Thoughts from the desk of Bob Repass…
Talk about two ends of the spectrum… Over the past several weeks I have spent time meeting with Congressional leaders and their staff regarding the impact of the CFPB and Dodd-Frank regulations on the Seller Finance industry along with spending time in the beautiful hunting land of Montague County, Texas hosting our 2nd Annual NoteSchool Hog Hunt.
Capitol Hill is an interesting place, to say the least. I went to Washington D.C. as a representative of the newly founded Seller Finance Coalition to help educate lawmakers on the unintended consequences of the sweeping financial regulatory laws that have gone into effect over the past 6 years. We met with Senators and Representatives, both Democrats and Republicans. The reaction was unanimously positive, with each Member of Congress expressing a desire to help the industry. Overall it was an encouraging first step in the process of cutting the red tape that is forcefully affecting our industry. Stay tuned…
Well, if you think that our nation’s capital is an interesting place, you need to check out Montague County, Texas! In December of last year at NoteSchool’s 2nd Annual Appreciation Event, we conducted a charity auction that raised over $91,000 for the Montague County Child Welfare Board. The auction item that raised the largest single amount was a weekend Hog Hunt with the Senior Management Teams of NoteSchool and Halo Companies in Spanish Fort, TX in the heart of Montague County. The thirteen winning bidders spent three days enjoying food, fun and fellowship as well as some hog hunting, and let me just say that a good time was had by all!
Needless to say, there is never a dull moment…
The Trading Corner
Breaking out of our Geographical Comfort Zone
As we fly across the country performing state of the industry presentations and conducting live training events, we inevitably get into investment conversations on the airplane. As you can imagine, the concept of buying mortgage-backed notes is very intriguing but foreign to most people. Because of this, we are often engaged in a fairly one-sided conversation to explain the investment opportunity.
In comparing mental notes of these conversations, we have concluded that when it comes to real estate investing, most people build a mental geographical comfort zone. They simply can’t wrap their brain around buying an asset where the collateral is in some town in Middle America that they have never heard of, yet these same people will buy stock in a company located half way across the world, run by people they don’t know, that produces a product that they don’t fully understand or buy themselves! They have a tolerance to invest in Wall Street but not Main Street?!
Why is it that investors almost instinctively need to touch and feel real estate? Why is this mental block causing investors to miss out on massive opportunities? Do you have a geographical comfort zone that is holding you back?
First of all, don’t confuse geographic location with demographics. Certainly we are sensitive to local demographics such as crime rate, job growth potential and population flight. By geographical comfort zone, we are referring to investing in assets where the collateral is out of state but in a cookie cutter, working class neighborhood.
Risk tolerance is the reason real estate investors create geographical comfort zones. Real estate investors with a low geographical comfort zone will tell you that they like to target a specific property type in a specific target area, all within a reasonable drive from where they live so that they can see and feel the property.
Real estate investors with a higher geographical tolerance will tell you to target properties in specific cities nationwide where opportunities are better than where you live. These investors don’t need to personally see and touch the property rather they have learned to rely upon third party experts that they can outsource certain tasks to.
A highly trained note investor develops a tolerance for geographical location because he realizes that he must adapt to the marketplace since the marketplace will not adapt to him. A note investor understands that the property is collateral for the note and mortgage that they bought.
Very simply, when we buy a performing note, we are interested in the price we pay, the value of the note and the value of the underlying asset. As long as the collateral is insured and worth more than we have in the deal, we don’t care if the property is in in Ohio, Illinois, Missouri, Georgia or Florida!
In other words if we are receiving monthly cash flow and yielding 12% per year through the $80,000 purchase of a seasoned $90,000 performing note secured by a $120,000 property, do we really need the property to be within driving distance? Do we really need to drive by it every day to check on it?
Unlike stock and bond certificates, real estate is highly tangible. Investors have a way of personalizing real estate and as such have a different tolerance toward real estate location. This is something that you simply must overcome if you want to be a successful note investor.
As a note investor you must understand that the property is merely the collateral we acquire if the note goes unpaid. It is an investor’s security, but rather than sitting in a vault somewhere, it is sitting on Main Street, USA. There is no question that we need to establish value for that, but by no means do we have to see it and touch it.
Investing in a real estate-secured note is not driven by location; the numbers drive it. If a note investor can quantify the yield, investment-to-value ratio, cash flow and other variables, their marketplace is nationwide.
How This Investor made over $32,000 on a $7,100 Buy (and will end up making even more!)
Like many investors new to the note business, Keith Warrington was anxious to get started. With enough confidence from what he had learned so far at Noteschool and with the benefit of ongoing support, he started out by purchasing a few notes at the same time.
Redeeming and Non-redeeming Qualities
One of his first purchases was a non-performing note on a property located in Memphis, Tennessee. This 1000 square foot property:
- Is located right by the airport and the constant noise level was noted in the BPO
- Was in an REO-driven market where the majority of sales were foreclosures and short sales
- Is in an a zip code with ratings of 10 (out of 10) for property and violent crime
The situation was that the property owner had lost her job, and although she was taking pretty good care of the property, she:
- Was 5 years delinquent on the loan
- Was also 3 years delinquent in city and county taxes
- Left the property uninsured
After Keith purchased this note he decided to both service and work out the note himself. Because the property owner showed emotional equity, he decided the best course of action was to try to do some kind of workout.
Since there was no way that she could do a workout, he then pursued a Deed in Lieu with the thought of leasing it back to her. This plan was taking too much time and didn’t look like it was going to work either.
After several months of facing a brick wall, the county now was scheduling a tax deed sale. Instead of paying the taxes himself, Keith was able to convince the property owner to work out a payment plan directly with the County. The county accepted these terms.
At this point time the deal was looking pretty grim, with foreclosure looking like the only solution. That is until he learned about the hardest hit funds program.
Did His Homework and Orchestrated His approach
Once Keith found out about the hardest hit funds (HHF) he started doing his homework. He went to the county website, researched all of the information, and made phone calls in preparation for approaching the homeowner.
His due diligence paid off as he learned several things along the way. For example, in Tennessee the hardest hit funds administrator cannot talk to the lender; they can only talk to the servicing company. Furthermore, the servicing company has to be registered and approved by the state. He quickly went from self-servicing the loan to boarding it with FCI Lender Services, which was on the approved list.
Armed with knowledge, Keith approached the property owner. She loved the idea. The issues now were how quickly could she get her paperwork together and whether she could she qualify.
Even though Keith couldn’t directly contact the administrator, as a lender he was able to build relationships and orchestrate all the parties involved so that the transaction could get closed. He knew the only way to keep this moving was by prompting and prodding them along the way (especially the homeowner).
In order to maximize the amount of the $40,000 allowable through the HHF, he calculated exactly how much he was willing to forgive and directed the loan servicer to present that to the HHF administrator.
- Paid $7200 for the note
- Paid $900 in miscellaneous expenses
Total money out: $8,100
- Received $25,600 for 42 delinquent payments from HHF
- HHF paid $3,000 in delinquent taxes
- HHF paid $785 in delinquent insurance
- HHF will pay $10,726 (18 months of payments $595.91)
Total money in: $40,111
Plus Keith still owns a note with a $62,000 balance payable at $595.91 per month for 25 more years! Identifying problems and coming up with solutions, followed by persistent follow through, turned what could have been a stinker of a deal into his most profitable to date.
The “Top Ten” with Kevin Shortle
There are many people behind the scenes that drive the engine to make our companies successful. Each month in this section we will turn the spotlight on one of these people so you can get to know them better. This month is Kevin Shortle, Director of Curriculum and Research for NoteSchool.
How long have you been with Colonial Funding Group/NoteSchool?
I first met Eddie and brokered notes through Colonial over 20 years ago. I caught back up with Eddie about 5 years ago and have been with NoteSchool now for over 2 years.
What is your role at Colonial Funding Group/NoteSchool?
Research, writing, curriculum development, oversee the member website & helpdesk, mentor & coaching calls, speaking & training at live events and overall sounding board for Eddie & Bob on new ideas and how to implement them.
Haggis, yep, love me some Haggis. Actually it must be the food at Marriott because it seems that I eat there a lot. No, the truth is my wife Kendra loves to cook, so anything she makes.
Favorite TV Show?
House of Cards, which I think is frighteningly accurate.
Favorite Movie of all-time?
Depends upon the genre but if I go with Comedy, I would say Tommy Boy.
Last Book You Read?
I’ve read a few books lately by Malcolm Gladwell. Blink was the last one I read. It’s an interesting psychological view on how people make decisions and how often your “gut” instinct is correct.
Favorite Sports Team?
Miami Dolphins. Growing up in Ft Lauderdale, my Dad used to take me to watch them practice. I had all the autographs; Shula, Griese, Csonka, Morris, Warfield, Little, Fernandez, Kiick, Morrall etc.
The 3 people you would like to have dinner with (dead or alive)?
Two of our founding fathers: George Washington and Thomas Jefferson who helped create the most powerful documents in the world. Framed copies of the Declaration of Independence, The Constitution and Bill of Rights hang on my office wall.
The third would be my great grandfather, Welterweight Boxing Champion of the World, and Hall of Famer, Jack Britton. I would love to hear his stories in his own words. Many of his records will never be broken. My son, Britton, is named after him.
What do you like best about working at Colonial Funding Group/NoteSchool?
Eddie has put together something very special: an organization of very qualified and dedicated people that have their students and investors’ best interests at heart. It is extremely rewarding to see and hear from students that are having a lot of success applying the techniques that we teach.
Quote of the Month
“We make a living by what we get. We make a life by what we give.” – Winston Churchill