When people are new to the note business, there are always many questions in their minds. Questions like where should you start? Should you wait, or should you jump in? And if you’re already in the business, should you stop what you’re doing or should you move forward? In this special episode, Kevin Shortle addresses all of these questions in his 2020 state of the industry presentation. Don’t miss today’s show because it will put you in a better situation as to where you are and what might be best for you and your investment.
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State Of The Note Industry 2020
I do appreciate you reading and also, if you enjoy the show, please give me a nice rating. It does help with putting these all together. I apologize, I haven’t been putting out as many episodes as I have in the past and it’s due to a couple of things. First of all, it is time-consuming. There is some production that I have to do on this. I have my Duly Noted segment, a guest and then a closing that I put together for my production company. It then takes that and fully transcribes everything. They put websites in there. They make sure the websites have proper links, they put pictures in there and they do the marketing. They do everything and they do a fantastic job but it does take a lot of production, which means it does take time to put these together. My time and will always be the top priority is going to be my clients.
I have been busy doing my one-on-one consulting sessions but I’ll tell you what, the reward has been tremendous. I’ve had twelve people who are new to the note business close on their first-ever transaction. What I’ve put together training-wise and consulting-wise is working for people who have been in the business and bought other training but didn’t get what they were hoping for out of that because the support mechanism simply wasn’t there. I’m happy about that because years ago, I set out to do that. I saw some of the faults within the industries. I knew it was going to be corrected by various parties and such and I said, “I need to go back out on my own. I need to do this the right way for people and let’s see what the results are.”
I’ve been dedicating a lot of time to doing that. I’m also writing articles for NoteWorthy. We’re putting out a newsletter every single month. I have two columns within that. I’m doing a lot of work with my friends and colleagues over at Paperstac as well as the MWM Fund. We’re doing a brand-new marketing concept to the note business. It’s going great. There are some speed bumps and such along the way. There are some things that we need to figure out and we need to smooth over which we’re doing. Other than that, I did a State of the Industry Address for the National Convention for NoteWorthy. I did another one-hour presentation for another group.
I’ve got a full one day coming up in December 2020. There is a lot going on. Between the production time for this and the priorities for my time, that’s why I haven’t been putting out as many episodes for this. What I’m thinking of doing is I’ll still continue to do this show, have a guest on and everything else, and go through full production. In between those, I might do some smaller shows that don’t get transcribed. They’re not going to have the website links or any of that but they’ll be there so that you can listen to them because that will give me more time behind the microphone where I can go in, record at one time, no editing, just me talking, cut it and it would be posted on the podcast. I think that will work out well. That’s the idea I’ve been toying with here. Hopefully, that’s what we’ll start to do and at least test it out. You’ll have several 20 to 30-minute episodes and then a full production podcast with the guests and everything else. If you have guests you want to hear on the show, by all means, please reach out and let me know at Kevin@KevinShortle.com.
In this episode, I’m doing something a little bit different. I briefly mentioned that I did the State of the Industry which I do every year and I’ve put State of the Industry presentations together for the last several years. I do them all the time for NoteWorthy. This one is a little bit different than the ones in the past. This one will impact us in this industry. What I talk about on this presentation will have some impact but when, how big and all these other questions. If you’re new to the note business, what should you do? Should you wait? Should you jump in?
If you’re already in the business, should you stop what you’re doing? Should you move forward? There are a lot of questions like that that should be or are on people’s minds. I addressed that in this State of the Industry. You’ll be reading this, but believe me, there’s a lot of research behind the scene. There are charts and graphs that I show within this presentation. I assure you, everything has been fully researched and it will put you in a better situation as to where we are and what might be best for you and for your investment.
I do think you’ll enjoy this. I enjoy putting those together even though they are a lot of work to compile all that data but I’m well-versed in doing that and I do it on a continual basis. Please enjoy the episode and I look forward to getting behind a microphone, talking into it, and hopefully directly into your ears in the future. This show is sponsored by NoteWorthy. I’ll be talking about my one-day virtual training with NoteWorthy coming up in December 2020. You’ll want to make sure that you attend that with us.
With NoteWorthy, we have a monthly newsletter that goes out so make sure you have a look into that as well and also NuView Trust. If you have not opened a self-directed IRA or 401(k) and you’re looking for a company to do that with, look at NuView Trust. They’ve got great people there. If you want a free consultation, free information on it, grab your phone and text Kevin to 484848 and they’ll make sure they’ll schedule a call with you and talk with you about those accounts as well. Thanks for reading and enjoy the presentation.
It’s great to be here. I wish we could all be in person but we have to overcome and adapt and just like in real estate notes, life and everything else, that’s what we have to do. It’s a pleasure to be here and hopefully, in 2021, we can all get together again and continue to grow with NoteWorthy. I know it’s going to be a great event for you. There are a lot of great speakers, a lot of good information that shall be shared. Thanks once again. I think everybody is familiar with my background and biography. What I have done for the last three events at the NoteWorthy Convention is to deliver the State of the Industry Address.
In reality, I’ve been doing the State of the Industry Addresses for years. I do that because I’m a researcher. I study the market. I like to call myself a student of the marketplace. I started getting into that after the first real estate crash where it happened quickly. It happened without the warning of how severe it would be. I would dare to say almost all investors who were invested full-time in real estate took a hit. As a result of that, I started to reflect back and I said, “There were signs. There were indicators and you should have started to hedge your bet a little bit more.” Since that time, I became a student in the marketplace and I’ve been writing industry addresses. I’ve delivered some of them and some of them I’ve written for other people.
Quite frankly, a lot of other people within the industry rely upon my research and data to put together their own form of presentations when it comes to what’s going on in the industry. Over that period of time, I’ve done my share of predicting and projecting what’s going to happen based upon known facts and trends. You can do that in fairly normal times. In fact, my predictions were well spot on. I don’t think I missed out on too many things that I projected and predicted that didn’t come true. In the previous State of the Industry Addresses, I would give my projections, what to do and what’s most likely to happen. This time, it’s different.
I think that anybody who is giving specific projections and teaching specific things for what’s going to happen in the future after we come out of this environment that is all-encompassing, what’s going to happen to the real estate market? What’s going to happen to the note market? There have been some wild projections about what’s that’s going to be. There have been a lot of opinions out there. I believe in this. I don’t think anybody knows. The reason I say that is based on my background and researching and what I can see in the data that I have, there’s too much going on.Real estate is an indicator of the overall economy because it affects so many different industries. Click To Tweet
We’re still in this pandemic, we still have new legislation that is enabling people not to make payments on their loans and not to make rent. There’s forbearance agreement but yet we have divided political theater where it doesn’t seem that anything’s going to get passed unless everything is lumped in. When you add those things together, the new legislation, the constant pumping of money into the economy, which certainly is changing things as well and then you look on the other side where property sales are still going, property values are still going up nationwide. There’s so much information.
It’s difficult if not impossible to say here’s what’s going to happen. Nobody knows. There’s not a single industry expert that knows, “Is this going to all come crashing down?” If so, when? It isn’t going to have a soft landing or is it going to come with a thud that was bigger than the last crash that we had. As I started to put this together and decide about what to talk about, I’m doing this one a little bit differently. We’re in different times. I am going to lay out some of the facts that are going on in the industry. I also want to make this actionable for you. I want you to take away something that says, “Here’s what I need to focus on.”
Part of my theme on this entire presentation is because of all the chaos and all the various areas that we could talk about, let’s focus on what we know and forget about all the other noise going on around us. If we can focus on what we know, we can prepare for the eventual outcomes. We won’t know the scale, how it’s weighted to certain strategies, techniques or another but if we focus on what we know. If we put together actionable plans based upon that, we shall be prepared for no matter what outcome that we have. Let’s face it, there can be multiple outcomes. The government can change laws and rules like that and it instantly changes everything. We saw that with the forbearances, foreclosures, and evictions.
Local state governments have a lot of say as well. Are they going to open up the court for foreclosures, evictions and get back to some sense of normalcy? Are we developing patterns within people to get away with not paying for as long as you can or people going to immediately come back? There are a lot of things that we need to think of in the industry that we are in which is real estate. I’m a specialist in real estate and the good portion of that is real estate notes. That is a part of the real estate umbrella. It’s a different side of the same coin. I’ve always taken that position here. In my number one bestseller back in 2019, I talked about some likely things that are happening before all of this.
Some of those are now coming into mainstream techniques. That’s good to know. Facts were starting to the line-up but there are too many other things and too much other noise out there. Three things that I believe note investors should do right now will be a good subtitle to this State of the Industry. There are many different things and I wanted to focus it down to the top three areas. I believe, as we go through this logically, you will come to the same conclusion and be able to take some actionable steps around it.
With all of these projections, when you look at all of these variables, and I listed a handful of them here, how are you supposed to navigate all of this? The real conclusion is we can’t do any of that because of all these areas here. To list a few, COVID-19, the federal government, they’re spending their other state government interjections as far as laws, rules, regulations, employment, unemployment, corporate bankruptcies are up. Urban flight people now are saying, “We don’t have to go to the office. We can live anywhere,” are starting to move. That’s going to shift things and changing the workplace, in other words. When will we be able to start the economy? The politics of everything going on in the world. We can’t ignore those things. Focus on what we do know.
Loan Modifications For Balances, Foreclosures And Bankruptcies
Here’s the first one. Loan modifications, forbearances, foreclosures and bankruptcies are highly likely to be a part of the outcome of the market condition. I don’t think that’s disputable. Forbearances are a part of a loan modification. It’s misunderstood by the general public why would they have an understanding of that if they’re not in this industry. That’s starting to change. Foreclosures, there have been changes there. Bankruptcies, we’ll talk about that as well. If we know that this is going to be a big part of the outcome of this market, doesn’t it make sense then that we start to study these things?
If we’re lacking in education in any of these areas, if we don’t have the knowledge, background and certain things, this is a great time to learn and study those. How did I come up with this conclusion of this is what we know? Let’s go through that. We’ll come back and revisit each one of these topics here. Based upon research by CoreLogic, back in April 2020, the current to 30 days late went to 3.4%. That doesn’t seem like a lot. It only went up 3.4% but as I’ve noted there, that is the highest rate since 1999. It is a significant move.
Everything started to go a little haywire in February, March, and in April, we started to see some of this movement that’s going on in the current to 30 days. It is considered late. It’s not a loan that’s going into default, it’s delinquency but it’s simply late. There’s a high probability that most people would catch up on this. What else do we know? Black Knight Financial Services come out with their monthly mortgage monitor and this is in June. April, May, June 2020 moving forward two months, the 30 days or more indicator is now at 7.59%.
Once again, it looks like a relatively small move. What was interesting about this one is the 2.25% month-over-month change. From May to June 2020, it got better in that month. When you take a look at what has happened over a year-to-year change, you’re looking at a 103.55% increase from June 2019. You’re starting to see that the trickle effect of this is 0 to 30 days starts to go up the highest it’s been in 1999. We see the 32 days or more delinquencies go up a couple of months later by 100% over year-to-year. It’s showing that we’re starting to have a pattern here.
This is all known data. This is something that they track in arrears. The report came out in July, August 2020 and it’s reporting back several months. We know this information to be true here. Further, in this same report, total US foreclosure starts were down by 85% year-over-year. They happened to be up by 15% month-over-month, but still, that is a relatively small number. When you look over the charts, foreclosure is steady and then dropped off. Part of this is because forbearance agreements and everything is in place.
They’ve delayed foreclosures through courthouses. They put a mandate on federal-backed loans for foreclosures so that would be normal and expected but there it is, down 85%. We also see those foreclosure sales as a percentage of this 90-day or late. There’s verbiage within the industry or somebody is late on their payments of 0 to 30 days. Thirty days or more becomes delinquent and after 90 days, it’s in default. Foreclosure sales as a percentage of those 90-day or late payors, you can see that it is a small fraction of the overall industry and it’s down 46% month-over-month and year-over-year to almost 100%.
We’re starting to see the beginning here of the growing number of delinquencies but here’s the weird thing. This is important. The way these numbers are reported, people in forbearance are still considered paying. They’re not considered delinquent. When you look at these numbers, these are the ones outside of that realm. There are over four million people that are in forbearance plans that are still considered to be actively paying. They’re not included in these numbers. What’s going to happen? Are they going to continue to pay after their forbearance period is over or are they going to extend that? Did you know they can extend that to twelve months? It started at 90 days. Now, they can file again for another 90 days until they’re up to twelve months.
That may soften the landing as things start to unfold, but at some point, the bell tolls. They’ve got to catch up on those. There’s a lot of ignorance around forbearance, what that means and what people can do. Some people think it’s a grant. They never have to pay that back. That is simply not the case. They’re going to have to pay those missed payments back and when is a different story. It depends upon the plan that they’re in. Believe it or not, some people didn’t know about this and their plan is they have to pay it back in a lump sum once they start making payments again. Other people will have a tack to the end of the loan. Others will have it smoothed out over the remaining life of the loan. There are still adjustments that are going to have to be made but those folks are not included in these numbers.
Another way of looking at that, when you look at the table which is from calculated risk, mortgage, delinquencies, and foreclosures by period past to all loans. The chart goes from 2002 to 2020. You’ve got the foreclosure process in red, the 90-day delinquencies in yellow, and the 90-day defaults and the 30 to 60-day delinquencies which are in blue. We’ve seen it hovering around 4% on the 30 to 60-day percentage of loans that are delinquent. That went up in 2009. The 30 to 60 were coming up to about 6%. They started to drop down again. They got below the 4% mark here but now the trend is upward. It’s been that way in the second quarter here of 2020.
What’s grown is this 90-day number. We’ve got 0 to 30 days growing in late payments. We’ve got the 30 to 60-day delinquencies going up and we have the default, the 90 days and more going up as well. Eventually, this all pushes down the road. The 0 to 30 have a high percentage that is able to catch back up. Once alone gets to that 90 days, it’s difficult for people without assistance from the lender to catch up. That’s why they look at those as defaulted but you can see the foreclosure process is a much smaller number here because they’re not foreclosing on most properties which will be the trend.
This was a projection by Moody’s and if you’ve been around the industry for a while, if you have watched The Big Short, Moody’s was mentioned there, Moody’s rates bonds and the risk and bonds. Moody’s was a big part of the last crash because they were taking these ridiculously underwritten mortgages that were garbage. The stated income, no doc kind of stuff and they were rating them AAA. They were packaged and sold. Moody’s is still around and doing that same business. They do have an economist and everything else. There are economists projected that if this pandemic continues on through November, December 2020 then we could see delinquencies as a percentage of all mortgages go all the way up to 30%.
That is a scary number. This is a big projection here and they did offset it with, “If this goes on,” but so far, it’s still going on. To put this in a proper perspective, during the last crash, the delinquency rate peaked in 2009, 2010 at 10% of all mortgages. Can you imagine it going all the way up to 30% and what’s going to happen? That would be massive. It would be a horrible thing for the overall economy, the trickle-down effect in everything else. There will be major problems with that because real estate is an indicator of the overall economy. It affects many different industries. Think about how many industries and individuals are impacted by building a single house? Make it simple.
Somebody has to draw up the plan, buy the land and hire the contractors who will hire subcontractors who all need material. They need wood so the lumber industry. They need steel and many different things. The labor, skills, jobs and transportation to get everything there and the money to make it all move. Real estate involves a lot of industries. When the wheels of the money side, the note side of the business dry up, the brakes lock up, it runs to a stop and there’s the big crash. If we hit that 30%, that would be a complete game-changer. It would be the worst thing that we have ever seen. Out of the last crash where it peaked at 10%, it did create opportunities. In fact, that’s why the note industry is where it is now.
It matured in that period of time because it became a need. The government figured out they can’t fix it. Banks figured out we can’t fix it. Wall Street tried to fix it and helps but it came down to small investors taking things over, buying the notes, doing workouts, acting more nimbly if you will than the bigger institutions could do so it did create opportunity. Our industry has helped many people across the nation, keeping them in their homes, getting new people into homes, offering to finance when otherwise financing isn’t available.
That’s been a great thing for all of us. Thirty percent could be a totally different story. That’s a projection. We have got down when they did this study to 3.77% of all delinquencies. Since the peak, it’s steadily gone down. Using the same numbers that we looked at in the previous charts, we are at 7% of all loans being delinquent. That’s based on that Black Knight Financial Services that we looked at versus what we had here as a peak in 2010. We’re still below 10% where we were but we’re at 7%, which is significant.
It becomes more significant because of the fact that the people who are in forbearance, the people who are not making monthly payments and those monthly payments are being moved to the back of their loan, they’re considered current, not delinquent. It’s hard to get a grasp of what that real number is. Let’s face it, there are some people doing forbearance that could afford to pay. If the bank is saying that you don’t have to pay or you could continue then if you don’t pay, we’ll tack it to the back of the loan, it’s logical to assume that there’s going to be a percentage of people who are going to do that and say, “Why not? Let’s stockpile that money. Let’s invest that money somewhere else.”
Instead of paying the loan, they’re going to push it to the back. Why not? There will be a portion of people who have no problems starting to make their payments again. Perhaps they could have been making them all along but there’s also going to be people who don’t have a job to go back to anymore. Look at all the corporate bankruptcies, all the retail stores that are going out of business and restaurants. There are a lot of folks who may not be able to pay. They’re hidden in these numbers, not from anything they’re doing. They’re considered that they’re not delinquent and that they are indeed current.
We could go up and will more likely go up here but 30% pushing it. With the way the government is right now, they would throw more money at it before they let it get to that. That’s a personal opinion but that’s what they would do is to start printing more money once again, but we’ll see. Seven percent without counting those other people likely that that number is going to increase. This is from the Mortgage Bankers Association. It came out on June 29th, 2020. Shared mortgage loans and forbearances decrease slightly. We did see some positive information from this where the number has gone down. According to their estimates, $4.2 million homeowners are in forbearance plans.The real estate industry has helped so many people across the nation keep their homes or get into homes. Click To Tweet
That could add to the number of people who are in foreclosure, the number of people who are 90 days late, once this government-mandated forbearance comes to an end. It’s gone down slightly by one basis point so not a lot. It was 8.48%. It went to 8.47% in June 2020. It’s not a huge drop. It did go down in all fairness but there are still about 4.2 million people who are being counted as current even though they’re not making payments. I put that in perspective here. We’ll go back to the Black Knight. We have four million people who are 30 days or more past due but not in foreclosure.
It doesn’t include those folks that we looked at over here. We don’t know what that number is again. I’m not making a projection that it is going to double. I’m not making a projection at all. I’m saying that forbearance is going to be a part of this issue as well as bankruptcies. Bankruptcies, interestingly enough, I had to go through a lot of research to get this and to put together my own chart on this. The numbers are available. It’s a big spreadsheet that you go through and take a look at. They do track these numbers.
In the blue is bankruptcy Chapter 7, 13 is in the orange and then the total BK personal bankruptcy we’re talking about here is in the gray bars. In 2018, somewhere between 400,000 and 500,000 people declared bankruptcy Chapter 7 and almost 300,000 people bankruptcy Chapter 13, bringing the total to over 700,000 people. In 2019, the totals were almost identical. They are slightly different. We can’t tell from the chart there but they’re insignificantly different.
When you look at the 7 and 13, those are also almost mirrored from 2018. In 2020, we’re not through the entire year yet. We are only through July 2020 is what these numbers are. It’s almost on track to be about the same. Is that what’s going to happen? Who knows? Are the people going, “We’re going to see bankruptcies explode because the stimulus runs out, the unemployment checks stop?” I don’t know. Is the government going to keep the stimulus money going and also the unemployment? Are they going to push back rent payments again? Who knows? It’s on track to do about the same. We can look at that. That same number affects us in the business.
Depending on if you’re buying first mortgages or second mortgage, how it affects you is quite different as well. When you buy the loan, do you own the loan then they declare bankruptcy? I would be prepared for that. If you buy a loan after bankruptcy, what do you have to look out for? What are your risks and rewards involved with all of those things? Those are the stats for you and what that backs up and brings us full circle is this is the time to study loan modification, forbearance foreclosures and bankruptcies. Loan modifications brush up on that.
What can we do to modify loans? A lot of people think you can stretch the loan out, you can change the interest rate of the loan and you can recast loans. You don’t even have to worry about any Dodd-Frank. You don’t have to run credit. You don’t have to have an RMLO do anything for recasting the loan. With other loan modifications, you do. You want to make sure it’s done the right way and outsource that and have somebody do that for you. All of the modifications you’re doing, the borrower is going to have to agree. How does it affect your bottom line if you stretch out the loan? Should you stretch out the loan and lower the interest rate? Should you keep the interest rate where it is? Should you do a combination of that?
Should you look at the payment and say, “They could only afford this if I lower their payment from 1,000 to 800 which is all they can now afford, what am I going to do with the rest of the loan?” Am I going to forgive any debt? If you’ve been doing a forbearance already which by the way, we’re not required to do forbearance on seller finance loans. That’s a big misconception that a lot of general population has where they look at the headlines and go, “We can ask for forbearance and they have to give us one.” No. The loans that are backed by the federal government, they do because they’re backed by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and all that stuff.
Seller finance loans are not. We don’t have to do a forbearance. We can. In a lot of cases, you should. I’d rather have somebody still living in that property and making some payment than them leaving the property and you don’t see any cashflow, but I wouldn’t make them some payment. Don’t do what the banks have done which is no payments for 90 days. After that, you’re building a pattern where people aren’t going to pay you again. They’re going to try to find every angle to not pay you because they’ve successfully not paid you for six months. They liked that at the end of the day. Don’t blame them. You have to modify those loans and forbearances. If you’ve already done a forbearance with somebody, then you have hopefully an end date.
When you set that end date, don’t give a free ride again. Get them to pay for something. There are a lot of things that you can learn. We all know the terms, we all know how they work but you have to take that next step and think about what’s the best thing. How is this going to impact my note? How is it going to impact the value of this? How is it going to impact the income stream that I’m getting on this loan? If I’m doing a loan modification, is it such a modification that I’m completely changing all of the terms of the loan? Do I have a co-borrower? Maybe I only have one borrower but there are two people living in the house. For me to do this, to modify your loan, I want the second co-borrower on the loan document. Now, I’ve got two borrowers on that.
There are a lot of different things that we can do above and beyond knowing what a modification is or forbearance is. Foreclosures, you should be looking at all the states that you do business in and finding out are the local courthouses open. Are they processing foreclosures if they’re judicial states? If they’re a nonjudicial state, it’s the same thing. Nonjudicial foreclosures are still legal foreclosures. It’s a legal process. You have the benefit of not having to go through court or judge but there are still counties and legal involved. If they’re not processing the paperwork, I don’t care if it’s judicial or nonjudicial, you’re not going to get your foreclosure scheduled. It’s important for us to start to do that research and compile data. If you’re doing stuff in Ohio, Indiana, Georgia, Tennessee, Carolinas and Texas but you live in Florida, start building a chart. Start thinking through, making some phone calls and see what’s going on with the foreclosure process.
Can you initiate and should you initiate foreclosure proceedings to at least get to the front of the line? If it’s in a state where they’re stacking up the potential foreclosures, I want to be at the front of the line. If that means I file a lis pendens now to get my foot in the door, I might not be able to take it past the lis pendens but I’ve got it to the front of the queue here that I can start to go to that next step as soon as they open that up. It’s worth looking into building a chart, starting to track all of that information. Again, you don’t know what’s going to happen in the future. You don’t know the magnitude of what’s going to happen but you don’t want to be caught off guard.
Find out what the procedure is, find out the timeframe, the cost involved and what you can do if you’re in a situation or you need to start those proceedings. We’re getting into that time of year where you’ve got to start to think about perhaps the weather. Foreclosure is going to take 6, 7 months. Here we are in August 2020. We’ve got the hurricane seasons, all the fires and all the horrible stuff going on. It could back a lot of things up so it’s best to be prepared so we can see down the road. There are going to be cases that you might run into. You might want to have somebody in the house even if they’re not paying. These are things that we’re going to be facing and have to think about as we start to progress through this year.
We’ve got the winter looming. It’s hard to think about now, but in October, November and December 2020, what are you going to do at that point in time? Are you going to kick them out? Now, your pipes freeze because you had nobody in the house and nobody running the water. You’ve got to think about it. What can you do with bankruptcies? It depends upon when you own the note, what you’re doing with the note, etc. Chapter 7 and Chapter 13. Read up and study those. You’ll learn things about doing a lift of stay. Can you proceed with a foreclosure? Can you have that property removed or sell the property? There are all sorts of things that we can do but a lot of it depends upon when you own the note, what position that note is and everything else. It will play some role worth looking into.
Another thing to focus on is what we do know historically. You can go back and look at the last crash and the last crash before that, the old Lincoln Financial days. Any time bank financing wasn’t available for people to buy homes, seller financing filled the void. People still have a big desire to own homes versus being tenants. They want that equity. They want the so-called American dream to own the home and build equity in a property. They want to buy and when they buy, it’s cheaper than rent. We’ve seen that almost everywhere in the United States. Seller financing fills that void when there’s no traditional financing or difficult traditional financing to obtain. The biggest you see on the bottom void nationwide. Before all this, moving in the future, we know this is affordable housing.
How do we know that? Banks make little money on loans under $100,000 because of Dodd-Frank restrictions. Under $75,000, they virtually don’t make any money. Why would they ride them? There are other little laws that influence them to ride them. There are certain rules and regulations that say, “If a bank does lending in this area, they have to put a certain amount of money aside for the lower-middle-income loans so they have to do them to get the bigger chunk of the pie.” A lot of banks are getting away from that type of loan. They’re putting a minimum cap on what they’re looking at. Look at Bank of America. Their minimum is $75,000. Wells Fargo is about the same or $60,000. They won’t do loans less than that, especially in the note business. Investing in the Midwest and the Southeast, you have in your portfolio a bunch of homes that are all under $75,000 in value.
People can’t get financing for that. That’s going to be an opportunity because the desire to buy is still there. I bet everybody at home, if you haven’t been looking at notes and start looking at notes, you have a portfolio of notes, or at least you’ve been looking at notes, you’ve seen mortgage payments of $300, $400, $500 but the rent is $700, $800, $900 for that same home. It makes sense for them to buy if they can get financing. They don’t care what the interest rate is. They care what the monthly payment is all about. That’s why you see many seller finance notes at 8%, 9% and 10%. They don’t care about that. “What’s my monthly payment? $400 rents $850, done and done because eventually, I’ll refinance or sell a property.” That’s what they’re thinking.
This creates a big opportunity in affordable housing. In the note business, most of us have already been working in that space anyhow. Most real estate investors work in that space. Lower price band, homes under $100,000 and I think it’s now $150,000 that we consider lower price band because property values have gone up so much. It’s harder for certain borrowers to get loans because banks are getting away from consumer lending. Do you know who they’re lending to through warehouse lines of credit? Non-banks. Non-banks aren’t under the same restrictions. Non-banks can say, “We don’t do those types of loans.” They’re not a part of that neighborhood improvement type of act where big banks have to hold certain money aside and lend, as I was saying, to the lower-middle-income. Non-banks will go, “We don’t have to do that.”
They’re not a part of this and a lot of non-banks get lines of credit from the bigger banks. It’s easier for them to do that. The most difficult loans for people to get I got my sources down there, borrowers with lower credit scores. If you’re under 650, it becomes increasingly difficult to get a loan. Most of the seller finance loans that you see, the borrower’s credit is under 650. Mortgages with higher loan-to-value ratios. In other words, they don’t have a big down payment. If you don’t have a big down payment, it’s harder to get a loan. Jumbo loans are also affected. The low-end and the high-end, interestingly enough, banks don’t want to take that big risk. Banks don’t want to go ahead and lend a whole bunch of money on a house because they’re uncertain what’s going on too.
It’s been difficult for jumbo loans of over $510,000 in most markets and over $760,000 in other marketplaces. Adjustable-rate mortgages, Fannie Mae said, “We’re not buying those anymore.” If they’re not buying them, banks will not create them because they can’t sell them. Banks don’t hold these notes in their portfolios. If they do, it’s a small percentage. Non-qualified mortgages, these are the old subprimes. They call them non-qualified. Nobody is underwriting those to any high degree. Somebody could get on Google and find a bank that’s doing non-qualified loans. To what capacity? It’s not a category at least for now. The small down payment, bad credit and that sort of thing, they’re not underwriting those loans at all. It makes sense. Everybody is like, “Let’s pull back a little bit here and hedge our bets.”
As an effect of all of this, there’s a ratio that’s called Mortgage Credit Availability Index. That shows how much credit is available. How much credit can you get? There’s a whole index on how they calculate that which we don’t need to go into but knowing that there’s an index that looks at that says, is mortgage credit available? In April 2020, it dropped 20% down to a 152 index. Two months later, it’s now down to 126. That trend line, once again, drops 20%, 152 all the way down now to 126 which means it’s harder for people to get credit and to buy properties. This is information that we know and is tracked. Let’s put this in perspective. This is the mortgage credibility index going from 2004 to 2020 in April. When was the last crash? It was around 2009, 2010. Look where we were on a credit availability back in ’05 and ’06? It’s easy money days.
The credit was easy to get. That’s what this looks at. That’s what this monitors. I hope that snaps this into perspective. That money was so easy and to get credits availability was so high that it eventually had a crash. Money was given to people who didn’t have the ability to pay it back. They were setting people up literally for failure because the banks could quickly package that paper up and sell it to investors. We all know what happened. This is a different crisis because that affordability index after the crash, you can see hovered for years down at the baseline.
Let’s say the baseline on this index is 100. It hovered right down there. It started getting up again. 2013 started, 2014, and then in 2018, 2019 what happened? It’s taken a big drop back down. It’s definitely harder to get loans. There’s less credit available which is going to have a bigger impact on affordable housing. Property prices though have gone up. This is the medium price for new single-family homes that have been sold all the way through 2020. Since 2000 and 2010, it’s gone up substantially. The medium price is $320,000. Is that affordable? Are there loans available?
These are not for most people affordable and they don’t have loans that are available for them. This is where seller financing comes in. It’s been a direct line up there. There’s another way to look at it. This is a different source. Medium home price trends have gone up but most people can’t afford that. What else do we have? In August 2020, DSNews. I’m assuming most of you are familiar with DSNews if you’re in this industry. Affordable homeownership opportunities continue to be an elusive object in the housing market according to First American Financial Corps, etc. Where can people buy affordable homes? They can buy them if they can get loans. If they can’t get the loans, they can’t buy them. Your opportunity is seller financing specifically in affordable areas. This is based upon facts that we know.
There’s been a V-shape recovery. If you look at some of the other charts, it’s absolutely showing a V-shaped recovery but not in this market, not in this elusive object that they’re saying here. I thought you would be curious. These are the top ten states with the most affordable housing, Iowa, Ohio, Indiana, Pennsylvania, Nebraska, North Dakota, Oklahoma, West Virginia, Michigan and South Dakota in that order. If you’re in the note business or the real estate business, it’s Iowa, Ohio and Indiana. Those have been markets that we’ve been working through and on since 2010. Pennsylvania we could put in there as well. There is not much inventory in Nebraska or North Dakota, Oklahoma, West Virginia, Michigan, South Dakota, not so much. Most of these markets, 7 out of the top 10 affordable housing in areas that you’re already buying notes in.It’s the American dream to own a home and build equity in a property. Click To Tweet
This is falling into our laps. It’s also falling into the laps of real estate investors who should be buying property, fixing it up and selling it with seller financing. That’s where the market is. It’s a perfect technique. If you’re in real estate and you’re flipping houses, you’re missing out. You need to attach the note technique to your real estate investing. Again, there’s plenty of other articles that support this small loan scenario. They don’t make enough money doing these loans so they’re not going to do them.
With most fix and flip real estate investors, they don’t do seller financing, which is a mistake because they want to cash out. They want to buy it, fix it up, turn around, sell it, cash out and move on to the next one. I want you to explore creating seller financing. What if I told you that you could sell the property quicker at a premium price if you offered to finance and still get all the money you need to cash out? You’re not going to get everything but you can cash out and get what you need if you create a note properly.
You can create a seller finance note and pre-sell all or part of it. Done correctly, you can do that even at the closing. If you acquire a piece of real estate through a nonperforming note, foreclosure, or a creative financing technique, sell it with seller financing and do it the right way. If you don’t know the right way, that’s what you have the time to do which is to learn about this and pre-sell all or part of that note before you even create it. That way you know if I create it like this, here’s how much I can get for it. If I created like that, I can only get this. You start to learn how to create good quality sellable notes.
You can sell that note several months down the road or possibly even cash it outright at the closing. Getting back all the capital you need and then building this long-term income stream which again, you could keep, you could sell, you could sell part of it and then years down the road, sell another part of it. With real estate, you sell at one time, you’re done. With a note, you can sell it multiple times. You can keep going back to that well and selling that note over and over again. If you run the numbers, you’ll find you’ll make a lot more money by combining the best of real estate with the best of real estate notes. Start selling with seller financing especially in affordable housing, home space and build relationships with investors who are creating these notes.
More Opportunity And Flexibility
There are investors already now doing this technique. I work with clients on a one-on-one basis every single day. I’m seeing more and more of this and sometimes, one relationship can lead to five deals. Those might be the only five deals they do that year for one relationship with one client. You help that client create the notes the right way and you make more money, safer money, each time you do a transaction with them. This is all based upon what we know. Focus on what we know. Number three, combining the best of real estate with the best of real estate. Note techniques allow more opportunity and more flexibility. Isn’t that what we want? We don’t know exactly what’s going to happen in the future. We’re in unprecedented times. That’s what we’ve been saying.
Why not expand your knowledge base and add in the real estate in its totality, not just real property, but real property with financing. That’s the real estate marketplace that gives you opportunities that you’ll see that has always been there but you haven’t recognized because you didn’t have that skillset. It does give you more flexibility because what if you think the market is going to do this and the government comes in and changes the law. You’ve got to have flexibility so we can’t do that anymore because the government says we can’t or they’re delaying what I’m doing. What do I do now? You want flexibility in that marketplace. If you’re going to keep looking for deals the way you’ve always done it pre-pandemic and all this thing we’re in, chances are that technique may not even be available to work.
We’ve got to expand our knowledge base. That includes the landlord type of owners. We’re right here right now where the eviction protection, unless something changes, which could happen is going away. What’s going to happen? People are predicting that we’re going to have tens of millions of people being evicted out. That’s not going to happen. If you’re a landlord and you got ten houses, you’re going to evict them all, have nobody coming in and bring in new people who haven’t been paying somewhere else. There’s going to be a mix of that. Some people have to go, they’re not going to make any more payments and other people are going to work with this. You say, “You’ve got to catch up now and increase.”
There’s going to be a whole mixed bag of all this stuff but it is going to affect you. We don’t know how big it is. Here’s from Forbes, “Over 40% of renters now at risk of eviction.” I can’t see all of them being evicted out there but there are the numbers, nonetheless. This is in July 2020. We do have to think in terms of let’s get more creative, let’s build in flexibility, let’s lower our risks by doing that and let’s look at more opportunities. It’s all these topics that we have been talking about. I’ve seen through my consulting. I do consulting every single day, working with people through their deals, identifying risk and pointing out opportunities. That’s what I do.
Real estate investors are getting more creative when they’re purchasing. I’ve already seen it. They’re learning these techniques or reapplying these older real estate techniques and you need to do the same thing and utilize. For example, buying subject to. It’s not a new technique. That’s been around for so long. I can’t even think of one that’s been around that long. Buying subject to is fine. You can acquire real estate. For those who don’t know, I’m sure most of our audience does, but if you’re buying a property that’s subject to, you’re just taking over.
It’s basically an agreement where you’re going to take over the property owner’s loan for them. You’re not going to get new financing to buy the property, you’re just going to take their loan. It’s an agreement. You’re not going to be signing the loan document, you’re agreeing you’re going to make their payments and they sign the deed over to you. Now, you own the property. Investors have used this for a long time. They take over the loan, they fix it up, they sell the property, they pay off the underlying loan and they keep the profit. No problem.
Another thing you can do, use a note technique, buy it subject to and then sell the property on a wrap. Now, you’ve got the underlined first mortgage which might be the Bank of America loan that the Smith family was paying on. You agreed to buy the property subject to their loan. Putting down money or not putting down money, it depends on the deal. We’ve got that underlying Bank of America loan and then you sell it because now you’ve enhanced the value of the property. You sell it on a larger loan. That loan wraps around the Bank of America loan.
If you have $1,000 coming in from the bigger loan and you have to pay out $300 to the Bank of America, you’re netting the $700 in between. It’s a great technique. If you sell it on a wrap, a lot of people think we’ll have stuck then, now I have to keep this. No. Can you sell a wraparound mortgage on the open market? Yes, you can. The numbers have to work but that’s the whole thing. When you create that wrap, you make sure is this a sellable note? Can I do this? Is this going to work out? If it can’t, don’t do it. If it does, great. That is a sellable loan.
Combining options, I’ve seen a lot of people buying real estate on options. Options give you great flexibility. When you buy, you can use options. When you sell, you can use options. Options are fantastic especially in uncertainty that we’re facing, getting the right to buy something versus the obligation puts you in a bit of a power position. You can combine a couple of those techniques. Let me play out a scenario here. You’re going to have people who haven’t paid rent for six months because they didn’t have to. They may not have a job or income, they’ve been evicted or asked to leave from their place and they’re coming to look at your place. Where did you rent from last time?
You’re making phone calls to landlords then they’ll go, “They haven’t paid six months.” We’re going to have a lot of that. Why not let somebody rent for a period of time with the option to buy it? Any structure with the option to buy, there are incentives in there. Their payment might go down. They’ll start to get equity in the property. You’re going to have better tenants. You’re going to have the flexibility with them where they say, “We don’t want to exercise the option.”
In that case, they can move out and move on. You can keep all the option money, sell it again, do the same thing. In the meantime, you’ve got a better quality tenant because they thought they owned it or at least in their mind, they’re going, “This is ours one day.” It didn’t happen or they exercise the option and they buy it. Most people put in there, “You can get bank financing if you can get it and then you cashed out or I’ll finance it for you. Here are the structures of the terms then we can do that.”
If they can’t do that, you have the other option which is making other agreements. You don’t have to, you can tell them, “You had twelve months and then you were supposed to exercise your option. In the 13th month, you didn’t do it. It’s time to move on.” Could you extend it? You could offer that to them. Their contract says no, thirteen months. It puts you in a more powerful position when you’re doing these things. That’s ultimately what we need. We want to face uncertainty with the most flexibility that we can and also have the proper techniques within us that we can see opportunities where others don’t.
We can creatively do things where others simply can’t do that. That’s going to open up all opportunities. It doesn’t matter how big this crash is, how small the crash is, how smooth it is, how many people can’t pay, how many people are paying again, it’s not going to matter if you’re better prepared. My suggestion is to let’s focus on what we know and let’s be prepared to utilize techniques around that. That’s what I do. I help people every day. I look at their deals with them through Zoom, one-on-one.
I don’t outsource that. I’m not a big mill educator that gets as many people through the program. I work with people one-on-one and that makes a big difference. I provide the best training and consulting in the industry. I’ve trained a lot of high-level people within the industry. I’m proud of that. I take it seriously. I study education, how people work and I started to think about the industry, and how it was being taught. We’re missing something here. People go to one training, they can’t learn everything and they can’t keep up on their notes.
That’s why I moved online years ago. I went back out on my own and said, “I’m going to put everything online. That way people can start, stop, rewind, go back, relisten, absorb that information and do it in such a way that they can pinpoint it and find it.” I’ve built the education which I’ve written for many people in the past. I’ve written for real estate trainers and such for many years. I recognize that although working in groups has a benefit, it’s not the same as one-on-one. It doesn’t compare. My clients are getting fast results because I do give them the individual attention that they need. What’s important to them?
They schedule these sessions. I say, “Here’s my calendar. Pick the date and times that you want,” and work with people that way alongside getting them educated. I’ve got a number of people. First deal within 30 days, second deal a couple of weeks later. Other people might take them two months to get them in their first deal. It depends on their pacing and everything else. If you’re looking for that, I do have different programs based upon your experience. If you’re new, I’ve got packages and things that I can work with you on.
If you’re advanced, I’ve got separate packages for those folks as well. I’d be glad to talk with anybody about that. If you’re looking for help in these areas that we talk about or any other areas in the note business I’ve been around. If you want to learn more about me, Google me. You’ll find plenty. You can get my book on Amazon and such. I’m going to do this too for this audience in NoteWorthy. I know this has all been virtual here. I don’t have a chance to meet you in person, shake your hand and all that.
Here’s what I would recommend. I’ve got a podcast Real Estate Without Renters Show. My website is RealEstateWithoutRenters.com. I’ve got a YouTube channel, go to YouTube and search my name. You’ll find it. There are a lot of videos up there. I do note investor tip of the day. There’s a ton of information. You can reach me at Kevin@KevinShortle.com. Shoot me an email and I’ll send you a link. It will be a Calendly link and we’ll schedule a free one-on-one session. We’ll talk personally to see what I can do to help you. If it’s a good fit, we’ll proceed from there. If not, at least we found out, we hook up later on and do business at that point in time.
I’m offering that to everybody who is attending this because we can’t be there in person. Shoot me an email. I’ll get you a schedule. We’ll have a little one-on-one session on the phone. If you want to do it on Zoom, I can set it up on that as well. Let’s talk about what you want to do in the business, what you want to do to move forward and how I can individually help you. My program is limited. It has to be limited. This is not a sales technique or anything. I’m one person. I work with people one-on-one. When you’re working with me, I’m not outsourcing it to somebody else. A lot of trainers do that. You never talked to the person you want to talk to. It’s somebody else within the organization you haven’t met.
With me, it is me. We only have so much time, I can only take on so many clients. Once I reached my maximum number then I’ll have to stop that program. We’re getting to that point but I do still have a room. If you’re interested in working with me, learning directly from me on a personal level, shoot me an email. I hope you enjoy that, everybody. I hope you got some takeaways from that. You got some things that you can think about and mostly take some action on. I know you’re going to enjoy the rest of the whole NoteWorthy events and in 2021, let’s hope and pray that we can get together personally at another NoteWorthy event. Thank you. Enjoy the rest.
- Steve Cunningham
- Episode – Taking Back Control of Your Money with Chris Naugle
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