Thoughts from the Desk of Bob Repass…
2017 kicked off with a once-in-a-lifetime experience as Angie, Kristin and I, along with Eddie and Martha, got to travel to Washington D.C. for the inauguration festivities. Being a witness to this historical event, regardless of what political leaning one may have, is truly something that we will never forget.
We were fortunate enough to meet with several lawmakers while we were there about the Seller Finance Coalition and our efforts for regulatory relief. We even wore our brand new “Make Seller Financing Great Again” baseball caps!
We attended the Texas Black Tie & Boots Inaugural Ball and listened to some “Red Dirt Country” music by Wade Bowen and Jason Eady, as well as traditional country music of the Gatlin Brothers and Clay Walker, and even got to see the legendary Beach Boys perform.
We enjoyed a bird’s eye view of the inauguration ceremony and parade from the 9th floor balcony of the 101 Constitution building. Truly an amazing few days!
It is more than apparent that our Nation is still very much divided and there continues to be an air of uncertainty as to what will take place going forward. The administration is still in the process of having all potential cabinet members confirmed and in place. My hope is they initially focus on issues that can best have some bipartisan support and build some momentum so that the American people can feel something good is happening.
Bob Repass
Managing Director
Stay up to Speed with Eddie
My Focus for 2017: Helping You Think Like an Entrepreneur
by Eddie Speed
I owe a huge debt (of gratitude) to my father-in-law for two reasons. First, for raising my wife, Martha. And second, for teaching me about life and business.
You’ve probably heard me talk about how he was a pioneer in the specialized field of buying and selling notes, but that’s only part of what I learned from him. Even more importantly, he imparted how to think like an entrepreneur instead of like a wage-earner. What he taught me changed my life, and my goal for 2017 is to help people change their mindset to think like entrepreneurs as well.
I grew up a cowboy, hanging around horses, horse barns, and horse auctions. My dream was to be a professional rodeo cowboy. Unfortunately, I really didn’t have the natural ability to make it to the top of the rodeo circuit, but I did have the natural knack for buying and selling; or as I call it, horse tradin’. I met my future father-in-law shortly after I graduated from the Ranch Management School at TCU in 1980. I was one of the only poor kids in the program filled with rich kids from wealthy ranchers. After graduation, the other kids went back to their sprawling family ranches, and I went to work as a state horse inspector in Hattiesburg, Mississippi.
Anyway, he had asked for my help in finding the right horse for his daughter. As he watched me negotiate the purchase of the horse, he realized I could apply those same skills in a whole other way – buying and selling notes.
Back then, I thought “a loan” was being by myself. I’ve never claimed to be the smartest guy on the planet, but I was smart enough to know that what he was doing was something I could learn how to do. I worked for him for two years for free – the only payment I got was learning how the business works and learning how to think like an entrepreneur.
You could say I reinvented myself, which I admit was pretty scary. And my goal for 2017 is to help you reinvent yourself just like I did.
I’ve been in the note business for 36 years, so I’ve had to survive all kinds of economic conditions. Once again, I can’t say it was my lofty intelligence that helped me survive the twists and turns over the years. And it sure wasn’t the ability to push the buttons on a calculator. What helped me survive was plain ol’ perseverance. Without the ability to think like an entrepreneur, I probably would have thrown in the towel several times.
I love this quote: “It’s not that I’m so smart, it’s just that I stay with problems longer.” Know who said that? Albert Einstein!
I’m a tenacious soul with a never-give-up spirit. When other people gave up on the changing note business, I kept going, learning, and adapting. I happen to believe that the same never-give-up spirit can be awakened in you. Here’s another quote I love, this one by Calvin Coolidge:
“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On!’ has solved and always will solve the problems of the human race.”
What I’m talking about goes beyond simply learning the mechanics of how to structure notes, which is something NoteSchool is really good at teaching. This year I want to go beyond that and awaken the never-give-up, entrepreneurial spirit in you. This will give you the strength to overcome the obstacles you don’t even know exist yet.
My background was in ranching. Yours might be in engineering, transportation, insurance, or whatever. But regardless of whatever business you start out in, this year I want to help give you the vision, knowledge, and confidence to become all you can be by thinking like an entrepreneur. And I want to help you find your “Why” for whatever it is that you do, but more on that next time.
Until then,
Eddie
The Trading Corner
What Changes Will the Real Estate Market Undergo in 2017?
Experts nationwide are currently addressing this question. They are looking at supply and demand, income and debt, rules and regulations and the impact of a new administration. I have read numerous articles and the opinions are all over the board.
This is not surprising, as no one really knows what will happen or how quickly any changes occur. Most of these expert opinions contain bias as to the authors’ area of expertise or professional practice.
The National Association of Realtors, for example, believes that real estate sales, especially with the help of a realtor, will grow. Mortgage originators foresee changes to the lending laws that will allow them to better serve demand of new homebuyers. Property flippers expect more opportunities to flip.
On the one hand, it was great to see the optimism returning but on the other, once again, no one really knows what will happen and how timely changes will occur. So how does one prepare?
- Have flexibility and adaptability
- Prepare for everything
In the “note” business, we are grounded in both the real property and financial markets. This allows us to have more flexibility and adaptability, which obviously is favorable in a changing market. We have more cards in our hands than just a wholesaler, rehabber or landlord. Since we have more cards (options) we can better decide which ones to play and which ones to hold back.
Prepare for changes but don’t lose focus. In other words, don’t get so jammed up about what “may” happen while missing out on opportunities. Focus on the situation and opportunities at hand. Stay educated and well read about your profession and adapt when necessary.
MarketPulse
Here is How to Find Market Deficiencies
by Eddie Speed
Our Eddie Speed was recently interviewed by DSNews about determining where to buy assets based on market deficiencies, here is a transcript of that interview:
We generally consider ourselves to be in the low price band space, and I’ve found that people would say, “I would rather fight if I’m going to make an investment in a distressed asset. I’d rather buy a $300,000 distressed asset than a $50,000 distressed asset.” The answer is, of course you would and so would everybody else. But as the margins and all of the distressed inventory has changed so much, it’s pushed me back into really what has been my rabbit in the briar patch most of my career, which is inexpensive working class real estate. And there’s a difference between that and unsafe real estate.
The thing that I noticed over and over and over, and this isn’t true in every market, but this is prevalent in probably 20 states, is this: In Ohio or Indiana, or St. Louis, or Kansas City, and it would be a safe neighborhood. I would see a realtor BPO and it would be valuing a property at $50,000, or $40,000, and you’re like, “That’s crazy. How could you look at that neighborhood and say it’s only worth $40,000?” And the reality is it’s because there wasn’t any bank financing for $40,000, so every house that was in MLS and sold, it was basically a cash deal. Yet it would rent for $850 a month, so you have a house that rents for $850 a month, yet the realtor is running BPO comp, all cash, and can only come up with $40,000. That smells like an opportunity to me, because there’s no way the house is only worth $40,000.
I ran in a circle with a lot of guys that were filling that gap, but what I realized was, in talking to them, when they were selling a house for maybe sub-$80,000, they almost never got bank financing. They were selling them all for cash. They do a turnkey deal, they renovate the house, they find a tenant, they manage the house, or have it managed. You know they make it a true turnkey for an out of town investor, and they just sell it on anywhere from a 7 to 11 cap rate, depending on what the market is.
There’s people that shortcut any of those things that I just said. But if somebody was a good operator and paid attention to the details, they’re selling that same house to realtors where it says it’s worth $40,000, they’re selling it for $65,000, and they should be. They’re selling it at a 10 cap.
So what happened in the market was, residential real estate turned into how you sell apartment complexes. Particularly in the lower price band real estate, it became the exact same model that apartment and syndicators figured out for years. They could go take and put a passive investor in a deal, it didn’t really matter where it was located. The investor could be a value buyer because he could go buy where he could get a better return on his investment. He lives in California, but he can’t get a 10 cap in California, so he’s buying in a different region in the country. He doesn’t really care where it is because he didn’t have to go fool with it.
Then I realized, wait a minute, there’s still another opportunity here. This is my space—I’m a note guy. I look at every deal from a financing scenario. I deal in consulting for some of the turnkey guys, because they said, “We’re selling all these houses for cash, and if we could get some leverage to investors, they could buy more property.”
This is how the math works: Let’s say that I’m going to sell a house at a 10 cap rate. Let’s say that the net operating income on the house, just for conversation purposes is $6,000 dollars a year. With the 10 cap rate, you take $6,000 and divide it by 10 percent. So the house is worth $60,000.
Then you’re saying if I could sell the house for $30,000 down, and finance $30,000, then the monthly payment on that house for a fully amortized six-year loan at 6 percent interest at $30,000 is exactly the net operating income on that house. The investor’s not making any cash flow, but the operating income is not coming out of his pocket.
A lot of times, the investor is somebody that’s in his sun setting years of his career, he’s scared of the stock market, and he wants to invest in real estate, so he has free and clear income down the road. If he could use some leveraging, if he’s 55 years old, when he’s 61 the house is straight paid for free and clear. But he didn’t pay $60,000 for the house, he paid 30 and the tenant paid for the other 30.
Capital Markets Update
WealthCare Check-Up
By Ryan Parson
As we begin the new year fresh from celebrating with our family and friends, I imagine just about everyone reading this has resolved to eat less, exercise more, and spend more time with family in 2017. Each of us, no doubt, has some goal in mind that we’ll either stick with or abandon in the coming weeks.
No matter the objective, early-stage momentum when one’s desire for change is strong is important to harness, but the big key to long-term success is having a clear, concrete, and actionable plan, particularly when it comes to money and wealth.
Perhaps some of you have made a commitment to pay closer attention to and better manage your personal wealth and investment portfolio in 2017. If so, I applaud you. There’s no better time than now to sit down with your team and do just that!
WealthCare in 2017
If you attended NoteExpo last year, you may have heard me use the phrase “WealthCare.” Just like with our health, which we value as highly as anything, our wealth needs an annual check-up, too. Here’s what “Dr. Ryan” thinks you should consider including in your WealthCare Check-up…
1. Take Stock of Your Current Capital Deployment Budget
Here, I’m talking about that amount of your wealth setting in cash earmarked for a specific purpose, or currently un-deployed. We should always look for optimal capital deployment and avoid having our capital setting idle.
What we don’t want to do is start off the year with a negative deployment amount (i.e., un-deployed capital).
Idle capital is one of the leading drags on your portfolio that can reduce your overall return for the year. I encourage you to take stock of what amount you have deployed. Get with your team to find out what those opportunities are, given your risk tolerance, and outline the objectives for your investments.
2. Identifying Potential Liquidity Events
The topic of liquidity events often dovetails into the theme of un-deployed capital. Hopefully the latter was due to the former and not merely to poor planning.
A valuable part of being able to take stock of your wealth during your annual review is trying to forecast what time in the year you will experience a liquidity event. It’s not always possible to pinpoint the exact moment when that will happen but you may have a general idea that allows you to make plans for that purpose.
If you know that a company you’ve invested in may go public in June, you may discuss this with your advisors to look for your next capital deployment opportunity. For your deal operators, this will be helpful when it comes time for such a liquidity event. They can plan and anticipate and make their own adjustments in an effort to best accommodate you. Anticipating your upcoming liquidity dates should be part of the review process.
3) Setting Goals (“If you don’t know where you’re going…”)
One of the elements I’m constantly amazed by when talking to club members and investors about their goals for the year is how those goals are vaguely formulated or simply nonexistent. Having clear, concrete goals helps you stay laser-focused on the actual tactical strategies that can make those goals a reality.
As you sit with your advisors, being able to articulate your goals to them is critical. Of course, some advisors may not be able to understand your goals in the first place, so it may become necessary to take stock of whom your advisors are and whether replacing them should be a goal in its own right.
4) Reviewing Your Goals
You need to pay constant attention to your goals throughout the year. You know the chance of success with most resolutions is low. Consequently, we all must be vigilant with our goals. Your vigilance may include periodic face-to-face meetings with all the players on your wealth team. Most of our members realize that having at least a quarterly check-in creates the possibility that their goals will be met (including the inevitable course corrections). Put this on your calendar now.
5) Additional Tactical Moves
There are additional tactical moves to consider during your Goal Review meetings. Here are several you might look at:
- Maximizing your contributions to tax qualified accounts, including your IRAs and HSAs. Don’t forget you’re still eligible to make a contribution to your IRA (including non-deductible IRAs) as well as your health savings account (HSA), assuming you have a qualified high-deductible health plan to go along with it.
*Keep in mind that not only is the part that you contribute to your HSA tax deductible, the earnings are also tax-deferred, and what you withdraw for qualified expenses is tax free. That’s a beautiful trifecta! The best part is that your HSA can be self-directed just like the retirement accounts you likely have. - Check your Requirement Minimum Distributions (RMD) for your age. One key is strategizing with your team of advisors in order to determine where to take those RMDs from.
- Another key element to consider is that of beneficiary designations. There are many types of accounts which have beneficiaries attached to them, including insurance policies. Who are your primary and contingent beneficiaries? Other assets to review include your bank accounts, tax-qualified accounts like IRAs, and employer-sponsored retirement plans. Finally, you should be sure to review your heirs in your overall estate plan.
- Optimize your credit for future lending needs. When was the last time you checked your credit report? There are very unique ways to be able to utilize your credit, if you have a plan in place. Many high net worth investors don’t need to utilize credit to get credit, but it can enhance more desirable credit opportunities if you have taken advantage of it.
- Review your overall profit and loss statement. I know budgeting is not a fun process to go through, but it’s an area with your wealth that, if handled with care and discipline, can result in additional assets on your balance sheet.
- Get your financial documents in order. As high net worth investors, we often have an overwhelming number of documents in our portfolio, so taking a look at some of the most critical ones is key. Key ones to review include estate planning documents, particularly your power of attorneys and medical directives. Finally, if you’ve gone through any major life events, it may be time to update your trust and wills.
- Look over your balance sheet for liquidity events. Is your balance sheet updated to reflect these events? If you have self-directed accounts, your custodian will be asking for fair market valuations for reporting purposes. If you are active with self-directed capital, this is especially critical.
- Make charitable deductions. Whatever “charity” means to you, assess whether you accomplished your giving goals last year. If you did, congrats! There are so many opportunities for us to help those who are less fortunate. Likewise, we must plan charitable giving to benefit our tax situation. Having a charitable giving plan is important; it’s equally important to evaluate things in order to reap the highest amount of benefits.
Let’s make 2017 the best it can be!
My main message here is that a lot goes into your WealthCare Plan review. Just like a vow to eat better and exercise more, it’s the consistent follow-up that makes – or breaks – your new habit. Set yourself up for success by setting clear goals, making a plan to work with your wealth advisors on a regular basis, and committing to conferring with your high net worth friends and colleagues about topics of wealth just like you do with health.
Quote of the Month
“If you don’t do it right the first time, what makes you think you will have the time to do it again?” – Mark Twain
This Month’s Poll Question
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I think I am becoming a fan of the new trend John Grisham is rolling out; the short story “prequels’ to his latest best-selling novels. He started this last year when he released a prequel Partners to his legal thriller Rogue Lawyer. At that time he actually released the prequel after the release of the novel. This time, his latest prequel Witness to a Trial, was released ahead of his latest best-seller The Whistler. The prequels are only available as e-books but after reading Witness to a Trial in one sitting I have jumped right in to The Whistler. More on that book next month.