Note investing is one of the easiest ways to create passive income. In this episode of the Distressed Pro Professional Podcast series, veteran investor and repeat guest Mike Ruscica of NoteConference.com and Brecht Palombo discuss how to develop a successful note buying strategy. They also talk about current market conditions, common note buying mistakes, and how investors can bolster their networks and seller relationships.
Check out NoteConference.com for Mike’s note investment coaching, insights, and tools.
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Note Investing Success With Mike Ruscica Of NoteConference.com
I’m having Mike Ruscica back here again, who might’ve had on half a dozen times over the last decade or so. Mike is one of my oldest friends in this business. He’s a friend in Distressed Pro. He refers folks here as we do to him because we have businesses that complement each other. The reason I asked Mike to come on here was that he’s on top of the market all the time. He’s out there acting, trading in notes, doing deals all the time and has been ever since I’ve known him.
We wanted to chat a little bit. First, we’re going to talk about the market, what we see happening now, and what we might forecast, no crystal balls. Weâ€™re going to talk about brokering. There are some disturbing trends or things happening in note brokering that it feels like we should drag out into the light and talk about a little bit. Mike will talk about what he’s seen there and then how you can do better than what we’re seeing in the market.
With that, Mike Ruscica of NoteConference, thank you so much for being on the show.
Brecht, it’s my pleasure. Whenever we get together, it’s always fun and interesting.
Letâ€™s talk about what’s happening in the market. Mike, you’ve been trading notes actively as a portion of your business in addition to investing. How long has it been?
It’s a big portion of my business. My first pool of notes that I brokered was in January of â€™09 when we closed. We started working on that pool in late December, right through the holidays and closed on it in mid-January 2009. I still own notes that I ended up purchasing on my first big trade. My daughter moved into one of those notes in North Carolina. We got back from there. I read an email called Staying In Your REO. Itâ€™s my first stay in an REO and it was fantastic. It is a 4-acre property that we foreclosed on. My daughter liked the property and she’s like, â€œI’m going to move into this thing.â€ This business is life-changing not only for me but for my family.
You’re saying REO and a lot of folks might not realize that REO refers to a line item on a balance sheet, which is Real Estate Owned that was acquired through the process of foreclosure. This is a property where you owned the debt and then you had to foreclose on it in order to acquire the property. Is that right?
That’s right. As note investors become the bank and we take the role of a bank on the good portion of it, which is collect the money or the problem portion of it where, in this case, the borrower had abandoned the property back in 2003. You can imagine what it looked like until my son-in-law got his hands on it and made it beautiful. We take the role of the bank and we own this real estate outright as the bank now and we can do with whatever we want.
Coincidentally, itâ€™s the same year that Distressed Pro started, August 31st of 2009. We were in the throes of the global financial crisis. Each of us is in business through this historical boom and run-up in asset prices. As we’re coming into this other strange time where we’ve had this COVID situation, we have high unemployment, a lot of forbearances, rent on all manner of residential and commercial property not being paid and the loans on all of those assets not being paid. What do you see out there in the market? What’s different from over the last few years? Talk a little bit if you have some sense about what you might see in the future.
All the information that I’ve received from all of your emails, which I love because I’m not a chart guy or statistics guy. In my mind, how many notes does it take for me and my students to be busy and make a nice living? It’s not a whole heck of a lot. A couple of hundred or maybe 1,000 notes. Out of all the notes that are out there in the world, we only need a couple of these assets. All the charts, colors, indicators and stuff don’t affect me very personally. From what I’ve gathered so far, we are entering a period of the perfect storm. I told myself back in 2011, 2012, I feel like I missed the boat on the last debacle, whatever you want to call it.
I’m preparing myself and my students for this next turn of events. In 2020, I got my hands on the perspectives from Bank of New York Mellon. In there, I was looking to buy the stock. In here, I said, â€œThere has to be a place where they do some type of provision for their defaulted notes.â€ Sure enough, we figure at the worst part of the 2008 and 2009 real estate crisis on-page or whatever we had a 4% default rate. Thatâ€™s what we build into our model for a 4% default rate, which is horrible, a lot of loans, and a ton of mortgages. I read in one of your emails that weâ€™re at an 8% or 9% default rate, which is twice with the Bank of New York Mellon and all the other banks have built into their model as a worst-case scenario, turning all their computers on to figure out the perfect storm. Nobody factored in this Black Swan right to this low.
The Fed is sounding alarms about asset prices, even which traditionally they’re pretty close to investing. A lot of the different bank reports are the same thing. Weâ€™ll have to see but what would be interesting to talk about is what you’re seeing now in the note business and specifically note brokering, which is how a lot of folks get started in the business. Most people don’t show up with piles of their own cash to start these businesses by making some transactional money. If you could talk about what you’re seeing out there in the market and then talk us through about how it could be done better.
My students use your product. Distressed Pro goes out and hunts down banks that have a product that they need to sell. My students are dialing for dollars, using your software, using the contacts that are in your software. The conversations that we’re having is, â€œCome back in the 3rd and 4th quarter.â€ We were doing our contacting back in March and April 2020 when they first started shuttering businesses. The banks themselves are too busy getting their employees to work from home and work in a safe environment. They were setting up their systems. They didn’t have time to talk about their distressed debt. They all gave us a warning and come back in the 4th quarter.
In my experience, this is the best time to prepare and build relationships with the people that are on the other side of the telephone, to let them know that we are here. What we do is we turn your non-performing assets into hard cash. We let them know that we are available or easy to talk to. We’re waiting patiently for you to contact us. We stay in communication every once a month. We send out more calls, emails and contacts. We connect with them on LinkedIn, sending messages back and forth. This is the time to learn this business, preparing for what you and I and many others in this industry are expecting over the next few years. It could be years of distress. Thatâ€™s what we’re seeing.
Before we started, you’re expressing displeasure with some of the funny business that you’re seeing out there in the market and folks would be doing a better job. There are a lot of folks who are holding themselves out as being able to transact and who aren’t. We could talk about how they could get past that and move on to doing real business. I don’t mean to be speaking of keeping it close to investing but I want to have you tell me rather than me telling you what you just told me, does that make sense?
The best thing I can do is teach from experience how it worked for me. I entered a mentoring program at the beginning of 2007. That mentor was teaching us the business of working non-performing mortgages but he was also selling us those mortgages. We had no other source other than to go to him, which was fantastic because it eliminated this whole side of the business. When the mentorship program was over, it’s like, â€œWe’re on our own. What do I do?â€ I found you early on because I need to get in touch with banks. The difference between me going out and wanting to connect with banks was I had one objective. That objective was to get my friendâ€™s notes because I had met all the people in my mentorship program.
I became friends with a lot of them and they’re all like, â€œWe’re note investors with no notes.â€ Off I go and I’m grabbing all the tools I can get my hands on. Your program came up immediately. I signed up with you at the beginning of 2010 and have been a faithful follower ever since. I don’t know how I could have done business without it. All I wanted to do was find notes from my friends. The first trade that I did was at the beginning of 2009. My friend and I worked on this project of taking 54 assets and selling them out to my five friends, he included. I bought 10, he bought 15, mostly other people bought 10. We ended up closing on 54 notes and we were all happy.
I said, â€œThe first one of you folks that get paid off takes me out to dinner. I don’t care where you live. You take me out to dinner.â€ Everyone agreed. That was the first brokering fee I received. I received a free all-inclusive meal at Buona Sera in Red Bank, New Jersey. It was fantastic. I was so proud of myself that I was able to let my friend turn a $6,000 investment into $32,000. He was tickled to buy me dinner and I didn’t hold back on that menu because I had put monthsâ€™ worth of work into this trade. Weâ€™re sitting there at dinner and my friend goes, â€œYou should make money the next time you do this.â€ Iâ€™m like, â€œI was happy that we all need to notes.â€
It was $1,000 or $2,000 a file and this was 54 files. My first trade was 54 notes. Thatâ€™s what I did. I made up a brokering fee for myself. I still had my friends and off I went into broker land. I firmly believe that the reason that I was successful in that first trade was two reasons. The first one was I was not focused on getting paid other than getting a nice Italian meal. The second reason why I was successful with that is that I knew how to do the due diligence on those loans so that I could show my friends, â€œThis one is worth $0.80 on a dollar and this one is worth $0.04 on a dollar.â€ Becoming a note investor is where the failure comes as far as you’re talking about the monkey business that goes on where you get a hold of a tape and what you do is you show it out.
Before you know it, it’s all rampant all over the internet and everybody saw it. Nobody knows what they’re looking at. They can’t get the thing close because they don’t understand the workings of being a note investor first and then a broker second to know what’s good and what’s bad. I know that’s where the breakdown occurs because I was strictly out on that first trade to get notes from my friends. If those people were strangers, the deal would not have closed. They knew me personally and my reputation. They knew me for over a year. I had that close to this relationship. We spent $350,000 on all these people. They wired $350,000 into my bank account and I could have hightailed it. These people trust me and know me and that’s why I start these relationships with banks and investors early.
I don’t wait until I find a tape and I got to find six people to perform this magical miracle of closing. It is difficult closing and getting everyone to wire, agree, and all the documents sign. There are quite a few moving parts to brokering that a lot of these brokers that are out there are not aware of. Thatâ€™s why I am successful in teaching this brokering business. I don’t know if you can tell by my enthusiasm but I am a diehard note enthusiast.
One of the words I hear you keep using is relationships.
The big R-word. I look at the relationship that you and I have. Itâ€™s all-important to my business. Relationships are what life is all about. I maintain a high level of relationship quality with the people that I want to be still related to. Not so hot with people that I don’t want to relate to anymore but the relationship is key to business. A side note on that is, I see this whole COVID thing and these restauranteurs struggling. I live in a resort town. Why don’t these restauranteurs capture email addresses so that they can send me a special 2 for 1 drink special or something to get people back in their mind? The big thing that is with me is I’m capturing email addresses and building my network of whatever it is.
Some folks on the newer side are going to hear this and they’re going to say, â€œI knew it was a relationship business. Mike already has all the relationship side. I can’t do this business. I don’t have the relationships.â€
When I got into this business, I was a machinist. I was going in the back door of a factory. I was even on the third shift, so I met new people.
Machinists, you didn’t know a bunch of bankers.
I didn’t know very many bankers. I knew one dentist, one doctor and it’s difficult to talk to those folks when they’re examining me. That is a story for home at the time but my network was net zero. I started getting out on this mentorship program. The thing will start at 7:30, I get on at 7:00 and see who would ping in. We were using whatever software free conference call, they would ping and it would say, â€œPlease, announce yourself.â€ Someone will get on and I’m not going to mention any names, Iâ€™d be like, â€œJohn, Iâ€™m listening to that deal that you were working on. Have you tried calling a bankruptcy attorney?â€
[bctt tweet=”You have to become a different person and start hanging with different people if you want different results.” username=”distressedpro”]
Iâ€™m chatting it up with these people. Before you know it, I’ve got some new friends. Some are in San Diego and you’re out in Bend, Oregon. I got friends in some high places. They never knew that I didn’t graduate high school or was a machinist my whole life. I was the guy who had the note in York, Pennsylvania, I turned that investment around and I ended up making a lot of money on it because that’s all they knew of me. What I did was I built that exact same model of having 40 students on a Zoom call but we’re all meeting each other intentionally, not unintentionally. I’ve managed to duplicate and expedite these investors’ connectivity a lot quicker than it took me 1 or 2 years to be not so shy.
Talk about that a little bit. Is that the program you’re running now to help folks who are getting started in the note business?
Thatâ€™s called NoteConference FasTrack Business. It’s designed for people that are serious about the note business and they want to start a business themselves, hence the name FasTrack Business. It is, among other things, intentionally set up for people to network with people that I’ve attracted into this education program. Thirty percent of those students are ex-students of mine when I was teaching one-on-one mentorship where we would get together on a weekly basis and work on their business together.
I came up with this group thing exactly because that’s how I learned the business in a group setting. I love it. Especially going through this virus thing. We meet on a weekly basis. I come up with a topic every week to talk on and then we have the Q&A. Sometimes, we all jump into a Zoom room, 4 or 5 people in a room, I let them chat to each other and get to know each other. If they want to talk about fishing, they can talk about fishing. That’s what personal relationships are. It’s not all about money and we’re having a great time with this group.
One of the things that I hear from folks a lot in Distressed Pro and through the Bank Direct Mastery Academy is when they get a live one and theyâ€™re like, â€œWhat do I do now?â€ Do you talk about that thing on your calls? Do you have folks bring deals to your calls? If so, what are you seeing these days?
We completed due diligence on one of the students. He brought in a tape with 650 loans and we ended up cutting that in half and putting an offering on 325 loans. That was a collaborative effort. We had 15 or 16 people that were very active in working on a Google Doc performing due diligence. We’re going to take this thing down as a group. The guy who brought that to the group would have got a check somewhere $50,000 to $100,000 as commission from each of the students that were willing to purchase on that. We lost the bid but we performed the exercise flawlessly. We learned a lot about getting sixteen investors to collaborate on due diligence, come up with an offer and pricing. Pricing alone is a tough animal.
I’m glad that we lost the bid. It doesn’t sound right because those loans went for more than what I thought they were worth. There were three other bidders that were above ours and two other bidders that were right at the same spot where we were. I felt good about that. I teach what I call note snobbery, which means that I don’t start a hedge fund, now I got to deploy $1 million, and buy whatever I can get my hands on. I’m a snob when it comes to what I pick and how much I pay for it. If I offend someone, I could care less. We had that conversation with the seller. They totally agreed and they agreed to continue. They only had seven bids. At a 7, we had 3 above us and 2 below us. They said, â€œWe have no problem with your bid.â€ I ended up spending about $3,000 under the due diligence but it’s nothing. We were looking at 325 loans. It was a fantastic exercise and we will get more loans to look at. I teach my students to go out, find products and let’s get you paid. It’s been fun.
We don’t have a crystal ball. We don’t know what’s happening in the future. We didnâ€™t know that the forbearances and the defaults are soaring. We do know that folks in high places, banks and the Fed are calling for some warning. We know that all the relationships have already been made and there’s no room for you. We know that making relationships is an ongoing thing that you do throughout your life in various ways. If you want to get a kickstart on that and you’re somebody who just getting started into the note business and you want to accelerate your time to doing a deal, being able to network and talk with 30 or 40 folks who are doing the same thing actively then you should check out Mike’s program.
I’ve known Mike to be an honest broker in my entire career. Heâ€™s always dealt me straight and I can recommend him wholeheartedly. I want to emphasize that I hear from folks so often that they’re getting started and ask a lot of questions about their chances of success. Mike, what would you say to somebody who’s looking to get started? They’re wondering like, â€œWhat are my chances of success in this?â€
This is a very interesting point. I have a full online training program that goes along with FasTrack Business. This is the most important part. All mechanical stuff of what I described on that 325-note tape. The due diligence, I spent $3,000, pulling reports and all the different mechanical stuff that we were doing to get to a point of at least coming up with a fair offer. That’s 20% of the business that is the mechanics of the business when you go looking for bankruptcy, going through pacer, looking at all the different TLOs and reports. The 80% of the business is what I enjoy teaching. That’s the mindset of an individual saying, â€œI don’t have to be a machinist anymore to make money. I can go and become a totally different person and start doing webinars and conference calls with potential clients and investors.â€
You have to become a different person if you want different results. With your software, I use your Realty Motor Software. I get to become that different person. Who am I to be writing emails about all this mindset stuff? It has completely changed my life and thatâ€™s what I teach. When I got out of the machine shop trade and got into real estate investing and then boom right into the note business, I had to completely become a different person and start hanging with different people. Thatâ€™s the only way that I see students becoming successful is they have to change their habits. They have to stop hanging with the people they’re hanging with and get on these webinars and conference calls with my training education. Somebody in Florida is meeting somebody in California. They don’t have to be neighbors to become partners in whatever collaboration they want to perform.
You got the 80/20 Rule that even pertains to our note business. The 80% is learning how to become that different person and model yourself after someone else who’s in the group that is already successful. That’s what I did. I modeled myself after a couple of different people that were holding their own webinars. I’m like, â€œI can do that.â€ What does it take to open up a Zoom account? $15 and then visit a real estate event Zoom thing and you do what I said with these restauranteurs. You gather email addresses.
If you got one guy whoâ€™s a realtor, one woman whoâ€™s a dentist and someone else is a doctor, you’ve got their three email addresses and you invite them on a Zoom call to discuss what their views are on the upcoming note events or the crisis that we’re headed for once available credit becomes harder to get their hands on the discussion topics that trust you. The other thing would be to become somewhat of an expert during this time that we’re waiting for this reaction. Early on, I became what I would consider an expert in self-directed IRAs. How did I do that? I didn’t go to college for that. I didn’t go to CPA school or anything. I went on the internet and I read everything I could about using self-directed IRA. Now, the people that I talk to, I would, â€œNext Wednesday, I’m holding a Zoom call on how I’m going to use my self-directed IRA.â€
I didn’t even use it yet but I knew all the different directions of investments that were allowed by the federal government. I would hold a webinar, discuss it and make sure that I hit the record button. Afterward, my son would go in and edit out all the burps that I’ve made and noises. I put that up on a website and I made that available. I did that out of kindness because everybody should be using self-directed IRAs. My kids have one, they should have an LLC and they should have an IRA. Things are basic but most people don’t have them.
Good advice to get anybody started. Folks, if you’d like to hear Mike and I talk or you want to talk to Mike more, find a button below this post. Mike, I appreciate you coming by and being on the show. Let’s check-in the first quarter of 2021 and see what’s cooking then.
Good talking to you, Brecht. I appreciate it.