July 8, 2019

JF1770:High Performance Real Estate Investing with Non-Performing Note

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Paige has started and ran multiple real estate investing businesses, and has been investing in real estate for over 20 years! Today Joe and Paige will have a discussion about her entire real estate story, from losing $20 million in cash to getting back in the real estate game and having more success than ever before with non-performing notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“They will focus on assets that are valued over $200,000” – Paige Panzarello

Paige Panzarello Real Estate Background: 

  • Real estate investor and entrepreneur for over 20 years
  • Founded and runs her own non-performing note company
  • Completed over $150 million in real estate transactions to date
  • Based in Simi Valley, CA
  • Say hi to her at https://www.cashflowchick.com/
  • Best Ever Book: Three Feet from Gold


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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 note investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Paige Panzarello. How are you doing, Page?

Paige Panzarello: I’m great, Joe. Thanks so much for having me on.

Joe Fairless: That is great to hear, and my pleasure. A little bit about Paige – she is a real estate investor and entrepreneur; she’s been one for over 20 years. She founded and runs her own non-performing note company, and she’s also had a construction company. She has completed over 150 million dollars in real estate transactions to date. Based in Simi Valley, California. With that being said, Paige, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Paige Panzarello: Absolutely. Hi, Best Ever listeners. Great to be here. As Joe said, I’ve been in real estate and real estate investing for over 20 years. I started out by default, with some buy and hold properties; I owned a sewer treatment plant and some land. Prior to 2005, and that boom and then bust, I was in my growth spurt. I started out knowing nothing at all about real estate mentors or real estate investing… And I just had to jump in with both feet, and ask a lot of questions, and surround myself with people that were in the know.

Then of course you have to be bold, too. I was very young at that point, so I was somewhat fearless. [laughs] Things have changed a little, Joe, but… [laughter] So I surrounded myself with a bunch of people and I grew really fast. We ended up having 36 employees. I owned my own construction company, and I started it knowing nothing about construction.

Joe Fairless: Wow.

Paige Panzarello: Yeah. We were building our own projects, we were building everybody else’s projects…

Joe Fairless: Where at?

Paige Panzarello: Mostly in Arizona. We had some in California, but mostly in Arizona.

Joe Fairless: Okay.

Paige Panzarello: And we were rocking and rolling. It was great. I held all of our licenses, except HVAC and roofing, and the only reason we didn’t have those is the insurance was too high… And it was prior to 2005, so we were just going crazy with building. Then the market crash happened… And I actually saw it coming, Joe. A lot of us did. I foolishly thought it’s not going to happen to me though.

By the end of the day, I was very fortunate in that I did not have a lot of debt. I was only encumbered about 10%. I had a lot of assets that I could sell, and it was really a fire sale… And at the end of three years I was very fortunate that I was able to fire-sale everything and pay everybody that I owed; I didn’t have to go through a bankruptcy dismissal, or any of that stuff. But three years later I lost 20 million dollars.

Joe Fairless: Net worth or cash that was in your bank account?

Paige Panzarello: Just cash that was in my bank account.

Joe Fairless: So you had 20 million dollars cash in your bank account?

Paige Panzarello: Yup.

Joe Fairless: And then it went away.

Paige Panzarello: And it went away.

Joe Fairless: Okay.

Paige Panzarello: Between the cash and the properties that I owned and everything else… Yeah, liquid – it was cash. It went away. But I felt really good, because I was able to pay the people that I owed money to.

Joe Fairless: Absolutely.

Paige Panzarello: To me, integrity is everything. So it was terrible for me, and I don’t like to call that a failure, I like to call that a really difficult learning experience, but I was able to take care of the people that I owed money to, which made it all worth it to me.

Joe Fairless: Absolutely, yeah. And they clearly appreciate that, and you are high on their list of people who have integrity, I imagine, when you speak to them.

Paige Panzarello: Thank you. Yes. I do have investors to this day because of that… And clearly, I went away from real estate investing for a little while; I needed to regroup… [laughs]

Joe Fairless: What did you do?

Paige Panzarello: I was always very entrepreneurial, so I started small, little businesses, but I was never fully satisfied, and my husband said to me “Paige, what are you doing? We need to go back into real estate.”

Joe Fairless: What little small businesses?

Paige Panzarello: For instance, I’m a dentist daughter, so I started a teeth-whitening business, and I actually still own it; I have other people running it for me, but… It was a perfect fit for me, being a dentist daughter… [laughs] But it wasn’t where my passion is.

Joe Fairless: Okay.

Paige Panzarello: So I had to rebuild, Joe. I had nothing when I came back into real estate. Nothing, literally.

Joe Fairless: Well, you had a teeth-whitening business. Was that producing some good cashflow?

Paige Panzarello: It was, but not where I wanted to… And it still is, by the way, but not where I wanted to be in my real estate investing career.

Joe Fairless: Okay, got it.

Paige Panzarello: It was enough to pay the bills and have a little fun, but…

Joe Fairless: There are more zeroes with real estate.

Paige Panzarello: Exactly. So I came back in, and I did what everybody does – I stared out by wholesaling, and fixing and flipping, and I did some tax liens and tax deeds, and all the while I started studying notes. And for me, angels absolutely sang when I got into the note space… And I haven’t looked back. I love the non-performing notes space; I’m actually in a position where I get to help people and do real estate, and those are my two passions. I’m blessed every day that I get to do it.

Joe Fairless: Well, let’s focus our conversation on that, but you’ve mentioned something at the very beginning – clearly, I can’t let that just go by without me asking a follow-up question or two… You said at the beginning you owned a sewer treatment plant?

Paige Panzarello: Yes. [laughs]

Joe Fairless: Okay, so how did you become an owner of a sewer treatment plant?

Paige Panzarello: Okay, so as I said, I started my real estate investing career by default. My grandmother passed away, and she had a very large estate. There was properties that she owned in California and properties that she owned in Arizona. The Arizona properties, which is what I originally started out handling – there were 38 townhome units; we were about 40% occupied, so we were really, really in destitute times… And by the way, the estate was about four million in debt.

And we owned a sewer treatment plant, and we owned land. When I say “we”, my grandmother and the estate, which – long story short, it went to my mom, and then I bought the company from my mom.

But yeah, the sewer treatment plant was a piece of the giant estate that she owned, so I learned a lot about sewer treatment plants, more than I care to share. [laughter] But it was really an amazing experience, because again, I knew nothing, and within three years I was able to turn that four million around and put us back in the black, and we just started rocking and rolling. We did sell the sewer treatment plant to the district, which was great. That’s kind of helped leverage us out of this debt. And then the townhome units, I was able to turn that around, too. I worked with all of my vendors and paid them everything that was due to them… And again, there’s that integrity thing, Joe; I made promises and I kept them… And I’ve built amazing relationships because of it.

Joe Fairless: I’ve never spoken to anyone who owned a sewer treatment plant, so just educate me – how do you turn a non-performing sewer treatment plant around, to be performing?

Paige Panzarello: Like I said, it was a privately-held sewer treatment plant, obviously… And we were only hooked up to about 10% of its capability. The townhome units, like I talked about, were hooked up, and a couple other areas were hooked up, but we were only running at 10% capacity. The district in Arizona where we are – the district was in desperate need for a sewer treatment plant, because everybody was on septic. And we’re right along the Colorado river, so as a result, the Army Corps of Engineers comes in if the septics is running into the river etc. So the county/district was desperate for a sewer treatment plant… So we were able to sell it to them for a decent amount of money, and we also negotiated some irrigation water for a very long time for the properties, which was great.

Joe Fairless: Thank you for talking about that, because I hadn’t ever come across that before.

Paige Panzarello: It is unique.

Joe Fairless: Whenever I come across something I’ve never come across before after interviewing 1,600 real estate investors, I like to ask a couple follow-up questions, because I imagine a lot of people haven’t come across that either.

Alright, let’s talk about non-performing notes. 90% of the listeners know what non-performing notes are, and the general business model… But will  you just touch on it for the minority of us who might not know? And then we’ll get into the meat of it.

Paige Panzarello: Sure, absolutely. Non-performing notes – notes in and of themselves are a promise to pay. So when you buy a car, or you buy a house, you sign a promissory note that you’re gonna pay the bank back the money that they have lent to you in order to buy said asset, whether it’s the real estate, or a car, or whatever. And there’s different types of note investors – there’s performing note investors, which is exactly what it sounds like; the borrower is paying their monthly payments, so you’re getting monthly cashflow being  a note holder, because you’ve become the bank, and you don’t have the headache of tenants and toilets, which is part of what I love about note investing – we get that monthly cashflow and sometimes chunks of cash without the headache of tenants and toilets. Been there, done that, so for me it’s amazing.

Non-performing notes is just what it sounds like – the borrower has stopped paying on their monthly mortgage, so I step in and I will buy that note, meaning I buy the debt; and I’m in the first position, I don’t ever buy second, so I’m the first one tom get paid… I will buy that debt at a very deep discount, and I base my purchase price on the collateral that’s securing the loan. In other words, I do an analysis of the house that is securing my invested dollars. And when I do that, when I can buy it at a deep discount, I’m not building in an equity cushion, and it gives me a lot of flexibility to be able  to work with our borrowers to actually try and get them to stay in their home.

Joe Fairless: What is the discount that you like to buy it at?

Paige Panzarello: Well, like to, or can? [laughs]

Joe Fairless: Both, both. 100% discount, but maybe — what’s typical?

Paige Panzarello: Everybody deserves to make their money and a  little bit of profit, right? My strategy is always “pigs get fat and hogs get slaughtered”, so be fair and be equitable. The discounts that I used to be able to get – we used to be able to pick them up at anywhere between 40 and 55 cents on the dollar. Nowadays it’s more like 55 to 61-62 cents on the dollar. It’s still a pretty big discount, so if the market drops 20%, if you’re a fix and flipper, that’s gonna hurt you, if the market drops that much. If the market drops in note investing and we’ve built in a  45% equity cushion, a 20% drop is not gonna hurt us nearly as badly as some of the other forms of real estate investing.

Joe Fairless: Okay. And on average, how many notes are you buying at once?

Paige Panzarello: It really just depends. We buy small mini-pools. Sometimes we do one-offs, which means we just cherry-pick. Sometimes we buy larger pools. It’s just a matter of what the asset managers have available for us. There is competition in the note space, but I’ll tell you, it’s a very collaborative space and it’s not like scratch-your-eyes-out type of competition, where everybody is trying to climb over everybody else and outdo them. That’s not the case here in the note space.

Joe Fairless: Why?

Paige Panzarello: You know, I often ask myself that question. I think because there’s so much inventory, and life happens to people every single day. And this particular space – like I said, between the asset manager, the loss mitigation team, the servicers – is very collaborative. We all really do help each other, and other note investors. Sometimes there’s a pool buy, meaning we have to buy the whole pool, and us note investors, we’ll get together and say “I wanna carve out this for my portfolio”, and we collaboratively buy the pool, which is really cool.

Joe Fairless: How does that work? How do you structure that?

Paige Panzarello: Each situation is different. Of course, if I’m the one that has brought the tape – and the tape is just basically an Excel spreadsheet of all the assets available for sale; that’s what’s called a tape. So if I have received the tape and I go to the other investor, I will simply say to them “Listen, I wanna carve out all of the Texas notes, or half of the Texas notes. Then we’ll do a lottery on the other half.” Or I will know that they only deal with Ohio, so they want all of the Ohio notes, and we’ll take the Virginia notes. It really works itself out; there’s really not a lot of fighting that goes on, as long as we know what each other’s buy box is.

Joe Fairless: In that scenario, you bring the tape to a group of, say, 3-4 people who are also non-performing note buyers. Do you all ever create one entity that purchases all of them and then you split up ownership based on who puts in what in that entity?

Paige Panzarello: Some investors do do that. I am very fortunate in that the way that my business is structured, I work through a Delaware statutory trust, which most people know through 1031 exchanges, but that’s not the case here. So I work through a Delaware statutory trust, which operates very similarly to a series LLC. So I’m actually able to create series of my DST and give ownership to those 3-4 different investors, so I don’t have to create another entity to do that.

Joe Fairless: Okay. But it functions in the same way, so you all are in one entity together, but you split the profits based on who owns what. Is that correct?

Paige Panzarello: We can do that. It depends on the tape and the assets that we’re buying. Again, if we’re carving out notes where I’m taking all of Virginia or Texas, and they’re taking all of Ohio, we don’t necessarily do that. We just need to have an operating agreement that we’re both gonna put our money together, we go through a purchase and sale agreement, just like you would a house or an apartment building, and then we just divvy up, tell the seller who to make the assignments of mortgage or deed of trust, who to make what entity to make those out to. And that’s just a transfer of ownership document.

Joe Fairless: And the reason why I was asking – perhaps I should have led with this –  is I was wondering if there was an advantage for the person who has the tape, who had that relationship with the asset manager, and then brings it to the group. For example, if everyone invests the same amount of money into the entity that buys all of those notes, then the person who brought the tape would get 10% extra ownership interest because they brought it, and then everyone splits everything else proportionate to the amount of money they invest.

Paige Panzarello: Yeah, there’s so many different ways you can structure a deal, of course.

Joe Fairless: But you’ve never done it that way.

Paige Panzarello: [laughs] There’s so many ways. But again, I think because of the collaboration in this space, if we’re each taking our own separate assets, then there’s no need for me as the person who brought the tape to take an extra 10%. Again, pigs get fat and hogs get slaughtered. I’m just happy that we can collaborate together and buy the whole pool. I don’t need that extra 10%. It’s fine by me.

Joe Fairless: That’s interesting. So if there was a large tape, then the advantage for you to bring it to the group would be that you all would be able to close on it, whereas perhaps you wouldn’t be able to close on it as an individual. So there is the value that they’re bringing to the table. That’s where the collaborative part comes in.

Paige Panzarello: Absolutely.

Joe Fairless: I’m with you now. [unintelligible [00:17:43].12] What type of process do you go through once you have closed on it, and – congratulations, you have notes where no one’s paying on?

Paige Panzarello: [laughs] It sounds crazy, doesn’t it?

Joe Fairless: Nice job getting that one! What do you do next?

Paige Panzarello: [laughs] So we have teams in place… With note investing, I call it  very front-end loaded in terms of your due diligence. The beauty part about once you actually get to the closing table and you close on these – you now take the notes and you pass them off to your team members. I’ve got an amazing loss mitigation team, and they start with the borrower outreach. The beauty part about note investing is that we actually have 23 different exit strategies. And as you can imagine, after 2007 and what happened to me there, I’m very risk-averse. So when I’ve got 23 different exit strategies available to me to dispose of these assets and work with people, I’m in a pretty great place, and pretty happy.

Our loss mitigation team is our point of contact, and they start with borrower outreach. We typically only use four different exit strategies that are typical. We either have to foreclose – which is our least favorite, by the way; we could do a short sale, we could do a deed in lieu foreclosure, which just means that we accept the deed to the house as payment in full for the loan that we just bought, or we get to work with the borrower to get them reperforming… And that’s actually my favorite, because we are able to generate both chunks of money and streams of monthly cashflow, and help somebody to stay in their home.

We have a general idea, Joe, when we are reviewing and doing our due diligence prior to buying the asset what kind of exit strategy we would like to employ… But borrowers are people, so they sometimes tend to surprise us, too. [laughs]

Joe Fairless: Sure, I know. We’ve got some apartment units, and when you have a lot of families living under one roof in a centralized area, then there’s always gonna be something that surprises you.

Paige Panzarello: Oh yes, and everybody’s got a story, don’t they.

Joe Fairless:  Yes, they do. So if you’ve got 23 different exit strategies — by the way, are those written down somewhere on your website, or something?

Paige Panzarello: I don’t want to overwhelm people.

Joe Fairless: Yeah, we won’t go over it on this call, obviously… But is it listed somewhere?

Paige Panzarello: I do teach a workshop and we do go over some of the exit strategies. Again, I don’t wanna overwhelm people, because there’s a lot of information out there and it can be a bit daunting. But yes, if you come to the Building Wealth With Notes workshops, I do teach all that.

Joe Fairless: Okay. But there’s four that typically are your go-to. One is foreclosure – you don’t like that. Two is short sale, three is deed in lieu of foreclosure, so the owner is basically saying “Here, I’m gonna turn the house over to you, and then I’m not gonna get dinged on my credit, or foreclosed on.” And then the fourth is reperforming, so they start paying, whether it’s some workout scenario or not.

So three out of those four are you getting the property, or sales proceeds from the property, whereas the fourth is ongoing cashflow… But then with the ongoing cashflow, the disadvantage is it diminishes over time, because they’re paying down the mortgage. So I just have a hard time understanding – and clearly, it is possible, because there’s a lot of people who do this, yourself included – how you can make a good chunk of money doing this without massive, massive volume… Because there’s gotta be a cost for the loss mitigation team, plus you’re buying it at 40% discount or something, but after the time that’s spent to do this, and then after the foreclosure process, the short sale… How many deals do you need to do to make a million dollars in profit over the course of a year?

Paige Panzarello: That’s a great question. [laughs] It depends on how much capital you have to deploy at any given time. And it depends on the assets in your buy box, what you are looking at. If you only have limited capital and you’re only starting out by buying assets that are lower in value, then yeah, it’s gonna take you a little bit longer to get to the million dollar net profit. If you’ve got a little more capital and you can buy some of the higher-end assets, it’s not gonna take you as long.

There are note investors out there that have a lot of capital to deploy, and they will focus on assets that are valued over $200,000. So if you’re looking between 200k and 500k, if you’ve got capital to deploy that, it’s gonna take you a lot less time to get to that million dollar net profit.

Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Paige Panzarello: Best advice ever is don’t be afraid to fail, really. Successful people are successful because they have failed. If you learn from it, then you can get back up, and hopefully it’s not catastrophic… But so many people are paralyzed, because they’re fearful of failing… And they really need to change that mindset, and look at it like it’s a learning experience. All of us scrape our knees.

Compound that though with doing your due diligence. Due diligence in any form of real estate investing is paramount. It’s crucial. Because when you do good due diligence, you buy your assets well, and that’s when you make your money. You collect it when you exit, but if you do good due diligence and educate yourself about that form of real estate investing, then you really can mitigate your risk and do very well.

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

Paige Panzarello: I’m ready! Bring it on, Joe!

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

Break: [00:23:45].12] to [00:24:27].28]

Joe Fairless: Okay, best ever book you’ve recently read?

Paige Panzarello: A couple of them. “Seven habits of highly effective people”, Steven Covey. Love it. “Three feet from gold”, Sharon Lechter and my personal mentor, Greg Reid. Love them.

Joe Fairless: Oh, I love that. I think I’ve read the first one… I feel like I have. I’ve heard about it so much. But I love “Three feet from gold.” That truly is a must read. What’s the best ever deal you’ve done?

Paige Panzarello: The best ever deal I’ve done was taking one of our non-performing notes and I was able to help a single mom who she and her husband divorced, and they had a couple kids, and she lost her job… And I was able to help her and her two kids stay in their home, get her to reperform, and they did not have to move. It was the best ever. She wrote us a beautiful letter, thanking us profusely. She was beat up by the big banks and we were able to  help her stay in her home. Nothing like that feeling.

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

Paige Panzarello: Oh, boy… [laughs] I think that the biggest mistake — we all make mistakes, but the biggest one was in 2007 for me, thinking “This is not gonna happen to me.” Because I did see it coming, and I was naive in thinking that I was only leveraged 10% and it wasn’t gonna affect me. Boy, was I wrong… Because it did. It happened to me right on my head, and caused me a huge loss. But I’ll tell you, that shapes you as an investor, and it teaches you who you are, and how you relate to other people, and to money also, and how you treat money.

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

Paige Panzarello: A couple of different things… Again, I’m very about helping people, so I do teach financial literacy in the form of teaching [unintelligible [00:26:04].20] cashflow game, so I do that. People wanna know what I do, and how to build wealth with notes, so I teach a workshop to help people to create their own financial freedom… And I often get the question “Well, you’re teaching people to be your competition.” Like I said, this space is very collaborative, so I don’t look at it that way. I’m very passionate about helping people to build their financial future, and give themselves financial freedom, so that’s part of my giveback.

And then the other thing is that I’m very passionate about our veterans. I donate a lot of time and money to Operation Gratitude. It’s one of my things, and I eventually am going to be taking some of these REO properties that we are acquiring through foreclosure and I’d really like to be able to set up housing for our veterans across the country.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Paige Panzarello: Well, the best way to reach me is to either direct-message me on Instagram, @thecashflowchick. You can go to cashflowchick.com. If you’re interested in scheduling a conversation with me, it’s free, of course; just go right to my website. And if they’re interested in Building Wealth With Notes, then they can go to BuildingWealthWithNotes.com to learn about the next workshop.

Joe Fairless: I loved talking to you and learning about your approach as a business person, and your focus on non-performing notes. Talking more about that, getting into the details of how you make money, exit strategies, as well as the sewer treatment plant; that was fun, too.

Paige Panzarello: [laughs]

Joe Fairless: So thank you so much, Paige. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Paige Panzarello: You too. Have a best ever day as well.

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