Thinking of using real estate notes in your retirement account? This interview covers 10 tips for buying notes in a Self-Directed IRA with Note Investor Tracy Z Rewey and Quest Trust Company IRA Specialist Haley Gant.
Watch the video, read the transcript, or use the outline for a quick overview.
At A Glance: 10 Tips For Buying Notes In IRAs
- Know Your Note Type
- Have A Playbook For Investing Guidelines
- Master The Time Value Of Money
- Embrace The Boring – Due Diligence Matters
- Seek Professional Help
- Spread The Risk
- Find Creative Solutions
- Tap Into Deal Flow
- Learn From Others
- Use A Self-Directed IRA Custodian
Questions To Answer Before Investing In Real Estate Notes
- How long has the buyer been making payments and are they current?
- Is there a servicer collecting and validating the payments?
- Do the documents match the terms presented for sale?
- Are the real estate taxes paid current?
- Is the Property insured for fire and other hazards?
- Is there an updated title report?
- What is the lien position and what else is owed on the property?
- Who is the current holder or seller of the note being purchased?
- Where is the original note and will it be delivered at closing?
- What is the current value of the property?
- How much equity does the buyer/payer have?
- What is the creditworthiness of the buyer and are there any bankruptcy filings?
Interview Transcript With Quest Trust Company and NoteInvestor.com
Haley Gant: 00:00 All right. Hello everyone. Thank you for joining us for today’s Interview with an IRA specialist. For those of you who don’t know me, my name is Haley Gant and I’m an IRA specialist here at Quest Trust Company. One of my biggest, most fun projects I’ve been doing over the last couple of weeks is bringing in different real estate investors that we work with a lot here at Quest to just kind of give you guys the most up to date information as possible in different realms of real estate investing. And today I am super excited to have Tracy Z Rewey with us. Tracy is actually coming to us live from Central Florida. She’s a note investor with NoteInvestor.com and Diversified Investment Services Inc. So Tracy, super excited to have you with us today. How’s it going down there in Florida?
Tracy Z Rewey: Well, we are all surviving in these crazy times, working to keep our mental and physical health strong. And, looking at how we can continue investing in Notes in the current environment. Thanks for having me on the show! I’ve been buying and selling notes for 30 years now and I’m excited to talk to people about using their self-directed retirement account for that.
Haley Gant: Yeah. Awesome. And I know you’ve joined us at our Quest Expo, and we’ve done some other events with you. I forget that you live in Florida because we actually see you pretty often. So, before we kind of get into the meat of today’s interview and presentation, kind of take a few minutes, tell us about yourself. Tell us how you got into the Note industry. What do you specialize in? Kind of things like that.
Tracy Z Rewey: 01:27 Absolutely. Well before I lived in Florida, I lived in a very rural area of Washington State and there’s a lot of seller financing up there. Then I moved to the “big city” of Spokane and I heard about note investing. I had a real estate closing background and I went to work for an institutional note buyer. People that bought notes individually and then packaged them up and put them into mortgage backed securities on Wall Street. They bought and sold a lot of seller finance notes and they bought them in all 50 States.
I was there about 10 years and I learned how to buy and sell real estate notes using their dime and all of their vast experience. Fast forward to now, and I’ve been doing this for 30 years. But when I went to work with them in the eighties, 1988 to be exact, the gentleman I went to work for had already been doing it for 30 years. I mean they’d been buying them since the late 1940s and 1950s. So it’s one of those things that’s been around. People often think, “Oh, it’s new”, but seller financing has been around awhile. Private people buying notes. So, in about ‘97 I went out and started buying notes for myself with my own company because I could see the potential that was there. And I’ve been doing that since then.
Haley Gant: Wow, that’s awesome. So, you’ve made it through the ups of the economies, the down, the recession. Now all of this craziness where, you know, our whole world’s been kind of turned upside down in the past couple of months. What are some of your main kind of goals and tasks, day to day things that you’re doing right now and how does that compare to maybe other downswings we’ve had in previous years?
Tracy Z Rewey: Well this one is unique and first off, you know, everyone joining us might be joining from home. You might have some more time on your hands. So, first and foremost, I hope you’re well and you’re healthy and you’re keeping your sanity during all these stay at home orders. Finding ways to learn things like we are talking about here on this webinar. I think that what I hear a lot of people asking now, and what I am looking at now, is how do we position ourselves to #1, help people during this time? Because it’s a really tough time and people are in a different place. They might be out of work, if they’re a W2 income person or they might be watching their retirement account and worrying about the stock market. Or if you’re an investor that owns real estate notes like me, we’re watching closely to see who’s able to continue making their payments. Or if you’re a landlord, you might be worrying about, are people able to make the rental payments? So, first and foremost, that’s what we’re dealing with now. I do believe that we will get through this.
We will come out the other side. I think it’ll be take a little bit of time, a few months, maybe into the year, but I think people hopefully will be able to get back on their feet because we did have a good economy before all of this happened. So we’re looking at our portfolio right now. We’re figuring out how we can work with people if they do need some time to make up some payments. What’s a good repayment plan? And then we’re looking for the opportunity on the other side. Because at least in the note environment, we feel like there’ll be a lot of people who want to sell their notes because they might need some opportunity to get cash and liquidate, or they may be tired of the troubles collecting payments and now they need help doing that. So, while we’re not looking at this virus as wanting opportunity, it is a situation where just like after the 2008 crash, there could be some opportunities out there for all of us that are note investors or real estate investors.
Haley Gant: Yeah, that’s so much great information. I mean, I’ve been saying on almost every single webinar, that I think when we do get out of this in a couple of months that there’s just going to be so many opportunities out there. And it’s interesting that you say you foresee that you think maybe a lot of people are going to be selling their notes coming up. And I know one of the things that you like to talk about a lot is buying notes in a self-directed IRA. So, what kind of tips and tricks could you give us for someone that’s looking to buy notes, coming up in the next couple of months? What information would you share with them?
Tracy Z Rewey: 05:21 Well, I really do like real estate notes in a self-directed IRA because they generate interest income and they’re not so hands-on like other types of fix and flips or being a landlord. I used to be a landlord and I used to do some buy and sell of properties. It was just a lot of work. As we get a little bit older, we’re like, how can we do things that don’t take quite as much work? I’m not saying it’s 100% passive because no investment I think is a hundred percent passive, but interest income is a more passive type of investment compared to fix and flip and managing rentals. So, I really like the interest income perspective of it. The notes I buy, I buy first performing real estate notes, generally seller-financed and I buy them at a discount. Since I’m buying them at a discount, we get even more of a yield than just the interest rate on the note.
And then a lot of times a note will pay off early so that we’ll have an interest rate or yield go up and then we are backed by real estate as security. These are the reasons I like a note in a self-directed retirement account. You’re the bank, right? If somebody doesn’t pay on the note, you still have the rights of the bank and in that you can foreclose and take back the property if they don’t pay. Plus, you can use licensed third-party servicers that collects the payments. This way you’re hands off. You’re not providing any kind of service to your self-directed retirement account. And there’s opportunities to rework notes. So, all of those things, plus when you put them in the self-directed retirement account, your profits are tax free or tax-deferred, depending on what kind of account you’re using. So those are the reasons I like it. And then I also have 10 tips I thought I would share with people if they’re thinking about buying notes or if they’re currently buying notes. Some things I’ve learned over 30 years of doing this that will help people on their path.
Haley Gant: Awesome. So, let’s talk about buying notes at a discount. Obviously I think there’s going to be a lot of opportunities coming up for that. But how do you calculate or decide how much a note is going to be discounted whenever you decide to buy one?
Tracy Z Rewey: 07:33 Yeah. Excellent. Well actually, that leads us into our tips because the first tip I have for people is to know your note type. Just like you have a blood type, know your note type. The discounts and the yield that you can anticipate are going to be different depending on your type. So, like I mentioned before, I like first position performing notes and I like seller finance notes because I know I can buy them at a discount. Even though they’re making their payments and are in first position, I can still buy them at a discount. That’s sort of how the seller finance note market works. Some people like nonperforming notes, where they know the people aren’t paying and they either plan to go in there and get it to restructure or repay or maybe they plan on foreclosing and taking the property back and reselling it. That is the first thing you have to think about, performing note buying or non-performing note buying. And then you have to think about what lien position. Are you a first position note buyer, or are you a second position note buyer? Because all of those things will affect what kind of price that you want.
Once you figured that out, then tip number two is you’ve got to have a playbook. Your playbook is what’s my investment to value? We call that ITV. What’s the payer or borrowers LTV? That’s loan to value. So that’s the very first thing we look at when I see deals. I’ll go, okay, you’re looking at the three P’s we call them. The People, that’s the payer and also the person selling you the note, the Property, and then the Paperwork. So those for me are the three P’s of note investing. When you have that playbook, the first thing you look at is how much does that borrower, that payer, the person that owes the money, what do they owe compared to what the property is worth? And that’s called their loan to value. And the opposite side of that is their equity, right? So somebody with more equity, more skin in the game, are less likely to default or get into a non-payment situation. Or if they do, they’ve got some options. They could sell the property or pursue the different options available when people have equity.
One of the first things you see, that I don’t like, is when people bring me a brand new note, it has no down payment, and they haven’t made any payments and they have poor credit. That deal just doesn’t have much going for it. But you bring me a deal that the buyer’s got 20% equity and they’ve been making payments six to 12 months, I’m interested. Now even if they do have some credit glitches if they’ve got some equity and some seasoning, or payment history, that’s still a note we can look at. So, we just might lower what we call is our ITV. There are also people out there who originate notes too, private lenders that loan money. So that would be a third way to get involved in notes as well. But in the notes I deal with, that LTV has already been established. So if the loan to value is higher than I would prefer, then I just lower what I’ll pay, I lower my investment to value. So we look at investment to value, we look at loan to value ,and then we look at the terms of the note.
So maybe the note has a 0% interest rate. I could still buy it and get a 10% yield. I just have to plug all those numbers into the calculator. That financial calculator will tell me what I need to pay to achieve the yield I want. So in addition to having a playbook, you need to understand the time value of money. If you’re going to buy notes, you’ve got to understand these five keys. Don’t get scared by all the keys on the calculator. Just understand the five keys here on the top row that have to do with time value money and internal rate of return. That’s actually something I do a training on, very affordably for people, because when I learned how to use this calculator, I was scared of it too. But once you learn it, you’re like, it’s very empowering. I take it now whenever I buy a car. I’ll take it into the car dealerships with me and run all the numbers on it. You really know whether somebody is charging you a fair rate or not when you understand it.
Haley Gant: Yeah. That’s awesome. I bet they are a little surprised when you walk in with your financial calculator. Let me check your numbers a little bit.
Tracy Z Rewey: Yeah, I do. It’s like I think you’re charging me this interest rate that’s much higher than the interest rate that’s the going rate, because that’s how they play with car prices. They make so much of their money in financing now, not so much in the car itself.
Haley Gant: And you teach a course over it. Can you tell us a little bit more about that? Because that actually sounds like something that I would probably like to take. It sounds very, very educational.
Tracy Z Rewey: 11:53 Sure! It’s called, How to Calculate Cash Flows and it’s about 60 videos. It’s broken into short bite sized pieces and it explains how amortization works. Because when you first start out, you’ve got all this interest. And then it starts to go down as you pay more to principal. So how you can use that arc to do things like a partial purchase? I do a lot of partial purchases where maybe there’s 30 years left on the note and I just buy 10 or 15 years. And so this class teaches you, how to figure out what an amortization is, how to figure out what you can pay to get a yield that you want, and then how to chunk that amortization up to just buy parts of it. I could buy five years from somebody now and then they might want me to buy five more years later. And it lessens the discount to the person selling the note, which is good for them.
And it also helps me because I’m lowering my exposure, my investment to value. I can usually get a little bit better yield on a partial then when I buy the whole term of the note. So yeah, the training is this video training. It’s under a hundred dollars. People just log in and they watch the videos and they learn how to do it on an HP 12 C or if they have a different financial calculator they like, they can use that. And then I also use T Value amortization software. That’s a great way because that has schedules and amortizations that you could print out. I run all the calculations on both of those. And we do a lot of recasting notes, restructuring notes, how to figure out your yield based on what you pay. And then if you were to change the terms of the note, how that changes your yield. We go through a lot of those things too.
Haley Gant: Yeah, that’s interesting. I’m going to look that up. How does someone find that course? Where can they go to find that?
Tracy Z Rewey: If you go to NoteInvestor.com/bookstore you’ll see it there or you’ll see bookstore up in the header and the menu of the site. And in the bookstore tab is that, How to Calculate Cash Flow training.
Haley Gant: Awesome. I’m going to post this here in the Facebook comments really quick. That is hugely valuable. I took several finance classes in college, so I remember doing all of these calculations, but now that my world revolves around self directed IRAs, it’s definitely a little bit rusty. But I know it’s something that a lot of Quest employees and even our executives, a lot of us invest in notes because we really like the idea that it’s passive. We don’t have time to go out deal with toilets and tenants, making sure they’re not trashing the property every other month. So we invest a lot in notes and it is something, whether you have a really large IRA or a small IRA, it’s a very accessible investment because like you said, you have a lot of options to purchase partial notes or full notes at discounts. Whenever you’re purchasing partial notes about usually what’s the value of those, if it’s like a five year or 10 year partial? Do those really have like a typical price range?
Tracy Z Rewey: 14:55 So it depends on what the terms of the note are. You’ve got to plug in the payment amount, the number of payments you’re going to buy and the face rate of the note. That’s the interest rate that the borrowers paying. So step one is to establish that cash flow then peel out the piece you want and then you’d basically put those numbers in and you solve for present value at whatever yield you want. So it really depends a lot on the interest rate of the note, how much those will get discounted. We go through all kinds of different samples and examples. It’s interesting how the amortization works because on most 30 year notes if I buy 15 years of it, when I sign it back to the seller, if they take what I’m paying them plus the balance that the borrower still owes at the time of reassignment, they usually equal pretty close to the balance of the note. So it’s a way for them to sell off some of that interest and not really take that big hit of a discount. This is because of the time value of money principal that money now is worth more than money later. The great thing I do about teaching people is that we just talk about the things that are relevant to what you want to know. It’s not like a economics class. We just teach you about the things you want to know to help you make money.
Haley Gant: That’s awesome. So I think we’ve gone through three tips so far, know your note type, your playbook and understanding the time value of money. What other tips and tricks do you have for us after those?
Tracy Z Rewey: 16:26 Well, you’ve got to embrace the boring. We love talking about yields and you know, I can buy this note and get a 20% yield and I can buy this note and get a 10% yield, and then they pay off early. We love talking about that stuff, right? But if you’re going to be a good note investor, you’ve got to embrace the boring. And those are all your due diligence items. So I see a lot of people go out and buy notes and then I’ll ask them a few questions. Then you hear crickets. They’re like, I don’t know that. And I feel bad for them because there’s a few basic questions that you always want to ask when you’re buying a note. So if we’ve got time, I’ll go through a couple of those. I mean, these are the kind of the things I want to know when I go to buy notes.
Haley Gant: And I’m even taking notes right now because notes are something of interest to me. I’ve grown up around real estate my entire life. But when you take the property away and it’s only the note, my head, it’s hard to wrap around it sometimes. So yes, I want to know what you like to know when you’re buying notes.
Tracy Z Rewey: 17:27 Okay, excellent. Yeah, so we get a lot of people who buy real estate that want to start buying notes just to diversify their portfolio. And we see people now that are landlords and they want to sell off some of their properties. Not all of them, but some of them and get some of that benefit of appreciation we’ve seen in so many real estate markets. And so in doing a seller carry back, they keep that interest income working for them and they also get to defer some of the taxes, the capital gains because it’s an installment sale. We see a lot of people converting over by creating their own notes. And then we see people who also want to buy notes. These are the kind of questions you definitely would want to ask. So the great thing if you are buying real estate, you already understand what your underlying collateral is, right? So that’s the great news. You already are halfway there. You understand title and you understand how to evaluate a property, but with notes, you’re not owning the property.
You’re not looking for the appreciation or the rental income, you’re looking for the interest income. So, we have to look at them just a little bit different. The first thing I like to know is how long has the buyer been making payments and are they current? The longer they’ve been making them, the better. Is there a servicer, a third party that’s collecting and validating the payments? Sometimes there is as a servicer and sometimes there’s not. Sometimes the buyer just makes the payments to the seller every month. And then you’re like, okay, well I would just like some proof of that. That’s reasonable. Right? And then they tell you, well, they come in and pay cash every month. I’ve had people take pictures of cash and send me photocopies as proof of payments.
Haley Gant: Very verifiable by the way.
Tracy Z Rewey: 19:17 Oh, yeah very verifiable, yeah right. Now you have to see if you can trace it in some other ways through deposits. Next, do the documents match the terms of the sale? So you want to look at things like the note and Deed of Trust in Texas. Here in Florid it’s a note and mortgage. In some States, they like land contracts like Michigan. So you’ve got to look at the documents and see do they match the terms that are being presented for sale. Or have they been modified? You might see that on a note that was previously delinquent and is now current. The next thing I always check, and this is so easy to do, it used to be hard, but now it’s easy, is just hop online and you go to the County site and you see if the real estate taxes are current. Because they may or may not have a reserve account in escrow. They may or may not be paying 1/12th in addition to their principal and interest payment for taxes and insurance. So go and see if taxes are current because as most of us know, real estate taxes can attach ahead of even a first position deed of trust or mortgage. So very important to know if real estate taxes are current or not.
Is the property insured for fire or other hazard? Is that buyer, borrower keeping the property insured? I bought notes where I learned this lesson the hard way when I first started doing it. I bought a note where the property was not insured and it burned down. How motivated do you think someone is to make payments on a house that’s no longer there when they don’t have insurance? Yeah… so very important. Or have some kind of force placed insurance or some kind of master policy. Doesn’t happen often, but sadly it does happen once in a while.
Haley Gant: And I will say if you are a real estate investor for any amount of time, at some point you will have a property burn down or catch on fire because it’s happened to my parents a lot and it just happens. You don’t think it happens very often, but it does.
Tracy Z Rewey: 21:10 Yeah. And when you’re a real estate investor, you’re used to keeping that policy active yourself. And so when you’re the bank, people don’t realize, Oh, I’ve got to make sure the person who owns the property is doing that. Or I’ve got to have force placed insurance or I’ve got to have a backup policy. Yeah. So very important.
Is there an updated title report? So I’ve seen a lot of people buy notes and they didn’t get a title report. How do you know the person selling you the mortgage or the deed to trust has the right to do that if you don’t get a title report? Even if it’s just a report. I prefer a policy over a report, a commitment for policy. But at least a report. You can get a report for a hundred, $125 from ProTitle. It’s just an owners and encumbrance report or O&E, but something, even if it’s without the title insurance. What’s the lien position and what else is owed on the property? Are you in first position lien or is there an underlying lien. I see a lot of wrap deals. I know they’re popular in Texas as well. We call them overalls or wraps or all inclusive trust deeds.
If you’re buying a note or mortgage, it’s very possible the person selling it to you still owes some money for when they bought that. So now you’ve got to say, well am I going to pay that off out of proceeds, which is one option, or am I just going to buy the net difference of the payment and keep that underlying there, which can also be a great strategy if you don’t have a lot of money to invest. It’s kind of like debt leveraging. Then you have to start thinking about, well what if that underlying calls it all due and payable? What’s my backup plan? There are some additional considerations on that. It’s usually safer to pay off the underlying, but there are ways to keep that underlying there. So, know your lien position, what other liens are on the property, and who’s responsible for paying for them. Now it might be the buyer borrowed some money behind your lien position. There might be a second behind you. And then that might be the borrower, the buyer’s responsibility to pay that. You want to make sure that borrower doesn’t have so much debt against the property, they can’t get out whole. So all of that would go into your analysis and a title report will tell you that information. That’s why you get a title report. You don’t have to trust the person selling you the note to answer that question.
23:23 I also like to know, who is the current holder or seller of the note being purchased. A lot of times you’ll see notes that have already been sold more than one. So is it the person who originally sold the property, like in an owner financing deal or it did it come through all of the bank waterfall of nonperforming notes that got sold off. I just looked at a note the other day that had eight assignments on it. It transferred hands eight times. So, if that’s the case and the person that is selling it to you is not the original person on the mortgage or deed of trust, as the mortgagee or the beneficiary, then you’ve got to follow the chain of assignments and you’ve got to make sure there’s an Allonge or a note endorsement that follows the chain of assignments. And that’s one thing that people who switch from real estate investing to note investing overlook. They are used to understanding how deeds work for chain of title and they get the assignment of mortgage or deed of trust because that gets recorded, but they forget to ask for the chain of title for the Allonges or the note endorsements because those don’t get recorded, right?
The original promissory note doesn’t get recorded. So you’ve got to get the original promissory note and you’ve got to get any Allonges or endorsements to the note along with that recording of Assignment in the County record for the mortgage or Deed of trust. So those are a couple of important things that you always want to know, where’s the original note? Because you’re going to want to get that at closing. And that’s a very important thing. So I’ve had a lot of people who are new to note investing, didn’t realize they needed to get the original promissory note. You need that. If you ever want to enforce your lien holder rights in case somebody doesn’t pay, you have to foreclose. You definitely want that or some kind of lost note affidavit. And then I like to know what is the current value of the property? We’re really fortunate because right now property prices have been going up. But maybe during this pandemic of COVID-19, we are going to see property values potentially, maybe start inching down in some areas. Not in all areas, but it’s a potential that there are certain areas that are more inflated than others or maybe more impacted.
For instance, I’m in central Florida. We have a lot of people who work at Disney and Universal and all the other tourist attractions. And sadly, they do not have employment. It’s very possible that after we have seen so much appreciation, some of the values around here are going to soften or go down or get stagnant. You always want to know what’s the current value of the property and you want to base your investment off of that. That’s a very important thing. We do things like get drive by appraisals or BPOs, broker price opinions, to figure out what the value of the property is. That helps you know, how much equity does that buyer have? That’s the other big thing I like to know. And then the last thing that is kind of in that top tier of questions, what’s the credit worthiness of the buyer? What’s the credit score? And do they have the ability to repay the note, can they afford it? And so that will depend on how much underwriting documentation the person selling you the note did. But there are also ways that you can find that information out on an existing note as well. You want to know what’s their credit? I mean we sometimes see notes with 700 scores and I oftentimes see notes with below 600 scores, and I see notes with no credit scores, borrowers, buyers with no credit history. You just have to look at the note and start balancing the scales of what’s the good versus the bad. So that was a long point. I promise, all my other points won’t be that long.
Haley Gant: No, that was perfect, I almost have a whole page of notes myself, which is awesome. And I assume the course that you teach probably covers all of those topics in much more detail. Something you said that stuck out to me that I’m very curious about. You said you looked at a note that I guess had been transferred or bought eight times. Is that potentially like a red flag or, is there a reason why that particular note might’ve exchanged hands so many times? Or is it maybe just a coincidence none of the note buyers didn’t want to hold onto it?
Tracy Z Rewey: 27:43 Well, it came from a group of notes that were part of that subprime lending group. From that, I think it was in originated in 2006. Then it was one of those notes that became over encumbered. And in 2008, 09, 10, as the values went down, then it got delinquent and it was modified and then the people got current. Then there’s this waterfall. So the bank sell sit off in a big portfolio and then they sell it to a hedge fund, and then the hedge fund sells it to a smaller group of private equity firms, and then they sell off a piece, and then they get it performing and then they sell it to another investor, and that investor sells it to somebody else. So that’s unusual and yeah, it can be a red flag if you don’t understand what’s going on and why it happened. But that note was serviced by a third-party servicer and it had a current payment history for the last five or six years. And the property values have gone way up since then. This one happens to be a good note. They really had all the assignments and Allonges to match, but it could be a red flag. Yes, absolutely.
Haley Gant: Yeah. Especially, I mean, when you multiply that amount of paperwork and due diligence process by eight and it’s passed through several hands, I could definitely see how, if there’s a few documents missing there, how it could potentially be a headache, especially for someone maybe who’s a newer note investor.
Tracy Z Rewey: Yes, I would say that would be something for more experienced note investors or get the help of an attorney that understands the paperwork, and not all attorneys are created equal. So make sure you get one that understands real estate. I know Quest does a lot of work and interviews with Jeff Watson. He’s very knowledgeable attorney on note investing.
Haley Gant: Now, let’s talk about, unless we’re going to deviate too much, but let’s talk about maybe servicing for a minute. Note servicers, how do you choose a good note service or what are some things that you might look for there? And you know, of course, kind of to touch on that when you’re buying a note in your IRA. I tell you how to structure your investment, but I would definitely recommend having a note servicer in place. It’s kind of like having a property manager just pay someone else to manage all of that for you.
Tracy Z Rewey: I completely agree with you. And that’s actually one of my tips or points, that’s to seek professional help. And one of the items that are very important as a note investor would be to use a third-party servicer. They generally charge somewhere between 20 and $30 a month to service it. So what do they do? They collect a payment from the buyer, the borrower. They keep track of principal and interest. If there’s reserves for taxes and insurance, they keep that account going and pay the taxes and insurance. Even if there’s no reserves, they can still implement a process where they check to be sure insurance and taxes are being kept current by that buyer or borrower. They record interest and file 1098s at the end of the year. People don’t always realize that when they buy notes, now they’re receiving interest income and they need to issue that 1098 interest statement to the borrower and that’s interest income to them or their self-direct retirement account.
With an IRA it’s great because it’s tax free or tax deferred depending on your account. So, the servicer does that. And then they also will make collection calls. If the borrower is late, they’ll send out notices, they’ll make collection calls, they’ll work out forbearance or modifications if it’s necessary. Some servicers do collections better than others. You want to make sure the servicers are staying on top of that. Don’t just trust it’s all happening. That’s my advice. But servicers are great for the note, like you said, it’s kind of like a property manager, but much cheaper.
Haley Gant: $30 a month sign me up. Like we’re good.
Tracy Z Rewey: Yes, and if you’re creating new notes. We work a lot with people who are selling a property and creating a note. We just make sure that they write it so that the borrower, the payer, who is already saving tons by not having to pay bank origination fees. Just have them pay that monthly servicing fee and then you don’t even have to worry about it.
Haley Gant: Nice. That’s awesome. So, I think we’ve had five points so far. Not sure if we’re going in order at this point. But what other useful knowledge do you have for us?
Tracy Z Rewey: 31:54 Well, I like to tell people spread the risk around. It can be risky if you get this retirement account and you just buy one note with it. I would rather see people buy four o$50,000 notes than one, $200,000 note. Now I also am sensitive to the fact that it might be, if you’re just starting out with a small amount, maybe it’s hard. You’re just trying to get enough to buy one note, let alone spread the risk of having four or five notes. But you could partner with another self-directed IRA company or account. Or you can buy a partial, there’s just different ways, but I’d prefer to see people spread their risk around so it’s not all in one deal.
Haley Gant: Yeah. And I’d just to touch on that to let people know before we just breeze over that point, it is really an awesome self-directed IRA strategy. We do see a lot of people that like to partner multiple IRAs together to purchase notes. And especially now in today’s world with all of the different creative deal structuring, there’s a lot of ways to utilize a small IRA to still have access to these investments. And that would be through partnering, or purchasing partials. We have seen it come up a lot more commonly where you’re really able to utilize smaller IRAs for these different types of passive note investments.
Tracy Z Rewey: Yeah. Don’t you guys do a whole presentation or March Madness thing that you help people focus on? I know that one got canceled, but you do something similar where you focus on the small deals, right?
Haley Gant: Yes, we do. March Madness is one of my babies that we came up with that idea for an event because every time we come up with ideas for events, we try to think, okay, what would Nate like and what is he going to let us run with, so that’s how we came up with Casino Night and March Madness. March Madness, we did it last year and we had about seven different guest speakers from all over the country come out to Dallas. And that recording is actually still on our Facebook page. If you search March Madness and our videos, you can see it come up. We were going to host it again this year, but unfortunately being scheduled at the end of March, it is no longer happening now, but stay tuned for my upcoming webinars that might have some surprise guests on those.
Tracy Z Rewey: Excellent. It’s nice to know what’s archived too, because, a lot of people get frustrated or confused. I think one of the most underutilized accounts now, and I’m probably preaching to the choir when I say this, is an HAS (Health Savings Account). I mean, Oh, what a great account. You know, it what I’m telling someone to get started. I say that even before a Roth, consider an HSA. And then once you do that move to the Roth. And then you’ve got your traditional IRAs and your solo 401Ks, but I mean, people don’t think about those HSAs. They’re a really great account that you can self direct.
Haley Gant: Exactly. And I preach this all the time. And it’s funny because you say this, Jeff Watson says this, people who are familiar with the different types of accounts that don’t even work in our company really, really push the HSA without us really having to do anything. But I love the HSA because it can be self-directed just like all of our other IRA accounts. But you can access the distribution’s completely tax free before you’re 59 and a half. And you do that by using your HSA to pay for your qualified medical expenses or reimbursing yourself for your medical expenses that you’ve paid for out of pocket. So if you plan it out right, you could start with a small HSA, pay for your health expenses out of pocket for the next couple of years. But since that HSA was in place, you can come back and reimburse yourself at any time, completely tax free. So you could take $10,000 out in a couple of years from now and go on a cruise with it and pay no taxes or no penalties. Hopefully we will be back on cruises by then.
Tracy Z Rewey: 35:42 But will we want to cruise again. Right? Plus you get a benefit for making a contribution to it, if you have a high deductible health insurance plan. I agree with you. They are just under utilized, but I think people are catching on now. Hopefully. The more the better. So, I like to find creative solutions. That would be my other tip to people who are note investors. I mean we’re trying to do things that fell outside of some traditional lender’s box. So, find a solution that might win for everybody. Definitely look at partials. I consider partial purchases to be huge creative solutions and partnering like you had mentioned as well. So those are all my tips. I always tell people to tap into deal flow. They always say, how do I do that? And I’m like, well, it’s easier now than ever. I mean, wow. We’ve got custodians and trust companies like you that help us tap into deal flow just by networking together. We’ve got online listing sites that list notes like NotesDirect and PaperStac. It’s easy to find other note investors because we’re everywhere. There are all kinds of groups on Facebook. There are webinars like this. There’s so many ways to network.
It’s so much easier than it used to be. We do still use some of the older methods like direct mail and SEO and posting ads on Craigslist. Those are still things that work as well, if you’re trying to get more direct to a seller, but there’s lots of professional networking that you can do that you’ll find notes. I mean, we get notes from attorneys and CPAs and servicing companies and other note investors. We’re all always recapitalizing, right? So other IRA holders. So tap into deal flow. My ninth tip would be, learn from other people. There’s lots of other people out here doing it. So learn from them. I have 300 free blog posts on our site, so I might not here just trying to sell everybody training. We give a lot of information. A lot of people have free webinars like this. There’s no charge to come to these. So during this time people may have a little bit extra time. I think it’s a great time to watch all these archives that you’ve got going on your Facebook page. If you’ve got some time on your hands, use a little to just get some knowledge from other people who are doing this.
And then, you know, my 10th tip, with note investing is use a self directed IRA account. That’s a great investment for that. Even if I do some deals in my retirement account and I do some deals in my company, because you know we need income now too, it can’t all be for retirement, but I push as much as I can into the retirement account. And there’s so many great options and people that understand this and can assist you. So those are my main tips for buying and selling notes. Everybody has their own kind of methodology to it. My sweet spots always been seller financed notes and that’s just kind of where I like to play.
Haley Gant: 38:45 Yes. And so speaking of seller finance notes, that kind of segways almost perfectly, but before we get to that, I want you to pull up your slides for the data in just a second and kind of take us through that. But buying notes in a self directed IRA is such a great option. And like Tracy was saying, you don’t have to do everything in your IRA but certain investments that come across your plate or come across your email that gets blasted out to you. Some investments might make really great investments for you to do in your own business or personal, outside of the IRAs. But some other investments that come across your plate, look at that investment and say, do I really need this cash flow now or would this be a good investment to shelter completely tax free within my IRA? If you think it’s a good investment for your IRA, give me a call. I will walk you through the entire process of how to set up an account, get it funded, fund that note. It’s a really easy process. And what’s also nice is if you end up using multiple IRAs together to partner in on one of these notes, Quest basically handles the kind of internal split of the accounting on our end.
So if your note payer pays one check and your servicer sends that to us, but you’ve got three IRAs in on that deal, once Quest receives that check, we’ll do the splitting of it up between the three accounts based on the percentages of ownership for each one. I know a lot of these topics might be new, maybe you’ve never done it before. I know sometimes my head still even spins with this stuff. But it’s really not that complicated. That’s why, and one of the best tips, is work with experts. Don’t try to do it on your own. Know that Tracy is the note expert. When you want to know what you need to do for a certain part of buying a note, go to Tracy. When you want to know how to do that in a self directed IRA. Come to me, and we’ll help you throughout the process, wherever our particular expertise is.
Tracy Z Rewey: And that’s one of the great things with Quest Trust is that all of your IRA specialists, number one, are super knowledgeable like yourself. And number two, they’re doing deals in their own IRA. They’re not just people pushing paper. They are people doing deals. I just love that about Quest Trust.
Haley Gant: 40:54 Yeah, it’s fun. I think why we get so passionate about what we do because it’s not like I’m out here selling furniture trying to just hit a quota, but we’re actually selling a product and service that really does help a lot of people out so much that we do utilize it ourselves as well because I definitely have a Roth IRA. I’ve done I think four investments in it now, tripled in size and about two and a half years from the time that I started at Quest, and now I’m kind of looking at what my next deal is going to be. I’m probably going to look at purchasing some partial notes, you know, just kind of be passive. I’ve done fix and flips and it’s just a lot of work and I’m ready to kind of be passive.
Tracy Z Rewey: It is a lot of work. They make it look easy on HGTV, right?
Haley Gant: Right. Yeah. These days, YouTube is where it’s at. I learn a lot of things on YouTube. There’s so many ways that you can still be watching TV but be learning at the same time. And you kind of mentioned this as well, right now when everyone is at home and we’ve got a lot of stay at home orders, probably ending in the next month or so, hopefully, now is the time where you really want to build up these relationships, build up this knowledge, and put a game plan together for what you’re going to do when we’re allowed to go out and get life back to normal again. Because once life gets back to normal, yes, it’ll be back to somewhat normal, but it’s going to be a new normal where there’s going to be a lot of opportunities out there. There are going to be a lot of people looking to retain some of their cash, maybe get out of investments, and now is the time to educate yourself about all of these different things that you might be interested in. That way once things start moving and shaking in hopefully a month or two you’ve already done this stuff now and you’re ready to move along with everyone else who’s been gearing up for this.
Tracy Z Rewey: 42:39 Yeah, that’s a really good point too. And you know, when we talk about note investing, people sometimes just think about buying a note, but remember that if you are a real estate investor, creating notes and using notes as part of your sell or selling strategy, can help you retain some of that money for the future. If you’re fix and flipper or wholesaler or rehabber, you might need to sell to pay off your underlying debt or your private mortgage, you know, your hard money lender. But if you could just push a piece of that into a note by selling off a partial and keeping a tail end, or maybe structuring a first and a second and keeping the second just selling off the first, you can keep some of that money working for you. Not all of it, but some of it so you won’t have to keep turning deals forever. If you love doing it, that’s great, then make notes part of a long-term strategy.
The other thing that people don’t think about for notes, and I think this is an area that is going to be increasing after the COVID-19 and one of the reasons I did this recent class called, Creating Notes ,is that people can buy real estate using owner financing. You can buy subject to or you can buy on a wrap. There’s going to be a lot of people who are going to have some troubles getting bank loans after this is all done. They’ve already said banks are tightening up. They want at least 20% down. They want 720 credit score. If you understand creative financing, owner financing, and then how to structure a note that can be sold off to an investor, then you will be able to do deals other people can’t. I think we’re going to have to go back to having to be a little more creative in our methodology of how we do real estate deals.
Haley Gant: Yeah, that’s awesome. And such a good point. You know, because the banks and all that Wall Street money really is frozen up right now. And you know, there’s probably two different ways that you could look at it. Say, okay, when is this money going to unfreeze? Or where else can I get my capital? And I say this all the time, but you always want to know where you’re getting your money for your deal and you know what your options are going to be for that potential private lending, note creations, things like that. So, let’s talk a little bit about seller financing. I know this is a strategy that you love. Kind of tell us about why you love owner financing and if you want to share those slides. You know, I’m a nerd for data.
Tracy Z Rewey: 45:08 Me too. We get along great. I love the numbers, right? It just takes it to something real instead of theoretical. Well, seller financing, like I’ve mentioned at the start, it’s been around a long time. So that’s where somebody sells property and allows the buyer to make payments to them over time. And in this little chart here, we’ve been tracking this data based on courthouse reportings all across the 50 States. And we do that with some help from our friends at Advanced Seller Data Services because they go in every year and pull all these records. And they’re looking for people who owned the property, they were vested in fee simple title, sold the property, and also recorded back a deed of trust or mortgage where instead of the buyer getting a traditional bank loan, they accepted payments over time. So installment sales, seller carry, land contracts, deeds of trust, mortgages. It could be any lien document that’s recorded where the seller accepted payments.
And these stats are based on first position. So, there’s lots more of them if you look at second position, but these are first position over $30,000. You look at this chart starting in 2009 and you see seller financing went up in 2010, 11, 12, 13, and 14 because there was a lot more seller financing after the last crash. They won’t call it a crash, after the last recession. Right? But if you owned real estate back then you felt like it was a crash. Let me tell you. Now, after the last recession, there was a lot more seller financing and then the bank financed, the markets came back, the real estate markets came back, the banks came back. And so seller financing did drop down a little bit in 2014, 15, 16 and then we saw it kind of even out in 17 and up a little bit in 18. And it just got across my desk yesterday, the 2019 stats. So we will add those to the slides because it’s a little bit of a delay in how long it takes to get the data from the court houses. I don’t have a crystal ball, but I predict if this continues to be a recession from COVID-19 that we’re going to see those seller financing numbers go back up.
So that’s just my prediction. Even if they just hold the same, there’s still lots of business. If you’re thinking, okay, just what kind of business is there, I’ll just share a couple of these slides. These are on our website too if somebody wants to download them all. But in 2018 it was 25.9 billion (with a B) dollars created in seller finance notes. So yeah, I know it’s a small market compared to some markets, but there’s still lots and lots of business there. And if you combine that up, knowing that people have 30-year mortgages, maybe they take seven to 10 years to pay off, we see that’s about the average lifespan of a note. Some go 30 years, but most end up paying off early because people, you know, sell the property, refinance, move, that sort of thing. But that’s a lot of inventory that’s out there. You can see it’s broken up into residential, commercial, and land. And
I thought another interesting stat I always like to share with people is that 10 of the 50 States made up 69% of the volume of seller financing. That’s a lot, right? Yeah.
And then the remaining 40 States made up 31% of the volume. So that may make you wonder, well, what States have lots of seller financing? So, you can see on this slide, Texas, your State. Number one, was Texas. Since I’ve been in the note business for the past 30 years, Texas has always been the top producing state for seller financing. Then you’ve got some other States like Florida, we’re number two. Last year California was number three. That might surprise people, but yes, they have a lot of seller financing. Arizona was number four last year, North Carolina, Georgia, Washington State (my old home State), Oregon, New York, Pennsylvania. You don’t have to buy seller finance notes in your State. It’s always easier when you do just because, you know the markets a little bit better, but you don’t have to be limited geographically when you’re the bank the same way. People buy and sell real estate, rehab it long distance, but it’s a little harder. It’s a little easier to own a note long distance. We have other stats too, but I just thought those would be a few fun ones just to share because people don’t realize that seller financing is a bigger share of the market than they realize.
Haley Gant: Yeah. And I didn’t realize that, you know, it’s so heavily like centralized in certain areas of the country. I think I kind of know the answer to this, but I want to hear it in the way that you would say it. Why do you think Texas, Florida and California have such a large share? I mean between those three States alone, it’s over 40% of all of the seller finance notes in the country.
Tracy Z Rewey: 50:02 So, number one, if you know Eddie Speed, another big seller financer, I’ve known Eddie for many years and we’ve bought and sold deals together, he says “activity breeds activity.” And I agree with that. Then when an area gets familiar with how to do seller financing and do it well, there’s not such a stigma. There are also certain areas where there’s a certain demographic that have a little bit harder time getting bank financing. So sometimes that plays into these stats as well. We see that places that have under $100,000 to $150,000 properties might have a hard time getting bank financing. Rural areas, even though they’re not the ones that show up here. They also have a hard time. But you remember, these are also areas that have a lot of real estate sales going on. So just by nature of that, those numbers are also higher. So all of those things play into it which is my opinion of why those States traditionally always have more seller financing.
Haley Gant: Yeah. That’s awesome. That’s a cool little statistic there. Were there any other slides here that you wanted to share with us?
Tracy Z Rewey: 51:15 Let’s do one more. Why not? I always like to see how many people create notes that are single note creators. I call those mom and pop sellers. They do one note in 12 months. And then I like to look at how many people or entities, because it could be they have a trust, LLC or something, are creating two or more notes in a 12 month period. So, to me that kind of mom and pop, they sold the property, they make one note. Somebody who does it frequently, you know, they’re at a more professional level. I like to track those numbers because, and from a marketing perspective, I market to those two groups differently. There’s something called the Dodd-Frank Act that came along. Not to bore people with legislation and laws, but they do come into play here. Something called Dodd-Frank came along after 2008 and it implemented laws to restrict predatory lending and to make sure that banks made sure they were making loans to people who have the ability to repay.
So they decided to lump some, not all, seller financing into that Dodd-Frank Act. And so there are exemptions in there for people who do one and there are exemptions in there for people who do three or less in a 12 month period. And then there’s ways that you can do more, but there’s more laws and legislations. Things you’ve got to do and hoops you got to jump through. So I like to track this as well because it helps me also see how much of an effect Dodd-Frank has or hasn’t had on seller financing. Now there’s some cool ways that you work through this process. We work with somebody called, CallTheUnderwriter.com, and if you’re creating new notes, they will actually qualify borrowers on seller financing for the ability to repay under the Dodd-Frank Frank Act, for less than $500. They will underwrite it just like with like Fannie/Freddie does. You still get to set your own different underwriting criteria of what you’ll do. You don’t have to be just as stringent as a bank, but it’s pretty cool cause you can document it just like banks do and qualify under the ability to repay. So there’s lots of creative strategies that have come along to help answer that question, What do I do if I want to do more than just this one or two in a 12 period?
Haley Gant: Nice. Awesome. We do have one question from Facebook. Mariah wants to know, is there a checklist? I assume that this is probably referring to you know, that big long list of things that you look for whenever you’re buying a note. So you have some sort of like checklist for that?
Tracy Z Rewey: Yeah, we do have a checklist. If they want to reach out to me, Tracy@noteinvestor.com, I can give them a link. In addition to these 10 tips, I actually have 21 tips so I can link them to that article. Also, there’s the checklist of the standard things that we look at. I mean there’s not one checklist that covers every situation. If you have a mobile home deal for example, you got to look at it a little different than you would a standard house. If you have ta second position lien, you must look at it a little different. But these are definitely the top-level questions I ask on every deal.
Haley Gant: Okay, awesome. And then we do have one other question right here through zoom. Jim wants to know what was the company again that does the service for $500?
Tracy Z Rewey: Oh, for the MLO mortgage loan origination qualification for seller financing. Yeah. do you want me to type it in the comments or do you want to type it or?
Haley Gant: I will type it in here right now.
Tracy Z Rewey: 54:37 It’s CallTheUnderwriter.com and I’m plugging him all the time. I don’t get any compensation for promoting him, except that he is really nice to me when I ask him to assist on deals. So that’s Russ O’Donnell at CallTheUnderwriter.com. What’s cool about him? All 50 States. So it used to be, I had every State I went into, I had to find somebody that understood seller financing and MLO laws and was licensed, but he’s in all 50 States because he’s a Fannie/Freddie underwriter and he gets seller financing. So great tip. Yeah. If you watched this whole session, learned nothing else: CallTheUnderwriter.com. That’s the other thing we talked about, seek professional help, you know, attorneys, servicers, trust companies like yourself. MLOs, if you’re going to be doing seller financing regularly. So all those are great tips that you can work with other professionals.
Haley Gant: That’s awesome. And my favorite one, embrace the boring or how I like to think of it, you know, kind of going along with the professionals, outsource the boring.
Tracy Z Rewey: Oh, that’s good. I’m going to borrow that.
Haley Gant: Awesome. So, and while this has actually worked out perfectly, I forgot to grab my charger before and my laptop is at 6 percent right now. So, we are moving right along.
Tracy Z Rewey: You are winning today, right? Winning the internet.
Haley Gant: I know we covered this a little bit in the beginning, but you know over the course of the next six months, to the rest of this year, are you pivoting any of your strategies at all? What advice would you have to other investors out there? As we’re going out, things are starting to get back up and moving again, but you know obviously going to be a little different. What kind of like last little piece of advice do you have for investors out there?
Tracy Z Rewey: 56:28 It’s interesting because I sort of was fortunate in that I already thought the real estate markets were kind of inching up there high, and so I was already like going to reserve some cash. I’m going to really start pushing creative financing, seller financing, creating notes, even did a new class on it this first quarter. And then this happened and I’m like, I didn’t know this was going to happen. Nobody knew this was going to happen. But I think those strategies, for me personally, that’s what I’m looking at implementing. Right now, in this downtime, I’m gearing up my marketing, my marketing message. I am making sure that people I work with know how to create a note correctly for seller financing, so that it can be sold for top dollar to an investor. So they don’t take so much of a discount because I think more people are going to buy property with seller financing and more are going to sell it with seller financing in the next 12 to 24 months. So, all of the things I’m doing right now are sort of positioning for that wave.
Haley Gant: Nice. Awesome. And you know, as everyone’s staying at home, what’s one way that you’re keeping up with your network? This is one of my favorite questions to kind of ask at the end of these interviews.
Tracy Z Rewey: Being here! It was nice of you to invite me to do this interview. I’m on LinkedIn a lot. I’m on Bigger Pockets a lot, I’m on Facebook Groups a lot. We do a lot of our own zoom meetings. We used to do a lot of networking at in person events. So now we’ve moved a lot of those to zoom, Facebook live, just like you guys had to pivot. I am one of those people who always try to look, well where’s the opportunity? Where’s the good out of every crisis is an opportunity. And I think people have slowed down a little bit and decided what really is most important, where do they want to focus? And I’ve seen more people reaching out and they’re working now you know, on a more meaningful basis than just inviting you to connect on LinkedIn.
Haley Gant: Yeah, definitely. And again, guys, right now is the time to really leverage these business and professional relationships. That way you can have as many tools in your tool belt as possible. You know, once you’re ready to move and do a deal. We’re going to wrap it up because I’m afraid my laptop will die if we don’t, I apologize for that. But you know, we’ve been talking for about an hour anyway.
Tracy Z Rewey: We are on time. We did good almost one hour to the minute.
Haley Gant: 58:57 Tracy, thank you so much for joining us today. I’ve posted her information in the comments on Facebook. Do you want to reach out to Tracy, her email is email@example.com. Here’s my information here: Haley.Gant@QuestTrust.com
Quest actually has a new lead page that we have posted to keep you guys up to date with the latest and self directed IRA education, the Cares Act, things like that. And then there’s my email address as well. If you’re interested in a free consultation or a free account or waiving all of our account opening fees for the entire month of April, just to kind of help people get some excitement in your step, help things get started. But Tracy, thank you so much for joining us today. This has been so much great information and I hope you guys that are watching out there enjoyed it.
Tracy Z Rewey: Thanks Haley!