KSS 57 | Recent Law Changes

 

As host Kevin Shortle continues to emphasize, the strongest real estate investors moving forward will combine the best of real estate investment techniques with the best of note techniques. In this episode, he sits down with not just one but two incredible guests who share some of their interesting techniques with us. He has Dave Franecki over to tell us the under-utilized technique of reselling notes to homeowners and borrowers: sending letters. Dave is a senior note buyer, note coach, and seller financing consultant. He shows us what reaching out and keeping good communication will do to your notes business and more. On the other hand, Kevin also talks with Jason DeBono, the corporate vice president of NuView Trust Company. Here, Jason keeps us updated with the recent law changes concerning 401(k)s and IRAs in light of the current COVID-19 pandemic. Not to get left behind, he then shares how you can still create opportunities amidst the ups and downs in the market.

Listen to the podcast here:

Reaching Out To Borrowers And Keeping Up With Recent Law Changes With Dave Franecki And Jason DeBono

Jason DeBono from NuView did a segment talking about some of the new issues with IRAs, 401(k)s. There have been some law changes that you should learn about because the more you look at setting up a 401(k) with your businesses versus an IRA, it’s mind-changing. It’s much better at what you can do. If you can’t do that, at least get the IRA going. Jason is going to do a segment for us on this episode. My friend, David Franecki is going to talk about a technique that he’s utilized where you’ll be interested too. There are a lot of short-term notes available in the performing world. They’ve been seasoned very long. They’ve got maybe three years of payments left. A lot of people pass those up because they feel there’s not enough money in them. What they do is wait out the three years.

First of all, if you can place some money somewhere safe on a property that’s backed about three times more than what you have in it and you’re making a double-digit return, that’s pretty good versus letting it sit somewhere in a savings account making nothing for you. He started to look at a bunch of these little short-termers that he had purchased. He said, “I need to raise a little bit of capital because I’ve seen some good opportunities.” He reached out to these borrowers and made them an offer to pay off their loans. If they paid it off in full, then he would allow them a discount. That discount still made him a profit.

He raised a good bit of capital by utilizing that little technique. That is one area in the business where purchasing and looking at the unpaid balance comes into play. I talk all the time about when you’re looking at buying notes, performing or nonperforming anything, you’re looking at risk first. We look at the investment to value ratio and then at the yield. What is our return? In the world of nonperformers, what are our potential profits? What’s our rate of return and what is our potential profit are what you’re looking at after risk. Risk first, then we look at the reward in terms of return on investment or potential return on investment. Once you’ve done that, the investment to UPB isn’t as important as a risk.

KSS 57 | Recent Law Changes

Recent Law Changes: The strongest real estate investors moving forward are going to combine the best of real estate investment techniques with the best of note techniques.

 

If you are buying short-term loans, then you want to look at that. If you want to employ this technique of offering them an early payoff, you don’t have to do that. You can enjoy the income. A lot of people, even with three years left, they don’t typically pay it off in full. They go ahead and say, “I’ll keep paying every single month,” and you make a nice return on that. David and I got together and did that interview style that you’re familiar with. We’ve got another segment of a Duly Noted. We’re going to start with a Duly Noted. We will then learn from David and then we’ll wrap it up with Jason DeBono from NuView. Let’s get to it.

On this particular Duly Noted segment, I want to talk about something that I’ve been emphasizing since I wrote my last book. The strongest real estate investors moving forward are going to combine the best of real estate investment techniques with the best of note techniques. That’s becoming more predominant, especially with the economic lockdown and everything else that we’re in. Real estate has been in flux. There have been some confusing numbers. We haven’t seen drastic drops yet, but remember the data always comes in months later. We don’t know the extent of it. Everybody expects because what we do know is that there are over four million people that have furloughed. They’re not making mortgage payments, but we haven’t seen a drop too much on property values.

One of the most interesting stats I’ve read is that the medium home price year-to-year in April 2020 went up about 7% or something like that. Remember, the medium is different. The medium went up because the lower price band property sales have dropped off drastically. That’s what happened. The top-end in real estate, we haven’t seen much of a big change yet. Numbers may come out in a month or so that changes the picture of that, but we have already seen in the data a big drop off, not only in home sales but at the lower end of the home sales. That’s what we’re facing here. For us as real estate investors who can combine real estate with real estate notes, that creates an opportunity.

You’re going to see more of these because it’s a great strategy. The opportunity that I went through with a client of mine, the technique was simple. An investor in Texas bought a property using borrowed funds. The borrowed funds could be a private loan, whatever. In his case, it’s a small community bank. He used a combination of small community bank loans as well as some of his own cash to buy properties. Wearing his investor’s hat, he buys a real estate at a discount, fixes it up, and then sells it. Financing nowadays is difficult because of all the loans that are going bad and everything else, you can’t get those non-conforming loans and non-qualified mortgages anymore. You have to put 20% down again.

Lending is tightened up considerably and expects that to continue probably through the rest of the year at least. If it’s difficult to get financing, if we’re also seeing sales drop off on lower price band properties, this technique is perfect because you can buy those properties inexpensively. A combination of borrowed money, your own money, buy the house and fix it up. When you go to sell it, don’t rely upon bank financing. It’s not there for most people buying $120,000 homes and less. It’s not there unless they have 20% down and good credit. Think of where we are credit-wise. Do you think people are taking advantage of not paying their credit card debt or rent? They are. That’s going to catch up and believe me, that’s going to affect people’s credit whether they think that’s going to be the case or not. It will catch up to them at some point in time.

When you look at the bigger picture of things, the best way to sell it and the greatest technique that we can use is to sell it with seller financing. The technique is to sell it, get a 5% or hopefully 10% down payment and then create a seller finance note. That will wraparound the underlying loan, the borrowed money, the money that this person borrowed from a local community bank to buy this property. That is a temporary situation, selling it on a wraparound. The next step is to take off the real estate investor hat and you’ve got the note investor hat on. You wanted to create a note of good quality. If you are going to turn around and sell that note, you want to have a good quality note because you won’t have to season it as much.

How do we do that? We make it Dodd-Frank compliant. We verify income, check the credit, meet all of the obligations that we need to meet under seller financing. The note investor part does that. Also, you take that wraparound note and sell it. If you’ve structured it the right way and if you bought correctly, you can sell that note. Remember, we’re still buying at discounted prices there. Out of the proceeds of the sale of that note, you pay off the underlying loan. In this case, the local community bank loan. It is a great simple technique. The hard work initially as a real estate investor is to find deeply discounted properties, buy it, get the financing in place, and rehab it as normal. Sell a property using a wraparound note and do it with good quality, sellable terms. By sellable terms, it would make sense to find out what could you sell that note for if you create it in a certain way with specific borrowers. You can do that.

You market and sell that note out of the proceeds of the note sale. You pay off the underlying loan and the rest is all your profits. It’s a great technique and you’re going to see more of those notes on the open marketplace. I’ve already seen quite a number of them on the Paperstac trading platform, for example. It makes sense because, in this marketplace, that’s a great technique. Are those notes purchasable? Are they safe? Absolutely. You just want to make sure that the underlying loan is going to be paid off in the proceeds. When that is handled at closing, it doesn’t go to the person who sold the note and say, “Don’t forget to pay off the underlying bank loan.” It’s all handled within the closing and you’ll see a payoff letter and everything works out great.

Things can get done when there is open communication. Click To Tweet

Whether you are buying those wraparound notes, that’s one thing that you can do or if you utilize that whole technique in the marketplace, you’ll find it to be a profitable thing to do. To wrap it up, we can buy a property, get a loan on it, fix it up, make sure your numbers make sense, sell it with seller financing on a wraparound mortgage as a temporary fix. You then sell that note and pay off the underlying loan in the process. That’s a great technique. I want it Duly Noted that the best investors are going to be doing techniques like that, combining real estate with real estate notes.

I’ve got my good friend David Franecki on. Like a lot of investors, he owns notes and portfolios and things like that. You go through the times where you want to raise capital, liquidate assets, reinvest, etc. He’s got a great technique that is probably very underutilized, but once you learn it, you will be like, “That makes complete sense.” For those of you who have a portfolio of notes and looking to get some capital, you will enjoy this. David, thanks for being on.

Thank you, Kevin. How are you?

I’m doing fine. It is good to see it. Give us a little background on this because I’m sure there are other investors in the same situation as yours that have a little a-ha moment. Tell us what brought you to this idea and jump right into it.

Back in September, October, November of 2019, I bought a bunch of little notes with small balances, payments remaining, whether it be from 15 to 35 payments remaining. A lot of times you say, “I don’t know if I want to deal with that.” With all the stuff going on, I’m thinking, “There are going to be some good opportunities out there so I could resell those notes at a steep discount. I could go to the homeowners and suggest to them and send them letters.” In this case, there were ten letters that went out and said, “You can own your house. You owe $10,000. If you give me $8,500 in the next 30 days, I’ll forgive that $1,500 and you own it.” Three people raised their hand and they were bouncing off a wall, “How can I do this?”

You didn’t have to go through a servicing company or any of that. You’re only reaching out to your borrowers.

I try to maintain some form of communication with my borrowers over and above the service companies anyway because I find it works better in the long run for me.

It makes sense for them to do that. You’re giving them a break on the discount. You’re making money and getting the capital that you need. Did you get any negative responses?

No, they didn’t think it was true. “Why would somebody give us free money with no strings attached?” Some of them went so far to call the servicer and say, “Is this guy for real?”

You send out ten letters. How many have responded so far?

Four responded, but three have done it.

You haven’t heard from the other one yet.

I will let him sit and probably give him a couple of months. I will wait to settle out the economy. It is a little invitation style blue envelope, folded up piece of paper into fours, and made it personal and gave the example.

The gist of it was essential, “This is what you owe and how long it would take, but here’s the offer.” Did you name numbers?

I did. I said, “You owe $10,000. If you pay this off by May 1, 2020, you will owe $8,500. I’ll forget $1,500.” Some people might say, “Why are you doing that?” It is because I bought them right. When a note pays off earlier, yield goes way high. On some of these, by doing that, I had yields of 160%.

KSS 57 | Recent Law Changes

Recent Law Changes: Take a look at the loan side first, not the distribution, because you’d much rather have the ability to put it back versus take it out and not put it back again.

 

Once somebody learns this, they will be like, “I could have done that.” I bet you there’s not a whole lot of people that have ever thought to do what you did. There’s got to be a good story in there. What did you hear from some of the people that call you up?

Two of them were unique. One gentleman lived in Pontiac, Michigan. He had a contract for deed that was assigned to him via a quitclaim. That would have been in October 2019. He didn’t know if he could even keep the place because the paperwork was messy. We transitioned that contract for deed into a mortgage. We put his wife on it, one big strike. He loved it. By doing that, he pre-paid a couple of thousand dollars. I came back to him a month and a half later, “If you can pre-pay the rest of this, we’ll forgive this and you own it.” He goes from October of 2019, not knowing if he even is in the house legally until in March of 2020. He owns it free and clear. What a gratifying story. He’s going to give me a testimonial video.

I was going to say that you could get a testimonial because you could pop that in your other marketing letters. It’s amazing when there’s open communication. That’s when things can get done. Everybody’s struggling with getting notes reperforming. People maybe not having the ability to pay because they’ve lost their job or something like that. I’ve been telling people, be proactive about it. Reach out to people. You don’t want them to fall into default and fall into silence.

What’s unique is I gave a little bit of money away. Who cares? I got my principal back. I made a lot of significant return on it. I’ll find another deal and more than make up for the discount that I gave away. It’s a total win-win. That’s cliché, but it’s true.

That’s a great simple, straightforward technique. I do like the extra hit that you had in there where you go above and beyond the communication with your borrowers and the servicing company. What do you mean by that? Expand upon that a little bit. Do you send a Christmas card kind of communication?

No, it’s totally selfish. A lot of times, I don’t know if they have insurance so you could rely upon the servicer. I sent them a letter and asked about their insurance. I call them and we interact that way. Whether I have to get forced place or they may have already had their own declaration page to have their own, but I established that. At the end of it, I said, “If there’s ever any challenge with your mortgage, I worked for the owner for this company. Call me.” They know me. You’re establishing that one-on-one relationship, which has lost so much in the way society works.

My instructor’s head is thinking as you’re saying that. I can almost see the hands go up in the audience of, “Don’t you need a license?” He’s not calling to collect a debt. He’s calling to communicate, check, and verify. That’s fine. You don’t need a servicing company to do any of that. I like it a lot.

The second one was in South Carolina. The lady waited a month before she responded. I said, “That’s okay.” I reworked the numbers and I gave her three options or pay lines. She went to her retirement fund and pulled the money out of that. She had remarried. I’m able to put her husband on the deed and she owns her home free and clear. No worry about anything.

Thank you, David. Where can people find you?

They can go to Capstone Capital USA. On there, I do have an area that says, “Free stuff.” There’s a Note Holder’s Handbook. It’s instructional. It’s tied into what you do. Also, I buy notes. There’s a squeeze page on there where people have notes that they want to sell. I’d love to talk to them.

If you’re in the Arizona area and you’re not a part of this Meetup, you should be. Look into that as well. David, thank you for taking out some time and be with us.

Kevin, that Meetup is Note Investors Forum.

That’s the website, NoteInvestorsForum.com. Thanks again, David.

Thank you, Kevin.

It’s great stuff there from David. He is an experienced investor and it makes a lot of sense what he talked about there. It’s different techniques at different times. Any of these techniques that you learn, you can start to implement at some point in time in your business. It will be in your benefit, including investing with self-directed retirement accounts, tax shelter, and tax-deferred accounts. NuView is my favorite absolute hands down. They’ve got the best fee structures and best customer service in the industry. There are all-around great people over there at that organization.

I’m also fortunate because they happen to be not far down the road from where I live here in Central Florida, but they do business nationwide. They act as a trustee for self-directed accounts and that’s all of them, the IRAs, 401(k)s, HSAs. They do a great job with that. They’re also a very charitable organization. I’ve been to several of their fundraisers that they’ve had for Chair The Love. It is a great organization with a great group of people. I was thankful to have Jason on and have him go through some of the new changes in the rules and regulations for these types of accounts. There are some new benefits. Take it over, Jason.

Be proactive about reaching out to people. You don't want them to fall into default. Click To Tweet

I am Jason DeBono with NuView Trust Company joining you to talk a little bit about the CARES Act. For those that don’t know, NuView Trust Company is a third-party custodian that helps individuals use retirement money to invest in assets that are outside the stock market. As you can imagine in a state of the environment that we’re in with COVID and all the disruptions that it’s causing, we’re seeing a tremendous amount of activity as people gear up to take advantage of some of the opportunities that they believe will present themselves as we get through this process. There are a lot of ups and downs in the stock market that has caused a lot of investors to say, “Maybe enough is enough. Let me find some alternatives and some safer havens that may be a little bit less volatile and a little bit more opportunistic.”

The CARES Act was passed and it provides relief in a lot of areas. We’re going to talk specifically about the IRA and 401(k) related items. Some of these may impact you, some may not, and there may be some you don’t know can impact you or create an opportunity for you. I’ll make sure I get those shared as well. We’re going to go ahead and dive right into it. The first thing that the CARES Act addressed is tax filings. If you are an individual that has a normal tax filing deadline of April 15, 2020, that has been extended to July 15, 2020. It also extends both contribution deadlines, corrections, as well as the removal of excess if you over contributed to retirement accounts until July 15th. From a tax filing standpoint, everything’s pushed back from April 15th to July 15th. I’m not sure if they’ll modify that. We can all wait and see how this plays out.

The second big area that the CARES Act addressed is the RMD or mandatory distribution. If you’re over the age of 72 or you are prior to 2020 over the age of 70 and a half in any prior years, you are subject in any pretax account to take out Required Mandatory Distributions or referred to as RMDs. The RMDs are waived for 2020. If you had an RMD due in 2020, that RMD requirement has been waived. If you had an RMD that was due in 2019 and it was your first one, which can be extended to April of 2020. If you’ve not taken that, that too is waived. If you fall in that awkwardness of having an extension on your first year RMD, there may be some relief as well. Although if you’ve already taken it, you may not be eligible to put that back in. Seek some counsel on that from your tax professional as they filter through what this means for some of the unique nuances especially in RMDs.

The other thing for RMDs is anyone that has an inherited IRA that chose to take their account over life expectancy, which was eligible in deaths prior to 2019. Anyone with an RMD based on an inherited IRA is also not required to take it in 2020. You get a year of relief for that as well. If you are taking a death distribution or have inherited IRA and you’ve chosen to take it over a five-year period, that distribution is also waived. You will get a sixth year, whether in the year one or year four of that. They’re providing some relief there as well. As a general rule, if you normally have to take money out via an RMD, you are not required for 2020. If you’ve taken it out, definitely take a look and see if there’s an opportunity for you to put it back, if that’s desirable for you.

The third area that I want to touch on is the 401(k) loans. For those of you covered under 401(k) plans that have loan provisions or those of you that may be considering setting up a solo 401(k). If you’re self-employed, it may provide you access to a loan from your 401(k). Should you need some capital, our team can certainly talk to you through the establishment of that plan and what it takes to qualify. In any case, all 401(k) loans have been both increased. If you have a normal 401(k) prior to the CARES Act, you are eligible if the plan permitted loans to take up to 50% or 50,000 the lesser of the two. A $50,000 account would allow you to take $25,000 because 50% is $25,000, whereas it’s the lesser of the two. Going forward for the CARES Act, they’re allowing you to take 100% of your balance up to $100,000. If you have a $75,000 IRA previously, you would be able to take half of that or $37,500. Via the CARES Act, you can take all $75,000 out.

KSS 57 | Recent Law Changes

Recent Law Changes: You should never take an IRA distribution to cover short term expenses without at least planning to put it back.

 

That’s something unique. This is not in perpetuity, but you have 180 days from March 27th of 2020 to take that withdrawal. You can both increase the percentage up to 100% and/or the dollar value of a $100,000, the lesser of the two of those. The max you can get out is $100,000 and it’s easier to get to that. You also have a one-year delay for any repayments on any of the loan payments that were due between March 21 and December 31, 2020. If you took out a loan over a five-year period, the first year’s payments or close to it up until December 31, 2020, would not be required. If you took a loan out and you took a 100%, let’s call that $100,000 loan, assuming you have that in your 401(k), you would not have a payment due until 2021. You could defer those payments, which is something that a lot of individuals are taking advantage of.

The benefit of the 401(k) loan is that you’re paying yourself back and you’re putting the money back into the account. We’re going to talk about distributions that come out that don’t get put back become permanent. There may be some big opportunity cost of taking money out of your IRA in terms of the inability for future tax-deferred or tax-free growth. I always encourage clients to take a look at the loan side first, not the distribution because you would much rather have the ability to put it back versus take it out and not put it back. That’s a big opportunity cost on all those years you’ve committed to putting the money in. As far as COVID related distributions, loan provisions are different. We are talking about IRA distributions.

The way that the Congress has laid this out via the CARES Act is first, there are eligibility requirements. It allows you to take up to $100,000. You could do this over a series of distributions, but the total aggregate is $100,000. The 10% premature penalty is waived. That’s a big difference. Before, premature distributions would cost you 10%. These days, they don’t. The other thing that is big here is that taxation can be over a three-year period. You can choose to pay it all in once or you can maintain that over a three-year period. That reason that’s important is that in almost every scenario, the goal should always be to put the money back. You should never take an IRA distribution to cover short-term expenses without at least planning to put it back.

I would encourage all clients to take withdrawals via the COVID distribution to delay unless there’s a benefit to pay the taxes earlier. Delay the taxes for as long as you can, which in this case is three years because it also gives you the same window to put the money back into the IRA without any tax or penalty. If you took $100,000 out of your account, you have three years to put it back in full without paying tax or penalty. Whatever you don’t return is taxed. The penalty will be waived in either scenario. Unlike the 401(k) loan, there is no interest accruing, but the limit here is three years, whereas in loan in the 401(k) side is five years. This is something to think about. If you believe you’ve got some short-term need for the money, I would encourage you if you are simply taking the money out to make personal investments that you strongly consider utilizing a self-directed account.

If you’re going to take this out and buy a piece of real estate, any of the gains on that real estate are going to be taxable to you. Whereas if you left it in the account and through your self-directed account, bought that real estate, which is perfectly permissible, then all the profits would also be tax-free. NuView can assist you with that. Those are some of the strategies there. As far as eligibility goes, you need to either be diagnosed with COVID, have a spouse or a dependent that was diagnosed, unable to work due to lack of childcare. The one that is pretty broad and most people could qualify under is experiencing some adverse financial consequence as a result of COVID-19. I know we covered a lot. I encourage you to do a little internet searching. There’s a blog on our blog page on NuViewTrust.com. You’ll find more information as well as a much longer version of the written details of the CARES Act. Thank you for having me on the show. We wish everyone a safe and prosperous journey through this COVID and Coronavirus pandemic that we’re all going through. Stay safe everybody and take care.

Thank you, Jason. Thank you everybody for reading. If you do enjoy it, you can give me a nice five-star rating. That is appreciated and please, feel free. I encourage you to share this show with a friend. I look forward to putting a lot more of these together. If you want to reach out to me with any suggestions on guests, anything like that, it’s simple, message me at Kevin@KevinShortle.com. I’ll be glad to do my best to get that person or persons onto the show. Those of you looking for investments in note education, I’ve got some great training programs. I strongly believe they are the best in the industry. I know what everybody else is teaching out there.

Distributions that come out and that don't get put back become permanent. Click To Tweet

You will enjoy these because I had been online with these programs. They are affordable as compared to other programs that are out in the industry. For those of you with experience, you’re not looking for education in the note business but you’re looking for consulting. If you want to get some help on some deals. If you want people to overlook what you’re looking at, a system of checks and balances, and other eyes on your deals. If you want to talk about new techniques and new things that you want to implement within your business, I have a special consulting program for that. It’s only $50 a month. That is unheard of. That price will go up, but I haven’t decided yet when. That program includes personal one-on-one with me over Zoom, just you and me talking about you and your deals.

I know a lot of people work during the week. They work on notes during the weekend. It’s hard sometimes if you can’t get a response. I do offer email support as well as two group consulting calls where you can hear from other people per month. It’s a great program for those of you looking for the consulting side. I’ve got that if you will need education. My education comes with consulting services as well. Check all of that out on either website. You can go to KevinShortle.com or you can go to RealEstateWithoutRenters.com. It will take you to essentially the same destination a little bit quicker. It takes you right to the programs. I’ve got videos and everything else explaining all of that. I look forward to talking with you once again in another episode. I do appreciate you. Stay safe and I’ll talk to you again soon.

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About Dave Franecki

KSS 57 | Recent Law ChangesDave Franecki has 30+ years of experience in various aspects of the Real Estate industry in three distinct geographic locations– Cincinnati, OH, Portland, ME, and Phoenix, AZ.

His range of experiences includes almost every facet of the real estate industry including real estate brokerage, landlord, rehabber, fix and flips, loan officer, credit repair, investor mentor, building &  land development, and note investing.

From 2008 -2014, as an REO broker, Dave and his REO team contributed to the Phoenix real estate recovery.

About Jason DeBono

KSS 57 | Recent Law ChangesJason is a 16-year veteran of the self-directed IRA industry. He has served as Director of Business Development, Director of Operations, and now, in his role as Corporate Vice President, Jason oversees the day to day activities of NuView Trust. He serves as Chairman of Chair the Love, a 501(c)(3) organization, which provides mobility and other related services to those in need. He is a graduate of the University of Central Florida and resides in Lake Mary with his wife, Christina, son Tyler, and daughter Delaney.

His understanding of the practical aspects of self-direction pays dividends both to his audiences as well as to NuView clients. He is heavily recruited to speak in front of legal, accounting, and investment professionals about the power and possibilities available for IRA investors. Jason has hosted and been a guest on numerous radio shows and is often quoted in business publications.

Jason is designated as a Certified IRA Services Professional from the Institute of Certified Bankers. He is also very active in the community, providing local high schools with education on personal finance, as well as being the Chairman of Chair the Love – a 501(c)3 that provides wheelchairs and other mobility-related items and services to those in need in Central Florida and throughout the world.

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