Bill Fairman (00:02):
Good afternoon, everyone. Well, it depends on where your time zone is, but it's afternoon here. I'm bill Fairman, This is Jonathan Davis with Carolina Capital Management. Welcome to our show, Passive Income, Active Wealth. And by the way, our website is CarolinaHardMoney.com. If you're an investor looking for passive returns, click on the investor tab. If you are a borrower looking to borrow private or hard money, click the apply now button. Don't forget to subscribe, share like, again, hit the bell! That's a new one to me.
Jonathan Davis (00:52):
What is that even on? I'm not gonna tell you. It's hit the bell on?
Bill Fairman (00:55):
No idea platform that is.
Jonathan Davis (00:57):
Yeah, I don't either.
Bill Fairman (00:57):
But this is our Ask an Ugly Questions segment. Speaking of questions and answers, we do have a comment section either on the right side of your screen or underneath, depending on the platform that you're viewing us from. You can go ahead and ask us any questions while we're on the air here and hopefully we'll be able to answer them. How are you doing, Jonathan?
Jonathan Davis (01:23):
We'll do our best.
Bill Fairman (01:23):
How are you, Jonathan?
Jonathan Davis (01:31):
I'm good, man. I'm good. Live from the home office but a more important question is how are you and how was Wendy? I know last time we talked to you as were, kind of under the weather. You sound a little better.
Bill Fairman (01:47):
Yeah. I still have a little bit of annoying cough and I've got some lingering pneumonia. They call it COVID pneumonia. Apparently, you get inflammation in your lungs as part of the problem with this thing but, you know, there's all kinds of different symptoms that people get and not all of them get the same symptoms, which is, you know, kind of odd, but we're working on the back end of this thing and getting stronger and healthier every day. Wendy is taking the day off to recover herself. She hit her a little bit harder than I. I tell you, the one thing I've learned about this is that I was so happy that I was in good physical shape before this hit me. If I would have gotten this, you know, three or four years ago when I was a couch potato, I think there would have been a different outcome, frankly.
Jonathan Davis (02:49):
Yeah, those two and three bootcamps a week have really paid off. Haven't they?
Bill Fairman (02:54):
Two and three. You mean three and four?
Jonathan Davis (02:56):
No, I'm sorry. I'm sorry.
Bill Fairman (03:00):
Yeah, I lost eight pounds and didn't do anything so now, it's a diet I don't recommend.
Jonathan Davis (03:09):
It's not a diet, sickness is not a sustainable way of weight loss.
Bill Fairman (03:16):
This is true. It's funny. I was doing a podcast yesterday and the host said, wow, you really look good and I said, that's what people always say when you're sickly. Are you a vegan now?
Jonathan Davis (03:32):
You've got that dehydrated glow about you.
Bill Fairman (03:34):
Recovering from COVID. That's why I looked so much better than I did when I was healthy.
Jonathan Davis (03:43):
Well, from three years ago, you look heck of a lot better.
Bill Fairman (03:45):
Thank you so much. We do have some, I don't want to say breaking news but we do have some news that, you know, when the job's front and whatnot that we have been trying to keep up with during this time. So I'm going to pause for a moment with our breaking news graphics! Wow. I'm impressed.
Jonathan Davis (04:31):
That was nice.
Bill Fairman (04:31):
That was pretty cool. So new Jobless Claims came in this morning. The estimate was 735,000 and it came in above that at 751,000. It's still fairly close but it's still under 800,000, which is a good thing. Continuing Jobless Claims, it was a little higher than estimated as well but it was a little over 7 million, which is not bad considering at one part during the summer. I don't know if it was May or June. It could have been July, I'm not sure. I mean, we were up to 20 million and so we've turned that around, quite a bit to be only in the 7 million. Now that said, you know, we have COVID cases increasing in spots around the country and depending on where you live, those States may be closing up a little bit. I know if you live in New York, you're not traveling because you go outside of the state or people aren't traveling to New York because if you can't prove that you're negative for COVID, you have to be quarantined for 14 days so who the heck is going to travel back and forth when you don't know whether you're going to be stuck there for 14 days or not so that's going to have an impact on employment until, you know, we have some sort of a vaccine. I'd prefer that the States open up, you know, I wouldn't want anybody to get this but let's face it. That's a very small percentage of the population that are gonna have, uh, you know, deaths from this and those people, we kind of know who they are going to be for the most part, you know, the very old and the people with heart, lung diseases, bad diabetics, people that are severely overweight. So those people have to really be vigilant but it doesn't mean that the rest of the country has to completely shut down. You know, for those folks, you can still protect those folks and I encourage the government to do that. We have to talk about the elections. This looks like it's going to be a long drawn out process. However, what I do know, no matter what happens, the Senate is going to stay Republican. The house is going to be, it looks like their margin is going to be a little bit less but either way, it's going to be gridlock for the next two years.
Jonathan Davis (07:40):
Yeah. Yeah, you're right.
Bill Fairman (07:40):
So that's a, I mean, that's a good thing. And, and I,
Jonathan Davis (07:44):
Gridlocks a good thing?
Bill Fairman (07:46):
You know, it's counterintuitive to say that, but it is, when it comes to government, no matter what party is in full power, you don't want swings one way or another. Business wants a little bit of certainty and when you have gridlock that certainty, you know, what's going to happen, which is nothing
Jonathan Davis (08:12):
Not there.
Bill Fairman (08:14):
And politicians for the most part, want to spend your money and not always the way you want the money to be spent and that said, I like the corporate tax structure right now, that's not going to change. If Joe Biden becomes president, the one thing that concerns me is the presidential orders that they can reverse.
Jonathan Davis (08:49):
The executive order that they can, yeah.
Bill Fairman (08:52):
The one thing that Trump that was very necessary for our industry is the deregulation. Here's the thing, regulations stifle small businesses. Because you're big multinational corporations, they have the money and the backbone to overcome lots of compliance and regulation and it's the smaller guys that are doing all the innovation that get pummeled with these things because they don't have the wherewithal. They don't have the team of lawyers, the money to waste on compliance instead of utilizing their talents with coming up with new ways to create wealth. Their brain power is going towards how to circumvent, not circumvent, but how to, how do I want to say this? And not sounded like an idiot. They need to be able to get in there and work with the regulations and get through the maze of things, obstacles that are in front of you. That is not wealth growing energy that's being spent, that's being spent on headwinds. Does that make sense?
Jonathan Davis (10:28):
I think so.
Bill Fairman (10:30):
That's why you have so many people figuring out ways to get around rules and regulations, which is a shame there's whole industries that are created around that and that's why there are so many CPAs. If we had a basic flat tax where everybody paid a percentage period, you'd have very little need for, you know, all the tax advisors, right?
Jonathan Davis (10:58):
That's true. Yeah, you're right.
Bill Fairman (11:00):
Whole industries have been built around trying to work within the bureaucracies. Now don't get me wrong, the government needs to protect the public but what ends up happening is government just always tends to grow. And then look how long it takes to build a highway. We have this stretch of highway in near Charlotte, but it's between Gastonia and Hickory. It took 23 years to build a four-lane highway that was only about 40 miles long. I don't even know if it was 40 miles long, it might be 30 and it had to do with a particular violet that grew and it was a species that was endangered and every time they dug it up and transplanted it, a new one would grow. It took them 23 years to finally get all of them transplanted.
Jonathan Davis (12:05):
The road looks kind of like this.
Bill Fairman (12:06):
Right.
Jonathan Davis (12:10):
Weaving around that violet.
Bill Fairman (12:10):
Here's my question. Obviously, that was a good place for that thing to grow because it kept coming back.
Jonathan Davis (12:17):
Yeah. Right?
Bill Fairman (12:18):
So instead of taking 23 years to make sure it didn't come back in that area, why didn't they just build a road around its favorite spot
Jonathan Davis (12:27):
Common sense and a lot of things don't mix well, especially in government,
Bill Fairman (12:34):
But, you know, back to the one of the things that Donald Trump did that was really good for business was lower and get rid of a ton of regulations that were really unnecessary. You have regulations and then you had regulations on top of regulations and you had so many different agencies that had regulations on. You had many, many instances where a company would come in and do a bid for a project and be out of business before the project ever got off the ground because it took them so long to get through all the obstacles and it was the regulations part of it,
Jonathan Davis (13:15):
And when you say the regulations, he took away regulations on small business. Like when can you make that like, real for us, like from the lending side, like, what regulations did he take away or any business. Kinda kind of give us a real world example.
Bill Fairman (13:32):
Well, this is mostly on the construction side of things.
Jonathan Davis (13:35):
Make sense.
Bill Fairman (13:36):
And it's mostly overreach from, you know, the EPA. And then, you have so many parts of the EPA. The air quality, the water quality, soil quality. I mean, it just goes on and on and what they did was is that, and I can't give you a specific regulations that he got rid of. All I know is he got rid of a bunch of them that were not necessary because they were already covered under a different agency and that was the problem. You had many agencies within the government that would be regulating the same thing.
Jonathan Davis (14:27):
Exactly.
Bill Fairman (14:27):
So it's not like, you're not complying with one, you have to comply with five or six different ones and everybody had to sign off or it wouldn't go through
Jonathan Davis (14:39):
That is a bit onerous. Yeah, you're right. Yeah. That's a lot.
Bill Fairman (14:42):
And again, when you have as a general theme, when you have a lot of regulations, it's the big multinational corporations that end up benefiting from that because no one else is going to innovate and cause competition for them. If they have to spend so much energy time and money on complying with rules and regulations to that extent and it makes it a more even playing field for the smaller businesses and typically that you see your bigger multinational companies, that they don't mind regulation because that helps stifle their competition.
Jonathan Davis (15:26):
Yeah. Well, I mean, no, you're right. I mean, you know, only publicly traded companies can survive two, three, four, or five years with negative income, your small business can't do that.
Bill Fairman (15:38):
No, absolutely. All right. So enough of this whining. Let's get to our ugly question and I'm assuming we have graphics for,
Jonathan Davis (15:52):
Alright, Ugly Question.
Bill Fairman (15:52):
Ask the Ugly Question.
Jonathan Davis (16:09):
Love it, love it. Oh, man. Well, Bill, what is our first ugly question for today?
Bill Fairman (16:15):
All right. Number one, what happens if the owners get sick or die? And owners of what?
Jonathan Davis (16:25):
Anything, right?
Bill Fairman (16:25):
Yeah.
Jonathan Davis (16:25):
Like owners of a fund that you're in. You, the owner of a fix and flip property, you know, whatever investment vehicle you're in, you're in a syndication and the syndicator who put it all together, what happens then?
Bill Fairman (16:40):
Yeah. Or if you're just the investor and your money is invested in a fund or in a loan, what happens if you get sick or die?
Jonathan Davis (16:55):
Yeah. It's a morbid, like, you know?
Bill Fairman (16:58):
Yeah. And Jonathan and I were talking about this earlier, Wendy actually put these questions forward and I think she had plenty of time to think while she was recovering from COVID. So we're, we kind of have an idea of where her head was at during this time.
Jonathan Davis (17:13):
Yep. No, but she's doing very well now, so,
Bill Fairman (17:17):
So we're going to talk about this in a minute any way about the contingency plans but everybody has to have, you know, a contingency in place anyway.
Jonathan Davis (17:31):
Sure.
Bill Fairman (17:31):
Now,
Jonathan Davis (17:31):
Well, I'm sorry, go ahead, Bill.
Bill Fairman (17:33):
Go ahead.
Jonathan Davis (17:35):
Some me say that the best, you know, we'll get into contingency plans, but you know, what happens if someone gets sick or die? I mean, that's the importance of partnerships and teams. Like, you know, you can do something alone, you know, what's that old saying, if you want to do something fast, do it alone. If you want to go far, you know, go with a team or a partner, I get it go faster, go far but we, we here at Carolina, we've built a team that, you know, Bill, Wendy or even myself gone, any one of us or all three of us combined, it still keeps running. It still keeps doing its thing and it's the power of a team. It's the power of the right but in the right seats, for lack of a better expression. You have people who know what they're doing, know how to do it and have been empowered to make decisions. You know, there are only a few things that, you know, our team is waiting for Bill to decide on, or Wendy decide or me to decide on, or all three of us collectively. There's very few things. Most things they're empowered to make their own decisions and that's the power of a team. So when you have a team, then you know, what happens if someone gets sick or someone passes away? Well, if it's a business, it keeps on running. If it's an investment, it keeps on producing. So it's the power of a team.
Bill Fairman (19:00):
Well, that then also gets back to building your business to sell, even though you're probably not going to sell.
Jonathan Davis (19:09):
That's a good point.
Bill Fairman (19:09):
But if you build your business to sell, then any moron can get in there and make money with it, right?
Jonathan Davis (19:20):
Yeah. You build your business. I mean, you know, it sounds like, I'm not trying to be crass or anything, but like you build it to be, dummy-proof like, you know, like you build it so you're, you know, I always think in terms of my kids, I built it so my eight year old daughter can go in there and make some money, you know, that's how I look at things.
Bill Fairman (19:43):
Well, a part of building it to sell is that if the business revolves around you or another member of your team and if you were going to sell that business, what's it really worth? I got a lot of that from really from the dental industry. Veterinarians, the private practice person where the business revolves around that person. People are there because of that practitioner, that dentists, that veterinarian and those people have to put folks in a position where, you know, frankly, they can go and take a month's vacation and not miss a beat. That's the only way you're going to build a real business. Otherwise, you're just a highly paid hourly employee and when you go away, so does your business and when it's time for you to retire, most of these folks figure, well, I'll work until I can't bend over anymore and I'll sell the business to a new younger doctor coming out of school. Excuse me. The problem is if it revolves around you, there's no guarantee that any of those patients are gonna show up for the new doctor and now your business is only worth the furniture, fixtures, and equipment that you have in there. If you own the real estate, it's worth that but it's not a business that is saleable, right?
Jonathan Davis (21:29):
Yeah.
Bill Fairman (21:31):
Pardon me.
Jonathan Davis (21:34):
Alright.
Bill Fairman (21:34):
I should be using my mute when I do this, my apologies. So let's talk about if you're the borrower on a property and you've got a whole bunch of projects going on and you're the one that is doing all the work. I think Wendy had spoken about this before that she had spoken with somebody who was doing all the work and which was great and they did it nice and inexpensively, but you know, if they ever got hurt on the job or sick and couldn't do it, everything comes to a halt and how do you sustain like that?
Jonathan Davis (22:22):
You don't, I mean, cause you could think about your purchasing model. You're purchasing these assets based on a lower cost to rehab them because you're doing the work yourself. So if you find yourself sick and unable to do the work and you have to hire a GC, your profit margins are completely obliterated. Like you've just created a model that is dependent on you, sweating day in and day out doing this work, which is not conducive that to someone else coming in and doing the work. So, you know, yeah. I mean you, in that scenario, you get sick and you know, or worse, but that's, you know, it doesn't work, your model doesn't work. So should you be setting up a model that is dependent on you being healthy all the time?
Bill Fairman (23:14):
Yeah. And granted, you know, when you're a small, when you're starting a small business, it is you. You just have to work towards, having a business and not just having a job.
Jonathan Davis (23:27):
Yeah. I mean, Rome wasn't built in a day and the whole thing is, you know, like you said, you'd build a business like you're trying to sell it and the goal is when you get sick or step away or whatever the case may be, if you've a successful business, your dollars per hour as the owner will go up when you step away and the company will still make as much or more money. That's what you're looking for. You know, when you're saying this. That when I step away, my dollars per hour go up and the company stays where it is or improves
Bill Fairman (24:05):
Actually in most cases, it improves because a lot of times as business owners, we end up becoming the bottleneck because too many people are depending on you to say yes or no to something when it should, when those decisions should be allowed to be taken care of by the persons whose job it is.
Jonathan Davis (24:28):
Yeah. And that comes back to empowering your, your team. If you as an owner and if you are constantly, micro-managing or any of those things with your staff, your employees that is not empowerment. They will not make choices, they will be afraid to make choices and if you're afraid to make choices, you are stuck.
Bill Fairman (24:55):
Yep. You become the crutch and you know, they're not going to do anything that it's going to cause you to be uneasy with it and then they become, they don't want to take any chances. So I do want to get back to the person doing all their work on the fix and flip because it's a lot cheaper. Those people are not borrowing money from us because we're not lending them money based on what it's going to cost for you to do the work. We're lending it based on what it's going to cost for us to get the work done.
Jonathan Davis (25:32):
Correct.
Bill Fairman (25:33):
Which means we're going to have to hire a GC. So I want to keep that in mind, if you're doing that, then you're typically using your own cash to do this or maybe you have an investor or a private lender that's, you know, contributing. That said, if you're doing all the work yourself and you're utilizing the cost savings in your business model, there's not going to be a bank or a hard money lender that actually does this for a living that is going to lend you money based on that model.
Jonathan Davis (26:18):
Yeah. And if you are a lender, like a private lender out of your IRA or whatever, and people are coming to you saying, yeah, I can do this for, you know, $20,000 and it's a new roof, new HVAC, new kitchen, and remodeled the bathrooms you should be saying, that's great that you can do it for $20,000, but I can't and I, you know, that's a $40,000 rehab or 45 or whatever it ends up being like, we're going to have to bake that into it, just for, you know, and to segue into Scott's question here, what happens if you loan to a fix and flipper and that person passes away? Well, there's a couple things, you know, from our experience and Bill, you tell me if yours is different than mine, you now are the flipper on that project as the lender. Like you get that now cause normally in those situations, you know, these fix and flippers, aren't a big business. They're not doing, most of them are not doing 5,000, 200 flips a year. Most of them are doing between two and 10 and they do it on the side. It's their job. They, you know, they might have a husband or a wife who has a full-time job somewhere else and, you know, they don't want to take over that project. So they're just going to say, you know, I can't do this, it's yours.
Bill Fairman (27:42):
Yeah. And Scott says, you know, would they have insurance? Well, most of them would. And we don't lend to people, we lend to legal entities and typically they have a, you know, part of their operating agreement, they have a succession. Now you have a sole,
Jonathan Davis (28:06):
Not yet. Single member, yeah.
Bill Fairman (28:07):
Single member entity and if they pass away, then you know, obviously they're not making payments. We would have to go through the foreclosure process, unfortunately. We can't make them get life insurance. We make them get fire and hazard.
Jonathan Davis (28:27):
Yeah. The hazard or builder's risk or whatever insurance, that wouldn't cover anything on here because the property is intact. The only thing that would pay out would be, you know, a person's life insurance. And like, they'll say we, you know, we do not make that a requirement of our loans,
Bill Fairman (28:44):
But it would be like anything else. If a family member wanted to continue that, then they can finish out the project as long as they're making the, you know, the payments. If they're not making the payments, then you have to do what you normally do in those situations where you'd have to start the foreclosure process.
Jonathan Davis (29:03):
Yeah. And in that scenario, like, let's say the family member, the spouse, or whomever didn't want to take it back, I would explore a deed in lieu where, you know, if they're the spouse, that's the easiest one. The company, even if it's a sole member entity, it'll revert to the spouse. In most States, that's what happens. So they can sign a deed in lieu over to the lender. Before you do that, down date your title and make sure that there are aren't any liens or material mechanical liens, anything that's clouding title because if you take a deed in lieu and you record it, you now own that property and if there are outstanding liens, you've just inherited those. Those are liens now that you must satisfy so before you do that, down date title,
Bill Fairman (30:00):
Now, you know, again, another question from Scott on the, you know, what advice we would give to a small flipper? Well, one of them is don't get sick or die. But in my opinion, a good thing to do would set up a trust, a family trust and make sure that the assets in that trust and go to a beneficiary and that way you can avoid probate and whatnot with any assets, because what happens in a trust, a trust is a legal entity and the legal entity never dies, it just changes beneficiaries. So you can have within the trust, if the one beneficiary passes away, you know, it would just revert to the other beneficiaries that you would have inside of that trust. Okay. That's a good way to protect the assets for your family. The other thing you need to do is if you have a family is make sure that they want these assets. I know so many real estate investors that work their whole life, putting these great portfolios together and none of their kids even want this stuff, they just ended up selling it. So make sure that your heirs actually want to be in that business. If they don't, they're going to, you're going to end up in some cases with a bunch of siblings that are going to be arguing over, I want this, I want that. I want to sell it. No, I want to get the income. Find out, you know, from your family, you have to have family meetings, find out what they, you know, what they want and it might be in your best interest when you get to a certain age to, think about cashing out. Now you could do one way to cash out and keep from having to pay, you know, higher capital gains. Now, if you own the properties for awhile, you have a, again, I'm not a tax person, so I'm not giving any tax advice, okay? But you can always sell assets and do it with owner financing and then the payment streams will then to your heirs versus, you know, one big lump sum so those are some things to think about. My advice is to get an estate attorney and go over your different options with them.
Jonathan Davis (32:55):
Isn't, Merry Heart, isn't she a state attorney?
Bill Fairman (32:59):
Yes. I don't know how much she's practicing on the law side.
Jonathan Davis (33:06):
Gotcha.
Bill Fairman (33:06):
Trusts. I know she also does 10 31 exchanges.
Jonathan Davis (33:10):
Didn't she have an office in Asheville has that right?
Bill Fairman (33:14):
She used to.
Jonathan Davis (33:15):
Oh, she doesn't anymore.
Bill Fairman (33:15):
But it's probably Kentucky.
Jonathan Davis (33:18):
That's right. Yeah. She purchased that farm there.
Bill Fairman (33:21):
But if I'm not mistaken, I'm fairly certain she still does for selected clients, estate planning as well. I have a question here from Quintin, when is hard money company, let me see.
Jonathan Davis (33:42):
I think it's what if the hard money company owned at the sale of property, the lender on for rehab? I'm not sure I understand the question. Quinn, could you send that to us again? We'll wait on that.
Bill Fairman (34:01):
Right. But yeah, trusts are a great vehicle. Planning with your family, having family meetings and understanding what your family's goals are, is another thing that you should have. I know we talk about this, all that. Well, I talk about it all the time, but you know, the Rockefeller's, the way they kept their money is by having, putting together, what's called a family office and one interesting thing that they did was they got a life insurance policy on every single child that was born in the family. Cause typically what happens is as the third generation from, let's say you have, the first generation makes the wealth, the second generation manages the wealth, the third generation spends all the wealth and that happens a lot. So what a lot of wealthy families have done and I pick out the Rockefellers cause they really kind of started this, they would take out a life insurance policy on every single member of the family that was born at their birth and the beneficiary would be the family office so when you did have a case where you had a narrative well family member that was just spending all the money, when they did pass away, at least they were contributing new money, right? So even though they were sucking out a lot of the wealth, when they did pass away, they help reinfuse the wealth and by the way, with the certain life insurance policies, you can borrow against them and instead of paying the bank, you're borrowing against those life insurance policies and you're paying yourself interest so that that's a great way to keep your wealth as well. By the way, Chris Miles, a good friend of ours, teaches folks how to do that and that's somebody that I highly recommend if you're in that, if you're interested in that. There you go. Money Ripples. Thank you, Scott. Okay. What is, okay. What is owed to the hard money company at the sale of a property they give rehab money for?
Jonathan Davis (36:47):
Yeah. They gave the rehab money for it. So it depends if you got money, the hard money lender give you money for the purchase and the rehab or just the rehab, but your loan amount is what's owed. So if, you know, if you got 50,000 towards your purchase and a hundred thousand towards the rehab, 150 is owed, plus any outstanding interest or fees that may apply. If you just got the rehab and you already own the property and it's a hundred thousand dollars rehab, you just own, you just owe the a hundred thousand plus whatever interest or fees are outstanding at that time. That just rehab. Yeah. So you just pay back the rehab. That's all you pay back. Every lender is a little bit different. Some allow you to accrue the interest and pay it when the property's done some require that you pay monthly interest along the way so if you took a hundred thousand dollars and you're paying 12% interest and you didn't make any payments through the whole year, you owe $112,000 at the end of it. If you've made monthly payments along the way, you just owe the a hundred thousand and then we have another question from Yu Min. Mean? Min? Sorry, if I butchered that. When an LLC is borrowing money from a hard money lender and the lender asks for personal guarantee, should LLC partners giving, should they give personal guarantees? If so, is the personal guarantee equally spread along all, you know, everyone. So you have to, every state's a little bit different, but let's say that, you know, there's three partners in an LLC and they all equally own 33.3, 3% that they all signed personal guarantees. A personal guarantee, depending on what state you are, and you'll have to, you know, talk to an attorney but depending on what state you are, that personal guarantee is transferrable to the wife. So yes, I would say, or to the spouse. So it is transferrable.
Bill Fairman (38:58):
And typically if you're, and again, it depends on each state, but usually if you have less than 20% ownership in an LLC, you're not having to do that. It's the other members that have the larger amounts that are signing.
Jonathan Davis (39:22):
Okay, she said,
Bill Fairman (39:22):
North Carolina.
Jonathan Davis (39:22):
Well, North Carolina is interesting. I was talking with a customer of ours and they were getting a loan through conventional mortgage program. And this is the first that I've seen in North Carolina, they were just required to sign a personal guarantee, but then they also had to have their spouse consent to the personal guarantee. so that would make me think in North Carolina, it's probably harder to transfer, you know, to transfer that personal guarantee from one spouse to the other And that's probably why they made him sign that spousal consent.
Bill Fairman (40:02):
Yeah. South Carolina is one of those States too, where if, you know, if the husband bought a house and the wife isn't on it, she doesn't get it If there was a divorce or a death, you have to include them. So I forget what they call that but they don't split the assets just because you're married, in the state of South Carolina and that Quentin had a follow-up and you also said, so you guys make money on the monthly payments. Yes. But that's not all, we also make money on the loan fees and origination fees, okay? So, and this is one of the things I want people to understand with interest only loans on short term, hard money loans and I'm going to give you a quick example. It is in your best interest to finish the project as quickly as possible and here's why .let's say you had a 12% interest rate and it's interest only that 12% interest rate is annualized so to come up with the payment, you're taking 12% and you're dividing it by 12 months so you have 12 monthly payments. If you only make six payments and then you pay it off, you've only paid 6% interest.
Jonathan Davis (41:29):
And your last, yeah.
Bill Fairman (41:30):
Right. So, lenders have to charge an origination fee in order to, yes, we make money on the monthly payments, but that's not really where you make your money. You make it on the, on the upfront
Jonathan Davis (41:48):
And, you know, for full clarity and transparency, we don't make any money on the interest all the investors in our fund make the money on the interest. The only money that we make is off of the origination.
Bill Fairman (42:02):
Yeah. And the occasional times where I'm on the corner saying we'll write loans for you
Jonathan Davis (42:13):
Those are great questions and, you know, personal guarantees to go back to use as a question. I mean, that's pretty common. I mean, most people will require a personal guarantee, but like Bill said, if you own less than 20%, most lenders, aren't worried about getting a personal guarantee from, you know, from that person and then, you know, following the spouse, if there is a spousal consent, then yeah, definitely it's going to follow. If there's not a spousal consent, I would talk with an attorney for that state and get that question clarified.
Bill Fairman (42:49):
And the term I was thinking of is community property, state, South Carolina is not a community property state. Alabama is not a community property state. North Carolina is, I know California is, you'll have to, you could probably Google that fairly easy. Community Property States and that'll tell you if the spouse is going to have that transferred to them. If it's a non community property state, chances are no. Excuse me.
Jonathan Davis (43:24):
Excuse you, Bill.
Bill Fairman (43:26):
I forgot to hit mute again.
Jonathan Davis (43:28):
Well, let's jump over to, we've touched on it several times.
Bill Fairman (43:32):
You mentioned number two, should everyone have a contingency plan? The short answer is hell yes! You never need it until you need it, right? And, you know, in our business, for example, the management company are our origination company. We have life insurance policies. That number one, if I passed away the life insurance policy pays my wife so she doesn't come in and want to run this business, which she has no idea how to do. Don't get me wrong, she's not, you know, a dumb individual. It's just, you know, she hasn't been involved in the business and I don't want, as much as I love Gene, I don't want Gene coming in and saying, all right, we're going to do it this way now. Wendy pass away and now I'm the owner or part owner. So we have life insurance policies in places where, you know, they get paid to not be a part of the business. At the same time the fund also has, as the management company, we have a life insurance policy that if one of us passed away that the fund has a million dollars to pay another fund manager until they can find one that they want to, they want to take our place. So yes, you have to have contingencies in place because you never know you could walk straight out in front of a bus, right?
Jonathan Davis (45:20):
And yeah, and it's just good to, you know, stress test and run those scenarios. I mean, no one wants to think about the worst case scenarios, but I mean, when you look at legal documents, everything, I mean, they're written for the worst case scenario, you know, God forbid that that happens but we have to know and have a plan in case those do happen. So, you know, it's just part of it. It's part of being a business owner. It's part of, you know, running a business and being responsible for yourself, your family and other people. So you've got to constantly run that.
Bill Fairman (45:56):
I was going to say a great example is our fund documents. If you look at those fund documents, there is contingencies for every scenario. If for whatever reason, we had to shut the fund down. There's a waterfall situations in place where, who gets paid first and how it works down until it's completely liquidate. You have to have all that out in front and in case of the worst. Now, as far as contingency plans, and you were talking about stress testing, that's something that you should do in your business all the time. You should look at your numbers. Where are your revenue sources are coming from and then say, all right, so what if tomorrow I lose 35 or 40% of my revenue can we survive? And if you can't, then you need to do some cost cutting and a combination of cost cutting and putting more money aside, you know, as a hedge, to help you overcome that until you can get that business back. The other thing you need to think about too, is maybe creating multiple sources of revenue as well. You know, let's face it. Things change all the time and I mean, who knew that COVID was gonna happen? There's a lot of businesses out there that were totally affected that only had one way of making money and they're not a lot of margin in business any longer, but if you could easily change to another revenue source, then you were okay. If it's hard for you to turn a big ship around and not so much, right?
Jonathan Davis (47:53):
Yeah. Jump, can you bring up the most recent question? So I think I'm understanding this, if the general partner owns less than 10% and the remaining is owned by the limited partner, should the general partners still be giving personal guarantees? That sounds like a syndicated model to me, that's what it sounds like and I guess it depends on who is putting this together. Is the general partner putting this together, or is it the limited partner who's putting this together? I mean, the person who's putting it together and raising the debt is the person probably who's going to be needing to sign the personal guarantee. If you are in there and you're just kind of an equity investor then, you know, know. I mean, I don't know. I mean, unless you're a very big equity investor, I don't think that you'd want to sign a personal guarantee.
Bill Fairman (48:52):
Yeah. I don't know. And too many cases where the main financing is requiring the investors to sign personal guarantees. It's typically going to be the general partner, the sponsor, the operator is the one that's signing personal guarantees, right?
Jonathan Davis (49:16):
Yeah, yeah, you're right. It looks like Keith is saying some wholesalers asked for up to a $5,000 non-refundable deposit to go into contract if my ARV differs from what you guys pull, would you still lend on the deal if I bring more money to the table so I wouldn't lose that deposit. In short, yes. I would say, you know, just from my experience and Bill can chime in on his, I mean, I'm not a fan of putting 5k deposits down. I mean, you know, 500 a thousand, you know, whatever. I mean, cause they're a wholesaler. I mean, basically they're just trying to recoup funds because they don't have the ability to close the loans themselves typically. So, you know, they're just trying to lock in some free money, you know, not always the case, but, you know, experience teaches. So, you know, I would say be, you know, I don't put $5,000 deposits down, I don't, non-refundable? No. Would I put a 500 or a thousand? Yeah. Yeah. I mean, that's the cost of doing business, you know, if I think that there's a profit to be made and I ended up being wrong and I lose 500 to $1,00,000, okay. That's the cost of doing business. 5,000? that's a little steep.
Bill Fairman (50:28):
And what if the appraisal comes back where you have to put down so much money and you have no margin left So that's not going to help you. And yes, and by the way, that would be a requirement. If the property comes back at a lower ARV, we're going to require you to bring more money to the table, but you also have to weigh it whether it's worth making that deal at all,
Jonathan Davis (50:54):
If you have to bring 50 grand down and you stand to make 15,000 at the end of the day, if everything goes right, that's not a deal.
Bill Fairman (51:01):
Yeah. Cause we all know in real estate stuff never goes away as opposed to
Jonathan Davis (51:08):
No. Never. Never does
Bill Fairman (51:11):
No, for the most part, it goes fairly well, but there's always going to be something that comes up that you didn't expect that you don't have a crystal ball. You don't have x-ray vision.
Jonathan Davis (51:21):
You don't know what's behind the walls. I mean, I was talking with a commercial, a borrower of ours and they're talking about a property that they thought was a good buy until they found out that the aluminum wiring and it had to be remediated, which costs $340,000 to remediate all the aluminum wiring like that, you know, that can kill a deal.
Bill Fairman (51:44):
Yeah. So, thanks for saying remediate, making us sound like we're smart. Most people would say remove, you know, remove. That was that was the killer of the 1976 or newer mobile homes or later mobile homes. They put aluminum wiring in them and they're a fire hazard.
Jonathan Davis (52:12):
They are a big fire hazard. Yeah. Yeah.
Bill Fairman (52:16):
We're going to have to shut this down, we're getting close to the, to the end of the broadcast. Thanks so much. You guys have been great, wonderful questions today. I hope you got a little bit of a knowledge thrown at ya, be helpful. Again, our website, we are lenders. Our website is CarolinaHardMoney.com. If you're a borrower looking to borrow money, we lend in the Southeast for the most part, click on the apply now tab. If you're an investor looking for passive returns, click on the investor tab. Don't forget the like share, subscribe and ring the bell because the bell is on YouTube. Thank you so much, Scott for putting that out.
Jonathan Davis (53:04):
We know that now.
Bill Fairman (53:04):
The bell will let you know when our show's getting ready to start. Thank you so much for joining us for Passive Income, Active Wealth and we'll see you guys later. Thanks.
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