Intoxicating Assets: How Defaulted Second Mortgages Helped Me Survive my Landlording Allergy

and Invest in Real Estate for the Price of a Used Car

Sándor Lau, Chief Inspiration Officer NotedFinancial.com

Confessions of a Recovering Landlord

Bamboo Retreat Eugene, OR

Duplex: • Rent $700/mo/unit • Mortgage, HOA, mgmt. • $1,400/mo

Bedlam and Millstone Kansas City, MO

Apartments 29 units: • Rent $15,000/mo • Mortgage $3,000/mo • Repairs, evictions,

vacancy, mgmt. $15,000/mo

Employed, 28% Homeless

Day Job • $1,500/mo to

Bedlam & Millstone • $1,400/mo to

Bamboo Retreat • Not enough for food,

car, bills

Be the Bank: Real Estate Without Tenants

• Landlord>Tenant • Bank>Landlord

My First Paper Source 2013

The Formula: Invest in discounted non-performing second mortgages behind performing

first mortgages on residential property.

Make Your Money When You Buy

• Discounted real estate: exceptional

• Discounted notes: standard • 2nds: most discounted

Predict the Future: Performing first mortgage means borrowers likely have: • Capacity • Will

Online Underwriting: Credit Report

• Title report • Transunion TLO • Netronline.com for tax assessor • Borrower social media

Case Study: Suwanee River

• Atlanta exurbs, Suwannee, GA • Borrowers paid first mortgage like

clockwork • Dark horse, very little information available • We bid appropriate to risk

Suwanee River: Numbers

• Value: $204,000 • 1st Mortgage: $178,000 ($26k equity>1st) • 2nd Mortgage: $30,000 unpaid principal balance • Our Cost: $5,000 price of used car (17% of UPB, 2.5% of home value, like

option or down payment) • Workout: cease & desist letter. Paying $9k arrearage @ $3k down then

$170/mo. • Return: ???%. Good enough. Intoxicating asset. Heart on fire. RECOVERING LL. • Win-win. Bank. Homeowner. Investor. Economy.

Example photo only, not borrower’s house

Be the Bank, Not the Landlord

• No tenants, no toilets, no termites.

• Never visit properties • No microwave out window…

Think Like an Econ Mediocracy says: • Normal and average is good and right • Uncommon and unusual is bad and wrong (ask a guy

with a funny name) • Do you want to be normal and average?

Think rationally: • Mediocracy says risk=reward • Note investing gives asymmetric risk • Leverage cuts both ways, but not equally

Emotional Equity > Financial Equity

Motivation: • Most human decisions based on emotion • We deal with humans not econs • House=asset • Home=where your kids and pets live

Case Study: Old Macdonald • 1 acre lot with house in Fontana, CA

• Suburban farm with pigs and chickens • Paying first mortgage like clockwork • Way underwater on first mortgage • Hispanic borrower, limited English

Old MacDonald: Numbers

• Value: $270,000 • 1st Mortgage: $320,000 ($50k underwater on first) • 2nd Mortgage: $83,000 unpaid principal balance (all underwater) • Our Cost: $12,000 price of used car (15% of UPB, 4.4% of home value) • Workout: Payment plan. Resumed scheduled $777/mo. Forgave $80k back interest. • Return: approx. 77%. Emotional Equity>Financial Equity. • Not every note works out like this. Not every one has to.

Example photo only, not borrower’s house

Seconds Come First

• 2nds pull the strings • 2nds can FORECLOSE like 1sts

Firsts Come Second

• 1st can foreclose—if we let them.

• We can own property subject to 1st loan.

• Not in our name, not on our credit.

Deed of Trust authorization

Seconds Fill the Sandwich

• Time is on 2nd’s side • Not on landlord’s side • Not on 1st mortgage’s side • Appreciation + principal pay-

down benefit 2nd most.

Pray for BK— Bankruptcy

• Bankruptcy gives relief from debt, not entitlement to free house.

• We are secured creditors. • Chapter 7: liquidation • Chapter 13: restructuring • Predict future at: www.pacer.gov

Predict Future w/BK

Chapter 13 Bankruptcy

• Lien stripping if 2nd unsecured. • Payments through trustee. • Payment plan 3-5 years. Only 1/3 complete plan. • No completion=no strip.

Case Study: Speed Racer Bradenton, SW FL: • Family in house since 1981 • Husband was once race car driver • Yard full of boats and cars • Refused all communication, FL expensive judicial FC

Speed Racer Numbers:

•Value: $160,000 •1st Mortgage: $150,000 ($10k equity>1st) •2nd Mortgage: $104,000 (mostly underwater) •Our Cost: $11,000, price of used car (11% of UPB, 7% of value) WORKOUT: Borrowers attempted to strip in BK13. Court denied. We agreed to reduce principal to $35k, payments $260/mo, 6.5% int. 20 years. Approx. $5k lawyer bills foreclosure and bankruptcy. Return: $3,120/yr/$16,000=20% return

Example photo only, not borrower’s house

Chapter 7 Bankruptcy • Wipes out unsecured debts, leaving

more to pay the mortgage. • No lien stripping, no cram downs. • Bankruptcy relieves personal debt

obligation, does not give free house.

Case Study: The Temple BORROWER • Home bought 2008 Farmington, UT • Discharged BK7 2011 • Paid first mortgage like clockwork • First mortgage hard to track down, not on credit report • No replies to foreclosure correspondence, can’t call

them • Borrowers called a week before the auction: from Japan

Example photo only, not borrower’s house

The Temple Numbers • Value: $630,000 • 1st Mortgage: $375,000 • 2nd Mortgage: $100,000 • Equity above 1st: $255,000 • SCHL cost: $40,000 nice used car (40% of UPB, 6% of home value) • Foreclosure delayed due to issues with title documents • Borrowers wanted to do deed in lieu, takes months • Foreclosed, full payoff $118,000 in two years, neighbor bought at auction

Leverage Your Time

• Are you getting any younger? • What do you fear? What is your purpose? • What’s highest & best use of your time? • Outsource (TapeTechs.com, Fiverr.com, Guru.com)

• Employees, interns

Leverage your Resources

• Leverage capital: credit cards not enough • Bank financing: difficult to underwrite • Passive investors provide capital • Private offerings, limited partnerships, joint ventures • Collateral assignments

Collateral Assignment Lending • Our note is collateral for private lender

• Similar to private lending on real estate • In event of default, lender steps into our

shoes • 9% mailbox money • competitive for recovering landlords and

stock market refugees

Where to Buy Notes?

•Build relationships of trust •Vet sellers (Pacer) •Exchanges show only a fraction of inventory •Demonstrate your reliability

Resources: BOOKS: • Intoxicating Assets by Sándor Lau

(coming never) • Paper Profits by Joshua N. Andrews • Performance Anxiety by Gordon Moss • Turning Distress into Success by Fuquan

Bilal • The Art of Investing in Distressed Second

Mortgages by Sherman Arnowitz • Memorize the Fair Debt Collection

Practices Act • YouTube.com/SandorLau

Do Well by Doing Good

• Compassion is good business • 1 completed foreclosure 200

notes • My emotional equity

The Future • Appreciation slowing down • 10 years since the last recession • Current housing market not driven by

free-flowing credit • Good bad notes hard to find: I’m still

buying, especially OR, WA, CA • Great deals any market (since 1754 BC)

Sándor Lau, Chief Inspiration Officer sandor@notedfinancial.com

Email or go to website for copy of slides, videos www.NotedFinancial.com