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If you've ever sold land with seller financing, and if you've taken the approach of not pulling credit reports or investigating the borrower's ability to repay (i.e., loan underwriting), you're probably familiar with the disappointment of a borrower who stops paying and leaves you to pick up the pieces.
What if there was a better way to create a more predictable income stream from each property you sold with owner financing?
There is! And the process is surprisingly easy, especially if you enlist the help of a residential mortgage loan originator (RMLO).
In this episode, I'm talking with Max Bailey from CalltheUnderwriter.com to discuss the “how” and the “why” of using an RMLO. After hearing the rationale behind this kind of service, you may ask why you wouldn't use this for every seller-financed property you sell in the future!
Links and Resources
- What Are the 5 C's of Credit?
- Loan to Value (LTV) Explained
- What Does a Loan Underwriter Do?
- How to Read a Credit Report
- Consumer Financial Protection Bureau
- What Impact Does Dodd-Frank Have On Vacant Land Transactions?
- What Is Fannie Mae?
- What Is Freddie Mac?
- What Is An Amortization Schedule?
- What Is Interest?
- Questions to Ask Your Borrowers During the Pre-Qualification
- The Beginner's Guide to Rental Property Ownership by A. Max Bailey
Seth: Hey everybody, welcome to the REtipster podcast.
Today I'm talking with Max Bailey from CalltheUnderwriter.com. I wanted to talk with Max because someone with his insight is desperately needed in the world of land investing. A lot of land investors were trained up with the idea that seller financing is your friend, and that when you sell land with seller financing, it doesn't really matter if the borrower is creditworthy, if they're reputable, if they have a history of making their payments, how much cash they have, it doesn't really matter at all, because if the borrower defaults, you can just take the property back and sell it all over again.
Well, I have some personal experience with this and I learned pretty quickly that when borrowers do stop paying, even though it's vacant land, and even though I can get it back and resell the thing, it's usually not a snappy process to get that property back if I can get it back and completely remove their equitable interest so I can sell it all over again. And some states make this process very difficult, and even the ones that don't still require a lot of gyrations that are frankly just kind of annoying and time-consuming.
The alternative to dealing with lousy borrowers who stop paying is to make sure you actually investigate them ahead of time. And this requires a process known as underwriting where you look at that loan applicant's credit history, maybe do a background check where you look at that loan applicant's credit history and verify their sources of income and check some other standard underwriting boxes. And this is what every bank does before they will approve you for a home loan.
And if you want to get quality borrowers, this is what you should be doing too. I'll be the first to tell you, as a former credit analyst who used to do this stuff all day, every day in my former job, it's a lot of work to underwrite loans and qualify borrowers and make sure you understand who you're lending money to.
But just like the importance of doing all of your other due diligence before you buy a property in the first place, this due diligence on your borrower is just as important if you want to get into seller financing the right way and have a long-term success without a whole lot of unexpected unforeseen defaults where you have to keep going back and forth with borrowers who don't pay and trying to get that property back so you can resell it again.
What if there was an easier way to do this homework and verify that your borrowers are all creditworthy? Now the good news is there actually is, and it can be done with a residential mortgage loan underwriter, and you can hire them on a per-job basis to do all this work for you before you close on each deal.
Max Bailey is one such underwriter. We're going to talk with him about how this service works, how long it takes, how much it costs, and what to expect from it, and a lot of other very interesting things that you'll see will come up in this conversation.
Max, welcome to the show. How are you doing?
Max: Good, thank you. Thanks for inviting me. I’m glad to be here.
Seth: I got a lot of questions for you about this whole underwriting process and how it works and who uses it and how much it costs and all this stuff. But I guess maybe the place to start would be, why do people use you? What kinds of customers do you work for or what situation is a business or person in that causes them to call the underwriter and get your help?
Max: Great question, Seth. We offer quite a diversity of services. The bulk of our underwriting is owner finance, one- to four-family occupancy. And that is because it's federally mandated that anybody doing a seller finance transaction on an owner-occupied home of one to four units must by law ensure that their borrower meets the eight elements of ability to repay in Dodd–Frank and create an underwriting file that proves that they did that.
So, that's how the business was born in 2014, was specifically for helping investors gain and maintain compliance in notes for seller-financed properties. But now, over the years, we've expanded that and we do land contracts, we do vacant land, I do quite a bit of work in maybe two dozen states on rentals and investment properties. And so, now we just basically will just underwrite on a custom basis for any investor that wants underwriting.
And so, for your folks listening, it's important probably to explain the business model because what we do is different based on who you are and what you need. If you were in Michigan and you wanted us to underwrite vacant land, we would have far more flexibility in helping you than we would if you were putting a family in an owner-occupied home. When you're putting someone in an owner-occupied home, then we have black-and-white metrics that have to be observed. And we walk you through how to screen to find the right borrowers that can meet those. And then we underwrite very detailed based on those eight elements of ability to repay. And then, at the conclusion of the underwrite, we actually issue a certificate of ability to repay, an ATR certificate.
But when we're underwriting for something that doesn't have federal compliance standards such as vacant land or non-owner occupied, let's say you're buying mobile homes and then you're going to resell them again, or you're buying rental properties, or in your guys' case, you're just buying vacant land to sit on and then find a developer and hope to flip it or resell that note.
We can offer custom underwriting, which what that would look like would be on an individual basis. We sit down and have a discussion on what are your concerns, what type of consideration do you want to give for the performance of this note and the likelihood of future default. And then we together would essentially set the metrics that we're going to screen for and then we would vet the borrower and then just communicate with you on that specific set of criteria or metrics that you and I came up with together. So, it's going to look custom in every case if it's not owner-occupied.
Seth: Gotcha. No, that's really interesting. And I'm glad we're talking about the difference between vacant land versus a multifamily owner-occupied property. Maybe just quickly run through what are those eight criteria that you would normally have to use under the Dodd–Frank, all that compliance stuff. And then when you're looking at vacant land, which of those things would apply to vacant land, or what would you suggest a person look at for a vacant land deal?
Max: Well, I would begin that by saying my motto in life and especially in this business is “The best indicator of future performance is looking at past performance.” If I'm going to invest in a company, the best way of getting an idea where that company's going to go in the next five years is for me to historically look back at where they've been in the last five years.
And so, with humans or with interviewing, let's say, even for an employee, that's what a resume is all about is, “What am I going to get from you if I hire you next year?” Well, the best indicator of that is going to be looking at your resume that shows what you put out last year and the year before. And so, those are parallel issues in non-owner occupied as well as owner-occupied because they all speak to your credibility, they all speak to your consistency. Is this person known to be a Steady Eddie that gets up and goes to work every day and pays his bills, or is his life a dumpster fire train wreck? And every year is a laundry list of new defaults and failures to honor commitments with a whole new set of excuses every year.
So, in a nutshell, it's the same everywhere. What's different is that when you and I underwrite for a business deal that's not owner-occupied, you're in the driver's seat completely. You share with me what your concerns are, what do you want to do with this note in the future. And then we create the stringency of the underwriting criteria together to take that file where you want it to go. If you just want to prep it for resale and you're just hoping that it's going to perform for 24 months and you're going to flip it and resell it, we might come up with criteria that are a bit more relaxed than what they would be on owner-occupied.
To go back to your original question, paint a picture of what owner-occupied looks like, the eight elements really take a deep dive into the borrowers as humans and individuals and really paint a picture of them from top to bottom financially.
We look at debt to income ratio, we look at a state-specific residual income. And this would be a good example of where this wouldn't necessarily be necessary for your business.
In owner-occupied, we're looking at residual income. We don't just have to prove that these people can have enough money to make the PITI of the mortgage. We have to also show that based on what zip code they live in, that these people are going to have enough residual income left over every month to pay utilities, gas, groceries, the things that feed their family.
So, when we add in a metric like residual income, you can imagine the difference between two different borrowers is night and day. If I'm helping you underwrite a file for owner-occupied, let's say, and we're in New Jersey, or we're in New York or Connecticut, really expensive states, that underwriting might look entirely different for a file in Connecticut or New Jersey than it will in Arkansas. Because a family of four in Arkansas, the residual income requirement might be $400 a month for a family of four. Up in Connecticut or New Jersey, that residual income requirement for a family of four might be $1,900 a month.
And so, when you add in a metric like residual income, which expresses the likelihood that a family's going to have adequate gas, grocery, utility money after making all their payments, that can really complicate things.
In non-owner occupied, we wouldn't probably even get into things as finite and personal as residual income. It's not the best indicator of a business purchase of likelihood to pay.
Some other issues might be this. In owner-occupied, we absolutely have to vet the individual creditworthiness of the borrower themselves. So, if you're selling an owner-occupied home to John and Julie Smith, then it's actually John and Julie Smith's individual credit we have to pull. We have to look at their income for two years. We have to look at their personal debts for two years. We have to physically see what their personal likelihood of paying in the future is based on their personal history in the past 24 months.
If you were doing a deal for vacant land and they wanted to purchase it under the assets of a corporation or a REIT or other form of entity structure, we wouldn't necessarily have to vet that borrower's personal credit. We could look at the creditworthiness and 24-month history of the entity that they're hoping to get credit based on, or maybe a combination of both is what I really like to do.
Then we might take the principles and say whoever this principal is, let's review that individual, make sure they're not a dumpster fire train wreck. But then let's also fairly heavily vet the actual entity and their credibility and draw a contrast between the two because we might get a more complete picture that way.
Whereas in Dodd–Frank, we really don't do that. We look specifically at the individuals who will be laying their head on the pillow every night in that place, and are we going to contribute to them becoming homeless? Are we going to loan money to somebody irresponsibly who all indicators say this person has no business getting a home mortgage, and now we loan them money irresponsibly because, hey, the LTV is great for us and we're getting a big down payment.
And so, as was the case with many predatory lenders, hey, I don't care what happens in 12 months down the road, I'm getting a $50,000 down payment from them today. And if they default next year, well then, I keep the money and I kick them out and I rinse and repeat. That's what the government's trying to prevent. And so, it's a little bit more of a thoughtful, measured approach when it is owner-occupied.
The biggest thing I could say is when we talk about non-owner occupied, it equals flexibility and options for you when you hire us because there isn't a federal law that we have to stay compliant with. Rather, we're just looking to help cover your bases and ensure your best interest with respect to risk.
Seth: Gotcha. So, kind of putting you on the spot here, I don't know if this is even doable right now, but I'm just thinking, I'm envisioning a one-page PDF that a land investor could use to say, “Hey, look at these things. Given that it's non-owner occupied vacant land, this is just a standard thing.” Obviously, change it if it needs to be changed, but what would be those bare essentials that a person should look at?
Max: Yeah, absolutely. Great question. Again, what we're talking about is default prevention. Ability to repay certainly has to be one of the elements that is what kind of monthly growth earnings or access to capital does this individual or entity have. So, no matter how you dice it, there's going to have to be a look at earning and cash flow consistency and capability over a 24-month period.
Whether that's individual or entity or culmination of both, would entirely be up to our discussion based on the scenario you gave me at that time. And then besides access to capital then, there certainly has to still somewhere in there be some sort of a look at creditworthiness, the financial history of this either entity or individual.
In other words, when we look this person up, do we find out that they're currently defaulted on 10 other ventures similar at the same time? That'd probably be something you'd want to know about and you'd probably want to run from. Or maybe we look them up and we look up their entity and we can't find anything on either one that indicates that they've had any problem. Maybe they already have two or three credit sources out there and those credit sources are all in good standing and always have been.
So, that kind of thing. Or maybe it's an entity that they want to leverage against, but that entity is so new in origin, there's just nothing on them, there's no history at all. It's like they just sat down at a diner and wrote the thing up yesterday and now they want to borrow a bunch of money against it and there is no history to even vet. It's nothing but goodwill and pie in the sky. And again, you'd probably want to know about that as well.
And then just the other issues would be maybe a very simple form of cap rate or debt-to-income ratio with respect to this person's hoping to float this thing with what type of capital from what source. And when we examine bank records or P&Ls, does it look like they have the kind of discretionary capital to absorb much more debt?
Because I'm guessing most of the time in your business, you're not looking at the asset being capable of providing its own debt service. So, if somebody's going to buy five acres of land and it's not currently rented, then that five acres of land can't be brought into the equation in terms of its ability to float its own debt service. Whereas if you're buying a sixplex, absolutely, we'll look at rent rolls and we'll see what the monthly earnings is above expenses on this and some sort of a ratio that will tell us, “Hey, okay, this thing is gross in $6,000 a month, then the new loan would be $2,000 a month. Then after all their other expenses, they still have about $4,000 a month left.”
We underwrite, again, totally differently based on the scenario. And so, your investors would come to me and paint a picture of what this particular venture was and what it looked like, and then that's how we'd kind of derive a strategy for. Here are all the things we should probably look at with this one to make sure that you're safe.
Seth: Yeah. I think what you're describing there, it actually sounds like a fairly short list. I'm sure you're familiar with the 5 Cs of Credit, which is kind of like this cute little thing that we use in the credit analysis underwriting world. And those things are character, the borrower’s character—are they a good person?—capacity, capital, conditions, and collateral.
And those make a ton of sense when you're talking about multifamily, owner-occupied property or a business, that kind of thing. But when you're talking about vacant land, the C for collateral value, a lot of times that's really hard to quantify and that's why banks won't get involved. Things like conditions, external factors like the economy, like our jobs going away, this kind of thing. That also is less relevant to vacant land because a lot of times, vacant land isn't generating income, it's not really dependent on the economy per se, but the things that do matter a whole lot is really just that person or that entity. What cash do they have access to? Are they a rich doctor and they could pay it off today if they wanted to? Because if so, that makes it a pretty easy thing to underwrite.
Basically, with vacant land, you don't have as much to sink your teeth into as the borrower, but what you do have is that individual or entity's financial resources if they have them and their credit history also. Do they actually do what they say they're going to do and does the history show that? What you're saying makes a ton of sense.
Max: Yeah. And we could still always soften and massage the Dodd-Frank requirements and then weave them into something that is a little more flexible but still honors a similar intent. In lending, if somebody has a credit score under a certain amount, then that automatically triggers certain conditions. In other words, by virtue of the credit score alone, that tells us that we better verify a few extra things. If somebody's got an 850 credit score, we're probably not going to worry about whether they've been on time on their last 12 mortgage payments. The credit score tells the story, they absolutely were, or they wouldn't have 850.
If somebody has 430, then we might say, “Okay, yeah, I see they've got 12 months of bank deposits. Yeah, they're cash-flowing, no doubt about it. They're making good money.” But the 430 credit score is telling me there's something there. They've burned somebody that we better look a little deeper. Maybe now we want certain other proofs of positive payment history for the last 24 months, or we want to dig a little deeper because what life event brought this person's credit score down to the train wreck level, despite the fact that we see a positive history of great earnings.
Seth: Yeah, I appreciate what you're talking about now because I know sometimes people have this mindset maybe because they don't really understand credit reports, but they'll think, “Hey, if the score is 500 or below or 600 or below, then no, it's bad.” But it's like, “Well, maybe”, but you got to look and understand why is it that low and can it be mitigated? Is there a story behind it?
Max: Yes. And one of the things that we do a lot of is investigation to understand the why. And then this is where Fannie and Freddie lenders don't because they don't have to, quite frankly, they're picking low-hanging fruit. Since they are churning a Wall Street-backed investment with a bunch of extremely risk-averse investors, they just draw an arbitrary line in the sand and they say “Anything under 580, we're not going to look at.” You're gone.
And seller finance is taking that market share that the bank is willingly walking away from, and then we're sifting it for the few nuggets that are within that demographic that Fanny and Freddy have just automatically written off.
And so, the idea in underwriting is to sift these borrowers and find the sweet spot where we're consistently mining out the ones that are still going to make great performing note holders, but they just happen to, for whatever reason, fall below the metric that the Fannie and Freddie lenders are gathering up with both hands as they run through the field.
And so, for example, if we look at a 430 credit score, we don't just kick them out the door because they're under 580, but we do employ some filtering methods to say, let's find out if this was a one-time life event versus if this is a life pattern. And what you're hiring me to do is to make that judgment call based on doing an investigation to figure out is the low credit score indicative of poor credit and poor character in general? Or is this a good person and this a good entity but hey, during Covid they got their door shut by radical government that said “You're out of business tomorrow no matter what,” because Dr. Fauci says your customers aren't wearing five masks. So, you're shutting your doors and overnight you're earning potential winning the toilet. But for 10 years prior to Covid, you kicked a** and now, the year after Covid you're back to kicking a**.
And so, we are able to look at that credit score and really connect the dots and understand that, “Hey, you know what? This guy is not the credit risk his credit score would say he is.” And so, that's kind of what we do. We don't do automatic underwriting, which is what all the banks do. They spit the document into a machine and a bunch of lights flash and it kicks it back out. And while the lenders out on the golf course playing, when he comes back, all of his loans are already underwritten and it just tells him an algorithm, he's a yay, he's a nay, he's a yay with conditions and he's a nay no matter what.
We don't do that. We manually underwrite every single one of these looking at you and your needs and your borrower and the deal and what makes good sense for all parties involved on an individualized basis.
Seth: Gotcha. Kind of a random question, but how did you ever get into this business? Did you use to work for a bank? What's your career history that led you to doing this kind of work?
Max: I had a background in finance, but believe it or not, I thought it was way more exciting to run in and out of burning buildings. And so, for 30 years, I was a firefighter and a paramedic. I did create finance on the side and bought and sold rental properties and did some freelance type of creative finance but I never actually worked for anybody in the financial sector until I jumped into this business.
Seth: Okay, gotcha.
Max: But it's something I've always been interested in and I authored a book on real estate investment and this is where my passion has been most of my adult life, other than the need to get my daily adrenaline fix. And now that I'm a little too old to keep falling off roofs and out of buildings, I finally decided to dive into this full-time.
Seth: Another question on the multi-family side of things where people are required to get a mortgage loan underwriter to do this. They're not allowed to do this themselves, right? They have to show that they find a licensed third party to do it. Is that accurate?
Seth: No? Okay.
Max: No, they're not. They are allowed to do it themselves. Kind of like going pro se on a murder trial, you're allowed to defend yourself.
Seth: Oh, gotcha.
Max: It's not advisable and you might spend way more time, effort, and money and still yield a poor product if you try to do this yourself. And the biggest issue is because of the business model we established, since you can pass this underwriting fee onto your borrower, there's just not good business sense in it for you to do it.
It'd be like if you were going to sell a house and they told you that this house needs a new roof for $10,000. Well, if you can know that ahead of time and just increase the asking price of the house by $10,000, then why wouldn't you put a new roof on it? Because now this is an insulated expense.
You've passed it on to the borrower and you're still going to get what you originally needed. You needed $100,000 for the house, and so now you're able to sell the house for $110,000 and show that it has a brand-new roof. Well, that's a win-win because if the borrower is happy to buy this place for $110,000, well now they get a warm fuzzy feeling knowing it's got a brand-new roof on it and you have no liability on your head because you're hanging the liability for that new roof on a licensed bonded roofing company.
Whereas if you get up there on a weekend with your wife and your grandma, and you all bang shingles on that roof to save the $10,000 and now you get called back over and over again because the roof leaks and the shingles are blowing off, did you save anything? And maybe you risk falling off the roof while you're doing it too.
What could you have done during those three days that you would've been roofing it to make more money while letting the roofer do what he does best and you're out getting three more houses in the same condition to rinse and repeat the cycle with.
And so, I think the big thing with underwriting is just understanding that it's what we do every day and we created a business model where there's very little expense and risk on you as the investor to have us be your underwriter and how much can you get done. If you send me two or three deals, while we're underwriting these deals for you, you can be out shaking the money tree, doing what you do best, which is chasing up three or four more of these deals.
Max: And then the other thing is that I provide a ton of free education to boot. So, once we start working together, we'll start developing borrower pre-screening methodology for you that will enable you to advertise to drive the right kinds of borrowers to you in the future so that most of the tire kickers and looky-loos and train wrecks you won't even waste your time with because we'll help you understand what you need in a borrower and ask the right questions upfront. Create the right advertisement upfront so that the dumpster fire train wrecks aren't even applying because you've got two or three things in there that're going to keep those folks away.
Seth: Yeah. Actually, it was one of my questions. I was thinking once you know what you want to see, couldn't a person feasibly just create some kind of an application form on their website and say, “Hey, answer these questions and then we'll talk?” And if they answer them wrong, you don't talk.
Max: I got them.
Seth: Yeah. You got those questions?
Max: I've already got it. Absolutely. And then I also give you questions to ask every borrower and teach investors. And just so you know, this is all free. This isn't anything I charge for. Once we start working together, I go through a list of questions to ask every borrower and the fundamental logic behind it, which helps you if you hire a transaction manager or somebody else to coordinate all of that, then we work with that individual and train them how to do it for you so that you now have somebody sitting in the front desk in the office who's pre-screening all of your borrowers.
So, when you put out a flyer saying “Hey, we've got this repo house that we're going to sell on owner financing, and if you've been turned down by a bank for a traditional home loan and you're still in the market for a new home for your family, call us.” They can get some education from us on how to build that flyer or that sheet to advertise in such a way that they drive the right people to them and not every looky-loo in the country. So, they overwhelm you.
Seth: Yeah. Those little pre-screening application questions, is that something available on your website that I could link to in our show notes or anything like that?
Max: It is on our website. There's a document called “Questions to Ask Every Borrower.” I think there are 10 of them and you could certainly tweak them for non-owner occupied. That'd be a great starting point. And that's not proprietary. I made them, and I give them out to people. So, it's not like you have to sign up for something to get them. That's the other thing. We don't play like that. That's just free for the taking. And then you could certainly call me, and we'd do a session just like this over the phone, which is also free and we'd help you tailor those kinds of questions to your specific business model, what you're doing.
Seth: Gotcha. To people listening to this, I will find that on Max's website and link to it right here, in the show notes. So, if you guys want to check it out, it's retipster.com/145 because this is episode 145. So, if you want to check that out, I'll have that there for you.
Kind of a random question. Regarding Dodd-Frank requirements or what the government wants me to do, so far, we've been talking about this in the context of when we are selling properties, the underwriting that a real estate investor would have to do. So, what if I want to go out and buy a property and I want that seller to give me seller financing. Maybe it's like the grandma next door. She's never done this before, she'll never do it again after me. It's just one time. Does she need to underwrite me or is that different where that's not required?
Max: She still has to underwrite you from the standpoint of the ability to repay. She still can't sign you up to a mortgage that is four times what you make every month and then take a down payment from you so that she can kick you out again in six months and keep your down payment and make you homeless.
Think of Dodd–Frank as prevention against another housing bubble burst. Remember all the teaser rate loans in the 90s and in the early 2000s, all of the predatory lending that was going on, all the risky features. Hey, we'll give you a 1.2% APR for the first 90 days and then in the fine print somewhere we'll see that you're on a balloon payment in 120 days or your interest rate goes up to 8% overnight and your mortgage is now $4,000 a month.
So, what Dodd-Frank did after the housing bubble burst of 2007 and 2008 was they analyzed the entire banking industry. They did an autopsy of the housing bubble burst and determined what all of the risky features and predatory lending factors were that led to this happening. And then Dodd-Frank was written as a preventative measure to ensure that we reform lending practices to ensure that this doesn't happen in the future.
The biggest underscore of Dodd-Frank is what it did is it took the responsibility for home loans off of the owner borrower and put them on the lender. And so, now the lender has a federal responsibility to ensure the ability to repay. In other words, it's no longer one of those things where you can say as the lender, hey, he had $50,000 to put down and he said he could make that $2,000 a month payment. How was I to know that he only made $1,800 a month? So, they put that responsibility on you. Now they say, “Well, that's how you should have known, it's because you're required by law to ensure that the borrower meets this ability to repay metrics.”
Seth: Yeah, gotcha.
Max: Now if you're just doing a one-off transaction, you don't have to hold an RMLO license and that's where everybody gets confused. There are two pieces to Dodd–Frank. One is the necessity to ensure your borrower has the ability to repay and that you're not doing predatory lending.
The other side of it is if you're doing more than three of these in a 12-month period, i.e. it's your for profit business model then there's the issue of unlicensed activity where they say you have to have an RMLO license if this is going to be your actual gig. It’s going out and flipping houses and selling them on seller finance churning and burning dozens of these up every year, then they expect you to have a license. But anybody putting somebody in an owner-occupied property is responsible for ensuring that this person can meet the terms of the loan.
Seth: Yeah. So, if I was buying a rental property, I'm not going to occupy it, but somebody's going to, is that considered owner-occupied or not?
Max: No, not if you're buying it to rent to other people. Nope. And I underwrite a lot of those. I have one investor that that's all he does in New York and he sends us lots of those. And so, same thing. We customize our underwriting for him specifically to what his corporation is looking for. He's picking up flipper rentals all over six plexes, fourplexes, 24 plexes and reselling them to people and they're not owner-occupied. So, we have helped him develop individual criteria that help him ensure that he's selling it to the right person, but none of them are Dodd–Frank-subject.
Seth: Interesting. In that scenario, or if I was buying vacant land with seller financing from somebody else, in both of those, there's no Dodd–Frank standing over their shoulder saying, “You have to do this or you're in trouble.”
Seth: Okay. So, they could technically not do anything.
Max: The one caveat there is though, you still have to vet your state lending laws and ensure that you're within usury limits and that you're not violating any state laws.
Seth: Is that like interest rate limits, that kind of thing? Or is that something else?
Max: Correct. And potentially other metrics as well. Require disclosures, perhaps. What if you know that there are SIDs on your property that could potentially be disastrous for a new borrower and you know that and you don't disclose it? Those kinds of things.
Max: So, anybody just wanting to go out on their own and just do a bunch of these, I would still at the very least say you better be in bed with a local attorney.
Seth: Gotcha. Yeah, I'm just trying to think through if I wanted to go out and buy a bunch of properties from different individuals with seller financing, how do I make it as easy as possible for them so they don't have to jump through a bunch of hoops? It sounds like as long as I'm not occupying it, it doesn't really need to be that hard as long as they investigate the state requirements.
Seth: Okay, cool. Alrighty. When you evaluate these things, you mentioned this ATR certificate that you come back with the ability to repay.
Seth: Is it basically like a yes or no thing, or is it like a risk rating, like “We think there's an 80% chance they'll repay” or something like that?
Max: Nope. Nope. That's met the government's requirement for ATR, ability to repay and that file is certified that the borrower met the elements of ability to repay. So, you're then sitting on a professionally underwritten, federally compliant note. And the purpose for that is multifold. One obviously is it's the government ensuring we don't have irresponsible lending and predatory lending.
But number two, from a lender standpoint, it makes your note far more marketable. I help people buy and sell notes all over the world. So, one of the reasons people come to me is because they want to create a note that's going to be resalable without significant discount in the future. So, this helps you as a lender, not just keep you out of trouble with the federal government, but also add value to your note.
So, let's say if we have two notes and all things are equal, you've got the same yield spread on both, you've got the same LTV on both. Everything is identical on two of them, but one was professionally underwritten and is holding this certificate of ability to repay. And the other was just a mom-and-pop special.
When you get hold of savvy note buyers, there's a world of difference between those two notes to savvy professional buyers because you got to remember, they're all pulling in investing money and in order for them to maintain credibility, there's an expectation of performing notes and note default. And so, they're going to greatly discount the notes of people who didn't vet the borrower as well as another seller who's got this professional consistent file here that has a proven track record of low likelihood for future default.
Max: So, you're adding value to your note by underwriting it professionally. Big time.
Seth: For sure. I've heard a lot of land investors who sell notes like this that are not underwritten at all. Understandably they're taking a huge haircut on these things when they sell them. And when you talk about the difference that it can make to have this kind of thing to verify that you did it right in the first place, that can be worth way more than the cost of your services, right? It's almost kind of a no-brainer.
Max: Oh boy, absolutely.
Seth: Yeah. And we actually haven't talked about this. So, what do your services cost to underwrite a typical deal?
Max: Yeah. I have two different services. One is the standard underwrite, which is what we've been talking about this entire time where we just underwrite the file. But you're still the seller lender, you're still the loan originator. You just hire us to do the underwriting work. That standard underwrite is $679. We invoice it in two separate pieces. We invoice you $119 upfront and then we invoice you $560 at the time of loan approval, both of which fees can be passed onto your borrower at closing or wrapped into their loan.
And then the other service is a full loan origination that we offer. And full loan origination is much more like what a bank would do. We only offer it in 18 states though, so it's important to say this, we're not licensed to do full loan originations in all 50 states. At this time, we're gaining more all the time, but at this time, we're only doing it in 18 states.
But what a full loan origination does for you is that takes you off the hook as the lender. And so, there's no legal liability on you then in the future. That's an actual RMLO NMLS licensed loan that you're the note holder on, but you are not the note originator. Our licensed entity then would be the note originator.
And that service is far more complex. It involves drafting all the loan documents, the note and mortgage, all of your state-required specific disclosures, coordinating with the closing agent and taking it right to the closing table for you. So, that 150-page packet a borrower would sign at closing, our full loan origination process would do all of that from start all the way to finish and the underwrite.
And then what we do on that, for a loan under $100,000, we charge a flat rate of $1,850 that's put on the borrower's loan. And for a loan over $100,000, we charge a 2% origination fee, 2% of the loan amount. And so, then just like a Fanny Freddie lender, just like Wells Fargo, your borrower's going to have a 2% loan origination fee that's trapped into their loan.
Again, it's still a no-brainer for you as the lender because this is a fee that you can pass on to your borrower, but it exonerates you of so much of that liability that you could be under as a lender for failure to disclose properly or for any type of Equal Credit Opportunity Act violation. Fair credit, there's about 50 lending laws that you could potentially run afoul of and be alliable for when you're originating your own notes, particularly when they're owner-occupied.
Because remember again, the federal government's looking for protection of victims. In the commercial realm, they don't look at it so much because if you're buying vacant land from me and you're a corporate entity, well hey, you have a burden of due diligence and if you do it wrong and you get screwed, the federal government doesn't necessarily get uptight about that. That doesn't make somebody homeless.
But if you are a for-profit entity and you're originating loans for poor families to be their owner-occupied home and they're leaving their Section 8 apartment to move into your home you're selling them and it's viewed as predatory, they're all over you.
Max: And so, the full loan origination means then that that loan was fully originated from start to finish, underwritten and originated by our licensed entity and not by you as an individual investor.
Seth: Yeah. Interesting. Yeah. The whole thing about Dodd–Frank, I remember when it first came out and everybody in the real estate investing world was just complaining up and down. It was just the worst thing in the world. And I get it, it was a huge change and a big additional layer of scrutiny put on everybody. A lot of people just got out of it altogether because they didn't want to deal with it.
I think the attitude, and I had this attitude. I was like, “This is too much, it's too far. The government shouldn't be getting this intertwined.” But as I hear you talking, from the vacant land stance, maybe it still is overreaching, but when you're talking about making people homeless and just screwing things up for a whole lot of people, I kind of get it. I sort of understand why this is put on the government.
Max: Yeah. Because if you study the history and if you really want to know it, go to the CFPB website and read about a bunch of case studies on people they've busted. When you're talking about massive lenders, Wells Fargo-size lenders and a history of routinely intentionally cheating borrowers and putting borrowers in homes that they knew in a year they wouldn't be able to afford because with their fancy numbers they knew that all the borrower sees at the day of the closing table is what his current mortgage is. He has no clue that in 36 months, this mortgage is going to quadruple and guess what? We can then foreclose on the house. Make major profit and resell it again. It was criminal.
Seth: That's messed up for sure.
Max: That's criminal. Absolutely.
Seth: It probably is one of those things where a lot of people aren't doing that, but there are people who do. And I agree. That does sound very criminal. And also, when you look at the repercussions of that, it literally pretty much caused that last huge recession. So, when you talk about the consequences of that irresponsibility, I get why they decided to do this.
Max: Imagine going to inner city Detroit or Philadelphia or somewhere like that, Houston, and advertising that we can get you into a home that you own for less than you're currently paying in rent now. And if you've got bad credit and a bank has turned you down, call us and we'll help your home ownership dream come true. That's what they're doing.
And so, a single mother of six kids in Section 8 housing working three jobs contacts you and says, “Tell me more. How can you get me into a home we own for less than I'm paying in rent?” And the investor manipulates everything on the front end to show that “Yeah, at a 1.9%, interest rate, you'll only be paying $1,500 a month for this new home. And right now, your rent is $1,700 a month. And guess what? Your principal and interest payment is going to end up being less than what your rent is.”
And they sell her on this thing. But in page 25 of the initial disclosures, it tells them that it's just a temporary rate and that rate is subject to ridiculous changes in a year and just all kinds of things and not observing all the legal disclosure requirements that we have today.
Well, all of a sudden, they give up their slot in their Section 8 housing and move their entire family into this home. And two years from now, they're being foreclosed on. They lost their down payment and they're now homeless and they're scrambling to get back into government-subsidized housing because somebody sold them on something that was too good to be true. And so, that was happening all over the country.
Seth: Yeah, it makes sense. When there's a way to exploit people at some point someone's going to figure it out until they make it illegal.
If somebody does want to bring their deal to you to have you underwrite it just with the standard package, not the full loan origination thing, how long does that take?
Max: The basic work that we do is just a day or two. It's still way quicker than what a traditional bank loan would be, but it's important to remember that there are certain conditions that we could find on your borrower that have to be worked through. And if those conditions exist, then part of the timeframe is going to be dependent entirely on how fast your borrower moves.
And that's why I recommend in the questions to ask every borrower that you ask a lot of the kinds of questions that could uncover the long-term challenges that we might find. And then have that discussion early with your borrower about how willing and motivated are you to fix these things. For example, a borrower might have an open collection on their credit. And while that's not a deal breaker, it does have to be brought current, it has to be dealt with.
And so, I just dealt with one this morning. The borrower has 10 open collections and they've been ignoring them for years and they've got an $80,000 down payment. So, the lender does not want to lose them. They're making great money, but they've got years and years of open collections they just walked away from. It comes to about $11,000. Well, that's got to be dealt with.
And even though they have significant cash reserves and they make great money, it's illegal to loan them money unless they make payment plans with all those open collections or negotiate payoffs and get that cleared up. And that will now slow this file for a little while we help them get ahold of all those creditors and make arrangements to negotiate payoffs or make payment plans.
And so, underwriting can take a little while if the borrower has a lot of those and that's why we teach you to ask the right questions in the pre-screen so that you have an idea how big and ugly this underwrite might be. Or maybe you're finding out you got a borrower that there's not going to be any of those flags with.
Seth: So, in order to start this process going, what exactly do you need? Do you need the borrower's social security number and driver's license and all that stuff? What are just the basic details you need to get the ball rolling?
Max: Great question. Yeah. Super easy. On our website, you'll find an Excel term sheet. We would get the term sheet from you. So, you would download that term sheet and you'd complete it and you'd email it to us and say, “I have a new submission for you.” And then you'd send your borrower an application guide that's in there and it has the link where your borrowers apply automatically to us, online application.
So, we get a term sheet from you saying you got a deal coming our way. And then you have your borrowers apply and their application comes to us directly and then we just marry the two together and start working the file from there.
So, super easy. You could do a loan submission to us in 20 minutes.
Seth: Oh, nice. Cool.
Max: And then you go on about your work while the borrowers are applying and we begin the underwriting process.
Seth: Sure. As somebody who used to work as a credit analyst in the banking world, I know how much work it takes to do this. It's not that you can't do it, but it's a lot of mental gymnastics to get all this information and figure out if it's good or not and to be able to have somebody else to just say, “Hey, do this” and that's what they do every day, that's a huge benefit to have them right on the line.
Max: Well, right, because, because then what's happening essentially is that you've got four or five deals cooking while you're still out generating the next four or five deals. But if you have to stop and finish each file all the way to fruition, then there are days and hours lost on your ability to go out and generate new inventory and create new deals and solicit new buyers. You can't go get next week's deal going because you're too busy pulling credit and analyzing everything on today's deal.
But when you get today's deal constructed and you sign a purchase agreement and you send it all to us, you're already back out chasing the next deal while we're helping you put this one to bed. We've got people where we're working four and five at a time form all the time and they're always out bringing in the new ones while we're working their old ones. So yeah. It makes good business sense.
Seth: I am curious, and I don't know how often you currently deal with vacant land deals, but I know it's something that I've dabbled with a little bit and I know a lot of other land investors do this mainly because I think it's out of desperation honestly. They'll have a really cheap piece of land, maybe it's $5,000 or $10,000 and it's not the most desirable property, but they offer seller financing because they know it's going to help the things sell faster, more people can get access to it.
But when you're talking about a deal that small, where payments coming in are like less than $100 a month, the economics of the deals start to get messed up. It's like, is it worth paying $650 and is it worth just dealing with all this hassle versus just getting paid cash? I'm just wondering of the land deals you see or even house deals, do you ever notice like a minimum? Like people typically don't come to us if the deal is less than X number of dollars? As a land investor, if I see a deal that's below $10,000, should I just not even do it? Just make him pay cash? What do you think?
Max: Well, no. Because what it would come down to is you screening properly. So, you sit down with the borrower and say, I'm selling this on owner financing and you would entail a loan origination expense for you because we have to vet you in some fashion, but we're willing to work with you on this one. A bank wouldn't. And so, here's the deal. It's going to add $679 to your purchase price. Are you willing to do that in order to have our guy work with you?” That's just how that works. And then it gets wrapped into their deal.
So, we don't do a ton of small deals, but they could still make sense from the investor standpoint because you're not bearing the expense. And they always make sense from our standpoint because it's the same amount of work for us. If it's a $4 deal or a $600,000 deal, it's the same amount of work. And so, yeah. $679, we don't care how big the deal is.
Seth: Yeah. Is that pretty much what everybody else does? They just pass it on to the borrower? Does a seller ever bear that cost on their own?
Max: Yeah, there are a few sellers in seller finance that have a business model where they're basically helping nearly indigent people. And so, they're giving them a no strings attached loan saying if you can qualify for their underwriting, we'll eat the underwrite, we'll pay it ourselves. I have several people that do it. They're doing lots of deals and their profit is in the down payment and holding that note at 10% or 12%.
Max: And so, yes, they'll eat all closing costs. I just did one last week and they said, “Yes, we'll cover all closing costs. Don't even list the closing costs on the disclosures to the borrowers. We're paying them all.”
Max: Because think about it, if you're selling somebody a $275,000 house at 10% interest and you've already put a markup on it anyway, you've got the house cheaper than you're reselling it. So, you've got a markup on the house and you're getting 10% interest on it and you're getting a $25,000 down payment from them, what do you care if you eat $679 up front?
Max: It's nothing. It's a drop in the bucket.
Seth: Yeah. I know a lot of states have a maximum interest rate that can be charged on a seller-financed deal. Does that also apply to vacant land, or does vacant land exempt from that in some way?
Max: That you will definitely have to check individual state by state.
Max: I specialize in federal compliance. In Dodd-Frank and federally, there's no max interest rate you can charge. You can charge 90% interest if your borrower can still meet all the elements of ability to repay. So, interest rate itself does not matter.
Max: But there are absolutely state usury laws that differ from state to state. And so, anytime you're making a state-specific transaction, you want to be aware of what your specific state usury limits are and make sure you're within those.
Seth: Yeah. Do you know is there one place you can go to check what that is state by state or do you just Google “state usury laws?”
Max: Yeah, if you just Google in “New Jersey usury user laws”, they'll come right up.
Max: But it's not a sexy read, I promise you. And so, for me to try to know all 50 when I'm dealing with deals in all 50 states, I've got a huge head, but it's a tiny brain. So yeah, there's no way I could do that.
Seth: Okay. Gotcha. Nope, that's good to know. For properties where Dodd–Frank compliance is required, what are the consequences for not being compliant? Say if you just totally ignore it, just do what you want, who would catch you? And then if they did catch you, what would happen to you?
Max: Great question. The CFPB, the Consumer Financial Protection Bureau, is the teeth that enforced Dodd-Frank. They're a massive entity that is all about curbing, regulating, stopping predatory lending. And the CFPB can levy fines up to and including $25,000 per violation per transaction.
In some cases, I've even seen them award the asset to the borrower. In other words, in court, this poor borrower, this mother and six children were lured out of their safe government housing on the promise of this home. It was predatory, it didn't meet the elements of Dodd–Frank. And we're now awarding the asset free and clear to this poor mom and her six kids and we're going to take the asset from the lender, we're going to slap multiple $25,000 fines on the lender and possibly even issue a state's cease and desist order on that lender. So, the fines and penalties are enormous.
Seth: Yeah. And they can destroy your business for sure.
Max: You could have 50 violations in one file. When I say it's up to and including $25,000 per violation, I don't mean $25,000 per loan. I mean, if you failed to disclose this, that's a $25,000 fine. You didn't do this right, that's a $25,000 fine. They could hit you with 50 of them in one file. So, it's a huge, huge issue.
Max: So, we help produce files that transparently demonstrate our regard for Dodd–Frank in fair lending. And so, when you're holding a note that we underwrote, you're holding a file that you can confidently lay out on the table and say, “Here you go. You want to see what my business practices are? Here they are.” And it will reek of regard and respect and concern for all the elements of Dodd-Frank and ensuring that you do not appear to be a predatory lender.
Seth: Yeah. It sounds like a good use of $679 to be able to checklist boxes.
Max: That your borrower paid for anyway.
Seth: Yeah, exactly.
Max: See, that's what's so silly about it. Your borrower, at the end of the day, is still the one eating that fee. And that's legal to do.
Max: You can't charge them for it upfront, but you can wrap it into their loan. And so, when they're paying for it anyway, why wouldn't you be as safe and conscientious and complex with your underwriting as possible when your borrower's paying for that service anyway?
Seth: Yeah, for sure. Makes total sense.
Max: They keep you out of jail.
Seth: Yeah. Gotcha. So, kind of going back to the underwriting stuff, whether you are doing it or a person's trying to do this on their own, just principles of it. What would be a big red flag or even a small one that should make you run away from a potential borrower?
Max: Great question. Two-year work history right off the bat. I'd start every talk with “Tell me about your last two years of earning. Can you document your last two years of income and were you making as good a money two years ago as you're making now or has it been a steady increase?”
When you get that person that hems and haws and says, “Well, I didn't actually work in 2021 because of Covid and then I started with Walmart but I didn't like them and I quit and now I went to Target. And I'm thinking about quitting them and going to Best Buy.” When you start getting that, run. Because you will next to never get that person qualified because they don't have a good strong history of waking up and going to work every day.
The flavor you're looking for with a borrower is you're looking for this Steady Eddie that wakes up and goes to work every day and earn steady money and they earn steady money in 2021 and they earn steady money in 2020 and they earn steady money in 2019 and they're eager to prove it to you and they can slap a pile of W-2s on you that show that every single day they get up and go to work. When it's anything other than that, that should start raising flags immediately.
Or the people that say, “Well, I'm coming to you because I heard seller finance will take people that a bank won't take.” When that's just their generalized attitude on why they're going the seller finance route, that should raise a red flag because you can't just give anybody a loan. And I correct people every single day that yes, seller finance is more flexible than Fanny and Freddie lending and it has more relaxed metrics, but it's still not the Wild Wild West.
So, you can't just still screw all of your creditors and then just still go get your next one from seller finance and expect that they're going to be ignorant and give you another loan so you can burn them as well. It still doesn't work like that.
Seth: Now if you do your underwriting and find that there's kind of a problem here. It's not a red light but it's a yellow light. Maybe the credit score is bad or there was some incident or whatever the case may be. Do you ever come up with recommendations for how to deal with that? Like “It'll be okay, but just do this. Ask for a bigger down payment or higher interest rate or shorter amortization.” Do you offer suggestions on how to get past that stuff?
Max: Yeah, absolutely. Our job is to get as many of your files to clear the federal hurdle as possible. And so, we don't even charge you the final $560 if we can't approve your borrower.
Our business model is built so that we make more money when you make more money and yet we're still highly motivated to make sure that we never pass anything on that could get you in trouble. We never pass anything on that is going to be a violation.
And so, we employ ridiculous creativity to help your borrowers clear up their credit boo-boos, and to establish alternative credit, and to show creditworthiness even if they've got nothing on their credit report that is a testament to their creditworthiness.
One of the documents you'll find on our website is called Understanding Loan Conditions and another one called The Alternative Credit List. We employ very creative techniques to take a file that on its face initially would be a no and write back to you and the borrower and say, “If you can do this and go get us proof that you are making your utility payments on time and get a letter from your car insurance carrier stating that you haven't made a late payment in the last 12 months, and get a letter from your landlord stating that you're paying your rent on time and that you have for the last year, we can balance out this black mark against you with all these compensating factors, and we can get you across the finish line.”
We do that every single day or we might get back to you as a lender and say, “Hey John, your borrower is $62 short of meeting residual income or meeting debt-to-income ratio, but I noticed you've got a 180-month term. If you're willing to bump that term up to 240 or 360 that'll do this for you.” And now that'll drop your borrower in, and your borrower will qualify.
Or another alternative would be, “Ask your borrower if he can come up with another $3,000 down. If we can lower your loan amount by $3,000, that'll put him over the edge. Or if your borrower will pay off this one credit card, we see he’s got a $680 balance and he is making a $75-a-month payment. If that payment went away, he would meet the requirement.”
So, what we do typically is we draft a range of options and then I get with you and I propose those options to you before I ever talk to the borrower and you and I brainstorm on what options are best for you to get your borrower across the finish line. And then we propose those options to your borrower. So, that's what we're in the business of doing is turning yellow lights into green lights.
Seth: That's huge. That's a big deal.
Max: Yeah, because a bank won't do that. They're busy collecting low-hanging fruit, hand over fist, right?
Max: So, it's easier for them to shut the door and go with the other thousand borrowers that have 850 credit scores. And in this market segment, that's what we're doing for you is we're combing and sifting and helping you refine the nugget that the banks missed because it's just too easy for them not to work with a 520 credit score when there's an 820 waiting for them.
Seth: I've seen this with a lot of attorneys with a lot of bankers where it's like they just want it to fit this cookie kind of thing. And if it doesn't, it's just like no. They're great at throwing up obstacles, but somebody who actually finds solutions, that's where the value is.
Max: Yeah. And when you think about it, it makes sense. Why would they? When they're sweeping up all the low-hanging fruit with two arms as fast as they can grab it and churning out $7,000 and $8,000 loan origination fees for every single loan and employing automated underwriting systems where they just sort a piece of paper into a machine and push underwrite and it spits it out, why would they slow down and do manual underwriting, which is tedious and time-consuming?
And so, honestly in the market share we're working in, that's why we're such a value to investors is because we're doing something that the big people will not do. They're too busy collecting the easy cash.
Seth: But it takes some actual critical thinking to do that. To really try to see it from different angles and stuff.
Max: It does, yeah. We spend weeks on every file for $679 and there's no big bank out there that will do that.
Seth: I think you just answered it for me, but is there an extra cost for these situations where you have to work hard to find solutions or it's just the same amount?
Max: Nope. I've got files that we've had sitting on the pipeline for three months because the deal will fly if or when a borrower will get us back this document or this document showing they paid this little debt off or whatever. A bank would just close the file on you and walk away. We leave them open as long as the borrower and the investor are both still interested in seeing this deal close. I've had ones, I leave them on my pipeline for a year and then finally they get that one last document and somebody will call me one day or email me and say, “Hey, we were supposed to get this credit card brought current and paid off last November. Here you go. We finally got it done.” We don't even remember the file anymore. We'll have to go in and open the file and look it over and figure out what we were waiting on and then put this thing together and finally put it out the door. So yeah, we never give up on them if you or the borrower don't.
Seth: That's amazing.
Max: As long as they're motivated to make good.
Seth: Yeah. Yeah. For the listeners out there, if you don't have a ton of experience in the lending banking world, I'm just telling you that it's unusual to find somebody who is that hungry to make it work for you. That's very uncommon. I just want to point that out there.
We were talking a little bit about this before we started recording, but I've been trying to find mortgage loan underwriters in a few different states. For some reason it's pretty easy to find them in Texas, but when I look for them in Michigan, I just Google “Licensed residential mortgage loan originator in Michigan”. And the results that show up are how to get licensed or it's maybe linking me to an actual mortgage company that provides a loan but not somebody like you who does this stuff for hire.
Max: And we do, by the way, just so you know if Michigan's the staple of your base. We are licensed loan originators in Michigan.
Max: Michigan is one of the 18 states we can perform a full loan origination for you. And you're right, it's extremely rare.
Seth: Why is that?
Max: Because it's so miserable to go through. It is not pleasant to have to do what we've done to be able to do this. And again, quite frankly, I'm probably a fool for being willing to do what I'm doing for the amount of money that we're making. The big banks, if they're not making $6,000 or $7,000 on every deal, they don't even look at them because they're just in the business of the gravy money. They're like the old Dire Straits song “Money for Nothing and Loans for Free.” They're busy picking all the low-hanging fruit that requires one quick squeeze for a lot of juice and we're helping you in a market segment that's far more work. We have to mine a hundred yards of dirt for every little nugget of gold and then do a lot of sifting to find it. It's a much harder market share to work in. And so, the big boys don't want any part of that.
Seth: Yeah. I don't know how much of a parallel there is, but it reminds me of I've heard it said, if you were to be a residential property manager in a super low-income neighborhood, but you actually did a really good job at it, you would be so busy because anybody who works there, they don't do a great job of it because it's a really hard job. So, if you can dive into a place that it's hard to even exist in and really knock it out of the park, man, you will pretty much own that market.
Max: Yeah. And that's exactly right. That's the biggest issue. The reason that we don't have a ton of competition, quite frankly, is not that we're amazing, it's that it's an ugly hard business and most people find they can make way more money. Just like my investors. You all can make way more money in a day than we can. And that's what we help you do realistically. I guess as I get older, I'm going to have to examine my brain and say, “How long do I want to keep working this hard for what we're making?”
That's why nobody's in the business. Because they've all found business models that are a lot less work and a lot more money. Even when you create a note, you now residually receive money back every month for the life of that note. Well, we help you create that note. We get paid one time and that's it. Tomorrow we're back to your onboard. And yeah, it's sort of a flawed business model. My accountant doesn't think I'm very amazing. But that's okay. It's good for you guys. It's good for the borrowers and it's something that we choose to do.
Seth: Do you have any insight, I don't know if you even know this, but what is the default rate for people who have been through your process? I know with vacant lots that aren't underwritten at all, it's huge.
Max: Yes. I don't have a statistic, but what I can tell you is one of the lines in Dodd-Frank that we all have to measure ourselves by, says that the mark of professional underwriting, the result is a historically low default rate. That is what the eight elements of ATR are supposed to yield. A historically low default rate.
And I can tell you that we have that, but I can't quantify it. All I know is I talked to my thousand investors in all 50 states who keep coming back to me and keep commenting “Yeah, those notes we did last year, they're all still performing strong and they're great. Now I need you to help me find a buyer for them because they've matured, they have seasoned for 12 months or 24 months. We haven't had a hiccup. Now help me get market value to resell that note.” And then I help them do that as well and then I help them churn some more. So, it works. We do definitely create historically low default rates and that is the standard that Dodd–Frank puts on owner-occupied underwriting.
Seth: Yeah. I don't realize that was something you do as well is you help people sell their notes. Do you have a whole network of something or if I came to you with one of my notes that you underwrote for me, what would you do with that? How would you help me find someone?
Max: Yes. I reach out to a network of note buyers I have all over the world. We help you get that thing sold.
Max: And same thing, it's a free service to you. It doesn't cost you a penny if you ask me to help sell your note and I help sell it.
Seth: Yeah. What would be a typical discount that a buyer would expect to pay on the balance?
Max: I can't tell you that because honestly, I don't get involved at all in the fundamentals of that. I'm exclusively a point of contact. What I do for you is I have a network of buyers and I have a network of sellers and I help bring the two together. And so, what I might do if you came to me and said “I'm trying to sell this note,” is I might put it out to 50 of my buyers and that'll be the last I ever hear of it. If you find one that buys it from you, it's between you and them, what they buy it for.
And I don't even have any formal agreement set up. So, it's not like I'm getting a big fat commission on everyone. Again, it's just a service I provide. Some of them will give me a little something if they end up buying a note as a finder's fee. But I don't negotiate it. I don't have written anything. Yeah, literally it's a free service to you. If you come to me and say, “When we get done creating this note, please help me sell it.” I'll give you every effort I can to help you sell it and you'll never pay a penny to me for that.
Seth: Is there anything you don't do? There are all these awesome things.
Max: Oh, I'm wiring my own house right now. So, if you're in this local region and you're willing to pay for beer, I will wire houses too.
Seth: Nice. You're a man of many talents.
Max: Well, I do a lot of things mediocrely. Underwriting, I think I do well.
Seth: Yeah. There is at least one thing well. So, one last question, and this has been an awesome conversation by the way. I appreciate it, it's been great.
Max: Yeah, I agree.
Seth: And I don't know if you even have any insights on this, but the typical investor who comes to you and you underwrite their deal and then they start collecting payments, how do they do that? Do they use a loan servicing company or software or do they just have people send the money right to them? What's the common way that people handle that?
Max: Yeah. I have a list of loan servicers and if you want your loan service, you just indicate that you want it serviced. And you either tell me who you want to do it and what their monthly fee is or you ask me for a list and I give you a list and then you call them and you pick who you want. And then on your term sheet under escrow you indicate yes and I want Allied to service my loan and it's going to be $1,850 a month and I include all that in your borrower's paperwork. So, that factors into his monthly payment and everything else. So yeah, we make it very easy.
Seth: And I know with loan servicers, they have to be licensed in certain states in order to work there.
Seth: Do you have ones that cover all 50 states? Maybe you don't even know that. I'm not sure of it.
Max: I do.
Seth: You do?
Max: I do, but I don't know which ones they are. What I always tell everybody is it's easier to just take my list of loan servicers because I deal with people in all 50 states. I can't possibly ever remember who does what in what state. Instead, I just give you the list of loan servicers and I say pick the one you want and then on your term sheet you just tell me who it's going to be and what the monthly fee is and then I plug that in.
Seth: Okay. So, it's up to the lender to verify that that one actually works in their state.
Max: And I do have lenders that say we're not going to escrow and I'm going to handle it all myself. You can do that.
Seth: Yeah. Do you know of any who use software? And if so, what software are they using? I'm not sure if you know that or not.
Max: I don't. I know there are ones using software. I haven't got a clue whether it's homemade software or whether there's something out there in the seller finance community. I know the right people to talk to. I could probably find that if somebody was looking for software, but I don't know it off the top of my head.
Seth: Awesome. Well, Max, thanks so much. If people want to find out more about your service, do they go to a website or call a phone number, or what's the best way to get that started?
Max: Yeah, they can call or email me off my website. That's how I would prefer it. And email is best. If you get on my site and check everything out and then shoot me a contact email from there, I'll get ahold of you. Email is best, but any way you get ahold of me, I'll respond.
Seth: And that website is CalltheUnderwriter.com and you can find a link to that and a lot of other stuff we talked about in the show notes, retipster.com/145.
Max, thanks again. I really appreciate your time and hopefully, we'll talk again soon.
Max: Yes, sir.
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