Welcome to The Deal Pen, a podcast that digs into the details of untold stories from crafty real estate investors. And now, here's your host, Avi Rasowsky

Okay, we are live in The Deal Pen with Tracy Z from noteinvestor.com. Tracy, good to be with you today and thank you for joining us.

Avi Rasowsky

Thanks for having me, Avi. I'm excited to be here.

Tracy Z

Awesome. Well, I told you right before this recording started that it feels like I know you already because I've listened to so much of your content, little bits and pieces over the last few years. And I've gotten to know quite a bit more about what you guys are focused on at noteinvestor.com. But for anyone that hasn't run across your name, I've been lucky enough to dig into some of your content. Can you share with those that might be listening what you focus on and a little bit about the note space?

Avi Rasowsky

Absolutely. I love seller finance notes. I got my start in them in 1988. Seller finance notes have been around a long time. We've seen different iterations through different markets, but that's really when a seller sells a property, allows a buyer to make payments to them instead of going out and getting a bank loan. The seller has all the rights as a bank. They collect interest. And that buyer, borrower, they maintain the property, the taxes, the insurance, the seller gets that interest income. And as long as the borrower makes payments, they just act like the bank. If for some reason the borrower doesn't make payments, then they can take the property back just like a bank can through foreclosure process. So it's for people who love real estate, but don't like tenants. So you get a security back by real estate, but you don't have the hassles of the taxes, the tenants, the termites, all the T's that we talked about.

Awesome. Okay. Thank you for the context. And I've heard you talk about this before where there's different categories of people that might decide to seller finance or owner finance. And, and in general, that's the same thing in your world, right? Seller finance, owner finance.

Yes, great question. So seller finance, owner finance, seller carry, the IRS calls an installment sale, there's some special provisions exemptions for that we can dive into later. Some people call it, you might have heard of called an all inclusive mortgage, if it's a wrap situation, all inclusive trust deed. Some people use a contract for deed or land contract, we tend to like our seller financed to be known deeds of trust or known mortgages, but we certainly have bought land contracts over the year too, but it's really anybody who owned the property, sold the property, and allowed that buyer to make payments to them. There's also something out there called private lending, That's different than seller financing or owner financing because those people are private people just lending money. They didn't ever own the property. The big distinction is somebody owned the property, sold the property, and now stepped into the position of receiving payments rather than owning the property.

Okay, perfect, perfect. And from my view, and a lot of people that may be listening to this, they're thinking about seller financing as a, well, this is a tool we use to create wealth and generate income and all that. But that's not the case for a lot of people, I'm sure. Maybe this is a good place to look at the overarching market, because you look at some pretty macro level numbers with the note space. Do you mind sharing a little bit about kind of how you look at that?

Absolutely. So some people find it surprising. We started tracking this in different forms and got much better at it in the last 10 years because now data is so much more relevant and prevalent. And so many more counties have their data online. So we pay somebody to scrape data from the county courthouse all across the United States, all 50 states. and go in and see who owned the property and took back a deed of trust or mortgage. And they didn't get a loan from Bank of America or Mr. Cooper or any of those things. They actually sold it and took back the property that owner financing. And it averages around 25 billion with a B every year in seller financed paper. Now, some of those are what we call professional sellers. They do it more than once a year. And some are just mom and pop sellers that sold a property. Maybe it's the only time they're ever going to take back a note. And so that applies across residential, commercial, land, mobile home and land, anything that would be considered real estate. Of course, there's lots more private lending that happens out there. There's a lot of business notes and mobile home only notes that get created, but we're just talking about the seller finance notes that are real estate related.

Okay, perfect. So $25 billion with a B. The first time I ever heard you talk in the B category with that, I had no idea it was such a large space until, really until I watched, I think, one of your interviews with J.K.P. Holdings, one of the no-buyers out there, and I was blown away. I mean, was it shocking to you when you first dug into the numbers how many people are actually doing this that maybe we didn't know about?

Well, we know because we market to them, right? But when you tally it all up, you're like, whoa, that's a big number. We also like to do the trailing five years. And so that's about 125 billion. So we, you know, yeah. I mean, when you say it that way, it seems big, but it's still a pretty niche market when you look at it from the perspective of the whole market of real estate in and of itself. Cause we, depending on the area of the country and the economy on average, we say about. sometimes three to 6% of all regular transactions have some form of seller financing.

Okay, and the big categories I heard you talk about were the obviously commercial properties, I'm assuming those are the bigger numbers.

Yeah, the residential are actually the biggest numbers count wise. You know, commercial starts to look at dollar wise. I can pull that here. I have it handy. Let's see. Last year, we don't have for 2024. So we're talking 2023, $14 billion for residential, $9.2 billion for commercial. $3.8 billion for land. If anybody's adding it together, they're actually $28 billion last year. So it did go up a little bit from that average of $25 I use. And there's just a little bit of a unknown category. Sometimes when we go to the county, they don't tell us what the property type was. They're just not that sophisticated. So we got a little bit of unknown in there. But yeah, the residential still makes up the bulk of it.

Okay, wow. Okay. And for the sake of your business and the folks that are learning from you about the note space, are they mostly focused on residential or is it really across the board? Are you looking at everything?

They're focused a lot on residential, mobile home and land, some land, provided it's got a good use. We say to stay away from swamp, because I'm located in Florida, and sand, depending on what part of the country you're in. So all of those are good. Commercial, you know, it's interesting, mixed use, yes. Those commercial deals tend to be larger. So us as private investors, they're usually outside our normal funding amount. We don't wanna put that much in one deal. So some of those will refer to banks and that sort of thing. But yeah, we mostly look at the residential and the land and the mobile home and land.

Okay, okay, perfect. What have you seen, so you're marketing to, people that have these notes, right? They're the payee on a note. And you're trying to, I don't want to put words in your mouth, but maybe if you can explain, you're trying to buy these notes or somehow get in touch with people that have notes that may want money instead of the payments.

Yeah, we work at this from two different ways. One is exactly what you said. We go out to go market to the people who are receiving notes and they might be perfectly happy with receiving that note and they've got interest and it's secured by real estate they know and like or something might have changed in their life and they might need an infusion of cash. Or maybe the borrower isn't paying quite as timely as they want, or they're worried about taxes and insurance, or they're worried about upkeep, or maybe they have a bill, or a kid they got to send to college, or they want to take a trip around the world, or they just want to get their financial affairs in order. Any of those reasons might be a reason that somebody wants to sell all or part of those payments to a private note investor like myself. So we can buy those and we usually buy them at a discount and take an assignment of the mortgage or deed of trust and an endorsement to the note. Nothing changes for that borrower. That's a legal agreement. The only thing changes is where they send their monthly payment. on who they make that payment to. So that's one aspect. We market to those and we buy those. And another aspect is we work with people who are landlords that are their own real estate that would like to move into being a lean lord. So they would like to move some of their portfolio where they're renting properties out, sell some of those, and turn them into seller financing, and they still have the monthly cash flow, but they no longer have the hassles with the tenant, and that new buyer, borrower, payer is the one that's going to do upkeep taxes and insurance and all of those things. we see people start to move a piece of their portfolio into creating a note and deed of trust or note mortgage. So we help them make sure they're structuring it in a way that's safe for them and is also marketable. If they ever do want to sell or recapitalize some of that note, they've got a note that's structured a way somebody like myself or other investors would pay them top dollar.

Okay, very nice. So those two categories are you're actually providing consulting to both Well, obviously you're buying from the existing note holders and then you're consulting with those landlords that want to be, I love that, lean lords?

Lean lords, yeah. Landlord versus lean lord, right? Yes. Yeah, and then we do, we have a membership group that works with us that we're helping them underwrite notes. We don't provide legal or financial advice, of course, but we can say over our 30 years with my husband, I've been doing this over 30 years each, there's things that we would look for. And so we have a group of people that do that, and they kind of network together as well. So I guess that's three prong approach to the note business.

So that's the education piece of, and that's how I came across you is, I don't think I mentioned this in the beginning, but when I first got into some of the depths of your content, beyond just some of the podcast interviews, it was about partials because I was looking at some of the, okay, well, I don't want to buy a whole note, but maybe I can offer a partial. I know that's a whole different universe, but can you dive into a little bit of that and give people a taste of what's even possible there?

Absolutely. It's one of my favorite parts of the universe. So. If you look at an amortization schedule, most, I know your listeners work with real estate, right? So they understand borrowing and lending and amortization. And if you look at amortization schedule over 30 years upfront, it's mostly interest, right? And then it starts a little bit more, it goes to principal a little bit more, and then they got about halfway through that amortization schedule and it starts to kind of go over that hump. And now more is going to principal versus interest. So if somebody has a 30-year note, for example, that's a long time to wait for money to come back. So the time value of money, we use financial calculations. We keep them simple. It's just five keys on that financial calculator. It's not trying to scare anyone away. So one of my specialties is making people feel comfortable with the math. My husband loves saying he doesn't like math, but he likes money. So that's a good motivation to learn the time value of money calculation. So setting that all up to say, if I buy the next 15 years of payments, money now is worth more than money later. I'm mostly buying that piece that is the interest piece in the amortization schedule. So I buy those payments. I don't have to discount them as much to the person selling them to me. And then when I turn it back over to them in 15 years, they can collect the next 15 years of payments or they can decide to sell some more payments. But the cool thing is, is when they get the balance back, it's really hasn't gone down all that much. And so they're selling off the interest piece. I, as an investor, don't have to put as much upfront cash, protects my position a little bit because we will talk about investment to value as note buyers rather than loan to value. So loan to value is what your borrower owes compared to the property. investment device, what I invest into it when I want to get back out to make whole, all the interest is the gravy, the profit. First, I got to protect my investment, first and foremost, and then get my profit. We like partials because they lower exposure. We tend to get a little bit better interest rates on those partials. And it's also good for the party selling them to us because they get to keep that interest working for them too. And in 15 years, they still have an asset, right? They didn't just sell it off and it went away. We buy whole notes too, but partials are our favorite because that's normally where we get our better deals. Like we talk about real estate investors get appreciation, right? Because they own the property and they get depreciation if they're buying it outside of self-directed IRA, they get that on their tax return. As non-investors, we don't get that, but we do get something really cool called early payoffs. Early payoffs when you buy a note at a discount, especially on a partial, that's our big payday. We like those for that reason.

Okay, perfect. If you can, I know this is audio, so I want to make sure it's still obviously engaging for someone that's trying to follow the numbers, but can you give some examples? So maybe like, okay, if you were going to come across somebody that has a note and they might sell you the whole thing versus how they could see on a partial how you might structure it.

Sure, yeah, yeah, we can do that. I'm just gonna pull up an example that lives on our website. Okay, perfect. Right, that's easy.

I assume that's noteinvestor.com, right?

That's right, yeah, and if you just do something like partials, then you go right to there.

Okay.

Yeah, so here's an example. of one. Here's a deal, we like to use this $100,000 because it keeps everything easy, right? So $100,000 note at 10%, in 30 years, it would have a payment of 877.57. And if I wanted an 11% yield, and I was buying the whole note, I could put that into my calculator and I would find out the present value of those 30 years of payments at $877.57 is $92,150. So if I wanted 11% yield on that 10% note, I would pay $92,150. So that's a little bit of a discount, right? Because unpaid principal balance is $100,000. If I'm paying $92,000 on it, that's a little bit of a discount. That seller may or may not want to take that discount. I can do something cool and I could just buy the next 15 years of payments. If I wanted to buy the next 15 years of payments, 180 payments of 877.57, and I wanted 11 percent yield, I could pay $77,210 for that. Now, I only bought half the cash flow, but I only reduced what I paid out by about 15,000. Seller is still getting a nice chunk. But the cool thing is, when you run the amortization schedule, when I assign that back to the seller in 15 years, the balance is still about $81,665. Just to recap, you got a $100,000 note. In 15 years, it's balance is gonna be 81,665. So the seller's still gonna get 81,665 for the next 15 years and also received that 77,000 cash that I paid for the next 15 years. So they walk with their 77,000 cash for the next 15 years, then they get the note back in 15 years. And they walked with whatever down payment they got at closing. And if it's a note they've received payments on for a while, they also have all those. It's a way to keep that interest working for them. Look, banks make money off interest and arbitrage. We all know that, right? They borrow at one rate and they lend at another. That's what private lenders do. That's what hard money lenders do. We're just applying those same principles to buying an existing cash flow at a discount. So we're just chunking it up and we're paying for the most valuable piece, which is that interest piece that's closer to today. The stuff that's off in the future will be valuable again off in the future, but it's way out there right now. So time value money says money now is worth more than money later. So that's why the immediate payments we can pay better for.

Okay, amazing. Thank you for breaking that down. So let's say you're on the side of the note seller and you think, oh, wow, okay, that sounds pretty good. There's some considerations, right? You talked about early payoffs. So let's say that example happened. They said, fine, we'll sell you the first 15. How do you typically structure it? Let's say someone's gonna sell you the first 15 years and the borrower pays off in 14 years, right? Just before, how does that play out?

Yes, great question. So first and foremost, we all have to remember, borrowers don't have to pay interest when they pay you off. They only have to pay interest while they owe you. So we don't get all that interest and the seller doesn't get all that interest. We all got the interest for the time we owned it. Right. But it's not going to be 30 years of interest divided up 15-15. So great question. In any kind of purchase like this, you have a purchase agreement. that outlines who gets what in the event of early payoff, or hopefully not, but in the event of default, and you gotta foreclose. And there's something called amortization schedule in there that tracks the full balance, which is the borrower's balance, the investor's partial balance, which we call the schedule B balance, and then the C, which is the seller's remainder. So at any time, those three columns of amortization all have interest working. The note for the borrower, that interest is working at the note rate, the face rate of the note, the investor's investments working at their yield, and then the remainder interest is what's left over basically. Anytime you can match those up, you take the full minus the partial, it equals the remainder seller interest. We are all about disclosure, no funny business. Everybody signs them, acknowledges them, because we don't want them to get upset later. And we also are very careful. We do a full assignment and a full endorsement, so we're not fractionalizing the note. We're not creating a security. This is an agreement of how those payments will be participated in, but we're not creating any kind of security. We're just keeping one note with one investor.

Okay, perfect. Thank you for breaking that down because I was going to ask you that. Are you fully assigning it or are you doing... I guess a collateral assignment of a portion of the payments is also possible. It does not sound like you're doing that, right?

You can do that. That's a great question. You understand our business well. That's not considered a partial. That's considered borrowing against a note you hold rather than selling it. Full assignment, full endorsement is selling it. and borrowing against it, collateralizing it, is a collateral assignment, an endorsement for collateral purposes. We call that hypothecation. When you borrow money against a note. So, you know, you're asking for a note and you're gonna secure that note by a note you hold. So that works very similar to a partial number-wise, but a little bit different documentation-wise.

And I guess the other, and you tell me, because I've not been involved in the full sale of notes. I've borrowed against notes that I have. I've actually borrowed from others, but I've not done a full assignment. And I assume, I could be wrong, I assume that it's a taxable event when you sell the whole note.

Yeah, it can be a taxable event. And when you borrow, then you usually are also liable and you get to claim interest expense. So when people ask me what's better, I'm like, Well, how are you? How do you hold that note? Okay, so if you held a note in a self directed IRA, right? you're not writing off interest in expenses and that sort of thing. So usually in a self-directed IRA, it's better to sell a partial because if you do borrow money against an asset in a self-directed IRA, which you can do with real estate or notes, There's something called unrelated business income tax, UBIT, some people call it UDFI, when you use debt financing to acquire assets. So that's, we're getting deep in the weeds, but you asked, it's a good question. If you hold the asset, the note asset outside a retirement account and you get normal write-offs, then it's usually better to hypothecate slash borrow slash collateralize against it because now you get to keep control and also you get to write off the interest as an expense and it's not a taxable event.

Okay, very cool. No, it's amazing stuff. And it's like, it makes your brain spin a little bit the first time you hear it, because the more and more I learn about notes, the more I want to continue learning. If we can go back just for a second, because I want to, you explained something that I got a little bit after the fact. So when you have this, let's say someone's going to sell their $100,000 note, and just to make it a little bit more real for people, they sold something for maybe, what, 120, 130, you think? Yeah. They took a down payment? Mm-hmm. Okay. So if you do that example where you say, okay, we'll pay you, it's a 30-year note, they're getting 877.57 a month, and then you're going to say, let's say you needed 11% yield and you're willing to pay 15 years, and you did, I think you came up with a $77,000 number. Is that the one from your website example? Okay. So you're actually, if I heard you correctly, on the purchase agreement, you're creating three amortization schedules as schedule A, B, and C. The first one is the original that the borrower owes the note seller. The second one is basically what you're expecting on your $77,000 at 11%. And then the third one is the difference or what is the third one?

It's the difference. We always say full minus investors partial equals remainder men. So as my investment pays down, the seller's is growing until that point in their 15 year example, where the seller's remainder interest has grown to the point of it equals the full balance and mine's gone to zero. That's at the point we reassign it back.

Okay, perfect. What is the reason you've chosen to do a full assignment? Is it just cleaner that way or what's the?

We don't want to fractionalize the note and we want full control of the note. So full assignment, full endorsement, only one holder in due course. I'm not providing legal advice, but since the 80s, we've done it. That's the way the attorneys have suggested. And we provide samples to get people started, but we always say, consult with your own legal advisors. The cool thing is, is that we're not just out here doing this rogue. We work with banks that actually will buy these and they will buy partials. So we just fashion our documents after them because they have a really good legal team.

Yeah, they've set the examples to follow, okay. Okay, so that makes sense. And if somebody, I guess when that would come into play is if somebody defaults, if a borrower stops paying, you can actually foreclose, right?

Yes, that's why you want the full assignment endorsement. Now you still have to protect the seller's interest and they still get what's left over. Hopefully the property can be sold, depends on how much damage has been done. Because sadly, when you take properties back, sometimes a lot of damage has been done. So all that has to get worked into the equation, but yeah, the seller is still protected. And we use, just to clarify for listeners, we use a third party neutral servicing agent to do this because one, it's just a lot less headache to use somebody licensed to service these notes. It's less headache for the seller, less headache for us. And it's definitely good when you're, you know, talking about these more advanced structures, somebody to keep track of those balances. So it's fair to both sides.

Yeah, I assume there's a bunch of Node servicers out there in the Node space. How do you, and I don't know whether or not you're comfortable sharing any names, but how would you say you would vet a servicer? Because someone might say, okay, I want to do this, but the servicer might not have ever done it before.

Yeah, so we actually just wrote an article, the how to select the right note servicing company for you. And there's lots of things you want to look at. First of all, are they licensed in the state where the property is located? That's one of the first things you want to ask. You want to know how long they've been servicing notes and ask around. It's a small, close-knit community who people like to work with. We do something called Best of Notes every year. You know how you vote for the best pizza place or the best... date night dinner or, you know, for your local area. So my husband came up with this great idea because he's the marketing man and he's like, we need to do that for notes. And so we do festive notes every year and people go and vote for the best note servicer and the best buyer for business notes and the best buyer for non-performing notes and the best buyer for seller finance notes. Very cool. And all those things, and who's the best BPO provider? Who's the title company they like best? So we have that category, best of servicers, and there's always, you know, a top 10 list in there. And so I always tell people, be very comfortable going with, you know, talking to those companies. because they've been vetted and voted by other node investors as being great. And just ask them, especially if it's a partial situation, do you service partials? Do you service hypothecations? Can you do investor disbursements? And they'll either look at you like deer in headlights or they'll go, oh yeah, we do blah, blah, blah.

Nice. Oh, that's great. I love that idea. Okay. And I have been reading, I noticed, I don't know if you guys have changed anything, but I've just been noticing your content a lot more over the last several months with email content and newsletters. It's really great stuff. So thank you for putting that out there.

Yeah, we started our blog in 2008 and we went full force. And then we were like, you know, and then we got re-energized because our daughter's working with us now too. So, you know, when you have a little bit of help and you don't have to do it all yourself, it's easier to, There you go. And re-energize to create all that great content.

Well, that's awesome. As a parent of three, I'm just curious, how did she navigate towards working with you guys? Was she doing something else and then came back? Okay.

Yeah, we all felt like if we were fortunate enough to get to all work together, it would be after she'd gone out. And for her sake and her independence, because she's an independent one as well. You know, I just think that they get that feeling of self-confidence and validity and you kind of see how the world works. And it's not all great. And somebody telling you what to do that's not your parent. Yeah. So it'd be fun to have her perspective on that as well. For us, it's worked well. She came in more on the marketing side because she's got a great tech background and she did really well in marketing before that. So she came in on that side and now I'm super excited because now she's working the investment side. So after seeing these deals, she's like, oh yeah, okay, I'm a part of that, right? So exciting to see her get really interested in that as well. And so she's an outdoor adventure. She loves kayaking and whitewater rafting and mountain biking and skiing. And she loves all those things and also worked in those industries for many years. And then she was like, yeah, I'd like to make more money than what they pay. Yeah, I'd like to work and enjoy those things on my free time, not as part of my job. So we're happy she transitioned over with us.

Oh, that's awesome. That's got to be exciting. It is. If we can talk about one category, I don't I don't think I shared this with you unless I sent you a message about it months and months ago, but you saved me on a deal big time with some of the content you guys have. So you talk about. I think it's the four P's maybe, or sorry, the due diligence, maybe you'll tell us about it. But when you're looking at buying a note, what are the stages of due diligence that you're looking at, or the sort of, I think they looked at four quadrants of due diligence.

Yeah, that's that's a great question. We just did a live two day recorded masterclass on due diligence because people kept bringing me deals. I'm like, oh, did you ask this? And I feel so bad because it's like it's like the basics on our checklist, you know, so you're trying not to make someone feel bad. But at the same time, you're you're wanting to protect them. So we look at the, we start with the three P's. So we start with the people and there are two people, the payor, the person making the payments. And then there's also the seller, the one that created the note. And then we look at the property because the property is what, payers going to want to pay on right it's got to be a nice property for them and it's also our security if we ever had to take the property back because somebody didn't pay so we look at the property and then we'll of course we look at the paperwork so the paperwork's what we use if we have to enforce our legal rights. And so we wanna make sure we have good paperwork and we order title, we get the original note at closing. And so those are the main quadrants that we look at. We like to do our due diligence, perform our due diligence in two phases, as you mentioned. We have our upfront initial analysis. It's all the things that you can check out online without spending any money. Now, let me tell you from facts, paper to going online and looking up county taxes and BPOs and comps. And I mean, it's it's you can tell a lot online, social media, too. You can tell a lot about people on social media. So that's everything you do up front without spending money. If you like that deal and it vets out and it looks good, then we go to the second phase where you got to spend some money. So we're going to order a BPO boots on the ground unless it's something near to us that we can do it. We definitely want somebody to go out and see the property and run comps and get some current pictures. So run an evaluation. Doesn't cost a lot, right? $150. If you are spending a little more money, you might do a actual drive-by appraisal versus a BPO. Depends on how much equity is in there, how much you're spending. Most cost a little more, 350, 400 bucks, but most deals BPO is fine. And then title. So then we get title insurance. I know some people just get title report. I'm a big believer in getting title insurance, not because I think they should get to charge me all that money for insurance, but because it means that what they tell me, they have to back it up with insurance, not just I paid you 100 bucks for a report. And when I, if you're wrong, oh, sorry, you know. So hopefully there's a lender's title policy from the sale. If the seller and the buyer worked with a good closing attorney or title company, they would have done title insurance then. And we can just date that down and we don't have to pay extra. But sometimes they don't, we have to go out and get a new lender's title policy. So we'll have to factor that in. It varies by state and by the amount of insurance. But those are the two things that cost money. And so, yeah, we have a due diligence checklist. I mean, since we had a two-day masterclass, we could talk about it for two days. So that's kind of the high level. Yeah, that's the high level. So do you remember Avi, what was that in the due diligence that caught your eye, like saved you on that deal?

I'm just curious. I know exactly what it was. And it wasn't even the, you know, further secondary analysis. It was in the very beginning, I was looking at the, so you've got the pay, or the payee, the property and the paperwork, right?

Yeah, that's right.

So everything checked out except for the property. I didn't really look. It was a very small note. I think it was, I don't remember exactly, but it was less than $20,000 owed and it was going to pay off, supposedly it was going to pay off in a few months and everything sounded great, right? I was going to buy something for, I don't remember the numbers, but I was going to buy it for, let's say 12 and it was going to get paid 19 or something like that. It all looked good, the paperwork looked good, the closing documents were fine. And then I went to say, what is this? And it was a piece of land and it was supposed to be built on by the builder. And I looked back at just, again, stuff I could find online, just checking some of the county records and online info. And it looked like a total dud piece of land. And I ended up calling some developers and people in the neighborhood, HOA, and it really was not easy to build on. There had been a neighborhood that was supposed to be developed years ago. It was way up in the mountains and it just, yeah, the neighborhood never took off. And so now there was some ambitious builder that I think probably wanted to get it. And he got a loan from his friend and the friend was trying to sell the note. And so, look, I don't really know what transpired. He may have ended up building on it, but I didn't feel comfortable with it. And I said, okay, I'm sorry, I just can't do it.

Yeah, yeah. If you don't feel comfortable, don't do it, right? There's another note will come along. That was, I'm glad you did that. We find a lot of deals that are landlocked that people don't have legal access to. Interesting. That's a big problem with land or just being so remote that nobody would be want to build on it or be able to build on it. It's a lot of desert land out like Joshua Tree area, they can't get water. So yeah, land is the one you gotta be a little more careful on.

Yeah, there's a lot of little things with land that I guess you don't know until you know, right?

Yeah, and I like land notes. They've been some of our most profitable, but yeah, what improvements have been made to it? Is there building going on around there? How hard is it to get permits to build? How expensive is it? All those things.

Right, right, yeah. And it's so important to know what's going on in the local area, right? Sometimes there's backups and permits for one reason or another, especially here around Charlotte, you have all kinds of problems with people getting backlogged on not being able to get permits and things like that, or land not having access to sewer and water. Yeah, all kinds of stuff.

Not parking, if you mean to septic.

Yeah, for sure. So yeah, anyway, so thank you for saving me on that deal. I'm always looking for, opportunities. I haven't actively gone after the note space to market to note holders, but if someone were going to go do that, what are some, I'm sure you probably teach it in detail, but what are some ways that you approach a note seller or someone that you don't even know is going to be a note seller with some of your communications? What would you suggest?

people that are in the real estate investing community like yourself naturally network and just mentioned that you're interested in buying seller finance notes or providing private lending. They just putting that word out there networking is a great way if you want to go more direct marketing. Then you're talking about, you know, either direct mail. So those lists, you can buy lists and direct mail to people who took back a note. Remember, you want to be very specific that they took back a note from property they sold because those list providers get a little confused. I think you just want to market to someone for a new mortgage, like you're going to make a loan, which you don't want to do.

Right.

Unless you're licensed to be a mortgage lender. That's a different category than an investor buying an existing note or seller creating your own note on your own property. So it's kind of an important thing to mention to people because they get all excited. It's like, no, no, there's lots of consumer laws about just lending money to consumers, right? So, yeah. So good, worth mentioning. So you want the right list that you're marketing to somebody who's already created a note. Plus, you just want to optimize your marketing dollars, so you can direct mail. You can Google ads. We've done Craigslist ads. We like networking and referrals the most, so if you get to have a reputation, you know, you network with real estate attorneys and title companies and mortgage lenders who have deals that fall out, maybe the seller will take back the note and sell the note. So those networking referrals is our favorite, but then all the traditional ways like direct mail and Google ads and real estate investor clubs, all of those are ways to find sellers who have a note and wanna sell it. There's even note listing sites now, that's new, right?

Yeah, I've seen several like that, yes, absolutely. Very cool. So if you had to say, let's say, and we don't have to get into all the regulatory background, but I know the note world changed after 08, I guess, right? Or 12, maybe with Dodd-Frank, is that the biggest change in your space?

Yes, so it varies. You got to think about licensing on two levels. Licensing regulation one is the federal level, like you mentioned. So Dodd-Frank after the subprime mortgage meltdown came along and got implemented in 2014, but it was passed sooner than that. And it did say that some seller financing would be subject to the same kind of rules of disclosure and qualifications as bank loans. And so there was a carve out, we call it a carve out. There was some exceptions to certain seller finance transactions that didn't have to go through all that process of qualifying and disclosures. And so that threw us a little bit for a loop because we had to figure out how do we comply with that? Can we operate under the carve-outs? And if we're not in the exception carve-out area, then when we're outside of that, depending on how many deals we're doing, what is a disclosure? At the end of the day, what we found is it's made us better.

It cleaned everybody's act up.

I'm not saying I didn't whine like everybody else. Yeah, yeah. When it happened, because we liked the way we did things and nobody likes to be told how to do things. We're all a little bit independent and creative and don't like that to be hampered and messed with. Right. So, but what it did was, it's one of the main things is that we had to make sure the borrower, the payer has the ability to repay, that they have the ability to make the payment. And that is just good business. because you wanna make sure that that person has the ability to pay, cause that makes for a better note. So it's just all these sellers who sometimes don't know they should be doing that, that having to figure out how to fix that after the fact. Now they have a carve out if they're just doing one in 12 months, they're one of the exemptions or exceptions. But people doing more, or their entities, they should be doing that. And the easiest way to do it is to use an MLO. So just like a mortgage loan originator works with banks, there's mortgage loan originators that will paperwork and document and do the disclosures and all those tests on a seller finance note. So you can even make your borrower pay for that, just like they pay for fees when they get a loan. So it's really had a simple solution that took us a while to get there though, because you had to get MLOs trained that understood seller financing. And so, but now I feel like we've matured and we're all good with that. Would we like to be able to do more? Because there's an exemption for one and there's exemption for three. Yeah, we'd like that to be just a little bit less burdensome, but we're all operating under that as best we can. So then you also need to look at state laws because that's a federal law. You just got to look at there's very few states that have specific laws related to do you need to be licensed to buy notes. But there are a couple out there and they fall under that MLO. So you can go to the National Mortgage Lender Service. It's like NMLS or something, and you can search by state. But most states, you're just a private investor buying a seller finance note. So as long as you're not lending to a consumer. And another important carve out to mention is Dodd-Frank doesn't even apply to investor deals. So if somebody's selling to somebody who's not gonna live in the home, it's somebody who's gonna be the landlord, it doesn't even apply. So some people just decide to operate in that realm.

So if you're buying, let's say you're buying a note and it was an investor who was the borrower, are you, is there something you're looking for in the paperwork that says there's some clear disclosure that says I do not plan to live in the home?

Preferably, yes. But you know, we've had to clean up paperwork in the past. Preferably, yes.

And I know within the next couple of minutes, we can certainly wrap it up, but are you okay for a moment or? Okay, all right. Let's say someone has a really messy note, not MLO, originated, not everything you're looking for. It doesn't check all the boxes. I assume you typically are a buyer. You're gonna discount it more the messier it is. Is that how you look at it?

Yeah, it depends on what level of messy. Yeah.

Let's say everything's great except for it wasn't Dodd-Frank compliant and, you know, but the borrower can pay and everything was ethically right.

Yeah, I mean, we don't ever want to get into a deal where we don't think we can enforce our lien or we think the borrower would have a legal claim to say they don't have to pay or they don't have to pay at all. So those would need to get cleaned up or we would just go to the next one. If it's a deal where they just didn't like dot all the I's and cross all the T's, or maybe they were the exempt one, you know, the one in 12, didn't know to ask some of these questions. And yeah, we'll still buy that. We're gonna perform all the due diligence we can on our own. Sometimes we'll talk to the borrower to make sure they're happy, just to get that comfort level. And then sometimes that means we're going to lower investment or lower exposure, or it's a really great time to bring it back around to the partial we talked about. So you buy a partial, maybe even the next five years of payments, and then everything's going good and it looks good, you could buy some more. So all of those would be strategies to work with a note that's less than ideal. all of our deals are less than ideal. There's some reason either the buyer or the property didn't qualify for conventional financing. So what is that reason and how do you lower your exposure and risk and still do the deal. So we're always thinking creatively to the point that we wanna be sure we'll always get a return of investment. And our return on investment is secondary, right? We always want return on investment, but first return of investment. And so that's, yeah.

Yeah, how do you make sure that you're not gonna lose everything, right? Yeah. Okay, perfect. Obviously, we're just scratching the surface here. And so if anybody wants to learn more, I know there's many, many places to find you and your content. And what would you suggest is the best way to kind of, if somebody leaves this episode thinking, well, gosh, I want to learn more about this note space or wants to hear more, how would they find that out from you?

Thanks for asking that. So our website, you mentioned noteinvestor.com. And if you want to just, you can go to the homepage or if you want to go forward slash 101, like 101, that'll take you to a little place that you can sign up for a free video series of just talks about how notes work. It's like a four or five videos. and how you can make money in the note business. Because you don't have to have enough money to just buy the note yourself. There are companies out there like ourselves or banks that will buy them. So if you find, if you're a wholesaler of real estate, you could be a wholesaler of notes. So you can refer them to an investor and make a referral fee at closing. So that's another strategy we really haven't talked about. that's a great place to start and to learn the business, to get a taste for it. Because people are like, oh, that's great, but I don't have enough money to buy a note. So that's a great place to start. If you are a seller that wants to learn how to sell real estate, create a note and get some of that capital gains deferral, which is an installment sale provision in the IRS code, seller financing can be a great tool. So we talk a lot with people about that, how to create a note that's a quality note. Yeah, and then we'd love teaching the financial calculator. So that's a piece, even if you have no interest in notes, it's so empowering to understand how interest works and how you can get a 33% return by just offering to pay your rent or whatever, whatever kind of payment you might have. You know, if you say to someone, I'll pay all 10 payments up front instead of one payment a month, and you count that good for the year, it comes up to like a 30 plus percent yield every single time. We call it the 10 for 12 strategy. So look, even if you don't want to invest in notes, I think you should learn how to use the financial calculator. I always tell people get on the right side of the calculator, start earning interest and stop paying it as soon as you can. Yes. Yeah. But I'm not afraid of going into debt, right? If it is debt that creates a cash flow creates an income stream. You can create arbitrage if it's thoughtful debt, but not consumer debt like credit card debt, right? So that's, I think the calculator class is big. We have a whole class on partials and the due diligence that you mentioned as well as marketing. So I love this business, been doing it for 30 plus years. If I didn't love it, I still wouldn't be doing it, that's for sure. And now we get to share it with others because we are still very active in the business. I don't want to be somebody who teaches and doesn't do. But we're not, you know, now we do a couple of deals a year instead of, you know, 20 deals a month, right? When I worked for the institution, we did 20 million a month. So, I mean, you know, I'm happier with less because my life is simpler right now and the no business has been good to us and we love showing and introducing to other people how it can be good for them. It's still kind of that last frontier for the small private investor that all the big guys haven't taken over yet.

Yeah, exactly. Amen. Well, I love it. I really appreciate you sharing so much color commentary with us and detail. Thank you, by the way, for bringing up the calculator. The more and more I learn about the financial calculator, the more I realize there are more tricks to learn. I didn't take it seriously about five years ago, and then I started to and I was like, wow, you can really make some amazing deals work by just understanding amortization and like you talked about earlier.

And there's one more segment we just didn't even touch on, and that's people who are buying real estate that can learn how to make really good offers with seller financing.

Absolutely. Yes.

Oh my goodness. I mean, I don't like it when I go to have to buy a note with a 0% interest rate because I got to discount it. But boy, I always think those borrowers, oh, I know who that good negotiator was on that transaction. So there's a lot of good deals out there as a buyer, borrower, if you can make offers with seller financing and give the seller the price they want, if you can negotiate the terms that you want.

Absolutely. And that right there, out of respect for your time, is a whole nother episode. But yeah, I totally agree. It's a tremendous opportunity there. And I won't keep you, I know you got another call coming. And thank you for sharing your insights with us today, Tracy.

Thank you, Avi. Thanks for doing this podcast. We all love doing deals. I love the DealPen podcast and thanks for having me on. We really appreciate it.

Thank you.

So honored. Thanks so much for tuning into this episode of The DealPen. We sure do appreciate it. If you haven't done so already, make sure you're subscribed to the show wherever you consume podcasts. This way we'll get updates as new episodes become available. If you feel so inclined, please leave us a review. And remember, there's always more deals to be had in The DealPen. Until next time, friends,