Thoughts from the desk of Bob Repass…
Earlier this year, I went to Washington, D.C., as a representative of the Seller Finance Coalition to help educate lawmakers on the unintended consequences of the sweeping financial regulatory laws that have gone into effect over the past six years. The very first meeting I attended was over lunch with U.S. Representative Roger Williams. His congressional district stretches from the Fort Worth area south to Hays County and includes much of Austin and the Texas Hill Country. For the past forty years, Congressman Williams has owned and operated his family’s car business. He knows first-hand what it takes to be a small business owner.
During our visit, I met with senators and representatives from both parties. The reaction was unanimously positive with each member of Congress expressing a desire to help the industry. Congressman Williams plans to take this bipartisan support and prepare language for a bill to introduce in the House to make some exemptions for the Seller Finance industry under the Dodd-Frank Act.
Recently, I had the opportunity to interview Congressman Williams, and I share that interview below. You can find out more details on the SFC at www.sellerfinancecoalition.org or drop by their booth at our upcoming NoteExpo November 7-8 in Dallas.
Bob Repass
Managing Director
Special Feature
Interview with U.S. Congressman Roger Williams
It seems like regulations just keep coming, what can small business owners do to keep up and stay in business?
As a small-business owner, I understand first-hand the headaches that government overregulation, such as Dodd-Frank and the Consumer Financial Protection Bureau, are causing all over America. Most small businesses are playing defense. Instead of growing their business and hiring more people, they are saving resources until the economy truly turns around.
Are there a couple of things the President can do now to give the economy a jolt?
Over the last few months, I have been discussing a plan I feel will jump start our economy. My plan is simple. First, lower the tax rate for individuals and businesses so they can begin to keep more of their hard earned money; and, in return, invest in America’s future. Second, cut both the capital gains and dividends tax. Third, allow for 100% depreciation of fixed assets that will allow businesses to deduct tangible goods the year of purchase. And finally, allow for a permanent tax holiday so companies can repatriate overseas earning. I believe that this plan will create more tax payers and allow business, both large and small, to be successful.
If Republicans take control of the Senate in November, do you think the president will work with Congress or are we looking at continued gridlock?
I’ve always said that 2014 is the most important election of our lifetime. Two more years of Harry Reid running the Senate will be detrimental to our economy. We need almost six million jobs to reach the pre-recession levels. If Republicans regain control of the Senate in 2014, I hope President Obama will consider working to enact some of the forty House job bills passed over the last four years.
Why do you feel it is better to do business in Texas?
I think the answer is pretty basic: Texas and Governor Perry have created a pro-business climate that has attracted companies from all over the world. As the former Secretary of State for Texas, my number one job was to encourage business to come to Texas. In my Congressional District alone, we have seen a tremendous amount of growth. In Austin, Dell, Intel and Apple are all investing in the local economy by creating jobs, essentially helping with infrastructure. Having the ability to attract companies that offer good paying jobs is vital, and I think in Texas, we have done just that.
What is the best business advice you ever received?
There is no substitute for hard work and sacrifice. I’ve done that for the last forty years with my own business, and I’m doing that in Congress.
The Trading Corner
Investors Facing another Market Change
By Kevin Shortle
Since 2010, individual and institutional investors have moved away from stocks and bonds and into real estate. They went from short sales to REO’s and foreclosures. More recently, they moved to the buy-and-rent model. It’s likely that trend will continue, but their returns will decline. This has been a boom time for real estate investors who now face another market change.
Where is the best value today?
Stock Market?
The New York Times interviewed Nobel Laureate Robert Shiller in May. In the interview, Mr. Schiller is quoted as saying, “Stocks have been more expensive only three times over the past century. Those other three periods are not exactly reassuring, either: the 1920’s, the late 1990’s and in the prelude to the 2007 financial crisis.”
In mid-July, a Bloomberg Global Poll indicated that among financial professionals, three of five say we are in or on the verge of a bubble. Also, in a mid-July interview in MarketWatch, financial consultant Andrew Smithers, who warned of the bubble in the late 1990’s, said that U.S. Stocks are now about 80% overvalued.
Hardly a value buy.
Bond Market?
In 2013, the bond market had its worst year in history. The Fed’s manipulation of interest rates has led to a guessing game among bond investors.
Through Quantitative Easing, the Fed has kept interest rates artificially low. They will inevitably go up, it’s just a matter of when and how much. When interest rates go up, the face value on bonds go down.
A guessing game is not a value play.
Real Estate REO and Short Sales?
With a limited supply and a huge demand, investors have had to pay higher and higher prices for these assets. In fact, a report in May by Realtytrac indicated that in the 1st quarter of 2014, cash buyers were paying 87% of the average market value. Even large institutional cash buyers were paying 82% of the average market value!
Paying that much for a rehab-type property leaves one with little margin for error. In addition, it limits investors to a long-term exit strategy.
Paying a premium price with a low margin of error is dangerous.
Buy and Rent Real Estate?
Which leads us to the buy-and-rent model. For turnkey rental property, short-term outlook for appreciation in value is not great. In many areas, property values have started to decline again, and the hedge funds that overheated the market have moved on. So, your only short-term play is your capitalization or “cap” rate or the ratio between net operating income and its capital cost.
Realtytrac’s second quarter residential property rental report took the average fair market rent of three bedroom homes in a county, annualized, and divided by the median sales price of residential properties in the county. Applying this across 370 counties, they determined that the average gross annual return is 9.97%.
Even though this number is artificially inflated, as expenses were not taken out, we can compare it to last year’s report, which was 10.6%.
So the trend is downward and most other sources indicate about an 8% cap rate for single-family rentals is typical right now.
Not a bad return, but why settle for that when you can make the cash flow without the liability, headache, and expense of being a landlord by purchasing mortgage-backed notes?
Real Estate Secured Notes!
There is a reason several “buy-and-rent” hedge fund investors left that market and started buying real estate secured notes. What is that reason?
It is the best value-buy today!
Not including shadow inventory or commercial notes, there is an estimated nine million notes. Black Knight Financial Services tracks this number very closely.
That inventory is larger than all the foreclosures that happened since 2008! With inventory that high, prices are at historical lows for performing, re-performing, or non-performing notes.
For passive investors, the obvious attraction is performing or re-performing notes while more active investors enjoy the large discounts offered by non-performing loans. Passive investors have no property liability or landlord responsibility; rather, they are simply “the bank.”
See the Case Study of the Month below for an Example of a Note You Can Own Today.
If you’re ready to move forward and grow your investment dollars, act today! We’re looking for passive investors wanting to make a solid rate of return buying notes! Contact Martha Speed via email at [email protected] or call 800-969-1200 x117. Let Colonial help you build a solid note portfolio! Be sure to attend Note Expo to learn more about today’s market changes and how you should invest…
Case Study
Performing Asset for Sale
SFR Owner Occupied
Milford Center, Ohio
| Sales Date | 1/15/13 | |
| Sales Price | $32,042.86 | |
| Down Payment | $2,574.19 | |
| Original Loan Amount | $29,468.67 | |
| Term | 153 | |
| Interest Rate | 9.0% | |
| Monthly P&I Payment | $325.00 | |
| Monthly T&I Payment | $156.79 | |
| Current Balance | $27,472.73 | |
| Date of Last Payment | 8/11/14 | |
| Date of Next Payment | 9/1/14 | |
| Payments Made | 18 | |
| Payments Left | 135 | |
| Current BPO Value | $40,000 | |
| Current BPO Date | 7/29/14 | |
| Current LTV | 69% | |
| Available for Purchase at | $23,976.81 | |
| Yield to Investor | 12.0% | |
| Investment to Value | 60% |
Employee Spotlight
Top Ten with Nathan Cheung
At the beginning of summer, we decided to add an intern to our team; not just any intern mind you! Nathan Cheung along with his parents Peter and Terrie are Titanium mentoring students with NoteSchool. Nathan has jumped in with both feet and works on a wide array of projects. He will be with us through the end of the year at which point he plans on returning to school to complete his college degree while working on the note business on the side.
How long have you been with Colonial Funding Group/NoteSchool?
I’ve been involved for two months.
What is your role at Colonial Funding Group/NoteSchool?
The Intern: I’m the assistant for Eddie, Bob, Susan and Charles and work on a variety of day-to-day activities. For example, I work with students if they have questions, help manage note pools, and also do due diligence on note pools. In addition, I do a lot of the daily background tasks that makes this company run.
Favorite Color?
Red/ Purple/ Yellow.
Favorite Food?
Asian Cuisine.
Favorite TV Show?
The Walking Dead.
Favorite Movie of all-time?
Guardians of the Galaxy for right now.
Last Book You Read?
The Sake Handbook (in progress).
Favorite Sports Team?
I really don’t have one.
The 3 people you would like to have dinner with (dead or alive)?
Confucius, Warren Buffet, and Larry Page.
What do you like best about working at Colonial Funding Group/NoteSchool?
Being able to work with a diverse field of experts in the real estate industry is rewarding. I get to learn from everyone’s point of view on how to approach different situations.
Quote of the Month
“The only place success comes before work is in the dictionary.”
– Vince Lombardi
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