In today's episode, Larry talked with Mark Ross of Good Steward Lending Services. Mark shared a lot of things—how RMLO or a Residential Mortgage Loan Officer can help you assess a borrower and how to provide feedback if they have the ability to pay, among many others.
Larry: Welcome to the Brain-Pick-A-Pro Show live from Lake Wylie South Carolina. This is going to be a really good show. I’ve had so many people that are out there doing our filthy riches deals. And they always ask me, “Larry who do I use for an RMLO, Residential Mortgage Loan Officer that can take a look at my borrower, can originate that loan and give me some feedback on that let me know if they have the ability to pay,” right.
So I found a guy. I know many students that are already using him and he’s working nationwide. So today is the day you get to hear from the man, the legend and the myth, Mark Ross with, it’s Good Steward right, is that it?
Mark: Good Steward Lending Services right.
Larry: Good Story Lending Services, now I’m going to be upfront with you, I haven’t used your services yet but I’m in line, right. I’m getting ready to. So I’m really excited about it and I do know some students that are already using you but as soon as I found out I wanted to get you on and have you talk about it. So welcome, thanks a lot for being here, I appreciate it.
Mark: Thank you Larry I appreciate the opportunity.
Larry: Awesome man. Yeah first of all, why don’t you start out and tell our viewers a little bit about yourself, your background and then you can kind of move in to Good Steward?
Mark: So I’ve been in the mortgage business since the 70s, it was right after Elementary School I decided to get into the field, that’s the way it works. But I’ve been a mortgage broker since 1976, so it’s been a long time. And I cut my teeth on private money lending that’s what I did for the first 10 or 15 years of my career, was exclusively in private money.
And then we branched out and ended up having FHA and being conventional and the traditional type of lender. We’re a mortgage broker and I ran my own shop for about 25/26 years. And then ultimately moved my operation in with Good Steward. And because they had some opportunities for me to expand in the different arenas that we do here at Good Steward.
Mark: So I felt like it was a good match. So I’m still doing all the traditional lending that a regular home mortgage shop will do. But we also do the private money in the commercial and we deal in paper. And then Dodd Frank so I call it the Mortgage Loan Originator in play man law.
Because that seems like what it did was it created an opportunity for mortgage loan originators to have another vehicle of revenue, which comes from the RMLO approach that Dodd Frank requires. So it’s not been obviously a huge job or a huge industry. But there are some facets of it that make it worthwhile so we’ve decided kind of jump into it and have it as an adjunct to our normal business.
Larry: That’s really good. Now we’re going to talk a lot about Dodd Frank and about that process and everything. In fact we’ve got some resources that you’re going to give out that we’ll have here on the page. But tell us a little bit about your traditional lending business, because maybe there are some people listening that maybe need just a traditional type of loan or something like that. Tell us a little bit about that side of the business.
Mark: Well that licensing issue is much more focused, what’s adds up happening to that is the problem with mortgage companies that offer these types of loans, is simply you have to be licensed in the state where the property is.
So because of that, we’re licensed to do business in Arizona and California, but I pretty much exclusively do the mortgage stuff the very traditional home loan stuff just in Arizona. It’s just each individual loan officer needs to be licensed in that state in order to be able to accomplish that thing. So we’re pretty much focused for the traditional stuff in Arizona.
Larry: Right, okay. That makes sense. Now what about you do some buying and selling of notes and do some private money lending or something as well. Tell us about that.
Mark: So I’ve kind of taken that one on, that’s an interest to me that I’ve had since I started in the business. And paper is a really interesting commodity. It deals in a lot of areas. Obviously when we have a seller carry back scenario you’re dealing with paper. It’s a security and that security can be utilized in a variety of fashions.
You can sell it, you can split it up, you can borrow against it, you can trade it into property. There’s a lot of opportunities when you deal with paper. So I started to play with some things, I took some courses. As you know from giving courses there’s always a good opportunity to learn from people when they take courses.
So I’m a proponent of the education piece as well, and I’ve taken some note courses and things of that nature. So I found that we got pretty creative in the structure of how we do with paper today. So we could buy the whole note, we could buy a piece of the note, we can lend against the note and that we can do nationwide.
So that paper is not restricted by Dodd Frank or other licensing rules for the most part. So we can deal with that paper pretty much across the country. So paper is a great opportunity for people to deal in real estate.
Larry: That’s really good. So I’m assuming a lot of the paper you’re buying is probably paper that was created through seller financing transactions.
Mark: Yes, that as well as interestingly a lot of institutions will sell their portfolio paper. So you can have both performing and non performing paper. On the open market you’ll see 10, 20, $30million pools of paper that are out there for sale.
So if you want to get really aggressive and big you can jump in with both feet and participate in that arena. I’m more on the lower end of the scale I deal in the onesies and twosies. So that’s the market that I prefer because that’s where my money comes from. It’s more efficient that way.
Mark: But there are opportunities depending upon how aggressive you want to be to deal with those large pools.
Larry: Right. Now, are you guys using-do you have a fund together or are you just using private individual investors to buy them or your own money?
Mark: All three.
Larry: Oh good.
Mark: We buy with our own money. I have a bank of about 150 private investors that I’ve amassed over these few decades. So they are people that I rely on a lot of our transactions. And then one of the reasons I mentioned that I came over to Good Steward is because one of the pieces that they provide are funds.
We have mortgage pools and mortgage funds across the country. So we’re doing that type of thing as well. So there’s a variety of different resource that we have to go to get money to try to move through the paper or real estate or whatever it may be.
Larry: Yeah. Now you’ve got a pretty extensive seller carry back education or experience, don’t you?
Mark: Right. I pride myself of that. That’s just an area that I liked. It’s interesting to me and I just want to continue to do that type of business. It’s worthwhile and I like to grow it. And one of the reasons I decided to do the RMLO part of the process was because I thought it would give me an avenue into some paper.
When a seller carries back a piece of paper, they may or may not want to. They may want to move through that with some other opportunities. So that’s why I decided to use paper or RMLO as an avenue towards that paper.
Larry: Wow that brings me to a whole another level here and we’re just getting started. But is that something that you might be able to-and I should probably save this question for later. But is that something that is someone sends you a deal to take a look at, to originate because they are seller financing it to comply with Dodd Frank, is that something you could look at and say, “Hey if you end up selling them this house with owner financing, if you get X down, you set up the terms this way I’ll but this note, or I’ll buy a partial or whatever.”
Mark: Yes we can both help them in structuring it as well as giving them some offers on that paper yes.
Larry: Man that’s huge. Now do you require any seasoning for that or can you buy it right at the table?
Mark: No, we can buy it right at the table. Obviously a seasoned note has a little bit more oomph to it. But loan to value is really what drives those transactions. So the equity exposure is what we’re going to be most focused on and seasoning is a consideration but in my opinion it’s overrated. People think about well the guy’s never had made a payment, how am I going to know he’s going to? Well if he doesn’t the loan to value protects me. So that’s why we don’t focus too much on seasoning we’re more focused on exposure.
Larry: And I don’t mean this in a bad way but if they don’t make a payment that’s probably the best thing that can happen, right?
Mark: To some of my investors that’s true, they’re very aggressive they’re looking to pick up real estate. If they can buy it at 50c on the dollar I mean that’s great. But most of my sources of money are more looking for performance, they’re not necessarily looking for closure process. But certainly that’s your backup position, your protection.
Larry: That’s good. Okay let’s jump in and talk a little bit about the Dodd Frank stuff. Tell us a little bit about the whole just for some people may be watching this and they’re interested in seller financing, maybe they’ve heard about Dodd Frank and just Googled the term. And up popped this podcast. So explain a little bit about what Dodd Frank is all about and why it applies to us that’s doing seller financing.
Mark: After the mortgage crisis of 2008, there was a need for new legislation. And one of the things that happened was Dodd Frank. Now it came about because of two senators, Dodd and Frank who are actually house representatives I guess they’re both in the house not in the senate. But they are both gone now.
But they produced this documentation that created a major upheaval in the finance arenas. And in fact like today there’s a bill going through the senate that is going to be presumably reversing some of the Dodd Frank rules. But mainly those applying to the large banks.
Mark: They’re not going to apply, I haven’t seen anything that is going to affect the seller carryback side of things. I would love for my job to go away to tell you the truth because it’s ridiculous to be able to have to go through this process to sell your own property. But the Dodd Frank rules restricted significantly the ability of mortgage companies as well as sellers to finance property.
So in the mortgage side of things, it really impacted the ability for me to be able to make a loan to an owner occupant, using private money funds because of the restrictions that are placed on the terms of that loan or the qualifying for that loan. So it had effectively eliminated the ability for an owner to finance their own home using private money source because of the Dodd Frank rules.
And seller carryback that’s a whole other section and the seller carryback was trying to make sure that if you put a buyer into a piece of property, they’re not going to be put in a position where they’re not going to be able to perform. So they want these rules established to make sure that that qualifying process is reviewed. That’s one of the main strengths of the- it’s where the RMLO process came about.
Because if you do three or more transactions in a 12-month period, you need an RMLO, a Residential Mortgage Loan Originator to review that transaction. You must hire somebody that’s licensed in order to do that. Now if it’s one or two sales in 12 months, you don’t need it.
Mark: But three or more you do. So they did put in an exception to allow somebody let’s say an individual who’s not a real estate investor who’s somebody who just has a piece of property. They’ve decided they want to move to a different location, they have this house they don’t want to sell it for cash, they want to create that paper. So they’re able to seller carryback and there’s no problem because they can move on because they’re not doing more than one a year.
Larry: They’re not in the business.
Mark: They’re not in the business. But the problem is the rule looks back 12 months, not forward. So if you may sell one piece of property today, and then have an opportunity in nine months to do another one you never thought you were going to do, now you fall into that two property sale scenario that you didn’t know about.
And from that two property sale it’s going to look back 12 months to see how many transactions you’ve done to see if you’ve been in compliance with the statute. So it looks backwards not forwards in compliance. So if you have a half a dozen properties and you think you’re going to sell one a year and you end up selling three, you’ve got to make sure you comply with the Dodd Frank rules for all three properties even though you may have only sold one that you thought was going to sell.
You may have only had that one transaction. So it does create some havoc for people. And the Dodd Frank rules are difficult and a little confusing. Just it’s governmental work I guess but that’s what we have to deal with.
Larry: Right. It’s crazy that I mean I understand that it was needed and I get that but just the way it has changed the whole seller financing industry. I mean I call it the Home Ownership Prevention Act.
Mark: Yeah, that’s true, it really does create a problem. I used to like I said I’ve been in this business a long time and I used to make private money loans to owner occupants all the time either we finance or help them buy a house.
Mark: And now for intents and purposes that market’s been shut down. So until they change the Dodd Frank rules we’re not going to be able to do those types of loans. It is frustrating. It’s affected my business obviously but it’s affected a lot of homebuyers that for one reason or another may not be able to purchase a house.
If they got up in a short sale or a bankruptcy or a foreclosure after the crush, they may not be eligible to get a really traditional loan until they wait a certain period of time. So there are still people having troubles from 2011, 2012, 2013 that would be good candidates for a home loan and to buy a home but they can’t do it. So that’s why the seller carryback opportunity gives your students opportunities to participate in that side of things.
Larry: Right. And I think it’s important to note it only applies to owner occupied buyers right.
Mark: That’s correct. It’s only owner occupied. If you’re selling to an investor you don’t have to deal with this.
Larry: Right, which is good but a lot of the people who need non-bank qualifying financing are the people who want to become a homeowner, they’re renting right now, right.
Mark: Right. And many times they can afford to buy a house easier than they can afford to rent. I mean the numbers often favor the purchase transaction over the rental transaction.
Mark: So it’s a shame and maybe one of these days something will happen but in the meantime we just keep plugging away with what we’re doing.
Larry: There you go. So tell us a little bit about what’s required by the seller? Like if I bought a house and I’m going to sell it with owner financing, what do I have to do to comply with Dodd Frank?
Mark: The problem with that is it depends on whether it’s one sale in 12 months, two sales in 12 months or three or more sales in 12 months. The rules change.
Larry: Let’s say it’s three or more. Yeah.
Mark: So under the three or more you do have some other issues that it restricts the interest rate, it restricts the amortization, you can’t have a balloon payment, if you’re going to have an adjustable rate there’s rules on the adjustable rate. There’s a lot of those details in fact I can send you Larry-I should have done this before.
But I can send you a big summary that you can post for your students to get an idea. It’s a quick and dirty summary of what is required for Dodd Frank.
Larry: Great, we’ll post that below in the show notes in the resources.
Mark: Okay I’ll send that to you. It’s just a quick two page summary that I put together from different resources that helped me to understand it. Because being in the business these number of decades that I have, I still have a tough time understanding exactly what Dodd Frank requires.
It’s not an easy rule and if you become an expert in it, I’ve often said I would love to find an attorney in my community that’s an expert in Dodd Frank because there aren’t any. I mean it’s a difficult world.
Larry: There’s not any. In fact you know the CFPB, Consumer Finance Protection Bureau is the oversight organization for Dodd Frank. I have called and emailed no less than probably a does times, how many return calls do you think I’ve ever had?
Mark: Right. It’s problematic. It’s a problem there. I teach a class on financing and one of the things that we talk about is the CFPB. And they’re the agency that oversees mortgage lending across the country among other things.
Mark: And yet they don’t comply with their own rules on their website. They quote interest rates without putting in the percentage rate.
Larry: Are you serious.
Mark: While us, have to put in both. So those are the kinds of things that you have to deal with, with a governmental agency sometimes. But and if you look at their home page, if you go to the CFPB home page, in the very bold middle of it, it’ll say, “Have a complaint?” they’re soliciting complaints. They’re soliciting for opportunities to sue people to try to get fines and fees out of them. So it’s not a user friendly, consumer friendly type of site in my opinion at least from an industry perspective.
Larry: No. well they’re trying to protect the consumer is what they’re doing not the industrial.
Mark: Well they are but to the detriment of the consumer themselves because it’s problematic. It just creates a lot of scenarios that you just question where they came from. Plus they’re the only agency in the federal government that has no oversight. So that’s the other problem. They were funded by congress but they don’t have oversight.
Every other department in the government either has a committee or a head that speaks to the president. This one doesn’t. So I understand they’re trying to change that in Washington now but right now that’s the only agency that doesn’t have any oversight.
Larry: And I don’t want to open up a whole can of worms here, but I’m going to go ahead and say this. I know a lot of people that do seller financing okay. And I mean I’m out there, I teach this stuff I’m travelling around conventions, expos. And people ask me, “Larry who do you use? What are we doing about Dodd Frank?”
And I always make sure I use an RMLO and I make sure I got everything. So if I go to sell that note, I got everything right there, if the regulators knock on my door I can show them the file right. But you know what you and I both know two things; number one the majority of the people out there doing seller financing don’t even use an RMLO.
I’m not advocating that at all in fact I’m just the opposite. I’m advocating using you an RMLO to originate the deal, right to make sure if they do come knocking on the door then you got your paperwork in order. Plus if you go to sell the note you got your paperwork in order as well, right. The second thing is everything I’ve seen about the CFPB, they’re going after the big banks, right.
They’re charging fines for the big banks, the big institutions $50 million, $100million, $150million. Do you think they’re going to go after the little guy that’s doing two or three seller financed transactions and try to reverse the $50,000 or $100,000 deal? It’s not going to help them at all, right. What are your thoughts about that?
Mark: Well that’s true and that probably happens in any kind of violation of a regulation or a statute, they’re going to go after the big guys. There’s only so many resources the authorities have to pursue. But for me I just want to make sure my nose is clean.
Larry: There you go.
Mark: Because I don’t want to be caught up in that.
Larry: I’m the same way.
Mark: And in any given state you’ve got a problem because the state regulators even though the boys CFPB are not going to probably knock on your door, your state regulator may be more inclined to. So if your state regulator notices or hears about somebody got abused and got hurt, their attorney general or that particular financing agency may very well be knocking on your door.
So it’s not necessarily the CFPB that’s going to come after you, maybe somebody else though.
Larry: And that’s a really good point and it might not be the CFPB, it might that state’s banking commission or whatever the regulatory authority is. I mean I used to be a licensed mortgage broker for years back in the 90s up until the end of the 90s. And they would come by knocking on your door once a year whether you wanted to see them or not.
And they’d want to pull through and look through random files. So if they get a complaint they’re going to research it and the states have a lot more resource to research the smaller deals, right.
Mark: Right. That’s where the rubber meets the road so to speak, that’s where it really happens is at the state level. If you’re a big abuser you’re certainly going to show up on the radar of CFPB. But it’s the little guys like you and me that do several deals a year and if one of those deals goes bad and that particular consumer picks the phone and calls the attorney general or the banking department or whatever may be in that state, that’s when you’ve got problems.
Larry: Right. So basically you’ve got a list of a summary if you do an adjustable rate loan and kind of just for five years at only 2% a year for the next up to a maximum of I think six something like that, is that right?
Larry: I just tell people just do a fixed rate loan and don’t worry about it, right.
Mark: Yeah that was one of the things that Dodd Frank first when we first came out we thought well there would be an opportunity for us to we’ll just stick in an adjustable rate feature to motivate them to pay a balloon off.
Mark: We know we can’t do a balloon payment we have to be fully amortized so we’ll just adjust that it goes from 6% to 18%. Well Dodd Frank built in a provision that doesn’t allow us to do that.
Larry: They could see it coming.
Mark: So there were a lot of places that they made sure that the consumer was not going to be abused in the process. And if you don’t structure your deal properly, that’s when you can get into some trouble.
Larry: I think the biggest thing is they just want to make sure that the borrower has the ability to pay, that the seller is not selling the property for the sole purpose of collecting a down payment and then getting the house back in a few months. Wouldn’t you agree?
Mark: Right. There are stories of people that did that, they put people into loans that they couldn’t handle. And they foreclose and took them back. And I know one particular situation where a couple guys ended up in jail because of it, people of the particular practice. So it can be abused, and I’m sure that’s where Dodd Frank and a lot of the discussion when this legislation was first created that came about, about how do we protect people from that type of abuse?
Larry: Right. so what is the process I mean let’s say that I get a borrower and I’ve got a house and I’m trying to market. And I get a borrower that says yes I have a down payment, I really want this house.” What’s the process how would somebody get that information to you or what’s the process to send it over for you to qualify them?
Mark: What we would first do is send them a loan application. We use a traditional similar to a residential loan application. It’s a little scaled back it’s not quite as detailed but it gives us some basic information about the buyer. And then we ask for documentation to prove it. So we’re going to get tax returns, paystubs, bank account statements, things of that nature in order for us to understand what their financial picture looks like.
Once we get the application and all the supporting documents then we’ll go ahead and pull credit so we can see what their credit picture looks like. And we will analyze their income and their assets and their liabilities to see what the ratios look like to see if they’re going to be in compliance. And then we provide a report to the seller that outlines all this information.
So that’s kind of what the RMLO does, is analyze the information that’s been provided so that the seller can make a decision as to whether they want to proceed with that sale or not proceed. We’re not making any decisions we’re just providing information.
Larry: And I’ve seen your reports, I really like them. I like the way you explain everything. I mean you might even say something like, “These people have the ability to pay but it doesn’t look like they have the willingness to pay,” right?
Mark: Right, I’m going to give my opinion in there.
Larry: It’s good.
Mark: I’m just trying to suggest, a number of the deals that I’ve done in this regard, I’d say probably a couple dozen or more of them have been very low down payment, $1000, $2000 down with the seller carryback. And most of those types of transactions we’re only dealing with borrowers that have or buyers that have pretty weak credit.
So the combination of a very low down payment and weak credit, you have to recognize whether or not you want to sell under those circumstances. As a seller you have to decide do I want to sell to somebody in that circumstance? They may qualify under Dodd Frank but you still have to make the decision do you want to sell under those parameters.
And then if you are going to sell now you have that paper and you want to move to that paper, you’re going to have to deal with somebody else looking at their credit qualifications to decide do I want to buy that paper. So you have to make some decisions not only do I want to sell the property but what’s your more exit strategy down the road to move through that paper, if that’s in fact a goal of yours.
Larry: Right. Now you get the borrower’s information or someone like me will send you the borrower’s information, you’ll send them a credit app you get all that information. When you put it all together, then you’re going to send me a report, right?
Larry: What else is included in that report?
Mark: Well the report goes through a variety of different areas. If first of all talks about the property briefly. But the primary focus is on the borrower. So where do they work? How much money do they make? What’s their credit picture look like?
Do they have any foreclosures, judgments, bankruptcies, delinquencies? What about their assets where is their money coming from? Do they have residual income where after the mortgage payment is paid do they have extra money to live on? What about their capability for being able to pay their other obligations?
Do they have a high car payment or something of that nature that can impact their ability? So we’re going to look at all those things and we’re going to provide the ratios that there’s a few different standard ratios we use obviously loan to value. But we’re going to use their front end and back end debt ratios for the analysis.
And then we’re going to grade the credit and we’re going to give them a grade of excellent, good, fair or poor based upon their credit score. And then we’re going to use some commentary on that. So it’s not a PhD essay but it’s a summary analysis of what somebody is going to want to know in a quick fashion as to whether they should or should not sell.
Larry: So in a nutshell it sounds like you’re basically evaluating do they have the ability to pay and do they have the willingness to pay?
Mark: Right. I am but I’m not making that call.
Larry: Right. It’s ultimately the lender’s decision. You want to be very clear about that.
Mark: Right. It’s the seller’s decision as to whether they want to. I’m just telling you what their debt ratio is. Debt ratio one of the requirements for Dodd Frank is for what’s call QM, Qualified Mortgages which is a standardization in the industry right now. A 43% debt ratio, maximum debt ratio so I’m going to quote this borrower does or does not meet the 43% qualified mortgage ratio.
Well that qualified mortgage in effect is your threshold number for ability to repay because if they fall under that 43% ratio, it’s presumed they have an ability to pay. If they fall outside that, it’s presumed they don’t even though they could, they may not.
So I’m going to tell you that it meets or does not meet that 43% ratio. But I’m not going to tell you whether they do or do not have the ability to repay. Because I’m not approving the loan, I’m just providing a summary analysis. It changes the dynamic of how I provide that information.
Larry: Sure. Well what does the typical deal look like that you see come across your desk with seller financing? What’s the typical type deal?
Mark: Oh we’ve seen some $50,000 sales price, $1500 down, 15 year financing at 11% interest rate. We have a couple that I remember one where the buyer, it was a husband and wife and they both work at Burger King. He’s a manager and she’s on the line, they had minimal down payment. They had a lot of student loans they didn’t have good credit.
I mean that’s pretty much the standard type of the picture that you might run across. And yet I don’t know whether my client who I did the analysis for actually sold to them but I presume he did because his motivation is to sell. That’s his focus, he buys a property for 20, puts 10 into it and sells it for 75. He’ll take that risk.
Mark: And that’s the type of scenario that we see pretty often.
Larry: Right. You mentioned 11% interest with this particular client or seller. I’ve heard a lot of things across the board about with Dodd Frank you can only charge X% interest. What are your thoughts on that?
Mark: There is a provision that predated Dodd Frank called Section32 which is HPA which is a high priced mortgage. And that can come into play on owner occupied as well. There’s a provision on there that’s been modified with Dodd Frank that if you exceed certain rules on interest rates you may be affected by violation. You may be challenged over rate.
So you have to be a little careful with the interest rate. But there’s a pretty much fair amount of latitude. I mean if you can sell and carryback at 10% interest rate, you’re probably going to be in compliance. It drives off of the APOR which is different from the APR.
The APOR is the- I’ve lost the acronyms means something and I forget the exact title. But you can look up APOR in Google and you’ll find that rate. And that rate is a standardized rate and HPA drives its violations off of that rate. So if you’re X% too high above that rate you may have a violation.
Mark: So that can come into play on some situations as well. It’s just you have to be a little careful about interest rate. But that’s probably one of the least things you have to worry about.
Larry: Well you mentioned 10% I’ve heard a lot of people mention 10% so I just do mine at nine just to make sure.
Mark: Yeah and you’re probably fine. You’re going to be fine.
Larry: Because at the end of the day, you know this, you’re not making your money as much off the rate anyway as you are off the spread from what you bought it for and sold it for.
Mark: Right. The interest rate is not the important piece. What’s important is the payment and the spread. So that’s what’s going to give more value to your note is the payment. So if somebody is paying 500 a month, it’s going to be more valuable than somebody paying $400 a month. It’s irrelevant what the interest rate is.
Larry: Right. The quicker you get your money back, right?
Mark: That’s right.
Larry: That’s the less discount you have to take.
Larry: That’s good. So what kind of deals are you looking for? If somebody says, “Hey I want to structure my deal so Mark will buy it,” what kind of deals are you looking for?
Mark: Well, we like partial notes. We favor those over full notes. First of all discounts are pretty heavy on low down payment transactions. So the sellers who have those are not as comfortable in accepting a big discount. So we’ve kind of transitioned over to the side of the equation where we’re dealing with partials.
So we may buy five years’ worth of payments as an example and at the end of five years you get the note back. And now you can sell another five years if you want or you can keep the note or do what you want. Gives more flexibility to the note holder because they’re going to get cash now, they’re not going to take a discount.
And they’re going to get that note back at some point in the future. And if you add those two figures together, it’s generally higher than the balance of the note today. So it usually works out very well for note sellers when they sell partials.
Larry: So basically what you just said is if- and let’s say you have a 20 year loan. And you sell five years of that note every five years, you’re basically going to get more than the face value of the loan.
Mark: That’s correct. Because there’s interest on that note that continues to be earned. So that balance doesn’t drop, it’s a principal only payment. If you had a principal only payment then it’s problematic but if you had anything with an interest rate in there that’s going to amortize over a period of time, that’s the value of it. It’s just going to get more money out of it that way.
Larry: Right, exactly. Because the principal doesn’t go down 20% every five years, right or 25% every five years.
Mark: Right. It starts to escalate. At the beginning in the first five years it’s very little principal reduction. The last five years of the note it’s going to be pretty hefty principal reduction.
Larry: That makes sense. So what happens if someone defaults during that five years and you only bought five years of the note?
Mark: So we have two provisions. One, if they default and then other is that they may pay off early. And both of those circumstances could occur and what we do is we create an amortization schedule based upon what we’re buying. So if we’re buying five years, at the end of five years our balance is zero. So we create a sub amortization schedule just for our side of the transaction.
And then if it pays off in the 37th month that’s the payoff figure and the borrower comes in with X, our price is Y and the note holder who sold the note gets the spread difference. So they’re still going to do fine.
Larry: What if they default?
Mark: Same thing, we’re going to go back to the note seller in the first place and say, “We’ve got a default situation, do you want to buy us out?” and if they do want to buy us out we’ll look at that amortization schedule and that’s the price to buy us out. If they choose not to buy us out then we’re going to foreclose and they’re going to get wiped out.
Mark: So most often, well it hasn’t happened yet I haven’t had a foreclosure in that scenario. But somebody could come in and buy us out and then they would foreclose and take back the property. If they don’t have the capacity to do that we might work out some arrangement where they especially if it’s out of state for us, it’s a management problem for us.
We may work out a relationship or we just want X number of dollars where we foreclose and take back the property and you come in and handle the property and then sell it and you get the difference.
Mark: So we may work out a partnership with them.
Larry: That’s impressive. You say and that’s never happened as long as you’ve been doing this. That’s huge. You’re a good underwriter.
Mark: We haven’t handled that. Because we’re not going to give 90cents on the dollar.
Mark: We’re going to give 50c on the dollar or something. There’s not going to be that scenario. There is defaulted notes that happen all the time, but our experience in what we’ve done has been we’re probably pretty lucky in that respect. I would expect us to have had a foreclosure by now but we haven’t.
Larry: And you’re a good underwriter.
Mark: Well we hope to be I mean that’s why we’ve been in business for all these years I suppose.
Larry: That’s good. Now would you prefer a seller selling a property on a land contract or do you prefer mortgage states versus deed of trust states? How do you feel about the difference between mortgage and deed of trust states and land contracts?
Mark: So in most states the land contracts give you a faster foreclosure process if there’s a low down payment. That’s usually what the benefit is under land contract. But deeds of trust depending upon the state can allow you to foreclose much faster and easier without a headache. If you do something using a land contract and then you want to do something with the paper down the road, it does create a bit more challenge.
Because the land contract, the vested interest is in one party’s name, and the equitable interest is in a different party’s name. That’s at least how we do it out here. I assume in South Carolina you have similar types of structure. So with the land contract the equity, who’s got the equity? Who’s got the equitable interest and who has the vested interest?
And if you have to take a land contract and the go ahead and sell the next five years of it, there’s going to be a problem in figuring out who’s the equitable or who’s the vested interest. So it creates bigger challenges than a deed of trust would.
But in the East of the Mississippi it’s a lot of times, it’s going to be more mortgage states or land contract states. West of Mississippi you’re going to find more deeds of trust. So we find that the deeds of trust are just simpler in the most part but we’ll do both. We’ll do mortgages as well. Mortgages, deeds of trust or land contracts.
Larry: So you don’t shy away from the mortgage states because they can take longer to foreclose?
Mark: We do look at those with a different eye. Because the mortgage state because of the foreclosure process we’re going to be more concerned about what transaction we’re doing. Now this is not the RMLO side of things, this is just if we’re dealing with paper.
Larry: I get it.
Mark: If somebody comes to me and says, “I have a note deed of trust I want to sell or I have a note mortgage that I want to sell or I have a land contract I want to sell,” all three of those are going to be looked at differently even with the same terms depending upon the states rules.
Larry: Right. Okay good. So if someone wanted to- they’ve got a property that they want to seller finance and they want to make sure that they’re Dobb Frank compliant, how will they get in touch with you to send that borrower to you?
Mark: Well I believe your website’s going to have our materials on there, right that has our contact information. I can give it to you verbally but it’s probably better if your students just look at that information and they just shoot me an email and say this is what the deal looks like. And then I’ll provide copies of what we need from the buyer to start that process. Our client is the seller, our client is not the buyer. So our relationship is with the person who wants to sell and carry the paper.
Larry: That’s good.
Mark: We do have sometimes contact with the buyer but only in the sense they may not understand what paperwork I need or something like that. But for the most part I’m going to be dealing directly with the seller.
Larry: Right. Now you’re not doing the mortgage or deed of trusts or note or land contract or any of that, are you?
Mark: No we don’t prepare loan documents.
Larry: Yeah I didn’t think so. I just wanted to clarify. And what do you charge for offering the RMLO services for doing a seller financed transaction?
Mark: It’s $350.
Larry: What? Everybody else I’ve talked to has been anywhere from $750, $850, $1000. I saw one that was $1250.
Mark: Well it depends on what you’re doing. If you ask me to draw documents it’s going to be more. If you’re asking me to make an underwriting decision it’s going to be more. But I don’t think most people want me to do that, I think they just want me to analyze the paperwork and get them a report. And it’s kind of like an appraisal to me. And appraisals I don’t know what it is in your area but an appraisal out here is $450. So I feel like that’s the type of work I’m doing. I’m just analyzing the deal to provide that information.
Larry: What kind of turnaround time do you have from the time that let’s say the borrower gets you everything right until we can get a report?
Mark: Three to four days.
Larry: Okay that’s not bad.
Mark: Depends on if it’s on weekend. If I get it on a Monday I’ll probably have it out by Wednesday.
Mark: It’s just a question of if it’s over the weekend I can’t pull the credit that type of thing. There are some things that interfere with it. But for the most part three or four day is usually when I get it back to people.
Larry: Do you find many for these borrowers it’s tough to get in touch with them, they don’t return calls, they don’t follow up they don’t get you what you need.
Mark: I don’t pursue them, I let the sellers pursue them. But there have been some situations where the buyer doesn’t understand what it is that I need or they’re incomplete in their application. That does happen and I’ll shoot them an email saying, “I need you to complete page three of the application,” or something.” But when I have a complete package it goes pretty quickly.
Larry: And it’s my understanding to qualify for Dodd Frank or to be Dodd Frank approved or whatever, the RMLO, you have to take the credit application. But am I assuming it’s okay for me as a seller to collect the paystubs the W2, copy of the social security card, tax returns, that sort of thing?
Mark: Yes you’re a creditor. As the seller you become the creditor so you have the legal right to see that information. And in fact in our report we provide all that information in a box account like a Dropbox account and we give you the link to that.
So even though they don’t deal directly with you and they may provide the information directly to me, you’re still going to have access to review that information and see the credit and see the paystubs and the bank statements and things of that nature.
Larry: Man it’s such a relief to be finally talking to somebody and I’m really looking forward to working with you, to talking to somebody that gets it. I got to tell you a story, I actually sent a deal to an RMLO that I tried, and they underwrote the person. They said, “Yes they qualify,” they would not send me anything. They wouldn’t send me any of the documents that the borrower signed, any of that. They said they can’t because privacy laws. I’m like, “I’m the creditor,” right.
Larry: They wouldn’t send them to me.
Mark: It used to be that we couldn’t even provide the borrower with a copy of the credit report. That was prohibited. Now the laws changed to allow us to do that now but we couldn’t even give them a copy of it. So there is sometimes the old schools philosophies tend to creep into our day to day business. And when you’ve been in the business a long time it’s hard to change those old habits that you’ve gotten used. And maybe that’s what happened with your RMLO is he was just used to privacy laws.
Larry: Maybe so.
Mark: And didn’t realize it but yet you are the creditor.
Larry: Exactly. I’ve called people up to talk to them about this and they’re like, “I don’t know this sounds kind of fishy to me. I don’t understand this.” I had this somebody one time said, “This sounds like a scam what are you talking about? It’s crazy.
Mark: It is, it can be. But we try to be professional about it and try to make sure that we’re doing the things properly. So I’ll say no to things and I’ll say yes to whatever I can say. I mean that’s the reality.
Larry: That’s awesome. So I’ve got one last question that I want to ask you. You mentioned about a typical deal they’re going to sell it $50,000 with $1500 down, now that almost sounds like a tenant to me not a buyer with $1500 down. What do you as an underwriter if you were going to buy that paper and I understand it’s not the only qualification, but what kind of down payment do you like to see?
Mark: As I mentioned I teach a class on financing and one of the things that comes up and I ask people, “Would you ever sell to somebody with zero down?” and certainly most of the people in that class will raise their hand and say, “No I’d never there’s too much risk. You’re never going to be able to get your money back. It’s just high risk it’s not worth the risk.
And then I ask this question, “What about a VA loan?” and a VA loan is 100% finance and it’s only to veteran. So is a veteran a better credit risk than a non-veteran? Just by the very fact that they served in the military and we appreciate the fact he served in the military. Does that make them a better credit risk?
In my opinion it doesn’t. so If I’m going to make a VA loan, if I’m going to give a homebuyer 100% financing because they qualify for a VA loan, why wouldn’t I make a person who has the exact same qualifications 100% loan if they are not a serviceman? And that discussion we have a five, 10 minutes discussion after that about why is VA better and why servicemen all this stuff.
But the whole point is that if you’re willing to make 100% loan to a serviceman why aren’t you willing to make 100% loan to a non-serviceman? Being in the service has nothing to do with your financing abilities, your mindset, any of those other types of things when it comes to paying your bills. So I look at loan to value and I say, “Well how much of a down payment would I really want?”
Well the more the merrier. Obviously if they have more skin in the game I’m going to feel safer about that deal. But it does not mean that I would not do a seller carryback with $1500 down if I had the confidence that they were going to be able to pay. And that’s a gut feeling that I would have. And then the guy who puts $80,000 down on a $100,000 property could get run over by a truck tomorrow.
And then what happens? Sure you’re well protected but you still have to go through the headache. So I just look at things, I try to be more practical and realistic and so rules driven. And you have to have policies, you have to establish certain guidelines that operate in.
But for the most part I want to be flexible so that I can say, “Yeah I’ll sell with $1500 down and I’ll carryback because I feel like this guy is a teacher and whatever may be. And he just had a rough time in 2012, he had medical problems and now he’s back on his feet, I’ll sell to him. You see but you just have to use the logic behind it.
Larry: That makes sense. I’ve never sold a house for that low down, I try to get a minimum of even if I’m just selling a house for 20 or $30,000 maybe I picked it up for five or 10 I’m still going to try to get a couple thousand dollars down right. and I guess my whole line of thinking is if they stop paying, if I do have to foreclose if I can’t just get them to sign a deed in lieu or whatever, if I do have to foreclose it might be a long process before I get that house back.
Mark: You’re facing time, the cost of the foreclosure and then any repairs you’re going to have to have when you go back in and resell it. And then resale costs so you’re going to be looking at a fairly expensive bill and it’s not going to be covered by that $1500 or $2000 that you get down. So your decision is going to be based more on whether you think you’re going to end up with that property or not.
Larry: That makes sense.
Mark: And you just look at logically. When you buy a piece of property don’t you look at it and think of the exit strategy out of that property and think about what you need to do and how you’re going to get out. You make a logical assumption based upon that strategy. And that’s just the way I look at paper as well.
Larry: That’s right, that’s good. Yeah and you buy paper nationwide, right?
Larry: That’s good. So Mark I got to tell you man I really appreciate you taking the time. This has been really informative, I’ve learned a lot of good stuff. And I can’t wait to start working with you and sending some deals over to you to have you underwrite them. And I hope our students do too and I just really appreciate you taking out the time today.
Mark: Well Larry thank you for the opportunity, we always like to get our name out there to branch out and get some more opportunities for us to do business as well. So we thank you for the exposure you’re giving us.
Larry: Awesome man. Thanks a lot I really appreciate it.
Mark: Alright take care.
Larry: You too.