Thoughts from the Desk of Bob Repass…
For those of you that attended NoteExpo 2019, you saw my NOTE Talk presentation on always putting relationships above transactions. Well my mantra was recently put to the test when I was working on a large trade with a new counterparty.
During the 4th quarter of 2019, we engaged in a loan trade with a firm that came highly recommended from a reliable source in the industry. There was a twist in that our company was the seller in this trade. Definitely a different perspective for both me and my team.
We have made the strategic decision to rebalance and recapitalize one of our capital funds and this transaction shone the spotlight on some internal processes we need to improve as a seller of portfolios vs one-offs. Through our NotesDirect platform, we have mechanized the selling of one-off assets to individual investors. Granted it is not perfect but it is an efficient and smooth process for both the buyer and the seller.
Being the seller of a large number of assets to what I will refer to as “institutional” investors is a completely different scenario, especially when you are used to dealing with the same counterparties and then realize that others have different parameters.
Over-communicate – don’t assume things will be the same with this investor as they are with others. Set proper expectations upfront. What impacts pricing? -credit quality of the borrower, complete loan documentation, property value and condition, or maybe pay history.
Discussing up-front what drives and impacts not only the price but the execution of the loan trade happening is crucial. This reinforced the importance of transparency on both sides. Nobody likes surprises or last minute changes so being transparent throughout the due diligence process will make for a quicker and hassle free transaction.
To be honest, at times during this trade, my patience was put to the test but I kept reminding myself that I must focus on the relationship aspect and the distinct possibility of future ongoing business.
Relationships will always be the key to having success in the note business. To that point, I have already scheduled to meet this counterparty along with a couple of other potential counterparties face-to-face at the upcoming IMN NPL conference in February to discuss how we might be able to work together on both the buy and sell side in 2020.
Now that we have our first trade closed and behind us, we have a second trade in due diligence to start the first quarter of 2020.
So as you move into the New Year and establish new relationships, remember to over-communicate, set proper expectations, be transparent and stay focused on the relationship.
Happy New Year!
Stay up to Speed with Eddie
2020: The Year It All Comes Together
by Eddie Speed
Imagine how excited Thomas Edison might have felt if he had introduced the invention of the light bulb AND the phonograph at the same press conference. That’s how excited I am right now for 2020!
I’ve been focused on the development of two separate initiatives for years now. They’re both innovative and they’re both different, but I knew that each one had the potential to be a game-changing, quantum leap forward for real estate investors and for the entire note business. Each idea has taken a ton of groundwork, research, and testing. The only timetable I had was to get them right before they were ready to be introduced to the world. Each one had a code I had to crack before it would work, and I had no idea how long that would take. To be honest, I didn’t plan for both of them to come together at exactly the same time—but that’s what happened. All the pieces of both puzzles fell into place at the same time. This is lightning in a bottle times two! And 2020 is the year it all kicks into gear.
The real headline is that you can add either one to your business without disrupting what you’re already doing, or having to break everything else down. These two new programs allow every active REI to add creative financing to their business. And they’ll open up a wider audience for note investing than ever before.
MY FIRST INITIATIVE: “THE DEAL ARCHITECT”
The Deal Architect is a program that connects active investors looking for affordable money from passive investors who have money to invest.
As we begin 2020, the real estate business is even more competitive now than it was just six months ago, with no relief in sight. Lights out, this is the most competitive market in the forty years I’ve been at it. You have to squeeze every drop of juice out of the lemon to make a profit. The squeeze of low inventory continues to get tighter for house flippers and wholesalers, and the profit margins are getting thinner for note investors who have to borrow money to finance their deals.
I’ve learned that when things get competitive, you have to get creative.
With profit margins razor thin, one of the biggest hurdles facing real estate investors is where to find affordable investment money. Bank loans are slow and expensive, which is why investors are always on the hunt for passive investors. Whether you’re investing in houses or notes, if you can’t find affordable money then you can’t make profitable deals. Affordable money from passive investors is out there, but it can take a lot of time and work to find it.
Passive investment money doesn’t grow on trees. It grows on TVs! The people who are eager to become passive real estate investors are the HGTV viewers who saw how easy it looked on TV to make money with rental properties, but then discovered what a headache it can be.
We have a data base of over 40 million rental property owners, and 95% of the nation’s landlords own just 1 to 5 rental properties. They love the idea of reliable mailbox money, but not the headaches they don’t show you on TV (like surprise expenses, high taxes, midnight calls from angry renters, vacant properties, and so on). These HGTV watchers are eager to make headache-free investments in real estate, but don’t know where to go.
The Deal Architect mechanizes this huge data base to connect active real estate and note investors with passive investment money from this pool of burned out landlords.
Not only will it be the money source active investors are looking for, but it’s also the pain reliever passive investors have been looking for to avoid the headaches of landlording.
Both sides win!
MY SECOND INITIATIVE: “THE NOTE ASSEMBLY LINE”
With the new Note Assembly Line, you’ll be able to access the expertise of people who are good at those sections of the creative financing conveyor belt that you’re not good at. For the first time, you don’t have to do everything, or be good at everything. You’ll be able to tap into NoteSchool certified experts to do what you can’t.
This idea was born when people kept telling me, “The stuff you teach people is amazing. If only you could do it for them!” Every time somebody told me this I laughed out loud. But there was something intriguing about their suggestion. I knew I couldn’t do it all for them, but if I could connect them with someone who could do the parts they needed, it could create an assembly line. (Henry Ford would be proud!)
As you build a note with creative financing, there are dozens of tools you can utilize to assemble the various parts of your notes. You don’t use every tool on every note, but you do use a dozen or so tools on every note. (That’s what makes it creative!) Some people are better at using some of those tools than others—particularly small investors or people who are just getting started in notes. It’s also perfect for the REI who wants to add notes without disrupting their current business.
People have different strengths and different levels of training. Lots of people understand 60% or 75% or 90% of the creative financing process. But because of the one stretch of the assembly line they’re not confident in, or those few tools they’re not comfortable with, it scares them away from executing the whole process.
Another reason I’m fired up is because this lets me utilize so many people within our NoteSchool community. One person doesn’t have to do everything or be good at everything. Every phase is done by an expert at that particular phase. So if you want to become a NoteSchool certified expert, you could offer your own expertise for the part of the process you love without having to fool with the parts you don’t.
For everyone involved, it frees you up to participate in more deals, and focus on the things you’re best at. Your compensation will be clearly spelled out, and is based on the percentage of the process that you contributed to. The smallest amount of the work you could do is about 20%, and the more you do the more you earn.
2020: THE YEAR OF PERFECT VISION
These will be two game changing innovations that will help make 2020 the biggest transition year the note business has seen since… well… ever.
It’s significant that when eye doctors say you have perfect vision with both eyes focusing properly, they call it “2020.” Fortunately, these two new initiatives are hitting at exactly the right time—in the year 2020.
Whether that’s ironic or symbolic, or just plain cool, I’ll let you decide.
Capital Markets Update
What the Jobs Report Can Tell Alternative Investors About the Housing Market
By: Ryan Parson
There are many macroeconomic indicators that investors can watch to gain insight into the health of the economy and one of the most-watched is the unemployment rate.
On the first Friday of every month, the Department of Labor releases its eagerly awaited Employment Situation Report, which tracks the number of workers currently out of jobs and the number of jobs that have been added or eliminated in the economy. Wall Street and other investors go crazy for these reports, causing significant fluctuations in various asset classes like housing.
For economists, the unemployment rate is a lagging indicator, not a leading indicator. The difference between the two is a leading indicator can influence change whereas a lagging indicator can only record what has happened.
Said another way, the unemployment rate doesn’t rise until after a recession has already started – and will continue to rise even after the economy has started to recover. Although the employment rate might start to rise prior to a recession occurring, the largest changes will be seen once the recession is officially underway and into the recovery phase.
A great example of this is the dramatic expansion of subprime mortgage loans in the early 2000’s and the housing market crisis that ultimately led to the Great Recession of 2008. In this case, the recession actually began in December 2007, but the unemployment rate didn’t reach 5.5% until May of 2008. In fact, the Great Recession lasted until June of 2009, but unemployment peaked at 10.2% in October of 2009. Let’s break it down with a quick example.
The Ripple Effect
Think about what would happen if your neighbor loses his job. First, there will be less money going to your local economy as your neighbor cuts back on non-essential items. Second, now there is one less person that will be paying state and federal taxes.
Maybe your neighbor is eligible for unemployment insurance and benefits. So now, your neighbor is taking money from the economy as opposed to contributing money to the economy (in the form of paying taxes).
Now, your state’s deficit increases as its tax revenue decreases. What will your state do in order to curtail its increasing deficit and falling revenue? Answer: increase taxes on you and your other employed neighbors.
Now that your taxes have gone up, you have less disposable income, meaning you spend less. And if you spend less at the local store, maybe someone else loses their job next. And the vicious cycle continues.
Impact on the Real Estate Market
The real estate market only worsens the situation and studies have shown that 45% of defaulted mortgages are a direct result of unemployment. If your neighbor’s house is foreclosed upon, what do you think that does to the value of your house?
So, while the housing market is a leading indicator because surges or declines in housing values and sales can forecast the direction of an economy, the unemployment rate is a lagging indicator that can only reflect these changes and help to identify long-term trends.
According to the Bureau of Labor Statistics, the U.S. unemployment rate fell to a 50-year low at 3.5% in November after October’s average job growth of 167,000 per month. Interestingly, more people than ever are choosing to rent. Studies are showing that people under 35 are the most likely to rent and are delaying the purchase of a home of their own. This may be a reason multi-family residential (apartments) have been so heavily sought after by alternative investors.
As a result, investors in the alternative market are faced with the tough task of defending their portfolio and making sound investment decisions by trying to pinpoint when markets will change long before they start to show signs of decline (like your neighbor losing his job).
Multi-family properties are an attractive option for high net worth investors because of the steady historical growth in both demand and rental rates. In the age of delaying (or declining in some cases) homeownership, apartments offer a solid risk-return profile, potential capital appreciation, and a path to passive wealth generation. However, investors should use caution and note that wages haven’t matched the pace of increasing rental rates in plenty of submarkets, which could suggest a turn in the markets. Additionally, signs of overbuilding of multi-family have become noticeable.
While homeownership demand is changing, that is understandable given the credit markets. Yes, credit is plenty if you fit into the tight parameters traditional banks offer. For many otherwise qualified homeowners that are self-employed for example, they continue to be shut out of traditional bank financing. There continues to be a credible opportunity for private investors to participate as a path to adding additional passive income to their portfolios.
We will discuss the topic of how fluctuations in the job market can impact alternative investment deals and how you can take advantage of the current market conditions in greater detail at our next Mile Marker Club Symposium, taking place in Phoenix, February 21-23, 2020. We are excited to host some of the industry’s leading experts and have them guide private investors through this and other relevant topics to develop a stable, diverse investment portfolio producing passive income.
The Trading Corner
Getting to Yes!
By: Scot Tyler
A couple of months ago I wrote about “Getting to Know Your Seller”. This month I want to dive a little deeper into building that rapport, quoting that seller and following up with that offer.
After our initial conversation with the seller, gathering vital information and getting to the seller’s need, we always want to ask questions that the seller will have to do a little homework on. For example, at the end of the initial conversation ask the seller to check on the property taxes and property insurance to make sure both are current and paid up to date. It really can be anything where an additional conversation will be needed at a future time. Make sure you’re setting the time and day (within 48 hours of initial call) and a good number to call them back. Calling a note seller back after an initial conversation to see what they found out regarding the homework assignment you gave them or to just ask additional questions is a vital part of building that rapport with the seller. In most cases, a note seller will NOT commit to selling during the initial conversation, hence giving reasons to call the seller back the next day or two. It’s been my experience that the seller who commits to sell, usually does so on the third or fourth phone call.
Now that we’ve established that it’s the third or fourth phone call before a seller commits to selling the loan, why are we determined to offer the seller a quote on the initial call? Use the calls one through three for gathering loan info, building the relationship, assigning homework and establishing what the seller’s needs are. Now that you’ve established a relationship and gained a feel for the seller’s personality and expectations you can now deliver a more accurate quote for the sellers note. Always remember that there are NOT two note sellers that are alike so make sure you tailor the terms of your offer to that specific seller and their needs. Always try to provide two or three purchasing options if possible. These options should be arrived at based upon the seller’s needs you already gained during calls one through three. This will give the seller choices which hopefully creates a mindset that they’re in control of the negotiation process.
Once the purchasing options are delivered I find it’s essential to draft a “follow-up” letter confirming the quote options “mailed” to the seller. Yes, I said mailed and NOT “emailed”. As we all know it is much easier and quicker to send an email but over the years I’ve found that the perception of receiving an actual mailed quote letter instead of a quick email goes much further. A letter with your company letterhead, specifying your last conversation specific to your note seller, signed by you is one of the most effective and professional techniques to get to the “yes”. I’m not saying don’t send an email if the seller wants an email but mail the specific quote letter, tailored to your seller, should be sent as well. Either way sending the letter and email gives you another reason to call the seller again to “follow-up” on the purchasing options you delivered. As stated above the more interaction you have with that seller the more vested the seller is with you and only increases your chances of getting to the “yes”.
Here’s a loan that came across our trade desk that we recently funded. If you’re interested in buying it, email me at [email protected]
Performing Note – SFR-O/O
$82,000 sales price with $2,500 down
$7985000 @ 5.5% @ $755.39/month for 144 months
29 made / 115 remain
Current UPB $67,402.03
Until next month!
In The Spotlight
Best Advice of 2020
In what is now a company tradition, we kick the New Year off with something a little different in the “In the Spotlight” column. Once again I reached out to my colleagues here at NoteSchool, Colonial Funding Group and Colonial Capital Management and asked each of them to share their best advice heading into 2020 for anyone in the note business. You will not find any better advice all in one place than the following!
Since my grade school days, referring to the year 2020 has been labeled as the year of the future. It represents a vision or a way of the future. It’s not the future anymore. It’s NOW! A super competitive market for both your note and/or real estate investing business is our environment, yet it’s surrounded with huge opportunities. So long as someone is willing to extract all the juice out of the lemon, verses only one squeeze. Beware of unharvested profit left on the table. Think creatively, analyze angles your competitors don’t see and all of the potential ways to get the profit that’s there. Remember throwing away leads where you weren’t creative enough is essentially dumping money in trash. The year 2020 will be a landmark year for current as well as future income for those who are (creative) action takers! – Eddie Speed
Be transparent. It’s as simple as that. Whether you are buying a note, selling a note, brokering a note or raising capital be sure to always be transparent. Transparency is the key to maintaining your credibility and credibility is the key to your long term success in the note business. – Bob Repass
Don’t get caught in the trap that it’s easier to DO than to THINK. This will be detrimental not instrumental to your business. – Martha Speed
In working with mentoring members all year, I am often reminded of a great saying by Charlie Munger, Warren Buffet’s mentor and business partner. “People calculate too much and think too little.” Why this message resonates with me is that often times when I work with people the number one obstacle in the way of implementation is that people focus too much time on the spreadsheet side of their business instead of looking at the opportunity that is right in front of them. – Kevin Moore
The most important thing to remember is to always treat the money that people trust you with as your own; more money will come your way if you do because they always test you first. – Ben Haught
There are only two reasons why ANYONE says “yes” to ANYTHING…a fear of loss or a hope for gain. May your 2020 be filled with wise decisions as to which button you push, and when, to get every “yes” you desire this year. – Derek Stringer
Definitely do due diligence. Research taxes, code enforcement/violations and title. – Linda Risk
“The best investment you make is in yourself” – Nobody does wrong when they spend money to get new knowledge, new skills, and new ways to develop themselves. – Riley Goff
Make the best use of NoteSchool’s resources if you have questions on how to review title or document issues. Keep on improving your communication skills to get your point across faster and more efficiently. – Nathan Cheung
Markets in 2020 will be in motion at their fastest pace ever! Investors with a well-organized plan designed to match the motions of the new marketplace realities will enjoy the biggest wealth advances. – Ryan Parson
1. Stay Engaged! It’s the best way to know the changes in the industry. 2. Deploy your funds! If you have money sitting in your IRA it defeats the purpose of having a self-directed IRA. 3. Record your documents! When you purchase a loan you must record your conveyance documents. You wouldn’t want to miss those important notices, including tax notices. – Susan DeLaGarza
As each new year approaches, we all attempt to put either a new, revised or old plan in place for business growth for the upcoming year but executing or following through with it sometimes doesn’t always happen. My challenge to you is to force yourself to do it for 2 to 3 weeks so it becomes a HABIT. Make a conscious effort daily to make certain parts of your business growth a HABIT. As we all know habits are not created overnight and doing this will help your business and create a productive HABIT for you. – Scot Tyler
Small thinking can keep your businesses small. Always think outside the box. – Charles Mangan
Preparation and attention to detail is vital in all business dealings. The best way to learn is through action. Search for answers yourself before asking others for the answers. – Angie Repass
The past does not have to equal the future. So, dump the past and make 2020 your best year ever! – Joe Varnadore
Find something about the business that really intrigues you and dive in head first… Or as Mr. Speed says “rip the lid off of it”. Get involved with the liaison position and ask for homework assignments. Dig into the Member site and do research on the topics and watch previous webinars. Before you know it you will start understanding more and more of the business. After you start understanding you will naturally want and feel confident to do deals… And doing deals is why you invested in this business… Never run out of questions or the steam to find out their answers. Good luck in 2020… It’s going to be a great year with lots of opportunity… You just need to be educated and ready to seize on opportunities as they start rolling by. – Matt Edwards
This Month’s Poll Question
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