Converting CFDs to Notes | Real Estate Notes Show

Episode: Call the Underwriter : Underwriting and Converting CFD's to Notes RMLO Dave's Goals and Plans: - Currently buying 2 CFDs and 1 note, finalizing purchases within a couple days - Has 4 bids pending, expecting to hear back on Monday - Started creating CFDs as introduction to notes before Dodd-Frank in 2012-13 - Has bought several lease options and converted them to CFDs over the last year and a half - Initially uncomfortable buying CFDs without understanding the conversion process to notes Nathan's Goals and Plans: - Has 4 bids in across Louisiana, New Mexico, and Texas (all notes, not CFDs) - Finds the notes world scary due to lack of knowledge - Recognizes CFDs as an opportunity due to dramatically lower prices than notes - Interested in understanding how to convert CFDs to notes to increase value Key Recommendations: - Focus on compliance when converting between asset classes (CFDs, lease options, notes) - Converting CFDs to notes can increase value since many companies buy performing notes but not performing CFDs - Work with a qualified underwriter/loan originator to ensure Dodd-Frank compliance - Understand that the loan originator bears responsibility for ensuring notes don't have predatory features Topics Discussed: - Converting CFDs to notes to increase property value - Compliance requirements under Dodd-Frank legislation - Differences between CFDs, lease options, and mortgage notes - Role of underwriters in seller finance transactions - Risk mitigation through proper documentation and compliance Guest Insights: - Max has 30 years background as firefighter/paramedic with real estate and finance experience - Call the Underwriter was founded in 2014 to help seller finance community comply with Dodd-Frank - Dodd-Frank was created post-2008 to prevent predatory lending and borrower exploitation - The underwriter's responsibility is ensuring notes don't contain illegal or predatory features, not the borrower's - Call the Underwriter clarifies they are NOT the loan originator - they provide compliance review services all the predatory lending going on we had teaser rates we had all kinds of things going on that were causing people to end up upside down in mortgages consequently the bubble burst was millions of people walking away from homes that they were underwater in and so dodd-frank came about from uh congress saying okay we don't want this to happen again once we bail ourselves out of this how do we ensure uh in the future that lenders can't behave like the wild west and write these predatory notes that borrowers have no understanding of and they get them in it today and and two years from now they default because they can't meet the terms of the loan so that's where dodd-frank was born and um basically what dodd-frank says is that if you originate a note you are responsible to ensure that you don't have any uh illegal features any predatory features uh in this note and it's the responsibility the onus is not on the borrower to understand whether this is a risky note he should or shouldn't stay away from the responsibility is on you the loan originator and so that's the basics of everything that that we're doing is helping loan originators um write a note and we're busy knowing all those uh yeas and nays every day so that those of you out there creating notes don't have to now before i get too deep into it i want to dispel a current myth that seems really big i hear it almost every day so it's important to dispel this notion somehow there there's word going around that we're the loan originator and that's why they're safe because we're the loan originator that's not accurate we're not the loan originator if you uh loan money to somebody and you what's the advantage in your my nathan to convert that over and spend the time effort energy uh that's an interesting question because um and part of it is personal preference um part of it is uh looking at different advantages so there are cases where actually in most cases for me i'm actually not going to convert it to a mortgage i'm just going to keep it as a cfd i have buyers where i can resell that note back out to a cfd buyer so there's no need in that case there are other buyers where they do want it as a mortgage so that'll be even just a term of of the sale is well it has to be converted to a mortgage first so there's that there are states where cfds are definitely an advantage and what i mean by that is in case of default and in case of default it's a whole lot easier and faster and cheaper to deal with this default and and get that property back than a mortgage so michigan a lot of the rust belt states are some of these they're just so much faster and easier foreclosure states yeah yeah and then there are other states where say new york florida uh texas i may buy it as a cfd but i would immediately transfer that over to a mortgage because the the the advantages of a cfd don't actually exist in those states they don't recognize cfds as their own thing it has to be a mortgage or d of trust whatever state you happen to be in so in those cases i would uh but that would for myself that'd be the only reason i would convert one over to uh to a different yeah aaron made the comment that you know there are certain states require that even with a cfd require judicial [Music] hey everyone dave putz here from jkp holdings alongside me nathan turner how are you doing my man very good very good good man it's been a interesting week uh we've got a lot going on how are things with business this week anything new and exciting going on i got four bids in i'll hear back on monday we'll see how that goes hopefully fingers crossed i'll get my bids this time cfds notes uh these ones are i think they're all cfds if i'm not mistaken i'll have to double check whatever i'm good it don't matter anymore so um i wanted to you know we're in the process of actually buying a uh cfd um two of them and then a note uh probably within the next couple days we're just finalizing some of that stuff right now and i know that makes it worse we're gonna be careful it's not something we're comfortable doing but we're gonna see what happens so yeah um the ones you're buying are they in like a certain state are they sporadic uh spread out a bit they are i'll tell you here yeah two in louisiana and new mexico and texas and in fact uh they are actually all notes they're not cfds oh okay it's a little different oh yeah looking forward to it that should be good so i think i think for me you know the notes world is is scary because we don't know much about it right when we don't know something about we gonna get nervous and worried about what it looks like right and how to handle it almost like a new note investor yeah but for me cfds became an opportunity because the prices were dramatically lower than those in seconds yeah and then you get in the world the fact that cfds are really close to notes just a little bit off so we want to know like could it increase the value by converting it from a cfd to a note and the answer is yes where a lot of companies out there that we both know of will buy a performing note but won't touch performing cfd so if we can just add that value of a note versus cfd it's awesome and then i i even got i can go a step further and go i've this last year year and a half i've bought several lease options and i've converted a whole bunch of those lease options to cfds so just kind of going from one asset class to another to another and and you can uh it's really not that difficult the biggest thing is compliance yeah and that's why we've got max on yeah cfds lease options are all kind of the same thing just a little bit different paperwork yeah and the idea we're looking to do is convert into us no in some cases makes a lot of sense it may get the fear out of people like us to get out of that world of hey it's a cfd i can't buy it too i can buy it and i can do xyz with it to make myself feel more comfortable yeah yeah and we had i i think most people know i started creating cfds that that was my introduction to notes and then uh in at a certain point there 2012-13 i forget the year and max will probably know then dodd-frank came into effect yeah and uh at the time there was no such thing as a mortgage originator so so i was kind of dead in the water further a little bit where i was originating beforehand but then i knew that dodd-frank was in place and there were some rules and that had to be followed and i knew i needed a mortgage originator and so we asked around about uh if somebody could do that for us at the time and everyone was like what are you talking about what's don frank we got that and so it just it took a few years uh until we got guys like max that that can help make that happen and sign off where they need to sign off make sure it's compliant interesting so they came in the world of need and then i think i first heard about called on the rider as a like a tv commercial in my head right um and then it was all over the place didn't make me feel comfortable buying cfd because i didn't connect the dots yeah i'm thinking i'm not selling finance i'm not buying the loan i might you know i'm not buying the property and converting it over i don't need it yeah and then lights went off wow i could actually flip it over but i'm still uncomfortable buying that cfd and i don't know what the process is don't know where it is i'll keep buying notes now we're seeing more and more cfds around the opportunities around cell francing is around so the idea is that you can mod it you can transition it so just recently we got an email i guess a couple months ago that called under air changed names and things converted so what we thought nathan and i thought about doing it bringing on the new owners and call the underwriter and to explain a little bit about where they're from the background understand what they do understand what the process is a little bit and the compliance which is the big thing here understanding what you can and can't do with a borrower allows you to know if you can or can't write that paper and whatnot so max welcome to uh today's uh live video and can you share a little about your background what you do and just a little bit about the process yeah absolutely thanks for having me guys i appreciate it and uh hello to all of you out there that uh i haven't met yet so yeah um i'm the face of uh called the underwriter um as much as that's probably not to my advantage but uh it is what it is so anyhow uh well we're out here in montana and so this is a type of business that can really be run anywhere we'll probably be doing some of it in phoenix in the winters i imagine as well and i'm actually sitting out in my cabin in the mountains right now so about uh half a mile from where the unabomber used to live so um that's when you think of me that's that's where you'll think of so we're tucked away um similar beard but a lot nicer i don't i don't want to hurt nobody um my uh my background is uh fairly diverse um and actually uh probably atypical of people in the finance world um i spent around 30 years as a firefighter full-time firefighter paramedic um but i did get a finance degree and uh because firefighters have so much time off um i spent 30 years with uh about five days a week off and that enabled me to start buying rental properties and uh doing a whole lot with buying and selling of rentals basically rehabs flips fixes um and and i still manage uh the the rental properties i have left today so i didn't really do anything with seller finance per se i mean i did a few too but i didn't know anything about um this long before dodd-frank but i didn't know anything about um you know there being an actual industry in seller finance i wasn't connected to any of these big networks like people are today which i think is hilarious because i was doing it but i didn't know anybody else was doing it and so i was kind of a handyman basically you know i would just look around my state for uh garbage and we had the fire department construction pool so you could throw people a few bucks on their day off and they were happy to to moonlight to come you know rip stuff out for you and allow you to put stuff back together and so i could remodel fairly cheap and uh yeah so i built a rental property crop doing that so i got fairly familiar with um commercial finance and uh traditional finance and uh and a little bit about you like i said uh did some seller finance before i even really knew what it was um and then uh dodd-frank came out obviously in 2010 and things continued to get changed and refined all the way up through 2014 uh to where it looks a little bit more like it does today and uh that's where russ got his start was in 2014 um he was involved already as an underwriter in the in the commercial worlds for fannie and freddie and so he was plugged in with people that were doing uh stuff in the note world and so he sensed the need uh to have somebody that understood dodd-frank uh help bring compliance and awareness to the seller finance community in the same way he was doing it for fannie and freddie in traditional lending and so that's how call the underwriter was born was uh people approached him since he had that knowledge and said would you uh would you be interested in looking our stuff over and making sure it complies with dodd-frank um and then obviously he built quite a machine um and it it quickly outgrew um what he was capable of doing while he still works full-time in the commercial world and uh just uh by total coincidence uh i had retired a year ago and had even more time on my hands than i've had for the last 30 years and thought boy this is not going to be good i'm going to get myself in trouble being fully retired and i can only drink so much beer and and do so much motorcycle riding in the in the mountains you know before my wife threatens divorce anyhow so i started looking around online for businesses and because i had a finance background that was where i wanted to land and uh i ran into two or three different businesses this one through russ and elsie was one of them and uh first jumped in just to do some work with him and see how the thing ran and we did that for several months and then he made it known to me that he was interested in doing some other things plus he was still working full-time and uh so we said well why don't we just take the business off your hands um we'll do it i can do it from the mountains at the cabin i can do it from phoenix in the winter i can do it from anywhere i want to do it it's perfect for me yeah and uh so yeah we a deal was uh cooked up and uh we officially took it over i think in uh the end of december so good for you that's cool yeah thank you so and then like we say like really um really what it comes down to is just compliance like like whether you're going from a renter a brand new origination renter to a cfd cfd to a mortgage what it really comes down to is just compliance and just making sure you're you're following the rules so can you tell us what like what are some of those things that we need to look at like what are some of the rules yeah yeah absolutely and i don't i don't know a whole lot about your audience and so i apologize in advance if i'm talking um dumbing it down too much um so i might be boring people but but i also don't want to say things that leave people saying i'm not sure why he's saying that or what that means so at the very very basics um dodd-frank legislation uh came about post 07 and 08 in the housing bubble burst right we had all the uh carry the note you are the loan originator so for all these people that write to me every day and say hey we're bringing a deal to you from uh michigan and they said that uh you know we we're absolved of liability because you're going to be the loan originator on it i always try to educate them and say understand you are still the loan originator and it'll say it right on the disclosures on that we issue it at the end of this what we are is we're the third party subcontractor that you're hiring to vet your borrower and ensure that you didn't write a note that is not going to be compliant with federal legislation so that is what we're doing for you is we're scrutinizing what you bring us and we're also scrutinizing your borrower and were meeting those eight mandatory criteria that dodd-frank set out that credit worthiness has to be vetted in these eight different ways that's what we're doing for you um and so what that looks like on a daily basis is uh somebody gets a hold of us and says hey we're going to uh we're going to put a deal together and we're in texas uh what do you want from us so i send them out a new investors packet and it has basically everything that they would need um and and i can put out my email before we're done here today and and so that if you end up with people saying the same thing they can get a hold of me be happy to send it out uh it's step-by-step directions in terms of if you're the uh note originator if you're the lender and you've found a borrower here's what you have to do step one step two step three step four and bring it to us what that looks like specifically would be um the standard 1003 or the erla they call it it is the universal residential mortgage loan application so that's kind of where everything begins with is is a lender would go out and find a willing borrower and they would get this 1003 application filled out and we've tried to dummy proof it somewhat we've highlighted it so that we just encourage them just fill out all the highlighted areas if you get that that'll be enough information for us to get started with uh and then there's a document that they have to sign the borrower signing an authorization that allows us to pull their credit and so it's important that they know that we will be vetting their credit so there's the application and the authorization to pull credit and then i've created some paperwork that guides them or the lender on what types of income documents are necessary to prove the claimed income based on how they make their money and i break it down in w-2 wage earner that would require uh the two most recent pay stubs and the previous year's w-2 they need to be able to show a two-year income to your work history within an industry one of the things we're noticing right now is we're getting an awful lot of applications from people that i did one here two or three days ago the guy worked seven different jobs in 2020 couldn't do it couldn't put it together and and had to just tell him this this just doesn't fly his income is not going to count um so part of credit worthiness is uh reliability consistency uh stability so not everything that fannie and freddie would shut the door on on your borrower on will we there's a lot of things we can flex and work that the reason that they're in seller finance right is because maybe they have a credit score under 620 and fannie and freddie's already said no go you're out of here or they had a bankruptcy three years ago they shut the door in their face we can get around a lot of those things but one of the primary areas we really can't get around nobody can get around is people who don't have some degree of stability to their income and to the method they earn their income primarily with w-2 wage earners it's it's these people that switch jobs every 30 days almost can't work with those people and so one of the things that i've done is i've created a lot of borrower pre-screening information in that new investor's packet that if somebody new to this will read and study then when they're soliciting for their borrowers you know and they're whatever they're doing no i don't know if they're doing radio or they're doing uh newsprint or whatever whatever how whatever method they're dragging borrowers in you know hey if you've been turned down by a traditional lender and you're interested in a home call us and we can help you well when those people pour in there's a method for that lender to do some peripheral just cursory pre-screening of a borrower before they put everything together and send it to us i've created what they need to help them know which borrowers to run from versus which borrowers have a legitimate uh you know possibility of making it so ideally they pre-screen their borrower and then they send that 1003 application to us they send the um authorization to pull credit then we have a form that we ask the lenders to fill out which is going to be all the terms to the deal so um obviously it's going to be the sales price going to be the loan amount the apr the term going to be uh all that kind of verbiage like do you want uh escrow done and if so uh do you have a servicer um are you gonna charge a monthly escrow fee uh who's gonna be your settlement company or using a title company or a settlement attorney um do you have late payments so we ask for we have kind of a template that helps guide that discussion but we need all the terms of the deal so that's what the lender would fill out to send in with that application and that borrower's authorization we don't necessarily need the purchase contract it's actually easier for us for processing if they just follow that template that we give them because it sort of walks down everything that we would need and just puts it all in that way and then the last thing would be the uh income docs that substantiate the income claim so whether they're self-employed whether they're a pensioner or whether they're a w-2 wage earner once that all comes to us uh it could be as small as about six documents right it could be the application the borrower's authorization the term sheet and then a couple of pay stubs and a w-2 that's a deal we can put it together and and uh put this thing out typically uh on a tight package we can do it in about a two-day turnaround period so where fannie and freddie is you know probably minimum 30 days anymore um and that's if you're lucky um on tight packages with lenders that really understand the game and and that have followed our our training that are doing some decent pre-screening yeah it's not uncommon to get a package in this morning and put out a decision tomorrow afternoon so and i know i've had that experience i've worked with you and with rice russ before on multiple different originations and and i'll come back to that in a second but it really is that simple and sometimes the borrower situation is is what's complicated and we had one where we're working on where uh the borrower had lost all their id all their important documents everything in a fire uh so that was a challenge it's just trying to get the documentation that we needed that that didn't currently exist we had to go back and request it from government sources and stuff and so that was yeah a case of a more challenging uh case but but i've had it turn around in less than a week absolutely what is the typical issue that you guys run across often where someone's trying to convert from a cfd or lease option two and know what's the biggest hurdle from my perspective yeah from your experience um you know honestly that's that's really not we don't see any complications with that all of the complications we see are from the standpoint of ineligible borrowers borrowers that they're they're trying to put into a deal that just there's just no way they're going to be qualified for this and and uh you know trying to pull a rabbit out of our hat we get pretty creative with helping people qualify but there's just some of those borrowers that just are they they will not they cannot um you know qualify uh for the size of the note that people are trying to so besides the work history what would be another common hurdle of disqualification yeah absolutely great great point okay um on the 1003 application um if anybody's familiar with that um block eight on page four has declarations there's about ten questions there and what those declarations are is the borrowers answering a bunch of uh potential deal breakers yeah first question is do you have any outstanding liens or judgments against you yes or no um that breaks a lot of deals and many times declarations come in and they're blank or they're selectively answered i just got one yesterday where question number one was not answered by the male borrower it was by the female borrower and every other answer was answered yeah interesting so of course we have to flag that and say write back to him and say you didn't answer question one on your declarations do you have a judgment against you uh you know those kinds of things uh that stops a lot um borrowers that don't either have a social security number or an itin believe it or not in a lot of states we're getting tons of borrowers now that they sign them all up and they send it all to us and the social security thing is blank and the question that asks about citizenship says no and when we investigate they don't have anything they don't have an itin they don't have an ssn that's a deal breaker cannot do a deal with somebody if we can't pull their credit um and that's a dodd-frank issue you have to be able to assess their credit worthiness well if they have no method of assessing their credit worthiness they're out the door so these are the kind of things that i'm recommending in the training that we're teaching lenders to pre-screen their borrowers there are certain specific questions you want to ask while you're still just getting to know that borrower long before you ever actually take an application fee and commit them to a contract you want to find out are you dealing with somebody that even has the potential to fly you know those those kinds of deal breakers um the the ssn that's got to be uh a u.s social security like they can't you come from canada or mexico or something we're not looking at a good point outside of united states yes you're right yeah an excellent point because i don't deal with two you guys are fairly unique i don't deal with too many um other than you guys and so that's a great note to uh to mention yep that's right and um you know and an itin is okay so we do get a number of them now that don't have an ssn but they've got an itin and that's okay as long as it gets on there and we can pull credit with it um that works um one of the other big ones that is getting more common all the time given the demographic we work with is people that work for cash only they don't pay taxes and they have no mechanism for proving their income claim so they write on their 1003 application you know under the income statement make eight thousand dollars a month self-employed handyman great looks good sounds good the lender is impressed but if the lender doesn't know to ask a few questions by the time it comes to us and we dig deep we have to burst their bubble and say well you know what this guy doesn't have any bank deposits he doesn't pay taxes and he doesn't have any 1099s he literally everything he's saying he makes is his own uh promise that that's what he makes well the the day and age of uh stated income loans is long gone those are no longer legal and so unfortunately sometimes i have to burst a lender's bubble uh and in a borrower as well right because if that lender doesn't know better well he gets the borrower all excited that oh great you got good income excellent this is a good deal well let me send this off to the underwriter and i'm sure we'll get this put together for you and then uh we have to write the dear john letter back and say um sorry to tell you this but your borrower's income is absolutely worthless because he doesn't have a single stitch of paper that proves he makes the income he claims he makes so again from the lender standpoint that's a really quick early pre-screen you're going to want to do when you're talking to borrowers and you say what's what's your source of income well i'm a self-employed handyman awesome do you either have uh two years business tax returns to substantiate the claim or can you get us 12 months of current business bank deposits because that's what they'll calculate your income on if you don't have either of those sorry can't do so one thing i wanted just to to point out here like i know dave you're talking about conversions and i know that's we talk in those terms but but if you break it down what you're actually doing is you're originating so if it's going from a cfd to a mortgage you're not converting from one to another you're canceling the one and creating another correct so it's every time we're talking about um any kind of a new document it's it's just a brand new origination and then that's why we have to go through the steps and make sure even if they they qualify you know they were paying under a cfd they may or not may not qualify uh under a new a new set of terms in a new arrangement is that ever state by state or is that across the country that is across the country that's federal guidelines so what state you're in doesn't matter um state to state issues have a little bit of bearing but not a ton for instance one of the things we're required to do is assess uh residual income so not only do these people have to meet a certain debt to income ratio they also have to have a certain amount of cash reserves at the end of every month which is going to right feed them it's going to pay their utilities um it's going to put gas in their car well every state's residual income is going to be different because it the formula we use is based on uh income taxes which are different in every state and cost of living which is different in every state so if you have a deal where you have a 1800 square foot house and you have a borrower with five dependents in california that residual income is going to look entirely different than that same borrower with 1800 square foot that has zero dependence in alabama totally different and so there is a difference in that respect and so for a lender maybe and i get i have a few of these for a lender that does deals all over the country they they send you one from alabama and they they qualify real easily and so in their mind they think oh good okay two thousand dollar a month income uh did just fine in alabama hey got one over here in california a similar income he should be good to go doesn't even come quite close to qualifying and i have to explain to them it's the residual income issue that's killing them in california residual income you know you might be 1500 a month short on that same formula in alabama you're 1100 plus right and so there's things like that not not to get lost in the weeds lender doesn't have to know all of that they just have to know understand that um things like how many dependents you have um and what state they're doing the deal in certainly gonna affect things like um residual income right so i think you know i've seen some crazy things in the recent time where we saw a loan where the servicing fee was actually written into the contract yes that the borrower pays that servicing fee is that something that's just unique or are you talking about the origination fee dave yeah well no just actually the monthly servicing fees yeah that's that's escrowed fairly often so yep no that's not uncommon at all and that's legal within limits um escrow service fee as well you know typically 30 35 a month a lot of uh you seller lenders are contracting servicing out to a loan servicing company and then when you do no problem we just ask for the information on it and uh tell us what that monthly fee is going to be and we put it right in yeah very common no problem is that ever where is it just or is that flat number where if that transfers to a different service or i'm sorry can you if they transfer to it like different services have different fees so is it a flat number that no matter what happens that stays what it is or they'll adjust whatever the servicing fee yep yep it adjusts just like when we escrow taxes and insurance right at the time that we vet the borrower we use what we have we're not responsible nor are you if two years from now taxes go up by 25 percent and insurance goes up by 25 and now this borrower is outside their dti you're not responsible for that and that's one of the beauties of using us is what we're going to do is in real time at the time that we vet this and this is stamped we're going to check all that stuff and make sure that your borrower fits in the dti model and the residual income model for that six-piece p-i-t-i right which is going to be hoas p-i-t-i possibly flood insurance all of those parameters put in there he qualifies at the day that we do it and we issue you a certification of ability to repay which you put in your file cabinet well if in the next two or three years insurance and taxes and hoa fees and everything else go up through the roof and that bar or work to default you're safe you're legal and so are we because you don't have an obligation uh to ensure that those issues don't go up you have a the way dodd-frank words it is you have an obligation to be able to prove that you made a good faith effort using reasonably reliable third-party records at the time of origination to ensure that your borrower has the ability to repay the loan and and you just mentioned that so the ability to repay and that's what i mentioned to my borrowers or potential borrowers is is the reason we go through all this underwriting is really that we're just really trying to establish ability to repay amen you know all things being equal that's that's really what we're essentially looking for is just that is you're you absolutely right you boil it down to the uh hit the nail on the head the atr is everything and that's what we're doing is we're we're either telling you yay or nay based on atr and this is one of the things i get all the time as well and it's frustrating sometimes because it puts us in a position of being a bad guy which is ironic because it'll be the lender that gets upset with us and yet it's the lender that hired us to do what we're doing right so we're trying to keep the lender out of hot water but once in a while we have to go back to the lender and say i'm sorry this guy just can't make it and then i get things like this well that's ridiculous he pays that much in rent every month already right now of course he can do it and i have to explain whether he can do it or whether he meets the parameters is two different things right so in dodd-frank he might be able to do it realistically yeah but if he's at a 62 dti while he's doing it it still won't be considered compliant because he doesn't meet that ability to repay parameter of being under 58 debt to income ratio and so needless to say for lenders that don't get uh read in on this they don't get educated enough to understand it sometimes it almost feels antagonistic to them it feels like they went out and got a good borrower and brought it to me and then i blew the deal up on them and so i spend a lot of time kind of trying to uh work with lenders to get them to understand i wouldn't be worth what you're paying me if i tell you what you want to hear right right the reason you're hiring me is to give you the hard answers sometimes they're going to piss you off but they're going to make damn sure you don't uh shut your file cabinet and skip off into the sunset thinking you've got a compliant note and in reality i set you up for failure and there are significant penalties for for not significant penalties and and this is important to know if they ever catch you on one the first thing the cfpb does is binge over and do the full body search and they take every deal you've ever done and they scrutinize it and it's 25 000 per deal per violation so it is huge not only that you can lose the asset because a a sympathetic court is going to say this family shouldn't have lost their home over this because they were told they qualified and now they don't well too bad they get to stay in their homes so you could you could lose the asset you could pay 25 000 per penalty in violation they could literally put you on the chopping block so it's just not worth it yeah so in the back of the day when things were going through one of the most common things with dodd-frank was idea of you can't originate something where owner occupied where are we at now with that and how what are we doing about that in terms of your legality to originate on owner-occupied note correct okay yeah and there's a there's a ton of uh there's a ton of debate over uh the exemptions rule safe harbor um qualified mortgage i could go on for days on all the caveats and even if you get on a lot of the blogs and hear the attorneys in all 50 states debating it none of them understand it completely so i'll try not to muddy the waters and i'll give you the the most basic explanation i can um what what the dodd-frank ability to repay cover specifically is one to four family occupancy owner occupied so if you're doing vacant land you're not required this if you're putting them into a six flex you're not required this and if it's a rental property that the borrower will never occupy you're not required to do this side note i do those all day long because lenders have now decided they want this done with them as well because it gives them a more easily marketable note because they've got a vetted borrower it lowers the likelihood of default so i'm still doing them all the time for people that don't fit the mandatory parameter but the parameter is owner occupied one to four family um in all 50 states so i can all add one more exemption is if it's b2b so if i'm if i'm going to originate alone to a company uh some kind of an entity rather than personal name then then i don't actually have to go and talk to you at all correct and i just did one of those yesterday that is a an llc buying and the lender still said yeah i want you to do it anyway um and so we still can't know but we can't originate a loan where the owner still occupies a home that was a cfd beforehand and converted to a no we cannot do that at all no you can you just have to get the borrower okay you just have to vet the borrowers so any owner occupied you can do but what the law says is that you're responsible as the originator to vet that borrower and not originate a loan that they can't afford the ability to repay it yeah so yeah so nathan i'll let you jump into some of the questions in the chat there that um are coming yes uh ray and i know ray and we've talked before and he's a big originator and yeah he's a good guy um he's asking about compliance regarding converting lease option to cfd and i we may have covered that already um anything to say on that max um i say anything no to me really to me the the the uh i guess the the terms we're using don't matter if it's still an owner occupied if it's a family that could be put out on the street if it's a family that could be left homeless because they couldn't afford the note then it still fits the same parameters whether you're calling it a cfd or you're calling it a note you're still you're still liable to make sure that your borrower has the ability to repay right and again we're not exactly we we think of it in terms of conversion but what it really is is is a new origination so instead of a lease option now it's a cfd so it's a new cfd yes yep and just so you all know i've even had people bring me existing notes and just ask us to vet a borrower that's already in they've already owned the place for two years and the note holder is now saying you know what i realized this was never a compliant note and i'm nervous about that uh can you do it yep we can still do that as well and we we do it all the time and again that makes it a more uh attractive note on the resale as well absolutely he has another question nathan i'll let you go ahead and handle that as well uh he's asking for an easy way to get underwriting requirements such as the dti sure um easiest thing to do is just to uh yeah easiest thing is just to contact me and i'll send you um an entire investors packet that breaks it all down for you but i can also just while we're talking i can just throw the figures out as well i mean if you take we only use um a front-end dti so you know where fannie and freddie typically use a front-end and a back-end so they're going to use uh you know they're going to use the house so that that six-piece p-i-t-i figure and they're also going to use all other debt and they have two separate dti's it's going to be like 28 36.

we don't do that we only use 57 period so it's an all-encompassing dti so if you just took your borrowers credible gross income and multiply it by 0.57 that's the total debt they can have so easy way to think about this would be you've got a borrower that says that they make 3 000 a month you you vet them just enough just okay well you know can you prove that you have it in taxes you haven't in w2s you haven't paid up yep absolutely okay great so you take the 3 000 you pencil that down multiply that by point 57 that figure is the total debt now subtract your p and i your taxes in your insurance your hoas your escrow fees all that subtract that from it now you get another little figure there when we pull their credit everything else in the credit score better fit into that other little figure or they're not going to make it and so that's where as a lender you want to start going through with your borrower and say when we pull your credit what are we going to find car payments student loan debts um credit cards other installment loans what else do you have out there and have them tell it to you and pencil it down subtract that from that other little remaining amount and if all of that together is more than that 57 the likelihood of them making it's nil so on credit scores i was going to ask about that our credit reports i should say because we're not necessarily looking for a score a number we're looking at the report itself and looking for what else are they paying on great yeah and i'll go through that real quick for you so yes i get this every day okay so credit score from a standpoint of dodd-frank seller finance credit score itself is relatively irrelevant what i mean by that is there is no number that's a deal breaker i can work with 400.

is a 780 gonna make it quicker and easier and better for you absolutely because i'll have to condition a whole bunch of things on a 400 that i won't on a 780 but can we make a 480 in the right circumstances or 400 can we make that fly absolutely i did one yesterday that has zero correct score when we pull it we get an n8 that means this guy doesn't have a single line of credit no problem we can still work with that if he has adequate income but here's what happens it's called conditioning and i've got a sheet that i can send anybody that's interested in learning how we condition loans if you'll study that sheet you'll be able to pre-anticipate what's going to hold up the loan and ask for it ahead of time give me an example a credit score under 620 is going to require a vor verification of rent so because their credit score is under 620 we have to establish something outside of the credit score that says this guy's good for his word credit score indicates he's probably not good for his word fannie and freddie shut the door on your face and tell you to go home they're done that's it we don't we condition for it and say let's help him build some alternative credits so this says he's not good for his word here's what we can get that counteracts that right like like in a court that says we're going to cross-examine and say yeah i know this says he's not good for his word but we have this other witness over here that says he is so if the credit score is under 620 one of the conditions to approve the loan will be a verification of rent which is very specific it's a 12-month letter it's gotta have the landlord writing a letter saying john smith has rented for me for this much time got to be minimum 12 months he pays this much money and he's never had a late payment in the last 12 months that will be a condition to pass for anybody with a credit score under 620.

so another good example would be a credit score or not a credit score but a credit where we don't have a single open line and i get a lot of these not a single open line okay so if you talk to your borrower and you're in pre-screening and you say when we pull your credit what do you have and they tell you i have no credit at all and you know right away you're gonna have to tell them will you be able to bring us a 12-month verification of rent and i recommend you build your own templates so you just basically hand it to them and say you'll need to get one of these and two 12-month credit histories from something on the alternative credit list which i can also provide you what that would be like would be uh car insurance cell phone utilities anything else they pay so in other words what we're saying is your credit score fico says you're not good for your word we're allowed to say we're going to bring in three other 12-month credit histories that debate that and say no he is good for his word so if you have no open lines you're going to need a vor and you're going to need two other sources like 12 months of cell phone bill that proves you pay on time 12 months of car insurance says you approve on time you pay on time so if i'm a pre-screening lender before i agree to bring this package to call the underwriter i'm going to have that discussion first of saying or i'm going to build it right into my paperwork if you have no open lines of credit will you be able to provide the verification of rent in two other 12-month payment histories yeah so um and even the verification verification of rent so i've had it actually where i i was the one i bought a lease option or cfd um and then i was the one collecting payments for those 12 months so then when we went to underwriting i was the only one writing that letter and i was completely confident in writing that because i'm i'm not relying on someone else's word i collected those payments and so amen that it was perfect really easy yeah and i take those all the time just so you know somebody might be out there saying well if i'm their landlord is that legit that is that is dodd-frank just says from my standpoint my obligation is that i use reasonably reliable third-party records well that's reasonably reliable same thing if um let's say we're we're needing um a covet letter let's say this is one of the big hot things that's going to happen in 2020 and anybody brings me a package is going to find this out we're we're now you know we always analyze payments right income is always about six to 18 months behind so if in 2021 you tell us you're making this much money the way we prove that is we review 2020 income well 2020 income has got tons of problems now because so many people had coveted hits right they were laid off they had reduced hours whatever so another good example fannie and freddie just say bye-bye go home and shut the door in your face they're done we're allowed to rely on reasonably reliable third-party records so we can't have the employee himself we can't have the borrower himself write a letter saying i used to make this much money i got laid off for six months and now i'm back to making this much money here you go and we say okay no we can't do that but we can say can you produce a letter from your employer stating you've worked there this length of time in 2020 you had these kind of hours and you made this kind of money then yes you had a six month period of covid that kicked your butt but now you're back to earning full deal here's what you're making and it's reasonably expected that that will continue then we can work with that and so we can take that little blip on the radar and we can excise that and cut it right out and we can give you credit for your full income so that's a good example of dodd-frank saying um we have to rely on reasonably reliable third-party records that's something fannie and freddie's not doing right so here's another question for you is uh it's when we're talking about uh predatory non-predatory what about interest rates what kind of interest rates am i allowed to set great interest rates great example okay um believe it or not you have no limit on interest rate um i've done them as high as 15 really so you have no limit on the interest rate but here's the thing it's another example of since that's a risky feature then it will have other uh conditions related to it so any uh we'll talk about hcm real quick high cost mortgage hcm is something you're going to hear a lot in seller finance what hcm the definition of hcm and if you're a note originator who's trying to understand all this you might want to write this down this is a pretty good rule of thumb this the street rate is called the apor you can look it up any day of the week you can google what the apor is that's the why i refer to it as a street rate because it makes more sense right that's that's the rate that you get from a conventional lender today if you had ideal credit so let's say today it's 3.25 a high cost mortgage is today's apor street rate plus 6.5 so if you're writing a note and you're doing a 10 apr when that gets to me first thing i do is figure out if that's high cost mortgage or not which is going to be today's street rate plus 6.5 percent if it is that's okay it's legal but there's a few conditions then that we'll have to attach to vet the fact that we weren't being predatory one of which obviously is that much higher he's still got to meet residual income and he's got to meet dti another one is that dodd-frank says he has to have mandatory counseling he basically has to have something that says somebody who's not making money off of this loan is sitting this guy down saying you understand this is a this is a high cost mortgage this you're paying a ton of money for this well the way we get around that is we have them do a little internet course we call it the hcm course and and you've probably seen anything anybody that's done a deal with us has seen it so if it comes in if it flags as a as an hcm flags at a high cost mortgage just know ahead of time one condition the borrower's going to have is they're going to have to go to a website that we give them it's a free course takes about 20 minutes and they have to produce a little certificate that tells you and me that they got their counseling they send it back and i get lenders all the time basically giving me grief about this seriously he's got to go do this course what's the point of that and i try to explain to them the point of that is keeping your butt out of jail the law says that if you're putting this guy in a high-cost mortgage for an owner-occupied home that's a very risky feature you're mandated as the loan originator to give this guy counseling well do you want to go send him downtown and give him counseling and have somebody try to talk him out of your loan or would you rather have him do my 20-minute internet course that qualifies it gives him the same thing it gives you the liability relief of having done it and it's not going to cause the buyer to come back to you and say well you know what that guy downtown talked me out of it so i'm gone so an hcm certificate is one of the things that we do to protect you if it's a high-cost mortgage and that so that's interesting that's a nationwide 6.5 street 6.5 oh okay i thought that was a little bit more state-specific nope nope that is federal there's another one that's an hpml high-priced mortgage loan and it has different parameters uh and an hpml is the apor plus 1.5 so you can imagine virtually all seller finance deals are going to be hpml right and so they've got their own little risky issues as well so each level of these loans although they're legal to do my job is to flag them and then say if we're putting them in this then to protect the loan originator we must require this this and this and so what you're all paying for when you send your stuff to us even though some people probably tell you what you're paying for is me to kill your deals what you're paying for is me to scrutinize all the finite details of this loan against the predatory dodd-frank screening criteria and say that's okay we can make this fly but we're going to make them jump through this hoop and this hoop and this hoop and this hoop and if they can then even though it has all these risky features this lender is protected if they can't then it ain't meant to be and that ain't going to happen so i know there's another question i just posted over to nathan and i'm not sure if you can answer this question what is the typical cost to do to run through you i know i guess depending on the bar where it changes that what is the typical okay what's the big cost for it okay great awesome same all the time super super simple okay so you send a package to me doesn't matter how much it costs doesn't matter if you have one bar or five borrowers doesn't matter if it's a uh anything doesn't matter you send a package to us the first thing we're gonna do is we're gonna invoice you 119 that pays for our processors to start doing all this research pull credit start digging through everything start communicating with the borrower start sending you out needs lists and do all the data entries so we bill you 119 right off the bat as soon as you pay the 119 we open this thing up we start digging through it and we send you a needs list so we write back to you and we say all right uh nathan um here's what we're noticing um this this isn't in compliance your late fee is more than four percent and given this apr it's gonna need to be four percent are you okay with us changing it to that uh hey we noticed that you only included one pay stub we're gonna require two uh this guy missed a block in his declarations about whether he's had any bankruptcies please find that for us we do all of that as soon as that gets paid we dig through it and then we we return a decision to you you know and it might be a lot of things it might be hey qualifies no problem with these conditions or it might be hey you don't have enough income we recommend you bring in a co-borrower or we do things like this we say hey nathan um he could potentially qualify for this but here's what would have to happen you want 12 percent on a 180 month note that puts his p and i way up here he can't make it but if you're willing to change it from a 180 note to a 240 he'll make it uh or hey um his his wife's credit is dragging him down big time and she's not bringing much income to the deal uh see if you can talk them into dropping her from the uh application and if we just run the guy he's he's gonna make it and they can still put her on title at closing but so what we do is is we look for all the ways to make the deal work what can we do to make the deal work so you you uh we invoice you the 119 you pay it we start working this deal then for everyone that passes for everyone that we managed to get this thing through and we send out initial disclosures and we tell you congratulations your borrower's approved then we invoice another 380.

so the total fee is 4.99 and that's what it is on every single package that's why we recommend that you hold out at least 500 in earnest money from your borrower and that's going to reimburse you at closing for our fees now here's another another great note uh and i've had i've had a few people ask me this so if we send a package to you and you bill us 119 and they don't pass do we eat that 119 we don't get anything for this and the answer is yes you do eat the 119 but you get a lot for it and i'll explain to you what you get for it number one what you get for it is if you think you've already found a quality borrower then what you got out of this is that we broke this deal down to its absolute finite uh increments and explain to you exactly how far off this person is qualifying so now you know what they do qualify for so you tried to put them in 180 000 house with a pni of 1300 you now know that if you find them a house for 1100 you've got a good borrower because we've already vetted them and they're gonna make it they just can't quite make that house so your 119 isn't thrown away you've now got this borrower that you can sit down with and go okay hey listen uh mr and mrs smith good news we know exactly what you qualify for we know that we can qualify you bad news is unless you pay off this debt or unless you get an increase in your income or you bring in another co-borrower we might not be able to make this house work but here's some other houses that will work for you and then when you bring that deal back to us you already know you've got a guy that's going to fly is there any requirements of deposit down payments anything one percent two percent 20 um no there is not um in fannie and freddie there would be right there they're going to take a minimum down or nothing i get some lenders that are comfortable not doing any down whatsoever uh and i get other ones that say i like ten percent obviously historically in seller finance you guys aren't requiring the as big of a down as fannie and freddie would my personal recommendation is and that's what i've done i i would never put somebody into a property without a down same reason now we're invoicing 119 right when when you go into business with anybody when you make any deal with anybody and they don't have some skin in the game stand by to pay the price for that right because what's what's to prevent them from misbehaving when there's no skin in the game same reason we hold a deposit a damage deposit in a first and month last month's rent from renters of course you're gonna get holes in your wall and uh kool-aid on your carpet if they don't have any skin in the game so my recommendation is if you have a bar where they can't put a penny down you better question whether you really want this guy to be your borrower yeah but no there is no hard and fast to answer that question you can go with zero down you can go with thirty percent down twenty percent it doesn't matter so nathan i just saw a great and i know uh anthony asked questions uh his own creating his own test and i think anthony we create a form that i post in the in the chat uh to be able to give the max a maximum email out all these packets everyone who's uh fill the form out ray asked a question about 10 being the kind of rule of thumb to go by um not to go over there or you then i guess you have certain things that you have to watch out for i think it goes with the 6.5 is what you're referencing not the 10 where 10 might been a common number to use yes 6.5 yes that's that's a great point it there is no apr that is problematic because it all depends on the day right uh i mean for instance back in the day the apor was 11 so you could have gone excuse my french i spent 20 years on firehouse i apologize um you uh given that right if it was a eight or nine percent apr street rate well then it wouldn't become hcm until it was over 15.

when we're at historically low it becomes hcm if you just add 6.5 to a 2 you could be hcm so don't focus so much on on that just understand that when you send one to me that's going to be hcm they're going to have to do that internet course and the reason for the internet course is i'm covering your basis on the mandate that you give this guy counseling so hcm is nothing to focus on it's not a deal breaker the kinds of things that are that you have to be more concerned about is things like um if you have let's say late payments right standard in the industry late payment is five percent of the monthly payment um if you if you always tell us that you want for late payments just standard that's easiest and we'll just make it five percent of the monthly payment but anytime you're uh hcm then we've built a trigger in the system to catch it and we have to change it to four because for whatever reason uh they decided that anything that's hcm the max late payment can only be four percent because you're already you're already nailing this guy with a heck of a lot of interest little things like that um but work that's what we do is we watch for those things and then uh we don't just change them we call you or we write you an email and say hey uh i'm noticing you know you're saying you want a hundred dollar um late payment that's way beyond four percent of your monthly payment and this is an hcm loan so do you want us to make it compliant with hcm or do you want to change a bunch of other things and stick with your hunter but you can't do both so that's what we're doing okay and ray's asking uh is it possible just to to charge the borrower the buyer the 120 up front uh yeah make an application fee yeah make it an application feature absolutely and same thing my answer to them then would be you know if a borrower has heartburn with that then again if you're not willing to put any skin in this game how serious are you and you you tell your borrower you say listen here's the deal you give me a 119 application fee it's not for this one deal we work with you until we get you something so give me a 119 application fee and one way or the other we're going to get you into a house we we might have to have rayon one day dave i don't know if you know ray but man he's got a good system going on i like it i like him yeah yeah i like him and there's another guy that i think would be really cool because they're doing a lot of what you're saying max yeah they're actually finding the borrower not the house first you're talking about gerard orry yeah drawer too right i do a lot of business with them right so the idea is that they you know for those who are watching they're finding the borrower and saying what house do you want and going and matching with the house versus finding the house we all think about doing and going hey what borrower can fit in my house yes they're finding the borrower and say okay where can we put you what house do you like we'll buy the house or finance it to you and write the contract up yeah maybe we'll do ray and yeah and their their system's outstanding and here's the other thing again the easy way to do that on this is they pay that 119 fee you send the package to us then you know when we're done with that you know right up to the nats cajones what the total amount this person's qualified for because we've pulled their credit now this is something important to mention though if you're working with the borrower and you get going let's say you find them a house you get a package put together uh we invoice you the 119 you pay it we go to work for you and we give you back a figure right and we say okay listen here's their max their max dti given their income here's the max debt they can have and then you go back to shopping for the borrower you've got to have that discussion with the borrower that says don't take out any more credit because what they're famous for i just had one here about two weeks ago all qualified good to go and all of a sudden they go out and get a 900 a month pickup payment yeah and they killed the deal and i'm required by law even if it's not on the credit report if if i become aware of the fact that they've taken out new credit before the deal closes and you are also as the loan originator we are required by law to seek proof of that and assess their dti for it so lo and behold guess what happens we get the whole deal put together they're at a dti of about 44 or 45 they make it adequate income good to go 900 a month truck payment blows the whole thing up they're at a dti of 90 and there goes the deal so what you want to make sure you talk to your borrowers about is don't buy or shop for anything new if you want a home from me don't look anywhere else freeze your credit don't do anything until we've got you your home because it will be found out and it will kill you it'll it'll kill the deal yeah so i i take a lot in today i think you know nathan can you share one of your stories that you've created you've you're originally a new loan where you've gone through the process would it look like sure yeah so i i mean it it's really as simple as what max is saying um i i go i like i'll get ahead of myself but i i will send over the the package over to max and say okay so this is what i this is my new borrower we're we're creating this deal um i'll send them some of the numbers and and just what we're looking at and then he responds back and sends me out that package and then between the borrower and i we fill out our respective portions and then i always like to be the relay person rather than having everything go from the underwriter to the borrower i'd rather be in the middle there so i always keep myself in the middle and i don't know if that bothers you max but that's no no thank you please everybody else do that too let me tell you when we have borrowers or lenders that refuse to get engaged in the process they basically send a package and say well let us know if it if it passes or fails but deal with the borrower please for me i can't stand it you can't stand it so thank you so much we want the lender engaged yes it just it usually i in most cases um i'm not necessarily going from a straight origination i'm going from you know a lease option to a cfd or something like that so i've got some kind of relationship with the borrowers already uh so that's partially why i want to be involved just because i've already spoken with them like we've already got a relationship it's easier and better for me at least uh to pass those messages along myself and then i can i can be the relay person and make sure i know what's going on at any given time so the one that well one of the ones we recently did was this really tricky one and it was there were a couple of tricky spots because not only had they lost all their documentation in a fire but their previous residence was actually in alberta canada so so they were dual citizens so they had the the us social security number which which saved us there uh but we didn't have the number because it had burned up in the fire so we that was uh you know a challenge and and uh we actually even tried pulling the canadian credit uh i thought i might have access to that and then turns out that my credit credit guys that i use they're based in canada but they're actually only work in the united states so that didn't work anyway it was a little bit tricky and and we eventually we had to go with uh it was a trailer park um in alberta and they had their their mobile home payments whatever they call that the you know the rental of the mobile home space uh that i think that's what we ended up having to use as one of the documents besides uh telephone records and not even a cell phone like we're talking a landline lot randy yeah it was like old old school but we got it done and that's why they're happily living in their house down down in texas now yeah that's amazing so this this space of doing it is really just qualifying that borrower it's really it's it's not the house it's really the debt on the house and the borrower and they do it or not do it and that's you know most of the assets we see that our cfds are low value where typically is not able to be created because the big banks won't create a 30 000 loan and for us we don't like buying anything that's under 50 value so most cfds are out of the picture for us but we are seeing more and more of the houses are bigger with the opportunity to buy the cfd on it and you know you got to know that the loans especially cfds uh the reason they don't have a conventional loan is because they didn't qualify yeah so so you just you have to know that there are going to be some challenges most likely there there are going to be some challenges and whether that's uh you know something simple like they went to the bank and their credit score wasn't high enough but their dti is still fine then no problem then that's a real easy loan to get qualified or it could be something a lot more complicated but we have one that we're we're looking to buy it's it's a multi-unit and they're they're landlords so it's even should be even easier for us and if they are if their landlords in their personal name or company name good question i believe it's in their company name so that'd be even easier easy so we're gonna see we're gonna see we'll be getting a whole match real shortly and uh once we get through this loan and getting it through so guys i posted the link to the forum uh in the chat if you need it just let us know we'll we'll get to max um to get max out some packages out to you guys who are looking to do this more and even the system of finding the borrower and find the home that way and using that 120 is the leverage to continuously find people's houses for them and make it work it's less you know what property you can get them into and have a deal made let me say one more thing too another way you guys can spin this that's going to really make you valuable is is from now obviously i'm not advocating that you you hold yourself out to be a professional on this or do anything that could that could give you liability but informally these people that you're working with you let them know that once this 119 is paid and we work this file let's say and we get it back right and so maybe they don't make it and we obviously will be sharing the credit report with you and all this information you can now sit down with these people and say i'm going to use all this stuff to help show you how to repair your credit and make yourself that borrower that hey keep renting from me in the next six months and we'll have you there so you're still keeping this person in your network they're still with you even though you couldn't get it today now you know why they didn't make it right you know there's this one thing they have to get fixed in their credit or or they would be good to go or you know maybe you know that they've got this i'll give you one good example verizon wireless is famous for this people don't pay their verizon wireless bill and it goes to collections verizon's one of the only companies i know that what will happen is verizon will keep the account open and they'll assess you the entire amount you owe well when we pull credit then that entire amount shows up as a monthly payment oh yeah i mean if i don't find this twice a week i'm a monkey's uncle so here's what happens person got great income they're gonna make everything four years ago they didn't pay a verizon bill and it was 1700.

that account is still open on their credit report and they don't know it is and so when i pull credit guess what comes up as a monthly payment 1700 blows their dti up and so one of the first conditions i have to do is come back and say you either have to call verizon and make payment plan and bring that back to us and get that payment down to a certain amount like you know get it down to 80 bucks a month or something or pay it off entirely but the deals broke because of the 1700. well if that happens and they can't pay that 1700 and they can't do that right now you're empowered to sit down with them and say you know here's the deal you're a good borrower except for this keep renting from me stay in touch with me let's keep working with you and help you get this fixed also don't go out and do it again and hey in six months we're gonna get you the place you want and so our service is going to help put you in a position of keeping these borrowers even if they don't make it today um earning their trust and loyalty so that they're staying with you because they say you know what i know he's gonna still help me get a house yeah banker won't do that but even though i don't qualify for today he's got all my stuff and he's helping me figure out how to square myself away so that i can make it in the future yeah very interesting so i would never lose a borrower if i were you guys i would keep them in your little black book and and you're always working with them and even if they don't qualify today you're keeping them close to you and you're continuing to keep them in your network and a broken deal today could still be a winner next month or six months from now for you fantastic sure good that's that's tons of good information that's enough for anybody to to feel comfortable originating converting whatever you want to call it but uh and i would be surprised some people start making their own business out of us i mean the fact that you know there's like an array and dante they are doing this on a regular basis um i think i was talking to one the other day they they go out and they talk to realtors who find borrowers who couldn't qualify and they get their name off of them because they can't find a house for them right we know the people great and they're just taking their names and running with it which is great fantastic go go get to know a bunch of the residential mortgage loan officers in in whatever town you're working in and and it i mean it wouldn't be very hard with the right network and to find a whole bunch of people that got turned away that are looking to buy yeah yep and all of a sudden yep you're helping people you're helping people that had the door shut in their face yeah light bulbs going off so renting is another one you know i've been a landlord for 30 years renting i can't tell you how many people would love to buy but they can't and in many cases it's two or three small things that if they had somebody you know looking at their stuff saying you know hey if you do this this and this for the next 12 months we can qualify and you'll be you'll be a buyer even though fannie and freddie won't talk to you i mean the the ability to convert people into buyers that wouldn't be otherwise is ridiculous it's it's out there big time yeah so there's all kinds of incentives for them to do that with taxes and everything else like that it's it's well worth a while yeah so i'm gonna ask unless nathan answer this question we got a question from mark why convert a note to a mortgage what is the problem with just not holding it as a mortgage as a note sorry as a cfd why create a cfd convert to a more why go through all this foreclosure um and some don't which is um it's interesting right and i know that you know there are the concern about having a cfd is owning the property right you have the liability of the property you know all that stuff even though you have a borrower you're till still technically deed into the property right and sometimes you don't want to be deeded you don't want that liability you don't want the insurance ratio you don't have that connection where when you're the note holder you're you're distance from that situation so aaron thanks for jumping in uh florida doesn't recognize and they're hard for judges to wrap their head around yeah they don't think they don't get it they don't like them they don't hear the same thing like we don't find in jersey for cfd that just doesn't you know we don't wraps here in jersey we don't know that stuff yeah yeah so it's easier just to convert that over and then you've got a solid something in that state yeah so max i think that you know you guys are have done a really good job of explaining the the legality of the process because that's the most important part doing or not doing is a business decision yeah right um but if i want to do it but the legality doesn't allow me to that may or may not allow me to do get into the deal right if i'm like we're buying a couple cfds but if i don't if i want them to become a note because i want to be new and i can't that may strike the deal for me to get into that duration so i like it i like it a lot um yeah and again you just you're you're originating your whatever conversion you're doing it's just originating to the other instrument yeah so mark says his cfd is in michigan so uh hopefully mark you'll be able to convert it over with that incoming ratio and everything else if you feel like because michigan's one of the states where if they default they can literally go past it and get it for closure pretty quickly or eviction uh yeah cfds in michigan are that's one of the best states for them yeah so i wouldn't really convert over actually even less you're past the five years 20 thing and yes michigan and ohio as well so indiana's in that club yeah yeah so well guys i appreciate max having spent this afternoon i know you're up in the mountains enjoying yourself um on this friday good friday for everyone um for those who celebrate hope you guys have a great holiday weekend spend time with your family everything else uh but max i appreciate you jumping on and just answering some of the dumb questions we have but also giving the little details that really need us to know so we understand better of what we need to do moving forward yeah yeah happy to be here you bet and and i'll i'll entertain coaching and visiting anytime so yeah let me know yeah all right guys well thank you so much everyone for watching i appreciate it and we will talk soon take care everyone see you next week happy to to moonlight to come you know rip stuff out for you and allow you to put stuff back together and so i could remodel fairly cheap and uh yeah so i built a rental property crop doing that so i got fairly familiar with um commercial finance and uh traditional finance and uh and a little bit about you like i said uh did some seller finance before i even really knew what it was um and then uh dodd-frank came out obviously in 2010 and things continued to get changed and refined all the way up through 2014 uh to where it looks a little bit more like it does today and uh that's where russ got his start was in 2014 um he was involved already as an underwriter in the in the commercial worlds for fannie and freddie and so he was plugged in with people that were doing uh stuff in the note world and so he sensed the need uh to have somebody that understood dodd-frank uh help bring compliance and awareness to the seller finance community in the same way he was doing it for fannie and freddie in traditional lending and so that's how call the underwriter was born was uh people approached him since he had that knowledge and said would you uh would you be interested in looking our stuff over and making sure it complies with dodd-frank um and then obviously he built quite a machine um and it it quickly outgrew um what he was capable of doing while he still works full-time in the commercial world and uh just uh by total coincidence uh i had retired a year ago and had even more time on my hands than i've had for the last 30 years and thought boy this is not going to be good i'm going to get myself in trouble being fully retired and i can only drink so much beer and and do so much motorcycle riding in the in the mountains you know before my wife threatens divorce anyhow so i started looking around online for businesses and because i had a finance background that was where i wanted to land and uh i ran into two or three different businesses this one through russ and elsie was one of them and uh first jumped in just to do some work with him and see how the thing ran and we did that for several months and then he made it known to me that he was interested in doing some other things plus he was still working full-time and uh so we said well why don't we just take the business off your hands um we'll do it i can do it from the mountains at the cabin i can do it from phoenix in the winter i can do it from anywhere i want to do it it's perfect for me yeah and uh so yeah we a deal was uh cooked up and uh we officially took it over i think in uh the end of december so good for you that's cool yeah thank you so and then like we say like really um really what it comes down to is just compliance like like whether you're going from a renter a brand new origination renter to a cfd cfd to a mortgage what it really comes down to is just compliance and just making sure you're you're following the rules so can you tell us what like what are some of those things that we need to look at like what are some of the rules yeah yeah absolutely and i don't i don't know a whole lot about your audience and so i apologize in advance if i'm talking um dumbing it down too much um so i might be boring people but but i also don't want to say things that leave people saying i'm not sure why he's saying that or what that means so at the very very basics um dodd-frank legislation uh came about post 07 and 08 in the housing bubble burst right we had all the uh all the predatory lending going on we had teaser rates we had all kinds of things going on that were causing people to end up upside down in mortgages consequently the bubble burst was millions of people walking away from homes that they were underwater in and so dodd-frank came about from uh congress saying okay we don't want this to happen again once we bail ourselves out of this how do we ensure uh in the future that lenders can't behave like the wild west and write these predatory notes that borrowers have no understanding of and they get them in it today and and two years from now they default because they can't meet the terms of the loan so that's where dodd-frank was born and um basically what dodd-frank says is that if you originate a note you are responsible to ensure that you don't have any uh illegal features any predatory features uh in this note and it's the responsibility the onus is not on the borrower to understand whether this is a risky note he should or shouldn't stay away from the responsibility is on you the loan originator and so that's the basics of everything that that we're doing is helping loan originators um write a note and we're busy knowing all those uh yeas and nays every day so that those of you out there creating notes don't have to now before i get too deep into it i want to dispel a current myth that seems really big i hear it almost every day so it's important to dispel this notion somehow there there's word going around that we're the loan originator and that's why they're safe because we're the loan originator that's not accurate we're not the loan originator if you uh loan money to somebody and you carry the note you are the loan originator so for all these people that write to me every day and say hey we're bringing a deal to you from uh michigan and they said that uh you know we we're absolved of liability because you're going to be the loan originator on it i always try to educate them and say understand you are still the loan originator and it'll say it right on the disclosures on that we issue it at the end of this what we are is we're the third party subcontractor that you're hiring to vet your borrower and ensure that you didn't write a note that is not going to be compliant with federal legislation so that is what we're doing for you is we're scrutinizing what you bring us and we're also scrutinizing your borrower and were meeting those eight mandatory criteria that dodd-frank set out that credit worthiness has to be vetted in these eight different ways that's what we're doing for you um and so what that looks like on a daily basis is uh somebody gets a hold of us and says hey we're going to uh we're going to put a deal together and we're in texas uh what do you want from us so i send them out a new investors packet and it has basically everything that they would need um and and i can put out my email before we're done here today and and so that if you end up with people saying the same thing they can get a hold of me be happy to send it out uh it's step-by-step directions in terms of if you're the uh note originator if you're the lender and you've found a borrower here's what you have to do step one step two step three step four and bring it to us what that looks like specifically would be um the standard 1003 or the erla they call it it is the universal residential mortgage loan application so that's kind of where everything begins with is is a lender would go out and find a willing borrower and they would get this 1003 application filled out and we've tried to dummy proof it somewhat we've highlighted it so that we just encourage them just fill out all the highlighted areas if you get that that'll be enough information for us to get started with uh and then there's a document that they have to sign the borrower signing an authorization that allows us to pull their credit and so it's important that they know that we will be vetting their credit so there's the application and the authorization to pull credit and then i've created some paperwork that guides them or the lender on what types of income documents are necessary to prove the claimed income based on how they make their money and i break it down in w-2 wage earner that would require uh the two most recent pay stubs and the previous year's w-2 they need to be able to show a two-year income to your work history within an industry one of the things we're noticing right now is we're getting an awful lot of applications from people that i did one here two or three days ago the guy worked seven different jobs in 2020 couldn't do it couldn't put it together and and had to just tell him this this just doesn't fly his income is not going to count um so part of credit worthiness is uh reliability consistency uh stability so not everything that fannie and freddie would shut the door on on your borrower on will we there's a lot of things we can flex and work that the reason that they're in seller finance right is because maybe they have a credit score under 620 and fannie and freddie's already said no go you're out of here or they had a bankruptcy three years ago they shut the door in their face we can get around a lot of those things but one of the primary areas we really can't get around nobody can get around is people who don't have some degree of stability to their income and to the method they earn their income primarily with w-2 wage earners it's it's these people that switch jobs every 30 days almost can't work with those people and so one of the things that i've done is i've created a lot of borrower pre-screening information in that new investor's packet that if somebody new to this will read and study then when they're soliciting for their borrowers you know and they're whatever they're doing no i don't know if they're doing radio or they're doing uh newsprint or whatever whatever how whatever method they're dragging borrowers in you know hey if you've been turned down by a traditional lender and you're interested in a home call us and we can help you well when those people pour in there's a method for that lender to do some peripheral just cursory pre-screening of a borrower before they put everything together and send it to us i've created what they need to help them know which borrowers to run from versus which borrowers have a legitimate uh you know possibility of making it so ideally they pre-screen their borrower and then they send that 1003 application to us they send the um authorization to pull credit then we have a form that we ask the lenders to fill out which is going to be all the terms to the deal so um obviously it's going to be the sales price going to be the loan amount the apr the term going to be uh all that kind of verbiage like do you want uh escrow done and if so uh do you have a servicer um are you gonna charge a monthly escrow fee uh who's gonna be your settlement company or using a title company or a settlement attorney um do you have late payments so we ask for we have kind of a template that helps guide that discussion but we need all the terms of the deal so that's what the lender would fill out to send in with that application and that borrower's authorization we don't necessarily need the purchase contract it's actually easier for us for processing if they just follow that template that we give them because it sort of walks down everything that we would need and just puts it all in that way and then the last thing would be the uh income docs that substantiate the income claim so whether they're self-employed whether they're a pensioner or whether they're a w-2 wage earner once that all comes to us uh it could be as small as about six documents right it could be the application the borrower's authorization the term sheet and then a couple of pay stubs and a w-2 that's a deal we can put it together and and uh put this thing out typically uh on a tight package we can do it in about a two-day turnaround period so where fannie and freddie is you know probably minimum 30 days anymore um and that's if you're lucky um on tight packages with lenders that really understand the game and and that have followed our our training that are doing some decent pre-screening yeah it's not uncommon to get a package in this morning and put out a decision tomorrow afternoon so and i know i've had that experience i've worked with you and with rice russ before on multiple different originations and and i'll come back to that in a second but it really is that simple and sometimes the borrower situation is is what's complicated and we had one where we're working on where uh the borrower had lost all their id all their important documents everything in a fire uh so that was a challenge it's just trying to get the documentation that we needed that that didn't currently exist we had to go back and request it from government sources and stuff and so that was yeah a case of a more challenging uh case but but i've had it turn around in less than a week absolutely what is the typical issue that you guys run across often where someone's trying to convert from a cfd or lease option two and know what's the biggest hurdle from my perspective yeah from your experience um you know honestly that's that's really not we don't see any complications with that all of the complications we see are from the standpoint of ineligible borrowers borrowers that they're they're trying to put into a deal that just there's just no way they're going to be qualified for this and and uh you know trying to pull a rabbit out of our hat we get pretty creative with helping people qualify but there's just some of those borrowers that just are they they will not they cannot um you know qualify uh for the size of the note that people are trying to so besides the work history what would be another common hurdle of disqualification yeah absolutely great great point okay um on the 1003 application um if anybody's familiar with that um block eight on page four has declarations there's about ten questions there and what those declarations are is the borrowers answering a bunch of uh potential deal breakers yeah first question is do you have any outstanding liens or judgments against you yes or no um that breaks a lot of deals and many times declarations come in and they're blank or they're selectively answered i just got one yesterday where question number one was not answered by the male borrower it was by the female borrower and every other answer was answered yeah interesting so of course we have to flag that and say write back to him and say you didn't answer question one on your declarations do you have a judgment against you uh you know those kinds of things uh that stops a lot um borrowers that don't either have a social security number or an itin believe it or not in a lot of states we're getting tons of borrowers now that they sign them all up and they send it all to us and the social security thing is blank and the question that asks about citizenship says no and when we investigate they don't have anything they don't have an itin they don't have an ssn that's a deal breaker cannot do a deal with somebody if we can't pull their credit um and that's a dodd-frank issue you have to be able to assess their credit worthiness well if they have no method of assessing their credit worthiness they're out the door so these are the kind of things that i'm recommending in the training that we're teaching lenders to pre-screen their borrowers there are certain specific questions you want to ask while you're still just getting to know that borrower long before you ever actually take an application fee and commit them to a contract you want to find out are you dealing with somebody that even has the potential to fly you know those those kinds of deal breakers um the the ssn that's got to be uh a u.s social security like they can't you come from canada or mexico or something we're not looking at a good point outside of united states yes you're right yeah an excellent point because i don't deal with two you guys are fairly unique i don't deal with too many um other than you guys and so that's a great note to uh to mention yep that's right and um you know and an itin is okay so we do get a number of them now that don't have an ssn but they've got an itin and that's okay as long as it gets on there and we can pull credit with it um that works um one of the other big ones that is getting more common all the time given the demographic we work with is people that work for cash only they don't pay taxes and they have no mechanism for proving their income claim so they write on their 1003 application you know under the income statement make eight thousand dollars a month self-employed handyman great looks good sounds good the lender is impressed but if the lender doesn't know to ask a few questions by the time it comes to us and we dig deep we have to burst their bubble and say well you know what this guy doesn't have any bank deposits he doesn't pay taxes and he doesn't have any 1099s he literally everything he's saying he makes is his own uh promise that that's what he makes well the the day and age of uh stated income loans is long gone those are no longer legal and so unfortunately sometimes i have to burst a lender's bubble uh and in a borrower as well right because if that lender doesn't know better well he gets the borrower all excited that oh great you got good income excellent this is a good deal well let me send this off to the underwriter and i'm sure we'll get this put together for you and then uh we have to write the dear john letter back and say um sorry to tell you this but your borrower's income is absolutely worthless because he doesn't have a single stitch of paper that proves he makes the income he claims he makes so again from the lender standpoint that's a really quick early pre-screen you're going to want to do when you're talking to borrowers and you say what's what's your source of income well i'm a self-employed handyman awesome do you either have uh two years business tax returns to substantiate the claim or can you get us 12 months of current business bank deposits because that's what they'll calculate your income on if you don't have either of those sorry can't do so one thing i wanted just to to point out here like i know dave you're talking about conversions and i know that's we talk in those terms but but if you break it down what you're actually doing is you're originating so if it's going from a cfd to a mortgage you're not converting from one to another you're canceling the one and creating another correct so it's every time we're talking about um any kind of a new document it's it's just a brand new origination and then that's why we have to go through the steps and make sure even if they they qualify you know they were paying under a cfd they may or not may not qualify uh under a new a new set of terms in a new arrangement is that ever state by state or is that across the country that is across the country that's federal guidelines so what state you're in doesn't matter um state to state issues have a little bit of bearing but not a ton for instance one of the things we're required to do is assess uh residual income so not only do these people have to meet a certain debt to income ratio they also have to have a certain amount of cash reserves at the end of every month which is going to right feed them it's going to pay their utilities um it's going to put gas in their car well every state's residual income is going to be different because it the formula we use is based on uh income taxes which are different in every state and cost of living which is different in every state so if you have a deal where you have a 1800 square foot house and you have a borrower with five dependents in california that residual income is going to look entirely different than that same borrower with 1800 square foot that has zero dependence in alabama totally different and so there is a difference in that respect and so for a lender maybe and i get i have a few of these for a lender that does deals all over the country they they send you one from alabama and they they qualify real easily and so in their mind they think oh good okay two thousand dollar a month income uh did just fine in alabama hey got one over here in california a similar income he should be good to go doesn't even come quite close to qualifying and i have to explain to them it's the residual income issue that's killing them in california residual income you know you might be 1500 a month short on that same formula in alabama you're 1100 plus right and so there's things like that not not to get lost in the weeds lender doesn't have to know all of that they just have to know understand that um things like how many dependents you have um and what state they're doing the deal in certainly gonna affect things like um residual income right so i think you know i've seen some crazy things in the recent time where we saw a loan where the servicing fee was actually written into the contract yes that the borrower pays that servicing fee is that something that's just unique or are you talking about the origination fee dave yeah well no just actually the monthly servicing fees yeah that's that's escrowed fairly often so yep no that's not uncommon at all and that's legal within limits um escrow service fee as well you know typically 30 35 a month a lot of uh you seller lenders are contracting servicing out to a loan servicing company and then when you do no problem we just ask for the information on it and uh tell us what that monthly fee is going to be and we put it right in yeah very common no problem is that ever where is it just or is that flat number where if that transfers to a different service or i'm sorry can you if they transfer to it like different services have different fees so is it a flat number that no matter what happens that stays what it is or they'll adjust whatever the servicing fee yep yep it adjusts just like when we escrow taxes and insurance right at the time that we vet the borrower we use what we have we're not responsible nor are you if two years from now taxes go up by 25 percent and insurance goes up by 25 and now this borrower is outside their dti you're not responsible for that and that's one of the beauties of using us is what we're going to do is in real time at the time that we vet this and this is stamped we're going to check all that stuff and make sure that your borrower fits in the dti model and the residual income model for that six-piece p-i-t-i right which is going to be hoas p-i-t-i possibly flood insurance all of those parameters put in there he qualifies at the day that we do it and we issue you a certification of ability to repay which you put in your file cabinet well if in the next two or three years insurance and taxes and hoa fees and everything else go up through the roof and that bar or work to default you're safe you're legal and so are we because you don't have an obligation uh to ensure that those issues don't go up you have a the way dodd-frank words it is you have an obligation to be able to prove that you made a good faith effort using reasonably reliable third-party records at the time of origination to ensure that your borrower has the ability to repay the loan and and you just mentioned that so the ability to repay and that's what i mentioned to my borrowers or potential borrowers is is the reason we go through all this underwriting is really that we're just really trying to establish ability to repay amen you know all things being equal that's that's really what we're essentially looking for is just that is you're you absolutely right you boil it down to the uh hit the nail on the head the atr is everything and that's what we're doing is we're we're either telling you yay or nay based on atr and this is one of the things i get all the time as well and it's frustrating sometimes because it puts us in a position of being a bad guy which is ironic because it'll be the lender that gets upset with us and yet it's the lender that hired us to do what we're doing right so we're trying to keep the lender out of hot water but once in a while we have to go back to the lender and say i'm sorry this guy just can't make it and then i get things like this well that's ridiculous he pays that much in rent every month already right now of course he can do it and i have to explain whether he can do it or whether he meets the parameters is two different things right so in dodd-frank he might be able to do it realistically yeah but if he's at a 62 dti while he's doing it it still won't be considered compliant because he doesn't meet that ability to repay parameter of being under 58 debt to income ratio and so needless to say for lenders that don't get uh read in on this they don't get educated enough to understand it sometimes it almost feels antagonistic to them it feels like they went out and got a good borrower and brought it to me and then i blew the deal up on them and so i spend a lot of time kind of trying to uh work with lenders to get them to understand i wouldn't be worth what you're paying me if i tell you what you want to hear right right the reason you're hiring me is to give you the hard answers sometimes they're going to piss you off but they're going to make damn sure you don't uh shut your file cabinet and skip off into the sunset thinking you've got a compliant note and in reality i set you up for failure and there are significant penalties for for not significant penalties and and this is important to know if they ever catch you on one the first thing the cfpb does is binge over and do the full body search and they take every deal you've ever done and they scrutinize it and it's 25 000 per deal per violation so it is huge not only that you can lose the asset because a a sympathetic court is going to say this family shouldn't have lost their home over this because they were told they qualified and now they don't well too bad they get to stay in their homes so you could you could lose the asset you could pay 25 000 per penalty in violation they could literally put you on the chopping block so it's just not worth it yeah so in the back of the day when things were going through one of the most common things with dodd-frank was idea of you can't originate something where owner occupied where are we at now with that and how what are we doing about that in terms of your legality to originate on owner-occupied note correct okay yeah and there's a there's a ton of uh there's a ton of debate over uh the exemptions rule safe harbor um qualified mortgage i could go on for days on all the caveats and even if you get on a lot of the blogs and hear the attorneys in all 50 states debating it none of them understand it completely so i'll try not to muddy the waters and i'll give you the the most basic explanation i can um what what the dodd-frank ability to repay cover specifically is one to four family occupancy owner occupied so if you're doing vacant land you're not required this if you're putting them into a six flex you're not required this and if it's a rental property that the borrower will never occupy you're not required to do this side note i do those all day long because lenders have now decided they want this done with them as well because it gives them a more easily marketable note because they've got a vetted borrower it lowers the likelihood of default so i'm still doing them all the time for people that don't fit the mandatory parameter but the parameter is owner occupied one to four family um in all 50 states so i can all add one more exemption is if it's b2b so if i'm if i'm going to originate alone to a company uh some kind of an entity rather than personal name then then i don't actually have to go and talk to you at all correct and i just did one of those yesterday that is a an llc buying and the lender still said yeah i want you to do it anyway um and so we still can't know but we can't originate a loan where the owner still occupies a home that was a cfd beforehand and converted to a no we cannot do that at all no you can you just have to get the borrower okay you just have to vet the borrowers so any owner occupied you can do but what the law says is that you're responsible as the originator to vet that borrower and not originate a loan that they can't afford the ability to repay it yeah so yeah so nathan i'll let you jump into some of the questions in the chat there that um are coming yes uh ray and i know ray and we've talked before and he's a big originator and yeah he's a good guy um he's asking about compliance regarding converting lease option to cfd and i we may have covered that already um anything to say on that max um i say anything no to me really to me the the the uh i guess the the terms we're using don't matter if it's still an owner occupied if it's a family that could be put out on the street if it's a family that could be left homeless because they couldn't afford the note then it still fits the same parameters whether you're calling it a cfd or you're calling it a note you're still you're still liable to make sure that your borrower has the ability to repay right and again we're not exactly we we think of it in terms of conversion but what it really is is is a new origination so instead of a lease option now it's a cfd so it's a new cfd yes yep and just so you all know i've even had people bring me existing notes and just ask us to vet a borrower that's already in they've already owned the place for two years and the note holder is now saying you know what i realized this was never a compliant note and i'm nervous about that uh can you do it yep we can still do that as well and we we do it all the time and again that makes it a more uh attractive note on the resale as well absolutely he has another question nathan i'll let you go ahead and handle that as well uh he's asking for an easy way to get underwriting requirements such as the dti sure um easiest thing to do is just to uh yeah easiest thing is just to contact me and i'll send you um an entire investors packet that breaks it all down for you but i can also just while we're talking i can just throw the figures out as well i mean if you take we only use um a front-end dti so you know where fannie and freddie typically use a front-end and a back-end so they're going to use uh you know they're going to use the house so that that six-piece p-i-t-i figure and they're also going to use all other debt and they have two separate dti's it's going to be like 28 36.

we don't do that we only use 57 period so it's an all-encompassing dti so if you just took your borrowers credible gross income and multiply it by 0.57 that's the total debt they can have so easy way to think about this would be you've got a borrower that says that they make 3 000 a month you you vet them just enough just okay well you know can you prove that you have it in taxes you haven't in w2s you haven't paid up yep absolutely okay great so you take the 3 000 you pencil that down multiply that by point 57 that figure is the total debt now subtract your p and i your taxes in your insurance your hoas your escrow fees all that subtract that from it now you get another little figure there when we pull their credit everything else in the credit score better fit into that other little figure or they're not going to make it and so that's where as a lender you want to start going through with your borrower and say when we pull your credit what are we going to find car payments student loan debts um credit cards other installment loans what else do you have out there and have them tell it to you and pencil it down subtract that from that other little remaining amount and if all of that together is more than that 57 the likelihood of them making it's nil so on credit scores i was going to ask about that our credit reports i should say because we're not necessarily looking for a score a number we're looking at the report itself and looking for what else are they paying on great yeah and i'll go through that real quick for you so yes i get this every day okay so credit score from a standpoint of dodd-frank seller finance credit score itself is relatively irrelevant what i mean by that is there is no number that's a deal breaker i can work with 400.

is a 780 gonna make it quicker and easier and better for you absolutely because i'll have to condition a whole bunch of things on a 400 that i won't on a 780 but can we make a 480 in the right circumstances or 400 can we make that fly absolutely i did one yesterday that has zero correct score when we pull it we get an n8 that means this guy doesn't have a single line of credit no problem we can still work with that if he has adequate income but here's what happens it's called conditioning and i've got a sheet that i can send anybody that's interested in learning how we condition loans if you'll study that sheet you'll be able to pre-anticipate what's going to hold up the loan and ask for it ahead of time give me an example a credit score under 620 is going to require a vor verification of rent so because their credit score is under 620 we have to establish something outside of the credit score that says this guy's good for his word credit score indicates he's probably not good for his word fannie and freddie shut the door on your face and tell you to go home they're done that's it we don't we condition for it and say let's help him build some alternative credits so this says he's not good for his word here's what we can get that counteracts that right like like in a court that says we're going to cross-examine and say yeah i know this says he's not good for his word but we have this other witness over here that says he is so if the credit score is under 620 one of the conditions to approve the loan will be a verification of rent which is very specific it's a 12-month letter it's gotta have the landlord writing a letter saying john smith has rented for me for this much time got to be minimum 12 months he pays this much money and he's never had a late payment in the last 12 months that will be a condition to pass for anybody with a credit score under 620.

so another good example would be a credit score or not a credit score but a credit where we don't have a single open line and i get a lot of these not a single open line okay so if you talk to your borrower and you're in pre-screening and you say when we pull your credit what do you have and they tell you i have no credit at all and you know right away you're gonna have to tell them will you be able to bring us a 12-month verification of rent and i recommend you build your own templates so you just basically hand it to them and say you'll need to get one of these and two 12-month credit histories from something on the alternative credit list which i can also provide you what that would be like would be uh car insurance cell phone utilities anything else they pay so in other words what we're saying is your credit score fico says you're not good for your word we're allowed to say we're going to bring in three other 12-month credit histories that debate that and say no he is good for his word so if you have no open lines you're going to need a vor and you're going to need two other sources like 12 months of cell phone bill that proves you pay on time 12 months of car insurance says you approve on time you pay on time so if i'm a pre-screening lender before i agree to bring this package to call the underwriter i'm going to have that discussion first of saying or i'm going to build it right into my paperwork if you have no open lines of credit will you be able to provide the verification of rent in two other 12-month payment histories yeah so um and even the verification verification of rent so i've had it actually where i i was the one i bought a lease option or cfd um and then i was the one collecting payments for those 12 months so then when we went to underwriting i was the only one writing that letter and i was completely confident in writing that because i'm i'm not relying on someone else's word i collected those payments and so amen that it was perfect really easy yeah and i take those all the time just so you know somebody might be out there saying well if i'm their landlord is that legit that is that is dodd-frank just says from my standpoint my obligation is that i use reasonably reliable third-party records well that's reasonably reliable same thing if um let's say we're we're needing um a covet letter let's say this is one of the big hot things that's going to happen in 2020 and anybody brings me a package is going to find this out we're we're now you know we always analyze payments right income is always about six to 18 months behind so if in 2021 you tell us you're making this much money the way we prove that is we review 2020 income well 2020 income has got tons of problems now because so many people had coveted hits right they were laid off they had reduced hours whatever so another good example fannie and freddie just say bye-bye go home and shut the door in your face they're done we're allowed to rely on reasonably reliable third-party records so we can't have the employee himself we can't have the borrower himself write a letter saying i used to make this much money i got laid off for six months and now i'm back to making this much money here you go and we say okay no we can't do that but we can say can you produce a letter from your employer stating you've worked there this length of time in 2020 you had these kind of hours and you made this kind of money then yes you had a six month period of covid that kicked your butt but now you're back to earning full deal here's what you're making and it's reasonably expected that that will continue then we can work with that and so we can take that little blip on the radar and we can excise that and cut it right out and we can give you credit for your full income so that's a good example of dodd-frank saying um we have to rely on reasonably reliable third-party records that's something fannie and freddie's not doing right so here's another question for you is uh it's when we're talking about uh predatory non-predatory what about interest rates what kind of interest rates am i allowed to set great interest rates great example okay um believe it or not you have no limit on interest rate um i've done them as high as 15 really so you have no limit on the interest rate but here's the thing it's another example of since that's a risky feature then it will have other uh conditions related to it so any uh we'll talk about hcm real quick high cost mortgage hcm is something you're going to hear a lot in seller finance what hcm the definition of hcm and if you're a note originator who's trying to understand all this you might want to write this down this is a pretty good rule of thumb this the street rate is called the apor you can look it up any day of the week you can google what the apor is that's the why i refer to it as a street rate because it makes more sense right that's that's the rate that you get from a conventional lender today if you had ideal credit so let's say today it's 3.25 a high cost mortgage is today's apor street rate plus 6.5 so if you're writing a note and you're doing a 10 apr when that gets to me first thing i do is figure out if that's high cost mortgage or not which is going to be today's street rate plus 6.5 percent if it is that's okay it's legal but there's a few conditions then that we'll have to attach to vet the fact that we weren't being predatory one of which obviously is that much higher he's still got to meet residual income and he's got to meet dti another one is that dodd-frank says he has to have mandatory counseling he basically has to have something that says somebody who's not making money off of this loan is sitting this guy down saying you understand this is a this is a high cost mortgage this you're paying a ton of money for this well the way we get around that is we have them do a little internet course we call it the hcm course and and you've probably seen anything anybody that's done a deal with us has seen it so if it comes in if it flags as a as an hcm flags at a high cost mortgage just know ahead of time one condition the borrower's going to have is they're going to have to go to a website that we give them it's a free course takes about 20 minutes and they have to produce a little certificate that tells you and me that they got their counseling they send it back and i get lenders all the time basically giving me grief about this seriously he's got to go do this course what's the point of that and i try to explain to them the point of that is keeping your butt out of jail the law says that if you're putting this guy in a high-cost mortgage for an owner-occupied home that's a very risky feature you're mandated as the loan originator to give this guy counseling well do you want to go send him downtown and give him counseling and have somebody try to talk him out of your loan or would you rather have him do my 20-minute internet course that qualifies it gives him the same thing it gives you the liability relief of having done it and it's not going to cause the buyer to come back to you and say well you know what that guy downtown talked me out of it so i'm gone so an hcm certificate is one of the things that we do to protect you if it's a high-cost mortgage and that so that's interesting that's a nationwide 6.5 street 6.5 oh okay i thought that was a little bit more state-specific nope nope that is federal there's another one that's an hpml high-priced mortgage loan and it has different parameters uh and an hpml is the apor plus 1.5 so you can imagine virtually all seller finance deals are going to be hpml right and so they've got their own little risky issues as well so each level of these loans although they're legal to do my job is to flag them and then say if we're putting them in this then to protect the loan originator we must require this this and this and so what you're all paying for when you send your stuff to us even though some people probably tell you what you're paying for is me to kill your deals what you're paying for is me to scrutinize all the finite details of this loan against the predatory dodd-frank screening criteria and say that's okay we can make this fly but we're going to make them jump through this hoop and this hoop and this hoop and this hoop and if they can then even though it has all these risky features this lender is protected if they can't then it ain't meant to be and that ain't going to happen so i know there's another question i just posted over to nathan and i'm not sure if you can answer this question what is the typical cost to do to run through you i know i guess depending on the bar where it changes that what is the typical okay what's the big cost for it okay great awesome same all the time super super simple okay so you send a package to me doesn't matter how much it costs doesn't matter if you have one bar or five borrowers doesn't matter if it's a uh anything doesn't matter you send a package to us the first thing we're gonna do is we're gonna invoice you 119 that pays for our processors to start doing all this research pull credit start digging through everything start communicating with the borrower start sending you out needs lists and do all the data entries so we bill you 119 right off the bat as soon as you pay the 119 we open this thing up we start digging through it and we send you a needs list so we write back to you and we say all right uh nathan um here's what we're noticing um this this isn't in compliance your late fee is more than four percent and given this apr it's gonna need to be four percent are you okay with us changing it to that uh hey we noticed that you only included one pay stub we're gonna require two uh this guy missed a block in his declarations about whether he's had any bankruptcies please find that for us we do all of that as soon as that gets paid we dig through it and then we we return a decision to you you know and it might be a lot of things it might be hey qualifies no problem with these conditions or it might be hey you don't have enough income we recommend you bring in a co-borrower or we do things like this we say hey nathan um he could potentially qualify for this but here's what would have to happen you want 12 percent on a 180 month note that puts his p and i way up here he can't make it but if you're willing to change it from a 180 note to a 240 he'll make it uh or hey um his his wife's credit is dragging him down big time and she's not bringing much income to the deal uh see if you can talk them into dropping her from the uh application and if we just run the guy he's he's gonna make it and they can still put her on title at closing but so what we do is is we look for all the ways to make the deal work what can we do to make the deal work so you you uh we invoice you the 119 you pay it we start working this deal then for everyone that passes for everyone that we managed to get this thing through and we send out initial disclosures and we tell you congratulations your borrower's approved then we invoice another 380.

so the total fee is 4.99 and that's what it is on every single package that's why we recommend that you hold out at least 500 in earnest money from your borrower and that's going to reimburse you at closing for our fees now here's another another great note uh and i've had i've had a few people ask me this so if we send a package to you and you bill us 119 and they don't pass do we eat that 119 we don't get anything for this and the answer is yes you do eat the 119 but you get a lot for it and i'll explain to you what you get for it number one what you get for it is if you think you've already found a quality borrower then what you got out of this is that we broke this deal down to its absolute finite uh increments and explain to you exactly how far off this person is qualifying so now you know what they do qualify for so you tried to put them in 180 000 house with a pni of 1300 you now know that if you find them a house for 1100 you've got a good borrower because we've already vetted them and they're gonna make it they just can't quite make that house so your 119 isn't thrown away you've now got this borrower that you can sit down with and go okay hey listen uh mr and mrs smith good news we know exactly what you qualify for we know that we can qualify you bad news is unless you pay off this debt or unless you get an increase in your income or you bring in another co-borrower we might not be able to make this house work but here's some other houses that will work for you and then when you bring that deal back to us you already know you've got a guy that's going to fly is there any requirements of deposit down payments anything one percent two percent 20 um no there is not um in fannie and freddie there would be right there they're going to take a minimum down or nothing i get some lenders that are comfortable not doing any down whatsoever uh and i get other ones that say i like ten percent obviously historically in seller finance you guys aren't requiring the as big of a down as fannie and freddie would my personal recommendation is and that's what i've done i i would never put somebody into a property without a down same reason now we're invoicing 119 right when when you go into business with anybody when you make any deal with anybody and they don't have some skin in the game stand by to pay the price for that right because what's what's to prevent them from misbehaving when there's no skin in the game same reason we hold a deposit a damage deposit in a first and month last month's rent from renters of course you're gonna get holes in your wall and uh kool-aid on your carpet if they don't have any skin in the game so my recommendation is if you have a bar where they can't put a penny down you better question whether you really want this guy to be your borrower yeah but no there is no hard and fast to answer that question you can go with zero down you can go with thirty percent down twenty percent it doesn't matter so nathan i just saw a great and i know uh anthony asked questions uh his own creating his own test and i think anthony we create a form that i post in the in the chat uh to be able to give the max a maximum email out all these packets everyone who's uh fill the form out ray asked a question about 10 being the kind of rule of thumb to go by um not to go over there or you then i guess you have certain things that you have to watch out for i think it goes with the 6.5 is what you're referencing not the 10 where 10 might been a common number to use yes 6.5 yes that's that's a great point it there is no apr that is problematic because it all depends on the day right uh i mean for instance back in the day the apor was 11 so you could have gone excuse my french i spent 20 years on firehouse i apologize um you uh given that right if it was a eight or nine percent apr street rate well then it wouldn't become hcm until it was over 15.

when we're at historically low it becomes hcm if you just add 6.5 to a 2 you could be hcm so don't focus so much on on that just understand that when you send one to me that's going to be hcm they're going to have to do that internet course and the reason for the internet course is i'm covering your basis on the mandate that you give this guy counseling so hcm is nothing to focus on it's not a deal breaker the kinds of things that are that you have to be more concerned about is things like um if you have let's say late payments right standard in the industry late payment is five percent of the monthly payment um if you if you always tell us that you want for late payments just standard that's easiest and we'll just make it five percent of the monthly payment but anytime you're uh hcm then we've built a trigger in the system to catch it and we have to change it to four because for whatever reason uh they decided that anything that's hcm the max late payment can only be four percent because you're already you're already nailing this guy with a heck of a lot of interest little things like that um but work that's what we do is we watch for those things and then uh we don't just change them we call you or we write you an email and say hey uh i'm noticing you know you're saying you want a hundred dollar um late payment that's way beyond four percent of your monthly payment and this is an hcm loan so do you want us to make it compliant with hcm or do you want to change a bunch of other things and stick with your hunter but you can't do both so that's what we're doing okay and ray's asking uh is it possible just to to charge the borrower the buyer the 120 up front uh yeah make an application fee yeah make it an application feature absolutely and same thing my answer to them then would be you know if a borrower has heartburn with that then again if you're not willing to put any skin in this game how serious are you and you you tell your borrower you say listen here's the deal you give me a 119 application fee it's not for this one deal we work with you until we get you something so give me a 119 application fee and one way or the other we're going to get you into a house we we might have to have rayon one day dave i don't know if you know ray but man he's got a good system going on i like it i like him yeah yeah i like him and there's another guy that i think would be really cool because they're doing a lot of what you're saying max yeah they're actually finding the borrower not the house first you're talking about gerard orry yeah drawer too right i do a lot of business with them right so the idea is that they you know for those who are watching they're finding the borrower and saying what house do you want and going and matching with the house versus finding the house we all think about doing and going hey what borrower can fit in my house yes they're finding the borrower and say okay where can we put you what house do you like we'll buy the house or finance it to you and write the contract up yeah maybe we'll do ray and yeah and their their system's outstanding and here's the other thing again the easy way to do that on this is they pay that 119 fee you send the package to us then you know when we're done with that you know right up to the nats cajones what the total amount this person's qualified for because we've pulled their credit now this is something important to mention though if you're working with the borrower and you get going let's say you find them a house you get a package put together uh we invoice you the 119 you pay it we go to work for you and we give you back a figure right and we say okay listen here's their max their max dti given their income here's the max debt they can have and then you go back to shopping for the borrower you've got to have that discussion with the borrower that says don't take out any more credit because what they're famous for i just had one here about two weeks ago all qualified good to go and all of a sudden they go out and get a 900 a month pickup payment yeah and they killed the deal and i'm required by law even if it's not on the credit report if if i become aware of the fact that they've taken out new credit before the deal closes and you are also as the loan originator we are required by law to seek proof of that and assess their dti for it so lo and behold guess what happens we get the whole deal put together they're at a dti of about 44 or 45 they make it adequate income good to go 900 a month truck payment blows the whole thing up they're at a dti of 90 and there goes the deal so what you want to make sure you talk to your borrowers about is don't buy or shop for anything new if you want a home from me don't look anywhere else freeze your credit don't do anything until we've got you your home because it will be found out and it will kill you it'll it'll kill the deal yeah so i i take a lot in today i think you know nathan can you share one of your stories that you've created you've you're originally a new loan where you've gone through the process would it look like sure yeah so i i mean it it's really as simple as what max is saying um i i go i like i'll get ahead of myself but i i will send over the the package over to max and say okay so this is what i this is my new borrower we're we're creating this deal um i'll send them some of the numbers and and just what we're looking at and then he responds back and sends me out that package and then between the borrower and i we fill out our respective portions and then i always like to be the relay person rather than having everything go from the underwriter to the borrower i'd rather be in the middle there so i always keep myself in the middle and i don't know if that bothers you max but that's no no thank you please everybody else do that too let me tell you when we have borrowers or lenders that refuse to get engaged in the process they basically send a package and say well let us know if it if it passes or fails but deal with the borrower please for me i can't stand it you can't stand it so thank you so much we want the lender engaged yes it just it usually i in most cases um i'm not necessarily going from a straight origination i'm going from you know a lease option to a cfd or something like that so i've got some kind of relationship with the borrowers already uh so that's partially why i want to be involved just because i've already spoken with them like we've already got a relationship it's easier and better for me at least uh to pass those messages along myself and then i can i can be the relay person and make sure i know what's going on at any given time so the one that well one of the ones we recently did was this really tricky one and it was there were a couple of tricky spots because not only had they lost all their documentation in a fire but their previous residence was actually in alberta canada so so they were dual citizens so they had the the us social security number which which saved us there uh but we didn't have the number because it had burned up in the fire so we that was uh you know a challenge and and uh we actually even tried pulling the canadian credit uh i thought i might have access to that and then turns out that my credit credit guys that i use they're based in canada but they're actually only work in the united states so that didn't work anyway it was a little bit tricky and and we eventually we had to go with uh it was a trailer park um in alberta and they had their their mobile home payments whatever they call that the you know the rental of the mobile home space uh that i think that's what we ended up having to use as one of the documents besides uh telephone records and not even a cell phone like we're talking a landline lot randy yeah it was like old old school but we got it done and that's why they're happily living in their house down down in texas now yeah that's amazing so this this space of doing it is really just qualifying that borrower it's really it's it's not the house it's really the debt on the house and the borrower and they do it or not do it and that's you know most of the assets we see that our cfds are low value where typically is not able to be created because the big banks won't create a 30 000 loan and for us we don't like buying anything that's under 50 value so most cfds are out of the picture for us but we are seeing more and more of the houses are bigger with the opportunity to buy the cfd on it and you know you got to know that the loans especially cfds uh the reason they don't have a conventional loan is because they didn't qualify yeah so so you just you have to know that there are going to be some challenges most likely there there are going to be some challenges and whether that's uh you know something simple like they went to the bank and their credit score wasn't high enough but their dti is still fine then no problem then that's a real easy loan to get qualified or it could be something a lot more complicated but we have one that we're we're looking to buy it's it's a multi-unit and they're they're landlords so it's even should be even easier for us and if they are if their landlords in their personal name or company name good question i believe it's in their company name so that'd be even easier easy so we're gonna see we're gonna see we'll be getting a whole match real shortly and uh once we get through this loan and getting it through so guys i posted the link to the forum uh in the chat if you need it just let us know we'll we'll get to max um to get max out some packages out to you guys who are looking to do this more and even the system of finding the borrower and find the home that way and using that 120 is the leverage to continuously find people's houses for them and make it work it's less you know what property you can get them into and have a deal made let me say one more thing too another way you guys can spin this that's going to really make you valuable is is from now obviously i'm not advocating that you you hold yourself out to be a professional on this or do anything that could that could give you liability but informally these people that you're working with you let them know that once this 119 is paid and we work this file let's say and we get it back right and so maybe they don't make it and we obviously will be sharing the credit report with you and all this information you can now sit down with these people and say i'm going to use all this stuff to help show you how to repair your credit and make yourself that borrower that hey keep renting from me in the next six months and we'll have you there so you're still keeping this person in your network they're still with you even though you couldn't get it today now you know why they didn't make it right you know there's this one thing they have to get fixed in their credit or or they would be good to go or you know maybe you know that they've got this i'll give you one good example verizon wireless is famous for this people don't pay their verizon wireless bill and it goes to collections verizon's one of the only companies i know that what will happen is verizon will keep the account open and they'll assess you the entire amount you owe well when we pull credit then that entire amount shows up as a monthly payment oh yeah i mean if i don't find this twice a week i'm a monkey's uncle so here's what happens person got great income they're gonna make everything four years ago they didn't pay a verizon bill and it was 1700.

that account is still open on their credit report and they don't know it is and so when i pull credit guess what comes up as a monthly payment 1700 blows their dti up and so one of the first conditions i have to do is come back and say you either have to call verizon and make payment plan and bring that back to us and get that payment down to a certain amount like you know get it down to 80 bucks a month or something or pay it off entirely but the deals broke because of the 1700. well if that happens and they can't pay that 1700 and they can't do that right now you're empowered to sit down with them and say you know here's the deal you're a good borrower except for this keep renting from me stay in touch with me let's keep working with you and help you get this fixed also don't go out and do it again and hey in six months we're gonna get you the place you want and so our service is going to help put you in a position of keeping these borrowers even if they don't make it today um earning their trust and loyalty so that they're staying with you because they say you know what i know he's gonna still help me get a house yeah banker won't do that but even though i don't qualify for today he's got all my stuff and he's helping me figure out how to square myself away so that i can make it in the future yeah very interesting so i would never lose a borrower if i were you guys i would keep them in your little black book and and you're always working with them and even if they don't qualify today you're keeping them close to you and you're continuing to keep them in your network and a broken deal today could still be a winner next month or six months from now for you fantastic sure good that's that's tons of good information that's enough for anybody to to feel comfortable originating converting whatever you want to call it but uh and i would be surprised some people start making their own business out of us i mean the fact that you know there's like an array and dante they are doing this on a regular basis um i think i was talking to one the other day they they go out and they talk to realtors who find borrowers who couldn't qualify and they get their name off of them because they can't find a house for them right we know the people great and they're just taking their names and running with it which is great fantastic go go get to know a bunch of the residential mortgage loan officers in in whatever town you're working in and and it i mean it wouldn't be very hard with the right network and to find a whole bunch of people that got turned away that are looking to buy yeah yep and all of a sudden yep you're helping people you're helping people that had the door shut in their face yeah light bulbs going off so renting is another one you know i've been a landlord for 30 years renting i can't tell you how many people would love to buy but they can't and in many cases it's two or three small things that if they had somebody you know looking at their stuff saying you know hey if you do this this and this for the next 12 months we can qualify and you'll be you'll be a buyer even though fannie and freddie won't talk to you i mean the the ability to convert people into buyers that wouldn't be otherwise is ridiculous it's it's out there big time yeah so there's all kinds of incentives for them to do that with taxes and everything else like that it's it's well worth a while yeah so i'm gonna ask unless nathan answer this question we got a question from mark why convert a note to a mortgage what is the problem with just not holding it as a mortgage as a note sorry as a cfd why create a cfd convert to a more why go through all this what's the advantage in your my nathan to convert that over and spend the time effort energy uh that's an interesting question because um and part of it is personal preference um part of it is uh looking at different advantages so there are cases where actually in most cases for me i'm actually not going to convert it to a mortgage i'm just going to keep it as a cfd i have buyers where i can resell that note back out to a cfd buyer so there's no need in that case there are other buyers where they do want it as a mortgage so that'll be even just a term of of the sale is well it has to be converted to a mortgage first so there's that there are states where cfds are definitely an advantage and what i mean by that is in case of default and in case of default it's a whole lot easier and faster and cheaper to deal with this default and and get that property back than a mortgage so michigan a lot of the rust belt states are some of these they're just so much faster and easier foreclosure states yeah yeah and then there are other states where say new york florida uh texas i may buy it as a cfd but i would immediately transfer that over to a mortgage because the the the advantages of a cfd don't actually exist in those states they don't recognize cfds as their own thing it has to be a mortgage or d of trust whatever state you happen to be in so in those cases i would uh but that would for myself that'd be the only reason i would convert one over to uh to a different yeah aaron made the comment that you know there are certain states require that even with a cfd require judicial foreclosure um and some don't which is um it's interesting right and i know that you know there are the concern about having a cfd is owning the property right you have the liability of the property you know all that stuff even though you have a borrower you're till still technically deed into the property right and sometimes you don't want to be deeded you don't want that liability you don't want the insurance ratio you don't have that connection where when you're the note holder you're you're distance from that situation so aaron thanks for jumping in uh florida doesn't recognize and they're hard for judges to wrap their head around yeah they don't think they don't get it they don't like them they don't hear the same thing like we don't find in jersey for cfd that just doesn't you know we don't wraps here in jersey we don't know that stuff yeah yeah so it's easier just to convert that over and then you've got a solid something in that state yeah so max i think that you know you guys are have done a really good job of explaining the the legality of the process because that's the most important part doing or not doing is a business decision yeah right um but if i want to do it but the legality doesn't allow me to that may or may not allow me to do get into the deal right if i'm like we're buying a couple cfds but if i don't if i want them to become a note because i want to be new and i can't that may strike the deal for me to get into that duration so i like it i like it a lot um yeah and again you just you're you're originating your whatever conversion you're doing it's just originating to the other instrument yeah so mark says his cfd is in michigan so uh hopefully mark you'll be able to convert it over with that incoming ratio and everything else if you feel like because michigan's one of the states where if they default they can literally go past it and get it for closure pretty quickly or eviction uh yeah cfds in michigan are that's one of the best states for them yeah so i wouldn't really convert over actually even less you're past the five years 20 thing and yes michigan and ohio as well so indiana's in that club yeah yeah so well guys i appreciate max having spent this afternoon i know you're up in the mountains enjoying yourself um on this friday good friday for everyone um for those who celebrate hope you guys have a great holiday weekend spend time with your family everything else uh but max i appreciate you jumping on and just answering some of the dumb questions we have but also giving the little details that really need us to know so we understand better of what we need to do moving forward yeah yeah happy to be here you bet and and i'll i'll entertain coaching and visiting anytime so yeah let me know yeah all right guys well thank you so much everyone for watching i appreciate it and we will talk soon take care everyone see you next week [Music] hey everyone dave putz here from jkp holdings alongside me nathan turner how are you doing my man very good very good good man it's been a interesting week uh we've got a lot going on how are things with business this week anything new and exciting going on i got four bids in i'll hear back on monday we'll see how that goes hopefully fingers crossed i'll get my bids this time cfds notes uh these ones are i think they're all cfds if i'm not mistaken i'll have to double check whatever i'm good it don't matter anymore so um i wanted to you know we're in the process of actually buying a uh cfd um two of them and then a note uh probably within the next couple days we're just finalizing some of that stuff right now and i know that makes it worse we're gonna be careful it's not something we're comfortable doing but we're gonna see what happens so yeah um the ones you're buying are they in like a certain state are they sporadic uh spread out a bit they are i'll tell you here yeah two in louisiana and new mexico and texas and in fact uh they are actually all notes they're not cfds oh okay it's a little different oh yeah looking forward to it that should be good so i think i think for me you know the notes world is is scary because we don't know much about it right when we don't know something about we gonna get nervous and worried about what it looks like right and how to handle it almost like a new note investor yeah but for me cfds became an opportunity because the prices were dramatically lower than those in seconds yeah and then you get in the world the fact that cfds are really close to notes just a little bit off so we want to know like could it increase the value by converting it from a cfd to a note and the answer is yes where a lot of companies out there that we both know of will buy a performing note but won't touch performing cfd so if we can just add that value of a note versus cfd it's awesome and then i i even got i can go a step further and go i've this last year year and a half i've bought several lease options and i've converted a whole bunch of those lease options to cfds so just kind of going from one asset class to another to another and and you can uh it's really not that difficult the biggest thing is compliance yeah and that's why we've got max on yeah cfds lease options are all kind of the same thing just a little bit different paperwork yeah and the idea we're looking to do is convert into us no in some cases makes a lot of sense it may get the fear out of people like us to get out of that world of hey it's a cfd i can't buy it too i can buy it and i can do xyz with it to make myself feel more comfortable yeah yeah and we had i i think most people know i started creating cfds that that was my introduction to notes and then uh in at a certain point there 2012-13 i forget the year and max will probably know then dodd-frank came into effect yeah and uh at the time there was no such thing as a mortgage originator so so i was kind of dead in the water further a little bit where i was originating beforehand but then i knew that dodd-frank was in place and there were some rules and that had to be followed and i knew i needed a mortgage originator and so we asked around about uh if somebody could do that for us at the time and everyone was like what are you talking about what's don frank we got that and so it just it took a few years uh until we got guys like max that that can help make that happen and sign off where they need to sign off make sure it's compliant interesting so they came in the world of need and then i think i first heard about called on the rider as a like a tv commercial in my head right um and then it was all over the place didn't make me feel comfortable buying cfd because i didn't connect the dots yeah i'm thinking i'm not selling finance i'm not buying the loan i might you know i'm not buying the property and converting it over i don't need it yeah and then lights went off wow i could actually flip it over but i'm still uncomfortable buying that cfd and i don't know what the process is don't know where it is i'll keep buying notes now we're seeing more and more cfds around the opportunities around cell francing is around so the idea is that you can mod it you can transition it so just recently we got an email i guess a couple months ago that called under air changed names and things converted so what we thought nathan and i thought about doing it bringing on the new owners and call the underwriter and to explain a little bit about where they're from the background understand what they do understand what the process is a little bit and the compliance which is the big thing here understanding what you can and can't do with a borrower allows you to know if you can or can't write that paper and whatnot so max welcome to uh today's uh live video and can you share a little about your background what you do and just a little bit about the process yeah absolutely thanks for having me guys i appreciate it and uh hello to all of you out there that uh i haven't met yet so yeah um i'm the face of uh called the underwriter um as much as that's probably not to my advantage but uh it is what it is so anyhow uh well we're out here in montana and so this is a type of business that can really be run anywhere we'll probably be doing some of it in phoenix in the winters i imagine as well and i'm actually sitting out in my cabin in the mountains right now so about uh half a mile from where the unabomber used to live so um that's when you think of me that's that's where you'll think of so we're tucked away um similar beard but a lot nicer i don't i don't want to hurt nobody um my uh my background is uh fairly diverse um and actually uh probably atypical of people in the finance world um i spent around 30 years as a firefighter full-time firefighter paramedic um but i did get a finance degree and uh because firefighters have so much time off um i spent 30 years with uh about five days a week off and that enabled me to start buying rental properties and uh doing a whole lot with buying and selling of rentals basically rehabs flips fixes um and and i still manage uh the the rental properties i have left today so i didn't really do anything with seller finance per se i mean i did a few too but i didn't know anything about um this long before dodd-frank but i didn't know anything about um you know there being an actual industry in seller finance i wasn't connected to any of these big networks like people are today which i think is hilarious because i was doing it but i didn't know anybody else was doing it and so i was kind of a handyman basically you know i would just look around my state for uh garbage and we had the fire department construction pool so you could throw people a few bucks on their day off and they were happy to to moonlight to come you know rip stuff out for you and allow you to put stuff back together and so i could remodel fairly cheap and uh yeah so i built a rental property crop doing that so i got fairly familiar with um commercial finance and uh traditional finance and uh and a little bit about you like i said uh did some seller finance before i even really knew what it was um and then uh dodd-frank came out obviously in 2010 and things continued to get changed and refined all the way up through 2014 uh to where it looks a little bit more like it does today and uh that's where russ got his start was in 2014 um he was involved already as an underwriter in the in the commercial worlds for fannie and freddie and so he was plugged in with people that were doing uh stuff in the note world and so he sensed the need uh to have somebody that understood dodd-frank uh help bring compliance and awareness to the seller finance community in the same way he was doing it for fannie and freddie in traditional lending and so that's how call the underwriter was born was uh people approached him since he had that knowledge and said would you uh would you be interested in looking our stuff over and making sure it complies with dodd-frank um and then obviously he built quite a machine um and it it quickly outgrew um what he was capable of doing while he still works full-time in the commercial world and uh just uh by total coincidence uh i had retired a year ago and had even more time on my hands than i've had for the last 30 years and thought boy this is not going to be good i'm going to get myself in trouble being fully retired and i can only drink so much beer and and do so much motorcycle riding in the in the mountains you know before my wife threatens divorce anyhow so i started looking around online for businesses and because i had a finance background that was where i wanted to land and uh i ran into two or three different businesses this one through russ and elsie was one of them and uh first jumped in just to do some work with him and see how the thing ran and we did that for several months and then he made it known to me that he was interested in doing some other things plus he was still working full-time and uh so we said well why don't we just take the business off your hands um we'll do it i can do it from the mountains at the cabin i can do it from phoenix in the winter i can do it from anywhere i want to do it it's perfect for me yeah and uh so yeah we a deal was uh cooked up and uh we officially took it over i think in uh the end of december so good for you that's cool yeah thank you so and then like we say like really um really what it comes down to is just compliance like like whether you're going from a renter a brand new origination renter to a cfd cfd to a mortgage what it really comes down to is just compliance and just making sure you're you're following the rules so can you tell us what like what are some of those things that we need to look at like what are some of the rules yeah yeah absolutely and i don't i don't know a whole lot about your audience and so i apologize in advance if i'm talking um dumbing it down too much um so i might be boring people but but i also don't want to say things that leave people saying i'm not sure why he's saying that or what that means so at the very very basics um dodd-frank legislation uh came about post 07 and 08 in the housing bubble burst right we had all the uh all the predatory lending going on we had teaser rates we had all kinds of things going on that were causing people to end up upside down in mortgages consequently the bubble burst was millions of people walking away from homes that they were underwater in and so dodd-frank came about from uh congress saying okay we don't want this to happen again once we bail ourselves out of this how do we ensure uh in the future that lenders can't behave like the wild west and write these predatory notes that borrowers have no understanding of and they get them in it today and and two years from now they default because they can't meet the terms of the loan so that's where dodd-frank was born and um basically what dodd-frank says is that if you originate a note you are responsible to ensure that you don't have any uh illegal features any predatory features uh in this note and it's the responsibility the onus is not on the borrower to understand whether this is a risky note he should or shouldn't stay away from the responsibility is on you the loan originator and so that's the basics of everything that that we're doing is helping loan originators um write a note and we're busy knowing all those uh yeas and nays every day so that those of you out there creating notes don't have to now before i get too deep into it i want to dispel a current myth that seems really big i hear it almost every day so it's important to dispel this notion somehow there there's word going around that we're the loan originator and that's why they're safe because we're the loan originator that's not accurate we're not the loan originator if you uh loan money to somebody and you carry the note you are the loan originator so for all these people that write to me every day and say hey we're bringing a deal to you from uh michigan and they said that uh you know we we're absolved of liability because you're going to be the loan originator on it i always try to educate them and say understand you are still the loan originator and it'll say it right on the disclosures on that we issue it at the end of this what we are is we're the third party subcontractor that you're hiring to vet your borrower and ensure that you didn't write a note that is not going to be compliant with federal legislation so that is what we're doing for you is we're scrutinizing what you bring us and we're also scrutinizing your borrower and were meeting those eight mandatory criteria that dodd-frank set out that credit worthiness has to be vetted in these eight different ways that's what we're doing for you um and so what that looks like on a daily basis is uh somebody gets a hold of us and says hey we're going to uh we're going to put a deal together and we're in texas uh what do you want from us so i send them out a new investors packet and it has basically everything that they would need um and and i can put out my email before we're done here today and and so that if you end up with people saying the same thing they can get a hold of me be happy to send it out uh it's step-by-step directions in terms of if you're the uh note originator if you're the lender and you've found a borrower here's what you have to do step one step two step three step four and bring it to us what that looks like specifically would be um the standard 1003 or the erla they call it it is the universal residential mortgage loan application so that's kind of where everything begins with is is a lender would go out and find a willing borrower and they would get this 1003 application filled out and we've tried to dummy proof it somewhat we've highlighted it so that we just encourage them just fill out all the highlighted areas if you get that that'll be enough information for us to get started with uh and then there's a document that they have to sign the borrower signing an authorization that allows us to pull their credit and so it's important that they know that we will be vetting their credit so there's the application and the authorization to pull credit and then i've created some paperwork that guides them or the lender on what types of income documents are necessary to prove the claimed income based on how they make their money and i break it down in w-2 wage earner that would require uh the two most recent pay stubs and the previous year's w-2 they need to be able to show a two-year income to your work history within an industry one of the things we're noticing right now is we're getting an awful lot of applications from people that i did one here two or three days ago the guy worked seven different jobs in 2020 couldn't do it couldn't put it together and and had to just tell him this this just doesn't fly his income is not going to count um so part of credit worthiness is uh reliability consistency uh stability so not everything that fannie and freddie would shut the door on on your borrower on will we there's a lot of things we can flex and work that the reason that they're in seller finance right is because maybe they have a credit score under 620 and fannie and freddie's already said no go you're out of here or they had a bankruptcy three years ago they shut the door in their face we can get around a lot of those things but one of the primary areas we really can't get around nobody can get around is people who don't have some degree of stability to their income and to the method they earn their income primarily with w-2 wage earners it's it's these people that switch jobs every 30 days almost can't work with those people and so one of the things that i've done is i've created a lot of borrower pre-screening information in that new investor's packet that if somebody new to this will read and study then when they're soliciting for their borrowers you know and they're whatever they're doing no i don't know if they're doing radio or they're doing uh newsprint or whatever whatever how whatever method they're dragging borrowers in you know hey if you've been turned down by a traditional lender and you're interested in a home call us and we can help you well when those people pour in there's a method for that lender to do some peripheral just cursory pre-screening of a borrower before they put everything together and send it to us i've created what they need to help them know which borrowers to run from versus which borrowers have a legitimate uh you know possibility of making it so ideally they pre-screen their borrower and then they send that 1003 application to us they send the um authorization to pull credit then we have a form that we ask the lenders to fill out which is going to be all the terms to the deal so um obviously it's going to be the sales price going to be the loan amount the apr the term going to be uh all that kind of verbiage like do you want uh escrow done and if so uh do you have a servicer um are you gonna charge a monthly escrow fee uh who's gonna be your settlement company or using a title company or a settlement attorney um do you have late payments so we ask for we have kind of a template that helps guide that discussion but we need all the terms of the deal so that's what the lender would fill out to send in with that application and that borrower's authorization we don't necessarily need the purchase contract it's actually easier for us for processing if they just follow that template that we give them because it sort of walks down everything that we would need and just puts it all in that way and then the last thing would be the uh income docs that substantiate the income claim so whether they're self-employed whether they're a pensioner or whether they're a w-2 wage earner once that all comes to us uh it could be as small as about six documents right it could be the application the borrower's authorization the term sheet and then a couple of pay stubs and a w-2 that's a deal we can put it together and and uh put this thing out typically uh on a tight package we can do it in about a two-day turnaround period so where fannie and freddie is you know probably minimum 30 days anymore um and that's if you're lucky um on tight packages with lenders that really understand the game and and that have followed our our training that are doing some decent pre-screening yeah it's not uncommon to get a package in this morning and put out a decision tomorrow afternoon so and i know i've had that experience i've worked with you and with rice russ before on multiple different originations and and i'll come back to that in a second but it really is that simple and sometimes the borrower situation is is what's complicated and we had one where we're working on where uh the borrower had lost all their id all their important documents everything in a fire uh so that was a challenge it's just trying to get the documentation that we needed that that didn't currently exist we had to go back and request it from government sources and stuff and so that was yeah a case of a more challenging uh case but but i've had it turn around in less than a week absolutely what is the typical issue that you guys run across often where someone's trying to convert from a cfd or lease option two and know what's the biggest hurdle from my perspective yeah from your experience um you know honestly that's that's really not we don't see any complications with that all of the complications we see are from the standpoint of ineligible borrowers borrowers that they're they're trying to put into a deal that just there's just no way they're going to be qualified for this and and uh you know trying to pull a rabbit out of our hat we get pretty creative with helping people qualify but there's just some of those borrowers that just are they they will not they cannot um you know qualify uh for the size of the note that people are trying to so besides the work history what would be another common hurdle of disqualification yeah absolutely great great point okay um on the 1003 application um if anybody's familiar with that um block eight on page four has declarations there's about ten questions there and what those declarations are is the borrowers answering a bunch of uh potential deal breakers yeah first question is do you have any outstanding liens or judgments against you yes or no um that breaks a lot of deals and many times declarations come in and they're blank or they're selectively answered i just got one yesterday where question number one was not answered by the male borrower it was by the female borrower and every other answer was answered yeah interesting so of course we have to flag that and say write back to him and say you didn't answer question one on your declarations do you have a judgment against you uh you know those kinds of things uh that stops a lot um borrowers that don't either have a social security number or an itin believe it or not in a lot of states we're getting tons of borrowers now that they sign them all up and they send it all to us and the social security thing is blank and the question that asks about citizenship says no and when we investigate they don't have anything they don't have an itin they don't have an ssn that's a deal breaker cannot do a deal with somebody if we can't pull their credit um and that's a dodd-frank issue you have to be able to assess their credit worthiness well if they have no method of assessing their credit worthiness they're out the door so these are the kind of things that i'm recommending in the training that we're teaching lenders to pre-screen their borrowers there are certain specific questions you want to ask while you're still just getting to know that borrower long before you ever actually take an application fee and commit them to a contract you want to find out are you dealing with somebody that even has the potential to fly you know those those kinds of deal breakers um the the ssn that's got to be uh a u.s social security like they can't you come from canada or mexico or something we're not looking at a good point outside of united states yes you're right yeah an excellent point because i don't deal with two you guys are fairly unique i don't deal with too many um other than you guys and so that's a great note to uh to mention yep that's right and um you know and an itin is okay so we do get a number of them now that don't have an ssn but they've got an itin and that's okay as long as it gets on there and we can pull credit with it um that works um one of the other big ones that is getting more common all the time given the demographic we work with is people that work for cash only they don't pay taxes and they have no mechanism for proving their income claim so they write on their 1003 application you know under the income statement make eight thousand dollars a month self-employed handyman great looks good sounds good the lender is impressed but if the lender doesn't know to ask a few questions by the time it comes to us and we dig deep we have to burst their bubble and say well you know what this guy doesn't have any bank deposits he doesn't pay taxes and he doesn't have any 1099s he literally everything he's saying he makes is his own uh promise that that's what he makes well the the day and age of uh stated income loans is long gone those are no longer legal and so unfortunately sometimes i have to burst a lender's bubble uh and in a borrower as well right because if that lender doesn't know better well he gets the borrower all excited that oh great you got good income excellent this is a good deal well let me send this off to the underwriter and i'm sure we'll get this put together for you and then uh we have to write the dear john letter back and say um sorry to tell you this but your borrower's income is absolutely worthless because he doesn't have a single stitch of paper that proves he makes the income he claims he makes so again from the lender standpoint that's a really quick early pre-screen you're going to want to do when you're talking to borrowers and you say what's what's your source of income well i'm a self-employed handyman awesome do you either have uh two years business tax returns to substantiate the claim or can you get us 12 months of current business bank deposits because that's what they'll calculate your income on if you don't have either of those sorry can't do so one thing i wanted just to to point out here like i know dave you're talking about conversions and i know that's we talk in those terms but but if you break it down what you're actually doing is you're originating so if it's going from a cfd to a mortgage you're not converting from one to another you're canceling the one and creating another correct so it's every time we're talking about um any kind of a new document it's it's just a brand new origination and then that's why we have to go through the steps and make sure even if they they qualify you know they were paying under a cfd they may or not may not qualify uh under a new a new set of terms in a new arrangement is that ever state by state or is that across the country that is across the country that's federal guidelines so what state you're in doesn't matter um state to state issues have a little bit of bearing but not a ton for instance one of the things we're required to do is assess uh residual income so not only do these people have to meet a certain debt to income ratio they also have to have a certain amount of cash reserves at the end of every month which is going to right feed them it's going to pay their utilities um it's going to put gas in their car well every state's residual income is going to be different because it the formula we use is based on uh income taxes which are different in every state and cost of living which is different in every state so if you have a deal where you have a 1800 square foot house and you have a borrower with five dependents in california that residual income is going to look entirely different than that same borrower with 1800 square foot that has zero dependence in alabama totally different and so there is a difference in that respect and so for a lender maybe and i get i have a few of these for a lender that does deals all over the country they they send you one from alabama and they they qualify real easily and so in their mind they think oh good okay two thousand dollar a month income uh did just fine in alabama hey got one over here in california a similar income he should be good to go doesn't even come quite close to qualifying and i have to explain to them it's the residual income issue that's killing them in california residual income you know you might be 1500 a month short on that same formula in alabama you're 1100 plus right and so there's things like that not not to get lost in the weeds lender doesn't have to know all of that they just have to know understand that um things like how many dependents you have um and what state they're doing the deal in certainly gonna affect things like um residual income right so i think you know i've seen some crazy things in the recent time where we saw a loan where the servicing fee was actually written into the contract yes that the borrower pays that servicing fee is that something that's just unique or are you talking about the origination fee dave yeah well no just actually the monthly servicing fees yeah that's that's escrowed fairly often so yep no that's not uncommon at all and that's legal within limits um escrow service fee as well you know typically 30 35 a month a lot of uh you seller lenders are contracting servicing out to a loan servicing company and then when you do no problem we just ask for the information on it and uh tell us what that monthly fee is going to be and we put it right in yeah very common no prob....