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There are two common ways of going about buying a property. One is by applying to a conventional financial institution and the other is through seller financing. If you prefer to walk the latter route, then this episode is just right for you. Tracy Z Rewey of Diversified Investment Services gives the lowdown on seller financing. Covering two sides of the spectrum, Tracy discusses how you can get started in seller financing whether you’re a buyer or a seller. She taps into finding buyers and getting a note originated and acquiring properties to create notes. She also talks about teaching people to understand the time value of money and put interest to work for you as an investor.

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Seller Financing With Tracy Z Rewey

I’m joined by Tracy Z Rewey. Tracy, how are you doing?

I’m well, thanks for having me.

Thanks for coming on. I was excited when you offered to come on because I know you have a lot of experience in notes that go back way further than it does. Maybe we can start by talking a little bit about how you got started in notes and how long you’ve been at it.

I started in 1988. I went to work for a company that bought and sold seller finance notes, private notes and private debt. They used insurance funds and securities and they took that money and invested in notes. They did that mostly in the Pacific Northwest where I was from. They branched out across all 50 states. I was with them for several years. In ’97, I went out on my own because I got tired of seeing all the money the investors were making. I need a little participation in that. I’ve been doing that myself since ’97. My focus continues to be primarily seller finance notes.

How much activity was there back in the ‘80s? Was there a lot?

Yes, because the interest rates were high. There was a lot of seller financing and then there was a lot of activity in the ‘90s and the 2000s as well. When the crash came in ’08, we saw a lot of lenders pull back and we saw a big surge in seller financing. We have a lot of inventory that’s in the books now. The great thing is that real estate prices have come back. As the markets come back, buyers aren’t underwater anymore. It’s still a great time for inventory in the seller finance world. I know there’s a lot of people who buy defaulted notes. I always jokingly say that I have enough notes that I bought that I thought were going to be performing that turned outperforming. That I’m not in the market,I normally go look for them. I bought some re-performers out of few portfolios and stuff too. I get why people like nonperforming. I’ve always liked the performing first position seller finance notes. It’s always been my sweet spot.

The nonperforming space seems to continue to get a little bit tighter and tighter because the economy’s hot and foreclosure rates are low.It’s maybe not the sweet spot of the cycle for that.

I would agree with you.

Where do you see the market’s heading? Do you think it’ll continue to be a lot of seller finance notes?

We track those numbers every year and we release all the stats on our website at NoteInvestor.com. We saw 2009. If you look at the graph that’s on the site, it’s down and then it spiked up in 2010, ‘11, ‘12, ‘13 and then it came down a little bit and now it’s evened out. 2009 was down here and 2013 was here, it evened out in the last few years. In 2019, there’s $25.9 billion that was originated in seller finance paper. There’s more than that, but those are first liens over $30,000 balance. We’re talking something a little more substantial. Thereare lots more if you add in seconds and you add in smaller balance notes as well.

How do people get started in seller financing? I ask this mainly because I have some REOs now and I haven’t created my own notes yet. I’ve looked at doing it in a couple of cases.What people don’t realize isone of the advantages of doing this show and have people on is you get to learn a lot because you go survey everybody from the industry when you want to know something. For me, with one of my REOs, how would you go about finding a buyer for that and getting a note originated?

One thing I'm really passionate about is teaching people to understand the time value of money and how to put interest to work for you as an investor. Click To Tweet

The beauty of seller financing is when you advertise that the owner will finance to qualified buyers with a good down payment. If you justsay owners will finance, then you get everybody in that. It’s a little bit of a waste of your time. It’s good to set some expectations. We’ll get people who want zero down and 0% interest rate. If you’re a buyer, that’s great. I love buying properties with owner financing, but when I’m selling, I have parameters that I like to operate in. The advertising part isn’t that hard. You can do it with a real estate agent or without. There arelots of opportunities that you can list online now with or without an agent. This surprises people, butmost seller finance transactions still have a real estate agent involved. It’s not all FSBO. That’s one of the misconceptions or myths that I run across a lot.

What’s FSBO?

For Sale By Owner. A lot of people think seller financingis all for sale by owner. There are no real estate agents involved, but a lot of times agents are involved. In fact, I get some good referrals from agents. That’s the first step. The next step I always tell people,and you’re familiar with this because you buy and sell notes, is if you’re going to be selling to someone who lives in the property, it’s going to be owner-occupied. Things changed a little bit in 2014 when the Dodd-Frank Act came along. There are certain seller finance transactions that do fall under Dodd-Frank. A lot of people say, “I’m only going to sell to investors,” people who aren’t going to live in the property and then they don’t have to worry about that. Still, I encourage people, there arealso exemptions depending on how many you do a year, how many seller finance transactions you originate in a year. There aresome exemptions. I still tell people there’s an easy solution and don’t worry about it because whether the exemptions apply or not. Use an RMLO.

There are lots of RMLOs out there that will underwrite seller finance deals and they make sure that you’re compliant.They do all the disclosures and they do the ability to repay calculation. All of those things made it affordable. You don’t have to worry about if your transaction qualifies or not. That’s when you’re dealing with owner-occupied. That’s one tip that’s come along. WhenDodd-Frankfirst came out, everybody was like, “We don’t want to do owner finance now.” Now everybody’s gotten more comfortable. There are affordable options. You don’t have to go out and get licensed as anoriginator yourself or you may fall under one of the exemptions or you sell to investors.

When you originate those, are you originating traditional mortgages or contract for deeds or a mix?

It’s normally for somebody that’s starting out and that’s not you. If the reader is starting out, I always recommend they go with the notedeed of trust or note mortgage. It’s more standard-type documentation and it’s going to be easier to resell if you need liquidity. You don’t want to keep the note, you want to resell it. I know a lot of people and I bought a contract for deeds as well. A lot of people like them because it’s easier to foreclose, but in a lot of states, that’s not true anymore. They are making you foreclose on the equitable interest similar to mortgage even. Sometimes the deed of trust is even preferable in some states over a contract for deeds. There are other states like Ohio that have gotten careful aboutthat whole contract for deed. If I was going to give peopleadvice on taking the safe route, it’s using notedeed of trust or note mortgage.

Being able to resell them is one of the key things I know a lot. Some people are staying away from the contract for deeds and Ohio is definitely one of those spots where you got to be careful. Make sure you’re doing everything right.

I’ve converted some. I buy a lot on the secondary market, while I originate some. I primarily like to buy them after somebody has done all that work. We buy them at a discount from sellers that sold to seller financing and they’re tired of getting the payments. They want to cash out and move on to their next deal. We’ve bought some of those contract for deeds, then we’ve converted them to notes and deedsof trust,some notes and mortgages

How do you structure those typically? You talked about the importance of getting a down payment and it seems like if you’re doing this with a blank sheet of paper. There are a lot of options in how you can set the purchase price or the interest rate or the term and the debt. There are a lot of variables.

There are a lot of variables and there’s no set standard. You get to make that decision and you negotiate that with the buyer. That’s the beauty of it. You can create a win-win situation. I’ve been on that institutional buying side for many years and when we also put notes into mortgage-backed securities and sold them on Wall Street. I tend to operate in a box. At least if I go outside that box, I realize I’m going outside that box and my investor pool might be different when I choose to go outside that box. Generally speaking, if you want to sell it right away after it originates, you’re wanting a 680credit score better. You’re wanting 20% down or with a minimum of 10% down. You’re looking at a twenty-year term. We love interest rates at 9.75% to 10%. We provided that there are no usury laws in your state that change that. Those are the basic parameters and people usually say,“If they’ve qualified for that, I could get in conventional financing.”

Some of my properties are sub-$50,000 properties. How hard is it to find buyers that meet all of those criteria?

 

When you step down from that criteria and then you have to go, “If I’m going to sell this note,” it becomes balancing the scales. Do they have a decent down payment but poor credit? Maybe we could balance the scales out. Maybe I can do a first and a second, look at selling off the first. Maybe I’ll do a first and I’ll sell off a partial if I wanted to recapitalize and get some money back out of it to do the next deal. There is some balancing of the scales. If you get somebody who has zero down, sub-600 credit score, they’re having trouble proving their income. Honestly, that’s another repo waiting to happen. You’re soon to put yourself back in that same situation. I say be careful. You can make exceptions because you are the seller and you are the underwriter, but don’t make exceptions that are going to put you back to foreclose on a property. I’ve seen deals where the person would have had to put more money down if they rented the property with first and last month’s rent into the deposit. They did get into an owner finance deal. That doesn’t make sense to me.

I have somebody that wants to buy one of mine on owner finance, but they don’t have any money for a down payment. This is somebody I know from elsewhere anyway. I’m not much worried about having to take it back when I’m like, “How am I going to resell that on the market if I do that?” I wouldn’t necessarily want to buy a note like that if somebody didn’t have any down payment.

You would probably need to season it up for a little while, probably show nice twelve-month payment history and then sell off a partial or maybe you would want to do a first and a second. You can keep the second and sell off the first. You’re keeping that investor that went by towards 50% to 60% investment to value.

What other things should people be thinking about when they look at doing seller finance on notes?

You definitely want to underwrite your borrower. Make them pull out a little map, full credit and verify their income. Use an RMLO. I like Russ O’Donnell at CallTheUnderwriter.com. He doesn’t pay me to plugin. I think his service is wonderful, but he can underwrite for seller financing in all 50 states. He’s affordable. He’s under $500. He’s done deals and he does a nice job of putting together that whole documentation package for the underwriting side of it. He doesn’t perform the underwriting. You still have to decide who you’re going to sell to. He doesn’t find your buyers, but hehelps to package up the deal if it’s going to be owner-occupied and you’re worried about that Dodd-Frank piece with the ability to repay. I still always get title. I still close it like a regular deal. I get a title commitment and I made sure my buyer gets an owner’s title policy and then I receive a lender’s title policy.

When you go to resell it, you have that in your package as well. We still like to have them bring in proof of insurance that they’re going to insure the property and set it up with some servicing, preferably reserves for taxes and insurance.Set the note up the way you would like to buy it. Do all those bells and whistles. One of the cool things when you’re setting up your own notes is that you can pass on things like servicing costs to your borrower. You can write that into the contract, into the agreement in addition to their principal,interest,tax and insurance payment or PITI. They’ll pay the servicing fee of $25, $30 a month or whatever that is.They send that in with their payment as well. It doesn’t come out of your side of the equation. That’s nice.

When you’re acquiring properties to create notes, you say you don’t do a ton of nonperforming. These are performing notes that went bad and you ended up with them.Are you buying REOs to then create notes?

I personally like to find performing seller finance notes that the seller already sold the propertyand took back the note. I’ll buy them to cash them out at a discount.I have also done it on properties I foreclosed on and now I’m reselling with owner financing. There are deals if you’re into mobile home and land or things that are harder to finance. If you have cash, you can buy those at a wholesale price and then sell retail by selling on terms if you want long-term interest income. Some of those property types are harder to sell off the notes. You might be doing those in your retirement account where you want the long-term interest income.

One of my challenges with some of my REOs is it seems like whenever I take one back, whether the borrower rode the ship down in foreclosure find cash for keys and was ready to move on and it seems all those people live pretty rough, they tend to come back in rough shape. One of those challenges I have is they’re not necessarily ready for somebody to move in. They require work. I don’t want to do the rehab work. I do that now and if I think it makes sense, but it’s not my area of expertise. A lot of those buyers and seller finance buy it with the understanding that they’re going to have to do some fix up to get it.

They can get sweat equity in for down payment or you could do a lease option, rent to own. Once they put in the sweat equity and done the fixed sets, then you could convert it to seller financing and then give them credit for their sweat equity as part of their down payment. It makes them perform before you sell it on those terms. You could offer seller financing to a wholesaler or a rehabber who was in the area they want to do the fix and flip.

That’s what’s nice about those. There are a lot of different options.

The great thing is that real estate prices have come back. As the markets come back, buyers aren't underwater anymore. Click To Tweet

I love this business for that reason.

Also, how you can structure it. You do some note educating and some training and whatnot. Maybe you could talk a little bit about that.

I’m finishing up my trading notes class. That’s one of my new classes. Some classes we already have are finding cashflow notes, finding real estate notes primarily,seller finance notes, how to market and find them. We have classes on mastering partials and how to run all the calculations. It’s called How to Calculate Cashflow. One thing I’m passionate about is teaching people how to understand the time value of money and how to put interest to work for you as an investor. I like using small deals and everyday numbers that people feel are achievable to them. Because when I was first shown a financial calculator, I had no idea what it was and somebody taught me how to use it.

A light bulb went on in my mind because I used to close the real estate. I saw that side of it. The only way you make money on it was if you were a real estate agent or loan originator. I then saw why banks loan money and how you could do that privately. That was one of my passions was to create a hands-on training for people who hate math on how to use a calculator to understand the time value of money, interest, compounding interest, internal rate of returns and long-term projecting. Have you ever read that book, Invest in Debt?

I haven’t read it, but I’ve definitely heard of it. I need to go back and read it.

It’sold school, but it makes you look at debt in a different way. It was around buying notes out on the East Coast here in Florida. I think he shipped me right back when we were out on the West Coast. The principles there still stand the test of time. The training is based on that. Jon Richards used to do some great training on using the calculator, but it was all in a written book. The beauty in that is you can show people using the keystrokes and how to do it right. It’s a look over your shoulder so they can follow along and do it with it. I use T-value a lot. I teach how to do it on a financial calculator and also T-value.

That’s scary because when I’ve been selling partials, I’ve had people ask me questions and come back and say, “I don’t think this number’s right,” because they weren’t sure how to calculate it. I get frustrated because I know it myself, but I can’t explain it well. It’s one of those things. Once you know it, it’s easy, but if you don’t know it, it seems daunting. I had a physics teacher in high school who suggested to approach things as if they’re easy and then it makes it easier to understand. That training you have is good because a lot of people have a hard time with that. In their normal jobs,they don’t need to do those things, so it’s foreign. Once you wrap your head around that, it’s easy and fun. It’s cool how you can set things up.

My husband always says, “I don’t like math, but I like money.”

That’s a good motivation for people to get in there and figure it out.

It’s empowering. My daughter was like, “When you go to buy a car or anything like that, you will look at everything differently.” They’re making their money off me by doing this and I need to ask this question. You understand why you don’t carry debt on your credit cards.

I was a little fortunate in that when I was a kid, my dad and my grandfather worked in the loan business. It was a business doing private loans back before credit cards were big. There were places you could go down and borrow $1,000 or whatever. I didn’t work in that industry, but I grew up around it and so it was easier. I learned that thing about the credit cards quick. It’s 20% interest rate or whatever is painful. You want to try to stay away from that.

We want to be on the other side if we can.

That’s what’s cool. You can get on the other sidefor small amounts of money.What other things do you think new note investors need to learn or may not be aware of as they’re trying to get started?

I have a blog with about 300 articles. It’s called NoteInvestor.com and I have my21 Tips To Read Before You Get Started Investing In Notes. I won’t go over all 21 now, but definitely go thereand download it. One of the things that I get surprised about still to this day are people who go to buy note and they don’t get the original note. They don’t get an assignment and they don’t get a note endorsement. You want the original note. It’s like a check. It’s an obligation to pay. You got to get it endorsed and signed over. You need to get an assignment of the mortgage that gives you a lien on the propertyif they don’t pay. You need to check that the person selling it to you has that assignment if they weren’t the ones that were originally on the mortgage or the deed of trust. There’s a chain that follows from A to B. That’s surprised me the last couple of years because that to me is you wouldn’t buy real estate without getting a deed. You wouldn’t buy a car without getting the car title. That’s the first place I started with people. Make sure you understand how you show you own that note.

I’m helping somebody with one where they bought a performing note and they didn’t know anything about it and then it stopped performing. They didn’t even know if they had all that stuff. It turns out they did. That aspect was good. I was quickly able to determine that. The property was vacant and there were all kinds of problems. Helping them get that worked out and the borroweris willing to do a deed in lieu, I was able to get it going quickly. When people don’t know, they don’t know. Fortunately, from a channel title perspective and all of that, he was in good shape and covered.

That’s great when it’s performing, but when it’s not performing, you go to enforce it. You’re going to have to provide evidence. If you ever want to sell it, you’re going to have to provide that. Those basic things on how to perform due diligence on a note, I know that’s a topic near and dear to your heart. Congratulations on that new due diligence class you released onhow to perform due diligenceamd what you should be looking at. You got the three Ps: property, paperwork and payer or the buyer, the person making the payments. Those are the three things. Understand how equity plays into that and property condition. If you’re buying nonperforming, you’ve got the whole gamut of judicial or non-judicial.How long does it take to foreclose? How expensive is it to foreclose?What are the laws?We think about those in performing as well, but we’re trying to underwrite it so we believe that it is performing and it will continue to be performing. If it’s not, are we equity-protected that we can go in there and take back the property preferably with a deed in lieu? If we had to foreclose, would we still be made whole and hopefully profit?

That’s how I look at performers too. I’m looking at my yield and everything and then I look at that as a backup plan. If this does go sideways, can I get out without getting hurt? Whereas when the nonperforming side, sometimes planning to go down the foreclosure route and then want to make a profit.

I’m with you. I’d always rather do a deed in lieu. I’d rather get them performing again if there’s any possible way, do some workout or repayment plan or restructuring, but then the second deed in lieu if that doesn’t work. If you have to, then you have to foreclose.

I’m always happy. It seems like I’ve been on a decent run, especially with land contracts of getting people to sign cancellations. What I found in some cases is they were willing to move on because the furnace was broken and winter was coming or there were other problems. It’s like, “It’s good I didn’t have to spend $5,000 or whatever on the foreclosure.” Sometimes if somebody is too willing to sign a deed in lieu, it means that something’s up at the property too.

Another thing that’s happening a lot in owner financing is you have to understand this process, document it correctly and involve your team. If you’re going to do these things, your team definitely needs to include a real estate attorney, a title company, a servicing company and an RMLO. You can do reps. You can buy a property and get it owner financed and you can sell a property and owner finance it. It’s a way to create leverage or arbitrage. He’s going to make sure that the interest rate you’re paying is less than the interest rate you’re earning. You can do some spreads that way as well. There are a lot of them. You said, “Where’s the inventory coming from?” We’re seeing a lot of people that are wholesalers of property, real estate. That market’s shrinking as well. Their profits are shrinking. By adding seller financing to the mix, they’re able to do transactions with those reps that they might not otherwise be able to do because there wasn’t enough money in there, justin the traditional buy, sell, fix thing.

One of the things I like about notes versus some of those other industries like wholesaling and other things is there arenot as many people doing notes. Sometimes people complain there aren’t enough deals or whatever, but I haven’t worked in those other areas. It seems like there area lot more in notes. You’re not fighting 10,000 people all for the same deal.

The other thing we have to look at too is that we’ve got to realize that real estate prices are at a high. You’ve got to be careful that your ITV can take a little bit of a hit if prices of real estate come down. In ’08, ’09, 2010, we held notes where having been in the business for 30 years that we were in at 50% investment to value. We turned around a few years later and they’re at 100% loan to value because property rates fell by half like in the state of Florida where I live.

If you're going to be selling to someone who lives on the property, it's going to be owner-occupied. Click To Tweet

What part of Florida are you in now?

I’m in Central Florida.

I grew up in Melbourne.

I think I saw that on one of your blog posts or something. You talked about that you were down in Florida visiting.

I have a lot of family around there. I get down there, usually at least once a year, sometimes twice or so. It’s a fun place. Although I enjoy Colorado, so it’s been good.

If I went from Washington State in the mountains on the Idaho side to Florida, you went from Florida to the mountains.

I went the other way, which wasn’t too bad. Our winters are not as bad as everybody. Some of my friends thought I was moving above the Arctic Circle or something and it’s like, “It’s not that bad.”

Colorado is pretty. I have some family in Colorado. It’s a gorgeous place.

It’s not like the Northeastern winters. It’s usually sunny and dry. It will get super cold on occasion, but usually it’s not too bad. I like it. I couldn’t live in New York, Boston or something like that, but Colorado works.

On the side of the mountains, I was in Washington State. We got way more sun than the Seattle side. They’re gray over there.

I wouldn’t like that. I would get depressed and it wouldn’t go well.

 

Our daughter lives in Salt Lake City and I’ve been out there to visit her a few times. They have some nice sunny days in the winter too.

Utah is nice. I especially like the national parks and everything.

Where are you liking to buy notes right now, Dan? Where’s your sweet spot?

My sweet spot has been in Michigan and Indiana for the most part. I still have a lot of Ohio stuff and I’m still buying some stuff in Ohio. I’m treading a little more lightly because everything’s changing there. I have a bunch of contract for deeds there that I keep meaning to convert to notes. I haven’t gotten around to it because I’ve been busy with other stuff. A few in the Carolinas,some in Jackson, Mississippi. They’re a little bit scattered, but that’s Midwest, the sweet spot. I even have some in Kansas and Nebraska where there’s not a lot of people. I like those areas as well. I don’t have anything in Florida. I want to buy a bunch of stuff in Florida because what I eventually want to do is have a golf condo and have more of an excuse to spend more.

In the winter, right?

Yeah, but the Florida market seems tight there in one of those cycles where everything’s high. Knowing the history, they’re going back like to the 1920s, there will be another crash. I’ll be ready.

That’s what my husband would say, “Let’s wait for the next crash.” The other opportunity in states like ours is to look for notes that are older. I get to seller finance noteholders that maybe originate the note in 2010, ‘11, ‘12 and now property values have come back and that buyer hasn’t paid off yet. There are certain ones out there, especially if you’re willing to look at things like land and mobile home and land or some odd use properties. You’re not banking on the higher values. It makes sense even when values are lower. You can pick and choose even in the states like Florida where appreciation’s a little bit crazy.

Tracy, thanks for coming on. I appreciate it.

Thanks for having me. I appreciate it.

We’ll have to have you on again. Thank you.

Important Links:

• https://NoteInvestor.com/
• https://www.Amazon.com/Invest-Debt-Jimmy-Napier/dp/1619274094/ref=sr_1_1?crid=17323NUW0N5Z6&keywords=invest+in+debt+by+jimmy+napier&qid=1578455369&sprefix=napier+invest+in%2Caps%2C187&sr=8-1
• https://CallTheUnderwriter.com/
• https://NoteInvestor.com/buy-notes/21-tips-get-started-investing-in-notes/

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