How Safe are Your Investments?
In this episode, Bill Fairman, Wendy Sweet, and Jonathan Davis get to answer “ugly questions”. The answers may not be what people like, but it is the truth. The goal is to provide unbiased answers to people’s questions.
With every investment, there are risks. So one of the ugly questions tackled in this episode is “How safe is Carolina Capital”.
Listen to our Podcast:
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Bill Fairman (00:00):
Hello everyone! It is Bill, Wendy and Jonathan with Carolina Capital Management. Thank you so much for joining us today. This segment of our broadcast is the big ugly questions.
Hello everyone! It is Bill, Wendy and Jonathan with Carolina Capital Management. Thank you so much for joining us today. This segment of our broadcast is the big ugly questions.
Wendy Sweet (00:17):
It’s called “Ask an Ugly Question Session”.
It’s called “Ask an Ugly Question Session”.
Jonathan Davis (00:19):
And give an ugly answer.
And give an ugly answer.
Wendy Sweet (00:23):
Well hopefully then the answers aren’t ugly but they might not be what you want to hear, but there’ll be the truth. Right? That’s the thing. So we were talking about Jonathan’s hippy hair earlier, he’s got that Corona thing going on.
Well hopefully then the answers aren’t ugly but they might not be what you want to hear, but there’ll be the truth. Right? That’s the thing. So we were talking about Jonathan’s hippy hair earlier, he’s got that Corona thing going on.
Jonathan Davis (00:38):
[Inaudible].
[Inaudible].
Wendy Sweet (00:38):
I know he’s, you’re like a long haired hippie free, that’s awesome! Making that statement, right?
I know he’s, you’re like a long haired hippie free, that’s awesome! Making that statement, right?
Jonathan Davis (00:45):
Yeah. I just feel weird getting my hair cut with a mask on. So I think that’s like, you know?
Yeah. I just feel weird getting my hair cut with a mask on. So I think that’s like, you know?
Wendy Sweet (00:51):
How do they cut your hair with a mask on that’s got to be..
How do they cut your hair with a mask on that’s got to be..
Jonathan Davis (00:53):
I have not found out.
I have not found out.
Wendy Sweet (00:57):
I’ll do it for ya!
I’ll do it for ya!
Bill Fairman (00:57):
I have, it’s not a big deal. So before we get started too deep into this-
I have, it’s not a big deal. So before we get started too deep into this-
Wendy Sweet (01:03):
Sorry!
Sorry!
Bill Fairman (01:03):
Don’t forget to get to like, share, subscribe and you know, we are Carolina Capital Management. We do two things. We–
Don’t forget to get to like, share, subscribe and you know, we are Carolina Capital Management. We do two things. We–
Wendy Sweet (01:14):
And that’s all!
And that’s all!
Bill Fairman (01:17):
We are a lender. We do short term bridge loans for residential and commercial property types but only to commercial entities.
We are a lender. We do short term bridge loans for residential and commercial property types but only to commercial entities.
Wendy Sweet (01:25):
Right.
Right.
Bill Fairman (01:28):
If you’re interested in borrowing money, you can go to CarolinaHardMoney.com and click on the borrower tab. We also have investment opportunities for those who want thinner wood, we call it paper so you can invest in the notes or invest in our fund, go to the same website CarolinaHardMoney.com and click on the investor tab.
If you’re interested in borrowing money, you can go to CarolinaHardMoney.com and click on the borrower tab. We also have investment opportunities for those who want thinner wood, we call it paper so you can invest in the notes or invest in our fund, go to the same website CarolinaHardMoney.com and click on the investor tab.
Wendy Sweet (01:50):
That’s right and tell all your friends.
That’s right and tell all your friends.
Bill Fairman (01:53):
And by the way, we’re going to cover a couple of questions here. If you have any additional questions yourself, you can put them in the the chat.
And by the way, we’re going to cover a couple of questions here. If you have any additional questions yourself, you can put them in the the chat.
Wendy Sweet (02:02):
You know, I’m really excited about this too cause we just started this last week and I’m really shocked at the response we’re getting from people on this. I haven’t got several emails after it was over asking me more ugly questions.
You know, I’m really excited about this too cause we just started this last week and I’m really shocked at the response we’re getting from people on this. I haven’t got several emails after it was over asking me more ugly questions.
Jonathan Davis (02:16):
We welcome them.
We welcome them.
Wendy Sweet (02:16):
Yeah.
Yeah.
Bill Fairman (02:16):
Seems to me it has to do with Jonathan’s hair.
Seems to me it has to do with Jonathan’s hair.
Wendy Sweet (02:23):
It’s just really neat that this has sparked a lot of interest because you know you go to anybody’s website and on their website, you’re gonna see everybody banging their chest and talking about how great and wonderful their product is or their team is or whatever. And you know, we fall into that category too, but what people really want is answers to their questions: unbiased answers to their questions. So that’s what our goal is.
It’s just really neat that this has sparked a lot of interest because you know you go to anybody’s website and on their website, you’re gonna see everybody banging their chest and talking about how great and wonderful their product is or their team is or whatever. And you know, we fall into that category too, but what people really want is answers to their questions: unbiased answers to their questions. So that’s what our goal is.
Bill Fairman (02:50):
Listen, every lender and every fund manager investment opportunity are going to be different, right? So there’s always a variety of questions to be asked and answered because there’s not, it’s not always a good fit.
Listen, every lender and every fund manager investment opportunity are going to be different, right? So there’s always a variety of questions to be asked and answered because there’s not, it’s not always a good fit.
Wendy Sweet (03:08):
It’s not one size fits all right?
It’s not one size fits all right?
Bill Fairman (03:08):
And you know, especially in lending right now, if you’re trying to get a commercial loan, you’re getting a lot of lenders that are saying, we’re not lending or we’re lending, but we’re doing limited property types,
And you know, especially in lending right now, if you’re trying to get a commercial loan, you’re getting a lot of lenders that are saying, we’re not lending or we’re lending, but we’re doing limited property types,
Jonathan Davis (03:23):
Or we really don’t want to lend. But if you pay this, sure, we’ll lend.
Or we really don’t want to lend. But if you pay this, sure, we’ll lend.
Wendy Sweet (03:28):
If you’re willing to be this crazy.
If you’re willing to be this crazy.
Bill Fairman (03:30):
Typically, the people that aren’t lending or not lending well are the ones that rely on the secondary market to sell their product, the balance sheet lenders. And that’s true with private lenders too, they’re balance sheet lenders, they have a platform or a balance sheet. They’re keeping those loans on the books, they’re not selling them off. Those people for the most part are still lending. Now, are they going to be cautious in certain property types and areas and all that? Yeah, because we don’t know exactly what’s going to happen yet, but you’re going to have the best luck with any kind of loan right now, if you’re doing a business with a balance sheet,
Typically, the people that aren’t lending or not lending well are the ones that rely on the secondary market to sell their product, the balance sheet lenders. And that’s true with private lenders too, they’re balance sheet lenders, they have a platform or a balance sheet. They’re keeping those loans on the books, they’re not selling them off. Those people for the most part are still lending. Now, are they going to be cautious in certain property types and areas and all that? Yeah, because we don’t know exactly what’s going to happen yet, but you’re going to have the best luck with any kind of loan right now, if you’re doing a business with a balance sheet,
Jonathan Davis (04:11):
Correct.
Correct.
Wendy Sweet (04:12):
Right. I actually just got a call from a US bank this morning, a representative at US bank. They’ve just moved to Charlotte. And if they have an interesting long term buy and hold product, you’ll be interested in hearing this. So it’s a nice product,
Right. I actually just got a call from a US bank this morning, a representative at US bank. They’ve just moved to Charlotte. And if they have an interesting long term buy and hold product, you’ll be interested in hearing this. So it’s a nice product,
Jonathan Davis (04:28):
Yeah.
Yeah.
Wendy Sweet (04:28):
But the problem is on this one, they are taking the vacancy rate to 25%. So they’re moving it from a 10% to a 25%. And then on top of that, you’ve got management fees.
But the problem is on this one, they are taking the vacancy rate to 25%. So they’re moving it from a 10% to a 25%. And then on top of that, you’ve got management fees.
Jonathan Davis (04:43):
So this is on portfolio lending?
So this is on portfolio lending?
Wendy Sweet (04:46):
They’ll do an individual standalone investor,
They’ll do an individual standalone investor,
Jonathan Davis (04:50):
Like a one like one property?
Like a one like one property?
Wendy Sweet (04:52):
Yeah, Single property.
Yeah, Single property.
Jonathan Davis (04:53):
But they’re going to slap a 25% vacancy on a one unit?
But they’re going to slap a 25% vacancy on a one unit?
Wendy Sweet (04:56):
Yeah. So it’s really, when you come out to it, it’s like a 31% hit. They’re going to give you which means it’s going to be hard for anybody’s houses to qualify for that. Even if you’re in it at 70%.
Yeah. So it’s really, when you come out to it, it’s like a 31% hit. They’re going to give you which means it’s going to be hard for anybody’s houses to qualify for that. Even if you’re in it at 70%.
Jonathan Davis (05:13):
The only houses that would probably qualify under that program would be houses under 30 or 40,000 value that cashflow, amazing! But then the bank probably won’t do it because the house is only 30 or 40,000.
The only houses that would probably qualify under that program would be houses under 30 or 40,000 value that cashflow, amazing! But then the bank probably won’t do it because the house is only 30 or 40,000.
Bill Fairman (05:26):
Or a duplex might work. You know, they’ve got some good income off a duplex.
Or a duplex might work. You know, they’ve got some good income off a duplex.
Bill Fairman (05:30):
What it boils down to is they’re just not going to lend you as much money that was just lowering the loan debate. So the only way it’s going to cashflow in their mind is if sorry, I brought my phone to the podcast.
What it boils down to is they’re just not going to lend you as much money that was just lowering the loan debate. So the only way it’s going to cashflow in their mind is if sorry, I brought my phone to the podcast.
Wendy Sweet (05:46):
Well, tell mom will call her later.
Well, tell mom will call her later.
Jonathan Davis (05:48):
I would rather have someone listen to me based off the lower LTV, then like then to slap a 40, 25% vacancy that kills your DSCR, and now you can’t qualify for like, because I’m sure there’s a DSR requirement. The STR probably will like 1.2, 1.25. There’s no way you can hit that!
I would rather have someone listen to me based off the lower LTV, then like then to slap a 40, 25% vacancy that kills your DSCR, and now you can’t qualify for like, because I’m sure there’s a DSR requirement. The STR probably will like 1.2, 1.25. There’s no way you can hit that!
Wendy Sweet (06:12):
Yeah. It’s going to, it’s going to be tough and hopefully the loosen up.
Yeah. It’s going to, it’s going to be tough and hopefully the loosen up.
Bill Fairman (06:15):
Well, that’s it it’s the same thing. They’re just not going to lend you as much money. And that way they–
Well, that’s it it’s the same thing. They’re just not going to lend you as much money. And that way they–
Jonathan Davis (06:19):
Well, they won’t lend you any money if you can’t hit the DSCR.
Well, they won’t lend you any money if you can’t hit the DSCR.
Wendy Sweet (06:20):
That’s right. That’s not going to change a loan to value. Yeah. He raises money for this.
That’s right. That’s not going to change a loan to value. Yeah. He raises money for this.
Bill Fairman (06:34):
Shut up!
Shut up!
Wendy Sweet (06:34):
They’re really trying to reach out and work with investors, which I thought was pretty good. I was glad to hear that.
They’re really trying to reach out and work with investors, which I thought was pretty good. I was glad to hear that.
Jonathan Davis (06:40):
They should, yeah.
They should, yeah.
Wendy Sweet (06:40):
They’re doing some small business loans. They’re, you know, looking to fund, you know, multifamily type stuff and single use facility stuff, which we don’t do.
They’re doing some small business loans. They’re, you know, looking to fund, you know, multifamily type stuff and single use facility stuff, which we don’t do.
Jonathan Davis (06:49):
Yeah.
Yeah.
Bill Fairman (06:51):
But again, they’re a bank.
But again, they’re a bank.
Wendy Sweet (06:52):
They’re bank, US bank.
They’re bank, US bank.
Bill Fairman (06:52):
They’re a balance sheet lender.
They’re a balance sheet lender.
Wendy Sweet (06:57):
They are.
They are.
Bill Fairman (06:57):
You know, they have to have certain amount of reserves and–
You know, they have to have certain amount of reserves and–
Jonathan Davis (07:01):
Well, it’s easy to be a balance sheet lender when your balance sheet is guaranteed by the federal governor.
Well, it’s easy to be a balance sheet lender when your balance sheet is guaranteed by the federal governor.
Wendy Sweet (07:04):
Well, she, she said this too. She said this too, that they are, they service and hold on to all their loans.
Well, she, she said this too. She said this too, that they are, they service and hold on to all their loans.
Jonathan Davis (07:13):
[Inaudible].
[Inaudible].
Wendy Sweet (07:13):
So I thought that was very interesting and they’re getting high on service. So if you haven’t tried US bank lately, give them a shot. Y.
So I thought that was very interesting and they’re getting high on service. So if you haven’t tried US bank lately, give them a shot. Y.
Jonathan Davis (07:19):
Yeah, absolutely.
Yeah, absolutely.
Wendy Sweet (07:20):
That’s the little tip for the day, right? But come to us first, make sure we can’t do it first. But she sounded like very customer oriented, I was impressed.
That’s the little tip for the day, right? But come to us first, make sure we can’t do it first. But she sounded like very customer oriented, I was impressed.
Jonathan Davis (07:33):
You put a 15% thing cause you write on it. So,
You put a 15% thing cause you write on it. So,
Wendy Sweet (07:37):
That’s right. No, it’s, it’s important that all of us lenders, no matter what our products are, that we try to work together and spread the love. And the bottom line is to help the customer.
That’s right. No, it’s, it’s important that all of us lenders, no matter what our products are, that we try to work together and spread the love. And the bottom line is to help the customer.
Bill Fairman (07:47):
They will, I’m certain they will adjust those guidelines as they see down the road that rents are being paid on time. We’re going to have to get through this first,
They will, I’m certain they will adjust those guidelines as they see down the road that rents are being paid on time. We’re going to have to get through this first,
Wendy Sweet (07:58):
And the rental markets, the hottest market there is right now too. I mean, and that’s hard to say with how great sales are going cause sales are really rock and rolling!
And the rental markets, the hottest market there is right now too. I mean, and that’s hard to say with how great sales are going cause sales are really rock and rolling!
Jonathan Davis (08:07):
Well then you had this influx of institutional capital, you know, the secondary markets taking on that rental product, flooding the market with all this money and then they pulled back. People are still doing it. It’s just a lot less. So it feels like, I mean, you just had billions of dollars, just pull back. Of course, you’re going to feel it. It’s you know, it’s going to feel like the whole thing.
Well then you had this influx of institutional capital, you know, the secondary markets taking on that rental product, flooding the market with all this money and then they pulled back. People are still doing it. It’s just a lot less. So it feels like, I mean, you just had billions of dollars, just pull back. Of course, you’re going to feel it. It’s you know, it’s going to feel like the whole thing.
Wendy Sweet (08:27):
Yeah, yeah, yeah. It’s crazy.
Yeah, yeah, yeah. It’s crazy.
Bill Fairman (08:31):
Rents are down and they continue to go down. But they’re typically going to be in the major markets that are very expensive. People are moving out of those major markets because they don’t necessarily have to be there any longer to work for companies because they’re allowing them to work remotely and then at the same time, why would you pay the higher rent in these areas when all the reasons for being are closed?
Rents are down and they continue to go down. But they’re typically going to be in the major markets that are very expensive. People are moving out of those major markets because they don’t necessarily have to be there any longer to work for companies because they’re allowing them to work remotely and then at the same time, why would you pay the higher rent in these areas when all the reasons for being are closed?
Wendy Sweet (08:55):
That’s right.
That’s right.
Bill Fairman (08:57):
The museums, the restaurants, the theaters–
The museums, the restaurants, the theaters–
Wendy Sweet (08:59):
The borrowers.
The borrowers.
Bill Fairman (08:59):
Why would you pay extra for that when you can’t utilize?
Why would you pay extra for that when you can’t utilize?
Wendy Sweet (09:04):
Yeah.
Yeah.
Bill Fairman (09:04):
So they’re fleeing those areas and they’re moving into the suburbs. So depending on where the properties are located, they’re going up. Some places are going quite a bit down and others.
So they’re fleeing those areas and they’re moving into the suburbs. So depending on where the properties are located, they’re going up. Some places are going quite a bit down and others.
Jonathan Davis (09:17):
Oh yea, you’re right.
Oh yea, you’re right.
Wendy Sweet (09:17):
And it seems like the A plus market is really, that’s the one that’s kind of taken the hit right now.
And it seems like the A plus market is really, that’s the one that’s kind of taken the hit right now.
Jonathan Davis (09:23):
There’s a lot of saturation there. And yeah, I mean, you know, there really is 25 plus percent vacancy there.
There’s a lot of saturation there. And yeah, I mean, you know, there really is 25 plus percent vacancy there.
Wendy Sweet (09:31):
Yeah.
Yeah.
Jonathan Davis (09:31):
I mean, that’s for sure there.
I mean, that’s for sure there.
Bill Fairman (09:34):
Well, here’s the problem with that. The development costs are so much less in the long run, you’re getting in and you’re getting a good return if you’re developing it from the ground up. But once it gets stabilized then you start getting higher vacancy and lower income from because you’re going to find that a lot of people are just going to move out of that stuff. But if you’re on the development side of it, that’s great. Assuming nothing happens while it’s being developed and that’s something that you have to worry about too, because markets change while things are going on and there’s not much you can do about it.
Well, here’s the problem with that. The development costs are so much less in the long run, you’re getting in and you’re getting a good return if you’re developing it from the ground up. But once it gets stabilized then you start getting higher vacancy and lower income from because you’re going to find that a lot of people are just going to move out of that stuff. But if you’re on the development side of it, that’s great. Assuming nothing happens while it’s being developed and that’s something that you have to worry about too, because markets change while things are going on and there’s not much you can do about it.
Jonathan Davis (10:13):
And that’s why we do short term lending.
And that’s why we do short term lending.
Wendy Sweet (10:15):
That’s right. So we can pit it.
That’s right. So we can pit it.
Bill Fairman (10:17):
Alright, let’s get this something ugly.
Alright, let’s get this something ugly.
Wendy Sweet (10:18):
Okay. So our first ugly question is what– I love this one. What happens to my investment if the borrower stops paying or is delayed in paying? And there’s actually two ways we can answer this: as one from the one off side and one from the fund side
Okay. So our first ugly question is what– I love this one. What happens to my investment if the borrower stops paying or is delayed in paying? And there’s actually two ways we can answer this: as one from the one off side and one from the fund side
Jonathan Davis (10:34):
This question is stipulated that you’re stipulating that you are in a first lien position, right?
This question is stipulated that you’re stipulating that you are in a first lien position, right?
Wendy Sweet (10:39):
Yes, well actually another thing to bring up when we get there, talk about the second link too. Go ahead, go ahead!
Yes, well actually another thing to bring up when we get there, talk about the second link too. Go ahead, go ahead!
Jonathan Davis (10:48):
Well I mean if you’re in a first lane position, you’re in the driver’s seat. I mean, there’s a lot of remedies that you can employ. I mean, you can work with the borrower.
Well I mean if you’re in a first lane position, you’re in the driver’s seat. I mean, there’s a lot of remedies that you can employ. I mean, you can work with the borrower.
Wendy Sweet (10:57):
[Inaudible]
[Inaudible]
Jonathan Davis (11:02):
You can do a Deaton lieu. If you believe the equity in the property, it’s something that you can convert to a rental or something like that. You can do a deed in lieu. I was recommended as a lender, usually you’re doing it cause you want to be a little more passive, so you don’t want to own a property.
You can do a Deaton lieu. If you believe the equity in the property, it’s something that you can convert to a rental or something like that. You can do a deed in lieu. I was recommended as a lender, usually you’re doing it cause you want to be a little more passive, so you don’t want to own a property.
Wendy Sweet (11:18):
Right.
Right.
Jonathan Davis (11:18):
So then how do you stay a little more passive and not on a property? You work with the borrower.
So then how do you stay a little more passive and not on a property? You work with the borrower.
Wendy Sweet (11:24):
Right. So what are some ways that you can work with the borrower? Or what, would you say?
Right. So what are some ways that you can work with the borrower? Or what, would you say?
Jonathan Davis (11:29):
I mean, for us, I mean, you have to talk to the borrower and say, what is the issue?
I mean, for us, I mean, you have to talk to the borrower and say, what is the issue?
Wendy Sweet (11:33):
What’s the problem?
What’s the problem?
Jonathan Davis (11:35):
Is it a cash flow issue? Is it a life of debt issue? Like what is the issue? We have to identify that if it’s a cashflow issue and the properties, let’s say it’s a fix and flip and it’s complete, okay, well we can work with you, like get the listing, get it listed and can move a portion of the interest or the, you know, whatever it is to the, to the exit of the loan, all of it, depending on the situation. I mean, you have a lot of options there. I mean, so cashflow, you know, you just work with, I mean, as a lender, I’d rather have my money a little bit later, then take a property back.
Is it a cash flow issue? Is it a life of debt issue? Like what is the issue? We have to identify that if it’s a cashflow issue and the properties, let’s say it’s a fix and flip and it’s complete, okay, well we can work with you, like get the listing, get it listed and can move a portion of the interest or the, you know, whatever it is to the, to the exit of the loan, all of it, depending on the situation. I mean, you have a lot of options there. I mean, so cashflow, you know, you just work with, I mean, as a lender, I’d rather have my money a little bit later, then take a property back.
Wendy Sweet (12:15):
Yeah. What if they’re halfway through the renovation of, if I see somebody that’s halfway through the renovation, my first thought is, ‘Oh my gosh, I don’t like being rehabber. I don’t want to get in that position. Am I still going to want to work with him in that case? I mean, my answer is yeah.
Yeah. What if they’re halfway through the renovation of, if I see somebody that’s halfway through the renovation, my first thought is, ‘Oh my gosh, I don’t like being rehabber. I don’t want to get in that position. Am I still going to want to work with him in that case? I mean, my answer is yeah.
Jonathan Davis (12:32):
Personal opinion is to the effect that you can, you drag that borrower across the finish line.
Personal opinion is to the effect that you can, you drag that borrower across the finish line.
Wendy Sweet (12:38):
Right. That’s so well put!
Right. That’s so well put!
Jonathan Davis (12:40):
Yeah. I mean, you just drag them as far as, you know, cause you don’t want that responsibility.
Yeah. I mean, you just drag them as far as, you know, cause you don’t want that responsibility.
Wendy Sweet (12:45):
Right.
Right.
Jonathan Davis (12:45):
You don’t want that property. Now there’s always, you know, situations where people say, ‘Hey, actually I would take that property back and that’s it, you know, that’s a different scenario, but now you’re to spend the time drag the borrower across the finish line.
You don’t want that property. Now there’s always, you know, situations where people say, ‘Hey, actually I would take that property back and that’s it, you know, that’s a different scenario, but now you’re to spend the time drag the borrower across the finish line.
Wendy Sweet (12:58):
Right.
Right.
Jonathan Davis (12:59):
So if it’s halfway done, I mean, again, what is the issue or are they, are they in a cash crunch or do their contractor walk out on them?
So if it’s halfway done, I mean, again, what is the issue or are they, are they in a cash crunch or do their contractor walk out on them?
Wendy Sweet (13:11):
Are they getting a divorce?
Are they getting a divorce?
Jonathan Davis (13:12):
Yeah, they get a divorce?
Yeah, they get a divorce?
Wendy Sweet (13:12):
I mean, there’s all kinds of things. We even had one where the daughter got arrested. Yeah. That was, that was an issue there. It got worked out, but that was an issue cause there was a lot of attorney money coming out for that. But, and you know, what if it’s multiple a borrower that has multiple properties? That’s one good reason not to lend to the same borrower on multiple properties at the same time.
I mean, there’s all kinds of things. We even had one where the daughter got arrested. Yeah. That was, that was an issue there. It got worked out, but that was an issue cause there was a lot of attorney money coming out for that. But, and you know, what if it’s multiple a borrower that has multiple properties? That’s one good reason not to lend to the same borrower on multiple properties at the same time.
Jonathan Davis (13:39):
Yeah, figure out what threshold risk is, I mean, if you have a million dollars, do you want to lend one person, a million dollars? Probably not. If I, you know, if I have a million dollars, I want to spread that out across that at least five to 10 different people. Like you want that spread out.
Yeah, figure out what threshold risk is, I mean, if you have a million dollars, do you want to lend one person, a million dollars? Probably not. If I, you know, if I have a million dollars, I want to spread that out across that at least five to 10 different people. Like you want that spread out.
Wendy Sweet (13:55):
Just like when you’re buying notes, you buy 10 notes to make sure you’re.
Just like when you’re buying notes, you buy 10 notes to make sure you’re.
Jonathan Davis (13:59):
Exactly, so, and again, in the loans that we do if the property is halfway done, that means that we’re holding on to half of the rehab escrow, which means if there was a hundred thousand dollar rehab, we’re still holding at least $50,000 to finish the property out. So we have that money there. So the whole, I guess the whole point of that is to maintain your LTV loan, to value ratio along the whole scope of the project. So even if it’s halfway done, you’re only exposed at the LTV that you first did the loan or at a lower LT, you’re never going to be higher. So then that gives you options. Do I hire another contractor to come in now? You’d have to realize that 50,000 that you’re holding when you bring a new contractor in probably isn’t to be enough.
Exactly, so, and again, in the loans that we do if the property is halfway done, that means that we’re holding on to half of the rehab escrow, which means if there was a hundred thousand dollar rehab, we’re still holding at least $50,000 to finish the property out. So we have that money there. So the whole, I guess the whole point of that is to maintain your LTV loan, to value ratio along the whole scope of the project. So even if it’s halfway done, you’re only exposed at the LTV that you first did the loan or at a lower LT, you’re never going to be higher. So then that gives you options. Do I hire another contractor to come in now? You’d have to realize that 50,000 that you’re holding when you bring a new contractor in probably isn’t to be enough.
Wendy Sweet (14:51):
Right.
Right.
Jonathan Davis (14:52):
I mean, they don’t like, I mean, you know that.
I mean, they don’t like, I mean, you know that.
Wendy Sweet (14:54):
They don’t like coming in after somebody else that no contractor thinks that the guy before him did a good job.
They don’t like coming in after somebody else that no contractor thinks that the guy before him did a good job.
Jonathan Davis (14:59):
Yeah, for sure.
Yeah, for sure.
Bill Fairman (15:02):
If they don’t mind buying it, doing somebody’s, finishing up somebody else’s.
If they don’t mind buying it, doing somebody’s, finishing up somebody else’s.
Wendy Sweet (15:04):
Yeah. But the other thing too is if you are dragging them along, they’re halfway done. You’re kind of dragging them along. You change the way you release the money too. Right?
Yeah. But the other thing too is if you are dragging them along, they’re halfway done. You’re kind of dragging them along. You change the way you release the money too. Right?
Jonathan Davis (15:14):
Yeah.
Yeah.
Wendy Sweet (15:14):
Cause now we’re paying all contractors direct, we’re paying all the help ourselves. We’re not sending that money to the borrower and allowing the borrower to pay, right?
Cause now we’re paying all contractors direct, we’re paying all the help ourselves. We’re not sending that money to the borrower and allowing the borrower to pay, right?
Speaker 2 (15:23):
Yeah, I mean, in scenarios where I look at it, I mean, if we’re halfway done and the borrower just can’t get there and I have to drag them across, what is that effort worth? Is it worth making the interest rate that you were making to do all that? Probably not. At that point. I mean, I would consider a forbearance agreement where I put in considerations for either an additional fee at the end, an equity position at the end, because now you’re doing more work.
Yeah, I mean, in scenarios where I look at it, I mean, if we’re halfway done and the borrower just can’t get there and I have to drag them across, what is that effort worth? Is it worth making the interest rate that you were making to do all that? Probably not. At that point. I mean, I would consider a forbearance agreement where I put in considerations for either an additional fee at the end, an equity position at the end, because now you’re doing more work.
Wendy Sweet (15:54):
Right.
Right.
Jonathan Davis (15:54):
You need more compensation.
You need more compensation.
Wendy Sweet (15:55):
Right.
Right.
Bill Fairman (15:58):
Now you have to consider this the States we do business in is not as critical but if you take an equity position in the property, then you in some form kind of own it too.
Now you have to consider this the States we do business in is not as critical but if you take an equity position in the property, then you in some form kind of own it too.
Jonathan Davis (16:13):
Well, I’m not an attorney, [inaudible] But you can put in language into your loan and actually we have it. We can, we can add it into our construction loan agreement where it is a further inducement for lender.
Well, I’m not an attorney, [inaudible] But you can put in language into your loan and actually we have it. We can, we can add it into our construction loan agreement where it is a further inducement for lender.
Bill Fairman (16:30):
And that’s what I was getting to. You don’t want to sign a joint venture.
And that’s what I was getting to. You don’t want to sign a joint venture.
Jonathan Davis (16:33):
Yeah.
Yeah.
Wendy Sweet (16:33):
No.
No.
Bill Fairman (16:33):
Cause once you do that, then now you’re sharing ownership and you’re also sharing liability, right?
Cause once you do that, then now you’re sharing ownership and you’re also sharing liability, right?
Jonathan Davis (16:40):
You want to stay in the lender position. You don’t like bills that you do not want to own the property.
You want to stay in the lender position. You don’t like bills that you do not want to own the property.
Wendy Sweet (16:44):
Right.
Right.
Jonathan Davis (16:46):
Because somebody gets slip and fall on the job and now you’re on the hook as well, for lawsuits.
Because somebody gets slip and fall on the job and now you’re on the hook as well, for lawsuits.
Jonathan Davis (16:51):
And sure your builder’s risk is up to date.
And sure your builder’s risk is up to date.
Wendy Sweet (16:54):
And you’re carrying the warranty on it for a year.
And you’re carrying the warranty on it for a year.
Bill Fairman (16:57):
And not even that I’ll give you an example in California, the builder is liable for workmanship and materials for 10 years.
And not even that I’ll give you an example in California, the builder is liable for workmanship and materials for 10 years.
Wendy Sweet (17:07):
Really?
Really?
Bill Fairman (17:07):
Yes. And if you started off as a lender and you ended up as part owner, then you’re responsible for workmanship and materials for the next 10 years.
Yes. And if you started off as a lender and you ended up as part owner, then you’re responsible for workmanship and materials for the next 10 years.
Jonathan Davis (17:19):
Yeah.
Yeah.
Bill Fairman (17:19):
The whole reason you get into the lending position is because you want to be able to control the asset without being responsible for it.
The whole reason you get into the lending position is because you want to be able to control the asset without being responsible for it.
Wendy Sweet (17:27):
That’s right, good point!
That’s right, good point!
Bill Fairman (17:27):
And another way of doing it again, because you’re in the lending position, because you don’t want to own the property. You can always sell that note to somebody else at a discount and just move on.
And another way of doing it again, because you’re in the lending position, because you don’t want to own the property. You can always sell that note to somebody else at a discount and just move on.
Wendy Sweet (17:40):
Yeah. So what happens, I’m sorry, what happens to your investment? I mean, that’s really the question. So what happens if I have to sell it for less? What can I expect to get back out of that? Now we’re talking in the one off realm here. We’re going to discuss being in a fund position as well but what happens if I were to sell it at a discount?
Yeah. So what happens, I’m sorry, what happens to your investment? I mean, that’s really the question. So what happens if I have to sell it for less? What can I expect to get back out of that? Now we’re talking in the one off realm here. We’re going to discuss being in a fund position as well but what happens if I were to sell it at a discount?
Jonathan Davis (18:02):
The note?
The note?
Wendy Sweet (18:02):
Yeah.
Yeah.
Jonathan Davis (18:02):
I mean, it really depends. I mean, it’s who you’re selling it to. I mean,if someone had a property that was 50% complete and they wanted to sell them the note to me, I mean here’s the issue that I’m thinking through. Okay, I have a half finished property, so, you know, the amount is X and I have to take it through foreclosure or I have to convince that borrower to work with me to do it. So right there you have more work and you have more fees. So I’m not going to pay par or a hundred percent for that loan. Right. I’m going to be paying a lot less than par. UI mean, it really depends on what people will pay for it, but I mean, I see usually, you know, mid eighties to low nineties or something like that.
I mean, it really depends. I mean, it’s who you’re selling it to. I mean,if someone had a property that was 50% complete and they wanted to sell them the note to me, I mean here’s the issue that I’m thinking through. Okay, I have a half finished property, so, you know, the amount is X and I have to take it through foreclosure or I have to convince that borrower to work with me to do it. So right there you have more work and you have more fees. So I’m not going to pay par or a hundred percent for that loan. Right. I’m going to be paying a lot less than par. UI mean, it really depends on what people will pay for it, but I mean, I see usually, you know, mid eighties to low nineties or something like that.
Wendy Sweet (18:55):
So when you say mid eighties to low nineties, you’re saying you can get mid 80% back on what you have in it?
So when you say mid eighties to low nineties, you’re saying you can get mid 80% back on what you have in it?
Jonathan Davis (19:01):
Yeah, best case scenario and something like that, you might get 90 cents on the dollar.
Yeah, best case scenario and something like that, you might get 90 cents on the dollar.
Wendy Sweet (19:05):
Okay.
Okay.
Jonathan Davis (19:05):
For your notes.
For your notes.
Wendy Sweet (19:06):
Okay. That’s easily understandable and yeah, you know, we talked about too, whether or not you’re in first or second position, you know, we’ve had to take houses back before that had seconds on them after us.
Okay. That’s easily understandable and yeah, you know, we talked about too, whether or not you’re in first or second position, you know, we’ve had to take houses back before that had seconds on them after us.
Jonathan Davis (19:18):
Yeah.
Yeah.
Wendy Sweet (19:18):
And you know, I had to make that—
And you know, I had to make that—
Jonathan Davis (19:21):
Don’t mess with Wendy.
Don’t mess with Wendy.
Wendy Sweet (19:21):
I had to make that phone call saying, ‘look, it’s going to cost me $4,000 to foreclose on this house. I know you have a second on this for 50,000. I’ll either give you that 4,000 or give it to the attorney and wipe you out completely. What would you like to do?
I had to make that phone call saying, ‘look, it’s going to cost me $4,000 to foreclose on this house. I know you have a second on this for 50,000. I’ll either give you that 4,000 or give it to the attorney and wipe you out completely. What would you like to do?
Jonathan Davis (19:39):
Yeah. And to just speak on foreclosures, if you are not in the first lane position, you are not in a, what we call priority position. You are subordinate to the first lien. And if you’re in the third lien, you’re subordinate to the first and the second lien. So what happens in a foreclosure sale? Let’s say that the total loan on the first and second is a hundred thousand dollars 80 for the first 20 for the second. Property goes to foreclosure and the foreclosure sell the first lien lender bids 80,000, what they’re owed. I mean, that’s pretty normal, right? And what they get is 80,000, the first lien lender just got paid off. The second lien lender got nothing and their lien is now extinguished. It is gone. So that’s.
Yeah. And to just speak on foreclosures, if you are not in the first lane position, you are not in a, what we call priority position. You are subordinate to the first lien. And if you’re in the third lien, you’re subordinate to the first and the second lien. So what happens in a foreclosure sale? Let’s say that the total loan on the first and second is a hundred thousand dollars 80 for the first 20 for the second. Property goes to foreclosure and the foreclosure sell the first lien lender bids 80,000, what they’re owed. I mean, that’s pretty normal, right? And what they get is 80,000, the first lien lender just got paid off. The second lien lender got nothing and their lien is now extinguished. It is gone. So that’s.
Bill Fairman (20:32):
Well, if you’re in a second position, you could always be the one being foreclosed.
Well, if you’re in a second position, you could always be the one being foreclosed.
Wendy Sweet (20:39):
That’s true.
That’s true.
Jonathan Davis (20:39):
And in the second position, you can buy out the first lien position or if it goes to foreclosure sale, you can bid the one, you know, the a hundred thousand dollars that we talked about. If you believe that there is a way that you can make more than that on the property itself. So it’s just, you know, you buy the first lane Linder out,
And in the second position, you can buy out the first lien position or if it goes to foreclosure sale, you can bid the one, you know, the a hundred thousand dollars that we talked about. If you believe that there is a way that you can make more than that on the property itself. So it’s just, you know, you buy the first lane Linder out,
Wendy Sweet (20:58):
You have to have the money to do it.
You have to have the money to do it.
Jonathan Davis (21:01):
Most importantly have to have the money to do it.
Most importantly have to have the money to do it.
Wendy Sweet (21:02):
Yeah.
Yeah.
Bill Fairman (21:03):
Well, the biggest thing is to make sure that there’s plenty of cushion between the money that is went out and total, if you we’re in second position and in first position, that’s all you’re caring about is your loan. As long as you have plenty of cushion to be below enough market value that when you do take this back, sorry,
Well, the biggest thing is to make sure that there’s plenty of cushion between the money that is went out and total, if you we’re in second position and in first position, that’s all you’re caring about is your loan. As long as you have plenty of cushion to be below enough market value that when you do take this back, sorry,
Wendy Sweet (21:31):
His stomach is growling i can hear it buddy.
His stomach is growling i can hear it buddy.
Bill Fairman (21:31):
My stomach is growling.
My stomach is growling.
Wendy Sweet (21:31):
Poor thing, he’s hungry.
Poor thing, he’s hungry.
Bill Fairman (21:33):
I’m on this uhmm–
I’m on this uhmm–
Wendy Sweet (21:33):
A diet?
A diet?
Bill Fairman (21:33):
Intermittent fasting. I don’t think he’s doing well after lunch.
Intermittent fasting. I don’t think he’s doing well after lunch.
Wendy Sweet (21:42):
So anyway,
So anyway,
Bill Fairman (21:47):
So what the heck was I saying? So you gotta make sure you have plenty of cookies.
So what the heck was I saying? So you gotta make sure you have plenty of cookies.
Wendy Sweet (21:53):
He’s old and hungry, sorry go ahead.
He’s old and hungry, sorry go ahead.
Bill Fairman (21:53):
I’m done.
I’m done.
Jonathan Davis (21:58):
No, no builder. I mean the equity position that you hold. So we would call it a CLTV, which is combined loan to value. You want to make sure that even if you’re giving someone a second lane, money on the second lane, that your combined loan to value, so your money plus the first liens money is less than, I don’t, I mean, I pull a number out 80%, whatever you’re comfortable with. I mean, some people might only be comfortable with 70, so I might be comfortable 90
No, no builder. I mean the equity position that you hold. So we would call it a CLTV, which is combined loan to value. You want to make sure that even if you’re giving someone a second lane, money on the second lane, that your combined loan to value, so your money plus the first liens money is less than, I don’t, I mean, I pull a number out 80%, whatever you’re comfortable with. I mean, some people might only be comfortable with 70, so I might be comfortable 90
Wendy Sweet (22:30):
And it disappears quick. So, especially depending on the price of the house, if it’s a lower price house, you’re really crazy for being in second position. Cause you really don’t have any room to play.
And it disappears quick. So, especially depending on the price of the house, if it’s a lower price house, you’re really crazy for being in second position. Cause you really don’t have any room to play.
Jonathan Davis (22:40):
What I always tell people are like, you know if we take this property back we can make X amount on assets. If you take this property back, it is now an REO. It is not going to sell for the retail price.
What I always tell people are like, you know if we take this property back we can make X amount on assets. If you take this property back, it is now an REO. It is not going to sell for the retail price.
Wendy Sweet (22:54):
Right.
Right.
Jonathan Davis (22:54):
It is not going to do that. So that equity position, like if you went at a CLTV of you know, just because it’s REO might eat up 10% of that equity, just because it’s REO
It is not going to do that. So that equity position, like if you went at a CLTV of you know, just because it’s REO might eat up 10% of that equity, just because it’s REO
Wendy Sweet (23:06):
And then you’ve got another 6% or 7% going to a real estate agent.
And then you’ve got another 6% or 7% going to a real estate agent.
Jonathan Davis (23:10):
So it gets thin, real quick.
So it gets thin, real quick.
Wendy Sweet (23:12):
Yeah, It disappears.
Yeah, It disappears.
Bill Fairman (23:14):
Well part of the good news now, is that–
Well part of the good news now, is that–
Wendy Sweet (23:17):
And then closing costs that you pay and stuff,
And then closing costs that you pay and stuff,
Bill Fairman (23:19):
Housing shortage. So I think the prices are going to stay up as long as it’s in the right place and you’re close enough to the finish line on the project that said, as a lender, you have to also calculate your missed opportunities. So if you’re debating whether to sell the note off at a discount, how long can I go without getting payments through my investment back? And what opportunities am I missing out on with that money on the sideline?
Housing shortage. So I think the prices are going to stay up as long as it’s in the right place and you’re close enough to the finish line on the project that said, as a lender, you have to also calculate your missed opportunities. So if you’re debating whether to sell the note off at a discount, how long can I go without getting payments through my investment back? And what opportunities am I missing out on with that money on the sideline?
Wendy Sweet (23:55):
Yeah.
Yeah.
Bill Fairman (23:56):
And does it make more sense for me to take a little bit less on the front end and sell it at a discount, take that investment in it and put it into something that’s going to pay me.
And does it make more sense for me to take a little bit less on the front end and sell it at a discount, take that investment in it and put it into something that’s going to pay me.
Wendy Sweet (24:05):
Yeah.
Yeah.
Jonathan Davis (24:05):
Yeah, I mean, simple that, simplify that down a little bit further is if you take 90 cents on the dollar, so we’ve lost 10 cents, how long would it take you to make that 10 cents back? So if you’re lending and let’s say, you’re turning your money twice in a year and you’re charging five points, it take you one year to make that money back. Like that’s, you know, essentially what it would be, you know, on the points, not on the interest, but
Yeah, I mean, simple that, simplify that down a little bit further is if you take 90 cents on the dollar, so we’ve lost 10 cents, how long would it take you to make that 10 cents back? So if you’re lending and let’s say, you’re turning your money twice in a year and you’re charging five points, it take you one year to make that money back. Like that’s, you know, essentially what it would be, you know, on the points, not on the interest, but
Wendy Sweet (24:34):
Yeah.
Yeah.
New Speaker (24:34):
It would take you a year.
It would take you a year.
Wendy Sweet (24:35):
Yeah.
Yeah.
Jonathan Davis (24:36):
Is that more favorable than going through the foreclosure process,
Is that more favorable than going through the foreclosure process,
Wendy Sweet (24:42):
Which could take a year.
Which could take a year.
Jonathan Davis (24:42):
Which depending on to your state can take between three and you know, five years.
Which depending on to your state can take between three and you know, five years.
Wendy Sweet (24:49):
Yeah. Three months to five years. You’re exactly right, yeah.
Yeah. Three months to five years. You’re exactly right, yeah.
Jonathan Davis (24:52):
So what’s that time worth to you?
So what’s that time worth to you?
Bill Fairman (24:55):
And most people aren’t getting five points, but it’d be nice.
And most people aren’t getting five points, but it’d be nice.
Wendy Sweet (24:58):
But I now will, you know, we speak from experience. We went through this and took houses back and decided to finish them. And if we had it to do all over again, we would never go down that path. It was too much at one time to handle a lender.
But I now will, you know, we speak from experience. We went through this and took houses back and decided to finish them. And if we had it to do all over again, we would never go down that path. It was too much at one time to handle a lender.
Jonathan Davis (25:19):
When you’re a lender, your time was now devoted to you know, property management and rehab as it goes to lending.
When you’re a lender, your time was now devoted to you know, property management and rehab as it goes to lending.
Wendy Sweet (25:24):
That’s exactly right and I’m a lender I’m not a rehab, non of us were.
That’s exactly right and I’m a lender I’m not a rehab, non of us were.
Bill Fairman (25:24):
If you sell those homes at a profit, is there really a profit in there?
If you sell those homes at a profit, is there really a profit in there?
Wendy Sweet (25:35):
Right.
Right.
Bill Fairman (25:37):
Again, you’ve missed out on that opportunity to invest in other things that are paying.
Again, you’ve missed out on that opportunity to invest in other things that are paying.
Wendy Sweet (25:42):
And then you’re taking a chance on the market changing and all kinds of things like that. So you’ve got a lot of unknowns when you go down that path.
And then you’re taking a chance on the market changing and all kinds of things like that. So you’ve got a lot of unknowns when you go down that path.
Bill Fairman (25:51):
So that’s a good segue into, if you’re doing this as an individual lender, those are the things you need to look at individual asset, but the better way to do this is to have that herd mentality.
So that’s a good segue into, if you’re doing this as an individual lender, those are the things you need to look at individual asset, but the better way to do this is to have that herd mentality.
Wendy Sweet (26:06):
In the funds.
In the funds.
Bill Fairman (26:06):
Circle your way in and you put it in a fund where if you do have someone or two or three or four, even that’s not paying, it’s a barely a blip on the return because you do have loan loss reserves that are set aside. And in most funds when you’re researching funds, that’s one of your first question. Do you have a loan loss reserve? And if so, how much?
Circle your way in and you put it in a fund where if you do have someone or two or three or four, even that’s not paying, it’s a barely a blip on the return because you do have loan loss reserves that are set aside. And in most funds when you’re researching funds, that’s one of your first question. Do you have a loan loss reserve? And if so, how much?
Jonathan Davis (26:33):
Or what percentage of [inaudible].
Or what percentage of [inaudible].
Bill Fairman (26:33):
It should be close, The percentage should be close to what their normal default rates are. Yeah. And in most cases in our industry, it’s a 2% default rate. So it should be in the one and a half to 2% of whatever you have under managed.
It should be close, The percentage should be close to what their normal default rates are. Yeah. And in most cases in our industry, it’s a 2% default rate. So it should be in the one and a half to 2% of whatever you have under managed.
Jonathan Davis (26:52):
And bear mind, whatever the fund is returning. If, you know, if they’re returning a higher yield, they need a higher percentage of loan loss reserves.
And bear mind, whatever the fund is returning. If, you know, if they’re returning a higher yield, they need a higher percentage of loan loss reserves.
Bill Fairman (27:02):
Yeah, cause they’re typically doing higher risk loans.
Yeah, cause they’re typically doing higher risk loans.
Jonathan Davis (27:05):
Exactly. So the more risk and that dictates the higher reward, but also needs to have a higher loan loss reserves.
Exactly. So the more risk and that dictates the higher reward, but also needs to have a higher loan loss reserves.
Bill Fairman (27:14):
And you know, at the same time, the circle and the oval wagons and you know, the herd mentality is because you’ve got many, many people that are spreading their risk out over many, many loans.
And you know, at the same time, the circle and the oval wagons and you know, the herd mentality is because you’ve got many, many people that are spreading their risk out over many, many loans.
Wendy Sweet (27:31):
Right.
Right.
New Speaker (27:31):
When you’re doing one or two loans, then you have a chunk of change invested in your one or two assets.
When you’re doing one or two loans, then you have a chunk of change invested in your one or two assets.
Wendy Sweet (27:36):
Right.
Right.
Bill Fairman (27:36):
And that’s definitely going to affect you more than the other way around.
And that’s definitely going to affect you more than the other way around.
Jonathan Davis (27:41):
And it goes back to that passive inactive, how active do you want to be? If you know, someone that has things– What’s that?– “How safe is Carolina Capital?”
And it goes back to that passive inactive, how active do you want to be? If you know, someone that has things– What’s that?– “How safe is Carolina Capital?”
Bill Fairman (27:50):
We’re not safe at all.
We’re not safe at all.
Wendy Sweet (27:53):
Yeah, we don’t like to use that word.
Yeah, we don’t like to use that word.
Jonathan Davis (27:58):
Safe is not something, you know, all real estate or any investing has risk to it. “Safe” Isn’t a word that the [inaudible].
Safe is not something, you know, all real estate or any investing has risk to it. “Safe” Isn’t a word that the [inaudible].
Wendy Sweet (28:05):
It’s like a, it’s a four letter word.
It’s like a, it’s a four letter word.
Speaker 2 (28:12):
I’ll tell you this, there’s risk with every investment, you have to read the PPM to see what the risk factors are because the PPM or the, I forgot what it’s called again. What does that stand for? Private Placement Memorandum. I’m sorry, folks.
I’ll tell you this, there’s risk with every investment, you have to read the PPM to see what the risk factors are because the PPM or the, I forgot what it’s called again. What does that stand for? Private Placement Memorandum. I’m sorry, folks.
Wendy Sweet (28:31):
I’m going to go get him an app [inaudible]
I’m going to go get him an app [inaudible]
Speaker 2 (28:36):
I had a really, I stupidly did a really tough workout last night outside and I’m still–
I had a really, I stupidly did a really tough workout last night outside and I’m still–
Wendy Sweet (28:39):
He’s bragging, he’s just bragging now.
He’s bragging, he’s just bragging now.
Jonathan Davis (28:43):
Anyway, our fund manager and “What’s PPM for?”
Anyway, our fund manager and “What’s PPM for?”
Wendy Sweet (28:49):
Yeah.
Yeah.
Bill Fairman (28:50):
The Private Placement Memorandum is a document that describes all the possible [inaudible].
The Private Placement Memorandum is a document that describes all the possible [inaudible].
Wendy Sweet (28:57):
Right.
Right.
Bill Fairman (28:57):
When invest the NFL. And they are purposely drafted to make, basically it’s like a home inspector trying to talk you out of buying the house or investing in the bond. It’s designed so you go into an investment with eyes wide open.
When invest the NFL. And they are purposely drafted to make, basically it’s like a home inspector trying to talk you out of buying the house or investing in the bond. It’s designed so you go into an investment with eyes wide open.
Jonathan Davis (29:17):
Exactly.
Exactly.
Bill Fairman (29:18):
But that being said, we are very conservative in what it is that we invest in. So comparatively speaking, we’re more conservative and all the things that we’re talking about here or things that we employ to mitigate risks on a daily basis and all of our loans, again, you know, we don’t just say drag borrower across the finish line because that’s a fun thing to say and we think people will like it. It’s because we do it. You know, if there is an issue, we drag that borrower across the finish line because we don’t want the property back just for what we’re telling you all is it, It can be missed opportunity and we don’t want that.
But that being said, we are very conservative in what it is that we invest in. So comparatively speaking, we’re more conservative and all the things that we’re talking about here or things that we employ to mitigate risks on a daily basis and all of our loans, again, you know, we don’t just say drag borrower across the finish line because that’s a fun thing to say and we think people will like it. It’s because we do it. You know, if there is an issue, we drag that borrower across the finish line because we don’t want the property back just for what we’re telling you all is it, It can be missed opportunity and we don’t want that.
Wendy Sweet (29:59):
And depending on how they behave, how, and whether they approached us first, that’s important.
And depending on how they behave, how, and whether they approached us first, that’s important.
Jonathan Davis (30:07):
Yeah, communication is the key.
Yeah, communication is the key.
Wendy Sweet (30:07):
When they approach us first and say, Hey, I’m running into some issues. What can you do to help me?. What we all learned from the experience, you know, we may even lend to that person again because, you know, depending on how they behaved, you know, bad things happen to good people all the time. But if we’ve got somebody that’s kind of dodging the bullet, doesn’t tell us anything until the very end, won’t answer our phone calls. We will not even, we’ll bury him and we’ll make sure that they’re not getting a loan from us or anybody that we know, like and trust.
When they approach us first and say, Hey, I’m running into some issues. What can you do to help me?. What we all learned from the experience, you know, we may even lend to that person again because, you know, depending on how they behaved, you know, bad things happen to good people all the time. But if we’ve got somebody that’s kind of dodging the bullet, doesn’t tell us anything until the very end, won’t answer our phone calls. We will not even, we’ll bury him and we’ll make sure that they’re not getting a loan from us or anybody that we know, like and trust.
Jonathan Davis (30:44):
Yeah, well, and I want to say also the payment does stop and it’s, you know, save your, whatever your note says. 30 days past due do send out a delinquency notice is that gets the clock running. If you don’t send that out, that’s an additional 30 days that if you do have to go to foreclosure that now you have to wait. Cause now you have to send out a default letter and say, ‘Hey, you have 30 days to cure because that is a requirement and it just adds it. So go ahead and do it. You don’t have to foreclose. You don’t have to do anything, but give yourselves, give yourself options, not obligations.
Yeah, well, and I want to say also the payment does stop and it’s, you know, save your, whatever your note says. 30 days past due do send out a delinquency notice is that gets the clock running. If you don’t send that out, that’s an additional 30 days that if you do have to go to foreclosure that now you have to wait. Cause now you have to send out a default letter and say, ‘Hey, you have 30 days to cure because that is a requirement and it just adds it. So go ahead and do it. You don’t have to foreclose. You don’t have to do anything, but give yourselves, give yourself options, not obligations.
Wendy Sweet (31:21):
Right, that’s right. And then talking to the safety of the fund, I hate to use that S word again, but you know, we took back a lot of houses in one year. That was the beginning of 2018, I believe, and spent that whole year working a whole lot of stuff out. So, so what was, you know, what could’ve been devastating or caused a company to close down the fund was able to not only survive it, but to come through it much stronger. I mean, you were talking yesterday, what did we end up making that one year? What was our return? Are you allowed to say that?
Right, that’s right. And then talking to the safety of the fund, I hate to use that S word again, but you know, we took back a lot of houses in one year. That was the beginning of 2018, I believe, and spent that whole year working a whole lot of stuff out. So, so what was, you know, what could’ve been devastating or caused a company to close down the fund was able to not only survive it, but to come through it much stronger. I mean, you were talking yesterday, what did we end up making that one year? What was our return? Are you allowed to say that?
Bill Fairman (32:00):
No, not really.
No, not really.
Wendy Sweet (32:00):
But it was good.
But it was good.
Bill Fairman (32:01):
I can tell you that we ended up with, even with having to take back a whole lot of properties, the fund still had a gain for the year and still beat the three index–
I can tell you that we ended up with, even with having to take back a whole lot of properties, the fund still had a gain for the year and still beat the three index–
Wendy Sweet (32:15):
For the stock market, that’s exactly right!
For the stock market, that’s exactly right!
Bill Fairman (32:17):
Well, alternative funds do not compare themselves to the stock market, even with the downturn,
Well, alternative funds do not compare themselves to the stock market, even with the downturn,
New Speaker (32:28):
We still–
We still–
Bill Fairman (32:28):
It still ended up with a game.
It still ended up with a game.
Wendy Sweet (32:32):
So having something, you know, even devastating like that, it was you know, we were able to come it and it’s the hard mentality and we worked through everything instead of selling it off. Like we, like in hindsight, we would have done anyway. So let’s see what Lori has to say, “How do you take an equity position as a potential alteration to alone without being an owner?”
So having something, you know, even devastating like that, it was you know, we were able to come it and it’s the hard mentality and we worked through everything instead of selling it off. Like we, like in hindsight, we would have done anyway. So let’s see what Lori has to say, “How do you take an equity position as a potential alteration to alone without being an owner?”
Bill Fairman (32:59):
Well you’re the note guy, So tell us how you structure that note without taking notes.
Well you’re the note guy, So tell us how you structure that note without taking notes.
Jonathan Davis (33:07):
So first you have to get the borrower to acknowledge that they are in default. You know, they did something that they weren’t supposed to do for the covenants up alone.
So first you have to get the borrower to acknowledge that they are in default. You know, they did something that they weren’t supposed to do for the covenants up alone.
Bill Fairman (33:17):
And this doesn’t necessarily have to be some money that’s in the vault. This could just be a way to draft a note in the beginning where you still get an equity position.
And this doesn’t necessarily have to be some money that’s in the vault. This could just be a way to draft a note in the beginning where you still get an equity position.
Bill Fairman (33:27):
You can do that from the beginning,
You can do that from the beginning,
Bill Fairman (33:28):
Or a percentage of sale at the end as part of your negotiation.
Or a percentage of sale at the end as part of your negotiation.
Jonathan Davis (33:32):
Sure, yeah so there’s two ways to do it: You can do it at the beginning. But I’ll focus on what do you do if you have that, Oh, no moment. This is happening. And what, like, what do I do now? So you have to get the borrower to acknowledge that they’re in default. They don’t necessarily have to be in default, but what we, what I typically would do is I would send them a forbearance agreement and I would say, Hey, I, as lender will forbear from pursuing default remedies on you, for whatever covenants that are broken in consideration of you, you know, doing this, this and this, and one of those considerations can be in consideration of at the sale of the property. 10% equity is paid to the lender as a further inducement to, you know, to do this forbearance. That’s how I would do it. I would do it through a forbearance agreement. Good, good, good. Yeah. So if you do on the front end, it’s a lot easier and I will say this, like, you can do equity positions on the front end as a lender, and it’s not a big deal. Just make sure that you don’t–
Sure, yeah so there’s two ways to do it: You can do it at the beginning. But I’ll focus on what do you do if you have that, Oh, no moment. This is happening. And what, like, what do I do now? So you have to get the borrower to acknowledge that they’re in default. They don’t necessarily have to be in default, but what we, what I typically would do is I would send them a forbearance agreement and I would say, Hey, I, as lender will forbear from pursuing default remedies on you, for whatever covenants that are broken in consideration of you, you know, doing this, this and this, and one of those considerations can be in consideration of at the sale of the property. 10% equity is paid to the lender as a further inducement to, you know, to do this forbearance. That’s how I would do it. I would do it through a forbearance agreement. Good, good, good. Yeah. So if you do on the front end, it’s a lot easier and I will say this, like, you can do equity positions on the front end as a lender, and it’s not a big deal. Just make sure that you don’t–
Wendy Sweet (34:41):
Don’t call it an equity pace.
Don’t call it an equity pace.
Bill Fairman (34:46):
Yeah.
Yeah.
New Speaker (34:46):
You can’t call it that.
You can’t call it that.
Bill Fairman (34:49):
[Inaudible].
[Inaudible].
Jonathan Davis (34:49):
You gotta call it something else because–
You gotta call it something else because–
Wendy Sweet (34:51):
Our appraised values nailing price.
Our appraised values nailing price.
Jonathan Davis (34:54):
When you go to court, I mean, that’s just the thing, but you want the language to be clear that it is not a joint venture, that you are not an owner. So just to avoid equity language, I mean, I would say, you know, 10% of sale or you know, fro seeds beyond X amount, you know, whatever it is. I mean, you want to structure it that way, but yes, you can, you can take those positions at closing of a loan or if a hiccup happens along the way.
When you go to court, I mean, that’s just the thing, but you want the language to be clear that it is not a joint venture, that you are not an owner. So just to avoid equity language, I mean, I would say, you know, 10% of sale or you know, fro seeds beyond X amount, you know, whatever it is. I mean, you want to structure it that way, but yes, you can, you can take those positions at closing of a loan or if a hiccup happens along the way.
Wendy Sweet (35:25):
Yeah, that’s good. Good stuff, Jonathan! I can tell you didn’t just make that up.
Yeah, that’s good. Good stuff, Jonathan! I can tell you didn’t just make that up.
Jonathan Davis (35:30):
I actually made it all up.
I actually made it all up.
Wendy Sweet (35:33):
That’s really good.
That’s really good.
Jonathan Davis (35:34):
Now it’s like, we tell you from experience.
Now it’s like, we tell you from experience.
Wendy Sweet (35:37):
That’s right!
That’s right!
Jonathan Davis (35:38):
That’s done most of these things, it’s now we’ve seen people do it.
That’s done most of these things, it’s now we’ve seen people do it.
Wendy Sweet (35:41):
That’s right. We’ve stepped in a lot of piles of [Inaudible]
That’s right. We’ve stepped in a lot of piles of [Inaudible]
Bill Fairman (35:45):
The beauty of being a lender or owner, someone doing owner financing is that you can structure a note any way you want and you want to structure it, or it’s a benefit to both the lender and the borrower. Those are going to be the best solution. You can buy investment property together with somebody and one, be a lender and one be the owner right there. There’s all kinds of ways to do it. This is what I love about the business. It’s just whatever works out best for everybody.
The beauty of being a lender or owner, someone doing owner financing is that you can structure a note any way you want and you want to structure it, or it’s a benefit to both the lender and the borrower. Those are going to be the best solution. You can buy investment property together with somebody and one, be a lender and one be the owner right there. There’s all kinds of ways to do it. This is what I love about the business. It’s just whatever works out best for everybody.
Wendy Sweet (36:26):
Well, you just have to have an open mind to think of, you know, what all the pain points are and how can they all be met and they can be if you do it right. I’m sorry.
Well, you just have to have an open mind to think of, you know, what all the pain points are and how can they all be met and they can be if you do it right. I’m sorry.
Jonathan Davis (36:35):
So if y’all have any more questions, please let us know if you want to move to the next one.
So if y’all have any more questions, please let us know if you want to move to the next one.
Wendy Sweet (36:39):
Yeah. We’ve, we’ve got 20 minutes left, a little less than 20 minutes. So this one is really pertaining on the borrowing side. And it’s “Why all of a sudden, is there a credit check for hard money? If a corporation is asking to borrow money, why does the CEO have to show their credit score and pay stubs?”
Yeah. We’ve, we’ve got 20 minutes left, a little less than 20 minutes. So this one is really pertaining on the borrowing side. And it’s “Why all of a sudden, is there a credit check for hard money? If a corporation is asking to borrow money, why does the CEO have to show their credit score and pay stubs?”
Jonathan Davis (36:59):
So basically what that boils down to is why are you checking credit if you are supposed to be an asset national lender? And why are you checking credit if you’re lending to LLCs and I own the LLC, why do you need to see my credit score and my pay stubs?
So basically what that boils down to is why are you checking credit if you are supposed to be an asset national lender? And why are you checking credit if you’re lending to LLCs and I own the LLC, why do you need to see my credit score and my pay stubs?
Wendy Sweet (37:14):
Right.
Right.
Jonathan Davis (37:14):
Okay.
Okay.
Wendy Sweet (37:16):
Cause we care about character, we like our money back!
Cause we care about character, we like our money back!
Jonathan Davis (37:21):
We care about character but I think everyone would agree. You know, no one knows the future, but the best indicator of future behavior is past.
We care about character but I think everyone would agree. You know, no one knows the future, but the best indicator of future behavior is past.
Wendy Sweet (37:27):
Amen, brother.
Amen, brother.
Jonathan Davis (37:29):
So we want to see that your past shows that you have an ability to repay debts.
So we want to see that your past shows that you have an ability to repay debts.
Bill Fairman (37:35):
Can I do a little, let me just do a little history. Back, you know when, before they had electricity, when I started in the mortgage business.
Can I do a little, let me just do a little history. Back, you know when, before they had electricity, when I started in the mortgage business.
Wendy Sweet (37:47):
Last time he [Inaudible]
Last time he [Inaudible]
Bill Fairman (37:48):
You only had two types of loans. You had bank loan, the bank would hold the loan, then these were conforming residential properties, upset and borrowers. So you had, you could get a loan from the bank, but you hadn’t put 20% down and you had to have stellar credit and proof of income. And there was no secondary market for this, the banks held them themselves. The alternative to that was the FHA or VA loans. And those were, you know, government bank. So they allowed less money to be put down.
You only had two types of loans. You had bank loan, the bank would hold the loan, then these were conforming residential properties, upset and borrowers. So you had, you could get a loan from the bank, but you hadn’t put 20% down and you had to have stellar credit and proof of income. And there was no secondary market for this, the banks held them themselves. The alternative to that was the FHA or VA loans. And those were, you know, government bank. So they allowed less money to be put down.
Jonathan Davis (38:23):
You’re talking prior to 1970?
You’re talking prior to 1970?
Wendy Sweet (38:27):
Not really Jonathan.
Not really Jonathan.
Jonathan Davis (38:30):
I thought he was trying to get in before [Inaudible].
I thought he was trying to get in before [Inaudible].
Bill Fairman (38:31):
Well back then, again, when I got into 89 and you really didn’t have mortgage backed security, if you had savings and loans, but get into that space, they crashed and burned because they got a little bit too risky on the commercial side of the thing. But then you had finance companies, which you don’t see anymore, but we used to call them stick lenders. Why? Because they would lend money on your specs furniture, stuff like that. Yeah,
Well back then, again, when I got into 89 and you really didn’t have mortgage backed security, if you had savings and loans, but get into that space, they crashed and burned because they got a little bit too risky on the commercial side of the thing. But then you had finance companies, which you don’t see anymore, but we used to call them stick lenders. Why? Because they would lend money on your specs furniture, stuff like that. Yeah,
Wendy Sweet (39:06):
Got it. That’s good.
Got it. That’s good.
Bill Fairman (39:08):
Then they got into the mortgage side of things. So you always had two types of borrowers. You had borrowers that paid on time, perfectly all of them. Then you had borrowers that paid slow. They never defaulted. They just chronically paid slow.
Then they got into the mortgage side of things. So you always had two types of borrowers. You had borrowers that paid on time, perfectly all of them. Then you had borrowers that paid slow. They never defaulted. They just chronically paid slow.
Jonathan Davis (39:25):
30 day payers.
30 day payers.
Bill Fairman (39:26):
Those were the people that went to the finance companies. They had to pay a higher rate because guess what? You had to work a little harder to get their payment. At the end of every month, you had to make your phone calls and say, Hey, and your payment’s due. When can I expect it? If you worked for a finance company, sometimes you’d have to go rent a U haul truck or a big Penske truck In somebody’s front yard and hit the air brakes and say, I’m here to get you, you know, your fee or your payment. Again, you had to work harder to get it. And that’s why the rates were higher. And then you got into the subprime companies, started springing up from that and all the finance companies going away. So at that point, you could fog a mirror and get along where their hard money lenders through all this, yesAnd .
Those were the people that went to the finance companies. They had to pay a higher rate because guess what? You had to work a little harder to get their payment. At the end of every month, you had to make your phone calls and say, Hey, and your payment’s due. When can I expect it? If you worked for a finance company, sometimes you’d have to go rent a U haul truck or a big Penske truck In somebody’s front yard and hit the air brakes and say, I’m here to get you, you know, your fee or your payment. Again, you had to work harder to get it. And that’s why the rates were higher. And then you got into the subprime companies, started springing up from that and all the finance companies going away. So at that point, you could fog a mirror and get along where their hard money lenders through all this, yesAnd .
Speaker 3 (40:17):
We will credit then back in 2000, I pulled credit.
We will credit then back in 2000, I pulled credit.
Bill Fairman (40:20):
There was plenty of hard money lenders that could care less about credit.
There was plenty of hard money lenders that could care less about credit.
Wendy Sweet (40:22):
Because they wanted your house.
Because they wanted your house.
Bill Fairman (40:24):
Because they’re only lending at 45, 50% of the value.
Because they’re only lending at 45, 50% of the value.
Wendy Sweet (40:30):
That’s good point to it.
That’s good point to it.
Jonathan Davis (40:30):
[Inaudible]
[Inaudible]
Bill Fairman (40:30):
And at the same time, a lot of times, the only loans that people would actually try to get from them because they could get a subprime loan. We’re so unique property types that they wouldn’t fall into those categories. And again, so they didn’t care about credit or anything else. They’re strictly lending on the property. Well times have changed. It’s much harder to get loans at the same time. No lender wants the property back. And so they have to do their risk evaluation based on the income, the assets and the character of the people that are borrowing.
And at the same time, a lot of times, the only loans that people would actually try to get from them because they could get a subprime loan. We’re so unique property types that they wouldn’t fall into those categories. And again, so they didn’t care about credit or anything else. They’re strictly lending on the property. Well times have changed. It’s much harder to get loans at the same time. No lender wants the property back. And so they have to do their risk evaluation based on the income, the assets and the character of the people that are borrowing.
Wendy Sweet (41:12):
Right
Right
Jonathan Davis (41:13):
And they’ve got the five C’s of credit only applied to banks.
And they’ve got the five C’s of credit only applied to banks.
Bill Fairman (41:17):
In this scenario, there is plenty of other hard money lenders out there that won’t pull credit.
In this scenario, there is plenty of other hard money lenders out there that won’t pull credit.
Wendy Sweet (41:21):
I can’t think of one. You know one?
I can’t think of one. You know one?
Bill Fairman (41:23):
Yeah, I see emails all the time companies that are still asset based lenders. But I can tell you right now that unless you have a ton of equity or you have a lot of cash in the bank with them, you’re not getting the loan trouble.
Yeah, I see emails all the time companies that are still asset based lenders. But I can tell you right now that unless you have a ton of equity or you have a lot of cash in the bank with them, you’re not getting the loan trouble.
Wendy Sweet (41:39):
Right.
Right.
Bill Fairman (41:40):
They’re basically only going to finance probably max 50, 55%.
They’re basically only going to finance probably max 50, 55%.
Jonathan Davis (41:45):
But I mean, yeah. So another, another piece of it is why don’t we run credit checks? If you’re rehabbing a property are the money that you get from a lender is held in escrow and dispersed after, you know, the rehab is done in phases. So if you have credit cards that you use to do that work upfront, that’s fine. But if your credit cards are at 90% usage, how are you going to pay that? Right. Unless you have money in the bank and you know, so that’s another thing that we look at is do you have the ability to front the money to get things going?
But I mean, yeah. So another, another piece of it is why don’t we run credit checks? If you’re rehabbing a property are the money that you get from a lender is held in escrow and dispersed after, you know, the rehab is done in phases. So if you have credit cards that you use to do that work upfront, that’s fine. But if your credit cards are at 90% usage, how are you going to pay that? Right. Unless you have money in the bank and you know, so that’s another thing that we look at is do you have the ability to front the money to get things going?
Wendy Sweet (42:29):
Right.
Right.
Bill Fairman (42:31):
And lastly, we’re looking for exit strategies. If you get into a situation where you can’t sell the property and you want to now turn it into a rental,
And lastly, we’re looking for exit strategies. If you get into a situation where you can’t sell the property and you want to now turn it into a rental,
Wendy Sweet (42:38):
We want to make sure you’re qualified.
We want to make sure you’re qualified.
Bill Fairman (42:40):
You have to be able to qualify for a long term loan, and so that’s another reason.
You have to be able to qualify for a long term loan, and so that’s another reason.
Wendy Sweet (42:45):
Yeah. And that’s really, really important. There’s so many people that have absolutely no intention of refinancing the house, then they can’t understand why that would matter to us, but it really matters to us. Number one, we don’t want your house. We’re not in that business. That’s not what we want.
Yeah. And that’s really, really important. There’s so many people that have absolutely no intention of refinancing the house, then they can’t understand why that would matter to us, but it really matters to us. Number one, we don’t want your house. We’re not in that business. That’s not what we want.
Jonathan Davis (43:02):
How many people have you talked to that their full intention worth to sell the house, but they had determined into a rental?
How many people have you talked to that their full intention worth to sell the house, but they had determined into a rental?
Wendy Sweet (43:08):
Several.
Several.
Jonathan Davis (43:08):
It’s more that one, isn’t it?
It’s more that one, isn’t it?
Wendy Sweet (43:08):
Oh yeah! Several, it happens a lot.
Oh yeah! Several, it happens a lot.
Bill Fairman (43:10):
I know plenty of people that needed to move and they were unintended landlord. Yeah. Because they had to rent in their house. They couldn’t either get the price they wanted or they couldn’t get it sold.
I know plenty of people that needed to move and they were unintended landlord. Yeah. Because they had to rent in their house. They couldn’t either get the price they wanted or they couldn’t get it sold.
Wendy Sweet (43:22):
Right. So you got to be able to qualify to get out of that loan and the thing is, is that people say, well, I can, I qualified for, you know, my primary when I bought it. And that’s all great and wonderful. But when you’re qualifying to get into an investment property, there are, they underwrite it a lot tighter. They care that you have six months worth of interest in the bank rather than the three, when they’re doing an owner occupied, they also will take, you know, your income into account. They care. Well, how are you going to make the payment? You know that, I understand that, that you might have a lease on this, but they’re only going to give you 75% of the rent that you get in toward the payment, the vacancy, the property management, all of that stuff. They’re only going to give you 75% credit on that.
Right. So you got to be able to qualify to get out of that loan and the thing is, is that people say, well, I can, I qualified for, you know, my primary when I bought it. And that’s all great and wonderful. But when you’re qualifying to get into an investment property, there are, they underwrite it a lot tighter. They care that you have six months worth of interest in the bank rather than the three, when they’re doing an owner occupied, they also will take, you know, your income into account. They care. Well, how are you going to make the payment? You know that, I understand that, that you might have a lease on this, but they’re only going to give you 75% of the rent that you get in toward the payment, the vacancy, the property management, all of that stuff. They’re only going to give you 75% credit on that.
Jonathan Davis (44:11):
Try to get a loan with no income but the property debt service itself and it has a 1.25 deep or higher DSCR, they won’t give you a loan. You personally have to have income. So, you know yeah, that whole thing, like, I don’t know,
Try to get a loan with no income but the property debt service itself and it has a 1.25 deep or higher DSCR, they won’t give you a loan. You personally have to have income. So, you know yeah, that whole thing, like, I don’t know,
Wendy Sweet (44:25):
It’s gonna be a two year job history.
It’s gonna be a two year job history.
Jonathan Davis (44:27):
Yeah, it’s gotta be a [Inaudible] I mean, for someone to say like, well, I don’t need income, the property debt service itself and I’ll just refinance it. No, no, that doesn’t work.
Yeah, it’s gotta be a [Inaudible] I mean, for someone to say like, well, I don’t need income, the property debt service itself and I’ll just refinance it. No, no, that doesn’t work.
Wendy Sweet (44:39):
Yeah, and people used to say to, well, I’ll just use a [Inaudible] hard money lender to refinance out of it. Well guess what? That’s what’s gone! Those, those long term refinances for investor properties that are not going through a bank, that’s what’s been pulled from the market. That’s what we’re having trouble with. But what’s funny? Why are you laughing?
Yeah, and people used to say to, well, I’ll just use a [Inaudible] hard money lender to refinance out of it. Well guess what? That’s what’s gone! Those, those long term refinances for investor properties that are not going through a bank, that’s what’s been pulled from the market. That’s what we’re having trouble with. But what’s funny? Why are you laughing?
Bill Fairman (45:02):
What do you say? I’m listening to the science channel.
What do you say? I’m listening to the science channel.
Wendy Sweet (45:06):
That’s not out there anymore. So if that’s the loan you’re counting on, you’re not going to get it. Not now, not today.
That’s not out there anymore. So if that’s the loan you’re counting on, you’re not going to get it. Not now, not today.
Jonathan Davis (45:13):
We’re working on one. Like, I think we’ve talked for, we will have one here shortly, you know, less than, less than 30 days I’d imagine. But–
We’re working on one. Like, I think we’ve talked for, we will have one here shortly, you know, less than, less than 30 days I’d imagine. But–
Wendy Sweet (45:21):
Keeping our fingers crossed, praying hard for it.
Keeping our fingers crossed, praying hard for it.
Jonathan Davis (45:22):
It’s like you have to have an exit strategy and, you know, a retail sell to an end user buyer. That’s great. That is, that is a great strategy, but there has to be plan B and plan C.
It’s like you have to have an exit strategy and, you know, a retail sell to an end user buyer. That’s great. That is, that is a great strategy, but there has to be plan B and plan C.
Wendy Sweet (45:38):
Yeah, so the CEO, why is it the CEO of the company that has to show?
Yeah, so the CEO, why is it the CEO of the company that has to show?
Jonathan Davis (45:45):
Well, that’s a good question! So if you’re the managing member, a manager, CEO, president, whatever it is of the, of the LLC, the corporation you are typically going to have to sign a personal guarantee on the loan, which means it’s a full recourse loan. So it is important to know that the person who signed them for the guarantee actually has money that can be pursued upon, you know, if they don’t do what they’re supposed to do, the documents as, in everything, the contract documents is for worst case scenario. And we only pull on them if the worst case scenario happens, but they have to be there. So that’s, you know, that’s why it’s there. We have to know that, you know, I can start. I mean, we have a saying, you knowpersonal guarantees, they’re great, but, you know, good luck getting them to pay. I don’t mind sharing that. Like, it is tough to get someone to pay it on a personal guarantee. Luckily, we’ve never had to do that but it’s nice to have. Yeah. It’s, it’s one of those things that says it helps build sleep at night. And you know, when, yeah, when bill sleeps better at night, I sleep better.
Well, that’s a good question! So if you’re the managing member, a manager, CEO, president, whatever it is of the, of the LLC, the corporation you are typically going to have to sign a personal guarantee on the loan, which means it’s a full recourse loan. So it is important to know that the person who signed them for the guarantee actually has money that can be pursued upon, you know, if they don’t do what they’re supposed to do, the documents as, in everything, the contract documents is for worst case scenario. And we only pull on them if the worst case scenario happens, but they have to be there. So that’s, you know, that’s why it’s there. We have to know that, you know, I can start. I mean, we have a saying, you knowpersonal guarantees, they’re great, but, you know, good luck getting them to pay. I don’t mind sharing that. Like, it is tough to get someone to pay it on a personal guarantee. Luckily, we’ve never had to do that but it’s nice to have. Yeah. It’s, it’s one of those things that says it helps build sleep at night. And you know, when, yeah, when bill sleeps better at night, I sleep better.
Bill Fairman (47:01):
Well, there are, by the way, there’s other lenders that don’t require any of this, but there are lenders like us that we will look at nonrecourse loan.
Well, there are, by the way, there’s other lenders that don’t require any of this, but there are lenders like us that we will look at nonrecourse loan.
Wendy Sweet (47:10):
If it’s an IRA borrowing money .
If it’s an IRA borrowing money .
Bill Fairman (47:13):
The LTV or there’s going to be some adjustments, because again, without recourse, there’s a higher risk of not getting paid back. Right. Yeah. And so you have to make adjustments for that rain or LTV or maybe a combination.
The LTV or there’s going to be some adjustments, because again, without recourse, there’s a higher risk of not getting paid back. Right. Yeah. And so you have to make adjustments for that rain or LTV or maybe a combination.
Bill Fairman (47:30):
But there are some of those available and yes, you can borrow with your IRA and you can make good money doing that. You know, keep in mind if you’re borrowing with your IRA. And again, I’m not a custodian, but I’m not a tax person.
But there are some of those available and yes, you can borrow with your IRA and you can make good money doing that. You know, keep in mind if you’re borrowing with your IRA. And again, I’m not a custodian, but I’m not a tax person.
Wendy Sweet (47:44):
He just place those on TV.
He just place those on TV.
Bill Fairman (47:47):
But if you do borrow through your IRA are subject or could be subject to [Inaudible].
But if you do borrow through your IRA are subject or could be subject to [Inaudible].
Wendy Sweet (47:55):
Unrelated business income tax.
Unrelated business income tax.
Wendy Sweet (47:59):
Another thing too, if I get a call from somebody wanting to borrow money and they are complaining that they have their, that they have to have their credit polled and that they have to show, pay stub or their tax returns or whatever’s, we’re asking for my first thing is red flag. They’ve got that attitude that, Hey, if it doesn’t work out, I can just walk away.
Another thing too, if I get a call from somebody wanting to borrow money and they are complaining that they have their, that they have to have their credit polled and that they have to show, pay stub or their tax returns or whatever’s, we’re asking for my first thing is red flag. They’ve got that attitude that, Hey, if it doesn’t work out, I can just walk away.
Jonathan Davis (48:24):
Exactly.
Exactly.
Wendy Sweet (48:24):
And I don’t want to borrow it. I don’t want to lend to anybody that has that kind of an attitude. Commitment to commitment.
And I don’t want to borrow it. I don’t want to lend to anybody that has that kind of an attitude. Commitment to commitment.
Jonathan Davis (48:30):
What blows my mind is people who, you know, their whole goal is to turn it into a rental and refinance it. And they don’t want to show other credit pool or show bank statements or tax returns. Those are all things that you’re going to have to show anyway to somebody.
What blows my mind is people who, you know, their whole goal is to turn it into a rental and refinance it. And they don’t want to show other credit pool or show bank statements or tax returns. Those are all things that you’re going to have to show anyway to somebody.
Wendy Sweet (48:49):
Right.
Right.
Jonathan Davis (48:49):
So, you know, then it becomes like I can go to irs.gov and print off my tax returns in about five minutes. So what’s so difficult about that. I don’t understand. I don’t understand it. So when people, you know, like you said, when people in bulk at it, I’m like, well–
So, you know, then it becomes like I can go to irs.gov and print off my tax returns in about five minutes. So what’s so difficult about that. I don’t understand. I don’t understand it. So when people, you know, like you said, when people in bulk at it, I’m like, well–
Wendy Sweet (49:08):
What’s the real problem?
What’s the real problem?
Bill Fairman (49:12):
Yeah, what do you not want me to see? Because we’re not going through these things with a magnifying glass and, you know, just trying to make you know, finding a way to not do the deal.
Yeah, what do you not want me to see? Because we’re not going through these things with a magnifying glass and, you know, just trying to make you know, finding a way to not do the deal.
Wendy Sweet (49:23):
Yeah, we want to do it. We don’t make money unless we make loans. Just so you’ll know,
Yeah, we want to do it. We don’t make money unless we make loans. Just so you’ll know,
Bill Fairman (49:32):
Bridge lenders, hard money, lenders, private money lenders, they’re their loans are not, they’re not doing loans based on somebody’s ability or compunction to pay the reason you’re paying more of that point.
Bridge lenders, hard money, lenders, private money lenders, they’re their loans are not, they’re not doing loans based on somebody’s ability or compunction to pay the reason you’re paying more of that point.
Wendy Sweet (49:50):
I’m impressed.
I’m impressed.
Bill Fairman (49:52):
The reason you’re paying a higher price for these loans have nothing to do with your ability to pay or your willingness to pay. It has to do with the risk of the property type, the speed and ease of getting money quickly. So you can be more of a cash buyer.
The reason you’re paying a higher price for these loans have nothing to do with your ability to pay or your willingness to pay. It has to do with the risk of the property type, the speed and ease of getting money quickly. So you can be more of a cash buyer.
Wendy Sweet (50:12):
The fact that you’re fine based on the value.
The fact that you’re fine based on the value.
Bill Fairman (50:15):
Any loan that is got a construction component is a higher risk loan because it’s not sale ready.
Any loan that is got a construction component is a higher risk loan because it’s not sale ready.
Wendy Sweet (50:23):
Right.
Right.
Bill Fairman (50:24):
And any lender that is looking, they always have to look at worst case scenario. If I have to take it back, how quickly can I sell it? If it is not completed and move in ready, then it’s going to take longer.
And any lender that is looking, they always have to look at worst case scenario. If I have to take it back, how quickly can I sell it? If it is not completed and move in ready, then it’s going to take longer.
Wendy Sweet (50:36):
Right.
Right.
Bill Fairman (50:37):
That just adds to the risk.
That just adds to the risk.
Wendy Sweet (50:39):
Sure.
Sure.
Jonathan Davis (50:39):
Looks like Don as you mentioned, making a loan to a self directed IRA, can you explain?
Looks like Don as you mentioned, making a loan to a self directed IRA, can you explain?
Wendy Sweet (50:44):
Thank you Don, Buy in hold or flip, he’s having that part too.
Thank you Don, Buy in hold or flip, he’s having that part too.
Bill Fairman (50:44):
Yes. There are plenty of them. There’s actually you can, you can do loans in both. We’ve had customers that have done fix and flip loans through their IRA. And I’ll give you a quick example. Let’s say you’re buying a house you need a hundred thousand dollars to do the fix and flip. You got $20,000 in your self directed IRA. You use a part of that money as your points and down payment, closing costs.
Yes. There are plenty of them. There’s actually you can, you can do loans in both. We’ve had customers that have done fix and flip loans through their IRA. And I’ll give you a quick example. Let’s say you’re buying a house you need a hundred thousand dollars to do the fix and flip. You got $20,000 in your self directed IRA. You use a part of that money as your points and down payment, closing costs.
Wendy Sweet (51:21):
The rest of it has to go to payment.
The rest of it has to go to payment.
Bill Fairman (51:21):
The rest of the money in there is going towards your monthly payments. And then at the end of the fix and flip you thinking you’ve leveraged that 20,000 into a hundred thousand dollar loan, and you end up selling the place or, you know, 170 or 160, Right?
The rest of the money in there is going towards your monthly payments. And then at the end of the fix and flip you thinking you’ve leveraged that 20,000 into a hundred thousand dollar loan, and you end up selling the place or, you know, 170 or 160, Right?
Wendy Sweet (51:40):
Right.
Right.
Bill Fairman (51:41):
And now you’ve added $60,000 in profit.
And now you’ve added $60,000 in profit.
Jonathan Davis (51:45):
If you still doubt yourself.
If you still doubt yourself.
Bill Fairman (51:52):
Let’s assume it, yeah. Sorrny, none. You made a $60,000 profit, you’ve gotten that original $20,000 that you started with and I’m talking profit, including the payments that you made.
Let’s assume it, yeah. Sorrny, none. You made a $60,000 profit, you’ve gotten that original $20,000 that you started with and I’m talking profit, including the payments that you made.
Wendy Sweet (52:04):
Right.
Right.
Bill Fairman (52:04):
So now you’ve got an IRA, that’s got $80,000 in it and you did it in six months.
So now you’ve got an IRA, that’s got $80,000 in it and you did it in six months.
Wendy Sweet (52:09):
Right, that’s great!
Right, that’s great!
Bill Fairman (52:11):
That’s a good return.
That’s a good return.
Jonathan Davis (52:11):
That’s a decent return.
That’s a decent return.
Bill Fairman (52:13):
Now it’s hard to offset your possible UBIT, but the fact that you can jump that thing up that quickly. And if you can do it a couple of times a year, again, you gotta be careful. You don’t want to have the IRS think it’s a business,
Now it’s hard to offset your possible UBIT, but the fact that you can jump that thing up that quickly. And if you can do it a couple of times a year, again, you gotta be careful. You don’t want to have the IRS think it’s a business,
Wendy Sweet (52:28):
Right.
Right.
Bill Fairman (52:28):
Because they don’t like that either. But if you’re buying rental properties this way and you’re doing it with your IRA, leveraging it, you can actually utilize the appreciation and expenses that you have. You can actually now take advantage of that in your IRA, because you can use that to offset your UBIT because you’re only owed to UBIT on the profit, right? So you’re writing depreciation off expenses and all that stuff. So your actual profit each year is a lot smaller so that you, but it’s not going to affect you, but that’s a good way to do it as well.
Because they don’t like that either. But if you’re buying rental properties this way and you’re doing it with your IRA, leveraging it, you can actually utilize the appreciation and expenses that you have. You can actually now take advantage of that in your IRA, because you can use that to offset your UBIT because you’re only owed to UBIT on the profit, right? So you’re writing depreciation off expenses and all that stuff. So your actual profit each year is a lot smaller so that you, but it’s not going to affect you, but that’s a good way to do it as well.
Wendy Sweet (53:11):
So it’s not as scary, UBIT is not as scary as everybody thinks it is. It’s not a big, gigantic number.
So it’s not as scary, UBIT is not as scary as everybody thinks it is. It’s not a big, gigantic number.
Jonathan Davis (53:18):
Could not be.
Could not be.
Wendy Sweet (53:18):
So how do you qualify the borrower for a hard money loan?
So how do you qualify the borrower for a hard money loan?
Bill Fairman (53:26):
You know it’s quite correct that IRA. We’re qualifying the individual but the loan is just in the name of IRA.
You know it’s quite correct that IRA. We’re qualifying the individual but the loan is just in the name of IRA.
Jonathan Davis (53:31):
Yes, so the only difference on that loan, like we’re like, like Don, we would qualify you as, as an individual utilizing your self directed IRA. The only difference on my loan docs would be that there wouldn’t be a personal guarantee.
Yes, so the only difference on that loan, like we’re like, like Don, we would qualify you as, as an individual utilizing your self directed IRA. The only difference on my loan docs would be that there wouldn’t be a personal guarantee.
Wendy Sweet (53:44):
Yeah, cause it has to be non recourse.
Yeah, cause it has to be non recourse.
Bill Fairman (53:44):
And the loan would be the name of the IRA for the benefit of whatever custodian.
And the loan would be the name of the IRA for the benefit of whatever custodian.
Wendy Sweet (53:52):
And so if it were a six month line, we would want to make sure that you had enough money in your account to make payments for 12 months really. Because if it, if for some reason you can’t get it sold, only money in your IRA can pay that extension fee.
And so if it were a six month line, we would want to make sure that you had enough money in your account to make payments for 12 months really. Because if it, if for some reason you can’t get it sold, only money in your IRA can pay that extension fee.
Bill Fairman (54:10):
Now keep in mind, you’re only allowed to put money in your self directed IRA once a year so you have to make sure that if you’re not making a contribution,
Now keep in mind, you’re only allowed to put money in your self directed IRA once a year so you have to make sure that if you’re not making a contribution,
Wendy Sweet (54:22):
You hadn’t made it yet. Just in case.
You hadn’t made it yet. Just in case.
Bill Fairman (54:26):
So we got the thumbs up, so apparently we answered your questions adequately.
So we got the thumbs up, so apparently we answered your questions adequately.
Jonathan Davis (54:30):
Typically, I wanna say also, typically, if we do a loan to a self directed IRA without a personal guarantee, it’s now non-recourse, it’s going to be a little more conservative than a typical loan with full recourse.
Typically, I wanna say also, typically, if we do a loan to a self directed IRA without a personal guarantee, it’s now non-recourse, it’s going to be a little more conservative than a typical loan with full recourse.
Bill Fairman (54:46):
Time’s up.
Time’s up.
Wendy Sweet (54:48):
And then just, just for the record, Don Harris, Don Harris already knew all the answers, those questions. He asked that so we would share it with other people. Thank you, Don for doing that.
And then just, just for the record, Don Harris, Don Harris already knew all the answers, those questions. He asked that so we would share it with other people. Thank you, Don for doing that.
Bill Fairman (54:56):
[Inaudible].
[Inaudible].
Wendy Sweet (54:56):
He’s trying to see if you knew what you’re talking about.
He’s trying to see if you knew what you’re talking about.
Jonathan Davis (55:01):
What’s convenient standpoint?
What’s convenient standpoint?
Wendy Sweet (55:01):
Okay, time to eat.
Okay, time to eat.
Bill Fairman (55:06):
Alright, thanks for doing this. We’re going to be doing a show at 1:10 or.
Alright, thanks for doing this. We’re going to be doing a show at 1:10 or.
Wendy Sweet (55:13):
Yeah, just a few more minutes and it’s, it’s really good. It’s these twin brothers out of New York that are doing a great, great business, and you’ve just gotten to hear their story and see what they’re doing. It’s pretty awesome, right?
Yeah, just a few more minutes and it’s, it’s really good. It’s these twin brothers out of New York that are doing a great, great business, and you’ve just gotten to hear their story and see what they’re doing. It’s pretty awesome, right?
Bill Fairman (55:27):
Right, yeah. Don’t forget CarolinaHardMoney.com. Share, subscribe, like all that good stuff, we’ll see you soon. Thanks.
Right, yeah. Don’t forget CarolinaHardMoney.com. Share, subscribe, like all that good stuff, we’ll see you soon. Thanks.
Wendy Sweet (55:38):
Thanks.
Thanks.
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