Hurry Up and Wait

Both my sons decided they wanted to join the Marine Corp. 2008 was an interesting time in our household. My wife and I instantly became “empty nesters” as our young men went off to join the Corp. Before a recruit goes into the Corps or any other of the armed services, they must go through MEPS. MEPS stands for Military Entrance Processing Station. Everything in the military has an acronym. MEPS has a series of stations that each recruit must go through to be processed into their respective branch of service. What I found interesting is that no recruit could move to the next station until all the recruits had completed the previous station. So if you have 50 recruits, all 50 had to go through station 1 before any recruit could start station 2. All very linear. Because of this, there was a lot of standing around and, at least from my perspective, time being wasted. Further, once the recruits are fully processed through one station, then it’s rush, rush, rush to the next station. It’s funny watching these recruits running from one room to the other, only to be standing around a few minutes later waiting for others to process.

Frequently, I find moments of linear processes in the note business, especially during the due diligence period until the wiring of funds for purchase. Here’s what I’m talking about: Let’s say a new tape comes out on Monday. Instructions of the tape say indicative bids are due on Friday. So for the next 5 days, I’m rushing through a tape of 250 assets looking for the top 10 that fit my model and the model of my investors. From that 10, I go into some deeper due diligence, attempting to be certain about taxes, title, and value. Then, I run through my calculations to check on potential ROI, looking at several different exit strategies to determine the best flow for each asset. Then, I look for joint venture investors that have given indication they want to invest with me, trying to match the asset and it’s proposed flow with the model and goals of the investor. Now, it’s Friday, and time to submit my indicative bids.

Then, we wait…………Understanding that note sellers, who just offered out 250 assets for sale, must sift through all the offers submitted to them from this tape. We wait for the email that indicates our bid was accepted, was counter-offered, or just simply too low. Often, you realize you’ve spent multiple hours of the past week only to have your bid rejected. That’s why my mentor tells me make more bids. For every bid that gets accepted, you need to submit 10 other bids. So, I work frantically during the week, submit indicative bids, with 9 being rejected, but 1 accepted. You know, it’s worth the trouble. The rewards are well worth the effort. Don’t get me wrong, this effort is greatly rewarded. Especially when you reach some proficiency in the 5-day preliminary due diligence period and can break down the tape quickly.

Turning back to the bid that was accepted, I now have 7 – 10 days to complete my final due diligence and prepare for funding. At this point we order our Ownership and Encumbrance report (O&E), checking taxes and title, and our Broker’s Price Opinion (BPO), solidifying value. Again, this is a bit of a rush, rush period as you have this looming deadline and now relying on third-parties to provide you with more information in a timely fashion. While you wait, you run different scenarios on the asset, call the county yourself, talk with your joint venture investor just to be sure they’ll be ready, and a myriad of other important details to check and double check. Assuming the O&E report returns with no surprises, and the BPO report supports your value, then we prepare to fund. A brief flurry to make sure all parties have the correct account wire information, I sign the Note Purchase Agreement, my JV investor wires funds to my designated account, and upon confirmation of receipt, I then request the wire to me made to the note seller’s designated account, the note purchase consummates.

Then we wait……….We wait while the note seller confirms receipt of the wire. I wait for that email of confirmation that I now own that asset.

Then we wait……. We wait for the original collateral file. We wait for the Note endorsement or Allonge. We wait for the Assignment of Mortgage AOM to be recorded or provided so I can forward to my service to record.

Then we wait…..There is this dead period due to RESPA where not much happens until the AOM is recorded and a certain time period passes. Generally, the loan cannot be set up with the servicer until the legal documents are ready to provide proof of the note sale.

Then we wait………for the official “Transfer of Servicing” and the “goodbye/hello” letters to get produced and sent to the borrower, advising them of the change of ownership and change of servicing.

After a whole lot of rushing and nervous periods of waiting, all the pieces finally flow together. The loan is set up at the servicer, the borrower is properly informed of the change, loss mitigation processes are initiated, and hopefully we can begin the objective of helping make America great again, one mortgage at a time.

So, let’s look at the details of the house shown above. This little house is an owner-occupied performing note in South Carolina. Per a recent BPO (not mine), the value is stated at $80,000.The total payoff of the first mortgage is just under $11,000, so the there is an excellent equity position in the note. The payments are just under $300 per month. The strike price for this note is a shade under $6,000. There is some indication I won this bid, but I don’t have confirmation as of yet. I’m waiting.

Here’s why I bid on such a small asset: I can buy this note in my self-direct IRA for the cash flow of $300 per month. $300 per month for 12 months is an annual income of $3,600. Divide by the investment of $6,000, that is a Return on Investment of 60%. I will gladly accept a 3-year investment for a 60% return in the first year.

I’m waiting for confirmation I won the bid. I’ll let you know.

Now, I hurry to the next station. Tomorrow’s Monday and there are tapes to review.

If you find this interesting, let me tell you how you can get involved.