Sándor Lau, Chief Inspiration Officer NotedFinancial.com Intoxicating Assets: How Defaulted Second Mortgages Helped Me Survive my Landlording Allergy and Invest in Real Estate for the Price of a Used Car Sándor Lau, Chief Inspiration Officer NotedFinancial.com

Confessions of a Recovering Landlord

Bamboo Retreat Eugene, OR Duplex: Rent $700/mo/unit Mortgage, HOA, mgmt. $1,400/mo

Bedlam and Millstone Kansas City, MO Apartments 29 units: Rent $15,000/mo Mortgage $3,000/mo Repairs, evictions, vacancy, mgmt. $15,000/mo

Employed, 28% Homeless Day Job $1,500/mo to Bedlam & Millstone $1,400/mo to Bamboo Retreat Not enough for food, car, bills

Be the Bank: Real Estate Without Tenants Landlord>Tenant Bank>Landlord

My First Paper Source 2013

The Formula: Invest in discounted non-performing second mortgages behind performing first mortgages on residential property.

Make Your Money When You Buy Discounted real estate: exceptional Discounted notes: standard 2nds: most discounted

Performing first mortgage means borrowers likely have: Capacity Will Predict the Future: Performing first mortgage means borrowers likely have: Capacity Will

Online Underwriting: Credit Report Title report Transunion TLO Netronline.com for tax assessor Borrower social media

Case Study: Suwanee River Atlanta exurbs, Suwannee, GA Borrowers paid first mortgage like clockwork Dark horse, very little information available We bid appropriate to risk

Suwanee River: Numbers Value: $204,000 1st Mortgage: $178,000 ($26k equity>1st) 2nd Mortgage: $30,000 unpaid principal balance Our Cost: $5,000 price of used car (17% of UPB, 2.5% of home value, like option or down payment) Workout: cease & desist letter. Paying $9k arrearage @ $3k down then $170/mo. Return: ???%. Good enough. Intoxicating asset. Heart on fire. RECOVERING LL. Win-win. Bank. Homeowner. Investor. Economy. Example photo only, not borrower’s house

Be the Bank, Not the Landlord No tenants, no toilets, no termites. Never visit properties No microwave out window…

Think Like an Econ Mediocracy says: Think rationally: Normal and average is good and right Uncommon and unusual is bad and wrong (ask a guy with a funny name) Do you want to be normal and average? Think rationally: Mediocracy says risk=reward Note investing gives asymmetric risk Leverage cuts both ways, but not equally

Emotional Equity > Financial Equity Motivation: Most human decisions based on emotion We deal with humans not econs House=asset Home=where your kids and pets live

Case Study: Old Macdonald 1 acre lot with house in Fontana, CA Suburban farm with pigs and chickens Paying first mortgage like clockwork Way underwater on first mortgage Hispanic borrower, limited English

Old MacDonald: Numbers Example photo only, not borrower’s house Value: $270,000 1st Mortgage: $320,000 ($50k underwater on first) 2nd Mortgage: $83,000 unpaid principal balance (all underwater) Our Cost: $12,000 price of used car (15% of UPB, 4.4% of home value) Workout: Payment plan. Resumed scheduled $777/mo. Forgave $80k back interest. Return: approx. 77%. Emotional Equity>Financial Equity. Not every note works out like this. Not every one has to.

2nds pull the strings 2nds can FORECLOSE like 1sts Seconds Come First 2nds pull the strings 2nds can FORECLOSE like 1sts

Firsts Come Second 1st can foreclose—if we let them. We can own property subject to 1st loan. Not in our name, not on our credit. Deed of Trust authorization

Seconds Fill the Sandwich Time is on 2nd’s side Not on landlord’s side Not on 1st mortgage’s side Appreciation + principal pay- down benefit 2nd most. Value 2nd loan 1st loan

Pray for BK— Bankruptcy Bankruptcy gives relief from debt, not entitlement to free house. We are secured creditors. Chapter 7: liquidation Chapter 13: restructuring Predict future at: www.pacer.gov

Predict Future w/BK

Chapter 13 Bankruptcy Lien stripping if 2nd unsecured. Payments through trustee. Payment plan 3-5 years. Only 1/3 complete plan. No completion=no strip.

Case Study: Speed Racer Bradenton, SW FL: Family in house since 1981 Husband was once race car driver Yard full of boats and cars Refused all communication, FL expensive judicial FC To make this more real, I’m going through case studies for most of the 12 keys. They all have nicknames. 1, because it’s very difficult to memorize loan numbers and 2, because we want to respect our borrowers and their privacy. These are human beings just like all of us.

Speed Racer Numbers: Value: $160,000 1st Mortgage: $150,000 ($10k equity>1st) 2nd Mortgage: $104,000 (mostly underwater) Our Cost: $11,000, price of used car (11% of UPB, 7% of value) WORKOUT: Borrowers attempted to strip in BK13. Court denied. We agreed to reduce principal to $35k, payments $260/mo, 6.5% int. 20 years. Approx. $5k lawyer bills foreclosure and bankruptcy. Return: $3,120/yr/$16,000=20% return Example photo only, not borrower’s house Beware curse of knowledge.

Chapter 7 Bankruptcy Wipes out unsecured debts, leaving more to pay the mortgage. No lien stripping, no cram downs. Bankruptcy relieves personal debt obligation, does not give free house.

Example photo only, not borrower’s house Case Study: The Temple BORROWER Home bought 2008 Farmington, UT Discharged BK7 2011 Paid first mortgage like clockwork First mortgage hard to track down, not on credit report No replies to foreclosure correspondence, can’t call them Borrowers called a week before the auction: from Japan Example photo only, not borrower’s house

The Temple Numbers Value: $630,000 1st Mortgage: $375,000 2nd Mortgage: $100,000 Equity above 1st: $255,000 SCHL cost: $40,000 nice used car (40% of UPB, 6% of home value) Foreclosure delayed due to issues with title documents Borrowers wanted to do deed in lieu, takes months Foreclosed, full payoff $118,000 in two years, neighbor bought at auction

Leverage Your Time Are you getting any younger? What do you fear? What is your purpose? What’s highest & best use of your time? Outsource (TapeTechs.com, Fiverr.com, Guru.com) Employees, interns

Leverage your Resources Leverage capital: credit cards not enough Bank financing: difficult to underwrite Passive investors provide capital Private offerings, limited partnerships, joint ventures Collateral assignments

Collateral Assignment Lending Our note is collateral for private lender Similar to private lending on real estate In event of default, lender steps into our shoes 9% mailbox money competitive for recovering landlords and stock market refugees

Where to Buy Notes? Build relationships of trust Vet sellers (Pacer) Exchanges show only a fraction of inventory Demonstrate your reliability

Resources: BOOKS: Intoxicating Assets by Sándor Lau (coming never) Paper Profits by Joshua N. Andrews Performance Anxiety by Gordon Moss Turning Distress into Success by Fuquan Bilal The Art of Investing in Distressed Second Mortgages by Sherman Arnowitz Memorize the Fair Debt Collection Practices Act YouTube.com/SandorLau

Do Well by Doing Good Compassion is good business 1 completed foreclosure 200 notes My emotional equity

The Future Appreciation slowing down 10 years since the last recession Current housing market not driven by free-flowing credit Good bad notes hard to find: I’m still buying, especially OR, WA, CA Great deals any market (since 1754 BC)

Sándor Lau, Chief Inspiration Officer sandor@notedfinancial.com Email or go to website for copy of slides, videos www.NotedFinancial.com