January 31, 2018

JF1247: Investing In Notes And Keeping People In Their Homes with Rick Allen

Rick and his company invest in notes, often times the houses are owner occupied. When asked if they would like to stay in the home, most of the time the owners say yes. Rick and his team will work with them to create a new payment that works for them and gets them caught up on their mortgage. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Rick Allen Real Estate Background:

-Co-Founder and fund manager of Cloud Capital Management and the Co- Founder of Paperstac

-Participated in 400 single family homes purchases with price of $25M and a market value of $45M

-Has conducted transactions with large A-list institutions

-Expert experience in investment strategies of the real estate sector, with a primary focus on discounted acquisitions

-Over 10 years experience in real estate investing

-Say hi to him at http://www.cloudcapitalmanagement.com/

-Based in Winter Garden, Florida

-Best Ever Book: Wherever You Go, There You Are

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Rick Allen. How are you doing, Rick?

Rick Allen: Doing great, Joe. How are you?

Joe Fairless: I’m doing well, welcome to the show. I’m so glad to have you on the show. A little bit about Rick – he is the co-founder and fund manager of Cloud Capital Management and co-founder of PaperStac. Did I pronounce that correctly, PaperStac?

Rick Allen: Yup, you got it.

Joe Fairless: He has participated in 400+ single-family home purchases with a price of 25 million and a market value of 45 million – important distinction there. He has over ten years experience in real estate investing. He has conducted transactions with large A-list institutions, and you can learn more about him and his company at CloudCapitalManagement.com, which is also in the show notes page.

With that being said, Rick, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rick Allen: Sure, absolutely. Originally, I was born in Columbus, Ohio. I’ve lived in Orlando, Florida for I guess roughly 30 years now, and I’ve always wanted to kind of help people out, so I went to school and was gonna major in pre-med, and quickly learned that chemistry and I didn’t get along, so I sort of adjusted my course there and ended up getting my real estate license after I graduated, and jumped into real estate. I started with a nation-wide wholesale firm, I guess it was back in 2005. I kind of learned the ropes of wholesaling houses; there was also an in-house hard money source, so it helped source not only deals, but it was sourcing money for some of the investors there…

Until 2008, when I started my own wholesale firm with a couple business partners, and went on to run that. We had multiple offices across the state and several employees, and wound up doing around 400 deals from middle 2008 until the end of 2011… At which time I sold off with another partner and we started just taking a run at just doing the fix and flips and building up our rental portfolio, until I guess in March or April of 2012 I had an REO agent call me and ask me an interesting question – they wanted to know if I would buy a mortgage note.

I’d always heard about notes a little bit, but never got into it, so I said, “Yes, sure, tell me about the deal.” It was a [unintelligible [00:04:47].14] duplex here in Winter Garden. The balance on the loan was $90,000, and I wound up buying it for $8,400. I got in and out of the deal in just under 21 days, and needless to say, I was hooked. So from there, my partner and I – we kind of did a full pivot into the mortgage notes space; we realized it was getting a little tougher to buy houses, to buy real estate, especially at the auctions, because a lot of the funds were coming in there.

So we directed all of our capital towards buying notes. After we did a handful of notes – maybe six to eight of them – we showed what we were doing to somebody, and he offered to give us a million bucks. From there, we started buying notes completely full-time, and have gone up to where we’re managing about six million dollars right now, and we’re in the process of doing our first offering, going to the SEC, doing a  Reg A+ Tier 2, which will allow us to raise up to 50 million every 12 months.

That’s kind of a fast forward to where we are. We also have PaperStac, which is a mortgage note trading platform at its core. It’s a marketplace for people to buy and sell mortgage notes on a one-off basis. In a nutshell, that’s where we are right now.

Joe Fairless: Well, that gives us lots to talk about. Let’s see, the first very tactical question I have for you – you said when you were doing the note buying, you showed it to someone and then he gave you a million bucks to then go deploy that to go do the same thing with his money… How did you meet this person?

Rick Allen: It was somebody I knew that was a family friend. I went to school with his son and went to college with him at Florida. We had a really good relationship with him, and he knew what I was doing and he kept asking me, he’s like “You really gotta go show my dad, you’ve gotta talk to my dad about this. He likes to invest, he loves the real estate space, and from what I understand you’re doing pretty good.” I’d always been – from my wholesaling days, I’d been pretty meticulous about keeping spreadsheets and charting all the deals and the profits and losses and costs and stuff like that, so I already had all this stuff in the master pipeline, so to speak.

So I went and showed him what we’d been doing. We were there for about an hour, showing him the ropes, he asked a lot of pointed questions…

Joe Fairless: What did he ask?

Rick Allen: He said, “I’ll give you a million bucks; do you want it all today?”, and I was like, “No…” [laughs]

Joe Fairless: What type of questions did he ask?

Rick Allen: He was asking deal structure; if he gave us money, how we would structure the deals and what we would do. We wound up setting up and doing a partnership. We actually did an LLC and had a pretty extensive operating agreement. Then he asked other questions about my opinion on the market, on how I thought the deal flow is gonna come, were we gonna continue to get this pricing, how long was this inventory gonna be available… Pointed questions like that.

Joe Fairless: What were your responses to your opinion on the market and were you gonna be able to keep getting that pricing?

Rick Allen: Well, fortunately, I had just come back from a mentorship thing…

Joe Fairless: Which one?

Rick Allen: Eddie Speed at NoteSchool.

Joe Fairless: Okay. Yeah, I interviewed him on the show.

Rick Allen: I would tell all the Best Ever listeners that you’ve gotta get some sort of education. You’re gonna pay for it one way or the other. Either out of your experience, or you’re gonna pay for it by standing on the shoulders of others.

Fortunately, I had gone and sat with Eddie for quite some time and learned really the make-up of the market and what was really going on and where was all this inventory. There had been so many buzzwords around like “shadow inventory”, and I kind of finally learned about it and see how much of this non-performing mortgage debt was really untouched. I was able to answer the questions that he had, and let him know that I felt like – and this was back in 2012; actually 2013 – we’d have another 7 to 10 years of this inventory if nothing really changed as far as the economy, if the economy didn’t take another tank… Which you never know. If it does, I think that there has been this desensitization by people towards the foreclosure process, and people are looking around (I feel) and say “Oh, some stuff went bad, but people came out of it.” So if the market does tank, I think that you could possibly see another big wave of foreclosures coming, or a big wave of default debt, for sure.

Joe Fairless: Let’s talk about each stage of life you had as a real estate professional. First you worked at a wholesaling and hard money lending company. Then you started your own, from 2008 to 2011. You said you did about 400 deals. Why did you switch from that to going into fix and flips, and building your own portfolio?

Rick Allen: It was really a quality of life thing. It’s a blessing in disguise when you start getting bigger and you start creating a company and you start having an extensive amount of employees, because then you have employees, and with that comes problems… And there was some dissension within — we had three business partners, and it just felt like it was the right move. I’m a big fan of if you’re thinking about something, kind of put it out in the universe and see what happens and see where we wind up going with it, and if you push on a door and it opens, it might be a good time to walk through the door and see what’s on the other side.

And then just really wanting to build our rental portfolio, but also take some time and kind of figure out what my next step was gonna be, because I was getting to the point where I didn’t particularly see that the wholesale game — I thought that there was maybe a little bit of an end to it coming. When we’re at the auction and you see a lot of these larger funds, like Blackstone or what have you, that were paying at the time over retail for stuff, it was “Wow, the writing is on the wall.” If these guys are able to come in here, their bankroll is a lot bigger than mine; the margins just started getting a lot smaller, so to me it felt like it was the right time to make a move, to start changing and pivoting and start looking for that next opportunity.

Joe Fairless: From the fix and flips rental portfolio to then the mortgage notes, I imagine, especially in 2012, fix and flips were doing pretty good, and if you were acquiring stuff in 2012 — because it’s different in every market, but relatively it was still depressed a little bit in 2012… So why then switch gears again and then do the distressed notes?

Rick Allen: The real reason was because the speed in which we were getting stuff and able to turn it… When you get into the fix and flip stuff you start cracking open walls and start getting contractors in there [unintelligible [00:11:06].04] there’s just no telling how long you’re gonna be sitting in the house… And the market was good, but it hadn’t really exploded like it did in ’13 and ’14, and we were buying the assets that we were getting in 2012, notes that we were buying stuff for $8,000, $12,000 and we could just simply do more deals with the capital that we had at that time. We were getting in and out of them so quickly…

The first deal we bought we bought for $8,400. There was like $3,000 in liens, but we wound up getting a deed in lieu of foreclosure from the borrower, and we paid her like $100 or something. We put it on the market for 19k and it ran to 38k getting bid up. We were literally sitting at the closing table waiting for our collateral package to come in from the person we bought the loan from so we could close; it happened so fast, and every deal after that seemed to just keep dropping like that, so there was no need to fix anything up. We were selling stuff as is, and we were making better margins than we were by doing fix and flips, so it made more sense for us to make that pivot.

Joe Fairless: Now, fast-forwarding to today. You’re working on — I think I wrote this down correctly, a Reg A+ Tier 2 offering… What does that allow you to do?

Rick Allen: It basically allows us to start pitching people and advertising and marketing to raise capital. Anytime you’re gonna start raising capital, there’s a lot of rules you wanna follow, and this will allow us to raise capital from not only accredited investors, but also non-accredited investors. And it will allow us to raise 50 million dollars every 12 months, which is a lot of money to start playing with.

We were considering Reg. D, Reg. C offerings, and this one is very, very new. It was last year that you could start doing these, so we kind of hit the ground running and said “This is the one we wanna do.” It’s more expensive, but it’s worth the capital outlay just to be able to bring this investment to not only the accredited, but also the non-accredited, which is a big thing. I think a lot of times the non-accredited investor gets passed over and they don’t get to take advantage of ground floor hockey stick type growth curve on companies; they have to wait until something comes out to the public. So this was a real opportunity to let us forward our mission of saving as many houses as possible – or 10,000 houses – from foreclosure and keeping families there, but also to bring a really nice investment to somebody who maybe only has $300 or $400 to invest.

Joe Fairless: You said it’s more expensive, but it’s worth it. How much are you investing in getting this offering?

Rick Allen: Before we hit the advertising, which as you know, the advertising – who knows…?

Joe Fairless: Bottomless pit.

Rick Allen: Yeah, exactly, it is a bottomless pit. But we’re probably gonna wind up being somewhere around $85,000.

Joe Fairless: That’s not as much as I thought it would be. I thought it would be in the half a million mark, but I guess including advertising and stuff maybe you will.

Rick Allen: You never know how high we’re gonna get there in the advertising thing. We were fortunate that we went like one other fund, who we were kind of — we were like, “Look, we wanna model our fund after that fund”, and it’s somebody else who’s in the mortgage note space. We were fortunate enough — we talked to him and we have some working relationship with him, and we asked him who he used for his fund to put it together, and we went directly to that attorney, and fortunately that attorney was like, “Well, the road has already been paved. It’s gonna cost you a lot less than it cost to the gentleman who came before you.”

We were very fortunate in that, to have found an attorney who had done this exact fund and already kind of ironed out all the kinks for the SEC, so we’re hoping that remains true when we submit.

Joe Fairless: That’s outstanding, and for every Best Ever listener – and myself included – there is a tip there, that’s for sure. If we do anything with attorneys, then see who’s currently doing it as an investor, and ask them which attorney they used, and it very well could save you thousands if not tens of thousands, or in this case probably even hundreds of thousands of dollars.

Rick Allen: Yeah. He said it may cost us close to half of what it cost — it very well could have been a $150,000 transaction to get this thing up and running, just on the paperwork and the audits and everything that goes into it. So yeah, that’s a great tip for the Best Ever listeners to kind of take in and really marinate on that.

Joe Fairless: Absolutely. So you’re managing six million dollars right now, correct?

Rick Allen: Yeah, roughly, right around there.

Joe Fairless: About six million. And is that six million in investment dollars or is that six million in the value of the notes?

Rick Allen: No, that’s six million in actual capital.

Joe Fairless: Okay, six million in capital. Approximately how many investors do you have?

Rick Allen: We have a handful… Say, five.

Joe Fairless: Okay, so on average they’re North of the one million dollar mark.

Rick Allen: Yeah.

Joe Fairless: Okay. Of those five investors – and obviously I’m not looking for names or anything that would identify those individuals, but I’m gonna ask his question for the purposes of the Best Ever listeners who are looking to raise capital, and how to find investors for their deals… How did you get to know these five individuals?

Rick Allen: They’re all within our sphere of influence. We literally just stayed within our sphere of influence of people that we know. There’s a lot of people in my sphere of influence I haven’t gone and talked to, just because we didn’t want the capital or didn’t need the capital at the time. So I would say just start within your sphere of influence, start talking about your product.

One of the things that’s been very helpful is that we had already had, from the first time we talked to an investor, and certainly up until now, until the [unintelligible [00:16:52].06]

Joe Fairless: Track record?

Rick Allen: We had a working product, so to speak. We had a proof of concept that we could show, “Look, this is what we’ve been doing for the past year and a half”, or in this case in the Reg A+, “This is what we’ve been doing for the past five and a half years. Here’s our proof of concept, here’s our body of work, what we’ve done. This is what we’re raising the money to do, to do more of this.” So that always helps, if you can kind of show, “Look, I already have the experience in this.” It gets a little more difficult, I think, when you don’t have any sort of experience and you’re trying to raise capital. For me, I wouldn’t be able to raise capital right now and go buy, say, large apartment complexes like you do, because I don’t have that experience yet. So I wouldn’t wanna go out and try to do a syndication, because that’s not my world yet.

Joe Fairless: As far as this “all within your sphere of influence”, specifically how do you know — well, just pick a couple of them, maybe two or three of them; specifically, how was the very first time you met each of those three people; three of the five.

Rick Allen: Whenever we asked them for the capital… [laughs]

Joe Fairless: I know, but how did you get to know them before that, because you wouldn’t just go to some random person in the grocery store to ask him for a million bucks.

Rick Allen: Family and friends of the family.

Joe Fairless: Okay, got it.

Rick Allen: So they were very tight-knit into our sphere of influence. And then even people that are just outside that. People maybe I coached with on my son’s Little League team, who would ask what I do, and maybe I knew that they were a professional baseball and they had some extra cash laid around, or hockey players, or stuff like that.

Joe Fairless: Oh, okay. Cool. So we should all coach our son’s Little League baseball team, there we go…! [laughs]

Rick Allen: Coach Little League in Orlando, Florida. [laughter] My kid plays in [unintelligible [00:18:33].04] Little League, which there seems to be a lot of professional athletes that retired down here to Florida.

Joe Fairless: Got it. Let’s transition a little bit into a typical deal that you do. Can you describe it for us, please?

Rick Allen: Yes, absolutely. I guess I can kind of talk about where we came from when we were buying these, to where we are now. When we originally got into this, we were buying assets that we knew were vacant and the borrowers were alive, so that we could at least get a deed in lieu, and it was just a faster way, a better way for us to get cheaper inventory.

The longer we went on, we wound up buying assets that actually had the borrowers still living in the properties or the assets… So it kind of came to an issue, because we wanted the house back, but a lot of times we ran into — they don’t wanna sign the house over no matter how much money we were offering them, because they have what’s called emotional equity in there, and they wanna keep their house. It’s their shelter.

So once we kind of pivoted, we kept buying notes, but we started targeting owner-occupied loans. So now the typical deal for us is we’re looking for owner-occupied houses that are not really much more than three or four years behind on their mortgage; if they’re upside down, that’s fine. We love to get in there, and the first question we like to ask people when we get a deal is “Hey, do you wanna keep your house?” and the majority of the time the answer is yes, everybody wants to keep their house.

A lot of our borrowers have just gotten bad deals. They’d start filling out lost mitigation packages with the bank, and then the loan gets sold and they have to start all over, and it leads to a very frustrating experience when you’re trying to save your house. It’s like you take two steps forward and three steps backwards.

So we just ask that question, “Do you guys wanna keep your house?” If they say yes, then we start them on a trial payment plan immediately to say “Look, you’ve gotta give me some good faith money to show me that you can actually make these payments.” Then we start just collecting the loss mitigation package, which goes over their financials, their tax returns, stuff like that, so we can establish how much can they actually afford to pay. We give them a discounted payment plan upfront. We give them 70% of whatever they were paying to say “Here, just start making these payments.”

And the residual effect of being able to save somebody’s house has just been — not only are you making a really good return, you’re not spending as much money or foreclosures or deed in lieus, but you’re also able to save someone’s house. And there’s a family at the end of a lot of these loan numbers that people don’t realize that — there’s a lot of families that were affected by the meltdown, and it’s not just people with nefarious intentions who were not paying their mortgage… They’ve got hardships, and that’s gonna happen.

So we’re really proud and really happy that we’re able to start giving back and saving people’s houses and getting taxes paid for the communities, and just making a real dent in repairing the carnage from the meltdown.

Joe Fairless: What if their answer is “No, I don’t wanna keep my house.”

Rick Allen: Then we ask him, “Do you wanna sign over the house, so we can kind of tear this chapter out of your life? We won’t come after you after any past due money, we’ll waive deficiency judgment, and it that’s the case, we’re happy to give you some cash for keys money to kind of send you on your way. We’ll do what we can to help you find a new place.”

At the end of the day we wanna have a win/win, so if we have to take the house back, we’ll take it back. That’s a last resort. But if they don’t want the house, then they don’t want the house. We do what we can to help people out.

Joe Fairless: What’s the most challenging part of this process for your team?

Rick Allen: Breaking down the barrier somebody has when making their payment for four or five years, the prior investor who own these loans, some of their servicing companies just didn’t treat these borrowers with any sort of respect. I’ve heard some horror stories about people being threatened to be thrown in jail, or kicked out of their house… Just some terrible stuff. So breaking down that barrier to say “Look, we’re really here to help. We have your best intentions. We wanna do what we can to help you out and come up with a nice win/win solution.”

Joe Fairless: How do you build that trust with them, other than saying those words?

Rick Allen: One is we do what we say, but two – it’s amazing that if you call somebody… And we don’t do the loss mitigation anymore; we actually have a not-for-profit credit counselor who’s able to reach out to them, who does a fantastic job. And he’s able to just ask the question and listen. I think that’s the biggest key – you’re not learning anything if your mouth is moving. So if you’re able to stop and just take a breath and listen and be sincere and try to help these people out, that immediately is something that is not expected.

So you’re starting off the conversation with a curveball, because they’re expecting what the past four or five investors are doing, who comes in there with a sledgehammer that says “Either pay me or get out”, and “You’ve gotta pay me the full amount and you’ve gotta do it in 30 days, or get out.” So just by coming in there, getting them off-guard a little bit and saying “Tell me your story.” People wanna tell you their story.

Joe Fairless: What is your best real estate investing advice ever?

Rick Allen: My best real estate investing advice ever – I would say keep your head and kind of keep your pulse on the market. Don’t be so down in the deal, every single deal, that you’re not looking to see what’s going on. Just be aware of pivots in the market. You’re gonna have to reinvent yourself along the way. It’s part of it. And it may just be a little reinvention, or it may be a large reinvention.

Some of the stuff that we can kind of see on the horizon is there’s a big opportunity coming up in the seller finance space, where you’re doing owner financing. So that’s still in our lane, but we may have to just do a slight pivot, and that’s money that the fund — it still falls right in line with what we’re doing. So I would say just be cognizant of what’s going on around you and don’t be so stuck in a specific deal that you’re missing something, or an opportunity going by.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Rick Allen: Yeah, let’s roll.

Joe Fairless: Alright, let’s roll. First, a quick word from our Best Ever partners.

Break: [00:24:31].16] to [00:25:20].24]

Joe Fairless: Best ever book you’ve read?

Rick Allen: Wherever You Go, There You Are.

Joe Fairless: Best ever deal you’ve done?

Rick Allen: Best ever deal would be we bought a deal that was a non-performing loan, we wound up getting — the borrower started paying; she had a hardship. We paid 12,5k for the loan and wound up getting 18k from the state to reinstate her loan, and then we wound up getting 24 months paid for her by the state on top of that, and then wound up selling the loan for like 35k. So that was a huge deal [unintelligible [00:25:51].06] It was just perfect.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Rick Allen: No doing enough due diligence on value.

Joe Fairless: Can you elaborate on that example?

Rick Allen: Sure. We did buy a loan — we did the high-level, we took the BPO that the seller provided. You should always trust, but then verify. We kind of did a lackluster job verifying and wound up buying a loan at close to par what it was worth, and it wound up costing us to lose some money whenever we got out of the deal. The value dictates everything. You wanna have a firm understanding of what the value of every asset you buy, because the value is gonna dictate where your price is gonna be.

Joe Fairless: What data point would you look further into if you had the chance to do that particular deal over again?

Rick Allen: I would look at value — price.

Joe Fairless: I’m trying to understand, to determine the value – what do you look at to determine that value?

Rick Allen: You have do your own BPO’s. Don’t necessarily take what the seller gives you. There’s one fund that we bought a lot of assets from, and their BPO’s magically come in at 130% of value, every single time. [laughter] So it’s a smack on my risk for not doing it. I know better than that, so… I would always say get your own data, get your own BPO, so that you know for sure going in there. It might not just be one BPO, you may order two, from two different people, just so you’re 100% if there’s something in question.

Joe Fairless: Best ever way you like to give back?

Rick Allen: We love to give back by saving people’s houses. There’s nothing more powerful for us than to give somebody the ability to keep their shelter and to keep their house, especially if there are kids involved… I love saving a home when there’s kids involved.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Rick Allen: You can check us out at CloudCapitalManagement.com or PaperStac.com.

Joe Fairless: Very impressive what you’ve done, and I’m grateful that you took us through your progression and evolution as a real estate professional, from getting started and being employed, by wholesaling and hard money lending company, to now putting together a fun that has the potential to raise 50 million every 12 months. And the reality is right now you’ve got six million dollars that you’ve got under your belt, that you’re managing that money. That’s incredible.

Thanks for being on the show, thanks for talking about one of the main challenges that your team has, and that is, as you said, breaking down the barrier with the borrower, treating them with respect. And as you said… I’m sure there’s exceptions to this if we wanna really think about it, but I love the generalization – you’re not learning anything if your mouth is moving. I love that approach. Basically, we’ve just gotta listen. People wanna tell their story, so listen to them.

And then lastly, if you want to find a million dollar investor, then go to Orlando and coach a Little League baseball team. [laughs]

Thanks for being on the show. I hope you have a best ever day, Rick, and we’ll talk to you soon.

Rick Allen: Will do. Thanks, Joe. I appreciate it.

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