All investors need money to operate their business. It’s rare that you can have ‘too much’ money, but those experienced at raising capital know they raising too much capital is also a ‘problem’. Steve Lloyd found himself with more capital than he needed, and branched into the note buying business to help soak up larger sums of capital. Turns out…it’s the best thing he’s ever done. Steve invests in re-performing 2nd liens, a niche that has brought him riches. Watch this episode of the FlipNerd.com Flip Show to learn more.
Mike: Welcome to the FlipNerd.com podcast, this is your host Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs who’s stories and experiences can help you take your business to the next level.
We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further ado let’s get started.
Hey, this is Mike Hambright welcome back to another FlipNerd VIP Interview Show. Today I have with me Steve Lloyd who is an expert at raising capital and applying it in the note buying world. So before we get started with Steve let’s take a moment to recognize our sponsors.
Advertisement: RealtyMogul.com is an online market place for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast and close in as little as 10 days. Rates start as low as 9%.
We’d also like to thank National Real Estate Insurance Group, the nation’s leading provider of insurance to the residential real estate investor market. From individual properties to large scale investors, National Real Estate Insurance Group is ready to serve you.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Steve: Hey, how you doing Mike?
Mike: Good, good, glad to have you on.
Steve: Thanks so much, I’ve been enjoying watching all the other shows you’ve had on, it’s really good stuff you’re doing.
Mike: Thanks, thanks. I’m always excited to get to meet new folks. Some folks that I know well and I get to know better and some folks like you who I haven’t met before who came recommended through a previous guest and so happy to have you on.
Steve: Thanks so much.
Mike: Yeah, yeah. So, one of the biggest challenges all real estate investors face, especially early on is raising capital. It’s an issue for even veteran investors in a lot of ways so you’ve become an expert at that. So, tell us a little bit about who you are and we’ll get into the capital raising piece and how you’ve focused on that area.
Steve: Okay, about 10 years ago I went to a real estate meeting down in Wilmington, Delaware and met a bunch of guys and women, about 15 of them and they were just talking real estate and I was looking for something new to get into and talking to these people, these investors they just gave me this big beautiful heaven of I have to get into real estate. I actually went back, I had a [inaudible 00:02:57] shop, I sold it within two months, got into the mortgage business. But the type of mortgage business we had, we were doing mortgages for investors so obviously that led me to buying some properties.
Mike: Are you saying like hard money?
Steve: No, no hard money, just regular financing for an un-owner occupied property. So that just led into investment deals that I thought that I should start owning myself. Typical investor, started out with a row home and then after a year or two I went into student housing at Temple University. I built a large portfolio there.
Mike: All right and do you still own that?
Steve: Yes, I still have it. I own about 60 buildings there, 400 or 500 students and we’re pretty self contained with property management. That was the time when the real estate was falling off the cliffs say. And the banks were going out of business and I knew if I was going to continue my real estate career I had to teach people how to be my bank. There was no bank construction loans of any type that was going on and everyone was running from real estate, so I knew that was probably a great time for me to get in, bucking all these problems. I think when you buy problems, my whole life has been buying distressed assets and creating equity in them.
So I had a friend, he was buying houses on credit cards and he would buy a
$40,000 house on a credit card, grab another credit card, take 20 grand, finish it, go to the bank, either sell it or re-fi it. And it was working well for him and I just said, I was like, let me just take my friends and normal people and show them how to be a bank. Just like, I don’t know what you have in Dallas but PNC Bank or Wells Fargo, so for me it was finding a distressed piece of property.
I’ll give you an example, it might have been a shell for $100,000 and teaching someone how to be my bank. No different than PNC or Wells Fargo would do it, use a title company, full disclosure, a note, a mortgage, a deed in lieu [inaudible 00:05:28], judgement or personal guarantees, name them in the insurance policy. So I was just showing them how they could be the bank and a lot of people were looking for places to put alternative investments other than the stock market.
I know in 1999 I owned Sun Microsystems that went to $99 to $0.50 in like two days so I cried for a day and I woke up the next day and started working again. That was painful and there’s a lot of people that don’t want to be in the stock market so it was just a really good timing thing.
Mike: Absolutely, yes. From there you just ramped it up and took it to a whole other level I guess, then?
Steve: Yes, I did. One of the things what I needed to do when I had a new investor or when I started out with my friend or a new client was to get them to wrap their mind around being a banker, to being the bank, how much work they have to do. Almost nothing, but education and the knowledge to teach them, the more I taught them how to be the bank and how they could be safe. I think a lot of people make a mistake by not teaching them everything.
I told somebody, talked about a deed in lieu one time in class when I was teaching and they’re like, why would I want to tell them that? Well you’ve got to remember when you start out with an investor they’re your marketing arm because you’re going to get to the point where if you’re doing well for them you’re going to say to them can you put me in front of three people that might want to do what I I taught you what to do? And so if you teach them everything in full disclosure, that’s the best policy don’t hold anything back. That’s the kind of way to do it.
There’s actually a great book, Mike. It’s called The Bankers Code by George Antone and I would give all of my clients one of those books because it teaches you the mind of a banker. Loan to value. The reason why the banks got in trouble seven and eight years ago was because they were doing 100%
loan to value and it created problems, and the type of mortgages they were giving. So I’ll lend anybody money. I’m I’ll lend anybody money, oh, there’s going to be a load, I’m going to get phone calls after this. I’ll loan anybody money at 50% loan to value, at 60% loan to value. So you have to educate, you have to teach your investor.
It’s almost like an interview, when I sit with somebody about them investing with me or my company I’m actually interviewing them. I’m going,
“What’s your timeline to have your money out? What kind of rate of returns are you looking for?” I go, “Hey, do you know about self-directed IRA’s? Go learn about self-directed IRA’s.” I actually don’t have time but I’ll turn them over to Carl Fischer from CamaPlan and go, go and get educated because most people’s heads spin when I talk about self-directed IRA’s when I meet them out at a restaurant or something.
But go find out about self-directed IRA’s, it’s extremely powerful rather than being up and down with the market, you get a consistent return over 20 years is pretty good and it’s probably 60% of the money I raise because if I meet someone that’s 52 years old that wants to get involved with me. I know it’s retirement money they can go all the way to 70 and a half before they even might want to start touching that money.
Mike: Right, right. One challenge that I know some people have with private investors, haven’t heard a lot of examples of this but the fear maybe is that if you let your investor get too close, let’s say your private banker, get too close you don’t want them to start telling you,
“Hey, I drove past your house and the lawn needs to be mowed.” or “Why did you paint it that color? It’s my money I want you to do it this way.” I guess that’s part of the education process but have you had folks that are lending you money start telling you how to run your business?
Steve: I don’t do that because it’s the education to them in the beginning. When I have a new investor I walk them through everything, everything in life is a plan, right? Unfortunately, I just figured that out, I’m 46 I just figured that out four years ago. You have a plan when you wake up for the day, or a plan for the year where you want to be. So if you don’t have a plan you don’t have anything and that’s what I hope I can help here.
With a new investor I would take them down to one of my properties and walk them through one of the properties that I’ve done before and especially in the beginning of a project I’m working with someone else, another investor but I’m going to say, this is what it’s about. I let them meet my partners, I let them meet the construction guy, I let them talk to my attorney, if they want to talk to my accountant.
But I take them from the beginning of when they give me their money, through the process and then how we’re going to pay them back because, Mike, I think we know that anybody can go buy a piece of real estate, that’s the easy part. But it’s really the end result is where that’s most important, where you’re going to end up in the end and I think that’s where a lot of people make a mistake.
To your question is I walk them through the whole process and once you get started and you get better at this, sometimes you do have to shut the investor down, but if you’re doing your job you’re not going to have those kinds of problems. You might say to them, “Hey look this investment isn’t for you the next time. Let me get through this deal, I’ll pay you back. It’s just not working out for you.” Because I always tell my investors I want them to sleep at night. If I have their money and they can’t sleep at night then they shouldn’t have their money with me.
Mike: Right, right, and we were talking a little bit before we started recording today I know one challenge that I’ve had, I’ve raised some private money but I’ve had the ability to raise, after you’re in this business for a while money just comes to you much easier after you’ve had some level of success. And the challenge is a lot of real estate investors, I know for folks that are new they are going to say, maybe laugh at this a little bit but it gets to a point where you can raise more money than you need, effectively.
So the challenge then is how you go to somebody and say, “You want to invest, let’s just say a million dollars with me, that’s fantastic but I only need $100,000 right now, can you just set the rest aside for me when I could use it?” And I sense you probably have run into some of those issues and so you started to have to find new ways to apply that money, so is that how you got into the note business?
Steve: Yes, a couple of years ago I knew, when I first got into this business you have this, I want to own $50 million worth of real estate and then after owning $18 million or $19 million you start to get a little tired.
Mike: Yes, maybe this is enough.
Steve: But it was real, I kind of was looking at my investors, how they were making money and let’s just say I borrowed $100,000 and they were getting a check every month for $800 I was like these guys have got the better end of the stick, being the bank, right? I mean, I’m doing all the work and they’re there sitting there collecting a check every month. So I started to learn about the note world. The non-performing first, the non-
performing seconds, performing seconds.
So to your point, yes there is, once you get rolling the money starts coming but you have to make good educated decisions on maybe it might not be just a real estate property, I chose to open up a private placement that’s called Stonebay Holdings and I decided to get into the note business and pool money so that’s why I needed a private placement. It’s definitely different than just a one arm investment with a property so it turns into a security and then there’s definitely laws that you have to learn, accredited investors and things like that. But to do a private placement and start raising money but there’s millions of notes available.
The access to the availability of notes, I can take a lot of money to that field. So I knew I had to go off on a different venture, I looked at many different ones but I buy performing second mortgages across the country so a lot of guys are doing the workouts with the homeowners but that really creates a lot of employees and I’m actually trying to scale down as I get older to have less employees. But look Mike, I buy a re-performing second mortgage and I have a servicer that collects the mortgage, I’m sorry.
Mike: Give us some education on the difference between first and a second and performing, non-performing, and re-performing. I don’t even know what that is unless it stopped performing and then it’s performing again, is that it?
Steve: I’ll talk about second mortgages, you have a second of each and that might be a line of credit or when they were doing 80/20’s years ago, 20% of that mortgage to get rid of PMI insurance so that second mortgage goes in default, they stop paying but it might not be forever.
People get in trouble for three reasons with their mortgages, health, job, divorce, health, job, divorce but it doesn’t last forever but I always make sure that that first is paying, that’s very important in my world. So the second mortgages, if you’re buying direct from the bank or a hedge fund you can buy non-performing for $0.08 or $0.09 or $0.10 cents on the dollar. The unpaid principle balance might be $100,000 you’re picking that note up, that mortgage up for $8,000 or $9,000.
Mike: Just to clarify, the reason that most people think this, if they understand this, that second mortgages are risky is because if they go into foreclosure the second mortgage typically gets wiped out, right?
Steve: Yes, I mean, there’s many different things you can do, we won’t go into all of it without [inaudible 00:15:10] of course. But when they’re buying the non-performing, this will be really good. If you’re buying first and the original first mortgage was $300,000 if that note goes non-
performing for a year or year and a half, you’ll probably be able to pick that up for like $0.40 on the dollar, $0.50 on the dollar. So for one first mortgage I have to spend $150,000.
In the second mortgage world they’re going for $0.08 or $0.09. I could buy 30 or 40 non-performing second mortgages for the same price of buying one, so now it just comes down to creating workouts with homeowners and creating a win-win situation with 30 or 40 mortgages.
On the non-performing world if you’re doing workouts, ten you’re going to throw in the trash. Ten it might take you nine months to get worked out but there’s what they call low hanging fruit that ten might start paying right away they’ve just been waiting for that phone call.
But what I do is I have a private placement, I raise capital. It’s a private placement because I’m pulling from many people, it’s a five year investment. But then I go and buy the notes after they’re performing again so I wait until a workout company’s had it paying for six or nine months then I step into the world buy their note from them at $0.40 on the dollar.
Mike: These are second mortgages still?
Steve: Yep, don’t let the seconds scare you.
Mike: I’m scared, man.
Steve: Returns can be from 18% to 30% you’re going to have hiccups but you get warranties on the notes there’s good companies out there one of the ones I deal with get a phenomenal warranty so if I stop getting paid on the note they’ll take the note back and replace it with another one. So there’s all kinds of things you can do with second mortgages. But to get back to your original question, I needed another place to take money so I had to look at other angles and other places that was safe.
In my placements my investors own my notes with me so that’s another topic, having your investors, letting them know their note is secured. I wouldn’t get involved in raising money in unsecured, it’s just not a good thing. Everything needs to be secured to an asset and I think that’s really crucial. But in my private placement, when I have someone come over I take them from the start.
I educate them on the business, I show them the servicer that I use, they collect the money, they send the money to my bank account every night, they do all the accounting and then we have someone working in the office that works three days a week and just books the principles and interest and it’s great. Then on the 15th of every month the investors get paid. I turned into raising the money to do my real estate projects and then just owning mortgages which is pretty cool.
Mike: And so talk a little bit about, I know a lot of folks that buy pools in notes, at least for non-performing notes one of the things that’s always made me, even though I don’t know a lot about it, not that interested is they’re scattered all over the place. And maybe it doesn’t matter it’s just getting over that hump. I’ve been so local in my real estate investing that I always primarily invest in one market, it’s a big market but. But talk a little bit about when you buy mortgages are you geographically specific or by the time you pick them up and they’re performing second loans again, do you care where they’re at?
Steve: I actually don’t really care where they are, there are some states I stay away from just because of the laws on foreclosures and things like that. You have to remember, Mike the most important thing is people want to stay in their home. It’s the greatest thing they ever bought in their life. The normal banks, I’m don’t want to get into trouble here, but the normal banks don’t know how to talk to people. They call up and the people are already in distress, and they might be going through divorce, they might be out of their job and the banks are calling up and just saying, “If you don’t pay in 30 days we’re foreclosing on you.”
It’s a completely different world when you have a non-performing it’s like,
“What happened? How did you get there? How can we create a win-win situation?” We don’t buy paper to foreclose on something, that’s the wrong thing to do and when you wrap that around your mind that’s half the battle. But buy in most states but New York, New Jersey there’s things we stay away from.
But I just went on Google Maps, I wanted to look at a note that I’m getting ready to buy. I was at the front door I could almost see inside the house, you know? You’re looking at the yard, you’re looking the property if it’s kept up and things like that. You can call a real estate agent to do a drive by for you all different things. It’s the communication with the homeowner that’s going to create that win-win.
Mike: Sure, sure.
Steve: When you’re looking at, I’ll show you one day if you want to get excited, when you get a payment for $300. When you create that workout because the homeowner’s not looking really at any interest rate, they’re looking for an affordable payment. You ever walk into a car dealership and what’s the first question they ask you?
Mike: How much do you want to pay?
Steve: How much do you want to pay? It’s not the interest you’ll talk about, it’s how much can you afford to pay? Now you have to make sure the homeowner can afford to make their payment but if they’re nervous, if they just got served with papers they might say, “I can afford to pay $400.” or maybe it’s after we look at the financials, “Look we really think you can only afford to pay $250.” But remember you bought that note at a discount it’s a good thing to keep them in the home.
Mike: So talk about, what’s interesting in the business that I’m in of buying houses, we buy them one at a time. It’s a grind because you’re grinding out one at a time, one at a time, one at a time and there’s some natural evolution going into the note business or multi-family, doing bigger deals. Talk a little bit about your thoughts on just the evolution from people getting started.
Once in a while I meet somebody that’s a big multi-unit player and they actually started in multi-unit they’ve never even bought a single house. That’s pretty rare, it’s kind of like the game of monopoly right they start the little red houses, or the green houses, work your way up to the hotels or bigger properties and I suspect it’s the same thing with notes. You didn’t start there you just got in and you said how can I take this to a whole other level?
Steve: Yes, it’s much easier to work, an average note specialist can work 80 to 90 notes at a time. If they’re really good they can work 100 to 130 at a time. One person working on 100 mortgages at one time. How many people does it take to build a tri-plex from a piece of dirt; 30, 40? Could you imagine doing 20 projects at one time, I was there I needed a big bag of Advil and I was starting to lose my hair as you can tell. It was a problem but you can work a lot of notes at one time.
I can go buy 100 re-performing notes at one time and get a 15% to 23%
return on my money. And really, raising money, evaluating paper, buying the paper, servicer, getting paid and I didn’t break a sweat.
Mike: And I guess it’s easier too if you’re buying them after they’re performing again versus the one who has to go grind out which ones are going to start performing again?
Steve: Yes, that’s the world I want to live in, just being the bank, holding the paper. If you talk to people, it’s both, I do both. To me I have such a passion for real estate and the note part of it, so I combine two things that has created great success in our company. I think I have the best of both worlds. If you talk to a real estate guy they love real estate, if you talk to a note guy they go, “Well I don’t have coolage, roofs, windows, building inspectors, licensing I don’t have all that stuff.” They want a more passive life.
Come on, what’s better than, you know the number that I look at every single month when I meet people that are like, “I’m cash flow and I’m doing this.” Mike, I tell you the only thing I really look at at the end of the month is what I’m paying on the principle to the bank at the end of the month. That’s a great number to look at because I don’t get to put that number in my pocket every month but I know that number is being paid down on and I’m creating leverage.
So when I teach I go wouldn’t it be pretty cool, I look at tenants as people who work for me so it’s almost like you have 100 or 50 or wherever you are in the stage of your investment career with real estate. If you only had ten people, I look at it this way, I have ten people going to work for me every day to pay down my debt.
Mike: So, talk a little bit about you said your motto now is to buy them after they are performing and re-performing and you allow other people to work through the ones that are going to perform and aren’t. Where’s the marketplace for buying those? Are you buying them one at a time? Are you buying packages?
Steve: I deal with a couple of people, I think it’s all relationships, you’re creating relationships. So I deal with one major player in the field where all they do is the workouts and they sell the re-performers, and they also give a warranty which is pretty cool. So I kind of want to develop more of that. But after someone’s been paying for say nine to 12 months consecutively you’re looking in pretty good shape that they can afford to pay that. If you buy one and there’s a hiccup it’s going to be in the beginning of the first or second month. Does that answer your question, I’m not sure?
Mike: Yes, I’m always curious what the restraint is. In the single family house business it’s always finding that next deal and the marketplace exists in my world, we’re an advertising model so we’re relying upon how much we advertise and how many leads that will bring in. And I’m curious what the restraint, where the marketplace is so it sounds like you just build relationships with people that are working them out.
Steve: If you want to get into the working out, the non-performing first world, there’s plenty of paper. Just have people call me or email me. If you want the second world, there’s not as much first, obviously but there’s plenty of non-performing paper in the second world. On the re-
performing side, I’m not just out in the open market out there buying from anybody the most important part is the workout specialist and I want to know who that person is just in case I do have problems with that note.
On the big scheme of things you can do, if you want to lend money or get involved you can do all kinds of financing other than a non-performing second mortgage across the United States, but it doesn’t have to be that risk level. But the returns are 15% to 25% to 24% so as I scale this thing up, say I have 200 notes, say I have a problem with 15 of them, it’s not going to affect that whole pool.
I tell somebody if they’re going to get into the non-performing note business and seconds don’t think that you’re going to buy one. On the second side you better be able to buy 10 or 12 because I think you might lose money on 4 or 5 but you’re going to make really good money on 6 or 7 of them. It’s really scalability on the note side for me.
Mike: It’s similar to rental properties, right? You don’t want to own one and you can’t get any scale until you own a bunch and start to get efficient.
Steve: [inaudible 00:27:04] your self-directed IRA owning three notes paying 25% and people, I shouldn’t mention interest rates.
Mike: You’re saying it man, it’s not me so.
Steve: It’s not out of the realm to have that. You can easily have a second mortgage note, or even a first in that 15% range but a second mortgage secured lien to the property? There can be equity in the property. If you own the second remember the first is still paying down the mortgage and the principle is coming off.
And equity is coming back in our country now so hey look where you didn’t want to be six or seven years ago in maybe Las Vegas or Arizona not looking bad, Florida’s looking pretty good. They’re building again down there with new construction houses I’m pretty surprised about that. But big bank, big money comes in and changes everything over time.
Mike: As a second mortgage holder how do you stay in touch with what’s going on with the first mortgage? Or is that a really long answer?
Steve: It’s not but when you get that note worked out they have to give you authorization to be able to talk to the first.
Mike: But if somebody stops paying on the first do you know?
Steve: I don’t even stay in contact with the first unless I get a note that’s slow pay. Say I own 200 notes, I don’t check on all 200 notes, I only check on the ones that are slow pay.
Mike: But do they notify you if there’s a slow payment? Or do you somehow get notified?
Steve: The servicer that I use, I know at the end of every month.
Mike: But you’re talking about on the second lien.
Steve: On the second lien, you said would I know if it was slow pay or not? I know right away because there are payments due on the 1st or the 15th. I know on the date with the servicer, you just go and log on and you see exactly what’s going on.
And then there’s a lot of new rules coming out in banking so especially with servicing you’ve got to keep up with it. But the servicer that I use they’ll attack the homeowner they’ll do soup to, they’re a full shop, they’ll do everything you want to pay for, put it that way. But basically servicing a note for somebody and they’re taking care of the accounting it runs between $8.00 and $15.00 a month.
Mike: And so talk a little bit about how you work with others and educate others and how folks could get a hold of you if they wanted to learn more about how to potentially get into business and maybe work with you.
Steve: If they want to learn?
Mike: Do you teach others how to do this?
Steve: I do this because I have a passion for it, people can email me or call me. I’ll give them my time, I don’t have anything to sell. I know what I do well, that’s how I make my money. But I love educating people, I speak in the northeast a lot. Coming up June 5th I think people, if they want to learn how to raise money there’s a great, it’s called The Pitbull Conference, I’m going to be attending that on June 5th. I’ve never attended one, but I think Leonard Rosen has a pretty good program there.
Mike: Where’s it at this time?
Steve: It’s at the M hotel in Las Vegas, June 5th. It’s a one day event, seven in the morning until six or eight o’clock at night. People could go there. If they want to learn about notes I send them to a company called Partners for Payment Relief. They want to learn how to do note work, they actually have a program that you can learn how to create workouts with homeowners. They have a full fledged program and it’s absolutely phenomenal, their program.
Mike: That’s great, okay. That’s what I was looking for. Awesome, well, hey I appreciate your time today and sharing some information on second notes. I know for a lot of folks it sounds complicated but it always amazes me how many different ways there are to play and make money in the real estate space.
Steve: Yes, for me I know what I know. I’ve been raising money for over ten years but I’m still going to the Pitbull conference to hang with people that do what I do and I can learn little tidbits and a couple nuggets from them so you never stop educating yourself. But I think one of the most important things that I can leave you with is learn how to raise money the right way. It solves a lot of problems and keep the ethics and integrity in the business and when you learn how to raise money the right way and you find things to do with it, the sky’s the limit what you can do and where you can take your future to.
Mike: Fantastic. Thanks, Steve I definitely appreciate your time today, I appreciate you sharing your knowledge with us.
Steve: Great show Mike, thanks.
Mike: Stay in touch, we’ll see you soon.
Mike: All right. Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.