Our topic is something that I’ve probably covered in our 480 plus episodes, but I thought I would share and bring it back up and do a throwback episode. I’ve been on the phone talking with a lot of people getting into the note business. They’re coming from buy and holding, landlords, fix and flipping and wholesalers. On this episode, I want to talk about the seven biggest mistakes I see fix and flippers getting into as far as trouble when they get into the note business because it’s a whole different ball game. A lot of fix and flippers want to evaluate deals the same way as they’ve done before. Let’s face it, note investing is different than fix and flipping. It’s different than wholesale. It’s different than being a landlord for a variety of reasons. I thought I would share this because I’ve answered these same questions or had these same discussions probably ten to twenty times.
What it tells me is a lot of people are like, “I’ve had a hard time finding deals. I’m excited. I see this note business. I want to jump into it.” I’ve answered some variation of this question from fix and flippers, wholesalers, realtors or investing or trying to invest, do some things like that and people with general knowledge. They’ve watched Flip This House or attended a couple of other things out there. It’s not necessarily a note convention or taking a class from somebody. They’ve taken their weekend thing and they think they know it all because traditional investing teaches you a couple of different things. You’re basing your whole exit strategy on the fact that you actually own the property. Either buying the property at a foreclosure auction, picking up on a subject to deal or having a deed to you in a variety of way or just buying it and fix and flipping it. That’s the big first mistake.
One of the first big mistakes that I see people making is the whole overbidding. They’re overpaying for assets. They’re jacking the price up because of one simple formula gone wrong. We had our friend Chris Naugle talking about if he’s in a fix and flip situation, he’s taking the ARV, the After-Repair Value times 70% minus expenses and holding costs. The after-repair value does not exist for the most part as a note investor, especially if you’re buying occupied assets. You’re overpaying, you’re not going to go off of after-repair value, you’re going off of as-is value. There’s a big difference between ARV and as-is. The difference, as-is is exactly how the property is in its current condition. Not adding granite countertops, not adding an extra bedroom or bath, it’s what is it worth exactly as it is.
This is an unfortunate thing because how are fix and flippers making money? They are adding value add to the properties. Price lifting as I often like to say. I’ll buy a house that needs to be updated or go and drop money to update it. Add an extra bedroom, baths, extra square footage or tweak some things. I may have now better comps at 4/2 versus 3/1 or 3/2 versus a 3/1, 3/2 versus a 2/1 or 2/2. That’s one of the biggest mistakes that people make. Why is that? Especially if it’s occupied, you’re probably not going to get the property back immediately. It’s going to take some time. That’s another big thing that a lot of fix and flippers get wrong. Fix and flipping should not be your primary astray being in the note space.
If it’s a vacant property, it’s okay but you still have to make your bid off of the as-is value, not the ARV value. If it’s vacant maybe you can get a deed in lieu but if it’s in a state that has a longer foreclosure process and you can’t track down the borrower, you have to look at the foreclosure time frame. This brings me into my second thing. Foreclosure timeframe is you’re all going to be getting out in 90 days. No, it’s probably not going to happen. That’s also why you have to deduct your costs down on the number one thing and overbidding. Not going off of ARV times 70 months costs. That’s overbidding most of the time, especially in a longer foreclosure state.