Here, I’m talking about something I don’t know if we’ve ever discussed on the show before: flipping, buying, and selling vacant land notes. There are tons of people out there doing vacant land deals just for the cash flow or for the notes. If you don’t know what a note is, you’re in the right place. Rick Allen, from a company called Paperstac, dives into everything you need to know right here.
In simple terms, a note is basically a piece of paper with a promise on it to pay back a certain amount of money with payments over time. A lot of folks who buy and sell vacant land will sell the land on owner financing. When you do that, you create a note, which you can also sell. Knowing this, you can wholesale a deal and make five to 10 grand on it. There’s big demand for buying properties on owner financing and creating notes, and there’s also big demand from private note investors who will want to buy them.
Joe: Hey, what's up? Joe McCall. This is the Real Estate Investing Mastery Podcast. Today we're going to talk about something I don't know if we've ever talked about before on the show. We're going to be talking about flipping or buying or selling vacant land notes. There's a lot of people out there that are just doing vacant land for the cash flow, for the notes. And now, if you don't know what a note is, we'll ask our guest, Rick Allen, about that in a minute. But a note in simple terms is basically some kind of paper that says there's a promise to pay back the certain amount with payments over time. And so a lot of people that buy and sell vacant land will sell vacant land on owner financing. And when you do that, you create a note, and that note you can sell. So you could this is the really neat thing about this. If you understand this, you can wholesale a deal and make 5 to 10 grand on it. But for every when you're advertising that vacant lot, for every one call you get from a cash buyer, you might get three or four or five calls from an owner financing buyer saying, Hey, will you sell that deal with owner financing? And so if you understand what to do, you can then sell it with owner financing and then turn around and sell that note to somebody like Rick and his company and make maybe possibly even more money. So there is a real high demand. Number one, there's a high demand for buying properties on owner financing and creating notes. And number two, there's a big demand from private note investors that will want to buy that paper that notes. We're going to be talking about that on this episode. Real quick, though, first, if you want some more information about how to flip vacant land, I got a cool little tool here. It's called Vacant Land Docs dot com. And on there, I'm going to give you the letter that I send to sellers to in my marketing that I send out to sellers, and I'm going to give you the contracts that I send out for getting the deal under contract with the seller. So if you just go to Vacant Land Docs.com, it's completely free. It's yours. I'll send it to you and you can go check it out. Let's bring Rick Allen on. Rick, how are you?
Rick: Good. Joe, How are you?
Joe: Excellent. Thanks for being here. I want to I have a bunch of questions to ask you, but I wanted to save them for this podcast as we're going live here. You're with a company called Paperstac, right?
Rick: That's correct. I'm the CEO and co-founder of Paperstac.
Joe: Cool. Talk about what Paperstac does and then I'd like to ask you some questions about what did you do? How did you get into real estate? Why did you start this company?
Rick: Sure. So Paperstac is it's an online trading platform for buying and selling debt, mortgage debt, land, no debt, contracts for deeds, deed of trust. We've had some commercial debt go through there. We've been approached by people wanting to sell credit card debt. But at its core, it's a it's a marketplace that just allows people to list, you know, list debt for sale and buyers can come on there and purchase a debt. But the real secret to it is the automation and the sort of the workflow which I'm going to talk a little bit about. And that's I know you're a big fan of workflow. It walks you through the process from the time you make an offer to all your communication happens right on the platform. You can send messages, you can respond via email, and everything lands on your timeline that everything is traded in a timeline. You can even make a phone call on the platform. It'll record it, transcribe it and throw it on your on your timeline. So that way there's a complete digital audit trail. We handle the closing docs, you know, the transfer of the note, the if there's a mortgage, you know, the assignment of mortgage and then tick off a loan servicing transfer. So it's really it's an all-encompassing platform that allows people to trade seamlessly. We've got some efficiency tools built in there and some security measures like escrow and collateral audit, all built into the platform.
Joe: Nice. And how long ago did you create this?
Rick: We've been working on it since 2015, and so we've launched a few different iterations of it. Over 2017 was iteration one, Iteration two came out in 2019. We've just launched our third iteration and a sister company called Note Closings dot com. So if you've got an if you've got, you know, you're the seller of a note and you've already got the buyer, you don't necessarily need our marketplace to try to find your buyer. So you can just use the closing process of the. Yeah. So we've had a lot of people who are trading, you know, high volume, maybe they're, you know, trading 30 or 40 notes a month saying, look, I love your closing process, I love escrow, I love audit, I've already got my buyer. I don't need necessarily your marketplace. Do you have can I just use the closing process? So we've made that sister company, no closing scheme now, and we're about to launch in the next six months. We're launching an enterprise version for institutions.
Joe: Okay. Nice. Yeah. Talk about your story. How did you get involved in real estate in this business of notes specifically?
Rick: Fair enough. So I started I graduated from college with a degree in business administration. I think it was. Didn't know what I was going to do. I still had my bartending job from when I was in college, just kind of figuring out where life was going to take me. And I had some people walk through the door on a lunch shift and they had, you know, Rolex’s on business suits and it was 1:00 and they, you know, just started hanging out and they were done for the day. And they were there were times that people sold timeshare. And so I started talking to them was like, you know, how do you sell this? What do you do? They're doing pretty well. So I said, You need to get your real estate license. So I got my real estate license and I sold timeshare for about eight months, which they're the Marines of sales, if you ever know anything. Everybody walks to the door not wanting to buy what you have. So you have to be good at selling or you learn real quick.
Joe: It's a great place to hire salesmen.
Rick: Oh, it for sure is. It's the training you get in sales is second to none that I've seen, but I didn't like it and ended up my dad's secretary. This kid worked for her kid worked for a a wholesaler, a nationwide wholesale firm called Real Net. And I went and she said that they had an opening in Orlando where we where I was. And so I went there was this. This was 2005. So in 2005, yep, I went and started with real net and cut my teeth on sourcing deals. And they also had an in-house hard money lender. So that's where I got my first taste of the finance side of things. The paper. And I worked for that company until 2008. At the time, you know, the market started to crash. They couldn't sell their paper. And in January of 2008, not really knowing what was about to happen, myself and three other guys quit the company and went and started our own company called Investment Homes Direct. And we were fortunate that between 2008 and then the end of 2011, we flipped about 400 houses wholesaling them and had an office in Orlando, had an office in Saint Pete, and it was great. We were doing well. I kind of got burned out and wanted to move on to something different, so I sold off the company and what I was going to have, basically I was going to do my own private fix and flips, build the rental portfolio a little more, and then play golf, raise my kids. And it lasted two months. And an REO agent called me up and said, Hey, I bought a lot of houses from this guy. He called me and said, Hey, you know, I got an asset manager for a bank is asking me if you're if I know anybody that'll buy a note. And I said, I'll take a look at it. So it was a framed duplex in Winter Garden, Florida. They owed 90 grand. This is 2012 in March. And I told the I told the guy, I say, tell him I'll give them $8,000. And I didn't expect to get it. He was yelling at me, They'll never take it. It's got to be 20 or 25. And they countered me at 8400 bucks and ended up getting the deal. The last person to sell it on the MLS was the actual owner. So I had our phone number, so I was signing paperwork to buy it and I called her up and said, Hey, I'm buying your loan. Do you want to sign it over? All right, you will check for your time. And she said, I got five foreclosures going on right now. I don't want another. You can have it. And so she signed the house over to me. I sold it for 38,000. And how.
Joe: And how much was owed on the property?
Rick: 90, about 93. 94.
Joe: So you owned the note that still you owned you bought the note for $8400, but the original mortgage balance was 90 something thousand dollars?
Rick: 94 grand was the balance on it at the time. I mean, we're talking 2012 so.
Joe: Yeah, yeah.
Rick: It's the bottom of the bottom. And you know, people, people ask, can you still buy stuff at that big of a discount? It's like now not certainly not there. I mean that house today is.
Joe: Just so we understand the process here though, because you contacted the lady living in the house or who owned the house. Was it an investor?
Rick: Yeah, she was investor. She had four or five properties.
Joe: And she was facing foreclosures and on her other property she wanted to avoid one more. And so you said, hey, I'll, I'll, I'll settle for at a discount.
Rick: I just told her I would. I said, Look, do you want to sign it over a deed in lieu of foreclosure? I'll agree not to come after you for any deficiencies. No court will rip this chapter out of your life, Throw it in the garbage, and you can start fresh. And you and I are good. And she said, Yeah. She goes, I don't want another one.
Joe: So then she wrote you a check. For how much?
Rick: No, she didn't write us a check for anything. We just. She signed the deed over to us.
Joe: Okay. Okay. That's what I was confused.
Rick: No, she signed the deed or I wrote her a check for 100 bucks for her time. As I can raise some money for, you know, for just taking the time out of your day. I didn't know what she was doing. She was like, You don't need to write me a check for anything. And I just was like, I feel like, you know, I knew what I could sell it for. You know, I had people already that were offering to fix it up for me and split the house with me. They'll pay for the repairs. And I was like, Now we're going to list as we listed it at 28,000. And it got bid up cash to 38 to somebody. I see. And I was literally at the closing table. I got into it not knowing what I don't know, and I'm at the closing table and my title company, who I've closed literally four or 500 houses with, is like, you need you know, they knew I owned it because I told them I owned it. But they're like, how I need to see that you own that sounds like, Well, what do you need? They said, it's called an assignment of mortgage. I go, They didn't give me any paperwork, so I had to call up the it was a hedge fund Condor Capital, who if you've been in the business, you've heard of them. I called Condor and I was like, Hey, where's the collateral package? I need an assignment of mortgage. And I said, Oh, it'll be out in a couple of weeks. I was like, I'm waiting to close. I need this now. So fortunately they overnighted it to me and we finished and we sold it. My partner and I looked at each other. We were like, That was fantastic. Wow. Can we do that again? So we went and we asked around because we've been in the business since 2005 and this is 12. And I knew most of everybody in the real estate investment space in Orlando at the time and nobody was doing notes. So we sort of said, Hey, let's do notes, let's do this. And so we jumped in full time. We did it about a year and a half, and then we went to a conference called the Five Star Conference, and we were going to go there, talk to Bank of America, talk to Chase and tell them, hey, we're buying notes, you know, give me your notes. And we ended up bumping into Eddie, speaking from notes. And we, you know, saw he had a breakout session. Loved what he had going on. It made sense to us because we had 12 or 15 notes that we owned at the time. And so we said, you know, we cornered him after his presentation, said, What can you tell us? How do we get involved? So he sent us to a three day class in Fort Lauderdale, which was, you know, 2 hours from us and started there. And actually, we met you at the next event of Eddie's.
Joe: Oh, yeah, that was in I remember that.
Rick: It was at like the airport Hilton, I think, or the airport Hyatt in Dallas. Yeah. And I remember we actually ended up winning. We end up winning note of the year or the note presentation of the year for what are the deals. And we ended up getting your class. And that's where like I got turned on to workflow Podio, the four hour work week, just all this stuff Joe McCall is about. And I was like, It was fantastic. Like, you changed my life and our trajectory.
Rick: I remember that. It was so I mean, this is probably it was probably ten years ago right around now.
Joe: That was a fun event. I remember being there. I felt completely out of my element. I was like, I don't know anything about notes. And I still kind of don't. I do kinda. But like I've always looked at, you know, it investors like with a little bit of envy, like, you know, I got a degree in civil engineering and there were the civil engineers and then there were the electrical engineers and the mechanical engineers, you know, computer engineers. And I've always looked at, you know, investors like that, like I'm this, this average house, vacant land guy. And here's these note, guys.
Rick: Oh, no way, man. It was you opened my partner and his eyes. I still work on Podio today. It's still.
Rick: It's still integrated into our systems. And it's almost like it's we're so tangled up in it that we can't get rid of it. And it just works. It's not sexy, it's not pretty, right? It's. But you know, it can pretty much do anything you need it to do and you can build it. I actually I think I still have if I go, look, you had a template, a real estate template that we still had.
Joe: I was Podio Joe. I had the domain, I had JoePodio.com and PodioJoe.com. I realized pretty quickly I didn't want to be in the software business, but and I wasn't really but I was I was trying to set up Podio for other people and it was a lot of work. So that's awesome, man. That's cool to hear the that's really funny. So you start doing land on a I mean, sorry, you start doing notes on a bigger scale.
Rick: We did. We started we had some friends and family that just were like, they saw what we were doing and they said here, you know, you can, you know, if you got. I see what you're doing and I see the returns are pretty ridiculous. So they threw some money in and we did it for that year and a half. And then I actually ended up we had our spreadsheet up with everything and we went and talked to somebody about said, Hey, this is what we're doing. And this is somebody who's, you know, they had what I consider a lot of money. And they it was the first time I ever pitched anybody for capital, and then I was tainted because it was easy. We walked in and talked to him for about an hour and he goes, I'll give you $1,000,000. Do you want it all right now? And I was like, for say, I was like, no, you know, this was like October or November of 13. And I said, Why don't we just wait till the new year that way, you know, setting up companies and getting everything. We've got a fresh start. And that way I can make sure that I have all my infrastructure in line. And so we started we started buying, you know, setting that up. And we just started really buying in bulk. At that point. We were we had a lot of notes going and we were really at the beginning just trying to get the house back because that's what we knew. We knew real estate we were just buying in Central Florida.
Joe: Were you buying from big banks, small banks, regional banks, private investors?
Rick: Honestly, like in the beginning we bought straight from this one fund, Condor Capital, and they they're a fund out of California, the hedge fund, who is a hedge fund. They were a note investment fund, but they were there, you know, over capitalized, understaffed, staffed. I would say, you know, they had two, three, $400 million of capital that they were deploying regularly. They were getting I know they had their money from overseas. And I think China was given a lot of money, but they were just buying stuff in bulk. And then if they can make a thousand, 2000 bucks, they would just if they could do it in, you know, 15, 30 days, they were just moving it. So we had kind of an endless supply of inventory, just buying strictly, you know, central Florida. And then it became harder and harder. And I had more capital that I had to deploy.
Joe: Just I'm sorry, just I'm just unclear. The hedge funds were buying the notes from the banks. Then they were flipping the notes to you for small little markups.
Rick: And it's exactly how it works. And so the way the waterfall would work in the note industry is the larger institutions. You know, Chase, Bank of America, Wells, whoever it was, they were they would package stuff up into portfolios of, say, $500 million and they would break it and sell it off to a larger hedge fund like a black knight or not a black knight BlackRock. And they're going to go ahead and take the cream of the crop off the top. So they'll say, I'm going to keep in for them. The cream of the crop would be something that's maybe worth 300,000 or more, you know, A-class properties. And just because if you're going to have to foreclose on a property, doesn't matter if it's a, you know, $30,000 house or a $300,000 house still going to cost you 15 grand. So you can do the math and say, okay, I'd rather have the, the higher end stuff. And then they would break up those pools, the remaining, say 400 million into $50 million portfolios and sell it to a mid-tier fund, who would then break it up and sell them on one off assets to folks like myself or to micro funds, maybe people with like five or 10 million under management. And so that was soaring. A waterfall, you know, a big pool, smaller pool, smaller pool down into the tertiary market.
Joe: And then you were buying them to basically take over the house, take possession of the house so you could sell the house.
Rick: What we did was we started doing was we were just like we knew real estate and we were like and I was a real estate broker. So it was like, Hey, buy the house, get the house, turn around, resell the house, make the money, move on to the next one. And after we did that for a while, you start running into people who were like, I don't want to give you my house, I want to keep it. And we started actually after we left the three day event for Eddie Speed. At that point we learned like we really became note investors because you learned more about, Hey, not going into every deal with one exit strategy of taking the house back. We went in and started looking at it like, if they want to keep the house and they can afford the house, how can we help? And we sort of had a mentality and a mind shift in the investment strategy of, hey, there's a lot of exit strategies here and they all can work and they all can work for us and they all can also work for that that borrower. And that was our that was a big changing point for us when we started looking at borrowers not as numbers but as people. And it was I remember the first deal we left the we left the three day conference and we were driving back and I was like, we can use one of the techniques we learned there. It was just offering nothing mind shattering, just offering a short payoff to I had somebody in mind, as we call them up, and it was a real it was a real heartwarming story. The other side, you know, the it was a grandfather who lived in there or a father. His daughter, who was in her mid-thirties, was kind of. Working with us and the gentleman who lost his wife a couple of years earlier. And this is kind of the last thing that they had together was this house. And so, you know, we were owed we were owed like 75, 80 grand. But we were into it for like, I think 30,000. And so we called up and we said, hey, would you be interested in writing us a check for 50,000? And you can keep the house and we'll let we'll just let all the passed you stuff. Goodbye. And they started crying on the phone, and it was just from there. It kind of was like, wow, we just really impacted their lives, helped us on because we got to we got a deal done. And so we started looking at deals differently.
Joe: And so you made you made a $20,000 profit approximately and roughly. Okay, because they owed about 80 or 90. The house was maybe worth what.
Rick: Probably 55, 60. I mean, we I think we left them with maybe like deals, probably 55, because I remember we offered him 50,000 and left him with like 10% equity or something like that. Not nothing staggering. But, you know, we were making 20 grand on a deal. It's like, hey, you know, we're not quite doubling our money, but it was our it was a really good return. And it was it was a it helped them, but it was also it was a fast, quick, hey, we can be done with this deal. And like six days in and they wanted to keep their house. And so that means there was no attorneys involved or anything, which was nice.
Joe: No foreclosure.
Rick: No foreclosure. We tried to avoid foreclosure at all costs. Foreclosure was terrible.
Joe: Nice. All right. So then 2012, the market really starts going up, Foreclosures go down. There's not many of them anymore. What did you start doing? Maybe advance, go forward a few years. What were you doing, like 2015, 2017 range?
Rick: So we started we were buying and doing the same thing. This was like so 2013 to 2014, we actually started buying from other funds and we had a sort of the catalyst for Paperstac was we were doing a trade and it was just the trade top. The bottom was a pain. It was there was just it was so convoluted. They were telling us they sent us due diligence documents inside of Dropbox and they'd actually sent it to us in a competitor of Dropbox called Box. And I didn't even know I had a Box account, but apparently I did. And one of the settings and boxes at auto accepts any invitations. And so they were telling me that I had the data. I was saying I didn't have any of the due diligence stuff because I was looking in Dropbox and then we got that sorted out. It turns out a bunch of the assets that they were trying to sell us were either condemned, had been knocked over by the city or had already been lost to taxes. So it was just a really rough trade. And then the final sort of straw that broke the camel's back or whatever, saying, you know, insert that there was when we got the collateral files for the trade, one of the assets, the only thing original was a lost note affidavit. So that means I had nothing but copies. And then there was a lawsuit affidavits basically saying that all the files had been destroyed. These are all copies. At that point, it was like, man, this is this is the Wild West. I'm sending money to somebody I've never met before to hold in escrow. And they're sending me these files and these files are garbage. So we were like, We got to do something about this. We want something. We want processes I hate, you know, suite process, that sort of stuff. I hate going through and doing the same thing over and over and over again. And so how can we fix this? How can I get out of my inbox? Because everything and to this day, still there's large institutions that they trade, and that means buy and sell that back and forth through email and spreadsheets, which is it's amazing to think about. So we created you know, that's when we came up with the idea for Paperstac, and it was called the Investment Note Exchange. And we outsourced to India and got back a just a pile of job. Where it came back in was just not good. One of our co-founders, Brett, was somebody I went to college with. I bumped into him at a grocery store, Publix, here in Florida, and we were going through what I was doing, what he was doing, and he ended up coming on board. And then I had him say, Look, you're going to have to handle this. Show it to this other guy. I knew Mike, who he's our another co-founder of ours. We had four co-founders, but he was a developer. And so he looked at the he looked at what we had and he said, It's Joe, get spaghetti code. You guys need to do a ground up build. And I go, Perfect, Can you build this? He goes, I'm not taking on jobs. I'm only doing stuff for ownership now. So I was like, Okay, no brainer, I'll give you ownership, Come on in. And Mike started developing Paperstac in 2015. We launched in 2017. At that point, you know, we were really using this as an internal tool to start, you know, we're like, this makes it really easy for us. We can sell our stuff. The people. We were just we were going to use that as our platform, as a way to sell. And I remember one day there were some new notes on the platform and it was like, Well, who are these people? And they'd signed up and they started. And next thing I know, people are doing deals without us, and we're just collecting fees. So it worked out. Yeah.
Joe: Okay. So I want to I want to share my screen here in just a minute. Little but explain to me kind of how it's working today. Somebody buys a note either. Well, let's say somebody goes out and they do some marketing. They find a note that they want to buy either from a small local bank or a private investor or something. And then they want to sell that note. So kind of explain that process of how note investing works today, I guess.
Rick: Sure. So there's definitely ways you can buy notes. You can market for them. We you know, in the past we had done that and I say we I don't mean Paperstac. I mean, our fund had been that marketing for stuff, whether it's postcards, texts, phone calls. And once you find something and you figure out you want to buy it, you got to put together the paperwork, purchase sale agreement, the transfer documents for the note and the mortgage. So and a launch and then an assignment of mortgage. And typically, you can go to an attorney or a title company and have them close it. But now you can use no closing scheme as or I would tell people to go. But once you own the paper and you're like, okay, I want to turn around and resell it, or maybe you've had it for a while and you want to, you know, you've collected payments on it for, you know, 36 months. You can go ahead and turn around and sell the note. And I would use Paperstac for that three to sign up. It's free to list stuff. You know, you pay 1% from the buyer and 1% from the seller at closing. So if a deal doesn't happen, nobody pays anything. And paper staff will be through the whole process. Right now, we've got roughly 15,000 registered users on there who are buying and selling that. So it's there's I mean, you're going to get offers on your notes, that's for sure.
Joe: So you can also create notes, which is what I like to do, right? Yeah. When I'm selling land, I like to sell land on owner financing. You can also do the same with houses. I have a good friend. His name is Scott Jelinek. I've interviewed him many times here, and he's got this program called Slow Flips, and he basically buys properties with private money, pays them off in five years, and then sells them on 30 year notes. So he's buying them like a car, selling them like a house. And so he'll have, you know, five years. There's no cash flow at all. But year six, starting of year six, he's got a free and clear asset and he's got this note that he's created where he's selling these deals on owner financing. So one of the things I wanted to ask you, though, was like there's a lot of terms out there that you can throw around. There's installment contracts, contract for deeds. You know, can you sell a note that's an installment contract that the deed hasn't been transferred yet. To that end buyer, does that make sense?
Rick: Yeah. Contracts for deeds with agencies at one or installment contracts. We have several of those going through. And whenever that's happening, if you're ever selling one of those, you're selling the contract. But also then you're typically doing either a special warranty deed or a quitclaim deed. Something like that is transferring over to whoever is buying that contract, that installment contract. So yeah, we have those going all this all the time. We have a lot of those on the platform. I love what you're doing with buying land. We have a lot of that going on. We have a lot of land notes that are have been coming and going through the platform. You know, if people do it right, I see huge upsides there as far as, you know, you could buy it for pretty cheap most of the time and definitely mark it up and sell it at a premium. And, you know, I've seen really nice interest rates. 12, 13% short term, which is always good. That sells rather quickly on the platform. If you got a high interest rate in the short term.
Joe: I thought a longer term would have been more interesting, more sellable. But you're saying shorter term isn't like five years.
Rick: If five year, ten year stuff is good, 20 or 30 year, just you got to look at it. It just takes longer. Yeah, the payments get spread out, so it takes longer to recover your money. We see people doing what your buddy was talking about, about using private financing to buy stuff and then selling it with a wrap. I see a lot of people doing that with. They'll do like three year interest only balloon stuff and then they'll come in once they, you know, sold the note on or once they've sold the property with that 30 year note, they'll come and sell the note on the platform and the other note gets paid off and then they keep the delta. So that's called a wrap as what you know, typically what is called is just a wrap around mortgage or something along those lines.
Joe: So with vacant land, can we do an example property here? Sure. I'm going to get my calculator just so I can stay on top of these numbers. Let's say a property is worth 50 grand. I'm going to buy it for 17,500. Okay. That's about what I'm going to buy it for. And I might use my own cash to buy that. I'm going to turn around and sell it on owner financing for 50 grand. So there is a, let's see, -50. There's about a $32,000 spread in that. Which is. Not too far fetched. Maybe not at all. So like, we're buying land depending on the area. $0.35 on the dollar on average. I might that the most pay $0.50 on the dollar. Now, I could wholesale that deal, and if I wholesale it, pay a realtor closing cost, just sell it for cash. I could probably make 15 grand in quick wholesale profits. But obviously if I sell it with owner financing, I can sell it for a higher price. I typically sell my vacant land on owner financing at nine and a half to 10% interest. I try to get 10% down and I try to do five years. Sometimes I'll do ten years. And again, I say this a lot too. It's it's crazy. We just had yesterday I was talking to my acquisitions guy for every one call. When we're selling land, for every one call we get from a cash buyer, we'll get four or five calls from people saying, Hey, will you own our finances? Can I make your payments over time? Right. Yeah. So we try to wholesale as much as we can because my acquisitions guy who's also sells the deals, he wants cash now, but we still maybe 25, 30% of our deals will still sell with owner financing. All right. So on this deal, we sell it for 50 grand on owner financing and let me open my mortgage. I have a little mortgage calculator here. Maybe I'll share my screen as this would be a good time to share my screen. All right. You see my screen there, Rick? Are we good?
Joe: Oh, I got to do I got to press the publish button. There we go. Okay. I don't know where this thing came from. It's ugly and obnoxious, but so let's say I'm selling it for 45 grand. I get 5000 down. So the note is $45,000 and I'm doing 60 months. I'm charging 9.5% interest. I'm going to be getting around $945 a month. Usually I might be a little high, so I might do ten years. So my payment will be about $582 a month on this deal. Now, my own internal numbers, I bought this thing for 17 grand and I'm getting $582 a month in cash flow like that's for me. I want to I want to keep that as long as I can. That's correct. Cash flow. I'm getting my money back. You know, I don't know. Let me see here. If I put 17,500 in it.
Rick: Take five grand down. So you got 12 five in it, right?
Joe: Divided by 582. I'm getting my money back in 21 months.
Joe: Right. So, okay, this note, if I wanted to sell this note, how long should I wait? How does it have to be seasoned and does it matter? How much does it matter how well I prescreen my buyers?
Rick: I would say it's like as Eddie Speed would say, you can only bake a cake once, So the better you bake the cake up front, the better it's going to be when you try to sell the cake. If you can prescreen your buyers and whatever we do, owner financing, you know, our personal stuff. If we're buying, you know, we buy houses, turn around and then I'll sell them on turns to people on our financing. We have everybody go through like a Dodd-Frank compliant sort of screening. So the paperwork, there's a loan application. That's the whole deal because I got to make sure they can pay the better off you do on the screening process, the better off it's going to be. I love that you're taking 10% down. That's a huge step in the right direction. I love that you're charging a really nice, healthy interest rate, which nine and a half? I'm at 9.4. I don't know why, but I've always done 9.4, which is right there at the nine five thing. It's green. It's a perfect interest rate because you don't have to take a big discount to hit the ten. And so that's lovely. But the prescreening, the better you can prescreen at least have a package showing that they can afford it. I'm not overly concerned about credit, but what I've noticed is most of the time when people come in and they can check all the boxes on the on the financial side, you know, on the scene like 750 770 credit scores. And I'm not having to worry about like, you know, a 580 credit score. And if you're taking, you know, five calls and four open order financing, chances are somebody in there is going to have that that just that sweet, that sweet file that you're like, yeah, next. Yeah, you can have the next property I get or this one's yours. So the more you strip, the better off you are.
Joe: I understand Dodd-Frank is important for residential housing.
Rick: It's not for you, not for the, not for what you're doing. And certainly that's a benefit to the land, is that you don't have to worry about all those compliance.
Joe: Don't ask that question to Eddie Speed. He'll talk to you for a half hour and you'll understand maybe 10% of what he says. And but I you know, I think I think Eddie will say differently. Would you would you think so?
Rick: Yeah, he would. But I mean, he's forgot more about note investing that I probably will ever know. So he's definitely it I mean he's going to tell you everything out there. But for the residential side, yeah, it's Dodd-Frank is pretty important.
Rick: I will say this. The notes that I've seen come through Paperstac, the ones that have like a 10% down and have a healthy interest rate and there's some sort of borrower application or great deal whenever you're selling your stuff. Are you how are you closing? Are you at a title company? Are you. Yeah. See, that's why.
Joe: We closed on the A to B side when we buy it with a title company and we sell it, we don't. We're just doing. We do. I forget our paperwork, what it's called, but it's a contract for deed. It's an installment contract. I don't even think we get it notarized. They just sign it, they send us, and then we start collecting payments from them.
Rick: Do you record it?
Rick: No. Okay.
Joe: Maybe we should. I don't know.
Rick: I would. I would record it.
Joe: Record what specifically?
Rick: Record the installment contract.
Joe: Okay. Why is that?
Rick: Because whenever you go to assign it to somebody else, they're going to want to. There has to be something in place showing, you know, that you're recording. It is showing that transfer and it's just typically done in public record. And also there's a few states I'm an attorney, not legal advice, but there's a few states that if it's not if it's not recorded and you have a certain number of days to record it, they won't honor it. Like if the borrower stopped paying, they would. I think Ohio was one, in Pennsylvania was another one. So I don't know. I would just look into that on the legal side and verify that just because I've the several of my attorneys have said, hey, make sure that if you do a land contract, you're recording it.
Joe: So you should be recording the contract for deed or the land contract in the county records.
Joe: But the deed hasn't been transferred yet.
Rick: Right now, the deed won't be transferred until they fulfill their installment contract. And so if you were to go to sell that, you would go ahead. And if, like, for instance, if it were on Paperstac, whenever you list something, you get to say, okay, this is a contract for the land contract, whatever it is, and we'll draft a assignment of land contract or assignment of seller's interest in a land contract, and then we'll give you a doc or a template where you can say, Here you go, fill out the quitclaim deed to the whoever is buying it. So then you would be assigning the contract to them and then they're getting the title of the property doesn't change anything with the contract other than who the payments made to.
Joe: Okay, well, let's review the website here. Let's see if you can see this. This is Paperstac dot com. I'll zoom in a little bit here. The modern way to buy and sell mortgage notes online. Easy access to inventory online transactions is really cool. Cost effective solution. So there is a 1% fee on the buy side and 1% fee on the sell side. Right?
Rick: So for that you get all the closing documents, you get included in that. The collateral audit is included in that at a collateral verification, and we pay for all FedEx shipping labels. So you get quite a bit for that in there and provide you, you know, the it'll be stuck there on our platform forever. So if you ever need to go review something, you know, we've had people who deals went south months after the transaction and they were able to come back, look at their transaction timeline and see where there was misrepresentation by the other party. And it helped them in a court case because you've got a complete digital audit trail sitting there with whether it's phone calls, messaging back and forth and representations made by the other party.
Joe: So is Paperstac just the software or do you have people behind the scenes that are kind of doing some transaction coordination at the same time?
Rick: It's just the software. We obviously if you see that orange button in the on the bottom right corner of the screen, that's our if you click on that, that's an easy way to get in touch with our helpdesk. You can type questions and we have, you know, we have somebody who mans that, but the platform really handles itself. Yeah. And I mean, it would be one of those things where I could.
Joe: So it gives you digital audit trail communication that works perfect for teams accounts. The easiest closing ever consistency and safety perfect for teams and you escrow and audit. So and it acts like an escrow company so the buyer will send the money to Paperstac right, and Paperstac then will release the money. When? Like, when the.
Rick: So the way it works is there's two phases in the in the on the Paperstac transaction, there's a negotiation phase where every year you're back and forth on price or just accepting price you're entering in, in this phase, all your vesting, how your, how you're on title or how you want to take title. You have options to use escrow in Colorado. You don't have to do it and then you're signing the purchase sale agreement. Then you enter into the closing phase. At that point, the seller is going to put it in their bank account information, which is, you know, locked, triple lock sealed and the whole, you know, encode it or whatever. You know, I'm not the technical guy, but it's under strict lock and key, so to speak. And it's held in Google's database for the wiring instructions. Whoever this loan servicer is, if you're self servicing it, you would put yourself if you're using a professional servicer, that information goes in there and then Paperstac will generate a buyer invoice. If they're using escrow and on the buyer invoice, they're going to wire funds to our wire account. Once escrow receives funds, it's marked as received on the platform. At that point, we generate a shipping label for the seller to send the collateral file, which is all the, you know, the application. It's the contract for deed or the installment contract and any other documents pertaining to the file send a FedEx label. They send it to an auditor whose name is Casey Wilson. They're out of California. They take the file and we pay for two day shipping. So it'll take two days to get there. They usually audit it within 24 hours. They go through, they verify what's original, what's copies. They provide an opinion on it, and they provide color scan copies to the transaction only for the buyer and the seller to look at. But it's really for the buyer At that point. The buyer can review the report and they have the option to, you know, talk to the seller, say, hey, this isn't what you represented or no, this is exactly what you represented. If that's the case, then they sign a disbursement agreement. The disbursements agreement says once they've signed and executed the assignment in the longe and the quitclaim deed, the transfer documents, I'm good for you to release money to them. At that point. It opens up the transfer documents and the seller will sign all those. If it's a custom document or something they're signing and wedding, they can upload it and the buyer can approve it. Once all that's taken care of, the seller then signs the disbursement agreement which says, Hey, I fulfilled everything on my end. You're going to release the collateral file to the buyer, release the funds to me At that point, once that document's executed, the collateral audit company sends out the collateral package to the buyer, and the escrow company releases funds to the seller, and then we send an email to the outgoing servicer and the incoming servicer saying, Hey, this loan has just been sold. You're now the new servicer. You're now the one who's got to transfer it. And then we step back.
Joe: Okay, So you're using a third party auditor.
Rick: Correct. We use a third party auditor.
Joe: All right. Here's some currently trending listings. We want to pick one of these to look at. Sure. How about this one that works?
Rick: Pick it up. Yeah. Let's go look at it.
Joe: All right, so sale pending. So somebody is working on this. They listed this one two weeks ago. So tell us what we're looking at here.
Rick: So this is the listing page. You're not logged in. Do you have an account?
Joe: No, not yet.
Rick: So this is a listing page. It's going to be whatever the seller is indicating is in inside of the transaction. You can see that this is a small pool. There's two performing first position loans. It'll give you the seller comment. You can see anything that they want to notify or tell you about the their sales pitch, essentially. Then you'll see that these are the asset details. So this is the first loan. It looks like there's an unpaid principal balance of 161,000. The loan to value on it's 88%. If you scroll down a little bit more, you'll see that we have the property valuations. So they've provided actually a BPO can see they're giving a valuation and we pipe in data from Zillow. So you'll have a Zestimate there and you'll have the rent Zestimate. Looks like there's a little bit of a discrepancy. I would look at the BPO and see what's going on there. If they've provided you with payment history, you can see it there. And then finally at the bottom you'll see there's note files. There's seven files that they've shared associated with this transaction. The only way to see it is to go ahead and to reach out to them. So what you can do is if you look on the right hand side, where there's an orange box, it says log in the contact seller. If you were logged in right there, it would has two buttons. One says, ask the seller a question or the other one says, Make an offer.
Joe: Okay, so maybe you don't know this, but you don't know if the. This was a note that a private investor created, or if this is a note they bought from a bank, the hope to you. That doesn't matter.
Rick: It doesn't matter. Well, to me, it doesn't matter. To some people it would matter. But to me, it doesn't matter if a private investor created it and they did a good job, then I'm okay with it. If it's from a bank, that's okay as well.
Joe: Well, this note originated just less than a month ago.
Rick: Yeah, it looks like that one is less than a month old. So what are they what are they selling this one for there? There's not pricing, I guess, listed on this specific asset, but they've got a 160 to 10% interest. So it looks like there was a 20 year note that more than that.
Joe: Do you think this looks like a good deal to you? They're saying the total pay off is 160, $161,000. They're saying the deal is worth $183,000.
Rick: But there's built in equity there. Scroll up. What does it have an actual. See, there's two notes here. So you got to look at the if you click on the dropdown and go to the next note. There you go. So the next payment.
Joe: So this is a 20 year note.
Rick: It is.
Joe: 10% interest. They say it's performing, but it's only been performing for one month. Does that does that count as performing?
Rick: Yeah, I mean, technically it's still performing, but so what's the total payoff? 120,000. And the other payoff was 161,000.
Joe: The payoff was 161,786.
Rick: So you're talking, you know, 280. And what are they asking for it. Scroll up a little bit to 60 now. That's not for me. It's not big enough of a discount, but. Right. If it's pending, somebody else's looks like somebody thinks it's good enough for them. So and it looks like they've got 15% down. So, you know, both of them, 10%, if you can deploy, you know, 260,000 and you're getting 10% on that for somebody, that's going to be good. I know a lot of a lot of folks who said, look, I just want I want mailbox money. I don't want to have to do a lot of work. Yeah. So the reason why it's a little different for me and I'm not saying that's a bad deal, but for me and probably I would imagine for you, you're talking about buying buy in deals that 35 to $0.50 on the dollar. Correct. I'm usually the one like I'll give you a for example, one of the deals we did earlier this year, if we bought it for 136,000. Sold it for 230,000 with $25,000 down and charged to 9.4% interest. So, you know, I've got a $205,000 loan and at 9.4% interest, I'm into the deal for roughly 110. And so you start you look at the numbers there and you're like, okay, well, you can you can really cashflow that thing and hold on to it. And it's, you know, you're getting I was like 18 or 19% on my money is you figure what I'm into for, for what I'm cash in for. So something like that, that's great for some, you know, that's a good investment 10% for somebody. But for me who in probably I would imagine for you somebody who's used to buying at a discount, that's a tough pill to swallow because I'm like, well, I know that if I do a little bit of the work, I can really take that number and double it and I can have a big equity spread in there.
Joe: You know, can I, can I just do some the some this is an example deal for land. Sure. Let's say the land sale price is $50,000. Okay. And my purchase price, my buy price, let's say I buy it at 40% of that. Right. So my purchase price and I'm buying this land for I'm buying it for 20 grand.
Joe: Then I'm going to I'm going to sell it on owner financing it, or maybe 50. 55,000. So, like, it's maybe less it's worth.
Rick: But you can sell it at a premium, right? If you're holding the finance and then I sell stuff at a premium all the time. Yeah.
Joe: So the land worth today, if I were to sell it to a cash buyer, maybe I could get 45000 to 50000 for it. So an owner financing, I could maybe sell it for 55,000. And I'm going to try to get a down payment of 10% equals that times. I hope you guys don't mind the spreadsheet math here and I'll zoom in. So it's real big. So the balance is that minus that. And then my term is going to be 120 months. My interest rate that I'm going to charge will be 9.5%. So my monthly payments is going to be 9.5 divided by 12. Number of periods, 120. Present value -49 500. Future value zero. Okay. So the payments are going to be $640 a month. If I were to wholesale this deal quick cash, you know, I might be able to wholesale it for 40 grand. And so my kind of net profit after realtor commissions and closing costs and all that might be around 15 grand if I wholesale it. But if I were to keep this deal, sell it on owner financing. All right. I'm a salon owner financing for 55 grand. I'm going to get 10% down. So the balance owed is this. I'm gonna do 120 months. Nine and a half. We're getting 640 a month in interest. I am all in my all in. Like what I'm into. The deal will be 20,000 plus, you know, let's just say 5000 and closing costs. Yeah. So I'm going to and then I've got, I might pay a realtor to help me advertise it. So I might pay a realtor another 20 $500 to find my owner financing buyer or whatnot. So I'm all in for 24 grand. I'm going to get my money back in 37 months if I keep this deal myself. Right. Which is this is just kind of the way my mind works here. Sorry, I'm going to get my money back in 3.1 years. The money I put in to buy this deal, I feel like that's pretty good. Cash flow, $640 a month without the typical landlord headaches and worrying about managing rentals and all of that. But let's say I were to sell this note to a note buyer on Paperstac. How much could I sell this note for? Is there a it's like a percentage of the balance.
Rick: That's probably going to be somewhere between the 47 or the 40 to 48 range, maybe 47 range.
Joe: So I'll sell my note. Is that is there like a percentage, an 80 to 80%, 85% range or there is.
Rick: But on these deals, I'm seeing stuff in the 95, I've seen stuff so in that 98%. So I would say 90% is pretty safe breezy.
Joe: 90% of the loan balance.
Joe: All right. So I'll give you 90% times the loan balance so I could sell that note for 44 grand because. Okay. The reason I'm doing this, if this is that right. So then my profit will be 44,005, 50 minus my all in cash when I put into the deal so I could wholesale it and make 15 grand or put it put an owner financing buyer in it and sell it for 20 grand and make it and make 20 grand profit.
Rick: Did you take out the 5500 that you took in?
Joe: No, I didn't. So my, my all in. I have to now subtract 5500 down payment. So my all in would be the cash out of pocket. Cash out of pocket. And I know I'm embarrassing myself here.
Rick: No, you're good.
Joe: Primitive math. That's the way I look at. So my profit, if I sell that note for 44,000 now. Yeah. Is that right?
Rick: Yeah. If you're, if you're. Yeah that's, that's correct. You just do the 20 plus your marketing costs minus You're, you're the money you're bringing in. Okay.
Joe: So it would seem to me if I was a land investor creating notes if you wanted to make more money. Create a note from that vacant lot and then sell it to a note buyer. You'll make more money doing that. Then you will selling it, trying to wholesale it and sell it to a cash buyer.
Rick: You can. You can also do something where if you create the note, you can sell what's called a partial.
Joe: I knew you were going to go there.
Rick: And that's and that's what hooked me. I saw and I go, Holy cow, you can sell a you don't have to sell the whole loan. So you can turn around and say, well, you know, you're getting a good cash flow there, $6400, and you're going to be into it for 18,500. So you might sell the next four years of payments, Right. And get all your money back out. And so whoever's buying, it's going to get you know, you'll sell four years of payments for 18,000. So they're going to make a spread on their money. But on the fifth year, you either payments come back to you, and so you own that deal free and clear. And you can also do stuff where maybe I want to sell five years worth of payment. So I want to get a little money upfront, a little lick off the lollipop, and I want the cash flow on the back end and I can turn around and have that cash flow. So if you start doing that and build, you know, build up your cash flow, you can live off the money you're making up front, but then you can also have like, wow, in year five. All of a sudden it starts compounding and you're like, I've got ten of these things and I've got no money wrapped up into that. I've just been keep on cycling through and doing them and now you've got a bunch of a bunch of cash flow that's coming in. Okay, That's a then it's called a partial or hypothecation. And there's a couple different ways to do it, but there's a really, a really, really powerful tool to start building back in cash flow and to, you know, I call it recapitalizing your piggy bank. If you if you if you're working on a limited number of funds and maybe you're like, look, I've got 20 grand, it's not like I can go, Yeah, I'd love to have ten of these. Well, this is a way that you can buy one. Run it through, make a little money, recapitalize. Now you've got your 20 plus whatever you made back. And you can either do it again or, you know, keep whatever you have off to the side. It's just it's a really intriguing way to start getting creative with.
Rick: And the fantastic thing is you can do this with some self-directed retirement accounts like the IRA, 401K as long as you leave. I think the IRA at $100 in the deal. So you can really start doing these things that you want, talk to your accountant or your tax attorney about it. But there's ways to use self-directed retirement accounts to really build up a nice, nice little nest egg. Yeah, and do it.
Joe: So how long does this note have to season?
Rick: Three months is really good. And if you can seize that three months, it's there. There's a pattern of payments. You know, I'll say this. Having a way to track the payments is key. So, you know, I know sometimes people use loan servicers. Other times they're not using a loan servicer. And, you know, you go to get payment history and the payments you're looking at are you know, I've seen photocopies of hundred dollar bills come in and I'm like, that's, you know, the better your record keeping is the more verifiable it is, the easier it is to sell your asset If you've got no payment history or you've got, you know, Zelle or Cash App or Venmo, stuff like that, just understand that. It just it doesn't look as credible. And, you know, as somebody who's buying notes, you're looking at the note said, okay, was the note created? Well, did they do any sort of, you know, loan application, they do any anything that's going to make sure that the borrower can pay? And then did they take down a down payment? And because I've seen some people do like $100 down and I'm like, that's that person's got no skin in the game. They've got no reason to hang around. If things go south, if you sell them and you put down $5,000, they want to walk away from five grand. Yeah. And then the payment history. So pre-qualify down payment history.
Joe: I'm sure somebody out here watching this or listening has a better spreadsheet than what I just did. Please send it to me. I'd love to see it. I'd like to see more example numbers of how this typically works for vacant land. But we need to wrap this up real quick. Your other website. The first website again is PaperStac.com. There's no K, Paperstac.com. You have 237 listings here of notes for sale. This is really cool. You can see which ones are available. Single asset, asset pool, first position, second positions performing nonperforming, different types of notes. This is interesting. And then also by state, you can look into that that way as well. You also have the website NoteClosings dot com. Explain what the no closing scheme does one more time.
Rick: So it's basically it's the closing process on paper stock without the marketplace. So this is for the folks who say look. I've already got the buyer, I've already got the seller, or I'm the buyer. They're the seller. I'm the seller buyer. All I need is the closing process. I just. I don't know how else to close this deal. I need somebody to generate the purchase sale agreement, the transfer docks, and I want to utilize escrow. All that stuff is baked into the platform, and it's at a reduced price. So instead of being 1%, it's $200 for their first asset and then $100 for each additional asset in the closing. So it's a much cheaper process.
Joe: Good. Paperstac.com and then NoteClosings dot com. Rick Allen, thank you so much for being on the show. Appreciate it.
Rick: Joe, thank you. I appreciate it. It was a lot of fun.
Joe: If people want to reach you on Facebook, Instagram. Do you do that or.
Rick: Yeah, I don't know my Facebook handle, but I'm sure if you look up Facebook, if you Google Paperstac or Rick Allen notes, we've got a podcast. You'll be able to find us there.
Joe: What's your podcast?
Rick: It's the Paperstac podcast. We kind of talk about everything notes. A lot of free education there. We talk a lot about other investments like real tied to real estate, and we interview some people in the industry. Yep, there it is. You know, we've got a few different series like the. What is it like, know investing 1 to 1. It's kind of like how to start. Take it for what? You. It's just me and Brett up there talking. Some sometimes people enjoy it, sometimes they don't.
Joe: Well, very cool. This looks interesting. I'm going to check it out. We do have to wrap it up. I have to go. Thank you so much for being on the podcast. I appreciate you.
Rick: Joe, thank you. Appreciate it.
Joe: We'll see you soon. Bye bye.