How Seller Financing Can Turn Underperforming Rentals Into 2.5X More Net Income | Eddie Speed

Eddie Speed (00:00)
So I’m not sure where you’re getting your data that says that there’s a big lift in value, because most of these guys that are doing this realize that we’re kind of in a flat market. This isn’t an argument about whether there is appreciation on property over 10 years or not. That’s not an argument. Okay. What we’re saying to you is that if you started collecting two and a half times net income more,

that appreciation would never pace with the money you’ve already collected. Would you rather have the dollar now or wait ten years and get the dollar?

Dylan Silver (02:05)
Hey folks, welcome back to the show. Today we’re joined by returning guest Eddie Speed. He’s an investor and founder of Colonial Funding Group. Eddie, thanks for joining us here today.

Eddie Speed (02:16)
How are you?

Dylan Silver (02:17)
Doing well, doing well. What types of deals are coming across your desk these days?

Eddie Speed (02:22)
Well, I’m a note guy, right? So I buy—I buy seller-financed real estate notes. So that would be what’s coming across my desk. And that could be somebody that intentionally chose to seller-finance a piece of property, or it could be where we helped somebody seller-finance a piece of property, maybe even convert a rental and do that.

Dylan Silver (02:42)
Now, when we talk about converting a rental, what is the ideal scenario for this? Or is there one specific scenario that works better than others?

Eddie Speed (02:51)
So I tell people, we can’t fix every rental problem. But there’s a decent percentage of single-family houses that if you ran the modeling and tested it, seller-financing the same house that you rent, that your net income could probably pop up about two and a half times net more money. That’s pretty good, huh?

Dylan Silver (03:11)
I think one of the things that we were talking about in the green room is this idea of people having difficulty with their rentals, but sometimes people have difficulty bridging that gap to what do I do to transition this. Can you walk us through on a granular level, maybe giving away some of the gold here, what that looks like if someone is having difficulty with their rental, how could they start looking at seller-finance as a way to potentially

exit from this in a way as a landlord, but still being involved as an investor?

Eddie Speed (03:40)
All right, well, let me take a real story. It’s called Mike and Lindsay Hambright, right? You know them? Yeah.

Dylan Silver (03:45)
Absolutely.

Eddie Speed (03:46)
Yeah. So Mike and Lindsay have rentals, and Mike—we’ve had a conversation for a long time about his rentals not making money. Let me ask you a question, Dylan. Let’s talk about the causes of inflation, and let’s talk about the causes of things that happened in real estate after the virus.

When the virus happened and inflation started fueling, a lot of people were on these Facebook groups, all these armchair quarterback real estate investors on Facebook—you know what I’m talking about, right?

Dylan Silver (04:15)
Absolutely. Yeah.

Eddie Speed (04:17)
They all said this is great. Rental properties are exactly what you need to own in inflationary times. But see, I started in this industry in 1980, when interest rates were 18% and inflation was raging. And so I knew that that did not match up with what I had experienced as a very young guy starting in the business,

because I used to call on landlords and home builders and Realtors. That’s what I used to do when I very first started. And I knew that they were very unhappy, particularly about their rentals. Why? Because rents did not pace up like expenses paced up. Right.

Dylan Silver (04:54)
Mm.

Eddie Speed (04:55)
Expenses went up about two and a half times more than rents went up. So you take the same rent house,

and all of a sudden the math doesn’t work the way the math used to work. So if it’s Mike Hambright or if it’s anybody out there, there’s likely you have some underperforming rentals. Now, I’m not saying every rental you should do this with, but I’m saying to you that it’s fairly easy to model it and go figure it out.

Dylan Silver (06:08)
Now, I wanna ask maybe a silly question here, but from the outside looking in, right, if you’re in areas of Texas where maybe rents are stabilized, maybe even going down in some cases, like let’s say Austin, Texas, but you’re still seeing property values go up, that seems like maybe threading the needle for this opportunity, right? If you realize that you’re not going to be able to cash out like you would like from a rental,

but property values are still going up, seller-finance makes perfect sense in that situation. Am I wrong?

Eddie Speed (06:39)
Order

values on properties every day on notes. I do it. We buy portfolios of seller-financed notes, is what we do for a living—Houston, San Antonio, Dallas, Tyler, all over, Abilene, Texas. And for the most part right now, if we saw a property sell a year ago, it’s flat to a little less.

Dylan Silver (06:58)
Mm.

Eddie Speed (06:59)
And so

that

so I’m not sure where you’re getting your data that says that there’s a big lift in value, because most of these guys that are doing this realize that we’re kind of in a flat market. This isn’t an argument about whether there is appreciation on property over 10 years or not. That’s not an argument. Okay. What we’re saying to you is that if you started collecting two and a half times net income more,

that appreciation would never pace with the money you’ve already collected. Would you rather have the dollar now or wait ten years and get the dollar?

Dylan Silver (07:33)
You’d rather have the dollar now, right?

Eddie Speed (07:35)
Exactly. So we’ve built models, and we can show this. It’s not hocus-pocus math; it’s pretty simple. If you had a house that rents for $1,800 a month, okay, which is the average rent in the United States for a single-family house, okay—that same house, if you owner-financed it, the mortgage payment would probably be about

$1,900 to $2,000. Just call it $2,000 for easy, easy conversation. But of that $1,800 rent, how much of that do you keep before you pay the bank? Statistics say you keep about half.

Dylan Silver (08:09)
Right.

Eddie Speed (08:09)
Right? I’ve taught a lot with like very recognized fractional CFO firms that have hundreds of

single-family landlords as their clients. And they—and they affirm to me that you may not—it may not cost you 50% in expenses at the end of every month, but it’s that end of every year, that end of every year and a half. It’s when the air conditioner, it’s when the roof, it’s when this happens, when the plumber, when a tenant moves out, all of a sudden you’re like, “Yeah, you’re right.” So of that $1,800, you’re keeping about half.

This is before you pay the bank.

Dylan Silver (08:44)
Right.

Eddie Speed (08:45)
Nine hundred dollars. So your rental makes nine hundred; you owner-finance, you get two thousand. Which would you take?

Dylan Silver (08:52)
Two thousand.

Eddie Speed (08:53)
Yeah, I think—

Dylan Silver (08:54)
Seems like a straightforward question. When we talk about the avatar of the person who is the buyer in these seller-finance situations, we hear a lot about ITIN, but we also hear about folks who might not be qualified in other circumstances. From, again, my vantage point outside looking in, I think there’s more and more people that are now looking for seller-finance opportunities as a buyer. Is that accurate?

Eddie Speed (09:19)
It is. And let me say this. One of the things we’ve done in developing a whole system for this is we’ve built us a system where we have management over the Realtor who’s finding the buyer. Because what we found is we can do a better job usually than a guy—that we have more customers and more transactions, and we can kind of demand a little more of the Realtor.

Finding the qualified buyer is the key to the deal. Finding an underqualified buyer does not take a genius; it just means that you’re accepting less than what you should sell—except if you’re the lender. The time to worry about a loan is before you make it.

Dylan Silver (09:57)
Right.

Eddie Speed (09:57)
And so we—we’ve developed a very distinct process. And the team that helps me with this has done tens of thousands of these; this isn’t their first time to try this. And so the reason that the underserved buyer exists is because underwriting has gotten so tight.

Dylan Silver (10:16)
It has.

Eddie Speed (10:16)
Right? If you—if you look at the Mortgage Credit Availability Index, which is

put out by Mortgage Bankers Association, around 2019 that scoring model was at a 185. So they developed a scoring system. So just call it whatever 185 is, it was that. Today it’s about a hundred.

Dylan Silver (10:36)
Mm.

Eddie Speed (10:36)
And so that means that 40% of the buyers that could have gotten a mortgage in 2019, a conventional mortgage, can’t today. You mentioned ITIN buyers.

They used to could get an FHA loan, did you know that? Can’t

Dylan Silver (10:48)
I did not know.

Eddie Speed (10:49)
anymore.

Dylan Silver (10:50)
When we look—when we look specifically at this idea of more people becoming non-qualified and having to look at non-QM loans, as a Realtor myself looking at the traditional mortgage side, I think you mentioned this earlier, too. Most Realtors are not necessarily equipped to understand this process. Is that a bottleneck in the system as well for the industry as a whole?

Eddie Speed (11:14)
Seller-financing is a specialty side of the industry. So you have specialty Realtors. You have Realtors that deal in all kinds of commercial land and commercial office buildings, and you have Realtors that specialize in this and that. So seller-financing is a specialization within the residential real estate community. Most of the buyers that you’re looking for are not searching in MLS to go find their house.

So you’ve got to go find a Realtor that can get out in that community and have an impact with people that are that underserved buyer in the market. And so we—I bought 50,000 seller-financed notes. So if there’s one thing that we’ve kind of patterned pretty well, it’s like, where do you find the buyer? Who is the Realtor that can do it? What is their process?

They need to be—they need to be held to a standard. They need to have a—like a “this is what you do.” And then it needs to be measurable actions, right? They need—so we’ve developed a system where we can have oversight of that Realtor to make sure that they’re looking for the right buyer. A lot of times people have a house listed for 60 days and hadn’t sold, and the real estate investor—some of which we were laughing about in the green room before we got in here, right? They’re cowboys; I know them.

And after sixty days they say, “Go find me a buyer by next Friday.” And sure enough, the Realtor will; it’s just that they just lower their standards.

Dylan Silver (12:37)
Seller-finance offers a unique opportunity to help multiple parties, right? Because you have the ability to demand, I believe, in many cases, a higher asking price than you would ordinarily—

Eddie Speed (12:48)
Not teaching that. Not teaching that. No,

sir. I’m not teaching people to oversell their property. Absolutely not. First of all, it’s a violation of Dodd-Frank, right? Second of all, it’s like that’s one of the things that makes people

not want to pay their mortgage down the road.

Dylan Silver (22:21)
Yeah.

Eddie Speed (22:21)
Right? The seller-finance transaction that’s the best is the one where the buyer thanks you every day of the week for letting them fulfill their dreams. That’s a great deal.

Dylan Silver (22:34)
I wanna—selfishly, actually, I have this question. When properties are sitting on market and they can’t sell based on a specified price, and people are saying, “Well, I’m gonna seller-finance it at that same price,” that wouldn’t make sense then, right? Because that would be more than the market would bring. If you’re gonna drop the price, you should drop the price either way.

Eddie Speed (22:53)
My dad used to say a horse is worth what the traffic will bear, okay. But take that in real estate: A property is worth what other properties sell for. It’s just that simple, right? You should—and it—it’s the basis of understanding, like, what is fair market value of a property, which every appraiser and every Realtor and every

mortgage banker in America like spends a huge amount of their energy and time working on, “Is this fair market value?” And so that’s all—in my mind, that’s what a property’s worth. You certainly can sell it for retail, but I’m not ever suggesting somebody oversell it. And once again, I—I’m trying to say that when I help people create mortgage-banker-quality paper, it trades in the market for more money.

That loan is worth more because it’s legit, and it’s got the legitimacy of the typical things that a mortgage banker would look for. And so you can cowboy it, but when people show up at my doorstep and then want to sell me those loans, sometimes they get hammered. I got a customer today—today. What’s his problem? He oversold the property,

right? And now all of a sudden he tries to go to the secondary market and sell the loan, and he’s getting clobbered on the price and he’s like—he doesn’t like that. And I’m like—I’m not saying this to the customer, but I’m thinking to myself, “You did it to yourself, dude.”

Dylan Silver (24:14)
Mm.

Eddie Speed (24:14)
And so selling it for the right price, not more than it’s worth, but what it’s worth; selling it to a super qualified buyer; having the underwriting tight; having the paperwork tight; having it close right; and then all of a sudden we get the—we can then immediately go out and help them exit part of that note. Now all of a sudden, you’ve got a full cycle to real estate within your seller-finance transaction.

Most people can’t seller-finance over and over and over, because why? They run out of money. We create a model where they don’t run out of money.

Dylan Silver (24:45)
You mentioned the secondary market for these notes, and it seems like based on what I’m hearing, that market is going to scrutinize the value of the property even more so than the buyer might. Is that accurate to say?

Eddie Speed (25:00)
Well, you’re gonna have to be able to justify the buyer. The buyer of the property probably isn’t sophisticated enough to investigate the value of what they’re paying for the property. Listen, you’re a Realtor. How many of your clients know how to really take a fair market analysis and really break it apart and tell you—yeah, do you see that very often?

But yeah, so the buyer’s not the one that really has the scrutiny to do it, but somebody in the secondary market. And here’s the thing about the secondary market for loans: The secondary market for loans could be some high-risk investor that wants to haircut your note with a big discount because they’re willing to take an ordinate risk, and they’re gonna look over all the things that Eddie just talked about. Well, if liquidity is a factor,

then getting the most money for your note is part of that best formula for liquidity, right? I help people create the most value. How have I bought fifty thousand notes over my career? You wanna know why? Because I’ve helped people make better notes.

Dylan Silver (26:00)
On that note, and I don’t know if we can give away all the gold here, but what differentiates—or what are some of the main things that differentiate a good note from a bad note?

Eddie Speed (26:11)
There’s six things that influence the value of a note:

the borrower, the collateral (which is the property), the equity (the buyer’s equity, right—that could be—that could be down payment, or it could be over time they pay down the loan, plus the property appreciates, right?), the terms of the loan (which are—which are the interest rate and how long the loan is payable), the pay history on the loan, and the paperwork. Those six characteristics

inevitably cover everything that influences in fifty thousand notes I bought, what drove the price up or down.

Dylan Silver (26:44)
When the secondary market is looking at paperwork, for myself and those who may not be familiar with this, what specifically are they looking for? What would be a red flag to them?

Eddie Speed (26:55)
Well, you know what a Fannie Mae loan is. Okay. And so if you—and so what would you suspect if you looked at ten Fannie Mae loans, what would you see? That all the underwriting and all the paperwork and all the disclosures and all the legal docs, they were all homogeneous, am I right? They all would kind of look like twin sisters. Homemade does not increase the value of a seller-finance transaction.

What I want them to do is look homogeneous. I want them to be drawn by a law firm. I want them to have the right disclosures. I want them to be compliant. I want the underwriting to be compliant. I want things to look like there was a discipline to how that loan was created. And there are—there are quality standards in loan documentation.

And I use an example of Fannie Mae because everybody in the audience can kind of relate to that. Do you think a Fannie Mae loan is written to a high underwriting standard and a high documentation standard? Of course. Okay, well then do you think that influences whether somebody at Fannie Mae would say your loan’s okay or it’s not okay?

Dylan Silver (28:02)
Absolutely.

Eddie Speed (28:03)
Okay, well then why would it be different for seller-financing?

Dylan Silver (28:05)
Would it be fair to say that the majority of notes out there do not have the most organized paperwork?

Eddie Speed (28:13)
Why do you think I help people create notes?

Dylan Silver (28:15)
They’re struggling with that.

Eddie Speed (28:16)
There’s about a hundred thousand seller-finance transactions created every year nationwide, and there is a percentage of those loans that weren’t—there wasn’t—nobody had evil in their mind; they just didn’t have discipline. And so there’s a—there’s a decent percentage of all those hundred thousand loans that are created every year I wouldn’t chase those loans.

They don’t—they don’t have good enough buyers, the property is not the right standard, the equity isn’t right, the credit isn’t right, the paperwork is homemade. There’s sort of a perception that seller-financing is substandard scenario, and the answer is

that’s myth. It does not have to be substandard. The reason that you think seller-financing is substandard is because you’ve heard of so many people that do it in a substandard way. That doesn’t mean it has to be done that way.

Dylan Silver (29:11)
If someone has a good buyer in place, but some of the other elements of the note may be disorganized, the paperwork isn’t to discipline, to standard, could they do some type of novation, if you will, and take that buyer and that note and rewrite the note so it would look better to the secondary market?

Eddie Speed (29:30)
Well, in doing this for forty-six years, we’ve repapered deals, but it’s hard. And it’s a lot of work. And you gotta go get everybody to cooperate. So you gotta go back to some borrower and explain to him why he’s gotta go sign new—like, that sounds hard, doesn’t it? Sounds a lot easier to go do it right to start with.

Dylan Silver (29:50)
When we talk specifically about the six elements of this deal, I took down equity, right? You mentioned that folks, if I heard you right, will have equity immediately, but they’ll also be able to sell their note quickly. Can you walk us through what that looks like and what that sale to the secondary market looks like, what time duration that happens in an ideal scenario?

Eddie Speed (30:12)
Well, in this scenario where we’re talking about helping somebody convert a rental, we’re buying the note virtually simultaneously. So that note is created, and then we’re coming around there and buying that. So let’s say that loan was a $2,000 payment. Well, they may not sell us all the payment. They might sell us $1,500 of a $2,000 payment, and they might keep $500 a month. So there’s different ways that you can structure it.

Here’s what we—here’s what we’ve become pretty good at, because we have a lot of decades of testing and trying and understanding what people want and need in the market: We back into what people like. What would a perfect scenario look like for you? You said, “Okay, if I could sell my house, I like the cash flow. Let me keep $600 a month.” We’re like, “Okay, well, let’s look at what buying $1,400 a month—how much money that would give you today.” And we can model that really easily.

And it’s almost like, what do you want on your ice cream, right? “No, I want M&Ms,” or “I want pecans,” right? Like, you can decide, and not everybody decides the same thing. But once we help people create loans of a quality standard, then all of a sudden they’re like, “Wow, I can do a lot better with my note than I was thinking.” And that’s because

we then help them create a better grade of note that will trade in the market at a better price. And then all of a sudden, they start realizing like all those disciplines mattered. And I know you’re buddies with all these real estate investors. I got it. You’re from San Antonio originally. Like, trust me, I got it. But eventually what happens over time is they show up at my doorstep and they say,

“I’ve done 50 notes already, or I’ve done a hundred notes already, but now all of a sudden this is happening or that is happening, or I got too many people that aren’t like paying perfectly—they’re paying less than perfect. And I tried to sell my notes and I got butchered in the market,” and somebody—like, okay, well, let’s figure out how to fix that. And if—and then if we can help somebody with that, listen, there’s nothing that we do is magic, but we just have tens of thousands of transactions of experience.

I’m kind of guessing, Dylan, you’ve never really interviewed people about seller-financing that are speaking of it the way I’m speaking of it, because this is not how real estate investors talk about it.

Dylan Silver (32:25)
No. No.

Eddie Speed (32:27)
You see, let me tell you something. You know the tallest building in most every town? What is that?

Bank. You got it. There’s a reason that they’re kind of the tallest building in every town: It’s a really good business. And the more I can help people be a bank instead of a pawn shop or a finance company—you get what I’m saying? The more I can help them be a bank, the more all of a sudden they’re gonna realize, like, “Man, I could go—I could go scale this and do a lot more transactions.”

Because now this is a way where I can create a note, be able to sell part of the note, be able to keep part of the income, and go do it again. How many times have you signed a mortgage and seen your loan be sold?

Dylan Silver (33:07)
Well, I don’t think ever.

Eddie Speed (33:09)
Most loans are sold. You go get a Fannie Mae loan, they’re gonna sell that one.

Dylan Silver (33:13)
Yeah.

Eddie Speed (33:14)
Okay. So understand, you know why they did that? It’s so that they could then create liquidity and go do it again, and then go do it again. And so what I’m doing is I’m helping a real estate investor build his own bank.

Dylan Silver (33:26)
You mentioned being able to keep a percentage of the rents, right? No, no, no.

Eddie Speed (33:32)
We’re not renting. We’re a lender. Yeah.

Dylan Silver (33:35)
Being able to keep a percentage of the note.

Eddie Speed (33:38)
Mm-hmm.

Dylan Silver (33:40)
In a situation where someone wanted to hold on to a portion of the note and then there’s another portion that’s being bought, does that make it more complicated? Is it an equivalent level of complexity, or is it kind of like six of one and half a dozen of the other?

Eddie Speed (33:57)
Well, if you’ve never done it before, it probably could sound complex, but all I’m simply doing is showing people mortgage banking standards, and I’m giving them strategies that are proven strategies in the mortgage banking world. So now that we’ve created mortgage-banker-level paper, now we can go play in the marketplace where mortgage bankers are used to these type scenarios.

And so once again, I’m just kind of guiding a customer down a path that all of a sudden lets them land with strategies that you’re saying, “Well, most of my buddies that create seller-financing, they haven’t done that.” And the answer is they haven’t done it because they didn’t create the quality of the paper that let them go play in that marketplace.

Dylan Silver (34:37)
As this is being done at scale with what you’re doing with Colonial Funding Group, do you foresee maybe a different type of buyer now looking at those notes in the secondary market? Might you see a different sophistication level of buyer looking at those notes in the secondary market, now that to a higher standard, you could call it the mortgage banker or industrial grade standard?

Eddie Speed (34:59)
Of course we are. We’re creating loans that now Wall Street can buy.

Dylan Silver (35:02)
That’s fascinating. On that note—

Eddie Speed (35:04)
That Wall Street wouldn’t buy it before is because people were cutting corners. Right? What you see me doing is—I believe in seller-financing, and I’m buddies with thousands of real estate investors, and a bunch of them are your buddies, right? But what they’ll say is Eddie has a different discipline level in seller-financing. And the reason is because I’m showing people how to scale their business. Now I’m helping them with a lot of processes.

So they don’t have to go bring it internally, because a lot of the people that you and I know, they don’t have that back office built internally. They don’t have mortgage banker types in their office. But they can rent it out and let my back office do it, and we do have that. And then all of a sudden they’re like, “Well, this is kind of like changing the oil in my pickup. I could change the oil myself, but I don’t have to.”

Dylan Silver (35:54)
Amen to that. We are actually coming up on time here, Eddie. That time flew by here. Anything you’d like to mention directly to our audience?

Eddie Speed (36:43)
Well, you can check colonialfundinggroup.com, and you can—you can just check us out. Just go see what—we’ve got some modeling on there, we’ve got—we’ve got some videos on there, we’ve got ways that you can make contact with us and say, “Hey, I heard Eddie talking about this, and I’d like to test some properties and see what that math looks like.” And

there’s 18 million rent houses, and there’s not near as many happy landlords as there used to be. And so we figure that we can serve a good portion of the market. We’re not going to do five million of these, okay, but we can serve a good portion of the market and help people with efficiencies that otherwise they wouldn’t have. And that was—that was our business mind when we went into this.

Dylan Silver (37:23)
Eddie, thank you so much for your time today.