Note Hypothecation with Local Banks | Real Estate Notes Show

Episode: Note Hypothecation with Local Banks w/ Justin Roberts Dave's Goals and Plans: - Been in the note space for over 15 years buying, selling, trading, and creating notes - Looking to do business with people creating notes and looking to recapitalize in coming days and weeks - Has had two loans default after holding them for five or six years - Over 130 episodes personally, over 90 episodes together with Nathan Nathan's Goals and Plans: - Seeing influx of seller creations reaching out and some non-performing note tapes coming to market - Seeing more non-performers coming out sooner than expected - Has a partial note that is two months delayed, borrower recently made partial payment - Had a conversation this week with someone needing to restructure their business Key Recommendations: - Don't calculate note yield alone when buying performing notes - expect performance may not continue - Don't use percentage of UPB as sole valuation metric - look at multiple factors instead - Continuously network and stay top of mind - constant contact makes a huge difference - Get face-to-face with people, not just email or Zoom - shared experiences build stronger connections - When buying performing notes, be cautious and thorough in analysis before purchase Topics Discussed: - Note hypothecation with local banks - Seller financed and short-term notes entering market - Non-performing note tapes becoming available - Note valuation methodology and common mistakes - Difference between note partials and hypothecation - Networking importance in the note business - Recent defaults and loan performance issues - Hard money loans in default becoming prevalent - Bank lending for note purchases Guest Insights: - Justin Roberts is entering note space and seeking bank financing for note purchases - Started in real estate by flipping a house 10 years ago, pivoted to owner financing when house didn't sell - First note paid off early after borrower made two payments and paid lump sum - Described himself as 'not too big' - representing typical note creator size for you, my man.

Hello. Hello. I'm doing very well. How about you, my man? Uh, this real estate notes show is going to be really awesome today. But before we dive into this awesome topic of note hypothesations, we'd like to just kind of get to know each other a little bit and see where everyone's been at. So, it's been couple weeks since we last talked. I think things have stayed the same for the most part, but we have seen influx of seller creations reaching out to me, but also some notes that are coming about. I've seen some tapes come out. Yeah, it's been really great. We've got uh big shout out Matt Gillette.

He's he's selling off some non-performing note tapes uh that I think we're going to see some more of those coming out here this year, but uh we'll see. Absolutely. So, big shout out to M Street out there. If you haven't got on their tape list, feel free to go ahead and reach out to Matt and them over there at M Street. Um really exciting to see that. Uh, yeah. With that said, I'm seeing some more non-performers, which is I didn't expect to see it this soon. Me, too. I figured we were going to see that, but I I didn't think that would be until later this year. And so, it's interesting that we're starting to see those coming out now.

Same thing. I'm seeing a lot of seller finance um a lot of short-term notes again coming out. people are I was just talking to somebody this morning where he's creating notes and uh looking to recapitalize and be able to put those back out there which I think is great and so I'm we're looking at doing some business um in the coming days and weeks as we uh move forward but yeah it's exciting stuff there's lots going on there's lots and lots of deals out there just got to tackle them absolutely and for before we get to those kind of questions um just let you guys all know this will be recorded this will be on YouTube.

This is on LinkedIn, Facebook, but it'll be also on the podcast streamed um as well. Recordings will be on YouTube. So, feel free to subscribe and all that good stuff. So, um yeah, it for those who don't know us, again, feel free to look us up. We've been in the note space for over 15 years. Um we've been buying and selling and trading and creating and doing all kinds of stuff and we connected with some of the best people out there, which is tremendous. Um, but you know, one of the things we we fail to say is that guys, when you're connecting with people this, it's not good to just connect once.

I just had a conversation with someone just two days ago, Wednesday, and they said to me, I reached out to one time and didn't hear back. You got to continue to reach out. This space is all about networking. And I'm telling you, I reached out to Nathan and didn't hear back two days and I got reached back. Hey, Nathan, this has to happen, guys. So encourage you guys get out and network all the time. All the time. All the time. And this is part of my conversation with this guy this morning with these short-term notes. I said, "Look, I I may not have money today, but I might have money tomorrow." Yeah.

So like it it really just depends. And you know, timing is everything as well. So if you can continue to can, you know, make sure that you're top of mind, that goes a long way. You got to make sure that people know who you are and and you're the one they think of when they're thinking, "Oh, I I've got a deal." Either something I'm looking to buy or something I'm looking to sell. Um, you want to be top of mind. And so that's going to take constant contact and getting out there. Connecting with your connections somewhere like, I don't know, DM me. get out there and actually get in front of people and and it it makes a huge difference.

Uh versus having an email communication or even a Zoom communication and then now you've gone out and you've had a meal together or you've you know thrown an axe with that person or whatever it is. You you've got an experience now that you can tie to. Uh it just makes a huge difference. A huge huge difference. So I highly recommend it. Email, call people, reach out to them. Schedule a call, even if you have nothing to talk about. I promise you, you'll find something and they'll find something. Yeah. I just had a call just this week with somebody that uh I've known for a few years. And uh she was like, "Yeah, I don't know.

I'm having to redo things here and there." And so I was like, "Oh, interesting. Let's chat." Yeah. You know what? I've got a lot of things on my plate right now, but it is so worth it to just have that conversation. and uh and we were able to talk about some things and absolutely and it was really good I think for both of us and so it's it makes a big big difference um keeping that constant communication make sure that you're talking to people all the time. Yeah. Um I would tell you right now uh for those who was curious Nathan, have you had anything default recently? I've had another two loans go bad that I've had for five or six years.

So really no I have not. It's crazy right now for me. It's just and again they're probably going to bounce back, but we'll see. Uh we have a partial that uh we're involved with that it's two months delayed. That person just paid up a little bit. So, who knows if it's just a freaky situation, but um I did talk to somebody and I wanted to make sure I put on the air is make sure if you guys are ever doing buying performing notes, we've talked about this on a show before. Make sure you don't calculate basing yield alone. We've had shows about this. You're buying performing. Don't expect it to continue to perform.

Just be careful with that kind of thing. Yeah. Same thing. I had again a same kind of conversation that I know you and I have both had several times where they said, "So, what what uh percentage of UPB are you buying at?" And I'm like, "Ah, if that's how you're calculating it, you're doing it wrong." There you have to look at there's many more factors there. You can't just say, "Oh, 75% of UPB or whatever it is." And no creators, if you are listening, which I'm sure we have plenty of you guys listening, please feel free to put in the chat any questions you got going on here because the fact that we realize is that you guys don't talk the same language.

We do. Uh we've been connecting with seller finance creators for a couple years now. We've had him on our show. We talk about what makes a note valuable. Um percentage upb is an old wise sale that really doesn't affect anything. I mean, I get some new beginners may use a terminology, but it really doesn't equate across the board. It will vary based on a lot of different factors. Uh, yield is a better question for the most part, but feel free to take a look at that kind of stuff when, and if you don't know what yield is, learn. Yes. Yes. And listen, ask questions. When I first began this business, I was buying non-performers.

I didn't know what yield was and I had to learn, right? I was buying number forming so I didn't really care to learn but then I started learning what that that meant what the financial calculator does what it doesn't do um things like that uh we are over personally I'm over 130 episodes we're over 90 together um it is amazing been years doing this with you um one of the things I constantly get asked about is that when we try to buy people's notes I see Gabe Cass comment on Facebook uh about uh that they're buying hard money loans in default. I think that's a big area that's going to happen more and more now as people are doing loans for um you know rehab projects and things like that.

I do see that kind of start to crack if if value prices of the houses drop at all or don't get that things going on. So, hey, before we get going, do you want to put your link in there for DME? Yes. Let me grab it real quick and uh I'll put in there so people who are interested in getting into the DME um we have links for you guys go right to it. Um you can use it. It'll do all that good stuff. It should be coming through. We So I This is going to be such a good conference. I we've got such a great lineup of people and different topics and things that that we don't touch on very often. And so this is going to be really really interesting just to hear what uh different folks are going to be saying.

And then it's all about the networking. It I cannot overstate how important that is to just get face to face with people. Um that has made I sure you'd say the same Dave, but it has made all the difference in my business is just getting in front of people face to face. And guys, we do this show to connect with more people. That's the premise of the show is to network. Get out there. Yeah. Conversate with people. And yeah, I had a call the other day say, "Do you guys do your show? Do you learn anything?" Absolutely. Every show I'm learning every time. Yeah. So guys, tune in, get set the recording, and let us know if any topics we haven't hit or something you want to rehash.

I know some topics in the Facebook group. I have was a lot of conversation about debt collection licenses. We've had a call like that. It we can't get a crystal clear answer because they say every business depends. One of the things we had, I want to say last summer, we had a call about the show about note partials versus hypothecation. Yeah. And one of the big differences was who owns the note itself. So in a note partial when you sell it, that person technically owns that note for a period of time. Yeah. The difference is is that they control it. Usually, it's a newer person who wants some passive money and they're in control of it.

However, we have a flip side that we talk about in the show and a lot of note creators are very interested in this idea of borrowing against their note, not selling it off, borrowing against it and getting capital. However, there aren't a lot of note buyers who are willing to do note hypothication. Right. Right. and and which is huge and and that's something I tell people all the time is yeah, you know, you're not going to be able to borrow money to buy notes. Uh kind of uh we've actually you sort of you can and and if you know how to do it, if you know how to prepare yourself and how to approach a bank, you can.

Uh, real quick, this is a bit separate, but we actually do have somebody coming to DME where um he is he's he's going to be lending money for you to purchase notes. So, not lending money on existing notes, but actually lending money so that you can go and buy notes. So, that's going to be very interesting. Anyway, that's a bit of a different subject, but we'll get in with uh with this because I find it fascinating because I've said for years, oh no, you can't get money from a bank. Florida. So, let's bring him into to the call. What's up, Justin? How are you, my man? I'm good. How are you guys? Good.

Doing great. I'm glad to connect with we connected a while back and um like Nathan said, we typically give the line, "You can't do it." Before we got into all the details here, give a little bit of background. How would you get started? Um I know one of the things you said to us uh before the call is, "Hey guys, I'm not too big." I'm going to tell you 99% of the people watching are in the same position if not a little bit smaller than you. So you're hitting the heart of a lot of people out there. So yeah, how did you get into notes? How'd you get this whole creation? Sure. Sure. Um started out um almost 10 years ago as the typical guy or gal who wanted to flip a house.

Um I flipped flipped the house. um what I thought it was worth, everyone else disagreed with. So, it was sitting, it was sitting, it was sitting. Finally, I had an owner finance offer. They said, "Hey, I'll give you what you want, this amount down, etc." Uh, I took the offer. Um, it paid off early about three months into the note. So, they had made two payments and then I got this big lump sum and it was like, well, hey, this was this worked out pretty well. Um, so I was jaded to uh owner financing, note creation. Um, and so I started there. I started doing a couple a year on a small scale where I would either fix up a property, clean up a piece of raw land, sell it on terms.

Um, and then just continued to scale that up and like you guys talked about, learn something every day with it. Um, I just had a discussion earlier with someone and tell them, you know, I don't don't know it all. No one does. And the mindset of just continuing to grow and understand and learn about the business is huge. So yeah, um I I kind of started doing the notes um in just originating them in my own cash with my own cash, which was not very sustainable for me. Um did five or six notes and I was out of money. So I was like, well now what do I do? Um started doing some wraps with some local banks.

Um and when I say wrap, they have a first lean. They allow me to sell it and they sign off on the do on sale clause that exists in pretty much every mortgage around. That's Let's pause for a second. That's a very very unique, right? When people hear rap, they're hiding behind a trust. Bank doesn't know they're doing it. You're out out Yeah. the sub two rap. You're out there saying, "Yeah, I'm wrapping your first lean bank. Are you okay with it?" And they're writing back, "Yes." Yes. Um it I will say it is it's pretty unique. Yes. Um, it's not something I invented or I'm the only guy doing it by any means at le especially in Texas.

Um, I was uh lucky enough that the attorney that was helping me kind of learn and write my contracts after he saw how I did things and was doing things the right way and he said, "Hey, I've got a bank that can help you do more." And so I had a warm lead, uh, Nathan goes back to networking, talking to people, connections, right? I had a warm lead into a small bank out in the middle of literal nowhere. No offense if you're listening bank. Um and uh met with the owner and he said, "Yeah, I'm willing to do this. I like you. I like your books, etc." And um I went from no wraps to um about 40 in two and a half years.

Fantastic. Let's call it that bank. Yeah. Yeah. It was it was a big uh catapulted me kind of to that next level. That's amazing. That is awesome. How cool. Congratulations. Yeah. So, you got you almost stepped in it kind of sort of, right? You kind of fell into it, which I'm going to say most of us do knowing, you know, Nathan walked into it. I walked in space not planning on it, not going for it, just kind of holy goodness. So, when you first got into that and started exploding, what were some of your biggest hurdles? Um, I think one of the biggest hurdles that I hit, um, and I'll say this whole journey of mine, um, I acknowledge it all started 2016ish.

I'm in central Texas, an hour north of Austin. I've benefited from low interest rates, good economies, rising property values, unhealthy values. So, I kind of got some diesel thrown on the fire. Um what what my biggest hurdle was is I hit the legal lending limit of that bank. I didn't know what a legal lending limit was. I didn't know that banks could only lend so much money to one person. And so I hit that which was not a lot but relatively was. And so I had to pivot and find another bank that was willing to do a wrap or what I learned was uh some banks have appetites to do the hypothecation or collateralization versus a wrap for different reasons.

So, um, the struggle that I've had more than once is pivoting when a bank either changes their appetite, their terms, they get bought out, and all of a sudden the big bank says, "We don't want any part of this, dude." So, that's been my biggest struggle. And it it takes a constant uh kind of revolving door of talking to banks and and bank officers and others in the space that can give you like referrals and leads to banks and Yeah. So it sounds to me is that you've learned along the way and and how to look more attractive. Yeah. A lot of job training there. Yeah. What was your first lesson? What was your first mistake you had in realizing that? What what did you have to change in your business to become more attractive? It's a good question.

Um, I think the big one for me, uh, in combination with legislation was using RMLLO for my notes. A lot of my folks are owner occupant buyers. Yep. Um, and so the first dozen I did, it was just, oh, you got some money in the bank. Yeah, I don't care what your credit is. Give me your 20 grand. You can buy the house. Um, and those went good. You know, knock on wood. Those those performed, are performing. Um, but I learned quickly that if you're looking to collateralize, I'm going to assume if you're looking to sell, um, the quality of that collateral is huge. And so I I one of the banks that I first looked at collateralizing with came back and said, "Well, we like most of your notes, but these first ones, they're they're performing, but they're not, you know, up to the up to snuff." So, real quick, define collateralizing.

What does that mean for someone who never heard that? Sorry. Yeah, that so when I use that term, at least what it means to me if if I'm using it right, um you have a note that you've originated. You may or may not have underlying debt, but you're the note owner. And I take that to a bank and say, "Hey, um I need some money. I want some money. I have this note. I don't want to sell the note. I want to own it. I want the 30 years of payments. What can you do?" And they say, "Yeah, we'll give you some dollars against that note." And they give you a loan against your note. Um, very similar to to a traditional, you know, bank note in kind of the small commercial space.

Pretty similar in terms of how it works mechanically. Yeah. And so, are you walking into Chase to get that done? Like, who's who's lending on that? What is Chase? I've never walked into Chase. No. Um, no. So, typically these the banks that I've used, I've used five banks for this total. Um, five different banks. Yeah. um as small as a two location 20 employee bank with like a $3 million legal limit. Um as big as a bank that's probably got 40 or 50 locations. Um everything in between. Um that smaller legal limit is kind of where you gravitate to because those are the banks you can you can talk to the owner.

You can talk to those guys and shake their hand. Um, there are some I know for a fact there are some of those bigger banks in Texas that are in the the collateralization space. I've talked to a couple of them, but they don't, at least for me, didn't have an appetite for my portfolio size or geographically where I am, um, so if you're doing this in a big market like Houston, Dallas, um, you've probably got some more options than I do in my backyard. What do you think it the the you mentioned the fact that there are certain people who are willing and wanting to spend it and sometimes it's too you don't have enough collateral.

Can you define what a minimum collateral would be? Can you sell can you collateralize a $10,000 note? Like where is there limit? Um, I'll tell you the the lowest one I've done was about a $100,000 note on a single loan where I took that note. Um, I had a bank pull out on some funding. So, I originated the note in cash and I needed some cash quick. So, I went to this particular bank that did a few for me and we did a single note. Um, I got about 80,000 against that $100,000 payable. 80%. I got about 80% on that one. Um, you'll see widely varying terms though in the space. So, I would not bank on 80% if you're looking to start doing this day one.

Yeah. Do you have negotiating power to do that? Like, hey, listen, have a 75 or Yeah, I think you you do. Um there's a lot of factors. Um probably the most important are going to be um how good of an operator you are in terms of how polished are your financials. Do you have actual bookkeeping? Are you using QuickBooks? Um, banks like cash in the bank. Are you stable? You know, um, they all the normal bank things go into that equation. Um, most recently I did a the biggest one I've done so far, uh, collateralized 24 notes at one bank. It was about a $2 million loan uh, I received from that bank.

And so we had some pretty good negotiating power. I got a little bit under prime on that. um pretty good uh loan to value loan to note value note payable. So yeah, high five. Fantastic. And then you're So as you approach them, are you putting together like an actual package to to present to them or like what does that look like? Yeah. Um yes. Um I have a package that I did not create the concept by any means. I have a a a friend out of Waco um Stinson Bland Waco first home buyers shout out. So if there's any DFW or Waco people, they probably know Stinson. Um Stinson had shared with me a uh I think he called it the his banker's bible and it was about for him a maybe 100page document of um recent financials, history on him and his company, some examples of what he had done.

and uh he told me he said when I walk into a new bank I bring a banker's box with about 20 of those and he said I'll drop it on their desk say hey let's have a meeting about some loans so to speak um and it's amazing that when I kind of replicated that and I took a about a 20page document has my financials quarterly reports you know asset uh personal financial statements that kind of stuff um it changed the game on on banks being willing to talk to me they went okay this guy gets it Yeah, you look like a professional more than anything else. And you're probably not walking in there like in t-shirts and shorts and the handles or something.

Uh I'm I'm kind of a t-shirt and shorts guy though. So I'm like I put on my good I put on my church tennis shoes and my church shorts. So that's what I do. Yeah. Marketing pitch. I like that. Yeah. So when you first did this, you know, did the First Bank say yes? Did you get lucky? Um, First Bank said no, but if you do it this way, we we will do it. So, they they said yes in a way, but they said we don't like the way that you're suggesting it, but we'll do it this way. The First Bank actually said it actually went from potentially collateralizing the notes. They said no, but we'll do some wraps for you.

We love wraps. And I was like, oh, okay. And so, I was able to still kind of reverse engineer some deals I had in the pipeline. Okay. Um, but I've had banks that say yes and then it turns into a no before it's funded or after we do one or two or I've had banks that say no and then few months later they said, "Yeah, you know, we've changed our mind. We'll do that." And so it it does vary. Um, there's not a lot of consistency. I will say that from what I found. Who are you typically negotiating or talking with? Is there the manager? Are you negotiating with a special asset person? Um, usually these bank titles are confusing to me because everybody's a vice president of some type, but normally this is like an owner or the like the the bank center manager.

He the guy that has the nicest office that signs stuff. That's usually the guy I'm talking to normally. And do you make an appointment with him? Do you schedule something? How's that? How's that process go? Yeah. Um, ideally I'm getting a referral of some type. Hey, so and so at this bank, this person who's an investor told me to talk to you. And so I get that warm lead in of of any type. And I normally start with a phone call and an email just like, hey, um, I've got a little quick template that basically just says, hey, this is what I do. Um, I'm I'm heavy in owner financing, which, you know, wraps and collateralizations.

Do you guys have any appetite in that space? interesting. And they'll either normally not understand what that is, which means no, they don't have an appetite, or they'll say no, we don't, or yes. And if it's a yes, then it's usually an in-person meeting, grabbing coffee, grabbing lunch, going to the bank, whatever. Okay. So, you said a warm lead. Where do you get your most of your warm leads from? Are you going to local RIA? Are you talking to people there? You contacting like real bank people? Yeah. Yeah. Yeah. I'm really bad about like going to networking events, so I don't do much of that.

I should do more. Um, shame on me. Um, I'm pretty good about talking to other investors one-on-one and when we we do deals. Um, so mainly it's just like my my local network connections. Um, I'm a real estate agent as well. That's kind of a component of what I've done in the past. And uh, I also lend money to other investors for fix and flips and things like that. So, I have a pretty deep network of varying levels of connections with people in my local area. And so, it's really just genuine relationships that I can ask questions to others that no, I'm not asking to try to undercut them or undermine them.

It's like, hey, here's a need I have. You have any suggestions? So, Okay. And then are you doing like online research to to see the stats of this bank to see if it's something you it's like a one that you want to approach or like how do you identify oh yeah I think these guys would be good. It's a really good question. I bought the little red banker book that you can get in Texas. I don't know if that's a nation if that those things exist in other states. Um it's a book that's I don't know it has every bank in the state. It's put out annually and it tells you its headquarters. It tells you its legal lending limits.

all the public information that you could probably find online, but it's in a literal $50 book. And so, um, that kind of gives me some credibility because I'll call a bank and say, "Hey, I see you've got like a 10 million legal limit." And they're like, "How do you know that?" It's like, "Well, I got the book, man." So, um, that book actually has helped me a ton in just knowing uh, who I should ask for because it lists all the public officers and things like that, too. So, it helps me kind of navigate past the teller or the, you know, the loan officer potentially. So, you mentioned earlier that one of your quick secrets is is working with title companies.

As an agent, you work with title companies a lot. How do title agencies or title companies help you kind of get in the door? Sure. Sure. Um, the biggest one being talk to a title company and say, "Hey, uh, this is what I do. I'm looking for banks that do some unconventional financing for investors. Maybe they allow wraps. Maybe you've seen them finance note portfolios. You know any bank like that? And I'm going to say nine times out of 10 they're going to say, "Yeah, I think so and so does something like that at this bank." Or they're going to probably tell you or they might refer you to another investor.

Say, "Well, we don't, but let me call a guy and see if I can connect y'all." Um, most title companies want to help because they want you to reciprocate and bring them business. So, Sure. Yeah. Pretty easy to ask them in my experience. So, are they willing to do that kind of stuff? I mean, are title companies that are you just friendly with them? Um, like willing just to make connections you was that what you're asking? Yeah. Willing to share who their connections are at the bank because that's kind it seemed like outside the preview to say, "Yeah, go to this person." Or you already network with them where they're willing to share.

um they've they know me and have done business with me and know I'm a trustworthy local person. And that's where it's important to start this in your backyard. I'm not picking up the phone and calling title companies in Dallas saying, "Hey, uh you don't know me, but can you tell me your secrets?" You know? Um but also, these title companies aren't divulging information that's that's they're not going to tell me something like, "Oh yeah, this guy just closed closed a loan yesterday for 500 grand. Give him a call." That's not the way that would flow. It would be, you know, hey, let me talk to him.

and see if I can get you connected. And so they're usually pretty tactful in that Gotcha. area of discretion. And when banks are borrowing against this, do they care a lot about what the interest rate of the note is, be it 4% or 10%. That's a good question. I'm going to assume they do. Um, most of mine, because I've originated most of mine in the last four years. Yeah. So most of mine are relatively good interest rates. Uh to me higher rates, you know, um I think my lowest notes probably in the 9% range. Okay. Um so what that bank's going to look at is is your debt service coverage ratios both globally as as an investor household and then locally on the portfolio.

So if you've got a bunch of 5% notes that you wrap sub two, um you're not going to be getting 80% at 8% 9% debt. Yeah, you're going to be cut way back on your loan to value, your advances because they want the notes to cash flow. So, I would imagine the not the interest rate does matter. Yeah. So, we did have a question from Cindy. Would you do this with private note buyers? Would you do that? And have you done that? Would I lend to a note buyer? No. Would you hypothecate if I had $100,000 and I wanted, you know, give you if you want to collateralize with me, would you go to me and say, "Dave, yeah, I'll do collateralization with you." Do you care or you go to a banks for specific reason? Oh, like would I allow Dave to lend me money? Yep.

Well, Dave, how much is the money going to cost me, man? You don't care what it is. You're not going to banks because of certain reason. You're just saying, "Listen, banks are willing to do eight. Dave's not going to do eight." I think that's the biggest difference. Uh Cindy, hopefully that answer your question. Um yeah. Yeah, I would I've never borrowed from a private individual for a note. I've borrowed for flip flipping and so I understand more of a private lender model and this lender myself. Um but yeah, if someone said, "Hey, I'd like to invest in notes via hypothecation and I like I'd like to make 6% annually." Uh I'll guess I'll send him my phone number.

Yeah, drop it drop it in the chat. Yeah, anyone can be open, right? Yeah, absolutely. Yeah. Yeah, that's great. But if they're talking about like eight or 10 or 12 or something like that, not so much. Well, not for me, but you know, there's a niche for that space. Just like I'm not borrowing at 12%, but I sure as heck will end at 12%. And there's a market that that will that will buy or or finance at 12%. So, by all means, there's a market for it. think um I've been kind of asked to lend against notes, but I don't fully uh I don't know that I can fully feel secured like I do with the other parts of my business.

So, I've never done it, but there's absolutely some some some economies there. Yeah. Would you be the person will to give the money be the other side of it? You're the one right now collecting that that the the money. Would you be comfortable being the lender on someone's deal? So, um, if we're talking about lending against a note, I am open to it. It's something my business partner and I in the lending space, because I have a partner with the hard money lending we do, um, we've talked about and it's something I think we could potentially look at doing. Um, where I've struggled is the insurance component and being insured that I've got that collateral super protected.

Yep. Um and and that's something that the banks that that lend to me don't have the same protection in my mind that the ones that have a first lean in place actually have. It sound like you're using borrowing on a note versus hypothecicalization. Are they the same in your world? It's not like you're using them two different ways. In in my in my world they are. I don't know if they are. Yeah. Essentially, but to me that's all one thing. It's just leveraging your note. Yeah. Yeah. That's amazing. And I I I don't know many people doing this on this on a bigger scale. So, I give you a lot of props on being able to do this because I a lot of people in notes space, I'm sure, drop in the comments, those who are note buyers, would you be interested? Because I think what Justin's saying here is if you had a bank originated Chase Morgan Bank note that you actually have that's been assigned down to you, you could go to the bank and get 8% money on it because it's actually more secure than your seller finance because it's written way a bank would write it.

You could. Yeah. So, very interesting. Would they would you recommend doing only one note or would you need a packet of notes to do that? You know, I think it's going to depend on the goals of the the investor and what they're trying to accomplish. For me, I want things as simple as possible. I want to pay the least tax possible and the least bookkeeping and accounting costs because when you start having a ton of wraps and you're doing books the right way, it starts getting expensive and cumbersome. And so that's where the benefit of consolidating I consolidated about 20 notes note payable against my receivable into one is part of that big deal.

So I just saved my bookkeeper four hours of work a month, you know. So for me that was a big part of it. not only um getting a better interest rate, having more spread, but actually just simplifying my books. So, I think it just depends on the individual investor. Absolutely. It's it's so weird because we for years, me, Nathan, both said this is not something that goes on because it people are dying for this kind of stuff. Not only borrowing money to buy notes, which is rare, but then using the note as collateral to borrow money as well. Um can you speak a little about on the other side you mentioned earlier about you are able to do a wrap note with a bank's permission not to do the do and sale clause.

How do you set that up? Well um process-wise it's pretty straightforward. Um essentially I I the way I do it is I'll get a contract. I'll own the house already because I'm flipping the house in some capacity. So, I'll own the house, whether I have debt on it or clear title or whatever, pseudo irrelevant. I'll take that house, I'll get a contract for an owner finance buyer, and then I'll have a few different banks that I know will allow a wrap. And I'll call my person at the bank, whoever that may be, and say, "Hey, here's the deal. I'm going to end up with a 150k note payable on this house that's worth 185, 190.

Um, I'd like to go ahead and have you do a refinance and let me wrap it." And so I'll have a closing with the title company, refinancing, uh, cash out, refine the underlying lender, whatever. And then I'll have a subsequent closing a lot of times the next day or the day after with the new borrower. Um, again, the bank you're using really is going to dictate how that goes because it's the golden rule. As y'all know, he who has the gold makes the rules. And so, um, the bank's going to tell you my maybe how that goes. But that's how I do it. um how it's kind of developed over the few years that I've been working on the system.

So you're the first lean at position or is the bank the first lean? So the bank technically has the senior lean in that scenario. They have the first lean from like a legal perspective um not attorney but they have the first lean. Um where things are a little different will depend on the title company the and the attorney preparing your docs. At least in Texas we're using title companies and attorneys. Um, I've had attorneys write a wraparound deed of trust where it actually names that first bank. I've had them write um a just a normal deed of trust without mentioning that first bank, at least in the in the header, per se.

It's this is all done with the right disclosures. Um, there there's different ways to do that from a document perspective, I think. Okay. Interesting. Again, Nathan, have you ever heard anyone doing that stuff? No, I'm I'm just kind of going around in my head because No, I I never even thought that this was possible. So, that's really interesting that you're having sounds like some really great success with it. So, that's Yeah, I'm just fascinated. How did you figure this? I mean, you like you said, you didn't invent this, so it's not like No, this is a brand new concept. It's just not one that I'm familiar with yet.

Yeah. Yeah. I didn't invent it. I definitely fine-tuned my own way of doing it with certain things, but you know, that initial attorney, uh, Jamie Serest, Centraland Title, Temple, Texas, he's not listening, but he really helped me on these first few deals. Um, you guys know Soel at Provident Loan Servicing. Uh, Soell helped me with some of the engineering of some of these things and and boxes to check for the title company, especially like endorsements on the title policies. And over time, it's built out a really slick system that the banks see and they really can appreciate because they're like, "Man, this guy's almost doing exactly what the bank does, just on a much smaller scale, but the paper is clean." And that's definitely one of the biggest factors in this and I think that so one of the keys I think is is getting into these smaller banks because yeah, scale is a big deal.

Like if you're if you're going to try to get into Wells Fargo or Bank of America or something like forget about it. It's not going to happen unless you're talking about like hundreds of millions. Yeah. They're not interested in anything less than that. But if you're going into somewhere that's small and local and and has a couple of branches, yeah, that's much more doable. I think Texas is a much bigger advantage than this. I don't think you can do this in Jersey or New York and Philly. I think because of the way Texas is just the wild west, a lot of times they're more open to doing that. However, I'd love for someone in the audience to prove me wrong and do it like in Missouri or, you know, some kind of Florida or Carolina.

I'd be really interested to hear that. Well, one thing to consider, too, and again, just the reality of it is, um, the last stat statistic I saw, and I don't know if this was accurate, was something like 80% of all owner or seller financed paper was originated in Texas. Um I and I don't know y'all may know better than me in the note world, but it's it's a a massive number. So because of that, banks obviously have a different appetite than in Arkansas or Jersey or wherever, you know. Yeah, absolutely. Yeah, we've got the same kind of thing. Tracy and Fred, um they do a report every year for us and I don't know that I've I haven't studied it well enough.

Anyway, 67% 67. Yeah, it's close. Yeah. Yeah, but a huge number. I mean, the vast majority for sure. Yeah. Yeah. Yeah. And we don't really do CFDs, contract for deeds, which also is a factor. Other states, you can you can do this a little differently because you can get regular paper and then put some type of lease option or CFD on it, whereas 99% of attorneys in Texas will steer you away from that, I think. Absolutely. From what I've seen, how is this helping your taxes? Does this change how your income does it affect anything? It helps the IRS. Um I mean the interest income is a tough a tough thing.

Um when you say help, you know, do you mean like uh does does it reduce my tax? Yeah. Yeah. Well, I suppose if if you weren't using leverage at all and you had a note portfolio of a few million bucks and then you took leverage against it, you're going to be able to write off the interest income. I would I think that's what is what a a tax pro is going to tell you. So, it could reduce your taxable income. Um I'm using leverage regardless in most every aspect of my business. Um, and so for me it doesn't necessarily change too much if I'm paying one bank seven and a half versus eight and a half for a different amortization.

Um, I I think it's kind of the opposite consideration though. You got to really look at uh I calculate to the best of my ability a post tax return on my note leverage because you've got to look at your you've got to compare your two amortization schedules because you you know your borrower is paying you more interest than you're paying the bank potentially. So there's a discrepancy there. There's a discrepancy in that most of my notes are 30-year amortizations. Most of my underlying may be a 15 or 20. Okay. And then you've got tax considerations. And so if you're paying a 25 to 40% effective tax rate or something and you're looking at shorter amortizations and a different amortization schedule, you might not be making as much post tax return as you think you are with the leverage, if that if that makes sense.

I don't know if I'm describing that well, but yeah. Um, again, it's going to vary based on how you run your business, what level you're doing things. Sounds to me is this doesn't affect your taxes. It's just a strategy to pull your money out at a cheaper rate than if you want to sell or whatever. Exactly. That's how I That's how I use it. And now I can take that money I pulled out and do all kinds of stuff with it. Um just like you crack the piggy bank in a rent house portfolio. We did a I guess uh I'm going to presume this person mentioned that Dan was talking about getting a bank loan 10 times multiple collateral.

I I've never heard of someone doing that. Um meaning if you have a $100,000 note, they'll loan you a million dollars. No, from my experience, I'm not saying Dan knows a lot of stuff too. Um they're going to do it at a percentage of that UPB. Even the big boys, the big funds when they go get collization, they borrow typically around 80% 75 80% of whatever they did. So if they went out there and spent $100 million, they're able to get 75 to 80 million as a debt on that that loan. If they do $500 million, it's still 75 80% at 4% or 5%. So I don't know 10 times seems much greater. Um but you know, not quite sure how you do that.

M maybe that maybe that has something to do with like 10 times annual income or maybe there's some other factor in that equation because I can't see any anyone lending 10 times the actual value of an asset, right? Unless it's some type of operating business you're buying or something, you know? I don't know. Yeah. I mean, you may be able to get a personal loan where it's like, hey, a business line of credit, maybe say, listen, I'm bringing all this money in. I'm looking for a line of credit of 10 times that line of credit. That may be something. Um, but yeah, a little different. That's not tied directly where they're collateralizing a note.

And actually, so let me ask this before we kind of wrap up. What happens if you fail? What if you default on one of their loan payments? Yeah. Yeah. Well, the best way I understand it is they're going to own the note in in in some in its simplest form. they're with all the rights and responsibilities that I currently have as the note holder. So, they're going to basically take my collateral, my title policy, everything. It's going to be theirs. Um, so they they they they have um a pretty good collateral position in that sense, I think. Do they do they foreclose or do you know what the legal process is to I've never you know I've never missed a payment never had a problem but I I think what that means is that they would step in they would essentially take over my rights as the lender and they could then subsequently foreclose on the borrower.

I'm just curious. We'll find out what the legal process is to take over for you, right? Do they have to foreclose on you and then foreclose on the borrower or is there or just a forced assignment? Some kind of assignment over to the bank. I don't think they foreclose on me because I just hold the note. My borrower has title to the property at least is the way I see it and the way it is in Texas. There's nothing to foreclose on me necessarily. Now, they might be able to put like a deficiency judgment or something against the property as it relates to the note, but I don't think they could take possession of the property assuming the borrower is performing.

My my borrower is performing. That's of course assuming they're paying and everything's well. Gotcha. Yeah. Some kind of forced assignment where they would take over. Yes. You know, ownership note where they step. Yeah. We assign we have like assignments of deed of trust affidavit and things as part of my package. So, they would get that. Yeah, I think you're right. Yeah. Do they have any kind of power of attorney at all? POAS? Um, I'd have to go back in there and look. Every bank has done it a little differently. I will say some have packets this thick, some have 20 pages. So, um, there's probably a POA somewhere in there, you know.

I just just sign and get my check and leave the title company. Yeah. Um, and when you do this closing, are you doing with a title company or are you just negotiating with the bank directly? Yeah. So, I have physically signed at the title company before, just more from a coordination perspective, but there's not a title policy involved. And so, that was a that was a just a courtesy of the title company to just say, "Yeah, come to the office. We'll file the the recording because they're recording these assignments at the county." So, there are some it's very similar to a title transaction, a normal transaction.

And are you signing a personal guarantee on this stuff? I am. I have personal guarantees on all the debt I have, which that's that the bank's like that. Yeah. So, that's where, you know, it's what it is. It's part of the game. Yeah. Yeah. Yeah. That's interesting. Really fascinating. I We've never actually talked to somebody that's doing that before. So, that's uh that's another new one for us. We get new stuff all the time. Years later. Yeah. Yeah. I'll let you wrap it up, my man. Yeah. So, curious now. So you I mean part of my hesitation is like debt on debt. That to me that that makes me just go eh it makes me a little bit nervous.

So how do you how do you kind of how are you how do you get over that? Well, I was already pretty comfortable with debt. Uh good de good debt, right? I grew up in a Dave Ramsey environment. So good debt is not a real word to me, but it is. So, um, I was already comfortable with rental loans and wrapping. And so, it's a math problem for me when I can say, look, I'm still going to make X after tax and now I have Y to go reinvest, to go pay off other debt, to go lend out at 12 and two or whatever. Um, it just it it makes sense for me. Um, if you're just complete anti- debt, then it may not make sense.

Sure. Um, but I've only got so much cash to work with, so at this point in my life, it definitely is justifiable. That's fantastic. And so, what do you see coming down the pipe? Like, given all the economics that we're in today, like how do you see that affecting you, if if at all? Yeah. Um, my my note originations have slowed down heavily as it relates to me selling a flip with owner financing. Um, two years ago I could get borrowers left and right that had 20, 30,000 cash to close. It's not that way anymore, at least in my market. Um, I've got four flips that are kind of sitting. We're getting traction, but they're priced right.

They're offering owner financing and we're just the people don't have the cash like they did a year and a half ago, a year ago. And so I think at least in my market with my little area, that's going to translate into the notes, too. There's probably less notes getting originated that are the quality of notes they were before. There's probably more, in my opinion, uh, less ideal paper because a seller's just trying to get rid of it. So, yeah, they'll take 5%. Just take it off my hands. And then I think they're going to look up and go, "Oh, I shouldn't have done that because I got a 4% 30-year note with a dude." Um, so I think it's going to maybe reduce the number of of good originations at least in at least in my area in central Texas.

But I'm I don't know. You guys know more than me on that. So, uh, take that with a grain of salt. Oh, that's interesting. That's it's good to get that perspective. That's interesting. Very cool. It's amazing, man. I appreciate you coming on here. Um, I'm getting some thank yous in the chat um on Facebook and LinkedIn. So it I know you were hesitant about coming on because you but I'm telling you there are so many people who are serious for this and we've been lying to him saying this isn't really possible and then Justin comes on and blows up the world which is what we want to see. We really want to challenge ourselves do better things and and really kind of get out there.

So we want to thank you really much for coming on spend some time with us um and teaching us some stuff as well as everyone who else listens to us. Um yeah, unfortunately Justin will not be coming to DME this year, but we're keep encouraging him to come on next year. Um but uh it's good. Justin, is there anything else you want to share with everyone before we disconnect again if you want his information? Uh feel free to fill out the form. It's in the chat. Um yes, you're welcome, Maurice. Uh hopefully everyone got a good Yes, Cindy. Yes, thank you so much. Anything you want to share with anyone before you leave? Anything you got going on coming up you want to share? I know you're not a big website person and stuff like that, but uh is there anything you any shout outs you want to make to anyone? Well, I just want to say I appreciate y'all having me on and the community that you guys have kind of built.

Um I'm not super plugged in, but I have watched probably a dozen or so of y'all's videos that seem to apply to me and I've learned stuff just like y'all have learned stuff today. I've learned stuff every day and continue to learn. And so, um, feel free if there's anybody listening that that has questions, um, within reason. I'm an open book. I will tell you what I know and give you my two cents on how you should engineer it if you've got a problem or something you're trying to do in the note space. Um, I love the note space. It's continuing to grow. And, uh, there's a lot of opportunity. So, uh, if you're interested in getting into it, you know, um, get your teeth in something.

That's what I would say. Just give give try something on. Let Dave sell you a note. There you go. You know, let Dave buy one from you, you know, 100%. And if you guys are doing hypothetications, I encourage you guys to connect with Justin. Share knowledge each other. Yeah. Um and whatnot. Tanya, just there's a form in the top uh comments thing. Just click on the link up top. Uh if you can't find it, our team will get to you, but there's a I'll resubmit it to the chat. Um, so just fill out this form and you'll get a uh link that sends a information to both me, Justin, Nathan, so we can reach out to you in case there's a question.

Awesome. Well, again, Justin, hold on for a little bit for after hours, but uh we're going to disconnect for live. Thank you everyone. We will be back in I think it's two weeks, Nathan talking about trust. Yep. We marry hard. It's gonna be great. I'm I'm excited for that one. That's going to be interesting as well. But yeah, get your tickets. Love to see everybody out. DM me. Awesome, guys. Thank you much and we'll see you everyone soon..