October 8, 2020

Thoughts from the Desk of Bob Repass…

If you are like me, you are tired of hearing (and using) the phrase “uncertain times.” 2020 has been anything but certain. It has caused us to stay focused on what drives revenue and adapt, as well as adopt new strategies.

Since 2014, we have hosted the note industry event of the year NoteExpo the first weekend in November. Once again this year we had a hotel lined up here in Dallas and plans were in full motion to make the 7th annual NoteExpo bigger and better.

A couple months ago, we had to make the decision to hold our event virtually. To say it has been a challenge is an understatement. More and more people have become accustomed to working from home and using Zoom and other platforms to connect with clients, peers and counterparties.

Our goal is to leverage that and put on a top-notch 2 day conference full of great content from leaders across our industry. We will have the ability to interact with sponsors and exhibitors as well as other attendees.

I will be doing a series of one-one-one interviews with subject matter experts and getting their points of view on the challenges, as well as opportunities, they see as we wrap up 2020 and prepare for 2021.

A lot of you have supported and attended previous NoteExpo events and we want to thank you and encourage you to check out this year’s virtual version. We are hoping and planning that NoteExpo 2021 will be back to where we can meet each other face-to-face and catch up in person, but until then we have NoteExpo 2020 on the horizon and I invite you to join us November 6th & 7th by registering HERE and use the promo code: VIRTUAL to save $100.

I leave you with this quote by J. Paul Getty. “Without the element of uncertainty, the bringing off of even, the greatest business triumph would be dull, routine, and eminently unsatisfying.” I can promise you that NoteExpo 2020 will be anything but dull, routine, and unsatisfying!

See you online!

Bob Repass
Managing Director

Stay up to Speed with Eddie

The Realtors Say “No Inventory” I Say “Wait!”

by Eddie Speed

For this month’s Buyline, I want you to read an important article written by Keith Jurow in  MarketWatch. A link to the article is at the end of my short introduction.

The article starts with a frightening statistic: By the end of 2020, several million homeowners will have gone 9 months without making a mortgage payment.

Moratoriums for both evictions of tenants and foreclosures of mortgage holders are currently in place. But soon, banks and landlords will run out of patience, so all these tenants and homeowners will have to pay the piper. If they can’t come up with the money (and many won’t be able to), the market will be flooded with inventory and home prices will plummet. This is what I call a “shadow inventory.” You can’t see it yet, but it’s coming.

In 2020, there are 18 million more rental residential doors than in 2010. That means there will be millions of burnt out landlords (“BOL”) who will want to relieve their headaches by unloading their properties at a discount. They can afford to drop their price because they’ve built up equity over the recent good years. It’s a huge opportunity for note investors who understand creative financing. You’ll be able to buy these properties and let the current owner finance their equity to you. BTW: Now is also the time to start cultivating relationships with these burnt out landlords to become passive investors in your future note deals.

Back in the crash of 2008, homeowners couldn’t drop their price because they had no equity. They were like a sinking ship with no freight to throw overboard. But prices will be dropping this time around.

In 2008, there was a calm before the storm and lots of people went blissfully and ignorantly into the crash. We’re seeing similar, misplaced optimism right now because many indicators are still good. But as the article explains, the storm is coming and we’ve never had more time to prepare.

There are people in the real estate industry who disagree and think things are fine. That’s good, because they’re the ones who can buy up all the troubled assets you want to unload now before we bottom out.

CLICK HERE and read this important, eye-opening article. You’ll be glad you did, because it explains all the factors coming together for the coming a-price-alypse.

Capital Markets Update

Good Results on Investment But Not on Equity?

By: Ryan Parson

Now that we’ve all been part of history and participated in an ongoing pandemic as consumers, citizens, investors and not to mention the various other roles we serve in day to day that have also been impacted by this historic health event, it’s vital to understand the economic impacts this unusual circumstance brings to your investment portfolio.

There are two important financial metrics widely used in the traditional investment space and while they are equally as important in the alternative investment space, don’t seem to be applied as regularly but yet have a profound impact on the investors’ ability to obtain, and sustain, real financial independence, regardless of the inevitable events and circumstances that impact market cycles.

Return on Equity

Equity represents the difference between the amount of value-add and the market valuation of your investment (capital) into a deal.  For example, suppose you bought a single-family rental property in 2005 for $220,000 all-in and today (2020), 15 years later, the property is worth (AKA can be sold for) $350,000 (excluding transaction costs).  Without considering depreciation, loan amount (if you utilize leveraging techniques) and other factors, your equity increased by $130,000.

Let’s further suppose that in 2005, that rental property produced $1,750/month in rental income.  Since there are numerous factors that go into useable rental income (I’ll cover that another day), your Return on Equity was 9.55% annually ($1,750 x 12 / $220,000).  This likely was a big factor in your consideration to buy the property initially.

And we will assume you have been able to raise your rents over time and in 2020, you are now collecting $2,125/month in gross rent.  Based on the market increasing the value (and thus your equity, on paper anyway) of the property to $350,000, your Return on Equity is now 7.29%.  This means a decrease of more than 23% on your equity since you originally bought the rental property.  They key lever here is does your income rise at the same rate as the market appreciation?

The consideration you now have to ponder is do you keep collecting your $2,125/month (which is real cash flow today to use for current living and lifestyle expenses) or do you decide that your $350,000 is better used in some other type of investment, that may produce more than 7.29%?

Return on Investment

This has to do with how much investment capital you have into a deal.  In keeping with the example above, your Return On Investment in 2005 was also 9.55% annually.  Your investment of $220,000, which was also the market value (equity), results in the same return.  However, fast forward 15 years later to today, and your return on investment (excluding time value of money and other considerations) is 11.59%, ($2,125 x 12 / $220,000) an increase of more than 21% on your same investment of $220,000.

These considerations explain, in part, why there is so much private capital available in the marketplace right now.  Active investors who are conducting these type of analytics on their investment deals know that they can likely find better optimized returns on their capital in other investment deals rather than just ‘riding it out’ in their existing, perhaps under-performing, portfolio of real estate and alternative investments.

Making Tough Decisions

Many investors are facing these types of decisions EVERY DAY.   Along with many other factors, these trade-offs have to be considered when making short-term and long-term financial decisions.  These are the active wealth management choices investors are making to ensure they have a truly optimized portfolio of investments that produce the desired return.

If you are an accredited investor (as defined by the SEC) and you want to learn more about how to determine your actual returns as well as guidance on how to think about the implications of those returns on your overall portfolio consider joining our next MasterClass where we’ll explore these and other crucial strategies needed to sustain, as well as grow, your wealth during and post the pandemic.

Click Here to receive more information on our MasterClass. In the subject line include, MasterClass inquiry. We look forward to sharing more details about what will be covered and how we might be able to assist you.

The Trading Corner

You Win Some, You Lose Some

By: Scot Tyler

Believe it or not, not every deal closes. I know it is hard to believe but it is true. I have been in the seller financed space for quite a while now and the guys I work with have been around even longer and each of us have MANY stories as to why a deal didn’t close. Some of the stories are even too hard to believe but there are always common themes for dead deals. Looking back over the past year, I wanted to share our top 3 reasons why deals do not close once submitted for due diligence processing.

The most common reason a deal dies is due to a low property value. There are two scenarios to this situation. The first is when BPO value is lower than what the property sold. The second scenario is when the BPO value turns out to be less than the current unpaid balance of the note. In either scenario, an investor has several options. The investor may choose to cancel the transaction, or they may reprice their offer and lower their purchase price to a specific investment to value (ITV) based upon the BPO value or they may reduce their risk and exposure by making a partial purchase offer.

The second reason for a file being cancelled is due to a clouded title. This typically means the title to the property has not been assigned correctly, recorded correctly, the chain of title is out of order or it could be an old lien that was not satisfied or maybe there’s delinquent property taxes. Obviously, all these issues could affect the value of a note and or the risk level of the investor processing the deal. With some title issues the risk is too high and the investor cancels the transaction.

The third most common reason is the payment history. Many times, we are quoting a deal and asking how the borrower pays each month? The answer MOST of the time is they’re paying on time as agreed. The file comes in for processing with proof of payments which are typically either deposit slips or copies of the seller’s bank statements. The reconciling begins and guess what? The seller is paying but is constantly running 30+ days behind. Paying September’s payment in October, October’s payment in November and so on and so on. In this case as the investor we might just adjust our pricing based upon the rolling 30 pay history if there are other redeeming factors within the loan. Other pay history reconciliations have uncovered much worse where the borrowers have skipped payments, paid less than the agreed principal and interest payment and or the loan being greater than 90 days delinquent. In these cases, the investor will most likely reprice this transaction based upon the increased risk or cancel the transaction.

It is good to know that the experienced investors will review every available option before cancelling a transaction though. Whether that is working with the seller/note flipper to get title cleared, taxes paid and or reviewing property evaluations to ensure that comparable sales in comparable areas were used to determine an accurate value. As we all know the investor, nor the seller/note flipper make any money if the transaction does not close.  I do not write this to discourage you but instead show you that sometimes “You win some you lose some”. The lesson learned is pushing forward to the next deal and not spending valuable time on deals that have no chance of closing. Be sure to focus on vetting the seller and performing preliminary up-front due diligence which might save you, the seller and investor some time & money.

Here is a performing loan that came across our trade desk that we recently funded. If you’re interested in purchasing it, email me at: [email protected]

Performing Note – Townhouse – O/O
San Antonio, TX
BPO $68,000.00 – May 2020
$60,000 sales price with $500 down payment
$59,500 / 10.0% / $522.16 for 360 months
155made / 205 left
Current UPB $51,167.61

Until next month.

Quote of the Month

“Infinite-minded leaders understand that “best” is not a permanent state. Instead they strive to be “better.”” – Simon Sinek

This Month’s Poll Question

Do you plan on voting in this year’s Presidential Election?

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Susan DeLaGarza