Presentation on theme: "Be the Bank: 12 Keys to Nonperforming Second Loans"— Presentation transcript:
1 Be the Bank: 12 Keys to Nonperforming Second Loans Sándor Lau, Chief Inspiration OfficerStewardshipCapital.com
2 Imagine Real estate investment: Single family home, down payment like FHA 3.5%.No application, no credit, you don’t live there.Occupants completely committed to your housing product. 10 years no vacancy.You can enjoy monthly payment stream, appreciation, or cash payout, sometimes all three.If it goes south, all you’re into it for is down payment.
3 Case Study: Mile Wide Never Should Have Worked: House upside down Borrowers bankruptHadn’t paid second mortgage since 2011But…paying first mortgage
4 Case Study: Mile Wide BORROWERS: Married couple with kids, KC suburbs. $11k/mo.Borrowed against house to start business 2007.Previous chapter 7 bankruptcy.Living month to month but paying first mtg.
5 Mile Wide Numbers: Example photo only, not borrower’s house Value: $360,0001st Mortgage: $400,000Payment on 1st: $2,000/mo2nd Mortgage: $55,000Arrearages: $30,000Our Cost: $6,000+$2,500 lawyers (2.4% of property value)PAYMENT PLAN: $350/mo, $4,200/yr, 10-year balloon, Sándor’s insuranceRETURN: 50% (improves at balloon). Resolved in 6 months.Never should have worked. Works all the time.Example photo only, not borrower’s house
6 1) Emotional Equity Trumps $ Equity House=Asset (IRS)House=Doodad (Robert Kiyosaki)House=Investment (real estate investor)House=Home where kids and pets live (homeowner)
7 Please Raise Your Hand if You Have Previously Invested in Notes?
13 Title Card: First lien, modified, paid off, foreclosed? Other liens (contractor, business, third, private)
14 3) People Do Not Grow Tired of Living Indoors Real estate appreciating for the past 10,000 years.Not everyone needs car insurance, pet reiki, iphone or psychotherapy. Everyone needs a place to live.One of my favorite books is Guns, Germs and Steel by an anthropologist, Jared Diamond. It’s a history of the fate of human civilizations in the last 10,000 years that have been largely decided by guns, germs and steel. The reason is it’s on the last 10,000 years is about 10,000 years ago human beings in the Fertile Crescent first developed agriculture. They discovered that life cultivating and harvesting your own food was infinitely better than hunting and gathering. For agriculture, you need land. Which is why land has steadily gone up in value for the last 10,000 years. The downturns are tiny blips in a long upward slope, and the last one is very likely to be the biggest in our lifetimes. Housing ranks a close third behind breathing and eating. Not everyone needs car insurance, iPhones, pet reiki, psychotherapy or Photoshop. But everyone needs a place to live.
15 Case Study: Fields of Green BORROWER:Milwaukee area, Greenfield, WI.Single dad raising two kids in house they were born in.Dramatic income loss, divorce in recession.Living month to month.Previous chapter 7 bankruptcy.To make this more real, I’m going through case studies for most of the 12 keys. They all have nicknames. 1, because it’s very difficult to memorize loan numbers and 2, because we want to respect our borrowers and their privacy. These are human beings just like all of us.
16 Fields of Green Numbers: Value: $165,0001st Mortgage: $170,000Payment on 1st: $1,000/mo2nd Mortgage: $25,000 (reduced from $40k)Arrearages: $5,000Our Cost: $3,500+$1,000 lawyersPAYOFF: $12,000RETURN: 266%. Resolved in 10 months. Intoxicating asset.Example photo only, not borrower’s houseBeware curse of knowledge.
17 Case Study: Cement Mix Midwest fourplex, $80,000 $500/mo. mortgage $2,000/mo. rentWhat could possibly go wrong?Mortgage due no matter what happensNot example: Real House
18 4) Be the Bank, Not the Landlord No tenants, no toilets no termites.
19 5) You Make Your Money When You Buy Discounted real estate=exceptionalDiscounted notes =standard2nds most discountedSweet spot: under 20 cents on dollar UPB
20 Case Study: Home on the Range 1982: 18% interestNo loan: paid cashFurnished from garage salesHow to know real estate garage sale?
21 Bank Paper vs. Seller Carry Loans Needle in haystackHaystack made of needles
22 Banks are the World’s Most Motivated Sellers Large institutionsStrict rulesMove slowlyAll or nothingUS:Small and specializedWin-win creative solutionsFast decisionsWhat can you afford?
23 6) Seconds Come First 2nds pull the strings 2nds can FORECLOSE like 1stsLower price point (smaller loans, bigger discounts).
24 Firsts Come Second 1st can foreclose—if we let them. We can own property subject to 1st loan.Not in our name, not on our credit.
25 7) Diversify Buy pool of notes, $4k to $20kish each. Spread risk. Strike OutsSingles/DoublesHome runsIn investing, you never want to put all your eggs in one basket. It’s difficult to do this with real estate investments because of the cost of each one, but a pool of notes costing maybe $4k to $20k costing an average of about $7k is much more within the reach of the average American investor. You can also make this investment in a self-directed retirement account.Unlike investing in property, you don’t need to just invest locally. We’re the bank, not the landlord. We don’t need to have our own boots on the ground everywhere. We use note servicing companies with national footprint who have people everywhere, know the laws in each area and have legal people everywhere.We spread out the portfolio risk across multiple notes, and I want to be very clear, they will not all work out as you would like. You will have strike outs. But you only paid a small percent of the face value of those. You will have some singles and doubles. I’d consider the Georgia Peach a single. And you will have grand slams. Those would be early payouts, even if at a discount. If you can make a resolution quickly, you can maximize your returns by turning that money over.
26 Tape=In investing, you never want to put all your eggs in one basket. It’s difficult to do this with real estate investments because of the cost of each one, but a pool of notes costing maybe $4k to $20k costing an average of about $7k is much more within the reach of the average American investor. You can also make this investment in a self-directed retirement account.Unlike investing in property, you don’t need to just invest locally. We’re the bank, not the landlord. We don’t need to have our own boots on the ground everywhere. We use note servicing companies with national footprint who have people everywhere, know the laws in each area and have legal people everywhere.We spread out the portfolio risk across multiple notes, and I want to be very clear, they will not all work out as you would like. You will have strike outs. But you only paid a small percent of the face value of those. You will have some singles and doubles. I’d consider the Georgia Peach a single. And you will have grand slams. Those would be early payouts, even if at a discount. If you can make a resolution quickly, you can maximize your returns by turning that money over.
27 Case Study: Chicago House of Blues Borrower:Underwater $30k or more on first mortgageHealth issuesStruggling to pay $1,000/month first with $1,250 social security income.
28 Chicago House of Blues Numbers: Value: $150,000???1st Mortgage: $180,0002nd Mortgage: $55,000Arrearages: $15,000Our Cost: $9,000Settled for $3,000Example photo only, not borrower’s house
29 8) Pray for BK— Bankruptcy Bankruptcy gives relief from debt, not entitlement to house.We are secured creditors.Chapter 7: liquidationChapter 13: restructuringRead cards at:
31 Chapter 13 BankruptcyHouse<1st mortgage balance, court can strip 2nd lien.House value<(1st and 2nd loans), court can cram down 2nd to lower debt.All payments come through trustee.Payment plan 3-5 years. Only 1/3 complete plan. No completion=no strip.
32 Case Study: Georgia Peach BORROWER:20 years in house with two childrenMiddle-class income ($5,500/mo) but poor money management skills. No savings.Defaulted on payment plan, filed BK 13, now payments through court.To make this more real, I’m going through case studies for most of the 12 keys. They all have nicknames. 1, because it’s very difficult to memorize loan numbers and 2, because we want to respect our borrowers and their privacy. These are human beings just like all of us.
33 Georgia Peach Numbers: Value: $150,0001st Mortgage: $80,000Payment on 1st: $500/mo2nd Mortgage: $45,000Arrearages: $10,000Our Cost: $7,000+$2,000 lawyers+$5,000 to reinstate first mortgage=$14,000PAYMENT PLAN: Borrowers signed agreement for $500/mo to us, but stopped paying us and first mortgage. We paid $5,000 to bring first current.RESULT: Borrowers now pay $700 through court garnished wages. $8,400/yr.Example photo only, not borrower’s houseBeware curse of knowledge.
34 Chapter 7 BankruptcyWipes out unsecured debts, leaving more to pay mortgage.No lien stripping, no cram downs. Except FL, GA, AL.Bankruptcy relieves personal debt obligation, does not provide shelter.
35 Case Study: Arizona Rattler BORROWERSingle borrower with steady job and no dependents.Built house 2002.Filed Chapter 7 after we contacted.Bankruptcy discharged and soon proceeding with foreclosure.
36 Arizona Rattler: Numbers Value: $160,0001st Mortgage: $135,000Payment: $800/mo2nd Mortgage: $36,000Arrearages: $10,000Our Cost: $6,000After discharge of Ch. 7, monthly debts are only 1st & 2nd mortgage.AZ state assistance program.Example photo only, not borrower’s house
37 9) Your Nearest Exit May be Behind You A property has two ways to make money:RentSell
38 2nd Notes Give You Multiple Exit Strategies Borrower Wants to Keep Property:Payment plan based on what borrower can affordPay off at a discount (higher returns on fast turn of money)Only current resident has emotional equity in that property right now.
39 If Borrowers Can’t or Won’t Pay Borrower ready to Move On:Deed property to lenderShort sale (we can decide in a few days)BORROWER REFUSES TO COMMUNICATEForecloseWait for appreciation
40 Property Exit Strategies Once we own Property:Keep as a rental property (subject to 1st)Keep as rental property. We don’t pay the mortgage and first forecloses.Sell for cash or regular loanLease option
41 10) Get the Right People in the Right Seats Highest and best use of our time is finding and fixing broken notesRequired attributes: Logical data crunching Intestinal fortitude Relationship buildingTeam:MentorsServicing companyAccountantLawyersInvestors Bill Syrios, Real Estate Reverend
42 Get Help from Your Uncle 18 states in federal Hardest Hit Loan Assistance FundOther states have own programsReinstatement funds, temporary payments or payoffsI Want You to Invest inNon-Performing 2nd Mortgages!
43 Case Study: The Ostrich BORROWER:San Bernardino County, CA, bread and butter 4/3Borrower shouts, “Leave me alone!” then hangs up.Facebook shows some interior pictures of houseModified first for low monthly paymentCA program will pay off 40% of 2nd loan if lender forgives 60%. Now, highly motivated.
44 The Ostrich Numbers Value: $160,000 1st Mortgage: $204,000 (sweet modification)1st Mortgage pmt. $600/mo (mkt. rent $1,200/mo)Market appreciating 15%2nd Mortgage: $50,000SCHL cost: $9,000CA state program will pay out 40% on successful applicationWe can also foreclose and rentExample photo only, not borrower’s house
45 11) Good Things Come to Those Who Wait Stanford Marshmallow ExperimentNotes take a long time to receiveDue process takes timeWe wait for the second marshmallow.
46 Case Study: Rancho Kowabunga Example photo only, not borrower’s houseBORROWERHome bought at market peak 2007 Rancho Cucamonga, CA.Lived in beautiful large house over 8 yearsDischarged BK7Pays first mortgage like clockworkAppreciating real estate marketModified first mortgage forgives $87,000/year for 3 years if borrowers continue paying first on time.
47 Rancho Kowabunga Numbers Value: $460,0001st Mortgage now: $472,0001st Mortgage in 1 year: $385,000Value in 1 year: $500,0001st Mortgage pmt. $2,100/mo, Market rent $2,200/mo2nd Mortgage: $57,000+lates and arrearagesSCHL cost: $25,000 (bought from friend, not traditional hedge fund route)Waiting for appreciation (6%ish) and equityExample photo only, not borrower’s house
48 12) If You Think Education is Expensive, Try Ignorance
49 Resources: BOOKS (available PapersourceOnline.com Or Amazon.com): Performance Anxiety by Gordon MossFast Cash by Lorelei StevensLorelei’s Legal Lessons by Lorelei StevensInvest in Debt by Jimmy NapierCOURSES:Gordon Moss, Quixote VenturesPartners for Payment ReliefNoteConferenceNational Note GroupKeyhole AcademyLEGAL:Memorize the Fair Debt Collection Practices Act