Everybody is raving about top tips on getting deals and performing due diligence. That’s great, but what do you do if a note becomes non-performing? Host Kevin Shortle dedicates this episode to help you prepare for the worst-case scenario by teaching on how to plan out multiple exit strategies. He also points out the importance of putting ideas into details so you can think things through. This way, you get maximum return in both time and money. Join Kevin today and get ready to uplevel your skills from newbie to expert.
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Planning Out The Details Of Multiple Exit Strategies
Thank you so much for tuning in to the show. If you enjoy it, please go ahead and rate me a five-star on your iTunes or whatever device that you’re utilizing to this show. I appreciate that. That enables the show to grow and it allows me to keep doing this which I do enjoy doing. Having said that, I am going to be changing the name of the show from the Kevin Shortle Show to better reflect my new number one bestselling book on Amazon called Real Estate Without Renters. I think it better reflects the show. It better reflects the future of the real estate and the real estate note business. If you’ve been following me for any length and time, you should know that I’m never just like, “Notes are everything.” It’s real estate and notes.
The strongest investors moving forward are going to have knowledge based on both of those and be able to apply the skills and strategies in both of those areas. Take the best of real estate and combine it with the best of notes. That in my mind makes the most sense of anything and that’s the way I teach it. That’s the way I’m teaching it moving forward, which is different than anybody else out there who’s educating in this space. A lot of them are focused on one category of notes or notes in general. They’re missing the point on the bigger picture there, but that’s okay. That’s why I’m here and that’s why you’re reading this and hopefully, that’s why you’re reading my books and coming out and see me at live training events.
The Problem With Meetup Groups
The new name will be reflected in the next episode that comes out, so we’ll have that. On this episode, I wanted to talk through some things on nonperforming loans. I’ve been doing a lot of trainings here in Orlando and in Tampa. There are a couple of local meetup groups that have some following. The problem with meetup groups that I’ve seen so far is that you have new people coming in who are brand new to a particular topic, in this case, note investing, then you have people who are more seasoned that tend to be more regular in coming to those meetup groups. It’s hard for me to grow like that because the new people want to figure out the very basics while the advanced people don’t want to talk about the basics again. They want to network. They want to move forward. They want to do deals together.
It’s difficult to make that a good mix and with the number of meetup groups that I’ve seen, that is a common issue within every one of them. With any kind of issue, with any kind of problem, there are solutions to that. If you have a note meetup group, you have to figure out what’s its purpose. Is it to educate or is it to set up for networking? If it’s networking, leave the education to somebody else. Having said that, there will always be a degree of education that you’ll put on as a part of marketing, but that’s very different from teaching somebody the entire note business. Leave that to other people. I go out and talk to meetup groups all the time. If you’re interested in having me come out to your meetup group or real estate club, I’ll be glad to do it. Contact me at Kevin@KevinShortle.com and I’ll be glad to get on the phone with you and we’ll work something out for that.Always think of not only how you can get into investing deals, but how you can get out of these deals as well. Click To Tweet
Commonality In The Due Diligence Process
What I’ve recognized in addition to that is there seems to be a commonality in the due diligence process that builds up to buying a note. I’m doing a number of trainings in the area, helping to grow these clubs and we’ve been doing the deal analysis workshop as I’m calling them. The deal analysis workshop is different than a typical training. In that, I break people into small groups. We’re talking maybe four people in a group, based upon common interest and we have them go through inventory that makes sense. I walk around, I help every group out because you have to do the work. It’s one thing to sit there and watch an instructor, watch somebody like myself teach because a lot of times you go, “I get it. That’s easy. I see it.” You go home and you’re like, “How did that work?”
It looks so easy in class and all of a sudden what looks so easy is no longer easy when it’s time for you to click that buy button if you will. It is an exercise that becomes easier the more that you do it. I have a lot of people that will come back to the classes and learn that way. I’ve modified the model that I’ve done with each time as I learn a little bit more about what is important to these groups. The last time I did one in Tampa, I gave an option. I said, “I’m going to do two trainings in one day. The first training is me instructing and showing you how I do the due diligence process and then the afternoon training is putting you to work and you looking at assets with my assistance, but I want you to work through it.” That’s the only way to learn. Everybody attended both of those.
Plan Your Exit Strategy
It takes a lot longer than people realize to go through some of that due diligence. I was doing a personal consultant call webinar, one-on-one with some of them. We’re looking at one asset and it took up almost 45 minutes to go through it because we’re viewing the deals. We’re trying to figure out if the first was paid off. Is this in the first position now? Is it still in the second position? We had to go to county records and then it ended up having bankruptcy issue involved. It can take a potentially lengthier time to go through these deals. My goal in teaching people this is always to think not only how do we get into these deals, but how do we get out of these deals. That’s what needs more attention. That’s my focus of this particular episode. It’s one thing to go through the due diligence, to check all the boxes, look at the valuation numbers, look at the investment-to-value ratio numbers, look at all your comparable sales, look at the paperwork, look at the title, look at the taxes and be able to check those boxes off. There are about ten things that I had that I always make sure that I’m able to check off or at least be able to get that before I close on an asset.
I don’t think people spend enough time to lay out what their exit strategies are going to be. If you’re dealing with performing notes, that’s pretty easy. It’s going to stay performing or if it doesn’t, you’re going to do some workout and then it’s deed in lieu or foreclose. With performing notes, there’s that grace period especially if they’re seasoning. They’re not going to default. My exit strategy is to keep the payments. On nonperforming notes, when you’re buying something that simply isn’t working, you’ve got to prepare for the worst-case scenario and you have to hope for the best-case scenario. When you’re doing your due diligence on assets, it’s not just about, “Is the price-to-value good on this,” which is important, “but what am I going to do with it to maximize my return?” Both time and money has to be considered in that.
What I mean by that is sometimes it’s easier for us to go, “On this one, based upon where I am right now, I’m going to take this property back through foreclosure. Maybe I’m in a short foreclosure state. It’s going to cost me $1,000 in 90 days. Let’s do that. I’ll sell the property as is.” You just want to churn that deal. Other times you might say, “This one’s better for me to hold as a lease option for a period of time and then paper our way out of that.” It’s what some call the lease-purchase note and set it up that way. There’s a whole chapter on my book on doing things like that. You could make more money, but you also have to account for the time mechanism on there.
What I tell people all the time is you figure out if this is a good deal for you. It’s the right price, the risk is in your risk tolerance, it’s a proper yield for you. It’s the proper out for you, which you would want to do a lump sum or monthly cashflow, that sort of thing. If you’re comfortable with the deal, it makes sense for you to sit down on a computer and you can even build spreadsheets to this and say, “What is my best-case scenario?” Maybe in a nonperforming note, for example, your best-case scenario is to buy that note and pursue Hardest Hit Funds. Maybe the people are still living in the house and it’s a Hardest Hit Fund state. They’ve shown the desire, the willingness and the ability to stay in the home if you work with them.
Let’s see if we can get the Hardest Hit Funds involved in that. It is in that proper state, I’m assuming. The Hardest Hit Fund might be our first one where we could get paid up to $35,000 on average to help this person out, to help them stay in their home by doing some form of loan modification. What if that doesn’t work out? Let’s go to our next one, but instead of just thinking through those, write it out. Get it on paper, whether that’s a spreadsheet, whether that’s a Word doc, whether that’s a handwritten piece of paper, run those numbers out. If we did get Hardest Hit Funds, what would they pay? How would they pay that? Do I have to redo the loan? Do I change the interest rate? Can I increase the term? Line all those numbers up. Instead of just going into it with an idea, you go into that with specifics and you know, “If this works out, this is exactly where I am.”
Your second thing would be, “Maybe, I can’t get hardest hit funds, but they still have that same willingness and ability to stay in the home. Let me modify the loan.” Run through the terms of the loans. If I were you, I would do at least two different ideas on how you would like to structure that note. I prefer three, but at least do two of them. That way you can play around with the payments, you can look at what’s the rent in the area, maybe you know a little bit about what the people can afford and start writing those numbers down. Maybe your intent is to sell the notes. You’re thinking, “I need a higher interest rate. I need a shorter-term if I can do that. Maybe that’s the best way to go and to modify the loan.”
Give Three Options
If you put the numbers out there and think in terms of this is the note that I would create, you can then by an extension go, “I’ll keep that entire note or plan on selling a part of that note in the future” and run those numbers out as well. It sounds like a lot of work, but you can see very easily that there’s a spreadsheet that you could build within this that’s fashioned based upon what you want to do, but that will give you a lot more ideas on what you’re going to do with it once you own it. The other thing that it’ll do for you is it will put you on a path. If this doesn’t work, go to the next one. You already have them lined out because the worst thing you can do in these nonperforming notes is to sit around for too long and not take any action. A lot of it is because people don’t have a plan.The worst thing you can do with non-performing notes is to sit around for too long and not take any action. Click To Tweet
You’ve got your plan number one, your number two plan, and this fictitious example is just to do a loan modification, but you got three different options on that. Whether you do the loan mod or not, you can still give those three different options to your mortgage loan officer and say, “Here’s what I would like.” They can pick anyone they want. I don’t care, but these are the type of notes that I want to create. Don’t leave it up to them what they want to create because their agenda might be slightly different than yours. Theirs is just to get the thing done. Yours is, “I want it done and I want it at these rates. I want it under these terms because I plan on potentially selling all or part of this note down the line.”
Make sure that you give them some options in which to work with interest rates, terms and all of those things. You can even do a two-note solution. You can work in forbearance. You can do trial loan modifications. Maybe you do a third technique which is, “I don’t know that these people are going to be able to make these payments, but let me do it under a trial modification. I won’t foreclose on you for now. I won’t accelerate this loan. I’ll forbear foreclosing on you.” That’s a forbearance agreement that says, “I won’t foreclose. You make the payment successfully for six months, then we’ll do a full loan modification.”
Right there you have three different ways to go, but put the details in there. It’s so important to do the details because if you just go to plan A, plan B, plan C or one, two, three, whichever way you think, it doesn’t mean as much when you don’t have all the numbers and think it through. My thought process is always this. If you know it so well in your head, it should be easy to write down. I’ve had people say that before like, “I know what I’m going to do here. I got my plans all in my head and I know what I’m going to do if this doesn’t work out.” My response is always the same. It’s like, “If you’ve got it in your head and you know it so easily, put it down on paper.” Those who do end up going, “I hadn’t thought everything through on this. I hadn’t run the numbers yet on how to create a better quality note for myself. I didn’t think through. Maybe instead of creating one note, I create two notes and I keep the second note and I sell the first, in full or in part.”
When you put the details down, it forces you to think of other plans and that’s a good thing because on these nonperforming loans, you don’t know which direction it’s going to go. This whole business is about solving problems. There are numbers and there’s the story and you should be familiar with both and do they work? Because I could do a deal where the numbers work fine, but if the story doesn’t mesh out, then I probably won’t be able to implement that plan. If the story is good, they want to stay, they have kids here, but they can’t afford it. In other words, the numbers don’t work. That plan is not going to happen.
We have to think through all of those and line them up in orders of priority. Going back to my example of if we’re going to do a modification, we’re going to start hardest hit funds with a modification. If we can’t get that rolling, it would mean I’m going to have to know how Hardest Hit Fund works in a particular state. If that doesn’t work, I’ll do the loan modification without Hardest Hit Funds and then I’ve got options of saying, “I’ll do a trial loan modification where I won’t force foreclosure and get the payments coming back in and then six months down the road we’ll see if that makes sense for us to keep those people in the house.”
Investing In Puerto Rico
If we can’t get those going, what about a deed in lieu? What about a deed in lieu with Cash for Keys? How much Cash for Keys would I have to come up with? That’s going to vary by state. For those of you who read my blogs and such, I was down in Puerto Rico and looking at properties down there and looking at note back to investments. Doing our research, we went to an investor who happens to be an old friend of mine. He’s been investing in Puerto Rico for fourteen years. This guy knows the ins and outs of real estate and he told us there is a big difference here in foreclosing on owner-occupied homes than foreclosing on a commercial building. With a commercial building, no problem. The judges are not sympathetic to that business, but because of the hurricanes, because of what happened here in Puerto Rico, when you’re foreclosing as an investor on someone who owns a home, the judges have a lot of sympathy for that homeowner. They’re going to make you work and go through that process and try to work things out.
The same thing is on the mainland here. We have the same things. We have different states and different types of documents. Is this a deed of trust or is this a land contract? If it’s a land contract, am I going to be able to do any foreclosure on that or eviction process? All of this has to be thought out. Deed in lieu might be my next solution where I’m saying, “How much do I need to pay this person?” We were told down in Puerto Rico, “You’re going to pay them money to move out because it’s going to be much cheaper in the long run for you to pay them a lot of money than go through foreclosure because they’ll eat up your time in the foreclosure process.” Other states where it’s quick, why pay a lot when you can foreclose for $1,000 in 90 days?
It’s important to lay that out. Depending on where this note is, I would go through and say, “What is my estimation of what the foreclosure is going to cost? Let me look at the deed in lieu and how much am I willing to pay to get them to move out, not damage the property any further, but most importantly to save me a lot of time.” Put those numbers. How do those numbers affect your potential profit margin? This is where the details have to be done. You no longer can simply say or you never should simply say, “If I can’t do this, I’ll just do a deed in lieu.” What is that going to look like? What does the document look like? Have you even reviewed what a deed in lieu looks like? Do you know how to word the Cash for Keys in there? Do you know how to present that? Who are you going to hire to deliver that?
Think Ahead Of Time
All this has to be thought out ahead of time. You will save time, you’ll save money and you’ll also make higher returns. What if a deed in lieu doesn’t work out? You’re going to have to foreclose. What’s that going to cost you? Who are you going to hire to do that? Where are the best attorneys in the area to do that? What’s it going to cost you in time and money in which to do that? If you’ve gone through my trainings, I show you things where you can get estimates of what that’s going to cost. I tell you, at the end of the day, it’s an estimate. It’s going to be between you and that attorney. Maybe before foreclosure, you even have a substep in there that says, “Before we foreclose, we’ll go ahead and send a letter to them saying that we have no choice. The loan modification is simply not going to work. Here’s what we can do. We can offer you X number of dollars for Cash for Keys or we will have to foreclose.”Don't limit where you're looking at deals. Go to where the deals are. Click To Tweet
If they start too long, maybe your next step is you have your attorney send a letter saying that you are going to start the foreclosure process. Number one, that letter’s cheaper than filing for the foreclosure process and it may be enough to get that person motivated to go ahead and take the Cash for Keys. You’re not threatening. You’re simply notifying that this is the next course of action because you haven’t heard from them in any manner in which that shows that they’re going to vacate the house under a deed in lieu. Put the numbers down. Write down what your scenario is on that.
What if we do get the property through foreclosure or deed in lieu? What are you going to do with it? You got to keep it as a rental. What are the rents in the area? What are the vacancy rates in the area? What’s your potential return on that? Who would you hire as a property manager in that area? What’s going to cost you to fix it up? Maybe it’s best to flip it. What’s going to cost to fix it up? Are you going to use a real estate agent to sell it in that area? If you did, who would that be? These are all things that you need to think through as you’re looking at buying this asset.
If you’re already in research mode, you’re looking up the property values. You’re on Realtor.com and looking up this property and finding valuations and in the back of your mind you keep thinking, “This might be a good real estate agent in the area. Their ad popped up on an investment property. Maybe they’re a good person in this particular area. Maybe they’ll even do a drive-by for free for me and let me know the condition of the property in the area. Maybe I’ll even get a free BPO from them if I end up with this property and I’m going to rent it. Maybe they can be a manager or they know somebody or they can be my salesperson.” You have to have all those in mind when you go through this. Remember, the note business is very national. You don’t limit where you’re looking at deals. You go to where the deals are. Always keep that in mind. You need to build up this agenda of what you’re looking to do.
If we end up with the property, should we sell it as is? Should we fix it up and sell it? Could we fix it up? As we’re fixing it up, we sell it to a contractor. We sell it to the handyman who’s doing the work on the property. We sell it right to them and we finance it for them. Maybe we fix it up and sell it to a consumer. Maybe we fix it up and sell it to a consumer with seller financing. Maybe we do a lease option with a consumer with a note created at the end of that twelve-month option. What do those numbers look like? What’s the best thing for me to work out? All of this can be done while you’re under that, hopefully, final ten days before you close. Most all sellers now, when you say, “Yes, I want to buy,” you’re making that subject to further due diligence.
Do Multiple Levels Of Due Diligence
You can start to drill down on all of these numbers during that period of time because now you’re facing the closing. Always think of due diligence as multiple levels of due diligence. The first one is always very surfaced. Do the numbers make sense? Do the ratios make sense? The next one is a deeper dive. Maybe looking at public records, examining assignments, allonges, deeds and everything else and laying out overall what your techniques are going to be. Once you get the buy sign on that and you’re the one who has that right to buy that, you better start hitting those exit strategies real hard. It’s going to save you time. It’s going to save you a ton of money. It’ll make you much more efficient investor to do that.
As you’re building that, whether you’re doing it handwritten, whether you’re doing that through Excel or a Word document, I would recommend you start to think in terms of building an Excel spreadsheet. If you don’t know how to do that, there are free courses and things that you can take. You can come to my courses and I show you how to do the basics on all of that. It makes sense because if you can start to put those numbers in and click a few buttons and see your entire picture of five, six, seven exit strategies all at one time, you’re going to go into deals a lot smarter, a lot more efficient. You have a completely thought out plan and when one thing doesn’t work out, you’re immediately moving into the other. You’ve thought about what particular people you’re going to utilize every step on the way. It’s much easier to move right into those deals. If there was one thing that I’ve noticed in the classes that I’ve done in Orlando and Tampa is not enough thought process on the exit strategies.
It’s all about, is this a good deal for me to buy? I totally get that part, yes it is, but what are you going to do with it? Get specific on that. You got to lay out the numbers. That’s the topic that I was thinking about based on the other trainings. I’ve got some other live trainings coming up. I am going to go ahead and put them on a webinar. We experimented with that over in Tampa. I had a gentleman in Indianapolis that wanted to attend but couldn’t make it. He said, “Could you put it on a live stream?” I said, “I hadn’t planned on it, but let’s give it a shot.” We did and it worked out well for him. He was happy with all of that. I’m going to continue to do that and that will open up my trainings up to a lot more people than just the people here in central Florida.
Once again, thanks for being a reader of the blog. The new name is simply going to be Real Estate Without Renters based upon my new book. If you’re interested in the book, it should be on Amazon. The eBooks are already up there, but the paperback, for whatever reason with Amazon, my account is on hold until they see some address verification document or something. We’ll get that straightened out with them. Real Estate Without Renters will be the new name of the show. I will continue to do this format. Sometimes it’s just me. Sometimes I’m going to have guests that I will interview. As always, when I’m interviewing guests, I always put the spin of how does this affect us in the note and real estate investment business? Thanks. I’m looking forward to talking to you once again. Bye now.