Published: November 03, 2014

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Thoughts from the desk of Bob Repass…

October marked my one-year anniversary working at Colonial Funding Group. The first year has been filled with many challenges and opportunities as Eddie and I look for ways to continue to improve and grow the business. One of our key accomplishments has been the creation of Colonial Capital Management, LLC, a private equity fund for Accredited Investors. Our initial fund is now open and deploying capital. Our fund-raising period is open until the end of the year.

One of my main goals during the first year has been to build a better, stronger brand across all three of our companies and to clearly convey how they all fit together. In that spirit, we created the tagline Learn, Trade, Invest which we feel summarizes our business strategy very succinctly.

Our NoteSchool operation, under Eddie’s guidance, remains the industry leader in training individuals in buying real estate secured notes. The network of investors we create through our training program provides the fuel for our other entities.

Incidentally, my history with Eddie goes back to our trading days. Sometimes people forget that Colonial Funding Group has been a premier note trader for over 30 years. I traded loans with Eddie when I ran large institutional investment operations for The Associates and Bayview Financial. Note trading has been and will continue to be the heart of what we do.

In order to take our firm to the next level, Eddie and I realized we needed to develop a platform to build our company balance sheet while leveraging our investor network we created through NoteSchool as well as our years of experience in trading notes. That is where our capital piece arose from, and with its addition, we are now in a position to have all three of our companies work in unison.

This is the story we are telling as we move forward. We recently attended the SBRE Summit in Seattle where we shared our vision with the audience and have had a great reaction. Spotting opportunities in today’s real estate investing markets is no easy task, especially when there are unforeseen risks out there. As an investor, it’s crucial to know ahead of time what you’re getting into.

There are two major events happening the first week of November and both will have an impact on our industry. The first is the mid-term elections taking place Tuesday, November 4th. Whatever the outcome, we will have a better idea of what the next couple of years will look like especially from a compliance and risk management perspective.

The second is NoteExpo 2014 which takes place November 7th – 9th in Dallas. Our goal with this event is to bring industry leaders together with potential capital partners, sellers and investors while providing exclusive content, market-leading analytics and due diligence tools to help assess and monitor risk, so that we can all maximize the rewards.

Bob Repass
Managing Director

The Trading Corner

Millennials Demographics Raise Demand for Creative Financing

By Kevin Shortle

I recently had a conversation with a fellow real estate note investor about a transaction that he had just closed on. By using creative financing, he should easily double his money.

He purchased a non-performing note on a single-family home in Florida and was able to get a Deed in Lieu. He then offered the property “as-is” to a young couple under a lease-purchase agreement. The arrangement allowed the couple to make and pay for their own renovations.

This note deal shows how an understanding of the new demographics and behavior patterns will allow you to successfully navigate the changing real estate market.

The Millennials

80 million people were born between the early 1980’s and early 2000’s. The behavior patterns of this massive wave of people, known as Millennials, will dramatically define the economy, politics, social issues, and of course real estate.

Some questions to consider: What percentage are interested in buying? When? What percentage prefers to rent? What price range can most of them afford? Where do they prefer to live? Are school districts important or are they delaying marriage and children?

You can see how the answers to these and other questions will have a dramatic impact on the real estate market. This is why Fannie Mae (Federal National Mortgage Association) and others do National Housing Surveys. These surveys try to gain insight into the future behavior of this generation.

Pent-up Demand

Although there is extensive data on the subject, this article will only focus on those 18-36 year olds who are currently renting. Here are some of the highlights pertaining to this demographic from the surveys:

  • Over two-thirds of current renters agree that owning is more sensible for financial reasons
  • More than half also believe that owning is a better choice for lifestyle reasons
  • Two-thirds believe that getting financing will be difficult
  • Half say credit scores and lack of a down payment make it too difficult to get a loan
  • Insufficient income, existing debt and lack of job security were also listed as reasons many were unable to get a loan
  • Student loans are a big reason for existing debt

The bottom line here is that this generation wants to become homeowners eventually but can’t get qualified under the current institutional lending guidelines. In addition, there is an estimated 20 million 18-to-31 year olds living with mom and dad who I believe would also like to move out but feel unable to do so.

Creative Financing

This pent-up demand that stems from looking for financing opens up the door to lease-options, lease-purchases and other creative selling techniques. In fact, the Fannie Mae National Housing Survey released May 2014 indicates:

  • 73% found lease-to-own arrangements desirable
  • 68% found it desirable if the location was in a preferred school district
  • Permission from the landlord to complete upgrades or renovations of the rental home at the tenants expense were desirable

Back to the Deal

So how did my note investor friend go so quickly from owning a non-performing loan to entering a lease-purchase arrangement?

As I mentioned, he purchased a non-performing loan on a single-family home in Florida. He then paid the owner-occupant $1000 in a cash-for-keys arrangement.

While working on the cash-for-keys with the owner, he started having conversations with the neighbors, whose son and girlfriend had been living with her until they could afford to get a place of their own.

Once he had the Deed in Lieu, the investor structured a deal where the couple could move in, do their own renovations at their own expense, and rent for up to two years.

He incentivized the young couple by allowing them to rent for up to two years, and has offered them the opportunity to purchase the home at any point at a predetermined price within that time frame. In addition, the couple has the choice of either getting conventional financing or having the investor finance it for them.

So, he offered a creative financing arrangement to a Millennial couple. He allowed them to renovate the property to suit their needs and wants. He incentivized them with the flexibility to finance the property as best suits them.

The investor, who did not have to do any renovations, will make a great return no matter which financing option this young couple chooses. He arranged a deal that targeted exactly what statistics indicate this massive generation is looking for.

It’s a win-win: the investor is happy, the young couple is excited, and Mom is happy as well!

Case Study

Performing Asset for Sale

Single-Family Residence Owner Occupied
Kansas City, MO

Sales Date 1/09/2013
Sales Price $24,648.35
Down Payment $817.72
Original Loan Amount $23,830.63
Term 168
Interest Rate 9.0%
Monthly P&I Payment $250.00
Monthly T&I Payment $26.17
Current Balance $22,268.43
Date of Last Payment 10/15/14
Date of Next Payment 11/1/14
Payments Made 20
Payments Left 148
Current BPO Value $45,000
Current BPO Date 7/29/14
Current LTV 49.7%
Available for Purchase at $19,243.50
Yield to Investor 12.0%
Investment to Value 43.0%

Employee Spotlight

Top Ten with Martha Speed

There are many people behind the scenes who drive the engine to make our companies successful. In our continuous Top Ten series, this month we turn the spotlight on one of these people so you can get to know them better. This month the spotlight is on Martha Speed, Eddie’s amazing wife.

How long have you been with Colonial Funding Group/NoteSchool?
I’ve been involved in helping with processing and functions for Colonial since its inception.

What is your role at Colonial Funding Group/NoteSchool?
Investor Relations – working with investors who want to buy individual performing or non-performing notes.

Favorite Color?

Favorite Food?

Favorite TV Show?
The Good Wife.

Favorite Movie of all-time?
Forrest Gump.

Last Book You Read?
Break Out by Joel Olsten.

Favorite Sports Team?
Argyle Eagles Football.

The 3 people you would like to have dinner with (dead or alive)?
My Dad, Ronald & Nancy Reagan, and Tom Hanks.

What do you like best about working at Colonial Funding Group/NoteSchool?
Everyone’s dedication, hard work, and expertise in their specific area on the Colonial or NoteSchool team. Eddie comes up with lots of ideas and plans, but it takes everyone’s commitment to make them happen.

Quote of the Month

“Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
– Warren Buffett

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