How to Make More Money with Notes

Mike: This is the flipnerd.com Expert Real Estate Investing show, the show for real estate investors, whether you’re a veteran or brand new. I’m your host, Mike Hambright, and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility, and taking control of your life and financial destiny, you’re in the right place.

Hey, this is episode number 308, and my guest today is Eddie Speed. Eddie is a note expert and has been involved in over 30,000 note deals and over 5,000 real estate deals. Really Eddie is an industry legend. Now when I say the word note, a lot of real estate investors tune out because their first thought is, “Well, I’m not in the note business.” But Eddie is going to join us today.

What he’s going talk about is why every real estate investor actually is in the note business. And you’re very likely passing on deals or selling deals for far less than you could if you really understood the note business just a little bit. So it’s really going to be a powerful episode.

So in part one of the show, Eddie is going to tell us more about the note industry. He’s going to share the size and scope and really help us understand the opportunity that you are most likely missing out on. Quite frankly, I’ve missed out on lots of deals, probably more than 100 deals that I could have sold another way, but just didn’t really realize the opportunity.

In part two, we’re going to shift gears and we’re going to jump into the action mode segment of our show. And Eddie is going to tell us more about actually how to take advantage of these incredible opportunities to make more money. Really it’s on lower priced homes, lower price band homes that you’re likely missing out on right now.

So if you’re a pro or elite level member, you don’t want to miss part two of the show. Let’s get started. Please help me welcome Eddie Speed. Eddie, welcome to the show, my friend.

Eddie: Thank you. So glad to be here.

Mike: Great to see you. And of course we saw each other just last month at a mastermind. So it’s always interesting when I interview people that are actually not far from me here locally in the Dallas area. We’re just in different parts of the suburbs, but I think we either have to get on a plane or get on Skype to see each other. What’s that all about?

Eddie: It’s really funny. You and I have seen each other at a lot of big events and these masterminds and stuff and yet, you’re right. We don’t spend enough time breaking bread locally and we should.

Mike: Absolutely. I’m excited to have you here and I want you to maybe take a couple minutes and maybe tell, for the listeners today, a little bit about your background. I know you’ve got a really rich history, and I’m excited to talk about what we’re going to talk about today because I think it’s going to . . . people have segmented that, “Hey, there’s real estate investing. There’s single family. There’s multifamily. There are these big silos.” There’s notes, but hopefully today, I think you’re going to do a good job of convincing people that the notes is not its own silo. It’s right up there. It’s connected to everything else.

Anyway, maybe you could take a couple minutes and just tell us a little about Eddie Speed.

Eddie: I was a lucky guy, and the reason I was lucky is when I was 20 years old, I was actually living in Mississippi at the time. And I was a horse inspector for the State of Mississippi. Seriously. So I met who now, Martha my wife, that you know well and we’ve been married for 34 years, but 35 here in a month or so.

But I met her and her father, and her father was one of the, really, the pioneers in the whole United States of buying owner finance notes. So I was introduced into it 1980. Interest rates were 20%. So people were creating owner finance notes because those, they could write the interest rates on those notes and make them affordable versus conventional mortgages were such a high interest rate. Payment shock was out of sight.

So I’ve just fumbled into this business. I wasn’t like you and very strategically. “Oh, there’s an opportunity here.” I was just a dumb cowboy kind of thing. And that was in 1980. So Martha and I married in ’82, and we moved to Dallas and started buying notes, and then obviously we’ve started and by the latter part of the ’80s, the market fell apart. The old RTC days and the banks were going broke. And then we started buying distress notes. So we bought paying notes and non-paying notes.

So pretty much that whole lifecycle, we’ve done both sides of the business. There were eras we didn’t buy a lot of defaulted notes. In probably the early 2000s, there just wasn’t a lot for sale. But we’ve always bought paying notes . . .

Mike: Performing notes.

Eddie: Here is some history. You probably don’t even know this. Half of the seller finance notes I’ve bought have been on dirt. You know me from the real estate investors that had a model and created owner finance notes over and over and over and we would buy those notes on houses. But if you look at all this country land and the guy selling land tracks and he offers owner financing, well now, what does he do with his paper?

So I bought a lot of paper like that. So predominantly working class real estate, not always. So it’s either been working class real estate or land. In my life, I’ve bought notes on everything.

Mike: I want you to just take a couple minutes and demystify it, because people hear . . . and I think sometimes the word “note” causes confusion. It’s just a mortgage, but . . .

Eddie: Everybody in our audience is in the note business. Everybody in our audience right now is in the note business. Because they have a dollar bill in their pocket and they’ve all written a check, and they’ve all received a check. Both of those are notes. So we buy installment notes. Meaning that it has an amount owed plus interest over time with payments. And then it’s secured by real estate.

So the note is the promise to pay, and then in Texas it’s called a deed of trust. In Oklahoma, it’s called a mortgage. That’s what gives the note the security of being secured by real estate. An attorney calls it a security agreement. So when we say we buy notes, we are buying the right to receive payments on the property but it’s secured by the property itself. And here’s the other caveat. We buy notes at a discount.

So everybody is familiar with this because everybody has heard of basically the check cashing service business. If you go to a check cashing service, you got $1,000 check, they give you 900 bucks, and then they get you check. Or when they deposit your check in the bank, the one that you gave them, how much do they get? They get the full thousand.

Theoretically people say it’s a fee and the truth of the matter is it’s not a fee. Mike, they could give you $500 for $1,000 check and it’d be the same thing. So we buy notes at a discount, but what we pay for the note has nothing to do with what the borrower owes.

Mike: Right. Or maybe nothing to do with the value of the home either because it’s based off of some discount to the revenue stream that’s expected from that property. Right?

Eddie: That’s correct. So if we buy a note that’s paying every month, when we buy the note at a discount, let’s just use a nice round number, $100,000 note paying 10% interest, and people say, “Well, that’s ridiculous.” Well, some owner finance notes are 10%, so that’s not possible.

But if I bought that note at a 25% discount, then I’m going to earn more than the 10% interest on the note itself and that takes my return up into hypothetically 15% return because I did not pay the full amount owed.

Mike: Right. And it’s no different than . . . I think there are a lot more everyday people that invest in stocks versus bonds that understand the bond trader, but a lot of your opportunity has to do with how much you discount that note for. Right?

Eddie: That is correct. And obviously non-performing notes are discounted for a different reason because you have to assume catastrophically that if you’re buying that note, you’re going to end up with a property. You’d hope you could save them and keep them in the house. But if that didn’t work out, and by the way, about half the defaulted notes we buy, they’ve already vacated the house. So the odds didn’t look very high there. Right?

Mike: Right.

Eddie: So then you’re just buying it, the note at a price that you can live with, the price if you end up owning the house. Think in terms of a pawn shop, kind of the same concept.

Mike: I don’t know if the pawn shop reference gives it any positive light though.

Eddie: It’s funny, but people have seen the shows on TV with the pawn shops, and so they can equate to, “Okay, he figures out what the collateral is worth and then he offers a percentage of that.” So I always just tell that we are kind of a pawn shop for real estate, but we are a high class pawn shop. How about that?

Mike: I know you’re very high class, Eddie. So the interesting thing we’ve had this discussion, and Eddie and I have been talking about this for a while now because he is working on some things to try to help investors understand that the traditional real estate investor that’s, or single family, that’s wholesaling and rehabbing all these things, never really thinks about notes. But you think of it in the context of the opportunity to seller finance.

And so it could be that seller financing, which is in its essence creating a note, is a very viable exit strategy particularly for lower end. You call it a lower price band, but 80,000, sub 80,000, sub 100,000 type. Would you want to talk a little bit about that, Eddie?

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Would you want to talk a little bit about that, Eddie?

Eddie: I think that that is by far the most undervalued market in residential real estate today, and the reason that’s true is the lack of financing. So if you looked back at real estate, what drives the sale of single family houses is either the affordability of financing or the availability of financing.

Now in this last era that we went through from 2008 to where we are today, what happened in the market is the stock market . . . people got scared, what I call stock market refugees, and they started to absorb in real estate. And the fact that in 2011 50% of people that applied for a mortgage were turned down, amazingly did not affect the flow of people buying real estate. And that’s only because of stock market refugees.

But what happened is is the government regulation, and our friends in Washington, and they designed a plan to protect the little guy, and I’m not defending subprime lending. Subprime lending had some big falls in it. So I’m not defending that or acting like that was ridiculous because it definitely wasn’t.

But what happened was is they came out with obviously the famous legislation called Dodd-Frank. And what happened as a result of Dodd-Frank is it walled off the consumer. And there’s articles that has been written about it. In fact I’ve been conversed with some of the people that have written some of the articles.

I know Daren at RealtyTrac wrote an article about it, and he and I discussed that quite a bit before it went out. Because I’ve been a big proponent and saying the problem with Dodd-Frank is the banks can’t afford to make a small mortgage. They’re limited in fees and just the math doesn’t work. And I know that people living in LA or people who live in metro Washington DC, they can’t wrap their mind around this, but there’s at least 20 states that close to 40% to 50% of all the houses in those states are sub $125,000 houses, what the industry calls low price band.

And when you see that and you realize that . . . a stat came out just not very long ago, 60% of all low price band houses sell for cash, 60%. And when you see that number, what it tells you is is that’s a wholesale market, that’s not a retail market. Real estate investor says, “Wow, [inaudible 00:13:30],” and maybe if you’re Mike Hambright and you’re a really seasoned investor guy, maybe even figure it out, but I’m just a little guy and I don’t know if I can figure it out. Here’s what I believe. This is a water bottle. What’s it cost? What’s it worth?

If you and I are at DFW Airport after we get through the TSA security . . .

Mike: As we dump out our perfectly good bottle of water on the outside of the . . .

Eddie: You throw that bottle out, now you get in there and pay three bucks for it and you go to Costco and it cost you 20 cents. So how that water is merchandised has all to do with its value. So if you’re looking at a house that its rental value far exceeds what its cash comps and MLS says it’s worth, then maybe the cash comps are a wholesale price and maybe you could sell it on a retail price based on the affordability of the payment to a tenant living in it as a turnkey property like you like a lot, and I do too.

And I have a seller financing technique that’s pretty cool for that down the road, and then . . . or you sell it to a consumer. And the reality is is then you look at a real estate investor and you realize that real estate investors are probably leaving a crazy amount of money on the table.

Mike: Yeah, and we talked about this a little before we started recording today. Is that historically we were viewing the MLS as the tell-all for what the value of the house is, and those houses are typically houses. There’s some cash sales on there, but typically it’s houses that got financing, went through an appraisal process and were evaluated on the retail market, the traditional route.

But if you’re looking at that we always struggle with low price point neighborhoods because there generally aren’t a lot of good comps, and you know in the back your mind that most of the sales are happening off the market, off the MLS market that is. And they’re probably selling for . . . if they’re seller financed, they’re going to actually get more money for them and that’s the opportunity that a lot of investors might be missing out on. Right?

Eddie: And think in terms of this. What about the consumer? What about the guy that now can’t have home ownership because he’s walled off? And that’s a very legitimate issue is, and we’ve been to Washington. We’ve been involved in this legislation, Seller Finance Coalition and we are in the process of we believe getting this law changed where you can sell 24 houses a year and not have to be treated like Bank of America. And that’s pretty cool.

But the reality is is the argument we’ve made with both sides of the aisle in DC is is this consumer, he didn’t have cash. The house may be cheap at 40 grand, but if he didn’t have 40 grand, it’s not cheap to him. So he’s not able to buy a house because he can’t go to the bank anymore and get a $40,000 mortgage.

Mike: But a traditional investor, a lot of people that we know are more than willing to write a note on that house and charge what the market sees as maybe an exorbitant rate, but it’s still a far better deal than renting an apartment.

Eddie: It’s not an exorbitant rate. He can . . .

Mike: I agree with you, but we’ve been conditioned to think that rates are . . .

Eddie: . . . he can own a house cheaply.

Mike: We’re conditioned to think that fair is what the 30-year rate is through a large bank.

Eddie: Here’s the bottom line. Their principal and interest payment would be cheaper than them paying rent. So if a guy can buy a house and pay back a loan in 20 years of mortgage payment that’s cheaper than he can afford to go rent the house and he owns the house in the 20 years, there’s nothing exorbitant about that.

Mike: For those that aren’t watching the video, I used air quotes when I said exorbitant, so those who are listening didn’t see that.

Eddie: Exactly.

Mike: That’s my thing. That’s supposedly why Dodd-Frank, a lot of that happened, is these investors are maybe taking advantage of people.

Eddie: You can’t defend subprime lending. They’ve made loans to people that should have never gotten a loan. And they did charge a lot of junk fees and they did stuff. You can’t defend the . . . you can’t say, “Well, the guys in Washington were wrong. Subprime lending was totally great.” Here’s the problem. When I got in the business, I started in 1980. Through the ’70s and the ’80s and part of the ’90s, a lot of inexpensive houses were finance companies.

The banks had a certain size loan, certain size deal and the finance companies would go out to make out and make the guy loan, and yet it would be a little higher interest rate, but they could get a mortgage on their house and they could own it. Now when they changed the laws and they limited the fees, the finance companies can’t make an economic model work. So instead, this house under 100,000 has become what I believe the subset of real estate. You can’t compare it to a normal MLS house.

If you’re looking at a house in Dallas, it’s 300,000 bucks and you look at MLS, that’s probably what it’s worth. If you look at a house that rents for $900 a month and on MLS, the comp say it’s worth 45,000, surely you can’t believe that the house is only worth 45,000 with a rental value of 900 bucks a month.

Mike: Absolutely.

Eddie: That’s my point. That is why every real estate investor needs to know something about notes.

Mike: I know you’re about to tell us that in the Taking Action segment here in just a second. So before we get into that, you’ve got a question that we got on Facebook that I want to ask you about before we jump into the next part of the show here, here is the question. Is it easier to invest in notes if you have prior real estate investing experience? Where does it screw your head up?

Eddie: Failure learning curve would be less. If I took you to a deep dive in the business, Mike, and I know you’re a very sophisticated guy, but there’s obviously things that I could teach you about notes.

Mike: I’m sure there is. I have very little experience there.

Eddie: You would have the advantage over somebody that’s never done it. But let me say this, Eddie Speed started 20 years old and I thought a loan was being by myself. So you can learn it with no prior knowledge. It’s going to be a little longer runway to get going.

Mike: Let’s go jump into the Taking Action segment of the show here, Eddie. What I want to talk about now is I know that you’re putting together a model. You’ve been a huge part of helping people understand the note space through the NoteSchool and lots of other programs you’ve been a part of.

And I know you’re trying to bridge that gap now for people that are just buying notes or buying bulk packages and notes to saying, “Well, how do you exit? What’s an exit strategy that we could see here?” Or even for real estate investors that we just talked about that are in low price markets instead of just wholesaling that to somebody else that’s going to do something with it.

And what we’ve tended to say is, well, I’m just going to wholesale to some guy that wants to operate there. More often than not, that’s probably somebody that’s running on a seller finance model ultimately. Right?

Eddie: Yeah. The first thing I want to say is I’ve been, as you well know, I’ve been deep dive with real estate investors a long time. It’s not like I’m a note guy and I’m anti-real estate investor. Between the houses that we bought and loans that we foreclosed on, I’m fairly sure I’ve had at least 5,000 houses in my career. So I’m not anti-real estate.

But the reality is is one of things . . . the popular TV of flipping and obviously you call it FlipNerd, it’s a sexy subject. But the reality is to grow wealth in the business, you’ve got to get past flipping because flipping is a way to make income. It’s not a way to grow wealth. It lets you get started. I’m not saying that it’s not important. I’m just saying to you that all of us in the day to have long term wealth in the business, to earn money without having to do anything for it, you’ve got to move past just finding a transaction, making a fee and moving on.

And in the low price band space, if in my humble opinion, if you’re selling a house for what the realtor says it’s worth, you’re wholesaling it. You’re not retailing it. So if you want to retail it, then you’re going to have to be what the bank is not. If you’re selling retail to consumers, the bank don’t want to make the loan because of Dodd-Frank, so what we just said.

And until they repeal Dodd-Frank and they change the whole thing, not just related to seller financing, but they change all Dodd-Frank, you’re not going to take soap and wash that off. And I have a heart for the consumer that I believe got something given to him, a law given to him that was . . . I get it. It was originally intended to protect them. I get the intent. I just don’t think it did it.

Mike: Right. There’re some blowbacks, some other consequences.

Eddie: Let me tell you something. With 1,000% integrity, I can show you thousands of people that own a home today because we were willing to owner finance them because the banks wouldn’t. I don’t know what people live and look at their success in their life, but that has a measure with me that I think we’ve been able to do that.

Mike: That’s awesome.

Eddie: So if I’m going to sell that house to him though and I’m going to provide financing, I’m simply going to back into the affordability of a payment. What’s a rentable value and what’s the affordability of it? Because if the banks were making loans on $60,000 houses, what do you think the comps would be? They would be very consistent with what the rentable payment would be per month. Right?

Mike: Absolutely.

Eddie: The market would rise to that level.

Mike: Absolutely.

Eddie: So that’s one method of doing it, is selling to the consumer. Let me say a couple things. I wrote a book about creating safe seller financing, safe for the buyer and safe for the seller called Streetwise Seller Financing in 2003. So I didn’t just start talking about this. As you know, I have a long history of helping corporate real estate investor companies figure out how to make a seller finance note so that if they get ready to sell it in the market, they can sell it and not get their head cut off from the price. And then if they make a loan, that the success of the loan becomes predictable.

So if you’re going to owner finance, there’s one thing that Dodd-Frank is right about. You need to vet the buyer. You need to make sure that you’re not selling something to them that they’re going to wake up and find out down the road they made a bad choice and can’t pay. And so that becomes in two areas, the buyer’s down payment is a factor and can they afford the payment? And are they at a stage in their life where the monsters are getting them every month so bad they’re just not really in a position for home ownership? What happens if the hot water heater goes out? They’re like, “Oh my gosh, I’m bankrupt now,” kind of thing. You can’t do that.

So I believe that qualifying a buyer correctly, I can tell you that that’s a big factor. And that’s on the consumer side. What happens on a rental property side? You and I are in masterminds with people that are big time turnkey guys, big time. If doing more than 500 deals is big, then they’re big. And you and I have sat there and we’ve all discussed this.

If you’re selling houses for 150,000 on a turnkey model, it’s super easy to go get a loan with the bank. That’s not true for a house for 60 grand. So that’s why we see all these houses selling for cash. What if you could provide the investors some leverage? What if you could owner finance him, not 90% loan, but 50% loan? What if you could owner finance him and then him wake up because he paid a very good chunk down, and based on the cash flow with the property, in five years, he got a free and clear house?

Mike: So I want to clarify what you just said here because that might have gone over some folks heads here. So what you’re talking about here and what we’ve been talking about is, look, if you’re a wholesaler right now and you’re just wholesaling properties for cash and you’re basing the value of the property on what you can sell it for and what you can buy it for off of the MLS comps, then you’re probably leaving money on the table compared to if you could do a few things.

You could keep it as a rental yourself and probably the rent to the price you pay for a value would be very high. You could seller finance that to somebody yourself that’s going to live in the house, and you keep that note, and you hopefully eliminate . . . if you vet the person right, you’re going to eliminate . . . probably they’re going to own the home. So they’re responsible for maintenance and repairs and tenants and toilets and termites and all that stuff. Right?

Eddie: Exactly. You’re the bank, not a landlord.

Mike: And there’s been this uprising over the past several years where it started to become sexy to do turnkey properties, which we’re obviously doing now too. We have passiverental.com which we have moved into that space because we see an opportunity for people that want to be more passive. They want to be more hands off. They want done for you properties, and we’re providing properties or connecting people with operators there.

But there’s this model that you’re talking more and more about now, which is the person that doesn’t want to . . . let’s say that it was me. I bought a house. I could put a tenant in it. I could fix it up, and I could sell that note to an investor that puts a significant portion down. Essentially instead of seller financing it to the end user, I’m seller financing a rental property essentially to an investor that’s going to maintain that relationship with the tenant. Right?

Eddie: Yeah. And it’s funny, Mike. We speak at a lot of real estate groups around the country, and cumulatively between all the faculty at NoteSchool we’ll do probably north to 50 events a year. So what I mean, I was in Seattle last week and one of my guys was in Fort Lauderdale last week or whatever. We’re all over the country all the time. So we asked this question. It could be here in Dallas-Fort Worth or it could be wherever.

And we say, “So we’re going to have a group of smaller investors. How many of you do less than 10 deals a year?” So I’m quantifying my audience and I probably could say 100 deals a year and it’d be the same thing. Say, “How many of you sell turnkey properties to out of state investors?”

Mike: Zero.

Eddie: Two percent will raise their hand, and maybe half of them will raise their hand because they just want to look like they want to play with me. But the reality is, is the small guy doesn’t do this, and the reason they don’t do it is because they don’t know how to glue it together. You and I believe some of the smartest operators in real estate, in working class real estate, in the last five years have been the turnkey guys. Because they’re now selling a single family house like you sell an apartment complex.

Same concept. Management is in place. The guy buying it is an investor. He doesn’t have to fret about getting the calls and the tenants and toilets. A management company deals with that, and you’re buying it on an income approach. And the market that’s underserved is the small investor doing this. This is the most underserved market.

Everybody can figure out the big guys that can do hundreds of deals a year, and they’re big enough to go build a system around it. And so I’ve had . . .

Mike: But even those guys though, we know all of them pretty much. Even those guys are constrained by inventory often in markets they’re operating in because they can only buy so many. But there’s this whole underground wholesaler market that exists that those properties often just aren’t making it into that turkey model because the investor doesn’t understand that opportunity even though it’s fairly simple when you come down to it.
Eddie: You’re right, and it’s because of this whole thing of people saying, “I’m a real estate investor and I’m not a note guy.” And it’s like, let me give you a simple answer. You’re a note guy when the bank says no. If the banks are consistently saying no, they’re leaving an underserved market. And the reason that’s important is when you say 60, we used this stat earlier in the show, when you say 60% of low price band real estate is selling for cash, I don’t need a calculator. I can tell you that that tells me that a lot of these properties are being seriously wholesaled because the banks aren’t in that space. They’re not making the loans that they would have been making in 2005.

And that goes back to the fact that I believe it’s the old Warren Buffett saying. Warren Buffett is a value buyer, and he says, “When people are greedy, be scared, and when people are scared, be greedy.” Now I’m not saying that we’re necessarily teaching people to be greedy, but everybody understands what he really meant by that.

It’s that you’ve got to be the smart operator, you’ve got to recognize the niche that other people are missing. And I don’t think you and I will ever teach every investor in the market to go think this way because I don’t know. They’re following, they’re not leading. Leading is going to take you in a direction when there’s a market opportunity to do things that other people aren’t necessarily figuring out.

Mike: Absolutely. And I agree with you about that flipping houses or wholesaling, it’s a never ending . . . it’s been a very good business for me. It’s good for a lot of people, but there’s no doubt. We got into this and we do that to allow us to fund the rental properties or do other things, because you need to have something there that’s long-term, wealth building. And I’ll tell you some days I wake up and I offer all my rentals. I say, “I’m going to seller finance those things.”

When you get a bill that’s like, hey, had a $7,000 plumbing problem last month on this one house that rents for 900 a month, it’s like, well, that’s going to eat my cash flow for how many years now. Unless everything goes perfect. But there’s a lot of opportunity in being the bank. Right?

Eddie: There’s an old saying once again I’ve been deep involved with real estate investors from guys that flipped to guys that did fix up and resale, fix and flip to . . . I’ve been involved in all aspects of the business, so I’m not acting like that I haven’t been involved in those other activities. But there’s an old saying that’s probably true. When I grow up in the real estate, business, I want to be a note guy.

Mike: Did you come up with that, Eddie?

Eddie: It’s to my advantage. No. Look at this. Mike, you look at all the people that . . . you and I have several common friends that we know, many dozens, maybe many hundreds. People that have been doing it for 20 plus years, 25 plus years. And the grayer their hair gets, the longer they’ve been in the space, it’s they do exactly what you just talked about, and they said, “I’m going to sell all my property and I’m going to be the bank and I’m going to just collect payments.”

And so I’m not saying that somebody does that with every deal. You still have a business in flipping houses and doing the things you do. It is what pays for your operation. It gives you the storefront to go on a long-term deal, but you still got to support the storefront. So I’m saying that this wouldn’t apply to every deal somebody does, but there are, I’m guessing in a lot of your audience, maybe one out of four deals somebody does, maybe one out of every five. There is a real note opportunity that could drastically change your profit structure, not just short-term but long-term.

Mike: Truthfully with a lot of the low end stuff, if you’re evaluating and I historically have, if you evaluate it based on current MLS comps without saying what price would this be if it was 100 times rent or 90 times rent? Something like that. And say, “Well, that’s the real value based on . . .” It’s more based on the terms. It’s not so much priced as it’s the term structure.

Everybody will get this when I say this. If you have a mortgage on your home and you stretch it out for 30 years, you’re probably paying twice for that home. If you had a $200,000 mortgage and you stretch that thing out for 30 years, you know this math better than me. But you’re probably paying at least 400,000 on it and that’s not even if you refinance it and do a bunch of other stuff that’s going to cost you a lot more money in the long run.

And it’s really the same thing here. It’s saying, “Hey, if I’m the bank, that is worth potentially 400,000. I’ve got a discount for my opportunity cost, the time value of money and all those things.” But it’s certainly worth more than the face value of the loan itself.

Eddie: It is, and once again, if you’re really looking at this business, I’m not trying to compete with . . . if you’re going to owner finance a house for 200 grand, I’m going to ask you really quick, Mike, why would you do that? The bank is going to make a loan on that house. The money is super cheap right now. Why wouldn’t you just do that?

Mike: Right. My point is for a lot of the guys that are looking at these low end markets, in the distressed housing industry, you tend to end up in the low points of [inaudible 00:36:41] pretty often, over and over again. And maybe if you’re looking at it as to if I want to buy it for this, can I wholesale it and mark it up three, four, or five grand? Whatever, and make money on it.

And a lot times we walk away from deals because we just don’t see the spread there, or maybe pass all together. But if you evaluate it on a different measuring stick that this could be seller financed and I could sell it based on a multiple revenue stream instead of what the MLS says. Then you might potentially be willing to pay more for it because you could probably sell it for a lot more.

Eddie: And I want to make up a point. This is not dealing in areas that are blighted. There’s blighted properties and there’s blighted areas. And I’m not saying that you don’t put your heart and soul in a social aspect and your benevolent aspect to help in those areas. That doesn’t mean you have to try to own collateral in those areas. Because if they’re going to strip it and you can’t find somebody that can pay every month and the house didn’t save because the hoodlums come in and steal . . . that deal is not what we’re talking about.

Mike: Right, no. Not at all.

Eddie: We’re talking about working class markets where houses are too cheap because the banks aren’t traditionally making mortgages on that price range property.

Mike: And truthfully you and I both know that there’s plenty of people out there. I think I’ve heard that Dallas has the worst credit scores in the country, but there’s plenty of people that have the ability to pay rent and make payments, but they either have really bad credit because they made some bad choices. It doesn’t mean they don’t have cash or the ability to pay, or they have no established credit. A lot of Hispanic community just doesn’t have established credit because they just don’t really believe in debt the same way that other folks have.

I’ll liken it to, there’re a lot of opportunities that exist here and there is where I have rentals, which are more of a C-class type neighborhood, working class, clean neighborhoods, pride of ownership, not the war zones or anything like that, which I wouldn’t go into no matter what.

Eddie: No, you’re right, and I’ll tell you something that is a big market issue and there’s a lot of economists that have alluded to this. And that is the affordability factor of real estate today. The reason supposedly the building business hasn’t recovered the way the economics say it should have recovered is that people aren’t able to move up because the affordability of property, they can’t move to that next class. And there’s a lot of . . . I don’t want to get too deep into that today, but it exactly goes to what you’re saying.

There is a serious affordability factor to real estate crisis really in our market, and what we’re doing is helping solve that problem by giving people a way to say, “Okay, if you can afford at 900, then what would that let you do in a homeownership role versus just being a tenant for the rest of your life kind of thing?

Mike: And you and I both know. The stat that you gave of, 20 states, 40% to 50% of the houses are $125,000 under market value. The reality is I bet you the majority of those houses are under their build price, replacement cost.

Eddie: There’s no doubt. If you look at . . .

Mike: So builders have moved upstream. A lot of areas don’t build entry level houses anymore because they can’t make money doing it.

Eddie: I did it I did a presentation to a pretty high end group about a month ago, and I pulled up some stats. That’s why I know this affordability stat factor. The other factor is that homebuilders spend 25% of the cost of a house today just for compliance. And that’s why it’s walled them off from building affordable housing is that there are some fixed costs to the things that they’re required to do in an affordable house range, the math won’t work.

You’re right. Which goes back to a statement that we made early in the show, which is what is the value buying real estate today? It is good properties, good areas that are working class. That is probably the ultimate value buy in real estate today of all the things that . . . we see hot markets and we know how hot markets work.

I’ve been doing this 35 years, I’ve seen hot be not so hot. But there’s a stability factor and I think our market probably is clearly in my mind, our market is probably the most stable of all the single family markets.

Mike: Eddie, is there anything we missed today? This is some good information, and I know that it can be overwhelming sometimes. I know you’re going to have some training coming up that’s going to talk to people about how to take advantage of this opportunity that we talked about today, how to really learn more about if you’re a real estate investor that hasn’t done notes, how to get more into the notes space to use that is ultimately an exit strategy. And I also don’t know if you’re ready to talk much about that. I know that’s coming, but how can folks learn more? Where should they go?

Eddie: Our website is noteschool.com, and we are always trying to put out good information. We obviously have classes, live classes, and people can buy those. But the reality is is we have some really good stuff that we frequently do that’s just like you. Its just, don’t necessarily charge for everything, but it’s good stuff. And obviously the second part of it today, we took a deeper dive, but the first part of the deal was just like it’s what people haven’t really thought about and we try to do a lot of that.

So they can reach out to us and we’ll try to connect them with some good information, and you know that even in the mastermind I’m in, a lot of the guys . . . and you’ve got to pretty much be a rock star in real estate to even be in the mastermind. And a lot of those guys go, “Man, I went to Eddie’s advance classes and it made me think about stuff differently than I had before.” So I hope that’s always the case. I hope it’s always someone like you comes and I make you rethink some possibilities.

Mike: Absolutely. You do every time we talk. Awesome. Eddie, hey, thanks for spending time with us today. I definitely appreciate it, and for folks that are listening, thanks for joining us today. We’ll add some links down below the video here for those of you that are interested in learning more. So Eddie, thanks again, my friend. Great to see you.

Eddie: Thank you. Good to see you.

Mike: Have a good day.

Eddie: You bet.

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