Sound the alarm, we’re introducing a terrific new Mogul Faculty Advisor – hooray!
We are in store for so much awesomeness from Brecht Palombo, we here at Mogul can’t wait to get started on his first lesson. We know how good Brecht really is because of his amazing background and proof from his killer training call we did with him recently that you must check out.
Before we let you have him, we want you know how super smart he really is…
The Guy You Want to Know
Brecht Palombo was just 15 (!) when he bought his first business in the late ’80s and has since created several more businesses. Having jumped into REI in 2001 as an investor, Brecht, who’s also licensed as a broker and an auctioneer, has sold more than $250MM in assets. And, he specialized in a niche area and sold 100s of distressed assets for banks.
In 2009, he started distressedpro.com and BankProspector in order to help more real estate and note investors and brokers do more lender-direct REO and non-performing note deals. He’s the guy with the expert REI industry knowledge AND a banking/financial background helping us all out. (And to that, we say, thanks, Brecht!)
Enjoy, Moguls…
From Brecht…
If you want to score great deals on distressed assets you’ve got to spend your time talking to the right lenders. When the world suffers a correction like it did in 2009 and like it is destined to again – some would say soon – the “action” will be the bottom of the capital stack.
If you’re not familiar with the term “capital stack,” then for the purposes of this lesson, suffice it to say that at the bottom of the stack are the lenders, the debt position.
When there’s an asset price correction the equity is wiped out first. The lower in the ‘stack’ you are, the safer your investment is.
Over the course of this series, I want to introduce you to one of the largest opportunities in real estate and debt, namely, working with institutional lenders.
Why?
Institutional lenders are perhaps the largest source of non-emotional, repeat sellers of distressed assets.
Let that sink in.
Sourcing deals from individual sellers is a grind. If they’re “distressed,” it usually means they have very little control over what happens with the asset. When you are able to source a deal you almost never do more than one. If you’ve ever worked through a distressed deal with an owner, someone whose position is at the top of the stack, typically they’re deeply emotionally invested in it.
Private distressed sellers aren’t able to make non-emotional decisions if they’re able to make any decisions at all.
I learned early on in my career that if I was going to do all the work to get a deal, I’d much rather have done the work to get repeat deals. And, I’d rather be dealing with someone whose day-to-day business is selling assets than someone whose entire identity and self-worth is wrapped up in the thing you’re trying to make a buck on.
This Is Serious Business
Look, what you’ll learn through this series isn’t for everyone.
This game is only for people who are serious about being in business next year… and the year after… and 5 years from now.
It takes a bit of time to “crack the code” of the institutional seller. But for those of you who are not fly-by-night wannabes, the rewards from investing in your deal flow and securing 2, 3 or 5 sources of repeat, discounted deals – the kind that come quarter after quarter, year after year – are huge.
One of the biggest factors that filter out 80% or more of those who try to get into lender direct REO and distressed debt investing is that they simply lose too much time going down the wrong rabbit holes. In short, they trade lots of frenetic busy work in favor of intelligently investing time upfront to make sure they’re going down the right road.
They get frustrated.
Sooner or later they simply can’t afford to keep it up. At best, they never see a fraction of the action and the results they hoped for.
It doesn’t matter if you’re pursuing residential or commercial REO or if you’re going after non-performing loans... we all only have so many hours in a day and none of us can afford to spend them consistently barking up the wrong trees.
In this first lesson on going lender direct for distressed assets, you’re going to learn how to find the right sellers to talk to and how to begin to position yourself to secure great deals on distressed assets.
How I Learned so Much about Banks…
I’m not a banker, but since 2001 I’ve helped in the disposition of hundreds of multi-family, commercial and construction, and residential distressed property loans to the tune of more than $200MM in deal volume.
I represented a major national auction company whose clients included nationally known lenders as well as local and community banks, special servicers and private lenders.
I started distressedpro.com in 2009 and since then I’ve interviewed dozens of experts including the biggest liquidators of debt and REO in the world, bankers, auctioneers, attorneys, private equity debt purchasers and yes, even FDIC regulators.
I’ve put all this together with my own experience across hundreds of transactions and I’m going to try to distill it all down for you over the next few lessons.
As a result of my experience with the frustration and then the reward in dealing with banks, I created BankProspector a “sales intelligence software” (prospecting tool) that compiles data for all U.S. banks and credit unions, adds contacts and serves it all up via easy to read dashboards.
Sure, I’m a little data obsessed, but I’ve found it definitely pays to know exactly what’s going on behind the scenes at our banks and lending institutions because the payoff is enormous.
Thousands of investors and real estate brokers, including major players and household names, have used our systems and training for hacking through all the big data, bank call sheets and industry mumbo jumbo to get down to brass tacks and source deals.
I can’t teach you everything I learned in more than a decade’s work in just one lesson, but before you’re through I hope to have you on the right track… and then in subsequent lessons we’ll dive much deeper into the specifics. For today, it’s broad strokes.
You Need to Understand the Distressed Asset Opportunities that Are Available
U.S. banks still face nearly a ¼ TRILLION in distressed assets.
Even now, years after the Global Financial Crisis (GFC) began, this volume of distressed assets exists across thousands of banks AND if you can find an economist or an analyst who isn’t some sycophantic lackey tooting the administration’s horn, then you’ll hear them say that the asset price bubble that the Fed has created in response to the 2009 crash is on its way to popping too.
Don’t be alarmed, be ready. You can be ready by knowing how banks report distressed assets and how you can use this information to win.
The first thing you should know is that while you and I are familiar with REOs and non-performing notes, there is an internal bank lingo that these institutions use… and when you know it and are comfortable with it, you win trust points and more deals.
Make no mistake, that’s how deals happen with the lenders. They happen between you and a decision maker, usually on the phone.
In order to get that decision maker on the phone, you should start by identifying lenders that have the types of assets that you’re looking for.
Federally Insured Institutions Must Report Detailed Financial Condition Reports
These reports will save you months or even years of headache and frustration.
They show:
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30 to 89 day late loans (still accruing)
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90+ day late loans (still accruing)
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Non-accrual mortgage loans
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REO properties (OREO – foreclosed on bank owned properties)
(In addition to this, they have financial health and ‘sell’ indicators that I’ll introduce you to along the way.)
“Accruing” means that the loan is still accruing interest. Non-accrual means that the loan is no longer accruing interest. When a loan is no longer accruing interest it’s a serious problem loan for the lender.
Banks silo distressed assets into categories:
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Residential (1-4 unit owner and non-owner occupied)
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Multi-family (5+ residential units)
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Commercial (owner and non-owner occupied)
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Construction
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Farmland and agricultural
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Consumer credit cards
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C&I (commercial and industrial) or non-real estate related business debt
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Auto loans
You can see what any bank or credit union in the U.S. has for all of the above assets…
Banks file reports through an organization called the FFIEC. These reports then go to the FDIC for further analysis. Credit unions report through an agency called the NCUA.
What you want to do is get a hold of these reports, FIRST, and pull together your own personal list of high value targets, likely sellers.
Why bother investing the time in penetrating an institutional account if you’re only interested in residential REO and the bank has none?
What Kinds of Deals Can You Do Direct from Lenders?
Some investors prefer REO properties (foreclosures). Others prefer to invest in mortgage debt (notes). If you’re going to play the institutional game, then you should first recognize that the underlying asset is the same – it's only the play and the position of ownership that change.
Said another way:
Debt is just another position in the same asset. It comes with different rights, different rules and a lot of different cash flow and payday opportunities. Understanding the debt position is crucial to your success.
That means getting to know the foreclosure laws of your target areas and learning about the rights and opportunities, as well as the caveats and liabilities, of owning and servicing debt instead of the real estate.
Get comfortable with dealing with the bottom of the stack, the debt.
How to Pursue the Right Lenders the Right Way
If you’ve attempted to buy, broker or wholesale REOs or non-performing notes from banks by blindly walking into bank branches, cold calling or even signing up to get free (junk) lists of bank owned property, you already know that it isn’t that simple.
But it doesn’t have to be as challenging as some make it. In order to be successful you need to recognize the hurdles and how to hack them.
Here are the 5 steps you need in order to succeed:
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Determine which banks have the types of assets you want
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Evaluate the financial health and “sell” indicators of the banks on your list
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Identify decision makers with your highest value prospects
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Contact the decision makers
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Be helpful
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Follow up… forever
The BIG Mistake Almost Everybody Makes Starting Out
The first mistake almost everyone makes is that they want to pursue the biggest banks. Bank of America, Chase, Wells Fargo. Don’t start here.
Start with your local and community banks. There are nearly 14,000 institutions in the U.S. Why everyone insists on pursuing the big boys out of the gate is beyond me.
Why?
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They don’t have the internal processes to do the size deals you’re probably looking for, you’re too small.
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Their employees aren’t empowered to make real decisions most of the time, at least not the ones you’re reaching on the phone.
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A single residential asset is virtually meaningless to them.
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They use special servicers to manage most of their problem assets.
Coming Up Next
In the next installment, you’ll learn more about who to contact at a bank and how their processes work.
By the end of this series you should have a list of prospects, qualified them as likely sellers, found contacts for each and have a prospecting plan for going forward. Good stuff!
I’m Listening
I just hit you with a ton of info… got any questions? Leave me a question or comment in the comments section below.
Visit the FDIC, FFIEC and NCUA websites and look at how to download or view their data.
Make a list of the local banks and credit unions that you know of today and look up their reports to see if they have the types of assets you’re looking for.
Look up the foreclosure laws in your region or the regions you trade in, and while you’re reading these think of yourself as the owner of the debt position and how those laws would apply.