April 4, 2019

Thoughts from the Desk of Bob Repass…

I recently read an interview from several years ago of Walt Bettinger, CEO of the Charles Schwab Corporation, that was in the New York Times.

There were two stories he shared that truly resonated with me that I think we can all learn something from. The first is a story of how he answered the question “how do you hire people?”

A person’s character is revealed during times of great pressure and distress. A great way to test out someone’s character is to observe how they react when things don’t go according to plan.

What if there were a way for employers to test out job candidates and compare how each reacts to unpleasant curveballs?

Bettinger has created such a system. Bettinger takes candidates out for a breakfast interview. But what the potential employees don’t know, is that every time Bettinger shows up early and pulls the manager of the restaurant aside and says “I want you to mess up the order of the person who’s going to be joining me. It’ll be O.K., and I’ll give a good tip, but mess up their order.”

He does that so he can see how the person responds. To Bettinger, character is everything. He told the Times that his “wrong order” test is meant to gauge how prospective hires deal with adversity.

“Are they upset, are they frustrated, or are they understanding? Life is like that, and business is like that,” he said.

“It’s just another way to look inside their heart rather than their head,” he explained. “We’re all going to make mistakes. The question is how are we going to recover when we make them, and are we going to be respectful to others when they make them?”

The second story that stuck with me from the same interview, Bettinger was asked to share one of his biggest failures. He said that it was one of his last college exams, which ruined his 4.0 GPA that taught him how important it was to recognize individuals “who do the real work”.

After spending hours studying and memorizing formulas for calculations, Bettinger showed up to find that the exam was on one piece of paper, blank on both sides!

“The professor said, ‘I’ve taught you everything I can teach you about business in the last 10 weeks, but the most important message, the most important question, is this: What’s the name of the lady who cleans this building?”

Bettinger had no idea. “That had a powerful impact,” He failed the exam and got a B in the class. “Her name was Dottie, and I didn’t know Dottie. I’d seen her, but I’d never taken the time to ask her name.”

Since then, he said he’s “tried to know every Dottie I’ve worked with.” “It was a great reminder of what really matters in life,” he said.

Ask yourself – Do you know Dottie?

Bob Repass
Managing Director

Stay up to Speed with Eddie

When Flipping is Flopping: Learn All The Ways To Negotiate The Terms

by Eddie Speed

I’m one of those guys who wears my cell phone on my belt. It might not get me on the cover of GQ, but I like to stay reachable. Lately, my phone has been ringin’ off the hook (or in my case, off the belt.) In the last two weeks, I’ve gotten more calls on the same topic than I’ve gotten over the last two months. The calls come from all kinds of real estate investors – from mega-seasoned investors and from rookie investors who have never lived through a cycle like we have now.

I’m hearing the same story over and over and over, just like a broken record: “Eddie, flippin’ ain’t working the way it used to. When I’m buying a property and I suggest a seller financed loan at the interest rate I want, the seller walks.”

Problem is, they all have the same percentage rate stuck in their head: Zero.

Lots of real estate gurus have everybody thinking you gotta get 0% to make a profit. Everybody has zeroes stuck in their head!

It’s great when you can get a seller to finance the property for 0% interest, but only I see it happen about 20% of the time. When the seller won’t bite on 0%, all is not lost. Not by a longshot.

The percentage rate is only one of about fifty points you can negotiate to architect a deal – if you know what you’re doing, and most investors don’t. Learn the whole toolbox and you’ll have the upper hand over competitors making offers on the same properties.

Even though you may not be getting the price you want or the percentage rate you want, you can still architect a seller financed deal in your favor and make a healthy profit.

You just have to be knowledgeable, creative, and flexible. Never forget that a seller financed deal (even with a higher percentage rate than you want to pay) will still have advantages over a bank deal.

Your first advantage is in qualifying for a loan. The bank makes you do a huge stack of paperwork, and demands your work history, credit history, and blah, blah, blah. But the seller makes you do absolutely nothing. This avoids a huge pain factor, and makes your deal come together faster instead of waiting for the bank to plow through their stack of paperwork.

The reason the bank gathers all that information is that they’re going to make you personally guarantee the loan, which leads to the second advantage. The seller who is financing your deal won’t insist you do a personal guarantee like the bank does. (By the way, I just turned 59, and even though I used to sign loans with a bank for 5 or 10 million dollars, I don’t anymore. Those days are behind me.)

Your third advantage is the down payment amount. If the seller gets the price and interest rate they want, sometimes they’ll say OK to zero down. How many banks will approve your loan with zero down? Zero! Even if the seller insists on 20% down, they don’t insist that it be your money! I can show you twenty creative strategies on how you can avoid putting up your own money, and we teach that in NoteSchool.

Advantage four is the first payment due date. The bank will insist on the first payment 30 days after closing. But with seller financing, I can push the first payment to three years down the road, and I’ve done it numerous times.

The fifth advantage of seller financing over the bank is release of collateral. The bank’s never going to release collateral ‘til they get their money, but I can give you case study after case study where the seller was far more flexible. For example, you might move the loan on Property A to Property B, which releases Property A. Or you buy a property and then release part but not all of the collateral at closing. And I can give you lots more examples.

Those are just five points of the negotiation toolbox, with the sixth being the interest rate. But there are dozens more we can teach you.

When you negotiate with any seller, you have to present your terms correctly and tactfully – what I call the “talk-off.” If you don’t serve it up right, the seller won’t agree to squat. How to dictate the terms and present it skillfully is part of the art of deal making. The more you do it the better you get.

Right now, most investors complete one deal out of twenty offers. That’s a 5% success rate (and a 95% failure rate). By learning the whole toolbox of seller financing techniques, you can double or triple your success rate.

Change that number and you change your whole game.

Capital Markets Update

8 Exit Strategies for Business Owners

By: Ryan Parson

Are you a business owner thinking about exiting your company? Which exit strategy will benefit you the most? It’s a tough move to undo, and you should know the pluses and minuses going in.

While the number of exit routes seems unending, you generally choose from only eight:

  1. Transfer the company to a family member.
  2. Sell the business to one or more key employees.
  3. Sell to employees using an employee stock ownership plan.
  4. Sell to one or more co-owners.
  5. Sell to an outside third party.
  6. Engage in an initial public offering.
  7. Become a passive owner.
  8. Liquidate.

While your emotions during the exit process can overwhelm you at times, your decision-making can be relatively straightforward, so long as you keep the end in mind and do some up-front planning.

Planning early is key

First, establish personal and financial objectives to identify the best buyers of your business. Second, determine the value of your company. Finally, evaluate tax consequences of each exit path.

Let’s explore the eight exit strategies.

Transfer to a family member. Owners usually consider transferring businesses to family members for non-financial reasons. Among the advantages, this transfers the company to a known entity, provides for the well-being of your family, perpetuates your company’s mission or culture and allows you to remain involved in the business.

Disadvantages include:

  • little or no cash from closing available for retirement
  • increased (and continued) financial risk
  • required owner involvement in company post-closing
  • children’s inability or unwillingness to assume the ownership role
  • the family issues that surround treating all children fairly or equally.

Transfer to key employee(s). With this type of transfer, you hope to achieve the same objectives as when transferring the business to a family member, with the added goal of achieving financial security (albeit potentially over time).

Disadvantages of this route resemble those in the family transfers and include employees’ possible inability or unwillingness to assume ownership.

Transfer via ESOP. These qualified retirement plans must invest primarily in the stock of the sponsoring employer. In addition to the advantages of a standard transfer to key employees, you enjoy tax benefits as well as cash at closing.

Again though, not all aspects of this route benefit you. ESOPs are costly and complex, offer limited company growth due to the borrowing necessary to buy the owner’s stock, net less than full value at closing compared with third-part sales, and use company assets as collateral.

Sale to co-owners. Advantages again resemble those of transferring your business to a family member. Disadvantages include the need to typically take back an installment note for a substantial part of the purchase price and, as in other avenues, increased financial risk, owner involvement past closing, and normally netting less than full fair market value.

Sale to a third party. This generally offers your best chance at receiving the maximum price for your company and the maximum amount of cash at closing. This route appeals to owners intending to leave after they sell and to owners who want to propel the business to the next level with someone else’s financial support. It also allows you to control your date of departure.

Disadvantages include:

  • potential loss of your personal identity as the business owner
  • potential loss of your corporate culture and mission
  • potential detriment to employees if you sell to a party that seeks consolidation
  • part of the purchase price may be subject to future performance of the company after the sale.

IPO. This route offers high valuation and cash for the business. Unfortunately, an IPO comes with significant disadvantages—just ask Elon Musk of Tesla. The disadvantages of this route are primarily:

  • limited liquidity at closing
  • not a full exit at closing
  • loss of full control
  • additional reporting and fiduciary requirements.

Passive ownership. This attracts owners who wish to maintain control, become less active in the company, and preserve the company culture and mission. Your disadvantages stem from you never being able to permanently leave the business, you receive little or no cash when you leave active employment, and you continue to carry the risk associated with ownership.

Liquidation. Only one situation justifies this route: You want, or need, to leave the company immediately and have no alternative exit strategies. Liquidation offers speed and cash, but can bring enormous disadvantages:

  • yields less cash than any other exit route
  • comes with a higher tax burden than any other type of sale/transfer
  • has a potentially devastating effect on employees and customers.

If you are considering a business exit, consult your power team to learn more about these and other strategies.

The Trading Corner

By: Tracy Z Rewey

Wow! You are an active group of note investors! On an average day on the NotesDirect platform there are 1 to 2 notes being funded and going to a new note home. We thought it would be fun in each month’s The Trading Corner column to highlight a couple of recently closed deals each month. These make great case studies for your meet-up groups and provide some extra motivation to keep visiting the site to see what’s available.

Austell Georgia Performing – Sold

BPO $109,900

UPB $38,201 @ 10%, $348.40/mo. next due 3/1/19

Purchase Price $33,395 (87.4% of UPB)

Discount $4,806

LTV 35%

ITV 30%

Anticipated Yield 11.83%

Southfield MI Non-Performing – Sold

BPO: $59,500

UPB $48,160 next due 7/1/18

Purchase Price: $25,000 (52% of UPB)

Discount $23,160

LTV 81%

ITV 42%

Anticipated Yield: NPN – depends on exit strategy

Lake Panasoffkee FL Performing – Sold

BPO: $160,000

UPB $27,985 @ 10%, $256.47/mo next due 3/15/19

Purchase Price: $23,860 (85.3% of UPB)

Discount $4,125

LTV 17%

ITV 15%

Anticipated Yield: 12.21%

In addition to the main release of assets the first part of the month, we are also adding new notes from third party sellers regularly so check back often for current inventory. Speaking of third party sellers, we are actively seeking new listings. Each seller is vetted with a full collateral file and outside servicing required. Feel free to reach out to me at [email protected] if you own any notes you are interested in listing on the site.

Also I will be attending The Paper Source Note Symposium April 11-13 in Las Vegas. If you are planning on being there, let’s be sure to connect.

Happy Note Investing,

Tracy Z Rewey

In The Spotlight

Last Chance to Be a Part of the 3rd Annual Seller Finance Coalition Fly-in

The 3rd annual Seller Finance Coalition Washington DC Fly-in takes place April 30 to May 1 this year and this may be the most important year ever for our efforts for regulatory relief in our industry. We are actively reintroducing The Seller Finance Enhancement Act in the U.S. House while also introducing a companion bill in the Senate. Both of these bills have bipartisan support and sponsor.

Here is an interview co-founder Bob Repass recently did on Facebook Live to a note investing group. Take a listen to hear why your grassroots support is so valuable. https://www.youtube.com/watch?v=3iKzDhkPC_U&feature=youtu.be

Time is running out, so please act now and sign-up to join us in DC to make a difference. Just go to http://www.sellerfinancecoalition.org/flyin

We hope to see you in our Nation’s Capital.

Quote of the Month

“I wish to have as my epitaph: Here lies a man who was wise enough to bring into his service men who knew more than he.” – Andrew Carnegie

This Month’s Poll Question

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