Ron Happe Hello, everybody. Thanks for coming, and welcome to our live cast, back on the air. I will tell you that in the next .... Whoa, the next couple of weeks here we're not going to have a live cast. The ... Trying to get my picture up here on the screen so everybody can see me. During the next couple of weeks we're going to be preparing for our bootcamp to be held in Los Angeles, on the 19th, 20th, 21st and 22nd. So we aren't going to have the live cast. Once we get back then we're going to start into probably the first thing that we'll do when we get back to this is to cover some bankruptcy issues, cover some foreclosure issues after that. We'll get in, maybe, to pricing first, how to price a one-off and how to price a portfolio, and then get into the workout stage. We'll get Sabrina on so that she can participate, and then after that we'll probably get Tyler back again on the fundraising and so on. We're looking for some real interesting stuff.
Again, before we get started, we need to cover the disclaimer, and again this is for educational and instructional purposes only. We're not trying to sell you anything. If you want to buy notes, contact us and we'll prepare a purchase and sale agreement for you, but we're not trying to sell anything on this. It's strictly for education. Let's get started.
Today we're going to talk about how do we enhance notes? For me this creative part of the note business is by far the most fun. I've ... I've been a fairly good math student my entire life. In fact, math was probably my favorite subject in school. But you don't have to be to enjoy working these things out. This business, unlike any that I've ever seen, gives you the opportunity to enhance your return and enhance your profits, simply with the use of a calculator. We're going to go through some of that today, and I hope by the end of today, at the end I'm going to give you a ... Walk you through a opportunity that was sent to me yesterday to do a joint venture with an investor. I want to go through it with you because I think it has some valuable lessons in it.
Let's get started first with this trade here, and let's say that we buy a note, $100,000.00 note, and we buy that note at a 30% discount, and we buy if for $70,000.00. What can you do with that note? The first thing, of course, is that you can hold it for cash flow. You would get a decent return, a very nice return, certainly something better than you can get in the stock market today or from mutual funds, or probably even from real estate investing but there are some other things that you can do with it. One of the best is to take that $70,000.00 note that you purchased, which has a face value of $100,000.00 and trade that note for a property at its full face value.
Let's say that we buy that $100,000.00 note for $70,000.00 and we find a property that we want that's worth $100,000.00, and we trade the $70,000.00 note for the $100,000.00 property. We have, in effect, bought a property at 70% of fair market value. It's even better if you buy this note that's defaulted, and you buy it at 50% of it's fair market value, and you fix it and then you trade that for your $100,000.00 property, and once you have the property you refinance that property for $70,000.00. You've got your money back, and you have $30,000.00 worth of equity in a property and you're ready to do it all over again. That's the fun part of notes.
Went too far there ... All right, let's say we buy it ... Let's say we do this one here. We buy a defaulted note, a first trust deed for $0.50 on the dollar, 50% of the fair market value. Remember when we're buying trust deeds that are defaulted, we're not buying on the face value on the note. We're buying on the fair market value of the notes. In this case the $0.50 on the dollar, the $100,000.00 fair market value, the unpaid principle balance on the note is $125,000.00, but the house is only worth $100,000.00. It's upside down, and the note is defaulted. We buy this note and we work out a plan with the homeowner to reduce the principle down to $100,000.00, and let's say that this started out at a 7.5% interest rate, and as an inducement to get them to start paying again and to give us a little bit of the arrears, we convince them by also offering to reduce the interest rate to, let's say 6%. They agree to that and they start making a payment to us each month, and they make that for six months.
Now, at the end of six months, we have a seasoned loan, and we can trade that note, at let's just say, because it was a defaulted note and we only have six months of seasoning, let's say that we can only trade that at 90% of its fair market value. We trade that $100,000.00 fair market value home for our note. We get $90,000.00 worth of credit from that note that we purchased because it is only seasoned for six months. We've now traded. We have $10,000.00 invested. We refinanced the $100,000.00 home at 65% of its fair market value and we now have cash of $8,500.00, and a $90,000.00 house with $31,500.00 worth of equity. Do you know any other business that you can do this with? When you use a note as collateral for a loan, that is called hypothecation and you're going to hear that quite often if you get involved in trading notes for either property or some other asset, some other commodity. You don't have to trade for a house. You can trade for a car, you can trade for commercial property. You can do all kinds of stuff with this note that you purchased that you cannot do with anything else.
I attended a meeting of exchange specialist and I found that almost ... there were 188 people at this event, and almost every one of them agreed that notes could be used to purchase property that they had listed for exchange. Either a combination of notes and cash, or all notes or a combination of notes and real estate. These are notes, remember, that you bought at a discount.
The note business, I say real estate investing is the second best investment available. The first, being, of course, note investing because, number one, I've never ever had a borrower call me at 2:00 AM in the morning I have had a tenant call me at 2:00 AM in the morning. I've had more than one tenant call me at 2:00 AM in the morning.
Here's a good example of why we would want to buy notes. Let's say that this property sold for $82,000.00, with $16,000.00 down. This is a seller finance note. I would suggest that you look to getting into seller financed notes, not ... You're never ever going to get into seller financed notes at the scale that you can get into performing or non-performing and institutional notes, because there just aren't that many available. However, when you can find them, they can be a gold mine. The reason is that most of your seller financed notes, most of the sellers do not want to deal with defaults. They are not professional at it, they hate it. They don't want to call their borrower and try to get payment. They don't want to foreclose. They don't want to spend the money. They hate the thought of going to an attorney. When you find a defaulted seller financed note it can be a gold mine for you because you're going to solve a lot of problems.
This one here, the property sold for $82,000.00 and the buyers put up $16,000.00 down. Now, that would be very unusual in a seller financed situation because most of the time the buyer doesn't have 20% to put down. But in this case they did. That left a $66,000.00 note, and that note paid down for seven years, and then the people quit paying. We purchased that note for $28,000.00. That is a lower price than we would pay, probably, from an institutional lender, although it kind of fits our pricing model. But we ended up paying $28,000.00 for this. The seller was anxious to get rid of it. We restructured this note on a workout schedule with the homeowner. We reduced the principle payment, the principle remaining to $60,000.00 and we took a payment of $545.00 a months. We just amortized that out over, think it was 300 months or 25 years. The private investor, then, loaned us $39,000.00 ... Remember, we have a $28,000.00 note on a $60,000.00 house, and a private investor loaned us $39,000.00 at 12%, which is a payment of $410.00 a month.
What happened in our wallet? Well, we received $11,000.00 in cash when we closed on that ... The difference between $28,000.00 that we paid and the $39,000.00 that we got. We received $410.00 a month ... Excuse me, $545.00 a month in payments and we are paying out $410.00 a month, so we now have $135.00 a month cash flow for 25 years. We all know that that's probably never going to last 25 years. We're going to get paid out, and when we do we'll pay out the investor also. But an investment like is an absolutely beautiful investment for someone's IRA. You just took $28,000.00, you made $11,000.00 cash and you're getting $135.00 a month in cash flow, either tax free or tax deferred. These are the kind you like to see.
I want to go through this. This is what I was talking to you about at the beginning, about receiving an offer to do a joint venture with someone. This is a house in Florida. The broker's price opinion was $150,000.00 ... Or is $150,000.00. It has a first mortgage of $227,000.00 and the purchase price of that note, the person that wants to joint venture has offered $90,000.00 for the note. We have a ... Let's say broker price opinion, $150,000.00 and we're going to offer $90,000.00 on $150,000.00 property, so we have a 60% LTV. Now, further to that, let's go down a little farther here and we ... This is a little bit of a summary that the person looking for us to joint venture with them gave us. We found this particular note, we personally visited the area and found the property to be well manicured and in a great neighborhood. The previous lender started foreclosure over a year ago. Remember, this is in Florida. It can take two to three years to foreclose in Florida. This is a great opportunity to continue the foreclosure and get paid off in the near future. Well, the near future may be a year, maybe two years. But still, that's ... We're not going to fight that. It is what it is.
If we acquire the house we will see it with a local agent. The timeline for the investment is expected to be less than a year. Profit potential for illustrative purposes only, and not guaranteed, is as follows: Cost of the acquisition, $105,000.00. I don't know where that extra $15,000.00 came in, but let's say we are going to pay $105,000.00. Projected expenses $5,000.00. Projected proceeds, $180,000.00. Now, the broker price opinion for this is $150,000.00. I don't know where the $180,000.00 came from, that's a $30,000.00 difference there. If this home is now well manicured and it is going to foreclosure sale, what are the chances of it remaining well manicured for the next year or two years? In addition to that, in fact, what is the likelihood that it will even be occupied? It could be vacant for a year before it goes to foreclosure sale?
Now, if the broker's price opinion is $150,000.00 and it goes to foreclosure sale, what's the likelihood of it selling at foreclosure? We'll probably get it back. So, you do get it back for $150,000.00 and you have $105,000.00 in it. If you ... I don't see how you can sell this house for $180,000.00 if it's got a broker's price opinion for $150,000.00 because it's already in a good neighborhood and well manicured. You're not going to do anything to enhance its value.
There's another glaring problem that I see with this, and I'm wondering if you see it. If you don't let me tell you. If you do, congratulations. First of all, the projected expenses are $5,000.00. I know from first hand experience that it's probably going to cost us $5,000.00 to foreclose in the state of Florida. And then once we foreclose, we've got to maintain the property. We've got to hire somebody to mow the lawn, to make sure that it's all taken care of, to make sure that it's not vandalized and all of that while we sell it. But the glaring problem that I see here is that there are no sales expenses whatsoever on this house. Whether or not this person that's looking for a joint venture partner has found a real estate agent on both sides of the transaction that will do it for free, I don't know. But I'm looking at $150,000.00 sale price and based upon our knowledge.
If we take the $150,000.00 sale price and figure that that we're going to get a commission of ... We're going to find a broker who will take a 5% commission, which is what we would probably offer on this deal because we'd probably be using a broker that we have used before in Florida, and we would say, "Hey, that person we found on Active Rain, or something quite some time ago, and used them before, and our deal with them is a 5% commission." Then you have sales and transfer costs of probably 3%, so you're going to have 8% total sales cost on this. We're going to get 92% return, is what we're going to net out of this deal. We're going to net $138,000.00. The cost of acquisition was $105,000.00 and the projected expenses of $5,000.00. Let's do this, we'll see where we are ... My mouse isn't working too good today. 1-0-5 ... Down to $33,000.00. Now we subtract the $5,000.00 in costs of expenses that the partner projected, and I'm assuming they projected this for the foreclosure cost. We're now down to $28,000.00. Twenty-eight thousand dollars divided by the money that we have invested, the cost of the acquisition ... Woops ... Gives us a cash on cash return of 27%. A lot different than the case on cash return of 63.6%.
Now, as I'm a joint venture partner looking at this, I'm going to say the partnership would have been 50/50, so I'd have gotten 13.5%. In my estimation, and our decision this is not a very attractive offer.
Now, why do I show you this today? Because this was sent to me by ... This was sent. Now, I'm not the only person that received it, but it was sent out looking for joint venture partners by someone who has paid at least $15,000.00 to learn this information. When I'm looking at this, I look at it and say, "I think of what this person does not know." That scares me. I would be very ... There's no way that I would invest in this note. There's no way I would buy this note at the projected income that is on there today. There's no way. I mean, if I'm getting ... If I'm paying a broker's price opinion and then not using it, I'm $30,000.00 off. That's a big difference between what the broker says he can sell it for and what the investor says he's going to get for it. It just doesn't pencil out to me. There were two more on this.
My point is that if you're going to get involved in this business, you need to know it. You need to know it 100%. You don't want to send things out that are not supported by the numbers, and you can't make a mistake. Once you make a mistake like this with an investor, it's unlikely that investor's ever going to come back to you again. In our boot camp, we'll go through all of these things. We'll show you, first of all, how to enhance it like we did on the first note. Secondly we'll show you ... Let's say there's a lot of $10,000.00 notes out there that you can buy, and the thing about $10,000.00 notes, if you're buying a seller financed note that's $10,000.00, it's usually because the seller really needs the cash. Those can be discounted quite handsomely. For example, you can by a $10,000.00 note for $6,000.00. We can show you how to turn that return into 75% return. THere's just so many things that you can do. We're going to spend a whole morning, or if not a little more on how to enhance these, whether they be loans that are seller financed or whether they're institutional, whether they're defaulted or whether they're performing. One we have that note performing, what can we do with it to make the returns just absolutely spectacular.
I encourage you all to come to our bootcamp. It's going to be in Los Angeles. It's limited to 50 people. It's going to be at the Four Points Sheraton at the LAX Hotel, March 19, 20, 21 and 22. It's going to be four full days with your teachers being me, Tyler, a licensed attorney who's going to cover all the legislations. Dodd [Frank 00:27:19], licensing requirements, debt collecting and maybe very important, capital raises, private placement memorandums, managing a fund, all of the intricacies of this business that if you don't know them can get you in trouble. He'll be there to answer your questions. Sabrina Allen, our executive vice president for asset management will be there to tell you how to do your workouts to cover what happens in bankruptcy, what happens in foreclosure, what you cannot do, what you can do and how to put a procedure together of how you're going to collect your debts. Ingrid Maddox, our Vice President of Servicing will be there to talk to you about servicing and how servicing is regulated and what you need to do as a servicer, even if you're only servicing one loan. Then Chrissy Jones, our President will be there to discuss with you how we actually do business, what tools of the trade we use, what software products we have, how do we find notes, how do we price notes.
You're going to leave this bootcamp knowing what is going on in the note industry and how you can participate at a very, very high level. The price is $2997, and that is fully refundable on the purchase of a note. If you buy a note from us, we will deduct the price of the seminar. In effect, the seminar will be free, and you'll have the opportunity to buy a note. I think one of the things that you really need to know is that this note business is a learn-by-doing. It's kind of like playing golf. You can read all the golf magazines that you want, you can go to all of the ... You can watch videos on TV, you can watch the pros play on Saturday and Sunday, but golf is a game that you have to play to learn it. You can't learn it by a book. The same thing happens in the note business. You can go to all the training that you want, but in order to really do it and learn it, you have to own a note. This gives you an opportunity to do so.
Thank you. Again, for the next couple of weeks we're going to be off. You'll get an email when we're coming back, and we're going to really dive into the nitty gritty of owning a note.