81 Is my investment guaranteed by Carolina Capital?
Why do I have to pay interest on rehab money I have not yet used? Is my investment guaranteed by Carolina Capital?
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.
Bill Fairman (00:06):
Hi, everyone. I know I’m live but my little screen was showing the fixed picture earlier. Bill Fairman and I have Jonathan Davis on another screen. Wendy is
Jonathan Davis (00:20):
I don’t think I can hear anything.
Bill Fairman (00:20):
That’s okay, we’ll get you here in a minute. Carolina Capital Management, Wendy is out of town and so it’s just going to be Jonathan and I today. Make sure you like share and subscribe, our website is CarolinaHardMoney.com and if you have an interest in becoming a borrower, just click on the borrower tab. If you’re interested in passive returns, click on the investor tab. Also, we have a little chat bar to the, well, at least it’s to the right for me. I don’t know where it is on your screen but you can join into the conversation. This is our Ugly Question Segment but I did want to kind of follow up or add on to this. I’ve gotten some really good data here that I wanted to share with folks. Before I get started with that, I got to show you something that’s a little new to us. Our streaming platform here added the availability of extra screens. So Scott here in his brilliant ingenuity, he said, ‘Hey, hook up some other cameras in the form of iPhone. So, Scott, if you’ll do me a favor and switch to camera number one, please. So you are literally getting the behind the scenes look at studio one as it were. So you get to see what I’m looking at, if you can see I have a webcam right in front of my face and I’ve got this professional overnight envelope with notes taped to it. We’ve got the big screen that I can see my guests on and I talked to folks, lights because I’m old and I have bags under my eyes and this kind of helps eliminate some of that along with these glasses and then we have the camera too, over here. So that gives you a little closer look, whether you want it or not. So if you want to set up your own studio by the way, I suggest, as you can see right here in front of me, is our microphone and the microphone that I use is one that has a directional, I forget what the heck you call it but it’s only one direction. So you don’t get a 360 degree pick up from around the room and it eliminates a lot of the additional noise that you might pick up. Also do not let it sit on your desk or your table cause as soon as you touch that table or hit your mouse or whatever, you’re going to hear it through the microphone so get a microphone stand if you’re going to do that. Okay, some of the data, we did a panel discussion with five other fund managers yesterday and there were some interesting statistics I wanted to share with folks. And it’s basically how things are going right now in the single family arena and Jonathan, I know you can pipe in. Can you hear?
Jonathan Davis (03:49):
Yeah, I can hear you.
Bill Fairman (03:50):
Okay great, you can pipe in on this as well. The vast majority of the people, and this is in the note space and in the commercial space and then single family lenders and people that are buying their consensus is the same. Single family right now is booming that as long as you’re in that affordable market, wherever it is that your market is prices are going up and they continue to go up. You find that true as well?
Jonathan Davis (04:24):
Absolutely, yeah. We’re seeing that across and prices go up. It’s like you said in that affordable range which, you know, every place is a little different but in that affordable area, I’m seeing, you know, compression on the high stuff and then we’re seeing expansion on the affordable housing.
Bill Fairman (04:44):
Right. And that’s not to say that there is not going to be an issue in the housing market in 12 to 18 months, okay? But for right now, prices are about as high as they’re going to get for a while so my suggestion to you is if you have a single family property that maybe not be, this is not performing like you’d like it to or it’s a pain in the rear end, now might be a good time to cash out and then use that money in some other arena. Obviously you have tax consequences so you have to look at that as well but now maybe time to take some money off the table and move a property to prepare for when, I’m not saying prices will drop in 10 or 12 to 18 months but they’re certainly not going to go up like they were before because you’re going to have a lot of extra supply on the market when a foreclosure started happening and you’re going to have a lot of people that are going to be able to rent as well back into apartments because they’re going to start having deals on their apartment because as soon as they start lifting those moratoriums on evictions and foreclosures, there’s going to be an uptake. Don’t you agree?
Jonathan Davis (06:14):
Oh yeah, for sure. I mean, they’re going to have to get bodies in there and increase the occupancy and then from that point on they’ll have to start slowly raising the rents to get the NOI where they need it to go. But yeah, the step one is to get bodies on the door.
Bill Fairman (06:32):
And if you look at the some statistics on the four major banks in the, you know, just before COVID hit their loan loss reserves were, I don’t have the numbers right in front of me but they were pretty low and in June and July, their loan loss reserves have 10x, what they were prior to that.
Jonathan Davis (07:05):
Bill Fairman (07:05):
So the big banks are expecting some losses in the housing market and now they’re not going to sell a note, let’s say, or even look at charging a note off until it’s more than 90 days delinquent.
Jonathan Davis (07:22):
And that’s pretty soon too for a bank.
Bill Fairman (07:26):
But at the same time, if they have an issue with not being able to foreclose because there’s a moratorium on it, or you know, it depends on the state. The federal government only has a moratorium on the federally backed loans. Now I don’t know if that’s going to include Fannie and Freddie cause it’s supposed to be like quasi government agency but they basically own it. So that being said, as long as they have a moratorium, it’s just holding off the inevitable for some folks. Is there an opportunity to get in there and buy some notes that are going to be distressed and be able to work them out? Absolutely. Because one of the great things that we have now that we didn’t have in ’08 is that we have tons of equity in our house. The average loan being made currently is at 82% loan to value and that’s Fannie Freddie stuff. So if you’ve had your home for several years, you know, you continue to build up equity cause the prices are going up now, obviously. If there’s a slow down and there’s an oversupply, then you know, those prices will either come down slightly or at least be flat. You’re not going to have as much equity but we are equity heavy right now so there’s a good chance that you’ll be able to modify a bunch of these notes if you end up buying some distressed and at the same time there’s going to be foreclosures available too for investors. Interesting thing here is that I read today in the Mecklenburg times, if you’re not in our area, the Mecklenburg times is a publication that’s really for Charlotte and surrounding areas. It’s about real estate but it also has the foreclosures, liens, all that kind of stuff in there. It’s a paper that comes out twice a week and it’s really for investors. The interesting story and a side note here, this is the front page that the story is on, okay? At the bottom it says, “see generations on page six” and you go to page six and there’s nothing that says generations, it’s a whole another page of stuff. The actual continuance is on page seven and it’s under a completely different name. You come out twice a week, I love this paper but do some editing! Anyway, the private here is that millennials and they call it the “silent generation”, these are people between 74 and 94, have the same interest in housing and why they are moving. And why this is interesting is typically when you’re between 74 and 94, you’re downsizing and millennials are typically buying affordable housing. So do you think there’s a bit of a competition there for the same houses in these areas? The biggest factor for people to buy a home both millennials and the silent generation is to move closer to family and friends and you used to be that the biggest reason was because of jobs. You were moving to a particular job or to go to a better job, that’s why you were moving.
Jonathan Davis (11:08):
Is that a recent statistic because of COVID or is that a longstanding fact of millennials?
Bill Fairman (11:15):
Well, it’s hard to say because the study was done in 2020 so it’s just a recent study, so I don’t know how far back that goes.
Jonathan Davis (11:26):
I guess my point would be, you know, with people being able to work remotely from anywhere, like, yeah. Then I see the draw of going, you know, moving close to your family as opposed to if you have to go find the job and work near the job.
Bill Fairman (11:40):
No, that makes great sense.
Jonathan Davis (11:42):
Bill Fairman (11:42):
What I gleaned from this is that all these people are going to be competing for the same property, which is more affordable housing because most millennials have not gotten into that situation where they’re going to be buying, you know, a luxury house. They’re gonna still be in the middle income type houses and then the 74 to 94, you know, they have plenty of equity but they don’t want to use it on another big house, they want a smaller home and anyone who used that rest of that money is, you know, retirement income so they’re all competing for the same home. So that said, because there’s not enough margin in building affordable homes for, you know, big builders. People that are doing track homes, they can’t make enough money on those. So they’re not doing very many of them and until they come up with a way to make those homes more profitable for the builders, they’re gonna rely on the one off people, the people that are doing, you know, a few homes a year, a new construction. And then the fix and flip people because, you know, the land costs are so high. Now I say that and I’m going to back up a little bit, if we do have a downturn land prices will start going down.
Jonathan Davis (13:14):
That is the first thing that’ll go down.
Bill Fairman (13:15):
Yeah, because those are the least liquid out of all the real estate, right? So, you know, that being the case, that may change a little bit and make the affordable housing more affordable. I also got news that DR Horton, big national builder is teaming up with Zillow who was back in all 50 States with their eye buyer type stuff, it’s called Zillow offers where they cut the realtors out altogether. So they’re competing with the investors that are trying to do wholesale, they’re competing with the investors that are just trying to buy up properties at a discount and then they’re cutting out the realtors because you don’t need a realtor if you’re selling your house to Zillow so you can buy your DR Horton home. So that’s something that realtors and investors need to keep in mind that, you know, the big corporations are now trying to compete in your space and if you’re a realtor and you’re paying anything to Zillow to advertise on,
Jonathan Davis (14:32):
You should stop it, you should stop.
Bill Fairman (14:35):
I mean you are paying for your own demise because they’re not working to help you, they’re working against you, all right.
Jonathan Davis (14:46):
You want to tackle a question here, Bill?
Bill Fairman (14:48):
Yeah, I’ll get off my soap box, I guess. Okay, remember you can ask a question as well, just put it in the little chat box over here. Alright, so here’s our first question “Why do I have to pay interest on rehab money I have not yet used?” Listen, that’s an awesome question and it’s a good question.
Jonathan Davis (15:12):
Well can I jump in here real quick?
Bill Fairman (15:15):
Jonathan Davis (15:15):
So if you don’t pay money on your rehab, that’s called a non-Dutch interest. If you are paying money on your rehab or interest on your rehab, that’s called Dutch interest. So most lenders are going to be Dutch interest lenders, where if they are making capital available to you whenever you need it, assuming your inspection comes through or invoices or whatever they’re requiring, then you’re going to pay interest on that because they’re holding that money for you. Now your much bigger lenders are going to be, you know, like maybe large banks, maybe some giant billion dollar hedge fund, you know, someone who has more limited capital, they’re probably going to be your only non Dutch lenders out there and that’s just because they have so much capital that they’re able to not collect interest on lazy capital.
Bill Fairman (16:17):
Yeah, and that’s a good point. And that’s where I was going to go with this as well. Most private lenders/hard money lenders are balance sheet lenders and they have limited capital. Now, an individual that’s loaning you money, they have more limitations on their capital than someone like us who has a fund but even though we have a fund, we still have a limited amount of capital. We’re not a big hedge fund, we’re not a bank. The other thing is that banks and your giant institutional funds and are attached to wall street are much more liquid. They have a lot more money coming in and out and they can afford to not set aside money for your project because they know it’s liquid stuff is always coming in and going out. Your smaller balance sheet lenders like us, here’s the thing, if I take capital that I have to earmark for you and it’s not earning anything, that hurts our returns for our investors.
Jonathan Davis (17:35):
Bill Fairman (17:36):
If I say okay, well, I’m not going to earn any money on it so I’m going to lend it out and hopefully when it’s time for you to, you know, get more rehab money, I’ll have more money back by then and you don’t want to go through that either.
Jonathan Davis (17:51):
No, no you don’t wanna go through that.
Bill Fairman (17:53):
So to guarantee that your money is there, the full amount you need to finish your job, your project is that you’re going to have to pay interest on it. Now you can get to the point where you can get lines of credit, you know, through banks or other institutions and you don’t have to worry about that. You use the capital in your line of credit to acquire the property and then you dip into it as you go when you’re doing your funds but you have to get to a certain point for that and as credit tightens up because of COVID and the economy, you know, kind of slowing down, banks are going to tighten up on those lines of credit. That’s land and lands of credit. Those are the two things he tighten up on most often in down term, don’t you agree?
Jonathan Davis (18:42):
Yeah, and I just want to say on the question on the paying interest on the rehab, we know it can be, you know, it’s a pain point for any borrower to be paying, you know, money that, or interest on money that you don’t tangibly have in your hand. So we make a very concerted effort to make sure that your drawls go through as quickly and as seamlessly as possible. Most of our draws, you know, from submission to us putting the money in the account is probably two to four days, is pretty typical and we do that purposefully because you’re paying interest on it. We want to get it to you as quick as possible, assuming all the work was done.
Bill Fairman (19:23):
Sure. I was going to get back to that and then, I mean, there are some lenders out there like I said, that do allow you to not be charged any interest on that money but well they’re very large and they’re not going to be as easy to work with as we are.
Jonathan Davis (19:44):
Bill Fairman (19:44):
See? pick your poison. A little bit last or is it going to be harder to work with? So those are the things you have to keep in mind.
Jonathan Davis (19:56):
And also, if you’re not paying money on that interest, how long does it take for you to get that? So, you know, what’s the backend administrative work, the red tape that they have to go through to clear those funds for you, so that you can get it to your project. It usually going to take a little more time and as we all know, and, you know, fix and flips new construction, whatever it is, time is money. So the sooner you can get your money, even if you have to pay a little bit more for it is better because it gets you to the end project that much sooner, which, you know, makes you more money in the end.
Bill Fairman (20:32):
It does add an additional layer of accounting to each loan when you’re doing that as well and I’m gonna end that question with one last comment. You don’t know how many times I’ve heard, or somebody was borrowing money from an individual person and they couldn’t finish their projects because they didn’t have the rehab money when they needed it because they said okay, we’ll go ahead and fund your acquisition and then by the time you’re ready to use this amount of money, this other loan will have paid off and for some reason they didn’t get paid off yet.
Jonathan Davis (21:16):
I’m not sure I’ve ever had a loan payoff or I guess a borrower pay off a property with a sale that was on time, like never is.
Bill Fairman (21:27):
Well, sometimes they pay off early unexpectedly.
Jonathan Davis (21:30):
Bill Fairman (21:30):
But they never pay off on time expectedly.
Jonathan Davis (21:36):
Bill Fairman (21:38):
Okay, here’s another one. “Is my investment guaranteed by Carolina Capital?” Well, it would depend, right? On what it is but the short answer is no, there are no guarantees in life.
Jonathan Davis (21:59):
Well taxes and death, right? Those are the two.
Bill Fairman (22:02):
I will explain some fund structure and Jonathan you can jump in here at any time but a lot of fund structures will have two parts to a fund. One will be a debt component and one will be an equity component. Now our documents say that we have a debt and equity component. We never exercise the debt component because when you’re using the debt component, let me kind of explain what that is, you’re loaning the fund money, just like you would be putting your money in a CD. You get a guaranteed interest rate for, you know, one to three years, however long you do it for, you know, doing it for one year, you’re going to get a much lower rate than you would if you’re doing it for three years. That said at the end of that term, you can either renew or you can get your money back and the reason we chose not to do that, even though it’s in our documents is twofold. Number one, we weren’t paying enough interest and no one was interested in doing it. Everybody we knew when we started our fund, we’re active investors and they could get a lot more return just doing individual loans, they wanted the return they were getting if they were making the loans themselves to the borrower. So that wasn’t going to be possible in a guaranteed return, you know, borrowing money or the fund borrowing money so we never chose that option. Everybody is an equity partner, which means you’re only getting paid based on the profit of the fund that quarter. Your guarantee is that you’re guaranteed to get whatever fund made in profit that quarter because you own a piece of the fund, you’re a business partner that owns a piece of the fund. All these funds are investor owned, LLC and so your guarantee is you’re getting a split of whatever the net profit is for each quarter or month, depending on how each fund operates. If you’re a lender, your interest is on the note assigned to you. You’re getting a certain part of what, you’re getting the interest rate minus any servicing fees. You’d have to pay to us or anybody else that would be servicing your loan but that rate is guaranteed but again it’s only guaranteed if the borrower pays
Jonathan Davis (24:40):
Well, yeah. It’s just like, does Carolina Capital Management guarantee any, you know, any like specific return or any kind of right? No, no, we don’t. If you’re buying a loan, your guarantee is the borrower. Most of them, I would say 99.9% of them have personal guarantees. So the person who owns or the people who own that LLC who’s taking the loan are personally guaranteeing the loan, they are. We can’t do that and then on the fund side like Bill said, you know, the guarantee is your ownership, you’re guaranteed to make whatever the fund makes your pro rata share
Bill Fairman (25:24):
Right. And again, there’s no guarantees. That’s why you have a lien on the property.
Jonathan Davis (25:31):
Bill Fairman (25:31):
And you build in enough of a cushion that if the borrower stops paying, you have to take the property back in the long run, then there’s enough cushion to get your principal back and hopefully make additional money.
Jonathan Davis (25:48):
Yeah, your guarantee is if you buy a loan from us that we will do everything we can to help you along the way but that’s the only guarantee we can give you, we will have you along the way.
Bill Fairman (25:58):
What we do out here that we do for you, when you’re, if you ever had to foreclose, we recommend you not foreclose. There’s other ways of doing it without having to take possession of the property. We’ve learned from experience, If you own the property, it’s very difficult to have another contractor come in and finishing someone else’s work.
Jonathan Davis (26:21):
Bill Fairman (26:21):
You’re better off selling it to the contractor cause they don’t mind doing their own work.
Jonathan Davis (26:28):
Well, I mean, think about the properties that we took back and, I forget who the-
Bill Fairman (26:34):
Jonathan Davis (26:34):
Yeah, an 18 and we became the you know, essentially the GC on the project and we’re in North Carolina, we’re liable for a year for fixes after we sell it and I know Wendy had to go do a, had someone to go do some work on one of the houses because of the contractor made an error but we were, you know, we have to pay for it. So you don’t want to be in that position if you can avoid it.
Bill Fairman (26:58):
Yeah. But the whole point is that there’s a big enough cushion in place to take care of that and then, you know, we underwrite like a bank anyway. We were proven that they had the income, that they have the credit and the capacity and the willingness to make payments. We do background checks to make sure they’re, you know, good folks and they have to have experience. So you know, you do what you can to minimize it. Our typical delinquency since we’ve been in business has been less than 2%, which is pretty darn good and you’ll find it in most lenders that do what we do, you’re going to find pretty much the same across the board. Now there are some people that do not care about anything other than the equity and they will make loans to people who not just don’t pay on time but don’t pay at all because they just didn’t get the property but do you think they’re going to be lending them as much money as we do to get a project done?
Jonathan Davis (28:05):
No, they will not.
Bill Fairman (28:06):
They’re probably lending a 50% or less of the value of that property. We do have a couple of questions.
Jonathan Davis (28:15):
Bill Fairman (28:17):
From the same person, PCS Girls. “Do you accept accredited investors?” Yes, we do so go to the CarolinaHardMoney.com, click on the investor tab and you’ll get more information on that and then “How do you guys make money?” Points. What does that– that’s a, well I see fees. Oh, finder’s fee and at what rate? So if you’re asking if we work with brokers, yes, we do and, you know, brokers get paid. We typically charge three to four points depending on experience and how long the customer has been with us, their experience level, the project type, our rates range from 9.99 to what? 1211?
Jonathan Davis (29:11):
- Yeah, something like that, yeah.
Bill Fairman (29:17):
And then, yeah. We make money on the fees, we make money on the interest and we encompasses a lot cause we, you know, we have a fund so the fund has a good split of a lot of that.
Jonathan Davis (29:34):
Yeah. I guess if he specifically like, you know, Bill gets paid by the fund, you know, he’s the manager of the fund. So we have an origination company, we have a management company and we have a fund. Our origination company, it gets paid, all the fees and stuff like that and that’s for all the overhead for all the personnel that we have, all the third party vendors, you know, those sorts of things. They collect those fees, make money, might be a stretch but it collects us fees and then the points are split between the management company and the fund.
Bill Fairman (30:16):
Right, and then we have a broker that’s involved. They get points too but some of it’s from us, some of it’s from the borrower, everything is disclosed.
Jonathan Davis (30:29):
Yep, we have three companies that we’re trying, that are involved here and they all get some piece of it but the fund gets the vast majority of everything and that’s to protect our investors.
Bill Fairman (30:47):
And here’s another question. “Have you had a time where the fixture couldn’t get refinanced?”
Jonathan Davis (30:53):
Bill Fairman (30:53):
Well, first and foremost, your first exit strategy is to sell the property. Now, if you’re buying the property for the purpose of buy and hold rentals and you’re acquiring it and fixing it up and then getting it refinanced then that is your exit strategy is getting it refinanced. Yeah, it’s happened before we’ve ended up in, typically what happens is we come to an arrangement. Sometimes they they’ll just do a deed in lieu and we’ll already have buyers that will buy it for that. It’s a shame, I hate seeing that happen when someone fixes a house and then can’t sell it. We try and do the best we can on the front end to prevent that from happening but you know, in the end, we’re not the ones that are, you know, working with that, we’re not the contractor on it. The fixer, the flipper is the one that takes all the risk and that’s why we’re lenders and we’re not fixing flippers.
Jonathan Davis (32:05):
Yeah, and if you’re buying a property to like fix or rent or whatever and you get a renter in there, part of your due diligence and your underwriting before you go into buying this property is to make sure that the property either breaks even or cash flows at the rate that you’re taking this loan because yeah, we don’t know the future and maybe you might be, you know, it’s great that there’s a tenant in there but you want to make sure that that tenant, that payment is covering your interest and hopefully your taxes and your insurance. So that needs to be part of your due diligence when you’re looking at the property is making sure like, ‘Hey, if I can’t refinance this, how long can I stay afloat? How long can this property take care of itself?
Bill Fairman (32:54):
Yeah and that being said, you know, markets change, you may qualify for a refinance today and six months from now when your house is finished, things change. Do you think things changed much from January to March? And everything was good to go in January but I just needed a couple little things before I can get refinanced to this long term rental loan and then all of a sudden March came and they were all gone.
Jonathan Davis (33:27):
Bill Fairman (33:27):
They just thought or they would not do a high enough loan to value that you didn’t have to bring even more money to the table and maybe you didn’t have that much or you did have that much and you weren’t planning on, you know, putting more into the property so things do happen and one of the benefits of working with a private lender, a balance sheet lender is that there’s more flexibility working with a balance sheet lender than there is working with your institutional types. If that was with the bank, you’re just out of luck.
Jonathan Davis (34:03):
Yeah and, you know, before COVID and this, you know, pandemic, I mean, there were people doing, you know, 75 closing in on 80% LTV loans on fix and flips and fix a rent. Well, people who refi, you know, the institutions that refinance those loans only refi them typically at 80% LTV. So like, you’re not even leaving yourself any cushion for a market swing or a market change. So you know, one of the things, you know, people like, well can I have a higher LTV on this loan? and I want to refinance and into a Reynolds, like, you don’t want one. Like, you think you do, but you don’t because if something changes like we just saw, now you’re stuck with the property. Now, what do you do? Cause now you have a 75% LTV loan and the banks are only refining 70% or 65%.
Bill Fairman (35:00):
Jonathan Davis (35:01):
So you don’t want to put yourself, you know, it’s just some of those things to think about as you’re going through all this. It’s nice to use to leverage your money and use someone else’s money to do these deals but you gotta also think about market condition changes. Not that you have to take a 50% LTV loan but you know, maybe not 75 if your exit is 80% LTV.
Bill Fairman (35:27):
Okay, absolutely. And right now is the best time to be levered as long as you’re not over levered because the interest rates are so low, if you can qualify for a Fannie Freddie type of investment loan, I mean, you’re looking at upper threes, lower fours, 30 years. You think your rants are going to be going down or up over that period of time.
Jonathan Davis (35:56):
Up, up, up, up!
Bill Fairman (35:56):
Right. So that’s a great way to control your costs. We did kind of cover the bubble thing at the beginning. I think we’re, by the way, I guess I could have read the question. “Do you feel a bubble is coming?”
Jonathan Davis (36:19):
That’s a repeat, the person who asks those questions before.
Bill Fairman (36:22):
Right. So, you know, all of our crystal balls are a little worn out at this moment. They’re not as accurate as they used to be but if there is going to be a slow down, I don’t think there’s a bubble.
Jonathan Davis (36:38):
The bubble is such a, like a nebulous kind of term. If people say bubble, bubbles are very localized. They are, you know, it’s not like there’s this bubble over the Southeast or there’s this bubble over the state of California or, you know, whatever it is. They’re very local to local markets, now can they reach bigger? Sure. But, you know, let’s just say in the Southeast if there’s a bubble in Miami, that’s going to look a lot different than Jacksonville in the same state. So, you know, you gotta look at each MSA differently.
Bill Fairman (37:16):
Well, I can tell you this, there are going to be people that have, you know, low 700 scores right now that maybe in six months, we won’t be able to get a loan and his credit starts to tighten up. I am more concerned about the treasury buying up mortgages than anything else, because right now, the only reason we’re still making mortgages is because treasury is buying a bunch of them and why do I say that? It’s all about the secondary market. So when a bank or a mortgage company makes a loan, then it’s backed by Fannie and Freddie but it’s securitized and it’s sold on wall street. So when they, I’m just going to give you an example, let’s say you have a hundred thousand dollar loan and now this loan is now, it’s been made, it’s being sold to the secondary market and they’re going to buy it at 102. Okay, so what does that mean? Well, they’re buying it instead of them paying a hundred thousand dollars for the loan, they’re paying a hundred thousand, I’m sorry, 102,000 for the loan and then-
Jonathan Davis (38:41):
Why would they do that, Bill?
Bill Fairman (38:43):
Well, they’re assuming that over a four to five year period and it used to be that the average loan stayed on the books for seven and that’s come down quite a bit since the rates have continuously dropped and people move more often now but it takes them two and a half, three years to just recover that $2,000 extra that they paid for that hundred thousand dollar loan and as rates continue to drop, people are refinancing every year, year and a half. So guess what? That money that they paid for that they’ve lost money on those loans.
Bill Fairman (39:25):
So a lot of these secondary markets are saying, “You know what, I’m not doing this anymore, I’m losing money, I’m only gonna offer you a 98 for it now because I have to make up for my losses.” And what would that do to our mortgage market? Well, nobody is going to make a loan to lose money so the treasury has been buying those loans at at least par so they can continue and par means they would pay for pay it what it’s worth. So they buy the a hundred thousand dollar loan at a hundred thousand and so they’re propping this up right now and the more rates drop, the bigger the fear of constant refinances are going to be going on. It’s not a biggest deal on the purchase side of things but if you’re doing refinances, secondary market doesn’t quite like it and at the same time, you’re taking these very new mortgages. If people have a forbearance on it or ask for some sort of modification during the shutdown, that hurts even worse cause now they got to take those loans out of securitization. They have to buy them back, modify them and then try and sell them again and then when they sell them back, they’re damaged goods, they’re scratching dent. So there’s a lot of issues coming down the pike that are going to have to do with the mortgage business. I don’t know exactly know how it’s going to turn out, but don’t worry about it.
Jonathan Davis (40:55):
You paint such a beautiful picture, Bill.
Bill Fairman (40:56):
Because it’s opportunity for a real estate investor.
Jonathan Davis (41:01):
Yeah, for local real estate investors, absolutely.
Bill Fairman (41:03):
It’s opportunity. So there there’s mine. Alright, right now, again, I’ll go back to this right now, housing prices are going up in the affordable market range and in our area it’s three 50 or less. It’s maybe different for your area but if you have a property that’s kind of underperforming or one that you’ve built up a ton of equity in over time, now might be a great time to consider it, getting that top dollar and then utilizing that money in an another outlet. Okay, I’m not saying that the sky is falling in, I’m just saying take advantage of what the market is giving you, that’s all.
Jonathan Davis (41:48):
Bill Fairman (41:51):
All right, folks, thanks. Hope this was helpful, don’t forget to like share and subscribe. If you want information on borrowing money from us CarolinaHardMoney.com click on the borrower tab If you’re interested in investing in our fund or perhaps doing one off loans as well, click on the investor tab. Enjoyed it, we have another show coming up at 1:05 where we’re going to interview Dr. Paul White who has a great little investor app and it all runs on the iPhone or Android. I’m old, so I have my iPhones
Jonathan Davis (42:31):
Cause the iPhone’s for old people now?
Bill Fairman (42:33):
Yeah, pretty much. Old people and people with money.
Jonathan Davis (42:37):
Which are usually just old people.
Bill Fairman (42:41):
That’s right. Anyway, everybody have a great day. Same time next week or if you’re going to join us on our next show, I appreciate it, everyone good bye.
Jonathan Davis (42:48):