Thoughts from the Desk of Bob Repass…
Over the last several years, I have been working alongside the other founders and members of the Seller Finance Coalition with the goal of achieving regulatory relief for our industry. At no point during this journey have I felt more confident that we are going to get something done!
A new version of our bill was introduced to the House Financial Services Committee by Congressman Vicente Gonzalez on January 15, 2020. Now known as the Affordable Homeownership Act, our bill once again has bipartisan support. We are pushing to add co-sponsors from both sides of the aisle so we can get it on the calendar for committee “mark-up” in March or April.
Below is the official press release from Congressman Gonzalez’ office. Stay tuned for how you can help us in this effort by checking out www.sellerfinancecoalition.org and liking our Facebook page at www.facebook.com/sellerfinancecoalition
Congressman Gonzalez Introduces the Affordable Homeownership Access Act
WASHINGTON – Today, Congressman Vicente Gonzalez (TX-15) introduced H.R. 5614, the Affordable Homeownership Access Act (AHAA) with Congressmen Henry Cuellar (TX-28), Andy Barr (KY-06), and Lance Gooden (TX-05). This bill seeks to provide working families with another access point to the home buying process. This program will allow individuals, small businesses, and families to sell their homes directly without paying the federal government licensing fees as though they were a mortgage originator.
The United States is facing a homelessness crisis and the lack of affordable housing is a major contributor to that problem. Home loans below $200,000 are scarce and significantly more so at the $100,000 price point.
“Our homelessness and affordable housing crises are partially self-inflicted. We are inadvertently penalizing lower-income Americans who work several jobs to make a living and earn a decent wage with our current regulations,” said Congressman Gonzalez. “The current home buying system is disproportionately affecting communities of color and lower-income Americans like those situated in colonias along the southern border. I introduced the AHAA to help hardworking Americans who are facing a housing and credit crunch, and have ensured that those consumers who take advantage of this program do not forfeit critical consumer protections.”
The bill will enable real estate owners to be seller financers giving homebuyers access to another form of lending in the price points that they can afford, while maintaining consumer protections. Through seller financing, both sellers and buyers have greater access to conduct business that is still regulated by each State’s real estate and consumer protection laws as well as State and Federal fair housing and equal opportunity laws.
“Seller financing provides access to capital and affordable homeownership opportunities to underserved consumers as well as underserved communities across the nation. For generations, seller financing has been a vital financing mechanism for working class and minority family’s home purchasing transactions and has allowed thousands of families who would not otherwise be able to own their own home the opportunity to achieve the American dream of homeownership. The private capital provided by seller financers can help solve the affordable homeownership crisis.” said Bob Repass, Co-Founder, of the Seller Finance Coalition.
In addition, the AHAA mandates that the Secretary of Housing and Urban Development and the Secretary of the Treasury conduct a study to help determine the effects of this policy change and measure its assistance to homebuyers.
More information on the AHAA is available here.
Always Think Ahead to the Deal After the Deal
by Eddie Speed
When you borrow money from a conventional bank to buy a property, they present the terms of the loan to you and you have two options:
Take it or leave it. That’s what you call “uncreative financing.” But when you negotiate with an individual, the terms of the loan are much more flexible. That’s what makes it “creative financing,” and why it’s a lot more fun (and a lot more beneficial to you) than having a bank dictate the terms.
Every loan has eleventy-seven things to negotiate, and you can be sure that a conventional bank has stacked every single one of them in their favor. But when you’re buying a property with creative financing, you’ll be dealing with an individual instead of a department within a division within a corporation within a conglomerate. A traditional mortgage company will never agree to the same things a private party will agree to.
By dealing with an individual, you can negotiate those dozens of things in your favor, or at least as many as possible. But you have to know what you’re negotiating for and which terms are most important.
When you’re negotiating, it’s not critical that you get every single thing the way you want it. That’s because the deal you make on paper at closing isn’t as good as the deal after the deal.
If you’re a golfer, you know how you might aim your drive toward the trees instead of toward the fairway, knowing that the wind (or my hook) will correct the shot as it flies. The ball will ultimately land where you want even though it didn’t start out going the right direction.
I’m definitely not saying that you won’t stick by the terms of the original agreement. I’m saying that by sticking strictly to those terms, you’ll benefit later by including the right of first refusal in your negotiations.
AS A SMART REAL ESTATE INVESTOR, TIME IS ON YOUR SIDE
A smart investor plays the long game. For a loan with payoff terms that are 12 years or longer, you can bet that the chances of that loan becoming available for purchase at a discount before it’s paid off are close to 100%.
Most untrained investors focus on negotiating the price and interest rate, because they think those are what determine how much money they’ll have to pay to settle the debt. But they make the huge mistake of not asking for the right of first refusal for when the note comes up for sale down the road. So they miss the opportunity to buy back their own debt at a big discount. They miss out on the deal after the deal!
Life happens, so there’s an almost guaranteed certainty that the note owner will want to get their cash early before the long payoff date so they can start a business, pay for college, settle a financial problem, buy a new property, cover health expenses, retire early, get divorced, or whatever. Life is full of twists and turns, so let those twists and turns work in your favor.
Getting the right of first refusal is never an afterthought; it’s your first thought. It’s the top box on your checklist during negotiations for if—or more likely when—the note becomes available for sale to get an early payoff.
When you ask for the right of first refusal, there’s no need to specify the price that will be paid in the future because nobody knows when that date will be, or how much will still be owed on the loan, or what property values and interest rates will be at that time. You’ll cross that bridge when you come to it, so the price you pay will be negotiated at that time in the future. I’ve been buying back my own debts for 40 years, so I can tell you from experience that the average discount for buying a loan is about 35% off the total payoff amount. But I’ve seen much higher discounts when the seller is highly motivated.
During your initial negotiations, you need to bring up the right of first refusal in the right way, explaining to the seller that there’s no money out of their pocket or skin off their nose to give it to you. (It’s possible to say the right thing in the wrong way, and if you’re married you know exactly what I’m talking about.) It doesn’t have to be the first thing you negotiate, but many investors start off with this because it’s easy to agree to, so it gets things off on the right foot by setting an agreeable tone before moving on to touchier topics like price, interest, deferred payments, length of the loan, etc.
Unless specified in the contract, note owners almost never contact the property owner when their note goes up for sale at a discount. They always go to a 3rd party. I’ve made a lot of property owners mad at me by buying their discounted notes when they became available. That’s when I realized people don’t know what to negotiate for! But since they didn’t include the right of first refusal in their negotiations, then they have only themselves to blame for missing a great opportunity.
IT’S THE DEAL AFTER THE DEAL WHERE THE REAL MONEY IS MADE
Untrained investors think a loan with a short length of time to pay it off (amortization), is better because they’ll pay less in interest. This will surprise a lot of investors, but paying 0% interest for 5 or 6 years is a terrible deal for the buyer. It’s not even average or good. Why? Because you’ll pay the FULL loan amount in that short of a term, and miss the greater opportunity of buying your debt at a discount. Instead of agreeing to a 5 or 6 year loan with no interest, I’d MUCH rather agree to a 15 or 20 year loan with SOME interest (lower than market rate, but somewhere around 2 or 3%).
I love teaching people how to put deals together with terms that are far more favorable than any bank will ever give you. And I love showing people how to put time on your side. Because when time is on your side, you’ve got an ally nobody can escape from.
Dividing Your Estate: A Practical Approach
By: Ryan Parson
Deciding how to divide up your estate can be a complicated business. Most people might assume that the fairest way to do this is by giving each beneficiary an equal share of their assets. This is perhaps the easiest method to avoid conflicts or complaints of favoritism. But does equality necessarily equate with fairness? Of course, you may choose to divide your assets equally; however, it’s important to be aware of all your options in estate planning.
An alternate approach to estate equalization is a division of assets that recognizes and supports the uniqueness and differences in the abilities and needs of your children, even at the risk of creating conflict. Through your estate plan, you have a chance to provide a degree of thoughtful and calculated support that your children may not otherwise experience.
Here are some practical things to keep in mind.
Developing a Tax Strategy
Estate planning is all about leaving your assets to your loved ones so they can be financially stable and cared for in the future. However, the estate taxes that come with this type of giving can be almost counterproductive to your intentions if your beneficiaries are strapped with large payments.
An effective tax strategy can help you save money today and avoid passing on expenses to your beneficiaries tomorrow.
How to Leave a Tax-Free Legacy
As a high net worth individual, you’ve worked hard to earn and grow your money. When you’re contemplating how to distribute your wealth to your children or grandchildren, you want to make sure the money ends up in their hands, not the pockets of the IRS. Leaving a tax-free legacy can facilitate an easier transition for your beneficiaries when you pass. Here are some ways to make sure your assets avoid the red tape of estate taxes.
Multigenerational Strategies and Roth IRA Conversion
One effective tax strategy for leaving a tax-free legacy is to combine the Multi-Generational strategy with a Roth IRA conversion (MGIRA). The MGIRA, aka an extended or stretch IRA, allows you to designate a successor beneficiary to pass on funds you saved for retirement. Converting other kinds of IRAs to a Roth IRA offers many advantages, including eventual tax-free withdrawals of qualified distributions.
When it comes to managing the size of your estate and planning for the future, minimizing your assets while you’re alive can be an effective strategy to enable your beneficiaries to escape estate taxes later on. You can accomplish this through lifetime gifts.
Lifetime gifts, especially of income-producing assets, can potentially reduce the size of your estate. A smaller estate may mean decreased probate costs and may also reduce or eliminate income and estate taxes. In addition, to cutting down on your taxes and avoiding uncertainty in the future of your beneficiaries, lifetime gifts protect your privacy more than a will. Lifetime gifts are private. Only you, the recipients, and possibly the tax authorities, need to know the details. By contrast, what goes through probate is a matter of public record.
Making gifts during your lifetime allows you to experience the pleasure of seeing your loved ones enjoy them. It may also give your heirs the benefit of the assets when needed most.
The Importance of Good Record Keeping
As you plan your giving, it’s important to keep accurate records in the event that you have to substantiate such gifts. While receipts and other acknowledgments are not filed with your annual federal income tax return (Form 1040), be sure to carefully store this material along with other tax documents for the year in which donations were made. As a general rule, keep tax records, including all tax forms, investment statements, bank statements, proof of deductions, or any receipts associated with a particular return for at least six years. Preparation and organization can help ensure that you have the records you need when you need them.
Communication is the key to a successful and fair division of your estate. Talk with your beneficiaries. The decisions may be difficult, but in the long run, your estate plan may provide a certain degree of thoughtful support for your beneficiaries.
Wishing you the best
The Seller Said Yes, Now What?
By: Scot Tyler
Last month I wrote about “GETTING TO THE YES”. Taking the initial call from the note seller, building the rapport and having the follow-up conversations before delivering your offer. Now the seller has agreed to your offer and you’re holding your excitement in and going over the next steps with the seller. What is your next step?
Like many note flippers, marketing, making your phone ring is where you spend most of your energy and time. Now the marketing has paid off and it’s time to execute flipping the note and recoup some of the marketing dollars. Let’s review the process after the seller says YES.
The note flipper needs to tie up the deal by having the seller execute a Purchase and Sale Agreement. This agreement outlines who’s selling, who’s purchasing (your company as the buyer and/or assigns), what is being sold and what the investor is paying for it so there’s no confusion and all the purchasing terms are in writing. The agreement is basically an acknowledgement from the seller accepting your offer.
Next you’re requesting pertinent documentation and information to send to your funding source so the due-diligence process can begin. What are the items you need to request?
These are the basic items needed to begin due-diligence. Most note holders should have copies of these documents handy and can forward them to you quickly. A complete package will include at minimum:
- copy of the signed promissory note
- copy of the security instrument (deed of trust, mortgage contract for deed)
- copy of the closing statement (aka settlement statement, HUD1)
- copy of a title policy (if available)
- copy of the homeowners insurance policy on the subject property.
- copy of the pay history
Every investor is going to want to know how the current borrower is paying on the loan so requesting pay records is a must. You as the note flipper should already know how the borrower is paying the seller based upon previous conversations and asking this important question.
If the seller told you the buyer is depositing directly into the seller’s bank account obviously you want to request the sellers bank statements showing the deposits each month. Sometimes the borrowers pay via check each month so you’re requesting copies of those monthly checks which the seller might already have or would need to request from his bank.
Sometimes the seller will send a handwritten payment ledger where the payments have been logged by received date and amount. This ledger still needs to be confirmed with copies of deposit slips, bank statements or copies of checks matching the ledger. What’s important is delivering 3rd party proof that the borrower is paying consistently and on-time as part of package to the investor.
Of course this a limited/basic list of what a complete file would include but enough for an investor to have confidence in starting the due-diligence process. Once the due-diligence process begins the investor will review and most likely have some additional information requested based upon the specific deal but gives a great base line of what’s next when the seller says YES.
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@example.com
Performing Note – SFR-2nd Home
$73,900 sale with $5,000 down
$68,900 / 5.00% / $730.79/month for 120 months
25 made / 95 left
Current UPB $57,234.55
62.2% LTV based on BPO value
Until next month!
Quote of the Month
“Marketing is telling a story about your value that resonates enough with people that they want to give you money.” ~ Seth Godin