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PLP-106: What You Don’t Know About Subordinate Lien Investing With Jim Maffuccio

PLP 106 | Subordinate Liens

PLP 106 | Subordinate Liens


The number one rule in real estate investing is return of investment. That is, for every dollar that goes out, you want to get it back, if not, more. That is why people just starting with real estate investing stay away from subordinate liens. But what really are subordinate liens? On today’s show, Keith Baker talks to Jim Maffuccio about subordinate liens and how he got started in this world of distressed second liens. The Founder and Principal of Aspen Funds, Jim’s role includes identifying and developing key investment opportunities currently focused on distressed residential real estate debt, as well as leading efforts in business development, building and maintaining key relationships with hedge funds, note buyers, and sellers, and key service providers in the mortgage note industry. If you want to know if investing in subordinate liens is the right path for you, you wouldn’t want to miss this episode.

What You Don’t Know About Subordinate Lien Investing With Jim Maffuccio

This is the only show that’s dedicated to teaching everyday people, like you and me, how to prosper with the most passive form of real estate investing known to humankind, while giving tips and ideas that can help keep your money safe with private mortgage lending. It’s just as simple. If you’re looking for practical tips and advice on being a successful private lender and on how to create wealth without banks or Wall Street, then you’re in the right place. If you want to learn from my mistakes so that you can avoid them, jump around them and prosper much quicker, then pull up a chair and pour yourself a stiff drink and get ready to take notes because this show is made just for you. The show does not constitute an offer to sell, a solicitation of an offer to buy or recommendation of any security or any other product service or investment.

We’re only talking here and rapping out loud. Do your own due diligence and make sure you stay compliant. Having said that, let’s get into the heart of the matter. I’ve got the good fortune of talking with Jim Maffuccio from Aspen Funds. Not long ago, I decided that I was going to no longer interview real estate fund managers for various reasons. Mostly, because I had locked onto some green fund managers and they didn’t exactly succeed. Knowing that I wanted to be conscious of who I led on the show, what we talked about, so on and so forth so I say, “No fund managers for a while, except those few crowdfunding, and things like that.” One of Jim Maffuccio of Aspen Funds’ assistant reached out to me and said, “Would you consider interviewing Jim on the show?” I immediately said, “No. Thank you, but I can’t recommend anyone invest in subordinate liens and especially nonperforming subordinate liens.”

There are no bad notes, only bad prices. Click To Tweet

I didn’t feel like it was a good fit, but the more I thought about it, I was thinking, “Who’s better to speak about such a topic on this show?” It is a topic I’d like to cover, but it’s one that I don’t feel like I have much authority on. I have done some lien lending in the second position, but I don’t feel like I have done it enough to talk confidently on it. I decided, “Probably, it wouldn’t be a bad idea to have someone like Jim to come on and talk about the ins and the outs.” Just because I don’t do something, it doesn’t mean that I can’t interview someone who does it. It doesn’t mean that I can’t learn from Jim’s process to help you do the same. That’s the whole purpose of this platform. At the end of the day, here we go interview with Jim Maffuccio of Aspen Funds. Let’s get down to the brass tacks in his interview.

Everyone, thanks for joining me. I want us to give a special thanks to Jim Maffuccio, who has come on to talk about his Aspen Funds and the particular niche that they’ve carved out for themselves in second lien notes. Jim, welcome to the show.

It is great to be here with you, Keith.

I’m excited because as everyone knows ad nauseam that I tell them, especially the people starting off that got their first self-directed IRA, “Stay away from second liens. Get good loan-to-value. Stay safe.” The number one rule is the return of investment before we talk about the return on it. For every dollar that goes out, you want to get it back. How did you get started in this crazy world of distressed second liens? That it’s not even good ones, but distressed.

In a nutshell, I’ll give you a quick background. I was a civil engineer. I graduated from LSU Go Tigers in 1979. I did go into the oil field. I went to work for Exxon in 1980. I did the corporate engineer thing for about 5.5 years. The entrepreneurship turned on in me and I got my real estate license in 1986. I jumped out into transactional real estate and then I got involved in development. I was developing small residential infill projects in Ventura County Coast, California. I went through the S&L crisis and lost everything. By 1995, 1996, I was tanked, broke, underwater, having a seven-figure net worth going into that and all kinds of projects went dumped and went South. It was because of a mortgage-related crisis. I got back into the game and in 1999, I started back in. From 2005 to 2006, there I was again. A bunch of leveraged real estate development deals is doing great and killing it. The market was on fire. I even had focused on affordable housing thinking that there was going to be some correction because values had ratcheted up in that timeframe.

The 2008 mortgage crisis took everything so deep and fast. For so long, nothing could stay underwater that long and survive. Once again, around the 2010 timeframe, I was completely broke with a negative net worth in Kansas City, a new city. I’d lived in Ventura County for many years and here I am, 55 years old with five teenagers, two of them are adopted internationally. I literally have no immediate source of income and no investors to speak of. I could probably go back to California at that point and raise money again, but when you’re beaten down, that’s not the thing you’re after. I was flipping homes because every other home was boarded up and it was a heyday.

I was flipping homes and put some people to work doing that. At the same time, studying the market because whenever there’s a crisis, there’s always opportunity. I had an epiphany in 2010. I saw the place to get in involved in the rebound, in the coming recovery was the distressed debt. Everybody was going after the REOs, further downstream, foreclosure auctions, and then further upstream from that, the pre-foreclosures and I worked in short sales. I did some of all of that, but I thought, “At the end of the day, where the distress starts is when a loan goes into default.” These institutions have to get rid of this paper before they go off a cliff.

I started looking into that. In 2010, I went to a note investing conference in Denver and 95% of the content was about senior liens. Buying the defaulted first mortgage and then running through. It’s a checker’s game figuring out, “Are you going to exit through the property or are you going to exit through the borrower or making some modification with the borrower?” There was one guy off to the side and in one of the breakout rooms talking about second liens. As soon as I saw what he was doing, the lights went on and I went, “This is where I’m sticking my fork into because I needed something that I could come into with minimal investment, most multiplier effect, and the greatest leverage.” Buying the seconds, particularly when the first mortgage is performing was genius.

When I saw it, I was like, “This makes all kinds of sense.” Whereas hard dollar equity is super important in anything real estate related. What we learned was we could make more money in terms of multiple on the loans where there wasn’t so much equity above our position. If any, it is because there’s this thing called emotional equity. These are people that are paying their first mortgage so you know they have an income. They want to stay in their home and we’ve bought this nagging second lien that’s on their property for pennies on the dollar. We have a whole lot of room to work things out with the borrower, whether it’s a onetime fast settlement or a loan modification. That’s on the ones where we have very little to no equity.

We make our best multiples on those, but they’re low numbers. We may buy a loan, for instance, for $50,000. That’s the payoff balance that the borrower owes, but we may pay $5,000 for that loan. Maybe the first $10,000 of our position is covered with equity, but everything beyond that is blue sky. We can go to that borrower and enter into a loan mod or settle that loan and make it 2X, 3X on our money pretty quickly if we have a reasonable and cooperative borrower. The good, the bad and the ugly of this thing are we’ve been doing it several years full-time.

We’ve built a company, we have twenty people and we’re focused on second mortgages. After doing thousands of these, we made between 2.3X and 2.5X on our purchase price. If we buy $1 million worth of these defaulted second mortgages, we will pull in $2.5 million of revenue. It typically takes anywhere. We start getting exits in six months and typically out to three years. It’s patient money because there’s an elaborate workout process we go through, but it’s pretty good multipliers. I wish there was more of the product. That’s a nutshell of what we do on that side of our business.

We then do have another side of the business, which is an income fund where we are buying re-platforming mortgages, whether they’re seconds or firsts, and we buy some hard money loans from other originators as well. That’s the way we can keep our truly passive investors that want mailbox money. We can keep them happy with a nice preferred return. We do all the brain damage of keeping the loans on track. When they break, we fix them. Since that’s our core competency if we have a default rate of 10% to 12% in our income fund, we know how to do workouts. We know how to get that thing back to performing status.

PLP 106 | Subordinate Liens


I’m going to back up a little bit. Is your fund for accredited investors only?

At this time, it is accredited only.

For education, you run through the SEC Code 506(c).

That’s where our funds are. That’s the particular exemption that we fall under.

Are you buying tapes of houses of seconds? Is it a cherry-pick piecemeal? How do you get your deal flow?

It’s everything from buying one-offs, but more typical for us because of our size is we are buying larger pools. In the second’s world, you’re not going to find a lot of quality products like on the note exchanges. It’s a relationship-based deal. It’s not a normalized market. A lot of the institutions that generated this paper, they charge it off their books typically after 90 days. It’s treated differently than a first mortgage. It’s almost treated like consumer debt. I don’t fully get that end of it, but it’s charged-off and it’s worthless to the institution. A lot of them won’t even sell that paper, it’ll just expire. The statute of limitations will time it out.

It’ll never see the light of day because they have higher priorities. Some of them look at the political cost of selling this paper out on the street and then ending up with some cowboy that’s mistreating the precious consumers and that’s happened. We’re very compliance minded. We have a great reputation. We’ve been vetted at a pretty deep level by a government entity that we bought some paper from through an intermediary. We have the FDIC looking into our processes. We came out with an unofficial report, but got the thumbs up, like what we were doing was good because we’re not out to take people’s homes.

We have to start foreclosure probably 65% of the time, but we only end up foreclosing less than 2% of the time. Most of the time, it’s agreeable at that point in time the borrower realizes, “I can’t afford this house.” We’re people-oriented and minded. To us, a win-win is when we can cancel a whole bunch of debt for a borrower, keep them in their home, create a reperforming asset that we can then 2.5X or 3X of what we paid for it. That’s very typical. Those are our numbers. It’s a wonderful thing. It is a win-win, truly.

The bigger the risk, the bigger the reward, but it sounds like if you’re paying pennies on the dollar, you are a couple of things. One, you’re setting yourself up properly. Two, if anyone’s out there reading, originating their own private loans, you don’t want to sell a loan to Jim. You want to avoid selling the loan to him, especially if he reads my show and take any of my advice. Don’t use this as an exit strategy, but it’s always good to know it’s there if you need it. You mentioned something that I liked. You said that these people have emotional equity in the property. They’re performing on the first lien. I’m curious, are these usually like home equity lines?

They could be. I’d say probably 30% or 40% of our home equity lines. Others are fixed rates seconds that people took out whenever they took them out. There are two components, emotional equity and pragmatic equity. Emotional equity is, “We’ve bought this home. We put our own finishes into it. We’ve lived here to 10 to 15 years. We know our neighbors. We like the school. Our kids have friends. We’re not going anywhere if we can afford the monthly payment. If we can afford to stay, we’re going to stay.” People or your typical household don’t wake up in the morning and look at Zillow and say, “Look at this, honey, our equity has gone down $5,000. Maybe we should sell this asset.”

It’s a home sweet home. Most of our assets are across the middle of the country. We have some on the coast, but we’re in 38 states with our portfolio. I ran the numbers on the pool of seconds that we bought and it was an average of 32 loan pools. The average FMV or home value was $250,000. You can see it right in the median pricing for the nation. This is a bread and butter housing. It’s more or less workforce housing and people don’t want to leave. They’re not going to leave because they’re upside down $20,000 or $30,000. They’re going to leave because they can’t afford the monthly nuts.

The other thing is, “What are their alternatives if they do leave or if we do end up having to foreclose?” In a lot of cases, the homes that are securing our position would rent for more money than what their mortgage payment is first and second combined. If you think about where are they going to go, if they’ve been through the 2008 to 2014 cycle, there’s a good chance they’ve modified their first because when they had trouble paying our loan, they also had trouble typically paying the first. Some of these people are still sitting on 2%, 3%, 4% money on their first. The best alternative financially, even for them is to stay home or stay in their house. We have a lot of tools to help them because of the discounts we buy.

Most of the loans we buy these days, we’re buying in the 20% to 25% of the unpaid principal balance range. Those loans would typically be ones where the seniors performing and we have enough equity to cover our investment. We’ve paid all the way up to in the 60% range of UPB if we have a loan that we pay $40,000 but it’s an $80,000 balance. Even above our $80,000 balance, there’s another $150,000 in equity. You tell me where the risk is in that. I would rather own that second than the underlying first. If you think about it, I’ve leveraged my position. The first mortgage is like my financing, but I don’t have to pay.

It’s a crazy sub-to.

That’s exactly what it is. That’s one of the reasons this is a pretty lucrative game because many people, including a lot of institutional players, either don’t realize that you can or aren’t willing to foreclose from the second position. When we foreclose from the second position, there’s a false narrative out there that says, “We have to pay off the first.” That’s not the case. In most states, we have the right to reinstate the first and keep it current. Even though it’s not our loan, we’re not the borrower on the loan. We foreclose from a second, we get the deed to the property and it’s a sub-to deal. It’s exactly what you said. There are states where the first does not have to let us reinstate and they can pursue foreclosure. Those are typically the states that take a couple of years to foreclose.

That gives us plenty of time to clean the property up and sell it. We’ve made some incredible profits on the handful alone ones that we did foreclose and where we flip the property. We’ve foreclosed from second and then turned around and resold the property back to the borrower because it took that to wake them up to realize that we were serious about securing our position. Those have ended up being wonderful stories because you got the original borrower. That’s back in place on their property and they’re performing again. We had to put $200,000 down, which got us back our investment plus some, and then they’re making us do monthly payments. They’ve been great borrowers ever since. We have all kinds of stories as you can imagine in this business.

I did not do this so this is one of my tales of woe. What I tell people is if you’re going to lay a second on a property, you want to talk to whoever owns the first position. I did not contact them

PLP 106 | Subordinate Liens

Subordinate Liens: When we foreclose from a second position, there’s a false narrative out there that says we have to pay off the first. That’s absolutely not the case.


first and put the second on the property. Lo and behold, the first is the one to foreclose and then wiped me out and I said, “Don’t call the attorney representing them. Is there something we can do here?” The guy who had the first position was even more fed up with the borrower than I was trying to track money. He’s like, “You want to make it whole. It will be $47,000 and it’s yours.” I was like, “The property is not even worth that. Fine, done.” It’s automatic that you’re taking it over, you foreclosed out the second position, but the first lien is superior, therefore, it stays in place. Do you have conversations with any when you purchase the seconds? Do you say, “We’ve bought this, here’s our plan if we have to foreclose,” or is it all in the paperwork?

Typically not because the first is serviced by the major and national servicers. They won’t give you the time of day. These loans are owned in trust. There’s not like a single investor they can go talk to. Their servicing agreement tells them what they can and can’t do. The handful of times that this happens, we just make the payment. We send them the check or in most cases, pay online. I don’t even know if they know where the money’s coming from. They don’t care. By the way, you touched on something super important. When we buy these loans, one of the biggest parts of our due diligence is getting a handle on the senior mortgage. A lot of times, on the credit report, it’s right there. You can see it. They’re current. They had a little tough patch back in the mid-2000s. We know the story on the first. We know what their payment and the interest rate is. If their loan was modified, sometimes the mod was recorded.

We can go pull that document. We watch that’s part of our risk management. We watched that first mortgage like a hawk, because if that thing starts to slip, then in some cases, it’s good for us. If we have a ton of equity above us and the borrower’s struggling to make their first payment, then it’s an easy conversation to have with the borrower like, “We have to start foreclosure to protect our position, but you’re not even making payments on the first, why don’t we agree to a friendly sale? We’ll even give you a discounted payoff and you’ll put more money in your pocket by selling the property and moving on with life. Obviously, you’re having a hard time keeping your bills paid.” That works on our benefit. I hate to say this, but what you didn’t do when you put that second property, we have to do. The due diligence on the first is the thing for us.

In my defense, the loan was to a very good friend of mine. That’s why it’s like, “Thanksgiving just got weird. No more of those.” I wanted to go back and touch on something. The other times that I’ve had a second position, I would have the borrower mail me the statements where they were paid or scan an email proof of the payment of the first mortgage was being paid every month. I’m curious when you purchase a note, how are you able to do this? Is it through the borrower’s credit report that you see these things?

That’s the main way. If the borrower’s been in bankruptcy, we go on PACER, that’s public access to that information. When a borrower files Chapter 13 Bankruptcy, they’re under the penalty of perjury to the federal government. They’re supposed to put all their financial information out there for the public to see. We have borrowers sometimes threaten us, “If you push me on modifying this loan or working, I’m going to file bankruptcy.” We say, “I can recommend a couple of bankruptcy attorneys.” We love it when they file bankruptcy because for the most part, they’re required to put all their financial information out on the table and we can go look at it. There’s a lot of ways we can see what’s going on with the senior.

Rents aren't going anywhere but up. Click To Tweet

Sometimes it’s an educated guess, but if it’s on the credit report, it’s right there. You can see what the payment history is. You can see what their FICO score is. You can see that they’ve got a car payment of $700 a month, that they’re down to their last four payments. When we’re negotiating with them to do a loan mod on our second, and they’ll say, “We don’t have any more bandwidth.” We’ll say, “You’re going to have the bandwidth in four months when you pay off your $30,000 loan on your Lexus. Your contract payment to us is $450, you’ll have plenty of room in your budget left if you don’t go back out and finance another expensive vehicle.” It wakes them up when they realize we know a lot about them.

I find this fascinating and I apologize. I’m just learning. No one loves to hear their own voice more than me. Normally, I’m chatting away. I admire that you take a business approach to do this. You’re only going to get in there if there’s a steep discount. You have a lot of margin for error. As you said, if there’s an equity or whatever, there are tools. Even if they don’t, they have emotional equity. There are tools that you can use. I’m sure that credit repair helps all this other thing to help them get them back on their feet, but in order for you to operate and be successful, you must have an ultra-conservative underwriting philosophy. Is it yes or no?

When you say ultra conservative underwriting guidelines, if you’re talking to an institutional banker or mortgage person, they would say, “You’re buying default and second mortgages. There’s no such thing. It’s outside of the envelope of a conservative underwriting.” We have an entrepreneurial pragmatic, a very in-depth due diligence system, and underwriting process. We’re typically buying a large pool of loans. There’s the good, the bad, and the ugly in there, but we know how to go look at the good. We go look at the fat ones that have a ton of equity. Those we underwrite, we have to know what’s going on with that senior mortgage and then the rest of it is pretty much the way you would underwrite a first.

We look at what our investment-to-value ratio is going to be, how much equity covers our investment because we want to make sure we get that money back. Those are the expensive loans and we don’t want margin for error on those. The biggest surprise we ever get on those is if we buy a lot of the East Coast States. They use judicial foreclosure. It’s basically a lawsuit to get the collateral back that the borrower pledged when they promised to pay you. It’s kind of insane when you think about it, but it’s the process you have to go through. A lot of times, we think we know what the balance owing on the senior mortgages. We can dig into the court records and do a better job finding that out.

We’ve been surprised by a couple that we thought the balance was $600,000 on the first and it turned out it was $900,000 by the time all the legal fees and advances and judgment. That can be an ouch so we discount price when we buy a New York loan. I have a saying that I’ve robbed from somebody else, but it’s like, “There are no bad notes. There are only bad prices.” I’ll buy New York loans, but I’m not going to pay the same thing that I would for the same loan in Missouri. Missouri is a fast foreclosure state. It’s a trustee’s deed state. The values are not wild. They’re very predictable and we are able to protect our position easily. Those are the great states.

PLP 106 | Subordinate Liens

Subordinate Liens: One of the parts, if not the biggest, of our due diligence, is getting a handle on the senior mortgage.


In one of my first loans, I told the guy that wanted $70,000 to buy this little strip center across the street from some refineries here on the coast. I went to a look at it and I was like, “I don’t know.” I’m feeling bad. I don’t know any commercial appraisers, but I’m going to have to go dust up my knowledge on the market and price and all of the different types of appraisals. At the end of the day, if this thing appraises for at least $150,000, I’ll give you the letter of proof of funds you can close and do whatever you need to do. The appraiser came back and it is $305,000, as-is. I told the borrower, “You can default on this loan and I will loan to you again.”

He didn’t. He handled it and it worked out well. When you have that much margin for error built into your buy, if there’s ever the adage that you make your money in real estate when you buy it, it is true in this case. As you said, “There are no bad notes, just bad prices.” Your journey has been very lucrative, but for me, I like the idea of paper because I don’t have to deal with contractors. I might have to deal with servicers, the occasional appraiser, and a title agent, but they don’t usually set an appointment for 3:00 to give you a drywall bid and no show. You’ve seen kind of all aspects of it. Do you think the flipping is more of a young man’s game? I tell you, that’s where I’m heading towards.

I would say it’s more of a young man’s game. I think it’s the reason most people do flipping. When I did flipping, I did it because I didn’t have enough capital. I didn’t have enough capital to go out and buy performing loans or even nonperforming loans and get them performing and hold them. It’s the old adage, “Do I want cashflow or do I want lump sum profits?” Honestly, I want both. Maybe this is what you meant by a young man’s game. You want to build up some capital so a lot of people will start flipping houses or wholesaling. You get fast and pretty decent paychecks. It’s funny to hear wholesalers and flippers argue about whose model is best and then you find out at the end of the day, a lot of flippers do some wholesaling and a lot of wholesalers do some flipping. The thing of it is if you’re a wholesaler by definition, you’ve created this efficient acquisition machine. You can cherry-pick.

If you see one, “This is a no-brainer. I can flip this on and make another,” then you’re going to keep your cashflow going by wholesaling. That’s your main thing and then you’re going to flip a house. I love properties. A lot of people in my space and the paper space, they’ll preach the sermon on, “We love paper because there are no toilets, trash tenants, and all that.” It’s a passive cashflow and you can manage the cashflow all over the country. It is super simple and all of that’s true. The thing of it is if you think about a mortgage, let’s say a 30-year mortgage in a perfect world, it gets paid off. In 30 years, you’ve had great cashflow, but after 30 years, you’ve got nothing.

You’ve got all your money back, plus the profit you’ve made, but you’ve got zero. If you buy a house that has a 30-year mortgage on it or put a 30-year mortgage on it, and you manage that properly, in 30 years, you have an asset that’s free and clear that’ll pay yourself and your heirs for the rest of their lives. Rents aren’t going anywhere but up. I like both. I’m not one of these extremists. I love having my day in and day out business be the notes. First of all, I love it because I hardly do anything with it. I oversee some of the acquisitions, but we have an acquisitions director of excellence.

This was me and my son in our basement in 2011 buying the first second mortgages. I literally was beyond broke. Now, we’re at $40 million, on our way to $50 million of assets under management and that’s purchase price value. We have twenty people by staying focused on this business model and improving it. We have systems and processes in place and an attorney network nationwide. There’s quite a lot to the business. It’s one thing to do it on a mom-and-pop basis. That was fun too back then, but I’m having the time of my life having scaled this and having a company that knows what they’re doing, great team.

This is great. I like what you’ve done here. It’s very niche. At first you are like, “It’s toxic. Why would you do that?” That’s why I was like, “Come on, Jim, tell me about it. Tell the Private Lender Nation everything about it.” How can people learn more about investing with you? Nonetheless, if people want to learn more about Aspen Funds or what you do and your business model, how do they get ahold of you?

The best thing is to go to the website and hit the Contact Us and tell us what you’re looking for. It’s We don’t educate. We don’t have an education platform. We’re not selling home study courses. However, I will be happy to point somebody interested in getting involved actively in the note business. I’ll be happy to point you towards some educators, some conferences. I started this business by going to a conference. We’ve hired our key people from conferences. All of our sourcing, the contacts have been made through conferences. I can’t say enough for networking in this business. It’s a niche and it’s a tight-knit little community, but there are people that are super willing to help.

As far as investing in our funds, I will solicit, but I can only solicit to accredited investors. That’s the one thing nice about this type of fund is we can use general solicitation, but only to accredited investors. You can look around on the website and see what our funds look like. We’ve got a great, fantastic track record. We have some institutional money that’s come on board with both on the equity side as well as on the debt financing. We have some debt facilities that have helped us to leverage out and get even better returns for our investors. We’re having the time of our lives. We love helping people. We have a great team and we feel good when a borrower is able to stay in their home. We’re able to eat some of their debt.

Our investors are super stoked because we had one close. I had to send out kudos to one of my staff members. We did a deal where we made a 2.5X in one year on the loan. It’s a Chicago, Illinois loan, which is brutal to work. It is in Cook County. I was born in Joliet, Illinois. It was wonderful because these people, what they owed us was $184,000 on a second that we had paid $23,000 to be exact. Our team member was able to get a settlement. It was a short sale. We did a preapproved short sale and they settled our loan for $53,000. We made a 2.5X in one year and the borrower’s like, “I got forgiven $134,000 worth of debt.” We’re like, “It works for you and works for us.” We love it and we do those all day. I’d like to say we do one of those every day, but we’ve done thousands of them.

That’s Final question, Cramer on CNBC was talking about a V-shaped recovery in the stock market and whatnot. I’m curious because everyone’s asking me, “What do you do as far as originating notes?” I was like, “If it’s not at 50% LTV and don’t even come yet, if it’s not a deal, don’t bring it to me.” What do you see? You’re buying properties all over the place. You are rehabbing the borrower, the tenant, owner-occupant or the payer. What is your gut telling you that’s going to happen?

If you go to our website and request this, there might even be a link for it. My business partner puts out an economic newsletter for many years have been super accurate. He takes the big picture approach and he has some incredible insights regarding the housing market. Even though this COVID, which is proven to be 100% true. I don’t know if you’ve seen what the markets have done, but the markets are on fire. In fact, I didn’t get into enough of the call options that I want to do, but I made a significant profit overnight because I’ve been buying the call options on the indexes. I was a believer that these companies that their stocks got devalued by 40% overnight, those companies didn’t become worth 40% less overnight.

As entrepreneurs, we have to be optimistic and look for opportunities. Click To Tweet

I started buying call options on the index and I have 5X my account. I have a hopeful perspective. The housing market’s up, the inventory’s low, builder confidence is high and we’re back to bidding wars in the hot markets. I would watch out for overheated markets on the coasts, but honestly, even if you look at it, it’s been almost supernatural. Even the people that got forbearance agreements, the percentage of them that have not used the forbearance, but have continued making their payments. Did you hear the job numbers? They came out so Wall Street was expecting another 7.7 million jobless claims for May 2020.

We added 2.5 million. It was positive. We may have some rough roads. There’s going to be some reshuffling. There are going to be some businesses that never come back, but to be honest with you, a lot of the businesses were probably on life support, to begin with. There are going to be opportunities in the commercial sector. Residentially, I don’t hope people are panicking, but I’ve gotten so over living in fear-based. We have to be wise and prudent, but there’s so much emotionalism in the markets and the media stokes it up and makes bigger issues out of smaller issues. I watched the markets and say, “I’m so tired of it. I’m going to start investing where I see this fear.”

I’m not a stock guy. I stay away from Wall Street, but I went to this thing and I saw this Standard & Poor Index go crashed down. I texted some friends and said, “I’m not a prophet and I’m not a stock guy, but my sense is that this market can’t find an excuse to go any lower. The first good news that comes out, it’s going to spike up.” I perfectly pinged the day. It was March 23, 2020. I started backing up the truck and buying call options on the SPY ETF. It’s gone nuts. That’s my little story. There are tons of opportunities out there. You just have to be opportunity-minded and don’t be a whiner. We got to knock off the whiner stuff.

I couldn’t agree more. I do this as my day job. We used to be corporate now I work from home, but that happened before COVID. When everyone started staying home, I’m like, “What’s the big deal?”

It is the same here. I worked out in my home for more or less the whole time since 1986. I’m running a company remotely. I live in Colorado and our headquarters is in Kansas City. I want to say something if I may, Keith. Everything that I said about don’t be a whiner, I am 100% sensitive to the fact that there are some people that have gone through and are still going through some serious trouble. I’m not meaning this in any way as demeaning of that or being insensitive to it. I’m talking about the financial markets and in business in general. As entrepreneurs, we have to be looking for the opportunity. We have to be optimistic. The opportunity to help people, that’s the bottom line. I apologize if I offended anybody with what I said, but it’s not aimed at somebody that’s going through a legitimately hard time.

PLP 106 | Subordinate Liens

Subordinate Liens: If you buy a house that has a 30-year mortgage on it and manages that properly in 30 years, you have an asset that’s free and clear and that will pay you and your heirs for the rest of your lives.


I felt like I knew exactly where you’re coming from. I’ll give you a prime example, two good friends of mine. I’d try to bring together one with money and one with a vision. The one with the vision approaches the one with money in a fashion that I would not recommend. The frame of the visions, “I had thought your buddy was going to give me money. I haven’t started my business.” I was like, “It’s the other guy’s fault that you haven’t started your business? I want to get this real clear.” I feel like I know exactly where the whining is coming from and what you meant because I was stunned. That was like, “How have I known you for so long? I still hang out with you.” I completed reading As a Man Thinketh by James Allen and it is phenomenal. Everything starts with the thoughts in your head. I’ve been telling everyone, “Read it and then read it again.” It’s not just a one-time thing. Constantly remind yourself that oftentimes, negative emotion starts as the seeds of thought.

I’m a Christian and I’m a Bible guy and that’s probably one of my life verses, “As a man, thinketh in his heart so is he.” That is true on every level of life and that why I’ve decided to change the way I think and it works. It’s good. By the way, the book that came out, I highly recommend that my top-selling book of all times, it’s called The Holy Bible.

Jim, thank you for coming on. Everyone, it’s, look them up. They’ve got a quite fascinating business model. Jim, thank you for coming on and explaining it and shedding some light. I want to stay in touch with you because I haven’t 5X to my Wall Street stuff, but around the same time, I decided, “Why not?” It is the time and I poured it in and I’m only up 28%. That’s why I’m like, “You’re doing call options. I’m still buying individuals. I was buying the FANG trade and whatnot.”

That’s a safer bet, but I looked at this thing and said, “This thing has to recover.” I didn’t know the timeline, but I bought far enough out expiration dates. I can be patient, but I ended up getting in and out. I got in before the closing bell with a bunch of call options and then the Standard & Poor SPY opened up so much that immediately, right after the opening bell, I said, “I’m taking the money and run.” I made 40% on that money overnight. I’m looking at it and it’s like, “I got out 1.5 hours too early,” but I don’t even think like that anymore. Nobody ever got broke taking a profit.

The way I look at it is it’s positive or negative. That number is black or red as long as it’s on black.

I like to look at it like this, “I had a good month.”

Jim, thanks again. I appreciate you coming on. Take care.

There you have it. Jim Maffuccio discussing how he pays pennies on the dollar for non-performing subordinate liens and still makes some mint. I want to thank Jim for coming on the show and talking about his methods and his process. I found it extremely fascinating. As you can tell, I let him go a lot of this episode because I wanted to learn. Now is the time where I grapple with you and thank you for reading and sharing your time with me because I do appreciate it. I ask for an honest rating and review over to iTunes, Google Podcast, Spotify or whatever platform you are using. I would love to have five stars, but you give what you think. Adios. Stay safe. Take care of each other. Besides self-awareness and prosperity, I wish you all safe and success with private lending.

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About Jim Maffuccio

PLP 106 | Subordinate LiensMr. Maffuccio is a 30-year real estate veteran and an expert in mortgage notes. He is deeply networked in the secondary mortgage industry and is responsible for acquisitions and underwriting as well as relationships with primary sources and key vendors.

Maffuccio received his degree in civil engineering from Louisiana State University in 1979. Upon graduating, Mr. Maffuccio moved to the West Coast and gained extensive project management experience with Exxon.

From 1986 to present, Mr. Maffuccio has been engaged full time in the real estate development and investment industry. In addition, he has overseen several hundred purchase, sale, and/or financing transactions, and has been a licensed real estate agent since 1985.

During his real estate career, Mr. Maffuccio developed, and/or rehabbed multiple residential projects in Southern California, including infill subdivisions, affordable homes, luxury homes and homesites, multifamily, and planned developments, such as the Gold Nugget Award-winning “Traditions” community in Fillmore. Mr. Maffuccio has personally executed and/or managed every aspect of the development process, including site selection and acquisition, project conceptualization and design, procurement of entitlements and permits, regulatory compliance, entity structuring and capitalization, construction management, marketing, sales, and investor relations.

In 2009, Mr. Maffuccio began investing in mortgage loans, developing key sources and vendors and applying his extensive real estate experience to the note investment space. In 2012 Maffuccio co-founded Aspen Funds, a fund management company focused on mortgage investments.

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About the author, Keith Baker

My ultimate goal is to create an economy for Real Estate (and other) Investors where banks are no longer needed. An economy where every day people look to each other for leverage and support. During the day I am an insurance adjuster for the oil field, where I handle millions of dollars of other people's money (OPM), and by night I invest in Real Estate and host this podcast. I hope you have an excellent experience and find real value within this website and the Private Lender Podcast. Please leave comments or submit your questions on the Contact Page.

I wish you prosperous, safe and happy lending and investing!

Thanks for listening


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