89 The Ugly Question
Carolina Capital Management’s Bill Fairman, Wendy Sweet, and Jonathan Davis are here for The Ask an Ugly Question segment. They tackle difficult, or ugly, questions about the industry sent over by other investors and entrepreneurs.
The first question is Why Do National Hard Money/Private Money Lenders Have Similar Guidelines?
Another great question in this episode is about charging extension fees and the reason behind that.
They also discuss the criteria for obtaining a loan.
Tune in to hear their answers.
Bill Fairman (00:03):
Hello everyone! It’s Bill Fairman, Wendy Sweet, Jonathan Davis. This is another broadcast of the Carolina Capital Management in the middle of the day show.
Wendy Sweet (00:14):
It’s called the Ask An Ugly Question Session, that’s easy!
Jonathan Davis (00:17):
Our version of a soap opera in the middle of the day.
Wendy Sweet (00:19):
Bill Fairman (00:21):
So please make sure to like, share and subscribe to our show. If you want any information on us it’s CarolinaHardMoney.com. If you’re a borrower, click on the borrower tab. If you’re interested in passive returns through investment, then click on the investor tab so I made it though that!
Wendy Sweet (00:42):
You did! And, and you know, Jonathan and I are making the screen exciting, we’re doing the great fo paw of video and that’s to wear something busy.
Jonathan Davis (00:52):
That’s right, yeah.
Wendy Sweet (00:52):
When you’re being recorded, right?
Bill Fairman (00:53):
Wendy Sweet (00:53):
That’s right. Solid guy, solid colors! We’re just busy kind of folks.
Bill Fairman (01:01):
So I’ve changed some of my lifestyle, I’m drinking a lot of water.
Jonathan Davis (01:06):
He’s one of those people. Not the drinking of water, It’s carrying the jug around everywhere.
Wendy Sweet (01:11):
Yeah, you’ve called him a gym rat this morning now, right?
Jonathan Davis (01:13):
Wendy Sweet (01:15):
He’s a rat.
Jonathan Davis (01:15):
They won’t even let you into planet fitness with a jug that big.
Wendy Sweet (01:19):
Bill Fairman (01:19):
Not even through the door?
Jonathan Davis (01:19):
Yeah, they’re like, no, no, there’s just no gym rats here. They see the jug, it’s like, if you have a jug of water or one of those like skinny tees,
Wendy Sweet (01:28):
Well, wait a minute, I thought that was the, what did they call them? The judgment free zone.
Jonathan Davis (01:32):
I know but, they judge those before you get in, I guess, I don’t know.
Wendy Sweet (01:37):
Judgments of judgment free zone.
Bill Fairman (01:39):
Judgement free once you’re inside.
Jonathan Davis (01:42):
Yeah, what do they call them? a lonk. They say, yeah, no lonks allowed. If you carry a jug or you wear those skinny little, do you wear those skinny little, cutoff shirts?
Bill Fairman (01:51):
Wendy Sweet (01:51):
He’s here to pump you up!
Bill Fairman (01:55):
I don’t have the body for that yet, someday in time, but yet.
Wendy Sweet (01:59):
I remind you of [inaudible].
Jonathan Davis (02:00):
Yeah, that’s good. Goals.
Wendy Sweet (02:02):
He’s working hard and I’m proud of him. For an old guy, you’re in great shape.
Bill Fairman (02:05):
Well, thank you for that backhanded jump. However, I did get my first senior discount at Publix.
Wendy Sweet (02:12):
Jonathan Davis (02:14):
Wendy Sweet (02:14):
Did they ask you for it or are you just?
Bill Fairman (02:16):
Yeah, unfortunately she said, are you a senior? I said, well, it depends on what your senior threshold.
Jonathan Davis (02:23):
Wendy Sweet (02:26):
Oh, that’s gotta make you feel good about yourself, right?
Bill Fairman (02:28):
Yeah, what was worse was I had a mask on and they really comes to me
Jonathan Davis (02:32):
And she saw through the mask, wow!
Wendy Sweet (02:33):
She saw it it in your eyes, the old in your eyes.
Bill Fairman (02:37):
She saw the bags under my eyes
Jonathan Davis (02:39):
Maybe you could just tell yourself, you know, she just assumed because of the mask, she just wanted to ask if she would have saw your face, she would have known that you weren’t a senior.
Wendy Sweet (02:46):
That’s right, you should’ve said no, are you pregnant?
Bill Fairman (02:52):
I’m trying to stay. Well, I want to keep all my limbs. I would probably have been beaten with something.
Wendy Sweet (03:00):
I say that because he did ask somebody when she was doing, she wasn’t pregnant, that was a great spot. But anyway, we’re here for stuff about real estate.
Bill Fairman (03:08):
That’s one of the life learning experiences, no matter how far along you are, I’m never asking you,
Wendy Sweet (03:18):
That’s right! Yeah, you learned on that, for sure!
Bill Fairman (03:19):
So let’s start off with a different ugly question. Like, are you expecting?
Wendy Sweet (03:24):
It’s only ugly id they answer it no. Too funny, too funny. Okay so our first question is “Why do national hard money lenders and private money lenders all seem to have the same or similar boxes or guidelines that we all deal from?” And that’s really a great question.
Jonathan Davis (03:48):
That’s a great question.
Wendy Sweet (03:48):
Cause they are pretty much the same, right?
Jonathan Davis (03:50):
Yeah. I mean, when you look at it, you’re going to see slight variances and LTVs as loan to value, LTCs loan to cost, slight rate variances, stuff like that but on the face of it, they all pretty much look the same and why? Like is there a national convention where we all meet and say this is what we’re going to lend and this is how much we’re going to charge, no. Actually, the hard money private lending space is one of the most fractionalized spaces there is and why do they look the same? It’s because they’re using someone else’s money and they’re using someone else’s money to fund the deals so someone else is making the determination on what that deal needs to look like so they’ll buy it.
Wendy Sweet (04:39):
That’s right. I mean, that’s a great, you know, when we came up with what we lend out on, we base it on whether or not it’s a good deal for the investor and that’s what so many people find really hard to understand. That’s what the investor sometimes finds hard to understand that if a hard money lender doesn’t want to do your loan at a higher loan to value or in a certain area, whatever the reason is, it’s because they’re trying to abate their risk, right?
Jonathan Davis (05:14):
Wendy Sweet (05:14):
So that should be the investor’s concern as well because you’re the one that’s taken a bigger risk than the lender, right?
Jonathan Davis (05:25):
In a lot of circumstances, yes. I mean and to get deeper into this question, you know, before, what, four months ago? There was a lot of wall street money backing a lot of these, and I’ll use air quotes when I do this, I don’t use them often “hard money lenders” who were just really originators and they didn’t have any money, they don’t have a balance sheet, they don’t have a fund that they lend out of, they originating for,
Wendy Sweet (05:58):
Jonathan Davis (05:58):
Or brokering. Yeah, you know, basically, we have, let’s call it a white label. So they would take the lender’s docs or the white, the wall street monies docs and they’d put their name on it, close the loan and then the wall street money would buy it or the fond or whomever it was, would buy it and it was on their docs already and they would just assign it over. So why do they all look the same? Because you’re lending or you’re working with money that is trying to lend nationwide.
Wendy Sweet (06:35):
Jonathan Davis (06:36):
And to do every, we all know this as investors, you know, every market is different, every region is different, every city is different. Neighborhoods, streets, we know that they’re all different and there’s really no way to underwrite to those differences so you have to create a box that says, okay, if it hits inside this box, no matter where it is in the nation, we’ll take it.
Wendy Sweet (07:02):
Jonathan Davis (07:02):
And that’s why they look the same, because it’s the same, you know, risk adjusted kind of box that they create that says, whether we’re buying in California or we’re buying in Alabama, if it hits this, we’ll take it, you know? So, a deal in Alabama, isn’t the same deal in California. They’re going to look differently so it doesn’t allow that flexibility but it does hopefully, mitigate risk is what they’re hoping for
Wendy Sweet (07:37):
That’s right and that’s one of the reasons why we are very particular about the area that we lend in. We blend in North and South Carolina and the States that touch us and a couple more outside of that range but all right here in the Southeast because we understand how the Southeast works, we understand that market. We’re really similar with how we lend in this area. If we were going to even just going across the border from somewhere in the Southeast, let’s say, Virginia. Even Northern Virginia can get quite a bit different from what we do here but once you cross that line and you go over into Maryland or New Jersey, or, you know, God forbid in New York, it’s a completely different lending world and you would want your criteria to be different. That’s why we don’t go over there.
Jonathan Davis (08:33):
Yeah, I mean, you even take Charlotte, for example, I mean, would you lend the same on the same guidelines in Dilworth as you would in, I don’t know, Northwest Charlotte? Probably not.
Wendy Sweet (08:44):
Jonathan Davis (08:45):
They’re very different and that’s in the same city. So you know, you have to be able to have that flexibility and that’s where, you know, I’ll go ahead and toot our horn here. Yeah, we have that flexibility to say, okay, that’s a deal here. I know it doesn’t fit normally, we do over on this side but over here, that’s a deal and most originators are usually put brokers, they can’t do that because they don’t have their own money, they’re beholden to somebody else’s terms.
Wendy Sweet (09:19):
That’s right and the product matters not only where it’s located but you know, what is the after repaired value? You know, what’s the price point that it’s going to sell in? You know, we’re much more happy to lend on a house where the after repaired value values under 400,000 than we are for one over because we know that it’s going to take longer to sell so, you know, if we are lending something a little higher than that, we might charge more for it, we might do a lower loan to value on it. That’s how we can change like that so the reason why, like Jonathan said that they all seem to be similar is because they all seem to be pulling from the same money. One of the things I wanted you to get a little bit deeper in Jonathan, is you talked about loan to value and loan to cost. A lot of people don’t understand, you know, why do we care about loan to cost? You know, what really is the loan to value loan to cost and ARV? Cause they’re all kind of connected but they’re not really.
Jonathan Davis (10:29):
Yeah. So loan to cost, loan to value and after repaired value or subject to value, subject to value ARV is simply that what is the value of the property once all the work is done? So we lend on those values, now those values are not set in stone. I mean, you know, Bill and I had these conversations all the time. I mean, appraisers are using historical data, old data to take a property in its current condition and forecast a new condition in the future and what’s that going to be worth? So, you know, typically when would they do ARV values, they’re going to be conservative because they don’t know what the market conditions are going to do so, you know, you’ll see people or I’ll, I see people come in and like, well, the air of in this house should be like 220 and then it’ll come back 190 or 195 and that’s pretty typical. I mean, if you can get 220, that’s great but the appraiser giving so many different conditions that have to happen in the future is probably not going to be as bullish on the value as an investor is so that’s ARV or subject to your loan to, we care about that, not only the end loan to value. We care about the current loan to value when you buy it. So when we do a loan, we want to manage the lenders, our exposure on the loan based on a loan to value so at the start, what is it? At draw one, what is it? Two, three, four, and then at completion, what is our loan to value? And we like to be, you know, definitely below 70 but our kind of sweet spot right now is 65% so we want to make sure that we are at, or below 65% loan to value over the course of that property, no matter where it is in the process. So then on loan to cost, we typically land 90% of the purchase price and we’ll lend a hundred percent of the rehab so on the purchase, we’re lending 90% loan to cost on the rehab, we’re lending a hundred percent. So depending on the rehab size and the purchase price, it’ll be somewhere between 90 and 99% is going to be the loan to cost. We lend more than most anyone else, you’re going to see everyone else is going to be lending between 80 and 90% loan to cost, which means that you either have to bring 20% down on the purchase or you have to fund your own rehab account or some portion of your rehab account. Why is loan to cost important? So that the lender knows that you have skin in the game so that you are invested in the project and its completion. If you have zero money in it, then you’re, you know, from the lender’s perspective, you’re probably not as concerned if something happens and you could walk away and the lender is left with a project. If you have some money in it, you stand to lose something so the lender says, okay, well, if they stand to lose something, they’re probably going to be a little more motivated.
Wendy Sweet (14:01):
Right. And loan to cost is important to you as an investor as well because you don’t want to be deep into a deal, too deep into a deal for it to be a deal. It’s important to, to use the numbers that whatever lender you’re working with, whatever private money you’re working with, it’s important to use their numbers to your benefit, they’re guidelines to your benefits so that you can calculate the deal and see what works and if you just don’t believe what they’re telling you and you want to get that loan done anyway, did you wanna talk?
Jonathan Davis (14:34):
Bill’s being usually quiet.
Wendy Sweet (14:37):
I never heard him that’s because he raises money, we put it out on the street.
Bill Fairman (14:40):
When you’re finished.
Wendy Sweet (14:44):
But when, now I totally lost my train of thought now.
Bill Fairman (14:47):
Jonathan Davis (14:47):
Jump on in, Bill
Wendy Sweet (14:47):
What did you want to say?
Bill Fairman (14:53):
So, one of the benefits of institutional money coming into our space is that it brought the rates down forever.
Wendy Sweet (15:03):
Yes, it did.
Jonathan Davis (15:04):
Wendy Sweet (15:04):
It wasn’t beneficial to us.
Jonathan Davis (15:05):
I was gonna say like a little,
Bill Fairman (15:10):
Let me finish. It’s still beneficial to other lenders that are balance sheet lenders like us because when you’re a balance sheet lender, just like a private lender, sometimes you run out of capital and you need the institutional investors out there to deploy capital in order for you to recapitalize so you can continue to make loans. If you run into that issue, where as a fund manager, your biggest fear is two biggest fears, one is I don’t have enough money to make loans with, the second biggest fear is I’ve got too much money and it’s dragging down my yield.
Wendy Sweet (15:52):
Yeah, one or the other.
Jonathan Davis (15:53):
But what you’re saying is assuming that whatever these people are underwriting guidelines to would fit the box of the people who are purchasing and that’s not necessarily the case.
Bill Fairman (16:07):
No, and I get that. The benefit is that they’ve lowered the cost for the borrowers because they brought rates down and the reason they have a box, obviously it’s because they’re lending nationally but they also have investors and they have to have parameters. Most of the institutional investors that have money in our space are not publicly traded. They are hedge funds and there’s using a credited investors like everybody else, they have documents that say, this is what we’re going after and this is how we’re going to mitigate risk, it’s all in the document. So they have to come up with guidelines that fit what the PPM saying, right?
Wendy Sweet (16:50):
Right. Just like we did.
Bill Fairman (16:50):
So what, now we’re a local lender, we’re a balance sheet lender. We, look at the total risk picture. It’s not in a box, but it’s going to be in some sort of a box because we know that the vast majority of the risk factors are and then we try to offset issues that might hurt it by capitalizing on the issues that are over and above what we need. So we’re taking the weaknesses and the positives, and we’re putting together and coming up with our own risk. That said because we are big enough and we have the capital to do it. If we do need to sell off pieces of the portfolio to raise more capital, we can always mitigate what those institutional investors don’t like about what we’re them by holding on to a piece of the loan and now there’s.
Jonathan Davis (17:52):
Guaranteed performance based on it, yeah.
Wendy Sweet (17:52):
Bill Fairman (17:52):
Less performance because we’re still in it too, we have skin in the game, so to speak on the loans we’re selling them. So your brokers or your originators can’t do that because they don’t have the money.
Jonathan Davis (18:08):
They don’t have the funds, right.
Bill Fairman (18:08):
To put into the deals.
Jonathan Davis (18:09):
I’m going to jump on my soapbox here cause you brought up the rates. So a combination of these hedge funds or the, you know, wall street money or whatever you want to call it, coming into the space coupled with HGTV has done is open up capital to first time, new investors, which is not a bad thing, that’s a good thing but what it’s also doing is you seeing these rate compressions and you are now targeting and going after transactional borrowers, people who only care about the rate, right? Not relationship borrowers. So when you do that, you are only going to target new investors or new borrowers, first time flippers and they’re typically a higher risk level because they don’t have any experience and the originators who are doing this don’t have an education program to help them through so they’re relying on their uncle Steve to help them come over and do some rehab work. Then you have the other side where you have someone who has does 50 plus flips a year and that becomes attractive to them like, Oh, a lower rate, I can do that and I can save some money doing this. And then they butt up against whatever the criteria threshold is for the maximum loan amount to a single borrower so then you know that you hit that. So those are your two extremes and that’s who you’re really lending to are those two extremes. It’s the people to do 2 to 30 flips a year that are left out of that because those are the people who are attracted to relationship lending and that’s where people like us come in.
Wendy Sweet (20:05):
That’s our sweet spot.
Jonathan Davis (20:05):
That’s our sweet spot, we like to have the experience but they’re not a full machine. But those people are left out now, would they do they like a lower rate? Sure. But they’re buying enough deals and have enough experience that their margins allow for them to pay more for a better product.
Wendy Sweet (20:23):
Jonathan Davis (20:24):
The person who has won, they don’t, I mean, probably talk margin with them, they may not even know what margin is. So, they don’t know, they might have razor thin margins and same thing for the guy who’s doing 50 plus, he has a crew, he has a team he had like, their margins are super thin so those are the people who are attractive. So that’s your portfolio is comprised of those people. I don’t worry too much about the 50 plus guy, he’s going to get annoyed because he’s going to hit his threshold.
Wendy Sweet (20:57):
Yeah and he’s got his own private money people, banks that are lending to him,
Jonathan Davis (21:02):
Yeah, and he’s got those private money people but then those portfolios are comprised of mostly first time flippers. So if something happens, you know, out of the ordinary, I don’t know, let’s say COVID-19, you know, then you have a portfolio that’s stressed because of the event and your portfolio is comprised of first time, unexperienced flippers. How will your portfolio fare when it’s stressed? I wonder why all those hedge funds stopped buying.
Wendy Sweet (21:35):
Yeah, exactly. That’s a great point. Well said, Jonathan, I’m glad we got that on tape. You know, the other thing too, you mentioned this morning that you’ve probably gotten a half dozen emails from other large hard money companies that are now back up to a 70% loan to value.
Jonathan Davis (21:57):
Yeah, that’s what they’re advertising, I don’t know.
Wendy Sweet (21:59):
Yeah, and what score do you have to have to have that? So they do. I mean, I’ve seen some people, I’ve gotten two emails saying but you know, your scores are going to have to be like 720 plus 780 plus I saw on one to get up that high but you know, my first reaction is, Ooh, it’s might be a little too soon to get comfortable with what the values are on properties right now. You know, we were approaching an election, we are just now to the point where people aren’t getting all the free money that they’ve been getting up until recently and you know, it takes about three months for a house to really fall into the pre-foreclosure process and, you know, I don’t know, I’m just feeling a little queasy about people and being a deal’s a little deeper,
Jonathan Davis (22:53):
Well, you know, the equity is still in the home. So,
Wendy Sweet (22:55):
At this point.
Jonathan Davis (22:57):
At this point.
Wendy Sweet (22:57):
Jonathan Davis (22:58):
So are people tapping into HELOCs to cover that gap? I don’t know. I mean, Bill, have you looked at that?
Bill Fairman (23:06):
I haven’t seen any data on the number of HELOCs. I know that there were certain banks, I believe it was Chase and Citi that were putting a hold on all their HELOCs. They didn’t want what happened during the 2008
Jonathan Davis (23:22):
Everyone to max it out and then completely eat away the equity, yeah.
Bill Fairman (23:25):
By the way, if you guys have any questions, there’s a chat box either at the top or at the bottom, depending on the platform you’re on. Just add in a question and we’ll be happy to answer it but there is plenty of equity and there could be people that are utilizing that to pay their bills but I think the banks are going to have a little bit more, they’re going to have tighter reigns on them this time around.
Wendy Sweet (23:54):
I hope so. A lot of people forget. I’m always surprised at the, the number of investors that do really, really well, that seemed to have forgotten,
Bill Fairman (24:05):
Yeah, they get amnesia.
Wendy Sweet (24:06):
You know, the recession and ’07, ’08, ’09.
Jonathan Davis (24:12):
That was probably the same investors who don’t understand perhaps market cycles like, real estate is pretty,
Wendy Sweet (24:20):
Jonathan Davis (24:20):
Yeah, pretty predictable. I mean, give or take a few years, you can pretty much pay, you know, like you can’t say this is the exact moment that something’s going to happen but you can get within a two or three year span and say, Hey, in this period, I mean, we’re probably looking for a recession.
Wendy Sweet (24:35):
Bill Fairman (24:36):
Now, keep in mind, you know, interest rate, how long has interest rates been low? 12 years?
Wendy Sweet (24:46):
I mean, quite some time, they’ve been under, what?
Wendy Sweet (24:48):
They haven’t been like they are now for 12 years, they’ve been low like this for a couple.
Bill Fairman (24:53):
But they’re still under five.
Jonathan Davis (24:53):
I was gonna say under five since what?
Wendy Sweet (24:56):
Maybe three years?
Jonathan Davis (24:56):
I would say, well, I was gonna say 2017? 16? 17?
Bill Fairman (25:04):
I’m thinking more like 12.
Jonathan Davis (25:06):
You would think it was, was it under 12?
Wendy Sweet (25:10):
Anybody can answer that question for us? That way,
Bill Fairman (25:12):
Somebody Google that for us, will you?
Wendy Sweet (25:17):
Is man a creation of God.
Bill Fairman (25:20):
Of course, that was an easy question. All right, so that said, my my point is they may not have amnesia, they might just not have been around or paying attention during the last and when they got into business. It’s just been full board ever since.
Jonathan Davis (25:39):
Well, I mean, and anyone who’s what, under 35? Wouldn’t have been an investor during that time.
Wendy Sweet (25:46):
Jonathan Davis (25:47):
Bill Fairman (25:48):
Well, apparently they didn’t teach it in school. The history,
Jonathan Davis (25:51):
I would say that.
Wendy Sweet (25:51):
Things has changed.
Jonathan Davis (25:51):
I would say the best majority of people who were in college at that time didn’t know there was a recession going on.
Wendy Sweet (25:59):
Yeah, they didn’t really get it on
Bill Fairman (26:02):
Until they got out to get a job
Bill Fairman (26:04):
And even, you know, and they didn’t, I mean, you saw that was during the time where like, you know, continue education was going on, people were staying in school, taking debts to, you know, do master’s degree, law degrees, stuff like that.
Wendy Sweet (26:17):
Yeah. So let’s talk a little bit about what we’re really seeing, like on average across the country. LTVs, we’re seeing right now for fix and flip, we’re saying 60 to 70%.
Jonathan Davis (26:29):
Wendy Sweet (26:30):
We’re, on rates, we’re seeing, I think I’ve seen a nine come through a 9.99 come through.
Jonathan Davis (26:37):
I’ve seen nines on flips and I mean, I see again,
Wendy Sweet (26:41):
And 12, 13, 14, I’ve seen those hit too.
Jonathan Davis (26:44):
Yeah. On points. I’ve seen it as low as two points and as high as, you know, five or six points, um, which, you know, those are a little more,
Wendy Sweet (26:51):
Jonathan Davis (26:53):
Cray, Cray but it’s very specific to the geography points, you know, you’re not going to get five points in those specific Northwest typically but you might get five and Mississippi, Alabama, kind of those more tertiary markets and It’s more risk that’s why you’re going to get more.
Wendy Sweet (27:14):
Bill Fairman (27:14):
Typically the higher the price of the home so that’s the point you’re going to be. You get down where your average loan size is around $65,000, you’re going to have a lot more points.
Jonathan Davis (27:27):
Yeah. You’re going to have to cause you know, you can’t make, it’s hard to make money at that level.
Wendy Sweet (27:32):
That’s what most hard money hard mailers make their money own
Bill Fairman (27:35):
There’s a lot more competition in California’s safer for loans than there is in Mississippi
Wendy Sweet (27:41):
The other thing I’m seeing too is that there’s a lot of companies out there that have a minimum on how much you can borrow and 75 seems to be pretty normal with a national lender. If the loan amounts less than 75, I know a lot of people don’t want to touch it.
Jonathan Davis (27:56):
And 75 is actually a pretty low for a national, I mean, I still see a lot at a hundred thousand. There’s a few that will dabble in the 55,000 but yeah, I would say you’re right. 75 to a hundred is kind of the low end.
Wendy Sweet (28:12):
And We’re at 50, we’re at 50,000, that’s our minimum and we’ll do a loan for 30,000 for you, that’s fine.
Jonathan Davis (28:18):
We’ve done a loan for $30,000.
Wendy Sweet (28:20):
Yeah but you’re going to pay points on 50. The interest will be based off of the true loan amount but when you’re going to pay points on 50, cause there’s a certain amount that’s,
Jonathan Davis (28:30):
It’s a break even point for us to do this.
Wendy Sweet (28:32):
For us to do the loan in the first place.
Bill Fairman (28:35):
And that reminds me, we have Eddie Speed coming on next hour.
Wendy Sweet (28:39):
You don’t want to miss it.
Bill Fairman (28:39):
And part of the takeaways that I’ve always had with seller financing is that most Fannie Freddie loans won’t go below 75 to 65 range anyway. And it’s not because they won’t lend that low. It’s just that there’s a threshold to be a qualified mortgage and if you charge the normal amount of fees that you have to charge on a conventional loan and the loan amount is below a certain amount then it kicks it into what they call a high cost loan and now it’s what they call non QM or non-qualified loan. So there’s a wide range of people that can do owner financing in that 65 to $75,000 range and just can kill it.
Wendy Sweet (29:30):
Bill Fairman (29:30):
And it works out great for the borrower because they can’t get financing anyway and then you’re able to get passive returns without having to have responsibility for the property.
Wendy Sweet (29:42):
Right, let’s look at this other question, we’re already at 12:36, let’s see. “Why do you charge an extension fee?”
Bill Fairman (29:54):
Cause we’re greedy!
Wendy Sweet (29:54):
Well, first let’s talk about what an extension fee is.
Jonathan Davis (29:59):
Yeah. Well, I guess my answer to why we charged an extension is like, why did it take you so long? Why did you not pay off?
Wendy Sweet (30:05):
That’s right. Why do you need one?
Bill Fairman (30:08):
No, but, what does an extension fee? So short term loans have a short term, which means, you know, they range from probably three months to 18 months is kind of a typical short term loan and oftentimes, especially on a fix and flip or even, I guess even a bridge loan, you run up against your maturity date and you haven’t quite exited the property, whether it was to sell it, to refinance it, whatever your course of action was.
Wendy Sweet (30:38):
We had a lot of buy and holds through the COVID that we’re ready to get their refinances done and didn’t get them done so they went and ask
Jonathan Davis (30:46):
Oh yeah. So you go past your ex your maturity date. So if you go past your maturity date, it is technically a default on the loan if you don’t pay it off. So at that point, the lender can move to foreclose on the property. We don’t like to foreclose, we will but we don’t like to. We would prefer to work with the borrowers and that’s why we are relationship lenders, you know, we understand the needs, we understand. When you lose a GC on a project and you get a new one in, you’re automatically going to be a month or two behind, it’s just going to happen. So now you’ve blown through your maturity date and you need an additional time to get the property where, you know, to exited refinance or sell so we do an extension fee for that. So what we’re saying is we should have had that money back and we would have redeployed that money and we would have made money on redeploying it.
Wendy Sweet (31:48):
Jonathan Davis (31:48):
Points on it, origination fees. But if we’re going to let you keep it, we still have to make something on it because we were going to make something on it if we got it back.
Wendy Sweet (32:01):
It hurts us when you’re in the loan longer than you should be.
Jonathan Davis (32:05):
Yeah, exactly. So to keep our, our yield and our returns, where they need to be, we have to make, you know, sadly we have to make money on the money we lend. So we charge an extension fee for that extra time that you need and honestly, it’s just because if we had the money back, we would be redeploying it and making money and if we’re not going to have that compensation, we have to be compensated on another in another way.
Bill Fairman (32:33):
And keep in mind, you’re getting a discount.
Jonathan Davis (32:36):
We don’t charge you the full origination fee.
Bill Fairman (32:38):
It is scanned on your renewal because if we had that money back, we would have made more money on the redeployment. When you’re doing six month loans, you’re expected to take that same hundred thousand dollars and use it twice in a year and if I can’t use it twice in a year, then our yields actually decrease because points, fees, interest rate, all figures into the yield and again, we have a yield target that we’re looking for for our investors and all that’s figured into the equation. Now there are loans that are available for 12 months.
Jonathan Davis (33:16):
Sure, we don’t set them up to fail, we try our best not to.
Bill Fairman (33:19):
It’s a larger project, we know it’s going to take longer, we’re not putting you in a six month loasn.
Wendy Sweet (33:22):
Like new construction, we default on that.
Jonathan Davis (33:25):
For sure, yeah, but if you have a $20,000 flip on your rehab, you don’t need 12 months.
Wendy Sweet (33:31):
No, you should be able to do you that in a month.
Jonathan Davis (33:33):
I mean, yeah. 30 days you should have that done and listed so it’s based, the term of the loan is based on the needs of the loan product or the property.
Wendy Sweet (33:44):
Right. If it’s taking you longer than that then you’re not doing something, right?
Jonathan Davis (33:47):
Yeah and then we’re happy to introduce you to GCs that we know and other investors that can help you.
Wendy Sweet (33:53):
Yeah. And it’s funny, so many people, when they’re getting into a loan they think that they’re going to be able to get it done at a certain amount of time and they want to save themselves money by doing the work themselves or using, you know, cousin Toni to help them finish or, you know, doing it on the weekends when they, get an opportunity or they’re just not good at lighting a fire under their contractors or whoever they’re hiring to bring in they’re choosing someone at a lower price and waiting until that person’s ready to do it, that’s the wrong way to do it. Because if you think you’re saving money, you’re not cause the money you think you’re saving, you’re paying to us and interest, right? And renewal fees on something like that.
Jonathan Davis (34:42):
And you’ve got a manager, your general contractors. I mean, I had a conversation with one of mine just the other day and we, you know, we had a come to Jesus moment where it was just like, your inability to get this done cost me X amount every month. This is the money I lose every month and you have to manage them that way. Because if you don’t have those conversations, you’re afraid to have those conversations, you’re going to be paying a lot of extension fees.
Wendy Sweet (35:06):
Yeah. You gotta kiss a lot of frogs to get to the right guy, right?
Jonathan Davis (35:08):
Wendy Sweet (35:08):
And the other thing too is, um, there are many people who will do a contract with the contractor and they have a timeframe in which they’re going to finish the house. If you say, I can have this job done for you by July 15th, I will come back as the owner and say, you know what? I’ll give you until July 31st but after July 31st, I’m going to start charging you a hundred dollars a day. I bet they’ll finish it but they didn’t put that in on paper. A lot of people do it.
Jonathan Davis (35:44):
Make sure you check those contracts for the amount of allotted rain days in there too. So they like to throw in about 50 during days.
Wendy Sweet (35:52):
Well, and then we did have, what was the, was it the, the beginning of the fall of last year where we had rain, like every day, every day, all day! It was like, it didn’t stop. For months, we had a lot of rain,
Bill Fairman (36:10):
The mold and mildew festival but if you’ll look at all your municipalities and States, when they do contracts for roads and bridges, infrastructure, they all have the same type of contract. You get it finished earlier, we’re going to give you a bonus. You get it finished later, then it’s costing you money.
Wendy Sweet (36:30):
That’s right. And we like to have an extension fee, ours is at 2%. Some people just have 1% and some people, I love the folks that come back to us and say, well, you know, I got it closed within 30 days of the extension. Do you have to charge me the whole thing? Well, yeah, we still didn’t get the, lend the money out and then we’ve negotiated on some in, in the past and there’s always extenuating circumstances that go along with it but understand that if you’re going to be a lender, then you need to act like you’re a real company and treat it like a real business and know that you have real costs. That’s why being a lender is the best seat at the table because the things that go wrong, aren’t your problem and they shouldn’t be your problem. The risk is truly on the borrower. The borrower’s the one that’s going to, they’re making the biggest amount of money off the deal to begin with if they do the things that they shouldn’t be doing.
Jonathan Davis (37:32):
And they’re supposed to be making the most money.
Wendy Sweet (37:34):
That’s right. So they should take on the biggest risk.
Jonathan Davis (37:36):
I love, I won’t say who the quote is but we all know, we all know him. His quote was when borrowers don’t want to pay an extension fee or whatever it’s like, so I’m sorry. You’re saying that money in your pocket is more important than money in my pocket, even though that you, this was part of the contract that we signed, you want me to, you know, go back on the contract and adjust it, even though you signed it. So it’s more important for you to have money than for me. Well, yeah. Money in your pockets always more important than someone else’s that’s right.
Bill Fairman (38:12):
Well, I don’t know if it’s more important or not, but it feels a lot better.
Wendy Sweet (38:17):
Bill Fairman (38:18):
And by the way, I used to like your wife and I just saw what she wrote up in there.
Wendy Sweet (38:25):
I like what you she wrote.
Bill Fairman (38:27):
She saw the old in your eyes, I didn’t see it at the time. You’re so mean!
Wendy Sweet (38:30):
That’s because you have old in your eyes.
Bill Fairman (38:32):
Thank you sir!
Wendy Sweet (38:32):
That’s too funny.
Bill Fairman (38:38):
So do we have, no one else has a question?
Wendy Sweet (38:40):
Are you tired? He’s old and tired!
Bill Fairman (38:40):
We do have a really serious question. What is a water bottle?
Jonathan Davis (38:52):
That says “That is a water bottle”
Wendy Sweet (38:53):
“That is a water bottle” See? He has old vision eyes!
Jonathan Davis (38:53):
The old in his eyes is getting in the way!
Bill Fairman (38:59):
It has nothing to do with that, I just can’t read.
Wendy Sweet (39:03):
Oh, that’s too funny. It was really funny as I watch you drink out of that gigantic thing
Bill Fairman (39:08):
Correct. This is quite a water bottle
Wendy Sweet (39:12):
That’s for sure.
Jonathan Davis (39:13):
But you know, to go back to the extension fee, you could avoid a extension fee and a couple of ways. Do your project on time and get it sold, or, you know, and we’re pretty flexible. I mean, we get to mold things around here and make decisions and if you want to bring a principal payment down in reduce our level of risk, if you want to bring, you know, 10 to 20% of the principal payment down, we’ll waive the extension fee but you have to, you know, so from the lenders perspective, there’s a perceived risk so I know the term of the loan, I know I can quantify the risk based off of the property and the term. Now, if we go outside that that becomes a higher risk because I didn’t make this loan outside of this timeframe, I made it for this specific timeframe on this property. So you can either pay down principal to reduce the lender’s risk or you can pay a fee to compensate the lender for the risk. You know, there’s two ways to look at it.
Wendy Sweet (40:21):
Right. You know, if you are a lender, whether you’re a private money lender or, you know, you’re just lending out yourself, direct an IRA, you should be charging an extension fee to whoever you’re lending to. I mean, I can tell you that, that for us, we’ve got people that have been in loan since 2018 and they’re paying extension fees every three months. Every three months! They’re paying on time, they’re paying an extension phase and you know, we would rather have those loans paid off. We really would cause we would make more money if they were paid off. but I mean we’ve had people that paid over a hundred thousand dollars in extension phase, that’s a lot of money!
Bill Fairman (41:07):
Yeah. And the good news is it was during a time when values were increasing. So it didn’t hurt him as much, but it sure cost them profit.
Jonathan Davis (41:17):
I don’t want to pay a hundred thousand dollars in extension fees ever.
Wendy Sweet (41:20):
Yeah. It’s kind of crazy,
Jonathan Davis (41:22):
Wendy Sweet (41:23):
But if you’re a lender, you really need to consider doing that in a big way. It says, what is the criteria for obtaining a loan?
Jonathan Davis (41:32):
Well, there’s a,
Bill Fairman (41:34):
First, Denise, you have to have a huge water bottle to bring to the table.
Wendy Sweet (41:41):
That’s pretty, that’s pretty easy and it’s pretty common for most people. It’s different, It is a little bit different for every lender but if you really want to get alone, the first thing is, is most lenders are not asset based lenders and what that means is most lenders are lending not only based on your property but they’re lending it based on your ability to pay it back. Most lenders care about what your credit score is, we are at six 50 and that’s actually probably one of the lower ends that we’ve seen.
Jonathan Davis (42:15):
Everywhere else is 680 plus the [Inaudible].
Wendy Sweet (42:16):
Yeah. So, and you’ve got to have money in the bank. You’re going to, she says, she’s going to her wallet home. So you have to have some money in the bank and when people ask me how much money,
Jonathan Davis (42:29):
It depends on your project.
Wendy Sweet (42:30):
Yeah, it absolutely does. And I know when I’m talking to people, I tell them that rule of thumb, you can count on bringing about 7% of the total loan amount to the table and closing costs. That’s for us, that includes our fees, your insurance, your hazard insurance, your title insurance, title binder, attorney fees, recording doc prep, all the things that, that you’re going to see on a HUD.
Jonathan Davis (42:59):
Plus, the 10% of the purchase price.
Wendy Sweet (43:01):
In addition to that, you’re going to bring 10% of the purchase price to the table, that’s for us. Now, other lenders are going to ask for different things. Some of them are going to ask to see 20% of the purchase price or they might want to see 10% of the purchase and the rehab together in addition to the closing costs and then you’ll have, you’ll have lenders out there that won’t have you bring any money to the table. Good luck in finding them. I’d like to find them for myself.
Bill Fairman (43:29):
They’re few and far between now.
Jonathan Davis (43:30):
And you can you know, more of the private money or people’s self-directed IRAs or cash you lend on, you know, just as a hobby pastime. Those are, the people are probably going to lend a hundred percent where you don’t have to bring anything down, but the closing costs but yeah, any company that’s doing this is probably going to have you bring money down. Now, you know like, what, what do you need to get alone at criteria? You need money so you need to be able to bring the money down that’s necessary. You need to be able to debt service the loan, which means pay your monthly payments o if you don’t have that money in the account, there’s lenders that will still lend to you as long as they see a cashflow on your bank statements that says you are making money. Like, you know, you have a job somewhere that’s paying you and you have the cashflow
Wendy Sweet (44:24):
So self employed doesn’t matter, we just want to see that you have some kind of income.
Jonathan Davis (44:28):
And, you know, other than that, like,
Wendy Sweet (44:30):
And that you pay your taxes.
Jonathan Davis (44:31):
Pay your taxes, you don’t have financial crimes or anything like that.
Wendy Sweet (44:39):
We do pull a background check, not everybody does that, right?
Jonathan Davis (44:42):
I mean, you know, as long as you know, you’re not like laundering money for the cartel, you know, there’s other things.
Wendy Sweet (44:50):
Stop doing that.
Jonathan Davis (44:50):
Yeah, stopped doing that please but yeah, I mean, we look at all those different things and so basically you need a six 50 credit score or higher you need to not be a financial fraud. You need cash to get started and you need to find a good property. That’s really it.
Wendy Sweet (45:13):
Yeah. And we would like for you to have experience, if you experience means at least having done one property, when we like to see that experience, if you don’t have experience, what we would at least want to see is that you’re involved in real estate groups, like maybe your local real estate investor association, or you’re coming to a subgroup. Like I have one, you know, sunrisers every Friday morning, we want to see or that you were raised in a family of real estate investors, you know, you can’t help but gain experience from that. So we want to know that you’ve done some investigating on what it is you need to do. Now we hold your hand, that’s one of the things that we do, that’s a little different than most, any lender you’ll work with is we do hold your hand.
Jonathan Davis (46:01):
Yeah. We would try if you’re a first time a flipper and you have all the answers and you’re not willing to take criticisms or suggestions,
Wendy Sweet (46:08):
We won’t get along.
Jonathan Davis (46:10):
Probably. I mean, probably not.
Wendy Sweet (46:13):
Don’t call us.
Jonathan Davis (46:16):
If you can’t take suggestions from people who’ve been doing, you know, this stuff for 10, 20, 30 years, you know, who will you take suggestions?
Wendy Sweet (46:25):
Yeah. That’s exactly right.
Bill Fairman (46:27):
Well, I think this is the least amount of spoken in a show since we’ve been doing this.
Wendy Sweet (46:32):
Jonathan Davis (46:34):
We should start you’re own series. I said that lane, one of the shows, it was what the Stump Bill should be one of our things where people submit questions, trying to stump Bill. I think that’ll be,
Bill Fairman (46:44):
Wendy Sweet (46:44):
Bill Fairman (46:44):
That was fun
Wendy Sweet (46:44):
Listen, we’ve got Eddie speed on next. He’s coming on at one and some minutes after that one 1:05. There’s a separate link for that. I wonder Scott, if it would be possible for you to put the link for the next one up on this video.
Bill Fairman (47:11):
Or in the chat.
Wendy Sweet (47:12):
Not yet we’ll no, on the video cause not everybody will be able to see the chat. Scott can you do that? Nod your head. He’s nodding.
Jonathan Davis (47:21):
He’s nodding, yeah.
Wendy Sweet (47:21):
So he’ll put it on there, great. So Eddie speed, oh there you go. So that’s the next one that we’re going to be doing. Eddie speed, note school, you don’t want to miss this. If you know about notes, you can do any real estate deal. You can make anything that works that comes across your desk work, It’s excellent.
Bill Fairman (47:42):
In this show, I saw this presentation that Eddie did a few weeks ago and he’s got some very timely statistics that have come up and this is going to give people an opportunity to take advantage of what may be coming down the pike and even if you’re not taking advantage of it, at least, you know what to expect.
Wendy Sweet (48:10):
That’s right and Scott also put them in the chat
Jonathan Davis (48:11):
And we have one more question from Denise and it was, it already disappeared but how do you, can you scroll back up, Bill?
Bill Fairman (48:19):
They like them a little mouse.
Jonathan Davis (48:21):
What is the best way to learn about self-directed IRAs?
Wendy Sweet (48:23):
That’s a great question.
Jonathan Davis (48:24):
Wendy Sweet (48:24):
So you need to Google self-directed IRA companies and I’ll give you some names right now. First go to Quest IRA.
Bill Fairman (48:34):
Actually it’s Quest Trust IRA.
Wendy Sweet (48:34):
Quest Trust IRA, you also want to check out Camaplan, C A M A, Camaplan. You’ll want to check out American IRA.
Jonathan Davis (48:43):
Yup, that’s one of those things, American IRA.
Wendy Sweet (48:43):
Who’s another one that, well, the equity trust company as well. If you get on their websites, they have resources tabs where you can get online and go to their free seminars, free webinars. They’re always training people on how to use your self-directed IRA and if you know how to use a self-directed IRA, that’s a great way to raise money for yourself.
Jonathan Davis (49:17):
And if you don’t, we do.
Wendy Sweet (49:19):
Yeah, that’s right. Hey, we raised over $30 million of other people’s self-directed IRA money to lend from so you can do that too, you got to know about an IRA
Bill Fairman (49:31):
There’s another one called NuView,
Wendy Sweet (49:31):
And Rocket Dollar.
Bill Fairman (49:31):
And then rocket dollar.
Jonathan Davis (49:35):
Yeah, Rocket Dollar that’s a good one too, yeah.
Bill Fairman (49:37):
So all of these companies have great education pieces on their website. They have webinars, they do, they have virtual events that you can attend and all of them are recorded
Wendy Sweet (49:50):
And NuView as N U V I E W, I think.
Jonathan Davis (49:55):
They all have their different things and you know, whether, you know, they all vary slightly and fees and things and you have to figure out what’s what’s best for you. You know, you can get charged, you know, a yearly rate, you can get charged by the transactions that you do so if you’re a heavy investor and you want to do a lot of transactions, you’re going to offer,
Wendy Sweet (50:13):
Get the yearly rate.
Jonathan Davis (50:14):
Get the yearly rate and if you, you know, if you do one or two transactions a year, maybe do the transactional fees
Bill Fairman (50:19):
Yeah. So for example, if you’re going to put your money into a couple of funds, that money’s not ever coming out until you withdraw it so you would definitely go by the transaction. If you’re doing a lot of loans or buying properties and stuff, you definitely want to do the yearly.
Wendy Sweet (50:34):
And if you have money in a self-directed IRA, we can lend it out for you, you just let us know by going to..
Bill Fairman (50:41):
The investor tab on CarolinaHardMoney.com.
Wendy Sweet (50:47):
That’s right, tell all your friends.
Jonathan Davis (50:48):
That’s right, sweet!
Bill Fairman (50:48):
Now, you can also borrow money in the name of your IRA.
Wendy Sweet (50:52):
That is correct!
Bill Fairman (50:54):
I don’t suggest you do it on a fix and flip because your profit would be subject to UBIT tax. If you’re doing it on a buy and hold, at least you have depreciation that could offset that. So don’t forget to share, like, subscribe, all that good stuff.
Wendy Sweet (51:14):
Tell your friends.
Bill Fairman (51:14):
If you’re a borrower interested in getting a loan, again, CarolinaHardMoney.com, click on the borrower tab. Great questions today, thank you guys for joining us.
Wendy Sweet (51:26):
Thanks so much, I hope we see you in ten minutes.
Bill Fairman (51:26):
And Brian will join the next show. All right.
Wendy Sweet (51:28):
Bill Fairman (51:29):