Not many real estate investors use owner financing as a strategy and that might be a mistake, or at the very least, a very big missed opportunity. In this conversation with Paul Lizell, Ben Fredricks of Noteworthy and Notetools.com gets into why he loves owner financing as a primary real estate investment strategy. A former employee of Lehman Brothers before the economic collapse in 2008 talks about his transition to real estate owning rentals then getting hammered by the financial crisis and quitting real estate for a few years before he got back into it in 2015 and found his niche in owner financing. Listen in as Paul and Ben get deep into the value of owner-financing and the headaches of going down the wholesaling and fix-and-flip path compared to this world of managing rentals.
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Owner Financing: An Underserved Powerful Niche With Ben Fredricks
My guest is Ben Fredricks. Ben’s a good friend of mine. He’s also in a mastermind group that I belong to. He and I have a similar business model. We both buy bank-owned properties. He will sometimes buy in bulk. He’ll also buy off the MLS. He specializes in owner financing which we do a bit of as well. He does it on a grander scale than what we do on the owner financing side. He does not do as much of the wholesaling as we do. We get in real depth about the value of owner-financing and what that does for you and the headaches that wholesaling and fix and flip path compared to this world of managing rentals. We also talk about the lack of other investors in this. You find many investors that are in wholesaling, fix and flipping the glamorous positions in real estate investing, but not enough into owner financing. We’re totally fine with that because we’re filling in that market.
There are other investors and it does seem like we talk about how middle-age, which we fall more into the category, go to that owner financing model. I don’t know whether there’s an age thing or it’s a spot in life. You get burned out from doing rentals. When you’re younger, you’re not burned out yet. I still have the rentals, but they are much more cumbersome for sure than owner financing because you don’t have to deal with tenants or toilets. We get in-depth about that and he talks about his company, Noteworthy and NoteTools.com which you can sign up for a monthly newsletter. I think it’s $9.99 or something like that a month. It’s a great quality program he’s got going. I’m signing up for that. There’s a lot of good info in there and it’ll teach you the ins and outs if you are interested in owner financing. Sit back, relax, and enjoy this episode and we’ll catch you in the next one.
I have a kindred spirit here, a good friend of mine, Ben Fredricks. Ben does a lot of the same stuff that we do like buying off online auction and buying off the MLS. He’s also big-time into the notes and owner financing so much so that he purchased a company called Noteworthy. Ben, why don’t you give us a little introduction on what got you into real estate, where you are now, and then we’ll dive into Noteworthy and some of the other companies that we have.
Thanks for having me on the show. I invested in real estate back in 2005 where I think I bought my first rental property. I was working for Lehman Brothers at the time looking for additional ways that I could stash some money away. We’re making great money, maxing out 401(k)s. It was like, “What can I do?” I watched my grandparents. They owned a couple of properties. I got the real estate bug when I was a kid. I was always putting in the sweat equity. I was the one doing the lawns and helping paint and stuff when people moved out. That’s where I got my interest. I bought my first rental property and then we bought another one 6 or 8 months later once we recapitalized and saved some more money to put down. By the end of 2008, we got crushed and it wasn’t because we were doing the wrong thing. We were putting 20% down on every deal.
It’s not like we were doing those no doc loans and stated income or whatever. It’s a case of bad timing, but it was also that I was uneducated on how to buy at the right price. At that time, I figured that real estate wasn’t for me and I’m going to go do something else and Lehman Brothers collapsed. I just got married and was financially destroyed. I was like, “This is a great time in the world,” like how every marriage wants to start out. I went to work in financial services after that and I did that for eight years. I hated every minute of it. I didn’t want to do it. I decided I was going to go back to real estate in some way, shape, or form. I realized that last time I was not educated on what to do. I started saying, “I’m going to start from scratch and learn everything that I can absorb.” For a year, I read every book, went to workshops, learned different things and watched a lot of YouTube videos.Not many young people are into notes because they either don’t know about it or don’t understand it. Click To Tweet
I had some people that I knew with money out of South Florida and they were looking for real estate deals. I was like, “Maybe I can put some people together here. I’ve always been good at networking. Let me see if I can connect some people and facilitate some deals.” I put out a Craigslist ad and I got a call one day from the guy who’s now my mentor. He opened my eyes to the world of owner finance. I haven’t looked back since and it was mind-blowing to me. I didn’t even know it existed but here I am. I was working for a bank doing loans and it never crossed my mind that I could be the one to be the bank. I always figured why you got to be a Wall Street firm or some big corporate bank to be able to make loans to somebody. When it was illustrated to me, I was like, “I could buy this property for $10,000 and turn around and sell it for $30,000 on an owner financing note and maybe get $4,000 or $5,000 down and have all my money back within a year.” It’s mind-boggling.
That was my introduction but my introduction was weird because it wasn’t to be an investor. It was because of my mortgage background. He was interested in me because I could underwrite the loans. Dodd-Frank had come about and was a big thing in the industry. All these investors were looking for ways to underwrite their loans and that’s how I learned it. I learned it from the inside out. I started underwriting loans and within 3 to 4 months, I started going to different conferences where these investors were. One of which was Noteworthy, which I’m part-owner of now. I would sit in the back of the room and learn everything. I had a booth, a sponsor and then when everybody was back in the classroom learning, I’d go into that classroom and sit in the back and taking notes furiously and learning everything that I could. Within six months, I was like, “I should be doing this.” That’s how it got started. I raised a little bit of money and then it started exploding from there.
It’s amazing what you could do with owner financing. Let’s say you had a $500,000 chunk of change. What you could invest that in and what you could turn that $500,000 and easily turn that into $1.5 million. With a lot of the deals that you get for $10,000, you’re selling it for $30,000 you would get $4,000 or $5,000 downs. There’s half your money back right there within a year or eighteen months. You’re a whole the rest of the time. If you want to, you can sell the note or you can keep it. It’s up to you. There’re many options that it comes to with that. Owner financing is incredible.
I’ve never seen a way to create wealth faster on paper. It’s exponential. It’s cool.
It has no tenants and no toilets.
That’s probably the best part. I had several years of the rental properties and I still own some rentals. I prefer the notes a little bit more.
Rentals are great for tax purposes. You need the tax write-offs but they are much more high maintenance, much more high touch. You have to fix wirings and fix the plumbing at times or add stone to a driveway. There are many different things that come up in a house you have to do that you don’t have to worry about the note. You’re the bank holder. If the note goes bad, one, you could sell this nonperforming note. You might only get $0.25, $0.30 per $1, but you still sell it for as nonperforming note. You can get it before me and start it all over and do it again and make even more which I’ve done a few times on a couple of my notes. I’ve done well with that. It keeps compounding.
Also, do partials to sell off a piece of your note too. It’s like a deferred annuity. You’re getting capital back and then later on down the road, your payments kick on again.
I’ve done that and I’ve had it where you have a 120-month note and you sell 24, 36, or 48 months off of that note. Those payments go to the investor and then kicks right back on. Sometimes you get that to make yourself whole and even pull some money out and then buy another one and do another deal. It’s almost a compounding effect of what you can do to increase the number of properties you could purchase and repeat with it.
That’s the key to it too. This happens to all investors. You’ve got to run out of money. You hate to part with the note and that’s what makes partial perfect. I’m learning that from guys like Eddie Speed. It was like, “This is something I can utilize because I get that money back and I can put it back to work.” You’re exponentially growing it if you can have it back. It’s there down the road. You’re kicking the can down the road.Be focused, but don’t look away from the possibilities of long-term wealth. Click To Tweet
Nick and I did a deal together in Groesbeck, Texas in a rural area together. I purchased it for $40,000 and we sold it for $89,900, created a note for $80,000. They put $9,000 down and sold that note almost immediately. I got my wholesale profit. He’s holding a short-term note on it as well. It’s like a win-win. You could do many different things with these things. I’ll probably do more deals with them down the road with that.
He’s smart in the industry. Every time I talk to him, I’m like, “I didn’t even consider it.”
He says things that don’t even cross my mind with that like, “You can do that? I didn’t even think about that. It never even crossed my mind.”
That’s the beauty of being the bank. You can get as creative as you want to. There’s not a lot of limits in terms of the things that you can do and you have to have the vision.
Getting into Noteworthy, we’ll jump into your company now because you had an online event. You also do periodic or quarterly events. How many do you normally do?
Pre-COVID, we’re going to do three a year. 2020 has been a little bit of a challenge. We had to pivot a little bit and go to a virtual event which was great. We packed it. Two days full of content. I’ve gone to a lot of events. I was trying to educate myself in a whole bunch of different ways. A lot of the events would be local where the HGTV stars would come and they are pitching you their $25,000 course or whatever. Thankfully, I never bought into any of that stuff. I didn’t feel like there was a lot of value in that. When I got involved in Noteworthy, the reason I agreed to do it was one is it taught me so much. Two is because we could continue to perpetuate that and keep it like an educational platform where it’s not a pitch fest. These are some things you can come and learn. You can network, bring your notes, and sell them if you want to. There’s going to be notes here that you can buy.
It’s all about those relationships and now it’s a little tougher because you don’t get the personal interaction, which is part of those events. You have to belay that a little bit. I think by 2021, we’ll be able to start doing smaller events. In February 2021, we’re going to do a 50-person event, keep it real intimate in Orlando and try to build from there. Hopefully, COVID goes away or dissipates or we get back to some normality. That’s why I got involved. It helped me and it’s a way of giving back and helping other people springboard into it because you and I both know that many people don’t know about notes. If you go to a note event and I’m becoming one of these guys, it’s usually the guys that are middle age and women that are middle-aged. There’s not a lot of youth in notes and it’s because they don’t know about it.
They don’t know and they don’t understand that. You and I belong to a mastermind group together and then that mastermind group, there’s probably maybe four guys that do what we do with the owner financing. I’m not sure if Nick’s still part of the investor people or not, but there might be 1 or 2 other guys that dabble in it but nobody does it to the level that we’re doing it. Even in Collective Genius, when I was in that, it was the same thing. There was a group of 2 or 3 of us that would do this and Eddie Speed was in that group. He tries to push these guys in that direction. I think sometimes you get into minds especially when you’re young. When you’re doing all these fix and flips and yet these $30,000, $40,000, $50,000, $60,000, $100,00 paychecks are coming in when you’ve done it, but you’re doing all that work and now it’s done. I got to find the next one and here you’re continuing.
Your note might have a finite and it’s going to end after 60, 120, 180 months. It depends on how long you make it. If you continue to make more and more of these notes, it continues to come in and you replace one with another one so you can continue to do it in compound long-term wealth. You’ll take some of these back as things go wrong as the bank does. You’ll probably do far better than you will on the ones that end up paying off for refinancing. It’s an interesting thing, but the mindset of a lot of people is either wholesale, which we do. I’ve done more fix and flipping this 2020 than I’ve done since 2008. It’s been good, but I’ve done it because I’ve had less reveals and I see there are lesser deals.
I’m like, “Let me maximize my return on some of these deals through some local fix and flips, and even do a couple that is a little further away.” The mindset of most people is not the owner financing and I don’t understand why not. Maybe it’s because we don’t have as much education in the real estate industry than the owner finance. There’s Eddie Speed. There are a handful of guys out there. I wonder if that’s what it is, but you’re right. It’s guys our age, I’m 47. You’re probably a similar age to me and these middle-aged guys that are starting long-term, got to think long-term, “What can I use to pay for my kid’s college education or retirement?” and all those kinds of things.Invest in yourself because that's what's going to pay you the most over time. Click To Tweet
The note industry is a small circle. You run into a lot of the same people at different events. I think it’s a lack of knowledge. There’re different programs out there that push wholesaling. Wholesaling is a big, sexy thing and that’s the way it is and that’s fine. Wholesaling is great, but what a lot of people don’t realize is you can create notes while you’re wholesaling. You could create a note out of your wholesale fee. Why not create a note out of every third wholesale fee that you do? Worst case scenario, they default and you take the property.
A lot of people get the blinders on and they’re focused on what they do, which I understand. It’s not a negative thing. You should be focused, but don’t look away from the possibilities of long-term wealth.
I first got into the owner financing side around 2011, 2012 when I did my first owner finance deal. I remember I was buying these properties $3,000, $5,000, $10,000. All these properties we find on auction, dirt cheap back in the day out there but it’s not that easy to sell. “I can wholesale this one to make 4 or 5, or I can keep this one instead of selling it for $20,000. Maybe I’m selling it for $35,000 or $40,000, collect the down payment and cut payments over time. I’m doing way better with this methodology.” All the smaller ones, we turn into owner finance.
Our $10,000 is an owner finance model or even $20,000. We did one up in Hanover, Pennsylvania which is near Wilkes-Barre the Scranton area. It’s a nice house ARV, probably around $150,000. It was in decent shape. There probably needed about $20,000 to bring it up and we sold it for $89,900 to a guy with owner financing. He put $59,000 down. I paid $55,000 for the property. The $9,000 down and I created a $37,000 note form. It continues to pay and I’ll either keep it or I’ll turn around and sell it. It’s my wholesale fee.
I hate those infinite returns there. On those smaller ones, it’s easy to do a 2.5X or 3X above what you paid for. It gets cumbersome unless you steal the property. With a $100,000 deal, you can’t turn around and sell for $200,000 unless you stole it. There’s a big market for those and that was one thing that we covered at our last Noteworthy event is that affordable housing is at an all-time low, access to it. It’s difficult because a lot of Millennials are not buying houses. They’re renting and that’s driven rents up. I think you subscribed to the same thing here is like when we price out a deal, we’re always making it more attractive than it would be to rent anywhere. Why would you go rent when you could own this?
It’s cheaper. Your monthly payments are lower than when you’re paying rent.
Also, you’re going to own it. It makes a big deterrent to screw it up.
I think you hit the nail on the head. The banks are tightening too. They never liked to do that $100,000 and under $50,000 loan. That’s where the owner finance people filled in that part of the market and with the unaffordability even more down the road here, I think the owner financing is going to grow bigger and bigger over the next decade. Especially as we hit a downturn in the market coming up as soon as these foreclosures all hit.
If interest rates stay low, there’s no benefit to the bank. They’re like, “This is too much risk and I’m not going to make any money on top of it for our shareholders. Why would I do it?”
Also, with a 3% return. That’s nothing for them.
Guys like you and I are happy to take those off their hands.
Do well with managing them, do a far better job with them, and less turmoil. I don’t think the banks like that. Have you ever been to a wholesale business or in a fix and flip?
I’ve done a couple of fix and flips. I don’t have a great vision for that stuff. I don’t know what it is. I have a vision for systems, processes, numbers, and stuff like that. This is how weird family dynamics are. My brother is a master carpenter. He knows how to decorate a place, make it look fantastic but the problem is he lives halfway across the country. I can’t utilize that. I have to stick with what I’m good at and fix and flip while I enjoyed the process, but it’s outside my wheelhouse. I don’t know anything about decorating. I’m going to stick with what I’m good at.
With wholesaling, I have looked at doing that. I’m looking hard at doing it because inventory is low for us. It wouldn’t be that hard to pivot because we’ve got great relationships all over the country and we can find deals. I think you’re doing this right where you’re getting deals from wholesalers. I’m going to turn the interview to you. How does that typically work? Is it like you’re identifying, “This is my target and what I want to buy at this price?”
A lot of these wholesalers are guys that are newer people out there that don’t have cash behind them. They can’t close on these deals. Let’s say a wholesaler brings me a deal for $75,000, but I know I can list this thing on the MLS for $109,900 and sell it for $100,000. I’ll turn it and do it that way. Make $20,000 to $30,000 list on the MLS and sit on a little bit paying a little bit, but it’s another way for us to do what we’re doing with the auction properties. We’re doing a little bit of wholetailing. We make this FHA mortgageable, get rid of the chipped paint, put some new floor covering down, light fixtures, make sure your plumbing’s and the electrics are okay. Relist then resell it. I got a couple from New Mexico I’m doing which is a hot market even these ones are coming out in the middle of nowhere.
We’re doing a little bit more with that and we’re working with our local wholesalers in the market that we know here. We’re going to start to dabble in the San Antonio market with wholesalers because we have a relationship. One of our student centers or one of our rock star students is out of San Antonio. He’s a licensed agent and he also is a general contractor. It’s like the best everything and we joined good together. We’ll do fix and flips with him full scale because he knows that market and he can do it more cost-effectively. It’s one of those things that you got to pivot as the bank’s inventory drops. Look at other alternative sources and tax sales, which I’ve gotten into over the past years. I’ve occasionally done some of them and they’re great owner finance deals if you can guess.
If they don’t have the clouded title or they don’t offer different stuff on them, that those costs can add up the order, the sewer, the trash, all these different leads that go on. You have to do a lot of research with those, but those are great owner finance deals. Switching and figuring out what works and what does work within our model. I don’t want to start something new. I don’t want to have that shiny object syndrome and go, “Let me try this here.” I don’t want to buy preexisting notes that need to be brought back up. I’d rather make my own notes to me. If I want to sell them, I do that rather than buying tape and I have good friends that do that. They buy the tape and they get it.
They are performing and that’s a whole other business. We have guys in Noteworthy that they look at millions of dollars of tapes of nonperforming notes and distress seconds and all these things. I look there, I go cross-eyed because I know what I know. You don’t want to take your eye off the ball and say, “Let me go try this now.” You become a jack-of-all-trades and a master of none. Sometimes you do need to substitute in something to get you through a lean time. That’s one of these times now.
At this point in 2021, I think we’re going to have potentially more deals than we know what to do with if they let the moratorium expire. You got to let them expire. At some point, the longer they kick this down the road, the more that inventory is going to grow up foreclosures of evictions which will then lead to disenfranchised landlords that wants to sell their properties and flood the inventory even more and drop prices further and further. I could easily see a 20%, 30% correction over the next year or two with different markets.
The thing about where they’re deferring those payments out people get used to not paying. It’s going to be hard them to turn that spigot back on one when the bank says, “It’s time for you to start paying me now.” There’s a lot of people that it’s not going to work.
It’s not going to work. We’re creatures of habit. We’re habitual. We’re used to not paying, to now being on Zoom meetings and doing virtual meetings. I would like Noteworthy if you do 1 or 2 virtual meetings here and then do 1 or 2 live events. I think that could be a nice blend for your company and things in there because people are used to and comfortable now going on the virtual meeting and doing it. If we talked about this in the past, we would never have thought it would work. The numbers are good. Eddie Speed is doing extraordinarily well with his virtual events. I remember talking to him years ago about this because I’m never going to go virtual. He likes to do that whole thing, but now he’s realizing, “I can do this virtually.”
You’re not going to be able to get them out of the house.
He’s used to being on a road all the time. I think he’s enjoying being home a little bit.
I was traveling much for years to do different things. I had the thought of going anywhere. It’s not because of COVID, it’s the whole process of traveling. I don’t even miss it.
I’m with you and I’m going to Tampa. I’m dreading this whole process. I’m going to wear this mask on and I don’t want to do it. I’m going to go to Investor Fuel and that’ll be another process but it will be fun. That one’s going to be held at what Dallas Cowboy Stadium. That’s going to be a cool event. I’m looking forward to that. Are you’re going to continue to grow this company? I’m sure we’re going to continue to grow what you’re doing on the owner finance side here. Are you continuing to grow capital to add more deals as they come? Are you ready for this next crash to ramp up even more?
Most definitely. We stress that now is the time to be raising money. On the idea of it that it’s coming because people know. People with money know what’s coming in there. They’re hyper-aware of it. We’ve added a bunch of money and we haven’t been able to spend it yet. It comes with a lot of telling the people, “You’re going to have to be patient a little bit, that the well is going to be dry for a little bit, but it’s going to fill back up.” You’ve given me a great idea here in terms of taking down some wholesaler deals because we’re sitting on money. We could do that.
Utilize that and put that cash. You’re going to find some good deals out there. There’re some deals in some of the outline markets we’re looking at. We missed out on a deal and that could’ve been one owner finance. It was a better one. I could have gotten it on the MLS, resold, and continued to make money off the capital that we have on the sidelines. I’m getting rid of some rentals too in this market thinking, “I’m going to get the ones that aren’t as good.” I got ones that cashflow.
I got to keep the other ones that are more problem properties, get rid of them, get the cash, put to the side, stash it for the crash and then be ready to buy in and do more owner finance opportunities or buy more rents as they are cheap again. I think that’s where we’re heading to. We’ll see where it takes us. The question is how quick it is. Did they do another stimulus too? That’s been a big question. It’s taken down a road and we’ll see what happens on that there. What are your thoughts on the stimulus?
I get terrified at the stimulus because of all the money. It’s crazy. There’s a great podcast with Peter Schiff. He was on Joe Rogan’s podcast and if you want to stay awake at night, go listen to that podcast. I love the free market. I hope it would figure itself out. I think that’s what happened for the most part in ’08. It realized, “This shouldn’t have happened.” It all goes to hell and you got to start from scratch. Some people got saved and some didn’t. I worked for a company that did not. A company has been around 150 years and gone. I was fortunate that I got out before that happened. I stopped believing the writing on the wall. I got moved to three different divisions. This is an anomaly.
We will probably never see this again in our lifetime. You and I probably thought that the opportunities that we saw coming out of the last recession were the greatest opportunities we’ll ever see in our lifetime. Here we are twelve years later and we’re seeing it again. It’s unprecedented. I wish I had a crystal ball to know how it’s going to work out. I think you’ve got the right idea in terms of selling off some things, profiting, sitting on that money and getting ready because that’s what the big boys do. They’re always ready to buy when everybody else panics and buy stuff at bargain bin pricing.
They buy it when it’s cheap and sell it when it goes up. If people want to reach out to you, find out more about Noteworthy and events that come up, what’s the best way for them to reach out to you?
You can email me at Ben@NoteTools.com. You can connect with us online. We have a YouTube channel which is the Noteworthy USA and we’ve got a bunch of content there. If you want to learn more about notes, you can come to check that stuff out.
Your monthly newsletter is on NoteTools.com.
We publish a monthly newsletter. It’s got a lot of experts from the industry with our contributors. To have you in as a contributor would be awesome. We publish notes that are for sale in the industry that is off-market in the newsletter. If you were looking to buy notes or learn more about it, if you want to learn more about the industry, how a note works, some of the things you need to know in terms of due diligence and all that stuff, there’re great articles in there from experts that have been doing it a lot longer than me. It’s usually anywhere from 15 to 20 pages a month. If you go to NoteTools.com/newsletter, you can subscribe and it’s less than $10 a month.
That’s a bargain for $120 a year and you’re getting great information. This is the time to sign up for that because over the next year or 2, 3 or 5, it could exponentially go on for a long period of time with the number of foreclosures we’re talking about and the opportunity that’s going to come is going to be unbelievable. Get into the newsletter, start making contacts and then from there, grow your owner finance.
If you can afford to in any way, shape or form, and this includes your coaching as well, if you can afford to stroke a check to get involved in something that will position you to take advantage of opportunities like this, it’d be the best investment you could ever make. Invest in yourself because that’s what’s going to pay you the most over time.
Thank you, Ben, for being on the program. We appreciate having you. We enjoyed having you as a guest. We’d have to talk again about this similar thing and see where we are and see where we think it’s going and look back on what happened.
I look forward to interesting times ahead. Thanks, Paul.
- Eddie Speed
- Peter Schiff – episode in Joe Rogan’s podcast
- Noteworthy USA – YouTube
About Ben Fredericks
Ben Fredricks is a real estate investor and owner of Odell Barnes REO. His company has over 350 transactions to his credit across 30 states over the last 3 years. He focuses primarily on acquiring affordable housing at auction and creating cash-flow with notes through owner financing. Ben is also a partner in NoteWorthy USA, a note investing education and resource company, that has been a leader in the space for over 25 years.