June 28, 2023 • 28 mins
Discover the secrets to navigating the often-confusing world of real estate transactions and title insurance with us, your hosts Justin Bogard and Richard Thornton. Learn from our experiences with title commitments and policies and join our debate on the pros and cons of loans with large down payments and short pay histories versus those with low down payments and long pay histories.
Explore the scalability of newly renovated homes with large down payments and discover why these can be more attractive than notes with a long pay history but minimal down payment. Don't miss this valuable conversation filled with essential information for real estate investors and those looking to build wealth through owning Real Estate Notes!
Resources and links discussed:
- Videocast on our YouTube Channel
- ANB Funds Website - https://anbfunds.com
About the Host:
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Facebook - bethebank
Twitter - bethebank1
Instagram - bethebankpodcast
American Note Buyers - https://anbfunds.com/
Monthly Broadcast - https://youtube.com/playlist?list=PLzc944w1xydt5aLDrrEPHJhdJeDkBjjD4
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Narrator (00:02):
Interested in real estate.
How about wealth?
Well, they go hand in hand, andhere you'll learn all about it.
Welcome to Be The Bank, apodcast where we discuss and
debate the topics centeredaround real estate investing.
Your host, justin Bogard,shares insights into investing
in real estate to create realwealth and passive income for
(00:23):
you and your family.
He'll share stories of realestate investments done right,
walk you through the process ofowning a real estate note and,
most importantly, educate you soyou can Be The Bank.
This is Be The Bank brought toyou by American Notebuyers.
Now here's your host, justinBogard.
Justin Bogard (00:46):
Welcome to episode number 13 of the Be The
Bank podcast, and today I've gotRichard Thornton with me and
we're going to be discussing afew kind of subjects, one in
particular being about titleinsurance, why you need to get
it and what happens when youdon't get it, and there's a
couple of transactions inbetween of that.
We also want to get into alittle bit of debate on what do
(01:07):
we, what are the pluses andminuses as it pertains to a loan
that has a large down paymentwith a short pay history, versus
a loan that has a low downpayment with a long pay history?
Stay tuned, hey, richard.
Richard Thornton (01:35):
Mr Justin.
Justin Bogard (01:38):
Is it hot out there in California?
Richard Thornton (01:40):
No, it's not.
It is a nice day, but we arehaving the weirdest summer.
I mean it's supposed to beright now 90 degrees and shorts
and t-shirts and blah, blah,blah Yesterday.
The last two days have beencold and blustery, and when I
say bluster I mean 15 to 20 milean hour, winds that are gusty,
(02:02):
and you think you were in thefirst days of March.
I mean like, wait a minute,it's cold out here.
That's interesting.
Justin Bogard (02:13):
Yeah, we've been fortunate enough not to have a
lot of wind.
It has it rained a few timesalready, which has been helpful,
but overall it hasn't rainedthat much and we're definitely
having around the 80 degreetemperature every day, with very
low winds, so it's actuallygood golf weather.
If anything, we can take apositive out of it, that's right
.
Richard Thornton (02:31):
You play golf this morning or yesterday.
Justin Bogard (02:34):
I played last weekend.
And how did you do?
I did not do very well at all.
It was a pretty poorperformance, i'd have to say, on
my part.
If that was a day to play skins, you probably would have taken
my bankroll.
Richard Thornton (02:49):
I see Okay.
Justin Bogard (02:50):
Yeah, pretty bad, but I will be playing a few
more times this week, so Well,that's good, That's you know
those of you listening to usbabble on here don't forget to
check out our YouTube channel,american Note Buyers, so you can
see the video stream of thispodcast brought to you by
American Note Buyers.
(03:11):
Richard, i brought up a minuteago in the little opening
monologue about title insurance,We're fortunate enough to have
our friend Brenda Flatter comeon our monthly broadcast that we
do live on our YouTube channeland our Facebook page.
She talked a lot about kind ofthe I want to say generics, the
(03:31):
basics of title commitments andpolicies and kind of just give
us a roundabout idea of kind ofhow it works.
I kind of requested that thatshe do that for us in our
audience because, quite honestly, richard, i was never really
taught about title policies andtitle commitments.
It's kind of just one of thosesubject matters that they just
give you all the documents andyou're expected to know what
(03:52):
you're reading and understandingit.
It's almost like you know Idon't know how to explain it,
but did you feel that way toowhen you first got into real
estate when someone said here'syour title commitment, sir, what
do you think?
Richard Thornton (04:04):
No, i knew it all from the first day.
I knew it all.
Yeah, no, and I still am,unfortunately.
I read through the highlightsand then my eyes start to glaze
over and I say, okay, mr and MrsTitle Agents, is everything
here?
Justin Bogard (04:24):
And they nod their heads to say okay, fine,
What I do appreciate about theescrow agents, closing agents,
whatever they call them atwhatever title company you use,
is that they in my experiencethey often will just they will
give you like Justin, this iswhat we need to clear.
To close, We need number one,number three and number 12 to be
cleared.
And you look at those items onthe schedule and you're like, oh
(04:46):
, i get it, that's easy.
Yeah, so I like that part of it, but it's nice to have her run
through and be like this is theexception, this is what they'll
guarantee.
This is what they won't insure.
Obviously, they're not going toknow if anything's not recorded
at the time that they give youthe insurance.
They can't help that right,that's not their fault.
How unprofessional, richard.
Turn off your phone.
Richard Thornton (05:07):
Yes.
Justin Bogard (05:09):
My gosh, it's like you're a marketing person
or something Could be an image.
Richard Thornton (05:14):
Can you imagine?
Justin Bogard (05:16):
So I don't know if I brought this up on live
before, but I'm in the processof trying to get a piece of land
for one of our trusts And thatpiece of land is being sold to
me through, i would say, like aland wholesaler Right, and land
wholesaler had found this littleparcel and was able to resell
(05:37):
it on seller financing.
So they did a land contract, sothey're actually on the deed.
And then they created a landcontract and the person trying
to buy it is gaining equitableinterest.
They are paying installmentsmonthly until they pay it off in
like three or four years.
Then they get the parcel freeand clear and they get the deed
in their name.
Richard Thornton (05:57):
Right.
Justin Bogard (05:58):
So in the process of me buying this, especially
in my trust, i don't take anychances.
I go through very rigoroussteps.
Even though it's a very lowvalued opportunity meaning it's
like under 10,000.
I still go through a titlecompany and I want to get that
insurance to make sure the titleis clean and clear, right, And
I also want to get kind of aloan policy to make sure that
(06:19):
the lien is in first position.
Again, this is my trust, thisis I make sure I dot on my eyes
and cross my T's because I don'twant any issues in my trust.
Richard Thornton (06:29):
Right.
Justin Bogard (06:30):
So I get a preliminary title report from
the title company.
They list out, you know,several things, and four of
which are the last four kind ofdeed transactions that happened
with this piece of land.
So I look into it and I readthe person I'm buying it from
used an LLC, okay, that's fine.
The person they bought it fromwas like individuals Okay, and
(06:52):
the person those individualsbought it from was an LLC, and
the person before that that theLLC bought it from was another
set of individuals.
So all those transactions,richard, they happened without
going through a title companyand without getting title
insurance.
Now, it's not illegal to not usea title company, right?
You don't get the advantagewhen the deed is changing hands
(07:15):
so many times because you wantto ensure that title.
So, because I want to get titleinsurance, because I want to
ensure that this title is cleanand clear and everyone that it
transferred for no one, canclaim that they own this piece
of parcel, this piece of land inthe future, i want it to be
insured.
So in order for the insuranceto be clear, to close or to for
(07:40):
the insurance title company toensure the title, we have to go
back and figure out how tocontact these people to have
them sign an affidavit Basicallysaying like yes, i was
president and this is true andaccurate.
You know types of things Andthe LLC has to provide.
You know some sort of operatingagreement that shows that the
(08:01):
sign on behalf of the LLC wasactually allowed and able to do
that on behalf of the LLC.
Richard Thornton (08:07):
So how are you going to do that?
Justin Bogard (08:08):
That's a great question.
How are you gonna do that?
So all this happened within thespan of, i'd say, four to five
years in this transaction.
I think there was fourtransactions.
So you have to make thedecision.
Are you gonna make the effortand go back and try to hunt
these people down, skip, tracethem so that you can get them to
sign this affidavit?
And it's really simple, it'sjust a document that reads
(08:29):
exactly what it says, as I was agrantee or the grantor on this
date and this was the parcelthat I was in the transaction
with.
Very simple and they can do anonline note rate.
But the hard part's finding themright.
They were somebody that youknow.
Oh, yeah, i know this person.
Yeah, i can get hold of them.
Yeah, it's easy, but whenlikely you don't.
These people are in Californiaor other places across the
country, and I'm in here in goodold fishers in Indiana.
(08:50):
So you just have to make thedecision now.
A Justin has to if I wanna gothrough with that and try to
figure that out, because thetitle company's not gonna be
able to provide any more helpunless it was closed at that
title company at some point,which obviously it wasn't,
because there wasn't titleinterns, so they can't really
help at all.
So it's just one of thosethings to where you gotta get it
(09:11):
done.
So if this transaction didn'thappen between me and this
wholesale land person, they areon the deed right, this LLC and
they have a land contract outthere with some borrowers that
are gonna pay them and they'regonna pay them off in like four
years.
I think that's what the noteterm is.
So, richard, what happens whenthey pay them off in four years?
(09:32):
Well, you're supposed to givethem clean and clear, equitable
title at the end of the landcontract so you can cancel it
and they become the deeded owner.
So you're gonna have the sameproblem then as you ensure that
title for them.
Richard Thornton (09:46):
So you might as well go ahead, and I mean, it
would seem to me to be easiestto work the chain and go back to
the previous person, theprevious person, the previous
person, because each one ofthose people will have the
other's contact informationright, correct, and, while it's
laborious, i mean in actuality,now that you, i hadn't thought
(10:07):
about this, but I sold a note toone of my clients that had a
defect and it was very.
It was stated Georgia, and instate of Georgia, if your notary
doesn't, notary statementdoesn't say that the person is
(10:29):
basically in the presence of thenotary, as a bank adjust, it's
invalid.
So we had to go through fivelevels of owners to find out who
these people were.
Fortunately, i knew how to geta hold of all these people And
so I sort of became the centralperson to get it all done.
But yeah, it had to be done andit was about a two-month
(10:52):
process.
Justin Bogard (10:55):
So I'm sure this happens way more often than we
realized.
We're not aggressively in thevacant land business to trade
notes or to buy them, but youand I both bought a few And with
this one experience it reallymade me think about it this week
and say you know what?
this probably happens very oftenand there's kind of There's
(11:16):
kind of a struggle here with theperson that is the wholesale
land buyer, because I want to beable to defend them and also
want to be able to curse them atthe same time.
Right, sure, because in theirrunning of business, all right,
maybe they're buying a couplehundred of these vacant landlots
across the country a year Andif you get title insurance on
every single one, that's a lotof money just in title insurance
(11:37):
, right, right, and thetransactions are probably really
small.
Sometimes they're like maybe afew hundred bucks, five hundred
bucks, thousand bucks.
So I get it that there aresmall transactions in the cost
of getting title insurancetotally outweighs the purchase
price of what you're trying todo, right, but like you said, at
some point you're going to haveto get title insurance or maybe
someone else does down the line.
(11:58):
Maybe it's not their problemand maybe that's how they see it
, but it does become a problem,and so I can see the land
business having a lot of issueswith title because of that.
Richard Thornton (12:09):
Yeah, and I think also for this reason and
I'm sure there's other ones alot of title companies won't do
land contracts because you knowthere is the owner is some place
in the chain that can't befound and you know can.
In fact, they can't insure itover it, so they can't do the
(12:30):
deal.
So you know why bother with abunch of smaller deals, right,
right?
So that was my experience andmy epiphany this week You are
learning more and more every day, my son Young grasshopper.
Justin Bogard (12:44):
The grasshopper, yes, some days I feel like this
is the grasshopper more than theother.
Richard Thornton (12:48):
Yeah, sometimes it comes with an oh
crap, you know, right, i feellike how did I not know that?
Let's switch gears to adifferent topic now.
Justin Bogard (13:03):
Sure, we have brought this up in the past and
we haven't really dived into itsuper deeply.
So let's get into a debatetoday and let's figure out where
we land and what side of thefence that we're on.
So in the performing note world, we see notes that have very
large down payments, meaninglike 20, 25, 30% down payments.
(13:26):
And if you're listening to thispodcast and you say really it's
not uncommon to see those largedown payments, it's just you
know they're going to be frommore or less the people that
aren't bankable but they havesizable down payments, right?
As opposed to somebody thatgets conventional financing on a
house in the several hundredthousand dollar range.
(13:46):
They probably don't put 20%down, they probably get like two
mortgages and stuff.
We're talking about the homesthat are probably under 150K.
So you got those people with avery large down payments with no
seasoning buying those notes.
And then we have notes that wehave very little down payment,
like maybe 5% under 10%, buthave like maybe a three, four,
(14:08):
five year seasoning of payhistory on them, right?
So the question is, richard,which note do you prefer and
what are the pluses and minusesto them?
Richard Thornton (14:19):
Well, let's put a little more spin on it,
which is, i know the ones thatwe're you looking at that don't
have any seasoning are alsorenovated.
So if somebody walks up to usand says, hey, i'd like to sell
you a note, there's 25% down butthere's absolutely no
(14:40):
renovation on the property,depending on the condition of
the property, it may or may notgive me pause to buy that note.
And I'm also going to want toknow more about the buyer.
Have they been a renter?
Have they been a renter along along period of time In one
(15:01):
place?
can we get a rental history,payment, payment history from
them, be it cancel, checks orwhatever?
I mean that sort of acts andwalks and talks like a rental
history, like a payment history.
Justin Bogard (15:17):
Yeah, right.
Richard Thornton (15:19):
I mean we all have to keep in mind buying a
new note, the old game thatHarvard got in trouble with
years ago.
Right, maybe they would sell ahouse to somebody who had a
minimal down payment and they'regoing to improve the house with
(15:40):
sweat equity And they laterfound out, as they lost a number
of court cases, that thosepeople had no ability to raise
the money to do the sweat equity.
So basically they were buying asubstandard house.
So we have to be very carefulof that if we're going to buy
(16:01):
something that's newly purchasedand unrenovated.
Justin Bogard (16:07):
And so I don't know if I can put an A plus
grade on either of them and thatwould outweigh each other.
I would say, kind of, how youdive into some, you know, you
put a spin on it on which onewould be better.
I think they both have theirmerits and I think they both are
(16:30):
good and we buy both of themAnd it ultimately comes down to
I think what you said I'll keyin on it was what's the
propensity to repay?
Richard Thornton (16:40):
Right.
Justin Bogard (16:41):
And what's your risk really?
So if somebody puts down a 30%down payment and you calculate
what the property value is todayand you're at like a 70%
investment to whatever the truevalue is of the property, well,
that's a pretty decent discount.
You know when you're looking atit and you feel pretty well
(17:02):
protected to get your money backif you had to go for closure.
Right.
So it would take a longerpayment history with someone
that had a smaller down payment,let's say a less than 10% down
payment, so that it looks likethere's a lot of equitable
interest for the borrower atsome point and maybe it balances
out to close to same.
(17:22):
But it may take more than morethan a few years to get to that
point.
Maybe it takes six or sevenyears, because sometimes these
excuse me amortarizations onthese smaller loans are going
out 20 to 30 years.
So the payments are reallysmall.
They might be under $500.
Right, so the amount ofprincipal they're actually
paying per month is very smalland the amount of interest
they're paying is a lot.
(17:42):
So maybe it's a $500 paymentand maybe $50 is principal and
$450 is interest.
So it's going to take a lot of$50 payments to really chew at
the principal balance of theloan.
Richard Thornton (17:54):
Right.
So I guess I'd have to say, allthings being equal, if somebody
brings to us which we've seen anumber of these say a
wholesaler or a renovator, abuyer who's putting 20 to 25%
down and a house that's newlyrenovated meaning not just a
(18:14):
bunch of slip shot stuff If weget good pictures, interior
pictures, and we can see thatthe kitchen was renovated, do a
good standard, the bathroom'salready done, the house is
wholly painted, probably newflooring, maybe or maybe not, a
new roof, and the yard is ingood shape, i'd say I'd rather
(18:37):
buy that than some of the otherones we have in our portfolio
where we've got two or threeyears payment history and the
house has kind of run down.
Because if you look at thescalability, that newly
renovated house is gonna be awhole lot more salable,
certainly for the next three orfour years, and by that time you
will have established a paymenthistory.
Justin Bogard (18:59):
Yeah, if there was like the perfect scenario
that's how I would describe ittoo A newly renovated property,
that's, you know, everything'sup to date, with a really large
down payment and a short payhistory, that would be the cream
of the crop, And I would agreetoo.
The one usually the pay history.
Then you see, it's a long payhistory and a short down payment
(19:19):
.
Usually the house is not asattractive as the other.
So, yes, i would agree, itmakes you feel more comfortable
when you have a newly renovatedhouse.
Now I will tell you, themarketplace says there is more
of an abundance of small downpayment long pay history loans
out there than there are ofnewly originated loans that are
(19:42):
newly renovated homes with largedown payments.
Right, so it almost becomes aunicorn for those types of loans
Right.
Richard Thornton (19:50):
so one of the things I find out here, though
and actually as we're marketingmore in the Southwest is largely
Latinos and immigrants whocan't get a regular mortgage.
but they can put down very largedown payments because they're
(20:11):
working the trades or whatever,and they're just taking the
money and putting it in a bankand they don't really know where
to invest it.
I think I may have explained toyou that I had some help out
here doing the renovations of mybackyard and got to know the
guys really well and reallywould like to work with them
towards buying a house,partially because of a do good
(20:33):
type of thing, but when Pushcame to shove, we found I found
out that really, these guys wereworking hard.
they're working about six daysa week, but they were making
$100,000 to $120,000 a year.
Wow, they had like 30 or$40,000 in the bank and they
weren't sophisticated enoughreally to know that they should
(20:55):
put it into stocks and bonds andthings like that.
And they were legal.
they were legal immigrants, butthey would much rather put that
into a house And for somebodylike that, i would lend to them
all day long, hardworking, youknow.
they got that much money in thehouse and they wanna be there
(21:17):
for a long time, that's a goodloan.
Justin Bogard (21:20):
Yeah, there's a pride factor to them, right,
right, right, you had mentionedsomething before we got on the
recording here, and that wasoften time you hear people being
confused or not understandingthe clear definition of what a
subperforming loan is versus areperforming loan.
Richard Thornton (21:43):
Yes.
Justin Bogard (21:44):
And I think we wanna set the table here for
this, And so the simplestdefinition that I can come up
for a subperforming loan is thatyou have a performing loan
until it doesn't really perform,and then the next category is
really subperforming.
So if it's not paying everymonth, doesn't have to pay on
time.
if it's not paying every monthbefore the next due date, we
(22:06):
call that a subperforming loan,meaning they're either gonna get
caught up or they're in betweena performing and a
nonperforming.
That's kind of a subperformingcategory.
Richard Thornton (22:17):
So what about a consistent slow pay, in other
words, somebody who pays, butthey're always 60 days late?
Justin Bogard (22:26):
Yeah, so they're paying two months worth of
payments every 60 days andthey're getting caught up.
That's gonna be a gooddefinition of a subperforming
loan.
Richard Thornton (22:35):
Okay, and so what about I'm trying to be a
little bit exact here for andgive examples What about
somebody who is in our portfolioright now and she doesn't pay
for three or four months, andthen she pays and comes current
and then doesn't pay for threeor four months again and then
pays and actually pays inadvance for two months and then
(22:59):
doesn't pay for a month or twoand then makes one payment, and
so basically it's very erratic.
What is that subperforming?
Justin Bogard (23:09):
That'll be a new category called a
subnonperforming loan, becausethey reach that nonperforming
status.
So once somebody does not payfor three months in a row and
you don't have any payments comein, they get kicked over to
what we call a nonperformingstatus.
And that's really when we canaccelerate the default clauses
in a note into our land contractAnd so we can try to initiate
(23:31):
the foreclosure process or reachout and hopefully do some loss
mitigation with them.
But that does happen And we dohave one in our portfolio to
where they do just get caught upall of a sudden and they just
kind of ride the wave for alittle bit.
So they're kind of in between asubperforming and nonperforming
.
So that doesn't happen veryoften, but yeah there's.
You can say they're either way.
you can say it's anon-performing loan or you can
(23:52):
say it's a sub performing loanAnd you can be.
you can be really accurate bysaying both.
Richard Thornton (23:57):
Hmm, so what's the difference of pricing?
Justin Bogard (24:01):
So if, if we were buying and obviously that that
pay history, erraticness, isExtremely important to view and
look at it over a long timeline.
So if you see that happenedrecently and in the past maybe
It was they had a prettyconsistent pay history and they
paid every month.
(24:21):
But all of a sudden you realizesomething's going on in their
life That's causing them eitherto almost lose their house or
they're just in a currentstruggle In whatever life cycle
they're in right now and theyjust need help getting caught up
and they'll probably staycaught up in the future.
So you kind of have to take agamble with that one.
So it would be priced lowerbecause you're not, you're
(24:41):
uncertain as to what's gonnahappen once you buy it.
So if someone was consistent andthey just this is their MO,
like you said, they pay every 60days, they pay two months worth
every, then we know what'sgonna happen and we see it being
habitual.
Then yeah, we're not gonnaprice that too low, but we're
gonna price it a little bitlower.
And then if the loan was payingevery single month on time,
(25:03):
because for those of you thathave an experience owning a note
, you do get the benefit ofgetting late fees as well.
That's written in a note.
So that's those late fees aregonna continue to add up and
that's gonna be more money inyour pocket as well now.
Richard Thornton (25:16):
So you're having this note serviced By,
you know, xyz servicing companyWho gets late fees.
Justin Bogard (25:24):
It depends on the servicing company.
Some servicing companies saythat they get all the late fees
and you have to accept that andMost servicing companies just do
a 50-50 split with you, andthere are a few out there that
actually give you the entirelate fee.
I can't think of any off thetop of my head, but I've seen it
in the past where they wouldgive you the entire late fee to
(25:44):
the lender, which would be thenote owner.
Richard Thornton (25:46):
I can think of one that gives you the entire
late fee.
Okay.
Justin Bogard (25:53):
So now a reperforming loan.
So a reperforming loan is aloan that has gone through a
default and They have remedi thedefault by basically
renegotiating the terms with thelender or coming up with some
sort of probationary period tosay, i Just need to show you I'm
(26:14):
gonna make this many paymentsConsistently in a row, and then
I want to alleviate myself frompossibly being accelerated into
foreclosure.
So wait a minute.
Richard Thornton (26:23):
Go through a default?
or what if they just didn't payfor six months?
and then they got a job andthey started paying, and Now
they're?
now they're paying, fine, butthey hadn't paid you for six
months.
Justin Bogard (26:33):
Yeah, that's, that's going through a default.
So the definition of default iswhen they go beyond 30 days,
they're in default technically.
So once they reach thenon-performing status, as we
alluded to earlier about threemonths not paying They're in
non-performing status.
Richard Thornton (26:47):
They're just not performing Okay and so I'm
trying I'm sorry, i'm trying todelineate something there for
the other, which is that you areterming default as a time
period, as opposed to an actualNotification or certification by
documentation.
Justin Bogard (27:05):
Yeah, there's many different ways.
Time is one of them.
Mm-hmm, not paying your taxesor your Homeowner's insurance is
another way to default.
Mm-hmm and then obviously, notmaking your payment is a way to
do a default.
Richard Thornton (27:18):
Okay.
So if you haven't bought yourkids any ice cream for four
months, then you have defaultedon your ice cream allotment for
your kids Was a contract, it wasin there and you real big
doo-doo, right.
Justin Bogard (27:31):
Yeah, it's depending on how little they are
to okay okay, because theywon't forget it.
Richard Thornton (27:35):
Oh, you know, they won't.
Justin Bogard (27:37):
Ice cream, that one day That's right.
So that's the differencebetween a sub performing and a
reperforming loan.
Richard Thornton (27:47):
All right, well, that's, that's a good
delineation.
I hope that's helpful forpeople.
Justin Bogard (27:52):
I hope it is too.
All right, richard, we are outof time for today's Podcast
episode number 13 on season 5,be the bank podcast brought to
you by American note buyers.
I'm Justin Boecker.
This is my co-host, richardThornton, and we will see you
guys on the next episode.
Great See you then.
Thanks for listening to be thebank.
Narrator (28:13):
We hope you learned something from today's show.
If you enjoyed this episode,please rate and review us.
Plus, check out our channel onYouTube and follow us on
Facebook and Twitter at be thebank, and on Instagram at be the
bank podcast.
Be the bank is sponsored byAmerican note buyers.
(28:34):
Thanks again for listening.
Interested in real estate.
How about wealth?
Well, they go hand in hand, andhere you'll learn all about it.
Welcome to Be The Bank, apodcast where we discuss and
debate the topics centeredaround real estate investing.
Your host, justin Bogard,shares insights into investing
in real estate to create realwealth and passive income for
(00:23):
you and your family.
He'll share stories of realestate investments done right,
walk you through the process ofowning a real estate note and,
most importantly, educate you soyou can Be The Bank.
This is Be The Bank brought toyou by American Notebuyers.
Now here's your host, justinBogard.
Justin Bogard (00:46):
Welcome to episode number 13 of the Be The
Bank podcast, and today I've gotRichard Thornton with me and
we're going to be discussing afew kind of subjects, one in
particular being about titleinsurance, why you need to get
it and what happens when youdon't get it, and there's a
couple of transactions inbetween of that.
We also want to get into alittle bit of debate on what do
(01:07):
we, what are the pluses andminuses as it pertains to a loan
that has a large down paymentwith a short pay history, versus
a loan that has a low downpayment with a long pay history?
Stay tuned, hey, richard.
Richard Thornton (01:35):
Mr Justin.
Justin Bogard (01:38):
Is it hot out there in California?
Richard Thornton (01:40):
No, it's not.
It is a nice day, but we arehaving the weirdest summer.
I mean it's supposed to beright now 90 degrees and shorts
and t-shirts and blah, blah,blah Yesterday.
The last two days have beencold and blustery, and when I
say bluster I mean 15 to 20 milean hour, winds that are gusty,
(02:02):
and you think you were in thefirst days of March.
I mean like, wait a minute,it's cold out here.
That's interesting.
Justin Bogard (02:13):
Yeah, we've been fortunate enough not to have a
lot of wind.
It has it rained a few timesalready, which has been helpful,
but overall it hasn't rainedthat much and we're definitely
having around the 80 degreetemperature every day, with very
low winds, so it's actuallygood golf weather.
If anything, we can take apositive out of it, that's right
.
Richard Thornton (02:31):
You play golf this morning or yesterday.
Justin Bogard (02:34):
I played last weekend.
And how did you do?
I did not do very well at all.
It was a pretty poorperformance, i'd have to say, on
my part.
If that was a day to play skins, you probably would have taken
my bankroll.
Richard Thornton (02:49):
I see Okay.
Justin Bogard (02:50):
Yeah, pretty bad, but I will be playing a few
more times this week, so Well,that's good, That's you know
those of you listening to usbabble on here don't forget to
check out our YouTube channel,american Note Buyers, so you can
see the video stream of thispodcast brought to you by
American Note Buyers.
(03:11):
Richard, i brought up a minuteago in the little opening
monologue about title insurance,We're fortunate enough to have
our friend Brenda Flatter comeon our monthly broadcast that we
do live on our YouTube channeland our Facebook page.
She talked a lot about kind ofthe I want to say generics, the
(03:31):
basics of title commitments andpolicies and kind of just give
us a roundabout idea of kind ofhow it works.
I kind of requested that thatshe do that for us in our
audience because, quite honestly, richard, i was never really
taught about title policies andtitle commitments.
It's kind of just one of thosesubject matters that they just
give you all the documents andyou're expected to know what
(03:52):
you're reading and understandingit.
It's almost like you know Idon't know how to explain it,
but did you feel that way toowhen you first got into real
estate when someone said here'syour title commitment, sir, what
do you think?
Richard Thornton (04:04):
No, i knew it all from the first day.
I knew it all.
Yeah, no, and I still am,unfortunately.
I read through the highlightsand then my eyes start to glaze
over and I say, okay, mr and MrsTitle Agents, is everything
here?
Justin Bogard (04:24):
And they nod their heads to say okay, fine,
What I do appreciate about theescrow agents, closing agents,
whatever they call them atwhatever title company you use,
is that they in my experiencethey often will just they will
give you like Justin, this iswhat we need to clear.
To close, We need number one,number three and number 12 to be
cleared.
And you look at those items onthe schedule and you're like, oh
(04:46):
, i get it, that's easy.
Yeah, so I like that part of it, but it's nice to have her run
through and be like this is theexception, this is what they'll
guarantee.
This is what they won't insure.
Obviously, they're not going toknow if anything's not recorded
at the time that they give youthe insurance.
They can't help that right,that's not their fault.
How unprofessional, richard.
Turn off your phone.
Richard Thornton (05:07):
Yes.
Justin Bogard (05:09):
My gosh, it's like you're a marketing person
or something Could be an image.
Richard Thornton (05:14):
Can you imagine?
Justin Bogard (05:16):
So I don't know if I brought this up on live
before, but I'm in the processof trying to get a piece of land
for one of our trusts And thatpiece of land is being sold to
me through, i would say, like aland wholesaler Right, and land
wholesaler had found this littleparcel and was able to resell
(05:37):
it on seller financing.
So they did a land contract, sothey're actually on the deed.
And then they created a landcontract and the person trying
to buy it is gaining equitableinterest.
They are paying installmentsmonthly until they pay it off in
like three or four years.
Then they get the parcel freeand clear and they get the deed
in their name.
Richard Thornton (05:57):
Right.
Justin Bogard (05:58):
So in the process of me buying this, especially
in my trust, i don't take anychances.
I go through very rigoroussteps.
Even though it's a very lowvalued opportunity meaning it's
like under 10,000.
I still go through a titlecompany and I want to get that
insurance to make sure the titleis clean and clear, right, And
I also want to get kind of aloan policy to make sure that
(06:19):
the lien is in first position.
Again, this is my trust, thisis I make sure I dot on my eyes
and cross my T's because I don'twant any issues in my trust.
Richard Thornton (06:29):
Right.
Justin Bogard (06:30):
So I get a preliminary title report from
the title company.
They list out, you know,several things, and four of
which are the last four kind ofdeed transactions that happened
with this piece of land.
So I look into it and I readthe person I'm buying it from
used an LLC, okay, that's fine.
The person they bought it fromwas like individuals Okay, and
(06:52):
the person those individualsbought it from was an LLC, and
the person before that that theLLC bought it from was another
set of individuals.
So all those transactions,richard, they happened without
going through a title companyand without getting title
insurance.
Now, it's not illegal to not usea title company, right?
You don't get the advantagewhen the deed is changing hands
(07:15):
so many times because you wantto ensure that title.
So, because I want to get titleinsurance, because I want to
ensure that this title is cleanand clear and everyone that it
transferred for no one, canclaim that they own this piece
of parcel, this piece of land inthe future, i want it to be
insured.
So in order for the insuranceto be clear, to close or to for
(07:40):
the insurance title company toensure the title, we have to go
back and figure out how tocontact these people to have
them sign an affidavit Basicallysaying like yes, i was
president and this is true andaccurate.
You know types of things Andthe LLC has to provide.
You know some sort of operatingagreement that shows that the
(08:01):
sign on behalf of the LLC wasactually allowed and able to do
that on behalf of the LLC.
Richard Thornton (08:07):
So how are you going to do that?
Justin Bogard (08:08):
That's a great question.
How are you gonna do that?
So all this happened within thespan of, i'd say, four to five
years in this transaction.
I think there was fourtransactions.
So you have to make thedecision.
Are you gonna make the effortand go back and try to hunt
these people down, skip, tracethem so that you can get them to
sign this affidavit?
And it's really simple, it'sjust a document that reads
(08:29):
exactly what it says, as I was agrantee or the grantor on this
date and this was the parcelthat I was in the transaction
with.
Very simple and they can do anonline note rate.
But the hard part's finding themright.
They were somebody that youknow.
Oh, yeah, i know this person.
Yeah, i can get hold of them.
Yeah, it's easy, but whenlikely you don't.
These people are in Californiaor other places across the
country, and I'm in here in goodold fishers in Indiana.
(08:50):
So you just have to make thedecision now.
A Justin has to if I wanna gothrough with that and try to
figure that out, because thetitle company's not gonna be
able to provide any more helpunless it was closed at that
title company at some point,which obviously it wasn't,
because there wasn't titleinterns, so they can't really
help at all.
So it's just one of thosethings to where you gotta get it
(09:11):
done.
So if this transaction didn'thappen between me and this
wholesale land person, they areon the deed right, this LLC and
they have a land contract outthere with some borrowers that
are gonna pay them and they'regonna pay them off in like four
years.
I think that's what the noteterm is.
So, richard, what happens whenthey pay them off in four years?
(09:32):
Well, you're supposed to givethem clean and clear, equitable
title at the end of the landcontract so you can cancel it
and they become the deeded owner.
So you're gonna have the sameproblem then as you ensure that
title for them.
Richard Thornton (09:46):
So you might as well go ahead, and I mean, it
would seem to me to be easiestto work the chain and go back to
the previous person, theprevious person, the previous
person, because each one ofthose people will have the
other's contact informationright, correct, and, while it's
laborious, i mean in actuality,now that you, i hadn't thought
(10:07):
about this, but I sold a note toone of my clients that had a
defect and it was very.
It was stated Georgia, and instate of Georgia, if your notary
doesn't, notary statementdoesn't say that the person is
(10:29):
basically in the presence of thenotary, as a bank adjust, it's
invalid.
So we had to go through fivelevels of owners to find out who
these people were.
Fortunately, i knew how to geta hold of all these people And
so I sort of became the centralperson to get it all done.
But yeah, it had to be done andit was about a two-month
(10:52):
process.
Justin Bogard (10:55):
So I'm sure this happens way more often than we
realized.
We're not aggressively in thevacant land business to trade
notes or to buy them, but youand I both bought a few And with
this one experience it reallymade me think about it this week
and say you know what?
this probably happens very oftenand there's kind of There's
(11:16):
kind of a struggle here with theperson that is the wholesale
land buyer, because I want to beable to defend them and also
want to be able to curse them atthe same time.
Right, sure, because in theirrunning of business, all right,
maybe they're buying a couplehundred of these vacant landlots
across the country a year Andif you get title insurance on
every single one, that's a lotof money just in title insurance
(11:37):
, right, right, and thetransactions are probably really
small.
Sometimes they're like maybe afew hundred bucks, five hundred
bucks, thousand bucks.
So I get it that there aresmall transactions in the cost
of getting title insurancetotally outweighs the purchase
price of what you're trying todo, right, but like you said, at
some point you're going to haveto get title insurance or maybe
someone else does down the line.
(11:58):
Maybe it's not their problemand maybe that's how they see it
, but it does become a problem,and so I can see the land
business having a lot of issueswith title because of that.
Richard Thornton (12:09):
Yeah, and I think also for this reason and
I'm sure there's other ones alot of title companies won't do
land contracts because you knowthere is the owner is some place
in the chain that can't befound and you know can.
In fact, they can't insure itover it, so they can't do the
(12:30):
deal.
So you know why bother with abunch of smaller deals, right,
right?
So that was my experience andmy epiphany this week You are
learning more and more every day, my son Young grasshopper.
Justin Bogard (12:44):
The grasshopper, yes, some days I feel like this
is the grasshopper more than theother.
Richard Thornton (12:48):
Yeah, sometimes it comes with an oh
crap, you know, right, i feellike how did I not know that?
Let's switch gears to adifferent topic now.
Justin Bogard (13:03):
Sure, we have brought this up in the past and
we haven't really dived into itsuper deeply.
So let's get into a debatetoday and let's figure out where
we land and what side of thefence that we're on.
So in the performing note world, we see notes that have very
large down payments, meaninglike 20, 25, 30% down payments.
(13:26):
And if you're listening to thispodcast and you say really it's
not uncommon to see those largedown payments, it's just you
know they're going to be frommore or less the people that
aren't bankable but they havesizable down payments, right?
As opposed to somebody thatgets conventional financing on a
house in the several hundredthousand dollar range.
(13:46):
They probably don't put 20%down, they probably get like two
mortgages and stuff.
We're talking about the homesthat are probably under 150K.
So you got those people with avery large down payments with no
seasoning buying those notes.
And then we have notes that wehave very little down payment,
like maybe 5% under 10%, buthave like maybe a three, four,
(14:08):
five year seasoning of payhistory on them, right?
So the question is, richard,which note do you prefer and
what are the pluses and minusesto them?
Richard Thornton (14:19):
Well, let's put a little more spin on it,
which is, i know the ones thatwe're you looking at that don't
have any seasoning are alsorenovated.
So if somebody walks up to usand says, hey, i'd like to sell
you a note, there's 25% down butthere's absolutely no
(14:40):
renovation on the property,depending on the condition of
the property, it may or may notgive me pause to buy that note.
And I'm also going to want toknow more about the buyer.
Have they been a renter?
Have they been a renter along along period of time In one
(15:01):
place?
can we get a rental history,payment, payment history from
them, be it cancel, checks orwhatever?
I mean that sort of acts andwalks and talks like a rental
history, like a payment history.
Justin Bogard (15:17):
Yeah, right.
Richard Thornton (15:19):
I mean we all have to keep in mind buying a
new note, the old game thatHarvard got in trouble with
years ago.
Right, maybe they would sell ahouse to somebody who had a
minimal down payment and they'regoing to improve the house with
(15:40):
sweat equity And they laterfound out, as they lost a number
of court cases, that thosepeople had no ability to raise
the money to do the sweat equity.
So basically they were buying asubstandard house.
So we have to be very carefulof that if we're going to buy
(16:01):
something that's newly purchasedand unrenovated.
Justin Bogard (16:07):
And so I don't know if I can put an A plus
grade on either of them and thatwould outweigh each other.
I would say, kind of, how youdive into some, you know, you
put a spin on it on which onewould be better.
I think they both have theirmerits and I think they both are
(16:30):
good and we buy both of themAnd it ultimately comes down to
I think what you said I'll keyin on it was what's the
propensity to repay?
Richard Thornton (16:40):
Right.
Justin Bogard (16:41):
And what's your risk really?
So if somebody puts down a 30%down payment and you calculate
what the property value is todayand you're at like a 70%
investment to whatever the truevalue is of the property, well,
that's a pretty decent discount.
You know when you're looking atit and you feel pretty well
(17:02):
protected to get your money backif you had to go for closure.
Right.
So it would take a longerpayment history with someone
that had a smaller down payment,let's say a less than 10% down
payment, so that it looks likethere's a lot of equitable
interest for the borrower atsome point and maybe it balances
out to close to same.
(17:22):
But it may take more than morethan a few years to get to that
point.
Maybe it takes six or sevenyears, because sometimes these
excuse me amortarizations onthese smaller loans are going
out 20 to 30 years.
So the payments are reallysmall.
They might be under $500.
Right, so the amount ofprincipal they're actually
paying per month is very smalland the amount of interest
they're paying is a lot.
(17:42):
So maybe it's a $500 paymentand maybe $50 is principal and
$450 is interest.
So it's going to take a lot of$50 payments to really chew at
the principal balance of theloan.
Richard Thornton (17:54):
Right.
So I guess I'd have to say, allthings being equal, if somebody
brings to us which we've seen anumber of these say a
wholesaler or a renovator, abuyer who's putting 20 to 25%
down and a house that's newlyrenovated meaning not just a
(18:14):
bunch of slip shot stuff If weget good pictures, interior
pictures, and we can see thatthe kitchen was renovated, do a
good standard, the bathroom'salready done, the house is
wholly painted, probably newflooring, maybe or maybe not, a
new roof, and the yard is ingood shape, i'd say I'd rather
(18:37):
buy that than some of the otherones we have in our portfolio
where we've got two or threeyears payment history and the
house has kind of run down.
Because if you look at thescalability, that newly
renovated house is gonna be awhole lot more salable,
certainly for the next three orfour years, and by that time you
will have established a paymenthistory.
Justin Bogard (18:59):
Yeah, if there was like the perfect scenario
that's how I would describe ittoo A newly renovated property,
that's, you know, everything'sup to date, with a really large
down payment and a short payhistory, that would be the cream
of the crop, And I would agreetoo.
The one usually the pay history.
Then you see, it's a long payhistory and a short down payment
(19:19):
.
Usually the house is not asattractive as the other.
So, yes, i would agree, itmakes you feel more comfortable
when you have a newly renovatedhouse.
Now I will tell you, themarketplace says there is more
of an abundance of small downpayment long pay history loans
out there than there are ofnewly originated loans that are
(19:42):
newly renovated homes with largedown payments.
Right, so it almost becomes aunicorn for those types of loans
Right.
Richard Thornton (19:50):
so one of the things I find out here, though
and actually as we're marketingmore in the Southwest is largely
Latinos and immigrants whocan't get a regular mortgage.
but they can put down very largedown payments because they're
(20:11):
working the trades or whatever,and they're just taking the
money and putting it in a bankand they don't really know where
to invest it.
I think I may have explained toyou that I had some help out
here doing the renovations of mybackyard and got to know the
guys really well and reallywould like to work with them
towards buying a house,partially because of a do good
(20:33):
type of thing, but when Pushcame to shove, we found I found
out that really, these guys wereworking hard.
they're working about six daysa week, but they were making
$100,000 to $120,000 a year.
Wow, they had like 30 or$40,000 in the bank and they
weren't sophisticated enoughreally to know that they should
(20:55):
put it into stocks and bonds andthings like that.
And they were legal.
they were legal immigrants, butthey would much rather put that
into a house And for somebodylike that, i would lend to them
all day long, hardworking, youknow.
they got that much money in thehouse and they wanna be there
(21:17):
for a long time, that's a goodloan.
Justin Bogard (21:20):
Yeah, there's a pride factor to them, right,
right, right, you had mentionedsomething before we got on the
recording here, and that wasoften time you hear people being
confused or not understandingthe clear definition of what a
subperforming loan is versus areperforming loan.
Richard Thornton (21:43):
Yes.
Justin Bogard (21:44):
And I think we wanna set the table here for
this, And so the simplestdefinition that I can come up
for a subperforming loan is thatyou have a performing loan
until it doesn't really perform,and then the next category is
really subperforming.
So if it's not paying everymonth, doesn't have to pay on
time.
if it's not paying every monthbefore the next due date, we
(22:06):
call that a subperforming loan,meaning they're either gonna get
caught up or they're in betweena performing and a
nonperforming.
That's kind of a subperformingcategory.
Richard Thornton (22:17):
So what about a consistent slow pay, in other
words, somebody who pays, butthey're always 60 days late?
Justin Bogard (22:26):
Yeah, so they're paying two months worth of
payments every 60 days andthey're getting caught up.
That's gonna be a gooddefinition of a subperforming
loan.
Richard Thornton (22:35):
Okay, and so what about I'm trying to be a
little bit exact here for andgive examples What about
somebody who is in our portfolioright now and she doesn't pay
for three or four months, andthen she pays and comes current
and then doesn't pay for threeor four months again and then
pays and actually pays inadvance for two months and then
(22:59):
doesn't pay for a month or twoand then makes one payment, and
so basically it's very erratic.
What is that subperforming?
Justin Bogard (23:09):
That'll be a new category called a
subnonperforming loan, becausethey reach that nonperforming
status.
So once somebody does not payfor three months in a row and
you don't have any payments comein, they get kicked over to
what we call a nonperformingstatus.
And that's really when we canaccelerate the default clauses
in a note into our land contractAnd so we can try to initiate
(23:31):
the foreclosure process or reachout and hopefully do some loss
mitigation with them.
But that does happen And we dohave one in our portfolio to
where they do just get caught upall of a sudden and they just
kind of ride the wave for alittle bit.
So they're kind of in between asubperforming and nonperforming
.
So that doesn't happen veryoften, but yeah there's.
You can say they're either way.
you can say it's anon-performing loan or you can
(23:52):
say it's a sub performing loanAnd you can be.
you can be really accurate bysaying both.
Richard Thornton (23:57):
Hmm, so what's the difference of pricing?
Justin Bogard (24:01):
So if, if we were buying and obviously that that
pay history, erraticness, isExtremely important to view and
look at it over a long timeline.
So if you see that happenedrecently and in the past maybe
It was they had a prettyconsistent pay history and they
paid every month.
(24:21):
But all of a sudden you realizesomething's going on in their
life That's causing them eitherto almost lose their house or
they're just in a currentstruggle In whatever life cycle
they're in right now and theyjust need help getting caught up
and they'll probably staycaught up in the future.
So you kind of have to take agamble with that one.
So it would be priced lowerbecause you're not, you're
(24:41):
uncertain as to what's gonnahappen once you buy it.
So if someone was consistent andthey just this is their MO,
like you said, they pay every 60days, they pay two months worth
every, then we know what'sgonna happen and we see it being
habitual.
Then yeah, we're not gonnaprice that too low, but we're
gonna price it a little bitlower.
And then if the loan was payingevery single month on time,
(25:03):
because for those of you thathave an experience owning a note
, you do get the benefit ofgetting late fees as well.
That's written in a note.
So that's those late fees aregonna continue to add up and
that's gonna be more money inyour pocket as well now.
Richard Thornton (25:16):
So you're having this note serviced By,
you know, xyz servicing companyWho gets late fees.
Justin Bogard (25:24):
It depends on the servicing company.
Some servicing companies saythat they get all the late fees
and you have to accept that andMost servicing companies just do
a 50-50 split with you, andthere are a few out there that
actually give you the entirelate fee.
I can't think of any off thetop of my head, but I've seen it
in the past where they wouldgive you the entire late fee to
(25:44):
the lender, which would be thenote owner.
Richard Thornton (25:46):
I can think of one that gives you the entire
late fee.
Okay.
Justin Bogard (25:53):
So now a reperforming loan.
So a reperforming loan is aloan that has gone through a
default and They have remedi thedefault by basically
renegotiating the terms with thelender or coming up with some
sort of probationary period tosay, i Just need to show you I'm
(26:14):
gonna make this many paymentsConsistently in a row, and then
I want to alleviate myself frompossibly being accelerated into
foreclosure.
So wait a minute.
Richard Thornton (26:23):
Go through a default?
or what if they just didn't payfor six months?
and then they got a job andthey started paying, and Now
they're?
now they're paying, fine, butthey hadn't paid you for six
months.
Justin Bogard (26:33):
Yeah, that's, that's going through a default.
So the definition of default iswhen they go beyond 30 days,
they're in default technically.
So once they reach thenon-performing status, as we
alluded to earlier about threemonths not paying They're in
non-performing status.
Richard Thornton (26:47):
They're just not performing Okay and so I'm
trying I'm sorry, i'm trying todelineate something there for
the other, which is that you areterming default as a time
period, as opposed to an actualNotification or certification by
documentation.
Justin Bogard (27:05):
Yeah, there's many different ways.
Time is one of them.
Mm-hmm, not paying your taxesor your Homeowner's insurance is
another way to default.
Mm-hmm and then obviously, notmaking your payment is a way to
do a default.
Richard Thornton (27:18):
Okay.
So if you haven't bought yourkids any ice cream for four
months, then you have defaultedon your ice cream allotment for
your kids Was a contract, it wasin there and you real big
doo-doo, right.
Justin Bogard (27:31):
Yeah, it's depending on how little they are
to okay okay, because theywon't forget it.
Richard Thornton (27:35):
Oh, you know, they won't.
Justin Bogard (27:37):
Ice cream, that one day That's right.
So that's the differencebetween a sub performing and a
reperforming loan.
Richard Thornton (27:47):
All right, well, that's, that's a good
delineation.
I hope that's helpful forpeople.
Justin Bogard (27:52):
I hope it is too.
All right, richard, we are outof time for today's Podcast
episode number 13 on season 5,be the bank podcast brought to
you by American note buyers.
I'm Justin Boecker.
This is my co-host, richardThornton, and we will see you
guys on the next episode.
Great See you then.
Thanks for listening to be thebank.
Narrator (28:13):
We hope you learned something from today's show.
If you enjoyed this episode,please rate and review us.
Plus, check out our channel onYouTube and follow us on
Facebook and Twitter at be thebank, and on Instagram at be the
bank podcast.
Be the bank is sponsored byAmerican note buyers.
(28:34):
Thanks again for listening.
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