97 As a lender, What Questions Should I Be Asking The borrower?
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”
1. As a lender, what questions should I be asking the borrower?
2. What is the borrower’s history?
Watch this video to learn the answers to these questions and more.
Bill Fairman (00:05):
Wendy Sweet (00:06):
Bill Fairman (00:07):
Welcome to another episode of what is the name of our show again? Don’t say it! Passive Income, Active Wealth.
Wendy Sweet (00:16):
Okay. So that was a rhetorical question.
Bill Fairman (00:19):
We are Carolina Capital Management. We do loans in case you’re wondering. Our website is CarolinaHardMoney.com. If you’re a borrower interested in borrowing money, then click on the apply now tab. If you’re an investor looking for passive income, then click on the investor tab. Don’t forget the share, like subscribe all that stuff.
Jonathan Davis (00:42):
Hit the bell.
Wendy Sweet (00:42):
Yeah. And this is Bill Fairman and I’m Wendy sweet and this is Jonathan Davis.
Bill Fairman (00:47):
I was getting there.
Wendy Sweet (00:47):
Oh, you were. I’m sorry.
Bill Fairman (00:48):
I’m not finished yet. We also have comment sections or if you want to ask us any questions, then you can put it in the comment section. And again, depending on your platform, it’s either going to be to the side of the screen or it’s going to be underneath the screen. So, how’s everybody’s day going?
Jonathan Davis (01:07):
I went to the bank without hitting a car. It was great.
Wendy Sweet (01:10):
That’s right, we told that story last week.
Bill Fairman (01:14):
Yeah. If you weren’t here to hear it,
Wendy Sweet (01:16):
It was a good one.
Bill Fairman (01:17):
Jonathan was on the phone with us and I heard a little bump and he went, I gotta call you back. So he was backing out of a parking spot at the same time somebody else was backing out of a parking spot right behind him and they kind of met in the middle.
Wendy Sweet (01:33):
And that’s not the best part. There’s more!
Wendy Sweet (01:35):
To get out and talk to the fellow, Jonathan left the vehicle in neutral, rolled across the parking lot into somebody else’s car.
Wendy Sweet (01:45):
A much nicer car, right?
Jonathan Davis (01:48):
It was Alexis, yeah. Of course. It was Alexis.
Bill Fairman (01:53):
So I mean, it’s like one of those America’s funniest home videos.
Wendy Sweet (01:56):
But it wasn’t funny now, was it?
Bill Fairman (01:56):
No, no, it wasn’t funny, but, you know, it all worked out.
Wendy Sweet (02:05):
It’s life, ain’t it?
Jonathan Davis (02:05):
The funny part was it was my personal bankers car that I hit.
Wendy Sweet (02:12):
That is funny.
Bill Fairman (02:13):
Shouldn’t lent me more money.
Wendy Sweet (02:18):
Bill Fairman (02:20):
All right, so this is our Ugly Questions segment but of course we have our,
Wendy Sweet (02:24):
Bill Fairman (02:24):
Weekly news we like to share so.
Bill Fairman (02:41):
Not all of it is actually breaking.
Wendy Sweet (02:43):
It reminds me of Saturday night live with Jane Curtin and Dan Aykroyd weren’t they, “Jane, you ignorant!”. Anyway,
Bill Fairman (02:52):
Thank you. So a couple of things, the employment numbers came in this morning and they were higher than last week.
Jonathan Davis (03:02):
Bill Fairman (03:04):
Yeah. And they were expecting 825. So they were higher than expected as well.
Jonathan Davis (03:12):
And the previous week was what? 840?
Wendy Sweet (03:12):
So it was a little lower, I think, if I remember correctly.
Bill Fairman (03:15):
The numbers went higher.
Jonathan Davis (03:15):
No, the previous week was 840 and then it went into 898,000 and they were expecting 825.
Bill Fairman (03:23):
And then the re-, what do they call it? Reoccurring?
Wendy Sweet (03:26):
Bill Fairman (03:26):
Recurring? Uh, anyway, that’s a 10 million and some change. So the numbers are trending the wrong direction. So that’s another reason they’re screaming for stimulus but that’s not going to happen, nothing’s happening. I can tell you right now, nothing in government is happening until after the election. Everybody is positioning themselves right now and frankly I’m kind of hoping that they position themselves in a way that nothing will happen in the next four years either. Because typically, when you have government gridlock, they can’t figure out ways to waste our money, right?
Wendy Sweet (04:16):
I don’t know that that’s a possibility.
Bill Fairman (04:18):
All right. So that being said,
Wendy Sweet (04:20):
Well, they used the rolling, they really used the rolling four week numbers.
Bill Fairman (04:25):
You never take individual weeks, you have to go by trends and one week doesn’t give you a trend that gives you a snapshot.
Jonathan Davis (04:35):
One of the things that was interesting, we were in your office, Bill, talking about it this morning was the confidence of certain sectors.
Bill Fairman (04:42):
Well, you love those confident surveys, don’t we?
Wendy Sweet (04:45):
I’d be interested in hearing that. What are you hearing?
Jonathan Davis (04:47):
Well, it was, you know, just the confidence in the financial industry. When they do financial, financial industry is usually investment baking wealth management, stuff like that. It is trending downward. A lot of wealth managers and financial investors are feeling less confident about the security of their job, longevity of it, which is music to my ears because like, yeah, it just means more people are one or two things are either not investing at all or they’re investing in alternative investments
Wendy Sweet (05:28):
Right. Not your normal stocks and bonds.
Bill Fairman (05:31):
Well, there’s another one you wanna add to that.
Wendy Sweet (05:31):
Jonathan Davis (05:31):
Bill Fairman (05:31):
The peripheration of no fee,
Wendy Sweet (05:36):
Bill Fairman (05:38):
Investing. So you have an app called Robinhood where you don’t need a broker, you don’t need a wealth man.
Wendy Sweet (05:44):
That’s true too.
Bill Fairman (05:44):
Do it all on your phone.
Wendy Sweet (05:46):
And people are so internet oriented for everything.
Bill Fairman (05:49):
You know, you’ve got Schwab and a bunch of others that are doing, you know, no fee stuff.
Jonathan Davis (05:55):
No fee, but we charge you for every transaction. They make actually more for the transactions.
Bill Fairman (06:01):
Basically they’re all, just like a lot of things are the racing to the bottom on cost and you’ve got people that aren’t looking out for you. Again, most in that industry, aren’t looking out for you anyway, the only people that are actually looking out for you are your what are they called?
Wendy Sweet (06:23):
Bill Fairman (06:23):
No. The financial planners. Those people,
Wendy Sweet (06:26):
Bill Fairman (06:26):
They get paid based on you paying the fee, not the companies that you’re selling stock for. They’re not getting commissions from the funds they’re investing in. They’re getting paid by you and they are looking out for your best interest.
Wendy Sweet (06:48):
I was talking to a guy on one of my Wednesday with Wendy calls yesterday and he’s a real estate investor but he also does a little day trading and he said, he’s not on it every day, it’s something that he just plays with, you know, every few weeks or so.
Jonathan Davis (07:05):
By daily trading?
Bill Fairman (07:07):
Wendy Sweet (07:07):
Exactly. And yeah, so right before, COVID hit in January, he had decided that he was going to take his money that he had invested in stocks and sell them and put them into a self-directed IRA. And so he did, he sold it right before and lo and behold COVID hits and I mean, it’s within just a couple of weeks, so everything plummeted and he, instead of putting it in an IRA, the self-directed IRA, cause it was an IRA money anyway. He bought stocks with it again and doubled his money in a month.
Jonathan Davis (07:47):
Good for him.
Wendy Sweet (07:47):
Doubled his money, isn’t that cool? So now he’s taking the money that he was going to take out to begin with leaving the rest and the stock taking the other half, putting it in a self-directed IRA, fund to do lending with, he’s in his thirties, he’s a young end.
Bill Fairman (08:05):
So he could afford to do that.
Jonathan Davis (08:08):
Well, see, I took my, I had, you know a 401k and I converted it into my self directed IRA. And did that and then this was probably a year ago and when I did it, I was averaging about, I think 5.8% and since I converted it to my self-directed IRA, I’m averaging 21%.
Wendy Sweet (08:30):
Well, that’s a bit of an increase then, Jonathan.
Jonathan Davis (08:31):
That’s a little bit of an increase.
Wendy Sweet (08:33):
Yeah, because that real estate is always, in my opinion, I’m not a stock person. I’m not good at it. The first time I ever invested in stocks was back in 1987, it was October. I invested,
Jonathan Davis (08:45):
She brought a hundred shares of Apple.
Wendy Sweet (08:48):
It was on a Friday. I had saved up 2,500 bucks and in 1987, that was a lot of money. It was to me anyway. So I sent it to buy a mutual fund on a Friday afternoon and that following Monday was called black Monday you may have heard of it. It took me seven years to get it back to $2,500. So I don’t invest in stocks. I just really, really stink at it. I feel so much more comfortable investing in anything that has to do with real estate, whether I’m a lender or a fix and hold or buying notes or whatever it is the have to do with real estate. I’m so much more comfortable in being there because you know, when that black Monday hits, it doesn’t disappear. Even if I lose some equity, didn’t disappear, but man, it disappeared. It disappeared!
Bill Fairman (09:42):
Wendy Sweet (09:42):
Yeah. In a big way. So don’t listen to me if you want to invest in the stock market.
Bill Fairman (09:50):
Jonathan and I were having this discussion earlier today. I was watching one of the business shows this morning as I was getting ready and they had a guest on and one of the questions was what’s a safe income investment? And then the first thing he said was let’s eliminate the word safe and put in less risky and he says, it’s very difficult in this climate because you know, interest rates are so low. You know, bonds are paying next to nothing. Everything that is a bank oriented or bond oriented is just not paying anything. You’re not taking savers and rewarding them right now, we’re not in that kind of environment. And what shocks me is how many people still don’t understand either. They still either don’t understand it or they don’t want to talk about real estate because his suggestion was the energy sector and I’m like, what? That is a little volatiles. Now he made sense. Most of the energy companies pay a good dividend as long as you’re with a good solid company, that’s been around for a lot of years and they have a lot of cash on their balance sheets and they are large, very largely capitalized companies. The likelihood of those dividends going down are going to be fairly low but none of them ever, still never mentioned real estate and part,
Jonathan Davis (11:28):
Bill Fairman (11:28):
Of it is the people that are investing in real estate through the stock market are investing in REITs. REITs are concentrated on very large portfolios of a class properties and they can be commercial and class a apartment complexes and that type of thing. And, you know, the returns really aren’t any better than what you’re going to get with a dividend paying energy stock anyway right? So that’s not really investing in real estate and they’re not going to mention the smaller players in the markets that really do have decent returns because they’re not capitalized enough for them to even worry about it. The institutional investors, aren’t going to invest in like a fund like ours because they want to write checks for, you know,
Jonathan Davis (12:19):
Hundreds of million.
Bill Fairman (12:20):
500 million at a time.
Wendy Sweet (12:23):
We’d have a little trouble putting all that into work.
Bill Fairman (12:27):
We can’t put that much money to work.
Wendy Sweet (12:27):
It’d take us a month or two
Bill Fairman (12:29):
Were going to be avoided, which is fine. I don’t mind being overlooked because that gives, that means that we’re not competing with them for that space. The last thing I want to mention in the news is that I was reading an article earlier this week on delinquencies and it was interesting that the loans that were 30 and 60 days delinquent back in March or in April actually were, there was fewer of them now than there were in March and April. So those actually went down. The problem is the people that were seriously delinquent 90 and 120 days,
Jonathan Davis (13:19):
Those didn’t go away, yeah.
Bill Fairman (13:19):
They actually went up.
Wendy Sweet (13:20):
Bill Fairman (13:21):
Yeah. So basically what’s happened,
Wendy Sweet (13:23):
That make sense.
Bill Fairman (13:23):
Is the people that have gotten real far behind aren’t coming at them and the people that were just, you know, a month or two behind, they got,
Wendy Sweet (13:32):
They were covered.
Bill Fairman (13:32):
They were temporarily closed, they’ve recovered or are recovering. So we’re going to have some.
Wendy Sweet (13:42):
Bill Fairman (13:43):
Foreclosures coming down the pipe as soon as, you know, depending on the state you lived in, you know, the federal government is holding foreclosures basically on a VA and FHA loans. Can’t do anything about Fannie Freddie.
Wendy Sweet (14:01):
Yeah. I was just on the HUD website cause you know, I’m a real estate broker as well and the houses on that better showing up on HUD in foreclosure have not increased at all over the past couple of months and that’s really what I’m looking for to see if there are any houses coming up so they haven’t hit yet.
Jonathan Davis (14:21):
I think you would expect, you know, we have this, you know, by the end of this year, first quarter of next year, you think that that’s probably when you’re going to see those?
Wendy Sweet (14:29):
Yeah, I really do.
Jonathan Davis (14:30):
Wendy Sweet (14:32):
Especially after the election. I think we’re going to see the changes come along then but you know, back between ’09 and 2000 and even 12, I could pull up just North Carolina alone and there would be two to 300 houses on the foreclosure, less than, literally, you know, there are less than 10 right now so that’s a huge difference of what it was. But you know, I see that making a serious change in a few months.
Jonathan Davis (15:03):
We talked about this before but I wonder if banks and other financial institutions are going to be more cognizant of doing workouts with the borrowers.
Wendy Sweet (15:16):
Right. Or just selling the note.
Jonathan Davis (15:17):
Or just selling the note or whatever it is, you know, some kind of workout or loan sale to avoid the foreclosure. I wonder if that’s going to happen. Maybe we don’t see that big uptake in foreclosures, I don’t know.
Wendy Sweet (15:30):
Even if a, I’m sorry. Even if somebody with buys it that as a non-performing note. If it can’t be worked out, it can’t be worked out.
Jonathan Davis (15:39):
Then that’s yeah.
Wendy Sweet (15:40):
So the foreclosure is going to happen anyway.
Bill Fairman (15:42):
Yeah. I suspect we’re probably going to see a lot more notes sales and foreclosures than we did previously. It’s very difficult to pull these loans out and then go through the process and they’re really not built for it. They don’t want to deal with it. I don’t blame them. I don’t like dealing with it either. We’ll have third parties deal with it by just selling the note at a discount move, you know, they’ll do a charge off for the amount they are going to discount it for and then sell them off. So, and there’s plenty of people out there that are just waiting for that part and I think that’s a much,
Jonathan Davis (16:21):
I mean, there’s a whole lot of people’s.
Bill Fairman (16:22):
No efficient system.
Bill Fairman (16:23):
Yeah and a lot of people setting up distress debt funds, and they have been for the last six months in anticipation of that.
Wendy Sweet (16:30):
And that’s very interesting. Good stuff. Good stuff
Bill Fairman (16:33):
So, now for our lovely ask an ugly question segment. So we laugh about this because we all back here in the back know that Scott’s lunch was delivered and he might be in the middle of eating instead of pressing buttons.
Wendy Sweet (17:01):
That’s true, that’s so true.
Bill Fairman (17:01):
So our question today, did you have something to say?
Wendy Sweet (17:06):
Yeah, I wanted to say, you know, we started this out talking about investing in the stock market and how, you know, uncertain it can be so your great alternative would be to invest in real estate, whether that’s, if you don’t want to be a fix and flipper, rehabber, a landlord, the best thing we believe anyway, the best thing even above these is being a lender. So what a great way to invest your money, right?
Bill Fairman (17:35):
Yeah. By the way, before we, I forgot to look at the comment section, which I should have. Did you notice that Scott said he invested that same Friday?
Wendy Sweet (17:43):
The same Friday that I did.
Bill Fairman (17:43):
But they didn’t execute him until Monday, he made a small fortune that
Wendy Sweet (17:50):
That’s good, thank you for bringing that in. I appreciate that.
Bill Fairman (17:53):
Wendy Sweet (17:53):
So that just shows you what my luck is in the stock market. But yeah, this question, so the question we have for today is if you are a lender, what questions should you ask the borrower? You know, I do Wednesday with Wendy. It’s a free mentor for an hour. I think I block out from 10:00 AM all the way to 2:00 PM. I have a Calendly link that I put out there if anybody ever wants to, spend an hour talking about whatever type of real estate they’re in and, you know, I might be able to connect them with other people that can help them. That’s really what that’s for. But yesterday, I actually had two people on there that want to be lenders that are, you know, one guy had a substantial amount of money to do it on his own, but he also knew other people that he could use their money and basically start a company just like we did, like, you know, back in 2002. That’s really how I got into the hard money was using other people’s money. So there’s a lot of people out there that have a kazillion dollars in self-directed IRA custodians. There there’s a lot of money that’s not being used.
Jonathan Davis (19:11):
A lot, yes.
Wendy Sweet (19:11):
And people are afraid to, you know, how are you going to direct it? What are you going to do? How can you trust who you are going to lend that money to? So there’s a couple of things you can do. One is you can let us lend it out for you. You know, we’ve been doing this for years, but what we really want to do here is if you want to try and do it on your own, we want to show you how to do that and let you know, you know, the questions that you should ask. One of the things that really helped me get into this business in the first place is I am a recovering mortgage broker. I know how to underwrite loans and we specialized, Billy did too. Specialized in investor loans. They were the hardest ones to get done on a conventional basis, doing those conventional loans. So understanding the investor, how they’re thinking, how the underwriter’s gonna think, that really, really helped me become a much better hard money lender and I learned the investing along the way as, because I worked with investors. I think if you have any type of a real estate investor background, that’s a great background to start off with and underwriting these loans as well. So, anyway, that’s really kinda how we got to this point. So the question again is if you are a lender, what questions should you ask your borrower? And we’re going to probably go overtime on this, right?
Wendy Sweet (20:46):
Well as lenders, we ask a lot of questions.
Bill Fairman (20:51):
So our first thought in anything we do is if I have to take this loan back tomorrow, actually not if. When I have to take this loan back tomorrow, how quickly can I get rid of it? Right?
Jonathan Davis (21:05):
I mean, there’s so many questions you have to ask yourself and probably at the top of the list is going to be the borrower track record, like what’s their history, what, you know, what’s their experience level? Those things are all combined into one. And, you know, getting a track record knowing, you know, is this their first flip? Is this their 50th flip? that helps out. And then also knowing, you know, getting a lender like a reference of past lenders. What did those guys do when things went wrong? Because if they’ve done a few flips or a few loans, something went wrong, did they do the right thing? Did they pay it back? Do they walk away? You know, what happened?
Wendy Sweet (21:48):
That’s right. And there’s a couple of ways to find borrowers. I’m glad you brought up what you did is getting a reference. I think the best way to understand the character of your borrower is to get involved in your local real estate investor association because those are the people that are borrowing money and, you know, you can walk in and sit in the back and just see who the movers and shakers are, look and see who’s doing business and who’s not and the subgroups, I think is an even better way to get in there, get to know people you’re sitting across the table, breaking bread. So you get to know what they do. People talk, you know, what’s good, bad, and ugly about them and it just gives you a better feel for what you’re doing. As a new lender, like if I were just lending out my self directed IRA money, I’m not going to lend to somebody I don’t know
Jonathan Davis (22:41):
Yeah. You want to, I mean, you heard the conversation you and I had the other day, we were talking about a loan and this, it was a fairly large loan and I was like, I don’t know and you said, Hey, this guy I’ve lent to him before and years past, this is what happened and this is where it went wrong, but here’s what he did and he did the right thing. And when you told me that, I’m like, okay, all right, now, all right. The character means a lot.
Wendy Sweet (23:05):
It really does.
Jonathan Davis (23:05):
So that was very helpful in processing that loan and getting it through underwriting. When he said, Hey, here’s what happened. Here’s what went wrong, cause things went wrong, but here’s what he did.
Wendy Sweet (23:16):
Right. It makes all the difference in the world. So that character, we can’t say enough about it. It’s still, I mean the size company that we are. It still means everything to us.
Jonathan Davis (23:27):
Character means everything. You can have a great property and a borrower with terrible character, and it’ll be a bad loan. You can have a mediocre, even like semi bad property and have a bar with excellent character and that’s a good loan so character means so much.
Wendy Sweet (23:48):
And we pull a background check, we pull a background check. We want to know, you know, what they’ve done in the past and that kind of thing.
Jonathan Davis (23:55):
And Wendy, you talk to every borrower pretty much that comes in and sends an application.
Wendy Sweet (24:03):
Yeah. Every single one.
Jonathan Davis (24:04):
Yeah. And what are the most important question to you?
Wendy Sweet (24:07):
So the first question I ask is, I asked them is, do you know your credit score? Because that’s, I’m going to either waste my time, you know, talking with, well, it’s a 520. I can’t even help you.
Jonathan Davis (24:19):
Why do you care about the credit score?
Wendy Sweet (24:21):
Because it shows whether or not they’re paying their bills, just like it does for anybody else. And if they say, well, I don’t really know, that always scares me and then they’ll try and throw out some numbers. So I know they’re kind of tricky, but I love it when people say, Oh yeah, I’m right out of 650 or I’m right out of 680. They know what their credit score is, it’s important to them and they care about that. So that’s the first thing I ask. And then the second question I ask is how much liquid cash do you have? At some people are, and I know growing up, you know, you were taught never to talk to people about how much money they have, right? Do you remember that? You never asked somebody how much they paid for that mini Pearl with the tag hanging off my hat.
Jonathan Davis (25:07):
We had that conversation too the other day. It was just like we’ve been lending for so long, like, not that we don’t, you know, like money is important and it’s very, you know, we all need it to live, but like, we get jaded with the numbers and like, it becomes just a number to us and it’s like, okay, so you know, this and this. Okay. Got it. You know, 50,000, 20,000, those are just numbers to us and I think you’re the same way. You see? You’re like, okay, 50,000. Great.
Wendy Sweet (25:32):
Yeah. And the reason why we care about how much liquid cash and I say liquid cash, I don’t say how much money can you get your hands on, or how much money do you have in the bank? I say, how much liquid cash do you have?
Bill Fairman (25:47):
How much available credit I have on my cards.
Wendy Sweet (25:47):
Yeah and that’s what I don’t want and I’ll get people that say, well, I have 5,000, but I have a line of credit of 20,000 that I can get ahold of. I don’t want them to go into that line of credit. That line of credit just means they’re going to have another bill. So I don’t really want them getting in there. So there were a couple of things we’re looking at when we ask about cash. One is how good are they at saving it, right? And if you’re an experienced investor, why do you only have $5,000 in the bank? There’s something wrong with that. You know, you need to have some money to be able to move forward in this.
Bill Fairman (26:21):
I’m going to hear a lot of this, or at least I’m hearing this in my head because people are doing it through telepathy, through the screen. They’re going, okay. So when I started off, the bank says I have to have credit before I can get credit and how do I get credit but nobody would give me credit. Well, one of the ways of doing that is to getting a co-signer and the same thing here. If I don’t have experience in fixing and flipping, you’re not going to make me a loan. Well, how am I going to get a loan? If I don’t have experience, how do I get experience? Nobody give me a loan. Find a mentor, just the same thing as having a somebody co-sign for you. Then I’m going to co-sign for you, but you’re not going to make as much profit. You’re going to be doing a bunch of the work, a bunch of the leg work and you’re not going to get a whole bunch of the profit but you’re going to get the experience. You’re still earning while you’re learning.
Bill Fairman (27:17):
Right. But that’s from a borrower standpoint, this is really from a lender stand point
Bill Fairman (27:22):
I get that but you’re going to have these,
Wendy Sweet (27:23):
These questions coming out.
Bill Fairman (27:25):
Questions being asked back to you.
Wendy Sweet (27:26):
But as a new lender, I wouldn’t play with that guy though. The one that needs the partner, the one that needs to get experienced. As a new lender, you know, we’re from lending, you know, I got a million dollars and I’m lending out. I have 500,000 and I’m lending out and it’s just me and I’m just starting. I don’t want to mess with that guy yet,
Jonathan Davis (27:43):
If you’re doing a self-directed IRA and you’re lending out of that’s the money that you’ve saved up, put there and you don’t want to lose it. So, I mean,
Wendy Sweet (27:54):
That’s the key!
Jonathan Davis (27:54):
I’m not saying that you’ll lose it if you lend to a new borrower. There’s a less, usually a less likelihood of loss if you’re going with experience.
Wendy Sweet (28:03):
And we lend a new borrowers all the time, but we know we’ve got to hold their hand through everything, right? Yep. I mean, we have to,
Bill Fairman (28:12):
You don’t have a full-time job doing this.
Wendy Sweet (28:14):
That’s right. We have to re we really review the rehab list to make sure that everything on it is, real like you can’t redo an entire bathroom, a full service bathroom for a thousand dollars. It’s not going to happen. Also, if they have $9,500 on a regular bathroom and $120,000 house, that’s a little high so we’re going to look at it and see, make sure that the numbers really matched what they’re trying to do, because we know. We want to help them get better, but we’re also protecting our money.
Jonathan Davis (28:50):
And you can, you know, it’s not a foolproof plan, but a good way to tell an experienced borrower and a non-experienced borrower. I mean, just look at their tax returns. If they can get you a tax returns. If they have no income, they’re probably experienced or if they have a high income, they’re probably not experienced. So,
Wendy Sweet (29:13):
That’s about true. Yeah. So we really, really do care about the new borrowers, but, you know, as a newer lender, you need to really stick to somebody that that’s tried and true, that’s done and what has experienced, I want to see them do. To me experiences, if you’ve done two or three deals, you’ve probably, three especially, you’ve probably lived through enough, bad enough mistakes to understand, okay, I need to do things in this order and, you know, I’ve got a crew that I can trust, or you’re just sitting in a little bit different position with that. So anyway, , and we, so we really were talking about the liquid cash. Let me go back to that for just a second. Cause our next thing is, what is your experience? And we really hit on that, but the liquid cash, the reason why we care about cash, not only is how good are they at saving but the other thing is we know they’re going to run into issues. We release money in a rears. They have to do the work, then do a draw request, it gets inspected and then we release the money. So they’re going to have to have enough money to get the contractor started and I want to make sure they have enough money to make the payments for at least six months. That’s the loan term, want to make sure that they’ve got that and they have to have money to bring to the closing table. The last thing I want to do is clean them out at the closing table. So if they don’t have it, if they only have enough money to bring to the table and they don’t have any money saved to do, to make payments or get that contractor started, that you are setting these people up to fail, right?
Bill Fairman (30:51):
Yeah. Yeah. I mean, making the loan is nice. You know, we have to make loans to make money but getting someone to pay that loan is just as important. So yeah. You want to make sure they have the ability to pay it.
Wendy Sweet (31:06):
Bill Fairman (31:08):
So we would rather not make a loan than to make a bad one.
Jonathan Davis (31:11):
Oh yeah, for sure.
Bill Fairman (31:11):
Because it’s a heck of a lot more work. Listen, even if we’re not losing money, the return on effort is so outrageous. Ask Wendy.
Wendy Sweet (31:24):
That’s right. It all falls on me. Yeah, that’s exactly right. And it’s an absolute headache when you have to go after someone that is slow to pay or they can’t pay or now you’re having to do a deed in lieu or go through the foreclosure process, it takes your eye off of everything else you’re supposed to be doing to take care of this one bad apple that’s going on and it keeps you from bringing a new business. So, you know, it’s not worth it. You really, really need to work with someone who has good character, has cash in the bank has some experience and the next question that I want to know as a lender is, so what is your intention with the house? Now we haven’t even gotten to the house numbers yet, but what’s your intention with the house? What do you plan on doing with it?
Jonathan Davis (32:15):
Yeah, I mean, yeah. Like, are you flipping it or is it a sort of fixed to retail sale? Is it fixed to rent? New construction? Will he know what, you know, what is it? So, you know, what they want to do, we’ll determine how you will determine further questions that you ask them.
Wendy Sweet (32:34):
We get a loan in this morning, a guy wants to buy a single family house. It’s a 700 square foot house. He wants to knock it down and put up townhomes. So he has to go through permitting process for the rezoning to make sure he can put two houses on this and we want to make sure that he has approval to do that before we close, don’t we?
Jonathan Davis (32:53):
We definitely want that.
Wendy Sweet (32:54):
Because I mean, he could get stuck with a house that he can’t really do anything with.
Bill Fairman (32:58):
Or you try to do a fix and flip in an area that is known for buying homes.
Wendy Sweet (33:05):
Absolutely. That’s a great point.
Bill Fairman (33:07):
You’re going to have a difficult time selling that property because the buyer that comes in, unless they’re an investor and you’re selling a turnkey property to another investor that’s going to hold it, you know, you’re wasting your time. You’re not going to have homeowners wanting to move into areas that are full of renters because they don’t have the same pride of ownership that the actual owners do.
Wendy Sweet (33:32):
And if you are, if your intention is to sell to an investor that would want to rent it, that’s great! Your market went from here to here on who you can sell it to but, and it’s possible. People do that all the time. Fix and flip properties for investors to pick up. So if that’s you, then you probably have a long list of buyers that, you know, that are gonna come in and buy those properties from you.
Bill Fairman (33:56):
And a lot of cases they’re pointing out what it is I want, and you’re going to find it and then do the work.
Wendy Sweet (34:03):
Great point. That’s a great point. Also if it’s a buy and hold, our biggest concern as a lender, cause we’re short term hard money lenders. We are not long-term lenders. We wanna know if you’re going to qualify to get out of this loan and get it refinanced. So I always ask them, have you talked to a bank or whoever it is, that’s going to refinance you out of this house? So we gotta make sure they got the credit scores, that’ll work and in today’s market, what, 660 or higher.
Jonathan Davis (34:33):
Yes. I mean 660. I mean, you really want to see probably 680 and hired if they’re going to qualify for that.
Wendy Sweet (34:40):
They’re also, this new bank is probably going to want to see six months worth of interest in the bank on this house that you’re doing and they’ll want to see interest in the bank on any other houses that you have for what? Two or three months. So you need to make sure that whoever you’re speaking with will also qualify to get out of it. So in a lot of cases, we’ll ask to see an intention letter.
Bill Fairman (35:02):
Letter of intent.
Jonathan Davis (35:02):
Letter of intent.
Wendy Sweet (35:02):
Letter of intent. Let me spit it out. A letter of intent from the bank that they’re going to get it refinanced.
Jonathan Davis (35:10):
And then also you have to, you know, whoever they’re refinancing it with, you know, they have the cash and all that. That’s great. But does the property itself qualify? You know, does the debt service coverage ratio work on that property? So, you know, you have to look at the market rents and what they’re going to get on that property. And, you know, let’s say that they do qualify for a four and a quarter rate on the 20 year am. Well, what’s that DSCR? And you can, you know, figure that out. You just get yourself a amortization schedule and figure out that payment and you know, you plug that in.
Bill Fairman (35:43):
Alright, just in case we’re talking about heads, explain what the bet service rate coverage ratio is.
Jonathan Davis (35:49):
Yeah. It’s just the debt. Yes. It’s the debt on the property. Usually it’s a PITI, so principal interest taxes and insurance. So, all of those things are the debt on the property and then it gets weighed against the gross income of the property. So your gross rent of the property. So you divide those and it gives you, you know, typically they want to lend at like 1.2,
Wendy Sweet (36:11):
Jonathan Davis (36:11):
1.25 debt service coverage ratio. So you need to be making
Wendy Sweet (36:17):
All of that payment with the taxes and insurance.
Jonathan Davis (36:19):
Plus 20% more.
Bill Fairman (36:20):
They don’t want a one to one
Wendy Sweet (36:23):
Which you should be doing anyway, you know? It’s not a good buy and hold
Jonathan Davis (36:30):
If a property only covers itself,
Wendy Sweet (36:30):
It’s not a deal!
Jonathan Davis (36:30):
At a four and a quarter rate in 20 year am, you didn’t buy it right.
Wendy Sweet (36:35):
That’s for sure. It’s not a deal. Don’t do it. And don’t lend on it cause you’ll be owning it
Jonathan Davis (36:42):
Then on that same thing, the LTV, they won’t lend above 80%. So you have to make sure your LTV is there’s enough cushion for that long-term lender to come in and take them out.
Wendy Sweet (36:52):
That’s right. That’s exactly right. That’s a great point. So we’ve discussed, you know, what is the intention of the house? So now we’re kind of getting down to the brass tax on the deal itself. My next question is what is the ARV? What is the after repaired value of the house? When I get the answer, “uh, I’m not sure” I know that I will be dealing with somebody,
Jonathan Davis (37:17):
How would you know that’s a deal?
Wendy Sweet (37:17):
So yeah, I know that they have no idea what they’re doing and they have just pretty much lost me on that one. That is if there’s no other answer that you should know as an investor, it’s what’s the after repaired value. Even if your intention is to rent the property, you still need to know what it’s worth and just as important, if your attention is to rent the property, you need to know what the rent’s going to be. You know how much you think you’re going to rent it for
Jonathan Davis (37:51):
ARV is a pretty widespread acronym that every investor might know. So if someone says, well, what’s ARV? That’s another. Yeah.
Wendy Sweet (38:00):
Yeah. Well, let me tell you about some investor groups you need to get involved with. That’ll help you get, you know, call biggerpockets.com, get online with them. So the ARV is the most important number that any investor should know and if you’re not getting that answer right off the top of your head, or if you’re getting range, well, it’s going to be worth between one 40 and one 60. That is way too wide range to be estimating what that is. Wouldn’t you agree?
Bill Fairman (38:37):
Yeah. For that size.
Jonathan Davis (38:37):
For that size. No, if you’re, if you’re saying, you know, 440 to 460, yeah. Okay. I can get with you. But yeah, if you can’t get it within five grand, under 200,000, you don’t know what you got.
Wendy Sweet (38:50):
Yeah. And I always ask them when they tell me what the ARV is if they know it, I always ask them how they came up with that.
Jonathan Davis (38:58):
I always love that.
Wendy Sweet (38:59):
Well, Zillow is a great way.
Jonathan Davis (39:02):
I just add averagerealtor.com and Zillow together and that’s what I got.
Wendy Sweet (39:07):
That’s right. That’s right. I encourage them to find a real estate agent that can pull comps for the, not within three miles. It needs to be when I pull comps, if I’m just doing a quick look at a house, I’m at a quarter mile out. Yeah, I really am. I got to go quarter mile out.
Jonathan Davis (39:23):
Yeah. I zoom in to the neighborhood to the street and then I’ll work my way out. And that’s how you should look at it as a lender is, you know, we want to get as close to the subject is processed possible and then we start working our way out to find the best comps
Wendy Sweet (39:36):
And the best comps are, how, when was it built? If I’m looking at a 1952 house, I am not using a new construction property. I’m not using a 1990 property.
Jonathan Davis (39:49):
I’m not using a 2015 property.
Wendy Sweet (39:51):
That’s right. That’s right.
Jonathan Davis (39:53):
You cannot use new construction as a comp for flip. You can’t, they’re not the same.
Wendy Sweet (39:57):
I had one come in yesterday where somebody said, Oh, this house is going to be worth between 240 and 280. Then I knew he didn’t know what he was talking about and then he said, well, we’ve got all these brand new neighborhoods all around. When was the house built that you’re trying to? In 1953. Sorry. It’s not even a close comp. And I really had to go out a mile to get other houses that were within the same build time that this house was to be able to pull the comps. And truly instead of the 240 to 280, it was 230 tops on that.
Bill Fairman (40:34):
And that might make it a more desirable area, but it doesn’t make the house worth anymore, more or less. You have to compare with comparables. That’s why it’s called comparables.
Jonathan Davis (40:46):
And it breaks down. I mean, people, I think a lot of investors, new investors get really fixed on this purchase price and it’s really comes down to the price per square foot. It’s really what it comes down to. New construction is going to sell higher price per square foot than your flip. It’s just like, so if you have a 2000 square foot flip and a 2000 square foot new construction, you can’t compare them. The price per square foot is gonna be totally different.
Bill Fairman (41:14):
If you look in an appraisal, if you have a chance to look at an appraisal on the page that’s specific to that property only there is going to be a cost value and a sales value and it’s always going to cost more to build that house than it is to sell an existing house. Why is that? Well, materials cause more.
Wendy Sweet (41:41):
And they’re even worse now.
Jonathan Davis (41:41):
Labor cost more.
Bill Fairman (41:41):
And they keep going out.
Jonathan Davis (41:41):
Yeah. And land cost more.
Bill Fairman (41:41):
And it’s pain in the butt. You can buy an existing home for less money. Most people are going to do that and that’s why it’s always going to be a higher cost to build than it is to buy existing
Jonathan Davis (41:57):
I’ve got a property I’m flipping right now in Concorde and the ARV is 285 and feel good about that. The new construction with the comparable square footage in that area is selling for 335. So yeah, I have the same square footage, but it’s going to sell between 30 and 50,000 less than a new construction.
Wendy Sweet (42:20):
And it’s rehabbed.
Jonathan Davis (42:21):
Yeah, and it’s completely,
Wendy Sweet (42:22):
And it looks new.
Jonathan Davis (42:23):
It looks new, but it’s not new.
Wendy Sweet (42:25):
Yeah. That does. That makes a big difference. So the next question I’m going to ask after what do you think it’s worth is what is the rehab amount? Now when somebody says, well, I’m not too sure. First of all, if they say between five and 10,000, I’m like, okay, they don’t know what they’re doing cause I haven’t done a rehab that cheap ever.
Jonathan Davis (42:44):
Wendy Sweet (42:45):
Yeah. And I’m going to change. That’s not going to work. So when they come up with the rehab amount I really want to know that they’ve walked through that house with a contractor and then when they tell me what the rehab is, I ask them, tell me what’s on that list. You know, I don’t want details, but are you going to redo the bathroom, windows, roof, HPAC. What is it that you’re planning on doing? And as they walk through, I talked to a guy just today that said, Oh, I know exactly what it is. It’s $12,400. Really? What are you going to do with that? I’m going to do a new roof, and I looked at the pictures. So I’m going to do a new roof. I’m going to paint the inside and outside. I’m refinishing the floors. I’m gonna put in a new kitchen and I said, Oh wow. boy! You’re way past the 12th floor. There’s no doubt about it and so after we talked to while it’s really a $20,000 rehab that he’s doing on this $130,000 house. So, you know, once we walked through it and he was still under the 65%, he had the cushion there to be able to do it.
Jonathan Davis (43:57):
Yup. I think I’m sorry, Bill.
Bill Fairman (43:58):
I was going to say there are variances in cost and it’s going to be depending on your finishes at your use.
Wendy Sweet (44:05):
Jonathan Davis (44:05):
In your contractor.
Bill Fairman (44:05):
And that’s going to determine, the finishes are going to be determined based on the value range of the area. You don’t want to put really nice stuff in an area that you’re not going to get that back out of it again but you’re not going to take a $500,000 house and put a bunch of cheap linoleum and stuff in it either.
Wendy Sweet (44:27):
That’s right. That’s exactly right. What were you going to say?
Jonathan Davis (44:29):
I was gonna say as new lenders, I think that’s who we’re trying to focus this on. As new lenders, I think it’s easy to be persuaded or deterred from asking questions or feeling like you can’t like, it’s the golden rule. He who has the gold, makes the rules. You can ask all the questions you want and if someone’s unwilling to answer your questions,
Wendy Sweet (44:50):
You don’t need them.
Jonathan Davis (44:51):
Maybe you shouldn’t lend to them. So don’t be afraid to ask questions.
Wendy Sweet (44:55):
I like when people say, you’re asking me for my tax returns? Why do you need to see him? Or you want to see my W2’s? Or why do I have to show you my bank statements? This is like going to a bank! You are going to a bank. We got money, that’s what it’s for.
Jonathan Davis (45:15):[Inaudible] Why do you need to see my bank statement? Well, we got to make sure that you can pay the loan. Why do you need to see my tax returns? Well, I’ll make sure you pay your taxes. Make sure the social that you gave me, and that’s a one way to verify it. You know, there’s a whole lot of reasons for things. Not just because it it’s not because,
Bill Fairman (45:35):
Jonathan Davis (45:35):
Not just because we’re nosy. It’s like, no. You’re giving in a lot of cases, hundreds of thousands of dollars to somebody. You should get a few things.
Wendy Sweet (45:45):
That’s right. You want your money back, not their house. That’s the key. So the next thing of course is the purchase price and all that wraps up into the formula and I have done a formula. I wonder if Scott can put that up on the screen. It’s a formula for what you should be doing as a lender. It looks like maybe Scott is having,
Jonathan Davis (46:05):
There it is!
Wendy Sweet (46:05):
There we go. There we go with that.
Bill Fairman (46:08):
No, he’s still eating.
Wendy Sweet (46:08):
So if you’ll look at this and I hope you can biggie size this if you’re on a phone, but, there you go. Scott biggie sized it. That’s great. So really, you’re going to take the ARV. The after repaired value, you’ll multiply it by 65%. You subtract the rehab costs and what you have leftover is the purchase price for the house. That’s what they should be paying for the house. So my sample here is on $150,000 house. Multiply it by 65%. The most that you can lend or the most that you should lend on this house is $97,500. If you’re working on that 65%, some people do 70. So then you take the 97,500, which is the loan amount. You subtract the rehab money first. That’s what you want to control. So I’m going to take 40,000 out on a rehab and when I have leftover is $57,500. That’s how much I, as a lender am going to put toward the purchase of that house.
Jonathan Davis (47:06):
Wendy Sweet (47:06):
Anything above that needs to come from the buyer. So that’s really the formula that you as an investor should be using you as a lender, investors should be using and you as a borrower should be using that same formula as well, because it’s, you know, you think to yourself, well, I’ve got a 35% margin that I can make profit on. Well, you know what? It dwindles really quick when you start paying real estate agents and payments to us and taxes and contractors that do a bad job and you have to do it over again and all kinds of things that can come up. So keep that in mind when you’re looking at that and I know we’re getting low on time, so I want to run through these real quick. The next thing is the timeframe. You know, you as the lender, determine who you’re going to lend to, what your terms are. Don’t let them tell you what they’ll pay. How much do you want to make? You know, how many points or originate, how much of an origination fee you want to charge up front? I think that, you know, if you’re not charging two points as an independent lender, you’re crazy because that’s really where your money’s coming from is on the points. Interest rate doesn’t really matter that much. If it’s a six month term, your interest rate really doesn’t matter, you know, 8%, 10%. It’s not.
Jonathan Davis (48:28):
Yeah. I’m the whole person that rates don’t matter.
Wendy Sweet (48:31):
They really don’t. If it’s a longer term loan it absolutely matters. A longer term loan, you want your interest rate to be a little higher. So the shorter the loan, you need to care a little bit more about the interest rate. If it’s a longer term loan, you want to make sure that it’s an interest rate that you can live with over that 18 month period or three-year period of whatever it is. And a point is 1% of the loan amount. That’s what a point is. Great question.
Jonathan Davis (49:02):
A hundred basis points.
Wendy Sweet (49:02):
Yeah. So those are, those are total. Don’t ignore what he says. That’s a high talk.
Jonathan Davis (49:09):
Wendy Sweet (49:09):
That’s high talk for financial person. That was good stuff. So, you know, when people are calling about a house, you know, the first thing I do is I ask them the address. I pull it up, I firstname.lastname@example.org. I want to look at the interior pictures while I’m on the phone with them. Because when they’re telling me about this house, I want to see the repairs. You know, I really don’t need to fix up the kitchen. Well, really, I’m looking at a picture of the kitchen, looks like crap. You’re going to leave it like that?
Jonathan Davis (49:39):
Just gotta paint the, paint the cabinet. It’ll be good.
Wendy Sweet (49:42):
That’s right. Sure! They’re falling off and all kinds of stuff. So we, you know, I want to see that address. We always get, okay, 97% of the time, we get an appraisal on every house that we do prior to the closing on it. In some cases, if it’s properties that we really know, or we may have done a loan on it previously, or, you know, there’s, it’s an extenuating circumstance if we don’t get an appraisal before we close on it. We don’t work off of a BPO.
Jonathan Davis (50:12):
Yeah. And you can always,
Wendy Sweet (50:12):
Brokers price opinion.
Jonathan Davis (50:12):
You can always work in a right size, provision into your loan as well. So you can do a loan amount with a right sized clause, which just says once the ARV or the appraisal comes in after the closing, if it doesn’t come in what we think it is, we have to make the LTV the right size. So then the borrower has to bring, you know, X amount, to bring that loan amount down. But then you need to verify bank statements that they have it. We should escrow that front. It can complicate things, but there are ways around that.
Wendy Sweet (50:45):
And work in the opposite direction.
Jonathan Davis (50:47):
Oh yeah, they can come in higher.
Wendy Sweet (50:47):
They can get more money.
Jonathan Davis (50:47):
Yeah, they could come in higher.
Bill Fairman (50:47):
Now, why are you doing this? Because it’s all about speed. And if you need to close this loan right away, and you can’t get an appraisal right away, because we have issues right now.
Wendy Sweet (50:57):
Yeah. It’s taken us a long time to get it done. So we have gone through everything we can possibly go through. Right?
Bill Fairman (51:04):
Wendy Sweet (51:04):
Well, there’s so much more actually we could do 10 shows on this but we don’t have time. So you want to close this up?
Bill Fairman (51:14):
All right. We’re done, have a nice day. So thank you so much for joining us again. We are Carolina Capital Management. Our website is CarolinaHardMoney.com. We do make loans so if you’re a borrower, click on the borrower tab. Nope, don’t do that.
Jonathan Davis (51:29):
We are fast at making loans too.
Bill Fairman (51:31):
Click the tab that says apply now. If you’re an investor looking for passive income, then click on the investor tab. Don’t forget to subscribe, share, and like our show and if you have any additional questions that you might’ve thought of after we’re gone, just stick it in the chat box anyway cause we do have people that will scour it and answer it for you and maybe add it to upcoming shows.
Jonathan Davis (51:56):
Bill has people.
Bill Fairman (51:57):
Yeah, my people have people.
Wendy Sweet (51:58):
And I do wanna say this really quick. I got a loan in this morning at about 11 o’clock this morning, and we’re going to close it tomorrow afternoon. How quick is that?
Jonathan Davis (52:07):
It happens. It happens.
Bill Fairman (52:09):
And we ordered the appraisal.
Wendy Sweet (52:12):
No, he came with one. And it’s in an area that we know, so we can do a weekend to a BPO on that one.
Jonathan Davis (52:17):
And if they do have an appraisal they bring to you, you can do an assignment of their proposal so you can assign their proposal to you.
Wendy Sweet (52:22):
That’s right. Awesome.
Bill Fairman (52:24):
So have a great day. It was fun. We’ll see you soon.
Jonathan Davis (52:39):
Let’s see what we got here.