain way so since we're keeping this in a high level General discussion I will say it's going to depend on the documents that are drafted and created and and I will I will add that part of my concern as an attorney has always been the drafting of the documents I've seen the most ridiculous uh notes I've seen the most ridiculous assignments transfers that arguably in my opinion aren't even valid under Texas law so uh I would I'm going to go right back to and I'm not trying to pitch attorneys for business but because you know I like to help but you've got to have a turn this is such a hyper specialty dealing with the Texas business and commerce code dealing with these certain federal laws that you got to have been an attorney drafty underline note and the assignment um well you know that actually it goes back to what Dave was saying at the beginning like we had a hard time finding somebody that could come on and talk about this it's not just any attorney anybody even the attorney that you're using foreclosures for foreclosures I may not know anything about this so it is it is a niche within a niche within a niche like this is it really is I mean I would even say I mean I'm a big believer in Thomas Jefferson's quote when he said he who knows best knows how little he knows I mean I I don't know everything there is to know about every aspect of law that I practice and so you have to to David's point I mean some of it really does depend and you have to stay updated and abreast of all the developments and changes in the laws it's especially in an area like this or in real estate frankly just in general yeah so I potted for the feed I realized that zoom up the other thing and we can't pop out the chat but some of the questions we came in regarding owned by retirement plans that they have to follow under the udfi hypo we're gonna let the if you have a question about what retirement scanner can't do I would focus more on the those kind of people out there doing that kind of stuff um we got Tim Heritage saying showing your great uh resource uh but her by definitely would focus more on uh the legal sideway I would definitely talk about that um and I would say that Susan asked a question regarding uh that she does a lot of these things she the difference is has been the speed of the transaction as well as the cost what do you say you know I'm gonna ask give you some softball questions too is is anything part of this collateral assignment recorded in the county records that's easy that's easy an easy softball there uh any any assignment uh is going to need to be recorded in the property records because it you not you don't you don't just want the note right you want the assignment of the lean and which usually includes two liens the vendors lean and the in the deed of trust so uh yes the assignment is going to be recorded needs to be signed by the assignor and the assignee um and there are other items that you need to check off in the assignment but to go back to our my original point you gotta you have to understand what the representations and the warranties are going to be and if you do a hypothecation is there any assignment that's recorded on that uh in a hypothecation uh no because I'm not assigning any sort of the ownership interest in the node in the lean I'm just I'm now there may be a document generally there isn't but there may be a document that the lender or investor wants to file a record uh an Affidavit of some sort but it's not required and on the call we talked about you know protecting the interest in the collateral hypothecation situation and we mentioned the fact that someone had talked to me about hey to protect your interest why don't you do some title clouding and just put a second lien there for 100 bucks and I said that sounded good until you said no no no I mean you know there's there are liens that you can file under the uh Texas Constitution and then there are also we call slander of title actions and any attorney worth his uh worth his uh hourly rate um if I found some 100 bogus second lien filed a record uh I you could rest assured I could probably see you for slander of title uh if it wasn't valid and I probably would win so uh not generally a good idea um it's crazy but I mean this is what people are trying to find ways around it um what do you suggest to those people who want that Comfort level of it not being double hypothecated um because you can sue them right that's a good question David but it's sort of it goes back to I have I've made this statement for probably 15 years that I've been an attorney the paper that you have the document the contract the assignment the data it's always only worth the paper it's written on unless you're willing to sue right I mean unless I'm willing to do something about it it's not worth anything so um to your point when you get in this area that the note sales the hypothecation you just have to be comfortable with there is risk associated with this area um and you got to be comfortable with knowing that okay this is the document I have this is what it says an attorney drafted it worst case I can sue over it I have several causes of action that I might be able to sue to enforce and I'll do it um but again the paper's on it's only worth the paper it's written on unless I'm willing to do something about it and this this goes back to we we say this so many times and over and over and over again it's all about relationships you know no know your seller know your buyer uh when you've got that kind of a pre-existing relationship man that's gonna help so many things the biggest issue that I see you know hopefully this doesn't go off topic but it's it's frankly it's the lack of diligence by uh by note buyers and when they come to me they're like my God Genie Sean I wanna I wanna Sue this person I want to sue this person and then I sort of ask them some basic questions like when they talk about them you know um did you did the note have a promise did you look at the underlying no was it signed by the debtor you know that have clear terms of repayment right was it demand or was it a fixed time did it have a you serious interest rate did was it an LLC did you check the LLC to if it's registered registered to do business in the state of Texas if it not it can't do business in the state of Texas so uh was it a homestead property of the underlying note if so in Texas the node has to be signed by the husband and the wife of their married man the deed of trust right these are just diligent like sort of common basic diligence items that need to be done by any note buyer or signee uh in Texas at least in the U.S I would say but I didn't know Texas had the the married couple claws in there that's good it's a it's a unique thing and because right you you have this property how properties characterize separate property versus community property Texas is a community property state right okay um but that's not what necessitates a a spouse signing off on any sort of document deed of trust or note um but Diva trust certainly it's the fact that we have we have What's called the homestead right so you're doing it to perfect the homestead interest in the property you don't want later down the road that the original borrower on the no defaults on the note or files bankruptcy you get into a bankruptcy and there's a challenge over the validity of the node and you get a creative attorney that says hey by the way those didn't sign off on this deed of trust therefore the lien itself is invalid in the homestead interest isn't protected so we're perfected so uh that's what the homestead concept is what requires the spouse to sign off and I need that another chance I didn't know Texas interesting so one of the ways we thought about doing this and you know I didn't pitch this before you is what just to protect the people the risk I find with the hypothecation is a due diligence making sure that if you bought this lean and you took it back you couldn't foreclose on it the proper is worth the value and everything else but also the fact of protecting it from a buyer perspective and my thoughts were but the note the mortgage the whole Cloud file as well as the assignment of mortgage and a launch in escrow with the attorney or servicer to protect it from being resold and having escrow instructions to protect it would that help protect from hypothecating multiple people that's good yeah I mean you know I I in theory yes right but I mean it goes back to my statement a few seconds a few minutes ago it's only worth the paper it's written on unless you're willing to do some of that right because putting these documents in escrow at a title company or your attorney's office or the service or may not necessarily stop someone from going and trying to sell it again or hypothecate again you know against it or collateralize against the node itself so while that all helps I'm not discouraging having escrow instructions I'm not discouraging having any of that I'm just what I'm saying is it's not going to stop really somebody unless that person has integrity and they go well geez the document I signed says I can't do x y z then I'm not going to do x y z so to Nathan's point it's all about relationships it's about who you know you want to do business with people that are going to respect the terms of your agreement um because if they don't respect the terms of the agreement what do you do you're going to have to sue them right and that's where attorneys like me just you just love it right we love we love people that don't have integrity and don't follow the terms that's your bread and butter so let's let's get into the fact of you know um we want to write these agreements up right and we want to buy a lot of these kind of notes right how can we do we have to work with a attorney that's licensed in that state or can we work with attorneys such as yourself to draft the general documents in purchasing this kind of asset and the escort instructions that's that is a great question I mean most attorneys are licensed as attorneys in their respective States right so I'm a Texas licensed attorney uh a lot of my business partners he's a Texas and Georgia licensed attorney so for me I can draft documents in Texas right um could I in theory draft a general document yes but um the concern for attorneys is that it what passes in Texas may not pass in California uh and that could be considered malpractice so you know it's as capable as I think I am even in other states I would tell somebody hey look if you're going to go buy a note in California use a California attorney if you're going to go to Nebraska use a Nebraska Attorney because I can tell you there are a lot of attorneys that come to Texas and try to draft these sort of General documents in Texas and I look at them and go geez I mean what on Earth and it's not even close because Texas is extremely strict in Texas is one of the more complex States legally that's why our bar exam is one of the most difficult in the country because it's the laws are complex here so you need to as an attorney you need to make sure you're not committing malpractice so if you can't anybody that's on this call I can do what you need in Texas um but it would be best suited getting an attorney outside of Texas for whatever state wherever if the note if the collateral is in Nebraska then you'd probably want a Nebraska Attorney to go look at it is there a way to find attorneys like yourself is there a category that we should be looking at a network uh I you know I've been asked that before into my knowledge there is not um there's no database that I've ever found uh there's no resource that I'm aware of as an attorney that would allow uh any group of individuals to go find attorneys in other states and I've not only been asked in this context I've been asked in the creative financing context I mean it's like every week I mean every week I'm getting a phone call hey Gee Sean you're great in Texas but can can you do something in Florida for me no I can't draft a deed for you in Florida whether you know anybody no I sure don't right because it's such a hyper specific sphere this the note sales the partications creative financing sub twos raps right I mean every law is different I mean Texas it's more difficult to do a rap transaction in a subject to transaction than it is in Arizona I mean Arizona it's easy right and here got a few additional laws you got to follow so unfortunately Texas you know land contracts are No-No in Texas right and a lot of the subjectives in the rap notes are created have come across as land contracts and cfds um that's just an example of Texas law that you can't create land contracts uh the protection of everything when we talk about this stuff um do you recommend someone to get a basic understanding of notes the legal a consultation with someone like yourself what is the first step to someone who says I want to buy a hypothecation or sell one and I can draft it and would you represent both parties if both parties want to use you great questions as part of that my first the first suggestion I always give to anybody is you know go find an expert um in your field like I mean I know for example that um you know USA home Partners Nick Nick is a one of the ones we deal with like he does a heck of a lot of business in Texas right he's a great resource so if you're going to do something in Texas go find somebody that's done the node sales go find the investor that does it I mean you guys New Jersey I don't I don't know anybody New Jersey I know you're an expert there yeah right so go find somebody like yourself that's a resource to go ask the question be you know let them be your Mentor the second thing I would say was to your point you you got to have an attorney that knows what they're doing in this sphere right because I cannot stress enough how bad a poorly drafted note or poorly drafted assignment could impact the validity could impact the sale monetarily it's a big deal right I mean if somebody drafts a note and it's not considered a negotiable instrument in Texas and it's considered a non-negotiable note in Texas you can just rest assured the value of that note is going to drop by an exponential amount right so the second piece of the advice I would give is to is to find an attorney that you can go have a quick consultation with yes it might cost you a few hundred bucks but I'll tell you what it's worth the three four five hundred bucks that you may pay now because you're going to save that later you know getting sued for fifteen thousand dollars because you signed a a full recourse note you had no idea what that was right um or a non-recourse so that my second suggestion will be to partner up with an attorney and then the third is frankly you just you just gotta jump in yeah and it's to be part of part of groups like this listen to podcasts like this right you guys do a great job of of talking to people and help educating and and it's just at some point in time and then you just you just dive yeah and my my experience is that most things are fixable if if there's some kind of like a the note wasn't written correctly or something like that or for example this is years ago but I I bought land contracts in Texas and then just converted them over to a date of trust so it's fixable it's not necessarily easy it's not necessarily cheap but you can do it I've always said you can fix just about anything yeah but to your point how much is that fixing cost you right so you know if you spend 500 on the front end to make sure it's done right then you might save yourself fifty thousand on the back end even though it's fixable uh it's just a some people I think are afraid to put up money at first and that is a bit terrifying but to me it's worth it especially in this area yeah some people were asking for your contact information uh in the chat we have a link to just fill out it's a form on our website you'll get showing information uh regarding his partner Gia in Georgia just fill the form out and he'll reach out to you and follow up when they got a question you got um when we buy these kind of Publications in um no softball question bye bye one year can I go buy a second year I'm another six grand next come around can I keep doing it on the same note can you keep buying partials or can you keep yeah keep hypothecating loaning out yeah on the same note can I hypothecate once and do it again and again yeah right so some people are saying well if I do sixth grade now I'm done no you can do as many times as you want right um but we really focus on the fact that this hypothecation versus this part no partials it depends on what kind of person you are what you're looking for and then make sure you have the attorney in place to review the collateral as well as review the document that you're signing regarding the transaction um both part items need to be reviewed because if something happens you make sure you're you're backed up um and understand what a partial is in regarding to the schedule if the buyer pays off or what not where hypothecation if the borrower pays off the original debt you may still have the hypothecation going because if your agreement doesn't say anything about it they may just keep borrowing your money for X period of time yeah I mean and I think and I think is part of the thought process has to be what am I doing this for right am I doing this to am I doing it to scale my business and go buy more notes at what point do I stop buying notes at what point do I stop collateralizing against nodes and my my collateralizing against my performing note so I can go buy 10 more notes right so what's your future plan so I would encourage any any newer investor even seasoned investor come up with a one-year plan a three-year plan and a five-year plan on what you want this business to be because that's going to dictate whether you sell notes or hypothecate notes right I mean that's how you and generally both of them can allow you to scale your business um but you got to have an idea where you're going in order to make decisions now we have one question regarding what happened at the borrower foreclose gets foreclosed on with the seller and didn't tell you about it is there any way you get notice that the Foreclosure is happening uh well that's a good question loaded question in um and that if you have if I'm in the partial note world yeah right and there's an assignment of Interest even if it's 10 there's an assignment of interest in the note in the deed of trust well then now I have an ownership of that note so the Foreclosure notice in theory I should be put on notice that it's going to be foreclosed on the hypothecation since nothing's filed of record that's that's a little bit more problematic and do you recommend doing hypothecation on wrap notes versus partials or selling a rap note because of the issue of the original borrower with the Pay Power of Attorney situation we're feeling that the hypothecation is probably a better suited thing because you don't want to transfer that node over it and have to deal with the original rap subject to owner kind of thing yeah I don't you know no I mean I don't I to me there's no really no difference legally in my opinion as to what what you know what may happen I mean I suppose they're kind of a little it kind of is but it like I said at the start it's a numbers game right it's how much do you want now right what is your business going to be like how much would the note be sold for versus how much can you you know get as a loan from the investor on your performing asset so to me I think you got to decide numbers first then because again if you have a good attorney either one of them can be structured in a way that you're protected um so I think you have to decide first uh from a number standpoint what decision you want to make and then go from there so the question was why is negotiability important I think it's the fact of figuring out what you as a buyer or you as a seller want in the no in the deal to be noticed of make sure you cover everything um it's easy to say cover everything you don't know what everything is um but as Nathan and I started with notespace we didn't know what a launch was yeah and you kind of learned you make some mistakes and you ask your attorney is there anything I'm missing in this protection process and they're going to do the best to protect you but there's no foolproof plan that that things just come up um people file BK and change ownerships and all kinds of stuff um but yes so when we do these kind of stuff yeah I was going to start an interrupt David I was wondering wondering if that question for you uh they meant negotiability is in negotiating on the Note sale or if they meant negotiability as in the sense in the legal sense is it a negotiable note or a non-negotiable note Stephen if you can uh comment back on here I'll watch the feed for it uh any question about that um but yeah so I want to make sure people understand when we're buying and selling notes we're not going to buy it what we call Par I'm sure Steve said legal sense so yeah that's always negotiable whatever me and Nathan is what we agree on yeah yeah and I think I think think Stephen I think it was his name I mean in Texas so um in the legal sense um that is a that is a pretty big deal under the under the section 3.201 of the Texas business and commerce code in order for it to be considered a negotiable instrument um it's got to be money to be paid to the pay or it's got to be payable for a certain amount of time and there can't be any other actor undertaking outside the payment of of the money right so if you don't satisfy the Texas business and commerce code then it's not considered a negotiable instrument if it's not a negotiable instrument then it's considered a non-negotiable note um a non-negotiable note is then subject to common law rules versus statutory law right so when you're in the non-negotiable note world the prices of those notes are significantly significantly Less in my personal opinion I wouldn't be purchasing non-negotiable notes not really ever so but that was a really good question Steve so is that like uh would that be like a HELOC no I mean that's that's probably still I mean that's probably that's still a little bit it would be I'll give you an example of what a non-negotiable note would be um you got the you've got the promise to pay right you've got the bar you got the lender and then in the note term you have it is no term at all right so there's no 30 years there's no 10 years there's no five years there's no balloon payment right there's no maturity data it's just this indefinite period of time that would be considered a non-negotiable note I'll give you another example if you want another one um I've seen some investors put in these notes for um they put in these notes on like rehab loans and things of that well they'll put in the note they'll say uh you know you on payoff it's going to get the interest rate you've got you know whatever the maturity date and then they say in the maturity day you know uh owner to all or borrower uh to assign interest in its LLC in connection with uh this note as part of its payment right like I'm going to acquire an equitable interest in an LLC as the lender so that's an act that's an act outside of the promise of money so that would arguably make that note non-negotiable so that's these are Concepts that are really boring but for me they're fun which is why you didn't tell me to look out so a couple quick things here I want to remind everyone it'd be decide comment real quick uh the DME recordings we do have them on our website so those who did not attend or did a 10 and want to re-watch the whole event available on our website um going back to it also is that when we're buying these notes John then a question regard can you self-direct your IRA to buy a publication note in your personality meaning something to me he's trying to hypothecate to himself I would say direct yourself to your custodians like that um I'm gonna say that's probably self-dealing um but I'm not going to be an attorney on that play but uh tend to agree with you David I mean you you get you got to go back to your custodian on the account you got to go back to the documents that you that you executed with is your IRA whichever Conquest whatever company it is yeah you just can't sell deal that's the worry I have with that is that if you're gonna borrow money from yourself at 14 it's uh kind of dangerous right um good question uh risky yeah so I wanted to for those who are looking to sell these things or buy these things understand we're not going to buy a par which is a definition word that we want to make sure you understand it means 100 of upb that if you have a loan at 12 we're going to ask for a discount because of Time Value money I'll put in the chat also a link to a little chart that we put together to kind of get an understanding of if you're creating these notes be sure you don't write these notes at four five six seven eight percent returns uh interest rates because you literally can't um sell them um we have the discount so much the chart I put in the chat shows you that kind of idea so on top of making sure the interest rates high enough the term if you can get a lower that's a great thing to get the most out of your note but also make sure the collateral and the actual origination of the note is legally clear which means we've had webinars on this make sure your arm alone and underwriting is being done and if you create the stuff make sure you follow the laws of Dodd-Frank especially if they're the owner occupant that you are following because we can't buy them we literally can't buy them because it makes it really difficult for us to foreclose if we have to so you've got to be sure you're doing that so one maybe slight clarification we may be able to buy them but we'd have to discount it even further because then we're gonna have to fix it yeah and again like we said that costs time and money so even if we could buy it it's going to be at a lower price and if you're willing to take the discount then come talk to us but yep just realize that that's that's a pretty major factor yeah it is so the chart's a big numbers game right that I put together for you guys I saw lonio day uh listed about six notes all under five percent or six percent and I said listen I'm gonna buy these things at like 40 cents on a dollar just not possible to get 11 yield so we're buying on yield we're discounting on the yield feature and saying what can we buy that it just doesn't make sense for you guys because banks are creating notes at seven why are you creating it five or six it just doesn't make sense and I get the fact you were about LTV that the byproduct of concerns because really first we're concerned about what goes in our pocket LTV is a secondary feature um no your borrower would have went to a bank if he could it could they couldn't so make sure that you're charging the interest rate that matches that it's trending it's like trying to compete with Walmart You're Gonna Lose just don't do it yeah make sure you charge a little more interest rate because that borrower could not go to the bank that's the feature is that borrower if you're writing five percent notes the borrower shouldn't go to the bank get it if they couldn't I'm gonna say the words take advantage of but so Sean what's what's the uh what's the interest rate that would be considered users in Texas right now uh anything over 18 so you've got some leeway there so if you want to write a loan at 12 go for it you're going to be fine uh we're going to be way more likely to buy that and you're going to be happy with the price and we could hypothecate you at 15 right or 16 or 70.

up to 18 to make sense for us right now we're doing a couple in Virginia right now at 17. I've got to make sure they use this law protects me okay on that and then finally showing out in Virginia to help me out and on the other side of it so and I hope that gentleman's listening right now uh because we're looking to close that before the 15. a bunch of uh hypothecations on that so we do these webinars not only to teach you guys but to learn ourselves yeah so um we hope you guys continue to join us and continue to follow along as we bridge the gap between note buyers and no sellers um we've been doing this for over 15 almost I've been over 13 Nathan's been 15 years yeah but we want to bring people on like Sean on if you have any additional questions before we close up here please put in the chat this again will be recording we'll be on YouTube we'll be on our podcast uh it'll also be on LinkedIn Facebook on the recording so I want to make sure if you have any questions first one click the link fill out the form and we'll get it over to Sean of answering specific questions on any kind of specific deals but keep all attorney um all accounting CPA tax things to those kind of people and custodians so um we're almost at the top of the hour I'll let Nathan uh finalize us and uh we'll let the audience go so just curious Sean we asked this to everybody who's on we're always looking to the Future we're always trying to figure out you know trying to see what's coming down the pipe uh it with your experience and what you've deals that you've been working on more lately do you see any kind of patterns do you see anything changing coming up in the next six 12 months yeah I mean that's a that's a good question in that uh I think it's going to get and has been and it's only going to get better frankly for for investors right anybody in the creative Finance World wraps of twos uh anybody in the note buying world I mean when you see these interest rates Rising people are forced to get more creative uh but looks like you know you and David have been doing this a long time you know so you're just just what you do but but for a lot of people even maybe some on this on this on this call it's they've been forced to get in there because they started thinking well there's other ways like there's other ways I can make money how am I going to figure that out and it with Rising interest rates I mean you saw this in the 90s a bit um with Rising interest rates you see an uptick in the amount of creative Finance world I can tell you personally through my title company we have closed a significant more subject to rap seller finance transactions in the last year that we did probably the last three years and it's because of the change in the real estate market so I mean I'm pretty excited about it so and I'm excited that now creative financing I've been on this crusade to dispel the rumors and the negative stereotypes for creative financing for years and I'm fine I'm excited where I feel like it's finally getting to a place where even real estate agents are going you know what it ain't that bad right yeah um there's people with Integrity in this business and and I want to do business with that person and um so that's where I see the market going I think it's only going to increase absolutely interesting so I'll I'll answer Sean uh Susan's question real quick regarding does no prices change if you have a Seasons or non-season notes with or without third party servicers um yes um seizing notes have a little more risk to it we want to show proof of ability to pay even though they went to the underwriting process um I would say that season notes definitely third-party servicers we encourage you to use third-party services if you're not and you're self-servicing make sure you follow all the rules required meaning a monthly statement in the year stuff but yes there's a there's a slight discount on that um and also if you're writing land contract versus mortgages that's another Factor you can use the chart to see what the differences are in each note buyer me and Nathan are not together we're we have different companies we just enjoy talking to each other we price things differently so I would encourage you to reach out um I believe our feed you can go to website and reach out to me Nathan anytime I'm asking specific questions so um Sean it was a pleasure having you on I think uh our phone call initially came across as well as saying I'm not sure if it's gonna fit ended up being a perfect fit I I couldn't have found a better guest for us to join in and explain the differences and maybe I'll help I hope that people reach out to you Sean especially in Texas I know nick uh is a big fan of you and to worry about your rap notes and yours and stuff like that owner finance subject twos reach out to Sean he's a great attorney down Texas um and if you're doing hypothecations which most notes I think is 80 percent of Virginia notes owner finances is in Texas um we'll buy owner finance hypothecations all day long uh so feel free to reach out to us and uh ask us questions I appreciate you guys joining in we're gonna disconnect from everyone live and hold on to Sean for a few minutes we appreciate everyone jumping in for the Friday afternoon thank you take care everyone foreign [Music] selling what exactly what it sounds like a part of the note you're selling a part of the payments right so if I want if I'm selling 10 of the note and there's 300 payments left then do the math I'm selling those payments in a note partial I'm assigning not only the note in the lien in Texas um but that's the ownership right so that's the point of a no parts whether you're doing a full sale or a partial sale I'm taking over ownership of those portion of the payments which is different than a hypothecation which we can chat about here [Music] hey everyone Dave putz here good afternoon I'm joined as always with Mr Turner hello you Nathan hello again this Friday afternoon it's been a fun week I think things have been progressingly forward with some of the stuff we're doing internally I'm looking forward to the coming weeks some stuff's been really happening on our sideline I haven't even told you yet about since you've been off the grid hiding for me uh for the last couple days uh tell us about that where were you at for the last couple days I mean haunting you down I had a great time so I get to take advantage of Canadian holidays and U.S holidays so it was great so Friday um Friday's normal but then anyway we went out uh on Tuesday so July 4th started out with a camping trip started with white water rafting uh in the Canadian Rockies and man that's fun if you've never been I highly recommend it it's just a ton of fun um went out with uh with our church group and did that first and then just in the mountains no cell service no anything so it's just completely off the grid gorgeous surroundings really really nice I'm a little I got a little bit of color I think so looking good oh man I I'm a little jealousy we've been heading about 90 degree weather here in Jersey for the last week oh yeah just random scattered thunderstorms out of nowhere like Florida weather um no we just skipped the rain so we're okay all that good lucky so it's amazing that you know what we've been talking about lately has incorporated more and more of this idea of having owner finance people and note buyers merging we're doing this more and more so if you guys haven't tuned in recently to us please go back listen to podcasts watch YouTube videos because everything we've been doing lately has been outside the typical note buying space all the hedge funds these hedge funds are buying and selling assets great but it's hard to play with these assets that are three and four five percent interest rates we want to get into the nines and tens and elevens and a lot of people reach out to me even this past week saying I'm buying these seller finance lists and doing mailers and got zero results and I challenge them to start talking to people more and more I think what we're finding is I mean seller finances has been around forever for forever and ever um but uh I well I think we've seen in the last year especially is there's more and more people that are doing seller financing as a business where they're going out and acquiring properties and then selling them on terms maybe they're doing a wrap whatever they're doing but they're doing it more as a business and so a lot of those guys are looking to sell their notes so that they can turn their Capital around and and keep doing it which is perfect for us and we're more than happy to participate with them and help them cash them out but there's been some questions that have come up that we don't know so we're trying to figure out how how it works and why it works and what we can do to make it better and before we introduce Sean uh Nick's comments on Facebook I don't know how to edit this feed but he's been doing around for five he said no it's a seller finances around for 500 years thanks Nick can Cindy said hi uh Coleman who's a regular on our program so I was this came out I've heard we've heard about buying Parcels which we I bought partials I've sold parcels and I've heard about this thing talk about this hypo hypothecation versus no collaborization versus pledging a note and I said listen I don't know enough about it and as most of the time when we don't know something about it we run a webinar on it so we can learn and you can learn alongside of us um so this came out and what I found was I had a hard time finding an attorney who would a talk about and be new enough about it that felt confident about it even at the DME somebody turns and said just not our bread and butter yeah and it was difficult but what do you what we all know about no Parcels is this Theory out there and not a lot of people are doing it do you think it's because they still understand it I think that's a big thing um I know that was the case for me for a long time now that I've gotten a better understanding just with the setup that I have it's difficult for me to get a deal done uh but it makes a lot of sense and especially when you're dealing with your own cash it makes a ton of sense it's a really great way to get some really juicy returns um but again it's still relatively unknown and a lot of people just don't know how it works or if it works and all that kind of thing so we're we're hoping to kind of learn more about it ourselves and help other people learn about it as well that's a great strategy um in in most circumstances yeah that's awesome so what we we talk about in our space is the buying of notes and the seller fines people are creating these things and they want to get their Capital out we've been talking about buying rap notes and then the headache of it was if we bought the wrap note what do you do with the underlying debt how do you handle with the borrower um and how do you take over the power of attorney part in the subject too but these notes are rated you know created at 10 11 12 interest rates I want to get my hands on some of this stuff and right they've acquired the property for a low enough amount that they're not trying to squeeze out every dollar when they're selling the note which is great news for us that means we can Jazz up those returns even more so yeah we're very excited about that and we want to do more but we need to know all that we can so that we can do it correctly yeah absolutely so let's uh without further Ado and let our guests sitting there looking pretty Sean we appreciate thank you for joining us this Friday afternoon thanks for having me guys it's been great so we always start with a background how did you get first started with doing attorney work as well as doing this type of attorney work which is really specialty good question I mean my back's I've been a real estate I've been an attorney 15 years started with a large law firm in Texas I should say I'm a Texas licensed attorney uh in Texas doing representing title companies Builders developers buyers sellers banks financial institutions really anything in the financial world in the real estate world after a few years I thought and I gotta I'm just gonna go out on my own and do this myself so I ended up starting a title company and I started my own Law Firm that specializes in real estate finance and corporate uh legal work and so uh years ago probably 10 years ago started really getting into this I mean as you guys noted owner finance has been around a long time subject twos wraps it just wasn't understood and to be candid it had a pretty negative stereotype for a pretty long time but I've been doing them for at least 10 years and and then sort of that just evolved into note sales and assignment and Publications and you name it and I touch it so to speak good interesting interesting it's it's funny you say all that right because there's very few attorneys who a do this type of work and B understand the work confidently enough to talk about it now we'll preface this with saying not everything we're going to ask today we're going to get an answer on right there are some things that depends on your specific situation and we don't want to try to get into specific deal structures today because it just with everyone on the feed and watching it and everything else and then this will be recorded on Youtube it'll be on our podcast so please go to the website and find the information but we want to go over some of the generalities as best we can um even on our private call we've been having our weekly Wednesday called privately the conversation about what the terms mean has been a little bit confusing right we all pretty much know what a note partial is but for those who don't know can you give a kind of a 30 second what is it no partial what happens in that kind of process who takes ownership of the note in that deal yeah I mean and you know this would be sort of the generalized version today as you know that everything is pretty specific and in my answers today are going to be specific to Texas law since that's where I'm I practiced but I know partial is essentially selling what exactly what it sounds like a part of the note you're selling a part of the payments right so if I want if I'm selling 10 of the note and there's 300 payments left and do the math I'm selling those payments in a note partial I'm assigning not only the note in the lean in Texas um but that's the ownership right so that's the point of a no parse whether you're doing a full sale or a partial sale I'm taking over ownership of those portion of the payments uh which is different than a hypothecation which we can chat about here in a few minutes but I'm selling a portion of the payments that are remaining on the on the loan itself and usually in the note in the note purchase world in the partial world you usually see that be from anywhere from three years to five years but it just depends and he said this so that was an important thing you said in there you're taking ownership of those payments for those for that amount of time you're managing the note right so you're taking you're taking ownership of it and managing a note and where where's the Hop application I'm just I'm just merely taken out a loan and using the notice collateral and I'm not taking ownership okay and that's an important distinction because that's what that's one of the first things that comes up is like okay who owns that note during that partial time is it you know the original note holder or is it this new partial note holder and you know who's in charge and what happens if there's a default is usually how that question comes out then what yeah I mean and those that's where you start to get really specific in in any sort of in any actual note sale or assignment of the note in the lien itself right because you get into the types of representations are you know how limited are the representations and warranties in the assignment what's the scale of them is it re is it with recourses it without recourse so there's a lot of really really specific things that need to occur in a note sale um that that an experienced attorney needs to address or somebody that's it's experiencing note sales need to address because you can really tailor them however you however you want yeah and that that's one thing actually so from what I've seen and again I I haven't bought or sold any partials but I've been around them a lot um this can like it can vary from sale to sale so in this case you're taking over and the new partial owner is in charge of whatever if something goes wrong then they're in charge I've seen it the other way as well where the it flips back to the original holder in case of default I mean I I you can kind of tailor it like you said right Taylor just about any way you want I mean there are certain statutory warranties under the Texas business and commerce code that are included unless you disclaim those warranties in an assignment of the node and the lien itself um so outside those statutory warranties which there's only about five uh you can create or disclaim or modify it however you wish and that's where it becomes that's that's where you see a change in the value uh and the purchase price of notes right if I'm if I'm purchasing with a significant with an Indemnity provision because the assignor or the seller or the note wants an Indemnity provision um if I'm if I'm the buy note buyer the assignee or the assignee and I want multiple representations and warranties it's going to affect the price of the note and that's why I think no purchases no sales are so hyper specific that they're going to depend on your transaction because ultimately the representations the warranties are tied to in my opinion the price right so if you have a secured note or if you have a in Texas we have negotiable instruments and we have non-negotiable instruments so I can have a note that's not a negotiable instrument under the Texas business and commerce code those are going to be deeply discounted notes um if it is a negotiable instrument under the Texas business of Commerce code you're probably going to pay a little bit higher on the value of the note so there's so many factors in determining the price to pay for the note and what type of representations the warranty should give so when we talk about these no Parcels in I love Nathan pointed out the fact that the ownership is what is everything in a no parcel but it's also the negative for a lot of people right they don't want to deal with the situation whether they have to do the foreclosure process some sellers will buy you out some won't it depends on the structure of the contract and if it don't buy out if it's even if you understand the note space and you've done foreclosures like me and Nathan have done for years if I'm doing with a Roth IRA and I got six grand I buy six thousand dollars worth of no parts from Nathan anything started for closure and he didn't agree to buy it back I'm in a bad spot now I gotta either lend money my IRA or do some finagling where that becomes a problem and if I'm a note seller and Nathan you know sells to his grandmother who doesn't want to deal with anything he has to either jump in or sell to a friend and then he has to jump in it becomes kind of problem-some but some kind some people say listen I want to take control of it newer investors Ira investors typically want to be more passive and learn that process so we're going to flip the script now and we've heard words such as hypothecation pledging a note collateral assignment are they the same are they different I mean qualification is just a is just a fancy word that people throw out for saying using your Note is collateral for a loan I mean right that that's it's just a fancy way of saying I'm going to use this performing asset this asset that's hopefully not in monetary or non-monetary default and I'm gonna go out and get an investor and get in a loan to use that notice collateral and then I'm going to take the cash or the loan I'm going to start making the payments to the lender and I'm still going to keep ownership of the of the note and I'm going to keep getting payments and you hope that the payments are relatively even right in this traditional hypothecation they're pretty close but you can have a higher payment on your on your hypothecation or your loan or a lesser payment in the actual income stream that you're bringing in for the note uh so it really just depends on how what you work out with the investor that's going to use your notes collateral would you say hypothecation is similar saying pledging your note and a collateralization and all that is the same it's all really love together I mean and it's all it's all simple I mean the concept is the same I mean the country lying concept is that I'm using a performing asset a note as collateral to secure alone that's what I'm doing yeah so when we we've talked about the differences right and then the pros are doing hypothecation side of the space is you don't own the note right if Nathan sells to me and I'm a new investor and he doesn't really want to deal with that problem going bad he can sell me the the payment string it could be a year could be 10 years and it's really alone against the node versus buying the note and if it goes bad Nathan can replace the notes with a different note he can keep paying you while he's foreclosing it's really an IOU would that be accurate yeah I mean IOU is a legal term David but no but you're right though in a typical hypothecation or a loan you you have a few different ways that they're taken but one of them would be substituting collateral right so I could go out in theory substitute additional collateral or new collateral with the lender on the note that was originally pushed if it ends up being about me and so what are the pitfalls then like why why doesn't everybody do hypothecation versus just selling a partial I mean [Music] right I mean what what is the interest rate that you're going to pay for the the lender the investor that's going to collateralize against you know uh versus what's the sale when you know how much money are you getting up front on a sale um are you keeping the asset I mean it's all boils down to me from me to numbers because legally you can structure out of one of them I mean you can collateralize a note you can do a partial note sale um once you get into the nitty-gritty of the documents the assignments where you start dealing with representations the warranties that's that's a that's a pretty important thing why that's one of the reasons you need an attorney but for me it's always a numbers game do you know do you know what the hypothecation of usury law comes into play here where the you know the the maximum you can charge interest rate does that come into play with the hypothecation where the partials that there isn't any ruling well you do you always have to be conscious of the user laws right I mean if you have a note that you're serious then it could be considered illegal um so and certainly in Texas uh you've got to pay attention to that so I would I would even argue that if I go out and I loan you uh I wanna I give you an a loan can I collateralize your node and I'm charging 25 interest that could be you serious in my opinion so you have to be conscious of that in any time an interest rate is taken out because you don't want um the the collateralization against the node that brings up another point is to with the lender going to ask for right what type of documents are they going to have are they going to have a note for your note right are they going to have a loan agreement and if so what's the interest are you going to be in there so you still have to comply with the usury laws um so you said loan agreement versus note I'm presuming that is a saying documentation is that different no they're different and so I should have said this at the start of the podcast but the presumption here and when we when we talk about note sales when we talk about hypothecation um everything that I'm talking about is based on the assumption that there is no separate alone a loan agreement that was done with the underlying note because and I'll give you an example in in the commercial world for uh in the commercial world you have not only notes but you have loan agreements right there are two two different documents and in the loan Agreements are rather restrictive on what you can or cannot do so in the commercial world uh you you will have loan agreements that lay out items like this node can't be sold it you know and so you have to you have to read those so when today for the purposes of this discussion when we're talking about no partials no hypothecation it's on the Assumption for me that there is no separate loan agreement that's been signed with the underlying note it's a standalone note and generally on owner finance transactions wraps a basic note there isn't a separate loan agreement you'll see loan agreements signed up for sure on Commercial transactions and possibly if there's been some sort of construction loan that was taken out but you don't usually see those in wraps seller finance transactions awesome so one of the things we wanted to talk about too is in addition to this is the idea and there's a question about tax repercussions I would talk tell you to talk to a CPA about hitting an attacks part of this um we're gonna say part we're going to stay focused on the legal side of it um but I appreciate questions too isn't um when we talk about this stuff to one of the things that me Nathan came up with this concern is could you technically sell me a publication on a note and then hypothecate again with Nathan without me knowing it depends on the underlying agreement right I mean it depends on the note I mean that's why the preparation of the documents is so critically important because what the documents are going to control the note is going to control right um the assignment's going to control so you have to it all goes back to the documents what they say what they allow what they don't allow because they can be tailored in a certain way so since we're keeping this in a high level General discussion I will say it's going to depend on the documents that are drafted and created and and I will I will add that part of my concern as an attorney has always been the drafting of the documents I've seen the most ridiculous uh notes I've seen the most ridiculous assignments transfers that arguably in my opinion aren't even valid under Texas law so uh I would I'm going to go right back to and I'm not trying to pitch attorneys for business but because you know I like to help but you've got to have a turn this is such a hyper specialty dealing with the Texas business and commerce code dealing with these certain federal laws that you got to have been an attorney drafty underline note and the assignment um well you know that actually it goes back to what Dave was saying at the beginning like we had a hard time finding somebody that could come on and talk about this it's not just any attorney anybody even the attorney that you're using foreclosures for foreclosures I may not know anything about this so it is it is a niche within a niche within a niche like this is it really is I mean I would even say I mean I'm a big believer in Thomas Jefferson's quote when he said he who knows best knows how little he knows I mean I I don't know everything there is to know about every aspect of law that I practice and so you have to to David's point I mean some of it really does depend and you have to stay updated and abreast of all the developments and changes in the laws it's especially in an area like this or in real estate frankly just in general yeah so I potted for the feed I realized that zoom up the other thing and we can't pop out the chat but some of the questions we came in regarding owned by retirement plans that they have to follow under the udfi hypo we're gonna let the if you have a question about what retirement scanner can't do I would focus more on the those kind of people out there doing that kind of stuff um we got Tim Heritage saying showing your great uh resource uh but her by definitely would focus more on uh the legal sideway I would definitely talk about that um and I would say that Susan asked a question regarding uh that she does a lot of these things she the difference is has been the speed of the transaction as well as the cost what do you say you know I'm gonna ask give you some softball questions too is is anything part of this collateral assignment recorded in the county records that's easy that's easy an easy softball there uh any any assignment uh is going to need to be recorded in the property records because it you not you don't you don't just want the note right you want the assignment of the lean and which usually includes two liens the vendors lean and the in the deed of trust so uh yes the assignment is going to be recorded needs to be signed by the assignor and the assignee um and there are other items that you need to check off in the assignment but to go back to our my original point you gotta you have to understand what the representations and the warranties are going to be and if you do a hypothecation is there any assignment that's recorded on that uh in a hypothecation uh no because I'm not assigning any sort of the ownership interest in the node in the lean I'm just I'm now there may be a document generally there isn't but there may be a document that the lender or investor wants to file a record uh an Affidavit of some sort but it's not required and on the call we talked about you know protecting the interest in the collateral hypothecation situation and we mentioned the fact that someone had talked to me about hey to protect your interest why don't you do some title clouding and just put a second lien there for 100 bucks and I said that sounded good until you said no no no I mean you know there's there are liens that you can file under the uh Texas Constitution and then there are also we call slander of title actions and any attorney worth his uh worth his uh hourly rate um if I found some 100 bogus second lien filed a record uh I you could rest assured I could probably see you for slander of title uh if it wasn't valid and I probably would win so uh not generally a good idea um it's crazy but I mean this is what people are trying to find ways around it um what do you suggest to those people who want that Comfort level of it not being double hypothecated um because you can sue them right that's a good question David but it's sort of it goes back to I have I've made this statement for probably 15 years that I've been an attorney the paper that you have the document the contract the assignment the data it's always only worth the paper it's written on unless you're willing to sue right I mean unless I'm willing to do something about it it's not worth anything so um to your point when you get in this area that the note sales the hypothecation you just have to be comfortable with there is risk associated with this area um and you got to be comfortable with knowing that okay this is the document I have this is what it says an attorney drafted it worst case I can sue over it I have several causes of action that I might be able to sue to enforce and I'll do it um but again the paper's on it's only worth the paper it's written on unless I'm willing to do something about it and this this goes back to we we say this so many times and over and over and over again it's all about relationships you know no know your seller know your buyer uh when you've got that kind of a pre-existing relationship man that's gonna help so many things the biggest issue that I see you know hopefully this doesn't go off topic but it's it's frankly it's the lack of diligence by uh by note buyers and when they come to me they're like my God Genie Sean I wanna I wanna Sue this person I want to sue this person and then I sort of ask them some basic questions like when they talk about them you know um did you did the note have a promise did you look at the underlying no was it signed by the debtor you know that have clear terms of repayment right was it demand or was it a fixed time did it have a you serious interest rate did was it an LLC did you check the LLC to if it's registered registered to do business in the state of Texas if it not it can't do business in the state of Texas so uh was it a homestead property of the underlying note if so in Texas the node has to be signed by the husband and the wife of their married man the deed of trust right these are just diligent like sort of common basic diligence items that need to be done by any note buyer or signee uh in Texas at least in the U.S I would say but I didn't know Texas had the the married couple cla....