There’s Transactional Money And There’s Wealth With Eddie Speed Of NoteSchool
As the world increasingly moves towards a data-driven economy, data is becoming increasingly important in the note industry. By understanding the data, businesses can make better decisions about growing and scaling their operations. That is what our guest, Eddie Speed, the President and Founder of NoteSchool, talks about. Having been in the note industry for thirty-plus years, Eddie has an unparalleled track record in the industry and honed marketing and negotiation skills. Tune in to this episode to know more about data, tax loophole strategies, and caution flags in real estate investing.
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There’s Transactional Money And There’s Wealth With Eddie Speed Of NoteSchool
I’m joined by a good friend and mentor of mine, Eddie Speed. Eddie, thanks for being here.
How are you doing?
If I was any better, I’d be you. Eddie, I met you for the first time in a meeting at the DoubleTree Hotel in Dallas when I first got out of the Marine Corps. You were selling a book called Streetwise Seller Financing. You were the first real estate author I’d ever met. I was awestruck until I realized you were a normal guy. Why don’t you take a minute and tell us a little bit about yourself?
I started buying seller-financed notes with my father-in-law in 1980. Seller financing became a big thing because of inflation, high rates. That’s how I got started in the business. My wife and I married in 1982. We came to the big city of Dallas Fort Worth to buy notes. By the time I met you, I’d set up the note system for home investors, had a whole era with Frank D’Angelo, and all that. In the end, I spent about ten years showing real estate investors a formula of how to make seller financing. I did that for my own selfish reasons. They could sell their notes to me for top dollar. What has become our thing over the years is how to do it correctly so that you’re making the best product. Whether you’re going to keep your note or sell your note or whatever, that’s how it works.
It’s important to do things right. Eddie, every week I start with what I call the bottom-line up front, the bluff. When I was in the Marine Corps, I used to brief generals. They would always say, “Never bury the lead. If the general has to get up and leave in the first couple of minutes, he’s got to know the most important thing.” Imagine someone tuned in on this show, they’re on their way to work, but they got to pull over, get gas, and don’t finish reading it. I’m going to give you two minutes to tell the reader the most important things they need to think about, be doing, or avoid in this market. Eddie, the bluff, take it away.
The most important thing for every real estate investor, whether you’re a high-volume real estate investor, or whether you’re a guy that does 2 or 3 deals a year, you got to know the data. Take advantage of the data. When I started in the business in 1980, honestly, there wasn’t any data. Now we have all kinds of information. Let’s play a little “Did You Know?” Did you know there are 2 million residential mortgages that aren’t making a payment? Did you know the most frustrated property seller in the business? Burned-out landlords, small-time landlords, particularly ones that self-manage. Did you know how many houses they have? They own almost 12 million residential houses.
That’s a big target list. Whether you’re looking at that, at how growth rates are going or projecting the market conditions, let me warn you of this. A lot of people love to read the headlines. You got to understand what’s behind the headlines. Some reporter wrote an article. They wrote a headline for a zinger. The big zinger may be details in that article that are way past the headline. Know your data. When you know your data, you can make smart decisions and find voids that every other real estate investor is missing. I’ll talk about strategies that are a big deal.
According to some of the top real estate negotiation trainers in the business, friends of Tim’s and I, the number one reason the frustrated landlord doesn’t sell is they’re scared of paying taxes. Why don’t you angle a tax loophole strategy? Instead of, “I’ll pay you top dollar,” why don’t you lead with, “I’ll show you a way to defer taxes?” That’s a completely different angle that positions you differently in the market. Once again, you have to know some data. You have to understand how that works to position yourself differently. That’s about it.
I was an intelligence analyst. We always talked about single-source information. Data was one of those things that you’re not supposed to ever take action on. If you heard something one place, or you only got imagery of something, you don’t start a battle plan against that. You have to go get more information. If you got imagery, intelligence, you’d go look for human intelligence, signals intelligence, or all the different types of information to form a picture. It’s almost what I heard you say. Don’t read the headline. That’s single-source. Get through those articles and look for the underlying data that you can form your own opinion on.
It’s got to be supported.
A couple of months ago, I was at a mastermind meeting. I won’t say whose. Someone said, “The Boise, Idaho market’s going to crap.” I was like, “I hadn’t heard that.” I started looking it up. There are some articles days on the market, up 75%. We’re from 7% to 12%. I get it. That’s what I tell everybody all the time. Percentages right now are misleading.
That’s why I caution against reading the headlines. I see it all the time. I don’t respond on Facebook as much as you do, but I see Facebook. I’m always curious about what people think. What do they say? Why are they saying it? You’re seasoned. You’ve been around. You’ve seen all these cycles like me. You’re younger than me, but you’ve certainly been deep in this space for a long time now and seeing these cycles. The truth of the matter is people are making decisions. The real data tells us one thing. The herd tells us another.
I challenge a real estate investor, “Are you following the herd or what the smartest investors in the business are going?” The smartest investors in the business have a high caution flag up right now. Why do they have a high caution flag up? We’ve had a big run in values. Affordability is a key. With affordability, it’s tied to the big thing that everybody’s talking about, the big a-ha, which is inflation.
Where is that going? You’re a lender. You got to be market-to-market. You can’t lend below market rates. You got to go show people how to do deals in different market cycles. There are two ways you can do it. You can either buy cheaper so that your product, the debt service doesn’t get out of line. You could do some creative financing, in some cases, for some piece of the deal that maybe doesn’t have significant interest or no interest at all, or maybe it doesn’t even have debt service for a period of time. You’re saying, “My seller would never do that.” He might, if he knew that he could defer taxes in a way that he never did. You had to show him the idea. He didn’t think of it
I don’t like to talk about pre-2008 strategies I may or may not have used, but one of the things we started doing in the runoff was carrying back seller seconds. It was amazing. A lot of them ended up not making payments, but you talked earlier about doing things the right way. The fact that we had them done properly and that we were servicing them properly, almost 90% something of them ended up paying. They paid all the interest they owed too. That’s one of the ways that people can, maybe if you already own inventory, keep. If there is a down cycle, creative financing that will help you on both sides of the closing.
My phone’s ringing off the hook because all of a sudden, people have gotten anxious, knowing that creative financing is a thing. To be honest with you, a few months ago, I have a herd that’s real loyal to what I do. You know several people within that cycle. The average person wasn’t trying to figure this out. Now, all of a sudden, the average person starts realizing financial modeling is more important than buy low, sell high. You were king at that. You fully understand that it’s how you structure the math around the deal. It’s not just what you pay. I can pay anything for a piece of property. Just tell me when I got to pay it back.
I want to talk about data. I want to talk about the early 1980s because I agree with you. There’s a lot going on right now that reminds me of that. We’ll talk about caution flags, what the average person is doing, a little bit about yields, that’s an important conversation for people to have, and ultimately, math. We’re going to talk about tax loopholes in a minute, but I want to talk about the early 1980s. When I’m around someone as experienced as you, I love to hear about what happened on the ground in the early 80s. I’ve been looking at a lot of the Federal Reserve data, interest rates, and property values.
A lot of people don’t know there was only a one-year dip in values in 1979, if I remember correctly, and then it kept going up until 1991. Every year, it was a year-over-year median home increase even though interest rates spiked. If you would, talk a little bit about the way this market compares to the early 1980s. As someone that has had a lot of problems structuring my tax situation, especially since we took the B2R Finance company public, I want to know what people are doing on tax loopholes. If you would talk a little bit about the early 1980s and then the tax loophole strategy.
When I started in 1980, I was a kid. I was twenty years old. I didn’t know anything. My father-in-law and his partner were like ninjas. They started this seller finance note-buying business in the modern-day form. They weren’t the only guys, but they were clearly leaders. I got stupid lucky and fell into these guys. They were geniuses at doing this. Here’s what I remember. The home builders were screaming. Realtors had been in business for 20 or 30 years were screaming. I wouldn’t tell you to do this strategy now, but they sent me out to call on home builders and realtors. I would drive from Hattiesburg, Mississippi to the Gulf Coast or Jackson because people were so forced to carry seller financing.
A lot of people had loans. You can just walk in somebody’s office and many times we’d find loans, but they were scared. You got to remember interest rates were 20%. People were scared. My guys had a bonanza. This is what that showed me. My guys understood how to reinvent themselves. The guys that taught me weren’t smarter than this home builder that had been doing it for 30 years or a realtor that had a broker shop for 20 or 30 years. They just had a position that showed them how to go make something work in a different market. I believe that era will happen again.
This is where I go back to, “You just can’t follow the herd.” What does Warren Buffett say? “When people are greedy, be scared. When people are scared, be greedy.” Not be greedy, but have a position that’s smarter than the rest of them. Whatever rates ended up being, there’s going to be terrific opportunity. It’s not going to be exactly like it is now. We’ve got to be smarter in financial modeling becomes a big deal.
You talked about tax loopholes. This is a great time to say that I’m not a financial advisor or a tax planner and neither are you. Talk about how maybe you could add an element to an offer or a purchase strategy where that tax loopholes would be advantageous to the seller.
Let’s talk specifically about small time landlords. This is going to be more relevant to them.
Call me Larry the landlord. I own eight houses and I self-manage them all.
You self-manage. I call him a burnout landlord. I ask a seasoned guy. He was a high-volume real estate investor. He’s in the mastermind that you’re fixing to go to. I said, “At the kitchen table of the people that meet that definition, what percentage of them are frustrated or burnout, 60%?” He said, “No, higher than that, 75%.” He was making up a number. That’s an incredible number. You’re talking about 11 million or 12 million properties and you’re saying 75% of those people? That’s a crazy number.
Your audience may be great at managing rentals because you are. Personally, you and I have had that conversation. I’ve told you, “Tim, you don’t represent the normal.” You got to think in terms of that’s a big market condition. I’m a specialist. I have spent time with what I believe are the best negotiation trainers in the business. There are a couple of different guys. Steve Trang is one. Jerry Green is one. They’re the cats. I know all they train. They train the biggest high-volume guys in the business. In talking to them, it led me to what percentage of people don’t take your cash offer. The people you’re coaching don’t take their offer. They said, “We probably convert 20%.”
There you go again using data.
That leads you to your strategy. You’re a sports guy. You don’t just get out in the boat in the middle of the lake and drop your hook.
Throw your spinner bait in the middle of the lake, no.
The data says that you know where the fishes are. All these things are true no matter what we’re doing in life. The idea is the biggest percentage of people don’t sell. From that, sprung an idea with me. I’ve been teaching terms buying for a long time. I didn’t just start this. I started realizing that if you’re sending solicitations to somebody and say, “Sell your house for cash,” and they’re the 80% that don’t want cash because they don’t want to pay taxes, you’ve got the wrong marketing message. The idea is, why don’t you try it a little differently? What we teach is go angle it differently and say, “Do this. Why don’t you take advantage of a tax loophole?”
We have to be smart about our investment and ensure we are testing it. Click To TweetI got that language from our president. That’s what he said he was going to cut out. It was all these tax loopholes. I’m thinking, “Before he gets a chance to cut it out, why don’t you take advantage of it?” It’s so simple. Everybody in real estate that’s super seasoned instantly knows that. All that I’m saying is installment sales. You pay the tax when you receive the money. If all of the price of the property, or part of the price of your property, either one, you’re collecting that money later, then you pay that tax later.
By the way, I’m not a CPA. I’m certainly not giving tax advice, but if a lot of your clients can keep their capital gains under $40,000 in a year, a lot of times those capital gains could go away. No tax on it. That’s all that it is. They want to sell. They’re motivated. There’s something that needs to take them over the edge. The tax loophole strategy is the thing.
There are some other things that may take people over the edge. We’ve had massive government interference in the collection of rents and then property taxes. As a landlord, I don’t get the benefit of the in Texas. I don’t get the benefit of exemptions. It’s just an exempt value and whatever they want to appraise it at. Even some of them, we’ve got this house that we paid $40,000 or $50,000 for it. It’s taxed over $300,000. I get mad. I want to argue, but then I look at the comps and I’m like, “They’re still $100,000 low.” No one wants to talk about global warming, but there are a lot of hailstorms these days. My insurance rates are going way up, too. As a landlord, these are other pain points that I’ve experienced.
I laugh and say that for the small-time landlord, I’m not beating up rentals. I want to be clear about that. I know hundreds of people like you, Tim, that manage rentals well. The truth of the matter is the hobbyist landlord doesn’t have systems and processes in place. They’re smart people. They’re smart at what they made a living at every day. They’re not taught and trained to do this. They got hooked on it on HGTV. It sounded fun and cool then the reality sets in. The problem is they all have an Excel spreadsheet. They either built one or they were given one. They have a checking account and they don’t talk to each other.
We’re going to do the Money Minute and Rapid-fire. Is there anything else to close up these thoughts?
You got to be constantly looking for a niche. All that I did was I kept poking around. I’d been teaching these concepts for years, but it was several months ago that the tax loophole deal set with me.
You were talking about tired landlords at my mastermind in early 2020 before COVID appeared. I’m sitting in the audience thinking, “I don’t know Eddie,” but then when you mix in the tax loophole, like now you have a value-add proposition to cross them across the fence.
You can’t give up trying to find every angle that gets you where you want to get. There’s nothing that we’re making up. The tax loophole strategy is true.
One of the most important things for the readers is don’t be a one-trick pony. Don’t only do owner finance. Don’t only do cash sale. Don’t only do rentals. Don’t only wholesale. Don’t only do Airbnb. Explore these niches. Have a lot of arrows in your quiver because when times get uncertain and a lot of people are screaming, it gives you more confidence in being able to execute your business.
One last statement. My father-in-law said something to me when I was a young guy. He said, “Eddie, when your living is made on January 1st, then you can go make a lot of money for the rest of the year.” You’ve been there because you’ve had rentals. You’ve owned notes. You’ve done things to where your income was set for the year. That didn’t force you to have to go chase a deal. You weren’t lazy. You went and chased a deal. Think in terms of the difference between transactional money and wealth.
Eddie, the Money Minute. Imagine there’s an investor out there. It could be a young, new investor, maybe a seasoned investor that doesn’t feel quite sure about what’s happening in the economy. This is it. You got 60 seconds to give them the best piece of advice that you can think of from your wisdom and experience. Here we go. Money Minute, kick it off.
I’ll tell you what I did. I went back to the advice that I was given when I was a young man. You reminded me of when I did this. What would I tell a young Tim Herriage? Here it is. It’s simple advice. There’s transactional money and there’s wealth. If your transactional income is growing faster than your wealth, you’re growing in the wrong direction. You got to be a wealth thinker. You entered this business because of the opportunities related to wealth, not the opportunities related to having a job.
There’s nothing wrong with making cashflow and transactional money, but look at yourself as a person in the business and balance yourself accordingly. Take your income and net worth, do a comparison every six months, and see which one is growing the most. You can easily shift over some transactional income into long-term strategies that grow wealth and get you a check in the mailbox forever. That’s my advice.
I love it because it’s those little nuggets that we learn throughout our career and our life that make us the successes that we are or not, depending on if we follow them. You have said a lot. I have to unpack a lot here. We’ve got a couple of minutes for Rapid-Fire. Are Interest rates still going up or have they plateaued?
They’re going up.
Have we beat inflation?
I don’t know anybody that thinks that.
Do you think the Federal Reserve will be able to be unpolitical in handling this mess we’re in, or do you think that the politicization of the monetary policy continues?
It’s going to be political. We’re foolish to think not, but they have a mess. We’re told that we have about 8% inflation. Did your groceries go up 8% in 2021?
No. Wages have gone up 50%, so I don’t know how we are dealing with 8%. You said earlier, “Reinvent and not be smarter.” What do you mean?
We sometimes get confused about the difference between the intellectual, how all the mechanics work, and just looking outside the box. They say, “In most entrepreneurial businesses, the smartest guy is not the founder of the company.” In my company, that’s certainly true. You do have to be a visionary.
In the Marine Corps, we always said, “Improvise, adapt, and overcome.”
You got to be a visionary.
You mentioned caution flags earlier. Give me a couple of them.
I would be a little bit careful in looking at multifamily. There are some great multifamily deals, but they have to be a true value add deal. There is a lot of multifamily that are financed with variable-rate mortgages. That’s definitely a caution flag in the market.
It’s like the 1980s in Dallas.
The other thing that I would say is to make sure that the math is going to work.
You mentioned math. What’s the most important math someone can be running now?
I laughed and told a funny story that we all can relate to. Probably every person here has sat at a kitchen table with a frustrated landlord and figured out he’s some smart guy who’s got a spreadsheet, but his checking account doesn’t match his spreadsheet. That’s the truth. I don’t say that just for him or anyone. It’s got to be real numbers. If the guy doesn’t load in his $3,500 air conditioner, it’s real numbers that come out of your checking account. That’s why we’ve got to be smart about investing in and making sure that we are stress-testing our deals against real math.
What is the average person screaming about? It was one of those things you said.
When you know your data, you can make smart decisions and find voids that every other real estate investor is missing. Click To TweetI target the small-time landlord because it’s such a big number. In there lies an opportunity. He bought an investment, but he found out he acquired a job. That’s the real story of it. It’s not a job that bothers you. It’s a job that bothers a lot of people part-time because they didn’t sign up for a job. They just signed up for the investment.
You got to keep it short, but what’s the dumbest investment decision you ever made, a note you bought, or something?
Dolan Springs, Arizona.
Everybody remembers the address and the day. We can make $100,000 on a house and not remember, but that one that we lost. What’s the most you ever made on a note?
I’ve made about $1 million on one.
Most you lost?
I’ve lost a few hundred thousand on one.
I won’t sit across the table with someone who says they’ve never lost money in this business because that means they are not trying hard enough. When inflation goes up, if inflation is 8%, and you’re not making 8% on your money, you’re losing money. Your dollar is de-valuing. What type of yields do people target or get on notes these days?
That market’s going to change. It always has. I’ve been doing it now for 40-something years. Yields are going to go up. We used to think that about a 10% yield was a bottom-in yield. Now we see people buying at 8%. With inflation, yields are going to go up. People are going to look at notes and say, “This is a good investment.” They’re earning the real income. They don’t have expenses related to it. They’re going to be able to earn some good money. Double-digit yields for good quality notes are not going to be abnormal.
That is what we had years ago. It’s the pendulum, left and right. In the late ‘70s, it went up to 20% interest. What I’m seeing is less building and a lot less inventory. If you go back and look, that’s what happened in the late 1970s, and early 1980s. There just wasn’t anything to buy. High prices could keep going up. Supply and demand is undefeated. Somebody said, “Do you think we ever catch up in building houses in this nation?”
We were overbuilt in 2008. The reason we were is we had a false money market. We were lending money to anybody that could fog a mirror. You and I were talking about this. Now, everybody’s comparison is 2008. I don’t think the circumstances are the same. Let me ask you a question. Other than 2008 in the past several years, when have we had $2 million mortgages that weren’t paying?
Right now.
Exactly.
The good news is 92% of them have equity.
I would say on the defaulted side, probably about 30% are underwater and 70% are equitable. Those numbers are pretty close.
That is one good thing keeping us.
Hopefully, they sail. Hopefully, they don’t wait to get foreclosed.
We all know people that have their heads in the sand and their butts in the air. We can’t help people like that. Eddie, this is good stuff. Do you have any parting thoughts or parting shots? How can people get ahold of you and do business with you?
I’ve got a cool training on the tax loophole strategy. It’s NoteSchool.com/GetStarted. I’ve got a little book and a little training. It gives me a little time to pack a story there. That should be a good resource. I’m looking at this market optimistically. What I’ve trained for several years is going to have a lot of value in the market. I’m pretty fired up about finding these niches and continuing to perfect financial modeling strategies that are going to be effective in the market. That’s where I’m at.
Eddie, I always learn a lot from you and I love these notes. What I’m walking away with is to keep paying attention to the data. Don’t take the headline news. Read the article. If you’re going to share it or soak it in, read the article. I’m going to continue to improvise, adapt, and overcome. I am going to look at some different niches for my investment business and make sure my customers know how to do that, too. Continue to monitor caution flags because the head in the sand is not a good idea.
I’m going to read and look at some creative financing. It’s been a couple of years. I’ve been the big rent house guy. I’ve even gotten some online arguments about a note isn’t investing because it’s a declining income stream with a declining asset base and rental house appreciates as an income stream. We’re out of time to argue about that. I’ll have to have to come back some other time. Eddie, thanks for being here. We’ll see you next episode.
Important Links
About Eddie Speed
I’m a thirty plus year veteran and expert of the discount note buying industry. I’ve purchased over 40,000 performing and non-performing real estate secured notes with total dollar value exceeding half a billion dollars, giving me an unparalleled track record in the industry. I have acquired and honed marketing and negotiation skills through which all types of note sellers have been sourced – and served. My tenure in the business also means I have weathered dramatic real estate cycles, and prospered through them.
I have partnered with many real estate companies to design and implement effective seller finance programs, notably Homevestors of America (“We Buy Ugly Houses”) where we constructed a comprehensive in-house program covering sale structure, buyer due diligence, loan servicing, and loan re-sale in the secondary market…a complete solution.
As founder of NoteSchool™, my immense range of experience is packaged into comprehensive training programs, available in home study courses, live seminars, and ultimately mentoring programs.
I have never seen the opportunity for growth I see today in the Note industry. The inventory imbalance of Notes vs REOs (few 100 thousand REOs vs many millions in NLPs) has triggered the greatest opportunity in buying discounted notes the industry has ever seen. By far! Plus there’s a huge supply of discounted performing notes that are available as well.
I have given hundreds of educational speeches to real estate and note professionals, and available on a limited basis for speaking engagements. Via live presentations or webinars, NoteSchool’s NotePros™ are available to educate and assist real estate agents and brokers, mortgage brokers, builders, investing clubs, REIAs, on buying both, performing seller financed notes as well as non-performing loans “NPLs”.
Specialties: Seller finance note expert, note buyer, author, award-winning training designer, public speaker, educator, consultant.
The following podcast program is furnished by RCN Capital LLC. The information provided is for general educational purposes only and does not constitute any legal, tax, financial, investment or other professional advice. The views, thoughts, and opinions expressed of any speaker are the speaker’s own opinion and do not represent the views, thoughts, and opinions of RCN Capital LLC. No information contained in this episode should be construed as financial, investment or legal advice from RCN or any individual, author, host or guest. You should always consult a financial advisor before investing.
