154 Money Problems? Do This. Don’t Do That!| Hard Money for Real Estate Investors
Welcome to Carolina Capital Management’s new show the “ Real Estate Investor Show – Hard Money for Real Estate Investors!”.
In today’s episode, Bill Fairman and Wendy Sweet answer the Ugly Question:
“ With the cost of everything going up, what happens if I don’t have enough left to finish the project?”
0:01 – Introduction
1:44 – Wednesday with Wendy: https://calendly.com/wendysweet/wednesdays-with-wendy
4:18 – Breaking News
4:56 – May Mortgage Application Numbers
8:20 – Employment Numbers
14:02 – Ugly Question: “ With the cost of everything going up, what happens if I don’t have enough left to finish the project?”
Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).
As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
Listen to our Podcast: https://thealternativeinvestor.libsyn.com/
Visit our website: https://carolinahardmoney.com/
YouTube Channel: https://www.youtube.com/channel/UCYzCFOvEt2n9TchgECLwpww
Have you ever wondered, since it looks like the prices of everything is going up, what happens if I started a project and now I have run out of money to complete it?
Well, I’m going to start off with a little bit of breaking news if you don’t mind.
So we had some economic news that is pretty important to our business yesterday. They came out with the May mortgage application numbers, and a year to year we’re down 26% total in mortgage loan application.
Down 26% from this time last year?
Yeah, year over year.
20% of that is a refinance and then the other 2% purchase money. So it’s obvious that rates have been fairly low for a long time. They take back up a little bit, but let’s face it. If you are refinancing now, it’s more than likely because you couldn’t qualify for a refinance previously. And there’s not a lot of purchase money loans going on. Although people want to, there’s just not a lot of inventory right now.
The other thing too, Bill, is there are a good number of people, who probably could have refinanced, but because they have been laid off or have completely lost their jobs or have been out of work for even a short period of time, they’re having a difficult time qualifying for any kind of a refinance or even purchase at that point.
Well, that’s part of those numbers, as well. It could be, too, on the purchase money stuff that people are waiting to have a house built, as well. Cause it’s taken a long time to get.
Well, I know that’s continually happening. I’ve recently just got two new bookings for people who are building a home here in the area. They’re each building a home here in the area and they have booked our short-term rentals for, one for three months, and one for two months. So they’re going on.
What’d you mean by “here in the area?”
Rock Hill, South Carolina. One’s building in Fort Mill, the other one’s building in York, South Carolina.
Nice. So there’s a key to your short-term rental. It doesn’t always have to be a vacation.
Short-term rental. Now they’re doing it for three months. What’s the little trick that you’re doing to stay under that or to keep it a short-term rental lease?
Well, there’s a couple of things. First we offer a discount if they stay for 30 days or longer. The city of Rock Hill charges an extra tax if it’s 28 days or under. So it helps me save money by not having to pay that tax if it’s an over 30-day stay or over a 28-day stay. In addition to that, we check them in and check them out at the end of every 28-day period to maintain them as a month to month short-term rental, rather than a re-lease that I would have to worry about eviction court and that kind of thing.
That’s what I was getting at. Thank you for bringing that up. So unemployment numbers came out again today. They are in another pandemic low, which is good for initial jobless claims, there in the 300,000s instead of way up where they were.
Continuing jobless claims are also declining, as well. And we have 25 states right now where the governors aren’t giving that additional federal $300 a week unemployment benefit.
Smartest thing they ever made.
Yep. Because we currently have over 9 million job openings that are not being filled.
There’s several reasons why, one of them is, obviously, if you’re getting paid more to stay home than your work, there’s a reason for that. That’s not going to last forever, but we have a lot of small businesses that really can’t get enough people to work. You’re going to find that we’re all clamoring to get out and go to restaurants and go do stuff.
And service is going to be kind of lacking because they don’t have enough people. You’re standing in line at a restaurant and there’s tables available and you’re wondering why. Well, they don’t have enough servers. Hopefully we’ll get back to closer to full employment. That said, there were a lot of people at an age where they could go ahead and retire. Those people aren’t coming back to the workforce. And we were only at 61% of the workforce that’s actually being employed right now. So that’s not a lot of frogs.
I understand, too, that a lot of people now are starting their own businesses, turning into self-employed people, consulting all kinds of things that they’re going to make money on the side. And I think we’re going to see a lot more small businesses start because they were kind of forced into the situation and I’m sure they’re taking advantage of the fact that they’re on unemployment. So they were able to get paid a little bit while they were starting it up, kind of a perfect situation for them.
Well, I mean, I was one of those. I just turned 50 when I lost my mortgage job, 2008. And so I was overqualified for all the mortgage jobs that were available at the time. So I couldn’t get hired. So I was essentially unemployable. So the only way you could be employed is really to be a subcontractor or start your own business. Or in my case, you could get into a business where they don’t care how old you are, or you just wanted butts in the seats. So driving a tractor trailer, there was a serious shortage. If you know how to fly a commercial airliner, they have fewer of those, but thanks to COVID, they don’t need as many, but they will in the future.
The numbers that are going to really move into our question for the day is the CPI, consumer price index. The numbers came out today and they were a lot higher than expected, 5% year over year inflation numbers. So prices were up 5% and that’s a lot of extra money you’re paying.
And why did you say that was year over year?
Last year, everything’s up 5%. Now that includes food and energy, which they take out of the core numbers. So if you’re on Social Security and the federal government decides they’re going to raise your Social Security benefits by the inflation number, they’re not going to use that core number. They’re not going to use the 5%. They’re going to use the core, which is they’re taking out food and energy, which you still have. And guess what, if you’re on Social Security, you still have electricity.
So that said, they’re only gonna give you 3% because, without food and energy involved, it was up 3%. That’s still pretty high. So that leads me to our question. And we all have been hearing about lumber prices and not being able to get appliances for months. I was in Lowe’s the other day, complaining about the price of a lattice to go around my deck. And I was told by one of the employees, “Heck, we don’t even have concrete.” You’re getting shortages and everything. And when you have shortages and you have a lot of dollars trying to buy them, then prices are gonna go up.
So the ugly question is, what happens if I’m in the middle of a project and then all of a sudden I run out of funds? What should I do?
That’s it. What’s the cost of everything going up, what happens if I don’t have enough money left to finish the project?
That can be a problem if you’re in the middle of the project and as you’re going, it depends on the size of the project, too. So a lot of lenders won’t do ground-up construction or they won’t do heavy rehab because of that possibility.
That market’s changed during that longer time period. And they’re more complicated. There’s more things that can go wrong with that project than before.
Well, there’s a couple of things that you can do. There’s a couple of things that you can do on this. A couple of different ways to look at it. Number one, when we’re underwriting, whether it’s a new construction or any kind of rehab, we always really care about how much money that borrower has in the bank. And we asked that question, not only for our benefit, but it’s for the borrower’s benefit because things will go wrong. You’re going to run into a wall that may have termites or water damage, or there may be structural issues that you didn’t know about going into the house, or there could be increases in prices of wood, sheet rock, cabinets, paint. I’m hearing that people can’t even get paint sticks to stir the paint. And that paint is really hard to get.
So there are things like that that happen. So that’s why we always care. And you, as a borrower, should also care about how much money you have in the bank when you’re going to do a hard money loan. This is another great reason why it’s really important to leverage your deal, to make sure that you’re borrowing enough money to do the deal and not using all of your own cash to do it because it’s times like this, when having your own cash makes or breaks the deal for you. The other thing that you can do – depending on what appreciation is like, where you’re located, how long the loan is – the other thing you can do is you may want to consider a modification of the loan. And what that means is when you are trying to get more money for your project, if the appreciation is what it has been lately, you may be able to get a new appraisal on it, see what it’s worth now. And if there’s enough money in there to lend you more money, we, or whoever you may have your loan with, would certainly consider modifying that loan and adding more money to your rehab costs. But you’re going to have to pay the cost of getting a new appraisal or an updated appraisal, which will be a little bit cheaper than, of course, getting a whole new appraisal. But that’s a great option for you. Two good options for you as a borrower when you’re running out of money.
And you can do your own homework. You can pull some closed comps to see that homes are in a great market because it is on the upswing. And you can see both comps to see the homes are going up in value because they’re all going to go up in price because everything costs more, even though you’re running short on funds. The values are going up right now. That would be a problem if values were on the decline. That’s part of the risk you take when you are the fixing-and-flipping person, you get the benefit of the upside, but you also have the downside and you have to calculate. A lot of lenders, or as inflation starts to go up, they are going to start considering, “Well, I’m going to require you to have more in reserves to do these bigger projects than I normally would on a quick in-and-out.”
And I’ll bet you, too, that if you’re doing a new construction project and you’re six months into the project, you know that the value of that house, the after-repair value of that house, or after-completed value of that house is much stronger than it was six months ago. Things are changing that much.
Yeah, and another way of doing it without having to spend a bunch of money with your lender is that if you have some investor friends, partners, so to speak, you can bring somebody in with a little bit of extra money to help you finish it up with their money back plus a little bit of the upside.
Yeah. That’s a great idea. Somebody has a self-directed IRA. Absolutely.
And then you don’t have to worry about going back to the lender for more money.
Not all, but some of your lenders out there, where instead of modifying your current loan, might actually do a small second behind their already existing first.
That’s a great option.
Again, once you can prove the value with closed sales, that lender might be willing to do a small second to make up the difference. And that way, you’re not having to modify it because when you modify, you’re changing the whole loan and everything starts all over again, so to speak.
And depending on the lender. If this is an institutional lender that’s taken that loan and they’re securitizing it and then selling it on Wall Street. It’s a real pain in the butt to modify an existing one. Take it out of the pool and replace it with another one. They don’t want to do it, but they might turn around and do a small second behind it. Again, probably your easiest route is financial friends that might get in the project with you.
Now as a lender, if you happen to be in first position, and somebody comes back to you for more money, being a second behind your own first is a really safe place for you to be.
Sure, assuming the value is there, obviously.
Correct, but depending on the loan-to-value combined on the value.
And as a lender though, you have to justify the higher loan-to-value with the updated appraisal.