Real Estate Notes Investing with Jim Griffin

On This Episode of Peak Market Watch...

Real Estate Notes Investing with Jim Griffin

Jim Griffin, Managing Director of Glastonbury Thorn, and Anton Mattli will discuss benefits behind investing in real estate notes!

 

Episode Highlights:

  • Learn the benefits and challenges of investing in notes

  • Get insight into the process of selecting & buying notes

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Show Host

Guest Speaker

Connect with Jim Griffin

Glastonbury Thorn

  • Website: https://gthorn.com/

VIDEO TRANSCRIPTION

 

00:00

hear you yeah super so uh back over to

00:02

you anton yes uh so uh uh

00:06

why don’t you uh give us a brief

00:08

background about you as well as uh

00:10

glastonbury thorne

00:12

okay

00:13

all right yes so um yes i’m jim griffin

00:16

with glastonbury thorne and glastonbury

00:19

thorn offers

00:20

concierge

00:22

services to investors who are interested

00:25

in investing in

00:27

notes

00:29

that is to say

00:30

mortgages and so

00:32

and

00:34

that is

00:35

for investors who

00:36

would like to hand pick i would like to

00:38

have this particular note or that

00:40

particular note in my portfolio so uh

00:44

that’s what we help with

00:46

okay very good

00:48

uh now

00:49

our typical listeners there are uh

00:53

commercial real estate investors whether

00:55

they are investing in multi-family or

00:58

other type of commercial real estate as

01:00

direct investors or then also passive

01:03

investors very often in

01:05

in syndications

01:07

so they may wonder why do we talk about

01:10

node investing right so what what does

01:13

it have anything to do that would add

01:15

value

01:16

to me as a as a multi-family or a

01:20

commercial real estate investor now i

01:22

think what a lot of people do not

01:26

fully understand is that

01:28

monitoring and knowing about

01:32

the underlying debt and underlying their

01:34

portfolio and how they perform

01:37

and how they evolve is actually a very

01:39

good

01:40

uh

01:41

signal we can call it the canary in the

01:44

gold mine or any other term you want to

01:46

use and we certainly have seen that in

01:49

2007-2008 when

01:52

anyone who was involved on the debt side

01:54

already saw clear signals there whereas

01:58

the investors were just buying

02:00

properties in investing in properties

02:02

never really caught off guard right so

02:05

that’s why i think

02:07

talking to an individual like jim

02:10

is is really important to get to get a

02:12

feel for where the market has been and

02:15

for how it’s evolving and also what what

02:18

you think it’s it’s going to look like

02:20

down the road and what potentially your

02:23

strategies

02:25

could be

02:27

so jim can you give us a little bit of a

02:30

of a picture of how obviously we went

02:33

through kobe 19 since early 2020 now it

02:38

appears that we are now getting back to

02:42

hopefully as normal as possible as

02:44

quickly as possible

02:46

uh but how how has that been working

02:50

with you on the on the note

02:53

business side

02:55

okay so um let’s break that down into

02:57

two sub topics that in some sense you’ve

03:01

talked about

03:02

the first just briefly uh sort of from a

03:05

tactical standpoint when you

03:08

set up that question you were talking

03:10

about the fact that many of your

03:12

listeners

03:13

invest for example in multi-family and

03:16

commercial and and how would

03:18

about notes being relevant for that so

03:20

with and so on so just very quickly

03:24

uh it’s interesting to think about you

03:26

know as you invest in notes

03:28

you can create

03:30

basically a virtual multi-family can’t

03:32

you

03:33

so uh whereas that multi-family is all

03:37

uh by definition

03:39

all concentrated perhaps in one or two

03:42

city blocks

03:44

uh so it has all that geographic risk or

03:47

you know if there’s a fire it’s going to

03:48

affect probably the whole thing if

03:51

there’s a change in crime rates it’s

03:53

going to affect the whole thing if

03:54

there’s anything in that

03:57

specific local environment that is

03:58

causing more vacancy it’s going to

04:01

affect the whole thing

04:02

whereas buying a portfolio virtual

04:06

multifamily of maybe 20 notes or 40

04:10

notes they can be spread across multiple

04:12

geographies and you can imagine already

04:15

without am i saying anything more what

04:18

the advantage would be of that

04:20

we could talk more about that but let’s

04:22

get now to the the question that you

04:24

raised is uh which i think is a very uh

04:27

perceptive that in the past

04:30

those who invested in notes

04:32

got

04:35

sort of

04:37

preliminary insights about what was

04:39

coming

04:40

and indeed uh

04:42

you know we do have now uh at this

04:45

moment sort of mixed signals

04:48

so what everybody is talking about

04:51

is the good stuff right yeah that’s the

04:54

cocktail party uh talk

04:56

the

04:57

market is on fire

05:00

boy when you put something on the

05:01

marketplace you get multiple offers and

05:03

they’re all over asking price it’s

05:06

amazing

05:08

and this is great

05:11

so uh indeed it’s true i mean when when

05:14

we talk about

05:16

year on year uh median

05:19

price

05:20

for existing homes

05:22

uh back in june

05:25

uh when this kind of started

05:28

and you you ask yourself you know why

05:30

where were prices starting to

05:32

go up in june because of covid doesn’t

05:36

make sense of course we know it’s

05:39

because all this money started to be

05:41

injected into the into the economy but

05:44

anyway

05:45

uh

05:45

though that median price

05:48

notched up pretty significantly in june

05:50

by about 3.2 percent year on year june

05:55

2020 versus june 2019

05:59

by july it was up 9

06:02

by october it was up 15.5 percent and

06:06

the most recent month for which i have

06:08

data which is february it hit a new

06:10

benchmark of 15.5 percent 15.8 percent

06:14

so in other words in february of 2021

06:18

the average

06:20

change in median existing homes

06:23

was it was 15.8 percent greater than the

06:26

year before so that’s amazing right

06:29

and uh you know you’ve you can see this

06:31

whole shift in the market up the

06:34

brackets you know what what were the

06:36

traditional brackets 71 percent of the

06:39

market was

06:40

100 000 to

06:42

500 000 and you know you can subdivide

06:45

that and so forth but all those brackets

06:47

are shifting

06:48

so the

06:50

brackets that were you know like 100 to

06:52

250 000

06:54

that that’s down 10.7

06:57

and the higher the bracket is the more

06:59

it’s increasing so all that’s good right

07:02

and that’s all the cocktail party stuff

07:04

so now

07:07

behind that

07:08

we take a look at

07:10

you know what i see

07:12

on the notes side

07:15

we can see

07:16

that a lot of smart money doesn’t

07:19

apparently share this optimistic view

07:23

and one of the ways uh that we can see

07:27

that

07:28

is uh taking a look at the mortgage

07:31

bankers association

07:33

mortgage availability index

07:36

so this is an index that is tracked year

07:40

on year

07:42

and we can see that uh

07:45

right now it’s about at the index is at

07:48

about a 125.4

07:50

it’s trending up a little bit

07:53

but it is down

07:54

about 35

07:58

versus uh december of 2019 in other

08:02

words for every 100 people who could

08:07

have gotten

08:08

a conventional mortgage in december of

08:10

2019

08:12

35 of those same people with the same

08:16

credit scores and the same profiles

08:18

cannot get a mortgage today

08:22

that is very significant and at the same

08:26

time

08:27

those people who are getting lose do you

08:30

want to guess what the average down

08:32

payment is today

08:34

so we’re talking about all these offers

08:36

over asking price right who’s paying

08:39

that extra over asking price

08:42

well

08:43

gold comes with equity right well yeah i

08:46

mean um

08:47

it it it comes with cash

08:50

so somebody doesn’t trust that

08:53

optimistic

08:54

price

08:55

so the average down payment right now

08:59

according to ellie mae

09:01

is 19

09:05

on residential

09:07

so you add it together and you can see

09:09

that there’s a lot of smart money on the

09:11

sidelines that doesn’t share

09:14

this wildly optimistic view that we’re

09:16

hearing at cocktails

09:20

yeah they’re very interesting

09:24

i think what also probably plays into it

09:27

and you can tell me if i’m wrong is is

09:30

uh the smart money obviously wants to

09:33

see that

09:34

bad new cushion on one hand but at the

09:37

same time they also see that

09:39

affordability

09:41

issue that that comes into play with

09:43

with a lot of borrowers right so

09:46

the ones that

09:47

can afford to put in more cash

09:50

they can bring the debt down so that

09:53

it’s still meeting the the debt to

09:56

income ratio

09:58

 

but it’s essentially limited to the ones

10:00

that have the cash all the others are

10:02

pushed out of the marketplace right

10:06

yes yes these things these factors are

10:08

all coming together and you know another

10:10

signal that that we can see

10:13

is uh flipping profits you know many of

10:15

us you know uh kind of like a little bit

10:19

on the sidelines right now with flipping

10:21

but uh you know if you do look at the

10:24

flipping profits the overall

10:26

gross profits

10:28

are

10:29

floating are trending up but the roi

10:33

percent has never been so low

10:36

as it was maybe

10:38

2011 or 12 was the last time we saw the

10:41

percent roi on flipping down this slow

10:44

and again the reason is obvious that

10:46

pressure to buy those properties trying

10:49

to find those good buys is becoming more

10:51

difficult

10:53

sure absolutely right so

10:57

you better hope that these values go up

10:59

otherwise you you you’re left with uh

11:03

uh with with your harmony loan that you

11:05

are that still has has to accruing

11:08

interest right and

11:10

it doesn’t take much we

11:12

we have a couple of clients who uh on

11:15

the multi-family side are also active on

11:18

the flipping side

11:20

uh and there was a brief period

11:22

particularly in california right in the

11:25

la and bay area

11:27

in 2019 where there was a little bit of

11:29

a cooldown and a lot of them got

11:32

caught off guard just for a few months

11:35

and

11:36

it it can whatever looked like a great

11:39

profit can turn into a disaster very

11:42

quickly there right yes it’s not funny

11:46

yeah yeah

11:48

so so what you are uh talking about uh

11:52

uh white when it comes to individuals or

11:56

lenders asking for more for more cash

12:00

down payments

12:02

and then also that aspect of

12:04

affordability and all that

12:06

it’s only short term at least that has

12:10

uh has created a major boom

12:13

uh

12:14

also for multifamily right whoever now

12:17

cannot afford to to buy a single family

12:20

home

12:21

either because it’s not available

12:22

because a lot of the prospective sellers

12:24

on odeem selling the prop views they

12:26

hope that they can even sell it for more

12:28

but apart from from the supply

12:31

constraint there there is only

12:33

affordability issue and that definitely

12:36

has helped now also to fill some of the

12:38

multifamily properties that have been

12:40

struggling

12:42

and as we know right over the last 12

12:45

months of all the commercial real estate

12:47

multifamily has been the darling

12:49

and a lot of

12:51

owners have been able to fill these

12:52

properties very quickly because a lot of

12:56

the new tenants

12:57

were all prospective single-family

13:00

buyers and they cannot afford it anymore

13:03

but i think the message there still is

13:05

right whereas on the single family side

13:08

the lenders obviously are pulling back

13:11

right they want to see more equity and

13:13

they’re they are not changing their

13:16

qualifications for the for the buyers

13:19

with the debt to income ratio

13:21

whereas on the multi-family side we

13:24

certainly have seen a lot of property

13:26

owners

13:27

adjusting their

13:29

criteria for their tenants for to

13:31

qualify

13:33

downwards so that they actually can pay

13:35

the rents or the higher rents right so

13:39

the reality is yes all these new tenants

13:42

they they come in they need a place very

13:45

often you can raise rents because they

13:47

need a place to live

13:50

but

13:51

on the flip side very often these new

13:53

tenants they cannot really afford all

13:56

these rents so what do property owners

13:58

do they are making concessions on the

14:01

tenant qualifications right so that will

14:04

be the interesting

14:06

thing to watch going forward uh how many

14:10

of all these tents that you are now able

14:12

to get on board are actually

14:14

long-term paying tenants and how many of

14:16

those will will turn into

14:19

more problematic tenants with

14:21

delinquency issues

14:23

[Music]

14:24

yeah that’s certainly a question you

14:26

know i mean i i’ve got

14:28

i can think of several uh properties

14:30

that i’ve i’ve got

14:32

signed agreements to purchase in my

14:34

market uh that i can’t close on because

14:38

the seller

14:39

uh can’t get the

14:41

tenant out of the property which is the

14:43

condition for closing

14:44

and the tenant is not paying

14:47

and they can’t evict

14:49

now uh

14:51

that is a big hardship you know so so on

14:54

whatever scale they’re not

14:57

that many investors that can

14:59

last that long

15:02

not having rental income

15:04

having to still pay their mortgage and

15:06

not being able to evict that’s a tough

15:08

one

15:10

yeah that’s a it’s an excellent point

15:12

right

15:13

i think what uh what is also ammo’s kind

15:16

of unfair right uh in in that whole

15:19

picture

15:20

is that

15:22

obviously it’s always the

15:24

everyone sees all these these large

15:27

multifamily properties and everyone

15:29

feels including many people in gorman

15:32

though these are all these extremely

15:35

wealthy property owners they can afford

15:38

to keep these tenants in in their

15:41

properties without paying

15:43

and obviously if you are a reit and if

15:46

you are a large hedge fund

15:48

or a private equity fund

15:51

you

15:51

it’s easier for you to afford it’s still

15:53

not fair but at least you have the

15:55

ability to

15:57

to fund some of the

15:59

the shortage for a longer period of time

16:02

but what no one really recognizes is

16:05

that the majority of all these rental

16:08

properties from single family to

16:10

to small multi-family they’re all

16:13

individual owners and they do not have

16:15

that massive cash

16:17

cushion

16:18

to just carry all these

16:21

uh these tenants that by law are now

16:24

allowed to

16:25

to continue to live there without having

16:27

to pay right

16:30

so it that will definitely be very

16:32

interesting to watch how how that all

16:35

turns out

16:36

uh i think there will be some

16:38

opportunities obviously with there will

16:40

be pain

16:42

but uh

16:43

i personally see particularly in the

16:46

smaller

16:47

rental segment that there will be much

16:49

more pain points

16:51

and as a result also opportunities

16:54

for

16:55

for buyers that are

16:57

looking at that market would you agree

16:59

with that

17:00

completely agree with that

17:03

you know it’s interesting i i think i

17:05

don’t know if you know but i i i spent

17:07

quite a number of years uh

17:09

living in asia and um

17:13

you know the kanji character

17:15

for crisis

17:16

in uh

17:18

in china is actually a compound you know

17:21

like we have compound words like

17:23

fireflies composed of the word fire and

17:25

word fly and get a firefly it’s neither

17:28

a fire nor a fly

17:30

so the kanji character

17:33

for crisis is a combination of two words

17:36

danger

17:37

and opportunity

17:39

and isn’t it interesting

17:41

because we’re in the middle of a crisis

17:43

and when you’re talking about a economic

17:46

crisis there is always embedded in there

17:49

some kind of opportunity

17:52

if one is ready and i do believe that

17:54

the opportunity that you’re describing

17:56

is a very big one uh the those uh tired

18:01

landlords who have had it and they just

18:04

want out

18:06

yeah uh that they want out or have to

18:10

get out right or have to get out yeah

18:13

yeah so

18:15

of of the of the loans uh that uh the

18:19

notes that you you have been uh buying

18:22

for yourself as well as for your

18:23

investors where would you say the

18:25

performance

18:28

has has been over over the last let’s

18:31

say pre-covet doing covert and what what

18:34

do you see is going to happen

18:37

now this year and obviously you don’t

18:39

have a crystal ball into next year

18:44

well let’s start by saying that broadly

18:46

speaking we can classify notes

18:50

at any given time into two broad groups

18:52

performing and

18:54

non-performing and you know if we’re uh

18:58

prudent

19:00

uh about how we select notes

19:03

then uh you know in in the performing

19:05

category

19:07

we have every good expectation to uh

19:10

continue to collect those payments

19:14

and uh the

19:16

uh and of course we know that we have

19:18

equity exit strategies if those payments

19:21

do not come that’s not our our goal

19:24

and within the performing uh category

19:27

we’re going to have a range of yields

19:31

and of course if you uh pick a note that

19:34

is like

19:35

perfect in every way the house is

19:38

beautiful the neighborhood is perfect

19:40

there’s no crime the economy in that uh

19:44

community is going up uh the vacancy

19:47

rates are down the investment to value

 

19:49

is perfect uh the payment history is

19:51

ideal but

19:52

every criteria you can think of

19:55

of course that note its yield is going

19:58

to be at the low end of the range

20:01

and as you find notes out there that

20:03

have got these amazingly high yields

20:07

just go look and you’ll find the reason

20:09

why they have amazingly high yields and

20:12

so basically if you just hit the ball in

20:14

the middle of the fairway and

20:16

say the six seven eight

20:18

nine percent yields you can find good

20:22

solid nodes that are going to pay and

20:24

you know

20:25

that are secured by nice assets and

20:28

they’re checking the boxes

20:30

but now

20:31

your question what does the what what do

20:34

we see coming

20:35

well

20:37

one thing i think we can say fairly sure

20:40

is

20:40

get brace ourselves for a pretty big

20:43

tranche of non-performing notes

20:46

and those non-performing notes for those

20:49

who have an appetite for that are a

20:51

different thing

20:52

so there the play may may not be that

20:55

you’re expecting to get the payments i

20:57

mean after all the note is a

21:01

a percentage of the value of the

21:03

property and then you’re probably buying

21:05

the non-performing note at a very deep

21:08

discount to the unpaid principal balance

21:10

so it’s a discount on a discount

21:12

just try to get those kinds of discounts

21:15

doing direct mail advertising saying i

21:16

want to buy your house so that’s another

21:19

thing

21:21

yeah

21:23

obviously

21:24

it takes an effort to find those right

21:27

uh

21:30

direct mail and that way it’s for

21:32

wholesaling whether in for multi-family

21:36

technically it’s possible but it takes a

21:38

lot of effort and time and money right

21:42

and

21:43

you may be able to find some great deals

21:45

there

21:46

uh but i think uh what’s only if if

21:50

someone uses a service like you you do

21:52

the footwork for

21:54

uh for that so someone

21:56

can focus on their core investments

21:58

rather than

21:59

now attempting to to find that needle in

22:02

the haystack that is is now the the

22:05

right loan right

22:08

so

22:10

why don’t you give us a little bit of a

22:12

of a picture what uh

22:14

what you’re doing and what type of loans

22:16

you’re typically

22:18

uh buying and how how

22:21

uh let’s say our listeners obviously

22:23

they are heavily involved in

22:25

multi-family or commercial real estate

22:27

directly but

22:29

as a diversification tool uh if someone

22:32

has an interest to invest in

22:34

in in a note maybe you can give a little

22:37

bit of

22:38

a picture there what what would be

22:40

what they could expect

22:43

yeah diversification is really a

22:45

constant theme of people that i talk to

22:47

that uh you know have a lot of

22:49

experience with syndication and you know

22:51

doing things at certain scale

22:53

but they are always fascinated by notes

22:56

and they always say to me i’ve always

22:57

wanted to kind of get and learn a little

23:00

bit more about it and buy a couple so

23:02

that i kind of understand what it what

23:04

it’s like

23:06

and um

23:07

so the first thing that i can say is

23:09

that uh i do have um

23:11

a pretty extensive ebook

23:14

that would be available if somebody were

23:16

to you know just send me a message at

23:18

you know info

23:20

at

23:22

gthorn.com g of course standing for

23:24

glastonbury and then thorne t-h-o-r-n-g

23:28

thorn.com i can send you that e-book um

23:31

or a link to download that e-book which

23:33

has like 31 criteria for selecting notes

23:37

and then it follows with says step by

23:39

step what do you do in order to buy a

23:42

note

23:43

and and after reading that you pretty

23:46

much see okay there’s a lot of factors

23:48

to consider and um

23:51

it’s a fair amount of work you know to

23:53

kind of filter and say not this one but

23:55

that one so we do that

23:58

and uh you know it’s just like buying a

24:00

piece of property

24:03

investment property uh

24:05

you know there’s a realtor involved and

24:08

and you know nobody pays the realtor

24:11

nobody no buyer pays the realtor

24:13

people always ask me you know so what do

24:15

you charge because

24:17

there’s no charge i mean you there’s

24:19

there’s a price and don’t worry i won’t

24:21

starve

24:22

but it’s you know all you see is the

24:23

cost of a note and what’s the yield then

24:25

you decide if you want it or not it’s

24:27

that simple

24:30

yeah that’s that’s very good so do you

24:33

focus on certain uh states obviously

24:37

you’re based in tucson right in arizona

24:40

uh do you focus uh on on i assume

24:43

arizona is a market that you are

24:45

focusing on but do you

24:47

do you do it across the country or do

24:49

you have some markets that you like or

24:51

dislike

24:53

that is a great question

24:55

so uh the the initial answer is i would

24:58

buy a note in any state okay

25:02

now there are certain states that i

25:05

love less than others

25:07

uh a new york uh would be a state that i

25:10

love less a new jersey would be a state

25:13

that i love less because of the

25:15

environment there the political and

25:17

legal environment

25:19

there right now

25:21

um but i would buy a great note in any

25:24

state

25:25

but

25:26

what i’ve found is that when i’m done

25:28

filtering through and all my criteria

25:31

and trying to figure out okay what’s the

25:33

best yield what’s the best value and

25:36

then i go look at this state

25:38

in general

25:39

my notes turn out to be mostly in the

25:42

midwest and southern states

25:44

that’s where i’m finding the best value

25:46

it’s not because i’m filtering for that

25:48

it just turns out that way

25:50

yeah very rare that i find a great note

25:53

on on the pacific coast

25:56

so uh it just turns out that way

25:59

okay so what what do you think is the

26:01

reason why the pacific coast

26:04

uh is generally not that that’s great

26:07

because the

26:10

everything is already so

26:13

highly valued

26:15

and

26:17

the margins that you have the safety

26:19

margins are are lower or what is the

26:21

reason for that

26:23

yeah um so i mean there are a number of

26:26

criteria that

26:28

you know one can look at some are more

26:31

important than others

26:33

so um

26:34

i’m very favorable to

26:37

as low an investment to value as i can

26:40

get

26:41

and

26:42

so that’s one of the things that i look

26:44

at strongly and

26:47

so

26:48

you know those

26:50

those

26:51

nice investment values tend to be

26:55

more in the states that you know i just

26:57

mentioned in the midwest and in the

26:59

south yeah there’s less volatility i

27:02

like i don’t like volatility when i’m

27:04

investing all those kinds of factors

27:08

yeah put it all together yeah

27:10

okay very good

27:12

uh

27:13

great uh i think uh jim you you provide

27:16

a lot of value here obviously it’s a

27:18

little bit of a different spin on

27:21

what we are typically talking about but

27:24

as we discussed

27:26

whatever is happening

27:28

on the on the note investment side

27:32

including single family right uh it it

27:35

has a direct impact on

27:37

on the multifamily side

27:40

and it’s it’s only gives some signals of

27:43

how

27:44

uh how lenders look like uh look at it

27:47

on the on the single family side and

27:50

maybe some multi-family investors should

27:52

also take note of how how they viewed

27:56

the state of the market right now

27:59

when they when they invest in

28:01

multi-family

28:03

refinance multi-family or

28:05

also just make decisions when it comes

28:08

to tenant qualifications should you

28:10

really be that aggressive

28:12

or should you take

28:14

kind of a lesson out of the book from

28:16

lenders and say well maybe we just need

28:18

to stick to our

28:19

uh our past criteria rather than losing

28:22

them just to fill the property

28:26

yeah yeah

28:27

yeah

28:28

so thanks again uh jim was was great

28:31

having you on uh so you you mentioned

28:34

your uh

28:36

uh your email so maybe you just can uh

28:39

to to wrap it up just to provide again

28:42

your contact details sure yes uh my

28:46

email uh you can reach me at info

28:49

at

28:50

g

28:51

g thorn

28:53

dot com

28:54

so

28:55

um

28:56

yeah from there i can provide you with

28:57

links to multiple other things all right

29:01

very good thanks again tim for for uh

29:04

joining us today thank you anton

29:08

bye-bye