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Getting Started in Notes Investing with TJ and Rick
In today's show, Larry sat down with note investors, TJ and Rick. They have been big-time wholesalers who are involved in the note business. TJ and Rick shared a lot of things about the note business, what they do and how they do it.
Getting to know TJ and Rick
How they met and how they started in real estate investing
Getting into note investing
Real estate vs notes inventory
What Paperstac does
he need for affordable houses
How things work from the institutions all the way down to small investors
Reperforming and nonperforming loans
How they pick their assets
Judicial vs nonjudicial states
Their mission of saving the house
What Hardest Hit Fund is
What their team looks like
Leveraging their time
"A reperforming mortgage note is a fantastic cash flowing opportunity."
"...we call them The Island of Misfits Toy notes, nobody wants them but there's a huge upside if you can just learn a few disciplines on how to work these out."
Larry: Welcome to the Brain-Pick-A-Pro Show live from Lake Wylie South Carolina. Really excited today I’ve got some good friends TJ and Rick on. These guys are note investors. Now they’ve been big time wholesalers, wholesaling hundreds and hundreds of houses.
But they’ve moved into a niche and you guys have asked and now you’re going to receive. I brought these guys on, they’re going to share a lot about the note business, what they do and how they do it. Welcome to the show guys how have you been?
TJ: Great Larry man good to see you again.
Rick: Good to see you Larry thanks a lot for having us on we’re looking forward to it.
Larry: Awesome. So start out and tell us a little bit about yourselves. Say something about yourself, tell us a little bit about yourself and turn the camera towards you a little bit.
Rick: Sure. My name is Rick Allen I’m from Orlando Florida originally from Columbus I’ve lived here for 30+ years. So I’d say I’m a natural flora. And I’ve been into real estate investing for about 15 years. I got my real estate license I’m a broker now. I sort of cut my teeth and started out in wholesaling. And I think that’s the entry point that a lot of people do, they start with it.
I met TJ working for a nationwide wholesale firm, we source properties. We also had in house hard money. So I sort of dipped my toe in the water of the financial side or the finance side. And we did that for I guess three or four years and then wound up opening up our own shop and we did about 400 wholesale deals in three years.
Larry: Wow great.
Rick: We were moving man, we had a bunch or employees we had two offices across central Florida and it was a time when the market was ripe and we were just pumping deals out. We’re really fortunate to have been a part of that. And then I guess it was in end of ’11 beginning of ’12 we kind of sold off our share of the company and went and just started doing the fix and flip thing.
And we kind of stepped in a big steaming pile of mortgage notes. It was on accident, and a bank agent asked us if we were interested in buying loans and we said yeah we’ll take a look at what you have. And so he said, “Well the debt on it is 90 grand, how much do you want to offer the bank for it?” I was like, “Well tell them we’ll them $8,000.” And he was like, “No they’re not going to take that.” And they countered us at 8400 bucks.
Larry: I love it.
Rick: Yeah so fast forward through a couple hundred assets here we are today, we’ve got about six million under management and we’re in the process of doing a regulation A+ Tier2 offering which says basically we can market to anybody and raise capital.
And really go out and buy a lot more of these notes. We have a technology platform that allows people to buy and sell notes right there online. So it’s an exciting time. I’m happy to be doing this, happy to have TJ as my partner and lets him.
TJ: Hey man what’s happening? Folks TJ Osterman of Richmond Chicago born and raised there, Go Cubs. I’m still in my [Inaudible] [03:19] of covering the World Series. I don’t even remember last year’s baseball season I’m just looking forward to this year and two years ago. But anyway year, I originally moved to Florida to be a teaching professional in golf.
And came down here and got an opportunity to buy my first investment home and really did a good job with it and made a bunch of money and said, “I can play golf for fun and get in this real estate thing full time.” So I went wholeheartedly into the real estate game and that’s when I met Rick, we started doing some wholesaling of real estate.
Where we were connecting investors with financing, hard money, loans for them and obviously finding the investments also for them. And it’s really an exciting process where I got to swing a lot of hammers, do some rehabs myself and I really enjoyed that whole process. So like Rick said we did a sendoff from the company and opened up two offices one in Orlando in Tampa, had about 20 salespeople doing it and did 400 homes around.
And we were just really tired of the old managing salespeople and we decided let’s go off and kind of do our own thing. So we sold our portion off of that wholesale company to one of our partners, and from there we ended up doing our own thing. And that’s when we kind of got the opportunity like Rick said I won’t beat it down too much but had an opportunity to buy a mortgage note.
We were looking for inventory at the time. At that time it was very tough to get good inventory in Orlando area. And our prices were going crazy where people were just like Blackstone and stuff was coming in these big funds and just paying retail for homes.
Rick: And they’re [Inaudible] [04:59] over par.
TJ: Yeah and paying retail for deals there was no delta, no place for somebody to really get in the middle there and broker a deal. So we decided, “You know what, we need to find a new way,” and we stumbled into a mortgage and originally went into saying that this was a great opportunity to get inventory for our real estate. And from there it organically grew into this is what we do full time now.
We’ve been doing it six years, we’re in the trenches every day doing mortgage notes. It was a great play for us to go into that direction because it wasn’t relearning a whole bunch of new disciplines. So for real estate investors out there looking to get into this, we’re not talking about just completely stopping your real estate game, this is a nice value add to your real estate portfolio.
And it’s not all that difficult, it’s very elusive there’s not as much education out there. So people like ourselves it’s take about six years to actually get to the point where we’re at now. But I think with technology leveling the playing field for everybody we’re able to now take advantage of certain asset classes like alternative assets and invest in them sufficiently.
Like in the past you’d have to have a whole shop of people, loan analysts, loan servicers the whole deal in house to be able to do this right. We’re very excited about this asset class and where it’s going to go. So I guess that’s what we’re going to talk about.
Rick: Yeah I would also want to mention kind of that we’re both fathers and husbands. So I have three kids, TJ has two and we’re blessed to have our families and our wives who pretty much stood behind us the whole way. And have been right there for us so I wouldn’t want to go any further without letting everyone know that.
TJ: Oh did I just forget my wife?
Rick: I forgot mine. No we didn’t we just wanted to give them their own segment. They get their own segment.
TJ: They get their own segment. Totally every time you’re doing these things you start talking and then you’re like, “I just lost in thought and then I start going into the business I’m like yeah but I’m a family man too.
TJ: That’s important obviously that’s what keeps us, unless that was it I’d just be living in the studio apartment playing golf if I didn’t have a wife and kids. I’m doing a few deals here and there but it’s a big motivating factor for sure.
Larry: That’s cool and you’ve got a newborn right TJ?
TJ: Yeah, four months old man. It’s been thank God she sleeps through the night and [Inaudible] [07:05]. But it was really exciting I have a four year old and a newborn.
Larry: As far as you know she sleeps through the night.
TJ: Yeah because I’m sleeping through the night.
Larry: Right that’s what I mean.
TJ: Hopefully my wife is, I don’t know. But yeah I think we’re good now and so it’s been a lot going on and we’re scaling our efforts right now too. So balancing all that this guy’s got three kids so I can’t ever complain to that because he’s outnumbered. I can still play Zone.
TJ: He has to play-
Rick: You’re your own man.
TJ: No I’m on man on man defense, he’s got zone.
Rick: I say when you have one kid you’re in zone, when you go to kids it’s man and when you’re over three kids, it’s back to zone but somebody is always outnumbered. Now I have an eight year old, a five year old and a three year old so it’s just crazy.
Larry: You don’t want them to outnumber you.
Rick: No, I would say two is good, two. That’s all you need.
Larry: There you go, so let me ask you guys a few questions. I got a lot of questions I want to ask you but let’s start off with the inventory as far as real estate goes, I mean you got to market hard to get real estate deals. And I think you even mentioned that you kind of fell into this or kind of looked into this a little bit more after your first deal to get inventory for you real estate. So tell us how the inventory is real estate compared to notes available.
TJ: Well I can tell you right now we deal in small balance distressed bonds. And that’s talking about the assets homes that are not worth more than $150,000 and below.
TJ: So [Inaudible] [08:38] them. And when we’re talking right now the distress loan market, experts are saying is about six to eight million untouched non-performing mortgage loans in the market today. And there’s a plethora of reasons why they’re untouched. Majority of the big banks don’t have an appetite for this type of investment they don’t have a process set up in place.
They’re not in the business of the type of discipline it takes to reach out to these borrowers and actually work out something on a distressed loan. They’re outsourcing this to somebody that doesn’t have any sort of vested interest in it. So the market for the small balance mortgage loans, non-performing stuff is great and that is where we’re at now six to eight million non-performing loans sitting out there untouched.
That are being traded through this waterfall and they’re just escalating down from huge guys to the smaller mum and pop investors. And that’s all attached to homes so if you’re in the business to actually look at indeed good inventory for fixer uppers, a lot of the stuff we’re seeing is vacant. This is stuff that has been traded between big banks back and forth. It’s kind of like look I’m going to trade you all these good loans but you’re going to have to take some of these too.
TJ: So they trade them and they don’t do anything with this small balance stuff. So a lot of the times these buyers get frustrated and what happens is they will actually just vacate the house. Nobody is contacting them, they don’t know who the mortgage company is, I mean nobody is working on this house with them.
So they’re either living for free or they’re living in fear that they’re going to lose their home or they just move on.
TJ: So a lot of the assets we see are vacant. So they’ve been sitting, they’re vacant sometimes for five, six, seven years. So you need to this stuff to work. And the systemic effect that is happening is to the communities it’s horrible. The type of crime that goes on because of a vacant home sitting in a community is major.
I mean the statistics I don’t want to go into how deep that goes but, it’s not good let’s just put it that way. So we can come in and you can come in as an investor and kind of save the day, and do what you’re already doing. But also you know those homes that are sitting there vacant their taxes aren’t being paid and what have you.
So there’s a lot of inventory out there. And we’re not talking about also if nobody ever just has a hardship and defaults on their loan again. So we’re talking about an existing inventory of six to eight million loan balance stuff, with stuff from that’s probably still being cleaned up from 2008/10/9.
Rick: Yeah I’ve definitely seen stuff from eight, nine, 10, 12.
TJ: Yeah so I mean there’s a lot of inventory out there and it’s only as our next market downturn, is when banks and bigger asset companies and bigger asset management companies will start selling off their distressed products again. So we’re not even done cleaning up this stuff yet and I speculate there’s another downturn.
I don’t know when obviously but it’s cyclical right everything there’s going to be a downturn. If you’re in a position right now to be in a good receiving sense of that when this next downturn happens, I’m going to buy all that distressed stuff, you can go to a community bank. Right you’re not going to go to Bank of America and say, “Let me talk to your asset manager,” they’re not going to talk to you.
But a local community bank is holding paper that they don’t want sometimes that is not performing. And you can say, “Look I’ll help you recapitalize,” that’s one of our pitches, is, “We’re going to help you recapitalize, get you that money back,” because they make money lending the money.
TJ: Not working out borrower issues. It’s a whole lot of issues. So you can go in as an investor and say, “Look man I’m going to help you recapitalize, I’ll take a look at any of your non performing notes that are out there,” and right now there might not be that much. But to put yourself in the position that hey I’m a guy that you can maybe look to, to unload some of that stuff.
And develop a relationship in your community with community bankers, I don’t know what your listening base is, Larry but everybody knows a community back or knows some people Larry. And that’s a really good place to source some of this stuff. You’re helping everybody out.
Larry: That’s really good. So aligning yourself with a small community bank so that whenever the time comes you’ll be able to go in and save the day basically right.
Rick & TJ: Yeah.
TJ: Yeah I mean that’s just the one strategy and then obviously there’s a lot of different sources. But inventory we’re not seeing an issue right now. So we have an investment platform called Paper Stack, P-A-P-E-R-S-T-A-C.com which we’re trying to make this asset class a little bit more approachable. We’re making it where technology doesn’t seem so confusing.
Because when investors and I’m sure you have some of them listening right now saying, “I’ve gotten a tape if assets.” Well a tape is basically a spreadsheet with hundreds of rows and columns and you’re looking at it going, “What are am I looking at?
TJ: It’s like typographics.
TJ: We’re trying to make is easier so that investor, that mainstream investor that real estate investor doesn’t seem so afraid because if you can see the asset you can see what you’re bidding on, you can see what balance of the loan is. And more of a user friendly type of atmosphere and more of a system, more of a process on top of that which is what paperstac does. We think we’re going to be able to get more people off the sidelines and into this asset class.
Larry: That’s good.
Rick: Yeah and definitely what happens is somebody in the real estate game starts looking to diversify they’re looking for inventory they stumble into mortgage notes. Then they get this tape of assets and the first thing they do is say they live in Orlando, they go searching through it they say, “Aha there’s one in Orlando.”
And it’s what we did and we went into our backyard, you start with the ones that you can touch and feel and you can see it and drive by it every day on your way home and say, “Oh there it is, still there.” and eventually what happens after you’re comfortable doing this, then you start branching out. We started out just buying in Orlando and then we started slowly spiraling out. As eventually your capital will allow, there’s not always going to be 1,000 distress notes in your backyard.
Rick: It may be 10 but you may have more money than that. So then you go start spiraling out and we got to a point now where we’re nationwide buying assets. It’s an interesting thing when you finally buy something you’ve actually never laid eyes on. It gets a little frightening but it’s good you need to do that.
TJ: And one thing I want to talk, everybody knows what’s going on with lack of affordable housing. If you’re reading any sort of news and headlines it’s just showing that that there’s a major need for affordable housing. And because of let’s just say the tax rate that was given, 35 to 21% which is great for corporations. We’re a corporation we love that.
Rick: Love it yeah.
TJ: However what that’s doing now, is it’s away from the low income housing tax credits that used to be utilized to build low income housing because now companies don’t have to shelter so much tax profits. Because they would generally buy these tax credits to be able to offset some of those tax burdens. Well now that they just dropped 35 to 21 that’s great but if you look at the systemic effects, there’s going to be a huge gap in spending for these lower income areas.
And to tell you the truth, the lack of affordable housing, Rick and I and everybody in the mortgage space, to me I think we just discovered what a lot of them are. A lot of these affordable housing is locked up in what I call The Debt Purgatory. It’s nobody is real with these, they not REO because nobody wants to foreclose anymore and these banks don’t want to do it.
They’re just not inventory that’s just sitting there in purgatory. So we’re able to unlocking with this mortgage note play. And you’re able to provide a lot of affordable housing with the rental market today.
Rick: Yeah these are assets.
TJ: A lot of them after that we take back because we have to they’re vacant or the borrower just can’t afford it, we turn it right into a rental an affordable rental that somebody can do. Whether it be Section Eight I mean Chicago we bought some assets out there.
Their section eight rental is crazy it’s $1500 a month in a three bedroom one bath. How can you not say that’s a great investment? And there are a lot I mean we get tapes of thousands and thousands of homes, 150,000 and below, some are and some are not.
TJ: I mean that’s what I’m saying. So if you’re an investor out there you want to find some inventory, get to know the mortgage note space a little bit. There’s a lot.
Larry: That’s awesome.
TJ & Rick: Yeah.
Larry: So I want to back up a little bit, you mentioned earlier about it’s kind of a waterfall from the institutions all the way down to the small investor. Could you kind of give our listeners an idea of kind of how that works because, most people listening to this although we have people listening from all different experience levels and around the country even around the world. But they’re not going to go out and spend $50million on a huge portfolio.
TJ: Right yeah.
Larry: So tell us how that works all the way down to the small investor.
Rick: Sure like if you want to go buy from Bank of America you need to be able to stroke a cheque for 50 million. You got to pay it off, I remember we were at one of the conferences and we were up on the hale doing a discussion and I got off. And the lady from the back office of Chase came up and handed me her card and said, “In Chase we have a bunch of assets we’d love for you to come take a look at them.”
I go, “What’s your minimum buy?” she’s like, 100 million.” I’m like, “We’re not getting that.” So what happens is somebody like Chase or Bank of America will pull up ther assets and usually they’ll sell them off in large chunks or charges at about 250 million, 200million somewhere in there.
Larry: And who buys those? Who buys them?
Rick: Well the large hedge funds like Blackstone is going to come in and they’re going to look at they’re going to take the cream of the crop assets off the top. They’re going to take the stuff that they think is worth 250,000 or more and it’s got the-
Larry: The higher priced assets.
Rick: Yeah the higher priced assets it’s going to have a larger return for them and they don’t have any appetite for the smaller stuff because it takes more manpower.
Rick: It takes the state manpower to do a smaller asset as a large asset. And they run off of a velocity model. So they’ll pull those up and they’ll break up say the remaining $150milion into three $50million pools over planch different smaller pools maybe five, $10million pools that they’ll sell off to then the medium size hedge fund, who’ll then break it up and they’ll work their assets they’ll go sell them off then to one off investors like ourselves.
I mean we’ll go in and we’ve bought assets on a one off basis all the way through we’ve bought 30 to 40 assets at a time. So it just really depends on your bankroll at that point. But you can go, and in those training platforms if you’re looking for a way to get assets like TJ said we’ve got paperstac which is a technology platform, which allows somebody to go on there.
And really look at an asset on a one off basis, see a picture of the asset, go through and look at the collateral file, run your investment numbers on it based off of just an online digital platform that you don’t have to necessarily looking at the hieroglyphics on tape.
Larry: Now are these assets that you guys have already done the work out or you’ve just acquired them?
Larry: Oh okay so both.
Rick: And they’re not just our assets, there’s other people. It’s an open source platform so everybody can go on there and list and buy assets. So our end product that we do put out is a re-performing loan because we’re in the business of saving houses. Our sort of goal is to save 10,000 houses or 10,000 families’ homes.
Rick: That’s what we want to do, so that’s our end product is we put out a re-performing loan. We take in an asset it was in a distressed situation, we stabilize the family, we’ve got them back on the right path and are able to let them keep a house and that’s what we put out. We also put out non-performing loans.
We get an asset then we like to take the role of look we’ll aggregate all that inventory into one spot and let other one off investors come in there, who can jump in and say, “Look I want to save a house,” can’t just be our fun we want to let other people do it. So we’ll put them on there immediately once we get them and then as we add value them obviously the price will go up. A re-performing loan is going to sell more than a non-performing loan.
TJ: Well I can tell you right now there’s the $14trillion question is self-directed IRAs and where all that money is sitting there from all these- they call them stock market refugees. And people are very yield hungry and with technology nowadays a lot of these self-directed investors are taking their 401K and IRAs and turning them into self-directing 401K and IRAs.
And a lot of the assets that they’re able to buy now are alternative assets like real estate, mortgage notes. They’re yield hungry, so a lot of the times people don’t want to have to deal with the rental home, with the broken toilets, the ACs, they like the cash flow.
A re-performing mortgage note the price that we put out, is a fantastic cash flowing opportunity where you can basically purchase a partial of it. Meaning if there’s 360 payments on that thing, you can buy 180 payments on that. Whatever you want to do with that self-directed money. So the retirement accounts are gigantic right now.
If you’re just looking at opportunity, $14trillion sitting in self-directed IRA accounts with these guys wondering, “What can I invest in?” well if you’re in the market of taking a non-performing loan, underwriting it with some-how would say-the apple pie type of underwriting that you can do as a small investor.
TJ: You see you back the pie that makes sense. You put something in, you put this borrow in a situation to where they’re going to want to pay. You give them back that equity. If they’re upside down 50% I don’t care how good of a pay they give them when you recapitalize it all at the backend of the loan and put it put it out four years, which institutes that’s their model, a lot of them. Their borrower is going to say, “Why am I paying on this thing? My American dream is gone, my American dream is equity, I want to have some.”
Larry: They can’t see the light at the end of the tunnel.
TJ: No, so we’re like, “Don’t be so greedy just we’ll principal reduce that person down to equity position. Because of the discount that you can buy, you can transfer that discount to this borrower, filter the double digit yield and bake a pie to where now that borrower, it would be stupid for them to stop paying.
So it’s a common sense thing that I think only a smaller investor that has vested interest in a small portfolio of loans is able to do. Because they’re not restricted by my boss is telling me I got to move out 1,000 loans next month and we just got to get off of our book.
Rick: No, I mean also that smaller investor they’ve got skin in the game, they’re not a $15 an hour employee trying to do a work out, that’s their retirement funds. So they’re very motivated to say, “Look let’s get that money going back into the 401K let’s start earning that interest.
And when you realize that you don’t have to beat somebody’s borrowers over the head and that you can sit down and work with them, and get their story and communicate and take the label off of them over the non-performing borrow and talk to John and see what’s going on in his life then results happen. Then you start modifying people’s loans and you start getting people back on the right path.
TJ: Yeah I mean we have 120 assets, we’re able to manage our 120 assets with a very small team. And that is in our business 120 mortgages is very small. We’re talking guys that are trading hundreds of thousands of loans every month. So even at 100 loans we’re able to organically reach out to these people and put down the real world approach on it.
And look just keep paying somehow and if you can keep these people paying it works out and it’s unbelievable what some of the stock you see then like the work out that these, and I’m like, “I wonder why they stopped paying I mean I would have continued to pay on a lot of these things.
Larry: Put them upside down.
Larry: So how do you guys pick your assets?
TJ: Well we look at like I said a big criteria is small balance stuff, homes that are worth 150,000 below.
Larry: The low price band.
TJ: Yeah the low price band stuff. Any part of the country we like non judicial states, there’s judicial and there non judicial. The reason why that’s a big factor is-
Larry: Explain that to our listeners.
TJ: Yeah is that foreclosure. And non-judicial you can never have a foreclosure that can take place. You still have to foreclose but it’s a lot faster.
Rick: You have the share of sale.
TJ: Share of sale and then the judicial process can you take you-people can run that out a year a year and a half and say you’re not getting that money back. But yeah anything that’s low value stuff we look at, we call them The Island of the Misfit Toy Notes. Nobody wants them but there’s huge upside.
TJ: If you can just learn a few disciplines on how to work these out. There’s a lot of juice left in those oranges.
Rick: We’re also focusing on stuff that’s owner occupied because our mission is to save the house. We’re not really trying to buy the vacant house, that’s not our cup of tea to get the house back it’s really to save the home. So we’re looking for owner occupied stuff and then we lay a filter of there’s a hardship fund. I don’t know if you’re familiar with that.
Larry: Yes. Explain it to our listeners though.
Rick: So the hardest hit fund the FED set aside $9billion that they gave to the states that got hit the hardest in the downturn. And they gave this money to them with the intentions of, “Look distribute it out to the people who have hardship to try to catch them up on their loans or pay down their principal balance so they have some equity if they’re upside down.
So if you have a borrower that’s got a hardship or they’re upside down you can have them apply to the state and it’s money that the state will essentially pay to whoever the lead holder is to catch them back up and get them back on their feet. So we use that as sort of a secondary filter over non-judicial because if that happens on top of it does great things for your yield and it really helps the bottom line.
It also allows you to really help these people out because in some cases we even recapped all the money we put out. We bought 75,000 in debt for 13 grand and wounded up getting 18,000 to catch them up on their payments from the hardest hit fund. So were already-
Rick: We still had the 70,000 in debt so we were able to work with the lady and say, “Well your house isn’t worth 70 so we can modify the loan,” and you can do stuff like that. And it makes it a lot easier to really give people amazing deals that’s going to set them up for their life.
Larry: And you got nothing in deal at this point.
Rick: Oh no, we’re making money. Everything on that’s just gravy. So the hardest hit fund or any of these government programs are really good stuff that we like to look at. And then for your investors I would say if you start working an area it’s all about your boots on the ground. When you have boots on the ground and you can develop your team you can really start plugging away at that area.
And when stuff comes up there. You’re not having to reinvent the wheel every time you open up a new city. So we’ve a great team going in Chicago right now as one this is on the top my head to get some going there to where. That makes all the difference in the world if you have to take the asset back.
Larry: Right, that’s good. So what does your team look like?
TJ: Well we have Rick and I are full time running our fund, and that’s sourcing deals, running the due diligence drilling down into each individual.
Rick: Sourcing capital yeah.
TJ: And sourcing the money we have. Miriam Burgos who kind of works director of operations. She does just about everything. She’s helps filter out a lot of the noise for us and we couldn’t be here without her she’s unbelievable.
Rick: Miriam she’s our work wife.
TJ: She’s come from a background of working with 711 on the corporate site, with real estate doing a lot of investor loans. So she’s familiar enough and can really help us run our 120 assets right now very efficiently. We have our marketing guy Brett Barky who is fantastic he does just about everything now too because we’re all kind of hustling right now trying to wear as many hats as we can.
And we have a really good developer that helps with technology side of stuff. So where we can help promote this asset class to more investors through technology because obviously to us that’s the future. And when you’re talking financial technology they call it Fintech it’s lacking. But it’s really behind so if you can bring a product that has some technology to it the market is very receptive to it. It’s hard to crack but so that’s what our team looks like right now.
Rick: Yeah we also have third party outsource servicers that we lean on heavily to help leverage Miriam’s work time our work time. They do a fantastic job, SN is our servicer and I couldn’t get on a pedestal and shout enough praises about them along with some other technology.
Larry: So you use a third party servicer?
TJ: Yeah, that’s on Saturday.
Rick: You have to.
TJ: We use in order to bootstrap like what we do is you have to be able to leverage your time and we don’t $10million operating budget. And there’s a lot of moving parts here. So the great thing about it is there’s these servicers that are more boutique self-servicers that are specialty servicers. They do charge but because you’re working in a very heavily regulated environment, you can sell a service.
I do not recommend it, if you have a good attorney go ahead and do that and it depends on what type of stuff you’re doing and you can be successful that way. We didn’t decide to do that, we used a third party servicer, they kind of quarterback all the debt service, they kind of quarterback a lot of the coordination when it comes to dealing with REO agents that we can reach out to.
So we’re able to leverage them a lot and there’s a lot of them out there once you get into the space. So we use SN servicing which is fantastic there’s FCI which are really good, there’s Madison Management which is another great and they’re all different and we have loans with a few of them. And it all depends on who you like to work with and how creative you want to be with your loss meet strategy.
We wanted the kind to do our loss meet, we utilize a non for profit also to reach out to our borrowers to lower that resistance. Remember these borrowers have been kicked around if you’re going to them with the traditional sense they’re going to put up their walls again and probably go dark. You want to just get them talking and like, “What’s going on? Let’s get this loan paying again and let’s come to a resolve here.”
And non for profit housing councilors is our first reach out. And they go out and they just say, “Hey guys look we’re a not for profit we’re help you. We represent Rick and TJ in cloud capital management and these guys are willing to work with you. And we have a strategy where we do 70% of what you’re paying when you defaulted of your principal and interest.
Let’s get you started on that for six months, let’s just get your going.” And then during that six months it gives us some discovery time, “Let’s find out what kind of person you are, if you default on that 70% of principal and interest, maybe it’s a reality check and we should turn the page and maybe like help you move out.”
We can give you cash for your deed, you don’t have to worry about foreclosing on you, we’ll give you cash for your deed and help you find a rental home. I mean we’ve given up to $20,000 for somebody to move out of their home.
TJ: Just because the discount that we had into the deal, it was so much more valuable to get that deed and like move forward at that point. And they realized that too that that’s the beauty of it. So as part of the immediate team we kind of went over that FCI and then SN servicing team and non for profit housing councilors everybody probably knows one of them.
Those are some really good staples to get working with you guys.
Rick: Yeah they’re good tools of working through is what they are.
Larry: Exactly. So you guys use third party servicers and you use the nonprofit to help you with the work out. And I’m assuming you also use like a third party workout company or loss mitigation company as well that’s going to either get it performing or get them to sign a deal in lieu or whatever.
Rick: Well that’s kind of what the non for profit does for us. We’ve given them the strip on what we’re looking to do and the not for profit allows us to reach out to somebody very early in the process and stay within compliance. And their job when they get in there is they say, “Hey first question, do you want to keep your house? If you want to keep it we’re here to help.”
Rick: If not then we can start going down the road of deed foreclosure or consent judgment stuff like that. And then obviously we’ll jump in or have our third party servicer jump in to draft up anything that needs to be drafted.
Larry: Right, that’s awesome. Guys this is really good stuff. I’m assuming your developer on your team that’s the one that helped you with the paperstac website.
Rick: Yes it is. We started paperstac I think three years ago and we were outsourcing to one of the online platforms for a developer. And it just didn’t work out we didn’t get the best quality work. So we brought in his name is Mike McLean we brought him in as a developer, gave him a piece of the company.
And not only is he great at the backend development, he knows frontend development and he’s got a great business acumen as well. He’s got a good mind for the business side of that too. So that’s been a huge asset to add to our team.
TJ: Yeah and then the whole story of the development we first realized like six years ago we did a trade and we both looked at each other said, “Holy cow what did we just do?” We wired like $250,000 to somebody that really said they were a good seller. And we were like why is this so hard with the amount of technology today out there, why is this so hard?
So we looked at that and said, “Let’s develop something that’s a little bit easier to look at than these tapes.” So it’s like really not all that difficult. So we went and did it overseas with some developers, spent like 20 grand and got back a crappy product and realized wow you have to spend money in this development world.
These developers make really good money because they have a very esoteric type of a talent that not a lot of people know how to do. so it was funny that we started developing it six years ago and only up until now we’re actually at a product that’s- because once you start unpacking it, you’ll realize holy cow there’s a lot involved a lot of moving parts into building it.
Rick: Oh yeah just a coding side of like just to understand like when you go to develop a platform, man the logic that actually goes into it, is you could be stuck on one piece on just a process. And how the logic has to work, it’s been a whirlwind of knowledge, the fire hydrant of information really.
Larry: That’s amazing. Well guys listen, you have provided just a wealth of information to really help our students learn about the note business. If some of our students wanted to reach out to you, how would they get in touch with you?
Rick: They can get me at email@example.com it’s P-A-P-E-R-S-T-A-C.com.
TJ: You can firstname.lastname@example.org, P-A-P-E-R-S-T-A-C.com.
Rick: No K.
TJ: And you can go to www.cloudcapitalmanagement.com. That’s the main company that is our company that we currently run. That’s our investment company and all of the other projects and all underneath that. And you can kind of read a little bit of our investment pieces there and if you want to reach out that way too, love to help anybody out there answer any questions. We’re really excited to see what the future holds.
Larry: That’s awesome. Well guys thank you so much for being on I really appreciate it. and if you guys out there listening and watching have any questions please don’t hesitate to reach out to TJ or Rick they’ll be glad to answer your questions and help you guys I’m sure, right guys.
Rick: Absolutely Larry thank you so much good seeing you.
Larry: Awesome good seeing you thanks a lot guys I appreciate it.
Rick: Yeah thanks.