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The Buyline, May 2017

Thoughts from the Desk of Bob Repass…

As I sit here writing this month’s column, I am sitting out on the balcony overlooking the Pacific Ocean from our room at the Hotel Del Coronado, “The Del.” Words cannot describe how peaceful and serene it is.

I made a commitment to my wife, Angie, that this year when we traveled to events we would tack on a day or two before or after the event so we could take a well-deserved break. Later this week, we will be attending the SBRE Investor Summit in Del Mar, California. This is the annual event where we speak to an audience of approximately 150 accredited investors and present the opportunity to be an investor in Colonial Impact Fund-II.

So, I figured if we were already going to Southern California anyway, why not go a few days early and enjoy the sand and sun? Now some of you may not know this, but I am a “flip-flop” guy. No, not the flip-flop political guy who changes his opinion every time the wind blows. I mean any day I can wear my pair of flip-flops around is a good day!

Part of the thought process being taking these kinds of breaks was to try and have a time to “disconnect.” Now I realize that may sound odd coming from the guy who dedicates a lot of time, especially in this column, stressing the importance of connecting and reconnecting with your contacts on a regular and frequent basis.

The kind of disconnecting I am referring to in this case, is more like “unplugging.” Taking a step back from the almost nonstop checking of emails, putting out fires back at the office, and replying to “urgent” text messages. I must confess it takes a certain kind of intensity to focus on not staying connected. Right now, we look at trying to disconnect a few hours at a time. Obviously, I haven’t come close to mastering it if I am writing this column while being disconnected!

Interestingly, we enjoyed a unique experience this morning that while in effort to disconnect resulted in connecting with a couple of awesome folks. This morning we asked the concierge for a recommendation of a local place to grab breakfast. She quickly said, “you need to check-out Clayton’s Diner.”

So, we walked a few blocks and as soon as we walked in the door I knew this was our kind of place. Just think “greasy-spoon!” There were a few booths along the wall, all full, but most of the seating was at a u-shaped counter. So, Angie and I sat in two empty seats at the counter and opened the menu. There were more options than you can imagine, all sounding awesome, but I am pretty predictable in these kinds of places and usually get three eggs over easy, hash browns and either sausage or corned beef hash. A sign on the wall said, “homemade corned beef hash” so that decision was easy.

Just after we ordered two guys came in and sat in the seats next to me. The one right next to me asked me what I ordered, I told him eggs and the corned beef hash. He said, “great choice, they make the best hash.”

We started talking and I soon found out that Bob was a retired Army veteran and his friend Johnny was retired Navy. They both lived on Coronado island and owned and operated a boat repair business down at Coronado Marina.

We had a great conversation covering a whole range of topics -nothing world changing but just telling stories about our lives. My point is, even when you are making an effort to disconnect from the hustle and bustle of your daily life, keep your antenna up and be ready to connect with some new folks!

Bob Repass
Managing Director

Stay up to Speed with Eddie

Fish with a Net Instead of a Hook

by Eddie Speed

Like you’ve heard me say, the best way to eat an elephant is one bite at a time. Well, after more and more bites, I was starting to get a pretty good idea of what elephant tasted like.

I described in my last article how it was close to a year after the launch of my note investment company in the early 1980’s that I realized I could find the names of potential customers written down in the public records at the courthouse. It was an idea that came from experience and noticing patterns. And I liked that fact that potential customers couldn’t hide from me!

That’s when I switched from using broad reaching newspaper ads (hunting with a shotgun) to sending out targeted direct mail (and hunting with a rifle). Looking back, even though it was a simple idea that had been staring me in the face, I can’t believe it took me almost a year to think of it!

And just like the previous idea, another big idea hit me when I was driving home from work. Most of the names of note owners in the courthouse record books belonged to banks, mortgage companies, and specialized lenders so I had been skipping over those to look for individual note owners. But it dawned on me that I needed to pay more attention to specialized lenders and hard money lenders who kept making several loans to the same individuals.

What did that tell me? It told me there were a lot of them buying distressed properties, reselling by carrying paper and many of these individuals didn’t just own one note – they owned entire portfolios of seller financed notes! Even though I never turned my back on individual investors (and still haven’t) I realized that instead of catching one fish with a hook, I could catch a whole school of fish with a net!

It took a lot of work to find a customer with a single note. Then whenever I negotiated a deal for a person with just one note, I cleaned out their entire inventory, so I had to find the next customer. But by pursuing owners of note portfolios, I was moving up to the big leagues. I had to really know my stuff, so I had to up my game on knowledge across the board; creating notes, servicing notes, and how these clients could sell assets. Back then I couldn’t get the information handed to me (like at NoteSchool), so I had to analyze and learn the mechanics.

Another obstacle was that there wasn’t a category in the Yellow Pages where I could go find names of people who owned portfolios of seller carried notes. Finding an individual note owner was hard enough, but owners of note portfolios with 10, 50, or 100+ notes were rarer and a lot harder to find.

These were uncharted waters where less tenacious personalities would have turned back to familiar shores. But an entrepreneur loves this type of situation because we realize that if no one else has done it first, then there’s a huge potential for untapped opportunity. It’s times like this that give me an inkling of what Christopher Columbus felt like!

It was time to put on the ol’ thinking cap. I came up with a technique I call Reverse Indexing. I looked through the records of specialized lenders for recurring names of individuals or companies like real estate investors and land sales offices. These note portfolio owners tended to keep going back to the same hard money lender since they had steady business relationships. Portfolio owners never had a different original lender for every note. Once I found names that appeared several times with the same lender, I knew I had a good lead, then I mailed them information about what I could offer, and even called them up. I also custom tailored a traditional “sell your note” type letter for each customer.

When I finally connected with a portfolio owner, I noticed another pattern that I never would have predicted. When they called us from our traditional direct mail letters, they tended to talk about one note and rarely would they tell me up upfront that they had dozens of others. But when you sling a machete long enough, you get better at getting through the jungle. Because I had done my homework on each lead, I usually knew the guy had other notes he was holding back.

Note portfolio owners were often great at some other aspect of the real estate business, but tended to have a very limited knowledge of how to maximize the way they created seller-financed notes, or how to evaluate how much a note is worth. They might be a real estate investor that sold a hundred homes a year, but structuring notes is a different art form than swingin’ a hammer or rehabbing old houses. They seemed to think that notes just evaluated themselves. But nobody accidentally discovers the value of a note. They would get me to price one note, then would expect the same price for all the others with no understanding of what made that more or less valuable to other notes. It reminded me of my early days as a horse trader; they’d show me one horse and then expect the same price for the whole herd.

When I gave them a realistic assessment for every note based on all the determining factors we now teach in NoteSchool, they tended to be pretty disappointed that their notes weren’t nearly as valuable as they thought; largely because they hadn’t structured them right in the first place. They had lots of substandard notes and didn’t like hearing the bad news.

I would first help them sell their existing notes, but more importantly I showed them better advertising strategies that attracted better credit buyers with bigger down payments so they would have the best notes that were worth a lot more. Plus, I showed how to structure the terms of sales as well as the terms of their notes – basically how to be more disciplined in their lending.

This is how I added value to the relationship, which I’ll tell you more about next time.

I’ve long since moved on from the antiquated method of searching dusty books in the courthouse to find customers. Now I use my Reverse Indexing technique, which is something we teach in NoteSchool. But long story short, since then I’ve closed well over 1,000 portfolios of notes, more than any other trader in the country, and some as big as several hundred notes per portfolio. That’s a lot of schools of fish!

‘Til next time,

Eddie

The Trading Corner:

Find Notes to Buy On Demand With NotesDirect

By Tracy Z Rewey

I have a confession to make. One of the most frustrating parts of note investing is FINDING the notes.

Why do you think investors, big and small, work with brokers and referral sources?

Investors want to INVEST in real estate notes…not spend their time looking for notes.

I know I’m not alone in this feeling. I get calls and emails all the time asking…

Where Do I Find Notes To Buy?

Performing and Non-performing notes are primarily bought at a discount from one of three places:

  1. Private parties that seller finance
  2. Banks selling scratch and dent loans or non-performing notes
  3. Hedge funds buying in bulk then liquidating smaller pools or individual notes

It takes marketing to cultivate these sources. And marketing takes time, dollars, or connections. Sometimes all three!

Before I reveal a revolutionary new shortcut for investors, let me go over a bit of history.

Sourcing Real Estate Notes

There are five main ways to market to “mom and pop” seller financed note holders. Some take more of your time (referrals, online, building your brand) while others require greater capital (direct mail and ads).

Non-performing notes (NPNs) are usually sold off by banks in large portfolios, which are gobbled up by the big hedge funds. Unless you have substantial funds or connections with asset managers, it can be tough for the private investor to get a foot in the door.

These wholesale methods are great if you have the time or dollars to build your marketing machine, but what about the passive or part-time investor? Someone that wants the high returns and security of real estate notes but just doesn’t have the time to pursue wholesale strategies.

Wouldn’t it be great if there were an Amazon for Real Estate Notes?

A virtual retail store where you could search for notes, select the ones you like, view the collateral doc history, and purchase with no haggle pricing?

That’s exactly what the NotesDirect.com listing and trading platform provides!

The NotesDirect.com Solution

I had the opportunity to test drive the note investing platform and let me say… I was impressed. In fact, I was so excited about the project I decided to collaborate with the NotesDirect team in a consulting role. It’s a game changer that makes it easier for private investors to find and buy notes and I want to be part of it.

The NotesDirect platform provides a retail solution to the challenges that we all face in the note business. I’m guessing you’ve encountered or even made a few of these statements yourself…

Problem: I just don’t have the time to market for notes.

Solution: NotesDirect.com provides notes on demand. Choose from hundreds of cash flows in a non-auction format. Search by State, Balance, Interest Rate, Asset Type (Performing, Non-Performing, REO) and more! Think MLS for real estate notes.

Problem: I’m looking for investment income, not a second job.

Solution: The listings on NotesDirect are ready for purchase with no haggle pricing. Answering calls from sellers, negotiating pricing, and collecting documents take time. Time, you don’t have if you are busy in another career and are looking for investment income, not a second job. With this online platform, you can focus on building your portfolio.

Problem: Chasing down paperwork is a major hassle.

Solution: Download a full collateral file upfront with just a click of the mouse. If the devil is in the details then purgatory is gathering all the documents. The ability to view the note, recorded documents, prior title, recent BPO, and a payment history UPFRONT is a note buyer’s version of heaven.

Problem: I want to own and control the note, not invest in a fund.

Solution: You are purchasing the note directly from the seller (no middleman). A third-party prepares the transfer documents, and you (or your retirement account, trust, etc.) take title and possession of the note upon funding. You also select your own servicing agent. This keeps you in control, ensures compliance, saves you time, and makes sure the payer doesn’t miss a beat on where to send payments.

Who Is NotesDirect For?

The platform was created for private investors with access to their own funds that are ready to take action. An investor needs to be prepared to review a transaction and verify details before funding. You have ten days after placing the offer to perform your due diligence before closing.

It is not for brokers wanting to place notes with institutional investors. While brokers are an important part of the note buying process, they would want to source their own deals using wholesale methods.

What Does Access To Note Listings Cost?

I saved the best part for last… NotesDirect retail access is free! If you decide to purchase a note after due diligence, there is a $750 transaction fee that is only collected at closing for completed deals.

Here is how you can start browsing notes for sale:

  1. Visit NotesDirect.com to register online.
  2. Login with the credentials you receive upon approval.
  3. Start searching for notes

I hope you’ll join me as we work to make NotesDirect.com the #1 online trading platform for investing in discounted real estate notes!

In The Spotlight

Americans need protection from the Consumer Financial Protection Bureau

The following Op-Ed by Congressmen Jeb Hensarling and Roger Williams first appeared in the April 12, 2017 edition of The Texas Tribune

Few Americans are familiar with the Consumer Financial Protection Bureau, but it is the most powerful and least accountable Washington bureaucracy in history and a perfect example of the political left’s dangerous belief that the ends always justify the means.

While the agency has an important mission, it was purposefully designed by Democrats to evade checks and balances that apply to other regulatory agencies, including those responsible for consumer and investor protection. Its bizarre, unique and defective design is exactly why a panel of federal judges ruled that the CFPB is structurally unconstitutional.

In its present form, the agency is an affront to the Constitution, to checks and balances and to due process. This is why we support the Financial CHOICE Act, legislation that changes the CFPB from an unconstitutional agency of unelected bureaucrats into a constitutional and accountable civil enforcement agency that enforces consumer protection laws written by Congress.

The CFPB’s current director, Richard Cordray, recklessly ignores the due process protections that have been deeply rooted in our American legal system for centuries. This abuse may generate headlines, but it does not achieve justice. The Dodd-Frank Act grants him incredibly broad powers to regulate consumer credit products, yet Cordray continues to ignore the law and the intent of Congress by making end-runs around existing laws.

In the legal decision that declared the agency’s structure unconstitutional, the court found that Cordray unilaterally reinterpreted the law and then essentially created his own law after the fact. In addition, the court said Cordray ignored the statute of limitations to justify imposing a huge fine on an American business. This is an outrageous violation of due process rights.

Another example of the agency’s violation of due process relates to its use of “unfair, deceptive or abusive acts and practices,” or UDAAP, authority. Citing the largely undefined and amorphous UDAAP is CFPB’s go-to claim, leaving plenty of wiggle room for the director to decide what the law says and means. The agency could provide clarity by writing rules to define UDAAP further, but refuses. Thus, CFPB deprives legally operating businesses of the information they need to follow the law when developing new products and services that benefit consumers. Given that Cordray was already found to have ignored legal protections in order to impose a multi-million-dollar fine on a company, clearly this UDAAP authority is a legitimate cause of concern.

Republicans and Democrats agree that the laws on the books must be enforced. Where we disagree is over whether unelected bureaucrats should have the power to write new laws. As currently structured, the CFPB has virtually unlimited power to do just that — and is harming consumers with higher costs and less access to financial products and services as it does.

The changes we seek through the Financial CHOICE Act will truly make the CFPB the “cop on the beat” its supporters claim they want. Cops don’t write the laws; they investigate and enforce the laws — and they don’t serve as cop on the beat, judge, jury and Congress all rolled into one.

It would be far easier to secure criminal convictions if the Constitution didn’t require probable cause for warrants or protect Americans against unreasonable search and seizure, but few would argue that justice would be served. In the same way, the success of the CFPB must be judged both on how it protects consumers and on whether it follows the Constitution.

In this debate, we must also remember that true consumer protection puts power in the hands of consumers, not Washington bureaucrats. True consumer protection promotes competition and choice and ensures that consumers have access to transparent and innovative markets that are vigorously policed for fraud and deception. In fact, the Financial CHOICE Act contains the toughest penalties in history for those who commit financial fraud, insider trading and deception. Our plan toughens penalties — not out of some ideological or poll-driven war against “Wall Street” — but to better protect consumers, restore checks and balances, defend due process and strengthen our markets.

Jeb Hensarling, U.S. Representative, Dallas
@RepHensarling

Roger Williams, U.S. Representative, CD-25
@RepRWilliams

ryan-parsonCapital Markets Update

Wealthy in the United States: Part 1

By Ryan Parson

Having the great privilege of working with accredited investors and high net worth families, I’m always impressed with the discipline our Mile Marker Club members and families we co-invest with have as they consistently grow and preserve their wealth.

In this three-part series, we’ll discuss some of the key disciplines high net worth families possess and can be applied by anyone who is serious about amassing wealth.  While some of these elements you may already find yourself disciplined to (and may seem very apparent), others will be new or possibly need to be re-engaged within your WealthCare© plan.

As with most areas of our lives be it fitness, personal relationships, business interests, spiritual journeys and the list goes on and on, discipline in and of itself is necessary to nurture in order to be successful.  In other words, it doesn’t happen by accident.  While these disciplines we’ll discuss over the next three newsletters are important and some even blatantly obvious, managing and overseeing your progress towards consistent success with them is as equally important.

Here they are:

  1. Make more money than you spend.

This is a very difficult concept to abide by in this country.  This is the largest reason less than 4% of the American population is considered to be an Accredited Investor.  Our economy revolves largely around deficit spending, and I’m not just referring to our Federal Government.  Most retail purchases of all sizes in this country have some sort of debt structure involved with it, whether charging a purchase at the local department store to buying a home.

In other words, ‘cash is king’, as it’s been said.  The more you pay with cash, and still have some leftover, is a key element to long term financial wealth accumulation success.

Debt spending is what allows us to have our dreams be brought to their reality today and not have to pay for it until some point in the future.  Particularly with low interest rates the last decade, we still live under a façade that “cheap” interest equates to “not much money.”  Take a look at your year-end mortgage statement and see how much interest you paid and I’m sure you could think of at least 10 other ways that money may have been put to a potentially better use.  Not that you shouldn’t own a home (as I’ll talk about later), we just must be mindful for how long we are paying the “cheap interest” for.

Bottom line, if you can’t afford something now based on how much money you currently make, DON’T spend the money you don’t have today even if you think you will have it tomorrow.

  1. Save a large percentage of your income.

Do you have savings?  Unfortunately, many Americans do NOT.  Once again, it’s why barely 4% of Americans have amassed at least $1,000,000 of net worth, excluding their primary residence.  That means the other 96% haven’t saved enough yet (at least by the accreditation standard).  And as I’ve written about in the past, the accreditation standard opens your world of potential investment options greatly that only the 4% get access to.  While many can make a legitimate argument today that $1,000,000 is not a lot of money, it continues to elude the vast majority of our fellow citizens from ever accumulating it in their lifetimes.  Relating back to making more than we spend, depending on what the percentage means to you will go a significant way in determining if you are one of the few that ever amass $1,000,000 of net worth, excluding your primary residence.

  1. Pay yourself first.

While this may be a lesson that most of us heard early on in our “wealth” careers, it’s easier said than done.  Particularly when first starting out, say after college, many are buried under student loans, saddled with a car payment and are supporting a hefty rent load, especially as rents have increased at a healthy pace the past 10 years.  It seems everybody else absolutely gets paid before you do.  Combine that if you are starting your own business and have employees, it never seems like there is any money left over to pay yourself.

Even the most modest of budgets and lean operating conditions leave room to pay yourself.  After all, if you don’t, there will always be somebody or something else eagerly waiting for you to pay them from your otherwise hard earned income.

Nobody else will ever be more interested in your wealth than you are, so pay yourself first!

  1. Know your outflow.

While pinching pennies doesn’t have much appeal to many of us, understanding your pennies that others are gathering from you are crucial to amassing a significant amount of wealth.  Given how easy it is to spend money today through an endless variety of plastic in our wallets to the stealth swipe of your smart phone at a check-out kiosk to our stored payment information at our favorite online retails, you need in-home/at fingertip technology to properly alert you to those pennies leaving your pockets and in other words, keep track of all of it.

Next time you are in a parking lot, in a store or at the gas station, notice how many pennies are on the ground.  Are any of them yours?  As they say, every penny counts and therefore each need to be treated with the respect they deserve and not carelessly ‘left on the ground’ for somebody else to pick up.

For those of you that are business owners, you can think of this as your P&L statement.  With our wealth, it too needs to be treated like a business with a P&L statement so you know where all your expenses are going.  Do you run your wealth with a P&L statement that you could produce within 30 seconds?  That’s how important this discipline is.

  1. Is your wealth superior or subordinate?

What I mean is, how much debt do you have?  Most of us at some point in our lives has a debt load we’re supporting.  Whether student loans or house loans, it is part of the beautiful system in America that gives everyone the opportunity to ‘get ahead.’  However, if you owe debt, that means somebody else owns your debt.  Whilst getting started as responsible adults, we tend to all have debt, the question is, how long do you have it for?  All the normal things you’ve heard about managing debt certainly apply here;  not too high of interest rate, pay your highest interest debt off first, etc, etc.  Where we get into a false sense of comfort is with the line of thinking and mindset of “being in debt is just natural and I’m going to have it for a long time.”

The longer you have debt, that means somebody else holding that debt is superior to you and depending on how it is structured, your overall WealthCare goals will always be subordinate to it.  While this may not be all bad under certain circumstances, this is a leading cause of why so few Americans have the otherwise level of wealth they ultimately desire to have.

And yes, this even applies to the mortgage you have on your home.  Don’t let that “cheap” 2.9% interest rate on your mortgage lull you into a false sense of belief…you are still subordinate to it and that’s just where your lender wants you to be.

  1. But own your primary residence.

Many homeowners think of their primary residence as an investment.  That was evident of the housing crisis in 2008 that was lead, in part, by homeowners treating their homes as their unlimited ATM machine.  While your primary residence is indeed an asset, it’s a use asset and not an investment asset.  This is a key distinction and why your primary residence is excluded from the calculation of determining, based on assets, if you are an accredited investor or not.  Generally, over time, owning a home free and clear brings a significant level of wealth to the balance sheet.  However, how you view that wealth in your home is a key difference to continuing to advance your balance sheet in the right direction.

Historically, homes appreciate about 3% per year over a long period of time.  While this may not seem like much, they do generally keep up with inflation.  Because housing expenses are typically one of the largest monthly expenses to a family budget, maintaining an appropriate home for your wealth not only brings joy and happiness to your family, but also to your bottom line.

Stay tuned for next month’s newsletter where we’ll explore additional disciplines.

Here’s to smart investing!

Quote of the Month

Listening to podcast, reading a book, listening to an audiobook and watching films isn’t a waste of time. It’s how somebody becomes wise!” – Deyth Banger

This Month’s Poll Question

Have you ever listened to a podcast?

Connect With Us

Are you on Twitter? If so, be sure to follow us on Twitter @NoteSchool and @ColCapMgmt, if not, why not?

Bob Repass
Managing Director at Colonial Funding Group
Bob Repass is a 25-year veteran and expert in the seller finance mortgage and distressed asset industry. Over the course of his career, he has purchased over 40,000 performing and non-performing mortgage loans totaling over $2 billion dollars in volume, giving him an unparalleled track record in the industry. Mr. Repass most recently served as the President of Pathfinder Equity Holdings, LLC a mortgage consulting, loan trade advisory and real estate investment firm whose focus is to assist clients in realizing the maximum potential on their investments by improving acquisition returns, as well as loss mitigation and exit strategies.
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