Distressed Mortgage Investing Explained: Buying Notes, REOs & Foreclosure Deals

Chad Urbshott (00:00)
COVID

made a big ⁓ change in how this industry works now. There’s not nearly as many ⁓ delinquent or defaulted loans anymore, ⁓ namely because the price of people’s properties went up significantly and they therefore had equity in the properties. Whereas prior to that, especially the graphically financial crisis, a lot of people were underwater, meaning the mortgage was higher than the value of the property. COVID hit, everything went up like 30%, 40%, 50%, depending on where you are in the US.

Dylan Silver (02:01)
Hey folks, welcome back to the show. Today’s guest, Chad Urbshott is a Canadian real estate investor who got started buying single family homes and then using them to create pathways to homeownership through rent to programs for tenants. Today, he has an itch in the distressed mortgage space, specifically purchasing foreclosure properties prior to the auction at large discounts. Welcome to the show, Chad.

Chad Urbshott (02:21)
Hey Dylan, thanks for having me on.

Dylan Silver (02:22)
Absolutely, absolutely. Now, when we talk about the distressed mortgage space, let’s define this. You for folks who may be familiar with the idea of default and the idea of foreclosure, what is distressed mortgage?

Chad Urbshott (02:36)
So, a distressed mortgage is typically when a borrower on whether it’s their own property or if they have an investment property, it’s when they have stopped making more than, if they’re four months behind or more on their payments. So then it becomes in a position of distress. And at that time, a lender either decides to continue on.

⁓ with the borrower and try to get them to pay again or oftentimes they just don’t want to deal with it and they sell the loan so then it gets sold as a it’s called an NPL or a non-performing loan.

Dylan Silver (03:10)
Now, when we talk about getting into the distressed mortgage space, I think a lot of people are typically looking at this like right before foreclosure happening and acquiring these properties just before the foreclosure auction, like when it’s set for the following week or the following month. When you were getting into the space, what was your typical approach to acquiring these properties? Was there already a foreclosure date set or would this be sometimes before that?

Chad Urbshott (03:37)
sorry, it’s broken up a bit there, but I think you asked him when, ⁓ like at what point do you acquire the property? So I started out buying directly at the courthouse steps, but you know, they call it courthouse steps, but everything’s online nowadays. So was basically sitting behind a computer, well down in Florida where started, was basically sitting behind a computer and just bidding on the properties. now we would do some homework at a time. Obviously you’re not just going to buy these things.

sight unseen, we’d send boots on the ground out to go and try to investigate as much as possible, do a walk around, you know, sometimes there might be a door left open if it was vacant, go and have a view of the property just so you know what you’re up against. And then, yeah, you’d rather put a bid in if it didn’t, you if it, you,

set your bid ahead of time or you know what your maximum allowable offer would be and just hold to it and then if someone now busy and you just let it go and if you did win the bid then you take over the property um eventually after you’ve settled with the uh settled with the sheriff’s office but uh yeah i was never did any door knocking before that you know for just stressed homeowners it was just buying strictly directly from the the auctions

Dylan Silver (04:46)
Now when we talk specifically about acquisitions prior to the auction, ⁓ what was your approach to acquiring prior to the auction?

Chad Urbshott (05:43)
Um, so when I started out, was, I started buying distressed properties. was bidding on stuff that was already listed on the MLS that were REOs or real estate owned properties that were taken back by the banks that didn’t get purchased through the auction, uh, by third party bidders. Um, and that was, um, that was back in 2012, 13 ish. Um, back in those days, you could find some pretty good deals, but

That was also when all of these big conglomerates like all the big rental companies that you have nowadays that you know, the own tens of thousands, they were coming in and buying these, ⁓ oftentimes set on seeing right off the MLS and paying, you know, top dollar. And it just wasn’t, ⁓ it was just, you know, the competition was just beaten, beat me out and,

So that’s when I started looking into going to foreclosures and that eventually led into buying the distress mortgages.

Dylan Silver (06:38)
Now when we talk specifically about, you know, going in the foreclosure route, one of the things that comes to mind is, in many cases people have a fair degree of suspended belief, know, or suspended disbelief, where they’re not really able to wrap their head around the idea of losing their home. And so these conversations can be tricky, especially if you’re going direct to seller. When you were getting started, was your experience mostly, you know, with, you know, direct to seller portion or?

Was there some level of you know, brokering happening where someone might have the property under contract and you would be reaching out to them through a, you know, almost arm’s length transaction.

Chad Urbshott (07:15)
⁓ No, it was never any communication with the homeowner or the borrower in this case. It’s always been just buying the mortgage directly. So we never reached out to anybody at a time. And in fact, when you are given a bunch of mortgages to bid on, it’s actually prohibited to reach out to the borrower. ⁓ There’s laws and other policies around that. So yeah, there’s never ever been any borrower outreach.

Dylan Silver (07:41)
It’s pretty rough. Yeah, these were always situations where it was real estate owned properties, REOs.

Chad Urbshott (07:47)
yeah. So REO, what that, what that terminology means is, ⁓ it’s a distressed mortgage that has gone to a closure sale. And if no one buys it at the, at the sale, it reverts back to the lender or the bank or whoever that held the mortgage at that point, it becomes an REO. then

They have the wherewithal to do whatever they want with it. Typically they would just listed on the MLS or back in the day when there was thousands and thousands of them, there was specialty agents that just focused on REO properties. ⁓ And like I said, that’s kind of how I got into the business to begin with before buying rentals. the idea was to buy them at a pretty cheap discount, fix them up and either rent them or fix and flip them. Yeah. ⁓

Yeah, they came to, know, when you buy them on the MLS, they are already in REO. And then that’s when I discovered you could, well, I didn’t discover, but I knew you could buy them from the auctions, but that’s when I started focusing on auctions and then doing that for a year or two and the competition moved in and pushed me out of that. that’s when I was like, someone said to me one day, well, actually one of the realtors I was working with, to, like, you know, bidding on these on the MLS, said, well,

Why don’t you start reaching out to the banks before the auction and see if you can acquire the mortgage before it gets to that point. And it was a foreign concept to me. didn’t even know of such a thing. I didn’t realize you could even buy mortgages from banks, especially being from Canada. There’s not really that much of a market for it here, but I discovered in the U.S. it’s a huge market for that. And yeah, I went down the rabbit hole. That was around 2015. Did a bunch of research and

Dylan Silver (09:12)
Yeah.

Chad Urbshott (09:32)
probably spent about six months on ⁓ learning how you could do that and then started networking and then had partnered up with another person that was already doing it. But then by 2017 branched off and basically just went full in on buying distress mortgages at that point.

Dylan Silver (09:50)
Now if someone was looking to get started in the distressed mortgage space and they’re trying to make these connections with the banks, how do those conversations look? Do you really have to know someone there prior to hopping on the phone with them or can you do some level of cold outreach?

Chad Urbshott (10:40)
Well, truth be told, it’s not, there are banks that do sell them, like they’ll sell one offs or they’ll sell a portfolio that, you know, they’ve been sitting on their books for some time and they’re trying to get rid of it. ⁓ That’s typically not the route that you acquire these. Generally what happens and what’s happened since the great financial crisis was back in those days, ⁓ tons and tons of these mortgages were put into mortgage backed securities.

⁓ and I’m sure you may have heard of, many of your listeners have probably watched the movie, the big short. was the entire premise of the movie was how the, you know, the run-up to the great financial crisis was because of all of these loans that were getting packaged into, into these securities that were packaged into with higher grade securities that shouldn’t have been in the same, ⁓ security, ⁓

like it’s called an MBS, it shouldn’t have been in the same tranches as those. When, and a lot of these loans were also teaser loans where, you know, the interest rate was, you know, four or 5 % below what the going rate was at the time. And then after a year, it would trigger back up to the, that’s just one example. But what happened was a lot of these loans started defaulting and

inside of the mortgage-backed security, they had to pull these loans out that were defaulted because the security, you know, it’s supposed to be an ongoing yield, you know, whatever it three, four, five, six percent, the yield coming from the payments from the borrowers of these mortgages. But when tons of these sort of get defaulting, they started pulling these out of the mortgage-backed securities. And a lot of these loans were backed by Fannie Mae and Freddie Mac.

when they started taking these back over, you know, they were getting overwhelmed with them. So they would put them out for bid to some of the same players that were actually packaging these mortgages up. like some of the Goldman Sachs would bid on these, like in the billions of dollars worth, buy them and they would, you know, they’d have thousands of these and tons of time, like tons of these mortgages, they didn’t fit in, you know, in their buybacks, buy box.

or didn’t fit within their realm of what they wanted to hang on to. So then they would peel off those. Those would be purchased up by another investment fund that would be smaller than some of the golden sacks and that investment fund. So these things used to get passed around for years and years getting bought and sold between tons of funds until it got, you know, then they would filter down to the smaller players like me that could bid from these funds where they would send out of a tape. It’s called a tape, a mortgage tape.

that may have, you know, 30, 100, 200 sometimes on them. And then we could just kind of cherry pick the ones that fit within our realm of what we wanted to deal with, whether, you know, it by state by state or, you know, the loan balance was a certain amount or if it was defaulted for a number of years, you know, there’s a bunch of criteria that we’d use when we were buying these. So to answer, to make your long answer to your question there, yes, not,

Typically, would say only maybe 5 or 10 % of the deals actually get done directly from the banks. typically, it’s a fairly long process before the loans. Now that’s how it used to be. It’s a little bit quicker now. As a matter of fact, I just had some sent to me this week directly from a bank. was through a broker, it was, or not a bank, but it was a lender that they had to get rid of them because they’ve…

They’ve actually got them in a mortgage-backed security, but they have to peel out the ones and buy them back from the security. So typically when they sell them into a mortgage-backed security, there’s a buyback provision stating that if it goes into a state of delinquency, that originator has to buy it back. And then when the originator takes it back, they don’t want to deal with the default borrower. So then they just seal it off. So, but yeah, there’s a number of channels, but there’s a handful of brokers in this industry that

a lot of volume most through. it’s having a good relationships with brokers that deal with these. That’s typically where most of the deals come from.

Dylan Silver (15:30)
Now, when you’re dealing with these brokers, are they presenting tens or a hundred plus at a time? can you do some level of cherry picking? Is that even a thing? Or is it really, you’re buying these in bulk and you’re assessing all of them collectively?

Chad Urbshott (15:48)
Yeah, so it depends on the broker. There’s some brokers that are basically, they just deal on an institutional level, like the players that have tens of millions or even hundreds of millions of dollars to buy at any time. So those ones, yeah, you’re typically taking down the entire portfolio. ⁓ There’s some smaller brokers that deal like…

I wouldn’t say the scraps, you know, like I said, you know, when I’m being my rant about how these things get, you know, passed on over the years, there’s some smaller brokers that have like handfuls of loans and they do allow some cherry picking. It’s not that prevalent nowadays. It used to be a lot easier.

Well, up until COVID ⁓ COVID

made a big ⁓ change in how this industry works now. There’s not nearly as many ⁓ delinquent or defaulted loans anymore, ⁓ namely because the price of people’s properties went up significantly and they therefore had equity in the properties. Whereas prior to that, especially the graphically financial crisis, a lot of people were underwater, meaning the mortgage was higher than the value of the property. COVID hit, everything went up like 30%, 40%, 50%, depending on where you are in the US.

And suddenly people have equity in the property. So the people that were once under water and well behind on the mortgage were now like, well, wait a minute, I’ve got some equity. I’ve got at stake here and I don’t want to lose it. So a lot more of them were stepping, these borrowers were stepping up to a plate to make a deal with their current mortgage holder. So therefore there’s not, not nearly as much inventories are used to be. So yeah, the cherry picking days are,

not over, it’s not nearly as easy as it once was. If you’ve got deep pockets, like if you’re spending five to 10 million at a time, it’s a lot easier getting the deals nowadays. Whereas, yeah, if you’re just picking off one or two or three or four or even 10 now, it’s quite a bit tougher getting a good deal on them. mean, the deals are still there. They’re just not nearly as profitable as what they used to be.

Dylan Silver (17:52)
Yeah, I get that. you know, the real estate landscape has certainly changed quite a bit, ⁓ you know, even over just the last couple of years. You know, and so if we take a look at how this looks, you know, at economies of scale, I can imagine that it’s drastically different, especially when you’re talking about what seems to be a, ⁓ you know, you have to be somewhat ⁓ risk tolerant in order to be investing in distressed mortgages, I would imagine.

Now we are coming up on time here though, Chad. Any new projects that you’re working on and then as well, what’s the best way for folks to reach out to you or your team?

Chad Urbshott (18:30)
When it comes to new projects, so there’s been a slew of, they call them reverse mortgages, but the term for it is H-E-C-E-M, which is home equity conversion mortgage, which is a reverse mortgage. There seems to be a plethora of them coming out the last few years and what those are, they’re typically, I don’t want to get into all the details about a reverse mortgage is, because I’m sure most relisters know what that is, but they’re typically,

the borrower, they’re generally elderly people that, you know, into the retirement years that, you know, try to tap the equity in their house. ⁓ So the general rule is, now these things are insured by ⁓ HUD, ⁓ came around the HUD stands for this moment, but they’re insured. So anybody that does the loan on them, get collected mortgage insurance. ⁓ If they don’t collect the principal back.

So once these are taken over, they’re then sold. And it’s typically when the borrower passes away and they’re not obviously, that’s one of the stipulations in the agreements that once the borrower passes away, they’re either foreclosed on or you you got to pay off the loan that was taken out against the house. So there’s, I’ve seen thousands and thousands of these in the last year or two. So there’s a lot more folks on those.

The problem, I wouldn’t say it’s a problem, but you’re not making a deal with the borrower, obviously, if they’re to see, so you can’t get them reinstated and paying again. So it’s almost like buying an REO or a foreclosure property ahead of time, I guess you want to say. ⁓ But you do get to see the interior, you can’t physically go into the property, but they’ll give you interior pictures. Whereas, you know, if you’re buying a foreclosure, you don’t get to see the interior. So it’s kind of nice in that sense.

So it’s almost like buying an REO off of the MLS, but you get a much bigger discount. So that’s a bit more of focus nowadays. And then I’ll add to that, ⁓ there’s also a plethora of DSCR loans, loans that have been put out to ⁓ people with rental portfolios that…

aren’t, they’re not putting their credit on the line is basically the lenders looking to make sure that there’s enough cash flow to cover the mortgage payments. There’s a slew of those lately, especially if interest rates rising. And then fix and flip loans with the market cooling. A lot of these borrowers, know, they’re investment, you know, they’re professional investors, but if the market cooling, you know, 10 or 20 % drop in home prices.

and of a sudden they can’t sell their property what they’ve got into it. So the hard money lenders, they don’t want to deal with it either. So there’s a whole slew of those coming out nowadays too. So the focus has kind of shifted. It’s not so much on owner occupied anymore. It’s more on the latter that I’ve spoken about.

Dylan Silver (21:23)
Chad, thank you so much for joining us today. Thank you for your time today.

Chad Urbshott (21:26)
Great thing it’s not doing. Appreciate you taking me on.