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The Power of Paper

The Power of Paper

Livecast #

10

How to increase the yields of any non performing note investment.
Transcript

Ron Happe: Good morning everybody and let’s start off by saying Happy New Year. It’s Ron Happe again, I’m glad for your patience. We’re trying to put something together that is a little bit of a change and it’s a little bit of a change because people have asked for it. And so I think what we’re going to do from this point forward is get a little more granular. We’ve had several … well not more. We had more than several, we had a number of requests for us to really get kind of granular in our analysis. Maybe get down to more nitty gritty. Who we are and what we are doing here and why that may interest you.

We think we’ve got some exciting stuff to talk about and for those of you that have been around us for a while, you’re just going to have to tolerate the next couple of weeks because a lot of it you may have heard before. I think it’s still going to be interesting and knowledgeable. If you please would just tolerate us. There’s a lot of new people on the program, and we’ll get into the things that you have maybe possibly not heard of in the near future. Now I think what we’re going to do for time being here, is that we’re going to do this every Tuesday and Thursday starting today, and we’ll do one again next Tuesday, then next Thursday.

We’re going to try to keep them somewhat short. Today might be a little bit longer but we’re going to try to keep them in the 30 to 40 minute range. They’ll all be on our website. So you can go to them and watch them if you can’t see the live cast. But I’m going to ask you now and I’ll ask you again at the end of the presentation to please email us if you have any questions or anything you would like to see on the web cast. I can’t really make you happy unless I know what makes you happy. Please, if there’s something that you really are interested in and want to see, or want to hear or want to take a look at, or you want to figure out, please let us know.

We have to start all of them with a disclaimer. The presentation’s for informational and educational purposes only, and we’re not trying to sell you any securities. We’re not trying to sell you any notes. We’re not trying to sell you any memberships or anything else. This is strictly educational. That said, who are we? For those of you that don’t know us, we are note investors. That’s what we do, and we also provide services to passive investors. We provide acquisitions, we provide workouts, we provide servicing. If the investor so desires, we will divest of the notes for them and we provide consultation.

We’ve been note investors for a long time. I think as we go through this you will see our stuff is if at all equaled by anybody, it certainly isn’t surpassed by any company whatsoever. I’d like to just kind of introduce our team to you and over the course of our time together, in the next days and weeks you’re going to probably meet every one of them because they all have a role in the company, and they all can teach us something about their particular area. My name is Ron Happe. I am the CEO of the company, and I want to give you a little bit of a background about me because I think it’s important to let you know what I’ve done.

I was educated many, many years ago as a teacher. I taught High School and I was a coach, and I learned fairly quickly that I hated teaching. I liked coaching. I coached basketball. I was a basketball fanatic. I grew up only wanting to play basketball. Do nothing else, and I enjoyed that coaching part. I’m going to say I was somewhat successful at it too, but I did not like teaching. After teaching for a while, I was offered a job, I was Business Manager at the school district where I student taught. I thought seriously about taking that job, but I also wanted to go back to school.

I continued to teach part-time while I went to graduate school. Still not liking it at all, but I then was hired by the Maytag Company. Maytag Company at that time and I’m sorry to have to admit, this is over 40 years ago. Maytag Company at that time was a small company. Had 4,000 employees in a small town Newton, Iowa. I was hired by the Maytag Company as a dealer trainer. I would go around, I got to travel all over training Maytag Dealers, and I decided I really like that. Once I left the Maytag Company to open my own business, I came to California, opened my own business with my brother.

What I realized was the reason I liked the teaching of Maytag Dealers was that they like to learn. They were there voluntarily as the basketball team was there voluntarily. That part of the teaching I enjoyed, and I still do today. I like sharing what we do. I love talking about the note business, and I love doing the note business, and I think that you’ll see that shine through as we go through these weeks together. Next in line is Krissie Jones. Krissie is our President. Krissie has an MBA in finance. She worked for a major international investment banking firm, until she had her second child and decided no longer did she want to travel like she had to and work the schedule that she had to work, and wanted to spend more time at more.

She joined our firm, and I will tell you that both Krissie Jones and Tyler Happe are my children and I am extremely pleased to be working with them. Tyler Happe is a licensed California attorney. He also in addition to working with us, has a law firm with a partner, Happe Reed and they work out of the same office complex that we work out of. Tyler is here. He’s been instrumental in designing our legal department, making sure that we’re in compliance with all of the laws and legislation that are out there today and believe me, it’s immense.

Ingrid Maddox is Executive Vice President. Leads our servicing division. Ingrid has a 20-year history with a major bank as a operations officer and running their servicing department, so very, very experienced in the servicing end. We have a mystery person that will be joining us, March 1st. I’ll be making a major announcement on February 1st. This mystery person also has in excess of 20 years’ experience in the business and that person will be joining us as a Executive Vice President, Asset Manager. In addition, we have Brent Stadhart.

Brent is our Asset Enhancement Coordinator and what Brent’s job is, is to help homeowners get modifications on their first, if we own a second to help write new workouts for them to find out what all of the opportunities are out there for a homeowner and help that they can get if they are a delinquent. By the way Brent is a mortgage broker. Has been a licensed mortgage broker for 15 years and had his own mortgage banking company. Nancy King is our Transaction Coordinator. For many of you that have talked to our office, Nancy would have been the first person that you talked to.

She’ll be kind of leaving that role very shortly and being a Transaction Coordinator full time, and we’ll have a new receptionist there to take care of the phones. Larry Canfield runs our pricing desk. Larry has an engineering background and actually was a trader in the Chicago Board of Trade. He’ll be involved in some of this training to show you how he goes about pricing a pool. Kevin Corbett runs our trade desk. He’s also our kind of liaison to the Southern California market. Kevin lives in LA and is kind of circulates down there amongst everybody, to make us known in Southern California market.

Mark Perchaluk is our IT Manager. That kind of gives you an idea of who we are and I’d stuck that team up against anybody’s team in the industry, I don’t care who they are. We’re going to be discussing notes in this business. We’re going to be talking about the different kinds of notes, and we’re going to cover them all. We’re going to cover institutional notes. Now those are notes that are written by the large lenders and regional lenders. Even credit unions, but anybody that’s institutional that’s written a note. We’re going to talk about seller finance notes.

A seller finance note really is not a loan, it is an installment contract, but Dodd-Frank has kind of lumped it in with the lender institutional lender in its legislation and legal ramifications, and so we’re going to be talking about that. We’re going to be talking about performing notes. That is notes that are being paid for. When they were required to be paid, and then we’re going to talk about non-performing or defaulted notes. All of those are going to be that we do all of these kinds of notes. We do them for ourselves and we do them for other investors. That’s something that I think is key to our ability to translate to you this business.

Is that we are doers, we are in the note business every, every day. It’s not something where we own 10 notes and therefore think we can go out and teach you how to do it. We’re going to show you what we do, and if that’s acceptable to you, great. If it’s not, you may be able to learn a better way to do it, and if you do, hey, we’re there. One thing we are not, and that is too cool to go to school. I have purchased and attended just about everybody’s note educational seminars and courses and so on. I have them all. I learned something from everybody. I think that people will learn something from us. Don’t be too cool to go to school.

At the end of the session today, we’re going to make a presentation on something that were put together and I think you’re going to be happy. Our mission at Main Street Capital Partners is to purchase portfolios and non-performing trust deeds occasionally REOs and we purchase some at steep discounts. Then we provide homeowners with creative financial solutions that big banks are unable to provide. We’re going to keep them in their homes and make their loans current. The way that we make money in this business is the way we buy the note. We do not make the money on the backs of the homeowners.

When you’re buying these notes at the kind of discounts that we’re buying, there are so many things that you can do for a homeowner to save their home, and we’ll tell you some of these stories. Before the end of the day today I want to tell you a story about our most recent, what we consider to be victory and it just makes you feel good. In addition then, depending upon what we decide to do with the note after it’s performing, we may sell it, or we may keep it for cash flow. Please I apologize today too, I’ve got kind of a tickle in my throat and I’m drinking water trying not to cough.

I know that there are a lot of people on now that asked that we get down to the nitty gritty of why do people invest in notes and especially why now. I bought a mortgage note in 1991. That was the first one that I ever purchased. I purchased a rental house, our first rental house in 1985, but it was not until 1991 that I purchased a note and then after I purchased that note, I also carried a commercial note and this was my first entry into the note business. We’re going to cover why do we even look at notes, especially delinquent notes, and why now.

Why is this is such an opportunity today. One of the reasons it’s such an opportunity is because what else is available in the marketplace. Here’s what the bank’s current CD rates are. If you put a CD in and tie it up for nine months, you’re going to get half a percent. If you tie it up for 13 months or over a year, you might be able to find double that half percent. 1.01%, and then if you’re willing to tie it up for two years, you could get a whopping 2%. Why would we look at a trust deed then? Number one, they’re secured by real estate. They have predictable high returns once you get them to work out, and they can provide a stable retirement income or just a monthly income.

But retirement income especially if you’re using an IRA or a self-directed 401K or in your pension plan. When you are investing in notes, you also become the bank. You’re just like the bank, and the notes can be a wonderful standalone investment. We’ve almost eliminated any real actual real estate that we hold as rental property, or they can be a real compliment to diversify a buy and hold investment portfolio because if you think about an investment portfolio, the things you really look for there are the appreciation in the property, and the tax advantage that the investment property holds.

Notes don’t offer either one of those, but what notes offer, are number one, extremely good liquidity. If I have a note for sale and I price it correctly, I’ll have it sold this afternoon. In addition to that, the yields are substantially, or should be substantially higher than holding the property itself. What you’re going to learn here is that you can purchase these assets just like the big boys. Just like the hedge funds, the REITs, and the private equity firms. Once you acquire or once you see the ability to acquire, you’re going to quickly realize just how big this market is, you’re not reinventing the wheel by the way.

The secondary mortgage market’s over a trillion dollars a year. It’s been available and used by the banks, this trading of mortgages since 1938. So it’s been around a long time. Why do you want to be the bank? What makes it attractive to be the bank? Look at this skyline. You can look at any skyline and you made your city United States, or even the world for that matter. You’re going to find that the most opulent high-scale businesses are banks. They’re either banks or they’re lending institutions that make their major bulk of their profit from real estate finance.

If that is the case, then why wouldn’t you want to be like the bank? But you really don’t want to be like the traditional bank. The traditional bank sees these mortgages and trust deed defaults as liabilities. In fact they’re carried on their books as liabilities. To us they are huge assets. Only because we know how to take care of them. What makes today so important? Well, everybody’s that’s on here certainly realizes the real estate run-up that we saw from let’s say 2000 until 2006. As you can see at the end of that 2006 period, the run-up almost went straight up. And then what happened?

The real estate bubble burst. And when it did, it in my opinion and many other note investors opinion, opened up a once in a lifetime opportunity for investing in real estate notes that were non-performing. From 2007, the market tumbled and in fact in my market, I live in Sacramento Area, California. Our market went down as much as 60%. Some of these loans that were written during that period of time, people just could not afford anymore. All of the liar loans, the negative amortization loans, the adjustable rate loans and so on, people could not afford anymore.

They went into foreclosure and they became an opportunity for us. Actually this is wrong. The mortgage debt in our company has now surpassed 13 trillion, I’m sorry. It’s hard for you to even say trillion, but $13 trillion in mortgage debt and 9% is now delinquent. Banks do not even consider a note delinquent usually until it’s over 60 days past due. So it’s really even higher than that. Another big reason for the opportunity is the bank consolidation that has taken place in the last 15 years. If you can see this chart on your computer.

If you look over on the right side, you’ll see that four banks, Citi, JP Morgan Chase, Bank of America and Wells Fargo, are the result of the consolidation of the 37 banks that are on the left. Over the course of the 15 years and most of it done when the market tanked, now there’s only four banks left out of all of these lenders here, and the reason that happened is these lenders made bad loans. And in large part, that’s the reason there was consolidation. These large banks here took over those bad banks that had all the bad debt, and they were encouraged to do so because they were offered loss sharing.

The government participated in the loss of the loans that those banks had written, and so it made very attractive for the big banks to take them over and then dump those on the market. These large banks and there are more than just the four that were on that list that do this selling. The large banks sell portfolios of let’s say $50 million pools and up of non-performing notes. The hedge funds that buy these portfolios, they may buy $200 million worth of debt and that debt could be unsecured debt, it could be credit card. It could be auto debt. A lot of it is mortgage debt.

We are buyers of the mortgage debt, and we buy these non-performing notes from the hedge funds who buy from the large banks as well as smaller regional banks, we buy from. We buy them in smaller pools that the large hedge funds kind of power out and sell to people like us, but there is still fairly significant size pools and purchases. So what we do, what Main Street does is we buy at large discounts because the relationships that we have built with the hedge funds and the regional and the regional lenders over the cause of the last 10 years or so. We buy at large discounts 10 to 50 cents on the dollar. We decide on a workout exit strategy. We work those loans out and then we either sell those loans to investors, or we hold them for cash flows if we still have them.

If they haven’t been let’s say sold or if the home owner hasn’t used a discounted payoff to get out of the mortgage. This is basically what we spend our time doing; buying, working them out, servicing them, selling them or holding for cash flow. Here are the exit strategies that are available, and we use them all at different times. We may buy a portfolio and sell it immediately or sell a portion of it immediately just like the big hedge funds do. We may sell 15% of the acquisition that we just made to people that want to buy non-performing debt, but cannot or do not want to buy in the quantities that we buy in. So we’d sell those off immediately.

We also could offer a discounted payoff to the home owner or to the borrower. The way this works is let’s say that we have a $50,000 or so thousand dollar unpaid balance on a note and we may offer the home owner or the home owner may offer to us a 20% payoff. So let’s say that … I’m sorry, a $20,000 payoff, so let’s say that it’s $50,000 note a homeowner has for 1k they can borrow one, and they come up with 20 to $25,000 to take that note out, pay us off. They are now free and clear of that note that we had.

We can work out the note where we get a payment schedules set. We’re going to show you examples of all of these. We are going to do a workout and then once we have a workout and season that note. Seasoning meaning we get it to pay for a period of time, then we would sell that note to an investor at a nice yield or we can work out that note and hold it for cash flow. We’ll see one of those. Often times the home owner just doesn’t want the house anymore. Maybe they’ve already left and we can locate them and they would agree to doing a short sale.

So we would assist them to do the short sale. We do the negotiation with the lender and we would find a real estate agent in the market place to represent the home owner and we would do a short sale for them. We also may accept a deed in lieu if there is nothing behind us, and if we are in a second position or a first position. There is nothing behind us, we would accept a deed in lieu. In rare cases, we’ll foreclose. Let’s go through a non-performing note that we purchase and we sell it immediately to another investor that’s looking to buy non-performing second trust deeds.

In this case we bought a note at the market value of the house was $115,000. It had a first trust deed of 140,000. It had a second trust deed, the one that we bought of 42,000 of which $39,750 was remaining outstanding. We purchased that note for 10 cents on the dollar for 3,975 and we immediately sold it to an investor for 5,167 for a net profit of $1,192 or a 30% return and we did that within 30 days. You do the math, 30 times 12 is a 360% annualized return, not bad.

Discounted payoff. There is another case where a fair market value, the home was below the first $117,000 fair market value of the home. A first trust deed of 168, so it’s upside down $2,000. One thing to really think about today is where the market is today. The market is still upside down. Many, many, many homeowners, if they had to sell today, pay commissions and sales cost, would have to come up with cash to sell their properties. The upside down house is not uncommon. In this case, the second trust deed had a face value of 50,000 and we purchased a note with an unpaid principle balance of 43,509 and we purchased it for $16,000. We accepted a payoff within 60 days of that 43,508 for 25,000. We had $23,140 expenses and net profit of 6,600 or 41.6% in 60 days. Another nice one.

Workout and sell; here is one that we kept and kept it for a while to season it and then sold it and made $8,600 on it and a 74% cash on cash return. There’s one that you can work out and keep for cash flow. The nice thing is take a look at that, annualized return on investment of 49.1%. That happens year after year after year until the note is paid off. In this case, let’s say that that was after 240 months. You got 240 months at 49.1% annualized return. That’s incredible.

Short sale, you guys you can go back to this and look at them at your leisure. This live cast will be on the website, you can see how they’re figured out. We’ll be doing a lot of this math because truly math is your friend in this note game and you need to know how to use a calculator and how to enhance your product by using different techniques and methods to get your cash return higher. Here’s is one with a deed in lieu, again a cash on cash return of 31.2%.

Then a foreclosure; I don’t want you to take a look at this, and those of you who’d not been in the note business think that every note turns out like this. These are not what I would consider to be real homeruns from either a help out to the homeowner or an investment return for us. I’m going to tell you about a homerun right now. This is one that happened to us only two weeks ago, so it’s fresh in my mind, but this is what keeps you coming back and keeps you in the market.

We purchased a note on a home in Virginia, and for about four months or five months, we could not get the homeowner to respond to our workout specialists phone calls, letters, attempts to make contact. We had to file foreclosure. When we did and a sale date was set, that prompted the homeowner to give us a call. Once the homeowner gave us a call, it became obvious to him that we wanted to help him out. That’s one thing you keep in mind. Because you’re buying this at such a good rate, if the homeowner wants to stay in the house, you can find a way to make that happen.

Our workout specialist became friendly with this homeowner because the homeowner knew she wanted to help. She determined that he was a veteran. He told her about his service. She researched the market and found out that there was an ability in Virginia to mitigate property tax. By mitigating property tax, she could save him over $9,000 a year. In addition to that, when she took a look at his financials she thought that he was paying an awful lot for homeowners insurance and just remised that it was probably forced insurance which is a lot higher than regular insurance.

She shopped the market and found insurance for half of what he was paying. He saved another $1,200 a year. Now, he is up to $11,000 a year that our workout specialist found for him. He then is capable of paying us $450 a month on his $80,000 balance. It’s just simple mathematics to figure out and we offered him a 31/2% rate, so he’s paying $450 a month, 31/2% to pay off $80,000 and I think that’s going to take him about 260 months. Once we season that, we could sell that note for approximately $30,000.

Let me tell you, when you save a veteran’s home, you feel good. That’s the kind of results that you can have in this market if you keep your eyes open and you really want to pay attention to the homeowner. One of the most frequent questions we get is how long will the opportunity last? How long are these notes going to be available? Well, one thing that I’ve learned is that I’m not going to predict the future, but I can make some projections based upon the things that we know and here are the facts. These are not pie in the sky, these are the actionable facts.

The US banks late nonperforming residential totals, if you look at the small, black square on the right hand side of your screen, it says residential REO. That is the total amount of real estate owned by the banks right now. That is every bank in the United States. Every bank, every credit union, that’s what they currently own in residential real estate. Everything else to the left of that is delinquent and nonperforming residential notes that are headed in that direction of being foreclosed on.

Does that look like its over? Let me tell you, there’s 28 times, that’s right, I said 28 times the amount of delinquent debt as there is delinquent … Excuse me, REO properties are those properties that have already gone through the cycle and through to foreclosure. One thing that we absolutely know, most of these bad notes, most of these delinquent notes that are on the left side of the black box will not go to foreclosure. Most are going to be sold to investors like us are years left there, at least we think three or four or five.

Residential is just at the tip of the iceberg. This is the same graph, except that this is for commercial property. As you can see by the light blue bar at the far right, that’s the commercial property that’s owned by the banks today. All banks, every bank, that’s it. If you look to the left of that, you see what is delinquent and headed toward that commercial REO. It’s five times. Now that looks a lot better than residential, but it really does not tell the story, the full story.

The reason for that is, is that those loans that were written during the heyday of real estate finance, most of those by very large percentage were written with a let's say 20, or 25 year amortization, but in all due and payable in 7-10 years. It's estimated that between now and 2017, one trillion dollars of notes that were written between 2005 and 2009 are coming due. Because of the balloon payment or the lets say 7-10 year call, and they cannot be refinanced.

They may be current in their payments and likely they are, but when that note becomes due, they cannot reify because the property is worth less than the loan. Those all are going to enter the market for purchase by investors. What's the key to the market? Number one, the relationships with hedge funds and regional lenders to provide a steady flow of loan tools to purchase; if you can't buy any and buy them at a decent price, then all of the other work is not available to you. You have to have some relationships and abilities to buy before you can really get into this business.

The second is you need to know how to do due diligence; you have to know how to price, you have to know what you can make a profit on by the amount that you're going to pay for this note, that if you pay too much, you don't have the ability to make a profit, and you have to have the ability, you have to be either with somebody or have the ability yourself to close and close in a relatively short period of time.

One of the things that has been disturbing to me is the amount of education that I have seen that is absolutely worthless. Somebody buys three notes, or maybe they haven't bought a note at all and all of a sudden they're offering education. Buy my course, attend my seminar and so on and so forth. I have often said, we would never do an educational seminar. I'm getting to the point where I just don't like to travel anymore.

Christy has a family, Tyler has a law practice, everybody is busy, but believe me and this is sincere. I have been asked literally hundreds of times if we would teach what we do. Not theory, but teach exactly what we do. We finally conceded to do that, and I think the reasons are basically just in the emails that I get every day promoting ‘buy my course’. I get emails from people that today they're teaching you how to do notes, tomorrow they're teaching you how to buy businesses, the next day they're teaching you how to get money from overpayments and foreclosure.

Nobody focuses on anything, they just continue to sell courses and you know what? People buy them. In addition to that, I see people paying upwards of $25,000 for coaching, when if you were taught the business … This is a business by doing, you learn it when you do it. Once you have been taught this, you don't need a coach, you can do it yourself. It's not rocket science, I'm not going to say it's easy, but it is simple. You follow the rules, you do what you're supposed to do and you do it right, and you’re successful.

We've decided that yes, all right, we're going to do a four day boot camp, I think we're going to try to set them up once a month, starting in March. We’ll do March, April, May. We're going to do the first one in Los Angeles, the second one I think I'm going to try to do in New Orleans and the third one back here in San Francisco I believe, and we're going to cover everything.

We're going to show you exactly what tools we use and how we do it. We’ll actually do some work on sourcing, where we're going to find these notes, we’ll get heavily involved in the workout part of it. We’ll show you how to the service, we’ll show you what to do with the notes once they're performing. Tyler will spend a day talking about capital raise, regulation D.

Tyler’s done a number of private placement memorandums and operating agreements for raising private funds. He's going to spend a whole day talking about that and the legislation, the licensing requirements, the Dodd-Frank, the Consumer Finance Protection Bureau and just how to keep yourself out of trouble for those of you that want strictly a passive investment. Believe me, I think legislation is coming to the point where you are going to have to be licensed at some point. I can get an argument every day with people who say “Do all this yourself, because nobody cares for your money as much as you do.”

I agree with that, nobody cares for my money as much as I do but there's something to be sad about a professional doing the job as opposed to somebody trying to collect their own money. There are certainly emotions involved there that could cause you trouble. We're going to talk about joint venture opportunities, using your self-directed IRA to invest, we'll have a self directed IRA company there, we're going to have some of the tools that we use actually on demonstrations so that you can actually see them in action. We will be showing you how we actually do the work and what tools we’re using.

We're not going to say “Okay, we've given you the basics, now if you want to learn more, pay us $25,000 and we'll really coach you through it. We're going to show you how to do it and when you leave this four days, you're going to feel comfortable that you know the note business. In addition to that, two things; one, it's going to be limited to the number of people that can attend, and two it can be free. How can it be free? It can be free, we're going to offer you the opportunity to … If you would want to buy a note. The price that you pay for the seminar would be deducted from the price of that note.

I think right now it looks like it's going to be the middle of March, if you have interest, please let us know, we'll keep you informed. We'll be sending out emails and we'll let you know from there. It's going to be a four day, complete four day seminar; we’ll include lunch in there. It will be a good source of networking. I think that … I know some of the people that have asked us our sophisticated note buyers are ready and it would be a great networking opportunity.

If that interests you at all, then we'll go from there. If you if you need to contact us, and I would really appreciate you calling or emailing any questions that you might have. Anything you'd like to see us cover, we're not going to hide anything. We'll be glad to show you what we do and how we do it and who does it here, and so on and so forth. We want to make you feel very comfortable with the assets that you're buying.

Thank you for attending today, we're going to get pretty heavily involved in Seller Finance notes on Tuesday, both from a performing and a nonperforming point of view. One of the big things that we're going to do is show you how to enhance notes that you buy, and how to really get in step with the seller finance laws as they now exist under Dodd-Frank. We're going to cover that pretty thoroughly on Tuesday, we look forward to seeing you then and so until that time again, thank you very much for attending, and we'll see you on Tuesday of next week, same time, same place. Thank you very much glad you had the time to spend with us and remember to be on our website. Thank you.

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