Thoughts from the Desk of Bob Repass…
If there’s one thing that we have all learned over the past six weeks or so, it is that “virtual is the new reality”.
Our team meetings have been replaced by Zoom or Go-to-meetings. At NoteSchool, we have shifted and now do both our 1-day Gold in Notes and our 3-day Rich Rewards in Notes training classes live, but virtually, and have had more success than we anticipated. You can find out more about our upcoming virtual classes HERE.
I have noticed the increased number of virtual meetings across social media channels as well, whether it is a Facebook group or on LinkedIn. So I thought how can we add value to our industry during this time of uncertainty and in some cases misinformation?
I decided to reach out to four of my industry friends and counterparties for a “virtual” panel discussion. All have been big supporters of the note industry event of the year, NoteExpo, over the years as well as featured speakers. I called on Cody Faller, Faller Financial, David Pollio, Security National, Paul Birkett, Automation Finance and Chaz Guinn, Revolve Capital Group.
Just to give you an idea of how willing they were to share their industry knowledge and insight, I emailed them mid-afternoon on Tuesday and asked if they would be willing to do this virtual panel discussion on Friday afternoon of that same week. All of them responded within an hour and said “I’m in.”
So on Friday, May 1st we recorded a virtual panel discussion to address the note investing industry during Covid-19. The topics we addressed include:
- How has the “stay at home” impacted you? Personally and professionally
- Is anybody buying right now?
- Is inventory hitting the market now? How about over the next 6 months?
- Current pricing expectations? Bottom fishers? Disconnect between bid/ask?
- One thing you learned during this pandemic?
- Piece of advice for note investors?
My thought was, hey, if the NFL can pull off their draft virtually surely we can do a panel discussion! CLICK HERE to watch this discussion. We have all agreed to record another industry update on June 1st so keep an eye out for that as well.
If we can get through this in a way that allows us to go back to business as usual – which is still a question mark – we are going to be a changed industry. Good real estate investors/entrepreneurs are always able to take advantage of a shifting market or environment and make sure they stay just ahead of their customer needs
We are six months away from NoteExpo 2020 which we are still planning on hosting November 6th-7th here in Dallas, TX. I hope all of you will plan on being there. I can’t think of anything better than seeing everyone again and talking about what a great season the Dallas Cowboys are in the middle of!
As we start reopening across the country, stay safe, be wise, but act without fear.
Bob Repass
Managing Director
Stay up to Speed with Eddie
Creativity Is Like Water – It Takes On The Shape Of Any Cup
by Eddie Speed
Being a successful entrepreneur in real estate investing is all about discovering voids and filling the gaps. The gaps in the market that need filling one year can be completely different than the ones in the year before. Creative financing is what fills those gaps for the challenges facing every deal you make.
At this point in the wake of the COVID19 financial beating, new voids have suddenly appeared that weren’t here just three months ago. I’m confident the economy will recover. But will we have a V-shaped recovery that turns back up immediately, or a U-shaped recovery that gradually turns back up, or are we looking at an L-shaped recovery where things stay flat for a long time?
I DON’T HAVE A CRYSTAL BALL—I HAVE A REARVIEW MIRROR
In recent weeks, I’ve been doing 2 to 5 interviews every day for articles, podcasts, etc. (That’s on top of my normal workload, so I’m busier than ever.) Everybody is asking me to look into my crystal ball and foretell the future. And I wish I could! I tell them I don’t have a crystal ball—I have a rear view mirror. It gives me a clear view of the past, which can be just as valuable! The creative techniques I’ve developed, expanded, and perfected in previous downturns are being put to use to fill gaps in today’s market to save the day for thousands of investors.
I can honestly tell you that I’ve boosted my net worth more in weak markets than in boom markets. But I haven’t done it by taking advantage of people down on their luck, just the opposite. I’ve done it by HELPING people down on their luck using creative financing to fill the voids big institutions couldn’t fill. When buyers are being left behind, creativity makes deals come together instead of falling apart.
THE SUREST WAY TO FAIL IS TO BE SET IN YOUR WAYS
I think of the real estate business as more like a river than a pond. A pond can quickly turn stagnant, but rivers are always flowing and staying fresh. As the saying goes, you’ll never step in the same river twice. That’s why we’re constantly adjusting the curriculum in our NoteSchool classes.
When I got into this business back in 1980, mortgage interest rates were a staggering 20% and I was calling on mortgage lenders and real estate companies. When I walked in the door it felt like I had walked into a funeral home. They had no ideas, no plans, and no hope. They were set in their ways and saw no way forward because they only knew how to do things one way. But because I had a different mindset and fresh perspective, plus a toolbox of creative techniques learned from my father-in-law, it turned out to be a bonanza for me.
Creative financing also helped me thrive in 1986 after the huge savings & loan banking debacle that started in Texas and the Southwest, that caused the most loans to default since the Great Depression (and led to the formation of the Resolution Trust Corporation to liquidate the mountains of defaulted loans). It helped me thrive in the 1998 financial crisis when 8 of the top 10 financial institutions went belly up. It helped me thrive during the terrible downturn after 9/11 in 2001. It helped me thrive in 2008 when the Lehman Brothers subprime lending fiasco collapsed after loaning money to anybody who could fog a mirror, and financial powerhouses fell like dominoes.
I’m confident that creative financing is the answer to not just survive in 2020, but to THRIVE! Lots of real estate investors are finally seeing the beauty of creative financing. If creative financing was a lady, investors who would have rated her a 2 in January will be giving her an 8 in June!
LOOK FOR THE OPPORTUNITY HIDDEN INSIDE EVERY PROBLEM
Right now, the reason you see an empty shelf at the grocery store where the toilet paper used to be is because of a supply chain problem. Well, that’s not the only place where the supply chain has been disrupted. It’s also happening in the downstream flow of lending money.
The money flow starts when a warehouse facility lender supplies the money for banks and mortgage companies to lend. In turn, these banks and mortgage companies then loan that money to real estate wholesalers and rehabbers, as well as individual retail home buyers.
These loans must meet the guidelines and requirements of Fannie Mae, Freddie Mac, FHA, or other federally backed financial conduits who will eventually purchase these loans from the loan originator. But if those loans have some kind of a “glitch” (and there’s a huge range of potential glitches), then the loan originator has to buy them back in an “agency buyback.” At that point, the loan gets branded as a “Scratch and Dent” loan. (Right now, we are seeing 10X the normal number of Scratch and Dent loans.)
What happens to all these Scratch and Dent loans? The loan originator has to find somebody else to sell them to, and many potential downstream buyers have moved the goalposts by changing their criteria, or simply evaporated altogether. These agency buybacks cause the money to flow back upstream instead of downstream, so it causes a logjam that stops the money from flowing to close deals. (They are trying to sell those Scratch and Dent loans to me at 95¢ on the dollar, and when it gets down around 60¢ I’ll get serious about buying them.)
As warehouse lenders see the logjam downstream, they have become extremely limited in extending credit to banks and mortgage companies until they can clear out their inventory.
With banks and mortgage companies in turmoil, the neck of the funnel has narrowed so it’s harder for loans to squeeze through. The requirements to qualify for a mortgage have tightened up dramatically in recent weeks. Lenders are requiring bigger down payments, and a credit score for the retail buyer of 700 instead of 620. (We’re seeing way more buyers in the “penalty box” today than just 90 days ago.)
There is another problem. About a third to half of hard money lenders, who are private investors that normally lend to real estate wholesalers, have stopped lending money period. The ones still lending have significantly decreased their loan-to-value ratio. The end result is deals aren’t making it to the closing table and thousands of potential homebuyers are ultimately getting left behind.
BUT, all these problems have opened up a HUGE door for entrepreneurs who can structure deals with creative financing to fill the voids!
Let me give you one example. If a wholesaler can only borrow 70% from the private hard money lender, creative financing enables you to have the property seller finance the remaining portion of the deal with a “Piggy Back” second. Instead of using your cash for a big down payment, you can borrow 70% in a Hard Money first mortgage from your hard money lender with the remaining 30% coming from the seller who carries the financing instead of getting all their cash up front.
The seller gets paid out over time (so you are buying their equity with tomorrow’s dollars instead of today’s dollars), and the deal closes instead of falling apart. To help bridge the gap, Piggy Back Seconds are making a powerful comeback (I used them in a huge way back in the 1980’s).
Even though there’s a lot of uncertainty in today’s market, I’m confident that investors who understand creative financing will come out smelling like a rose on the other side.
How do I know? Because I have trained 40 years for this party!
Capital Markets Update
The Power of Understanding the Capital Stack
By: Ryan Parson
For a private investor like yourself, as you assess deals, you look at the capital stack to understand how a deal will be financed and structured in both the short-term and long-term. While there are certainly many other factors to consider, capital stacks provide the financial means for any deal to operate, hopefully successfully, in both the short and long-term.
Capital stacks also apply to each investor’s personal wealth structure. Each investor decides if they want their assets concentrated in positions such as senior debt or in common equity and constructs their capital stack to match their individual situation. While circumstances are wide and varying amongst investors, the basic constructs of a portfolio capital stack, related to the investments chosen, including traditional and alternative, remain relatively constant.
The Importance of Evaluating Your Own Capital Stack
Many investors don’t take the time to truly assess their capital stack and the significant implications it has on the long-term sustainability of their wealth. Those implications include, amongst others, providing insight into the way their wealth performs in various market conditions and how they allocate their capital assets into new investments.
With the current market conditions evolving by the day, if not by the hour, many private investors are wondering ‘where to go next.’ While there will certainly be many new growth opportunities to consider as markets (both traditional and alternative) return to some overall stability, those investors that have a solid command of their capital stack will be even better positioned to identify and take advantages of the new sea of opportunities that will inevitably present themselves.
Understanding your personal capital stack starts with assessment of your investments now and where they fall. Generally, there are four main sections to the capital stack:
- Senior Debt,
- Mezzanine/Junior Debt,
- Preferred Equity, and
- Common Equity
Using Knowledge of Your Own Capital Stack to Guide Investment Decisions
Typically, debt investments are less risky than equity investments. As such, debt investments tend to have a lower rate of return. Keep in mind, returns also need to be on a risk-adjusted basis, a topic we will cover in more detail in a future article. By categorizing your investments into the four sections, it will give you another assessment tool to analyze concentration, overall diversification and clarity as to what types of structures you may consider investing in next.
For most Americans, they invest in stock market offerings via their 401K plans and other types of IRAs. Many are invested into common equity structures (unless weighted more towards bonds), corporate debt and other forms of government backed debt investments. Alternative investors tend to see a greater concentration of their investments in debt related investments than traditional investors. There are many examples of debt-related investments including both secured and unsecured debt. Typically, the greater the level of collateral, the less-risky the debt is to be considered.
Investing in Turbulent Times
During economic periods such as what we are currently experiencing, there is a natural investor tendency to employ a “flight to quality” strategy and to make sweeping changes to less-risky assets, both in the traditional and alternative spaces. Then, in good times, investors may allow ‘capital creep’ to occur and start heading back into more risky investments to seek higher returns. While a strategy of investing in primarily debt or primarily equity offerings may be appropriate, it is more likely some combination of both. However, making knee jerk reactions doesn’t usually produce the desired outcome either.
If you quickly move to a debt portfolio, you may be selling equity positions (if they can even be liquidated) at an in-opportune time and not selling for the highest value. Conversely, if you move to an equity concentration from a debt (or cash) concentration, especially quickly, you may have a hard time understanding the true value of the equity investments to understand what your long-term rewards are going to be. While these are extreme examples to help articulate the point of making changes amongst your capital stack in extreme circumstances, the answer for most investors lies in knowing the capital stack constructs of their current portfolio and assessing if they still see a long-term positive outcome, even during an extreme market shift like is happening right now.
Stress Testing Your Wealth
From there is when you can truly begin to stress-test your wealth and see how your chosen investment strategy, even if it does need to shift, can still bring the comfort, confidence and clarity investors seek, especially during stressful times. It can also help you hold-back and not steer the financial car off the cliff, so to speak, during go-go good times when you could get caught up in exuberance and excitement and otherwise deviate from your well thought-out plans.
Happy Investing!
The Trading Corner
“Ever-Changing”
By: Scot Tyler
When I wrote last month’s edition of The Trading Corner our office had just begun the stay at home per the social distancing direction from our state and government officials. We had no idea what to expect. 30 days later I’m writing again from home but listening to what appears to be some lifting of local and state restrictions. In just 30 days seeing how much things have changed in our society is crazy. We’ve adjusted our way of everyday life to ensure we keep our self, our family, friends, co-workers and our neighbors safe. We’ve adjusted and so will the note business.
I’ve been working in the seller-financed note business since the mid 90’s and one thing I can say is it’s an “ever-changing” industry. Now that I’ve dated myself, one advantage of being in the seller-financed business is I’ve seen a lot of people come and go and I’ve seen others that weather the storms/changes that have been around a long time (i.e. see Eddie Speed, Bob Repass). Okay, okay…. probably in trouble for aging them now because trust me they’ve been doing the business for a lot longer than me. J
From what I’ve observed each and “ever-changing” event that has happened the individuals that are successful are the ones who are flexible and have well thought out game plans for when something happens or goes wrong you can adapt and keep pushing forward. Being flexible and being prepared to deal with the unexpected is vital if you want to succeed.
These individuals stay positive and keep themselves and staff motivated when the unexpected happens. You have to follow suit and take control of what you can and not worry about things that are out of your control. Allowing yourself to be engulfed in “out of your control” circumstances will stop your progress and move you further away from your next victory.
Right now is the time to go the extra mile no matter whom you come in contact with. Do more than they expected so they know you appreciate them, their relationship and their business. Going above and beyond expectations will do more than you know helping you achieve your goals and becoming flexible in this “ever changing” world and industry. The seller-financed note business will continue to survive and thrive even more as evidence of prior events that have happened in the past. There’s no doubt in my mind.
Here’s a loan that came across our trade desk that we recently funded. If you’re interested in purchasing it, email me at [email protected]
Performing Note – SFR-O/O
Hobbs, NM
BPO $75,000.00
$70,000 sale with $5,000 down
$65,000 / 6.00% / $500.00/month for 211 months
23 made / 164 left
Current UPB $60,745.68
Until next month.
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