95 Answer an Ugly Question – Hard Money Made Easy!
In today’s episode of Active Wealth, Passive Income Show of Carolina Hard Money Bill, Wendy, and Jonathan will answer and discuss the following “ Ugly Questions”
What questions should you ask when you are shopping for hard money or a private loan? Can I renew my Loan?
Are payments monthly or paid at the end?
Watch this video to learn more.
Bill Fairman (00:05):
Greetings! Hi everyone.
Wendy Sweet (00:10):
I kept thinking that we’re blurry. We’re hoping not. Maybe we’re just thinking too much.
Bill Fairman (00:13):
I’m a little worried but I can’t focus from here because my number one, my glasses are foggy and number two, I can’t reach that far into the camera and focus. So hi! I’m Bill Fairman and this is Wendy Sweet and Jonathan Davis. We are with Carolina capital management and welcome to, what is our show? Don’t say it.
Wendy Sweet (00:34):
It’s on the screen.
Bill Fairman (00:35):
Oh yeah. Passive Income, Active Wealth show.
Wendy Sweet (00:39):
That’s right. That’s good. You memorize that very well.
Jonathan Davis (00:42):
You nailed it, Bill.
Bill Fairman (00:42):
Yeah. Especially when it’s written in front of me. So our website is CarolinaHardMoney.com. If you are a borrower, click on the applying tab. If you’re someone who is interested in some of that active wealth.
Wendy Sweet (00:57):
Bill Fairman (00:57):
With passive income, you interrupt me, I know the roll.
Jonathan Davis (00:58):
They just get in from two separate ends.
Bill Fairman (00:58):
Click on the investor tab. Don’t forget to share like, and subscribe to our show. We have tons of episodes on there, tons!
Wendy Sweet (01:13):
And most of them are pretty good.
Jonathan Davis (01:15):
Some are mediocre.
Bill Fairman (01:19):
Well, we’ll help you out.
Wendy Sweet (01:20):
Bill Fairman (01:22):
So you know what today is, it’s Thursday and it’s employment news day.
Wendy Sweet (01:28):
All day long. Oh, so we have news.
Jonathan Davis (01:43):
I feel like we’re official.
Wendy Sweet (01:46):
Yeah. We’re like Jane Curtin and, who was it on it wasn’t that on Saturday Night Live? Jane Curtin, Jane, you. It wag great!
Bill Fairman (01:50):
It was Chevy Chase.
Wendy Sweet (01:56):
Yeah. That was good.
Bill Fairman (01:56):
So this just in, Bill has a new sport coat.
Wendy Sweet (02:03):
That’s right, he look so handsome.
Jonathan Davis (02:03):
Looking fly, Bill.
Wendy Sweet (02:03):
And there’s a fly on your head.
Bill Fairman (02:03):
So, the continuing unemployment claims this week, we’re actually down from last week by 9,000. I don’t know what the number, I think we were in the 875,000 range last week but they’re down. So we’re trending well.
Jonathan Davis (02:23):
Bill Fairman (02:23):
And that continuing unemployment claims are also down. I don’t know what that exact number is. So my breaking news is not as sharp as it should be. It’s just getting better.
Jonathan Davis (02:36):
And it’ll be down until,
Wendy Sweet (02:37):
It starts going up.
Jonathan Davis (02:39):
Until the airlines.
Wendy Sweet (02:42):
Yeah. That’s right.
Bill Fairman (02:42):
We were talking about that if the airlines don’t get a buy out. There’s going to be a lot of people that are going to get furloughed.
Wendy Sweet (02:49):
That’s for sure.
Bill Fairman (02:50):
I think, probably in the 30 to 40,000 range.
Jonathan Davis (02:54):
Bill Fairman (02:55):
That’s a lot.
Wendy Sweet (02:55):
But will that last?
Bill Fairman (02:55):
But you know what? It costs a lot of money to keep there airlines rolling.
Wendy Sweet (03:00):
Yeah. I mean, will it last? I know they cut back the flights.
Bill Fairman (03:04):
Well, it will last as long as people are afraid to get out.
Wendy Sweet (03:09):
To travel. Yeah. I mean, we’ve traveled, I’ve traveled twice in the past month.
Bill Fairman (03:14):
Yeah and there’s nothing wrong with us.
Wendy Sweet (03:14):
And, you know, the first time I went, which is maybe six weeks ago. The airport was absolutely empty in the morning. I like to fly the morning cause that’s usually the one that won’t be late and so I was surprised at how absolutely empty the airport was
Jonathan Davis (03:37):
Or two flights now, today they’re usually not late.
Wendy Sweet (03:41):
That’s right. But coming back, it was packed. It was in the afternoon and the airports were packed. All the eating places were open and that kind of thing. Second time, I believe the same thing occurred. One was flying to Chicago and the second one was flying down to Tampa and I experienced the same thing at both. Also, the town, the Tampa flight, they had all the middle seats with people sitting in them, which didn’t occur on the first flight but now all the,
Bill Fairman (04:12):
It depends on the airline.
Wendy Sweet (04:12):
Yeah. USA puts people in the middle, Delta still hasn’t blocked everlane.
Bill Fairman (04:16):
I like to fly in the afternoons because I don’t care if the drinks are for free, I’m drinking in the morning,
Bill Fairman (04:23):
And if the free is for me,
Wendy Sweet (04:23):
At least he has his standards.
Jonathan Davis (04:23):
Don’t sleep in the afternoon if you sleep in the morning.
Wendy Sweet (04:28):
That’s right. He has his standards, I’m proud of you pal.
Bill Fairman (04:28):
If it’s free, I’m going to take advantage so just move my schedule.
Wendy Sweet (04:34):
That’s right. You know, there was something interesting that you said too a little earlier though, when we were talking about unemployment and you said that the new jobs are not, new creation, new job creations are not on snap
Jonathan Davis (04:47):
Yeah. We have unemployment trending down but new job creation is not trending up.
Wendy Sweet (04:50):
Jonathan Davis (04:52):
Which you could be, you know, we have, I mean, you have jobs that are going out of business and new jobs being created. It’s not saying that there’s not new jobs being created. It just saying that the jobs that are being phased out or furloughed, or, you know, being rid of are not, or outpacing the new creation of jobs.
Wendy Sweet (05:14):
Well, that’s a good way.
Bill Fairman (05:16):
You can also look at it this way. As businesses are starting to reopen, they are bringing people back that were already there first. So some of those businesses that slowed down are starting to pick up. Then some businesses are closing all together and we’ll never be back, but
Jonathan Davis (05:36):
It’s a strange time. I mean, you have some businesses that are just booming and exploding and hiring like crazy, and you have other shuttering, their doors. I mean, it’s, yeah.
Wendy Sweet (05:46):
Jonathan Davis (05:46):
It’s sad, but I mean, I’m happy for the ones that are, you know, providing a service during this time and that’s valuable and reshaping kind of, our economy a little bit and pivoting where they need to pivot. I mean, I saw where, you know, hotels, I mean, they’re renting out rooms to companies, you know, for offices, they’re putting homeless people in there. They’re doing all kinds of things just to make it through this so it forces innovation.
Bill Fairman (06:15):
You know, what shocks me are the small restaurants that never had a website and still don’t think they need one where, you know, you’re having fewer and fewer people that are going to the restaurant for dinner but they feel like they like their food and they don’t want to have to call them up and say, well, what do you sell? Because they don’t have a website that has a copy of a menu on it or they don’t have a phone app, which by the way, you can get a phone app built for your company for next to nothing.
Wendy Sweet (06:48):
Yeah, on fiber.com. Five months. That’s true.
Bill Fairman (06:51):
And you don’t have to have a fancy phone app that takes your payment, sends the order in. You can have a phone app that at least shows the menu and then you just hit a button to call them and say, yeah, I’d like this. I just don’t get it. These people are complaining about not having any business. You have to innovate. If you don’t innovate or you have to go with how the people want to be served, you’re going to be left behind.
Wendy Sweet (07:22):
Here’s what I thought was funny. I went to a birthday party of dear friend last night, Jeff Johnson. And it was held at this old mill house that’s been converted into, it looks like a big giant food court, that’s really what’s there. It’s, got a, in the center, it’s an open courtyard. It’s all outside, really, really, really nice place. But on the inside, it’s a U shaped building and it’s just little restaurant after restaurant, after restaurant. You don’t eat in the restaurant, you take it either outside or their little chairs in the hallway. It looks like a gigantic food court and the rest of the restaurants that are serving are really, really good. I mean, it was amazing, the variety and everything. So when you walked inside to get your order, if you didn’t have a mask on, they would stand there in front. Now they’ve got plexiglass in front of their stations and they have masks on and you’re standing six feet back. They will not take your order standing in front of them. They’ll say you have to use your phone app to order
Jonathan Davis (08:31):
Because they don’t want you to speak into them.
Wendy Sweet (08:33):
They don’t want you to, but if they’ve got, you know, an armory in front of them, it was really interesting how different it is in North Carolina versus what’s going on in South Carolina.
Bill Fairman (08:44):
They have to do that to stay open.
Wendy Sweet (08:45):
Yeah, that’s for sure. But everybody’s out in the food court sitting, you know, right next door to each other. I’m pretty sure that spit travels in the same of air outside that it does on the inside. It’s just, it’s so weird, the regulations, how different it is and how it just doesn’t make sense.
Jonathan Davis (09:05):
I mean, it’s different for me. You go into a grocery store and, you know, you,
Wendy Sweet (09:10):
Touching all the cans.
Jonathan Davis (09:10):
Touching all the cans. I mean, I went to go get my haircut yesterday. They wouldn’t let me touch anything in the,
Wendy Sweet (09:16):
Which looks nice by the way, you don’t look like a hippie anymore.
Bill Fairman (09:21):
I guess it’s not really part of the shop or whatever it is. I couldn’t touch anything until they watched me sanitize my hands.
Wendy Sweet (09:29):
And they got your temperature?
Jonathan Davis (09:29):
And they took my temperature. But yeah, I mean, yeah, everywhere is a little bit different. You know, we’re all just, you know, everybody’s trying to take precaution and everyone’s trying to feel safe and, you know, whatever you need to feel safe is relevant.
Bill Fairman (09:43):
We’re very litigious society so part of these things that they’re doing has nothing to do with CDC guidelines or regulations that the state put out, they’re more worried about litigation and liability.
Wendy Sweet (10:00):
Which is sad.
Bill Fairman (10:02):
Somebody saying, Oh, well, I got COVID and I’m sure I git it in your restaurant, but yeah, they know exactly what had happened.
Wendy Sweet (10:09):
Yeah. It’s all in the side.
Bill Fairman (10:09):
I mean, you’re a target as a business. You’re a target, no matter what.
Wendy Sweet (10:15):
And it’s at home for you and I, we just lost a cousin to COVID and our family is absolutely devastated.
Bill Fairman (10:24):
We’re not taking it lightly, don’t get me wrong but still have to live your life with the best you can do. Take common sense. Okay. So,
Jonathan Davis (10:38):
And not shame others wherever they think that’s, you know, that’s the biggest thing. People shaming other people on both sides.
Wendy Sweet (10:42):
Whether you’re wearing it or not wearing it.
Jonathan Davis (10:46):
There’s no need for that.
Wendy Sweet (10:48):
Yeah. It’s just a divided society right now.
Jonathan Davis (10:50):
Yeah. But let’s jump into our ugly questions.
Wendy Sweet (10:55):
Bill Fairman (10:55):
We have a question.
Bill Fairman (11:04):
Today’s ugly question makes 72 parts. Actually, it’s not. We just have 72 answers.
Wendy Sweet (11:13):
72 answers. That’s right. That’s right. In fact, so many answers,
Bill Fairman (11:13):
Why don’t you tell us what the question.
Wendy Sweet (11:13):
There are so many answers that we knew it would pretty much take the full time to talk about it. So our question is, “What questions should you be asking when you are shopping for a hard money or a private line?” And that is, I think it’s a great question. I get that question all the time.
Jonathan Davis (11:38):
I feel like everyone’s first question, especially new borrowers is what’s your rate? What’s the rate? How much am I going to have to pay? What’s the rate? And while that is a valid question on my list, it’s probably one of the least important.
Wendy Sweet (11:51):
It’s one of the least important. Coming from a Hard Money Lender. There’s like, yeah, you’re a Hard Money Lender, of course, you’re saying that
Jonathan Davis (11:58):
I borrowed money as well. And I do real estate deals personally and you know, again, on my personal list, interest rate is pretty far down the list.
Bill Fairman (12:08):
Interest rate is very important on a long term cash flowing property because that’s going to determine how much cash is flowing but when you’re doing a value add project, that’s no, that’s not an, it shouldn’t be an issue.
Jonathan Davis (12:27):
When you do a value add project, fix and flip repositioning, whatever it is, the first question that should come to your mind is leverage. What is the leverage? So, you know, what is my equity stake versus the interest rate? So that should be, in my mind, that’s the first question.
Wendy Sweet (12:46):
In third grade is how much money are you going to have in it?
Jonathan Davis (12:49):
Correct. How much money do you have to bring? You know, how much equity do you have to provide? How much skin do you have in the game? Because in a repositioning like a fix and flip or multi-family repositioning loan, it’s the acquisition. That’s what you’re after, the acquisition. You made your money on the acquisition. On a longterm cash flowing project, you don’t necessarily make your money on the acquisition. It requires like Bill said, to be able to cash flow. So, you know, paying 12% as opposed to 4% makes a big difference on cashflow. So yeah, on long-term stuff is a big deal but when we’re talking, so for the sake of argument, for what we’re talking about it’s all pretty much 18 months less loans, which will all be short term. Right?
Wendy Sweet (13:36):
Right. So that first question should be, how much money am I going to bring to the table? That’s really what your concern is, it’s what is it that I’m going to bring out of my pocket? And what adds up is if you have to bring a down payment on the purchase price or a down payment on rehab amount, cause some companies do that as well. So that’s money you’re bringing out of it out of your pocket, plus closing costs. Are you bringing closing costs out of your pocket? There are some lenders that will roll the closing costs into the loan and you don’t have to bring that either. So, I mean, there are companies out there that will put you in your position without you bringing a dime to the table. I couldn’t tell you which one does but I know there are private money people out there that do it and I’ve heard that there are companies out there that do that and I really don’t know the name of one, or I would share it with you. I promise I would.
Jonathan Davis (14:32):
And I had a conversation with a commercial, potential borrower, I think last week. And he brought to my attention. He’s like, well, I have two other offers from other lenders at 8%. I’m like, okay, cool. What’s your down payment? Well, you know, it’s between 25 and 30 percent, I was like, okay, so 8% and 30% down, as opposed to, let’s say 10% and 10 or 15% down, like I’m not going to do the math for you but do it over the life of the loan in 12 month loan and see which one you have less money in.
Wendy Sweet (15:12):
Right. It’s pretty obvious. For sure.
Bill Fairman (15:12):
See, the one thing that you always have to keep in mind is the cost of the opportunity lost. So if you’re putting a lot more money down, that means that’s money that you could possibly have working somewhere else and you’re going to miss out on that opportunity. Secondly, peace of mind. If you have that extra cash in the bank and things go wrong, which it’s real estate, things go wrong. You’re always going to go wrong. If they don’t go wrong, that’s the cherry on the top. That said,
Wendy Sweet (15:50):
And you’re Superman.
Bill Fairman (15:51):
You have a lot more ways to get out of a predicament if you have money in your pocket, not being held with somebody else.
Jonathan Davis (16:02):
And again, another conversation I had with the commercial borrowers, you know, they could go straight into a CMBS loan as, you know, 4 or 5%.
Wendy Sweet (16:12):
Jonathan Davis (16:12):
So a Commercial Mortgage Loan.
Wendy Sweet (16:14):
Jonathan Davis (16:14):
So they can go straight into that, it’s Commercial Mortgage Backed Security, but they don’t. They don’t take that on the acquisition acquisition. They take how much higher rate and why do they do that? Because they have to bring less money to the table. And if they were here, they would tell you, well, I do that because I’m a savvy real estate investor. If I have to bring less money down, the difference of that 4%, let’s just say 11%, you know, that 7% difference. He’s like as a real estate investor, if I can’t make at least 7% on the money that I have, then I’m not a good real estate investor. And he’s like, of course I can do that. So I’d rather have more money and I can make more than 7% on it so I haven’t lost anything.
Bill Fairman (17:05):
Well, it’s not just that too, it’s speed. You’re paying for the speed of the transaction to close and the faster you can get a transaction to close, the more likely you are to get the deal in the first month because as a seller, isn’t going to take a property off the market and by the way, most of the people that we deal with, are buying stuff on the market. But that said, there’s other people that are interested always because there’s plenty of competition out there looking at the off-market properties as well. I guarantee you, if they called you from a mailer, they’ve gotten 12.
Wendy Sweet (17:45):
Jonathan Davis (17:45):
Yeah. Well, and the other thing is, you know, like you don’t need to, I guess, what’s the best way to say this? Your rate versus your leverage. Like if rate is the most important thing to you, then you’re swallowing a lie. Because rate doesn’t matter if the difference between 8% and 10%, a 2% interest only payment kills your deal, it’s not a good deal. Your margins are way too thin. I think personally, like when I do properties, even on like a fixed rent, if the property doesn’t cash flow at 10% interest, I won’t do it.
Wendy Sweet (18:34):
Jonathan Davis (18:35):
I won’t do it because it has to make sense, even if I can’t exit, which was a great strategy given COVID cause I had to stay in some deals a lot longer than I planned on it.
Wendy Sweet (18:50):
That’s for sure.
Bill Fairman (18:50):
One of the things, and we don’t have this in our answers or our question.
Wendy Sweet (18:56):
Bill Fairman (18:57):
I’m going to add this. You need to find out if there’s a prepayment penalty.
Wendy Sweet (19:01):
Oh yeah, I think we should add that.
Bill Fairman (19:03):
Because one of the things I always tell people and I know if you guys have listened to us before, you’ve heard it from us before. If you have a 12% interest rate, it’s annualized. It’s based on 12 monthly payments and if you only meet six monthly payments, you’re really only paying 6% because you’re only paying it half the time and if you use that strategy and you go in and say, I don’t care about the rate because I’m going to pay it off in half the time and you find out there’s a prepayment penalty on it because you didn’t ask and that strategy doesn’t mean twice. Now you’re concerned with interest rate but most of us in this industry, unless you’re doing bigger commercial actual property,
Wendy Sweet (19:47):
There isn’t a pre fi.
Bill Fairman (19:47):
You’re not going to see a pre fi
Jonathan Davis (19:49):
Just be careful. There’s a lot of lenders who don’t word it as prepayment, but they worded as six months interest earned.
Wendy Sweet (19:55):
Yeah. Very good, say that again.
Jonathan Davis (19:57):
The word is six months interest earned or, you know, six months of interest is due for this loan, no matter what.
Wendy Sweet (20:07):
That is a prepayment.
Jonathan Davis (20:09):
That is a prepayment because if you pay it off in three months, you’re still paying six months of interest.
Wendy Sweet (20:12):
Yeah. I just did one myself or I’m the borrower and I know it’s going to be a really short term because this is a house that I’m basically going to clean up and throw on MLS real quick. So I know it’s not even going to last, I mean, three months maybe. So the loan is set up for six months but I guaranteed three months worth of payments because I wanted to make sure that it’s worth the while to wire the money and that’s that.
Jonathan Davis (20:37):
And get a loan from them again.
Wendy Sweet (20:39):
That’s right. That’s exactly right. So here’s another one. What happens that you need to understand what that term is and happens if I go past my term. So for us, we usually do a six month term for quick fix and flips. For new construction, we go up to 12 months. Sometimes if the rehab is over $50,000 or even sitting at a hundred thousand dollars on the rehab. We’ll tend to set it up at a nine month term because we know it’s going to take a little bit longer than that but you need to know what that term is because you don’t want to get to a point where you’re at the end of your term and you’re not done. What are you going to do then? And that leads us to our next question is What happens if I go past my term, can I renew it? And renewals kind of different
Jonathan Davis (21:34):
Wendy Sweet (21:36):
Jonathan Davis (21:36):
Some people put it in the notes as a, you know, option. I mean, most will put it in as a lender sole discretion and that means that, you know, you used to borrow where you can request it via, you know, written request and the lender has X amount of time to review it and assuming the market conditions are favorable to what they want, you’ve made all your payments, you’ve been a good borrower, they’ll probably say yes.
Wendy Sweet (22:02):
Yes. And there’s a fee for it.
Jonathan Davis (22:02):
And usually there is a fee associated with it
Wendy Sweet (22:04):
And the reason there’s a fee with it is because, you know, our goal is to turn our money in the fund at least twice in one year.
Jonathan Davis (22:14):
What’s the cost of lost opportunity? I mean, that money was supposed to come back at X time. It didn’t. And if that money did come back at X time, it could be recycled and make X amount of money. It didn’t. So there has to be some kind of feed up offset that loss of potential income.
Wendy Sweet (22:32):
That’s right. And if we’re really living off our points, which is really what we’re living off of is the origination fee. That’s really where a company makes their money. A smart company makes their money anyway, off of that.
Bill Fairman (22:45):
So I was going to mention, if you’re a private lender, you can use something. If you’re a private lender and you’re loaning money and you’re worried about a term being a little bit longer than you’d like it to be or your borrower says, I need this money for a long period and then you’re worried that you don’t want to get locked into a long-term situation. You could put a what’s called a call option after a certain period of time. It’s not a balloon, it’s a call option. And what this does is it allows the lender to call the note due to renegotiate the note or to leave it the way it is. And that way, as a lender, you feel good knowing that you can still continue to get, we’ll call it market returns and if the borrower is chronic slow payer, and you can call the note due and move on to another one and at the same time your borrower has, you know, at least the idea that they could probably continue doing this as long as they’re keeping up their end of the bargain for a lot longer.
Jonathan Davis (23:56):
I will make one point. If one thing that has irked me here recently, is REI companies asking for, like signed extensions or modifications of loans? One, they’re not rate company, they’re custodian. They’re not as servicer, that’s a whole separation, but don’t get me started too.
Wendy Sweet (24:20):
It’s really just a request. They’re not, they have no authority to do that.
Jonathan Davis (24:23):
Yeah. They have no power.
Jonathan Davis (24:23):
They have authority in the note.
Jonathan Davis (24:26):
So anyway, you know, talking to these people is like people, I think maybe, don’t realize this. There’s nothing wrong with a matured loan, like holding onto a matured loan, there’s nothing wrong with it. It gives the lender you, if let’s say you’re a one-off lender or you’re doing an out of your IRA, it gives you all the power because accepting payments post maturity does not deteriorate your loan or your ability to effectuate any clause in the deed of trust or mortgage. You can accept payments for as long as you want but if you throw a mature, if you throw an extension on there or, I’m sorry, a forbearance or modification, it pushes that maturity date out. Now you are in, you know, you’re locked into that loan again for that time period. So just as a lender, there’s probably not too much wrong with the mature loan, that’s just my little 2 cents here and kind of little aside, if there’s been an argument with IRA companies, man, kill me.
Wendy Sweet (25:32):
If they’re good, we [inaudible],
Bill Fairman (25:35):
Our long time listener or viewer, Scott has a question.
Wendy Sweet (25:38):
This is on our list already. The what happens if I can’t pay? That on here.
Bill Fairman (25:43):
Well, if you can’t pay because it’s a pure,
Wendy Sweet (25:47):
Well that’s still on here. So we’ll skip ahead and go to that cause I really just wanted to have a bunch of questions set up for people. So what if I can’t pay? And there’s a couple of things that you can’t pay. You may not be able to pay not only the pay off but you may not be able to pay for things that aren’t on your budget. So that’s a question that’s really kind of in here twice. So what happens if you can’t pay? Well, that leads us to many other things. Dozen of it.
Jonathan Davis (26:23):
There’s a lot of things.
Wendy Sweet (26:23):
As for us as a hard money lender, if you can’t pay, we want to try to work with you. We want to try to help you sell the house, get it to another investor, maybe set things up and change the payments a little bit to get to you to a point where you can finish it up and move on so it really depends on where you are in the deal, right?
Jonathan Davis (26:47):
Yeah. One of the one-off lender of ours, Bill Mann and you know what he does in a lot of new loans is someone matures and they can’t pay it off, he requires them to pay 10% of the principal doubt and you know it’ll go out for X period time, if they still can’t pay it off, you have to pay 10% more, which is just lowering his liability on the loan as it goes. So there’s that option. You know, there’s extending it out, there’s working with them, there’s obviously foreclosure,
Wendy Sweet (27:18):
Which is s a last straw for all.
Jonathan Davis (27:22):
Wendy Sweet (27:22):
Yeah. Hard Money Lenders and Private Lenders. We don’t want your house.
Bill Fairman (27:25):
If you’re a private lender or an institutional one, it doesn’t matter. You just have more leeway as a private lender, you can do what the heck you want. Scott specific question had to do with if it’s a call option and the loan is called and you can’t pay, how do you, what do you do? Well, if you’re calling the note due, there’s a reason. You either have to, you need the money as the lender to do something else with, you know, an emergency could have come up, you don’t know but there’s options for the lender.
Wendy Sweet (28:00):
They can sell an eight.
Bill Fairman (28:00):
If they can’t pay, they can sell the note and as long as you had a good mortgage history on it, that the borrower has been paying on time, someone that’s buying the note would be happy to buy it. Now, if the current interest rate is well below what somebody is willing to buy it for, you may have to discount it but you can always settle with the borrowers. Hey look, I realize you can’t pay this amount, but if you pay me this, I can sell this note to somebody that’s willing to take it off their hands.
Wendy Sweet (28:32):
That’s right. So it could be modified.
Bill Fairman (28:32):
And then you can continue to pay that payment but you’re going to have to pay this amount down for me to do it. Okay.
Jonathan Davis (28:38):
Who do you sell it to? He asked again, it’s, you know, you can sell it to someone with a self-directed IRA, you can sell it, I mean, there’s a whole host of companies and people who would buy.
Wendy Sweet (28:49):
You can Google note buyers and you’ll have a list of different entities.
Jonathan Davis (28:54):
Eddie Speed would be a good person to talk, to talk to Eddie speed,
Wendy Sweet (28:57):
Or his wife, Martha.
Jonathan Davis (28:58):
Oh Martha, she must be a great one too.
Wendy Sweet (29:00):
Yeah. So there there’s a lot out there of note buyers that are out there that you have access to. So the next one says, how many, we talked about how many times can I renew? Well, that’s one of the things that we talked about could be at the discretion. That’s in our note that it’s at the discretion of the lender.
Bill Fairman (29:17):
They give you the attorney’s answer.
Wendy Sweet (29:19):
Yeah, it depends. That’s a good one. The next question that you need to be asking is, are payments monthly or are they paid at the end? There are some companies out there that will allow you to take a loan out and will not charge you interest during the life of the loan. They want it paid at the pay off
Bill Fairman (29:42):
Where they are charging interest.
Jonathan Davis (29:44):
Bill Fairman (29:44):
They’re just not making you pay a payment.
Wendy Sweet (29:48):
They won’t make you pay it on a monthly basis. They accept it at the end.
Jonathan Davis (29:50):
There’s others that will build in an up payment after on the front end too.
Wendy Sweet (29:53):
Yeah. And collect it at the closing, which means you’re going to bring more money out of your pocket to the table. Cause you’re really prepaying your payments. We collect it monthly. People who are collecting it at the end, that’s more likely going to be a private money lender. That’s going to do something like that.
Bill Fairman (30:14):
Tell them why.
Wendy Sweet (30:14):
Because they don’t know any better.
Bill Fairman (30:18):
Tell them why you want them to make monthly payments.
Jonathan Davis (30:19):
For you to look pained.
Bill Fairman (30:19):
There you go.
Wendy Sweet (30:20):
Yeah. I want to glide a fire under her butt and feel the pain of writing that check every month.
Jonathan Davis (30:25):
If we make zero payments for six months and some things are not going the way you want them to. How incentivized are you to pay off? Probably less than if you had made six months of payments and that came out of your pocket
Wendy Sweet (30:37):
Yeah. And you’re thinking about it every month. I need to be in a hurry to make this happen. It’s not because we’re into torture, you know, or we want to make people feel bad,
Jonathan Davis (30:47):
We’re into getting our money back and not having properties.
Wendy Sweet (30:49):
And we want you to be successful.
Bill Fairman (30:52):
It’s in your best interest to get this thing done quickly. You must always, in your mind, you want to move quickly.
Wendy Sweet (31:03):
You want to have a sense of urgency
Bill Fairman (31:05):
That’s what I was going for.
Wendy Sweet (31:06):
I know you were trying to get there.
Bill Fairman (31:06):
I couldn’t figure it out the word anyway,
Jonathan Davis (31:11):
It turns out, litigious but he can’t get urgency.
Wendy Sweet (31:12):
That was too easy.
Bill Fairman (31:18):
I’m multifaceted. However, again, it’s, it’s in your best interest, the quicker you can pay this thing off with the more money you’re going to make, right? And then we’ve always had these, not always. We’ve had people along the way that will step over a dime to pick up a nickel. You know, I’ve gotten to a certain price in mind for sale of this house but you’ve offered me this and I’m not going to take it, even though it might take me another name they used to sell it, which I would have lost that if they does. So no, moving along!
Jonathan Davis (31:54):
And those can be burden, drive me nuts.
Bill Fairman (32:01):
Take the money, move along.
Wendy Sweet (32:01):
Burn the hand.
Jonathan Davis (32:01):
$250,000 today is worth more than $280,000 90 days from now. Every time, every time!
Wendy Sweet (32:09):
That is the truth. What kind of insurance do I need?
Jonathan Davis (32:14):
Depends on the project.
Wendy Sweet (32:14):
That’s right. So for basically a one to four family type unit, and it’s not level, you’re usually getting a builder’s risk policies. A builder’s risk, it really covers, you know, it covers a lot of things that a vacant policy would but builder’s risk will cover theft for,
Jonathan Davis (32:37):
Wendy Sweet (32:39):
Your materials, like, you know, they’re dropping the shingles in the yard and all of a sudden they’re gone the next day and trust me, that happens.
Bill Fairman (32:45):
It doesn’t cover tools. Just materials.
Wendy Sweet (32:50):
Yeah. Your contractor has to be responsible for their own
Jonathan Davis (32:54):
I thought you’re gonna say your contractor doesn’t need to be a tool
Wendy Sweet (32:56):
That too but that’s what builders risk is for and really, they only really want you to get builder’s risk if you have, if the rehab is, I think it’s what? 30% or more of the price of the house.
Bill Fairman (33:14):
I’d go with 50, but,
Wendy Sweet (33:14):
No, it’s 30. So if it’s, you know, a lipstick on a pig, you probably don’t need those riff.
Jonathan Davis (33:22):
I mean, yeah. If you’re not moving along, you’re not doing construction, you could probably get a vacant policy.
Wendy Sweet (33:28):
Yeah. But talk to your insurance person about that and what it covers and you know, it doesn’t hurt to ask those questions for that person. So what happens if I go over my budget?
Jonathan Davis (33:38):
Bill Fairman (33:40):
Oh, by the way, before we get into that, we don’t require this but you shouldn’t have a blanket lab ability policy as well.
Wendy Sweet (33:48):
You mean at the company.
Bill Fairman (33:48):
We don’t care about, yeah. As the owner of the property, you should have a blanket liability in case someone gets hurt on your property because it is your property. Your name is on it. We don’t require it because as a lender, we’re not going to get sued for somebody trips and falls across this stuff your builder lived down here in a yard that they were trying to steal
Wendy Sweet (34:10):
It’s like a blanket liability ram umbrella.
Bill Fairman (34:12):
The blanket li- umbrella, whatever.
Wendy Sweet (34:14):
Bill Fairman (34:15):
You just need a liability policy that covers everything other than structure, you know, fire. Go ahead. I’m sorry.
Wendy Sweet (34:23):
I forget where I was. What happens if I go over my budget? Is that where we were?
Jonathan Davis (34:26):
Yeah, I said you will.
Wendy Sweet (34:27):
Yeah, you will. In fact, it’s all, I’d say 90% of the time you’re going to go over your budget.
Jonathan Davis (34:34):
You’re gonna find something. I mean, every time, and once you walk through a house, a building, all you want until you open up those walls, assuming you’re moving walls or doing something, until you open them up, you don’t know the full scope of what’s going on.
Wendy Sweet (34:47):
Right. That’s exactly right and if it’s not all your reading that budget, your lender is not going to cover it so you need to make sure. So what happens if? That means you need to have money in the bank to cover that issue. That’s why we care about how much money you have in the bank so you can’t get a loan and have $3,000 in the bank. It’s just not gonna, it’s not smart for you.
Jonathan Davis (35:14):
Yeah. I mean, because the lenders are holding to a certain LTV loan to value threshold and just because you find an issue in the walls that we didn’t know was there and it costs more money, when we fix it, doesn’t increase the value of the overall product. It’s the same value. So that money has to come from somewhere and it’s not the lender, it’s going to be from you.
Wendy Sweet (35:40):
And I promise you, if you’re in three deals at one time and you are doing fine, everything’s running normally, you had enough money to do each one of the properties. Something will go wrong on all three of them at the same time, it will happen, right?
Jonathan Davis (35:57):
I bought six properties in Gastonia and all on the same street and go in, and now I have five. I have to tear one down. Like, I mean, luckily the margins still work. I mean, there are a lot thinner than they were but I mean, yeah, I lost a whole house. So like, those things happen.
Wendy Sweet (36:19):
I hate when that happens, but it does!
Jonathan Davis (36:23):
You lose the whole house.
Wendy Sweet (36:23):
I does. It happens. It happens to people who know,
Bill Fairman (36:25):
It’s the inspector’s fault.
Wendy Sweet (36:28):
It happens to people that know what they’re doing,
Bill Fairman (36:30):
By the way, you should automatically build 10 to 15% contingency into your, all your budget.
Wendy Sweet (36:35):
That’s for sure. That’s for sure. Okay. So, what happens if the work needed is not on the budget? That’s, you know, that’s really what we’re talking about is if it’s not written into your budget, that’s something that’s going to come out of your pocket. You can’t expect that to come out of the lenders pocket because the lender doesn’t want to be any deeper into that house than they started out with. So if they get money to cover, what’s not in the budget, that means that they’re not 65% in the deal or 70% of the deal. They’re now over the percentage of the deal, which puts them at a greater risk.
Bill Fairman (37:12):
Spend the few hundred dollars more than it would cost you to have a home inspector come in and go through the house before you go to bed and know all your stuff.
Wendy Sweet (37:22):
It’s a couple hundred bucks.
Bill Fairman (37:23):
Yeah. Ignore the stuff that you know, you’re going to be repairing but stuff will come out and if the inspector sees it when they’re inspected your house, they’re going to see it. Your buyer has an inspection.
Wendy Sweet (37:36):
Yeah. I’d rather know upfront. So, do I pay interest on the full amount of the loan? That’s a great question to ask. There are a lot of regular construction lines that you get from a bank. A bank will only charge you interest on the money that you’re using. That’s very, very normal. That’s not normal in a hard money loan or private money loan. We have to earmark that money for you because when you come to us and say, Hey, I need my $25,000 to do this repair and we go, we want that money out to somebody else or, Oh, I’m out of money. That doesn’t work. So we have to have that money available for you and especially the smaller private money lender, it really affects them because they’re very limited on the funds that they have. So you’re going to have to pay interest on the money because they can’t lend it out to anybody else. Now, there are some companies, some hard money companies out there that we’ll only charge you for the amount of money that you’re using. There’s some out there. Again, I don’t know who they are, I’m not trying to keep it secret, but I don’t know who they are. If I knew, I’d tell you, but there are companies that do that. So if that’s important to you ask that question.
Jonathan Davis (38:50):
Yeah. I mean, you on it’s called Dutch, non Dutch. Dutch is interest on the whole balance, non Dutch is interest on what you’re using. In the hard money, private money space, even the kind of that quasi institutional hard money space, the only time, well, not the only time. But the times that I’m most likely see non Dutch is on larger commercial doodles with, you know, hundreds of thousands to multi-million dollar rehab budgets or construction budgets. That’s the only put like, you know, if you have a $50,000 rehab budget on the fix and flip, I don’t know anyone who’s going to say, we’re not going to charge you interest on that.
Wendy Sweet (39:27):
Yeah. It’s kinda crazy.
Bill Fairman (39:30):
Oh, before we get to the next question and by the way, we are on the ask an ugly question segment and our question is, what questions did you ask when you’re shopping for a hard money or a private loan? We are Carolina Capital Management. Our website is CarolinaHardMoney.com. If you’re a borrower interested in borrowing money from us, click on the apply now button. If you’re an investor looking for passive returns, click on the investor tab. Don’t forget the like share and subscribe to our channel and if you have any questions, you can go over to the chat box either to the right or to the bottom of your screen, depending on the platform that you’re watching and you can ask us questions as well.
Wendy Sweet (40:11):
That’s right, let’s look at the time. Okay, we’ve got about 15 minutes to finish up. So the next question is, do you use an appraisal or a BPO, which is a Broker’s Price Opinion or they may just pull their own comps, you know, do you use an appraisal or not? You know, we all lend money based off of what the after repaired value is. We use a full appraisal. I would love to know exactly what every house would sell for. I’ve had my real estate license, thanks to my mother, since 1981. So I’ve got MLS in both States, both North and South Carolina. and I took the braids of course and I’m still wrong when I come up with prices, I can give you kind of a ballpark but I’ve been just wrong, wrong, wrong, wrong, wrong.
Jonathan Davis (40:56):
It’s hard to, I mean, again, appraisals are using past data to predict now and future values. That’s a difficult task to undertake because now, I mean, we all know real estate is so local. I mean, a street, a neighbor hood, a borough, whatever it is. I mean, it could be trending up or it could be stagnant or it could be trending down and, you know, at that point in time, the prior data says trending up. The current data says it’s trending down so six months from now, that house could still be turning down. So you can get an appraisal at 300,000, but you might be able to sell it for 260. It’s not a complete science so there’s a lot of just using the opinion and a lot of using the data that’s ended, but the data is old.
Wendy Sweet (41:46):
Yeah and that information is in an appraisal. There’s so much more in an appraisal then you’ll know, from any kind of a BPO or pulling your own comps, you know, what’s going on in the neighborhood. Is this a house that’s going to qualify easily to whoever you’re in buyer’s going to be and an appraisal can help you qualify that house a whole lot better than just a broker’s price opinion on that so we use an appraisal, it’s worth asking that question. The other thing is, do you have a loan minimum? There are many, many companies that don’t have alignment minimum or if they do have one it’s pretty low. Ours is at 50,000 and there are companies that have 75,000 companies that have a hundred thousand, you know even in the millions when you get up to the commercial.
Bill Fairman (42:41):
Most of them do have a minimum.
Wendy Sweet (42:41):
Yeah. So why is there a minimum? It’s because when you are doing the loan, everything is based off a percentage of the loan amount. Well, if the percentage is really, really small, you’re doing all of the same work for itty bitty amounts of money. So we do have a loan minimum, we’ll go lower than our minimum but you’re going to pay as if,
Jonathan Davis (43:03):
Wendy Sweet (43:03):
It’s at the 50,000.
Bill Fairman (43:06):
We talked about this last week, return on effort.
Jonathan Davis (43:11):
Yeah. We have to work as hard on a $50,000 loan as we do at 200.000
Bill Fairman (43:14):
It’s the same amount of work, a million dollars to a thousand.
Wendy Sweet (43:19):
But the other thing I think that’s really important is if you don’t meet the minimum amount of the hard money lender or the private money lender, you need to be concerned about your exit strategy out of that loan. Once you get into one anyway because banks have loan minimums, and if you can’t get out of the loan, you’re in deep doodoo, right?
Bill Fairman (43:43):
Keep in mind, a traditional bank that’s doing a mortgage loan for some money that’s going to buy this home from you is not going to go typically below $80,000 because what happens is there’s a certain amount of fixed fees that are a percentage of the loan and the fees remain the same, no matter how big the loan is,
Wendy Sweet (44:08):
It’s gonna take the ARP at.
Bill Fairman (44:08):
And as the loan goes down in size, what it does is it hikes up the fees that go into the APR and then that puts them into what’s called a high cost mortgage.
Wendy Sweet (44:21):
And they get in trouble.
Bill Fairman (44:21):
And they have to go thanks with Dodd-Frank, they have to go through a whole lot of hoops and they don’t want to bother with it. So they’ll just say, no, we don’t do hackles loans.
Wendy Sweet (44:32):
Right. So that asked that question and if that question is that there’s a loan minimum and you’re not able to make it, you might want to question whether or not that’s really a house that the want to do because of that. What does your draw schedule look like? That’s really, really important when you’re doing a rehab. How many draws can you have? Do you have a maximum of number of draws that you can have?
Bill Fairman (44:57):
What do you charge for your draw?
Wendy Sweet (44:58):
Yeah, that’s another one and I didn’t have that on there. That’s a good one because there is a fee when you get a draw, there’s people that have to go out there and look at the house and make sure that the work’s been done and what is left to do, you know, do I have enough money in this account to finish up the work that’s left to do? So ask about that draw schedule, what it looks like. Another thing is, do you need the receipts? I get a lot of people thinking that they’re going to have to turn in the receipts of the work that’s done invoices and things like that. We don’t care to look at them. There may be some companies out there that do want to see if we can see
Jonathan Davis (45:34):
If we pay the third party vendors driver, we do want that.
Wendy Sweet (45:36):
Absolutely. So that we know what to pay them
Jonathan Davis (45:40):
Well, you know, both, but that’s why the rehab budget is in the scope of work is so important. You know, we have an inspector that goes out there and compares the scope of work rehab budget to what’s done and what was said was done and then we can say, okay, yeah, 80% of that was done or a hundred percent of it was done, whatever that case might be.
Wendy Sweet (45:57):
Right. Which leads us to the next question that you really just brought up is can I pay my contractor? Can you pay my contractor direct?
Bill Fairman (46:05):
We’d love to.
Wendy Sweet (46:06):
Yes, yes, absolutely. The next thing is, do I need lien waivers?
Jonathan Davis (46:14):
Wendy Sweet (46:16):
Please. They’re so important, right? Oh man. I can’t tell you how
Jonathan Davis (46:21):
You cannot sell the house if there are active M&M liens on the title.
Wendy Sweet (46:26):
M&M is not a candy.
Jonathan Davis (46:27):
It’s Materials and Mechanics lien. You cannot sell it. It’ll cloud title. You’ll have to get those cleared. So any lender or any savvy person in general wants to make sure that, um, if we’re putting money into the property for the, for the drawls, we want to make sure that the money that we’re putting in for the work that was done is being paid to those third parties, those, those contractors and for that, they will give us a lien waiver saying, Hey, we are paid in full and we do not claim any lien on this property. That’s what we want to do there. As a borrower, you should want that too. As the owner of the property, you want to make sure you’re collecting them.
Wendy Sweet (47:13):
So even if your lender doesn’t require it and you shouldn’t getting it yourself and so when you have that check in your hand, ready to pay this person, you have a lien waiver right beside it and have a copy of the invoice that you’re paying attached to it with maybe the invoice number and the price on it, written on the waiver, let them sign it, give them their check and then you’ve got what you need to say they’ve been paid in full.
Jonathan Davis (47:42):
Yeah. Cause I mean, we’ve seen it before. I mean, you do do a project, you pay the contractor and you think all is good. You go to close and they’re still a lien on it and the contractor, some less, you know, less scrupulous than others, you know, they’ll say,
Wendy Sweet (47:59):
There’s one or two out there.
Jonathan Davis (47:59):
Yeah. They’re like, well, I need 10 grand to get that off. You know, you owe me. And here’s the thing, depending on which state you’re in, if the contractor can prove that he did work within a certain period of time, it’s valid.
Wendy Sweet (48:12):
That’s exactly right. At six months in one of these states, I don’t know which one.
Bill Fairman (48:15):
Okay. So we got four minutes and four questions so speed up.
Wendy Sweet (48:19):
Okay so we’ll do it quick. Do you need a clear title close? Yes.
Jonathan Davis (48:24):
Wendy Sweet (48:24):
You don’t want somebody coming back and taking it from you. How many loans can I do with you? Ask your lender that. How many loans can I do at one time? That’s a great question.
Bill Fairman (48:33):
Wendy Sweet (48:33):
The other one is, do you drop rates or points as we build a relationship? That’s a great question. That’s a great question.
Jonathan Davis (48:43):
Do you do equity participation?
Wendy Sweet (48:45):
Yeah. I love that. You want to talk a little bit about what an equity participation would look like, Jonathan?
Jonathan Davis (48:50):
Sure. Say you’re one of those people who want a really low rate and you’re like, man, I’ve just paid more than 8%, just can’t do it. Okay. Well, you’re going to have to bring 30% down. Well, I don’t have 30% down. Okay, so we can give you or lend you X percentage of that 30% as an equity participation, maybe mezzanine debt, which is, you know, it could be equity or it could be like second lien position, you know, kind of, you know, depending on who it is, mezzanine means different things and we can lend that to you, which allows you to do the deal still bring less money, have a lower rate. However, for all of those things you have now given up X percentage of the,
Wendy Sweet (49:42):
Jonathan Davis (49:42):
Of the profit of the, of the equity, when you sell it or you refinance it. Um, and that depends on the lender and that depends on the structure of the deal. But, I mean, I typically see it.
Wendy Sweet (49:53):
You do it with commercial deals.
Jonathan Davis (49:53):
I’ve seen them as low as 5% and I’ve seen him as high as 80%.
Wendy Sweet (50:01):
Which is nice.
Bill Fairman (50:01):
And I can guarantee you if your margins are thin, you’re not getting any equity because there’s no guarantee that the person that’s willing to do that is going to have any profit when they’re done.
Wendy Sweet (50:13):
That’s right. So these list of questions, I am going to put these up on our website so that you can just get right to the list and have that in front of you. So if you go to Carolina Capital Management, no, CarolinaHardMoney.com
Bill Fairman (50:30):
Wendy Sweet (50:30):
And we’ll have a button there that you’ll be able to find that,
Jonathan Davis (50:37):
It’s Active Income, Passive Wealth, right?
Wendy Sweet (50:37):
Go over there, click on the resources tab.
Bill Fairman (50:39):
Yeah. That’s a good place to put it. It’ll be under there. And it’ll be called questions you should ask when shopping for a loan.
Bill Fairman (50:47):
Right. And we’re also going to, and I think we told you this last week, where are you going to do some articles, comparing different lenders, different funds, you know, the best practices, that type of thing. One doesn’t mean they’re better than another. All it means are they the better fit for you?
Wendy Sweet (51:06):
And even that particular deal.
Bill Fairman (51:08):
Jonathan Davis (51:10):
And Sue, if you’re on, I see you calling, I’ll call you back in a little bit.
Bill Fairman (51:16):
She’s going to say I like your haircut.
Jonathan Davis (51:19):
I think this is calling to me about a IRA question.
Bill Fairman (51:24):
Anyway I hope that answered most of your questions about what questions to ask when you’re looking to get a loan. Right? So once again, we are Carolina Capital Management. We do lend the money so if you’re a borrower looking to borrow money, then click on the apply now tab. If you’re an investor looking for passive returns, click on the investor tab. CarolinaHardMoney.com. Don’t forget the share, like, subscribe, all that good stuff and we will see you guys next week at this very same time.
Jonathan Davis (51:59):
Remember rates don’t matter, leverage and speed.