How do you get started in the note business? In this episode of the DistressedPro Professional podcast we have Mike Ruscica and Barbara Gelok. They will be walking us through their most recent note investment and highlighting just how easy it easy to invest in mortgage notes. This episode is full of insight into exactly what it takes to be successful in this business.
Brecht: Hey everybody! This is Brecht Palombo with distressedpro.com and I’m on here today with Michael Ruscica and Barbara Gelock. Alright.
Barbara: Thank you. That was correct.
Brecht: I didn’t think I was going to get that right.
Barbara: Most don’t.
Brecht: I was talking to Mike the other day. Mike and Barbara have been working together for about a year. I was talking to Mike the other day. You were telling me about an excellent deal that you’ve been doing on the notes space. I wanted to bring you on to talk about that because I think that it is the kind of story that folks should hear if they are considering getting in to this business at all. So, I’m hoping that you’ll just sort of lay out all the pieces of that for me.Click here to Download the Note Conference Case Study PDF
Brecht: Mike, we’ve known each other for seven years, something like that?
Brecht: Too long anyway.
Mike: Yeah. Yeah, too long I’m sure. Yeah, in 2010 I got a subscription to your Distressed pro and I’ve been using it ever since.
Brecht: And you guys have been, you are certainly one of my main go-to guy when things come in, and I’m not sure what to do with them or if I think somebody would be better advised by someone other than me, I send them to you and it’s for reasons like the deal that you were going to tell us about right here. So, we dive in here, and you kind of tell us about … You’ve been a full time note investor for that same time right? Eight, nine years, something like that 2010?
Mike: 2007. Yeah, I stumbled onto this non-performing note business the day that I sold my last flip house. And I didn’t know it was my last flip house and I didn’t know that the market was going to head to where it headed in 2007 and I luckily found out about this distressed note business and I really found my home with this business and so I mainly purchased non performing second mortgages. I liked that space. I can buy them cheap enough and really screw up and still make money and really if I pay twice what I should have paid for it I can still get away with a profit and that to me is important because before we know it we’re all going to be hitting it 100 percent buying average. So yeah, I can buy a couple bad ones and still get out alive.
Mike: It buys me a lot of room.
Brecht: So tell me about this good one that’s what I want to hear about.
Mike: Yes, so today’s Tuesday we close on Friday on note that Barbara, Barbara is my student, we’ve been doing this for about a year. Barbara, why don’t you give us the rundown from A to Z on how this note went and how it started off rough.
Barbara: Sure, okay, this particular note is in a non traditional state, was purchased last April. It had been in contact on and off with the borrower. He planned on putting the house on the market, never did throughout the entire summer, then we revisited. We actually set the demand whether through an attorney last September and I started responding more. Tried to come up with a solution. We do have a contact that we do a refinance and we tried that avenue, but after two months we found out that he did a loan mod on his first decision. Therefore, he would never be able to refinance for a twenty-four month period. So, every option we explored dead-ended and then we wound up not hearing from him, starting January of this year.
Brecht: When did you guys buy the note and how much did you pay?
Barbara: Purchased it last April. Mike do you wanna?
Mike: I don’t recall the purchase price.
Barbara: We went 50/50. I would say about 22 grand, if that, 20 grand.
Mike: Yes, so you’re into it for 11.5, I think, and I was into it for 11.5.
Brecht: And what was the unpaid principal when you bought that?
Mike: The unpaid principal, I would say, was around sixty thousand dollars. Then we had an arrears of another twenty-two or twenty-three thousand.
Brecht: Alright, so you paid 25 cents – 23 cents on the dollar, something like that – in that ballpark.
Mike: Yes, and we always just talk about the unpaid principal balance. We never purchase the arrears; the arrears kind of come along for free.
Mike: Okay, so in this deal with Barbara – the way I try to structure these deals with my students is: the student takes care of interviewing the attorneys that we are going to use in foreclosure, because she is going to be the one that has to work with this attorney. It has to be someone that understands our process. They understand that if we foreclose and we take it all the way to sell, then we’ve both done a bad job. We want to foreclose to get the borrower to do something.
Mike: In this situation, Barbara started foreclosure, interviewed the attorney and now this forced the hand of borrower to do what he said he wanted to do when we first bought this note; which was sell the house. So, he thought that he was in the driver’s seat – he would sell it when he was darn well ready and willing to do it. We needed to accelerate that. We accelerated that by starting foreclosure and coming up with a sell date.
Mike: So, the sell date, believe it or not, was … Didn’t the sell date actually end on the day of this guy selling his house? So we actually had to postpone another 14 days past that date, so that he could actually get his house on the market; under contract and sold for us to get a full pay off. I checked my accounts on Friday, kind of forgetting that this closing was coming. I just went in and I checked all my different accounts that I had, to see what payments came into my bank accounts. I’m like “Whoa! Where did this extra 83 grand come from?” I called Barbara and I said that I guess we had that closing today and I can’t even repeat what she said.
Mike: I don’t know if you remember Barb, but it was like –
Barbara: Yes, I was out and with my son in public and everyone turned their head.
Mike: And that part I did not know. That was the first time your son had ever heard you speak like that, I’m sure.
Barbara: Of course.
Brecht: Was it the first big pay-off for you, Barbara?
Barbara: No, actually not. Last year was my first. Actually, the first one I started working with performed very well. But, this was pretty amazing as well.
Brecht: How quickly did things getting going after you got started, Barbara?
Barbara: Pretty quickly. I think it was the boot camps that Mike provided. I went through each on and took notes; was able to go back on my notes. For each one, they wrote pretty lightly, so I had a good base. I’m not shy when it comes to having something to do or something to accomplish. It was different; I never really had to contact attorneys. Some attorneys understand that we just want them to perform; others start questioning statutes, craziness. You just have to find the attorney that you want to work with. It’s pretty smooth after that.
Mike: Yeah. So, let me add to that. This business of note investing; once you acquire the notes, that is definitely another big part of why you and I are together. You are helping me source product and then once we acquire the product doing the do-diligence, there’s really only three factors that we work with. One of them is borrower management, servicer management and attorney management.
If you can manage those three, or you can eliminate any one of those tree, it’s an even better day at the beach. So, I’ve eliminated a lot of my servicer management because, as Barbara stated, we went right to foreclosure with this one. So the attorney is acting as our compliance officer; I guess you could call it. They are handling the communications between the borrower and us.
So, we’ve go the legal comfort that we are doing everything by the book. Then, in this situation, it was Barbara speaking with the attorney. Then, we are speaking with the borrower’s realtor and she was informing us of the progress and gave us a copy of the purchase contract that came in.
The offer was for full price. It looked like the borrower was still going to walk away with a nice chunk of change, even after we got paid. This was a fairly sizeable mortgage. We buy second mortgages, this was a second mortgage that we purchased. So, we did get a full pay off on this one; with all of the arrears and all of the unpaid principal balance.
Mike: Barbara is a great student. She calls me up, “Hey, what are we gonna do here.” So, Barbara’s got 75,000 dollars on the line, that she purchased five or six notes 50/50 with me. So, she’s got some incentive to get these things going. We have a weekly call. We review each note. We say okay, “Where are we at with this one, this one is going to foreclosure, this one is in bankruptcy.” We need to … file … I’m looking at my board of the things I’m supposed to be doing … We need to file proof of claim with the bankruptcy attorney on that one. Another one, we’ve got three performing, I think Barbara?
Mike: So, we’ve had some really good success. Another note that we own together, unfortunately, I’m only 30% partner on that one. She is 70%. We got a 24 thousand down stoke on that one. Right?
Mike: 24 payments of $1000 each. That was the new negotiation. Because we negotiated with this guy, it turned out that he was getting like a 40 thousand dollar discount. If he could come up with a thousand dollars a month, for 24 months – we’ve received five or seven payments of that so far.
Mike: Five, with another nineteen to go.
Mike: So to date; I’ve just counted up Barbara’s numbers, she had 75,000 in – maybe another two or three thousand she had to add for attorney fees. With this large wind that we just go on Friday, she will have received back 77/821.
Brecht: Cool. So, with what outstanding still to come in?
Mike: So, we have the most recent not that Barbara worked at with the borrower as a $375/month payment until the year 2040; only 82 I think.
Brecht: And still kicking.
Mike: You’ll be 92 Brecht. So, there is $375/month coming in off of that one. Another one is getting $328/month for another 25 years. This other note we get nineteen payments of $1000 each, for the next two years. We still have three outstanding we still need to do something with. So, it’s a total return on investment.
Mike: All the cash back and having a lot of upsetting.
Brecht: Yep, that’s fantastic and just in a little more than a years work.
Mike: Yep, I think that’s about right.
Brecht: Nice. Well, what would you say to somebody who is looking to get started in this business who has been kind of shy, or maybe they’ve been lurking around, reading some stuff; now they’re kind of listening. Maybe their thinking about it.
Brecht: Let me ask you this first: Barbara, do you have any experience before you started working with Mike?
Barbara: I have been in real estate since 2000.
Barbara: I actually do have a real estate background. I do have my MBA in fiance, so I understand the financial part of it; calculating forbearance agreements and general rate of return.
Brecht: So, why work with Mike? What’s the difference. Why not just go do it yourself?
Barbara: Well, Mike provided all of the bootcamp and all the tools to understand the business. I can’t say that’s just because I have seventeen years of real estate background and a degree, that I definitely needed his help when it came to educating myself to the business.
Barbara: The weekly coaching; conferencing that he had, extracurricular finds that keep me on base, actually, to obtain my goal.
Mike: Can you speak a little bit clearer into the microphone? It sounds like you are breaking up, Barb.
Barbara: Like I said, I could not just dive into this business without Mike’s help.
Barbara: For Sure.
Mike: Well, thank you.
Brecht: It’s that kind of business, I think, where there’s sort of a lot of components. It’s not rocket science, but it is sort of black box-ish, even if you’ve been in real estate for a while.
Brecht: Mike, what would you say to somebody who’s thinking about getting started, now?
Mike: It’s kind of … I mean, when I first got into this business, I realized that this is a team sport. I can rely on people that are in my network to help me along. There’s a lot of different things that could happened. There’s a lot of moving parts; as far as having an attorney in the right state, in this situation, Barbara actually had to go out and interview four or five different attorneys, foreclosure attorneys.
Had I not had Barbara; had I been doing this not myself, I probably would have reached out to my network and said, “Hey, who’s got a good attorney in Colorado?” – or wherever the note is. I treat this as a team sport, just like I treat my students on relying on their input to further all of our success.
Mike: I have a group of people, about a thousand people that ar in my network that I reach out to. Had I not had an attorney in Colorado, I would blast this out to my people. I would’ve gotten thirty responses: “don’t use this guy, use this person, this one is great” – all above. It is definitely a team sport. I treat it as such with my students, my partners; with my associates that are in this business. You include it.
Mike: So, for somebody that … I would have never even dreamed that this business existed, if it wasn’t for my mentor reaching out and saying, “Hey, check this out.”. Like we are doing now, check this out! We did this on Friday!
Mike: It took us from April until October to get it done, but once we started moving, we were moving in the right direction.
Mike: The lessons that we learned, just on this one alone, Barbara – we catered to the borrower more than we probably should have.
Brecht: How do you mean?
Barbara: Yeah. For sure. The conversations I had with him; it just seemed like he was stringing us along for a good three months and I was getting frustrated. Again, trying to figure something out and yeah. It finally [inaudible 00:18:21] in the long run.
Mike: Yeah and three months is nothing.
Mike: I mean, you are an excellent student, Barbara to have, because we work well together. We move right along and so it is definitely a team sport.
Mike: For someone, like you had asked, is sitting on the fence or something – go find yourself someone that will walk you through the paces that has as much at stake as you do.
Mike: Barbara had 75,000 dollars at stake to get these things up and running. So, I had something at stake, she had something at stake and so we needed to get to the end game; which is getting our money back – and now getting it to the [inaudible 00:19:07],
Mike: So now, even if we didn’t do another deal, we would have probably … we are going to get two or three more of these things performing. We’ll have had no cash flowing for the next thirty … at least twenty years on all of them. Twenty years of multiple streams of income. That’s why you and I were talking about affiliate marketing; getting these multiple streams of income to flow into your life.
Mike: Whether it’s notes … the note business for me has worked for the last ten years – to build up my portfolio of streams of income coming in. So, that I can do the life that I want to design for myself and for Barbara. Barbara signed up for my course … How long did it take before you quit your job?
Barbara: Four months.
Mike: Four months to feel comfortable and start realizing profit; and realizing that this has potential. You can really put some legs on this thing.
Mike: Yes, 75 grand – 77 thousand coming in. I think, Barbara, you own maybe three or four rentals, right?
Barbara: Four rentals and I am purchasing a vacation rental at the beach; if it doesn’t storm again.
Mike: Yeah. Barbara’s down in Florida; in Jacksonville area.
Mike: Yikes. We are just watching these things roll through. It allows us to … Barbara travels ten times more than I do. I mean, it’s amazing. This business allows that type of lifestyle. Barbara doesn’t physically have to be anywhere to do this business. So, she proves it. You’re testing it out, right Barb?
Barbara: Yes, I actually do better when I am away.
Mike: That’s good.
Brecht: It’s a phenomenon, isn’t it?
Barbara: Yes. It never use to be that way though.
Mike: Yeah. Not with your j-o-b hanging over your head.
Brecht: Yeah. Well, here is what I would say: If you are watching this video and you’ve been kicking it around and you’re serious about it – you’re looking for a mentor, you’re looking for somebody whose notes show up; someone who is gonna hold your hand and have skin in the game and get a deal done with you – I can’t recommend Mike enough.
He’s been excellent to me over the years. He’s been here for Barbara. He’s been excellent for students. We are gonna have some information right here on this page about how you can find Mike and how you can get started with him.
Brecht: Mike, thanks a lot for coming on here. Barbara thanks for coming on and telling us the story of that note.
Mike: Yeah. Thank you – thanks guys.
Barbara: Thank you.
Mike: Thanks Barbara. Appreciate it.Click here to Download the Note Conference Case Study PDF