Episode Transcript
[00:00:00] Well, here we are at this is the Mic'd up show and we're starting a little bit late today.
[00:00:07] As you know, we talk about all things regarding either real estate or the mortgage industry.
[00:00:13] My co host Michael Kelleher is unable to make it today and our guests got moved into next week and this week you get me. And actually very rarely do I ever get to talk about myself, at least in on this LinkedIn podcast and what I do. And of course we are here typically live every Thursday at 11am Pacific in sunny San Diego and at 2pm Eastern Time. This is actually a live show where we are on LinkedIn and if you have the opportunity to please like comment and subscribe to our show, if you're listening to us on Spotify or Apple podcasts and of course we do encourage you to actually go in live and make comments and ask us questions. Always looking forward to our listening audience and it's very interesting this week I just got back from the AAPL conference, the American association of Private Lenders Conference, which is in Las Vegas. Of course last week you, if you watched the show with Leora, we were talking about her and we were talking about the Mortgage Bankers association. She was reaching out looking for employment. So if you are a independent mortgage banker, she according to what I still know, still out there looking on the job hunt. And I was in New York City meeting with investors, family offices alike. And really interesting in what I do in the family office space, in case you don't know, is I am what they call in the residential transition mortgage loans. And a lot of them just know them as fix and flip loans. And of course there's a number of investors that are out there right now. The major, the major players that are in there, they are investors, you can get correspondent lines with them or you can also work with us as a family office. And actually I work with a number of family offices that are entering into the space. Some of them want to work directly with a hedge fund and they're looking for like 750 million a month in type of volume in the real estate space that we're in right now. Of course, inventory precludes and does not really allow really a lot of volume in that space. So the demand for it is good because the yields are good. And the basis points to the independent mortgage banker is also very high as well. Not really selling what I'm doing. As much as I really like to just inform the leaders of the independent mortgage bank to really consider this, there's a number of them already Doing this, I've seen one top 10 lender already get into it and a few localized regional independent mortgage banks as well. In case you don't know, the typical fee on this type of loan is pretty high. And the reason it's higher is because there's no early payoff penalties to the borrower nor to the independent mortgage banker. So if you're listening live and you are looking to invest into basically buying and flipping properties, or if you're an independent mortgage banker and you like to get these loans and learn more about how to offer them to your retail originators, this is actually the show that you want to listen to as just a general informational on whether you want to get into it or not. So number one, there is no prepayment penalty to the lender or to the investor. That's important to know. If you're the borrower. You sit there and go, well nobody wants to pay a prepayment penalty. And why do they charge prepayment penalties when the lender, whichever your broker or lender you're working with, they have to actually adhere to the guideline to an investor onto Wall Street. And for that purpose, the Wall street lender, buyer of that bond, mortgage backed security, or the buyer of that mortgage loan, they want 30 years of yield. So going to get a loan for a low interest rate and then getting it paid off within three to six months, it actually doesn't work in the favor not only of the loan officer, not only of the mortgage, it only works as a one sided benefit to the investor. And the reason it's the benefit to the investor of course is for the lower interest rate. But that lower interest rate is meant for a 30 year amortized loan. And so when the investor actually flips the house, makes the profit, the loan officer loses the commission, the mortgage banker loses, also loses the commission. And it's not just the commission to the loan officer. You know, if they were W2, you have the front end and the back end of the federal taxes, you have Social Security that was paid out and then any gains that that Wall street was expecting to have, they may have some kind of penalty. And so with the fix and flip type of loan, it does two things. Number one, it allows with no early payoff penalties and no penalty to the investor borrower and no penalty to the investor lender. And so the benefits of that is that it's a win win situation, it's profitable for the lender, and it's also profitable if done right for the real estate flipper. As well, and so what the real estate flipper has an intention of doing is now, number one, if you've never done a flip before, a lot of investors actually want you to have anywhere between 5 to 10 flips under your belt. And if you don't have that, but you have the cash, what you may want to do is talk to your lender. It could be a regionalized broker or it could be a regionalized independent mortgage bank. Not every mortgage broker or mortgage lender has this type of product available.
[00:05:43] They may know about it, but not all of them offer it. And so it's with that purpose is if you're looking to get a fixed and flip mortgage loan, you can always reach out to me via LinkedIn or you can send me an email, or you can send Micah Mike Kelleher an email or direct message on LinkedIn and we'd be happy to give you a lot of information, well, as much information as we can on educating you on this product.
[00:06:08] Number two, it's also what I call the Anti Fraud 203K. There's been a number of, and I call it a small amount of fix and flippers. What they want to do is they want to put 3 1/2% down, get the FHA 203k streamline or the full FHA 203k call it owner occupied when really they don't have any intention on calling it owner occupied and just actually flipping it. It's bad for you as a reputation as a borrower and it and also there's penalties to the loan officer and there's penalties to the bank as well. And actually that if you purchase it for the purpose of actually filling the property, that's actually considered fraud for profit. So for you quality control guys out there, yes, we don't want to do that. So this fix and flip mortgage loan is actually beneficial for you as the borrower, so you don't commit to some kind of bad reputation for yourself. But also good because the mortgage originator, mortgage broker, mortgage loan officer that you speak to, they actually have the ability to get this type of product and then offer it to the fix and flip person. Now it's not three and a half percent down. Some lenders may offer no down, some may offer 10% down. But the benefit to the fix and flip borrower is that not only do you get to put the 10% down, but potentially you can also get the amount of money to fix up the house. So you'll have a house and you need whatever 30,000, 40,000, 80,000 to fix it up. And if the house future value and also they call it after repair value is greater than your purchase price plus the fix up cost, then you can get anywhere between 50, 60, 70, 75, in some instances 80% of the future value. As long as you put 10% down on the purchase price to get a mortgage loan and with no penalties, you can actually use that potentially even as a bridge loan, meaning that you're taking up one property to sell the property, get it somewhere else. Or if you have an investment property and you need to leverage it to buy something else also for investment purposes. These are called business purpose mortgage loans. These are not DSCR mortgage loans. So you don't use future income in order to qualify. It is solely based upon the value of the house. As long as the purpose of this mortgage loan is used to buy it, fix it and then sell it immediately. Now does that mean you have to sell the house? Is it somewhere in the deed of trust or in the promissory note that says you have to sell it? No, that you can talk to your mortgage originator or your loan officer and also turn it into a DSCR mortgage loan as well. So the benefit to the borrower is that they get to buy it and fix it. And even potentially if they hold it for six months to a year, depending upon what type of of rehabilitation it is, they might be able to refinance it. And if you're an originator and you want to be able to provide this mortgage loan and not lose it to a mortgage broker or another originator, then you can also originate this mortgage loan and then you can also refinance it into a DSCR loan. Now if the borrower wants to provide two years of tax returns and the whole bottle lacks as far as documentation is concerned, they're of course able to, if they qualify, obtain an agency or Fannie Mae Freddie Mac loan for a non owner occupied property. Once the property is fixed up, you'll have the budget, you'll have the closing statement, you have all the documentation in order to do a refinance on the property. If they want agency, but of course the non QM investor, because you don't have limits typically on how many houses a person can and purchase, you can actually use a DSCR launch DSCR debt service coverage ratio loan non QM to refinance into this type of into from that property and transition it from one end to the other. It's super exciting. I wish more of this product was available. Fifteen years ago when I started flipping houses it would have been much easier for me to do that. But I think that it's important that this type of product is actually brought out to educate the public. As you. If you listen to the housing wire, you listen to what Logan Motashami is saying. Like builders build for profit. And there really isn't much inventory out there because builders are building for profit. They don't want to flood the market like they did 20 years ago and create. And create just too much inventory there, thereby eventually dropping prices. Because we don't have as irresponsible lending as we did 20 years ago. We have more qualified borrowers. And in this particular instance, if you have money and you want to work with a flipper and you have an LLC that you would like to do this in, guess what? You can actually partner with someone that's already done five of them. If you have the money, it's actually better for the investor. Why? Because the flipper can now guide the person with the money that hasn't done five of them. There's all kinds of mistakes, title mistakes. I remember one time, and it wasn't my transaction, but I talked to a flipper and everything was good until it wasn't. And what happened on title was everything was good on title except on the plat map on title report. What happened is there was an easement that was not a common easement. So when the contractors went to go fix the house and the person who actually owned that easement said, you cannot use it. Well, we need to, because we need to get up to that house.
[00:11:58] No, you're not allowed to. And you may have accessibility to that property, but not on this easement. And so it's important to know you don't want to fix and flip a property, that the value looks good, the pro forma looks good, but the property gets landlocked. Because he didn't study the preliminary retirement report, because the person who's actually been through that may have that type of experience that they don't have to buy a landlocked property, even though all the comps look good, the pro forma looks good, the budget looks like, the contractor looks good, and everybody's been using the same dirt road for the last 20 years. But who wants to go through litigation just to use that road when the whole purpose of the property was only to fix and flip it within three to six months or even a year to begin with anyway? So if you're a beginning flipper and you're looking to find out how to flip a property that's just one example on how to properly read a preliminary report. Not just looking at the property itself, but looking at can you get accessibility to the property which leads into the next part of fixing and flipping a property is the budget itself. Do you have the proper contractor? In other words, has the contractor done enough money? Did you do a financial analysis of how they pay their people?
[00:13:12] It's kind of insulting actually to talk to someone and ask them, well, do you have enough to pay the people? And if you have the money to fix and flip them, the lender that you work with may have what's called a draw system. In other words, they don't give you all of the money upfront. That'd be foolish, right? You could take the money and run with it. And so it's on a draw system, but you want to make sure that the contractor is also solvent enough to be able to pay his people and get things done. In certain states and in certain cities, there's a number of contractors that basically left the job, believe it or not. And so it's not always the cheapest person that can get the job done. It's also making sure that the qualified contractor can get the job done. And if you're a first time flipper and you're working with a first time contractor who hasn't done any work, that's also not good for the lender as well. And so the lender needs to get fully informed on not only on vetting out the borrowers, but also the general contractors. And I think that working with the right type of investor is going to be able to help you out. Fixing and flipping sounds awesome when you're watching hgtv, but doesn't necessarily mean that it always works out because again, money is not emotional, people are. And I think that if you have the willingness to actually go through, go through the process and working with someone who's already properties working with and having that person coach you through it's actually worth it. You shouldn't be looking at it at what is it that you're giving away as your profitability.
[00:14:45] The money itself and the interest rate is actually pretty cheap. When you talk to an agency borrower or someone who has an 800 FICO score and a million dollars in the bank, they go, wow, I can pay cash for it and I don't want to borrow money because it's 10 and a half percent, 11 and a half percent, 14%, whatever it is for your regional or geographic area.
[00:15:06] And I would say, I would beg to differ. I would Say it is not necessarily what you make, although that is definitely the end result and the end goal. It is always what you get a chance to keep. And working with the right professionals that are not only going to be able to handhold you through the underwriting process of the property itself as well as the mortgage loan process, because the mortgage lender is looking to get their money back. And when the investor is looking to pay cash for it, they're not looking. They're looking to make a profit and they're looking to make their money back, but in a different way than when you have someone that's literally working with the money, right. Working more concerned with the return of our investment than the return on the investment. And so when we look at the particular situation, trying to figure out, hey, is this person going to be profitable? Yeah. Great. Have they flipped a property before? No. Well, then they're going to make mistakes. And the lender doesn't want, they want their money back, but they don't want those title issues and they don't want to deal with the subcontractors that didn't get paid, even though for you, as the flip, you may have paid the general contractor, but the subcontractor that the, the drywall, the tile, the carpet, the flooring, the pool person, the landscaper, all these subs, maybe they didn't get paid all the way. Maybe they had a disgruntled employee, the sub didn't pay their own employee, and then put a lien onto the property, a contractor's lien or something else. And so getting that type of experience onto the table is going to be important for the fix and flipper and also for the mortgage originator that hasn't done a flip for themselves. They should also get informed on learning how to fix and flip a property because maybe they may want to do it themselves. You know, they're watching, you know, getting the loans. They're like, hey, wait a second, I think I could do that. In fact, I would say that most originators that have been doing this for the last four years that haven't yet done a fix and flip and can get educated on this type of opportunity in lending. You can go ahead and send us an email, of course, you can also drop a message down below onto the LinkedIn page. And of course I'll be able to respond to you, send you a DM via LinkedIn, or if you put in your email address or DM me a phone number, I'll be happy to give you a short telephone call and give You a brief education.
[00:17:27] I just wanted to give a brief education on what we're doing because as a private family office right now, when we provide fix and flip mortgage loans, either from ground up construction or for the actual single family dwelling itself, the underwriting becomes nimble. And what I mean by nimble is we're really looking at can we get the money back and what is the capacity that we're getting the money back.
[00:17:50] A lot of originators don't even understand, or I would say residential originators don't even understand the concept yet of interest reserve. And what that means is the lender has the possibility of actually providing six months of mortgage payments into the mortgage loan itself if they have the experience, by the way. And then they don't have to make, they don't have to come out of pocket for the mortgage payment, they just come out of pocket for the down payment. And so if you're a first time flipper and you're working with someone that has the experience and they don't want to make the mortgage payment and you don't want to make the mortgage payment, but you do have the 10% down and there's enough equity to put the mortgage payments as well as the, the rehabilitation into the mortgage loan, then that's an, that's also an option that's not in agency financing or even in DSCR financing. Why? Because the purpose of this loan is to fix it and then pay off the loan as quick as possible, either in a refinance or for a sale. I didn't intend for this to go on for a long. We're missing our co host, Michael Kelleher. He's, he had a family event and unfortunately his father passed away. And of course we give condolences to the Kelleher family, but there's multiple people asking me. I actually tonight in San Diego I am hosting a cash flow event where we teach people how to utilize creative financing, whether it's the fix and flip mortgage loan using equity investors. Meaning because equity is always more expensive than debt.
[00:19:18] And if you are an investor and want to fix and flip properties, you're going to learn that really quickly because someone says, hey, I will provide you with 50% of, of the down payment so you can go get a private money mortgage loan or I'll even pay cash for it. Just give me 50% of your profitability. And then you start to do the math on and you say wait a second. Even if I had to pay a 14% and 4 points which is like super expensive for Most people who are in agency land, 4 points and 14% and they look at it and go, well, you know what, that 4% on fee on the mortgage loan and that 14% on the interest rate is way cheaper than giving up 50% of my profitability.
[00:19:58] And so that is something that you may want, that you may be contending with when working with an experienced flipper. And so you, you, if you are a first time flipper and you need to go get this mortgage loan and you need to find someone that's experienced, you know what, there's a lot of people who have actually flipped more than five properties in the last 12 months. There are more than you can imagine. And there are wholesalers out there. A wholesale, a wholesaler in that fix and flip space is what they do. Is they literally all they do, they may or may not be a licensed real estate agent or a realtor. They will go out and market to go purchase a property into contract and then sell you the contract so you can go and flip the property or buy the property or do whatever you want. And typically you, you're gonna, you can't get an agency mortgage loan for that purpose. So you may want to just get this bridge loan, slash, fix and flip mortgage loan just to buy the property so that you can refinance into a DSCR or an agency mortgage. Why? Because you're going to have a seller and then you're going to have the wholesaler on the contract who's going to assign the contract to you. So there's a number of steps which agency financing does not allow for that purpose, which is why you may just need to pay the freight for this type of loan just to get the property. If you don't have the ability to pay cash.
[00:21:16] Lots of types of financing that's available, lots of types of opportunities. I think that the general public is uninformed. I won't call them uneducated, just uninformed. And this type of product that's available is super convenient as far as concerned. Is there a price to pay? Well, yeah, that's part of the deal. If you're going to be making money, then share the wealth. I think when you think about how much abundance that there is, whether you're paying the contractors, paying your realtors, paying the wholesalers, paying the lenders, the title, the escrow, the property taxes, the city that or the county that, that you're going to be, be profitable in and even the federal government when it comes to capital gains potentially, unless you're going to kick the kick the can on the boot into a 1031 exchange or some other delayed sales trust or some other tax vehicle to delay the capital gains. There are all kinds of ways to either create the profitability today and then and then create cash flow or mailbox money, as some people would say, over the course of time as well.
[00:22:23] Not your tax professional and I would definitely advise you to talk to your own tax professional when coming up with these types of questions. So go ahead. And if you have any questions about fix and flips. If you want to be a seller of fix and flip mortgage loans and you are a mortgage banker or a mortgage broker and you want us to be able to buy the mortgage loans from you, we don't originate them. Okay? So if you are a flipper and you want us to lend you the money, you need to talk to your mortgage broker or mortgage lender to talk to us so we can buy the paper. We want them to do the underwriting, we want them to keep this fees, we want them to keep the points and we want to just get our money back and get our yield. So with that being said, I hope you found this to be an interesting show. And if you know Mike Kelleher, go ahead and send them a shout out. Send them your love, send them your condolences. He's been from the highs and the lows. Definitely miss him. And I think that's it. We don't have any questions on the air right now, so definitely appreciate you. For those of you who have been listening, go ahead. Remember to like subscribe and join in on the next call. Be happy to answer any questions and we will of course want you to participate by asking questions online. This is Thanksgiving and so we are certainly grateful for all that you have in either subscribing or listening to us. Thanks a lot for coming in.
