Note Investing: The Power of Seller Financing and Private Mortgage Notes with Eddie Speed of NoteSchool
[David] Listeners, really excited about today's podcast. You're going to be learning about something new. At least one part of it isn't new. We're talking about seller financing. We all know sellers oftentimes or not oftentimes, but some many times sell their home and are willing to carry the notes on it. This is really true in case someone owns their home free and clear, or if they have a sum of alone and a large amount of equity, they can assume the loan, and someone could carry an owner financing in the form of a second. Now, most owner financing is a first mortgage. So it is that so oftentimes it's because of someone owns their home free and clear. And that happens with older people who are looking for retirement income. I know my parents, when they passed on, they owned all their real estate properties free and clear, and they carried notes on virtually all that income. And it was their retirement income for a long time. They were asset rich, in what you'd say and what carried them through the retirement years and left an investment that we inherited was the notes that they carried on those properties. So, we're going to be getting into that today. So, you may say, why do I care about this topic? When I'm a mortgage loan originator trying to originate loans into the secondary market. There is a secondary market and there's a lot more to this, but I'm going to challenge you listening to this. Listen to the opportunity of what you can now carry as information to your realtor and who is out there and looking for new ways in which they can do their business. Again, we want to help our realtors sell more homes and what you're going to hear here in just a minute and what you're going to hear now is a tool that gives you an edge when you're talking to your realtors. Enjoy this interview. I'm excited to have two guest joining me here. Eddie Speed is joining us. He's with Noteschool.com and how I met Eddie was through one of our consultants, good friends, regulars that I work with, and I have so much respect for Russ Anderson. So, first of all, I could go on and on, but I think it's better, Russ, if we just let you start out by giving us some insights into Eddie and how you met him and why you found this so interesting and then open up why this is so important right now, Russ, if you could.
[Russ] Yeah, sure. So, I was in the mortgage warehouse business for many years. And I was curious one day when I came across something I was reading about mortgage notes seller financing in particular, and I saw how big of a market it was. So, I started digging into it to find out more information. And of course the one person who kept popping up everywhere was Eddie Speed, who has been involved in this industry for a long time and so he and I met and who would become fast friends ever since.
[David] That's just how it's adding. Russ, why is this relevant today? When you look at the market conditions and what is it that as a warehouse lender, pique your interest in it.
[Russ] There's a lot of transactions that occur that are below the agency guidelines where it makes sense for a mortgage company to finance a house because it costs as much to finance a million-dollar house as it does to finance a hundred thousand dollar house. There are a lot of these people who can only afford a lesser priced house don't have really financing available to them and so the seller financing market fills that void along with many others, by the way, but that's just one area where it really concerns me. Yeah.
[David] I think that's really good. Eddie, so good to have you on the podcast. Really thrilled to have you joining us.
[Eddie] Thank you so much. I'm really glad to be here.
[David] Yeah, so let's get into that question of how big is this market?
[Eddie] Seller financing is about 90,000 transactions a year. It ranges a little bit, but somewhere between 85 and 100,000. It's on the rise for obvious reasons.
[David] It may not be so obvious to everyone, Eddie. So explain what is obvious. Give us a little more insights why it is on the rise.
[Eddie] I generally say, and I've been involved in the industry since 1980, right? I generally say that seller financing fills the void where conventional lending is not able to fill it. We're never going to compete with it. We're only going to fill the void when seller financing solves the problem and there's about 28 billion dollars in seller finance notes that was generated in 2023. And so, we're trending a little higher than that this year. So, it's not near, it's not the size of the traditional mortgage business, but there's more of it than people think.
[David] Yeah. I think that's the most important part of this thing and we want to get into it, but before we go there, give us a little insights into your background and your journey into this space.
[Eddie] I started at 20 years old. The gentleman that became my father-in-law, he and a partner brought me into the business. I didn't know anything. I was 20 years old as a kid, right? But I was willing to work, and I was willing to go learn something. I essentially served an apprenticeship with him in 1980, as you well remember, David rates were crazy, right? And so, I started when interest rates were 18% and 20%. And then, I found this niche and I kept finding kind of different ways to grow it and do it, and it's just been my journey. I bought other notes. I bought institutional loans as well, like discounted loans there. But I've always been known as a seller finance guy.
[David] That's so interesting. Anyway, what's so interesting about that story. I picked up you say he became my father-in-law. So, you might say you got married into the business.
[Eddie] That is 100% truth, but that is absolutely the truth.
[David] That’s so good.
[Russ] Eddie, what exactly are private mortgage notes and how do they generate returns for the investors?
[Eddie] So a private note is just simply where the seller of the property carries the financing for the buyer. It wouldn't be any different, Russ, than a tote the note car lot. In other words, anytime the vendor, the seller of the asset is going to finance it, and that's what seller financing is. Seller financing is generally written, call it non-QM rates. That's probably about where the pricing is for seller finance notes and the market standard is you still buy those notes at a discount. So, you pay less than the full amount of the note, which means that the interest on your investment is higher than the interest rate on the note.
[Russ] It's like yield to maturity in a bond.
[Eddie] Yes, sir.
[David] Yeah. as I'm hearing this, and Russ, please jump in on this because this is a new topic for me. I've been aware of seller financing, but I just assumed the seller carried it this whole time. The part that you're talking about here and what piqued your interest for us is this is the big market, and a seller can sell their note. So, if they're struggling to sell a home, now we know there's been so much demand, Homes go get sold within, seems like hours of going on the market. Sometimes as they go on the market, they're being sold. But this market is turning around shifting a bit, and we could find ourselves in a market or as a unique property that has some issues to that thing that may not make precluded from fitting inside the box of a Fannie Mae and Freddie Mac conforming loan, or even within a non-QM loan. So, there are factors and a way someone could sell it is to offer seller financing. But I'm really getting into understanding the benefits the lender and the MLOs listing have on this. So again, a note's been created. That's one thing. But now you're talking about being able to trade that, almost like you're creating a new secondary market. Am I correct?
[Russ] That's correct, if I've heard Eddie say it once, I've heard him say it a thousand times, which is he buys by the case and sells by the bottle. So, he buys up a bunch of seller notes that have been created out there and then he'll turn around and sell them to individual investors who get the return from that. And it's a good solid investment. If you do your homework, as you buy each individual note, you can make a pretty good yield on these things.
[Eddie] Yeah, we talked about it, the other day. Certainly, a market that is growing for us a lot or people in the loan origination business or somehow related to that, as it has been for realtors, we train a lot of high-end realtors and you're saying, oh, you train them how to sell our finance when they broker a house. Okay, we may do that too. But the truth of the matter is we teach them how to go invest and buy a note because it's way better than a rental. They work, a tenth of the effort, they get a check it's third party serviced, and they get a return, and they bill retirement. And we're very good at helping people with retirement, modeling and strategies.
[David] So again, I want to get some clarity on this. So, the number of components, you've just almost introduced another component. First of all, there's the component of someone selling their home, carrying financing. They're not stuck holding it. People like yourself will come in and buy that note. That's the second stage. Then you will then in turn go find buyers of the note you bought and turn around and resell it. So, you're acting as an intermediary to help create liquidity for the seller that did the financing originally, creating a liquidity event for them, help them sell their house, and then also creating an investment opportunity on the other side of that. Do I have that right, Eddie?
[Eddie] That's correct. We're in the space. I bought well over 50,000 seller finance notes. So, we've been doing it a lot for a long time. We're well known.
[David] Did you say, can you repeat that number again?
[Eddie] I've done over 50,000 seller finance notes.
[David] 50,000 seller finance notes. Any idea of the average loan amount of those?
[Eddie] Oh, I would say because over the years, right? So, it wasn't as high back then. Probably the average loan balance about $75,000.
[David] Okay. So, this does work in the more of the lower price range. You'd say, is that fair to say?
[Eddie] Today. The average seller finance note is about 200 grand. So, it's not always on the cheapest house. Sometimes people kind of label seller financing like it's always going to be like on a substandard situation. That's not really true. Because as you well know, there's a lot of people that are self-employed or, there's some uniqueness to it, don't label it as this is like the bad neighborhood of note. Because I wouldn't buy that. I've also for 44 years been buying these notes. I know what will pay and what won't pay.
[David] Yeah. Payment repayment is an important component of this.
[Eddie] Getting your money back is a good thing.
[David] That is a good thing. That is for sure.
[Russ] So Eddie, I've heard you say a million times, would you rather be a bank, or would you rather be the landlord? And so, when you look at it from that perspective, everybody knows the risk of being a landlord what are the risks associated with owning the note and how can they be mitigated?
[Eddie] I think there's an old saying, probably an old banker saying, the time to worry about a loan is before you make it. Right and underwriting in our business is not the same as Fannie or Freddie, but it is underwriting. Right? So, investigating the buyer and their story and their ability to pay and their propensity to pay is really the same in our business that it is in any other form of lending. And we don't just look at down payment, although we do look at down payment, but we don't just look at downpayment. We say, how do they pay their bills, and their capacity to pay and stuff. So, it's the same thing. it wouldn't be any different than us doing a class on originating any kind of a debt instrument, right? and then we get to work on some unique kinds of collateral not weird, not bad, but sometimes unique. So sometimes seller financing is on a house. Sometimes seller financing those land or different asset classes. So, it's really the same concept of lending overall. You're an old banker, Russ. It's the five C's of lending, right?
[Russ] That's absolutely correct. So, is this accessible to everybody? Do you have to have a large pot of money to get into this business and how does somebody with not very much money get into the business of buying notes?
[Eddie] One of the things that I think we have done really well, and we've done a lot for a long period of time. So, we have. Tens of thousands of transactions we've seen and been involved in and doing this and that is a unique leveraging technique, so I'm going to use my little pencil here. My pencil I write on my computer with, right? say that this represents a stream of payments. This line represents 20 years’ worth of a payment. Call it a thousand bucks a month. Okay, you buy in your retirement account, or even in your company, you buy those 20 years’ worth of payments and let's just say that you buy that stream of payment for 80,000 bucks and it's going to pay back 240,000, but that's over 20 years. So, you're earning a pretty good return on your money. But let's say Russ that you say, I need to go take my retirement account and really put it to work. So, then you turn around and sell of that 20-year note, you sell 12 years’ worth of payments to a passive investor, probably somebody that would have liked being a landlord, except they didn't like the headache. And now the expenses have gotten out of whack, right? You sell 12 years of that note for $79,000 and for $1,000 investment for us, you own the back 8 years of that note. Now, that's how you can really take a lot of money and propel yourself up.
[David] That's fascinating. So, this is a question I have for both of you, Russ and Eddie. What makes real estate note investing attractive during these kind of economic downturns?
[Russ] for me, when I look at it, I look at it from a perspective of what's available out on the market for purchase. You can go, everybody runs to the treasuries when you know mark when markets are bad and that's the flight to safety and because they know what they're going to get for a yield on that. When you look at it from this perspective if you're buying good notes, you know what your yield is going to be on those notes because it's written right into the contract and for somebody who's looking for a safe place to put money, then this is a good place to look. If you're looking for what they call in the investment business a four bagger or a two bagger, you're probably looking in the wrong place at notes. Although it could happen, honestly, you could end up making that kind of return on some of these homes. But more likely you're looking for a constant stream of income. And that's a great way to look at this investment as a way to secure a stream of income for perpetuity as far as your life is concerned.
[David] Yeah. Good. Eddie, how would you respond to that? Why is this a good, attractive investment during economic downturns?
[Eddie] People ask me all the time. What is Note School? What do they represent? And I say that we're home for burnout landlords, right? Listen, first of all the most predominant landlord is somebody that owns 5 houses or less. They don't really run it like a business. And it's probably running them. And secondly, right now we've seen in the last few years, we've seen in expenses increased by 60%and rents increased by 20%. So, it's very likely that the rental property you had in 2019 was netting more income back then than it is today. And so, we see a lot of people converting their rentals to seller financing. The biggest trend I've ever seen in the industry, like ever by far. And then we're also seeing a lot of people just saying, I want cashflow and my rentals not giving me cashflow. And so, I want my investments to have a return. The example I just gave you invest 80,000 bucks and you get 1,000 back. That's pretty good cashflow,
[David] Right? Yeah, really outstanding. And it's for someone in the right place in their lives and their investment strategy, cash flows everything, just a steady stream. And it's backed by real property, residential property. And what's the average loan to value ratio of these kinds of notes? Is it traditionally like around 80% or less? Yeah, it's 75% or 80%. You'll see some that can be a higher and you may additionally discount the note because of that. If it's higher, right? Or you may see some loans that have been paying for years and gosh, the loan to value be 50%.
[David] Really good point. Yeah, the pay down on it or the value of the property has increased since the note happens. I would love both of you to explain the loan officers that are listening to this, the mortgage company owners that are involved in the mortgage industry. You go this doesn't sound like it has anything to do with me. There's just no value here. I can immediately start seeing some value, but I want to start with the two of you and share with us, why should a mortgage loan originator, or a mortgage banking owner. IMB, listen to this and go see the opportunity here.
[Russ] Mortgage loan officers and real estate agents all the time, looking to become landlords. It's just, it's part of what they do. They're looking at properties all the time. They're looking at loans all the time. They decide that they need to buy houses. So, they can get that stream of income going and then next thing, they're, calling plumbers and getting stuff fixed and refencing a yard and doing all the things that come with being a landlord. And now it's not so much fun anymore, and they're not getting such a great return on their investment to begin with. Whereas, in this particular kind of process, even if they do buy the property, they can turn around and sell or finance it and get a stream of income off of it. And they have none of the headaches that a landlord normally has. That's really a good deal for these guys who are out there investing in the properties that they're dealing with every day.
[David] Yeah. One of the first homes I bought was on a lease option. And which is a form of seller financing. We made payments when we first started built up enough equity through the payment structure and then the seller financed it after that, and it was a wonderful way to get into home ownership. So from a standpoint of some realtor listening to this conversation, this does give them another tool from that, from a mortgage loan originator standpoint, we're always looking to go to real estate realtors and saying, here's another tool. There's this, are you aware of it now? I may not get anything out of it immediately. Maybe interested in buying the note at some point in time but anytime we can go to a realtor with a new means or new way for them to sell more homes. We're benefiting our primary focus of our sales effort. And that's the realtor. So, Eddie, jump in on this as we wrap this up.
[Eddie] David, I would say that I've taught these note investing strategies for more than 25 different self-directed IRA specialist companies, right? and the reason I've taught this is because people don't know it until they see it and then they see it and they're like your reaction, right? And so, it doesn't matter if you're a realtor or you're in the mortgage business, is your retirement where it needs to be? Is your wealth where it needs to be? And if it's not, then the next thing is how much of a time suck does your sideline wealth or retirement business take out of your life? If you want to spend less time and you want to have at sleep at night with a better investment, that cash flows more. I would challenge you today that it probably notes are going to be way better than other investments.
[David] Yeah. And the fact that these are usually happen at lower denominations than what you'll see multiples. Then when I'm talking about lower loan amounts then you see through the standard Fannie Freddie lending that's going on across America. It's a wonderful tool. Russ again, why is it that piqued you're interested in? Were you looking to be able to finance these things?
[Russ] I started looking at whether I wanted to buy rental properties, honestly. And I started looking at options to that, and looking for something that gets a good yield on your investment. That's really what drove me to investigate this more and the more I looked out on the internet about seller financing, the more Note School popped up. That's how I got in on this.
[David] Good. It's really good. So, thank you so much for being here and Russ, thanks for making us aware of it. It came up on a call that we had recently, and then you introduced us to Eddie and here we are. So, loan officers and originators across the country pay attention to this. This is another tool in your toolbox and that many and most are not aware of. Eddie, thanks so much for being here.
[Eddie] Thank you so much.
[David] and again, Russ, thanks for joining in on the interview.
[Russ] Always a pleasure, Dave.
[David] Eddie, how can people reach you? What's the best way?
[Eddie] I'll tell you what I would like to do. I want to give them something. We've got about a 2-hour master class where we actually go through and it's virtual, but we go through and model some of these ideas. So, people can actually see the math and we address some the most common questions that people have on the call. As part of the training. And that's going to be that's going to be a special registration. This is a class that we do sell, but I want to give it to your audience. It is noteschool.com/tms
[David] Good, very good. I'm going to take the course. I studied this years and years ago and I just let it slip and I'm wishing I had because I own some rental properties at different times where like you said, Russ, I got tired of the maintenance factor and had I They've come back to realizing, thinking again about it. It's a good reminder for me or a wakeup call to come back and visit this. So, listeners sign up for this course, Eddie, thank you so much for making it available for free.
[Eddie] Thank you so much.
[David] You bet. Thank you.
Important Links
Eddie grew up around horses, but in 1980 he learned there’s more wealth to be built with a pencil than a rope. That’s when his father-in-law, a pioneer of seller-financed notes, taught him the ropes of the note business. Eddie has been perfecting his craft ever since, introducing creative innovations that changed the way note investing is done.
As the nation’s most experienced note buyer, he has closed over 50,000 note deals. He launched NoteSchool in 2000, where anyone can learn the art of creative financing for performing and non-performing discounted mortgage notes. He is the owner and president of Colonial Funding Group LLC, which acquires and brokers discounted real estate secured notes, and he’s a principal in a family of Private Equity funds that acquire bulk note portfolios.Thousands of NoteSchool students have testified to the wealth-building, life-changing power of his tried-and-true, data-driven approach to note investing.