87 The Ugly Questions – The Future of Investing?
1 What is the current & future status/outlook of Carolina Capitol Mgmt regarding investments, interest rates paid, quality & diversity of projects, average loan size, performance, delinquencies & defaults?
2 Under what circumstances would you be willing to provide 100% financing where the borrower comes to closing with no cash out of pocket? Stated differently, how attractive must a deal be in order to mitigate borrower skin in the game? 40% as-is ltv? This would be for a fix/flip
Wendy Sweet (00:02):
Jonathan Davis (00:06):
The phones are ringing!
Bill Fairman (00:06):
The phones are ringing, so we’re live, apparently. Hi! I’m Bill Fairman, this is Wendy Sweet.
Wendy Sweet (00:10):
Bye bye, cell cell!
Bill Fairman (00:10):
Wendy Sweet (00:10):
Jonathan Davis (00:10):
Bill Fairman (00:10):
Jonathan Davis. Wendy throwing in there and now that’s messing me up.
Wendy Sweet (00:19):
Sorry for everything I do.
Bill Fairman (00:20):
Carolina Capital Management, this is our kind of market update, Ask an Ugly Question Session.
Wendy Sweet (00:29):
Ask An Ugly Question Session, that’s right!
Bill Fairman (00:29):
So if you’d like any information on us, it’s CarolinaHardMoney.com. If you’re a borrower click on the borrower tab, if you’re an investor and you’re interested in passive returns, click on the investor tab. Don’t forget to share, like, subscribe.
Wendy Sweet (00:46):
Tell all your friends and now we’re on Twitter, right? Is that what Scott was saying?
Bill Fairman (00:52):
Wendy Sweet (00:52):
Periscope, which is a part of Twitter.
Bill Fairman (00:54):
Wendy Sweet (00:55):
I think, I think that’s what he said. Nod if that’s true, Scott.
Bill Fairman (00:59):
I’m an old fart so I don’t.
Wendy Sweet (00:59):
He’s nodding, yes so it’s true
Bill Fairman (01:04):
So that being said, if you guys have a question for us, and again, this is the ugly question segment. We already have two really good questions we’re going to answer
Wendy Sweet (01:11):
That are way better than anybody else could think of.
Bill Fairman (01:13):
But if you have any of your own, you can go into the chat. Again, It’s to the right of our screen, `I have no idea what platform you’re on and where it would be on yours.
Wendy Sweet (01:22):
Yeah, could be upside down.
Bill Fairman (01:24):
But we will answer that if we can or if we feel like it
Wendy Sweet (01:31):
Jonathan Davis (01:31):
We will answer your questions.
Bill Fairman (01:35):
But before we get started, there’s a lot of news today on Thursdays, you know, unemployment numbers came out. The initial claims were a little higher than expected at 1.1 million, they expected around 9.25 but the continuing claims continue to go down and so they were a little bit below expectations.
Wendy Sweet (01:57):
Good, that’s good.
Bill Fairman (01:57):
Overall, that’s good but you know, that’s going to happen a lot when you have a lot of fits and starts in different areas of the country. Construction jobs.
Wendy Sweet (02:10):
I know, I put that on your desk yesterday. I thought that was interesting, I don’t think they read that.
Bill Fairman (02:13):
My favorite paper,
Wendy Sweet (02:14):
The Mecklenburg Times.
Bill Fairman (02:14):
I’m going to, yeah.
Wendy Sweet (02:19):
Yeah, show it to that camera, yeah.
Bill Fairman (02:23):
So The Mecklenburg Times. Scott, switch over number two for me please.
Wendy Sweet (02:26):
He’s not there.
Bill Fairman (02:27):
So our producer has left the building.
Wendy Sweet (02:33):
Dang! The one time we would have an opportunity to use the different camera angles that we have.
Bill Fairman (02:42):
And we can’t hollering him cause he’s not even actually in the building.~
Wendy Sweet (02:42):
He goes and gets a lunch when we do that.
Bill Fairman (02:43):
That’s the little bell load that we’re hearing.
Wendy Sweet (02:43):
That’s right and we thought it was a phone call.
Jonathan Davis (02:43):
So Mecklenburg Times
Bill Fairman (02:53):
Back to what we we’re were talking about, Mecklenburg Times is a local paper.
Wendy Sweet (02:58):
Anyway, the headline is construction adds 20,000 new jobs but commercial drops in the jobs that they’re doing it.
Bill Fairman (03:09):
Non residential construction jobs are actually going down.
Wendy Sweet (03:12):
Bill Fairman (03:12):
That makes sense.
Wendy Sweet (03:13):
Bill Fairman (03:13):
You have municipalities that cannot collect enough money.
Wendy Sweet (03:19):
To pay for what they were doing, right.
Bill Fairman (03:20):
And so they’re going to have to, well, they’ll finish the projects that they are already earmarked.
Wendy Sweet (03:25):
And at already slower pace, right?
Bill Fairman (03:29):
And the have to, they’ve already budgeted.
Wendy Sweet (03:29):
Bill Fairman (03:30):
It’s just any new budgets are going to be screwed because they’re not getting the revenues that they find especially when half the businesses are not producing sales tax.
Wendy Sweet (03:40):
Yep, hurts everybody.
Bill Fairman (03:42):
Now the good news is,
Jonathan Davis (03:43):
There’s a lot.
Bill Fairman (03:44):
A lot of those people will be able to go over into the residential side of things.
Wendy Sweet (03:50):
Bill Fairman (03:50):
Unless you’re a heavy crane operator, that might not work but hey, you can always put mobile homes together.
Wendy Sweet (03:58):
That’s correct, that’s correct!
Bill Fairman (03:59):
Wendy Sweet (03:59):
So what about the mortgage applications, you were talking about that earlier as well.
Bill Fairman (04:05):
Yes, mortgage application volume for this week down 3.3% as from the previous week.
Wendy Sweet (04:13):
So my first thought on that was that it was because of that half point tax that was put on the refinances but you also mentioned that the rates were a little bit higher.
Bill Fairman (04:27):
Yeah, FHA went up initially first and then Fannie Freddie are following suit and they’re putting a refinance. The Fannie Freddie is a refinances, the FHA is all loans.
Wendy Sweet (04:40):
Bill Fairman (04:42):
But part of the reason, they want to try to slow down the refinances too.
Wendy Sweet (04:47):
Bill Fairman (04:48):
It doesn’t help anyone if you continually refinance. Although in the long run, we had a conversation with Aaron about that,
Wendy Sweet (04:59):
Aaron Chapman, right.
Bill Fairman (04:59):
What does that do If you were constantly refinancing every five years? You’re constantly paying nothing but interest and your principal never goes down.
Wendy Sweet (05:06):
Bill Fairman (05:06):
So it does keep you,
Wendy Sweet (05:09):
In a bad place!
Bill Fairman (05:10):
Wendy Sweet (05:13):
Not necessarily a bad place but yeah, you’re still, you know, not reducing your principal amount. Now you know, if you can get lower rates, I mean, you’re, again, the 30 year mortgage you’re paying the, mortgage with the decreasing value of the dollar, so.
Wendy Sweet (05:29):
Jonathan Davis (05:29):
It’s still a good thing it’s just not as good.
Wendy Sweet (05:32):
Plus you’re hoping that your appreciation is going up at the same time but that’s the cherry on top, you never do stuff based on that.
Bill Fairman (05:39):
You’re always going to be in debt. Some people when they’re ready to retire just as soon not have the debt, right.?
Wendy Sweet (05:45):
That would be me.
Bill Fairman (05:45):
Because it has to be good that it has to be income producing debt, not debt on where you live. That just cost you money, that’s just an expense although it’s a lower expense at lower rates. Now that said, mortgage rates did go up a little bit too and the demand for refinance dropped 5% for this week. That said, mortgage applications for purchase money increased by 1%, which doesn’t sound like a lot but it’s 27% higher than this time last year so it is booming.
Jonathan Davis (06:25):
Well, what I want to kind of ask the question is we see when we do investor long term loans, which are 30 year AMS and not 20 year AMS like you can get with a credit union, they’re actually better for cash flow. And they usually carry it three year prepayment penalty on it, that goes 3% first year, 2% second year, 1% third year and then it goes away. So my question is why wouldn’t those people who are used to buying the securitizations of homeowners loans not switch over to landlord loans because they’re not going to refinance as often and you’re going to have a higher coupon. Like I just, I feel like that’s a market that should be tapped heavier by those securitization firms and those reeds and hedge funds that are,
Wendy Sweet (07:23):
The longer term investment lines.
Jonathan Davis (07:25):
Yeah, the longer term. Like if you came to me and said, Hey, do you want to buy this residential owner occupied loan that’s a three and a quarter rate and it looks like on the horizon rates are probably going to fall over the next two years or do you want to buy this investor landlord loan that’s five and a quarter rate and there’s a three year prepayment penalty on it. So even if they do pay off soon, you’re going to recoup whatever you pay the premium for.
Wendy Sweet (07:54):
Exactly, It’s a safer loan.
Jonathan Davis (07:55):
So I’m like, why wouldn’t they, like if I had a billion dollars to invest.
Wendy Sweet (08:00):
But you don’t.
Jonathan Davis (08:00):
I know, and I had to invest in 30 year mortgages, that’s what I would invest in.
Wendy Sweet (08:05):
That’s right, that’s right. That’s a great point, Jonathan.
Bill Fairman (08:08):
The problem is most banking,
Jonathan Davis (08:12):
And they’re all ran off with the DSCR so I mean, they’re all cashflow.
Bill Fairman (08:16):
But most people don’t understand the real estate investor, the mindset, they tend to think of second homes because the second home owner is the first person that’s going to let a second home go back when things get bad.
Wendy Sweet (08:30):
Yeah, but an investor loan is different.
Bill Fairman (08:32):
That’s right. But you know, being in the mortgage business 30 years, that is what I was always taught. Your primary residence is the one you’re going to hang on to when things get bad,
Wendy Sweet (08:45):
Do you think it’s because there are pencil pushers that are making those decisions rather than people who are really in the mortgage business?
Jonathan Davis (08:51):
I mean, yeah cause I’m thinking about it, you know, I’m looking at it from my perspective and I get my perspective is very different than a lot of people’s but if I have four properties that are cash flowing enough to pay for my primary residence, that mortgage, I’m not going to lose those like, no matter what. I’m going to make sure that those take care of this. You know, so that’s how I think most investors would think so I just wonder if that secondary market is ever going to catch up to that way of thinking.
Bill Fairman (09:22):
Well, if you look at the percentage of individual investors that own properties versus, you know, REITs or you know, just large investment firms, there’s probably 75, somewhere between 75 and 80% of the rental properties are owned by small individuals,
Wendy Sweet (09:46):
Right, mom and pops.
Bill Fairman (09:46):
You know, two, three, four properties. And in the back of their mind is that once, you know, they have a couple of bad experiences, they just give up and maybe that’s the problem, maybe that’s what they’re thinking.
Jonathan Davis (10:01):
I don’t know.
Bill Fairman (10:01):
They’re either just not experienced enough or it’s not being run by a company and they’re just not as good of a risk as it would be if it was firm owning them and running them by the numbers only.
Jonathan Davis (10:11):
Yeah and I understand, we only know what we know and I can’t, you know, I don’t work in that industry, in the secondary markets. I mean, I’ve dabbled in it, but.
Wendy Sweet (10:20):
You work with them,
Jonathan Davis (10:21):
Well, you know,
Wendy Sweet (10:22):
You saw full lot of stuff.
Jonathan Davis (10:23):
So, you know, I’ve definitely worked with them for sure, but not in that market. So I would like to know,
Wendy Sweet (10:30):
What are you thinking?
Jonathan Davis (10:31):
What’s the thought process? Because, you know, if you have a property, I mean, we know historically rents don’t go down.
Wendy Sweet (10:40):
Jonathan Davis (10:40):
So, you know, the same thing that we tell everyone, like if we have to take back our properties, we’re going to turn them into rentals, that’s what we’re going to do. So I mean, we saw what was it, Blackstone prove that the model even works, I mean, Blackstone bought, I don’t know how many thousands of homes as rentals and, you know, they turned up huge profit off of that. So I’m just wondering, what’s the downside? What am I missing?
Wendy Sweet (11:07):
Here’s the other thing that’s really interesting about that is because, you know, when we go to present a long term investor loan to somebody who’s going to finance it for us, they have these guidelines set in place where the loan has to be at least 75,000 and the property has to be worth at least a hundred thousand or more.
Jonathan Davis (11:30):
Cause they’re buying across the nation and they, you know, if you buy a $75,000 house in Sacramento, you don’t have a house, you have a shack, you barely have a shack. So they’re creating these guidelines to cover the whole nation.
Wendy Sweet (11:44):
Instead of creating the guidelines to cover the area.
Jonathan Davis (11:46):
Wendy Sweet (11:47):
It’s kind of crazy because you know, in our area, if you’re, you know, it’s, it’s very common to have a hundred thousand house as a rental property that’s making, you know, 13, $1,400 a month in rent.
Jonathan Davis (12:00):
Real estate is local,
Wendy Sweet (12:00):
Jonathan Davis (12:00):
Yeah, real estate is local. I mean, and there are few big firms that understand that or at least from their actions that they, you know, they show us that they understand that. So I feel like those firms who do understand that are going to be the ones to make a big play in the market.
Wendy Sweet (12:23):
Yeah. So far, there’s no one in that spot.
Jonathan Davis (12:26):
Not yet, maybe it’s us.
Wendy Sweet (12:27):
I think that’s the case.
Bill Fairman (12:29):
They do have,
Wendy Sweet (12:29):
So we need lenders for that, tell all your friends!
Jonathan Davis (12:33):
About 2 billion, we’ll do it.
Bill Fairman (12:37):
They do have a box. They have to fit them in because they’re going to end up selling them eventually through the secondary market to investors and anytime you have an investment, there has to be a lot of black and white to it and you can’t say, well, we’re gonna lend on this as long as this happens and then this happens. And then sometimes we’ll just take this into account and no, it’s gotta be in a box.
Jonathan Davis (13:03):
Well, if we, you could have.
Wendy Sweet (13:04):
That’s why we’re in business because we don’t have to be in a box.
Jonathan Davis (13:06):
You could have like a Southeastern box and Northeastern box,
Wendy Sweet (13:09):
Jonathan Davis (13:10):
Or mid-west box. So, you know, I mean, if I was going to do it, that’s kind of how I would go about it and not to make it too complicated, I’d probably make it even more granular than that, I would have, you know, these two States box; North and South Carolina box. I’d have a Georgia, an Alabama box and, you know, Florida would be its own, you know, so,
Wendy Sweet (13:31):
Right. And that’s a good point. I mean, you look at,
Jonathan Davis (13:34):
But then again, that’d be, it comes like, how do you underwrite that? How do you hire people to,
Wendy Sweet (13:39):
That know how to do it.
Jonathan Davis (13:40):
Yeah, so that could be an issue.
Bill Fairman (13:43):
Well, Aaron mentioned that, you know, it took him like five years to convince the company he works for that the investors are the least risky.
Wendy Sweet (13:52):
That’s right. Well, and he did it with the numbers. How many loans are you having to go into the fall, he had one.
Jonathan Davis (13:58):
He had one and then they had like, what was it? Like 10% of their portfolio.
Wendy Sweet (14:02):
Yeah and he had one in thousands of loans.
Bill Fairman (14:05):
Wendy Sweet (14:05):
That was pretty crazy.
Jonathan Davis (14:10):
So again, just reiterating the point is like letting the board or these investor loans.
Wendy Sweet (14:14):
Jonathan Davis (14:16):
They’re, I mean, properly purchased and properly underwritten, they are solid.
Wendy Sweet (14:21):
Yeah and that’s another good point. It is properly purchased. You know? I hate to see people in rental property deeper than 75% of the value, I hate to see it. I don’t care if it’s an Airbnb property or just,
Jonathan Davis (14:36):
What’s your exit plan?
Wendy Sweet (14:37):
That’s exactly right and you kind of leave room for vacancy and management and expenses. Things are gonna go wrong, you know, and you gotta leave room for all of that and still make a profit. It’s not just about, you know, building the wealth in that property, which is also a relevant point
Bill Fairman (14:58):
As long as you have the liquidity and you have a longterm plan, you can pay more for a house than you do and the Blackstone who you just brought up did that. That was one of the problems buying all the properties, all the local investors said, I’m not buying those homes for what you’re paying for them.
Wendy Sweet (15:20):
And they said okay, we will.
Bill Fairman (15:20):
And they ended up going to work for them, finding properties and they overbid and they overpaid and then they ended up.
Jonathan Davis (15:29):
Wendy Sweet (15:29):
Bill Fairman (15:31):
On top because now they had all these properties.
Jonathan Davis (15:34):
Well, that’s the whole point. It’s like, you know, you can overpay if you have the ability to purchase the entire neighborhood. If you buy the whole neighborhood, you now control it. You know, you get to control your sales cops.
Wendy Sweet (15:45):
Bill Fairman (15:46):
And here’s the other thing, they bought a ton of the properties, which meant there were fewer properties on the market for other people to buy. So what did thatdo?
Wendy Sweet (15:56):
They created scarcity.
Bill Fairman (15:56):
They created scarcity and the prices went up.
Wendy Sweet (16:00):
But the other thing too is, you know, it’s all about timing and there’s no way people can really see into the future and know what that timing is like.
Jonathan Davis (16:08):
Jonathan Davis (16:09):
You know, there could have been another 2008 and they would have lost everything. So you just don’t know what that timing is, I think some of it has to do with a little bit of luck, the timing of the market on what they did but you know, they shot for a home run and got one for sure.
Bill Fairman (16:30):
And the great news about this is they’re not going to dump all their properties either cause as soon as they do, they’re going to lower the price of those homes that they’re going to end up eventually selling.
Wendy Sweet (16:40):
Yeah. This is important where greed can’t come into play, you have to be smart and look into the future about what you’re doing. There’s a lot of people that would have been greedy about it and just let it all drop.
Jonathan Davis (16:49):
Well speaking of looking into the future, we can get to our first question.
Wendy Sweet (16:52):
Oh yeah, yeah, yeah!
Jonathan Davis (16:53):
What is the current and future status outlook of Carolina Capital Management? Regarding investments, interest rates, paid quality and diversity of projects, average loan size, performance, delinquencies, and defaults
Bill Fairman (17:10):
Geez that was a long question.
Wendy Sweet (17:12):
Bill Fairman (17:12):
That’s like five questions.
Wendy Sweet (17:13):
I know but that’s a good one.
Bill Fairman (17:16):
This guys is this one.
Wendy Sweet (17:16):
Well, yeah, it’s good.
Jonathan Davis (17:17):
So Bill, what is the status outlook, the current and future of Carolina Capital regarding the investments?
Bill Fairman (17:26):
Okay. So we are very optimistic about the market because we are focused on affordable housing. You know, what 90% of what we do and I need maybe more than 90% is single family affordable housing. That is going to continue to go up, there’s a high demand for it. Even demand drops a little bit, people still need a place to live and they’re getting, you know, the affordable housing is going to be the best part for them.
Wendy Sweet (17:56):
Yeah. We were very cautious beginning in January, 2019, you know, it was obvious to pretty much everybody that we were going to see a correction in the market and we had already been burned on high end houses we’ve been down that road.
Jonathan Davis (18:15):
They’re pretty to look at.
Wendy Sweet (18:16):
They are very pretty look at and they’re really sexy when you can say, Hey, these are the loans that we’re doing, look how great these houses look. But you know, when it comes down to, you know, what the bottom line is all about, you know, what happens if they go into default, how quickly can you sell that? You know, we went through all that, we learned our lesson and we cut that stuff off.
Jonathan Davis (18:38):
Because what wasn’t pretty was based on market.
Wendy Sweet (18:40):
That’s exactly right. So,
Bill Fairman (18:43):
You make it two bedroom, two bath cottage.
Wendy Sweet (18:45):
Bill Fairman (18:46):
Wendy Sweet (18:47):
That’s exactly right.
Jonathan Davis (18:49):
Yeah, it’s cute. I don’t know if I’d go sexy.
Bill Fairman (18:53):
If you have a little nice outside,
Jonathan Davis (18:55):
I think you need a least 3,500 square feet to hit sexy.
Wendy Sweet (19:00):
Yeah, that’s the guidelines, so we were able to turn things around starting in January and people thought we were crazy for doing it. Our competitors thought we were crazy the people that we were lending to in the high end arena were mad at us but you know, they found money that they could get. So, you know, didn’t kill us.
Jonathan Davis (19:20):
And then what did that do for us in 2019?
Wendy Sweet (19:22):
Well, it set us up to be absolutely ready for when COVID hit in 2020.
Jonathan Davis (19:31):
And not only ready. So 2019, we saw,
Wendy Sweet (19:34):
The best year we had.
Jonathan Davis (19:36):
We had one of our best years or maybe the best year where we saw an increase of, I believe it was 43% of origination dollars out the door and an increase of over 50% of units or so number of loans.
Wendy Sweet (19:49):
And that’s while at the same time we lowered our loan amount, our average loan amount, like almost cut it in half from what it was.
Bill Fairman (20:01):
That was part of the question, average loan size was 158,000
Jonathan Davis (20:05):
Last year. This year it’s 190,000.
Bill Fairman (20:10):
That said, we’re doing
Wendy Sweet (20:13):
In 2020, you mean.
Jonathan Davis (20:14):
2020 is 190.
Bill Fairman (20:16):
We were looking at 300 or less and now we’re more focused on anything under four.
Wendy Sweet (20:21):
Yeah. Because it’s still even up until about 500, it’s still flying off the market but we start getting a little queasy when it’s over 400 and we really are particular about the area that it’s in if it’s, you know, between four and 500 but we won’t go over 500 on some.
Jonathan Davis (20:41):
Yeah. And we just had banks to pre just,
Wendy Sweet (20:45):
I just talked to him on the face.
Jonathan Davis (20:46):
He said thanks for believing in my project, we did it.
Wendy Sweet (20:48):
Awesome, awesome. That’s right, I talked to him this morning, thanks for calling in banks and I appreciate you writing in and listening to us. He’s got another deal, he wants us to do some new construction.
Jonathan Davis (21:00):
And we do like new construction, so that’s also part of this is the diversity of projects. So we’re doing about 20% commercial and when we say commercial, we’re talking multifamily,
Wendy Sweet (21:13):
Not restaurants, not bars, no hotels,
Jonathan Davis (21:17):
No, no hospitality. Multifamily and a warehouse or storage space. So that’s, when we say commercial, that’s what we’re hitting on and we’re doing about 20% of that. 15% of what we’re doing is new construction on the single family side and then about 65% is a fix and flip.
Wendy Sweet (21:38):
Yeah. And the new construction is strong.
Jonathan Davis (21:41):
And we would love to do more new construction. I mean, I love new construction, we’re in control of the entire process and people need new homes, especially new construction. When we say new construction again, to go off what we said,
Wendy Sweet (21:58):
It’s still affordable.
Jonathan Davis (21:59):
Affordable new construction.
Wendy Sweet (22:00):
Yeah, people that can build a house for 85, $90 a square foot, you know, you can find a good lot for 15, $20,000. Get the city water tap, if there’s a house that’s been on it already, you’re saving money there as well. So there’s, lots of infill lots, there are many infill lots through out all of the cities in the Southeast that we do loans in. especially the second tier cities, there’s a ton of those infill lots. So that’s pretty amazing.
Bill Fairman (22:37):
Right. I don’t want to forget about the interest rates paid or return as it were so from the fund perspective, I can’t give you returns.
Wendy Sweet (22:47):
Or we’d have to kill ya.
Bill Fairman (22:48):
No, you have to be an accredited investor and I’m kind of standing in territory. I’m not supposed to just broadcast that out but if you’re an accredited investor and we’ll certainly get that information out to you but our returns are going to be within our expected returns that we have listed on our agreements and then if you’re buying notes from us, we, you know, we charge anywhere from what a 9.9, nine to 12, depending on the project and the person and all that stuff, right?
Wendy Sweet (23:25):
Jonathan Davis (23:26):
And there’s other opportunities that you can potentially make more, talk to us about that.
Bill Fairman (23:31):
If you’re buying a note from us, you’re getting whatever the rate is that the note
Wendy Sweet (23:35):
Hold up, let’s back up. We got a question about the infill lot. So what is an infill lot? So an infill lot is where you have a neighborhood that’s already built or a street that already has houses on it. They may be old, they may be newer but.
Bill Fairman (23:50):
The word’s stabilized. Stabilized neighborhood.
Wendy Sweet (23:50):
Yeah, that’s a good word, stabilized neighborhood and there’s a house or a lot that’s in between a couple of houses and you’re filling in the neighborhood, It’s pretty simple or it may be in a neighborhood where the house just really needs to be knocked down. You knock it down, you build new so there’s new construction right beside.
Bill Fairman (24:10):
So we go with refill?
Wendy Sweet (24:10):
Jonathan Davis (24:10):
Wendy Sweet (24:10):
I like that, that’s a good question. I’m sorry, I’m using slang, I probably shouldn’t use slang.
Jonathan Davis (24:20):
Let’s see, we’ve got the interest rates, quality. So the quality, every loan that we do undergoes a rigorous due diligence process and underwriting process so we not only vet the property and the feasibility of the property or project, we also vet the individual or individuals who are doing the project. We can say that our underwriting process is in line with most national lenders. Now we are not constrained to a box, we can think outside of a box.
Wendy Sweet (24:55):
We can see different, we know the markets
Jonathan Davis (24:57):
See different but we still get certain things that allow us to create a higher quality product.
Wendy Sweet (25:08):
Right. And I’m going to mention something too that I actually said to Bill yesterday but I didn’t get a chance to say it to you. We’ve got a deal now that we loaned some money on and it is a movie theater, it’s over a year old, it’s a movie theater a restaurant and an out parcel piece of land that goes with all those properties. And I mean, we’re only in it at 43% maybe of the loan to value on it but one of the things that I think is so great about this is that the guy really just wanted to buy the restaurant and you, Jonathan had him throw in the movie theater and you had him throw in the out parcel as part of that deal.
Jonathan Davis (25:52):
I wasn’t going to finance a restaurant.
Wendy Sweet (25:54):
Jonathan Davis (25:55):
But who would have known? Going back, you know, restaurant and a movie theatre, those are like the two hard to hit things.
Wendy Sweet (26:02):
That’s right. And right in the middle of his refi is when COVIT hit so it had the timing kind of sucked on that but yeah.
Bill Fairman (26:08):
And that parcel is in the middle of a sinkhole.
Wendy Sweet (26:14):
That’s not true, stop it! But the bottom line is, you know, when we’re talking about the quality of a project, you know, when we see and itsy bitsy bit of risk or just an unknown, you’re great about, you know, let’s cross collateralize this with something else just to have the borrower have more skin in the game, more faith in what he’s doing and a little more protection for us, the lender, right?
Jonathan Davis (26:39):
Wendy Sweet (26:40):
Jonathan Davis (26:40):
Absolutely. Yeah. If many years in this business has taught us anything, it is too over collateralized.
Wendy Sweet (26:46):
Yeah, that’s for sure.
Jonathan Davis (26:49):
It’s just part of it. Now, you know, there’s a lot of deals, like, especially on single family deals, those pretty much stand up on their own. They’re very, you know, I think we’ll use the word vanilla, everyone understands that it’s a smaller group of people and investors who understand commercial. So for us and for a lot of people nationwide, you have to add in some extra security blankets to create that comfortability.
Wendy Sweet (27:16):
Right, absolutely. So then we talk about the loan size, the performance, the delinquencies, and defaults or something I think we haven’t talked about.
Jonathan Davis (27:25):
Delinquencies is someone doesn’t pay on the exact time they’re supposed to right. Default is that they,
Wendy Sweet (27:31):
They paying it at all.
Jonathan Davis (27:32):
They paying it at all, yeah! So default is typically, I think everyone’s a little different. The way our loans work, it’s 15 to 30 days past the due date is you’re you’re in default but it’s kinda standard on a residential, like consumer mortgage, it’s 30 days. So on delinquencies, I mean, we have, you know, probably, you know, it’s like that 80, 20 rule. It’s less for us but we have a small group of we, you know, I guess we’ll call them.
Wendy Sweet (28:02):
Jonathan Davis (28:04):
It’s just people who, you know, they’re not going to pay on the first or the fifth, they’re going to pay on the 15th and they’re just going to do that and they pay their late fee and that’s just part of how they do their business. Like, there’s plenty of people out there like that and there’s nothing wrong with it. Then you have on the default side, when they go 30 days late and we have to send out a default letter, do we have one in default?
Wendy Sweet (28:28):
I’m thinking since 2017 when we got the big hit, since that time we’ve had three.
Jonathan Davis (28:40):
Three loans in default since 2017, sounds about right.
Wendy Sweet (28:43):
Right, and that’s out of, you know, the Adam since that amount, that’s, you know, well over 200 loans. So that’s not a bad count.
Jonathan Davis (28:54):
So default, you know, less than 2%.
Wendy Sweet (28:56):
Yeah, which is normal. Actually it’s below normal.
Jonathan Davis (29:00):
Well, and you know, there’s an argument to be made if your default rate’s too low, you’re not being aggressive enough in the market.
Wendy Sweet (29:05):
Yeah, that’s true but we’d rather not have any. That’s the case.
Bill Fairman (29:10):
That’s how the market came up with a 125% loan to value loan for purchase money so, Hey, let’s furnish the house and get a new pool, we bought it.
Wendy Sweet (29:22):
That’s kind of crazy though, that’s what caused 2008 and then seven and eight, for sure. But, you know, how do you handle something like that when it goes into default? Our goal is always to get that barrower back on track, the last thing we want is their house or their project or whatever it is that we loaned on, we don’t want it.
Jonathan Davis (29:50):
We will take it but we don’t want it.
Wendy Sweet (29:51):
That’s right, because we’re in the lending business, we’re not in the rehab business or selling the product, that’s not what we do. So our goal is to, as Jonathan put it yesterday, drag them across the finish line if we have to. You know, always try to do that first, if worst comes to worse and we do have to take it back, then we’ve kind of changed the way we handle things and our goal is to put that property into a third party receivership, right?
Bill Fairman (30:24):
Wendy Sweet (30:24):
And why do we want to do a receivership, Bill?
Bill Fairman (30:27):
Because as a lender, you’re in the lending business and you’re not at fault for anything you do as long as you’re sticking with the lending business so going through a foreclosure process, you’re having to, you know, keep up with the lawn or the taxes or any of that kind of stuff. If somebody slips and falls, you’re not the one liable for it because you’re not stepping outside of your normal business but as soon as you take possession of the property in your name and then, which is still okay but if you take possession of the property and then you start any additional work to it to complete it, now you become,
Jonathan Davis (31:06):
Bill Fairman (31:06):
Basically the contractor or the investor.
Wendy Sweet (31:10):
Being the warranty work.
Bill Fairman (31:13):
Now you’re, as a lender, you’re just as responsible for any other owner If there’s a slip and fall, there’s different liabilities and then you touched on it, you’re now responsible for the quality of the work, which you didn’t perform, most of it.
Wendy Sweet (31:32):
Right. Like we’re fixing nail pops a year later.
Jonathan Davis (31:36):
In North Carolina, it’s a year, right?
Wendy Sweet (31:37):
Yeah and we’re fixing nail pops
Jonathan Davis (31:39):
California is what, 7 years?
Bill Fairman (31:40):
Jonathan Davis (31:41):
Wendy Sweet (31:41):
And of course, we’re taking the, hit ourselves on that. Uh, but you know, if, if it were you the lender doing it on your own, you, you have to step up and take care of it.
Bill Fairman (31:50):
You see, one of the things that we realized quickly when we were taking these back and finishing them up is that no contractor wants to finish anyone else’s work. They’ll certainly buy the property and finish it up themselves, they don’t have a problem with that.
Wendy Sweet (32:07):
And they want it at a discount.
Bill Fairman (32:09):
They just want, everybody wants a discount, I wanted it to discount. My point is, they’ll do it themselves, they’ll finish somebody else’s work if they own the property but if they’re doing it for somebody else, now they’ve got a problem with, well, how do you determine if there’s a problem that comes back up with it later if it was the first person that worked on it for them?
Wendy Sweet (32:32):
That’s right but it’s going to be the latest guy that touched it that’s going to be responsible for that.
Bill Fairman (32:35):
So as a lender, you’re better off taking it and,
Wendy Sweet (32:39):
Going in receivership.
Bill Fairman (32:40):
In receivership and then hiring people. And of course you wouldn’t be hiring it, It would be the person that is handling the receiver would be contracting the people.
Wendy Sweet (32:51):
Well, and then the other thing that we’ve done, getting back to this first question that we’re, you know, pounding into the ground is we also dropped our loan to value from 70% down to,
Bill Fairman (33:05):
Jonathan Davis (33:05):
Wendy Sweet (33:05):
Yeah, 65% and 60% in some cases,
Jonathan Davis (33:11):
A lot of the new construction,
Wendy Sweet (33:12):
A new construction and it’s out of our States.
Jonathan Davis (33:15):
It’s really growing out of our loan to costs.
Wendy Sweet (33:18):
So that’s gonna put us lenders in a better position if for some reason we have to take it back, it just gives us more wiggle room to be able to sell that project off through a receivership at a discount without taking a hit. So, you know, I’ve talked about cross collateralizing other property, you want to have as much collateralization as possible so that you’re guaranteed to get your money back. You’re never guaranteed anything but that’s going to help a promise that you’ll get your not only your money back but possibly all your fees and things like that, that it costs you two to take it back.
Jonathan Davis (34:00):
One of the things, you know, want to caution people who are lending on their is your loan to value. If you’re lending at 80, 85% loan to value, and your thought is I don’t care because is I have to take it back, I’ll just take it back through foreclosure or whatever it is. When you take a property back through foreclosure, it becomes a distressed property. Distressed properties do not sell for the same price as an arms length property so if you’re lending 80, 85%, there’s a good chance that distressed property equity is eaten up just because it is distressed. You might get your money back, you might lose some, you might make a little but just know that like those distressed properties typically sell for 10 to almost 20% less than a non-distressed property.
Wendy Sweet (34:52):
And be careful about a deed in lieu versus going through the foreclosure process because if you’ve got contractors that have been working on it, they can present you with a bill.
Jonathan Davis (35:03):
So with a deed in lieu, before you ever execute a deed in lieu, always down date, the title policy and please have a title policy but always down date it to make sure that if there are any mechanics liens, material liens or anything else that are on there that you see them before you take the property back, because when you take it back, you’re now responsible.
Wendy Sweet (35:21):
That’s right and it can be hairy. There’s a lot there to look for but that was a great question.
Jonathan Davis (35:28):
Wendy Sweet (35:29):
Jonathan Davis (35:29):
Wendy Sweet (35:30):
Jonathan Davis (35:30):
Number two here is under what circumstances Wendy, would you be willing provide a hundred percent financing where the borrower comes to closing with no cash out of pocket? Stated differently, How attractive must a deal be in order to mitigate borrower’s skin in the game? Is it 40% LTV? and this would be for fix and flip.
Wendy Sweet (35:54):
Okay, so that is a great question and would I ever finance a hundred percent of the deal? We can all say this answer together, no!
Jonathan Davis (36:01):
I wasn’t sure if she’s going to say yes, I was like,
Wendy Sweet (36:10):
Has she lost her mind? No, no, no, no, no, you can’t do a hundred percent. Here’s the way I think right off the bat, if my borrower can’t come to the table with money, whether it’s closing costs or a percentage of the purchase price, then that means they don’t have money. I’m not lending to somebody who doesn’t already have money, they have to have money to make payments, they have to have money to get the contractor started, they have to have money to do business with. If they don’t have money, that means they’re not very good at balancing their checkbook and budgeting what they need to budget gotta have a good foundation.
Bill Fairman (36:54):
There’s something that’s always going to go wrong.
Wendy Sweet (36:58):
Jonathan Davis (36:58):
Bill Fairman (36:58):
It is very, very, very, very unusual that you go through a rehab and everything goes perfectly. Let’s face it, watch any of your HGTV shows.
Wendy Sweet (37:11):
There’s an issue in every one.
Bill Fairman (37:11):
I mean, that’s why they’re on there because there’s always some kind of drama that comes out.
Wendy Sweet (37:16):
And the drama is real. I mean, they make most of it up and make it look like a bigger deal than it really is but cause it’s also real.
Bill Fairman (37:24):
But you must get away with all to be able to overcome those obstacles because everything that you have done has been based on a subject to completion, appraisal scope of work has already been budgeted, you can’t go back in and redo the loan. So anything extra is going to have to come out of your pocket and we have to show that you have money in your pocket. So here’s the old bank adage, I can’t lend you any money, you actually need the loan.
Jonathan Davis (37:53):
The thing is,
Bill Fairman (37:53):
We’re not that tough.
Jonathan Davis (37:53):
Just earlier, we said, we don’t want properties, that’s not what we’re in this business for and whether it’s true for your particular project or not, the perceived risk of someone who has no money in the deal if something does go wrong, which we just confirmed here, it will.
Wendy Sweet (38:14):
It always will.
Jonathan Davis (38:14):
Do you have the financial wherewithal to move through that? And if you don’t, do you just walk away and now we’re left with the project and the property, which we don’t want. So, you know, it’s kind of that kind of logic that we’re thinking of. It’s we don’t want the property, we want to make sure that you get through this project so we never to step foot in this property or take it back.
Wendy Sweet (38:38):
That’s right and people will say, well, if I have to bring all my money to the closing table, you know, what money am I going to use for the rest of that stuff? Or I have money to take care of the contractor and to make the payments but I don’t want to bring money to the closing on that. I only have a 40% of the as is loan value, I’m only needing to bar 40% of the, as is value of the property. That’s that’s great, that’s great, you’re, you’re in a deal really, really at a good position but bottom line is we don’t want your deal.
Jonathan Davis (39:24):
No, we don’t want to manage properties, we don’t want to list properties, we don’t want to rehab properties, that’s why we’re living you all the money, so you all can do those things.
Wendy Sweet (39:33):
That’s right, that’s exactly right.
Bill Fairman (39:35):
And even back when we were doing 70% of the after repair value and we were doing,
Wendy Sweet (39:41):
A hundred percent of your purchase and rehab.
Bill Fairman (39:44):
Right, you still had to bring money.
Wendy Sweet (39:45):
Yeah, you have to bring the closing cost.
Bill Fairman (39:47):
You have to bring the closing cost, the points, any kind of fee.
Jonathan Davis (39:49):
Which usually came out to like 7 or 8% of the project.
Bill Fairman (39:52):
So you still had skin in the game and we want to see a little skin in the game.
Wendy Sweet (40:01):
Well, the thing is, you know, everybody who has a little bit of interest in investing, you know, wants to dive in headfirst and they wanna, you know, they want to be an investor. I think that real estate investing is the most awesome career that anybody could have. I love this business, I love it! And I want everybody who wants to be in it to have that opportunity to be in it but you are not going to do well If you don’t have a firm foundation to begin with, you’ve got to have a rock to stand on it. It can’t be made of sand because there’s all kinds of things, bad things that are going to happen, multitudes of bad things are gonna happen and it’s going to happen over and over again. You’re going to learn from this project, then you go to the next project and all kinds of new, bad stuff is going to happen. You know, we have been doing it 20 years and I still step in all kinds of piles of dog poo, as I like to put it. I still can lose money on a deal, I can still make bad decisions on something, I can still miss judge What I think that house will sell for. I mean, there’s all kinds of things that can happen and you have to be ready for it. So, you know, if you’re wanting to get into this business, you have to have a foundation of not only some money but you need the education too. You gotta be plugged in to groups of other people that do this.
Jonathan Davis (41:38):
And honestly, the education first and foremost, I mean, you can,
Wendy Sweet (41:42):
Which is why we’re doing this!
Jonathan Davis (41:43):
You can have the money and you can lose the money. I mean, the education gets you to the place where you can manage your money and manage the project.
Wendy Sweet (41:51):
Right. And you meet other people who are already in the business that are willing to take you under their wing and teach you what you need to know. Everybody brings something to the table, even the person who knows nothing.
Jonathan Davis (42:05):
Good question, usually,
Bill Fairman (42:05):
How do you get started in this thing when you don’t have any money? Well, you worked with a mentor, you bring deals to the table. They will find the financing for you or you’re going to have to give up probably half of it but that’s how you learn and I know,
Jonathan Davis (42:23):
50% of some things more than a hundred percent or nothing, right?
Wendy Sweet (42:25):
That’s exactly right.
Bill Fairman (42:27):
Where you’re going to is I always say, you earn while you learn, that’s better than paying to learn, right?
Wendy Sweet (42:32):
Jonathan Davis (42:33):
Wendy Sweet (42:33):
Jonathan Davis (42:34):
We have a question. “What if you already own the home, what money do you need to bring to the closing table?”
Wendy Sweet (42:39):
Jonathan Davis (42:39):
Great question. So there’s two different scenarios here, one would be a lot. Do you own a piece of land? And in that scenario, we can finance the lot plus the construction and we can finance the lot at 50%. So you have to hold 50% of what you paid for that property into the loan. On a house, you would, I mean, depends on what you need. If you’re doing like a fix and flip, you already own the house, we wouldn’t probably require any money down for the house cause you already own it, that’d be crazy, we would fund you the rehab money.
Wendy Sweet (43:17):
Right. But we wouldn’t give you money for the house.
Jonathan Davis (43:19):
Correct. We wouldn’t give you money for the house but we would fund you so you wouldn’t have to bring a down payment or anything like that. You get the rehab money because you already own the house.
Wendy Sweet (43:28):
Now, if you paid cash for the house on an auction and you wanted to try and get a loan for the whole thing, you know, on a case by case basis, we’ll talk about how much of that house we would, may reimburse you for, It really depends. And that’s what’s so great about being in the business that we’re in and knowing the areas that we know because we can really make a decision based on the area, based on the house, based on the total numbers, based on you, your history, your credit history, your background check, all the things that we’re looking at, your experience means a lot, It means a whole lot.
Jonathan Davis (44:12):
And one of the things that we constantly look at so everyone’s aware, we look at the life of the loan with an expected drawl schedule and what is our LTV or loan to value over that life of the loan? Because we want to make sure at the beginning, we’re at X and at the end we don’t exceed Y. So, you know, we have to make sure that through that life of the loan, we are managing that project so we don’t exceed a certain LTV. So that’s how we’re looking at these projects, based on mostly LTV.
Wendy Sweet (44:46):
Bill Fairman (44:49):
I got nothing else.
Wendy Sweet (44:52):
He’s got nothing, he’s got nothing. This has been great, there’ve been great questions and we appreciate you guys taking your time, I hope you’re all, you know, eating a sandwich while you’re listening.
Bill Fairman (45:07):
Something that I’d like to be doing.
Wendy Sweet (45:07):
You can but we’d have to turn your screen off.
Bill Fairman (45:13):
Yeah, I know. Again, we are Carolina Capital Management. If you want to find out more information about us, Carolina Capital, I’m sorry, CarolinaHardMoney.com.
Wendy Sweet (45:23):
Jonathan Davis (45:25):
It has been for years.
Bill Fairman (45:25):
I get it wrong, here we go. If you’re a borrower and you’re looking to borrow money, then click on the borrower tab. If you’re an investor looking for passive returns, click on the investor tab and don’t forget to share, like, subscribe. If you think of any other questions along the line, just ask it inside the panel there, we have someone that scours these things and we add them to the question list afterwards.
Wendy Sweet (45:54):
Awesome. And then another thing too, thank you, Lisa, that’s really sweet. But another thing too is we talked about education and how important it really is. If you’ve heard me speak at all, you’ve heard me talk about how important it is to join your local real estate investor group. It’s important to go to the smaller subgroups that branch off from that, it’s really, really important because that’s where you’re going to meet other investors. That’s where you’re going to meet other wholesalers, other lenders, other contractors, other people that you can build your team that you need to build. That’s the person that’s going to take you under their wings because I can tell you the people that have the money are the ones sitting at the back of the room with a piece of straw and overalls, you know, piece of straw in their mouth and overalls and they’re the ones that have all the money. They’re just looking for the movers and shakers, they’re looking for the people that know what they’re doing, right?
Jonathan Davis (46:50):
Look for the people who are trying the least hardest to impress others.
Wendy Sweet (46:53):
Jonathan Davis (46:53):
Those are the ones you want to.
Wendy Sweet (46:55):
Yeah. They’ve got the private money, they’re the ones you need to do.
Bill Fairman (46:58):
It’s not to say you don’t go to the main meetings.
Wendy Sweet (47:01):
Yeah, cause they’re good too.
Bill Fairman (47:01):
There’s good educational value there but to really meet and establish relationships with folks, you need to go to the smaller ones.
Wendy Sweet (47:10):
Jonathan Davis (47:11):
Last question. Do you have any no cash out refi products for investment properties? I have a call right after this and I will answer that question shortly.
Wendy Sweet (47:21):
They’re coming back but they’re coming back really slowly and we’ve got two companies keep threatening to bring us a couple of good loan products but right now they just really stink bad
Bill Fairman (47:35):
And you remember what we were just talking about? How the buying and hold real estate investor is probably the least risky? And these are the buy and hold expert lenders that don’t want to lend.
Wendy Sweet (47:46):
That’s for sure. So what we’re telling people right now is you need to check out your small local banks, they’re the ones that will most likely do those refinances for you. That’s what I’m doing, you know, that’s why I’m taking my stuff.
Jonathan Davis (48:00):
Are you getting a 20 or 30 year AM?
Wendy Sweet (48:02):
I’m getting a, I’m getting a 20 year AM. It’s a five-year renewable, they treat it just like a commercial loan and that’s how you have to approach your regional lender, your local lender about that. You need to tell them you’re looking for a commercial loan because you want to leave it in your LLC so you want to talk to a commercial loan officer, not their regular loan officer. So they’re going to give you a 20 year AM, It’s renewable every five years but you know what, right now that’s the best you can get so take what you can get.
Jonathan Davis (48:29):
And the rates that I’m seeing are, you know, between 4 and 5% from a lot of us.
Wendy Sweet (48:36):
Yeah, they’re not terrible listing.
Jonathan Davis (48:36):
Yeah, they’re not terrible.
Wendy Sweet (48:36):
And then I know there’s a private or a hard money company called lending one, and one is spelled out, lending one and I know they’re back doing their long term refinance. I don’t know that the rates are like, you know, very good, I do know that your credit scores have to be, you know, off the charts, good.
Jonathan Davis (48:56):
Most of them are 700 plus.
Wendy Sweet (48:58):
Yeah, or seven 720.
Bill Fairman (49:00):
I think they’re focused more on the multifamily.
Wendy Sweet (49:03):
Yeah. And they might have guidelines based on what the property is worth and you know, like that hundred, at least worth a hundred thousand and the loan amount has to be at 75. So there’s little things like that that could pop in and mess it up but anyway,
Bill Fairman (49:19):
So we have to go, we’ll be running out of time here.
Wendy Sweet (49:23):
I know, I know, I’m sorry.
Wendy Sweet (49:23):
Alright. It’s funny. I’m usually the one that’s running off of this.
Jonathan Davis (49:28):
Bill Fairman (49:31):
Bill Fairman, Wendy Sweet, Jonathan Davis. Carolina Capital Management, again, CarolinaHardMoney.com is our website. Don’t forget to subscribe, share, and like us and we’ll talk to you guys next week. Same time, different light.
Wendy Sweet (49:46):
More 10 minutes at a little after 1, right?
Jonathan Davis (49:48):
Yeah. We’ll have one here, shortly.
Wendy Sweet (49:51):
Bill Fairman (49:51):
Absolutely. Great guest too.
Wendy Sweet (49:55):
Bill Fairman (49:56):
Have a great day guys!
Wendy Sweet (49:59):
or he says