In this episode of the Distressed Pro Professional Podcast series, Brecht Palombo meets with Abby Shemesh of Amerinote Xchange to discuss sourcing note deals, how to profit from them, and how Abby built his note investment business.
Amerinote Xchange is loan acquisition firm specializing in buying and managing mortgage and business notes.
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Building a Note Investment Business with Abby Shemesh of Amerinote Xchange
I’ve got Abby Shemesh on here. He runs Amerinote Xchange. I’d like to get some more details from you on that. Here’s what I’d love to do. Some of the folks who read this are in business, and a lot of them want to be in business and are starting off in business. I would love to talk a little bit about how you got into the note business. Maybe we could talk about a couple of deals if we could and where your business is at, and what notes you’re buying. We’d walk through that, and then maybe a couple of case studies on a couple of deals you’ve done or something like that. We’ll chat loosely about them without too many details. That would be great. Tell us how did you get started with Amerinote Xchange. When did you open it? How did that whole thing come to fruition for you?
Thank you for having me. I was in the loan origination space in the big subprime boom. I got into originations in ‘99 as a junior loan officer for a company in Pennsylvania, which was licensed only in Pennsylvania. Through that evolution of career, you could say we branched out into other spaces of residential commercial originations. We did a lot of subprime, conforming and non-conforming we’ll call it. Nowadays, it’s referred to as non-qualified mortgage loans. That lasted until about 2004.
To be perfectly frank, one day, sitting in our office, when Bear Stearns was still around, we had our account rep from Bear Stearns come in and introduce us to our new account manager and said, “I’m going over to acquisitions.” I’m like, “What are acquisitions? What are you talking about?” They explained in great detail how banks also purchase loans, sell loans off and so forth and so on, which led me down a path to research the backend of the secondary mortgage market. That’s how I discovered the note buying space.
Did you jump right off from there? Were you getting a product from that? How did that go?
No. To continue the story, we got out of origination and started doing research in the acquisition space. That was late 2004. We started researching and building a plan, getting the sense of how to source leads. From 2005 to the end of 2006, I did a lot of my research and there wasn’t a whole heck of a lot out there at that time. I founded Amerinote Xchange officially at the end of 2006 and started with the website and got the lead gen going. We slammed right into the 2008 financial crisis when we were getting some lift in our industry and our business.
When you first started that, was your plan an acquisitions company? Did you start with capital?
We started with the sheer idea of wholesaling loans, brokering you can say, at the time, and taking those proceeds to use as a stepping stone to start buying. What we found out quickly is that the players that were in the industry were not as prevalent. There wasn’t as much saturation as there is now. There were few investors that were buying. There were a lot more deals that we were seeing in the seller finance space than we were on the institutional banking side. We did get our share of both of those types of leads that came across our desk. We did not have capital per se to start, but we built up capital quickly in that period of time.
Walk me through that a little bit more. Back in 2006, you’ve got partners or production. Bring us through, if you will, to now.
We definitely had a partner involved and are still involved. She’s my partner now and one of the Cofounders of the company, Molly Corson, who is also my wife. We took the bull by the horns here and we’re trying to generate as many leads as possible. We were wholesaling, referring notes off, and buying what we could. Capital partnerships and joint ventures with who we could at the time, but we were seeing that the cost of capital was much different. The sentiment in the market was different back then.You can’t just pin yourself into a corner and hope for the best. You need multiple strategies to succeed in note investing. Click To Tweet
Wholesaling was started ferociously and doing well in 2007, and then right around February 2008, we started seeing a tremendous slowdown, which came to a screeching halt in October of 2008. From there, honestly, from October 2008 to December of 2009, I didn’t have one single yes on any offers that we were making. Whether we were trying to buy for our own portfolio or wholesale off. It was a challenging period and a challenging time in the industry.
I had opened a commercial real estate brokerage like a boutique investment firm. Our transaction volume dropped by 97% that year. That was definitely a tough time.
I may add that even for the prettiest performing loan, we weren’t seeing offers or making offers higher than $0.65 on the dollar because we were running into huge equity deficits on these deals that were coming back way under for many months and years. It didn’t level out for us and we didn’t see a change in the market until September of 2010 when appraisal started cooperating with the transaction. That’s where we saw it. I don’t know if you recall but Miami, Florida and Nevada, Las Vegas were toxic at those times. Everyone was allergic to these areas.
The condos there especially. I remember I had a good friend of mine who I did a lot of business with in the mortgage space. He’s gone long in an upper-floor condo on the beach in Miami. It was totally wiped out down there. It’s bad.
It’s devastating. Texas didn’t see too much swing either way so that was still safe, but the offers weren’t generating any interest. Of course, California was a bloodbath. Starting with Stockton all the way down to the Inland Empire like San Bernardino. It’s toxic. We started slowly but surely seeing small areas that were not necessarily affected by the real estate downturn. Wild price swings starting to come back and offers were being accepted. Money was flowing and deals were flowing. It was a roar back in ‘11 and ‘12, and the rest is history.
Talk a little bit about what kind of deals you’re buying and what’s your business model. Are you clipping coupons? Are you just buying for income? Are you rehabbing these? What’s that look like?
We have multiple spying strategies across the board depending on the assets that we’re reviewing for purchase. We operate a great deal in the seller finance space. We have multiple marketing apparatus where we cast a wide marketing net, which captures not just seller financing leads, but from time-to-time, we get leads from asset managers that will reach out to us specifically a couple of times. Where they turned out to be fortunate in our ability to capture those leads.
Credit score sensitivity comes into play a tremendous amount when you’re trying to achieve par or close to, which is the unpaid principal balance as possible, which a lot of these institutions and seller finance lenders are looking to achieve. We see a lot of poor credit, good seasoning, good decent equity loans, where we would rehab the borrower to A) Either collect payments over the life of the loan, compounding interest, and so forth and so on. B) We would buy as low as we could, rehab the borrower’s credit as much as possible by placing them with a loan servicing outfit that reports to the credit bureau.
Assuming that they’re making all of their other payments on time, which is a risk, maybe 12, 18, 24 months down the road, we took a loan that we paid $0.62 on the dollar for. Now we can turn around and wholesale that if we want for $0.92 on the dollar or we can continue collecting our 11.5% return on investment. There are different exit strategies there because we’d like to keep our options open as we learned in 2008 and with what I call the Great Depression of the 2020s in route. At least from what we’re seeing and based on the research that you provide from your great platform, we need multiple strategies here. We can’t just paint ourselves into a corner and go, “Hope for the best.” It’s a surefire way to lose money.
It’s hard to have a crystal ball with the weirdest economy ever, but it’s also hard to see how all of this stimulus between the PPP, direct payments, eviction moratoriums and foreclosure. It’s definitely a severely distorted market. When these distortions go away, it’s going to be interesting to see what’s underneath.
I feel like we’re in one of those mirror funhouses.
You look all nice, skinny and attractive.
That’s a good explanation there. That is our primary strategy, but we also have strategies when it comes to nonperforming, sub-performing and re-performing. I don’t love re-performing notes. I know some people do. We also do deeds, which come through our seller finance marketing arm. We do lease options. We have a capital partner who’s hungry for lease-option contracts, which is the acquisition of the property, not necessarily the note.
There are different strategies that we provide, but not least of all, the nonperforming bank paper that we’re seeing. There’s a lot of outfits out there that are following that strategy. It’s effective and it’s lucrative if done correctly and modeled correctly. You don’t just close your eyes and put your finger on a map and go, “Here is where we’re going to do it.” You have to put the research in. I know this is from personal experience. The information that we get on the platform that you operate is priceless.
I appreciate that. One of the things you say is that a lot of times when I’m talking about folks, they want a secret formula or one answer on how to make money with these things, but it’s not that. It’s about being able to source the deals, and then figure out ways to make money with those deals, isn’t it?
It’s exactly right. I’m going to take a couple of steps back. We did a lot of speakership to folks who were trying to get into the business, who were in the business, landlords trying to be buyers, and real estate agents trying to be note brokers. Here’s the deal. You may not have capital. You may not have a rich uncle or capital partner that has money to step in and buy. What do you do? Your seat at the table comes through your ability to generate leads. That is your currency. You are at the frontlines and you are in charge of who gets what lead. In essence, you’re going for the one that makes you the most money.
In some cases, you’re also going for the ones that make the most money in the future depending on your investment strategy. You may not need that wholesale fee now. You may need an incoming payment stream in the future. There are different ways you can slice this up. I always say your currency is the leads. That is the money that you’re bringing to the table. You don’t necessarily need $100,000 in its self-directed IRA. You may just need a $12,000 marketing budget per year that you can dump in SEO or pay-per-click. I know pay-per-click can be a lot more expensive, but in SEO, if you have the right tools and the right team, you may be spending $12,000 to $36,000 a year. That’s all you need to generate $500,000 in fees.
If you don’t have that, then you’re dialing the phone and you’re sending emails.Leads are your currency. Click To Tweet
Through a subscription to a service like yourself.
I appreciate that. Commercial real estate, which is where I’ve got a lot of friends, colleagues, and where I spent a lot of time is similar in that. You start off as a broker, but after a while, you participate and maybe you don’t even participate with cash. Maybe you throw your commission in and now you’ve got a little piece of a building over here. It does take being a student of it all and being flexible and smart enough to evaluate what’s coming across your table.
I learned a lot about underwriting. As an originator, you want to pump them out. You put them through the loan process or a desktop underwriter or you try to pump them out as quickly as possible and you move on. I learned a tremendous amount of information and strategy through the underwriting process, especially our institutional buyers, what they accepted and what they didn’t accept. Many years, you’re on the frontlines and you start learning how to buy them correctly.
That’s the difference between being wiped out in a recession or a depression and not. I’m not bragging. There’s still plenty of time for this to go wrong. Our entire in-house portfolio, not once have we received a request for delayed payment or foreclosure in any of this because I feel like we bought correctly and that’s a big part of it. We’ve had conversations about what would happen. There’s plenty of time. These moratoriums start expiring when in March 2021.
We have had no issues and I attribute that to paying the right dollar amount and not jumping on every lead that comes your way. Just because it’s good on paper doesn’t necessarily mean it’s going to play out that way. You need to talk about the human element and emotional element if you’re dealing in seller financing because what I learned in seller financing is that that lender is emotionally attached to that asset.
If I’m not mistaken, and I’m sure you’re familiar with this, the institution or the asset manager or the loan officer or whoever you’re dealing with at the credit union or the bank that you’re buying from, they’re not emotionally attached. They may not even be price-attached. They’re more attached to how long is this going to take for this to happen? How much work do I have to put into this? Process is what they’re interested in.
Process, timing and then probably the number after that.
The number does play a role. You start seeing the landscape and reading the terrain of the different avenues that one could take to benefit from the backend note business, whether it’s institutional or seller finance. I know we’re hyper-focused on institutional here and we have plenty of experience in that realm as well, but they are two different strategies.
I didn’t make this up. A good buddy of mine, Mike Carey, whom I’ve worked with for a long time and I’ve interviewed on this show first set it to me, “Lenders are our repeat non-emotional distressed sellers.” You can’t find that anywhere else. There’s no private seller who is a repeat non-emotional distressed seller. That doesn’t exist. That is why I like working with them, too. More numbers than a process person and care less about people’s personal attachment to their assets and how to navigate that.
There are a lot of emotions. I’ll say this and I’ll end it there. If you’re dealing with seller finance space, you are sometimes more than just a lender or an investor buying a note. You could be a family therapist if you’re dealing with some inheritance dispute between siblings, which is a big reason why these seller finance folks sell notes. Even sometimes, dad bought a note from the bank. Now, dad’s gone and the juniors are fighting over. There are definitely levels of experience that come along with the strategies that you choose. Let me tell you and to everyone who’s reading, there’s work involved in this for sure. There’s no get-rich-quick here.
I don’t think there’s any get-rich-quick anywhere unless you’re in Bitcoin or GameStop, then the timing is perfect.
Cryptocurrency or GameStop is another one.
Tell our audience a little bit about who should contact you. You’re running this business over here. What’s a good match? A lot of folks read my blog and they want to reach out to the guest. I want to make sure that they’ve got a good understanding of whether or not they should, and when they do, what is it about? How do you work?
I’ll start by saying what we don’t do if that’s alright.
What we do not do is provide broker education. We get a lot of requests for education. “I’m looking to get into the note business. We want to figure out how to get bank deals. Can you show me how to do that?” That’s not what we do. I don’t care about your level of experience. Myself and my team will hold your hand through your first transaction as long as you have that currency with you, those leads. I’m not talking about the lead gen that you pluck off of a website and pass off as your own because that’s not going to get anywhere quickly.
We’re talking about cultivating and harvesting your own leads, either in the seller finance space or a relationship with a bank manager where you would be at the forefront of that conversation. You will be right there with us when we do the negotiation and when we do the processes. If it is your first transaction, you’ll see exactly how we do it. You can take that, scrub it, use it as your own, wash, rinse, repeat, and move on, and then hopefully, you’ll bring us more deals. We live in reality so we understand that we may do a couple of deals with you and that maybe it. We are more than willing to work with new folks that have that lead generation.
If someone gets a live one, they can contact you and you’ll help them make money with that?There is no “get rich quick” in note investing. You need to put in the work. Click To Tweet
Exactly. The first thing we’ll do is we’ll identify what the goal is of not just the entity selling the note, but what does the broker call it or the wholesaler want out of this. We’re going to touch on that. I know a lot of folks that are new to the industry, or maybe not. Maybe they don’t have so many deals under their belt and they’re hesitant to give up that information because they think they’re going to be circumvented. That’s a good stance to take. The last thing that we are looking to do is to circumvent anyone because we need that wholesaler or broker front and center. We’re not a large institution and we don’t have the bandwidth to do that. It’s a symbiotic relationship there.
We’ll identify the goals, get on the phone with the seller, and put the broker in the driver’s seat if they so desire. If they’re not comfortable with that, we’ll put ourselves in the driver’s seat with them in the passenger seat and give them all of our secrets to negotiation because we have nothing to hide in that sense. We’re not looking to monetize that. We’re looking to buy notes, get compounding interest and arbitrage. In some cases, those proceeds. In other cases, looking to create payment streams or assets that we can sell.
I assume the way you participate is whatever the fee or strategy or return is?
That is correct. In some cases, we have some successful situations where you don’t take a commission. We call that a deferred commission. You defer the commission for a piece of the note down the road or you defer the commission for a piece of the property sale once we foreclose, which can be 20X what you would get. You’re going to get a $10,000 fee or you can have a $100,000 piece of this asset if and when it sells. It depends on the investment appetite and the goal of the source bringing us the deal.
Selfishly, what I’d love to touch on before we wrap up here is that I know you’ve been a customer and I know you’ve done some lender direct deals. I wonder if you could talk about what that looked like for you when you’re dealing directly with an institution. Maybe if you could paint a picture of one of those deals that went down.
There were four that come to mind. We have a list that we cultivated and we’re nurturing NAPs into transactions. Ever-growing, some subtract, takeaway, and add. There are two of them that come to mind that was a combination. I’m sure that you know this. The training that I’ve seen on your platform has been mentioned that follow-up is required. It is everything in any kind of marketing. I’ll give me an example. In the direct mail lead, whether you’re selling refrigerators or note buying services, they say that the average person needs to see your mailer 5 to 8 times before they start sinking in.
Those numbers apply to asset managers that you’re reaching out to a bank and you can’t shower these people with gifts. That’s a big no. You want to make sure that you’re doing this in a way that’s professional and plays by the rules. What I’m getting at is it took many polite, persistent follow-up calls, emails, and visits to some locations, in some cases. That finally gained the trust of some of these institutions that provided us one of them up to seven months of just feeding us deals. These weren’t large banks. We’re talking about small banks, which are the target market here.
You do not knock on the door of banks like Wells Fargo and expect to get a response. Even medium-sized banks like Bank of the West and even smaller. We were targeting credit unions and small banks who may have 1 or 2 here. It’s a great experience. Get your feet wet and get a feel for the cadence that occurs in this type of process when you’re dealing with institutions. It’s a tremendous platform that has been good to us. This required follow-up, email and phone calls. Once we got that and we built that and establish that trust, we were fed deals. Some of them were just one-offs.
The credit union had 1 or 2. We remember taking both of them under commitment. One of them went through and the other one didn’t for appraisal reasons. There was some back and forth. It didn’t pan out. There was another institution that had statute limitation seconds, which we’re so hard to place. These statute limitation seconds, we had a buyer that was eating those up. That’s something that we went by personally, although we were definitely putting them under contract.
We had an institution that provided us with statute limitation loans. It was one of our biggest trades we’ve ever did and it was solely from the hard work that we put into using a tool like BankProspector. I don’t know of any other out there that comes close to providing the level of information. What we see and what we hear, especially in this industry, is we run into a bunch of people, businesses and institutions, specifically independent folks who say, “BankProspector. Heard of it, used it and didn’t have any luck.”
I’m not saying that’s the overall experience. What fails to be realized here is the work that needs to be put into cultivating and harvesting a marketing strategy. You can outsource the marketing strategy to a company and maybe they’ll perform. There’s nothing like what BankProspector offers on the market. The level of information and intelligence that you can glean from this reasonable subscription-based platform is volumes of what it can be in business. Especially if you get a couple of banks that continuously feed you deals that you can service those leads. You can cut marketing budgets, especially if you want to hyper-focus on that.
I know folks that get into this for the specific purpose of buying nonperforming seconds and rehabbing them. I know folks that are getting into it for the acquisition of vanilla nonperforming firsts that went awry. I personally like the non-accrual. I like the weird ones. I like the construction. We have an investor that will do non-collateralized business debt, which is a big one. There’s a tremendous amount of opportunity, especially off of the weird ones like construction loans, industrial, and gas stations. These are big ones that no one’s paying attention to.
I have a lot of good gas station stories from selling notes. I appreciate you coming on here. If you’re reading this and this sounds like it makes sense to you, get up there and start finding some deals. When you get ahold of one, give Abby a call over at AmerinoteXchange.com and he’ll walk you through the whole thing. Make sure that you make your money and you’re going to learn a lot. Abby, I appreciate you coming on here and talk. I appreciate you being a BankProspector subscriber. I know everybody reading the show appreciates it when folks come on here and they share the real deal, so thank you for that.
Thank you for having me. I greatly appreciate the opportunity and I greatly appreciate the product that you put out. It is second to none.
Thanks, Abby. AmerinoteXchange, check Abby over there and visit us at DistressedPro.com.