Thoughts from the Desk of Bob Repass…
Back on April 15th I published the following post on my Social Media pages that I called I miss baseball:
Today I realize I miss baseball! It is a beautiful sunny day here and my favorite team the New York Yankees were supposed to be playing an afternoon game against the Texas Rangers at the Rangers new stadium. Angie and I “had” tickets. The Yankees only come to town once a year and it is our tradition to at least catch one game while they are in town. No game today made me think about some of the top moments we have seen over the years. Here are my top 3. #3 was last year when we saw the Yankees play in the final series ever played at Globe Life Park. #2 when I saw Mariano Rivera record a save in his final appearance in Texas on a very, very hot August afternoon in Arlington. #1 seeing one of my all-time favorite Yankees, Derek Jeter, play his final game in Texas! Baseball has always held a special place for me and the great memories it creates.” #IMissBaseball #PlayBall
Well here we are almost three months later, Major League Baseball has announced plans for a 60 game shortened season starting at the end of July, but who knows? Things change on a daily, if not hourly, basis it feels like.
I realize what I truly miss is “normalcy.” Nobody in their wildest dreams could have predicted the first half of 2020. A devastating pandemic that has crippled our economy, we are a divided nation and all this on top of the election year chaos. Talk about a perfect storm.
For the past 15 weeks I have participated in our Water Cooler Wednesday webinars for NoteSchool members and take 10-15 minutes each week to provide “industry updates” to keep all our members as informed as possible in these ever-changing times.
Initially my focus was on the impact of the CARES Act and how the PPP loan program could assist small business owners. I continued to discuss trends on unemployment claims, stimulus checks, mortgage forbearances and the effect they are having on our industry.
I’ve covered the future flow of NPL inventory and what triggers to look for as banks start charging down these assets on their books. We also spend a lot of time discussing the tightening of the availability of mortgage credit and how close to 40% of the borrowers who could get a mortgage loan in January could not get one in June due to the new restrictions by lenders.
Investors both large and small are sitting on piles of cash, some are scared and preparing for the worse, while some are looking for opportunities that uncertainty creates. In my opinion, the key metrics to watch as an indicator that we are heading in the right direction is consumer confidence, consumer demand and most importantly consumer spending. That is what fuels a healthy economy.
Yes I miss normalcy, I think we all do, but to be honest I’m not sure how to define normalcy right now. And I sure wouldn’t try and predict when it will return. Truth be told, the normalcy we knew will not return, but that is not bad news, as there will be a new normalcy that will inevitably take time to adjust to, but we will adjust.
I know a lot of you are dealing with anxiety and stress and I wish I had the answers for all of you. If you have two minutes, listen to the song “What a Wonderful World” by Louis Armstrong. “I see friends shaking hands saying, ‘how do you do?’ They’re really saying ‘I love you’ and I think to myself, what a wonderful world!”
Bob Repass
Managing Director
Stay up to Speed with Eddie
Play the Ball Where You Think It’s Going, Not Where It Is
by Eddie Speed
What are the most accurate tea leaves to predict where the real estate market is going? Follow the money!
The real estate industry is driven by credit availability because it’s a finance game business. If people can’t get financing due to unemployment, underemployment or strict credit guidelines, houses don’t change hands.
MUCH LIKE 2008, WE’RE SEEING A CRASH IN SLOW MOTION
Those industry tea leaves have been giving some mixed signals.
I’ve been looking in my rearview mirror a lot lately. I remember how I felt back in 2008, and things didn’t fall apart in 2 weeks. It actually started in early 2007, and it took almost a year to bottom out.
We saw dozens of financial powerhouses slowly tip over like dominos knocking each other down one by one.
I remind you of that because lots of real estate investors have seen the recent bump in real estate sales. In May and June existing home sales were up over 40%. Many investors breathed a huge sigh of relief, assuming the worst is behind us with blue skies ahead.
But have things really turned around? Should real estate investors start popping the champagne?
Don’t be fooled by a chart that says things are fine. If you’re a real estate investor and you think the business as you know it isn’t going to be drastically affected, then you’re not looking at how the money flows and how it affects the parties downstream.
I always keep my ear to the ground and listen to best advice I can find. John Burns is one of the world’s smartest real estate consultants. The companies he advises are like a “who’s who” in the global banking industry. Back in April, I was at a meeting of top real estate and hard money lenders, and he was called in to share his wisdom. When he talks, people listen! He said we could expect to see an increase in home sales in the near future (which happened exactly as he predicted), but he described it as a “dead cat bounce.”
It means that even a dead cat will bounce if it falls from a great height. He said we’d see a small, brief recovery from the pent-up demand in home sales, but things would quickly flatten out again. When properties don’t sell for three months, you’ll see a short resurgence, but a dead cat only bounces once.
If you compared today’s market to a Monopoly board, the Park Place and Boardwalk properties will continue to be in demand because those buyers will be able to qualify for mortgages thanks to their excellent credit ratings and solid income. The mortgage industry is currently slammed as they create loans for perfect buyers. You can do a refi for 3% interest IF you have great credit. But the working class folks shopping on Baltic and Mediterranean Avenue will be left high and dry. Traditional lenders don’t want to take a chance on loaning them money with the economy still shaky because these folks are the ones most likely to suffer and have less savings to ride out the storm.
According to the Mortgage Bankers Association, the current mortgage credit availability is about 35% less now than in January. When you take 35% of the mortgage money out of the finance-driven real estate industry, that’s going to have a huge impact on properties changing hands. Underwriting standards have changed significantly, so the guy with a 650 credit score can no longer get his FHA loan like in January.
WHICH WAY IS THE BALL HEADED? WHAT WOULD IT MEAN FOR YOU IF YOU WERE THERE WAITING?
I’m not making some bold claim that property values will decline like in 2008, with unsold properties flooding the market. While that’s not out of the question, the market characteristics are just different now than then.
The inventory levels today are not as high as in 2008. There’s still a shortage of inventory but expect some price depreciation.
If you look at the real estate industry as a whole, investors who buy properties at a discount don’t represent the mainstream. But the real estate investor side of the business is more drastically affected than everybody else.
You gotta know where we’ve been to know where we’re going. Prior to 2008, wholesaling was not a huge segment of the real estate industry. Investors were advertising to locate properties to buy at a discount, and had a successful formula for making money: Buy, fund, fix, and flip. High-volume investors stayed busy and did well, often flipping to a landlord as a rental property. It was also a good way for beginner investors to get their feet wet.
Then in 2008 we saw a gigantic reset in real estate prices and demand. Investors who couldn’t put deals together lost their shirts.
Things plodded along until 2012 when a new player jumped into the business. Hedge fund managers looked at future property value projections and used their giant checkbooks to buy up houses thinking they could make a killing in a few years. They didn’t have the marketing machinery in place to locate properties, so they bought from real estate investors. These investors who used to buy houses, fix them up, and sell them could now just buy houses and sell them to the hedge funds (for top dollar) without the headaches of fixing them up! This changed the whole business model for wholesalers to simply flip the contract and do more deals per year. It was essentially a market interrupter that made house buying more efficient for the investors. Less work, but with the same or more profit.
Around 2015 the hedge funds were losing some of their appetite for acquiring properties and started cutting back. But wait, there’s more to the story, it only gets better for real estate investors. Because that’s also about the time the HGTV watchers got fired up about getting into real estate. The HGTV fans didn’t have the financial discipline of a hedge fund pro with a fancy MBA and analytics; they knew nothing about real estate but they could qualify for loans and it looked fun on TV so they jumped in. Buying houses became an American pastime. Wholesalers started flipping properties to HGTV watchers for excessively more money.
The HGTV watchers bought properties with two simple exit strategies in mind. They would buy a property intending to either rent it, or intending to flip it. Neither option can work near as well today without reliable financing for their own loans or for the people who buy their properties.
What’s your read? With todays credit availability crunch, does it produce a major speed bump for the HGTV investor? Do they struggle? Can they continue to buy rental properties with a hiccup in financing for landlords, or flip their properties to subsequent buyers where they get financing? Will a much tighter loan approval criteria affect the HGTV buyer’s aggressive pattern of buying from wholesalers?
So if the answer to any of those above questions is even a “MAYBE no”, then which direction is the ball headed? If history repeats itself, then it’s going toward creative financing to fill the gaps left by traditional lenders, and make deals come together for people who have been left behind. This is why I’ve always made more money in down markets than up markets. There are far more people who need help qualifying for loans in down markets, and that’s where creative financing increases your competitive edge as a successful investor.
If you understand how to architect a deal using all the tools available with creative financing, the ball will be bouncing right into your hands.
Capital Markets Update
Minding the Gap
By: Ryan Parson
Building your financial freedom to last a lifetime means not only reaching a point of financial freedom, but maintaining that freedom for the next decade and the decade after that. An important part of that maintenance comes from minding the gap — being aware of market changes that could impact your wealth down the line and having protections in place to weather both anticipated and unanticipated gaps, as well. By addressing gaps now, before they happen, you can position yourself to minimize or even capitalize on the effects of market changes.
Market Changes to Watch
The market fluctuates often, but there are large, impactful changes that are important to stay aware of as it pertains to your wealth. Investors may be concerned about the effects of inflation and how it will impact their wealth, or may be considering the impact an increase in income tax could have. The market can be affected by unexpected events, as well — something we’ve all become familiar with during the past 90 days.
Market changes are unavoidable, but your reaction is well within your control. Reacting to the gap as it happens when you’re concerned about the longevity of your wealth and trying to navigate a loss of resources can be stressful. By preparing for gaps in the market well before they happen, you have the opportunity to implement supports and mitigate the impact of market fluctuations.
Realigning Wealth to Weather the Gap
Market changes are unavoidable, but by repositioning your investments you can maintain your wealth and freedom to live your best life despite gaps in the market. The goal is to have supports in place year after year to ensure you have the cash flow you need to live freely long into the future.
Implementing supports and precautions to protect your wealth into the future starts at the decision center — the day-to-day decisions you make when managing your money. With the help of analytical tools, you can forecast the effects predicted market changes can have on your wealth and gain prospective on how that wealth will last into the future. By looking into the future over the next five or ten years and anticipating how your wealth may be affected, you can take the necessary steps today to prepare for, and even take advantage of, gaps in the market.
Without planning for the gaps, even high net worth families can find it difficult to maintain their financial freedom in market downturns. By identifying the gaps in your financial future throughout your lifetime, you can start to close them now when you have the opportunity to address them in advance. Not only can you avoid the stress of a market downturn affecting your ability to live freely, but you can strengthen your wealth management so that those gaps have less of an impact.
Identifying market gaps and building those supports is easier when you have a community of other investors whose knowledge and experience you can draw from when anticipating future market fluctuations. There are also powerful analytical tools available to guide you through the process.
Building your financial freedom to last a lifetime means not only reaching a point of financial freedom, but maintaining that freedom for the next decade and the decade after that. An important part of that maintenance comes from minding the gap — being aware of market changes that could impact your wealth down the line and having protections in place to weather both anticipated and unanticipated gaps, as well. By addressing gaps now, before they happen, you can position yourself to minimize or even capitalize on the effects of market changes.
Market Changes to Watch
The market fluctuates often, but there are large, impactful changes that are important to stay aware of as it pertains to your wealth. Investors may be concerned about the effects of inflation and how it will impact their wealth, or may be considering the impact an increase in income tax could have. The market can be affected by unexpected events, as well — something we’ve all become familiar with during the past 90 days.
Market changes are unavoidable, but your reaction is well within your control. Reacting to the gap as it happens when you’re concerned about the longevity of your wealth and trying to navigate a loss of resources can be stressful. By preparing for gaps in the market well before they happen, you have the opportunity to implement supports and mitigate the impact of market fluctuations.
Realigning Wealth to Weather the Gap
Market changes are unavoidable, but by repositioning your investments you can maintain your wealth and freedom to live your best life despite gaps in the market. The goal is to have supports in place year after year to ensure you have the cash flow you need to live freely long into the future.
Implementing supports and precautions to protect your wealth into the future starts at the decision center — the day-to-day decisions you make when managing your money. With the help of analytical tools, you can forecast the effects predicted market changes can have on your wealth and gain prospective on how that wealth will last into the future. By looking into the future over the next five or ten years and anticipating how your wealth may be affected, you can take the necessary steps today to prepare for, and even take advantage of, gaps in the market.
Without planning for the gaps, even high net worth families can find it difficult to maintain their financial freedom in market downturns. By identifying the gaps in your financial future throughout your lifetime, you can start to close them now when you have the opportunity to address them in advance. Not only can you avoid the stress of a market downturn affecting your ability to live freely, but you can strengthen your wealth management so that those gaps have less of an impact.
Identifying market gaps and building those supports is easier when you have a community of other investors whose knowledge and experience you can draw from when anticipating future market fluctuations. There are also powerful analytical tools available to guide you through the process.
The Trading Corner
Successful Note Flipper
By: Scot Tyler
After being in the note business for all these years I’ve dealt with some of the most experienced note flippers in the industry and the NOT so experienced flippers. Of course Note Investors like Colonial, if we had the option, would rather only deal with the experienced flippers because of our prior dealings and confidence we have they can get a deal done. Doing so would be short changing the industry as well as myself and others who have been around a long time. I believe we need to give back to the newcomers. Spend time with them and explain why we priced a deal a certain way or how/when they should deliver their offer to the note seller. One question that is asked nearly every time from the not so experienced flippers is “How do I become successful flipping notes? One thing I’ve learned from the “old timers” (experienced flippers) is they all have common characteristics that have led to their success.
Product Knowledge: This is a must to be successful. Knowing how to deliver a full purchase offer along with a partial offer or maybe even bump payments over a certain period of time. Every note seller is going to have different cash needs and you as the note flipper have to be able to determine what that need is and then the best product for the sellers scenario. The experienced flipper doesn’t just restrict himself to only a full purchase offers.
Financial Calculator: In order to be able to provide a note seller with multiple purchasing options (product knowledge) the most experienced note flippers are proficient with the financial calculator. Being able to calculate amortizations, partials etc., while holding a rapport building conversation with the seller after getting minimum note information. I personally still use a HP12C, which is considered a dinosaur today, because that’s what I was taught on many moons ago. I compare it to an old car. It runs slow but gets you where need to go every time! There are much more user friendlier calculators out today but use what your most comfortable with. The experienced flippers are spouting out the monthly P&I payment the seller is receiving based upon the amount financed, note rate and original term the seller has given. “I show the monthly P&I payment to be $535.33 since, is that correct?” Seller – “Yes it is. How did you know that?”
You’ve now begun the process of the seller having confidence in you. At bare minimum, you must be able to calculate an amortization, monthly payment and current balance on a loan.
Communication Skills: As we spoke about in prior articles building a rapport with notes sellers to build that trust is essential. The great note flippers are great communicators and know what to say to get the information from the seller they need. They not only know what to say they know what NOT to say and most important, when to listen. When they speak they come across as confident and as we all know that leads to success.
Persistent: One thing I found with experienced flippers is they don’t give up. If I call for an update on a loan I priced for them you can bet they are able to tell you where they are at with the deal and seller. They are persistent and consistent with follow up calls, obtaining additional information and getting to the “yes” (February 2020 article). They are always communicating with the seller.
As a note flipper, you have to educate yourself, practice what you learn and keep pounding the pavement. You won’t be an expert overnight but continued repetition on calls will definitely get you the experience you need to get to the “successful” stage of note flipping.
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 – SWMH-O/O
Douglas, AZ
BPO $73,000.00
$65,000 sale with $7,000 down
$58,000 / 8.00% / $500.00/month for 224 months
51 made / 174 left
Current UPB $51,300.80
Until next month.
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