Ron Happe: Hello, everybody. Thanks for coming today. Today I'm going to do something a little bit different. I had a very interesting phone conversation and conference call at the end of last week. It just brought to light some of the things that people are asking and questions that are being asked about this business of note investing especially the arena of second defaulted notes.
This conversation lasted a couple of hours. We had a really good conversation. It was very enlightening. I thought maybe I would share that with you and share some things that I have researched and looked at. In relationship to that call and answering that investor's questions, let's first get this disclaimer out of the way. This presentation, again, is for educational and instructional purposes only. We're not making any offers to sell any securities. We're not offering to sell notes or anything else for that matter. So to have that out of the way, let's get started with our discussion today.
What I'd like to do is just share a lot of information that we talked about with this investor. This person was looking possibly to get into the note arena and was very concerned about the risk involved, as he should be. This person had recently sold a significant size business, had quite a bit of capital to invest. And was looking at notes as utilizing part of his investment funds and creating a note portfolio of buying non-performing notes.
And he was interested in the seconds, but was very, very concerned about the risk involved. So our conversation was mostly concerning the risks of investing in delinquent seconds and just what would it take to make him comfortable in that arena. Now, all we can do is provide education, experience and so on. If that is not something that can make you feel comfortable, then I can't make you feel comfortable. But what I thought I would do today, and because of that conversation with him, I looked around and I did some research over the weekend and put together a little presentation, because we have a lot of people that get on these live casts that are brand new.
When I talk to some on the phone or if I talk to them in person if we're at an event or something, one of the big questions is, how do you manage that risk? Well, we don't feel that the risk is that much different than the other risks that are in the market. One of the things that I'd like to show you is, first of all, there are trillions of dollars locked up in IRAs, and in 401ks, Keogh plans and so on. By a significant, large margin, most of those funds are put into mutual funds. One of the things that people are not aware of, is the risky nature of mutual funds. I just wanted to point out that 96% of mutual funds do not match the index that they follow.
For example, on the screen right now is the return for the index, the S&P 500. Now if you're not familiar, the S&P 500 is, you can buy that index. And that index would include 500 of the largest companies in the country. You could buy a piece of each of those. And that index, if you look across the top, you'll see that it had a one month return of .23 of 1%. It has a three month return of 1.24%. A big year last year, 16.25%. The three year average, because we've been on an upswing in the stock market, 17.31. For a five year average of 16.27, and a 10 year average of 7.79%.
So why would I show you this? Well, over the last 10 years, the S&P has had a return of 7.79%. Year to date this year, we're down four tenths of a percent. But the important thing is, is that I researched this and it showed that according to Forbes magazine, 3.7% fees are attached to the average mutual fund. So you may be talking to a mutual fund and they'll tell you that the fees for their mutual fund is 1%, however, usually they're not disclosing all the fees and the fees could run as high as 7%. But on the average, Forbes Magazine says that the average fees for a mutual fund are 3.7%.
Now, what's important about that? You might think 3.7%, so what? That's not much. However, keep in mind, that's a compounded rate. Even 1% is a compounded rate. What do I mean by compounded? Well, let's say that each year you grow your portfolio. And let's say you grow from $100,000 where you were paying 3% to a million dollars where you're paying 4%.
If you're paying 3% on a million dollars, you're paying 30,000. Or if it's 3.7%, you're paying $37,000 a year in fees. Now, that may not sound important, but that compounded over the course of 20 years can mean as much as $3 million in a fund versus, let's say one that only had 1%. So fees do matter and they matter a lot.
Keep in mind that only 4% of all the mutual funds will match this return. 96% will not match the return, so you would be better off just putting your money in the S&P index and letting it sit.
Here's the problem. If only 4% equal the index that they are following, can you pick those 4? Can you pick that 4%? Now there are over 10,000 mutual funds. Can you pick the 4% each year that are going to exceed the index? The problem is, that four change each year. So it would be virtually impossible for you to pick the 4% that are going to perform to the index each year.
Over the last three years, these are the funds that were the top. In this case, we've got 7 funds listed there. These are the ones that provided the top three returns over a three year period. Keep in mind the top one, the Profunds Biotechnology Group. These are the ones that performed the best over the last year. And that Biotechnology Ultrasector Profund was the fourth highest. In the three year, it's the first highest. But no other fund is on both lists. That's the only one that's on both lists. Could you have been lucky enough to pick that?
Here is six months. These are the top performers for the last six months. And if you look at it, you'll see there are no funds from the other two. It would have been impossible for you to pick the fund that performed the best in the last six months, the fund that performed the best in the previous one year, and then the previous three years. You couldn't have done it.
Let me make an analogy here. I'm sure you're all familiar with the game blackjack where the objective is to get a score of 21 from your cards. Now, you all know that as you're playing blackjack, if you're dealt a hand and you go over 21, you lose. You lose even if the dealer goes over 21, because you lose first. So if you were sitting there with 20, let's say you had two jacks or two cards worth 20 that you were dealt, and the dealer was sitting there with a face card showing, the dealer had 10 showing, would you take a hit? Would you take another card if you had 20? Probably not, because you realize that the only card in the deck that you could possibly win with that you could not bust would be an ace.
Well, the chances of you getting an ace are 8%. Compared to your chances of selecting a mutual fund of being 4%. You're far better off drawing to 20, than you are trying to pick a mutual fund that's going to beat the index.
Now, the poor person who was in a mutual fund in 2008 and was ready to retire in 2008 and saw their portfolio decrease by 50% was really in trouble. That's the problem with getting into a mutual fund or getting into the stock market. If you're not aware of the risks and something happens, let's say that you're in a balanced fund. And you were in a balanced fund in 2008, where they balanced you with stocks and bonds. They both went down, and you lost 50% or more of your portfolio. If you were ready to retire that year, you were finished and probably did not retire.
So, let's say that we have the opportunity to take a portion of our portfolio and put them into non-performing second notes. Let's also assume that we pay $.14 on the dollar. In that case, we would purchase $714,000 of unpaid principle balance. If the average note that we purchased had $102,000 unpaid balance, we'd be able to purchase seven notes.
Let's further assume that, in our portfolio of seven notes, over the course of a period of time, we're able to work out three of those notes. And we get wiped out on four. And we get wiped out totally. Now at some point in our live cast, we'll cover what can go wrong. You'll see that it'll be unlikely that you'd ever get totally wiped out. But let's assume that you do and you get wiped out on four of them. Three of them are worked out.
So, here's our assumption. We have an unpaid principle balance of 102,000 on each of the notes. And each of the notes, we have to have a common ground for us to work, but if each of those notes had a original payment of $758 per month, and they were delinquent for quite some period of time, now we're talking about the three that we actually work out. We work out payments with these homeowners that want to stay in their house, and we work out payments of $400 a month. The original loan had a 6.5% interest rate. We talked to the homeowner, we say, "Hey, look, Mrs. Homeowner, we will gladly accept $400 a month on your balance of 102,000. And we're only going to charge you 2% interest. We're going to reduce your interest payment to 2%. Now, in order for us to do that, Mrs. Homeowner, we'd like for you to pay $5,000 of your arrears." And in most likelihood, this note is going to be delinquent for three years.
The arrears are going to be somewhere in the $20-$25,000 range, so we tell them that we will accept $5,000 and wipe out the rest of those arrears. And that we will accept a payment of $400 a month, which is almost 50% less than their original payment.
If we get total payments to pay off the UPB of $400 a month, with a UPB of 102,000, how long will it take to pay off that note? Well, let's do that calculation right now? We're going to solve for N. We have 2% interest. We have $102,000 present value, and we're going to pay $400 a month, which is a negative number. We're going to pay that out. So how long will it take us to pay off 102,000? 332.31. We round that up to 333 months. All right?
So, if we received $5,000 in arrears from each of these loans, that's $15,000. If we subtract $15,000 from the amount that we paid for the notes, 100,000, it leaves us an $85,000 investment. I hope everybody can follow that. We have 15,000 subtracted from the $100,000 that we paid out. We've received 15,000 back in. And we've got $400 a month coming in on those three loans. That's $1,200 per month, or $!4,400 per year on our net investment of $85,000. That is a 17% return, even though more than half of our notes were wiped out totally. Not a bad return. Certainly, it has kept up with the S&P index and there's no fees on this, because all your servicing fees would be added to the payment that the homeowner made. So if there was a servicing fee of $20, that's usually added to the 400 and the homeowner pays 420.
Let's go a step farther. And let's say that that $400 a month payment for 333 months is going to be sold to an investor. So what we would do in that case, is we're going to take the 333 months. And let's say that investor requires 15% return. And the payment if $400 a month. What would that investor pay for it? They'd pay $31,488 for that note. So three times that, is 94,466. We have three notes to sell for 31,488, which gives us an 11% return. Let's say we did that in six months. That gives us an annualized return of 22%, far better than the S&P index.
Now, I don't want to discourage anybody from being afraid of the risk involved in buying non-performing notes, either first or seconds. However, when you know what else is available out there and the risk involved in them, and you compare that with the risk that is involved with non-performing notes. If you are at all good at getting them re-performing, you can match that index or come pretty darn close to it even though you're not collecting on all your notes.
We like to be somewhat conservative when we make our projections. I think that what we've done here today is make a fairly conservative projection. We've not taken into consideration any discounted early payoffs, where $102,000 note could pay you, let's say, $40,000 in a discounted payoff real quick. And two other ones may be on a work out.
We haven't taken into account any short sales or any deed in lieus. We've taken into consideration only $400 a month from only three notes, so keep that in mind. I think that when you really compare what's available out there and if you get experienced, you'll find that it really isn't much riskier than if you were to buy a mutual fund and let somebody else totally manage your money for you when only 4% of them each year match the index.
So keep his in mind. I hope this is helpful to help you assess risk and make comparisons with other things in the marketplace. Now, if we were to do a first, it would be different, but I think the returns could be quite similar on a first. It's unlikely that on a first, you're going to get wiped out totally unless you're just not paying attention at all and the house burns down and the lot floods or whatever. It would have to be something pretty critical to have you get wiped out on a delinquent first.
But this person that we were talking to was more concerned about the risk involved in a non-performing second. So I hope that's helpful and will get your attention to maybe really study and get involved in this delinquent mortgage business.
So, I also would like to just discuss today our four day boot camp that were going to have March 19, 20, 21st, 22nd. We've already started getting signups for it pretty briskly. It's going to be held at the Four Point Sheraton Hotel in Los Angeles. Some of the things that we're going to cover. I mean this is going to be an intensive four days of learning the note business. We'll be talking about miracle math, how to make money with a calculator on the note that you own. We'll be talking about the mechanics of the trade and that will include the firsts, the seconds, performing, non-performing. We're going to talk about sourcing. I'm hoping to have a couple guests there that can help you learn the sourcing. We're going to talk about pricing, due diligence, how do you know that you're paying the right price for a note? We're going to talk about workouts and servicing.
Sabrina Allen will be covering us with the workouts and Ingrid Maddox the servicing part of the industry, compliance and so on. We're going to cover, very thoroughly how to be buyer focused, and that is borrower/homeowner focused. We're going to discuss the tools of the trade, that is what tools do we use in order to do our due diligence and to manage our loan portfolio? I'm hoping to have some guests there. We are not selling anything. However, some of these tools, they do require a purchase. We'll have the people there that can walk you through the tools that we use. If you want to purchase them, fine. If you don't want to purchase them, fine. We're not getting anything for it, but we're going to show you what we use as our software and due diligence tools.
In addition to that, Tyler Hoppe, a California attorney will be covering the legislation that's out there, the Dodd Frank legislation as well as consumer finance protection board. Tyler spends just about full time in his position at our company. He also is a partner at a law firm, but with the time he spends with us is in compliance issues as well as helping people raise funds, teaching them regulation D and capital raising, how to do it and avoid any problems with the SEC. He'll also cover licensing requirements.
It's going to be four jam packed days of note knowledge taught by us who are actually doing the note business every day. So don't miss it, call Nancy King at 888-966-1256 or email at email@example.com. These are recorded. Our live casts are recorded and you can get this information off of the live recording. The slide will be up there. We look forward to having you come. The price of it is 2,997. That can be refunded to you on the purchase of a note. So you can actually come for free. So we're looking forward to seeing you then. Get signed up. We'll be providing lunch every day so that we have the time to network and there will only be 50 people allowed at the presentation. Thank you and we look forward to seeing you and talk to you again next week. Thanks, again.