The Buyline, August 2020
Thoughts from the Desk of Bob Repass…
After much thought, deliberation, and research we have decided that NoteExpo 2020 will now be a fully live virtual event on November 6-7.
This was not an easy decision for us to make, but given the current circumstances and continued uncertainties, we feel it is the right decision.
Most if not all major conferences across the country such as Five Star, IMN and MBA have decided to host their events virtually as well.
This will not deter NoteExpo from delivering the quality educational and up-to-date industry content that has made NoteExpo the industry event in the note business. Fear not, while this year’s event will be virtual it will also be interactive. As we have since 2014, our goal is that you will be able to visit exhibitors, engage colleagues and hear from speakers from across the real estate and note investing industry.
The technology available now to hold live virtual events is truly amazing. We are currently analyzing various platforms in order to decide which is the best fit for NoteExpo 2020.
We realize especially in these chaotic times that the note industry continues to evolve as does your need to stay on top of the latest going ons that we all face on a day-to-day basis. We stay committed to bringing in industry leaders and subject matter experts to provide their insights.
I can assure you that virtual does not mean less content. Again, this year we will feature general sessions, panel discussions and our popular NoteTalks presentations across jam-packed two-day event. I believe all our sponsors, vendors and attendees will find this year’s NoteExpo impactful and valuable as together we navigate our way towards 2021.
I invite you to plan on joining us November 6th & 7th by registering at https://noteexpo.com/ and stay on the lookout for more updates and information about what we have planned for you at this year’s live virtual NoteExpo 2020.
I have always said that we created NoteExpo with these three things in mind Content, Connections & Community. I realize that not being able to see each other in person this year will make this challenging, but we are dedicated to making this a great event for all of us.
See you online in November!
Stay up to Speed with Eddie
Why the Real Estate Visionary Makes Decisions Based on Data
by Eddie Speed
If you grew up reading MAD magazine, you know the famous quote by Alfred E. Neuman: “What, me worry?” He never worried because he never knew what was going on. Unfortunately, there are real estate investors who are following his example.
They’re not worried because they look around and see title companies are busy. Real estate is moving. Hard money lenders are back making loans. Wholesalers have investors ready to buy. Mortgage lenders are bustling. The sun’s shining and the birds are singing. What is there to worry about?
If you think things are fine, I encourage you to seek out information from the industry’s top experts. That’s what I do. I always try to make decisions based on data instead of a wet finger in the breeze.
John Burns is one of the world’s smartest real estate consultants. He says that right now, the real estate industry seems to be in the middle of a dead cat bounce. We’ve been through some slow months, and now we’re seeing a bounce from pent-up demand. If you drop a dead cat from a skyscraper, it’ll bounce—but it only bounces once. And not very high.
Right now, title companies, and particularly mortgage lenders are busy because they’re doing deals for perfect buyers with perfect credit—most of which are refis. There are so many refis that loan processing times are now months, not weeks. Overall, about 65% of loans being done right now are refis, and only 35% are home purchases. That’s pretty much the flip-flop of a normal market. And it’s giving us a false read of the condition of the mortgage lending world.
According to the Mortgage Bankers Association, refinance applications are up 100% from one year ago, but purchase applications are up only about 10% from a year ago. The influx of refi applications is causing a log jam with lenders when it comes to processing loans.
So, what should the real estate industry expect in the next several months?
I’m not saying I’m a genius, I’m definitely not a data geek, or scientist; but I do have experience. I’ve learned to pay attention to data and information from the most reliable sources. In order to be a real estate visionary, I go looking for their opinions, and this is often information other people aren’t paying attention to. When you listen to people who are smarter than you are, you make smarter decisions.
Right now, industry heavyweights like the National Association of Realtors, the National Home Builders Association, Fannie Mae, Freddie Mac, and CoreLogic are all predicting a decline in home prices in 2020 and 2021. They can’t agree on what the percentage drop will be, but they all agree that prices will drop.
I’m not the one making the prediction; but all these sources are saying the same thing, and they know what they’re talking about. I’ve learned to gather information from people who gather and analyze data all day, every day. I seek out their opinions and so should you.
You might not notice that the market is changing, but change is around the corner. What does this mean to your business, and how will you react to it? A surfer can’t direct the wave, but if he knows what he’s doing he can get a good ride from whichever way it’s heading.
In the late 90s, I was doing a lot of deals in the manufactured housing industry. (You know, mobile homes.). A dominant lender in the category was making extremely aggressive loans to anybody who could fog a mirror. It was straight up, “Have you lost your mind? Who would make a loan to this guy?” lending. To compete, the other lenders followed the same unrealistic lending criteria. But the wheels came off the mobile home business because all this aggressive lending left the industry with credit availability problems and excessive defaults. This led to a massive inventory of foreclosed mobile homes. By 2000, 80% of the sales centers were out of business because they couldn’t sell new homes when there was no mortgage money left and an oversupply of super cheap repos.
In 2004, ’05, ‘06, it was déjà vu all over again. I saw the same storm clouds forming over the residential real estate industry. I didn’t have to be an economist to see the identical disaster shaping up with the subprime lending industry; I only needed a decent memory. It sounded eerily familiar. Extremely aggressive lending to people who aren’t going to successfully pay their loans back results in repos and foreclosures. It was obvious to me that the situation was illogical and unsustainable because I’d seen it before. I told people the industry would blow up in their face and they thought I was crazy because business was booming, and everybody had both hands filled with money. When things started to unravel in 2008, I can’t say I was shocked. I had been predicting it would happen but didn’t know when. When the bottom dropped out, there were people who thought it was only going to be a speedbump. (But it was a speedbump as high as a mountain.)
Many REIs as well as other people in residential real estate were caught off guard in 2008 because they weren’t paying attention to all the market conditions. In this case it was caused by extremely aggressive lending. And they weren’t making data-driven decisions—they were making emotional decisions. They were like the doofus who keeps betting on his home team to win simply because it’s his favorite team while ignoring the fact that it’s a lousy team.
Because I was one of the few who had gone against the grain and accurately predicted the bottom dropping out of the industry with all the foreclosures and defaulted loans, I become known as the go-to guy for advice in the REI world. That’s funny, because what’s a note guy doing telling REIs the “weather” conditions? I was asked to speak at more than a hundred state-of-the-industry events in the aftermath of the collapse. I made them aware of important information that was available, but just wasn’t on their radar.
I hammered home the importance of studying the data and drawing your own conclusions. I’m doing the exact same thing today. Lots of REIs are “people people” and they need to listen to “numbers people.”
Here at our family of Colonial companies, my executive team comes from the loan servicing / mortgage banking world. They’re constantly diving deep into the numbers that tell us what’s coming down the road. The steamroller we’re seeing headed our way is a shortage of available mortgage money.
Shortage of money always affects real estate! And it always affects it in a bad way.
Very few people buy their homes with cash; most buyers have to borrow money. When money isn’t available to borrow, the supply and demand balance gets derailed. Deals can’t close without money.
A new industry buzzword has been launched in 2020, and we’re hearing it all the time: “Fractured closing” It’s the term title companies have been using when a real estate agent has a house under contract with the sale pending, but it doesn’t close because the mortgage company turns down the loan. If there’s no money to fund the deal, the buyer can’t buy, and the seller can’t sell. That’s a direct result of credit tightening. Remember about 35% of the people who get a mortgage in January 2020 can’t qualify for one to today, they have been left behind.
The good news is entrepreneurial-minded note investors can fill this huge gap by understanding how to architect seller financed notes and use other creative financing techniques that we teach at NoteSchool. (BTW, our training classes in the last few months have been busier than ever. It’s no wonder why.)
I’m not a weatherman, so I listen to what the weatherman says. I also listen to the experts in the real estate industry and you should, too. I encourage you to pay attention to the research from the most reliable sources, it’s out there. Let data drive your decisions not optimism. What happens if you watch the weather forecast and you don’t believe the weatherman when he says it’s going to pour down rain? You’ll probably get drenched.
In my opinion, there’s no such thing as bad weather. There’s only the wrong clothes! If you know the storm is coming and you’re prepared when it hits, you won’t get soaked like everybody else.
COVID-19 will bring to baseball what it brought to the stock market: volatility
Capital Markets Update
The Persistent Hope of Baseball’s Opening Day
By: Ryan Parson
Thursday, July 23rd was Opening Day for the 2020 season of Major League Baseball, the latest opening day in history. Unlike past Opening Days, only 4 teams played on Thursday, with the remainder making their Opening Days on Friday.
This year’s Opening Day was quite different, thanks to the coronavirus pandemic. Not only were there no packed stadiums, but the season was shortened to a 60-game schedule that is more regional than national as teams play two-thirds of their games against division rivals, and one-third against teams in the same divisions from the opposite league (East versus East, etc.)
For every team, as writers have written over the years, “Hope springs eternal.” This year writers might use the term “Hope summers forever” or something like that.
History of Opening Day
So, how long has baseball had Opening Days? This is the 145th season of the National League, which began in 1876. From 1876 to the present, every year has had an Opening Day.
U.S. presidents have been part of Opening Day for over 100 years. Since President William Howard Taft threw out the ceremonial first pitch of the 1910 season, every president has thrown out the first pitch on Opening Day at least once. President Franklin D. Roosevelt did it eight times, halting the practice during World War II. President Harry Truman did it seven times. As a matter of fact, President Truman threw first pitches with both his right and left arms in 1950.
Some games on Opening Day have been especially memorable:
- On Opening Day, 1907, fans in New York rioted, throwing snowballs at players. The umpire stopped the game, and the New York Giants had to forfeit. In that same game, Giants catcher Roger Bresnahan became the first catcher to wear shin guards, a now universal practice.
- On Opening Day, 1940, 21-year-old Bob Feller of the Cleveland Indians pitched a no-hitter, the only one ever pitched on Opening Day.
- On Opening Day, 1947, Jackie Robinson of the Brooklyn Dodgers became the first African American to play Major League Baseball in the 20th century.
- On Opening Day, 1974, Hank Aaron hit his 714th home run, tying the record of the legendary Babe Ruth.
Hopeful Baseball Teams
Only two teams have played continuously since 1876, the Chicago Cubs and the Atlanta (originally Boston) Braves. Talk about persistence… Year in and year out, whether in good times or bad, these two teams have returned for Opening Day.
The Cubs provide a particularly persistent example of hope. Before their 2016 World Series victory, the Cubs last won the World Series in 1908, back when Kaiser Wilhelm and Tsar Nicholas II still enjoyed their Empires.
The Boston Red Sox also maintained their optimism. After selling the contract of Babe Ruth to the Yankees, the Red Sox waited 84 more years before another World Series title in 2004. Even after making what many consider to be the worst deal in sports history, the Red Sox came up with many great players over the years, enjoying many winning seasons. And then they won the World Series three times in ten years and again in 2018.
Fans of the Pittsburgh Pirates never gave up hope, either. The once proud Pirates, with past World Series titles and many Hall of Fame players, endured 20- consecutive losing seasons, from 1993 to 2012. This marks the longest streak of seasons with losing records in professional sports history. However, after careful planning, restructuring, and analysis of its players and the competition, the Pirates have had more recent winning seasons and playoff appearances.
These baseball teams and their fans did not abandon the cause, drop all their players, or give up on the proven baseball strategies for success. They kept plugging away. Team management reviewed the team’s status every year. They changed players as needed, sometimes in a planned way, and sometimes because of a sudden injury. They adjusted their rosters and their strategies to fit the situation and the competition.
Baseball had been around for a very long period of time, but Major League Baseball began in 1876. Stocks had been traded, but the stock market’s first index – the Dow Jones Industrial Average – was created in 1896. Long before there was the stock market and major league baseball, individuals were investing in “alternatives” such as real estate, precious metals, private equity, etc.
The stock market, as a whole, has experienced its fair share of up and down years. It crashed in 1929, lasted through the Great Depression, and weathered various financial crises due to wars, oil prices, foreign asset bubbles, currency adjustments, the housing market, and 9/11. On the other hand, alternatives can provide stability, and provide opportunities for investments that are most fruitful and less affected by the volatility of the broader markets.
Just like baseball teams, year in and year out, whether in good times or bad, companies and investors continue to show up for business. After careful planning and as-needed adjustments, they remain hopeful. Wise investors do not abandon the cause or the proven financial strategies for success.
Conclusion: Investors can learn from baseball
Despite bad seasons or strings of bad seasons, each team’s fans hope for the best. Fans do not drop their teams. Baseball team owners do not abandon ship just because things are not going as planned (well, sometimes they abandon cities, but that’s another story altogether). Successful team owners and managers keep level heads, carefully adjust their rosters and their strategies, and stay hopeful. Even when they do not win championships, they still win games.
Successful investors would be wise to follow the same strategies. Remain level- headed, plan carefully based on resources and the market, and then succeed.
Please join us for our next Industry Expert Webinar on August 17 at 4pm CDT when we will welcome Lance Pederson of Verivest who will discuss the importance of due diligence for sophisticated investors. Register here for the webinar.
The Trading Corner
Don’t “Box” Yourself In
By: Scot Tyler
Last month we spoke about the “Successful Note Flipper” and what common characteristics they have that have led to their success. This month I want to piggyback off
that and talk about what the successful note investors do by NOT concentrating on one product type.
As note investors we all want the cookie cutter deals that we think have the least amount of risk. We all chase those deals that are single family residences (SFR’s) in big city USA that have great seasoning, great equity, high interest rates, high credit scores and great curb appeal. Who wouldn’t want those deals only? The reality is most investors are not taking advantage of all the other deals that are NOT cookie-cutter deals with limited risk.
What investors must remember is that seller-financing is happening not only on the SFR’s but also on manufactured homes/land, land only, commercial properties and multi-family/income producing properties. These properties are sold via seller financing just like SFR’s for many of the same reasons. Lack of traditional financing, shorter marketing times, more buyers, quick closings, etc. etc.
The more successful note investors will also invest in these property types as well. These investors take advantage of the fact that others do not understand the other product types and the risk’s involved in purchasing them. Just like the SFR’s proper due diligence needs to be completed to know if this other property type is a high risk or low risk loan to purchase.
For example, some investors are not interested in a manufactured home/land deal in rural America. Even though that property/product type is needed for a specific cliental than what is needed for an SFR in big city USA. There is still a need for that loan due to the limited amount of financing available for that customer. So how does the borrower get that loan? He gets it by seller financing the property. Of course, there is a little different due diligence involved than an SFR, for instance whether the manufactured home is still titled or is the home permanently affixed to the property? Is the home and land taxed together as real property? How much land the home sits on and what that value is?
Bottom line is as investors when we begin our due diligence, we just want to make sure the borrower has the ability to pay and we receive our monthly payments. Weighing our risk on a SFR, manufactured home/land combination, land only or commercial property is all the same. The only difference is the actual collateral we are purchasing the loan on. Successful note investors do not limit themselves to one asset type. They will review all assets and weigh their risks vs. rewards on each and if there is money to be made, they will pull the trigger.
Do not put your investing habits in a box. Diversify and open up your portfolio to other product types that make money too. If you are only concentrating on a single product type, you are not opening yourself up for other/more investing opportunities. Take a minute and go back through your leads and identify how many opportunities you missed out on due to product type. Go and rework those loans and figure out where the money is in the deal and diversify your purchasing criteria.
Here is a “COMMERCIAL” loan that came across our trade desk that we recently funded. If you’re interested in purchasing it, email me at: email@example.com
Performing Note – Restaurant – O/O
BPO $225,000.00 – August 2019
$107,000 sales price with $16,050 down payment
$90,950 / 5.0% / $488.24/month for 360 months with balloon in 94 months
63 made / 31 and 1 balloon of $77,558.10 left
Current UPB $82,349.55
Until next month.
Quote of the Month
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty” – Winston Churchill
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