In real estate investing, if you’re an agent, you don’t sell houses, you educate people about whether they should buy or sell, or what they should sell for. And if you’re an investor, you’re educating people why your deal is better than the other deals that they’re going to get. Bob Zachmeier, an innovative real estate investor and broker, specializes in creative financing and out of the box solutions to create profitable real estate deals and shares his perspective and method for structuring owner financed note deals to attract funds. He talks about why notes are better than most other investments and how to score a perfect 10 with notes. He says there’s never been such a high demand for notes than now, so if you can build a note, you will have plenty of buyers for that note.
We are here with Bob Zachmeier from NoteCarry.com, who’s going to talk to us about how to score perfect ten with notes. Bob, you’re an owner-financing expert and an all around great guy and great investor. You’ve helped a lot of real estate investors across the country capitalize on owner‑financed deals. We’re excited to have you here. You’re a first timer at Note CAMP, so I’m going to let you take it away.
I appreciate it, Scott, and I appreciate the opportunity. I’ve been a follower of yours for years and I appreciate the opportunity to be on your Note CAMP. We’re going to talk about a perfect ten with notes. I want to share with you some of the things we’ve been doing, the latest way that we’re investing, but also educate people about why notes are better than most other investments. A real estate investor, if you’re an agent, you don’t sell houses. You educate people about whether they should buy or sell or what they should sell for. If you’re an investor, you’re educating people why your deal is better than the other deals that they’re going to get. A little bit about me, I was in an engineering career. I worked at Texas Instruments and then we were purchased by Raytheon in 1997 and then I quit in 2002. I just walked in, hung up $100,000 a year job and walked away. I started a real estate company on a bar napkin, and in three and a half years, we grew our team to the number one producing team and in a city of a million people in Tucson, Arizona. Since we started our own brokerage, my wife and I and our team have sold 4,000 homes and I’ve written some books along the way. I have another book called No Bank Needed and it’s all about seller financing.
I have a weekly radio show that I started back in 2012. It’s called Home Solutions. It is on an AM station on Sunday at 10:00 AM on the Conservative Talk radio station. It is a goldmine for listeners that call and want to invest with me. I don’t advertise money. I can’t advertise money, I don’t have a securities license, but what I can do is talk about the last deal that I’ve done. I do that all the time and people, especially my mother, who is 84 years old, buy notes with me. I have all these people that call and say, “I want to be your mom. I want to do what she does and have her lifestyle.” It’s pretty cool. I was involved with the Craig Proctor Program in real estate and I coached for Craig for five years and I’m out at the Note Investor Summit in Irvine, California. I’m speaking. I do a lot of stuff. This was a very complicated tax year this year. We touched 42 addresses with notes last year and we did buying, selling, fixing, flipping, and sometimes, we did it twice. We financed the initial lender that bought the property to flip and then we ended up carrying the buyer on a note that we purchased from the seller. Creative financing is something I specialize in. If somebody doesn’t know how to get out of something, my brain doesn’t shut off until I figured out a way to help them get out of the bad situation that they’re in.
My goal is to change the way you think about real estate. Most people have a preconceived notion when you tell them you’re a real estate investor, everybody immediately goes to the landlord tenant and toilet picture in their head and that’s something that most people don’t understand that they can be a bank and there is a reason why banks have their name on the tallest buildings in the world. The one thing I want to share with you is the most expensive thing that you can own is a closed mind, and this is objecting hard to whatever you’re trying to share with them saying, “If the most expensive thing you can own is a closed mind, are you so close-minded you won’t even listen to another person’s view?” Most people, calling them closed-minded is like calling them a bigot. It wakes them up and it’s like, “I’m sorry,” and then they let me continue instead of trying to shut me down, but the other thing I want you to be aware of is your perception is real. What you believe is what’s real. It might as well be real. I always tell people that they have a six-inch problem and it’s between their ears, and your brain, whatever you believe in your head is, is basically what your actions are going to reflect. “If you don’t change the way you believe or look at things, you’re never going to change your outcome. When you change the way you look at things, the things you look at will change.” That was from Dr. Wayne Dyer, one of my favorite authors.
We’ve all heard the saying “Go big or go home.” Is bigger really better? In 2011 in the heart of the REO market, my wife and I sold 641 homes in 365 days. We about killed ourselves doing it. Last year, we did 42 notes on homes. We made more money take home to the bank net than we did the year that we did 641, so we were able to take off two months. I went to Europe on a three-week trip with Walter Wofford and Quincy Long of Quest IRA. I went to Alaska with them for a couple of weeks in December. I went down to o Machu Picchu in Peru with Quincy. We have been traveling the world. I took two months off. It’s the most time I’ve ever taken off in my life to go on vacation and I had my biggest year ever, so bigger is not better. Dimes and nickels, nickels are bigger. Dimes are worth twice as much. What I found is better is better, so don’t go big, go better. How to score a perfect ten with notes? First of all, let’s talk about the Baby Boomers. Between 1946 and 1964, 6,000 Baby Boomers were born every single day. There were 80 million Baby Boomers in nineteen years. In 2011, the leading edge of those Baby Boomers started to turn 65 years old, so 2018 is now the eighth year of this generation turning 65. I’ve heard that it’s closer to 10,000 people, but I always like to err on the side of being conservative.
These people are aging and when they retire, they have three investment choices. Do I want to buy a rental home? Do I want to put my money in the bank or do I want to invest in the stock market? I’m going to explain each of those and this is what most people believe. They don’t know that they can be the bank. All they know about the bank is I can put my money in the bank. Traditional investors hold their real estate as rental properties and most, including myself, are very, very tired of tenants and toilets and that was a disgusting picture, but it sums up being a rental property owner. If you ever approach a rental owner, the one question that you can ask them that brings in all the light is, “Aren’t you tired of cleaning other people’s dirt? What if I could show you a way that you can make more money and never have a tenant again?” That is gold and you definitely have their interest. If you think about it, the people who have their property advertised on Craigslist or Facebook for rent, first question, “How much money are they making on that property right now?” The answer is none because it’s vacant. The second question, “Do you think that the last tenant did a good job of cleaning the property up and giving it back to them in the same condition that they received it?” The answer to that almost every time it’s going to be a heck no.
These people had to give up a couple of weekends, if not months, to go and put the house back together so that it’s in the condition that it could be rented out again. Deep down inside, they don’t want to start the cycle all over again. This is an opportunity to catch them at this low point, this emotional low on the roller coaster, and bring up this “What if you can make more money and never have another tenant?” It works extremely. In a market that has very, very low inventory, landlords are an awesome resource. Let’s talk about putting your money in the bank. Banks are paying 0.2%. That’s a $1.67 a month for every $10 invested. To summarize that, people don’t pay attention to interest rates and what they care about is what it will spin, so is one Starbucks every three months a good use of $10,000? You’re talking to retirees and they’re married and say, “There are two of you, so you either have to share or each one of you gets a Starbucks every six months.”
That’s not a very good use of $10,000. This is a bank statement I got from one of my clients that showed they had $200,000 in the bank and the bank was paying them $34 a month in interest. They invested in a couple of notes with me and at 7% interest, their check a month was $1,320 instead of $34. This is very easy to show people that there is a better way but remember that retirees are very concerned about security. They can’t work anymore. What they have is all they have, so you need to make sure that you put them in a very secure position where the market would have to be annihilated before they would have any risks. I’m going to share with you how I actually structure my notes and that way the retirees are very protected.
Let’s talk about investing in the stock market. With this massive 80 million population, about 4 million Baby Boomers have died, so that’s 76 million people left. We’re in the eighth year of a nineteen‑year generation, so we’re not even a third of the way through it. What happened when they stop working and start retiring? They stopped investing and instead of putting money in, they’re now starting to take money out. Every day, 6,000 to 10,000 people stopping, investing, and starting to take it out. What do you think the value of the stocks is going to do over the next ten to fifteen years? I attended a financial planning event in Tucson and there was a Senior Vice President at Vanguard who was one of the speakers at this event and he said this about the stock market. Keep in mind the audience is a bunch of financial planners. “Educate your clients to expect lower returns going forward 4% to 5% if they want to invest in US investments and 4% to 6% if they’re investing in global funds.” People have been realizing way better than 10% gains on the stock market, and he said, “They’re not going to like this, but tell them they have four other options. They can earn more, spend less, work longer, or die younger.” Those are your four options.
If you look at that list, I don’t think anybody is going to like any of those, so earn more, spend less, work longer, die harder. What if we had option five? Option five is what if we can earn a much better return and get monthly mailbox money with no tenants and toilets and get paid for the next 30 years? I like that way better than being volatile in the stock market and how much do you know about the stock? This is where we’re going to come back to those landlords I told you to go speak with. What could you possibly invest in, what stock could you possibly buy that you know as well as this rental house that you’ve owned for the last twenty years? What other investment is there that you understand as well as this? You would hold the same investment. You’re holding it as paper, not as property. Property has liability, paper doesn’t. Somebody slips on your sidewalk and you’re the owner, you get sued. Somebody slips on a sidewalk and you’re the investor, even if they win the lawsuit, they are in a second-place lien behind you, you’ll get paid your principal and your interest before anybody else gets paid anything. This is an awesome thing to remind people of the security that a first-position note has.
This is from 2014. The approval rate just after the recession, things started getting better at the tail end of 2011 and all through 2012 and 2013, but in August of 2014, Ellie Mae reported that 53.3% of all the loans in this country that were applied for were granted; 53%, so half the people were getting turned away. You can go out to EllieMae.com and sign up for the origination insight report. If you go to EllieMae.com, click on Resources and then find origination insight. This is handy to show your potential investors so that you can say, “Last month, 70.6% of all the loans in the United States that were applied for were granted.” That gave them 90 days from when they wrote the application to close. That means almost 30%, almost one out of three home buyers who applied for a loan could not get a loan. This is from our Tucson MLS. We sold 1,331 properties and only four properties were financed by the seller. There’s tremendous opportunity and I am baffled.
I’ve been doing seller financing in Tucson for six years. There are 6,000 real estate agents in Tucson. I’m the only person that is financing people. I never charge a commission if I’m financing a note. The minute you start buying something for yourself, you have a fiduciary duty as a real estate agent to do what’s best for your client, so you can’t negotiate for yourself. Anytime the opportunity comes up to buy a note, I go to the person selling your home and I say, “We have a problem. I cannot represent you any longer. Would it be okay if we don’t have any commission in this deal?” and I’ve never had anybody say, “No, I want to pay a commission.” If you’re not a real estate agent, it is better because you don’t even have to have that conversation, so don’t be put off by, “I’m not a realtor. I can’t do this” It’s better if you’re not a real estate agent.
How does the buyer benefit? We give them home ownership, which means I want to focus on properties that can be rented for far more than what the payment would be. Everybody in their life is going to hit a bump in the road and at some point in time they’re not going to be able to pay all their bills. By buying the properties that are in the lower part of the market, not in war zones and gangland territory, but in very affordable neighborhoods where rents are higher than the mortgage payment would be, they’re going to look out the window and the house across the street would cost them more money to rent than this one does to buy. I guarantee you I’m going to be paid and they’ll find someone else not to pay. Besides making it cheaper than rent, that is real money left in their checkbook at the end of each month. They’re going to get a tax refund because their rent is not a tax‑deductible expense. However, property tax and mortgage interest are. Now all of a sudden, they can go change their W-4 and get more money back in taxes than they’re currently receive. Now, their paycheck is bigger and they have leftover money from not paying as much in rent. There’s $200 a month or more on their checkbook. To move across the street and rent would mean paying someone else more and having to go back to your employer and change the deductions back so that you don’t owe money at the end of the year.
The long-term benefit of rental property is the equity which is paid two ways: principal payoff and appreciation. There’re four ways that this buyer is being helped by you financing that loan. We know that buyers who can’t get a bank loan will pay a premium. The reason that we need a premium is someday, if you want to sell that note, you may have to pay a discount, depends on how that note is structured. I’ve actually gotten compliments from leaders in the industry, Eddie Speed once told me I was the only person he’s ever met in his life that for six years has been able to sell a loan at par, at face value, with no discounts and that’s because of the way that I structure it. These buyers on average would pay $10,000 to $20,000. That doesn’t mean on $100,000 house, they are going to pay $10,000 to $20,000, but on a $600,000 house they’re going to pay six times more. It’s $10,000 to $20,000. That’s what the convenience of being able to get home might be worth to someone and there may be exceptions, but I wanted to make sure people didn’t think that was percentage.
The buyer benefits. We give them a house that nobody else would let them have. We give them a payment for less than they’re paying in rent and equity that’s theirs and it comes with all the tax deductions and everything else. How does a seller benefit? The seller benefits from a much faster sale. They’re going to get that house sold very quickly because we showed you there’re a lot of people that can’t get a loan and nobody else will help them. They’re to make more money than they would if they sold it on a straight-out sale on the MLS and less hassle, writing it off and close. We closed several deals last year. The title company has asked us not to do it anymore, but we literally wrote the offer on Tuesday and closed on Friday. When you have fast money, you will attract the best deals and the most motivated people.
This is how you would explain the seller-finance process to a newbie. A normal sale, the bank gives the buyer a loan, the buyer then takes that money and pays it to the seller for the home and then the seller gets the money and puts it back in the bank and it completes the circle. What if that buyer can’t qualify? The bank won’t give them a loan. It stops the whole process and you don’t have a sale unless you make one subtle change. What if we replace the bank with a retiree? The retiree then creates a note for the seller. The seller is offering financing to the buyer, and then the buyer starts making payments to the retiree. Why do we run it through the seller? That’s because the seller is the originator of that note. It’s their home. A person just cannot come in and create a loan without a loan license, so the seller has the right to sell their own home. How many notes a year is the seller going to carry? They will probably do one in their lifetime, but they don’t want to carry, so then they turn around and sell the paper and then they hit the one a year and that’s fine within the Dodd-Frank guidelines.
The reason I use the word retiree and not investor is investors are greedy pigs and they want way too much money. They’re going to kill every real estate deal that I have. When I find a retiree, they’re actually comparing me to Wells Fargo instead of to a trailer park or Church’s Chicken or whatever other investment they might have. This is a way that if the home was worth $100,000, let’s say that we found a buyer, everything has value. You wouldn’t expect a home on a golf course to be sold for the same price as a home that isn’t on the golf course. You wouldn’t expect a home with granite countertops to be sold at the same price as a home with Formica. A home with financing is actually the best amenity you can have in this market because one out of three people are being turned away for a loan, but only a fraction or a handful of people are being financed by the owners because all the owners need more money to buy the next home most of the time.
In this case, if the $100,000 median 30-day MLS price was $100,000 and we were able to sell the home for $115,000, the minimum down payment that I would want from that buyer would be $15,000 because I don’t want them to be upside down. That would leave $100,000 to be financed. If you put $100,000 loan on a $100,000 home, you’re not going have any takers, and that’s a very risky proposition for a retired person. By making a first position loan at 70% and a second position loan for 30%, then now this person is extremely protected. That property would have to fall $30,000 in value before their first dime would be at risk. Keep in mind that during the Recession, 6 million loans went bad, but the number you need to know is that there are 130 million loans in the United States. Out of all those loans in the United States, less than 5% of them fail during the worst seven years since the Great Depression. That’s a pretty darn success rate. If you look at the percentage of those loans that failed that were FHA loans, one out of three FHA loans fail. They had no skin in the game, 3% down. That’s why they changed it to where you need 3.5% down. When this person is putting 15% of the market value down, the chances of them failing as the Great Recession proved to us is less than 1%. During the recession, the people that had 15% or more down, less than 1% of all the loans failed.
Craig Proctor is a real estate coach that I hired back in 2005 to coach me and I worked for Craig as a coach for five years. This is the most important thing to know about real estate whether you’re a real estate agent or a real estate investor. There’re only two things that matter, nobody cares what color of jacket you have, what logo your company has, nobody cares about you, the name of your company, or where you live. All they care about is buyers want houses, sellers want buyers, so in this market of short supply, everywhere in the United States, there’s a shortage of homes. As I said, the creative person that goes out and finds inventory by finding renters, by going and getting a list from your title company of all the people that bought REO at a very low price and showing them if you sold now, you’d get slaughtered in income tax gains. However, if you carry that as a note, that would be spread over 30 years. Buyers want houses, sellers want buyers, that’s all that matters.
Notes are everywhere. There are websites all over the internet where you can go out and buy and sell notes. Here’s something that with the stock market all-time highs and the recent trouble that the stock market has been demonstrating and in anticipation that there’s more coming and banks paying 0.2% interest, there has never been such a high demand for notes. If you can create the note, believe me, it’s one of those things, build it and they will come. If you build a note, you will have plenty of buyers for that note. If you had ten notes and we’re going to sell five, which five would you sell? Would you sell your five best ones or your five worst ones? Most people know the answer to that question and that’s why this guy is sitting on a pile of money but on top of a pile of dead bodies. These are a lot of the performing loans that people are finding out have all kinds of hair on them and they are bad properties in distressed neighborhoods. They throw them back and there’s such a demand for notes that people are buying them and buying other people’s problems. There are good notes and there are very reputable people out there. You need to find out who they are, but what I found is why would I want to buy a note that someone else structured that may be their worst deal they have when I can create my own notes on my terms. Especially if I can orchestrate the deal and not even be the note creator? The seller of the home is the note creator, but I can have it on terms that meet my criteria. Albert Einstein came up with this Rule of 72 and it’s pretty magical. If you take the number 72 and divide the annual interest rate you’re earning on your money into 72, it will tell you how long it takes for your money to double.
If you had $10,000 and you were earning 3% interest, three goes into 72, 24 times, so it would take you 24 years to make $20,000 and another 24 years to turn that $20,000 into $40,000. How long it takes your money to double? If you go to 6%, 6 goes into 72 twelve times, so now your money is doubling every twelve years. If you’re making 12%, 12 goes into 72 six times, so every six years your money’s doubling. Look at the bottom line, the difference between 3% interest and 12% interest, $40,000 in 48 years or $2.5 million in 48 years. Most people would choose the higher number. At 1% interest, your money doubles every 72 years. For those of you who have money in Wells Fargo, Bank of America, Chase, you’re getting 0.2% and it would take 360 years for your money to double. I don’t think you’re going to make it before you see that double and your kids won’t make it and their kids won’t make it and their kids won’t make it and their kids won’t make it.
There are a lot of people out there that got spoiled during the Recession and they got 16% interest when the market was scary, and nobody was lending money and they’re still stuck on this 16% model. I meet these investors all the time, “I hear you have deals and you need money. I’ve got money and I get 16%.” I laugh at them and say, “When’s the last time you got that?” “It’s been awhile,” so I said, “What you’re telling me is that you’re making nothing right now. If you do find somebody that will pay you 16%, they’re going to pay you back as fast as they can because you’re the most expensive loan they have. You might make that money for three months.” At the end of the year, you had nine months of undeployed capital and three months of deployed capital, you get the bragging rights because you’re in 16% for three months. Guess what you did for the year? 4%, so your 16% is a joke. It’s not 16%. It’s 4%. If you’re waiting for 16% deals, there’re probably some other things that you’re looking for, Big Foot, Santa Claus, unicorn, or pot of gold at the end of the rainbow.
Let’s look at the calendar. You’ve already lost a quarter of this year, so even if you make a 12% yield, you lost the first three months. Even if you could deploy your money right now and get it working, you would end the year at 9%. You’ve already lost a few days of this month, so it’d be less than 9%.This is where people sometimes get stuck on a number and they’re not using common sense. 9%, let’s see what that costs you having undeployed money. This is an example, don’t get overwhelmed by the numbers. On $100,000, what if it took you three years to get your money deployed? What you’re going to have happen is you’re going to miss the final three years on this 30-year schedule. That three years of interest at 8% that was undeployed during the times that you didn’t have your money working for you, it costs you $207,000 by not having it deployed at only 8%. What if it was 10%? That costs you $433,000, and if it was 12% undeployed, unbelievable. It costs you almost a million dollars, $863,000. By having your money sit for three years and then you deploy it and keep it deployed for the next 27 years, you lost that front end. Because keep in mind when you’re earning compound interest, it is compounding on the base number, especially if you have low-balance IRA accounts, if you’re not working the heck out of them to get that balance up, every number, every time it doubles, the Rule of 72 doubles it, and it’ll be doubling a bigger number. If you’re sitting there frozen and you’re waiting for some pie-in-the-sky deal, you’re not going to ever make any money and it’s going to cost you a fortune.
Here’s the bad thing about notes, it makes you lazy. You get mailbox money and automatic deposits and you’re traveling around Europe and Machu Picchu and then you could keep going. There’s enough money coming in to keep the trip, waving the wand and giving you new trips to take. I logged into my bank account and I found out that these notes are actually paying us so fast, I got lazy and so did my money. If you add up all these different accounts and these are for different trusts and different entities that hold notes, but I have $95,000 of undeployed capital that appeared that wasn’t there very long ago. It’s like, “I got to keep on this and keep that money working” or else I’m going to be a victim of my own example that I showed you. This is a new investment model that we started doing in the last several months. We’ve been working with a guy and he has flipped 50 properties. I’ve got several flippers in Tucson I’ve been working with for years, but this is the model that we came up with. Don’t get put off by the 8.8% interest only. Three-year balloon, two points paid upfront, one point at the end. This was a good model that once your money gets big enough, you want to keep it deployed and keeping that constant payment because finding the next deal is the job and every month that goes by, you’re losing equity and you’re going to end up with lesser return, so with the two points upfront and the one point at the end, it ends up being a 10% yield.
By lending to a fix and flip investor there, there’s no Dodd-Frank. It’s interest only, so the note doesn’t appreciate in value like a regular pay cycle would on an amortized loan. It’s three years straight through that your money stay constantly working. You didn’t lose any capital in the middle. There’s a balloon payment after 36 months. The loan payments are professionally serviced. All the tax information, the 1099, 1098, all the collection, everything happens, you just get checks and the yield is twice when the stock market projection was from the guy at Vanguard. Let’s say it was $100,000. First of all, I only have to bring $98,000 because I got two points at closing. Now I’m making interest on $100,000 even though I invested $98,000 that pays me $733, which is $8,800 a year, $26,400 in interest payments. At the end, I got two points at the beginning and another point at the end, so my total profit on this $98,000 investment in three years is $29,400. Let’s look at my yield. If I got $29,400 on $98,000 investment, it’s exactly 30% yield. If I happen to have it for three years, that makes a 10% a year average on my money and I didn’t have to scramble to find deals in the middle and I didn’t lose any payments in the middle.
This is the equivalent of funding fix and flip loans at 12%, but every time the money comes back, you lose a month and you end up the year with two months lost, so you ended up with 10%. This is set it and forget it where I have my money deployed and when I first started investing in notes, I wanted to get discounted seconds because I could build money quite a bit. I recently sold a lot of my discounted seconds for par or very little discount on them because at first, I always sold at par. Some of these seconds I was able to sell at par because they’ve got a 24‑month pay history, but this freed up the capital because I got them at a discount. It freed up capital to go invest in first. This loan is summarized $98,000 invested, $26,400 payments in the middle, paid back $101,000 at the end. You lend $98,000, you get $26,400 and you get back $101,000. That’s a pretty easy to understand investment and a lot of the retirees who have been telling me no for years because all my loans were 30-year loans to owner occupants, all of a sudden, they’re saying, “I love this deal. Do you have any more?” I funded one of these at 10:00 PM. I was trying to get out of town and I posted this note and I hit the button 10:00 PM, and at 10:13 PM, I got past clients of mine who said, “We’d love to do this loan.” At 10:46 PM, I got another person, “We’d love to do this loan.” The money that’s out there is unbelievable. Every day for you people still holding out with the hard money trying to get your 16%, there are some people who will pay it, desperate people, risky people. Your competitor isn’t the investor down the street, your competitor is mom and pop retiree who can’t live on Wells Fargo.
Here’s the added insurance. The flipper has resold this property. He’s wrapping this loan. He’s selling it for $140,000 because keep in mind when you finance is the wholesale acquisition price and the wholesale repair costs. The flipper has none of their own equity in the game, but you can buy houses at the price they can buy them, and you can flip houses or get the work done for the price that their crew can do the work. This is where equity comes from is, it is this house, if they are able to buy it for $85,000 and spend $15,000 on repairs, then their cost is $100,000. You finance $98,000 and that two points off the market value of that house is probably $125,000 or so, maybe $130,000 and they’re selling it for $140,000 with financing. Now that buyer actually puts down $14,000, 10% down of the $40,000, at least, that’s the minimum. That is where the flipper gets their cash because they have to have eating money and this is where the flipper actually gets their money as the buyer’s down payment. They owe you $100,000. You only lent them $98,000 but look at what the buyer owes to the flipper, $126,000 at 10% interest rate on a 240-month term. A 20-year term makes a payment of $1,215.93. This particular home would rent for $1,300, so we met our criteria of being less than rent plus they’re getting mortgage interest deduction. They’re getting property tax deduction. They’re getting principal that they’re paying down, and they’re getting all the appreciation that would happen.
Let’s look at the flippers profit. Remember they got the $14,000 down payment for their eating money, but they have a monthly cash flow spread of the money the buyer paid to them and the money that they’re paying to you, $480.60. If this flipper does a deal like this a week and they’re ahead of schedule, it’s getting scary how fast they’re going. He’s creating this cash flow on every single deal. If he does for a month, he’s created almost $2,000 a month of cash flow and at 50 a year would be $24,000 a month of cash flow. Here’s the question. This is the added security. Do you think this guy is going to give up his $26,000 equity stake by not paying you and you foreclose and get the house for the $98,000 that you paid? The answer is no. This guy could get the house back, turn around and resell it again, get another down payment and still make the spread on the money because your money is on this loan for three years. This was a very secure way to invest that you always want somebody behind you that’s going to take the hit. If you’re talking to investors or retirees, investor is a bad word, they want too much money and retirees are comparing you to the bank. You have to educate them. The best thing to do is call out the elephant in the room. I’m sure you’re wondering what if they don’t pay you. If they don’t pay you, two things are going to happen. That buyer is going to lose their $14,000 and the investor is going to lose the $26,000 of equity because even though you only invested $98,000, they owe you $100,000 and thier loan is worth $126,000.
What’s the chance that two people are going to lose $40,000 so that you can foreclose on the house? I don’t think that that is very likely to happen, especially not in a market where there’s tremendous amount of growth. This is a very interesting way to invest. If you’re tired of the big banks making huge profits on your money, lose the bank and keep the profits yourself. This is what I’ve been doing. This is what I have helped a lot of my retired clients and friends and family members do. My mother is 84 years old. She just got back from spending eight weeks down in our Cabo San Lucas. She lives in North Dakota and for the last several years she’s been going to Cabo since 1996 as a matter of fact. What enables her to do that used to be the money she made at the bank on her loans and she was making 4% interest on our money. When my father passed away in 1996, we set up my mom’s accounts where not more than $100,000 was invested in any one account and that was what the FDIC insurance was. Then the financial planner at the time said, “Make sure to isolate your money, if something happens and the bank fails.” We know that several hundred banks failed during the Recession while the FDIC insurance is protecting them. We know that FDIC insurance is extremely underfunded and for the $13 trillion sitting in banks, there’s about $25 billion worth of insurance which is a huge mismatch.
My mother, when the bank rates fell in 2007 to 0.2%, her 13 accounts that were paying $4,000 each her ironically $52,000 a year and there’s 52 weeks in a year. My mom is living in a paid off home in North Dakota and she’s making $1,000 a week on her bank interest plus getting social security checks. She couldn’t spend all the money that she was earning. In 2007, the banks lowered their rate from 4% to 0.2%, so all of a sudden, my mom’s thirteen accounts started paying her $2,600 a year instead of the $52,000 a year that she was making. That is where she started investing with me and notes. Just one note at 7% interest on $100,000 pays her $665. The bank on that same amount of money, $100,000, would pay her $16 instead of $665. After my mom did her first note and she got her first check, she calls me and says, “I think they made a mistake.” I was like, “No, that’s the right number. That’s what you’re supposed to have.” She said, “Do you have any more of these notes?” My mom has been one of my early adopters of funding notes all the way back into the late 2000s before the Recession even hit. This is why I do a lot of investing in Dallas/Fort Worth. I live in Tucson up. I’ve got several notes in Tucson and around the country. I have notes in seven different states.
I’m going to share with you two criteria that I have for buying out of state notes. The first is I will only buy a note in a market where I have a very close friend who I trust with boots on the ground in that market. If you have a note and you live in that town and you’re going to be behind me in position, I will help you finance that note. If you don’t live there and you find some deal in Dayton, Ohio or Indianapolis, I’m not interested at all. I want boots on the ground and I want skin in the game. That’s the only way that I invest in deals that I don’t make myself. This is why I like the Dallas/Fort Worth area. First of all, if you go back to the basics, real estate is a component of supply and demand. If there’s a high demand for something and low supply, which is exactly what we have in the market, it causes prices to rise. I want to be invested in the fastest growing market in the country. Dallas, Fort Worth last year had the number one spot for population growth, 399,734, so almost 400,000 people moved to Texas last year. That brought the state population up to 28,000,304. Dallas/Fort Worth has three of the top 50 cities in the United States, Dallas, Fort Worth and Arlington.
If you look at the total of the Hispanic population, 2.4 million in Dallas and then Plano-Irving metropolitan area, and then Arlington and Fort Worth, it’s a tremendous amount of 2.4 million Hispanic population. The reason I bring up Hispanic population, I don’t advertise in Spanish, but about 99.9% of the people that I find that our Hispanic construction workers. I’ll tell you these people are pure gold. I don’t think many people would argue that the Hispanic culture has the strongest family unit in this country. It’s not their house, it’s grandma and grandpa’s house. It’s mom and dad’s house. It’s their children’s house and their wife’s house, so not making that house payment would mean that three to four generations typically are going to be ejected onto the street. I think that that would be the absolute last payment not to be made if there was a money shortage. That is why this number is important and this is my target market. Most of these construction workers are self-employed business owners. They own a sheet rock company. They own a plywood or a framing company, electrical contracting company. How do I target them? How do I find these buyers? I advertise in the construction corridor where all the roofing supply stores are and the plumbing supply store and the electrical supply store and paint supply stores. If you’re not putting signs in Home Depot and Lowe’s on the weekend, you’re missing a tremendous opportunity.
By the way, city jurisdictions can’t take down those signs because it’s on private property and usually those stores are so busy that they’ll probably take them down within a day or two, but how many thousands of eyes laid eyes on your sign while they were there. This is another reason. Dallas out of the top 100 fastest growing counties in the United States, DFW had 9 out of 100 in the Dallas/Fort Worth area. Dallas/Fort Worth metropolitan area itself gains 393 people every single day of the year. Think about that from a supply and demand standpoint. If you’re buying homes in a rustbelt destination, which has very cheap houses for a reason, next year, there won’t be as many people living there. The year after that, there will be even less than even less. What is the value of your assets? When there’s more supply and less demand, your asset is going to fall in value. When you’re in a market that’s going crazy like this and you want to see some projection numbers, Dallas/Fort Worth has a total population of 7.9 million people, and the next three years, they are expected to cross 9.2 million people. They’re anticipating 1.5 million people coming to DFW area in the next three years. That’s a tremendous mismatch. The builders cannot keep up, so the value of the notes that I have, the collateral that backs them, is going to be a lot higher every year because of the demand for the property. When there’s that a new growth, guess what happens to rents? Rents go higher too, so my payment looks even better because it was less than rent when I started and now rents are even higher. This is a very good way. The current model that we’re using with the three years in and out, you’re not tying your money up for an extended period of time and maybe in three years there’s a better deal at a higher interest rate if rates continue to climb.
This is an example of a property that we funded in Mesquite, Texas. Mesquite is on the eastern side of Dallas. If you look at the Realtor.com, Zillow, and Trulia, the median value of the neighborhood comes in around $120,000 to $122,000 depending upon which site you go to. Here’s Redfin. Of course, none of these sites know anything about the home itself. They take the average sale price for the area divided by the number square feet of the home and that’s how they come up with a value. We all know that that’s not how people buy homes. It takes into account a nothing about the condition, the amenities, does it have granite or Formica; is it 1980s house or has it been fully remodeled with the stainless and an architectural gray, and all the stuff that people are buying. The thing I look for in the neighborhood is how many homes are selling for more than this house? This house is $120,000. That is what the median $120,000 or $121,000 value is. A newly remodeled, totally fixed up house is going to sell for a lot higher than the median Zillow price or Trulia or Realtor.com price, but I look at the way appraisers look. Is this the most expensive house in the neighborhood? If it is, I don’t want to buy it. The answer is it’s not, so this was a good investment for us.
There’s a buyer, a seller, and an investor in every deal. Who comes first? Normally in a traditional sale, the investor is actually a bank, so you have a buyer and a seller. In most cases, the seller lists the property and then you find the buyer to buy that property and then the buyer goes and gets pre-qualified with a bank and that’s where the investor comes in. When you’re doing seller-financing, it doesn’t matter. I’ll tell you the best way to attract sellers is to have buyers that pay the highest price. I haven’t met a seller yet that doesn’t want more than their house is worth. When I have a buyer that is predisposed to pay a higher than MLS value price, that doesn’t mean you’re overcharging for the home. That means you’re in a market that is undersupplied and you’re offering financing. That demand is the same as demand for the last sheet of plywood before hurricane or a can of orange juice when there’s been a big freeze in Florida. All of a sudden, I have buyers that will pay $10,000 to $20,000 more. How many sellers can I get? The answer is all of them. In a short-supply market, I have supply coming out my ears because I offer them value by getting more for their home than anyone else could get it, but it’s not always about the money.
In this market, a good question to ask the seller is, “When your house sells, where are you going to move?” Because there’s a short supply out there, what’s the chance that a buyer comes in, writes you an offer, tells you how much they want to pay, tells you all the stuff they want you to fix, tells you the day they want you to move out, what’s the chance you’re going to find another house in that little two-week window? You’ve got to go get financing on your home. Even if they give you a six-week close, you’ve got maybe two weeks to find your dream home. I don’t think that’s going to happen. This is the benefit of me buying your home. You pick the day, you tell me what day on the calendar you want to move, and we’ll close that day. Nobody else is offering that. What if it’s three months, four months, a year from now? I don’t care. You’re in charge. We are in a seller’s market, so why are you letting the buyer make all the rules? The answer is the deal has to come first and then you find the money because the people, especially retirees and investors are doing due diligence. How do you do due diligence on a property you haven’t found yet? You don’t even know the address. How do you do due diligence on a buyer you haven’t identified? You don’t even know who they are, where they work, why they can’t get a bank loan, what they do for a living, and how much they have in their bank in the savings account?
This is the profit formula. It takes a deal, which is a buyer and a seller and a house, it takes money to make a profit. You have a deal, a deal pillar, you have a money pillar, and then have your profit. If the deal goes away, the money gets 0.2% at Wells Fargo. Same picture, if the money goes away, the deal can’t close so you have no profit. The deal is stayed, profit went away. A profit requires both deals and money. This is something that I want to point out. Almost every person that comes to me and says, “I don’t know how you find so much money. I can’t find money.” It’s because you, Mr. Investor, are being a greedy pig. You’re trying to take all of the money for yourself. Once you find a money partner, you want to keep that machine oiled where they don’t want to invest with anybody but you. If you remember that a deal without money can’t close. Find your money partner. Why do you want to work so hard? Why do you want to screw the money partner you find and you have to start from scratch and go try to find a different one? Why don’t you treat that guy better than anybody else and it’ll keep rolling and rolling and rolling around and the money keeps repeating itself? You made a repeatable process.
If you want to get connected, I have something called the Note Carry Network and this is a conference that I put on once a year in October. This year is going to be the 11th and 12th of October. This will be the 10th time the Note Business Builder has been putting on. Every year, I donate 100% of the proceeds to the Make-a-Wish Foundation. Last year took us over $500,000 that we donated from this conference just by sharing what I do. If you go back to a NoteBusinessBuilder.com and you’d like to come, I’d love to have you there. If you get bored, there are my five books so far. There’s also a sixth one, Who Needs the Bank
I highly recommend it, October 10th through 13th. He does donate every penny to the Make-a-Wish Foundation. I’ve seen them do it and it’s a great event, lots of good stuff there. An audience asked, “Where can I find a list of owner-financed notes by any chance?”
I don’t know of a list of owner-financed notes. There are all kinds of websites of people that sell their notes, but actually I do webinars every week and I have students that are creating seller-financed notes and they’re looking for investors. This is why I don’t do too many examples of being a realtor because over half my network is not real estate agents. I have several people in their 70s that are worth millions of dollars and they actually came because they wanted to buy a good product within the network of people, but there is a tremendous amount of deals. The 10.0 deals that we funded in Dallas, I’ve done 16 of them since the first of February, so eight a month. The guy has done twice ahead of schedule, he wanted to do one a week. We’re doing two a week and I am redeploying all my money. I sold $300,000 worth of my seconds to be able to cash out on the discounts I got to go in and buy on these because I’m getting busy and it’s nice to lock your money in and set it and forget it and check for the next two years.
This goes back to your example. “If a house is worth $100,000 and they put $15,000 down, how are you financing $70,000 and $30,000 and them having the equity? The house is still worth $100,000 and they have $100,000 in debt.”
At the point they purchased the home, there is no equity. If you look at what they’re paying in rent, they’re getting nothing. They can’t write off anything in their taxes, they don’t get any equity, they get no appreciation, they get nothing. It will take them usually between a year and a year and a half to recover the $15,000 premium that they paid. From that point forward, they’re ahead of the game, but they are never upside down because they put as much down as they currently had. Most people, the big carrot to people, if you think about it, Scott, they haven’t sold a car on sale price for 30 years. It’s how much is your monthly payment? Could you use an extra $200 a month? That’s like candy. People jump on that and the buyers are the easiest piece. It’s unbelievable. When I first started doing this back six or seven years ago, I had to get it through my own head, “How can I get a buyer to pay more? They can go to Zillow and if Zillow tells him this house is only worth that, how can I get them to pay more?” You’re giving them something no one else will let them have, which is home ownership. That is still the American dream.
When you start figuring out dreams are great, plus they’re saving their money and they have the write off capabilities, tax consequences that work in their favor in a positive way. There is a lot of great stuff going into the aspect of offering owner-financing for them. It’s a lot of intangibles that maybe you don’t see immediately there hitting your face. It’s a longer-term play when it comes, and the other things that they’re planting a rosebush that’s going to be their rosebush, not something that’s they got to pull up every year when they move or their rent rate goes up and stuff like that. That’s the thing to keep in mind too.
I had one of the very first notes I funded to an owner occupant back in 2012, and it paid out last summer. They were one month short of five years paying on that note. The buyer paid a premium, $15,000 more than the market currently said that home is worth. I had a $30,000 second on that property. They paid $220.13 a year on that second. I made over $13,000 in payments on that second. When it came time to pay up, they had paid off $1,479 worth of principal. Then you’re saying, “How did they get ahead?” They walked out of closing with $32,000 in their pocket because that was the equity that the house came, and that same guy bought a bigger house and he owns two rental houses and I financed all of them. I’ve done every loan for him. He’s self-employed. He’s an air conditioner mechanic and he only have two guys driving around in trucks. He was able to start that business in the first house that I sold him, so if you want to talk about changing people’s life by charging a premium, that definitely did it.
How do people get on your webinars that you have every week?
Anybody that wants to look at them, it’s a members site, but I give a couple of free looks to anybody. If you send an email to Bob@NoteCarry.com, I’ll add you to the next couple of webinars.
How do you handle Dodd-Frank?
Everybody says, “How do you get around Dodd-Frank?” I don’t go around Dodd-Frank. I go through Dodd-Frank. Dodd-frank looks at who originates the notes. By the way, the Seller Finance Coalition is working and we have a bill on the floor that should come to a vote this year. We already have 23 congressmen and women that are going to vote. The current limit on the number of seller‑financed transactions is three per year. We have a note on the House floor and I flew out to Washington DC last year and I got to meet with all nine Arizona Congressmen and women in McCain’s office and Jeff Flake’s office. The bill is going to change the number that you can do in a year from three a year to two a month. It was very cleverly written. It’d be 24 a year that you could finance.
The thing is I haven’t financed one ever because I buy those notes from the seller of the home and basically I didn’t create them. I’m buying that from the owner that doesn’t want to carry. Almost every seller you talk to is going to have a knee-jerk reaction, in their head, they believe that that buyer is a deadbeat that doesn’t pay their cable bill on time. I say, “No, these are self-employed business owners. These are the hardest working people in the country. That’s who you’re lending to,” but they don’t want to lend. You can snuff out every objection in the world by saying, “What if I found someone to finance it for you?” “Yeah, then that’s fine.” That’s how you get the notes, you’re actually buying them from the person who generates them. That will be the only note they generate in their life, not just this year. Every one of them is perfectly acceptable to Dodd-Frank.
Another question, “How exactly does having a first and second mortgage instead of a first only make the investment safer if the amount financed is the same?” I can answer that. As the next mortgage broker, if you have 70% first and then 30% second. That 70%, once they get refinanced out in twelve or 24 months, it’s very attractive to a bank. To finance at 70% a note first lien on a refi especially if they had been paying on time for twelve or 24 months straight. That’s very attractive and pretty easy to do. You keep the second, they’re so perfect for cash flow. If you were to try to get it refinanced, you have to take a haircut, you did a whole 100% first lien, you don’t want to do that. Breaking it up first and second gives you a lot of flexibility and still maximizes your profit.
Also, something that may not be too obvious, but because you needed $100,000 to purchase that home, the buyer brought in $15,000 of it, so you only had to buy that second for $15,000 even though it’s $30,000 note. You got a 50% discount, so your loan to value on that note, on both notes, combined loan to value is 85%. That is better than any FHA loan, VA loan, USDA loan, conventional loan. That is one of the most secure loans in the country. As a matter of fact, I would wager to say that not only is the first at 70% by far the most secure loan in the country, in my mind, the second is the second most secure loan because it has more skin in the game down payment than any other bank loan out there.
“How can we partner with him where we are the boots on the ground?”
Send me an email. I look at deals every week. I’ve got a network of people that are constantly looking for deals. One of the things we did at our conference was in the first break of the first day, we had gone to Home Depot and bought two 4 x 8 sheets of mason. I ripped them in half, so we had 4 x 4 panels. We put hinges on them and we made a big box and we set it up on chairs. That was our deal board. We had a four-sided deal board and everybody at the conference had an envelope that they had a little puzzle piece in and there were four pieces to the puzzle and everyone was a different color.
We had 125 people come last year. You had to wander around the room and find the three other people that had your color piece, and then each person had to write the other person’s deal cards. A lot of times you know your investments so well you forget some very important details when you’re putting up the information, so you had to interview each other, and it started commerce. I’m telling you, there were deals funded before lunch that day, fix and flip projects. I brought in all hard money lenders that have been lending to me for over ten years and people couldn’t believe it, “Why would you bring your money people and then share them with this whole group?” It’s because you have to believe that there’s only so much money, and I know that money is unlimited. There’s an obscene amount of money. There’s $13 trillion sitting in cash in banks in this country. They’re one-third of all the IRA deposits. You can ask Quincy Long at Quest IRA. One-third of all the IRA deposits are sitting in cash. There’s so much money out there. All you got to do is show people how they can benefit from them and keep them in a very secure position.
I spoke at the Trillion Dollar Mixer for Quest and Rebecca was telling me Quest has $270 million in 0% in cash accounts sitting there. They got over 14,000 clients across the country. That’s a lot of cash sitting out there waiting for somebody to talk to them. Waiting for a good deal. Are you concerned at all of the changes in tax law increase in standard deduction might decrease the number of people who itemize, probably not the end of the world but still make benefits?
I don’t worry about that. I have a friend in Connecticut, and she’s very concerned about the higher priced homes, million plus homes because in Connecticut, a home over a million dollars or right at a million dollars would have over $30,000 a year of property tax. They lost two-thirds of that deduction. In Arizona, a million-dollar home is about $10,000 in tax, so it’s much less. I don’t know if it was on purpose or not, but if you look at the election map and who voted for what, it seems like all the places that didn’t vote for the President are the ones that are getting hit the hardest with the property tax thing and I’m not alienating, I’m citing an observation.
I would agree to that. It comes out very simple. You’ve got people that aren’t making any money at all and the cost of not making money is hurting them dramatically. Bob outlined a great way to help them get the velocity of capital working in their favor. The longer that money sits in the sidelines not making anything, the more it hurts them and that’s why this makes so much sense. Working with retirees, working with people that want to sell their house, but they can’t always do it and they need somebody to be a problem solver.
If you can go in and solve people’s problems and put money in their pocket and help them get out of a bad situation, you’re going to make money. Bob’s always said, there’s a lot of motivated people out there looking for somebody to help them get financing, looking for somebody to offer buy a house. The Hispanic market he talked about is one of the top five emerging markets this century, this decade as well. Those people always say there’s an ex-banker who worked in South Austin, biggest bank market. They’re always looking for financing and they will always pay you first before they pay anybody else because they may have two or three families living in that same house, but they’ll take care of it, pay it on time because that’s their la casa.
Make sure you drop an email to Bob@NoteCarry.com or drop him a phone call there. He travels quite a bit, so it’s probably best to text Bob because that’s actually how we initiated, via the Facebook messaging and text messaging because you’re traveling, which is great.
“Where do you find retirees?”
Money comes with trust and you’re surrounded with people that trust you. That’s a very good question and something that I learned is you do not chase money. Money chases you, so the best thing you can do is actually position yourself by someone who you believe you would like to have as a lending partner and simply ask them this question. The highest compliment you can receive from someone is to be asked for advice, s you say, “I’ve got a little bit of cash. What is the best investment that you have?” Almost every time, if you zip your lip and start listening, they’re going to start complaining about the bank, “That bank is paying me 0.2%,” and it’s like, “Never mind, I’ve got notes that are paying me 7% to 10%,” and then walk away. When you walk away, they go, “What’s a note? Could I do that?” That’s where the power of the conversation changes and the money starts chasing you because you have a better opportunity. This is not something you chase, you don’t push. You plant seeds. It’s like a garden. You don’t go out and put seeds in and come out in the afternoon, expect to pick cucumbers. You plant seeds every single day and some grow up fast and some went up right away. I’ve got seeds coming up that I planted five years ago, “Are you still doing that note stuff? I’m not satisfied with what I’m earning and I’m seeing myself spending more money than I see an end in sight because I’m eating my capital,” and they come back. Every day, emote what you do.
Bob, once again, thank you so much for coming in and spend time with us at Note CAMP 5.0. I know that you’re juggling things but thank you so much for being a part of this. If you always want a chance to meet him in person, he will be there in Las Vegas at the Tuscany. Thank you again, Bob, for being a part of it. Reach out to him. You will get taken care of. Thanks, Bob.
Thank you, Scott.
- Seller Finance Coalition
- Quest IRA