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Ellis San Jose is Director at The Note Guys and Group Leader for Real Estate 360. He is a full-time residential and commercial real estate investor with a background in researching, analyzing, acquiring, and managing distressed assets. He also buys distressed debt. He holds a Series 7,63, and 65 licenses and a Certification in Personal Financial Planning. He’s co-founder and leader of For Investors By Investors (FIBI).
Martin Saenz is a Managing Partner of Bequest Funds, a national mortgage investment company. Martin cofounded Bequest Funds with the dual purpose of helping investors grow their wealth and helping mortgage borrowers stay in their homes. Martin owned and operated multiple successful companies prior to launching Bequest. Martin holds a BA degree in Philosophy from U.T. — San Antonio, an MBA from Drexel University, and a M.S. in Project Management from George Washington University.
Have questions or feedback? Each show is posted on the Data Driven Real Estate Podcast #13 in our community. Catch pre-show research and continue the dialogue online after the show.
- 00:00 The Data Driven Real Estate Podcast welcome Ellie San Jose of The Note Guys and Martin Saenz with @noteinvestingmadeeasier
- 01:53 What is not buying?
- 03:19 How did Ellis go from being a stockbroker to investing in notes?
- 04:53 What are junior liens?
- 05:49 Some of the key players in the note buying business
- 06:44 Do you buy judgments as investments?
- 08:02 How did Martin Saenz get into the note buying business?
- 09:29 Buying individual notes vs buying a pool of notes
- 10:25 Can you get a discount on notes that are not in distress?
- 13:11 Buying pools of junior liens and the process of resolutions, foreclosures, and workouts
- 14:14 T15:24 Where does Bequest Funds source most of the notes?
- 16:26 How keeping homeowners in the home is the most profitable scenario
- 17:33 Institution note investing vs. private notes and mortgages
- 18:39 The issue of poorly written private notes
- 19:51 The benefits of individual notes vs. pooled not investments. Creativity!
- 23:16 Note hypothecation and lenders for notes
- 24:20 Hypothecation vs. investors buying notes with lines of credit. Very different.
- 25:13 The number one thing you need to get in the note buying business
- 26:19 Did Covid cause the note buying industry to contract?
- 27:47 First position liens only?
- 28:33 What Ellis looks at to know a private note is worth investing in
- 29:33 Vetting a consumer while trying to evaluate a note when they don’t know who you are and why they were thrilled to hear from Ellis during the downturn 30:46 Is there an ideal combined loan to value that is the max you should bid on a note?
- 31:20 How are vetting note pools nationwide even possible?
- 35:01 Is licensing the biggest risk in note buying? What license do you need?
- 36:47 How some states treat buying notes directly from institutional investors. Warning!
- 37:26 If I’m a note buyer, am I regulated as a lender, broker, or servicer?
- 39:26 Why mentorship in the space helps speed up whether you want to be in the business
- 42:42 Three pillars of note investing that Martin shares to stay safe and compliant
- 45:02 The important of collateral review when buying notes and what to look for
- 46:09 Are there attorneys and other resources that help you know if the note was underwritten and serviced correctly?
- 47:39 If a foreclosure is required, must a note buyer comply with state-regulated foreclosures rules?
- 47:54 How old are the notes that Ellis and Martin buy? Pre Great Recession?
- 48:50 The age and length of default Martin is buying from large banks
- 49:13 Why having some length of default is good when buying a note
- 50:47 Will there be a wave of distressed notes due to Covid? Is note buying on hold due to the pandemic?
- 51:45 What data does Ellis look at to avoid the emotion of the market?
- 52:35 Do HERO loans and the like cause issues for note investors?
- 53:41 What is a HERO loan and why can it catch a note investor off-guard.
- 58:02 is it always the goal to hold the note to payoff?
- 1:02:43 What data does Martin look in the general economy?
- 1:04:49 The Intelligent Investor Conference coming up in 2021
Aaron Norris 00:02
Hey, welcome back to the Data Driven Real Estate Podcast. I'm Aaron and this is episode 13. We are really excited today to cover notes. We haven't done that yet. And this is our very first podcast with four people on at the same time. We are welcoming Ellis San Jose, he is he owns The Note Guys as well as a co-founder of For Investor by Investors. That's how I know him out here in California best and he's focuses on a very specific piece of the note buying industry. He has his background in financial planning, got into the courthouse steps buying and then worked his way into notes. And then we have Martin Saenz. He is the co-founder and the managing partner of Bequest Funds. He has also written several books one of them being Note Investing Made Easier, which is also a website so, noteinvestingmadeeasier.com and he works more on a broad scale nationwide on owner-occupied mostly distressed notes for sale. But in this episode, we cover several things about the note buying business. From the localized opportunities to a more national scale, some things that you need to consider from operations to how to structure a deal. We talked about how the industry has changed over the last year and the last decade, as the market has definitely shifted with regulation and after the Great Recession, you won't want to miss this one. Let's get to it. Hey, welcome to the Data Driven Real Estate Podcast, the podcast for real estate professionals dedicated to driving business using data. I'm Aaron Norris, and with co-host Sean O'Toole with PropertyRadar, and we are very excited to have our first four-way interview. Ellis San Jose of The Note Guys and Real Estate 360 and Martin Saenz joining us from Virginia with Bequest Funds. Guys, thanks for joining us. Let's start why notes. It seems like a secret club that only the very few know about and get into. I love to understand your journey how you got here.
Sean O'Toole 01:53
Well, I'd even start a little bit simpler. Why is note buying?
Ellis San Jose 02:02
Yeah, so note buying is where you're actually acquiring the debt that is secured by a property versus the property itself. So you're basically stepping out as a bank when you're acquiring these assets.
Sean O'Toole 02:15
Okay, so somebody has a mortgage on their property, a lien of some sort. And the, the lender or the person that's owed the money says, I'd like my money now, but the note itself says they don't have to pay me off for a long time and I want out so you take them out.
Ellis San Jose 02:35
That's exactly right.
Sean O'Toole 02:37
All right. Cool.
Martin Saenz 02:39
Yeah, I tend to look at it like, you know, you have you have the mortgage, the security instrument that ties the promissory note to the property. So, you have a promise to pay between a lender in a bar given a certain set of terms. So, so there is a human factor involved versus maybe like a straight real estate deal where it's just, it's just the physical structure. So so you're dealing with a physical element the bar and you're dealing with the security instrument is or the collateral for that, which is the property.
Aaron Norris 03:19
Well, Ellis, when did you how did you get involved in note investing? Where did that even start?
Ellis San Jose 03:24
Oh, gosh, that's a good story. So I, I used to be a stockbroker. And I met a gentleman who was teaching people how to buy real estate and mostly focused on foreclosures. So I took his course. And it took me a while but I eventually had the guts to go out and actually quit my job and go into real estate full time. And I was knocking on doors of, you know, people in default in those are very receptive people many times, so I was not having a lot of success. And I was like, Well, here I am. I'm not doing very well. And, you know, my wife's getting nervous. So I go back to my mentor, and I say: Look, I've been knocking on X amount of doors and you know, it's not happening goes, Well, why don't you just buy the debt? And I said, What's that? And so, he explained to me that you can actually buy the debt on a property rather than buying the property itself. So many times always buying the second or third Junior trustees in many cases, for pennies on the dollar. And when I was in them at that time the market was so it was so vital because it was very easy to get loans. This was back in you know, 2001 so I would just sit back and I would get a call from ESCO: Oh, we need to have your demand because this person is either reifying or selling. And I would be kind of you know, ribbing my other flipper friends who are out there really working hard and here I was just filling out demands and setting mid escrow and getting checks so it was a beautiful time to be in the in that business.
Aaron Norris 04:53
Junior liens. Let's do a vocabulary check. How about we describe jr lanes. Because the worst I've ever seen on a property by five.
Ellis San Jose 05:04
So there's a stratum of liens on a property. So you know, the number one person you have to pay is your property taxes, right? The county always wants your money. And then after that there's a first mortgage. And then you can have a second mortgage. And as you said, Aaron, it could go to five to up to infinite, as many as you know, the lender is willing to, to swallow. But yeah, so I would specialize in buying the junior liens. Because it's a little bit of a different quality, they usually lower dollar amounts, I could, I could, you know, it was much more approachable. And my very first lien that I bought was a $14,000 second trustee that I bought for $865. So it was a very easy entry to learn the business.
Aaron Norris 05:45
That's a load that's a low price point. I like that.
Ellis San Jose 05:48
I was very lucky.
Sean O'Toole 05:49
I'm gonna jump in with just a little bit more vocabulary to write like, as you just said trustee right, we said loan and liens, encumbrances judgments like there's all these different term. So you mean blown is under the generic term in the US depending on the title system that's used right? It can be a deed of trust or trust deed, which basically means when I sell my house or when I get a loan, I give the deed the ownership of the house to a trustee to hold and they have the right the power of sale to sell that if I don't fulfill my commitment, there's other states which are judicial foreclosure, where it's a mortgage, which is another term we hear a lot mortgage loan deed of trust all kind of get used interchangeably right loan kind of applies to both and then mortgage and deed of trust depending on the state. And then we get other types of liens and encumbrances, which so for example, I sue you. I win money in court, and I get a judgment. Are you guys buying those as well?
Ellis San Jose 07:01
I have in the past five versions. I'm not super active in that space right now.
Sean O'Toole 07:05
Okay, so most of your notes aren't we're loans of either the mortgage or deed of trust variety. Yeah, voluntary liens on voluntary liens yeah that's the judgments or category correct. I'm the owner of a voluntary lien I borrowed money is Yeah, that's another term there. Yeah, good stuff.
Martin Saenz 07:26
I don't care what whenever note it's in default, you know, you have the option as the lender to go after the bar from a civil standpoint. So so you're going to go, you know, seek a judgment against that borrower. However, for you know, like Ellis with our notes, you know, we're always looking for resolution with the bar to keep them in their home or you know, as we go through the foreclosure route if we have to. So we're going to go through the property, we're not seeking to gain any resolution through the bar. by means of a judgment.
Aaron Norris 08:02
So Martin, how did you get into this side of the business?
Martin Saenz 08:06
So actually, when my wife and I sold the company in 2013, it was a government contracting company. And from that point, like many businesses, I think it's something like 60% of businesses that sale sell come with some form of seller financing. So we took back a business note as a result, and right away, we connected with someone in the note industry, and we sold a partial tail of that business note to to this investor. And so that was really my first exposure was was that of a note seller. However, I had already been heavily involved with land-lording on the commercial residential side in the DC area. So from there I just kind of connected with some folks in the note space and ice I went out and bought 10 first mortgage, non performing notes to kind of get things kicked off and, and my butt kicked in the process of getting getting kicked off.
Aaron Norris 09:11
Ellis San Jose 09:12
I have a feeling they were more than $800 for the first mortgages.
Martin Saenz 09:16
Yeah, it was like a $240k by and I recovered about 80% of it, but it was it was a lot of pain involved.
Sean O'Toole 09:25
Ellis San Jose 09:26
I believe that's called tuition.
Martin Saenz 09:28
Sean O'Toole 09:29
No would that have been a pool of notes because that's the only thing you hear about a lot of buying pools versus buying from individuals.
Martin Saenz 09:38
Yeah, because a lot of notes are sold in the secondary market. So it's post origination, and once it's already originated, whether it's originated as contract for deed or or through a lending institution with Fannie and Freddie underwriting guidelines. Either way, once it's originated, if there are transactions that occur in the secondary space Whereas there's buying and selling of these mortgages both in before in a performing state for the mortgage and a non-performing state, there are different silos that transact, but yes, pools are purchases purchased. However, there also are one-offs in individual notes that are that are transacted, but that's more in a retail setting within the secondary space.
Aaron Norris 10:25
Do you get discounts on notes that aren't in distress?
Martin Saenz 10:30
Um, yeah, sometimes you do, you know? Yeah, sometimes you do sometimes, you know, a seller, what's their motivation? Right, you know, do they need to liquidate, recapitalized for some need, where they can get better returns, you know, with their money using it somewhere else so you can get people that will sell a discount. I purchased a performing note about a month ago and for an 18% yield. So and it's a season first mortgage note. So it happens.
Sean O'Toole 11:04
18% just on, I think there's a little interesting bit of math there. Right? So you said for an 18% yield, that's going to be your return? What's the interest rate on the note itself?
Martin Saenz 11:16
I don't remember, but I'm thinking it's about 7% to 9%, somewhere in that range.
Sean O'Toole 11:22
So seven to 9%, they discounted enough that your return is going to be 18%. So, you know, that, that changes the math quite a bit. And I imagine it's also possible, right? If somebody had a note that was at 18%, and current rates are 4% or 5%, they might be able to sell at a premium where the face value of the notes 18, but you'll pay a premium for it and get a 12% return or something. Right? That is the big picture, at least theoretically, that happens, right?
Martin Saenz 11:51
Absolutely. You know, buy with the end in mind, right? So when you're buying and pools you have to look at the interest rates on the loans that you're buying. Especially if they're in a non-performing state because, you know, at some point when you get those loans modified and they're performing again, they're going to be around the interest rate that is the current interest rate. And, and that's going to give you some guidance in terms of what you're going to be able to sell those for in the secondary space once they're seasoned. So that'll that'll tell you that'll kind of give you your numbers.
Sean O'Toole 12:23
Let's net out like, okay, so there's a buy side, I'd like to talk a little bit more about that. And then I'd like to talk about the sell-side because I, you know, it seems to me like there's different strategies on the buy sides, buying pools, buying from individuals, etc. And then on the sell side, there are different strategies like you just mentioned, you can season it, get it performing and sell it for maybe full value, right? You can get, Ellis, mentioned getting paid off and just waiting for the title company to call and say, maybe you don't even collect payments in the meantime, so long as somebody calls you someday and says, Hey, we're paying it off. You get your return. You could obviously just collect payments until it's over. Right? So there's different strategies there. But you want to tackle the buy side first?
Martin Saenz 13:11
Yeah, I mean, I can. So. So generally, just kind of like a high overview when you're buying Junior liens that are non-performing in the secondary space. In pools, you're generally look, if you're buying correctly, you're generally looking at about seven of the 10 loans are going to modify. So the borrower is going to come to the table, you're going to work out terms, they're going to start paying again, or they'll reinstate. So they're either going to modify the existing terms of the loan or they're going to reinstate and catch things up, so to speak. Then one out of the 10 is going to force go to foreclosure. So the bar is just going to say forget it, you know, I need to just move on and it's going to result in foreclosure. And then and then two are going to result in something weird All right. like a like a pay off or, or they're just going to go through bankruptcy and there's no equity and you're going to have some kind of trials and tribulations that way. So one you might be wiped. So that's kind of like the general rule of thumb when you're when you're coming in. Now, based on the types of notes that we source, and in our in our due diligence process whereby we focus equal attention to the Property Valuation, and and as well as that the title for that property, equal attention from that to also the bar situation and their ability to pay, we actually end up with pools of loans where we have probably about a 90% conversion to loan modification. We foreclose less than 5% of the time, which is exactly in line with the mission for our company, which is keeping homeowners in the home with payments they can afford, while we make a profit for ourselves. And in about 5% of the time, we're seeing payoffs occur now and the past few years we've seen a massive uptick in payoffs given interest rates and reifies. And Ellis I love to hear, you know what, what he's seen on on his side as well. But um, so you can take that and use those kind of rule of thumb numbers to go and create, you know, return projections for the pools that you're buying.
Aaron Norris 15:24
Where are you sourcing these deals, who's selling these notes?
Martin Saenz 15:29
Hedge funds, hedge funds, so it's, um, it's a it's a very tight-knit community. And you have to really have strong relationships in place, that are built on strict trust past performance, as well as the ability to close and do what you say. So these take time to develop. And this is why the barriers to entry are very high. doing it the right way. Like you could go and be like, I'm going to be a note investor. Take a weekend. course and go buy some notes on on an online exchange. And you can do that in one week. However, to do it where it's it's a scalable business and done correctly and very profitably over the course of time, you need to have be entrenched within the community with relationships with large hedge funds that will offer to you and others within a tight circle.
Aaron Norris 16:27
Reading your website, it's a sexy mission to you. You purposely try to keep the homeowners in the home. So...
Martin Saenz 16:34
It's, it's amazing. It's amazing because that's our most profitable scenario. That's our golden goose. I mean, keeping the homeowners in the home is like, I mean, do I want a short-term capital gains play? You know, do I do I want to just go and take someone to foreclosure, take their home, displace a family and then and then evict and then take it to auction? No, never. We never want to do that. You know, even if it's like a question infusion of cash if we want 30-year streams of income, that that's all we want as many of those as we can get our hands-on. Yeah.
Sean O'Toole 17:11
ls on the on the sourcing side? You know, we know, I know, we have a lot of customers that source the individual notes. Are you the same? Are you also looking, you know, buying these larger pools working with hedge funds, are you out, you know, buying seller carrybacks directly from the seller and that kind of thing. So I know that's another way that people go about this business.
Ellis San Jose 17:33
Right. So originally, I started out buying from seller carrybacks from individuals. And then when the downturn hit, there was so much product available at the institutional level. I could not ignore it. It was just too easy. I mean, you just were trying to throw it in the boat and get it. And so I went into that institutional space, but now I've gone kind of, you know, full circle. I'm back focusing on Individuals again with or honor carry back and seller carryback type of notes now and I, you know, thankfully your product property Raider is so good that it gives me a lot of a lot of, you know, great ways to source these.
Sean O'Toole 18:15
Yeah. Aaron has a lot of experience in the hard money business right is going after those folks or they usually go back to their same broker that put them in that note or you have any luck going in and tackling those folks that individuals that are hard money broker puts into
Aaron Norris 18:35
For Ellis that question? Or...
Sean O'Toole 18:38
Ellis San Jose 18:39
Well, a lot of times there wasn't a broker involved, believe it or not, that you know, that when the seller carrybacks, carry back Yeah, and, you know, sometimes that's good and bad. Sometimes you have a very poorly written note that has a lot of problems, and you have to clean it up, but then you know, it's it gets priced accordingly. But I really enjoy that. pace because it you know, I can work directly one on one and solve a problem for a person versus working with an institution where it's like, what's your bid? Yeah, it really comes down a lot. I mean, it does come down to relationships as well. But it's, it's much more of, I just get much more of satisfaction of doing it. And, you know, hats off to Martin, because I could see how the industry was going. And then to be a national buyer of notes on a consistent basis, you have to have the right machine. And I had to take a, you know, a very, you know, deep look at myself say, is that what I want to do? And, and that's why I went back to how I started.
Sean O'Toole 19:37
There's a, there's a range of there's a variety of paths here, right from the, you know, folks who want to just go by a few to large, you know, becoming a large player.
Martin Saenz 19:51
What's interesting with Ellis's approach is that and that's an area actually don't have much expertise. The whole seller-financed you know, sector. But I gotta imagine that knowing Ellis's expertise, like you're able to have full-blown control over that note, so so you go and buy you that you can control the flow of how that whole, you know, navigating the, the exit from day one. And you know, whereas when you're buying institutional and you're buying in larger pools, you don't always have your hands on everything, right? Because there's so many other elements that are outside of your control. So, right, so I get it and
Ellis San Jose 20:30
Yeah, on the buy side, what really appealed to me on the individual notes is I have much more creativity I could buy part of the payment, I could buy, you know, front, you know, just a few payments of a note or the back. I don't know, there's so many more options, where you don't really have that opportunity when you're buying a pool. It's kind of like, you know, you do your due diligence, and then you have to come up with what's your bid. So
Sean O'Toole 20:52
Yeah, that's a good you know, segue so different ways to find them. Go work with hedge funds, use public record. To go find the seller, carrybacks, you know, etc. And now you've got a prospect. So next step is due diligence.
Aaron Norris 21:10
Maybe we should talk about the one I sent you two days ago.
Ellis San Jose 21:15
That's very timely. It is.
Aaron Norris 21:16
And it just it was a fluke. I just do get calls occasionally with people with and this was a funny situation you want to you want to tell that one?
Ellis San Jose 21:23
Sure, sure. So I got a call Oh, hey, Aaron Norris, you know, referred me to you. And the situation was there was a foreclosure investor who bought it for steps. And there was a holdover owner who was living in the property. And because of COVID Well, I think before COVID she was like, Well, you could stay here, pay me some money. And you could see her temporarily because I think the story was that the foreclosed homeowner was going to go somewhere else and buy something else. Well, consequently, COVID hit and she's just kind of digging her heels and not making payments. The gal says, Well, you know, how would you like to be the owner of this? And I was like, well, that's a kind of a big problem, especially the code because there's not a clear path to exit like there used to be right pre COVID. Before you had your timelines, you say, Okay, if, if they declare bankruptcy, if this happens, there's certain amount of things that can happen. And like Martin, when when I get a situation like that, I like to work it out. It's much more rewarding to figure out a way to keep in the property because, you know, sometimes the worst thing to have is an empty property really bad things happen to empty properties. But yeah, so this, this potential seller just wants out, she does not want to be the bad guy and have to, you know, basically pull out the legal the legal help that she needs to kind of put pressure because there's not a lot of levers to put and that's a whole nother subject about, you know California about the levers that you can Push to to secure your asset now. So..
Aaron Norris 23:03
I felt bad for it because it sounds like something I would do. All of a sudden, she came became friends with the tenants and basically leased it back or try. Yeah.
Ellis San Jose 23:10
Which is, which is a no no. And yeah, that's a no, no.
Sean O'Toole 23:15
Aaron Norris 23:16
Let's talk about how the industry has changed too. I mean, first hypothecation before we started recording, I talked about this real quick. So there are there are lenders out there willing, willing to lend on notes?
Ellis San Jose 23:34
There are, it's not as prevalent as kind of your traditional lending. And that's the beauty of real estate is that the exit strategies are much clearer when you're when you own the actual real estate with notes, it becomes a little bit more specialized. So there's only you know, maybe a handful of lenders that specialize in saying hey, you know, we will use your notes as collateral and extend credit to you. Interesting,
Sean O'Toole 23:58
Yeah, just you throw out that big term hypothecation and
Ellis San Jose 24:01
Sean O'Toole 24:03
Around notes, but you know, so so I got a property, it's got a mortgage. Right, right. I own the mortgage, and then I go get a mortgage on my mortgage. The lender, right? Yeah, yeah. and on it goes.
Aaron Norris 24:20
Not to be confused with credit lines people using credit lines to buy notes.
Martin Saenz 24:25
Exactly. There's there's not a there's not a big market for for lenders of non-performing notes whatsoever. I mean that whoever whoever that would be, there's only a few parties, but whoever that would be, they have, you know, in depth knowledge of the industry. So so they know kind of what they're getting into, and they might want cross collateralization with you know, hard assets property or what have you to back up the back of the loan. However, you can collateralize a portfolio performing loans, and get you know, lending that way. That's not a problem however, but when you scale up and you start the you know you show a good track record over time you can go to lending institutions and get lines of credit out and and work with it that way.
Sean O'Toole 25:13
But bottom line when you get started note buying bring cash,
Martin Saenz 25:17
Sean O'Toole 25:19
You're not gonna be a wholesaler you're not gonna like yeah get a hard money loan in the back end like you want to be start you want to come be a note buyer bring cash.
Martin Saenz 25:28
Bring cash, but a lot of times people bring Aunt Suzy who has cash so while they're learning so that's like the big no no in the industry is don't learn on an Suzy's dime and you know use your own money initially till you know what you're doing. And but you're bringing in Equity Partners for the most part. And you know, if you're buying correctly and you're buying at a deep enough discount, there's enough juice in the deal where everyone will do well.
Sean O'Toole 25:57
Partners is good, good idea there, yeah.
Aaron Norris 25:59
Was anybody caught off? I know I got a call from somebody trying to get rid of a pool of mortgages to the tune of $250 million in March after the stock market crashed and they had a margin call. Did you see a lot of people sort of that were posing as cash buyers when they were doing it on lines of credit that have since disappeared?
Martin Saenz 26:19
What I saw during COVID we did we did, we probably purchased about $10 million in mortgage debt during COVID. And so we went out very hard. We already had some active trades going on that we had to close based on relationships. So we took a big risk there was a lot of California notes involved in that in those trades actually was about three different trades. And and so we didn't let up However, what we did see is we saw some sellers more eager to sell and we saw less buyers on the trades because people were holding back whether it was their Capital Partners, holding back whatever the case, so it was it was actually really a heyday during COVID. And I know COVID still going on so don't shout at me later. But um, but right now it's the exact opposite. There are twice as many buyers on trades that are going on in the marketplace now, post-COVID. So that's in quotation marks, because everyone's in heat. All the buyers that weren't buying before they're all pent up and so it's actually a real big buyers market a seller's market right now and they're getting top dollar for product.
Aaron Norris 27:36
Well, that's not fun to hear. Sorry.
Martin Saenz 27:39
Aaron Norris 27:42
Now Martin, do you specialize in buying firsts or will you buy Junior liens as well?
Martin Saenz 27:47
I mainly by Junior liens. I only buy first if I have to. So if it's a mixed opportunity, and I have to take down some first, but generally when when when I buy first it's it's because it was originated as a junior lien. And the first paid off or was satisfied in some way. So So this Junior lien becomes, you know, moves into the senior position, and we'll buy it that way. However, we will not pay any price difference for the senior lien status we will pay based on Junior lien pricing matrixes that we have in place, we kind of stay true to that. But I prefer Junior liens well over senior liens any day of the week.
Aaron Norris 28:33
Maybe talk about vetting a little bit less what matters to you as far as the data that you're looking at to know that it's a it's a good deal on these private things.
Ellis San Jose 28:42
Yeah, I get asked that a lot. And I always say it starts with a collateral number one, you have to understand the collateral what the value is because that's what's going to pay you off. And the higher you go into, you know loan to value the higher you go closer to what the value of that collateral is. The more the borrower's purchase. Situation play comes into play. So now you have to set the bar would say, okay, what's their ability to stay? What's their, you know, desire to stay Is this something that we can work with to, to, you know, keep them in the property, the the tougher situations that I've run into is when we're buying close to the value of the collateral, and then the borrower is also kind of, you know, a little sketchy, a little soft. So that's when you start to get a little bit nervous. So I always start with the collateral trying to buy as you know, lowest percentage as possible of the actual collateral value.
Aaron Norris 29:33
I'm trying to think of the conversation because, I mean, it does feel I mean, I'm in the private money space, but this feels like a secret club. So you're vetting the asset, and you randomly call this person and you're not Bank of America. A lot of people just think this, you know, this is a bank thing. So you're calling trying to vet the consumer and they're like, Who are you? What's that conversation?
Ellis San Jose 29:53
Yeah, you know, what was really great was, you know, back in the downturn, they were happy to hear from somebody because the banks were so swamped, and they weren't, they didn't have kind of the attention that I would have when I spoke to them or somebody my staff would speak to them is that they actually got a real person, they had their name they could connect with I mean, they were so they're like, I can't believe I have somebody that I can call back to the same person. And that's a huge advantage. And as you build trust with them, then they start to say, Okay, I'm willing to hear how you can help me. So yeah, I think initially, because there's a little bit of resistance towards institutions, I think there's an advantage to being kind of a, a, an operator that really pays a lot of attention to that to that borrower and really thinks of many solutions. And I have so many creative solutions that we did to help people stay in their homes. It was, you know, that was really satisfying.
Aaron Norris 30:46
So, do you have a combined loan to value that you stick to that there's just like the do-not-cross mark for your investments?
Ellis San Jose 30:54
It really depends. And I know that's kind of like a lawyer answer.
Aaron Norris 30:58
That's a lawyer answer. Yeah.
Ellis San Jose 30:59
Yeah, but usually I'm around, you know, I don't like to go above 70%, you know? And if you're going, you know, further and further down the collateral, like, if you're in a second, then it start, you start to want to drop that a little bit more, because you have a little less control over the, what happens in the the senior lanes.
Aaron Norris 31:20
And Martin, how about you the on the on the buy side? How what data are you looking at? You've mentioned the collateral, but I mean, when you're doing nationwide, that can't be easy.
Martin Saenz 31:30
Yes, so we'll we'll look at it fair market values initially just to kind of get a gauge and I know that right there means why like, we're looking at a number of different data points, you know, online resources, reality track, you know, getting you know, all various resources, but we're actually a little less concerned on the fair market value. So so we're because we go for fair market value, we want to understand lien validity, ownership and then you know, So once we get kind of past that, then we're going to go deep dive into credit report and some other, you know, tools where we're understanding the borrower's ability to pay within and so but at the end of the day, we're looking at cumulative loan to value on the junior lien side. So, if you know if the first mortgage is that $70,000 and our mortgage is at $10,000, as a junior lien and property's worth $100,000, then we're at you know, 80% cumulative loan to value. So we're, we're safe that way. So we will buy loans that have full equity coverage, in that case, that's full equity coverage, all the way to partial equity coverage. So if if the first is at $70K, the second's at, you know, 60 k, in the property's worth $100k will will you know, $30k of my $60k lien is covered with equity. So I have 50% equity coverage and we're okay with that because At the end of the day, if we're true to our if we're true to you know how we've been trending, we're only going to take back that property less than 5% of the time. So it's almost always going to lead to a loan modification.
Sean O'Toole 33:19
We're gonna change your life when we launched nationally here in the coming days on on the due diligence side. So you have that to look forward to.
Martin Saenz 33:28
Well, you know what I'm gonna I'm gonna extend the courtesy and I'm really appreciative of Ellis bringing me on with you guys. I'm gonna have you I run the largest note investing Facebook group called Note Investing Made Easier. I'll bring you guys on to discuss your platform and showcase it for my group.
Sean O'Toole 33:47
Awesome. Awesome. Yeah, excited to do that. We definitely you know, it's it's a small niche market, right. It's a very small part of our overall business. But you know, from the folks that, in your space that use it, and this is one of the reasons we, you know, we're excited to have you on is, you know, they definitely love the service and we've got a small hardcore group have a view on the platform now and, and so, and it's just it's such a fascinating, you know, thing and you know, just no buying that these things are being traded, you know, they're they are they're assets, right, and they're their own own right. Let's talk about some of the, the risks, right, you know, we saw a lot of this thing, you know, with people saying that, you know, the note was invalid, like, all the way up to the claims that like, well, mortgages aren't real because banks just create the money out of thin air and therefore, I don't have to pay it back. Like, you get some real you get some nutters out there on some of these things like, and I imagine buying notes occasionally you're going to deal with some of that.
Martin Saenz 35:01
Yeah, I think the risk, I think the biggest risk in our spaces is licensing is, you know, being compliant. Compliance is where things are headed. So it's one thing where, you know, we're a lot of us on the smaller size. You know, we have Yeah, we have some asset managers, we have a team built up. However, we have to stay compliant. So we have to go expend money and human, you know, a way with time and capital to make sure we're compliant. We're getting audited, our company's getting audited on an ongoing basis, financial audit, not an IRS audit. And so you need that and you need bonding and all these other requirements in various states. And it's really a full-time job for someone to make sure that you're compliant in all the states. So but if you don't do that, and you go with a nationwide presence that could really hurt you. It's one thing if a bar says you know, they give you a You know, debt validation letter, and they're like, prove it, right? That's one thing and you're like, you go, and you send your collateral in and you ship your collateral to the courthouse and all this other stuff, and you prove it. But there's another thing to say, Hey, I'm actually not licensed to be, you know, pursuing a foreclosure case on this note right now
Sean O'Toole 36:19
What is that bar? Right? Like, cuz, you know, I sell you my house and I carry back a note, I don't have to be licensed, right? If I buy that note from that seller, do I have to be licensed? Is there a bar like, and probably varies by state, right? Like.
Ellis San Jose 36:33
It is by state
Sean O'Toole 36:34
I remember something like in California like it being more than five, but maybe that's on flips? I don't remember. Do you give us an example of what that looks like? And at what point do you have to go through all the licensing and compliance?
Ellis San Jose 36:47
Well, as you said, Sean, Martin knows better now since he's more exposed nationwide, but you know, depending on state to state there are certain states that in many cases, they treat anybody that has bought institutional note on the secondary market, they treat them just like a bank and hold them to the same standards.
Sean O'Toole 37:07
Suddenly, Wells Fargo.
Ellis San Jose 37:08
Yeah, so so I may bought three notes in Atlanta. And then all of a sudden I have the Attorney General saying, where's this? Where's that? Where's this? And then you're just like, wow, I was gonna make you know $20,000. But I've spent all of that in compliance. Right/ So that's one of the things you have to be aware of when you're going nationwide.
Aaron Norris 37:26
Well, especially when you're dealing with owner-occupied I mean, you're you're being regulated at the owner-occupied level it was gonna ask it so I was asked, I was curious if you were like in the state of Florida, I'm licensed in California, in Florida. In Florida. You can be licensed as a lender or broker or a servicer. Martin, are you are you a lender so it captures the originator bucket and the servicing bucket.
Martin Saenz 37:52
So it depends on the state. So just like give you an example. You know, we went through an audit cost us two 180 thousand dollars, it took six months to get. And we paid 2500 to get registered in Illinois for our mortgage license lenders license. And so However, in Ohio, we're registered for our servicing servicers license. So various states have various requirements. So, but what I'll say to all that is that it's not, it's not that this should deter someone from coming in the space and starting a business for themselves, like, like Ellis and myself have done. It's just to say that if you're going to do it, you you need to understand the requirements and the resources that are going to need to go behind all this to do it correctly. Because if you shortcut the process, you're going to get caught. It's going to catch you up at some point. Where do people go for that level of information, you know, so you want to start off a note buying like, you know, I think you mentioned a Facebook group A minute ago or their clubs are there What are what are the good resources? Where would you point people who want to, you know, dabble in this business maybe? Or go after this business? Where do they start? Or do they go look for that information? I think the best thing go ahead, Ellis
Ellis San Jose 39:14
No, I was gonna say, That's why I brought Martin here because I think he's one of the, one of the most professional people I've met at this level that really helps people get from the ground up to, to, you know, up to speed. So he's, he's very good at that.
Martin Saenz 39:27
I have a mentorship program, but I only mentor a handful of people every six months. So I'm not like the go to source for like a Walmart operation for loads of people coming in the space. I would just suggest that obviously over educate, right, learn as much as you can read the books and everything else. But at the end of the day, I believe wholeheartedly you need to pay someone who's successful. Whatever you need, whatever it takes whatever they need, if you're very serious and committed to this you know, if you want to go start, you know selling sandwiches, you're going to go pay $200,000 to Subway and get a building space, you're gonna learn to take all their systems and do it correctly. So go find someone who's successful in the space, see if their model resonates with you and your objectives and see what you need to do to ingratiate yourself or to, you know, build yourself into what they're doing. But it's going to cost you time and money.
Sean O'Toole 40:28
Yeah, I agree. 100% is is how I got started in, you know, flipping foreclosures, right. I went out and found, you know, a guy who's great, I think he's probably one of the best ever, and I learned a ton from him. And, you know, foreclosure radar on property radar probably only exists because, you know, I met him and, you know, learn the business from him. So, yeah, it's good, good piece of advice.
Martin Saenz 40:53
You have to come with something of value. That's like the number... because you get so many people and God bless everybody, right? They want To be better and do better, and you know, that's great. However, you have to know that if you're going to come to someone extremely at people that are doing well are very busy. And so you have to bring some value proposition for you to catch their attention.
Sean O'Toole 41:16
Put your game on, think about your pitch your value proposition, what you bring to the table and get that down. Practice it with somebody even. That's a really good mentors are important, but you know, getting really good ones takes a good pitch. For sure.
Martin Saenz 41:32
I think Ellis is ready for mentorship to go mentor people I think he
Ellis San Jose 41:38
Tell that to my wife and kids, they're like, oh, what are you doing now?
Aaron Norris 41:41
Yeah. We belong to the California Mortgage Association which is private lender that predominantly focuses on non owner-occupied but there are people who focus on owner-occupied and then the American Association of Private Lenders. That's put together by think Realty, they do a really good job and they really focus on mind-numbing regulation. Honestly, I don't know how I would have stayed compliant because I don't have you know, there's no in-house compliance and there's not a lot of attorneys and CPAs in the space. Martin when we went to go because go into Florida, we have to have our financial audit every year. It's not, it's what's that $2 and 15 cents and what's the process and procedure around it? This is a really, for me, it's a really important data point. Because if you want to get in the business and you're growing if you don't set up, right, you don't know how you're going to be regulated. It can be really painful and really expensive. And it's not based always on volume depending on the state. It's triggered like automatically so if you don't know that going in, ouch.
Martin Saenz 42:42
Yeah, I in in the book, um, note investing fundamentals. I I came out with three pillars of note investing that I think is very significant in the space. The first one is mechanics. And that's actually how most people come into the space. They come in as, as the car mechanic, right, they want to learn, they want to buy a note, they want to vet the note, they want to, you know, work out the note. And that's, you know, doing the day to day operation. Very few focus on identity and kind of setting up your business structure so that it operates as a business versus a sole proprietor, and the other one is community. So in trenching yourself and the right community or cultivating the community around you, that's going to lead you to what your aspirations are. And so all those three pillars need to be worked simultaneously. And and you have to have, you just have to have a massive amount of effort and you have to have access to capital to do it, right. Whether it's your own capital or someone you know, who's partnering up with you, but it's not worth it in the risk is very high when it's done incorrectly.
Sean O'Toole 43:51
And Martin so, earlier when I asked like where would you go like you didn't mention the book, but now it sounds like I just picked up you wrote a book on how to do this, that, that right?
Martin Saenz 44:03
I've written three books.
Sean O'Toole 44:05
Martin Saenz 44:06
On note investing, and I just published a book Cashflow Dojo on building multiple streams of income for yourself. And I published that in June. So I have five books that I've written in whole.
Sean O'Toole 44:18
And Aaron, you'll link to those in the show notes. And real quickly where do people go to find those those books?
Martin Saenz 44:27
You go to noteinvestingmadeeasier.com and and my books are there and thank you.
Sean O'Toole 44:33
Okay, yeah, no, great. That's good stuff. Should we move on to the, the so due diligence, right, you're looking at the value of the property, you're looking at the other liens on the property, you're looking at the quality of the borrower to the degree you can, right like so those are kind of the key, the key pieces and then what about the like the note itself like how it's written in the the text in it, right? Like what is this?
Martin Saenz 45:02
I was just gonna say collateral review is is significant it's it's actually the part that's that's missed a great deal you know there's a lot more to collateral review than just are all the pages initial than the documents signed and notarized on the back end there's there's a lot more to the review process but I'll let Ellis jump in on that.
Ellis San Jose 45:22
Yeah it's much easier for me because I'm you know, dealing with kind of a one-off note versus a bidding on a pool where there's, you know, you have a timeframe, well, you know, we're going to need your bid and you know, 13 days and here are, you know, 300 notes, you know, now you have to have you know, now you're kind of poring through this stuff. So, like, I note that I just I bought last month, you know, you review the note you make sure it was underwritten correctly, that it it has, you know, it wasn't insured, you know, a lot of basic things like that because, you know, the soundness of the note is really going to affect the the value and you have to have the experience to know, well, if there is a flaw in the note, how do you correct it? And what's the cost of correcting it? So that makes it a stronger note.
Martin Saenz 46:09
And there's law firms that that there's law firms and document preparation companies that will perform full blown collateral reviews. And they'll provide you exception reports. So, you know, everything that that needs to be cured. And and from that you get to make a decision, do I close and just put on their, you know, you know, side agreement for for corrections to be made post closed? Or do I require some of the cures to happen, you know, prior to closing, but um, yeah, when you buy in pools, you need to have it professionally reviewed. That's the only way
Aaron Norris 46:46
That doesn't sound like something I could find on Legal Zoom.
Ellis San Jose 46:49
Martin Saenz 46:52
No, no. And then and then there's also servicing comments too. So you have to have the you have to have you have to understand that, you know, The notes were serviced with the licensed servicer prior to your purchase. And so, during the servicing process, you know, the borrowers have called in they have given third party authorizations, they have done pay off request. They've told the servicer they don't know the money, you know, all these comments, you need to have a grasp on, they all need to be pulled together. So you can analyze all the servicing comments to make sure that you know not nothing's gonna bite you post close.
Aaron Norris 47:31
Now, as a servicer, both of you guys have to comply with state rules when it comes to foreclosure. Correct? Especially because it's owner-occupied.
Martin Saenz 47:39
We I use licensed servicers. So we partner with licensed servicers, yes.
Ellis San Jose 47:45
I don't know. Do you service all your own notes. I service them initially if they are non-performing. And then once I get them performing that I put them with a servicer.
Aaron Norris 47:54
Okay. Yeah. Yeah, that's a whole nother process. Isn't it? I'm reviewing a lot of legacy loans from FHA and Fannie Mae and looking at all the stuff that they did. Speaking of what's the legacy of some of the notes that you are buying are these stuff that are these things that were originated before you know, during the downturn way before newer?
Ellis San Jose 48:18
It's a mixed bag for me I'm seeing a lot of like notes that are just fairly recent last few years and then once in a while I'll have you know, someone that has had a note forever and ever and it becomes inherited by you know, someone else in the family just they just want to cash out of it and you're like, Oh my gosh, you know, this is like a 15 year old note and it's gonna mature in the next couple of years but they just you know, they just want out.
Aaron Norris 48:41
Sean O'Toole 48:43
What about you from the hedge funds? What do you what do you what is the typical note look like? Who who originated it? Where did it come from?
Martin Saenz 48:50
So, um, you know, everyone you know, all the top 10 lenders you know, Wells Fargo, Deutsche Bank, PNC I'm you know, City, you can just run down the list. We we've bought paper from all of them. And and so origination dates, you know from 2006 all the way to 2012 that timeframe on average, the period of default is about four years on the notes we purchase, we actually look for notes that have have a little bit of longevity with the default, though, with the default periods because if they don't, then we don't that's our leverage really is is to work with the bar and get them back on their feet is is the past two interest arrears it's been accumulated, but also too if a borrower defaulted at some point they had some life occurrence, right divorce or medical or love relationship, divorce. And so you want some period of separation between when that occurrence took place and when you're buying the note, because, you know, you know, you know, folks need time right. And so if you're buying it right after that occurrence, and it could set you up for failure, but a good four or five, you know, year period of time, we find that people are back on their feet in some capacity and have more ability to work with us. And then you just need somebody who's willing to work with them, which is, so you come to the table is awesome for them versus the guy that says, hey, you're
Sean O'Toole 50:21
$30,000 behind, write me a check. You can come in and work that out with them in a way that's affordable. So that's a win-win.
Martin Saenz 50:30
It's a legacy play. So we..
Aaron Norris 50:36
Oh, no, we lost them. Hey, Ellis, how are you? Are you preparing for distressed assets at all?
Ellis San Jose 50:47
That's a great question. I think that there are there is going to be a stressed assets but I don't believe it'll be the same as the last time. I think that you know, I'm in a place where I, My intention is to build a war chest just to have more access to opportunity. You know, however, I'm not, I'm not going to pass up good opportunities if I see them now. So if that makes sense, there's actually something that came across just last month where I was like, Well, here's No, it looks pretty solid. But I was such in fear of, well, what if I'm going to, you know, the fear of missing out? What if? What if I just raise cash and just just wait until next year? But, you know, I thankfully have a good metric, it lets you know, what are you waiting for? This is a very good note. And so I went ahead and bought it. And I'm glad I did. So you just I think you have to have a very discipline approach. And with just a little bit of caution, because I think, you know, there's a lot of turmoil that has to be resolved. And I think it'll take a while before that happens.
Aaron Norris 51:45
That's a really good point about the emotion and the FOMO. And what data do you look at to not be fearful when everyone's going so crazy?
Ellis San Jose 51:54
Yeah, I mean, you know, I, I looked a lot at what type of volume is being done in business. Because like right now and this is what I love about when I hear Shawn speak is that he kind of cuts through the the press and all the the the the pomp and circumstance when you see prices going up and a ton of low volume of real estate, that means something different than if there's uh, you know, if there's the regular type of volume with price increases, that's much stronger market, right but when you have limited volume and the price is going up on that you've got to be wary because that can be a false signal of things being appearing better than they really are.
Aaron Norris 52:35
Interesting. Do you do you worry at all about like the HERO Program in California where you know, you have these players that were putting sometimes really large loans on property tax roll, are you catching those are you seeing that very often that because you have zero control that shows up six years late, you know, six months later when it gets recorded, and the pushes you can 70% combined loan to value the 90%.
Ellis San Jose 52:58
Yeah, that is a horrible approach. Grant I cannot believe that actually Yeah, I do look out for those I mean if there is you know if there's any recording of that on a particular attention that and I have to come up with some sort of discount because it is kind of a wild card right I can really bad
Aaron Norris 53:19
Because it affects the sales side too. You have a lot of lenders that won't touch it unless that's paid off. Just a little scary and that I was I complained because we have a lot of originators that really got strong here in the Inland Empire. Mike, if it's such a good idea, just go into Junior lien position. You're at hard money rates anyway. They would just be like, no.
Ellis San Jose 53:39
That's the true test right?
Sean O'Toole 53:41
Yeah. Folks plan at home, right. The HERO loan is for certain certain investments in your property. And it basically jumps in front of all your other loans which is just kind of a crazy insane like sets aside all precedent. Like, it feels like it shouldn't be like not legal to
Ellis San Jose 54:05
Sean O'Toole 54:06
Loan for this thing and jump ahead of everybody who already made a loan. Right? The way loans are supposed to work. If you get another loan, it goes behind everybody else. It's a lower priority. It's a crazy, but it exists.
Ellis San Jose 54:19
Yeah. And it goes on the tax roll. Right? So it's like, oh, my God, how did they how and who were the lobbyists that got that done? Because it was pretty powerful. Right?
Sean O'Toole 54:28
Yeah. Right. The taxes always get paid. Right. Like, yeah, so...
Ellis San Jose 54:31
And it's usually I usually went to some solar modification that happened on a house and you'll see it. Oh,
Aaron Norris 54:37
Martin, we're talking about in California the hero loan programs that attached a property taxes that the the first and the second, nobody knows what's going to happen until six months later when it gets recorded, and it pushes your combined loan to value and you were never even notified. It's...
Sean O'Toole 54:53
It's an after the fact loan that becomes super senior. Yeah.
Aaron Norris 54:58
Yeah. Are you aware of those And how are you preparing for those?
Martin Saenz 55:05
Gosh, I'd like I think I'd like to hear Ellis's take on that.
Ellis San Jose 55:08
Yeah, I get really nervous. I luckily, I haven't run into too many words, you know, I have to take a position on that. But when I see it, I definitely trying to find out, you know, is this something that you know if I paid it off, right if I pay up to protect my position, so I might put that
Sean O'Toole 55:25
Proptect my equity.
Ellis San Jose 55:27
Yeah, to protect my position, just pay it off. And then if I can still buy the note with that pay off and be in a good position then use will be but I think that's probably the only solution I could think of, because it's a super priority lien there's not a lot you can do.
Martin Saenz 55:40
So so I'm just catching in midways. That's something that will show up on an on a title pull.
Sean O'Toole 55:46
After after the loans been made, yes, but you could buy a note today, and they could get a hero loan tomorrow. And it would push your priority down.
Aaron Norris 55:57
And you have zero control. Nobody calls you.
Martin Saenz 55:59
Ellis San Jose 56:00
Yeah, I mean, there's there's another situation which is similar that in Texas, for instance, there's companies that are authorized by the state to give property tax loans. So for the uneducated I, you'll see, oh, Martin got a property tax loan after so he's in second. He's in third position. I'm in second, so I'm good. But the state allows them to jump ahead of everybody. So you have to know all these things, you know, state to state to understand
Martin Saenz 56:28
Involuntary subordination. Do they notify you at least?
Aaron Norris 56:33
No. That's what's so upsetting my grandparents became did this and it's a really high interest rates, and a lot of general contractors took it and ran with it and they were charging seniors. It was gross. Considering all the you know, Dodd Frank stuff CFPB the ability to repay rules. I have no idea how they got around it. It's absolutely terrible. They've since like, wound it down a little bit. It's not as aggressive but I'm just shock that it's just a an extra layer of risk that our industry just we have zero control over. So I know..
Sean O'Toole 57:08
I'm gonna let you guys finish up on, you know, maybe the exit the various exit strategies. I'm hoping you guys can chat about that a little bit. And, you know, I think we talked touched on them briefly, but I'd love to hear a little bit more on that, unfortunately, I'm gonna have to drop. So I'm gonna leave that to you guys. And thank you so much both for coming. And, Martin, great to meet you. And I'm going to pick up your books and check that out because new buyings I've actually bought a couple and I've actually done a couple of hard money loans. Just more like helping friends out kind of thing than anything serious, but it's I think it's a super fascinating business and I look forward to learning more about it and thanks for being on today that teach me a little more today to and thank you to lso. Alright guys, have a great day. I'm gonna drop...
Ellis San Jose 58:00
Thank you Sean.
Martin Saenz 58:01
Aaron Norris 58:02
So funny. We've never had a podcast with four being interviewed. And that's awesome. Well, let's let's get into the exit side, is it your goal when you're going in that you're always just going to hold it until it pays off?
Ellis San Jose 58:15
That's always my intention.
Aaron Norris 58:17
Okay, that's fair.
Ellis San Jose 58:18
That is that, you know, if I want to hold this long term that if I'm going to buy this note, I have to be willing to hold it long term. So many cases, you're you're, you know, you're, if it's a non-performer, you're renegotiating the terms so that it works for both parties. Other exits, I mean, you know, the uglier ways to do it are to actually foreclose to do deed in lieu or you know, they, they say, you know, Sayonara and give you the keys. There's also you know, a short sale that could happen. And then you know, the other obvious exits are you can also resell the note you get it performing, you raise the value and somebody else wants to buy a performing note. There's also the They actually sell the property in a normal sale or their refinance. I think I've covered many of there's probably more than you know, the hypothecation I think is I don't know if that's technically an exit but that's more of a recapitalization.
Martin Saenz 59:13
Yeah, I think you covered all of them I would just say you could flip a non performing note you know, that's done. Those days are kind of a little behind us because you know, you know, know prices have gone up so you don't have that ability to flip and double your money. Like, like folks used to do 10 years ago, and short sale I think you mentioned something or you mentioned, you know, property sale, but short sales do happen, but they're happening less and less is at people's equity positions of growing so you're getting more full payoffs.
Aaron Norris 59:45
Martin, are you are you being approached? I was surprised a couple years ago, I was approached by somebody that wanted to buy the notes that we created at The Norris Group, and their goal was to package them up, take on leverage. So, if I was originating at a nine, they were taking it down to seven. So as the originator I could keep a 2% spread. They were then taking on leverage packaging them up and selling them as bond-rated paper to pension funds. Are you getting a lot of pressure because the need for yield or to create those kind of assets? I don't even want to call them pools leverage.
Ellis San Jose 1:00:20
Aaron Norris 1:00:20
Martin Saenz 1:00:22
That's interesting. Yeah, no, we don't. We don't go down that road much. And in, it's just what we do is we just kind of focus internally on our model. So we actually don't coordinate or partner with other companies where we're buying performing debt or where we're securitizing the debt and reselling and working on spreads. So we work internally as a cradle to grave solution. It's the same thing Ellis said we keep it till it pays off. So we get the loan in a non performing state. Our asset managers work with the bar To create a payment plan that the borrower can afford, keeping them in their home, and once is performing, then it becomes seasoned. And then we consider that note for a purchase into our Income Fund, which is a 506 c Income Fund that pays monthly dividends to our investors. So that's where we bring other investors into the equation. So that So, so before, so it's really a long term cradle to grave in that those notes once they're performing, they still need maintenance and oversight. And that occurs by the same asset managers that initiated the loan modification originally. So there's a relationship that's cultivated with the bar. It's very deep, and that's a very significant component to our business, versus it just being like, Well, let me modify the loan and hand it off to someone that is across the country that you know, I don't even know myself. It's the same person that modifies If you have a problem, give Susie your call, you know, just like she helped you out initially. And and so it helps um, it really just helps with with consistency of payments.
Aaron Norris 1:02:12
Wow. Okay. I'm gonna ask you a question why you why you re logging on I asked Ellis's question. How do you get? How do you stay out of the fear? There's so much noise in the market, lots of stress, lots of talk about foreclosures. I get asked by the media all the time, and I'm like, Man, what data are you looking at for to keep sane, confident that what you're doing is the right thing to do for your clients?
Martin Saenz 1:02:40
You know, in terms of in terms of, is it..
Aaron Norris 1:02:43
Is it what inflation rate is it median home price, is there any specific data that you're watching? As the market progresses?
Martin Saenz 1:02:52
I look to buy consistently. So you know what dollar cost averaging In terms of investments, so we, we look to buy on a consistent basis and modify loans on a consistent basis. And we look at those metrics very closely on a month by month basis. So if the market dips down, then Nope, there'll be an influx of note inventory and no pricing will go down, we're still going to buy in our consistent pattern. If if the pricing if it becomes you know, fair market values are going through the roof across the country, so no pricing is going up because the quality of the asset, you know, the value has gone up because there's more equity coverage back in the note. So so we're still going to buy we were going to pay a little bit more, but we're still going to buy so we actually don't I pay attention to economic factors, but to me, it's more I focus on internally and the consistency of my process.
Aaron Norris 1:03:56
Well, I've I've chewed up an hour, I didn't go through all my questions, per usual, but if there was one site you'd like people to run into us, where would you send them? Ellis?
Ellis San Jose 1:04:08
I have a note bike site called thenoteguys.com. And that's where you can, you know, you can find some information on me. I also have a networking group called for investors by investors. And you can you can look up on there too for investors by investors calm and you can connect with me there.
Aaron Norris 1:04:26
And I believe you guys will be having some kind of event at the beginning of the year.
Ellis San Jose 1:04:30
We are planning for a January event. It'll be a virtual event, obviously, because of the situation. But this will be our second one. We're very excited to be putting that on. So that
Aaron Norris 1:04:41
I was at the first and it was really really good.
Ellis San Jose 1:04:43
Yeah, thank you. Yeah.
Martin Saenz 1:04:44
What's the name of that event, Ellis?
Ellis San Jose 1:04:46
It is called the Intelligent Investors Conference.
Martin Saenz 1:04:49
And can you you can post it out on my Facebook group so that we can come up.
Aaron Norris 1:04:54
And I'll make sure to link all this stuff too. And then Martin, what's the best way to get in touch with you and find your books?
Martin Saenz 1:05:00
Just go to note investing made easier.com and you can gain access to all my books.
Aaron Norris 1:05:06
Awesome. Alright guys, really appreciate you being here today.
Ellis San Jose 1:05:10
Martin Saenz 1:05:10
Aaron Norris 1:05:11
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