Buy Your Next Apartment Complex From the Bank

(By Kevin)

Housing is still a hot commodity.  In fact, most real estate investors are backing up the truck and loading all they can into the truck right now.  Remember my golden rule, "everyone needs a place to live."  If you know what you're doing it can be a great place to invest.

We recently re-connected with our friend Sue who we first met 5 or 6 years ago when we both started in this business.  Just a few years ago Sue was an Art Teacher.  Now she is a wildly successful real estate investor with apartment buildings.  In fact, she and her partner Ed own more than 1,500 units. 

Currently she is finding great deals by contacting banks directly for properties with distressed notes.  A distressed note is when the payments on the loan are behind, not being made at all, or the collateral for the note is worth less than the note itself.  If payments are not being paid at all this is also referred to as a non-performing note.  For the purposes of today's discussion I will refer to them all as distressed notes.

Distressed notes are a real problem for banks because they need to keep 7-8 times the value of the note in reserve as long as the note is in the distressed status.  That means for a $3 million distressed note the bank has to keep $21 - $24 million in reserve.  Therefore it is in the banks best interest to sell these notes, or sell the properties, if they have taken the property back, as soon as they can.

Here's the interesting part, even though the bank wants to get the distressed note off their books Sue gets them to write her a new loan on the property 9 out of 10 times.  Why?  Well Sue is the most creative person I know and she implements this creativity when putting deals together.  Here are a couple of key points she will point out to the reluctant banker.

1. Even if the bank is selling the property for half of the value of the note, it is in the bank's best interest to write the new note because it frees up all that money that was held in reserve, furthermore:
2. Suppose the property has a problem.  She will ask them, would you write a note on this property the way it sits right now?  When they answer no, then she asks why they think another bank would make that loan?  If they really want the distressed note off their books to free up those reserves then they may be the only bank that will write the new note.

Here's another great reason to try to work with the banks that have these distressed notes.  Banks aren't in the business of owning properties.  In fact, they usually manage the property badly creating operating expenses that are generally higher than the industry averages.  This means that the Net Operating Income (NOI), the primary basis of commercial property valuation, can be improved with proper management of these properties.  This will then create added property value with additional equity for the investors.

Sue has an upcoming boot camp in May where she teaches her techniques in much more detail.  If any of you are interested in learning more please let us know.

Industry News  

(by Kevin)

Introducing the Seller Finance Coalition:

In recent issues of our newsletter we have discussed the Safe Act and most recently the Dodd-Frank Act which are intended to curb poor lending habits and control banks.  Unfortunately these same Acts have created a very difficult environment for real estate investors who offer seller financing.  Recently one of our mentors, Mr. Eddie Speed, sent out an informational email announcing the creation of the Seller Finance Coalition (SFC).  Because this is such an important issue to real estate investors I have included the body of the email here.  They have done an excellent job of summarizing the issues facing us.

Leaders in seller financing from around the country have formed a new coalition to advocate for changes in federal financial regulation laws that threaten their industry.  The Seller Finance Coalition (SFC) was created to protect the seller finance industry from over regulation from Washington and to undo the unintended consequences stemming from both the Secure and Fair Enforcement for Licensing (SAFE) Act and the Wall Street Reform and Consumer Protection (Dodd-Frank) Act that threaten the private lending industry.  While this type of lending is a simple, private treaty loan between two parties requiring no fiduciary involvement, this vital financing mechanism has been under attack from Washington over the past 7 years.

The initial blow to the seller-finance industry came in 2008 with the SAFE Act, which set forth stringent national guidelines for states licensing mortgage originators.  Although they don't originate Fannie Mae, Freddie Mac, VA, FHA or Reverse Mortgage loans, members of the seller finance industry were suddenly required to take national licensing tests.  Not surprisingly, the failure rate for these individuals has been astoundingly high on the 100-question tests designed for mainstream mortgage businesses.  With the denial of a license, seller-financiers were left with two unappealing options: restrict the number of transactions to under five per-year, or hire a licensed mortgage originator to process the application process - essentially eliminating the inexpensive and simplistic attraction of seller financing. 

The Dodd-Frank reforms that went into effect in January of 2014 further reduce the number of transactions allowed for unlicensed seller-finance to three per year.  These new restrictions erode the opportunities for seller-lenders thus eliminating a key financing option for would-be homeowners.

"These sweeping financial laws were supposedly designed to target Wall Street, big banks and large financial institutions," said Glenn Lee, President of Texas Funding, a founding member of the SFC who led the visits on Capitol Hill last month.  "Seller financing plays a critical role in the commercial and residential real estate markets, which are foundational to the U.S. economy.  The new burdensome regulations threaten the entire seller finance industry and must be changed."

Bob Repass, Managing Director of Colonial Funding Group, added, "If these regulations are not changed or eliminated, our businesses and our customers will suffer.  Let us not forget the effect the law is having on those that we serve; folks that desire to purchase the properties from us by having us provide the financing on properties we own. Very often, we are the only source of financing because persons can't qualify through traditional financing. If regulations severely limit or possibly eliminate financing by us, the owner of the property, it hurts not only us doing the business but also those who would be losing the financing we provide. After all, our customers ARE our business."

Founders of the Seller Finance Coalition (SFC) visited Washington, D.C. in February to educate lawmakers on the unintended consequences of the sweeping financial regulatory laws that have gone into effect over the past 6 years.  Bob Repass, Managing Director of Colonial Funding Group, and Scot Campbell of S.R. Campbell Properties joined Lee on SFC's maiden voyage to Washington.  The group met with Senators and Representatives, both Democrats and Republicans.  The reaction was unanimously positive, with each Member of Congress expressing a desire to help the industry.

"Our purpose is to educate lawmakers about the important role that seller financing plays in our economy and how current law is threatening to run us out of business," said Repass.  "The positive response we received from the lawmakers we visited was encouraging for a first-step in the process of cutting the red tape that is forcefully constricting our industry." 

The SFC is working with the Keelen Group, a top Washington, D.C. public affairs firm, on a comprehensive outreach, education and advocacy campaign.  In the coming weeks, the SFC will work to create bipartisan support for legislative solutions to the congressionally-created crisis the seller finance community faces today.

ABOUT the SFC

The Seller Finance Coalition was formed in February of 2014 to advance the interest of the Seller Finance industry.  Founding members of the SFC include Glenn Lee of Texas Funding, Bob Repass and Eddie Speed of Colonial Funding Group, Scot Campbell of S.R. Campbell Properties, and Doug Smith of My House Deals. For more information about the SFC and the Seller Finance industry or to join the Coalition, visit www.sellerfinancecoalition.org, follow us on Twitter @SFCdotORG, and on Facebook at www.facebook.com/sellerfinancecoalition. 

Laughs and Interesting Stuff 

(Kevin and Mary Jane)  

A Blonde Takes a Plane to Toronto:

A plane is on its way to Toronto, when a blonde in economy class gets up, and moves to the first class section and sits down.

The flight attendant watches her do this, and asks to see her ticket.

She then tells the blonde that she paid for economy class, and that she will have to sit in the back.  The blonde replies, "I'm blonde, I'm beautiful, I'm going to Toronto and I'm staying right here."

The flight attendant goes into the cockpit and tells the pilot and the co-pilot that there is a blonde sitting in first class that won't move back to her seat in economy.

The co-pilot goes back to the blonde and tries to explain that because she only paid for economy she will have to leave and return to her seat.

The blonde replies, "I'm blonde, I'm beautiful, I'm going to Toronto and I'm staying right here."

The co-pilot tells the pilot that he probably should have the police waiting when they land since the blonde won't move.

The pilot says, "You say she is a blonde?  I'll handle this, I'm married to a blonde and I speak blonde."

He goes back to the blonde and whispers in her ear, and she says, "Oh I'm sorry." and gets up and goes back to her seat in economy.

The flight attendant and co-pilot are amazed and asked him what he said to make her move without any fuss.

The pilot says, "I told her First Class wasn't going to Toronto."   

Paraprosdokians are figures of speech in which the latter part of a sentence or phrase is surprising or unexpected; frequently humorous. Winston Churchill loved them.

1. Where there's a will, I want to be in it.
2. The last thing I want to do is hurt you. But it's still on my list.
3. Since light travels faster than sound, some people appear bright until you hear them speak.
4. If I agreed with you, we'd both be wrong.
5. We never really grow up, we only learn how to act in public.
6. Knowledge is knowing a tomato is a fruit.  Wisdom is not putting it in a fruit salad.
7. To steal ideas from one person is plagiarism.  To steal from many is research.
8. I didn't say it was your fault, I said I was blaming you.
9. In filling out an application, where it says, 'In case of emergency, Notify: 'I put 'DOCTOR'.
10. You do not need a parachute to skydive.  You only need a parachute to skydive twice.
11. I used to be indecisive.  Now I'm not so sure.
12. To be sure of hitting the target, shoot first and call whatever you hit the target
13. You're never too old to learn something stupid
14. I was always taught to respect my elders, but it's getting harder and harder for me to find one now.  

(so people will wonder what your up to AND its contagious)