In his three decades of investing, mentoring, teaching and training in the note-buying industry, Eddie Speed has never seen such favorable market conditions as he sees today.
During his workshop at the first bonus day at the Equity University Networking Conference this past September, Speed told attendees that a “perfect financial storm” is happening in note buying right now: the two elements of anxious money and huge inventory at good prices are coming together to create some great deals, he said.
“These are the best conditions I’ve ever seen in my whole 32-plus years in the note business,” Speed said. “There’s not a close second. The next five years are going to be a market opportunity like we’ve never seen.”
Preconceived notions
Note investors are in good company with investors including Warren Buffett. “The No. 1 industry he’s focusing on today is buying distressed debt,” Speed said.
It’s one thing for Warren Buffett to make successful investments. But can the average investor get into this market? A common refrain Speed hears is that real estate investing is simple and notes are more complicated.
“They’re convinced that I can do it; they’re not convinced they can do it,” he said
But Speed, armed with case studies of average students striking big deals, countered that investors have likely already had some experience in notes without realizing it.
“If you’ve ever deposited a check, you’ve negotiated a note. If you’ve bought a CD at the bank, you made the bank a loan,” he said. “You’ve already been in the note business.
“I’ve been teaching people this business that you build things you’re familiar with, and find out it’s not as hard as seems. You can become a bank; you don’t have to go run your bank.”
Note basics
A note is essentially a promise to pay. The note holder, or lender, receives the right to receive all future payments.
Speed said the biggest opportunities with notes lie in residential properties where the current value of the property has fallen. The inventory of delinquent notes and properties are known as “toxic assets.”
A decent chunk of the toxic asset inventory continues to come from the subprime mortgage crisis fallout of a few years ago, Speed said.
Generally you can’t go to a bank and buy a one-off distressed note, Speed said. Banks will bundle loans together and sell them to hedge funds. The hedge funds then re-aggregate the loans, then turn around and sell them off. Investors can buy the notes from the hedge funds.
By buying distressed notes, investors are generally helping contribute to a recovery because they’re seeking ways to improve the housing market rather than prolong the troubles, Speed said.
“When people hear we’re in business of buying bad loans, they sometimes think we’re in the business of kicking people out of their houses – no, that’s not the deal,” he said. “We want to figure out every way in the world that we can let someone stay in their house and restructure their debt and pay if there’s any way possible to do that.”
Another misconception is that you have to have a sky-high pile of capital to get into notes buying. Notes can be bought for a relatively small amount of money, as referenced below. You don’t even need to use your own money, either. Other investors can be a source of funding.
“There’s so much money available today, you can basically bank your business,” Speed said. “Everyone in this room is bankable.”
By the numbers
Here are some astonishing numbers about the notes industry that came out of Speed’s presentation:
3 million: number of houses sold for cash between 2010 and 2011.
In each of those years, cash purchases accounted for at least 34 percent of the entire real estate market.
Many investors flock to real estate because they’re wary of gambling with stocks, Speed said.
“I’m tailoring strategies for people who have this ‘anxious money,’ as I call it,” he said. “I tailor strategies to give people painless ways to invest – just like you’re investing in the stock market, but knowing you’re totally not wanting to play in the stock market anymore.”
Many have turned to investing in real estate – as is partially evidenced by the 3 million cash sales over the last two years.
“It’s astonishing,” Speed said. “We’ve never seen this before. Not in the last 100 years.”
Now, so-called mega investors are having a problem finding bargain rental properties because “a lot more hounds are chasing same fox now,” according to Speed. But the supply can be found instead in notes, he added.
***
9 to 1: estimated ratio of delinquent notes to REO properties available in the market.
It’s nearly impossible to pin down an exact number because the information isn’t released, but this is what industry experts estimate, Speed said.
“Now you understand why everyone’s chasing notes,” he said. “It’s called supply and demand. Assets where the collateral is less than $125,000 are not going to be taken to foreclosure. They’re going to notes and they’re not going to foreclose on them.”
When you own a note and you’re receiving the monthly payments from the borrower, it’s a lot like owning rental property without having a tenant, he said.
***
1 million: estimated number of delinquent mortgage loans Bank of America holds. That’s just one bank’s inventory, Speed pointed out.
Speed referenced U.S. Treasury Secretary Timothy Geithner, who said the private sector is critical in the mission to liquidate toxic assets.
***
For those concerned with their investments ending in foreclosure, Speed pointed to industry statistics for workout loans, meaning people who have not made a payment in the last two years.
<20 percent: share of workout loans in the industry that actually end up in foreclosure – despite inexperienced investors’ fears that the percentage is higher
He added that 40 percent of time you can modify the loan and get the borrower paying again; and
40 percent of time you can get a deed of property to avoid the foreclosure process. It’s called deed in lieu of foreclosure.
Speed said he buys loans assuming the worst, but knows that there are steps he can take to try to avoid foreclosure.
In the unfortunate circumstance that the lender stops paying, the lender sends the borrower a notice to try to work something out. If that fails, the note goes away and the lender takes possession of the property.
***
30,000: estimated number of notes Eddie Speed has purchased during his life.
$9,000: average price you pay for a note, according to Speed.
$150,000: the high end of the range that a residential property value should be when buying a note, according to Speed. Buying notes for higher-valued properties isn’t likely to be as profitable, he said.
$60,000: average collateral value that can be realized from the investment. He pointed out that not every deal is identical.
***
Here’s a breakdown of a note investment that one of Speed’s students, Justin, completed.
$23,000: value of a vacant property in Ohio for which Justin bought a note
$6,000: price Justin paid for the note
Justin ended up arranging for the home’s owners to deed the property to him in lieu of foreclosure to take the property off their hands.
$5,500: amount of money Justin put into the property: $1,500 in updates, $2,000 in back taxes, and about $2,000 in closing costs
$38,000: amount in cash Justin received by selling the property
$26,500: Justin’s profit on the investment.
Speed acknowledged that Justin’s case isn’t typical, adding that it’s only because people don’t jump on the opportunities out there due to preconceived notions or fear.
“Most people that find out something about this business don’t make the money Justin does because they don’t act on it,” he said.
Stay tuned for part 2 of the Eddie Speed notes series: “4 steps to success in note investing.”
For more details about investing in notes with a self-directed IRA, click here.
For details on purchasing the full recording of Speed’s workshop and the rest of the recordings from the 40-plus sessions at the Networking Conference, call KT Hartman at 888-382-4727 x393 or email k.hartman@trustetc.com.
November 5th, 2012 | No Comments »
It’s been hard to turn on the news in the past few weeks without hearing blow-by-blow accounts of the last-minute maneuvering in Washington to avoid the “Fiscal Cliff.” While most of the news has revolved around the preservation of tax cuts and the retaining of funding to other government programs, some might not be aware of the changes to government-sponsored retirement accounts that came out of the deal. One rule shift might interest those looking for more options when it comes to preparing a nest egg.
The Roth IRA has long been considered a powerful tool for growing wealth – investments grow tax-free in a Roth IRA, and all qualified withdrawals are tax-free after the age of 59½. Plus, in contrast with a traditional IRA there are no required distributions at 70½.
