The inventory is not gone, especially on the nonperforming side. It has simply shifted and it’s going in a different direction. Chaz Guinn has been on the side of the industry that most people don’t get to see, those people that buy in bulk and then go through due diligence to get that inventory out to individual investors. Chaz is the President and Managing Director of Revolve Capital Group, a real estate firm that is an active purchaser of seasoned or re-performing loans. He shares some tips on how you can get your hands on quality note deals and shares his insights on the quality of inventory he’s seen, why they created the firm, and the key focuses they’re looking at.
Listen to the podcast here
The Inventory Shift: How To Get Your Hands On Quality Note Deals with Chaz Guinn
Thank you so much for sharing this at your Meetup groups, at your real estate investment clubs and with the people that should meet who are interested in the note business. I do appreciate it. If you liked the show, please go ahead and click that like button or give me a nice five-star rating or whatever system that you’re using. I appreciate that as well. I’ve got a couple of things coming up, especially if you’re in the Central Florida area. We’re doing more and more training in the Central Florida area. We’ve expanded from our one-day training to adding on a deal review class where we can look at live assets, drill down on them and we’ll be setting up our first couple of those. The first one is going to be in Orlando. We’ll probably follow that up with a Tampa or West Palm or possibly South Florida training. If you have not gone to my website, KevinShortle.com, subscribe down on the very bottom to our mailing list. Please do so. I’ll keep you updated with all of that information. Believe me, I do not bombard you with a lot of endless emails at all, but it’s a great way for me to be able to communicate with you on what’s going on. We’ve got some big announcements that I can’t get into just yet and expanding things. Also, don’t forget that I will be once again co-hosting the NoteWorthy event. It’s going to in September and it’s going to be in Arizona. We’ll keep up with that as well.
I’ve got a special guest, someone I met years ago. In fact, the first time I met him, I was getting back into speaking and teaching the note business. A bus load of us actually were down in Southern California. We came right to the office at that time. Many of you know my guests from granite and he has formed his own organization. I met him quite some time ago. I was always impressed. In fact, before we got started, I was telling him the last time I believe that I saw him, we were down in Fort Lauderdale at the Ritz Carlton down there for the IMN Non-performing Note Conference. I remember I went up to him at the end and we were both waiting on cars to circle around. I shook his hand and saying thank you for knowing how to run a panel and know how to interview and ask questions and all that. He’s very well-versed in the industry, knows it from a different angle than most every one of my readers, including myself. That is Mr. Chaz Guinn. Chaz, how are you?
I’m doing great, Kevin. It’s not only good to be here, but to run into you about events and knowing that we’ve come full circle. Thanks for having me.
I’ve been looking forward to it. As you know, I’ve reached out to you a couple of times and our schedules didn’t mesh. I’m glad about putting up something on a calendar and saying we will make it at this point in time. I’m glad we hooked up on there. I have a lot of questions for you and we’ll get to your new company, Revolve in a little bit here. You’ve been on the side of the industry that most people don’t get to see. There’s a limited amount of people that buy in such bulk and then go through due diligence and get that inventory out to individual investors. I’ve been recommending companies that you’ve worked for quite some years. One of the things I’ve been getting and I explained to people that the inventory is not gone, especially on a nonperforming side. It’s shifted and it’s going through a little bit different direction. What do you see inventory-wise? Let’s start with the nonperforming side.
I think if you look at the journey of this business coming to the mainstream, take it back eleven years ago when the tidal wave was starting to hit the shores. In terms of the number of defaults happening on single-family space. You’re talking not only do we tip over on the billions, but we started to have a keyword of trillions of delinquent loans tied up in the banks. You fast forward eleven years later and sure, the way that those same owners of those mortgages, whether it be the government or whether it be a tier one bank, the banks that we all use on a daily or weekly basis on our ATMs, etc., they own the majority of products. I think they’re a bit hipper to the loss mitigation workout tactics that it does take to get a delinquent deal back to performing status. The knowledge base from ‘08 to 2012, we felt like it’s hot to the ancient time period like, “Let’s get these loans off our books.” “Mr. and Mrs. Smith aren’t paying. This house was $500,000 and now it’s worth $250,000.” We get why they’re not paying.When you feel comfortable about what the property is worth, you can go out there and make your money. Click To Tweet
What all that means to them in a nutshell to rewind time and then bring it back forward to now is folks are working out loans more or they’re keeping them on their books longer than a quicker liquidation time period that they had the years ago. The inventory that I did, we did a recap and put it up on our blog at RevCapGroup.com. Under News, you can see the article. It’s not our article. We got it from the market watch. It was showing from 2012 through 2018 the delinquency rates in New Jersey through Ohio, through Pennsylvania have gone from 11% statewide in 2012. It had ballooned to 50% delinquency rates per state of loans that are five years or more delinquent still on the bank’s books. What all that means is we’re still looking at $850 billion of people that are twelve months or more delinquent on their mortgage that is still tied up in the bank that has yet to hit the streets of our communities and our neighborhoods throughout. The inventory is still massive and it’s still very delinquent, believe it or not.
I’ve seen that too. As you know, I’m a student of the market. I do a lot of research and I continue to do that. I get pretty much all of it through extensive research. It’s nice to hear someone like yourself who obviously stays in tune with the market, but your role at Revolve Capital Group is buying in large bulk, so you have to be in tune with who’s handling this. I totally agree with everything I’ve read. Everything I’ve been preaching for a while is 2019, 2020 are going to be the years of re-performing notes and it’s already starting to come through fruition. People are holding them longer and getting them out there but I also caution people about that definition of what re-performing means.
My suggestion to people is assume it’s nonperforming until proven otherwise, with the way they’ve been doing that. What about the quality of inventory that you have seen? Is that accurate for most of what you see or is that no, most of what we’re seeing is nonperforming coming out from these banks and other entities that you work directly with to provide these notes to individuals? Do you see true re-performing where they have some seasoning or is it still that gray area of what exactly nonperforming means?
I see both. Revolve is an active purchaser of seasoned or re-performing loans. Loans at one time that were delinquent that could have been delinquent for a year or two or three or more. At some point they started to show the behavior of being able to make their payment again. For us, we’d like to see consistency there. I’m so glad you touched on that because a lot of people out there have a blanket turn for what a re-performing mortgage truly is. It’s been performing for three months and barely has a heartbeat. The guy goes, “It’s re-performing. Give me $0.80 on the dollar.” Little did we know that he bought it for $0.40 on the dollar three months ago. What tends to happen on those three months season performing deals is that a Band-Aid was put on a wound that absolutely needed stitches. They didn’t truly root into what happened in the divorce, what happened to the financial income of the household? Why did you stop paying? That’s the root of these nonperforming deals.
I will touch on the quality of the loans now are far greater than they were in the early stages of this great recession. The stuff that we were buying between 2010 and 2012 and ‘13, the majority of that stuff was vacant or boarded up. That is because we buy in Middle America, single-family, affordable-type house. We still see that same property, a three-bedroom, two-bath, 1,400, 1,500 square foot house, but the cars are in the driveway. There are toys in the lawn and Mr. and Mrs. Jones stopped paying in November of 2018 and it’s June of 2019. We’re sitting here saying, “There’s something going on there.” I think if we rooted in the problem, the property is quality. The neighborhood is nice. Mr. and Mrs. Smith or Bank of America or a big tall tier one bank couldn’t root into the problem for them. It made absolute sense to sell these types of deals to folks like yourself or me and allow us to root into that issue.
That’s where we still see the quality, but we are starting to see less delinquent-type deals. Meaning they’re not three, four and five years delinquent anymore. They’re a year or two behind. Because that performance is not maintaining on the books, big, bad banks for the government, for them, they would rather hold loans that are perfectly performing. It allows the yield to be there. It allows that bond and that’s acuity to remain its grade a performance. The minute that there starts to be deterioration, which is lack of payments coming in, it absolutely makes sense to tear that batch of those loans off, sell them out to a private market. That’s where I feel that’s the advantage of everybody reading this. I feel like that’s where the advantage comes from, us being able to get our hands on these types of deals that the banks can surround their hands around. That’s where I still see the others as quality out there.
I love what you’re saying because you can see the fundamentals of the business are still there and they’re still applicable. It’s just the inventory has shifted. I’ve always said it a slightly different way than you have, but I said this business is always about the numbers and the story. The numbers as you said, the property is good, this is good and the ratios are good. What the story here is what you’re looking at and that’s still so relevant now. That leads ultimately to how you get in, but also the story of how you’re going to get out of that inventory. Even at your level when you’re buying in bigger bulk, you’re able now to go through that process more with the institutions than the years of the way earlier where you had to take some bad with some of the good. Are you able to work that a little bit better these days?
We’re a bit hipper. I’m sorry to keep using that term, but we are a little bit more educated on the vendor processes that every one of you can tap into that we didn’t know existed back in 2009 and ‘10. We had to roll up our sleeves ourselves and use title companies.
You just had to figure out the business.
It’s cutting your teeth and hoping for the best. At the end of the day, typically if you bought $100,000 mortgage or $100,000 house, for example for $40,000, $50,000, chances are you’re going to come out okay on the other end. It’s making sure that the collateral documents all tied to the same. You didn’t want to buy Mrs. Brown’s loan, but Mrs. Jones is the one who is on the title. To get back to your question is now we are able to root in further to what’s happening on these loans. What we’re finding out and I want to make sure that I’m not painting a blue sky’s picture for the readers. I want to make sure that everybody knows that there is education here and that’s why everybody’s not in this business.The Millennial generation is by far the largest generation coming into the business marketplace that is still not owning a house. Click To Tweet
This is why we don’t have HGTV shows, Flip or Flop or Chip and Joanna Gaines following us around because there’s a bit more of a learning curve to what we do. We’re still buying single-family homes. That’s what I want to make sure that everybody understands is that the type of quality of the house is still there. What’s happened though is because these mortgages have changed hands a handful of times, usually the documents get lost. They get mis-jumbled, sometimes they’re inaccurate and it’s up to us as a buyer to ensure that everything ties to your loan. Education-wise as there are company companies out there, AMC, ProTitle or KC Wilson that are national vendors that do this review for you from the comfort of your home. They will show you a report from the time of the origination, the loan was taken out in 2008 for example.
123 Main Street in Colorado was taken out and from 2008 all the way through the last eleven years, those mortgages changed hand. The title policy maybe is not in the file. You need those wrappings around your mortgage loans to ensure that you’re buying the single-family house that you see on Zillow. All this background work is a little bit of a shuffle game that I see more of in recent environment, is that the collateral and the title side of our business needs to be insured. When you feel comfortable about what the property is worth, you can go out there and make your money. You’re not being held or tied up because the collateral documents are not tied to that very good curb appeal house that you’re seeing on Realtor.com.
It is about the business has grown. It’s matured, evolved if you will. In fact, you have evolved in your Revolve Capital there. That’s great. Evolve is right in the word there. It has not only from our side. The buyers are learning the business, as you said cutting your teeth, but also the surrounding services that we all need for BPOs and title work, preservation and everything that we utilize in this business. Have you also seen that on the other side, banks and servicing companies for those banks, they’ve evolved too to the point where they get the system now and it makes much more sense for them to get rid of these notes? Get rid of them early rather than waiting as they did for two, three years while they’re trying to figure out should we foreclose or not. They have the system down too where they want to get rid of these. It’s easier, less painful for them to do and they’re working a lot easier with bigger companies like yourself.
That’s a good lead in. You’re looking at all the new emerging markets that we see happening. Bitcoins, you see a tiny home, you see energy sectors and technology sectors. If you see real estate, we call it FinTech. Financial technology in our sector alone is far behind where Amazon is in their sector. They’re deliverable from the point of purchase to the consumer. You are able to get that process pinpointed from A to Z as far greater in other industries than it is in real estate. The banks realize that. Banks would rather cut their losses on their mortgage loans that are not paying and revolve a part of that capital into other industries and other emerging markets than to continue to hang on to a loser. Absolutely, a part of their business has a secondary capital markets trade desk that hedged into its mortgage division. It understands that the billions of dollars of loans that they’re collecting mortgage payments on a month, a percentage of that book is going to remain delinquent. Unfortunately, we all went to class. There’s always going to be the funny guy. There’s always going to be the loud burster in class. That’s a part of human nature.
If you look at history and you look at payments and you look at the way things have evolved throughout the time of cashflows and attrition rates on cashflow, you always are seeing a percentage of your portfolio is going to be delinquent. Banks have gotten smarter. They have realized that if we take that capital, that’s the trudge of our basis and put that capital back to work in other markets or into new mortgage loans or into other asset classes that are going to make us a return because that capital is not making us zero dollars. We originated those mortgages. Those mortgages are not paying on their said promises. The only thing we’re left to do is try and collect on those. After the collection efforts have worn their paths, especially in states like Pennsylvania and New York and Illinois where it takes a year or more to get to the house, it makes far greater sense to cut your loss, put that loan out for a high discount to Kevin Shortle or Chaz Guinn. Allow us to step into the shoes of them and make sense of the deal and go from there.
Since we’ve crossed over as far as a number of loans created, we now have more nonbanks creating loans than banks. The banks have depositors and the nonbanks have shareholders. We’ve crossed over now where more nonbanks are doing loans, Quicken being the biggest. How have you found them adjusting in the industry or are they a little sharper, a little more high-tech than the banks were and they’re going right down this path of loans go bad that they’re cashing out?
I was surprised to see that this is going on my thirteenth year in this business, Kevin. I felt like I did catch the right timing in 2006 as the origination market was beginning to take its turn. Origination slowed down and delinquent mortgages picked up. What I see now is a new mortgage product that is being originated at a faster clip than I saw back in 2004 or 2005 and 2006. They’re re-coining that mortgage product a non-QM. It stands for non-Qualified Mortgage. To me, the reason I brought up my timeline in this business wasn’t to tell my age. It was to give some sure that there’s more runway coming. I’m not saying that your self-employed, your potential attorney that works for himself but doesn’t collect the W-2 and makes $400,000 a year. I’m not saying that guy or gal out there does not deserve a mortgage. What I’m saying is that there’s still riskier nonbank loans that are still dipping down to below 600 FICO scores that are still originating dated income mortgages, so you do not have to prove your income. That guy or gal out there is still good in a single-family home.
My wife and I had to show almost our DNA to get our house because of the credit requirements of where they’re at now. When I understand that people are still getting houses now and don’t have to show too much to get it, that to me sounds like and smells like we’re going to have additional bad mortgage loans to continue to purchase and add to our portfolios. The Quickens of the world, thank you. LoanDepots of the world, thank you. All you private brokers out in the world, we appreciate you actually trying to stimulate the market by allowing folks to get into home ownership. I think we have realized that the Millennial generation is by far the largest generation coming into the world and coming into the business marketplace by far that is still not owning a house. They’re either in the rental market or living with mom and dad. We do appreciate trying to create some sort of creative financing and alternative investment to get that group into the market, but do it safely. Don’t do it in a manner that allows us, which I can’t believe I’m saying this, I don’t want the economy to tip over from housing again. At the same time, our business boomed during the greatest recession. If you’re creating more bad loans for us to continue to buy in the future into 2020 and beyond, I would say, “Giddy up.”
I was reading that these loans are backed by Ginnie Mae, which is the wholly government-owned version of Fannie Mae. A lot of those are nonbanks are backed by the government guarantee and also FHA and 62%, I think it was of their portfolio, already has over the legal limit of 43% debt to income ratio. It baffles the mind and you’re right, it’s not good for the economy and in the future, but good for the business. I get exactly what you’re saying there. I’m talking to Chaz Guinn with Revolve Capital Group and their website is RevCapGroup.com. There are lots of good free information on there. They have a blog going on there. They also talk about how to become an investor and the type of notes that they specialize in because it’s a little bit different. Rather than me try to explain that to you, Chaz, let’s shift gears. I feel what I’m looking at is you’ve thought this through. You’ve been in the industry a long time and you’ve found what I feel is a needed niche and that’s dealing mostly in portfolios of notes. Why did you create this company and what’s your key focus that you’re looking at?
We created this company based out of necessity to bring a message to the market that allows what we see on television shows and we’re seeing all throughout communities and neighborhoods throughout the country. Rehabbers and fix and flippers and folks that are going to the option’s steps and they’re paying top dollar for single-family homes. We have been buying single-family homes in volume. At this point, we’ve purchased north of 9,000 single-family doors to date and we are trying and we’ve also sold the majority of that product out to the north of 5,000 everyday investors. Guys and gals that are reading this are literally who we sold to. We sold to mom and pops. We’ve also sold to institutions. We’ve sold to tier one banks.You've got to start somewhere. Unfortunately, a lot of folks make things a bit harder than they need to be. Click To Tweet
We created this company so that folks understand that instead of going out and learning the business of residential real estate and getting into the single-family home and investment world. You guys need to know a message out there that stop paying $0.80, $0.90 or more on the dollar for that same single-family home when you are able to diversify yourself and buy that same single-family home for as cheap as $0.40 or $0.50 on the dollar. It’s happening with far less competition. Let’s say for the folks out there that are not contractors and not fix and flippers or rehabbers, that’s okay. Maybe some of you out there or are hedged in the stock market. Maybe some of you out there have mutual funds or bonds that bring you a small dividend or return on a yearly basis. Why don’t you look at the mortgage note that has a 30-year balance still on it owed and the borrower or the homeowner inside the house still has 28 years still left to pay and they’re paying every single month like clockwork?
You’re able to put your retirement plan dollars into single-family homes, return yourself a 10% or greater return based on the monthly payments and be able to have a long-term sustainable cashflow as well. Whether you’re a rehabber, fix and flipper or a cashflow-based person, that’s literally why we got into this business of creating Revolve. We can be at the point A position to buy directly from sources that are originating these mortgages and originating them in bulk. Our goal over 2020, Kevin, is to be able to deploy north of $100 million equity into the market. Hopefully, acquiring over $500 million of this type of product and be able to be able to build a bridge between Wall Street big time firms and everyday investors and be able to get into this space of buying single-family homes that are being sold in bulk on Wall Street.
That’s where we saw a big gap of folks that don’t know about this space. We love that there’s no competition, but I also love turning the light bulb on of sophisticated folks that go, “Really? That’s going on? That happens?” To this day, it’s still exciting to be able to get front of audiences that they had no idea about it, but when they do get into it, you start seeing that years later they’re running podcasts or they’re having portfolios that they’re managing 50 or more. They’re the shot caller. They’re the quarterback and they’re running a fund and they have the freedom that they took away from their 9 to 5 jobs and they’re doing this from the comfort of their home or they’re doing it from the beach or doing them from somewhere that they enjoy.
That’s a long-winded way of saying why we started Revolve, but I will say that with just shy of twelve months of being open, we have acquired north of thirteen single-family home portfolios, north of 500 houses. Just more or less for a proof of concept to show that we know what we’re doing in terms of purchasing, but we also know what we’re doing when it comes to the sell. We also know what we’re doing when it comes to educating folks to do this safely and do it properly and to start small. You’ve got to start somewhere, Kevin. Unfortunately, a lot of folks out there make this a bit harder than I think it needs to be. I’m glad guys like you are building the bridge for folks to say, “Teach me more. Show me more. Let me understand how I can potentially help my family out by looking at something different.”
Your ideal investor is somebody who has some capital ready to buy notes. Do you sell individual notes or are you selling portfolios now? What do you consider a portfolio?
We realize that there are a lot of folks out there that sell individual houses and they do it very well. We prefer that if you’re new to this space, we prefer you to get that education. We are built a little bit more for speed and we’re built more for a more of a sophisticated investor that knows the note game. We don’t want anybody to misstep. We are looking for folks who have purchased notes before or at least are familiar with the ins and outs of how particular states work, how to make sure that you have a servicer handy, those sorts of terms. We’re not built for the person learning the business. We’re built for the folks that are already in the business and are looking for a reliable and consistent source to come to on a constant basis. That’s what we’re built for.
I love it because it’s needed in the industry. There are people who have matured within the business and they want to buy portfolios down. It’s been difficult to find. It takes a lot more time for an investor to put together a bunch of one-off notes versus coming in looking at a portfolio. There’s a slightly different mentality as buying portfolios as far as moving risk around. You’re looking at a marketplace that finally has recognized this industry at this particular asset I should say as an asset class. We have people from the stock market diversifying into this. It’s recognized now that notes should be a part of everybody’s portfolio.
There’s no just notes, just stocks and just this. You want to diversify amongst all those. I like everything I’ve seen there and encourage everybody reading to please go check it out, learn more about what they do, see if it’s a good fit for you. As he said, this is for somebody who’s got some more experience and they’ve got some capital to deploy within this. They’ve had a lot of sales. They’re putting out good inventory. You can learn more at RevCapGroup.com. They’ve got contact information on there. I can tell you I’ve known Chaz Guinn for many years in the business and seeing the way that he works, I think you will have a great experience with that. Chaz, thank you so much for being here.
Kevin, thank you for having me. Thank you for letting me be a part of your group. We look forward to seeing you and working with you more.
I look forward to seeing you again as well. Thanks, everybody. I hope you enjoyed this. Please, once again, share with a friend. If you are not on our mailing list, jump on that mailing list and I’ll keep you posted as to all the training that we have now and coming up. Thanks.
About Chaz Guinn
Revolve Capital Group (“Revolve”) is a privately held real estate investment firm located in Anaheim, CA. We specialize in the purchase and management of non-performing and re-performing mortgage notes across the United States. Since 2010, Revolves management team remains at the forefront of the U.S. residential market downfall in the lower-valued affordable housing sector. Between 2010 through 2018, the management team at Revolve built a track record of purchasing and owning defaulted mortgages that were acquired from GSE’s, Tier 1 banks, Investment Banks, Large Servicers, and a few of the largest privately held mortgage funds in the U.S. Here at Revolve, our team has successfully managed purchased, and sold over 8,000 family homes and over one billion in mortgage debt.
We have experience in many facets of residential and commercial real estate. From servicing, foreclosures, bankruptcy, asset management, commercial, multi-family, hard money loans, rental, fix/flip, and other alternative real estate investments. Revolve executives and board members form a unique team of accomplished professionals from an array of different backgrounds. Including Digital Media, mergers/acquisitions, IPO, Attorneys, accounting, Triathletes, and life-long entrepreneurs.