79 Hard Money Loan Fees Explained
HardMoney #RealEstatenvesting #AccreditedInvestors
Hard Money Loan Fees Explained
Ask an Ugly Question Session
1 – Why are hard money loan fees more expensive than bank loan fees? Do I have to pay a separate servicing fee as well?
2 – How quickly will I receive my first interest payment & how often do payments occur?
What questions do fund lenders avoid? Those are the ones we tackle each week.
Wendy Sweet and Bill Fairman have been successfully lending money primarily in the Southeast to investors, rehabber’s and builders. They also manage a real estate fund for accredited investors, in addition to, brokering loans for those with money to invest.
Wendy Sweet (00:04):
You’re going to talk to them? When it says you are live across our screen, that’s when.
Bill Fairman (00:10):
Here’s the problem, I’m old and I can’t see very well. So I can’t see that little thing up there that says you are now live. So, welcome!
Wendy Sweet (00:18):
It’s like this big!
Jonathan Davis (00:18):
Bill Fairman (00:18):
So welcome everyone. That’s also the dark side of our monitor.
Wendy Sweet (00:24):
Stop throwing excuses there, bud.
Bill Fairman (00:27):
Right? Well then you start us off moving on.
Wendy Sweet (00:29):
Hey, this is Wendy Sweet and we’re here with Bill Fairman and Jonathan Davis and we are so glad that you are here with us today because this is the Ask An Ugly Question Session.
Bill Fairman (00:42):
I was going to call it another episode of First World Problems
Wendy Sweet (00:49):
And there are a lot of problems out there, aren’t there? And we’re here to try to solve all of them.
Jonathan Davis (00:54):
Wendy Sweet (00:54):
Or at least point you in the right direction, right?
Bill Fairman (00:57):
Wendy Sweet (00:59):
Bill Fairman (00:59):
So don’t forget to like, share and subscribe. Our website is CarolinaHardMoney.com. If you are a borrower and interested in borrowing money, click on the borrower tab, that’s pretty easy, right?
Wendy Sweet (01:12):
Bill Fairman (01:12):
If you’re an investor and you’re looking to get some passive income or passive, what else would be?
Wendy Sweet (01:22):
Bill Fairman (01:23):
Wealth Building, thank you. I need another outcome.
Jonathan Davis (01:26):
There you go, yeah.
Wendy Sweet (01:27):
Bill Fairman (01:27):
You can just click on the investor tab and if you have any questions for us, there’s a little chat box
Wendy Sweet (01:32):
Keep it to yourself.
Bill Fairman (01:36):
Put them in the chat box, we’d love to answer them.
Bill Fairman (01:36):
Yeah, absolutely. So,
Wendy Sweet (01:37):
For the most part.
Bill Fairman (01:38):
What ugly question do we have?
Wendy Sweet (01:40):
So here’s, what’s really cool. If you haven’t seen this, we just started this the week before last, or was this last week?
Bill Fairman (01:46):
No, it was two weeks ago, yeah.
Wendy Sweet (01:46):
Yeah, the week before. So we have been asking everybody for ugly questions. You know, everybody has their website built up to where they pump their chest and they’re talking about how great their company is and which is what we should do is promote ourselves, right. But one of the things that I think all websites lack is true, unbiased information on your product or your business or whatever it is that you [Inaudible]
Bill Fairman (02:16):
[Inaudible] Stuff that people have questions that you’re not going to get from a salesperson and then at the same time, most companies, aren’t going to tell you that the correct answers.
Wendy Sweet (02:27):
That’s exactly right!
Jonathan Davis (02:27):
You ask about a question it’s like, don’t look here, look ever here, you know.
Wendy Sweet (02:27):
Watch this other hand, that’s right!
Bill Fairman (02:37):
Because as we all know, this is real estate and with any business, not just real estate stuff, doesn’t always go like it’s supposed to, right? So what that does for us in answering these questions is figuring out where our weak points are on the servicing customers, try and help make those strings.
Wendy Sweet (03:00):
Yeah. That’s exactly, good twist on that Bill!
Bill Fairman (03:04):
I’m still the consummate salesperson.
Wendy Sweet (03:09):
No, but it’s absolutely true. You know, there’s that real, estate’s a moving target. It is always changing and, you know, answers that you get one day may not hold true tomorrow because of the way things change.
Bill Fairman (03:25):
It’s always evolving.
Wendy Sweet (03:25):
That’s one of the reasons I love it.
Bill Fairman (03:27):
But you know what? It always comes back around too, right? It’s so cyclical.
Bill Fairman (03:28):
Wendy Sweet (03:31):
Cyclical, so that’s a big word. We have to give him a point or two for that one.
Bill Fairman (03:37):
It’s a point and a half for me.
Wendy Sweet (03:37):
That was really good. So what we’re trying to do when we answer these questions is we want to do a question that really kind of pertains to just the borrower side and a question that really pertains to a lender side because we serve two clients, we serve borrowers and we serve lenders and we want to serve both of them well and making sure that they get the answers and the response and the service that they need. So our first question is “Why–” it’s kind of a two part, “Why are hard money loan fees more expensive than bank loan fees?” And the second question is “Do I have to pay a separate servicing fee as well?” So let’s hit that first question. The first part of the question, “Why are hard money loan fees, more expensive than bank one fees?”
Bill Fairman (04:32):
Because we can’t.
Wendy Sweet (04:34):
Okay, that’s not a good answer.
Bill Fairman (04:37):
Well, the individual fees may be higher, but unlike banks, we’re not nickel and diming you in a bunch of other different fees.
Wendy Sweet (04:46):
Well, we’re lending a more money and we’re lending money based on what’s predicted as the future, right?
Jonathan Davis (04:50):
Bill Fairman (04:52):
Part of that was down to risk and loans that we do are more riskier than banks are willing to do. That’s why we’re here, we’re offering something that the banks don’t.
Jonathan Davis (05:05):
Yeah. It’s whether it’s risky or not. I mean it’s also, it’s a speed of service. There’s a lot of factors that that boil into that is, you know, can we close in less than 45 or 30 days that a typical bank loan takes? Can we lend based on a subject to, or future value? You know, so yeah. I mean, the answer is yes. To all of those things so that, you know, it costs more, but the cost of a lost opportunity will cost you more in the long run. So, you know, even though our fees are higher, it’s it’s to help you not lose an opportunity and for us to help you not lose an opportunity and move fast and do those things, there has to be a risk adjusted return for that. And, you know, usually it’s, you know, double digit yield on the rate. Yeah.
Wendy Sweet (06:01):
So we’re paying our lenders more than a bank is paying for the money that they have to lend to.
Jonathan Davis (06:10):
Wendy Sweet (06:10):
A whole lot more.
Bill Fairman (06:12):
Let’s face it, If you have a savings account, what are you getting?
Wendy Sweet (06:14):
What, do you make enough for saving? Point zero, zero, two?
Jonathan Davis (06:15):
I don’t know, I mean, I was gonna say you’re lucky if you’re getting a quarter of a point, if you’re eating in that.
Bill Fairman (06:22):
And granted they’re only charging, you know, three and a half, 4% on their rates and hey, they still have, again, this is about fees, not necessarily rate.
Jonathan Davis (06:31):
Wendy Sweet (06:31):
But it all goes back into the same pocket.
Bill Fairman (06:32):
It’s all part of the risk adjusted yield that we have to calculate based on us running our business, us making a profit. Guess what? We all want to make profit.
Jonathan Davis (06:49):
Bill Fairman (06:49):
And then our investors that we have making a profit.
Jonathan Davis (06:53):
Well and, you know, we talked about rates and this is more point or, you know, kind of the fees or points. When we sell a loan or you know, sell it to an investor, we sell the whole loan, the face value of the loan. So that face value right. Is going to the investor. We don’t make any money off of that rate. How we make our money is off the points. So that’s, you know, that’s one reason that we charge points is if we didn’t, we wouldn’t able to offer investors into loans, you know, a higher return and we would have to take some of that yield off of it
Wendy Sweet (07:32):
Right, that overhead will kill you.
Bill Fairman (07:34):
And without getting into detail on the fund,
Wendy Sweet (07:37):
We got time!
Bill Fairman (07:37):
Because it’s for investors, accredited investors only, and you have to go through a questionnaire before I can give you details but the fund structure is more sharing of points and interest between both the management company and the investors. So it’s a little bit different structure in the fund but it all works the same. You are paying for the convenience. The one thing that I want to point out is when, for example, if I’m out scraping paint off the side of our building,
Wendy Sweet (08:14):
I’d love to see that.
Bill Fairman (08:20):
It’s at the best use of my time.
Wendy Sweet (08:20):
Jonathan Davis (08:20):
I don’t know.
Wendy Sweet (08:20):
That’s a good question Bill!
Jonathan Davis (08:25):
I really got the think on that one.
Bill Fairman (08:32):
If I’m making copy, is that a better use of my time? Or can somebody do that and we pay them less than what my hourly rate would be? So you need to look at this the same way when you’re making these loans or getting these loans.
Bill Fairman (08:47):
Or making copies.
Bill Fairman (08:49):
They were paying because you can make more money doing other things and having to gather all this stuff, you’re going to have to gather to get a bank loan. And then plus the miss opportunity because it’s going to take a heck of a lot longer and then at the same time, when you start getting your draws, it takes a little bit longer for them than it does for us.
Jonathan Davis (09:09):
I mean when you get a bank, when you,
Bill Fairman (09:11):
Or someone like us [Inaudible].
Jonathan Davis (09:12):
You know, when you take a bank loan to close a property, you know you have 30 to 60 days that you’re gonna need to close. Typically you’re going to pay market value for whatever that asset is because it’s, you know, you’re, you’re going to take one to two months to close. If you can close in less time, you can potentially get that asset for a cheaper price. So that’s the other piece of it. It’s like now you have negotiating power. Yeah, You’re going to pay a little bit more for the product loan product, but you’re going to get a lower price on the asset. Right. That’s, you know, that’s another piece off of all of this.
Wendy Sweet (09:49):
That’s exactly right, good stuff!
Jonathan Davis (09:52):
So now the second part of the question, “Do I have to pay a separate servicing fee as well?”
Wendy Sweet (09:58):
That actually got question was posed from my borrower, but it was also posed from a lender.
Jonathan Davis (10:05):
From a lender, yeah. So on the borrower side we use third party sub servicers, which is just a licensed servicer for loans and they do not do their job for free. So we charge the borrower servicing fee to set up that loan and to service that loan for the life of the loan, if it’s six months, 12 months, whatever that life of the loan is that’s charged upfront to the borrower. So yes, you have to pay that otherwise it would be a cost or more overhead, as you said, on to us and we’re not about adding overhead as much as we can, and it’s a cost of doing business. Again you got a loan product that allows you to close quicker, potentially negotiate a lower price, all of these things. So yes, there is a cost of doing business. On the lender side, there is a servicing fee as well kind of how I explain that to everyone. If something happens to the loan, let’s say you buy the loan and the loan goes into foreclosure or whatever the case may be, there are additional fees that a servicer will charge a foreclosure filing fee, a document prep fee. Now you have to set up an escrow payment with the closing or the foreclosure attorney. So all of these fees come in. Now do you want to be hit up every two weeks, every two months for those fees as the lender? Cause those are the lenders cost to bear. I mean, no, you probably don’t so we charge a marginal fee for the servicing of the loan to transact all of the transactions that happen and to mitigate any future risks that may happen in the loan. And that’s how we, you know, that’s how we cover those costs when they do arrive and trust me, they do like loans go into foreclosure, things do happen. So that’s how we cover that cost.
Wendy Sweet (12:22):
Right, and the servicer charges us to cut checks for the lenders. And if there is, let’s say we have one loan that has four lenders in it. They’re charging us the same price for every single lender on that one loan.
Jonathan Davis (12:40):
Yeah. Let’s use a fictitious number. Let’s say it’s $20 to, to disperse the check to a lender, whether it’s one lender, it’s $20, or if it’s a hundred lender, it’s $20 per lender. So, you know, every lender would have to bear that cost and we do not transfer that cost to the lenders, we absorb that and for that absorption and everything else that we do, we charge a fee.
Wendy Sweet (13:02):
And we just do a small flat fee. So what is it? So if you’re getting, let’s use more fictitious numbers, if you’re getting 10.9, 9%, that’s a return to the, that lender of what did you say it was, 10.74? Is that what I heard? Was it you, that was talking to or Jonathan?
Bill Fairman (13:22):
Wendy Sweet (13:22):
I should have known he’s making copies.
Bill Fairman (13:26):
Wendy Sweet (13:26):
And scraping paint off.
Jonathan Davis (13:30):
Yeah, scrape the paint. So if you’re making ten out of nine on face value of the note and you’re paying 3% of your payment amount as a fee for the servicing. Your overall per annum return will be 10.74. And the question I would ask, you know, if I ask myself this question is, do I want to make ten, nine, nine, and have to deal with any issue that arise from this loan? Or do I want to make 10.74 and deal with no issues that will arise from this long? Yeah. I’m going to take 10.74 because I don’t want to deal with this loan. I want to make a passive income.
Wendy Sweet (14:06):
That’s exactly right. And you know, if you go back to the to the borrower side, paying, servicing phase, you know, we get people to say, well, you know, if I use a private money lender, you know, a guy that has a, you know, self directed IRA, they’re not going to charge me all these phase. And you’re right. They’re not going to charge you all those fees because they don’t have the overhead that they have to pay on it and you should have somebody in your bag of tricks that you go to, that will lend you money like that. That’s, you know, we encourage you to have several different people that you borrow money from but also understand that that one person lending you money will get tapped out. They’re not going to have, you know, they don’t have millions of dollars to land. If they do, I’d like their number.
Bill Fairman (14:53):
I like to say they don’t have infinitely deep pockets.
Wendy Sweet (14:56):
Yeah, that’s a good way to put it.
Jonathan Davis (14:57):
Yeah, I mean,
Wendy Sweet (14:59):
You figured that out while you we’re scraping paint?
Jonathan Davis (15:01):
If someone is lending you money as a, you know, and they’re, and they’re servicing their own loans. Yeah, they’re not going to charge that. But if they set their loans up with a sub servicer, which a lot of people are doing cause they don’t have, like, if you are investing with your IRA and you have, or your self directed IRA and you have $500,000 that you’re lending out of you probably aren’t doing it full time and it’s your IRA. So who’s servicing those loans. You want to set it up with the third party. Sub servicer, it’s going to cost your IRA to do that and you know, you can either absorb that in your IRA and it can compress your yield of whatever you’re getting on the note or you can pass those fees along to your borrower as a cost of doing doing the loan. So it’s, you know, again, if you’re doing it full time as a, you know, investor and you have a couple million dollars or whatever it is, and you’re just servicing it. Yeah, as a borrower, if you, if you borrow from them, you’re probably not going to pay those fees.
Bill Fairman (15:59):
Here another thing to think about if you’re a lender and you’re lending out of your IRA. Now we know that if you’re an investor in rental property in your IRA, you are not allowed to touch that house. You can’t change a light bulb, you can’t cut the grass, you have to hire a management company, you can’t do any of the work. So how much work if you’re lending out of your IRA on your own, are you actually doing, are you driving by and doing inspections? Are you ordering appraisals? Are you doing the draws?
Wendy Sweet (16:37):
That’s right. Cause you’re not even supposed to do the inspections. I didn’t think about that.
Bill Fairman (16:41):
All that is additional work, now I’m not an attorney.
Wendy Sweet (16:46):
He just plays one on TV.
Wendy Sweet (16:46):
That he did, yeah.
Bill Fairman (16:46):
We do know some really good IRAslash tax attorneys. And I don’t know that this has ever been brought up, but I do know that in the 2017 tax law that was passed by the Trump administration, one of the things they stuck in there that nobody talked about is that if you are in the business of lending and of your IRA and you spend more than a hundred hours a year in that IRA managing that lending business, they could recategorize your money and call it a business and charge you UBIT
Wendy Sweet (17:30):
Jonathan Davis (17:30):
I think It’s no longer passive if you’re spending more than a hundred hours a year, it’s not seeing this passive.
Bill Fairman (17:37):
Again, I don’t know how they’re going to look at that. You could always claim that I only did 98 hours a year, just saying that if they actually put that language in, they may start at these and if you turn it over to a managed portfolio, you don’t have to worry about anymore.
Wendy Sweet (17:55):
Yeah, that’s a good point. That’s very good point.
Bill Fairman (17:58):
Is it extra 20 basis points?
Wendy Sweet (18:04):
Yeah. But you know, I have a, excuse me, this reminds me of a conversation I had yesterday on my Wednesday with Wendy’s that I do. I helped mentor people who were interested in either getting into the business or they’re in it and they’re just trying to get better at what they do. And, you know we just know so many people, I love connecting them with other people outside our, our network that, that might be able to help them too. But I talked to one couple yesterday that filled out an application for us and I told them about our Wednesday with Wendy, they signed up and they ended up using a private money lender instead of us. So I was a little hurt that, you know, that they chose someone over us. That was, you know, he was charging them a half point less than we were on the points up front. So it wasn’t a big difference, but I know the lender, Tim Mancke is the guy, that’s the lender. He’s a great guy and I told them that he’s a great guy. I definitely want to work with him, I’ve known him for probably 20 years at this point and he will do a great job and, you know, he’s not charging for the inspections that he’s doing and/ or servicing or any of those extra fees. And I’m sure they’ll be really, really happy with them, but, you know, because of the other services we’re offering the Wednesday with Wendy and, and the guidance that I’ve been giving them on deals and the things that they’re doing, you know, they’ll come to back to us for the next one that we do. So just understand.
Bill Fairman (19:46):
Sounds like sour grapes to me.
Wendy Sweet (19:46):
It’s yeah, they’re not my friend no more. I know that’s what we encourage, is for you to be able to have several different options in your tool bag, to be able to borrow from different people on things like that.
Bill Fairman (20:07):
It’s something that we always and have always talked about is that we encourage you to find private lenders first but you always need to have a hard money lender in your back pocket.
Wendy Sweet (20:19):
Bill Fairman (20:20):
They don’t have infinitely deep pockets and they run out of money occasionally, and you need to have somebody you can quickly go to that will help you scale your business
Jonathan Davis (20:31):
And to all those private lenders who are making, you know 8, 9% on their loans and one or two points. No, that’s nice.
Wendy Sweet (20:40):
You could do better!
Jonathan Davis (20:40):
You could actually buy and make more money, so I’m just throwing it out there.
Wendy Sweet (20:43):
That’s right, Can we talk, we can talk about that, how we sell some notes from loans that we do. Cause that’s a,
Bill Fairman (20:54):
It’s not an accredited thing.
Wendy Sweet (20:57):
Yeah, It’s not an accredited thing so we can absolutely talk about that
Jonathan Davis (21:00):
To buy a note is fog a mirror.
Wendy Sweet (21:03):
Yeah, and have the money.
Jonathan Davis (21:06):
And have the money, yeah.
Wendy Sweet (21:06):
But we do all the work, we do all the work for you. We’ve done all the underwriting for the borrower,
Bill Fairman (21:15):
And our underwriting is set up to sell loans,
Wendy Sweet (21:18):
To the national buyer.
Jonathan Davis (21:20):
Correct! So our underwriting is pretty thorough.
Wendy Sweet (21:26):
We have appraisals on all of them, subject twos and as is we pull background checks, we pull credit checks, we look at their tax returns, their W2’s their bank statements, we’ve reviewed the repair list, the rehab list or the construction list, whatever it is to make sure that it coincides with reality that you’re not trying to do a bathroom.
Bill Fairman (21:51):
[Inaudible] I was gonna call it the BS test.
Jonathan Davis (21:56):
It was another rehab with the $20,000 contingency.
Wendy Sweet (22:01):
Yeah, we make sure that the rehab list is right on. So we’ve done all the work upfront and, and you have the option to buy that loan or a portion of it, you don’t even have to buy the whole thing. You can buy a portion of it from us for exactly what we’re in it for. You know, we’re not given a discount on it, but we’re not trying to make money off of it either. We do it because we’d like to have the capital back to do more loans, right?
Jonathan Davis (22:26):
Yeah. We have plenty of loans to look at, we, you know, we like to do those, those sales. I mean, it’s a very simple process. It’s a assignment of mortgage or deed of trust, depending on what state your security instrument is and it’s allonge of the note and it is about a simple as that.
Wendy Sweet (22:43):
And we service it for you, se continue to service it for you, service it for you.
Jonathan Davis (22:47):
We will service it for you, if you want to have servicing retained, you can, or I’m sorry, released. We can release the servicing to you if you buy the whole loan. So you, if you want to service it yourself, be our guest.
Wendy Sweet (22:58):
But I wouldn’t recommend it cause then you have to do all the draw requests.
Jonathan Davis (23:01):
All the draw requests, all the taxes, you know, like, you know, sending out the tax forms.
Speaker 2 (23:08):
Make sure the insurance is updated and all of that stuff,
Jonathan Davis (23:12):
Taxes are paid. Insurance is renewed. If it’s not, putting force place insurance on it to protect yourself as a lender. I mean, there’s a lot of things involved in it.
Wendy Sweet (23:22):
Yeah, that’s a great way to learn though. If you want to learn the hard way.
Bill Fairman (23:25):
We do have a new question.
Wendy Sweet (23:25):
Okay, what is it?
Bill Fairman (23:28):
So the question is “Is hard money best for fix and flip? Or do you guys offer anything for buy and hold investors?”
Wendy Sweet (23:38):
That is just, that’s scary.
Bill Fairman (23:40):
So, we do and we don’t. And we’re working on.
Wendy Sweet (23:42):
Bill Fairman (23:46):
Let’s get a little detailed hard money really is for a short term acquisition and,
Wendy Sweet (23:54):
And new construction.
Bill Fairman (23:56):
Well, yeah, but what I mean is it’s for short term.
Jonathan Davis (23:58):
The only reason you sold,
Bill Fairman (23:58):
It’s not for buy and hold investors, unless you’re buying it at a district for a distress reason, you’re going to fix it up and then you’re going to refinance it into something long.
Wendy Sweet (24:09):
Jonathan Davis (24:09):
And let’s jump into why do people associate hard money with long term buy and holds that’s because wall street money, hedge fund money saw a shiny object and said, ‘Oh, we can make some money and they pumped a lot of money into the hard money section of the economy and now we have these landlord loans or long term investor loans that, you know, are done by hard money lenders. But they’re not holding them, they’re selling them off to, to those aggregators, to those hedge funds. Right. So I mean, long term hard money didn’t exist until what couple years ago.
Wendy Sweet (24:50):
Yeah, and so the first part of the question is it’s hard money best for fix and flip? Absolutely yes! And your goal is to get in and get out as quickly as possible when people call us and they say, well, your term is only six months. Well, you know what? You don’t want to be in a loan longer than six months. You don’t want to be rehabbing a house longer than six months. You did the market’s changing too quickly, right?
Jonathan Davis (25:16):
Well, it’s, again, it’s like your term is only six months, your rehab, budget’s only $25,000. How long do you think it should take you to do $20,000 worth of work to a half.
Wendy Sweet (25:26):
That’s right and don’t do it yourself, please don’t do it yourself!
Jonathan Davis (25:27):
Please pay someone to do it.
Bill Fairman (25:31):
And you don’t want to do a fix and flip where the market time is more than 90 days. So that’s another thing I know that’s a concern. What if I have this thing finished and then I can’t sell it.
Jonathan Davis (25:42):
Don’t worry, we will extend you as long as it’s, you know, you know, everyone’s current on their payments and you know, it’s a good opportunity.
Wendy Sweet (25:49):
That’s exactly right.
Jonathan Davis (25:50):
We write that into our notes that, you know, we will extend you should the, you know, should that need occur and were agreeable to try it.
Wendy Sweet (25:59):
That’s right, and you go back to the first, very first question, which is why our hard money loan phase more expensive than bank fees? Well, when you are getting into a fix and flip, you need to add the numbers into the deal. Your deal should work with the cost of the loan included in it. You want to make sure you need to back your way into it when you’re figuring out, should I use hard money? Would it be better if I really found somebody that was a private money lender? Well, yeah, you should have one of those too. You should start off with what the after repaired value is subtract or multiply by 65%, which is the percentage that we like to be in, subtract out the rehab money and what you have left over is what you can pay for that house. The numbers are either going to work or they’re not going to work. There’s really no gray area of in, in there. So yeah, fix and flip is great for short term hard money. Now, the long term buy and hold stuff that was out there disappeared completely. And is starting to come back slowly. So what people are doing is they’re using a hard money loan to buy fix, and then they refinance it into a longer term hold product. And sometimes that can be set up like a commercial loan where it’s a 20 year am and every five years it’s renewable, or they’ll set it up on a 30 year am where it truly is a 30 year loan. And those are coming back. In fact, we’re working with a company now that should have one ready for us to use.
Jonathan Davis (27:42):
Bill Fairman (27:44):
You’re true. Here’s, here’s what your plan should be If you can qualify for a Fannie Freddie loan, you acquire the property, you fix it up and have it rent ready with a hard money loan and then you can turn around and refinance it with a conventional mortgage. If you do that, you’re able to use the new appraised value, not what you paid for it.
Wendy Sweet (28:10):
Depending on who the lender is, but yes, it’s a possibility.
Bill Fairman (28:12):
Almost all lenders, as long as you were paying off a mortgage and they consider it a rate and term refinance cash out and then they’ll allow you to use the new value. Now, what we should do is, and yet to the answer of your question, yes, we have stuff for buying hold, but it’s just the first heart part of it, right?
Wendy Sweet (28:37):
Bill Fairman (28:40):
Which is the bad part. Were gonna have to figure out the whole but we are working on that.
Wendy Sweet (28:40):
Yeah, we’re good, we’re good on that.
Bill Fairman (28:41):
Now what we should do,
Wendy Sweet (28:41):
Small community banks too is another great option to refinance it into.
Bill Fairman (28:47):
Back to the speed while we want you in and out quickly. Here’s what we should do. We should start marketing our loans that if you pay this loan off in three months instead of six, no, I’m sorry. If you pay it off in six months, we’re going to give you a discount of half your interest rate.
Wendy Sweet (29:11):
Cause you kind of get that.
Bill Fairman (29:13):
Let me explain why. If you have a 10% interest rate, it is interest only, and it’s annualized for 12 months, it’s annualized. So if you only pay six payments, what’s your interest that you’re paying?
Wendy Sweet (29:25):
It’s half of what you we’re for what you were [Inaudible].
Bill Fairman (29:26):
5% instead of the 10, because they only made six payments and it’s based on 12 payments. So you are already getting a half discount if you pay it off in six months. Now, if you do it in three, you’re only paying two and a half percent interest. Not bad, eh?
Wendy Sweet (29:41):
Bill Fairman (29:41):
But we’re not gonna charge you [Inaudible] I’m just kidding.
Wendy Sweet (29:46):
I like his math.
Bill Fairman (29:50):
I’m jut kidding.
Wendy Sweet (29:50):
That is a great way to get.
Bill Fairman (29:51):
It was a great question.
Wendy Sweet (29:52):
Yeah, really? I say we got, we got 20 minutes and we’ve got this other question. You want to read that one, Jonathan?
Jonathan Davis (29:58):
Yes, next question is, “How quickly will I receive my first interest payment and how often do payments occur?” So I guess this is only for the,
Wendy Sweet (30:06):
Jonathan Davis (30:06):
Lender’s side. How quickly will I receive my first interest payment?
Wendy Sweet (30:12):
Again? That depends.
Bill Fairman (30:15):
So brand after the closing.
Jonathan Davis (30:15):
Well, yeah, so.
Wendy Sweet (30:16):
Jonathan Davis (30:18):
Unless you closed on, probably the first of the month. You will get a, it depends on how we set that. Anyway, that’s probably misleading. Anyway, you will get an interim interest payment immediately at closing.
Wendy Sweet (30:33):
Collect into the closing.
Jonathan Davis (30:34):
So interest is paid in arrears, which just means if your payment is made on eight one, that eight one payment isn’t prepaying all of August. It is post paying all of July, which means July 1to July 31st is your eight one payment. So when we close, let’s say we close on July 15th, you were getting paid six, 17 days of interim interest to true you up until the end of July. Then you will not receive a payment again until nine one, because nine one will be paying for the interest between eight one and eight thirty. So you have at, at the close, you got your payments up to July 31st. You got prepaid that, and then you won’t get another payment for a month and a half. And that’ll be for the August payment. Now there are transactional times that that occur. So when the wire or the ACH or the check is sent to the servicer, they have to put that in their account has to clear their accounts.
Wendy Sweet (31:44):
So it’s due on the first and it’s late on the fifth.
Jonathan Davis (31:46):
Wendy Sweet (31:46):
A lot of people get the payment there right around the fifth.
Jonathan Davis (31:50):
Yeah, most people pay, I would say most people pay on the fourth or the fifth, like most don’t pay on the first.
New Speaker (31:57):
So that means?
Jonathan Davis (31:59):
That means that typical, you have to wait five business days roughly for those payments to clear. So now if they paid on the fifth, we’re already at the 10th. And then once that clears, it usually takes two days and I’ll probably get too deep into this, but we have to set up a notch, a file, which is just an ACH file with our bank. And that takes two days to,uset up and disperse. So now we’re at the 12th or 13th of the month before you’ll probably get your payment. That was for the first. And that’s just the timeframe. It’s nope, it’s the same for every sub servicer everywhere. You know, unless the bar were pays 10 days early from the due date, you’re not going to receive it on the due date.
Wendy Sweet (32:45):
Bill Fairman (32:45):
So best case scenario sometime between the 15th and the 25th is when your payments [Inaudible].
Wendy Sweet (32:51):
Yeah, because then, and then if it’s awry, if it arrives on the sixth of the month, the servicer only really pays out what twice a month, right?
Jonathan Davis (33:03):
Wendy Sweet (33:04):
They’re only paying out twice a month. So, on the sixth, you’re going to miss that timeframe of when you would originally get it between the 12th to the 15th.
Jonathan Davis (33:13):
If it doesn’t clear in time, yeah.
Wendy Sweet (33:15):
You’re gonna miss that deadline. So what that means is it’s, they’re not going to address it again. I think it’s the 20th when they hit it again.
Bill Fairman (33:24):
Might be, yeah. I don’t know that off hand, but I think it is the 20th.
Wendy Sweet (33:26):
So, that’s why sometimes you’re thinking, wait a minute, I, you know, I don’t understand why my payments are coming in. So like, well let’s because if they’re coming in right there at the deadline and then the service or waits another, and I believe it is the 20th day.
Jonathan Davis (33:45):
It is, I think so.
Wendy Sweet (33:45):
That they come back and readdress all the payments that came in from after the fifth up until that point.
Speaker 3 (33:53):
Yeah. I mean, we get, I get asked so many times, it’s like, Hey, where’s not payment. It’s the third day of the month. Where’s that I’m like, we haven’t even gotten the payment. Like, it’s, you know, there’s a grace period. So on your, on your personal mortgage, you have a 15 day grace period. You know, you have your payments due on the first, but you have until the 15th to pay it on our loans, their business purpose loans, they’re doing the first, but you have until the fifth to pay it so there’s a grace period. So, you know, we don’t get the payment on the first of the month.
Wendy Sweet (34:25):
Jonathan Davis (34:27):
I wish everyone paid us. I mean, I’m sure mortgage companies wishes that too about, you know, personal property, you know, it’s like, Oh, I wish everyone would pay on the first of the month but you know, it’s so, we don’t even get it. And it just takes time to turn it around. I mean I won’t go too far to say that our banking wiring system and everything is antiquated, but it is so it takes time.
Bill Fairman (34:50):
There’s an app for that, and there should be, yeah.
Wendy Sweet (34:53):
We have a question from Diane. Hey, Diane it’s so good.
Bill Fairman (34:56):
We didn’t answer the very end of this or how often do they occur? They are going to occur monthly,
Wendy Sweet (35:01):
Bill Fairman (35:01):
Payments are going to recur monthly until a loan pays off.
Jonathan Davis (35:07):
Yeah, the note dictates the occurrence of the payment so you can set it up monthly, weekly bi-monthly, quarterly, annually,
Wendy Sweet (35:15):
Some people set it up so it’s done when the loan pays off.
Jonathan Davis (35:17):
Yeah, there’s some people, I mean, and then there’s some loans that the borrower prepays all the interest up front and there are no loan payments cause they’re already paid up front. So now you’d have to wait for the maturity of the loan. I mean, it’s however you set it up.
Bill Fairman (35:31):
Wendy Sweet (35:31):
Absolutely. Now can I say hi to Diane? We love you. And that’s a great question. Why does the private money lender, we talked a little bit about that, but maybe we need to go in deeper. Why does the private money lender have to bear the cost of servicing rather than the borrower the borrower does as well
Jonathan Davis (35:51):
Yeah, there’s two sets of costs. There is the borrower side, which is the, preparing all the tax returns for the year end taxes, collecting the monthly payments, sending out the link, Quincy letters default letters, whatever that may be that’s on the borrower side. The borrower has to pay for all of that service. And then on the lender side, there is transactions so the wires coming in and out, so there, I mean the bank doesn’t let us do that for free.
Wendy Sweet (36:29):
Then when they’re paying us all those big books
Jonathan Davis (36:33):
I know, and every time a wire hits our account, or we send one and there’s a fee and then on the loss mitigation side. So if, you know, if a loan goes into foreclosure or bankruptcy or needs to be modified or forbearance or anything outside the normal scope of servicing that servicer that we use, that’s an additional fee. So that is a fee that has to be covered by the lender, us or whoever we sold the loan to. So instead of just hitting up the lender, every time something comes up and saying, ‘Hey, this week we need $25 for this document prep fee, or this week we need 50 bucks for this, or, you know, a hundred bucks for that. We just say, there’s this constant fee that’s based on the percentage of the payment amount and if any of those things come up,
Wendy Sweet (37:28):
Jonathan Davis (37:28):
It’s covered, you don’t have to worry about it. We’re not hitting you up for anything, that way that you can know that you’re getting a constant return on your money and it’s not, well, let me go into Excel because in the month of March, I had to pay $400 for legal fees on this. And then in April, I had to pay 50 bucks for this. And what’s my return? I don’t even know. You know, so you don’t have to worry about any of that. You just get a constant return through out the life of a loan.
Speaker 2 (37:55):
Right? Good question, Diane, thank you for asking that. And thank you for following us on this program today, right?
Bill Fairman (38:03):
Yeah. You must be born in Texas today. I’m just kidding. We’re very exciting. Aren’t we
Jonathan Davis (38:11):
Really, you are the most exciting person I’ve ever met.
Bill Fairman (38:16):
I’m so dynamic.
Wendy Sweet (38:16):
That’s exactly right. So we,
Bill Fairman (38:19):
Any last thoughts?
Wendy Sweet (38:19):
Bill Fairman (38:25):
While we’re at kind of a break, don’t forget to share, subscribe, like, and again, our website is CarolinaHardMoneycom. If you’re an investor looking for passive returns, get the investor tab. If you’re a borrower click on the borrower tab, okay.
Wendy Sweet (38:44):
I just really want to pump up the real estate opportunities that are in front of you right now. You’re hearing people say, ‘Oh, there’s a big correction that may still come another big influx of foreclosures may happen. And you know, what’s going to happen with job loss because everything is changing with the way jobs are right now, you know? We’ve had a loss of a lot of jobs out there, but there also have been a whole lot of jobs that have been created that are new and different from what they were so things have changed. They’re going to be there. They’re not going to go back to the way it was be happy about that because it’s exciting to see but understand that real estate is a solid investment, no matter what.
Bill Fairman (39:38):
And you know, Wendy and I were on the show yesterday evening in Australia.
Wendy Sweet (39:44):
Oh yeah I forget about that.
Bill Fairman (39:44):
While we were here, the show was in Australia, the audience,
Bill Fairman (39:49):
We wish we we’re in Australia.
Bill Fairman (39:49):
They were just waking up we were getting ready to leave for the day, but we were covering some of the issues that are facing the US right now. And really what we looked at is the retail renter. That is the one that was living paycheck to paycheck. They’re the ones really gonna suffer the most through this right now. Fortunately,
Wendy Sweet (40:19):
You mean retail, commercial retail?
Bill Fairman (40:22):
I’m talking about on the residential side.
Wendy Sweet (40:23):
Bill Fairman (40:25):
So those people are going to be the ones struggling the most to pay rent. The single family purchase side of things is hot and it’s going to stay hot for awhile because people are trying to move out of the cities. They want to, they want their own place, they want a bigger place, you know, you have too many kids.
Wendy Sweet (40:47):
They are working from home.
Bill Fairman (40:48):
And you have parents that are working out of the house. They need more room. That also means they can rent. It doesn’t mean that they they’re going to buy, but the single family homes are really going to be an opportunity. Like I said, the folks that are renting right now in apartments and they’re living paycheck to paycheck, they’re probably going to end up moving in with, you know, family members to overcome this. The commercial sectors retailcommercial office. Your class A luxury apartments
Wendy Sweet (41:22):
Bill Fairman (41:22):
Hospitality. Those are all gonna kind of suffer self storage, big warehouses.
Wendy Sweet (41:29):
Bill Fairman (41:29):
They are all going to be doing pretty well. So there definitely some opportunitiesthe single family people. You’re not going to see what happened in ’08. What we had happened in ’08 people’s values went down underwater in their homes. And they got a new job opportunity but they couldn’t sell their house to go to that place if they had to move. Well, that’s not going to be an issue now because we have people that are very equity rich in this country.
Wendy Sweet (42:02):
And they’re working from,
Bill Fairman (42:02):
I think it was like a 70, some odd percent of all the homeowner homes that are owned are,
Wendy Sweet (42:09):
Bill Fairman (42:11):
Yeah, they’re 50% or less loan value.
Jonathan Davis (42:12):
Yeah, I think it’s under 50.
Wendy Sweet (42:15):
That’s pretty strong.
Bill Fairman (42:15):
[Inaudible] But mortgage value. So they’re very equity rich right now. So that’s not going to be an issue. People will be able to sell those houses. So there’s going to be opportunity there amd there’s going to be an opportunity and note buying come the fall and early winter. Cause you’re not going to see, I don’t think you’re going to see a lot of foreclosures. I think you’re going to see the banks and the investors sell the notes.
Wendy Sweet (42:43):
Yeah, so nonperforming notes will be pretty good.
Jonathan Davis (42:46):
And that’s like, if we can hit on that for a second, that’s one of the most beneficial things that private investors, people with self IRAs, people with cash, whatever it may be funds buying distress notes and doing loss mitigation to help to restructure loans, to help people stay in their homes. That is phenomenal. And I hope we see a lot of that.
Bill Fairman (43:16):
Then there’s plenty of equity to work with too.
Jonathan Davis (43:18):
Bill Fairman (43:18):
So you’ll probably see more short sales than you will foreclosures and then you’ll have plenty of opportunity. If someone can’t afford their house anymore, they can certainly sell them. There’s plenty of eye buyer opportunities out there that’ll buy them faster. I mean, I hate that for the real estate community, but there’s tons of opportunity. And if you’re a wholesaler, that’s a great, great way to get in and get some houses.
Wendy Sweet (43:44):
It is. And the affordable market, you really need to look at staying in the affordable market where, you know, the after repaired value is absolutely are below 500, but preferably, you know, 300, 200?
Jonathan Davis (44:00):
Yeah, depends on where you are.
Bill Fairman (44:03):
That reminds me, cause we got to sign off here shortly. Some news out of the left coast. The number one Google announced this week that they’re going to have all of their employees across the board work out of their homes until 2021.
Jonathan Davis (44:24):
That’s so they can pay their antitrust fees.
Wendy Sweet (44:28):
That’s another show!
Bill Fairman (44:30):
Think about it. Those companies, all those high tech companies struggle with getting enough qualified talent. And so they typically try and bring them over from overseas. Well, there’s a lot of people in middle America that could work there. They don’t want to live out there and their expensive areas. Now this gives them an opportunity to start hiring people in the middle of the country for less than what they were going to have to pay somebody to move up there and do the extensive areas. And at the same time San Francisco city council was kind enough to put on their next ballot initiative that they were going to charge these company an extra tax if their CEO made over $2.8 million or if they were more than a hundred percent of what the median income is for the rest of the firm. So there’s another reason to get the hell out of it. So you’re going to have a lot of businesses that are going to be dispersing throughout the country, or they’re just going to close their San Francisco offices. Anyway, lots of opportunities.
Wendy Sweet (45:38):
And you can poop on the sidewalk and get away with it.
Bill Fairman (45:42):
That’s right. Thanks again for joining us. Hope some of these questions were helpful and actually I’m hoping that the answers were helpful. Questions don’t help much.
Wendy Sweet (45:50):
Jonathan Davis (45:54):
Oh, no. Asking the right question can help you a long way.
Wendy Sweet (45:58):
That’s exactly right, we ask them all the time.
Bill Fairman (46:01):
If you don’t receive an answer,
Wendy Sweet (46:03):
Because we can’t hear you, what’s that you say?
Bill Fairman (46:05):
Sometimes that’s tilling so if you don’t receive an answer from somebody else, that’s probably tilling.
Bill Fairman (46:10):
All right, we’ll see you next week. Thank you so much for joining us, talk to you soon!