Robert Leonard  01:51

I’m looking forward to our conversation today because we’re going to be talking about a topic that isn’t talked about in real estate space as much as other strategies, and I know it’s one we haven’t covered yet here on the show. But before we get into the details of note investing, let’s talk about your background, how you got into real estate. How did you get to where you are today?

Dave Van Horn  02:11

For me, it was working in construction. I was living at my mom’s house after college. I was married, had a child, and I would come home from work sweaty and grimy. I hated my job, and my mom suggested, “Why don’t you try real estate?” That’s literally how it started. I went and got a real estate license. I started when I was 26 years old, and just went on from there. I came to real estate investing from the realtor side, which is a little different. I was handy though. I actually became a contractor and all, that as well.

Robert Leonard  02:41

When you worked in construction, were you working in residential construction, so it was relevant to your real estate investing?

Dave Van Horn  02:48

Primarily. I worked on residential and commercial. I worked for a painting contractor for a while, and then I started my own company. Today, my oldest son has a painting company.

Robert Leonard  02:58

What does your current real estate portfolio look like? Are you using any strategies other than just note investing?

Dave Van Horn  03:03

It looks seasoned. My single-family residential portfolio is shrinking. I had gotten it up to like 40 places, but I’ve been shrinking it a little bit on purpose. My company owns several hundred houses at a time, so we might have several hundred REO properties, and we own thousands of mortgages. It’s not that we don’t deal with a lot of properties. I don’t own them in that way. My business is probably my largest investment.

I’m also a multifamily apartment investor. Having done some commercial syndication, I’ve been syndicating over 20 years. I’ve been involved in a lot of different types of projects, everything from commercial development to construction –you name it. I’ve done mobile home parks, cell storage, and all kinds of stuff.

Robert Leonard  03:55

So you’ve done it all.

Dave Van Horn  03:57

Not all, but a lot.

Robert Leonard  03:59

As I mentioned at the beginning of the show, I don’t think the majority of people know what note investing is or what the strategy is. I think even fewer people are actually using it. I think most people are usually on the other side of notes, where they’re writing checks to the owners, rather than collecting checks as note owners themselves. What exactly is note investing?

Dave Van Horn  04:20

In the simplest form, it’s being the bank. There are all kinds of debt out there. I manage several mortgage investment funds, but there is plenty of auto debt, medical debt, student loan debt, credit card debt –it just goes on and on. My industry is a trillion-dollar industry. There’s probably a good $8 trillion in first mortgages, and probably close to $1 trillion in junior liens. I’m in the one-to-four family residential space, and we’re nationwide, but there are commercial notes, unsecured notes, and so on. There are a lot of categories and asset classes that the average person might not know about, but they exist and they’ve been around a long time.

Robert Leonard  04:58

Who is this strategy good for? Does it have to be as a business? Or is it something that an individual investor can do?

Dave Van Horn  05:05

Anyone can do the business. One time, I asked my heating and air-conditioning guy, “Hey, did you ever think of financing the installation of the units?” He responded with, “There’s a company that does that.” And I told him, “Yeah, I know, but did you ever think of owning that company?” You can invest in what you know, and so, what he ended up doing was getting a deposit for a heater or air-conditioning unit, and he installs and finances the labor. If they don’t pay, he could turn it to collections or put a mechanic’s lien, and by having financing available, he can actually sell more units, have more service contracts, and have the service contracts increase the value of his business. You can invest in what you know in the notes space, and do very well.

I have a tennis buddy in Dallas, Texas who does the same thing. He and an orthodontist teamed up, and I think their IRA accounts even got involved. I think they might own the company, too. But his finance company actually grew to be worth more than its dental practice, so he’s been financing dental work for many other dentists that are friends of his too. His company provides financing for dental work.

Now, they don’t have the same collateral as a heating and air conditioning guy. I don’t know what they’d if they don’t pay them. It’s not like they’re going to go rip the fillings out, but you get the idea. In that case, it could be similar to credit card debt. They would know the default rate on dental debt. So, you can invest in a field of what you know.

There are all kinds of financing. There’s financing to install swimming pools, and so on. Everything you can see right now from your seat has been financed at some point, and people just don’t really notice it. I always say we’re all in the note business, but you just don’t realize you are. You’re paying for everything from your furniture to the construction of your property. Everything around you has been financed unless it grows. But even crops are financed. So, just about everything has been financed.

Robert Leonard  06:54

In the case of the heating and air conditioning company, how does something like that work? How is he going to be able to find payroll if he’s financing it? Where does that funding come from?

Dave Van Horn  07:04

Well, it depends on how he goes about it. He could have a business line of credit. He could put a line on his house. He could utilize his IRA account. If his IRA account owned an entity then it becomes the company. There are a lot of different verticals there. He could have a money partner. Just like anything else, there are a million ways to do that.

Robert Leonard  07:21

So is it really just an arbitrage of the interest rate? So he’s charging a higher rate to the end customer versus, let’s say, what he’s paying on his home equity line of credit?

Dave Van Horn  07:30

Oh, yeah, that would be typical. He could borrow the money out of his life insurance policy. There are a million places to tap into to do that.

Robert Leonard  07:38

Do you see people using this strategy to land on single-family or small residential rental properties?

Dave Van Horn  07:46

I started by trying to buy deals with owner financing. I bought houses as a business for a little bit. I would make multiple offers on the same property. I’d give my cash offer, an offer if you hold the mortgage, an offer if you hold a second, and an offer if I bring in hard money, etc. I just had multiple offers based on the type of financing. Even when I sold properties, I would sell a property with the seller’s second, or I would throw in a seller assist. Basically, an investor buddy could buy a property from me. In one of my rentals, he picked it up from me with no money out of pockets, no cash flow, that kind of thing, and then I’m cashed on for property I no longer own. I’ve done that for years.

Robert Leonard  08:22

In the seller financing, is the most common way to do that in the rental space?

Dave Van Horn  08:26

Yes, there are two note worlds. There’s the seller finance note world, and then there’s the note world I’m in today, which is the institutional note world. Like all the loans that we bought, we won’t buy seller finance loans. We won’t buy a contract for deeds, or things like that. We just buy bank-originated paper, like from Bank of America and Wells Fargo. We buy from government agencies. We buy from HUD and Fannie and Freddie. The seller finance world is a completely different world.

Robert Leonard  08:50

 Is that because the loans usually stay with the seller?

Dave Van Horn  08:54

There’s actually a market for that. There are actually trade desks that buy seller finance paper, like colonial funding, etc.

Robert Leonard  09:00

Interesting. Are people investing in your business, or in your funds, as an asset class, and expecting a return from the interest that you’re getting paid back?

Dave Van Horn  09:11

In our funds, we’re basically pulling capital from high net worth investors, and then buy pools of mortgages. So they’re backed by the pools of mortgages, and then we pay a preferred return. We’ve been doing that for the last 13 years.

Robert Leonard  09:26

Of course, it’s going to vary from deal to deal, but what returns to you generally see in note investing, both on the side as the note owner, and on the side of the private investor that’s lending you the money for the strategy?

Dave Van Horn  09:37

It varies with the market. Note values are in direct correlation to real estate values, so if you’re in an up real estate market, the cost of notes are up, and that means the yields are less. Right now, most yields on residential mortgages to the note holder, like a small investor, would probably be in the 8% to 15% range. Usually, it’s right below hard money rates.

For us as a note fund, we’re doing probably better than that. We pull capital. We raise capital from 4% to 11.6%, depending on liquidity. We have moddable options, like a 60-day, 6-month, 1-year, or 3-year liquidity deals. Our investors can compound, as well. That’s why there’s a variation in rates, but we typically invest in first mortgages that are non-performing. Our yields are normally 18%-22%. On junior liens, it’s very common to be north of 30%. We just can’t get enough of them. When it comes to re-performing loans (RPLs) that are usually in our liquidity funds, our cost of capital is around 5%, but we have a coupon rate north of 12%. So we’re making that arbitrage between 5% and 12%. That’s how we make money. Just like in our non-performing funds, our cost of capital is right around 9%, and our yields are 18%-22%. That’s how we make money.

Robert Leonard  11:01

For those who aren’t aware of what non-performing means, can you explain what that is?

Dave Van Horn  11:06

It means they don’t make their payments. Typically, we’re talking about first mortgages when we talk about non-performing loans. Loans start getting classified as non-performing when they haven’t paid in more than three or four months.

Robert Leonard  11:18

And then do you generate the return by foreclosing on those properties?

Dave Van Horn  11:22

It’s a combination. We do modifications, but yes, on occasion, we’re taking back properties. It depends on whether they’re occupied or not. There are a lot of variations there. The senior lien status is actually more important than equity for determining the outcome. Junior liens are different animals as it’s very statistical. First mortgages are a little different being more about sticks and bricks and geography and location.

Robert Leonard  11:46

I was a bit surprised to hear that the returns for the smaller investors were as high as they were, given that mortgage rates are usually 4-5%. I was surprised to hear that they were north of 8-15%.

Dave Van Horn  12:02

You’re probably looking at it compared to a newly originated first mortgage with perfect credit, 800 credit score, and all that kind of thing. Yes, they do have a lot lower coupon, right? In the seller finance world, they tend to be higher than that. The commercial notes also tend to be higher than that. But a lot of the notes that we sell were once defaulted but now re-performing mortgages. So it’s more of a scratch and dent category that pays a higher yield.

Robert Leonard  12:28

You mentioned that you’ve been doing this for about 13 years now. That puts us about back to the 2007 timeframe.

Dave Van Horn  12:35

Our company started in 2007.

Robert Leonard  12:38

Was that right before the crash or right after?

Dave Van Horn  12:41

It was before it. We were still in an upmarket, and we de-stressed that there’s a timeline, so a lot of the assets we’d buy had been delinquent for a while, so we really didn’t feel the impact of the crash until probably a couple of years after.

Robert Leonard  12:55

What was that like for your type of company?

Dave Van Horn  12:58

It was a little scary at first because we bought all equity deals. We started out in the junior lien space. We didn’t even buy the first mortgages. We were only buying second mortgages, and only those covered by equity.

The equities fell out of our portfolio, but it was probably the best thing that ever happened to us because we learned that equity doesn’t determine the outcome. On an equity junior lien, we were seeing a favorable exit on 9 out of 10 assets. When the equity fell, we panicked. “What are we going to do? There’s not enough collateral back in our portfolio.”

But what we found was that equity doesn’t dictate the outcome. We learned that we were overpaying for equity deals, and we were making just as much money almost on the partial equity and no equity junior liens. So, by that, you could buy a partial equity junior lien, that’s currently on the first, and you’re going to get 7 or 8 out of 10, instead of nine out of 10. You’re paying a third of the money to buy them. So, we started selling off the equity and made most of our money on partial equity and no equity, which is a concept for people to get their minds around. But that was the greatest thing that ever happened to us.

Here’s a good analogy for that. If I have a $100,000 property, and I have an $80,000 first mortgage, and all of a sudden, the property falls in value to $50,000-$60,000, but they’re paying $1,000 a month rent doesn’t really matter. The fall only matters if you’re forced to sell the property. Now, could your rent go to $975 or $950? Maybe, but that’s not really what happened in the crash. We didn’t really see rents fall dramatically. It fell maybe a little bit. It only became a problem if you’re forced to liquidate.

It’s the same way in the note business. If you’re forced to liquidate the portfolio at a fire sale, yeah, sure. It would be hard to get the value out of it. So, it was a valuable lesson for us.

While banks only understand collateral and don’t have a high default rate, my whole portfolio defaults. It’s different. I’m in the collections business. I’m really not in the lending business. The banks are in the lending business, so it’s a different model. Also, they might not have the data on collections. They have the data on lending, so the collateral is really important to them. But even bankruptcy assets tend to be risky for folks that don’t understand bankruptcy, but we make very good money on bankruptcy, and banks tend to lump them all in this one category.

Robert Leonard  15:13

Given that you’re more in the collections side of the world, what are you seeing in today’s market? Are you seeing things in the delinquency area start to pick up? Or is the market still going strong? Where do you think we are on the cycle?

Dave Van Horn  15:29

It’s funny that you say that. People ask, “What’s going to happen if there’s another downturn?” And we kind of laugh at that because we go into a buying frenzy. In a down market, the non-performing notes space takes off. In an upmarket, I deal with commercial notes. I have a separate fund to invest in commercial notes. They boom in an upmarket, and then PPR booms in a down market. So some people will find that risky, but yeah. And they ask, “Which one do you like?” I like them both. I don’t worry about it. I’m gonna make money in both markets.

Robert Leonard  15:58

By having both, it sounds like you’re well-diversified.

Dave Van Horn  16:02

Yeah, they’re counter-cyclical to each other. The commercial lending side is a little different. The collateral and asset class are different. I’m fine with that. I understand both. It’s just different data that react differently to the market.

Robert Leonard  16:20

Yeah, you made a good point that right now is probably tough for your collection side of the business. Whereas, when things go bad, you can go on a shopping spree and start buying all kinds of assets for your business at pennies on the dollar because that’s really when you guys start to make all of your money, correct?

Dave Van Horn  16:36

Well, believe it or not, we’re doing really phenomenal. We’ve bought more products than we ever have. But in a down market, there’s just an abundance of product, and it’s really cheap. Then when the market goes back up, a high tide raises all ships.

A lot of times, you’ll hear frustrated retail note investors complaining that notes are so expensive, but right now, I can’t complain. I’m getting awesome execution on the selling of assets that we’ve had in our portfolio. Now, I could go, “When I go to buy, it’s a little more expensive. The margins are a little thinner.” It’s true. I can’t argue about that, but what am I complaining about? How my portfolio’s value went through the roof? Or am I complaining about a little tighter to buy? The person that’s really complaining is the person that doesn’t have a portfolio that went through the roof. They’re complaining because they’re trying to get into the business, and everything’s expensive, but it’s the same way in regular real estate as well, right?

Robert Leonard  17:22

Yeah, absolutely. So are you able to use what you’re seeing in your business? From a delinquency rate perspective? If you see delinquency rates start to pick up, can you then use that in your personal real estate investing to maybe start to consider not making acquisitions because the economy might be turning? Whereas, somebody who doesn’t have access to that delinquency data might just continue to buy.

Dave Van Horn  17:44

We buy a lot of data. We are almost like a data company. We have a lot of internal data on how we execute, but we also utilize external data. We’re looking at the same data that any real estate investor’s looking at because if we buy an asset today, it might take a while before we have to go through a foreclosure process.

We have a whole matrix on the timeline and cost. Various states are different, like the northeast might take longer than, say, Texas or Georgia, which might only take a couple of months. So, you definitely have to weigh that in. But the market already does that. They built it into their pricing a lot of times. But we’re looking at all that, like population growth and economy.

The biggest economic factor for our business is jobs. Because there are four main reasons people default, and it’s death, divorce, loss of a job, and medical emergency. Jobs tend to be the biggest reason. Back in the crash of 2007 to 2008, unemployment was pretty high. That was the real driver besides all the crazy loans that were underwritten. But if we start lending out at $125 loan value, and unemployment ticks up, what do you think is going to happen?

Robert Leonard  18:21

In your book about note investing, you talked about how people can squeeze more profits out of the deals they’ve already done by utilizing creative offers and multiple financing strategies. Can you talk to us a bit about that?

Dave Van Horn  18:54

That was one of the things that I learned early on because I was pretty much a blue-collar guy that didn’t come from a lot of means or anything. When I got into real estate, contracting, renovating, and all these different things, I started out as buying one house a year, then wanted 23 and clear, and then 100 houses. Then, I wanted to get into apartments and multi-families. I had that typical real estate investor mindset. 

But what I started to figure out when I got to about 40 properties, and I was a property manager in court every week managing other people’s properties, and then I was also a lender, I quickly realized that one was more efficient than the other. One gave fewer headaches than the other.

It really came down to when I look back at how I built wealth over the years, it was through leverage. What can you leverage that’s going to really maximize your personal life or your business life in the next 6-12 months? For me, I was leveraging capital, and my skill sets. I had the MLS, and I’m a contractor. All I needed was capital. When I first started out it was through credit card. I was using credit cards to access money to buy a house, to fix a house up, to move a tenant, to refinance properties, etc. Then, I started doing lines of credit in all of my properties, and then I became the lender. It’s really all about leverage and tax advantages.

I was an accounting major for three years. I didn’t become an accountant, but I learned enough to be dangerous and to realize that every dollar I saved in taxes was another dollar to invest. It wasn’t rocket science. I’ve followed that mantra all the way through. How can I save on taxes? How can I leverage to the best of my ability? But not leverage in a bad way. Leverage can work in both directions. I don’t want to act for the sake of leveraging or anything, but we can leverage a lot of things. It could be education, a JV partner; it could be all kinds of things. Technology doesn’t have to be just capital, it could be human capital, right? All of these things are important.

Robert Leonard  20:52

At what point in your investing did you realize that you wanted to go into the note investing business? Was there a tipping point that you were just like I’ve had enough with maybe renting or flipping or whatever it might have been, and you just wanted to go into the note business and go all-in on that? What did that look like?

Dave Van Horn  21:05

It kind of happened by accident. It’s funny that you say that. First of all, I’m a big proponent of real estate investing. I’ll probably always invest some way in real estate. But it was funny. When we started the note company, we actually had a short sale business. We opened both the short sale business and the note company in the same building. In fact, the sign on the building even had the name of the shirt sale company, but that closed while the note company took off. We didn’t know what was going to work.

We started out with four mortgages, and it was really one grand slam, a home run, and two we lost money on. So, if we had only bought two mortgages. I wouldn’t be on this call. We just happened to be lucky, made money on two of the assets, then just kept going. Once we kind of saw that it worked, and perfected it with our own money, then we started to raise other money. That was one of the reasons for pushing my partner to team up with me. He knew I raise capital for commercial real estate. He knew I had a big audience and a big capital base, so he hit me up to help raise money for the note space. Raising money for notes is a lot harder than raising money for something tangible, like apartments where I can show you properties or a blueprint. Notes are more intangible kind of like, say insurance. It’s intangible. “It’s a note!” And people ask, “What’s that? What does that look like?”

Robert Leonard  22:18

Note investing is not necessarily super complex, but it can be. And so, to explain that to somebody and get them to fully wrap their head around the concept and understand what they’re putting their money into, that’s another aspect of it that I think is probably difficult for people.

Dave Van Horn  22:35

Not that we can’t deal with the general public, but we tend to do better with real estate investors because they understand mortgages, understand properties, and understand hard money. We’re very similar in that regard. Somebody invested in hard money on it’s a note fund. It’s a commercial note fund. The short term is a commercial note. So we’re in a similar space people can get their mind around that.

How do the tax benefits of note investing, relate to those you can receive in real estate? Because one of the biggest benefits of investing in real estate is the tax benefits. How does that translate the note investing?

Not as well. Note investing has different advantages. It doesn’t have depreciation. There’s nothing you can do about that. Could you get tax breaks if you own note in your qualified plan or self-directed IRA? Yes. There are advantages that way, but it is very passive. It also has liquidity.

A lot of times, I invest in a lot of different things. In fact, I bought a high-net-worth investment group, and we invest in all kinds of alternatives. I’m an investor too. I look at short-term, long-term, mid-term, multi-family investing that can be a 5-year or 10-year wait. I can also be in a hard money fund that might be a year. And we fit into a 60-day to 3-year category. Also, some funds have liquidity and some funds don’t. There are a lot of different things to look at when you’re looking at alternative asset classes. There are all kinds of things. For example, life settlements. Life settlements aren’t tied to the market. They’re tied to mortality. So, you can find a category to invest in that you can be diversified, snd then it has a different make-up as to what it does. It’s really about what you are trying to accomplish. I invest in ATMs. That’s the smallest piece of real estate with depreciation and with cash flow.

Robert Leonard  24:17

There’s depreciation on ATMs?

Dave Van Horn  24:19

Oh, big time! Yeah.

Robert Leonard  24:21

Interesting. And you’re investing in that business now almost as a plan real estate?

Dave Van Horn  24:25

It is real estate. You own a small piece of real estate. There are ATM investing funds. Yeah.

Robert Leonard  24:32

Very interesting. A lot of our audience is newer investors. They probably heard of hard money, but they might not know necessarily what hard money fund is. Could you please explain what a hard money fund is?

Dave Van Horn  24:45

Hard money or private money is just more of an institution doing a construction loan on a usually on a residential house. If you went down to the bank and wanted to borrow money to fix up a beat-up house that wasn’t really financeable through traditional means, most banks would say no. Unless you’re going for a construction loan, and you’re a general contractor with experience, they won’t want to lend to you. That’s where a private lender or a hard money lender comes in. They’re going to charge higher rates and stricter terms, maybe even with a draw schedule for repairs, and they’ll lend you money to acquire or fix up or both. So it’s really a short term commercial note and mortgage.

Robert Leonard  25:29

We’ve talked about note investing sort of abstractly here. I’d love to dive into two examples of an actual note deal that you’ve done. If we could one being good and one is bad. And I’d like to start with the good. What are the details of a good deal that you’ve done in the note investing space? How did it come together? And maybe what did the numbers look like?

Dave Van Horn  25:50

I put together a couple of quick examples that I could blow through. But I normally don’t look at an individual. The first one is a junior lien where you typically exit through the borrower, and I’ll show you what one of those looks like. Then, I’m going to show you a first mortgage that wasn’t so well. At first mortgages, you’re typically exiting through the property. So, I’m going to show you a good deal and not so a good deal, and even run through a quick, small pool example. That’s really what we look at in most cases. One would look at a deal or look at one house, while we’re really looking at a pool, and I’ll show you what that kind of looks like.

This was a junior lien in Milton, Massachusetts, and the original note was $76,500. This was a second mortgage, and we paid $14,610 for that. It was a 15-year loan, and the payment on it was $698.34 a month, with the interest rate at 7.25%, and the payoff on this, because it was non-performing, was $84,594. So, the payoff was actually higher than the average loan amount because they’re delinquent. They were $12,570 in arrears. The fair market value of this property at the time was $450,000, and the first mortgage was $370,000. So you can see that’s a second mortgage that wasn’t completely covered with equity at this time, but they were current on their first mortgage.

In this particular case, the husband had gotten injured and was unemployed for over a year. We do outreach campaigns, so sometimes we use the mail or phone campaign, door knock service, and all those types of things, but we got lucky on this one. It was pretty much a good deal because he called in right away after he had gotten contacted. This guy wanted to stay, and he had two children. The homeowner was back to work as a police officer, and he was hoping to get his payment around $500 a month because that’s what he felt was affordable. So, a lot of this is an affordability play when you’re doing a modification. What we did was we were able to extend the term to a 30-year amortization. We lowered the interest rate down to 6.5%. His wife actually put $5,000 from her retirement account towards the arrears. You’re allowed to access your retirement account penalty-free if you’re in foreclosure. Then, what we did was after we got it re-performing, we turned around and sold this note for $43,000.

Just a quick recap on this: We sold a note for $43,000. We had paid $14,610. The monthly payments we received was about $1,498. We received $5,000 in the arrears from her retirement. We didn’t really have any legal fees on this one, so our net income was $49,498. We did this in five months. So what’s the rate of return on that? It’s actually off the charts. It’s about 239%. I hate to even say that because it sounds so far off the reservation. It starts to not sound believable. So you get the idea of how “Nah, it’s a junior lien. That’s a knock out of the park. It wasn’t highly contested. There wasn’t a lot of legal fees, right?” That’s about as good as it gets.

Then, the first mortgage example. This one was in Oakland, Tennessee. The original note was $85,000, and we paid $31,875. The first thing you notice is that when you buy the first mortgage, the cost goes up. It’s not like buying a junior lien. You need significantly more money to get into a deal. This was a 30-year mortgage, 360 months. The payment was $706.99. The interest rate was 9.375%. The note payoff was $92,512, so they were $15,766 in arrears. The fair market value of this was $45,000, and there were back taxes of $1,501. It was bacon.

So, what is the big red flag there? That the fair market value is only $45,000. So what happened there was the original note was $85,000, and we paid $31,875. Have you ever heard of getting a bad broker price opinion? Or get out to the property, finally getting inside it, and realizing it is trash? That can happen, right? That’s kind of what happened in this deal. We thought it was worth $85,000 or more, but it turns out, it’s worth $45,000.

So, how did this shake out? For us, after completing the foreclosure, we got a realtor to do a BPO (broker price opinion), then we got a contractor to bid a full renovation. It came back at $19,000, and we decided the best course of action was to renovate it and try to market it to a first-time homebuyer. We were lucky we received an offer three weeks after the renovation for $74,500, and it was a case where the buyer was purchasing it for his daughter.

This deal wasn’t as favorable as the first one, but the sale checked out. We had a total income of $74,500. The note cost was $31,875. Add in the renovation, $19,000, and back taxes of $1,501, some legal of $2,196, and realtor fees of $37,025 from the sale. Our net income was $16,203, and we did this in 12 months. Our ROI on this was still 50.8%. This was a tight deal. The renovation got us out of that tight deal, but it wasn’t as sweet as the junior lien in the first scenario. This is a deal where we were exiting through the property.

Now, do they all end up being super or horrible? No. We did have a good one today. It was pretty crazy. We paid $1.30 for it. The after-repair value is over $500,000. I’m trying to sell it at the foreclosure sale for $310. If I get $310 on a $1.30, that’s knocking it out of the park, right out of the gate. But they’re not all like that. I mean, we just tend to win more than we lose. So, that gives you a little bit of color on that.

I also did a quick pool case study just to give people color. This is on a junior lien pool that we had done last year, 2019. We closed on around 700 assets of junior liens with an unpaid principal balance of $36 million on the pool. The loan to value was 51%, and the combined loan to value is 73%. Keep in mind, it’s a junior lien. We do a lien security check where we check with real quest and fair market values. We check with Universal Credit to do credit checks. We go to PACER, which is a bankruptcy scrub. We do our analytics, our proprietary stuff in tech in-house, and then we’re overlaying our cost, whether it’s cost a capital personnel overhead, servicing legal, and all those things. Legal is probably our biggest expense next to the cost of capital.

In this particular deal, to summarize, our expected revenue was $7.3 million to $7 million. We had about $790,000 in expenses. Our purchase cost was $4.778 million, and we were expecting gross proceeds of $1.758 million, less the cost of capital of $556,000. So, our net proceeds were just over 1.2 million. That’s the kind of deal that we’re really looking at. We’re don’t look at how an asset does. It’s really how did that portfolio does. That makes sense in most of our cases.

Robert Leonard  33:25

Is that mostly because of size? The individual assets are much smaller in scale. Even though that was a home run deal, to make that material and grow a real business, you have to do a lot of those, whereas, with the pool, you could do 1 to 3 of those, and that starts to get pretty big in size.

Dave Van Horn  33:40

Well, right. I mean, you could tell that 700 junior liens are just under 5 million. We recently did a trade of around 30 million 1st mortgages, and it was only 145 loans. Big difference, right? So, it takes a lot less personnel, as well. For junior liens, it would probably take two assets managers to handle 700 junior liens. While it would only take one asset manager to handle over 100 million first mortgages. So, there’s a big, big difference in numbers.

Robert Leonard  34:12

I want to go back to your first deal. As you were talking through that, the first thing that popped in my head was that, into relating this back to real estate, it’s a flip. It was a flip of a loan. Is it similar in the sense of like flipping a house is flipping a loan?

Dave Van Horn  34:25

Exactly. We often say that notes are versatile. Anything you do with a house, you can do with a note. So, you can flip the note, rehab the note, sell a piece of the note, you mark the note up and sell it, etc. There are all kinds of things you can do. You can borrow against the note or get a collateral assignment with a note mortgage. Just about anything you can do with a house, you can do it to a note. So really, if you think about it, we’re buying banged up paper, and we’re rehabbing it like you would rehab a house, and then once it gets some seasoning, and then it becomes worth par again on us. That’s one of the beauties of notes.

We have a liquidity fund that all it is buy re-performing mortgages that were once delinquent. Sometimes, the asset goes up in value. We call it phantom appreciation. It’s not appreciation like a property, but here’s what I mean. Say it had partial equity backing it. Now, all of a sudden the market goes up and has full equity backing it. But we didn’t really do anything. The market did. Or, we have an asset that’s been paying, and now all of a sudden it has pay history. It’s been paying for a year or two, and just pay history alone will increase the value of the asset. So, I can have a re-performing mortgage sometimes where I could collect payments on it for two or three years and actually sell it for the same thing I could sell today. It’s kind of a unique characteristic.

Robert Leonard  35:38

Yeah, I’m glad we were able to walk through those three different examples. I think it provided a lot of clarity. I think the abstract conversation was really good, but I think being able to see actual deals and how it starts from the beginning works through to the end is going to be really helpful for everyone listening to the show.

Now my next question is one that I like to ask people who I know are both a real estate investor and a real estate agent because there are a lot of varying opinions on the topic, and I want the audience to be able to hear all sides of it from different points of view. Do you think new investors should get their real estate license to invest in real estate? Has it been beneficial enough to make it worthwhile? Or is it even necessary?

Dave Van Horn  36:17

For me, it’s been very beneficial and been an agent for over 30 years. I was a regular agent for about 15 years, and then I started to get smart in my old age. I started to get multiple streams of income from the business. I ended up owning my own title company. I did property management. You heard earlier, I owned a painting company. I used to do some mortgage stuff, as well. I was paid multiple times. I even sold insurance. At that point, I was getting multiple verticals out of a similar client base, so there’s more than one way to do the business. But really, the biggest factor for me has been the accessibility of the MLS.

Today, I’m one of the biggest referral agents. People typically sell hundreds of properties. I can refer them to other agents, and get paid a fee without even doing the work. I’m a horrible agent, but I’m a great referral agent. But the big advantage is really the tax advantages because, as an agent, you can have unlimited passive losses. That can offset earned income. That’s a big deal if you’re a high-income earner.

Robert Leonard  37:17

Yeah, I’m licensed in the state of Massachusetts as a real estate agent. I don’t practice, but similar to you, I do referrals. I’m nowhere near the scale that you do. I don’t do hundreds yet. But it’s a great side-benefit of it. Any rentals I buy, even if they’re out of state, anything I do, really, I can earn the referral fee. Even from friends and family, I’m able to do the same thing. So, I think that’s the benefit of having your license that investors don’t always look at.

Dave Van Horn  37:39

You’re also going to find deals. One of my favorites was always the handyman estate, but I even used to love administrators because if that’s a nursing home scenario, they don’t care what they’ll give to the house. All the proceeds are going to the nursing home. So, there are certain opportunities in there. People just aren’t paying attention. I’d look at days on markets. There was a point in my life where I was sending out letters of intent to any property that was on the market. I just sent out letters of intent. And believe it or not, I’d get hits. People would entertain my crazy offers. It’s like anything. If you want to work at it, there are plenty of deals out there.

Robert Leonard  38:17

Were you sending out those letter intents without ever seeing the properties?

Dave Van Horn  38:21

Oh, yeah.

Robert Leonard  38:22

And you were just sending super lowball offers.

Dave Van Horn  38:24

I’d send all kinds of lowball crazy stuff. Every now and then, somebody would hit on it.

Robert Leonard  38:28

That’s interesting. I hear people sending postcards, hoping somebody will call them back, have a conversation, and see what they’ll sell for.

Dave Van Horn  38:35

I did it years ago, I would just do it by fax. I’m sure there’s a way to do it today. It’s probably streamlined or something, but I would just fax around offers.

Robert Leonard  38:44

Yeah, that’s interesting. I wonder why more people aren’t doing that. You just cut out the middle and it’s the same end result. Ultimately, you’re making a lowball offer that you’re hoping somebody will buy.

Dave Van Horn  38:52

That’s kind of what led me to the note space. There were a couple of things I liked about it. One was that anytime, I could buy something at a discount with high yield with collateral. It appealed to me. I also liked that I was ahead of everybody, by that, I mean, let’s take the sheriff’s sale or the list of houses at the sale. When you buy the note, you’re ahead of that list, the sale, “we buy houses” people. It’s very similar to if you do a modification with a borrower. While you do have a captive audience, in the “we buy houses” business, you’re really doing the same thing. You’re really figuring out what to do in someone’s living room based on the equity in the property. But then when you leave, there are competitions coming up the walk.

I’m not saying there’s no competition, there is, but it’s just different and not as much as in sheriff’s sales. The attorney for the bank is my attorney. Most people that go to the sheriff sale walk into a bidding situation, which never really appealed to me much either. I don’t like being in a live auction trying to get assets I haven’t seen inside. I’d rather buy the REO. I bought them in REO in my earlier days.

Robert Leonard  40:03

How about some of the designations that you have? Like the CRS (certified residential specialist) designation or GRI (graduate of realtors institute). Are those helpful as a real estate investor? Or are they more for building a successful business as an agent?

Dave Van Horn  40:19

Good question. Well, CRSs are the top 5% of all agents, and there are about 2 million agents in the US and outside Philadelphia. There are over 10,000 agents in Philadelphia. So what do you do to set yourself apart if you are an agent? You definitely have more education. You’ve done a lot of volumes, else you can’t get the designation. It’s also a good network. Say I was moving to Hawaii, and I wanted one of the best agents. I would just look in the crs.com, and get a top agent anywhere in the US. Now does that mean they’re going to be an investor-friendly agent? Not necessarily. Just like they’re not an REO agent. When I need an REO agent, I might go to reoredbook.com or something like that. So it’s really having the right tool for the right thing. Just like anything else. There are multiple types of agents. You need the right agent for what you’re trying to do.

Robert Leonard  41:05

Is that CRS database that you mentioned, is that accessible by the public? Or is that only for CRS designation holders?

Dave Van Horn  41:12

No, anybody can go to crs.com, and pull up a top agent in any major area.

Robert Leonard  41:18

Are you familiar with any databases that are for agents that are investor-friendly or specifically focused on real estate investors?

Dave Van Horn  41:27

Not really, other than the REO networks. There are a lot of paid networks for REO agents, as well. There are some platforms that REO agents belong to get the list of bank-owned properties. reoredbook.com is just like crs.com. It’s just a database of REO agents. Now, does it hurt? Most REO agents have a buyer’s list, and if you look at any major metropolitan area, it usually has a handful of REO agents that dominate that area. Is it a bad idea to take one of those guys or gals to lunch and get on their list? A lot of them also know the bank-owned properties that are coming their way before it even hits.

Robert Leonard  42:04

Yeah, we had Mark Ferguson back on episode 2. He was a big REO agent. He said he was doing upwards of 200 REO deals a year.

Dave Van Horn  42:12

Yeah, it’s a volume play, and it’s a little different animal. There are different ways. I used to do different strategies. I had to attack buying REO property or bank-owned property. I used to do some crazy things.

Robert Leonard  42:24

There’s a lot more I’d like to talk to you about, so we’ll have to have you back on the show another time to discuss some of those other topics. But I really enjoyed our conversation today, and I know the audience is going to get a lot of value out of it. I think there’s not a lot of information about it out there, so I think it’s interesting for them to see a different perspective or a different way to invest.

So, where can the audience go to learn more about you and connect with you?

Dave Van Horn  42:47

Probably the easiest is pprnoteco.com. It’s our company’s website. We do have a distressed mortgages group on LinkedIn, and I’m always on Bigger Pockets. I actually answer questions on Bigger Pockets almost daily.

Robert Leonard  43:00

I’ll be sure to put links to all the different things that Dave and I talked about throughout the conversation in the show notes, as well as all the resources that he just mentioned so that you can go connect with them further. And, as always, I’ll put books that are related to these topics in the show notes. You guys can go check that out, as well.

Dave, thanks so much for your time. I really appreciate it.

Dave Van Horn  43:19

My pleasure. It was fun being on. Thanks for having me!

Robert Leonard  43:22

All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week!

Outro  43:29

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