83 The Ugly Questions Answered
How do you know if a deal is a solid deal?
What is a dutch interest?
Why am I not allowed to change my rehab budget after the appraisal or after starting the rehab?
Wendy Sweet and Bill Fairman of Carolina Capital Management answers all of these ugly questions and more.
Bill Fairman (00:03):
And we are live once again, we are, we are alive! That sounds like the Frankenstein movie, right? “It’s alive!”
Wendy Sweet (00:13):
What are you talking about?
Bill Fairman (00:15):
Hi! I’m Bill Fairman, this is Wendy sweet we’re with Carolina Capital Management. Thank you so much for joining us today, if you need any information on us, our website is CarolinaHardMoney.com. If you’re interested in borrowing click on the borrower tab, if you’re interested in investing, getting a passive return, click on the investor tab. You want to do the next one?
Wendy Sweet (00:39):
What is the next one?
Bill Fairman (00:40):
Don’t forget to subscribe, share and like us.
Wendy Sweet (00:44):
Like, tweet us.
Bill Fairman (00:44):
You want to do the next one?
Wendy Sweet (00:48):
What’s the next one?
Bill Fairman (00:53):
If you have any question yourself, we have a chat. Ours is to the right, yours may be to the left. It may be underneath, I have no idea but we have a live chat and either platform that you’re on, we can look at your questions and carry on. Now,
Wendy Sweet (01:07):
Bill Fairman (01:08):
We tried an experiment last week.
Wendy Sweet (01:11):
And that was not having me here cause I was off at, this is the answer and ugly question session. We’re really glad you’re here for that because it’s been pretty cool, we’ve gotten some great response on this and I guess the experiment is trying new cameras, right?
Bill Fairman (01:28):
Wendy Sweet (01:28):
And so now I have to really worry about how I’m sitting because you know, how does this outfit look? And the back of my head, this is kind of cool. So we have different,
Bill Fairman (01:40):
That was the behind the scenes.
Wendy Sweet (01:40):
So you can see how trashy the room really is!
Bill Fairman (01:45):
So the experiment that we tried last week didn’t work well because I’m going to give you the real behind the scenes, we’re using a platform called stream yard and essentially you can broadcast to several different platforms, live.
Wendy Sweet (01:58):
At same time.
Bill Fairman (01:58):
Via your phone, your pad, your computer and so what we did was we hooked up two additional iPhones to give you these other camera angles and they’re connected directly, you know, through the shows and the internet. The problem was, we didn’t account for the
Wendy Sweet (02:20):
We’ll know what camera to look at!
Bill Fairman (02:21):
You’re off again.
Wendy Sweet (02:23):
Is it? Show me this way, show me this way.
Bill Fairman (02:27):
We didn’t account for the phones actually talking.
Wendy Sweet (02:33):
They talk to each other?
Bill Fairman (02:33):
So we had a lot of feedback. So my brilliant idea was to plug ear bugs and the both of them and,
Wendy Sweet (02:40):
You’re so smart.
Bill Fairman (02:41):
Yeah, I know.
Wendy Sweet (02:41):
So hopefully that works.
Bill Fairman (02:43):
Well, if you’re hearing, if anybody there is hearing any feedback, put it in the comment section.
Wendy Sweet (02:49):
Give us some feedback.
Bill Fairman (02:54):
What is that called? Productive or,
Wendy Sweet (02:55):
Bill Fairman (02:55):
Wendy Sweet (02:58):
Bill Fairman (03:00):
All right. So,
Wendy Sweet (03:01):
Oh, you are just sounding so excited today, Bill.
Bill Fairman (03:04):
I’m sorry, it was a workout night in the parking lot. We’re not really doing it,
Wendy Sweet (03:11):
Not here in this parking lot.
Bill Fairman (03:14):
We are unofficially, groups of us are gathering socially distancing while we do it and we have group workout classes and it was hard and I’m worn out. So,
Wendy Sweet (03:27):
Bill Fairman (03:27):
Sorry I’m dragging a little bit today.
Wendy Sweet (03:29):
Yes, he truly is. And I wasn’t here last week because I was at the good success mastermind in Indiana.
Bill Fairman (03:39):
Yeah, you wanna talk about that a little bit?
Wendy Sweet (03:39):
Yeah, it was awesome, it was really, really, really good. Great group of people, great core values, just learned a lot, actually. And we’re going to talk more about what we talked about, market-wise, things like that. Things that we can really, that we can probably count on is going to happen in the near future, we talked about that and we’ll share that in our 1:00 or what is it? 1:05, is that when we go live? We’ll share a lot about that cause we are going to be addressing the market, you know, what’s going on at this time or what we see that’s going on, nobody’s crystal or more alert.
Bill Fairman (04:20):
And for those that are catching their recording, what number show will that be, Scott? Hold your fingers up. Just kidding, alright.
Scott Paton (04:32):
It’ll be about 85.
Wendy Sweet (04:32):
About 85, I like that.
Bill Fairman (04:35):
So if you’re searching, you don’t catch the next one, it’ll be recorded tomorrow.
Wendy Sweet (04:39):
That’s right. So gosh, we’ve done 85 of these already?
Bill Fairman (04:43):
Wendy Sweet (04:43):
Bill Fairman (04:43):
Yeah, not live but,
Wendy Sweet (04:45):
Bill Fairman (04:45):
We have, yeah.
Wendy Sweet (04:47):
Wow, that’s like being professional and stuff.
Bill Fairman (04:50):
No, the problem is,
Wendy Sweet (04:51):
Bill Fairman (04:51):
People have had about enough of it.
Wendy Sweet (04:57):
Yeah, that could be the case.
Bill Fairman (04:58):
So, you want anything to add to that or do you want to go to this question?
Wendy Sweet (05:03):
No, I’m good, I’m good.
Bill Fairman (05:04):
All right, so question one. “How do you know if a deal is solid?”
Wendy Sweet (05:09):
How do you know if a deal is a solid deal, that’s a great question.
Bill Fairman (05:13):
If we’re underwriting and they pay us, that’s solid.
Wendy Sweet (05:16):
Yeah, well, and that’s the thing. So many people, you know, what, when someone calls about a loon, they are, you know, inquiring about money. “How can I borrow money?” Well, when they call me about a loan and I’m answering them, I’m inquiring about how solid the deal is because everything depends on, you know, whether or not we’re going to have to take this house back. I don’t want your house, I’m going to underwrite it to make sure that it’s a good solid deal, not only for us but also for you. There are several people that have tried to get alone on a property and it didn’t fit their goals. You know, they’re trying to do a fix and flip and they’re buying a house that’s in a buy and hold neighborhood, or, you know, it just doesn’t fit the goals of what they’re trying to accomplish so I address that with them too. It might be that the deal’s not bad, it’s just not a deal that works for what your goal are.
Bill Fairman (06:20):
It’s not the right deal for that goal.
Wendy Sweet (06:21):
Right, or a newer investor trying to take on a hundred year old house that’s gonna need a hundred thousand dollars in rehab, that’s kind of a stupid move for a brand new borrower, right?
Bill Fairman (06:34):
Well, I wouldn’t say it’s stupid, it’s just not smart.
Wendy Sweet (06:34):
Yes, it’s dumb and so it would be dumb for you, the borrower and it’d be done for us, the lenders because you’re you’re gonna run into things that you won’t know how to handle. So it’s, you know, my goal is to save you too. I want to do all of your loans, not just one and I can’t do any of them if we put you out of business on your first deal so how do you know if a deal is a solid deal? Well, if your lender turns the deal down, ask them why, you know, what it is that’s making them queasy on the deal, what makes them not want to do that loan? There’s gotta be a good reason for it.
Bill Fairman (07:20):
Consider us the Canary in Nicola.
Wendy Sweet (07:22):
That’s a great way to look at it.
Bill Fairman (07:24):
If you have a lender that is not willing to do it, then you shouldn’t be willing to do it either.
Wendy Sweet (07:29):
That’s exactly right.
Bill Fairman (07:29):
Wendy Sweet (07:30):
That’s exactly right. And you know, I talked a little bit about goals, you know, what your goal is. Everybody is at a different place in their investing life, everyone is. Some of us have small kids and, you know, you’re just now starting a little college funds for them or, you know, you’re trying to get away from the job or maybe you have kids in college already and you need to start paying for that, or maybe your kids are out of college and you’re getting ready to retire and you’re just looking to build some wealth or you know, new eat money is what you’re trying to bring in. There’s all kinds of reasons why people are in this business and for that reason, you need to understand what your why is and the best way to get to the goal, to satisfy that why. People that are wanting to get into buy and hold and they don’t have enough money saved up, if you’re trying to get into the buy and hold market and you don’t already have $30,000 in the bank, you probably don’t need to be getting into the buy and hold market yet, unless you’re buying houses with seller financing, that’s a great way to do it or taking over property subject to that’s another great way to do it, you don’t need a whole lot of money to make that happen but in order to build your cash reserves and the why I’m saying $30,000 probably isn’t enough is because when you buy a house, you fix it and then you want to put it into a long term loan, you’re going to have to show that you have six months worth of payments in the bank to get that refinance. Well, what if you’re taking your 30,000 and you’ve used that on the property for, you know, your first loan or you’ve put it into buying another property at the same time? You’re going to have to show that you have funds to be able to get prequalified for that refinance so I don’t want to make sure that just qualify for our loans, I want to make sure you qualify to get out of our loan.
Bill Fairman (09:34):
Wendy Sweet (09:34):
Bill Fairman (09:35):
You’re not going to last long in a buy and hold situation with a short term loan.
Wendy Sweet (09:39):
Bill Fairman (09:39):
Because the payments are going to be too high.
Wendy Sweet (09:43):
Bill Fairman (09:43):
You’re not gonna make any money.
Wendy Sweet (09:45):
Just– go ahead.
Bill Fairman (09:45):
So I was going to say just because it’s a solid deal, doesn’t mean it’s a guarantee that’s going to work, right?
Wendy Sweet (09:53):
Right, that’s exactly right.
Bill Fairman (09:54):
Because what it is we do is that we try to mitigate losses based on current market data and all of us know that within the last quarter,
Wendy Sweet (10:10):
It’s changed a little.
Bill Fairman (10:12):
The market data is not the same as it was in February.
Wendy Sweet (10:14):
And it’ll be different tomorrow.
Bill Fairman (10:16):
So let me give you an example, let’s say that you’re an investor and you want to refinance a piece of property that is on a major artery, so it’s got, and I’m talking commercial now.
Wendy Sweet (10:34):
Bill Fairman (10:34):
It’s a major artery, it’s got lots of eyeballs on it because it is on a major artery.
Wendy Sweet (10:44):
Bill Fairman (10:45):
It’s a fairly new buildings but you got to in this particular place, one’s the restaurant, one’s a movie theater.
Wendy Sweet (10:58):
That sounds familiar.
Bill Fairman (11:01):
My point to that is, you know, six months ago, a year ago, depending on the loan to value.
Wendy Sweet (11:08):
Yeah and it was really low, really really low.
Bill Fairman (11:10):
I’m not saying we’re using anything in particular that we have, I’m just giving an example. It was a pretty low risk deal add a low loan to value.
Wendy Sweet (11:22):
Like 40%, that’s really low, yeah.
Bill Fairman (11:24):
And then all of a sudden, you can’t. Because of the pandemic, restaurants are limited so they’re not going to make much money.
Wendy Sweet (11:33):
Can’t get into finance.
Bill Fairman (11:33):
Can’t even get into movie theaters, can’t even open.
Wendy Sweet (11:37):
Bill Fairman (11:40):
So market conditions evolve and change over time and the best thing that you can do is just make sure you have a plan B, always look at worst case scenario when they always gets on me cause that’s all I look at.
Wendy Sweet (11:55):
The Debbie downer.
Bill Fairman (11:57):
No, I understand the rewards but I also want to try to mitigate the risk, best we can.
Wendy Sweet (12:04):
Well so many people try to hit a home run every time they get up to bat, right?
Bill Fairman (12:07):
Wendy Sweet (12:07):
And that’s not the way to make money in this business. Home runs are great and they’re going to happen but singles and doubles will pay the bills all day long and build wealth.
Bill Fairman (12:20):
Yeah and let’s look at, again, we’ll look at current market conditions. If you were in the luxury market or the high end median price point, the high side of that, people aren’t going to be buying your homes as quickly because that market has changed, it’s softened. Right after the pandemic hit, all your jumbo loans just completely went away, nobody would even do them. So because those homes are already priced high, you only have a certain number of people that can afford to buy them.
Wendy Sweet (12:59):
Yeah, smaller target market.
Bill Fairman (13:00):
And then now, because the jumbo loans went away or the ones they did have, you would have to put a ton of money down. If you don’t have a jumbo loan, you have to make the loan conventional. When you do that, you put out a very large down payment now to make the loan amount low enough to not be a jumbo loan anymore. So now you’ve shrunk your buyer’s pool by even more.
Wendy Sweet (13:24):
Bill Fairman (13:24):
So those are the kinds of things that happen.
Wendy Sweet (13:26):
You need to be careful. Now in our market, the, right here in the Charlotte Metro area, where we are and I would really say even within the Carolinas, we are at a point where our higher end properties are still selling and they’re still selling quickly. We don’t know how long that’s going to last so it’s a, you know, if you’re renovating or building or a rehab or in that price range, you need to be very, very cautious with what you’re doing there.
Bill Fairman (14:04):
Currently, all right. So based on what’s happening now in our bigger cities, the people with money can be mobile.
Wendy Sweet (14:14):
Bill Fairman (14:15):
And so they can move.
Wendy Sweet (14:17):
Yeah and luckily, they’re moving here
Bill Fairman (14:20):
So that said, they’re moving to the areas where the cost of living is a little bit less.
Wendy Sweet (14:26):
Bill Fairman (14:26):
They get a little bit more for their dollar, you know, price wise, buying a home but you’re allowed to move around, you don’t have to show your papers and record, you’re not going to have checkpoint Charlie.
Wendy Sweet (14:42):
Yeah, where’s your mask?
Bill Fairman (14:47):
But at the same time, you still got rock solid business in the affordable housing market, you’re always going to have that. We’re going to be fortunate that we can have the upwardly mobile being mobile coming through the Southeast, not just us but everywhere in the Southeast is going to be like that as long as you’re somewhat close to airports and stuff that you can get around.
Wendy Sweet (15:14):
But how do you know it’s a good deal? You’ve had more than one person take a look at it and tell you it’s good. So Jonathan is saying, so he’s not supposed to be on this call but we wish he was on the call.
Bill Fairman (15:27):
So Jonathan is not on the call but now he’s asking questions.
Wendy Sweet (15:27):
You can call in any time, Jonathan.
Bill Fairman (15:29):
He’s not even suppose to be in here.
Wendy Sweet (15:29):
“Are there any typical metrics you look at to determine a good deal?” This is what he would have said, had he been sitting here and that’s a great point to bring up because “How deep are you into a deal?” Makes all the difference in the world. Now when the COVID hit, we dropped our loan to value from 70% of the after repaired value down to 65% and we did that for a reason. We weren’t sure on about a couple things, what would the after repaired values do, what’s going to happen to the market? Is it going to drop in what the values are? Is it going to take longer to sell? Well, yeah, we believe in houses that are over 500,000 with the ARV that they are going to take a little bit longer to sell so that’s really something that, you know, made us really rethink that 65% where we feel a little bit safer in a deal when we’re at 65% and it’s causing the barrowers to bring a little more money to the table, not much, but a little more and what’s really cool is that they’re finding deals that fit within that 65%. I can tell you that before the pandemic, it was hard to find deals that would fit into that 65% but now they’re finding them all the time so what does that say to you about the deals that are coming along there? So he also says, “What are some tangibles that investors can look at to help them know what is a good deal? The range of cops rehab to loan size, the DSCR, the cap rates”
Bill Fairman (17:23):
Wendy Sweet (17:23):
Yeah, that service that you didn’t wanna,
Bill Fairman (17:27):
If you’re looking at a home to fix and flip, here’s a few things you want to look at: neighborhoods. Are you trying to buy a home and in a rental neighborhood to do a fix and flip on? You want to be in a neighborhood where the majority are owners, they’re owner occupied. It’s hard to sell owner occupied properties in a neighborhood full of rental properties because you don’t have that same pride of ownership. Now, it doesn’t mean that neighborhoods don’t improve over time, those are some of the things that you’re looking at. Are there plenty of comps that are very close to the subject property?
Wendy Sweet (18:05):
So when we’re pulling them up, we’re looking at a quarter mile out, you know, an appraiser can go as far as three miles out and it still is considered good but we like to see comps within a quarter mile. If I’m pulling it for myself, when I’m buying a property, I’m looking at a quarter mile.
Bill Fairman (18:19):
If you’re in a subdivision and they have to go three miles away from the subdivision, that’s not a good thing. It’s not a terrible thing either, it could be such a popular neighborhood and nobody’s selling. There are neighborhoods that, you know, people want to get into but they’re kind of on a waiting list to get in there.
Wendy Sweet (18:40):
Which is why it’s really good for you as a lender and you as an investor to really know your market.
Bill Fairman (18:46):
Here’s the other thing too, if all your comps are on the other side of a barrier and a barrier being railroad tracks, major highways, that kind of thing, it’s not the same neighborhood,
Wendy Sweet (18:58):
That’s right, that’s exactly right. The other thing too is the days on market to us is really, really important. We like seeing them 30 days or less, it’s not uncommon for all the comps to be 60 days or less. We really really are happy to see that, when we do, we know that’s an area that’s really selling quickly and remember for you and for us, we want to see you get in and out of this deal quickly, you know, the term might be six months for a fix and flip but we’d love to see in and out of it in three months, that’d be great, be great for you, it’d be great for us.
Bill Fairman (19:36):
Well, we actually promote people to finish these things as quickly as possible.
Wendy Sweet (19:41):
Bill Fairman (19:41):
Because it’s going to save you money, it’s going to cause us to have less axed but it works well for everybody. Listen, the more times I can make a loan in the same year, the more money we make. So if you pay your loan off quickly, that means I can turn around and quickly make that loan to somebody else with those funds so it’s to our benefit that you pay it off just as much as it is.
Wendy Sweet (20:10):
Yeah and for you, you pay fewer interest,
Bill Fairman (20:11):
Go ahead, I’m sorry.
Wendy Sweet (20:11):
You’re done with this?
Bill Fairman (20:17):
No, I was going to move to the other part of that question. Then you get over into the commercial income producing bank properties, your debt service coverage ratio, and this is how lenders look at commercial income producing properties. It can be a house, it could be a self storage, it could be a mobile home park, office buildings, all that stuff. It’s all based on the income they produce, that’s the value. So basically what a debt service coverage ratio is “Is it going to service the debt?”, Which is the loan with the rents collected minus all expenses, plus you as the landlord or the owner of the property have to make some money too. You’re not doing this just to cover the rent you want, you want to be handling some money too. I mean, why else are you doing this? You’re not doing it for the exercise and then a cap rates are going to depend heavily on the space that you’re in and what I mean by space is the type of property and where it’s located and at what stage the property may be in. So if you classify properties, you know, from a C, class C B and A, your A properties are going to be newer, they’re probably going to be in areas where the land costs a lot more to acquire so those cap rates are going to be lower but you have less of a chance for issues, maintenance issues and that type of thing because they tend to be newer problems, right?
Wendy Sweet (21:57):
Bill Fairman (21:57):
So because of the less headaches you’re willing to make a little bit less,
Wendy Sweet (22:02):
But you have to be careful too. If the A to eight plus units are in an area that has a lot of them, a lot of A and A plus units like Charlotte, your rents are gonna gonna feel that
Bill Fairman (22:18):
Well, the point is well-made when there is a downturn in the market. Those A properties tend to have higher vacancy rates because they’re the most expensive to rent, which means people are going to be moving down to the A minus to B properties because they’re getting more bang for their buck themselves.
Wendy Sweet (22:41):
So in order to compete, those guys are gonna have to reduce their income, which would make the cap,
Bill Fairman (22:47):
Which would make the cap rate get even smaller. So you also, in the cap rates that your capitalization, by the way, if you don’t understand what the cap rate is, that’s the income that you’re going to produce based on the value of the property or the purchase price. In a value add property, you’re expecting to get a much higher capitalization rate, maybe not right away but down the road. So, you know, let’s say you’re buying a C plus or B minus property, there’s plenty of room for improvement. You make those improvements then you’re raising the rates as you go, then it’s a lot cheaper typically to buy any existing property than it is to develop a brand new one.
Wendy Sweet (23:45):
Bill Fairman (23:45):
And it’s less risky because in the middle of development and all the planning, guess what, we can have a black Swan event and it changes everything.
Wendy Sweet (23:56):
That’s right, COVID could happen.
Bill Fairman (23:58):
And if you look, if you look at the, I guarantee you, any appraisal that you pick up the cost to reproduce that property is always higher than the sales price so it happens with every property, not just residential but commercial. It’s cheaper to take an existing property and turn it in into a better paying upgraded than it is for you to build it new.
Wendy Sweet (24:27):
Right, and then you have to look at how it’s managed.
Bill Fairman (24:30):
That said, if you were playing in the A space, you’re going to get much more bank for your buck if you’re developing it, not buying an existing instrument stabilized. But you don’t have near the risk if you buy a stabilize new property, that’s why REITs won’t develop properties, they let the developers develop them, get them stabilized, meaning they get them occupied and then they turn around and sell them to a REIT and they’re fine with a three and 4% cap rate, at least they used to be, they may be changing their tune now because in some of your bigger cities, listen, you’ve got some really high dollar class A properties and downtowns of major metropolitan areas.
Wendy Sweet (25:21):
Better, going empty, aren’t they?
Bill Fairman (25:23):
Yeah. I mean, with what’s going on right now, people don’t have to commute to the city, they can work from home. There’s a big question mark on where those properties are gonna go.
Wendy Sweet (25:34):
We’ve got a dear friend right now that has a condo, a really nice condo in downtown Fort worth and he has said over and over again, how much he loves it down there and that. It’s just so convenient for him cause he’s a member of a club down there as well and because of the pandemic, he said Fort worth is just a shell of itself. There’s, you know, it probably has 20% of the business that it once had going on down there, there’s just nothing going on so his whole thought is the reason I was here is because of the hustle and bustle and all the different things he could do and now that’s not available to him so he’s thinking of no longer leasing his space and moving out to his Lake house.
Bill Fairman (26:22):
Yeah, you can work from anywhere you want and it’s good views.
Wendy Sweet (26:27):
But and the point is he’s not alone, there’s a lot of people that are thinking that way on what they’re doing. Okay, so how do you know if a deal is a solid deal? Bottom line, if a lender tells you no, it’s probably not a good deal. There’s gotta be something wrong with it unless you just have terrible credit, no money, then it could be a borrower issue but for the most part,
Bill Fairman (26:52):
Okay so short, in short, a solid deal is a deal you could move quickly if you need to or can produce a good rate of return if you want to hold it.
Wendy Sweet (27:06):
In a short period of time.
Bill Fairman (27:08):
Yes and I think the most solid deals are the ones that are the most liquid.
Wendy Sweet (27:14):
Bill Fairman (27:14):
And that’s why we’re in the affordable housing side of things because those are the most liquid out of any type of real estate.
Wendy Sweet (27:23):
Right and not highly leveraged is another great point, you don’t want to be highly leveraged in those properties.
Bill Fairman (27:29):
Well, that’s not gonna change whether the deal is solid and what it does is it limits your exit strategy.
Wendy Sweet (27:39):
That’s exactly right.
Bill Fairman (27:39):
And that can get you into trouble.
Wendy Sweet (27:41):
That’s exactly right.
Bill Fairman (27:42):
Okay. What’s Dutch interest?
Wendy Sweet (27:46):
I’m thinking it’s interest that we’re as clogs.
Bill Fairman (27:48):
No, it’s with the banks and Holland and Denmark charge.
Wendy Sweet (27:54):
Oh, look, we’ve got a borrower that says “I haven’t told you but the house you guys went on when under contract right away.” Yay! “Received three above list price offers within hours of listings, set to close in a couple of weeks.” Love that, Kim!
Bill Fairman (28:10):
Thanks Kim, do we get a commission?
Wendy Sweet (28:12):
“Moved quickly and it was in the perfect location!” So she is just verifying what we just said and we can’t wait to do new your next line! That’s awesome, that’s awesome! Good news.
Bill Fairman (28:23):
All right. So that’s interest, very easily explained.
Wendy Sweet (28:31):
I wanna do the clogs, little touch boy.
Bill Fairman (28:32):
If you borrow a hundred thousand dollars and I’m just gonna, this is an example, you have a house that’s going to be worth 200 once you fix it up but it’s taking a hundred to fix it and we make a loan for 200, you’re paying interest on the entire 200.
Wendy Sweet (28:51):
That’s right, why do we do that? Why do they have to pay on the whole amount if they’re not using it? I don’t understand.
Bill Fairman (28:57):
Well, we are what you call a balance sheet lender, we don’t have depositors like a bank.
Wendy Sweet (29:05):
Bill Fairman (29:05):
Our funds are not flowing, we don’t have money coming in, money going out. Bank has depositors and all kinds of stuff, money coming in, money going out. When we make you a $200,000 loan and half of that money is for your rehab, you want to make sure that when it’s time to get some rehab money,
Wendy Sweet (29:31):
That it’s there!
Bill Fairman (29:35):
You still have it.
Bill Fairman (29:35):
And if we make you a loan for $200,000 but we’re only charging for a hundred thousand, then we have a hundred thousand sitting out there that we can’t do anything with that’s not earning any money and then our investors suffer.
Wendy Sweet (29:48):
That’s right and they get angry, angry!
Bill Fairman (29:52):
So that’s why most private lenders are going to do Dutch interest because they’re not big enough to have the kind of cash flow and what I mean by balance sheet lenders, that means they’re lending their own money. There are wall street connected companies that have plenty of institutional financing and there’s a lot of money that can go in and out. Some of those are doing,
Wendy Sweet (30:20):
300, 600 million.
Bill Fairman (30:21):
Almost like a lot of credit.
Wendy Sweet (30:21):
Yeah, they’ve got plenty of money to play with. Now, one thing I want to warn you about, if you find a private money lender that’s willing to loan you money and only charge you on what you’re using, be careful. It’s a great person to borrow from but be careful because they’re going to lend that money out and make money and they’re going to bank on the fact that I loaned you a hundred thousand and I loaned this guy 200,000 but the $200,000 loan is going to pay off in just a few weeks. So I know that when you need your $50,000 out of your hundred for your rehab, I’ll get it off this $200,000 guy. Well guess what? $200,000 guy house may not be closing. I would say that in many circumstances,
Bill Fairman (31:08):
How often do all loans close on time when they sell them?
Wendy Sweet (31:08):
Over 50% of the loans do not close on time, over 50%.
Bill Fairman (31:17):
Not the ones that we make,
Wendy Sweet (31:20):
But the ones when we’re getting paid back.
Bill Fairman (31:23):
Wendy Sweet (31:23):
Yeah and it’s because there’s so many things that are happening. So when we’re doing loans, we’re dealing with investors, we’re not dealing with consumers but in the consumer world, anything can happen. There’s issues that could happen to the house that need to be fixed it could be that the borrower from the person buying your house, Mr. Investor, that borrower could be selling another house and maybe that one fell through which means that he can’t afford to yet to buy the house that you’ve done. Or, you know,
Bill Fairman (31:53):
The lender that they have is having issues, they cant get them closed.
Wendy Sweet (31:56):
And that’s happened, we’ve got six loans lined up to pay off this week and every one of them have been pushed back, every one of them.
Bill Fairman (32:04):
Listen and we’re gonna talk about this in our, on our next show cause we have Aaron Chapman coming on. He’s awesome when it comes to the national conforming conventional financing.
Wendy Sweet (32:16):
Right, you don’t want to miss that. You don’t wanna miss it!
Bill Fairman (32:18):
But we’re in the middle of a gigantic refinance boom, have you noticed?
Wendy Sweet (32:27):
What happens when rates are less than 3%?
Bill Fairman (32:28):
We’re talking 15 year loans at less than 2%.
Wendy Sweet (32:35):
Yeah, it’s cray-cray!
Bill Fairman (32:35):
So if you noticed any of the one ads, they’re all looking for mortgage help.
Wendy Sweet (32:40):
Bill Fairman (32:41):
It’s, oh God it’s such a backlog of appraisals and titles and everything else so yes, you set your closing up but just assume it’s going to be pushed back.
Wendy Sweet (32:51):
That’s exactly right and it’s happening just about everywhere at this point. So back to the what is Dutch interest, we have to go ahead and charge for the amount of money that we’ve set aside because there are so many exterior factors that can be happening that would change everything and us not be able to give you your money for your rehab and the last thing you want to do is be caught without being able to pay your contractor, without being able to pay your subcontractors, without being able to pay your carter lumber bill. There’s, you know, you need to be kept on track with what you’re doing as well so we protect you in that respect that’s why we go ahead and charge that Dutch interest. So non Dutch would mean that you’ve borrowed money and you only have to pay for what you’re using and some banks are doing that on their construction loans, right?
Bill Fairman (33:49):
And next week, we’ll talk about the Varian interests, that’s interest with craft beer.
Wendy Sweet (33:56):
Bill Fairman (33:56):
Wendy Sweet (33:56):
Bill Fairman (34:01):
Okay, here’s a really good question. “Why am I not allowed to change my rehab budget after the appraisal Or I start my rehab–
Wendy Sweet (34:09):
or after I start the rehab?” And I love this question, In fact, I’m dealing with that today. When we do alone, we do that loan based on the repairs that you’re doing on a house and so often the appraisal will come back a little bit lower than what the borrower thought it would come in at.
Bill Fairman (34:32):
That never happens.
Wendy Sweet (34:32):
And so in order to keep themselves from having to bring money to the table to make it work or maybe it’s just not a deal at all, they want to change the rehab budget around, you know, take out, maybe we’re not going to do granite countertops, we’ll just do a Formica or instead of the hardwood flooring, we’ll do vinyl and instead of tile we’ll put in the, you know, they’re cutting costs. Well, when you cut costs like that, you cut the value of the house, therefore it’s not going to sell for what that appraisal is coming in at so you’ve got to do what you say you’re going to do on that repair list, right?
Bill Fairman (35:12):
There’s a reason they call it a subject to completion appraisal and the appraiser does the appraisal based on the scope of work that you’ve given them and it’s, you know, it’s based on the finishes and the different things that you’re doing. Yeah, I was gonna open this up, now I’m not going to take this wall out. Well, that is completely different. I always our borrowers to actually walk to the property with the appraiser if the appraiser will allow it, some of them don’t but you’re not there to try to influence the.
Wendy Sweet (35:49):
Appraiser but yes you all are.
Bill Fairman (35:49):
Appraiser as much, it’s hard for them to look at a budget.
Wendy Sweet (35:54):
They want to see your vision.
Bill Fairman (35:56):
Yeah, that’s exactly what I’m gonna say. You need to explain your vision and how you’re going to do things versus them just looking at a parts list.
Wendy Sweet (36:03):
That’s right. Cause if they haven’t appraised a house that you’ve done previously, they haven’t seen your work, some people do really good quality work and some people don’t, well, there are appraisers out there that just assume that you’re not going to do the quality work that it says on this rehab list, they don’t trust you, we don’t get to pick all the appraisers. We, you know, use a third party company that picks appraisers for us so, you know, we don’t know what they’re going to say but we do want them to be realistic with what their appraisal is, that’s just as important for us as it is for you, you don’t want to be buying a house that you think you’ll sell for more than you really will because then it’s not a deal anymore so you got to be a little careful about that. Today, we got alone in, actually, we got an appraisal back and the appraisal came in at what we thought it would but the borrower’s rehab was at 20,000 and there’s enough room for him to take it to 30,000 and make a higher rehab on it. We haven’t done the loan yet, we have a closed so can he change that rehab budget now? can he do a little bit more? can he put a little bit more in his miscellaneous column? Yeah, you can. I would much rather you have more than enough money to do what it is you want to do on that house then not have enough because every time you do a rehab, there’s going to be an issue, every time. Not just sometimes, every time. You’re gonna have an issue come up and to be able to have money in that miscellaneous budget to take care of that, everybody’s happy, everybody’s happy, right?
Bill Fairman (37:48):
Wendy Sweet (37:48):
And the addition that she, yeah, what she said. And the additional money that you’ll pay on the interest rate, the mortgage payment for every month that you paid the difference, it’s not going to be that different when you’re adding $10,000 to a budget. So adding to it, there’s absolutely no problem but taking away from it, it’s a problem. It just changes everything especially when you’re removing some pretty big items.
Bill Fairman (38:20):
That reminds me of another point, you can’t really change things in the middle and this is why we want to see that you have additional funds in the bank over and above what miscellaneous part that you’ve given for your budget.
Wendy Sweet (38:37):
Bill Fairman (38:39):
Because real estate, especially fixing and flipping, by the way, if you’re doing a fix and flip, you are the one that is carrying most of the risk,
Wendy Sweet (38:49):
That’s right, thank you.
Bill Fairman (38:49):
Not anyone else, okay?
Wendy Sweet (38:51):
Bill Fairman (38:53):
So you have to plan for stuff That’s going to go wrong, no one has a x-ray vision. You have an appraiser or an inspector go in there, they don’t know what’s behind the walls.
Wendy Sweet (39:06):
Even your contractor.
Bill Fairman (39:07):
If you take a wall out, there could be all kinds of stuff in there you didn’t think was gonna happen.
Wendy Sweet (39:13):
That’s right. Termites, little craters.
Bill Fairman (39:15):
And you have to get in there and make those changes and all that’s coming out of your pocket because we can’t change the loan, you can’t modify the loan because it’s still based on the subject to completion value that we had before.
Wendy Sweet (39:28):
Bill Fairman (39:29):
So that money is going to have to come out of your pocket, you just do the best you can.
Wendy Sweet (39:35):
And be prepared for the worst, always be prepared for the worst, you know,
Bill Fairman (39:39):
Again, in most cases, it’s not going to hurt you much. What I’m saying is, you have plenty of, you typically,
Wendy Sweet (39:42):
Easy for you to say!
Bill Fairman (39:46):
You typically have plenty of margin the work, it’s usually, and I don’t want to go to this but I’m doing it anyway. In an airplane crash,
Wendy Sweet (39:58):
Bill Fairman (39:59):
It’s not the mistake that causes a crash, it’s a chain of events.
Wendy Sweet (40:07):
Yeah, of unfortunate events.
Bill Fairman (40:07):
And usually that’s what happens when you end up losing money on a property, there was something that I had to do that costs me more money. The market conditions changed, interest rates went up, all this happens at the same time. It’s not one thing hat does is it, it’s a combination or a chain of events.
Wendy Sweet (40:25):
There was a virus coming down the pipe.
Bill Fairman (40:26):
Wendy Sweet (40:27):
So the other thing too is, you know, when you’re beefing up your rehab list, you know, if you’ve got room in your deal to beef it up, you need to beef it up. Let’s say you had $4,000 in your budget to do the sheet rock work and you know, they come down to finishing the sheet rock work and you behold, got it done for 3000. Well, that’s okay, we’re going to still release 4,000 because that’s what was in your budget to do it. We just want to see that it’s done. Yeah, so that extra money can go to other things that you’re doing on that house.
Bill Fairman (41:07):
Wendy Sweet (41:07):
Bill Fairman (41:07):
Yes, you can now add that granite instead of the Formica.
Wendy Sweet (41:13):
That’s right! Put tile on the floor instead of just doing vinyl, there’s all kinds of things you can do to beef up that repair list and, you know, we really want everybody to understand too, it’s not just what that appraisal value is, the other thing that’s important to understand is what you do or don’t do to a property can determine how quickly it sells. You might sell it for the price range that you want to sell it for but how long did you have to wait to get that buyer in the door rather than just doing something a little bit different? Like, you know, changing that carport into a garage, it’s not going to add a whole lot of value but man, it’ll sure sell the house quick or putting tile on the bathroom floors versus vinyl. If it’s in a price range that’s $150,000, right?
Bill Fairman (42:12):
Yeah. I mean there’s so,
Wendy Sweet (42:13):
Having the tile would make the difference
Bill Fairman (42:15):
That there are things that aren’t going to add value, they’re just curb appeal.
Wendy Sweet (42:19):
Backsplash on the kitchen.
Bill Fairman (42:22):
And it’s good to talk with Wendy or really most real estate agents,
Wendy Sweet (42:27):
Bill Fairman (42:27):
That have been around a little while, they know what sells.
Wendy Sweet (42:31):
Yeah. Talk to Don Harris, he knows.
Bill Fairman (42:32):
Get their opinion on stuff.
Wendy Sweet (42:36):
Absolutely, absolutely. They can really help you sell that property quick and I would recommend anybody that’s in this business, that’s trying to sell a house, if you don’t have a real estate agent involved from day one that can walk through that property and just give you little ideas about light fixtures, even placement of light switches, the brands of appliances you’re going to use, you know, do you really need that LED backlit fireplace or will a plain one work? I mean, there’s all kinds of things that, that agent can help save you money on doing it right, getting it sold quicker and they’re well worth their weight in gold when they’re walking you through that property. So I would highly recommend you get an agent that’s experienced and that knows the neighborhood and that has your best interest in mind and they’re easy to find, they’re out there.
Bill Fairman (43:42):
So if you find that,
Wendy Sweet (43:44):
Why are you laughing about that?
Bill Fairman (43:44):
I’m just thinking about some nice DIY landscaping tips that you might get on Pinterest that you think is interesting and if one of them, you know, includes a old toilet with plants coming out of it, save that for the backyard.
Wendy Sweet (44:02):
I don’t know, I’m going to put one of those out on the farm.
Bill Fairman (44:06):
The farm, can’t see it from the street.
Wendy Sweet (44:09):
Well, that’s, I might put it out to the street, that’s a really good idea or where I’m going to get some tires and cut them in half and paint them pink and green and yellow and use those.
Bill Fairman (44:18):
If you want to keep people away, those are some of the nice landscaping tips.
Wendy Sweet (44:22):
Plastic flowers in the yard, all of that will increase the value.
Bill Fairman (44:28):
Wendy Sweet (44:30):
Yeah, be careful about what you’re doing, it may be more of a detriment than a positive thing for your property.
Bill Fairman (44:38):
So again, if you could think about, if you’re getting this as the recording and you can think about some questions to ask, you can still put them in the chat or the, whatever the thing is, comments at the bottom of the screen and we have someone that actually goes back through all of our shows and finds questions and comments that people have and then we will add that to the show.
Wendy Sweet (45:06):
Yeah, we’d love to have your questions and comments. We’re going to send out another survey monkey, right? To get some more,
Bill Fairman (45:13):
Well, we’re sending out the survey, I can’t guarantee the monkey will come on.
Wendy Sweet (45:19):
Anyway, it’s coming to a store near you, asking questions for what we can answer.
Bill Fairman (45:25):
So don’t forget to like share and subscribe again, we’re Carolina Capital Management, our website is CarolinaHardMoney.com. If you’re interested in borrowing money, click on the borrower tab, if you’re interested in passive returns, click on the investor tab. It was a pleasure having you on this week.
Wendy Sweet (45:43):
Keep investing, now’s a great time.
Bill Fairman (45:44):
Again, we have a show coming up at 1:05, we’re going to talk about market conditions, we have a great guest and Aaron Chapman coming on to talk about the conventional mortgage industry and he is an investor focused lender. He closed over 700 transactions last year, I’m sure it’s going to be even more for this year. Again, have a great day! It was good seeing you.
Wendy Sweet (46:15):
Thanks so much.