Thoughts from the Desk of Bob Repass…
Affordable Homeownership is not the same as affordable housing.
By reading the headlines you would not realize that most, if not all, the headlines talk about the affordable housing crisis. While there is no doubt a need for affordable housing in a lot of markets across the country, the rate of homeownership continues to decline as well, which in my opinion, is due to the lack of affordable homeownership.
HUD Secretary Dr. Ben Carson recently said, “The major mechanism for building wealth in this country is homeownership and doing it in a responsible way—that’s the key—and this is all looked at in terms of sustainability. Not only do we want to put people in homes, but we want them to stay in those homes so they can accumulate that wealth.”
As part of the Seller Finance Coalition, we have been working diligently with Congressional staff on both sides of the aisle, as well as staff members of the Financial Services Committee, to reintroduce the Seller Finance Enhancement Act in this session of Congress.
It is our goal that the bill reflects the impact seller financing can have by providing access to capital and affordable homeownership opportunities to underserved consumers as well as underserved communities across the nation.
We have specifically addressed this in the revised language of the bill which outlines “the potential benefit to home values, neighborhood stabilization and family wealth creation through affordable homeownership if more homes are able to be sold utilizing seller financing.”
After attending hundreds of meetings on Capitol Hill over the past several years, I honestly do not think anyone is “against” affordable homeownership, but at times they do seem to get caught up on the phrase “affordable housing” too much. The debate centers around who will or should provide the opportunity of affordable housing, the government or the private sector.
Technology giants such as Apple, Facebook, Google, and Microsoft, have all made contributions in recent weeks to help fix the affordable housing crisis in California. However, a lot of this funding will go towards multi-family projects.
The impetus behind the Seller Finance Enhancement Act is to achieve regulatory relief so that private capital provided by seller financers can help solve the affordable homeownership crisis.
“Regulations are creating excessive costs that are holding back the development of needed affordable housing,” the White House said earlier this year. “Many of the markets with the most severe shortages in affordable housing have the most restrictive state and local regulatory barriers to development.” The White House states that more than 25% of the cost of a new home is due to federal, state, and local regulations.
I invite you to join our effort by going to www.sellerfinancecoalition.org today. I also urge you to help promote the message of the need for AFFORDABLE HOMEOWNERSHIP through seller financing.
Bob Repass
Managing Director
Stay up to Speed with Eddie
Bankers Call It: “Hypothecation” I Call It: “How to Get Rich, Slowly”
by Eddie Speed
It’s safe to say I’ve awakened a sleeping giant.
A short time ago, I did a blog that briefly described how a note can be used as collateral for getting a loan. Lots of people asked more about it, so I did a deep dive webinar.
Even after the webinar, people from all phases of real estate are still wanting to learn more about how it works because it’s a great add-on to their current real estate efforts. It’s a process that bankers with MBAs have a fancy name for: “Hypothecation.” It’s all about using the note you own to borrow money so you can own more notes. Then once you own more notes, it’s a snowball that keeps on growing––you use them as collateral to get even more notes.
You can also bundle your collection of notes and sell them as a portfolio to make a killing to live on or retire on. (I know because I’ve shelled out lots of money to people over the years who sell their note portfolios to Colonial Funding Group.)
Lenders look at your note just like any other income-producing asset like a rental house, stocks, commercial property, or whatever. Bankers are in the business of making loans, so they understand the income producing potential of a note better than anybody. Bankers know their loan is backed by a reliable income track record––plus the property to boot if push comes to shove.
BANKS LOVE NOTES AS COLLATERAL, BUT WHO SAYS YOU HAVE TO GO TO A BANK?
As much as banks love notes as collateral, banks aren’t the only place to find investment income. Finding your own investment sources gives you more freedom to dictate the terms and pay your investor less interest than the bank wants, and there’s a lot less paperwork than with a bank.
One of the best sources for finding passive investors might surprise you: It’s the HGTV watcher! They stay glued to “Chip & Joanna,” “Flip or Flop,” and all the rest. Lots of them have dipped their toe into fix ‘n flipping or landlording and discovered it’s never as simple as on TV. They were turned off by the headaches of expensive repairs, high taxes, etc.; but they like the idea of getting predictable income every month from real estate investments. The HGTV investor would be thrilled to earn 6% on their money, because you sure can’t count on that from stocks or precious metals.
YOU’RE NOT ALL IN ON NOTES? NO PROBLEM!
The real estate industry is a diamond of many facets. Learning how to architect a note in your favor always gives you a huge leg up on your competition, no matter what facet you’re in.
Entrepreneur-minded investors like the idea of not having to go through the hassle and red tape of banks every time they need seed money. We teach people how to locate passive investors, how to structure the terms in your favor (whether you’re buying or selling), and the notes you create will have more value when you sell them or use them as collateral.
Snowballs are good, because they keep growing as big as you want them to be!
Capital Markets Update
3 Mistakes to Avoid Before Taking Required Minimum Distributions
By: Ryan Parson
Uncle Sam wants your money.
He has bills to pay, just like you. And he’s been waiting patiently for decades for you to hand over his share of your tax-deferred retirement dollars. He expects some folks to be stubborn about it, so he has an answer.
It’s called a required minimum distribution (RMD), and savers who have money stashed away in an IRA or qualified retirement account (a 401(k), 403(b), etc.) are expected to take money out and pay taxes annually once they turn 70 1⁄2 (with some exceptions).
Many people don’t realize this. When they receive their quarterly 401(k) statements, they think the dollar amount at the bottom is all theirs to spend, however and whenever they wish. But they’re wrong – or they’ve simply forgotten the bargain they struck with the IRS back when they signed up for the account.
If you took your statements into the FBI building in Washington, D.C., and held them under one of those lights that reveals invisible ink, you’d see Uncle Sam’s name written right next to your own.
The required withdrawals are based on the balance in your accounts as of Dec. 31 of the year before you turn 70 1⁄2 and your average life expectancy, according to the IRS. And they increase by a small percentage every year – so the bite can get bigger as you get older. This is something to keep in mind and to discuss with both your financial adviser and tax professional so you can plan appropriately.
Here’s the thing: RMDs are, indeed, required. There is a whopping 50% penalty if you miss the deadline – plus, to add insult to injury, you still have to pay ordinary income taxes on the withdrawal. But you can reduce the amount of money you hand over each year with some smart long-term strategizing.
Here are three mistakes investors make that a little advance planning can help avoid:
1. Reinvesting RMDs into a taxable account.
Imagine that you have three buckets where your retirement savings can go. The tax-deferred bucket (IRAs, 401(k)s, etc.) contains primarily pre- tax money you won’t pay taxes on until you use it or when you reach 70 1⁄2. The taxable bucket (non-qualified investment accounts, bank accounts, etc.) holds assets on which you pay taxes as soon as interest is earned. Year after year, you pay tax, tax, tax. And then there is the tax-free bucket (Roth IRAs, Roth 401(k)s, etc.), which has a beautiful ring to it and is one of the best places to be in retirement.
You would think every saver taking RMDs would automatically spend those dollars or reinvest them in a tax-free vehicle. But they don’t. Many make the mistake of putting the money into taxable investments.
Let’s say, hypothetically, that you do this for 10 years in a row: Every year, you take out your RMD and move it to a taxable account. You might not realize how much you’re slowly losing. But it can add up to a large percentage of your life savings. For example, 4% of 10 years = 40%.
2. Allowing a tax-deferred account to keep growing.
Many savers, trained to focus on accumulation, happily watch their tax-deferred dollars increase without considering the consequences. If you do that until your RMDs kick in, though, you’re basically growing your IRA for the IRS.
Let’s say you retire at age 60 and you have enough income without touching your tax-deferred money. It might seem crazy to take some of it if you don’t need to, knowing you’ll have to pay income taxes on it. But those years between 59 1⁄2 and 70 1⁄2 offer a golden opportunity to move your money into a tax-free account, a little at a time, to get some control over your tax bracket and your looming tax burden. Many people do not use the lower tax bracket to their advantage.
3. Letting a surviving spouse deal with the RMD.
Let’s say you’re a same-age couple whose nest egg continues to grow in retirement – maybe it even doubles. You start taking your RMDs at age 70 1⁄2 when you’re in the 15% tax bracket and your status is married filing jointly.
Then, a decade later, when the RMD is much higher, one of you dies – the husband. Suddenly, the widow is filing as single, but with the same assets. The RMD easily could throw her into a higher tax bracket – 25% instead of 15%. That’s a 67% increase! Caught unprepared in an already tumultuous year, she will have to come up with that money.
There’s an old saying that there are three types of people in this world:
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- Those who make things happen.
- Those who watch things happen.
- And those who wonder, “What happened?”
It doesn’t have to happen to you, but you must have a plan. And the obligation doesn’t go away once you retire – if anything, it gets more complicated. Be a saver who takes control. Because the bottom line is this: The more money you can keep away from Uncle Sam, the more you’ll have for you and your family.
To your financial success!
The Trading Corner
Know Your Customer!
By: Scot Tyler
Every good sales person, whether they sell cars, appliances, insurance, etc., will tell you that you MUST know your customer. In the seller finance note business, our customer is the note seller. Most note investors or even note flippers (brokers) do NOT take the time to know why the customer is calling you to potentially sell their note. Knowing what the seller needs, wants or are they just curious about selling their loan is essential in negotiating to agreeable purchase price of a discounted offer.
Anytime a note seller (customer) calls in regarding their note, I spend time getting to know them on a personal level by asking lots of questions about where they’re located, the weather, family (kids, grandkids etc.) to break the awkwardness of the initial call. Like many people we love to talk about our OWN situation in detail which opens the customer up and creates dialog that will help you later in the conversation.
Doing this leads me right into pertinent questions of how the note came about, why they sold the property, why they sold with seller financing and how the terms of the loan were determined. I always find this builds a rapport/relationship with them that will build your credibility when it’s time to deliver a discounted offer on their note.
It’s almost certain after these questions are asked the seller (customer) will tell you with “pride” how, why, when and where the loan was created and what a great loan it is. You typically have more information than you ever thought you would receive.
After taking all that in I always say “this sure is a fine note, why in the world would you considered selling it?” That’s when you get the “need” or “reason” they want to sell which will determine how serious of a customer you have.
Another question I always ask the seller is if they’re familiar with selling notes and or have you spoken to anyone about how this works? The answer to this question should let you know if the seller has others that are interested in the note that he may still be speaking too. If they understand that the note will be discounted they most likely have already spoken to another investor(s)/flipper(s) and are shopping their loan to others as well for the BEST possible price.
If the seller says they understand notes are purchased at a discount, I would ask if they already have any offers for their loan. If you’ve built enough credibility and rapport, the seller will tell you what their best offer is because they want to do business with you.
If the seller has no idea how the selling of a note works, then chances are you’re the only letter or inquiry the seller has received which puts you in a great spot if your seller is serious about liquidating the asset. I let them know these types of loans are sold at a discount and not going to sell for what is still owed on the loan. The discount is based upon how the loan was setup like we discussed earlier (property type, location, rate, term, and credit worthiness of the borrower).
So, the next note call you get, take the time to Know Your Customer. Tee up those questions with topics anyone of us would want to talk about (believe me the stories you will hear will make your day and build your business at the same time). Then lead into asking questions that help you determine who your customer is and what their needs are. Find that connection and build that relationship which will increase your opportunities for closing deals.
Here is a loan that came across our trade desk that we recently funded. If you are interested in buying it, email me at [email protected]
Performing Note – SFR O/O
Lakeland, FL
BPO $82,000
$82,000 sales price with $4,000 down
$78,000 @ 10% interest
Payment $895.32/month for 154 months
10 made – 144 remain
Current UPB $75,452.71
Until next month!
In The Spotlight
A Recap of NoteExpo 2019
The 6th edition of NoteExpo was a great success! Thanks to all the speakers, sponsors and vendors from across the industry for participating this year. A special thank you to all the attendees as well. The interaction and knowledge that was shared was felt by everyone who was there.
We covered a lot of pertinent topics facing the industry such as Cybersecurity, Negotiation skills, the changing environment in the real estate and housing market, the impact technology is having on the note business, the continued availability of note inventory across all lines and note investing with your self-directed IRA account.
We recognized Martha Speed as this year’s recipient of the industry’s Lifetime Achievement Award for her years of supporting and being a key part in the growth of the note industry.
If you missed it or just want to go back and live it again, the videos of all the sessions are available for purchase at NoteExpo 2019 Videos.
Plans are already underway for NoteExpo 2020. The time is now to register for NoteExpo 2020 being held in Dallas on November 6th & 7th.
We hope to see you there!
Quote of the Month
“If you stop looking for a short cut, and find your discipline and your will, then you will find your freedom?” – Jocko Willink
This Month’s Poll Question
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