Yes, REO properties may sound extremely intimidating on paper, but there are ways to go about dealing with them that won’t break your back. All it takes is a good, clear, level head, and some strong foundational knowledge. Keith Pionk, the Broker of KMP Realty LLC, gives Kevin Shortle the lowdown of the realities of REO properties in today’s industry. While it may seem like a difficult field to get into, Keith keeps it simple so you can understand what the deal is with REO properties, and why they’re worth the time you could be putting into them.
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Of REO Properties And Big Investments With Keith Pionk
I do appreciate you reading this blog and also sharing it with a friend. If you have a Meetup group, if you have a real estate investment club or anything like that, please mention the show. If you do enjoy the show, please go ahead and click a nice five-star rating there if you enjoy it. That does help, believe it or not. I certainly would appreciate that. Before we get going here, I have a couple of announcements. I like to keep you in tune with what I’m doing and some other industry events we have. As many of you know, I’m a part of the Noteworthy Convention and we had two of those conventions which I co-hosted. We’re going to have three of those and we have some new partners involved with Noteworthy and you’re going to enjoy that.
The first one is coming up in Anaheim, California. That’ll be in February. The good news for me is we’re going to do one right here in Orlando, Florida. That’s going to be some time in the summer. We’re going to do a third one towards the end of the year, probably October, over in Las Vegas. I’m looking forward to those events. We’ve got some new concepts there including having live deals that you can purchase and at a trade desk that’ll be available all three days for you to look at actual deals and get started. Please go to NoteworthySummit.com if you’re interested in learning more about the upcoming event in Anaheim.
I have a special guest. I’m excited to talk with him. It’s somebody I’ve known now for a number of years in the note industry. It’s one of those people who learn this business, took it, ran with it and has done things above and beyond the techniques that I’ve taught. In fact, it works both ways. He’s been very generous over the years in giving case studies and explaining some of the very creative things that he’s done on the deal-making side of things. He is very gracious to share those with me. I create PowerPoints. I’m able to teach other people at live events. It’s a great way to learn the business.
As I’ve said many times, it’s always great when you go out and share your ideas with somebody else and they take that and take it up to a whole other level. That’s certainly what my guest has done. My guest is Keith Pionk. Keith is up in Michigan. He is my Michigan go-to guy when I have questions about Michigan or I have people I’m working with that need help up in that area. I know I’ve got Keith up there because of his expertise, not only in the note business side but also in REO properties, real estate development and building relationships with investors as well. Keith, welcome to the show.
Kevin, how are you doing? It’s great to be on. We’ve talked about Paperstac. I’ve had the opportunity to deal with them a little bit. They have an aggressive platform. They have some good things coming up and I like how they put it together.
I go over there every Tuesday for our meeting and they’re constantly building and improving. It’s changing the industry. It makes it easier for people to find deals and get them closed with security and such. I agree with you. I’ve got so many different things I can talk about. First of all, being in Michigan, there are a lot of investors that buy inventory. I wanted to double-check with you and see if there were anything new in Michigan that note investors might have to be aware of or take note or look into a little bit further.
I don’t think there’s anything new, but the one thing that is prevalent in this market is there’s quite a bit of land contracts out there available. A lot of people shy away from land contracts. Michigan is one of the easiest states to deal with land contracts. If I’m going to keep something in my own portfolio, I’d much rather have it on a land contract because I can get the people out probably four times as quick as if I had a note and mortgage. I had to go through the long way to do it. That’s probably the most unique thing about the Michigan market is the way they handle land contracts.In this industry, there are a lot of things around the parameters you can make good money on. Click To Tweet
Contrast that with some of the issues they’re having in Ohio. It is crazy how states differ on a simple topic like that. We look at land contracts one way. In Ohio, the judges are starting to look at that in an entirely different way. That points out the importance of staying in touch with the industry and what’s going on. We invest in different areas than we live typically. You have to understand what the market is all about. I know something else, which I wasn’t fully aware of at least to the extent of it in Michigan. This isn’t new, but it was new to me. I had to look it up again. It’s the amount of time that people can stay in their home after a foreclosure. In other words, they’ve been foreclosed upon, but they have a period of time in which they can redeem themselves.
That’s the redemption period you’re talking about. That starts after the sheriff’s sale. At six months, people have rights to the house. Unless it’s three acres or more, then they have a one-year period. They hold all rights to that house to redeem it and pay the bank off in full for that period of time. What happens is at the sheriff’s sale, the mortgage and note are gone. They owe 100% of everything that they have in debt in this.
The loan is essentially called due. It’s accelerated. The entire thing is due and we’re giving you one last chance in the form of six months or a year to pay it off.
That provides a lot of opportunities. You can’t look at this industry strictly as a 1, 2 or 3-type of a deal, not a non-performing or performing note. There are a lot of things around the parameters that you can make a lot of good money at. I sent you a case study on what we first started talking about and what you asked me. I’ll run through that real quick if you want so people understand that this is a redemption deal. The deal is not that difficult. It was a hard money loan that I put together. It was a 14% loan. It was 5% points upfront.
One of the things that you mentioned, and I’ll expand upon it for the audience to make sure they’re following here, is you find opportunities many times in the smallest areas. It’s one simple thing that you identify and go, “How can we make a deal work on that?” You’re known as a deal maker. You know how to put things together and see opportunities that other people may not have seen and you know some of the details. That’s where the profits can be made on things like this. The other thing that I like, and I’ve always been a practitioner of myself, is taking real estate and combining it with real estate notes.
I do think that gives you an advantage where you see opportunities where other people don’t see it. The example you’re going to give us here is a deal that you’ve done and you’re on to doing the same thing over again, which is awesome. It does illustrate that whole thing of real estate and real estate notes and understanding your overall marketplace. There was this property that an investor contacted you and said, “I’m working with people who are in this redemption period where they’re still living in the house, but the clock is ticking.” That’s where it started from.
I had an investor that I’ve dealt with in the past. In our business, trust, knowledge and most importantly integrity are key points to be successful. The trust that you build from people is essential to be able to get or access capital when you need it. Trust is something that’s built over time. It’s not given. It’s definitely earned. The knowledge is things as simple as this show that you’re doing. The more you can devote to education and exposing yourself to the industry, you pick up things and they pick up the education that is invaluable. That’s why people trust you because you build the knowledge over a period of time. Integrity among all, if you don’t do what you say you’re going to do, you’re never going to get somebody to trust you a second time, that’s for sure. The first time is easy. The second time is when you start making money. That’s the three key points that I try to hang my head-on.
That’s been something you’ve been working on way before you even got notes with the REO space that you were in and everything else. That’s been a way of doing business. As we get into this deal, you’re going to see why that became so important because it enabled Keith to move quickly. If you don’t have all those things in place, it’s hard to move quickly because you’re incomplete. He’s got a system ready to go. It took a little bit of time to build that up. Maybe we can talk about that after you go through the example with us. You’ve set this up. You’ve got partners involved that you’ve worked with on deals. Tell us what happened.
The deal itself is not that complicated. I had an investor lend another investor $265,000 on a redemption deal. They paid a 14% rate for a term of 180 months. It was as simple as that. The deal itself wasn’t that complicated. The complexity comes when you start peeling the onion a little bit. The deal was brought to me originally by an investor. His name is Jay. He’s a personal friend of mine because I’ve done real estate deals and mostly note deals with him over the last few years. I’ve got to know him. I’ve done several deals and I trust him.
I used to be in the REO space. I first came across him selling some REOs that he had bought nonperforming. He called me up and said he had the redemption deal. The redemption deal needed to be funded at $265,000. I had about four days to fund the deal to make it work. I called in another investor friend of mine. His name is Ted. I’ve known Ted for several years and I’ve done note business with an employee of his for several years as well. When his employee, Mark, would talk to him about what we’re doing, it would intrigue him. I had an opportunity for him. I called him up and said, “Ted, I need $265,000. I need it wired within a couple of days and this is how it lays out.” For him, I gave him 10% interest on his money and I kept a 4% override. The first investor, Jay, it’s his deal. I charged him five points upfront to make it happen.
In this case, it is a loan. It’s a form of creating your own paper. They had to come up with that to pay off that underlying debt. That’s the amount of money that was owed on that underlying debt. They had to pay that off to redeem the house. The investor who put that together would essentially owe money on the $265,000 note. He would have to pay 14% of that, 10% going to the other investor and the 4% going to you. Is that right?
Yes, that’s all it lays out for sure. When we closed the deal and Jay, the guy that has the mortgage and owns the house, he makes a deal with the people that are in it. He doesn’t throw them all out on the street. He lets them stay in for a couple of extra months. It gives them some participation on the backside because there was equity in the deal. The house sold eventually for $400,000. There was money on the table, but there was money they put in on renovation, $20,000. The cost of funds over here was not cheap. By the time they paid interest and they paid the points and everything, there was $20,000 in costs of funds probably. He gave the owner of the house a piece of the pie. At the end of the day, everybody made a little bit of money and the only way it worked is from years of knowing different people, knowing that you’ve built trust, you have the knowledge and put it together. They know for sure that you’re going to do what you say, which brings into the integrity part.
When you have four days to come up with $250,000 and get a deal done and have everybody sign paperwork, that’s pretty crazy. For those who are thinking, “The rates, that’s pretty expensive money. You got four days to put it together,” what else are you going to do? Everybody would lose in that deal without all of this put in motion here. Going back, you send out Jay who ended up owning the property. He let the people stay in the house. Was he leasing it to them during that period of time or simply saying take care of it?
No, he got rent from them as well for a couple of months. They got their stuff together. We had an opportunity to figure out what they were going to do and move where they’re going to move to.Trust, knowledge, and integrity will equal your opportunities. Click To Tweet
He gave them participation saying, “When it does sell, they get whatever it was,” which is nice. They would’ve lost everything. That’s a win for them. They seem to me they were lost. They were looking for guidance with four days left to enter a situation where you can stay, take your time and move out. When it does sell, we’ll give you whatever the participation was in that. That’s a pretty good deal for them. It’s a good deal for Jay, the investor, for you and the money investor as well. It’s win all around.
The typical lifespan of these redemption deals is once they go to sheriff’s sale, the people got six months, so they don’t feel pressured. I got six months, I’m going to work something out. They got fifteen people who have all kinds of ideas that are going to help them out and work things out. By the time it comes down to the call coming to me, the firetrucks are at the door and they got to pay to be rescued.
Do you think that’s what happened where the people in the home were going, “We got six months,” and they tried different things and didn’t perform?
You had talked about me doing the same thing and I did. I closed the same model with the same players with a different house and that lifespan, they had the house sold to a third party. They redeemed the house and put a little bit of money in your pocket and moved on. At the eleventh hour, the guy couldn’t get the mortgage and the redemption period is about done. What do they do? Jay gave me a call and said, “I got this one and we lost the deal. The deal fell apart and we got five days to get it redeemed.” We plugged and played the same type of deal.
On this redemption amount, what is that amount unpaid balance or added interest in principal? What were they looking at for the redemption amount?
The redemption amount is when you have a non-performing note and you take it to sale. That’s what the number is. Whatever that number is, unless the bank takes less for a payoff which sometimes they do, the highest number that could be is the total amount of principal, the accrued interest, the legal fees, any back taxes or any other charges they can figure that they can plug on there. That’s what the number is for the sheriff’s sale. They take that number to the sheriff’s sale. The deals I get involved with, the banks don’t sell them short because they know they have a bunch of equity. It still accrues interest on a daily basis until it’s paid off at the note rate. Whatever the note rate is, that’s what that accrued interest is at.
When I saw this case study the first time, I started going, “I know in Florida we have a ten-day period where somebody loses a house at the foreclosure and whoever bought that property in the foreclosure doesn’t get a deed until ten days later.” They use that ten-day window as a timeframe where people could typically dispute the sale. It made me wonder, “Could they redeem themselves within that period of time?” What you did in Michigan made me start thinking where else might I be able to do something like this It’s a smart technique. It’s always been out there, which is not one that’s on the forefront of anybody’s thought process. It could be a very unique niche to look at in other areas. Have you looked into other states?
Not on this particular model because my team is around here. That’s important to be successful when you’re doing specific niche things. It’s easy to buy a note cross country and get support from different vendors. When you’re starting to do this type of stuff, the guy’s not going to give you $250,000 unless he feels comfortable that you know what you’re talking about for the value of the home too.
That is more backyard because it’s a direct play to acquire real estate especially when you have a short period of time such as that.
One thing I want to mention is 14% is a high rate and you could not do this house with a homeowner because he’s an owner occupant. It would be usurious. This is a commercial loan. It’s business-to-business. Jay was an LLC. He’s the one that bought the house from the borrower who lost it. The borrower was a renter at that time. You couldn’t make the same deal with the borrower and charge the borrower 14% because now you’ve got a problem.
What Keith is talking about in case you don’t know is when you go business-to-consumer, there’s a different set of regulations versus business-to-business. A government looks at businesses. If you’re in business even it’s an LLC that you own personally and you’re the only a member in that LLC, you’re supposed to have a certain level of expertise. That’s the way they look at businesses where they look at the consumer as always needing protection. That’s with the rate and everything else. When people do regular real estate deals and they get hard money loans, that’s not uncommon to pay that type of interest rate. When I was doing hard money loans in Florida because our user rates are higher, I was charging 18%. People would get funded right away and their costs for funds overall, they’re paying 18%. That’s an annualized basis, but they’ll pay me back in three months. Their costs of funds ended up being good versus even trying to go to a bank and get something done. In this example, there’s no way Jay could have gone to a bank and got this done in four days. It’s not possible.
The only other thing is if he had a big line of credit, he will sign his name on. I usually have one of those. They’re harder and harder to get. Not many people have a line of credit for $1 million anymore.
Let’s go into a little bit for me to help people out building these business relationships. I know it takes time, but what would you recommend to somebody who’s fairly new to the business, anybody who gets in the business? They start doing a couple of deals. They start to recognize pretty quick that at some point in time you’ve got to bring in other people’s money. You’ve got to bring in other investors, especially to do some of the higher-level techniques. What could you recommend that somebody starting out how to grassroots-set this in motion so they can shorten the time frame of finding good investors like a team that they could put together?
I believe the smartest and the fastest way is to surround yourself with people that you know are business-minded. There’s a lot of different organizations, the meetup groups and the different things from the real estate point of view. There’s a room full of people who are like-minded and have an interest in investing and learning about stuff. The more you can do, the bigger track record you can build. It’s not the person you talk to that can’t afford to help you. It’s the people that he knows.The more you surround yourself with like-minded people, the bigger track record you can build. Click To Tweet
I am diving down into a second level of investors that are friends of mine or acquaintance or business people that I know that I’ve dealt with and bump into somebody. They get into a conversation and they start talking about me and what I do and send me a name and number and say, “I talked to this guy and I told him what you’re doing. He says he’s interested in it.” For example, the one guy I got a referral from is a guy that used to work for me. He did some handyman work in my building business. I sold him a place that I got back as an REO up north on land contract.
It was no money down, pay me a couple of hundred dollars a month. He loved it. It was ten acres. He goes up there and hunts. He’s been working in a cottage and was very grateful that he had an opportunity to be able to own something because he never saw himself being able to do that. He doesn’t have the big pot of money to throw on a table to do a type of investing. He runs into a lot of different people and ran into a doctor, started talked to a doctor, a friend of his. I’m working with the doctor a little bit, trying to get him educated on the note business. That’s what you have to do. It’s not the guy that you talked to now, it’s the guy that he’ll talk to and help you down the line.
Even if you’re going to a meetup, clubs or even more social clubs like you were talking about, because it’s about finding people of like-minded interest, it’s a full step above trying to go to that friend or relative who doesn’t have an interest in real estate and notes. It’s so much harder to try to approach those people versus somebody who’s got some familiarity with the business and maybe they do already hard money loans. You talk about them and buying notes. It’s not a huge chasm between those two things.
There are many deals that pop in my head that you’ve sent me over the years I’d love to get into, but I’ll have to have you back on some more episodes so we can talk through some other creative things. I do want to ask you about your creative process. This business, real estate is about making deals and making deals work. Sometimes that means you see opportunities where other people don’t. I wanted to know if you had a process. When somebody presents something to you or you go, “No, that can’t work,” or “How do we make that work,” do you start to outline that or do you have a procedure that you might be able to help us with and coming up with creative solutions?
My procedure is I’m 62 years old and I use the school of hard knocks. I go right back down to the trust, knowledge and integrity will equal your opportunities, if you can build that within the people that are around you. I’m not as sophisticated as somebody, young guys that have all these computer programs. I’m a guy who wants to shake your hand. I rather call you on a phone than text you personally. I know that the world is moving lightspeed in the other direction, whatever works for you. The younger people that know the technology, you can get a lot more coverage. I’m looking for quality rather than quantity. My note portfolio, they’re all performing notes and they’re probably all 40% or 50% equity in each house. They’re not going anywhere.
If a deal comes your way and you already have in your toolbox a resolution to that, you reach out to your contacts essentially. Is that’s what you’re saying, you reach out to people who might know?
There are several people that I’ve gotten to know over the years that have specialized knowledge in different areas that if it doesn’t work for you and it still looks like it’s a sound deal, run it past some other people. It’s okay to be a broker on it. You don’t have to do every deal if you have a place to park it. Send us someplace else and take a modest brokerage fee and solve the problem for somebody else.
Are you more of a numbers guy where when something comes across your table, you go, “Let me look at the value. Let me look at my risk and I can try to solve the problem?” Is there any aspect that you look at?
I look for a minimum deal. It depends on the exposure you can get, but I want a good yield and a good equity in the property. I do quite a bit of due diligence on the things that I buy. These redemption deals, they’re pretty easy to do due diligence. You do an RPR, AMV, automatic value. You can see what the property’s worth and check the taxes out. I know the guy that’s bringing me the deal that he’s already done his work too. No more easy deals. The deals that you want to spend time with are the ones that you’re going to be married to for a long time and you’re going to have to make sure they’re going to make payments to you for sure.
When do you know when to say no or pass on a deal? Is that something that comes pretty quick to you? I know it’s deal to deal basis, but I’m talking in general terms because I’ve seen some people try to make a deal out of ultimately something that’s not there or at least not that I see. I try to advise and coach people all the time and I’ll see them keep working and working on this deal. Sometimes as much as I plead with them, “Enough with this one,” you’re forcing a deal that’s not there. There are too many other opportunities to do that. Is that experience in your opinion or is that something that should be certain lines in the sand that people draw?
A lot of it comes with experience, but a wise man once said, “You never lose sleep over the deal you didn’t do.” There’s a lot to be said. There’s a lot of truth in that statement. I’ve seen some deals that people share. They put them on a table and it’s like, “This deal doesn’t even make any sense. You’re not going to make any money. If you’re break-even, you’re going to do great. If this happens and that happens, I’ll make more money.” You cannot put a deal together thinking you’re going to get the best of every situation. You have to look at what’s the worst scenario because nine out of ten times it may not be there, but it’s going to be there. In 2, 3 or 4 times, the worst scenario probably will come around more than you want it to.
That’s what I always say, hope for the best and prepare for the worst. If you live by that, you can be very safe in this industry. More and more I’ve been trying to give people, as I consult with them, a little checkbox and say, “Look how many negatives you have versus the positives. Maybe you want to get away from this one a little bit and move on to something else.” If anything, there’s more opportunity coming. In fact, I’m doing some more blogs talking about inventory levels in this so-called third wave. Being up in Michigan, you get the biggest lender in the country up there, but we’re starting to see those loans get very creative again. Default rates in the first six months has shown a 3% increase on FHA-back loans. We could be looking at another cycle. Have you noticed anything in particular in the industry or you’re not monitoring that?
I’ve seen everything flatten out pretty well. The yields have diminished in the note industry and they’re hanging at these levels for about several months. I see it across the board. I talked to different people that everybody’s cautiously optimistic. They believe something’s going to happen and coming into an election year, win, lose or draw whatever side of the fence you want to be on. It could have a huge impact on the economy.
I agree with you. I’m trying to stay on top of it. I’m sure you are as well. Keith, I appreciate it. I could go on and on with you here, but I definitely would love you back on another episode.
I enjoyed it. Thanks a lot, Kevin.
Do you have a website or anything that you want to send people?
I am building my website. It’ll be PatriotFunding.net.
Thanks so much for being on. Thanks everybody for reading. If you haven’t visited my website, it’s KevinShortle.com. Those looking for further education. I’ve got my educational programs there. Also, if you’re looking to deploy some capital into a note but you don’t quite have enough to buy a single note, do take a close look at the Money with Meaning Fund, MWMFund.com. If you liked the show, please share it and please give me a good rating. I look forward to talking with you once again.
About Keith Pionk
Started in the Real-estate sales business in 1981 as an Agent, received my Broker license in 1985. Started buying and fixing house in 1982. Over several years acquired 40ish rentals, including 4 Group Homes.
I am also a Licensed Builder and have been building residential home for 25 years, about 20 total. I started in the Note space in 2014 attending many events to learn the effective way to build a Note Portfolio. Presently Own and Manage approx. 3.5 Million Portfolio of Real-estate and Notes.
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