The Hidden Risks and Rewards of Mortgage Note Investing with Jamie Bateman

Jamie Bateman (00:00)
That is one thing that’s actually really interesting about mortgage note investing is every note has a story ⁓ and you never really know how it’s going to go. So ⁓ you can sit there and pencil out with your projections, your fancy calculator, whatever it is, and project your yield or your ROI. And ⁓ it’s going to be wrong. No matter what, it’s going to be wrong. It might be better. It might turn out better than you thought.

Michelle Tack (00:16)
Hi, I’m Michelle Tack. I am the leader of Real Estate Pros podcast today and I’d love to introduce Jamie Bateman. Hey Jamie, just say hi to the folks.

Jamie Bateman (02:10)
Hello folks, how are you doing? We’re hoping to bring some value to you today.

Michelle Tack (02:14)
Absolutely. One of the things that I really believe is a strength that Jamie brings as a subject matter expert is as a buyer of mortgage notes, running a fund that does that and the amount of work and effort that’s in that area. So we’re psyched to have you here, Jamie, to go through the good, the bad and what’s really exciting about what you do. So in terms of

If no one knew about mortgage notes and how that area of the business, which a lot of people don’t, as you had rightly said in our pre-podcast interview, can you tell me a little bit about those people that are listening in a short summary of your world, what you do and what markets you serve?

Jamie Bateman (03:04)
Sure.

Yeah, absolutely. And it does get into the weeds very quickly. So I try to keep it high level for people. ⁓ But a lot of people are, as you alluded to, unfamiliar with even what a mortgage note investor does. And so as a fund manager, you know, there are three parts to running a fund. One is finding capital, raising money. The second is finding deals, which in our case is mortgage notes.

Michelle Tack (03:11)
No, not a problem. Not a problem.

Jamie Bateman (03:32)
And the third part is managing those two. With regard to being a mortgage note investor or buying mortgage notes like we do for our fund, ⁓ essentially we’re looking for, ⁓ not essentially, we are looking for previously originated mortgage notes. So existing mortgage notes, those tend to fall into two buckets. One is institutional, the other is seller finance or privately created ⁓ notes.

Mortgage notes, as most people are familiar, a mortgage comes from a lender providing a loan to someone who wants to buy a house or in some cases, an investor trying to buy a property. But that loan will be attached to the property via a lien. And so we focus on first lien mortgage notes. And so when we buy a first lien mortgage note, we do buy some seconds. We do buy land notes. We’ve bought some commercial paper as well.

for this discussion, first lien, owner occupied mortgage notes. That’s what we focus on. We step into the shoes of the bank essentially, if it was a bank that originated this loan. And it could be in default or it could be performing. So it could be performing, re-performing or non-performing. ⁓ But we step into the shoes of the bank. We are not a bank. ⁓ We’re not a lender if we’re not originating the loan.

we’re actually an investor, a mortgage note investor. And so we buy that debt. And so the way to think of it is

don’t own the property. We’re not dealing with tenants, toilets and trash, but we are dealing with the paper. And so it’s kind of a, if you did a Venn diagram with, you know, the property in one circle and then kind of like finance or in the other circle, we’re kind of in that middle. we’re, you know, is it, am I a real estate investor? Yes, I like to think so. I also do.

rental property investing. But am I in finance? Yes, I think so as well. So it’s kind of a blend between, you know, the financial world as well as the real estate world. So we step into the shoes of the bank or the lender, we buy that debt. And now that borrower is required to send us those those payments that are due, we can get into different aspects of that. ⁓ You know, why why people sell loans and that kind of thing.

Michelle Tack (06:35)
Sure. Okay.

That’s a great explanation. really appreciate that. One of the things that impressed me and you wanted to stress was, you know, obviously you are, you understand the entire milestones that have to occur from looking for that note and have the operational piece run smoothly. Can you talk about your knowledge? Cause you’ve been doing this for a while.

Jamie Bateman (07:03)
Okay.

Michelle Tack (07:07)
how you’re able to make it a successful business from a operational side of the steps that you go through.

Jamie Bateman (07:13)
sure.

Yeah, I mean, you know, I started out doing being more a little bit more passive than I am now I started doing some joint ventures with people. There are different ways to get into this space. If you’re not instantly looking to run a mortgage note fund. But some of the you know, really everything falls into one of those three buckets is finding capital finding notes and managing the notes and the capital. And so a lot of the

how we spend our time, quite honestly, is ⁓ asset management. And so when we buy defaulted notes, for example, there’s a lot to manage with regard to ⁓ running the operations of the business. And so a large part of those operations are focused on asset management. So for example, my fund currently owns 39 mortgage notes. Well, seven or eight of those are beyond 90 days delinquent. ⁓ So we’ve got

five or six active foreclosures going on, one REO, probably seven or eight that are in bankruptcy. And so there’s a lot with regard to managing bankruptcy ⁓ trustees, attorneys, communicating with your loan servicer, making sure that things are moving forward because ultimately we’re the ones that own the notes and nobody cares about them more than we do. So there’s a lot with regard to asset management that people do not.

that people often underestimate with regard to the effort and time that it takes to run this business. Now, to be clear, you can buy a couple of performing first lien mortgage notes and spend 30 minutes a week and make some cash flow for sure. It’s not one or the other. There’s a spectrum with regard to how active you want to be in this business. ⁓ But that gives you a little bit of insight into what it takes to kind

Michelle Tack (09:06)
It does.

Jamie Bateman (09:07)
run, be an active mortgage note investor.

Michelle Tack (09:10)
Now, and that was a very detailed explanation, which I appreciate, and I think the team will. Now, every operator always has some challenges, right? I mean, I don’t care what type of company you run. Obviously we’re talking about real estate and real estate affiliated businesses, but can you give for the purposes of, you know, what you may have learned through this process, what have you, of a recent deal that you were dealing with, like within the last year, maybe, if you have one.

Jamie Bateman (09:36)
Hmm.

Mm-hmm.

Michelle Tack (09:39)
that started to go south, but you were able to pivot really quick. You did something quickly or maybe it wasn’t even quick, but something that you pulled out to try to save that deal. And it could be a deal. It could be a relationship. It doesn’t have to be necessarily the function of finding that mortgage note and capitalizing on it.

Jamie Bateman (09:41)
Yeah.

Hmm.

Mm-hmm.

Right.

Yeah, I mean, you’re absolutely right. There’s ⁓ that’s all that’s being an entrepreneur being an investor, an active investor. That’s that’s all you’re dealing with is problems. And I mean, I don’t mean to be negative, but that’s what it is. You’re solving problems and challenges. And so ⁓ we have, you know, numerous challenges every day ⁓ with regard to both raising capital and finding notes and then also managing those. ⁓ You know, so

Michelle Tack (10:50)
Right, right, right, right. ⁓

Jamie Bateman (11:09)
⁓

is one thing that’s actually really interesting about mortgage note investing is every note has a story ⁓ and you never really know how it’s going to go. So ⁓ you can sit there and pencil out with your projections, your fancy calculator, whatever it is, and project your yield or your ROI. And ⁓ it’s going to be wrong. No matter what, it’s going to be wrong. It might be better. It might turn out better than you

Michelle Tack (11:26)
Right.

Jamie Bateman (11:39)
⁓ And so, but what you can’t really predict, ⁓ you know, is how the borrower is going to cooperate. And then you really, one of the biggest, ⁓ I guess, hurdles you have in this space, particularly with owner occupied mortgage note investing is we are not able to get inside the property. So, ⁓ you know, that can be a huge surprise when you finally get inside the property, we do buy some loans that are on vacant properties. Those are a little bit different, but in general, the loans we buy

These are owner occupied notes. So you’re not able to get into a full interior appraisal and you know, or BPO and get a property value estimate, right? So that’s really where we’ve lost money on deals before is from under valuing the property. ⁓ Man, there’s so many there. They’re always. Yeah. Yeah, there are always surprises with this. ⁓ I’ve got tons of case studies and stories. I mean, ⁓ we had a borrower who was ⁓

Michelle Tack (12:26)
That’s interesting. That’s interesting. Yeah.

Jamie Bateman (12:38)
paying through bankruptcy and he passed away ⁓ in September. yeah, then, know, navigating kind of the human element of this can be really tricky. And that’s one reason that I keep a distance. I’ll use third party vendors, like a loan servicer, for example, to deal with the communications with the borrower. So in this case, this person passed away and, you know, we’re left with…

Michelle Tack (12:43)
That’s terrible.

Jamie Bateman (13:08)
the option of pursuing foreclosure. And so what you have to do is get a relief from stay and, and then his spouse is currently in the, the house and she legally doesn’t have any right to be there at this point. So navigating that where, you know, I’m not trying to kick her out on the street, obviously. So, but at the same time, if we don’t kind of give her notice to vacate, we’re waiving a lot of our own rights and not protecting our investor capital. So there.

Michelle Tack (13:22)
boy.

Jamie Bateman (13:37)
there’s a balance there of making money and also being a good person. So we’re actively navigating that and I’m working with a real estate agent who I think has ⁓ some good people skills to be able to kind of work with her. it’s not just numbers on a spreadsheet with mortgage note investing, there’s the human element specifically with regard to the borrower. ⁓ Another quick example, and this is not resolved yet either,

Michelle Tack (13:43)
Right, exactly.

Jamie Bateman (14:06)
I had a hard money loan that I purchased. It’s gone terribly wrong, quite honestly. But what protects us in this case is there’s a buyback clause in the contract. So when we bought this note, there’s actually a buyback clause. so unfortunately, we’re, you know, fortunately that clause was there, but unfortunately we’re having to pursue that legally to enforce the note seller to buy this loan back. And so there’s,

You never know how a case is gonna go. You never know what the story is going to be with a particular mortgage note. But if you buy correctly, even if it goes through the property, through the borrower, or even through the note seller, those are kind of the main exits really, or you could sell the note. If you buy correctly, you can make some missteps here and there with asset management or, know.

Michelle Tack (14:38)
Mm-hmm. Mm-hmm.

Jamie Bateman (15:00)
But if you buy correctly, you have options. I guess that’s really what I wanna get to is then you can pull out whichever tool you need for the situation.

Michelle Tack (15:51)
That’s awesome. I have two last questions for you. Can you talk about your next goals where you’re trying to take the business over the next year, obviously short term, maybe the next six months, but then longer term as well?

Jamie Bateman (16:06)
Yeah, so we have a fund, it’s called the Integrity Income Fund. It’s for accredited investors who want to earn a passive return. We pay monthly distributions. We’ve had the fund for four years. We’ve never missed a distribution. ⁓ I’m actively trying to raise more capital for that fund to serve more investors and provide a stable source of income for investors. We’re trying to get that fund beyond

$3 million currently has about 1.5 million and it’s a 506 C we can talk about it and and It’s you know public I can advertise and everything So that’s that’s where we’re trying to go with regard to the integrity income fund one thing that we’re actively actively pursuing now is is pivoting a little bit not not not a 180 but pivoting somewhat to start originating more notes ⁓ this may just

quickly also answer your prior question in a way we were able to solve a problem. And it speaks to what we’re trying to get into more in the future as well. We were able to, we took back a property through a reverse mortgage. was vacant. The property ended up being much ⁓ lower in value than I had anticipated and that what the prior BPO had showed. So this was a property in Tennessee, finally take it back through foreclosure. It was a deceased borrower. We didn’t kick anyone out of their home or anything.

⁓ And we got the property back and it was it was a very ⁓ in much worse condition than we had anticipated and the property value was much lower. We were able to find a good ⁓ borrower slash buyer with a credit score of over 800 and we did sell our financing to that to that person ⁓ and he’s already made a couple of payments and so you know things are going well with that. I thought that could be pretty pretty ⁓ not not a disaster but it was not looking good.

Michelle Tack (18:00)
Yep.

Jamie Bateman (18:00)
⁓

I’m not going to say it was a home run, we were able to navigate that situation by instead of just listing this property for sale to an investor, we sold it on terms to someone who’s going to fix it up and live in it. And he has a personal interest in living in this property. So we were able to find that person through networking and other ways. And it looks to be a good solid performing loan with a high interest rate and a very qualified borrower.

To your point, your question, I’m trying to originate more loans and get into a little bit more private lending. ⁓ Not fully, but that’s an option within our fund. So instead of just buying existing debt, also originating more loans. ⁓ And I think from my perspective, from my experience, I’ve got the ability to understand what a good mortgage note looks like from a buyer’s perspective, a note buyer’s perspective, and a lot of…

A lot of loan originators never even think about what if I need to sell this loan? What does a note buyer look like, look for, excuse me. And those two worlds are often separated completely. The note originators and the note buyers, they don’t even speak to each other in many cases. So I’m trying to originate more paper that may be attractive to sell to a note buyer.

Michelle Tack (19:19)
Yeah, you know what you talked about was very important, right? The level of detail that is not as we talked about previous to the podcast of knowledge that isn’t out there. You’re really in a niche play and you’re doing sort of both sides of the coin there. And you know, I think and I hope the folks in the podcast really understand how important that is that subject matter expertise.

The other thing that, will lead into my last question, I think is really, ⁓ you know, evident from the conversation with you is the prioritization of your people skills and your ability to work with people because given, you know, someone having passed away to be able to be deaf at that is not an easy skill that takes some, some time we developed that over a lifetime, quite frankly, but yeah, exactly.

Jamie Bateman (19:58)
Hmm.

Mm-hmm.

Mm hmm. I don’t think we’re ever done with with that, right?

Developing that skill.

Michelle Tack (20:15)
Right, right.

So the last part of that that goes into that is tell me a little bit about your networking. And often that is undervalued. And I mean real networking, not like I’m posting on LinkedIn every day. Network that you continually go back to that’s feeding you and maybe, you know, things that you want to aspire to in your network.

Jamie Bateman (20:22)
Mm. Mm-hmm.

Yeah.

Right. Yeah.

Right.

That’s a great question. And I do think I have a small team that helps me with marketing and things. We do lots of social media. I’ve got my own podcast. It’s called the from adversity to abundance. And we do a lot of posting a lot of, you know, email marketing and things. And it’s important in branding is important and people will Google you and check you out online and they should, but it’s not enough. and honestly, it’s one of the areas networking intentionally is one of the areas I’ve probably

There’s room for improvement. ⁓ I certainly have strong a strong network and in various ⁓ From various, you know aspects of my life We talked a little bit about pickleball before we record here and that’s an area that’s grown in my in my own You know as far as my own network goes ⁓ But I had lunch last week with an older gentleman who has done hard money lending for the last

many, many years and he’s done quite well with it in the in the Baltimore area where I am. He reached out to me, but I immediately said yes and I realized I need to be doing more of this and so one of the other ways I’m working on just kind of developing my network is working with our our investors in our fund and having direct one on one more direct calls with them one on one and asking them what are we doing well? What what can we improve improve upon? Who else do you know in your network?

Michelle Tack (22:00)
That’s great idea.

Jamie Bateman (22:04)
that might be interested in investing in our fund and receiving monthly distributions. So I have those, a network and a pretty, I think quality network. I do think there’s room for improvement with regard to being more intentional in developing that network, not just with the approach of what can I get, but also what can I give? And I do value adding value to people. I just think I personally could be a little bit more active in…

Michelle Tack (22:25)
to look like.

Jamie Bateman (22:33)
developing that network and intentionally just looking for opportunities to add value. ⁓ So yeah, lots of different areas of my own, I guess lots of different sub networks, if you will. I’ve got the social pickleball network and then my college network from my athletic days. And then the real estate investor network. And I know we’re probably almost out of time here, but I am intentional about setting up

Michelle Tack (22:59)
No, that’s fine.

Jamie Bateman (23:02)
I’m a part of a couple of different informal mastermind groups. They’re not paid or anything. It’s just a group of people, ⁓ peers who get together and want to share lessons learned and help each other. A group of us just met in Orlando a couple of weeks ago. it was basically 24 hours of actual work. Just one day where we sat down, went through, each person was on the hot seat and we…

you know, we went through and provided feedback. This is what I think this is what I would do in your situation. This is what I think you’re doing well, you know, this is what you should focus on and and but developing that peer network is huge in the mortgage note space. Most of the mortgage notes I’ve purchased and sold have been from fellow investors. And so that’s from the network. It’s not from an online site. It’s not from walking into a branch of a ⁓ bank and say, I want to buy some mortgage notes. It doesn’t it doesn’t work that way.

Michelle Tack (23:35)
Yep.

Yep. Yep, that’s.

Yeah, right. Exactly.

Exactly. Well, look, you’ve been ⁓ great. We really appreciate all of your insight. And I really want to thank you for being on our podcast. For those that are listening and find value from this podcast, please ensure to continue to subscribe to our podcasting subscription model. There’s a lot of great content there. And again, Jamie, thank you so much and best wishes for continued success.

Jamie Bateman (24:29)
I appreciate it, Michelle. anyone wants to reach out, Labradorlending.com is where to find me.