How do you make better owner-financed notes? The key is to be reasonable with your offers. You’ll do better in the long run. In this episode, Scott Carson’s guest is Will Henning, the Vice President of Loan Acquisitions from the First National Bank of America. Scott talks with Will about creating, structuring, selling, and buying owner-financed notes. They discuss the pros and cons, what First National is buying currently, and how investors can broker their note deals for profits to FNACUSA.com. Want to learn more? Sit back and enjoy this episode!
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How To Make Better Owner-Financed Notes With Will Henning
I’m excited to be here and I’m jacked up to have a buddy on that I haven’t talked to in a while. If you’re a note investor out there, he is one of the most important people you want to know and talk to. He can probably add some cha-ching to your bottom line if you’re any type of note investor and marketing anything online. This guy is a rockstar. He has been doing what he’s done for decades. He’s a VP at the First National Acceptance Company. Many of you may know it as the First National Bank. The company has been a leader in the note buying industry for over 45 years.
He oversees a group of buyers in Texas, Michigan and everywhere else who are buying private contracts in all 50 states. In 2020 alone, his team purchased over 1,100 contracts with balances exceeding $98 million. He’s the $100 million man. Before he joined the acquisition team of FNAC, he had an extensive history with the company’s REO department. He calls East Lansing, Michigan home. He’s a big fan of Ohio State with his wife, Hannah and their four kids. I’m honored to have our buddy Will Henning join us here. What’s going on? How are you doing?
It is good to see you virtually but it is good to see you. It has been too long but I’m doing fantastic. Thank you so much for having me on. It’s a pleasure.
It’s been a while since I’ve been out to any note conferences. I’m doing everything virtually but there hasn’t been that much.
It’s been very quiet.
The $98 million in purchase contracts in 2020 is a big feat. I’m sure Fred is laughing his way to the bank over there.
We’re keeping him busy. We’ll break that and we see nothing but blue skies going forward in 2021. I’m tired of $98 million. I want to break well over that $100 million.
Let’s talk a little bit about what you do. One of the things that I get all the time is when I say I’m a note investor, I get people all the time calling me, “Do you buy owner finance notes?” I’m like, “No, I’m an institutional guy,” but they can call you and you’ll make it easy. Let’s talk a little bit about what you are buying and looking to buy here.
We buy loans all over the country. We are a federally chartered bank. We have access all over the country, Hawaii, Alaska, you name it. We’ll buy anywhere. We’ll buy any property type. We’ll look at almost any dollar signs. We probably don’t do a lot under $15,000. It’s hard to make money at that price point. That’s not necessarily off the table. You never say never when you’re doing loan sales. It’s first-lien performing. We buy full transactions or partials. That’s the broad picture of what we do. What does it look like in reality? In reality, most of our loans are going to be backed by single-family and owner-occupied homes.
We’ll look at any credit but if you get below 550, it gets pretty dicey. Part of being a bank is we can get very aggressive on yield. Why? Because we can borrow our money for so cheap. We can make very competitive offers, which means bigger broker commissions, more money to your seller, and we’ll still be able to preserve a very strong net interest margin at the end of the day because our money is very inexpensive to borrow. That’s a real competitive advantage. It’s also limitless. We did $98 million and my boss came to me and said, “Why aren’t we doing $200 million?” There’s an opportunity for growth. We’ve seen a lot of our brokers grow and we’ve got more than enough capacity to handle more.
We’ll look at anything and everything. We just want it to be performing. When you buy nonperforming, when you’re dealing with this many loans all over the country, you can’t be that guy who specializes in the Indianapolis market. You’re not that specialized. You’re also regulated. You have more hoops to jump through so you can’t just buy anything and everything. There’s money in nonperforming. Nobody doubts that. We’re looking at buying paper that we think they’re going to pay.
They’ve been paying and you think they’re going to keep paying.
That 20% yield doesn’t do any good if that guy doesn’t pay. That would be one of the things that I would make people know. We’ll look at any transactions, but we want to make sure they pay. Some of the biggest indicators of the ability to pay are going to be your credit and your equities.
One of the things I get a lot is I originate the notes. If they are owner-financed notes, single-family property, I want to sell it immediately. Let’s talk a little bit about newly originated versus something that was seasoning on it. Do you like newly originated or are you like, “I’d rather have the one seasoning?”
I’m going to blow your mind, Scott. Are you ready?
Go right ahead.
Give me credit. Give me equity. I don’t care about seasoning.
The equity takes away the seasoning aspect of that a lot of times.
The only good thing about seasoning is it’s giving you time to build up equities. I don’t want to phrase it too strongly but I’m starting to realize more and more that if you don’t have skin in the game and you don’t have a history of paying your bills, the seasoning is not going to overcome those objections. If they’ve got good equity, good credit, and it’s a newly originated note, that does not bother us.
Let’s talk about that on the origination side, structuring, creating the right type of paper for you. We’ve always talked about how it needs to be somewhere around an 8% interest rate and at least 10% down. Some prefer 620 FICO or greater. I know you have a formula but can you give folks a little bit of guidance if they’re structuring it? We see people all the time, “I’m owner-financing. It gives somebody a 3% or 4% interest rate.” I’m like, “You’re probably not going to find a very good buyer for that unless you do take a big discount.”
I like to break that up into two sections. There’s finding your yield and calculating your yield. You can find your yield. The higher the coupon rate, the better the equity and credit, the less risk that’s going to be. We’re going to want to retrieve a lower yield. We’re getting into some very low yield. If it’s good quality paper, we’ll pay for it. We get it. You want to get fat equity. You want to get fat credit. You might have to get down into the 6%, at least. We’re willing to do it if it makes sense. Having a loan that’s structured with good equity, good credit will get you a lower yield because the risk will be lower. How do you calculate that yield?
If it’s a 30-year loan, that’s going to be a lot different than a loan that has a balloon coming due in five years. You’re going to collect your money a lot sooner. It’s going to be a lot easier to get that yield. Another example is if it’s a low-interest rate. Low-interest rates are going to pay off at a slower pace. If you got a loan with big money down and big credit but it’s a 1% rate on a 30-year, even though it’s a low risk, you have to price it to get any of your yields because you’re so far off in your coupon and your remaining amortization.
I would say you want to write a note that’s going to get your top dollar. We’ll look at anything but you want to get top dollar, get us 20% equity, get us over 650 credit, give us a loan that’s twenty years or less amortization or give us a five-year balloon. You’re firing on all cylinders. Those loans, they get what we call premium pricing. They get mighty aggressive. They’re an almost 100% pull-through rate with underwriting. We close them in a matter of a couple of weeks. We love them. The commissions are fat. The offers are aggressive. That’d be top-shelf.
At 20% equity, that’s a combined loan to value, whether it was a 90% LVN and it brought another 10% down.
You hit the nail on the head, Scott. The only caveat I would make is we don’t give a lot of LTV based on the appraisal if the evaluation is under a year old. A lot of things are appraising now. It’s a great time because you might have 20% equity but if the loan is two years old, it’s going to appraise and now you might have 40% equity. From a practical standpoint, some people submit loans with one month of seasoning, which is no problem. They got 10% equity and they say, “The home’s going to appraise to give me 20%.” Maybe there’s a good reason but we’re going to be a little suspicious that you’re going to get 10% equity in a matter of a month for no particular reason.
Let’s do the flip side. I hate to say there are these gurus out there going, “You can make the loan for more than the value of the appraisal because you’re technically the bank where you see it’s a 105% and 100% LTV on a loan like that.” I’m like, “That’s not a loan that’s saleable at a point where it’s at without taking a big discount to get that point.” What’s your counsel to people out there looking to structure loans where the UPB is over what the appraisal is?
The question is somebody got a loan with a UPB of $50,000 and it appraises for $40,000.
That or they overwrote the loan. They owner-financed a property, but they make the loan for $110,000 and the house only appraises for $100,000. I’m the bank so I can set the value.
You’re playing with fire there. You don’t have skin in the game. You don’t have reason to stay. You don’t have a vested interest. Maybe the rate is high enough that it makes sense. Maybe you just have a real comfort level with the neighborhood where you say, “If I take it back, I know I can get $150,000 so I don’t care.” There might be an inside secret on a deal-by-deal transaction where it makes sense. From a 10,000-foot view, that’s playing with fire. By the time you do your appraisals, it costs us about $10,000 to foreclose and take a property back. The values tend to drop by about 25% to 30%. That’s using ten years’ worth of foreclosures data.
Let’s take that again because you’re one of the few people that say that actual number on that. I love it because I’ve been saying it too. A foreclosure impacts a neighborhood. It’s just not that house. It impacts the whole neighborhood.
If you were to look at ten years’ worth of data, on average, we go about twelve months without collecting a single payment. Be prepared for that. Average foreclosure expenses are around $10,000. That’s collections, attorneys, real estate agents, lawn mowing, cleaning the pipe, the whole nine yards. That’s not just not collecting payments. That’s in addition to not collecting payments. On average, if you look at the value prior to foreclosure, then you look at the value after foreclosure. On average, I’m using ten years’ worth of data. It drops about 25% to 30%, those are appraised values. Pipes are gone, roof is bad, windows are busted. Sometimes you do all right. It’s not like it doesn’t happen but the big picture is foreclosure is a big deal.
I’m glad you shared that because part of that is out front with a foreclosure, but then also it’s the backend side of it, property preservation, landscaping, minor fix, eviction, clean-up, and all that stuff.
It’s a question we get asked. We have the data to be able to help supply the answer to say, “I don’t think so. I know so.” Everyone likes to think they’re the exception to the rule, but if you play the odds, you win some, you lose some. At the end of the day, this is what it shakes out to.
It’s a great thing that you have those numbers. You understand that. That works in your favor by figuring that into. Whereas a lot of people are like, “I can get away without doing that.” You may do but the law of numbers don’t lie. When you’ve got a proven track record in your 45 years, there’s a lot of learning that had been going.
With the seasoning, it makes good sense using your gut. Seasoning isn’t going to hurt the transaction but it’s not going to overcome the other problems as you’d think.
Let’s talk about partials a little bit. I know you guys buy a lot of partials. We don’t see many partials in the distressed debt space when we’re dealing with banks a lot of times. Most of them want to sell the full note off or buy the full note. They don’t want you to do parts of it, but you do embrace the partial side, whether it’s 2 years or 5 years or whatever payments. What’s the structure of that for you? What are you focused on?
What we’ll do is it’s a little bit of a twist. It’s not terribly different from what you said. We just make a technical distinction. We say that we’re going to buy a portion of your balance and then it will amortize to 5 years or 4 years. Just like with any loan, if they pay off fast or they pay off slow, it’s going to go shorter or longer. We do that maybe for clarity’s sake so people will understand that this might go more than five years.
As far as partials go, we certainly are agreeable to them. We don’t buy nearly as much as we’d like. A lot of note sellers just want to be done with the transaction. They want to wash their hands off of it. I’d be happy if somebody bought even more. The yields on those are going to be pretty comparable to the yields that we get. Most of them are going to be 5 to 7-year partials. We do a lot of backend partials. We buy five years, but it’s very common for us for 1 year or 2 years later to come back and buy some more.
Partials are always welcome but they’re most often used in exactly what you’d expect, vacant land. We do a lot of commercials. If they’re not going to pay, you shouldn’t buy the deal. A partial helps you if you don’t understand the value. If you think this is a good guy and he’s going to pay, but I don’t understand what this restaurant is worth, the partial helps preserve your investment. It doesn’t magically make a bad deal good. If anything, you better be careful because you can lose money real fast on partials.
If anything, they need to be even stronger buyers. Think about this for a second. There’s less meat on the bone. You have less of an investment. Even though you might be getting a 15% yield, if it’s a $25,000 investment, you do a couple of collections calls. You pay for your closing expenses. You pay for title work and your money is gone. It’s lost. Maybe you foreclose and you recoup your expenses. Maybe you don’t. You’ve got to drag it across the finish line but it’s eaten up so much time and expense. There’s so little meat on that deal that you’ve lost money. You’ve got to be careful with partials.
You brought up commercial notes, especially partials. What do you see a lot of now? Restaurants and mixed-use. What are you seeing that you’re buying a lot of on the commercial space? That’s the million-dollar question. That’s going to depend on location and what’s going on, but do you see any trends?
From where I sit on the bus, I wouldn’t say I’m seeing a trend as in an influx of restaurants or pizza joints. We get a pretty good smattering of anything and everything across the country. We’ve been a little bit more agreeable to full buyouts more than we ever have. They’ve proven to be well-performing. We see a little bit of everything. I’m trying to wrack my brain. No crazy stories. Usually, I’ve got some crazy story where we bought a church that was turned into a gas station that turned into a repair shop that exploded one night or something. We’re not buying as many commercials as we did in 2019, but we’re certainly working our way back up.
A lot of the same rules apply. One thing I would say is if you want to buy commercials, ITV and yield are issues. If you’re able to get financials, and I realize that’s not common, but if the seller is savvy enough to get financials, that is so powerful. To see that this is cashflowing and that they are very responsible makes a big difference. If it’s not personally guaranteed, the compensating factor is the equity, 30%, 40%. The more you can get, the better. That shows you’re in it to win it. The opposite is true. Someone with good credit, generally speaking, has the savvy to pay the bills or to have an exit strategy. That’s still probably a smaller portion. I wish we did more commercials to tell you the truth but that’s still probably a smaller pocket of what we do.
It is still figuring things out on the market by market basis. We’ve had a lot of the smaller banks or smaller lenders. They say that a lot of the bank’s finance 60% to 70% of the small balance, $5 million and below compared to Wall Street in the last downturn that we had. If somebody goes late or they lose a tenant, that NOI reduces that capital and the value very quickly. You go from having 40% to 30% to 25% to 20% very quickly if you’re not putting tenants in place on a regular basis.
We’re very careful with commercials. We’ll do it but you don’t know what it’s going to be worth when you take it back. I used to work in the REO division for a long time. I’ve seen too many pizza joints and oil change stations, too many things where it can be an environmental hazard, the whole nine yards. That’s a complicated sector to get involved in.
What are Will’s most hated things? The top three things that you don’t like to buy notes on. It could be New York or New Jersey because it takes forever to foreclose there. It be could a specific asset class like gas stations or other things.
There are a couple of transactions where the bank had no appetite. If the bank hates it, I hate it. The bank had no appetite for it. I was a little surprised but the more I thought about it, the more it made good sense. The first one is going to be vacant land that is out in the middle of nowhere. I don’t care if it appraises. We’ve had some transactions that look good on paper but it is the rocky, bare, and no man’s land. It doesn’t matter. We’re not buying 10 acres in a 20,000-acre sandlot. We’re not opposed to vacant land, but vacant land that is totally off the beaten map.
The other one will be commercial if it is not operational. We have seen transactions with good credit, good equity, the whole nine yards but it is not operational. Either they’re doing reconstruction or it’s shut down for the pandemic and they’re going to open up. It doesn’t matter. If it’s a business, it has to be actively operational. Call us back when you’re up and running. We’ve closed several notes where we said, “The guy looks solid as a rock. The equity’s there but until he’s up and running, we’re not buying something out of the gate we know is not operational.”
How has your portfolio been? Do you see a big increase in forbearance or lates? Has it been very lower than expected? How has your portfolio performed?
When the pandemic first hit, there were forbearances as there were all across the country. A lot of people hold their breath. What does tomorrow bring? Who knew? It was a weird time. We shut down a lot of our purchasing because we didn’t know. At the end of the day, the portfolio has remained unbelievably strong. We have record-setting low delinquencies, which is wonderful. We hate foreclosures. To see that people are thriving and making their payments and that delinquencies are low, and they have been for some time is encouraging. The portfolio is very healthy, strong and good.
That’s a good place to be in. We’ve had a lot of conversations with other lenders out there. They’re like, “We’ve had rough.” That was the perfect time they would be focused on. One of the things I know that you were buying, and I don’t know if it’s still that way or not, but you were even looking at contract for deeds but performing contract for deeds. You want to convert them first to mortgages. Are you still in that same philosophy?
Yeah, specifically in Texas. It’s falling out of fashion more. People aren’t doing CFDs. I am not familiar with other states well enough. We have a processing team and attorneys that will help us on a state by state, but specifically for Texas. It pops its head up once in a while but it’s rarely an issue. We get it converted.
The thing is you’ve had such property values increasing of the place. Most mortgage brokers don’t want to do a loan on a house that’s less than $100,000. There’s no way to make any money on it. These days, the values are going up. A $100,000 mortgage is much more common in areas like the middle of Ohio or Indiana where lower values were predominant at the last downturn, but those markets have recovered.
One of the things that have also helped our portfolio that I mentioned earlier is we are still hungry for any and all transactions, but we recognize if you have a good loan, you have to be willing to pay for it. A guy with a 680 credit and 20% equity is not going to sell at a double-digit yield. You’re looking for a needle in the haystack. We want to get a good yield and we do retrieve a good yield but we’re also willing to pay for a good paper. That means we buy more good paper. You don’t have to pay for the servicing. They pay their bills. It causes less waves.
For a long time, we bought very low-dollar paper and high yields but you can still make good money on those deals, but servicing will gobble that money up. You might have 40% equity but $10,000 might drop you to 5% equity. When you’re dealing with small numbers, you have a lot more elbow room. I’m not talking $500,000. We’re not crazy. We’re talking $100,000, $200,000. It’s normal-sized transactions. You have so much more elbow room on deals like that.
Talk a little about the balloon. A lot of people are like, “Five-year balloons are illegal out there because of Dodd-Frank.” I hear that from people all the time. I’m like, “They’re not illegal to do.” There are specific ways to do them.
We buy balloons all the time. You are not a creditor. If you’ve originated more than a certain number per calendar year, I believe it’s five, unless it’s vacant land. You’re not considered a creditor. We have to go through that process with each loan to verify verbally and in writing that you’re not a creditor. If you’re not a creditor and we’ve done our due diligence and you’ve signed it. We have, in good faith, a reason to believe you’re not. You can do that. You can structure these loans. You can ask for no money down. You can ask for a balloon. We see some weird payment streams. It’s an orchard. The payments go up from September through November, then they go down in the summer and the wintertime. You can do all of that.
Balloons are perfectly fine. The only thing I would note is that if it is a high coupon rate, the threshold of becoming a creditor is a lot shorter. You might only have to do two deals depending on the length of the loan and the coupon rate. Some people, “I have only done two.” You did them both at such high rates. We’re now creditors and that takes them off guard. If it’s a normal loan, I will write that balloon, 5 or 7 years, something like that. It’s good for you if you want to sell it. It’s good for your purchaser. You can always amend it if you need to. We see quite a few balloons and it’s certainly going to help your pricing. No doubt about it.
One of the things I always ask beyond that is how valuable it is to have an RMLO to write your paper for you when you’re owner financing? Does it add value to the paper? Are they doing a one-off for themselves? Are you still going through them and cross your T’s and dot your I’s in a lot of cases.
You’re still going to go through them, cross your T’s and dot your I’s. It’s not terribly time-consuming. We’re going to get an updated policy. We’re going to go through closing if it’s professionally done. I wouldn’t say it’s a deal-breaker, but I’ve seen more than my fair share of backwoods loans that are put together, “I forgot to put in the payment amount, I forgot to mention that the guy’s name,” some sloppy stuff. You’ve got to rewrite the contract. You’ve got to amend it. You’ve got to get the purchaser involved, but the purchaser doesn’t like it that you’re buying the loan. They don’t cooperate. You’re five weeks into the transaction and you’re at a standstill because you didn’t create it right.
Do you need a professional guy? It’s not a mandate. You don’t have to. If you’re a newbie and you’ve never done it, I would think through it and be careful. Maybe call one of those if only to double-check yourself. Even though it’s well-intentioned, we see a lot of sloppy paper and you can’t buy it that way. We had one not too long ago where it’s like, “I forgot to put in an escrow.” Now we can’t collect for taxes or insurance. That’s a big deal. It was an accident. You wouldn’t get away with that stuff if you went through professionals.
Those are standard. Having a professional working on that, it’s their job to do that and make sure it’s good-looking on paper. One of the biggest underdeveloped and unknown facets of what you do, it’s a strong point in your success, is your Broker Desk. It is the fact that you’re willing to work with no brokers out there. I saw a grin on your face there and I’m sure $98 million in 1,110 contracts. Do you know the breakdown? How much that came from you and then how much was with your broker network?
It’s about 50/50. 2020 slowed down at the Broker Desk. We saw guys drop-off. We saw a slowdown but in ‘21, we’re climbing back. We’re getting back to 2019’s numbers but we do a lot. In fact, we have an entire broker division and they only work with you. Not only do they work with you, but I think this is cool. Maybe it’s just me and I’m nerdy.
No, it’s cool too. That’s why we’re talking about it.
What I also think is cool is some of the things we’ve started to implement. We have a reporting as a broker that we give to you where we say, “Last week you gave me seven loans. Two of them, I don’t think we can buy, but these five, where are we at?” We give you automatically updated reporting so that you can stay on your leads. Even if you’re maybe not the most organized or you don’t have the tools, we try and give you the tools so you can follow up with your leads.
We also give you more competitive pricing. We track things with you. Let’s say you’re a new broker. Let’s sit down and say, “Here at the Broker Desk, most people convert 1 out of 5 quotes. Do you want to be there or do you want to be at 40%? Do you want to be at 20% like everybody else?” Maybe you say 40%. We say, “Let’s have that be our goal. You and I, let’s partner together.” Every week, every month, we have data we send to them.
We say, “You’ve given us ten loans and you’ve converted five of them. You’ve given us 40 and you’ve only seen two converts. That’s bad. We’re not where we need to be. What can we do to turn this ship around?” We’re more than just you give us the data and we spit you out a number. Anybody can do that. We don’t work at McDonald’s. We’re not order-takers. We’re here to grow the business.
We can help you know your conversion rates. We can help you know your leads. The same is true for backend partials. We always preserve your backend if you do a partial. Also, we have sales tools that we’ve developed that we’re looking to release very soon that are PDFs that you can use with your sellers. For example, people hate the word discount. If you’re saying discount on your sales call, stop it right now. Discount equals loser. They’re not losers. They’re wise with their money.
Think about what a lump sum can do. What if you take that lump sum and reinvest it in the stock market? What would that earn you? What if you invested in a CD where it can gain interest? What if you paid down debt? What would that look like on your mortgage and money you would save as opposed to money you could earn? We have different data and graphs for all that stuff.
As the broker, you can take that and have a better, more compelling sales presentation than saying, “You owed $100,000. We’ll pay you $80,000. Yes or no?” Have it make sense for them. Show them. You might be taking $80,000 right now, but you reinvest that in a stock rate that gets you 5% and you’re only earning three on this loan, which is losing interest daily. You’re going to end up $10,000 ahead over the same period of time with less risk, no early payoff, more liquidity, but who develops tools like that? We can help give you the tools to be successful. I know I got off on a tangent but all about the Broker Desk.
That’s Broker Desk, but you also have a good document. You are getting bids back very quickly to your brokers to give them an idea of what you’ll pay, then working with them and holding their hand to help them. You make a commission. Do you know what the average commission was in 2020 or 2021 that you see in your brokers per owner or note that they sell to you?
You look at that and that is about 6% of the UPB, which comes to about $4,500. We got some brokers. Their commissions have shot through the roof. They’re taking advantage of this new pricing. They’re doing well. I would say another trademark of our most successful brokers is they have a little bit of more of a long-term view in mind. What I mean by that is if you’re going to juice every deal, you’re going to close way less in the long run. We want you to make as much as possible but I’m telling you, the data doesn’t lie. Year after year, our brokers do their best to do more quantity as opposed to trying to go for the gold every time and make a $10,000 commission. You end up not doing as well.
It’s the repeat business that builds long-term success with it. You can try to slice and dice and make a big jump in that. Note holders are not going to come back to you. They’ll go shopping somewhere else for the next one.
You only have so many cracks at these offers. If you come out with a commission that doesn’t make sense, sometimes that happens. Sometimes there’s a need. If you can fit that need and still make a good margin, more power to you. If I could say a word to the broker community, be reasonable and you’ll do better in the long run. By and large, about 6% of the UPB is the commission. You negotiate that yourself. You work that out. We give you the gross offer. You go back to your seller with that difference. Whatever you can negotiate, that’s what you keep. We keep that separate from the seller. We have a separate agreement with you. That’s paid outside of closing. We try and keep our seller out of that conversation. That’s between the two of us.
That’s a big, strong point there. It’s not somebody like, “He’s making $4,500. I want that.” You do a great job of keeping that separate and protecting your brokers and taking that animosity. Sometimes people feel that way, “He’s making $5,000 on my deal just to sell it to you. Why can’t I just sell it to you and keep the $5,000 myself?”
Those relationships are very important. We owe a lot of awesome business from the Broker Desk and the cash per broker has gone up. The size of the transactions at the Broker Desk is bigger than they ever have been. I don’t know what these brokers are doing, but they’re bringing good paper. Do you want to know what the pull-through rate was with underwriting? You get a deal signed up. I’m not saying a quote. I’m saying they say yes and they sign the paperwork. I the past few months, you said, “What percentage of our loans get approved by underwriting where the bank says, “I’ll buy it?”
I don’t know. Is it 50%?
It’s 93%. What that tells you is we are open for business. You bring us the paper. If it’s priced right, you give us the data we need, we’re here to say yes. The Broker Desk is on its way back. The loans we’re getting, commissions are strong, approval rates are high. It’s a great business. We’re excited to get back in the saddle. We’re getting to conventions. We’re signed up to go to a couple of broker visits. We love it. We’re excited to see everybody.
Can you give a little secret or insight into what and how the brokers are marketing? Is there anything that you see consistently working well without giving away any secret sauce?
I can give you some stuff and I’ll give you some stuff from First National as well. Online, there’s certainly a presence there. It’s a smaller pool but it is more cost-effective to find these loans online. Lists still bring you business. The reality is there is a lot of people that didn’t know they could sell their note. I would not be afraid of lists. I would also say don’t be afraid to re-market. Just because you have a list doesn’t mean it’s the end of the story.
Feel free to re-market. Use different languages. If you’ve talked to them, your next letter should be phrased differently. If you’ve given them an offer or you follow-up, it should be phrased differently. Guess how many of our loans we’ve had the quote at least twice? It’s not like I quoted it, then I recorded it a day later. I’m talking about at least a 30 to 60-day gap between offers. How many of our total closings did we quote at least twice?
I would say probably at least 25%, 30%.
It’s 50%. You’re going to get a pool of people that are going to say yes. If that 50% is good or bad but it is what it is. I wish we got more upfront but that’s the reality. Half of our closings, we’ve quoted at least twice. Some poor soul, we quoted eight times.
Motivation changes all the time.
You get them once. If you’re going to get that conversion, most of your conversions are going to happen in two weeks. After that, it takes a nosedive. Just because you didn’t get them on that first round, we get a lot of business the 2nd, 3rd time around. Don’t be afraid of lists. Don’t be afraid to re-market. Make sure you have different verbiage for people. Avoid the word discount, fair market value, cash, cash now. Things that accentuate the positive. Things like that do resonate with people. Our marketing hasn’t worked for them, “We can pay you more for your loan. We can get your money right now. How is this going to help you right now? We are here to make your life better.” Verbiage like that resonates with people.
How much of the loans you purchase was a self-directed IRA investor or the originator or lender? Do you know, by any chance?
I don’t have my finger on the pulse for how often that happens but it’s not terribly often. We can buy them. No problem there. It’s not personally guaranteed. We do like to see some equity.
I met where somebody originated. They wrote the loan out of their IRA for somebody. They owner financed the house, bought it on a finance note, then they sell it off later on.
I don’t know. It shows its head once in a while but any number I could give you would be a guess. I would not say it’s any meaningful amount like 20%. It’s definitely less than 10%.
Maybe because people are pretty savvy. They don’t mind holding it for cashflow because they can’t touch it for a while, so it’s different in a lot of cases that way. The beautiful thing is that your Broker Desk is very easy to go on to and enter all the information, have all the information when you enter in to get a bid. It’s one of the most important things.
You’re only hurting yourself. Pay it forward. I can’t tell you how many brokers I’ve said, “If you’re bringing your car to the auction, you don’t run it through the mud. You don’t not clean it. You don’t let your dog hang out in the back of it. The cleaner and nicer it is, the better it’s going to be.” That’s very true for loan submissions. The more we know, the sharper we can get.
You can find out what the seller wants. “What are we doing here? Are you looking for 100%? Are you looking for 90%? What kind of money are we talking about? Can we make that work? Are we going to fill your need or are we just throwing darts at a wall and hoping something sticks?” Sometimes it feels like that, “I didn’t know what the guy wanted. How can I meet his need if I don’t even know what he needed? How can I get a pricing exception or anything like that if I don’t know what the guy needs?” Any data like that helps all parties involved. You get better pricing. You get faster approvals. There are less requotes and less drama with the seller. It is a benefit to everybody.
You need another motivation. You need to know the story behind the story so you can make an accurate answer and an accurate quote for that.
Salespeople talk about a sales funnel. We like to talk about a sales cylinder. We’d rather have maybe a little bit less because that’s all waste. Give it to us and just let it drop right down to the bottom.
I did have one question I want to ask you about. When people are structuring a deal and they do an 80/20 or an 80/10/10, 10% down payment, 10% second, 80% first, do you have a problem buying that first and leaving that second in place?
Not necessarily. We would need to figure out what true equity is. On the surface, I don’t have a problem with that. We would need to figure out what the second lien is. How much of it has been paid down to figure out your true equity? I don’t think that would be a problem.
I want to thank you for coming on the show and sharing your wealth of knowledge. I get people come and say, “Just call FNAC. They’re going to give you better pricing on that. They’re going to make it easy for you.” Even some of the big names in the industry are like, “Just call them. Come on. Let’s quit bullshitting and beating around the bush.” What’s the best way for people to reach out or to jump online? What’s the best way for people to connect with you?
Go to FNACBrokers.com. We got our phone and email if you want to give us a buzz and shoot the breeze or if you got a loan that you want to submit. As soon as you do that, we’ll get you set up with a loan officer. We have a very seasoned staff. They’ll call and walk you through. We are working on a little bit of a sales presentation. If you’re new, we’ll meet with you for maybe fifteen minutes and say, “Who are we? What do we like to buy? How does this process work?” The more clarity you have upfront, the better. The best way to get that conversation started is it hop onto our website, check us out, whether it’s 1 or 100 deals, whether you’re a real estate agent and you only got one, no worries. We’re happy to work with everybody.
Keep rock and rolling. Tell Fred I said hello. It’s been a long time since I’ve seen him. Do you still have Jack Daniels over there working for you or not?
He’s a crazy dude. There’s something about the note industry that appeals to these off-the-wall guys.
It attracts some interesting characters out there.
They have been called that before but it fits the description. Thank you so much. Good stuff there for you. Be safe and thanks for coming on the show and sharing your knowledge.
Scott, thank you again so much. I appreciate the opportunity.
That was Will. $98 million bought in 2020. They’re buying a lot of stuff. They’re being aggressive. They got some cheap money being a bank. They can be aggressive on pricing. Maybe you are a note investor out there. You’re going to start people asking me, “Do you buy owner financed notes?” Take advantage of this. Go out there. An average of $4,500 commission and that’s everything across the board. Use it to work a great tool in your tool belt as a note investor and make some money while you’re looking to raise capital or to find some other deals. Whatever your niche may be, this is a great thing to have in your tool belt. Go out, take some action and we’ll see all at the top.
About Will Henning
Will Henning is Vice President at First National Acceptance Company. First National (www.fnacbrokers.com) has been a leader in the note buying industry for over 45 years. Will oversees a group of note buyers, in both Texas and Michigan, who purchase private contracts in all 50 states. Last year alone his team purchased over 1,110 contracts with balances exceeding $98,000,000.
Before joining the Acquisitions team, Will had an extensive history with the company’s REO department. He currently lives in East Lansing, Michigan with his wife Hannah and their four children: Liam, Moira, Ruth, and Ilsa.