With seller-financing, you don’t need financial institutions because you’re now the bank. How do you navigate this real estate investing strategy? In this episode, Jamie Bateman is with seller finance and non-performing note industry expert Eddie Speed of NoteSchool to tell you what you need to know so you can double your net worth, especially in this particularly challenging time. What should you be looking for in a note when you enter into seller-financing as a buyer or a seller? Where can you find these notes? How does seller financing differ from conventional lending? Is seller financing here to stay? Eddie answers these questions and more. Plus, he also introduces us to the amazing things they do at NoteSchool with helping real estate investors in the business and how they’ve adapted to change.
Listen to the podcast here:
Double Your Net Worth Through Seller-Financing With Eddie Speed, Note-Investing Teacher And Creative Seller-Financing Expert
I’m joined by a legend in the note space, I would say, Mr. Eddie Speed. Eddie, how are you doing?
I’m good. How are you?
I’m doing well. For the few people who are in the show who may not have heard of you, why don’t you give us a little bit of your background if you could?
I started in 1980, so a long time ago. My father-in-law got me started in the business. At that time, we were buying seller financed notes. Seller financing became super common back in the early ‘80s because of high interest rates. If you think about the note business overall, it’s peripheral of a regular business. Seller financing was a necessity because high interest rates and semi-seller financing could carry it lower than bank rates. How high? Interest rates got to 21%. That’s how I got started. One thing layered and did on top of another. Here I am an old man.
Could you hit on a few of the highlights over the last years?
There are a few things that I think some people may not know. I set up the note system for HomeVestors. Ken’D Angelo that founded HomeVestors, was here in Dallas-Fort Worth, where I was. We set up a system where the HomeVestor franchise could create seller financed notes to a formula. That revolutionized the note business because we went from mom-and-pops creating seller financed notes to a lot of real estate investors who could do dozens or hundreds of notes in a year. Some of the biggest buyers in the business, Metropolitan Associates at the time, they were capped out at $50 million, $70 million in production a year and they got to 200,000, 300,000, and 400,000 a year. That was because real estate investors learned how to use seller financing correctly.
It was good for the note business and it was good for real estate investors. I would say, honestly, it was just an accident. People look like, “How’d you envision that?” It was a little bit like Moses parting the sea but we didn’t know the sea was going to part. There were some funny things that happened along the way like that. I’ve been in many of the cycles certainly since 1980, buying distressed assets and lived a lot of that back in the ‘80s, and then again in the ‘90s and certainly in 2008 thereafter. You and I talked before the thing. I see that coming again.
Do you mind touching on that? I saw your State of the Union posted. I haven’t had a chance to check it out. I do plan to but do you mind touching on some of the takeaways from that?
In our little NoteSchool YouTube TV, every last Wednesday of the month, I will do a summary of something. A lot of times, it’s where the market is. YouTube doesn’t like to use of the word state of the industry, by the way. We learn. We had to figure out how to resay it a little bit but it is a state of the industry. It’s what it is but it’s their platform. I have to operate with their rules.
That’s why I said State of the Union. It was totally intentional on my part.
Some of our staff called it that. That wasn’t going to be a thing but we are in a weird market. We’re in the weirdest market that I’ve ever been in years. At the moment, we’ve got residential real estate sales that is on fire, hottest gain in years. There are 35% less properties listed than were listed in 2020. Thirty-three percent I think was the number. That’s crazy because that means that every time you put a piece of real estate on the market, there’s a feeding frenzy. There’s a fight in the front yard, so to speak, of who’s going to get it, a bidding war. On the other hand, if you pay attention to all the mortgage banking and distressed asset management folks, which of course we do, you got 17 million households that either didn’t make a mortgage payment or a rent payment.We're in a microwave society. A rental portfolio is a long game, and most people look at it as a short game. Click To Tweet
It’s a crazy number. Fifty-nine percent of the households in Louisiana did not make a mortgage payment or rent payment. My marketing guy was listening to the YouTube thing. We play it live too. He listened to it and he’s a student of the game. He said, “Eddie, what you’re describing is a dam that is filling up with water and all of a sudden, it breaks. Up until it fills up with water, who would suspect anything’s wrong? The water is calm and everything’s good.“ I said, “It’s the weirdest thing.“ People are trying to get me to throw the dart and say exactly where it’s going to land. I can tell you, if anybody that tells you 100% where it’s going to land, it’s probably full of bull. I will tell you this. What I’m saying is consistent with what mortgage banking is saying. It is inconsistent with what some residential real estate economists are saying. Let me tell you this. Mortgage banking is like in the breakfast thing. You got the chicken and the pig. Mortgage banking is the pig and real estate industry is the chicken.
How do each of these conditions compare? I know 2008 to 2010, everybody wants to compare those two, that time to this time, and then the crash was initiated by real estate.
One thing that is easily comparable is shadow inventory. This is an inventory that hasn’t been forced to be put on the market but is likely to come on the market at a later date.
Are you talking specifically non-performing notes or REOs or all of the above?
I know this isn’t necessarily what this show is but I do a lot of real estate investor podcasts. I do them for the guys that are from beginners to the most seasoned guys in the business.
We have a lot of readers who are interested in buy and hold rental properties.
If I were chasing a customer that is likely to sell to me on terms, not just wanting cash, I’d chase burnout landlords.
I’m a new note investor compared to you but what if I’m a brand new note investor with 0 to 5 notes?
This isn’t note investing. This is note manufacturing. What you’re doing is you’re buying a property, specifically a burnt-out landlord, and you’re going, “Why would I go buy his house? He’s already got a tenant in it that didn’t pay him and he can’t collect the rent. Why do I want to buy his problem?“ This is what creative financing is. This is structuring the deal even to the point where you aren’t required to make a mortgage payment unless you’re collecting a payment. You bake in a forbearance agreement when you buy the deal.
Do you mind quickly walk us through a basic example of how that might work?
You’re the seller of a property. You got a house. It’s a nice house. You’re an amateur landlord. You represent 70% of the market. You own 1 to 5 houses. You self-manage. You told your wife that you are going to diversify from the stock market, you’re going to take your money, and you’re going to put it in the most profitable thing out there as real estate. You said, “Honey, we’re making an investment.“ All of a sudden years later, she’s reminding you that you bought a job. It isn’t exactly a fun thing at the kitchen table.
My wife and I have a small rental portfolio and I can relate to this. She’s helped me out a lot with it and we don’t need to go down that rabbit hole too much. It’s not passive. I’ll tell you that.
It’s not your story. It’s the story but it is your story and it’s their story. All of a sudden, you hated the rentals before but it was a love-hate relationship because the lift in value made you a genius. The management of the rentals was terrible but the market took care of you and you have this lift in value. All of a sudden, there’s no big problem. By the way, your rental didn’t necessarily cashflow very well because you had these surprise invoices. Am I right?
It does happen.
Residential rental portfolio is a long game and most people look at it as a short game. We’re in a microwave society. All of a sudden, they’re not collecting rent. If I were a guy wanting to start out in the business, you can easily buy data of rental property owners. There’s an account of 90,000 in Dallas County, Texas. Trust me. It isn’t nothing to it. I’m not the ultimate real estate investor but I’ve trained, been to a NoteSchool class in the last couple of years. I know exactly how they source all this stuff. Buying the data is easy. Sixty percent of these landlords paid cash, so they have equity. They are not looking for you to cash them out at a discount. They are looking for you to get rid of their real estate problem. If you cannot discount it, they’re willing to take their payments over time. You‘ve got a deal.
It can also help with tax liability too.
You bake all the stuff in the agreement that a bank or a mortgage company would never let you do as the borrower but an individual will. You wrap it. Who are you going to sell it to? Another amazing statistic. Thirty-five percent of the people that could get a mortgage in January 2020 can’t get a mortgage in January 2021. It’s called the Mortgage Credit Availability. The penalty box buyer, the guy that needs seller financing because he’s been left out in the cold from traditional lending, 1,000 people in 2020 that can get a mortgage, 350 of them can’t get a mortgage in 2021. The opportunity for seller financing is excessively better than it was.
Do you think it will only remain that way?
Mortgage banking isn’t backing up. They’ve already made it clear. Mortgage banking is looking at the long road. You‘re telling me there are 17 million households that are making a payment every month, let me tell you something. That does not lead to great things in a residential real estate.
You come in and you’re assuming teach your students to do what you’re saying. Go in and buy the property, not necessarily a discount, but on terms that are favorable to you.
That’s how I help a real estate investor. People say, “What does NoteSchool do?” That’s a good example. We help a real estate investor because he wants to do that. On other hand, some may be more like you. You’re like, “I don’t want any more real estate problems. It would be a terrible subject to bring up to my wife. I want to buy a paper.” What you realize is there are 100,000 seller financed notes created every year. There are non-performing notes. We’re not going to see an avalanche of non-performing notes for a little while and it probably is going to be in the edge of 2022 because banks have to charge the loans down. It takes time but it is common.
On the other hand, maybe your wife says, “Honey, why don’t we buy notes and be the bank?” You buy a note and you’re the bank. All of a sudden, you buy three notes and then your wife looks at the checking account, and she goes, “Jamie, we’ve done good but we’re running out of capital.” You’re going to say, “Honey, here’s what we’re going to do. We’re going to do the Eddie Speed Capital Recoupment Plan.“
What we’re going to do is take one of these twenty–year notes and we’re going to sell ten years’ worth of payments to some passive investor, not us, we know how to find stuff. We’re resourceful. We put stuff together. This is some guy that didn’t know how to find it and he didn’t want a headache. He doesn’t want to rent a house with invoices anymore. He’s a burned-out landlord with capital, with no tolerance. You sell ten years‘ worth of payments for about what you paid for the whole note. You got your money back. You got no money invested in it. All of a sudden, you figured out how to build your own bank with a burnout landlord‘s capital.Don't restrict your business and only buy notes from people that do it perfectly because, honestly, there's not enough of them. Click To Tweet
Let me ask you because we have a lot of note buyers in the readers. If I’m looking to buy a seller financed note as opposed to creating one, what should I be looking for? Should it definitely be going through an RMLO and underwritten that way? Should it be closing in a title company or attorney’s office? Are there 2 or 3 things I should be looking for as a note buyer of a seller financed note?
Seller financing, I’ve been doing it for years. I bought 50,000 of them. It’s going to be hard for you to restrict your business and only buy notes from people that do it perfectly because honestly, there’s not enough of them. Seller financing have good intentions but they cut some corners. You have to get a read to figure out if the deal has enough redeeming factors to buy it.
I’ve bought some seller financed notes and none of them are 100% wrapped up with a nice little bow on them but typically, I’m willing to take that risk depending if it makes sense from the pricing.
NoteSchool goes through a waterfall of, “Here’s what drives the value of a note, here’s the characteristics, here’s a scale, here’s how you do this, here’s how you do that.“ We address all that. I’m not going to try to do it in the show. I’ve answered this question thousands of times. It gets down to it as this, I’m buying a note. It’s been paying for three years. They did not vet the buyer the way I would have upfront. They don’t have the qualifications. They don’t have all the credit. They don’t have all the financials but he’s got a three-year pay history. That three-year pay history will outweigh a guy that had all the information. You might not buy it with two months of seasoning but you would buy with three years of seasoning.
It gets to the point, honestly, of human behavior. As far as predicting human behavior, I think past behavior is a good indicator. Whereas putting together some paperwork and trying to predict that without that past, that history is difficult. I get what you’re saying. It makes a lot of sense.
It’s measuring the propensity to pay.
You think the whole seller financing thing is going to be here to stay for quite some time, I would imagine.
Seller financing is the alternative to conventional lending. When conventional lending is loose and easy, then seller financing gets thinner and thinner because people don’t need to sell or finance. When the conventional mortgage market gets tight, which it is, then seller financing gets thicker and thicker. If there are 100,000 seller financed notes generated in 2020 and there were for about the last years, I fully believe it can be 250,000. We could be looking into the future and people will say, “That’s crazy.“ I’ve been doing this a long time and I can tell you that people will adjust and adapt to the market. Look how we’ve adjusted to COVID. We don’t even think it’s weird to walk around the store with a mask on. Think about that years ago.
Let me ask the question a little bit in the weeds. When people hear seller financing, it can mean a lot of different things. Do you deal with CFDs and land contracts? Do you deal with lease options at all or is it more the traditional seller financing?
Seller financing has always been where the seller sold the property and financed their equity. That could be papered with the note and mortgage or it can be papered with what is commonly referred to as a land contract. Urban places call it Bond for Deed, certain places call it a Real Estate Contract but 50% of the 50,000 notes I bought had been land contracts. It is a form recognized by the IRS as seller financing. A lease option is not that. It can be converted to that. You could take a lease option and convert it to seller financing.
The transaction hasn’t happened yet with the property.
It’s an option for a sale but it’s not a sale. A land contract is a commitment to sell.
You mentioned COVID and it’s a real thing. It’s a pandemic, the shutdown, regardless of political views and that thing. At NoteSchool either your individual portfolio or your business, how have you changed things?
NoteSchool did great. NoteSchool has up student count about double what it was in 2019. A lot of people figured out they have to learn creative financing in some form to go do the business. That was good and I think we had prepared for that. We’ve been developing training, how you scale it, you fulfill it, and all that stuff for a long time. It‘s been, “We doubled in business. If we weren’t a mature training company, we probably would have gotten smeared.” It put a lot of resources out there. We don’t feel like we’ve done good. We’re anticipating a bigger growth for that reason again. I look at the training thing and we have developed a lot of different, I would say, wings of the university where I help real estate investors with how to buy on creative terms.
I help another guy learn how to go bill a self-directed retirement account. I help another guy go figure out how to buy nonperforming notes. Our student base has different appetites. When we do a regular three-day class, we put it all together. The reason we do is because people go, “I never knew you could do that. I never knew how that tied together.“ Here’s an example. What if you were creating seller financed notes? You were the real estate investor and you own a financing property. What if you then understood you could sell a partial and then get your capital back out of the house but you leave a long-term play in it?
Go originate another note and scale that way.Don't risk your net worth on a deal but risk a little blood, and it will make you good. Click To Tweet
I show people strategies that I showed real estate investors to show them how to survive. You’re going up the ladder. You get one rung at a time. When you get up to the top, you’re like, “I can‘t believe all these dimensions.“ I’ve learned to keep people more focused. They need to be. The virus has been good for us. It’s a blessing. There’s no funny attitude about this. We’re not entitled. We know a lot of people have been hurt bad by it.
Chris and I talked about that on the show before. We don’t want to sound like we’re spiking the football or selling out. The fact is a lot of people have been hurt both financially, health-wise, and also the social side of things where we’re all disconnected but you got to recognize the blessings when they come along and the successes when they happen. You got to be able to take good with the bad.
We own a lot of loans. We have seen some slippage in the portfolio, not terrible but certainly seeing some slippage. We try to be reasonable. We need to look at a customer and figure out whether we need to advance them or do forbearance. We don’t allow people to do it because they’re entitled. We allow them to do it because they’ve been affected and we want to be helpful partner with them versus we don’t want to feel like we’re being abused. There are elements of responsibility on the lender side and there are elements of responsibility on the borrower side.
I found that to be one of the biggest challenges. I’ve got nowhere near the number of notes you do but we’ve got about 36 notes at this point trying to figure out if I compare it to parenting. Figuring out when the borrower or the child needs support or when they need discipline or it could be a difficult thing to assess. Do you mind talking briefly about that? Is it a fund that you run?
We call them Capital Stacks. We’ve got different things. I own a company and we’ve been buying notes for a long time. I don’t have my fund inside that company, so I have my portfolio. We have a significant play in our retirement portfolio. We use self-direct retirement accounts. We use Coverdell Education Accounts for education, the kids, and so forth. We have health savings accounts. By the way, if you don’t do those things, you should know how. Those are awesome.
I need to look into that more. I sold a partial to somebody who is using one and I’ve read up on it a little bit more. It’s fantastic. It’s like a double tax savings.
We have a private equity fund and we raised money from accredited investors. We bought both asset classes of performing notes and nonperforming notes and then we use a platform to facilitate that. That is called NotesDirect. We own a platform. It’s not owned by NoteSchool. NoteSchool students get to use it. Other investors get to use it. It’s a platform called Notes Direct because we saw a real shortage where investor could go on and buy assets. How do you find a legitimate source that offers a note for sale and know that when you get it, you’re going to have gotten an honest play of the due diligence that they had that they gave to you so that they‘re not trying to hide anything? There was a gap in the market. We sell 600 to 1,000 assets a year off of there.
I often recommend to newer note investors to check out your platform along with PaperStac. Even if you’re not going to buy an asset or you don’t necessarily intend to, I’m not suggesting they make offers without intending to follow through but check it out. It’s good. You can run some initial due diligence and if you’re brand new, see where pricing might be and understand what makes up a note.
On the NotesDirect Facebook page, we do what we call Feeding Frenzy Friday. Every Friday, couple of our team members will come on there and take an asset, analyze it, and talk about it. It helps people see what guys that look at the business, what do they look for? It’s helpful to do it. We’ll have an asset of the week and stuff. I built NoteSchool because I figured out I could do a lot more business with people when they were knowledgeable. I was a note guy for years before I ever had NoteSchool. I did it to go figure out how to do business with more people and then it becomes its own animal.
I wake up every day with a feeling that the reason I built NoteSchool still was to go show people how to do the business. I want to put what I call the golden handcuffs on people. Meaning that the only reason they want to continue to do business with me is because it’s so profitable that why would they not? We train somebody to do the business and we ended up doing business with them down the road. PaperStac or NoteSchool guys, that’s how they got started. We’re about a bigger world. We’re not about exclusivity.
A couple of other questions before we wrap it up here. What would you say are 1 or 2 of the biggest mistakes you made as an early note investor or something you wish you’d known? I know it’s all dependent on market conditions and things like that but maybe speak to the newer note investors something that you wish you’d known earlier on.
It is going to sound self-serving but it’s the truth. Let me tell you something. There are two ways you can get an education. The second way is not so good. The second way is the School of Hard Knocks. My father-in-law and a partner took me on as a kid in the business and I didn’t know anything. You’d never know Eddie Speed had it not been for them and other things. All I try to do in NoteSchool is give people a path of experience and then they can start making choices in the business. It’s like a 22–year–old tough guy and he goes to the mountain, tells his girlfriend, “I’d never skied in my life but don’t you worry. If you could ski, I can ski.“ They go down the mountain with a pair of skis on them. Nobody’s ever taught him the balance concepts of skiing and how to control your skis and so forth and so on. What do you figure is going to happen?
He’s going to wipe out.
He’s going to have a 100% chance of a bad wreck. Don’t be that guy. Don’t be invincible. At the same time, when you get some information and when you get some knowledge and some clarity, be an action taker. You learn a lot. Don’t risk your net worth on a deal but risk a little blood and it will make you good.
I’m sure you have many times both sides, both extremes, you have the people. I had a call with a guy who’s been researching and learning for the last few years and he hasn’t bought a note. It’s like, “Come on.”
To be honest with you, he wouldn’t want to get on a conversation with me because I‘d bust his chops. I’d be like, “If you’re wasting your time, don’t expect to waste my time.“ You have to get along with that. You have to give people a path. That’s why I originally built NoteSchool for that same reason.
One other question here, who do you look up to either in the note space, in real estate, or economic world, if you will, now that you’re a legend in the note space? I’ve still got plenty of people like yourself to learn from and to look up to. Who do you look up to? Who do you learn from?
There are great business people. If you want to know how to keep your head on straight in business, what greater example could you have than Warren Buffett? He‘s not emotional. He’s well-informed. He’s a business owner that looks at how the whole business works and in my mind, a perfect example of where you’d want to grow to in the business. We scrape a lot of data weekly and daily because we’re trying to keep a grip on the market and we have a lot of people relying on us, as you said, trying to listen to us and figure out where we think this market’s going.
I’m a little frustrated with some economists. I’m not going to mislead you because what they’re saying does not line up. When they tell me how great residential real estate is going to be for the next years and yet they don’t tell me that mortgage banking is off 35% and they don’t tell me there are seventeen million houses that hadn’t made a payment in the last few months, then I got to think they didn’t measure all the facts. I’m at a point where I say, “If I can help you with one thing, I want to help you to make an intelligent, informed decision. You make your own decision but let me support you with some facts with sourceable data. That way, you can make a better informed decision.“ That’s my obligation to the industry. I don’t know on the residential real estate side who exactly I’d tell you to go chase because I’ve heard some predictions in the last few months that they didn’t give me all the measurable facts.
Warren Buffett is a great one. Is there anything else we haven’t touched on that you’d like to hit on, Eddie, before we wrap it up?
We’re coming into a market to double your net worth. If you can’t double your net worth in this market, you’re not pursuing an appropriate strategy. I’m saying there are people that won’t double their net worth. If they’re not, they’re not doing the right thing. I’m 61 years old and I’ve been doing this pretty long time. With 1,000% integrity, I can look straight at you and say, “I plan to double my net worth after this pandemic.“
Eddie, where can people reach out to you if they want to learn more? I know we’ve thrown out a few things already. Where can people find you?If you can't double your net worth in this market, you're not pursuing an appropriate strategy. Click To Tweet
We’ve got a good little starter kit and this is for people that want to learn investing. It’s a slightly different angle if you wanted to do the real estate investing, buying on terms model. NoteSchool.com/growwealth and there’s a good, solid little information, particularly about self-directed retirement account and tax advantage account. We’ve got a good little training that we can do with case studies. People learn from case studies, so we like using that example. There’s a good, solid little angle there that people can do. It will give them a direction and some clarity. We’d love to come see them at a class but I have learned this. If I push somebody to come and sit in a class and they’re not prepared for it, then they miss some of the real picture of it.
Eddie, thank you very much. I appreciate your time. This has been valuable. We’ll have to have you back on after the pandemic when you have doubled your net worth. Thank you so much, Eddie. For everybody out there, make sure to give us five star reviews if that’s accurate. Go out and do some good deeds. Take care, everyone. Thanks.
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