Real Estate Notes Investing with Jim Griffin

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