February 1, 2018

JF1248: Pivoting From Landlording To Non-Performing Notes with Kimberly Banks Fawcett

Kimberly was a landlord but decided she did not want to deal with tenants anymore. Now she focuses on non-performing 1st mortgages. Being in this space allows her to help people stay in their homes, but sometimes she will have to take ownership of the properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Kimberly Banks Fawcett Real Estate Background:

-Portfolio Manager at Inspired Capital Group, LLC.

-Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties

-Raised by real estate investors and bought her first rental property 3 months after graduating college.

-Experience in both residential and commercial investments

-Now focuses almost exclusively on the non-performing 1st mortgage space.

-Say hi to her at www.inspiredcapitalgroup.com

-Based in Plano, Texas

-Best Ever Book: The One Thing

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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, Kimberly Banks Fawcett. How are you doing, Kimberly?

Kimberly Banks Fawcett: I’m doing great, Joe. Thanks for having me on the show.

Joe Fairless: I’m glad to hear that, and it’s our pleasure. A little bit about Kimberly – she is a portfolio manager at Inspired Capital Group. Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties. She was raised by some real estate investors and bought her first rental property three months after graduating college. Based in Plano, Texas… With that being said, Kimberly, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kimberly Banks Fawcett: Sure. I’m focused on non-performing notes because I spent so many years as a landlord. I did the typical when it was going great went to a REIA, sat in on a meeting where someone told me that I no longer had to deal with tenants, I could actually deal with people that cared about the property as much as I did, and I was hooked. So in 2013 I pretty much stopped being a landlord and became a note investor, and I’ve never really looked back.

Joe Fairless: Pros and cons, as objectively as you can look at it – pros and cons on both sides?

Kimberly Banks Fawcett: Well, I’d say the pros are, again, they’re as interested in the property as you are; that’s always helpful. I also really like the fact that I can make that cliché work, the win/win/win. I make money for myself, I make money for my investors, and I help out the borrowers on the deals that I can actually help them come out on the better side of their bad situation – those are just the home runs for me.

On the con side I would say the regulations that we have to deal with… Not that I have a problem with the idea of taking care of people and doing it the right way, but you hire a servicer to work on your notes, and I can honestly say that you have to be on top of the regulations as well. You can’t count on your servicer always covering you, and I think that’s a bigger burden than most landlords have.

I think also in this current environment there are people that actually train homeowners how to stay in their home without paying their mortgage for longer periods of time. You don’t find that in a rental situation. If you’re not gonna pay your rent, you either leave or you wait to get evicted. There’s no training on how to extend that. So a lender that is doing everything right, a borrower can stall fixing the situation forever nowadays. So I’d say those are pretty much the pros and cons.

Joe Fairless: I’m impressed. I think you did objectively look at that, and I’m grateful that you did that. So let’s talk about the cons first, and then we’ll talk about the pros. Cons – regulations; you mentioned you can’t necessarily count on your servicer staying on top of the regulations. For someone new to investing in notes, what’s a servicer and what are the regulations that you need to stay on top of?

Kimberly Banks Fawcett: Your servicer is the person that has the licenses in the different stakes that you wanna operate in. They have a debt collector’s license, so they are the ones that are gonna stay on top of how things have to be done to treat your borrowers with respect and help them succeed as much as possible, and to keep you compliant. The problem is your servicers don’t care as much about your money as you do, so while they do follow the regulations, they’re not necessarily sharing with you what’s going on, so you’re not necessarily covered.

Let me give you an example. I had a borrower that we were foreclosing on, and finally she got her modification paperwork in and we were gonna look it over. Now, you cannot be foreclosing and actively looking at a loan modification at the same time. That’s called dual tracking, and it’s not fair to the borrower. While they’re doing all the right things, you can’t take their house. But she turned her paperwork in the day before the foreclosure sale, so we immediately stopped the foreclosure sale, started looking over her paperwork, but the servicer did not tell her that we stopped the foreclosure. So she went ahead – she had a little coaching, as I mentioned before… [laughter] She went ahead and got me in trouble with the CFPB. All I had to do was have an attorney write a response and saying “No, no, no, we did stop it. She just wasn’t notified.”

When I went back to the servicer, their comment was “Well, we can’t call her on that, we can’t e-mail her on that. We had to put it in writing.” What?! How long is it gonna take to mail a letter? The sale is tomorrow. So what would have made sense is either to tell me that and I would have called her or had the attorney call her, or go ahead and send her an e-mail and follow up with the official legal documents. So their process, while following probably all the rules, got me in trouble. It only cost me $250 for a letter to explain the situation and it all went away, not a big deal, but that’s just an example of how even hiring someone to take care of this can still be an issue.

Joe Fairless: If you were presented that circumstance again – which you might be – it’s tough because you don’t know if the servicer is actually doing some common sense things. By the book perhaps, but common sense – come on. So how would you approach that differently (if at all) on the next go-around?

Kimberly Banks Fawcett: I would quiz them mercilessly on how they do it? That actually applies to everything you do with a servicer. Don’t assume that they’re doing it logically. I would say “Okay, fine, you’ve stopped it. How does this person find out that we’ve stopped it? What’s the best way of doing it?” If they had said, “Well, we’d have to put it in writing”, I would immediately have had my attorney make a phone call. It would have been a lot cheaper to have my attorney make a phone call, than have to write a letter to the CFPB.

So it’s one of those situations you don’t know what you don’t know, so this is a great example why I think note investors really do a good job for themselves when they listen to different interviews, talk to different investors… Because we all experience different problems, and if you can hear the problem that I had, you’ll avoid it. If I hear about what you had, then I can avoid it. So in that way, it’s a great way to build a collective intelligence in the community.

Joe Fairless: Oh yeah, thank you for sharing that and adding to that collective intelligence. You mentioned CFPB – what’s that stand for?

Kimberly Banks Fawcett: Consumer Finance Protection Board. They’re basically the people that — the organization was put together by the government to deal with some of that robo-signing signing and unjust practices that people were doing to take advantage of some of the lower price point borrowers, some borrowers that might not natively speak English, and were doing all of these loans that nobody could afford and got everybody in trouble. So it was one of their efforts to try and keep that from happening again.

Joe Fairless: What’s another question that you would ask the servicer?

Kimberly Banks Fawcett: A specific question, or just in general how their processes work?

Joe Fairless: Either one. Whatever’s top of mind for you when I ask you that.

Kimberly Banks Fawcett: Well, the one that I am currently struggling with – because I have a few servicers that I use. What I like to do is I have a couple that I like, and then if I buy a couple of new assets and they’re at another servicer, I’ll leave them there and see how it goes, see if maybe I wanna add them or never deal with them again.

A problem that I’ve been having is with force-placed insurance. To explain what that is – if your borrower is not paying for insurance, there has to be insurance on that asset; that’s your collateral. So you force-place insurance upon them as the lender. It ends up being much more expensive, and it ends up not covering as much as the borrower would like it, but my collateral is at least protected.

So for me to be able to charge back that expense to my borrower, I have to do a bunch of disclosures to give them the opportunity to get their own insurance, to prove they have insurance, or all of that. I have found over time that every servicer does it differently. So you have to quiz them on how that’s happening, because ultimately, if I pay $1,000 for this insurance, if I can’t charge it back to them, that hits my ROI pretty hard. Again, I need to look out for my money, I can’t just rely on the servicer making sure they’re doing it in a way that protects me. So that’s a huge question that I ask every servicer.

Joe Fairless: When you ask the question or questions to them about their force-placed insurance, what response is your ideal response?

Kimberly Banks Fawcett: My ideal response would be — there are three letters that need to go out to give them the opportunity to take care of this. We send the first one out as soon as we board; we send the second one out if we haven’t heard from them in a month and a half, and then we send the final one out saying “Hey, you have not done this. You will be charged for this insurance.” That would be the perfect response.

A lot of times I’ve gotten “No, we don’t do that. You’ll have to send your own letters.” Well, that’s the reason why I have a servicer, because I don’t have the license to get that close to my borrower.

Joe Fairless: [laughs] You’ve had this conversation before with someone, haven’t you? [laughs] That’s funny. Okay, and then the other con – and then we’re gonna get into the pros that you mentioned – this actually bleeds into what you were talking about before… There’s actually people out there training homeowners how to stay in their home longer without paying the mortgage, so you’re just having to fight against that.

Kimberly Banks Fawcett: Yes. And some of the things they do raise are legitimate, like you don’t have proof of the payment history. Sometimes when you buy a note, the payment history that you’ve gotten from the previous lender is a little fuzzy, there’s some holes… As an aside, that’s pretty easy to deal with, because you just waive the payments that [unintelligible [00:11:42].05] Okay, sure, you made those. I’m still ahead, because I bought the loan so cheaply. But you have to address that in court. It doesn’t work to just send them an e-mail saying, “Okay, sure, whatever.” And anything that goes to court takes more time, so that’s two, three, six more months they’re living free.

Joe Fairless: Got it. Let’s talk about the pros. You mentioned you used to be a landlord, and then you realized you didn’t wanna mess with the tenants and all that stuff. You said two pros is you have people interested in the property, number one, and you can make it a win/win/win for you, investors and homeowners. Can you elaborate on that?

Kimberly Banks Fawcett: Sure. If someone’s living in a home, they care about it. If the roof is leaking, they’re generally going to get it fixed… If they have the money, obviously. If you have a tenant in your single-family house — I actually had a friend that had this problem; she was tired of calling her landlord, and the upstairs bathroom was leaking. There was like a waterfall coming down from the upstairs when we were at this party, and she’s like “Yeah, it does that sometimes.” [laughter]

When you have someone that cares about the house, they’re gonna fix that. Chances are you won’t have a borrower set off fireworks inside the house, where that can happen with a renter. You’re just dealing with a different group of people, and since you’re not there, peeking in the windows all the time, you just have a better level of comfort that that asset is being taken care of. It’s not a guarantee, it’s just a higher probability.

Joe Fairless: Does it set you up for long-term wealth, buying and holding a single-family home one?

Kimberly Banks Fawcett: Not typically. If you like modifications, which I tend to, they’re a wasting asset. With every payment it’s worth less, because — I mean, obviously, in the beginning it’s mostly interest… But when they’re paying off their principal, there’s less and less value in that note, so you have to be careful how you structure that. You can’t just have a portfolio of modifications and not manage it to make sure it’s not losing value. So it is different in that respect, and I don’t know that all note investors really focus on that.

When you’re buying them, you don’t know what your exit strategy is. You know what you want it to be and you know from looking at your ROI calculator which one looks prettiest, but it’s what the borrower wants, what the borrower is willing to do, what you can make happen. So if you end up with a bunch of mods and then a bunch of REOs, and some of those you rent and some of those you fix and flip, you can blend your business so that it’s not a wasting asset pool. But if you don’t realize that your asset is getting less and less valuable, I think you can end up kind of sunk after a while.

Joe Fairless: Can you elaborate on that last part that you mentioned?

Kimberly Banks Fawcett: Which part?

Joe Fairless: The very last part.

Kimberly Banks Fawcett: Say you have a portfolio of (I don’t know, I’ll just throw out) 75 notes; they’re all modified, they’re all paying. Well, every single month they’re paying off a little bit of the principle, so at the end of the month, your assets are worth less. There’s less that’s gonna be coming in at a certain time. And if you just stayed in that portfolio, eventually they would all be paid off and you would have nothing.

Now, did you take the money and reinvest it? Well, if you’re smart, you did. So you probably bought other assets. But if you’re not paying attention, eventually there’s nothing left. It’s not a “purchase with your servicer and just let sit” and expect it to be worth something after ten years, whatever. Because remember, the average person also only stays in their home for seven years, so then your loan is completely gone then. I mean, you get a nice payoff and all of that, but if you don’t wisely invest it in more assets, you’re not gonna keep your portfolio valuable… Or substantial maybe is a better word.

Joe Fairless: I’m glad you mentioned that. I haven’t heard anyone talk about that as it relates to note buying, and it’s something I should have picked up on but I haven’t, so thank you for mentioning that. So you’re actively managing your portfolio and actively optimizing it as you’re going along, right?

Kimberly Banks Fawcett: Yes. I started out wanting to do mostly mods, and now I have changed it up a bit where there are certain markets in the country that I have a great team, and I really like to — obviously, I wanna work with the borrower; don’t get me wrong, my first choice is to help them out. But if I have to take back the property there, I don’t mind, so I’ll buy some more vacant ones in that area, just in the hopes of taking back the property and going that route.

Joe Fairless: What’s the most profitable approach or exit for you?

Kimberly Banks Fawcett: For me it’s more work, but it’s usually taking it back and doing a really nice renovation and selling it retail. Again, I only do that in certain markets; not because I have problems with other markets, I’ve just built better teams in certain areas. So I love taking a house that’s okay and making it great, and then helping out another borrower. I love to do owner-financing if I can. Some markets don’t support that, or it’s an affluent-enough area that they don’t need to buy it on terms, they can just go ahead and get a regular mortgage… But I think the fix and flips, in my most favorite markets, are probably one of the most profitable.

Joe Fairless: Could you estimate for us in your portfolio now which ones are modifications versus fix and flips versus whatever else, just so we can get a rough percentage?

Kimberly Banks Fawcett: Let’s say over 10 deals, 4 of them are mods, 5 of them I foreclose, and then I’ll have one that I can do like a short sale or a deed in lieu on. More short sales than deed in lieus. I find that people have been dealing with this stress of “What am I going to do about my house? What am I going to do about my house?” It’s hard to really talk to them about, “Well, you know, if you just sign this document, I’ll give you a little money to go away.” I find that a harder sell, it just sounds almost too good to be true to them, kind of thing. So I’d say most of mine are probably foreclosures.

Joe Fairless: Okay. Based on your experience in this industry, what’s something that you see people starting out doing or reading about or thinking about and spending time on, that is a waste of time as it relates to note-buying?

Kimberly Banks Fawcett: Note buying has a lot of rabbit holes. We very often find a new note investor going, “Okay, what if?” then “What if this happens?” Well, I don’t think those are bad questions, and it does depend on your mind – I’m a what-if kind of person – but you have to find out if that’s logical.

For example, I bought this one deal in Pittsburgh, Pennsylvania, and the seller had me — when you’re in that transition of when you’ve closed, your assignments are recorded and all of that… I was getting ready to go to tax sale… So my seller had me pay the taxes to their law firm, so their law firm could pay that.

Well, in the process of doing that, the law firm went bankrupt. They closed their doors, they wouldn’t respond to my e-mails, they wouldn’t respond to the seller’s e-mails and I ended up losing $18,000. Now, okay. That happened. That’s not great. But how often is that gonna happen?

Sometimes if I’m presenting on deals, I don’t wanna talk about that, because I don’t wanna spend that time in that rabbit hole. Yes, it happened. It sucks, it was awful; you don’t want that to happen to you, I get it. But I’ve done close to 200 deals, it’s happened once.

I’ve also had a deal where the house was actually gone by the time I closed on the deal. It had gotten destroyed in a tornado. I still made money on that deal, but now people could be afraid of a tornado, could be afraid of bankrupt attorneys… If you’re getting all caught up in the afraid things, you’re gonna stop yourself. If you wanna listen to these stories and go “Okay, let’s see… Okay, so you can actually get out of that situation and be alright.” “Okay, maybe I don’t have as many things to worry about as I thought I did”, then that’s a useful exercise.

Joe Fairless: What’s something that on the flipside you would make sure you teach any beginning note investors?

Kimberly Banks Fawcett: I think to double-check your vendors. For example, when you’re doing your due diligence and you’re trying to get a value on a property, I will talk to a local realtor or I will order a BPO, but I also use a service called We Go Look, and they go to the property and they take at least ten pictures of the property, they get all four sides of the house, and they’ll make some kind of indication of what they think the condition of the house is based on the neighborhood. Now, they’re not realtors, so they’re not giving me a value estimation, but I now have independent pictures and an independent comparison to put together with my BPO… Because some BPO agents, they don’t wanna get out of the car, they don’t really care, they don’t have attention to detail; they just want their $75 and move on. So I can compare these two and I get a much more accurate picture of the real condition of that house.

So you have to double-check your vendors, and I think the other thing for new investors, especially in this current market, prices are going up and you have to make sure your ROI is going to work on these higher prices… Because everybody wants to get in their first deal. They’re so excited to suddenly be a note investor. But if you overpay going in, you’re never gonna make that money back up. So you have to be careful, you can’t be so ignorant that you end up ruining the deal before you’re ever really in it.

Joe Fairless: Now I’m gonna ask you a question I ask everyone, and you might say “Well, Joe, I’ve just said it…” Well, if that’s the case, then we’ll roll with it. But if you’ve got something in addition to share with the listeners, then please do so. What is your best real estate investing advice ever?

Kimberly Banks Fawcett: I would say focus, but not the focus that most people say. Most people say “Pick one thing, do it and become fantastic at it.” I disagree. I think you need to focus on what your end goal is; what you want to be great at, and then take all of your activities and draw them there.

For example, I wanna be a great note investor, so the fact that I have residential real estate experience, I also have commercial real estate experience, I have experience in firsts, I’ve done some seconds, I’ve done some  contract for deeds, and all that together makes me a better note investor. I am more accustomed to different outcomes, accustomed to different headaches, I’ve taken the nuances and how to do each one of those things and put them together, so that I have a better picture.

So now that I have been doing residential notes for so long, I can build up my commercial portfolio because I have experience in that investing, and I’m gonna be able to bring it together, and the fund that we’re getting ready to put together, at a much higher level.
Some might look back and go “Okay, wait, you can’t do commercial and residential, and first, and second…” I think you can, as long as you’re using them as a tool to learn how to be better at the end.

Joe Fairless: That’s powerful. I’m enjoying that, because it is more of the end goal that we’re focused on, and ultimately what you wanna be great at, and then leveraging that to then get you there, there might be iterations of it along the way… But ultimately, you’ve gotta focus on what the end game is. I love that.

What’s one challenge that you’ve come across that we haven’t talked about already, as an investor, whether it was pre-note buying or no?

Kimberly Banks Fawcett: I think actually a love of real estate is a problem, because you want to do everything. This sounds cool, and that sounds cool, and “Oh, I can make money with that…” And you have the squirrel syndrome that everybody talks about.

Joe Fairless: What’s the squirrel syndrome? I haven’t heard of that one.

Kimberly Banks Fawcett: Well, “I’m on this track — oh, squirrel, there’s a new idea! Oh, squirrel…! I can find properties that way!” You’re all over the place. But that ties into what I was just talking about, focusing on your end goal. It’s okay to do different things as long as they’re gonna take you to one place.

Joe Fairless: You said you’re putting together a fund… What’s the amount that you’re looking to bring equity-wise?

Kimberly Banks Fawcett: Well, we’re gonna start at five million. Everybody tells me that a fund for less than that would be not worth the cost. I’m one of those, I don’t wanna bite off more than I can chew, so we’re gonna start at five million. That will allow us to do some residential, and a nice, sizeable commercial one all in the same place, and I think it’s gonna be great?

Joe Fairless: Where are you at in that process?

Kimberly Banks Fawcett: We have our attorney picked out, and we have brainstormed all of our ideas about how we’ll want it to operate and who we want to be business partners, and all of that… But we haven’t put it on paper yet. That’s for 2018.

Joe Fairless: Okay. We’re gonna do a lightning round… Are you ready for the Best Ever Lightning Round?

Kimberly Banks Fawcett: I am!

Joe Fairless: Alright. If you’re ready, we’re gonna do it. First, a quick word from our Best Ever partners.

Break: [00:24:44].17] to [00:25:32].25]

Joe Fairless: Best ever book you’ve read?

Kimberly Banks Fawcett: The One Thing by Gary Keller.

Joe Fairless: Best ever deal you’ve done?

Kimberly Banks Fawcett: I bought a note in Florida that I was hoping to take back as an REO, and within 36 days they gave me a full payoff. I almost didn’t have to bother boarding. I did, as I was supposed to do, but I got a full payoff, which was twice what I paid for it. So in 36 days I made a little over 100% on my money.

Joe Fairless: What’s the best ever way you like to give back?

Kimberly Banks Fawcett: I enjoy working with the homeless. There’s two different organizations that I work with. One focuses on feeding dinner every night, so that they at least have one really good meal during the day, and then the other one is part of a shelter that offers job training and daycare for the kids while you’re doing your job training. That one gives you more of a hand up rather than a hand out. I like working with a population and I like the comparison of the two organizations.

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

Kimberly Banks Fawcett: My company’s name is Inspired Capital Group. Our website is InspiredCapitalGroup.com, and then I’m on Facebook too, so I’m pretty easy to find.

Joe Fairless: Well, thank you for being on the show and spending some time with us and sharing your knowledge of note buying and the pros and cons, as I’m gonna say you really did objectively, so bravo on that. It would be tough for me to say that on multifamily, so I appreciate you being objective there. Then also giving us a 2.0 lesson on some things that you’re working through, and that is the force-placed insurance, and some questions that you ask and ultimately what you want to hear from the servicer.

Then the modification process… If you have all of the loans that have been modified and they’re paying like clockwork, then congratulations, but eventually your portfolio is gonna be zero. [laughs] I’ve never thought about that, that’s very interesting. That’s something to keep in mind.

Then lastly, it’s okay to do different things, but you’ve gotta know your end game and what you’re good at… So thanks for being on the show, great stuff. I hope you have a best ever day, and we’ll talk to you soon.

Kimberly Banks Fawcett: You too, take care.

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