From $2,500 to $25K per Deal: The Capital Flip Model Explained | Real Estate Notes Show

Episode: Ep 138 From $2,500 to $25K per Deal: The Capital Flip Model Explained | Scott Brown Dave's Goals and Plans: - Climbing Mount Rundle tomorrow with his son - has been on his bucket list - Buying a couple of notes from people on their private call in a couple weeks - Recently shifted from buying bank-originated notes to private lending notes Nathan's Goals and Plans: - Bought his first private note a few months ago - Interested in doing more private notes but hesitant and wants to learn more about the game - Learning about hard money and short-term notes as part of the industry shift Key Recommendations: - Be open to opportunities - whether through conversations or media - and take action on them - Understand that banks won't lend on properties under $50,000, creating opportunity for private lending - Recognize that owner financing solves a real market need where traditional bank financing is unavailable - Shift investment strategy with market tides rather than staying locked into outdated approaches - Focus on due diligence when exploring unfamiliar note types in the same asset class Topics Discussed: - Evolution of real estate notes market from non-performing bank notes to private lending - The capital flip model and short-term hard money lending - Why owner financing and private lending are necessary - banks won't lend on cheap properties or certain neighborhoods - Market cycles and how the industry is returning to pre-recession private lending models - Redlining practices and how banks use loan balance requirements instead of explicit geographic restrictions Guest Insights: - Scott Brown pivoted from mortgage brokering after 2008 recession and discovered private lending opportunity through bulk wholesale of cheap homes - Banks have ways around redlining by looking for neighborhoods with low loan balances rather than explicitly refusing certain zip codes - Private lending basics are repeatable once you understand the fundamentals - similar to the 'buy the tenant' principle in real estate - The private lending market exists because banks systematically avoid lending on lower-priced properties, creating consistent deal flow Welcome back to another Real Estate Now Show.

I'm your host Dave Puts. Alongside me as always, my co-host Nathan Turner. What's up, my man? Hey, doing well, man. How are you? Good, good. It's been a uh summertime down here in Jersey. It's been really nice. Actually, been hot. I guess I hear it's been really hot. Yeah. So, I'll cry about later. We've been raining for the last spring. So, hopefully you're getting a little better weather up there in Canada. We, you know, I, it's a realization I came to a little while ago is, you know, the Southern Californians, they always brag about their their perfect weather all the time. Uh, it's very similar here.

You will be like mid70s is pretty much our our summertime weather. The difference is that overnight it cools off dramatically. So, it'll get down to, you know, 60 overnight and then uh during the day it warms back up again. So, I actually really like that. Then it keeps everything cool overnight and I don't ever like we don't even have air conditioning in this house cuz we don't need it which is awesome. I love it. It's great. Yeah, that's awesome. I think for a lot of people, you know, this time of year is exciting for a lot of people. It is. Um we're getting outside. We're doing more. Um we're excited for more things.

We are um energized because the sun um all that good stuff happens. Yeah. And and at the same time, it can be distracting from whatever you're doing in work. And you know, there's all kinds of really great plans and things we've got going on, which are great. Uh but it can be a distraction. So that it can be difficult to kind of juggle between getting work done and and spending time with family and doing those kinds of things. And yeah, it's it's not an easy task trying to figure out, you know, when to spend what time where. Yes. Yeah. Absolutely. And I think, you know, kids getting out of school, all that stuff happens right now.

And that that excites a lot of people, right? Yeah. So, with that said, I think what we really want to work on is what do we do with our time with our kids and juggling? That's a hard thing to do for anyone. Yeah. We're we're going to climb a mountain tomorrow, my son and I. And so, that's fun. That's awesome. If if you see pictures of B and you see in the distance there's one mountain that really sticks out that it's very um angular profile. It's it's an easy one to spot. It's called Mount Rundle. So that's the one that we're climbing tomorrow. Uh it's been on my bucket list forever and ever.

And so here we go. It's not an easy climb, but we're going to do it because we're up for the challenge. That's awesome. Well, hopefully everyone is doing well as well. Uh for for who may not know us, we've been in the real estate notes space for a long time. Um it's it's been a while since we've done a show a couple weeks, which is kind of odd, strange, whatever you want to call it. Um but it allowed us to kind of get into the investing world almost passively. But what we've learned over the last 15, 20 years now is that notes are very not passive. Yeah. Um what we find also is that we went through already been through a cycle uh and a half and recently notes have been um different in the last five years I would say.

Yes. Yeah. It's really interesting now that we've have a few years under our belts, I think. Uh just seeing how it progresses over time. And it's been really an interesting shift. Yes. Where when we both got started, it was all about non-performing notes. And like that was the name of the game. They were all bank originated paper, uh all non-performing, and there were thousands of them. Literally thousands. And we could just pick and choose whichever ones we wanted. Margins were huge. timelines were unpredictable, profits were unpredictable, but good. Uh, and that has since shifted over time. I feel like we're actually going back to pre recession time.

Yep. Where before we got into this game, it was all about private lending and seller financing and and that was really kind of how this game was played. And I I we're turning back into that and and it maybe just in time for another turn back to non-performing. I don't know. We'll see. Yeah. But uh but I feel like that's the shift that has taken place is now we're going back to that seller financing, private lending, those kinds of loans. Yeah. And I think what people don't realize is that that's been around for endless years. I I can't even guesstimate what they're at. you know those kind of things is something that we all know and love and trust and agents understand but at the same time you know buyers non-performers working amount I mean you and I done I don't know how many countless foreclosures and and people in today's last five or six years don't know anything about those things foreclosures is kind of a scary word where right um I think performing for was a scary word for us because we didn't know anything about it really.

We had so little loans performing. Um but and I think we still kind of carry those scars where we just kind of assume everything's going to stop making payments. Yes. And on our private call we talk about it's like well we don't think the borrower is going to make payments. Well, it's a perfect score. It's a perfect situation. Something's gonna happen, right? So I get it. But I think for us what we've shifted in the last couple years is not buying bank originated, not buying these hedge fund notes simply because you can't. Right. Right. They're not available. Um and what I think what we're shifting is that we're shifting with the tides.

So those people out there who have reached out to us and say, "Hey, we'd love to buy notes. What fund should I buy from?" You don't. Yeah, unless it's scratch and dent, which is SND. However, yeah, where do you shift? People are asking all the time, where are we going to buy notes? On our private call, I'm actually buying a couple notes from people on our call. Uh, this in a couple weeks, we're just doing due diligence is you shifted over to something you maybe not familiar with, but it's still in the same ballpark. We're still real estate notes, right? Yes. But we wanted to understand is that these notes are a little different from what we are experienced and knowledgeable on.

Right. Right. Yeah. And we're always learning. We're always trying to figure out like what's what's something we don't know and let's figure it out. And so that's that's what we're doing today is just trying to figure out this different world. Private lending is never something we've really ever been into. You or I. No. Uh, I bought my first private note just a few months ago and I'm interested in doing more of those, but uh, but I'm a little bit hesitant honestly and so I'm looking to learn more and see what the the whole game is and how to play. Awesome. So, for those people, we're going to explain what do we mean by hard money, short-term notes, all this stuff is going to come and explain, but before we get into explaining ourselves because we're not the experts.

We're bringing on the experts to help share us, Mr. Scott Brown. How are you, my man? Hey, hey guys. I am doing awesome and I'm really looking forward to this call. Thanks for having me. You're welcome, man. I appreciate you coming on, spending time with us on this Friday. Um, and sharing your knowledge more than anything else. Right. Well, I'll give you what I got. Let's start at the beginning. How did you get into real estate? Well, so in the beginning I was in IT staffing and lived in San Jose and uh California and then uh opened an office in uh Utah and did IT staffing for like eight years.

I took a small buyout and the truth is is it was really a force out and then I I had a non-compete and when I had a non-compete I was looking for something that would pay me similar commissions and I got into mortgage brokering and that was back in the day where you could walk literally walk into the finance department, fill out a form and you were a mortgage broker. It was crazy. Um, so anyway, I started doing traditional lending and did that for um until the great recession hit. And so that was like uh 98 to 2007208. And then the rug got pulled the, you know, as they say, the cheese got moved and I had to pivot.

And so I was trying to figure out what do I do? And this is the most bizarre story you'll probably ever hear, but I saw a guy on TV on Night Line who was buying homes at an uh auction. And uh I saw this auction where this guy paid like 10K for this, you know, nice home. I mean, you know, 1,200 square feet. It was a nice home, older, but uh but then I woke up the next morning and um and I spent six hours and I found this guy. I found him. He lived in South Carolina and kind of the rest is history without going into all that detail. Over the next uh what four years we did bulk wholesale of 3,000 homes to a seminar company and um one client it was the dream deal and they would just buy everything that I could find.

So that's the high level on how I got into it. Wow, that's cool. God, and it's it, you know, I've heard this kind of story before where um whether out of desperation or just or just having your eyes open to whatever opportunities are out there and then you're open to it and then take action. And that's huge. And I think so many people miss that is just be open to the opportunity. and whether that's a conversation or something you see on TV or online and and go for it and see what happens. What's the worst could happen? Yeah. Well, yeah. When I flew back to meet the guy, I told my wife because I grew up in North Carolina.

I live in Arizona, but I said, "Hey, I'll go visit my family. That's the worst that can happen." But yeah, I mean it was turned into something pretty amazing and really led me into private lending because those homes were cheap and banks weren't lending on cheap houses, you know, and still today if you have a property under $50,000, a lot of banks just won't lend on it, right? So those are listening, that's a key thing right there. Right? You're most people ask us, well, why would anyone do owner financing? Why don't they just go to the bank? And one of the factors is many banks won't do it. Yeah, there's a lot of factors that go into it.

May um you know, so the this is a fun little you know, tidbit that a lot of people don't know, but you may have heard the term redlinining. Like it's illegal for a bank to redline, meaning you can't say this zip code or this neighborhood we're not going to fund the loan on. And so instead, what they do is they look for neighborhoods that have uh low loan balances and they don't lend in there because those tend to have higher crime, older, you know, etc. And so they have their way to get around that. And so what ends up happening is is those homes um tend to cycle through the market over and over because it's tough to get financing on them.

Yeah, absolutely. So it's amazing because like you said first 10 plus years I mean Nathan started private financing by accident notes and then we're back into it after about 2019 2020 when notes just changed and the rates change everything else and we got learning about you guys. There's a lot of things that go into you guys legislationally, what you can and can't do, but you guys are huge need in the market that most people don't realize. Most people don't knows that you can sell or finance a home. You just fix and flipped. That you don't have to to sell to a bank eligible person. So, let me ask you this question.

When you're doing this private lending, you know, when you first did it, what were some of your fears? What were some of your concerns? Well, there's there's a there's a lot you need to know. Uh but once you know it, it's basically you put it on repeat. And um I mean the you've heard the statement that, you know, when you buy the home, you buy the tenant, etc. And so what ends up happening is is um when I like I just closed a deal yesterday. The guy, it was in Bowmont, Texas. The guy purchased it for 50k and he's putting 25 in it. He's going to sell it for about 145 and we're basically splitting the deal.

And so what did I look for from him? I have a list of literally 30 questions. And I don't want to I don't want to wear you out with all that, but I would just tell you that if somebody in the chat chat just says, "Hey, send me the list of 30 questions." I'll send them to them. It's awesome. And I'm happy to to share the information. like a for me I don't have any secrets because what I what I believe is that this is one of the the best niches that nobody talks about. Y and from my standpoint I'm willing to share and educate and even help people do a couple deals or two because you know I just split the deal with them.

I teach them show them and you know Mark Twain said the best way to learn the deal is to do the deal. And so if there's a specific question you have, I'll tell you, but but I've got a laundry list of things and what I did is I built a calculator and that calculator allows me to see if the numbers work in less than a minute. And if the numbers work, then we look at everything else. Gotcha. Yep. So before we get into what you're doing now, I'm just curious in private lending in general, this is a question I get all the time is um who are the borrowers? Like why are they not going to the bank? Why are they not doing that and instead they're looking for some kind of private lending? Yeah.

So there's a there's a whole part of my background that we're kind of jumping over and that's fine. But I'm going to tell you briefly that I spent um after I did all those um bulk wholesaling, I got back into I was with a seminar company at the back of the room and they'd have two or 300 people coming through that were that paid 25K to learn how to flip houses, right? So we'd sit at the back of the room and we would uh pre-approve them for a fix and flip loan or a DSCR loan or whatever. And so we got really really good at the reps and trying to figure out how to just I mean when you have 500 people a month calling you on a loan that went through a seminar who feels like they've been maybe taken advantage of right and so we had to get really really good at this and so we built systems and so Nathan to answer your question directly why aren't they going to the bank most of them are trying to go to the bank and what you what you don't realize is is that for whatever reason about half of the people out there getting turned down for this reason, that reason, whatever.

And so, but they have a really good deal and so how do you how do they make it work? And when I was with the seminar company, we just say, "Hey, you know, get with someone else, they'll help you do it." But the moment that I left that space, um, you know, I realized there was a huge opportunity there. And I wasn't quite sure how to tap into it um until I met this guy Peter in Tampa that had made 30 million in eight years. And when when I met him and I saw what he was doing and how he was doing it, that shifted everything for me. And so just to bring it back to your question, um there's only so much capital you have as a private lender.

And so from our standpoint, I look for deals where people want to share the profit. Now, nine out of ten people may not want to share the profit and they can go to whatever lender they want to go, but I was on the phone yesterday with a guy buying a portfolio in Mississippi. He's buying like 36 homes. Um, and he's buying these doors at like 12 to 15k a door. He can't get a lender to help him, right? Wow. Yeah. Of course not. So, yeah, they look at that and go, they wouldn't touch it with a 10 foot pole, but there's a deal there. Yeah. Well, and he and he's cash flowing really well, meaning he's making $600, $700 a month per door.

Um, and so in that scenario, I'm going to do a blanket loan for about a h 100k to on some of them. I'm picking the best ones. I'm going to do a blanket loan anyway. But I don't want to get in the weeds on it, but but you're right. Why wouldn't they? Most people try to go every to any place they can to get the lowest rate and the lowest fees. And that is what set me down this path. I got so sick and tired of every time a borrower would call me, the first question they ask is, "What's your rate? What's your fee?" And I can't make a living doing that, right? If the if the guy before me is only making, you know, 1,500 bucks, well, I'm out.

So, we closed when we were doing the seminar thing, we closed 600 fix and flip loans and a couple hundred DSCR DSCR loans. So, real quick, for those who don't know what DSCR, just a brief definition. What's DSCR for those who don't know? Yeah. Debt service coverage ratio instead of instead of your debt to income ratio. Because what happens when you're a real estate investor and you buy two or three homes, you don't qualify anymore because your your debt to income ratio is too high. And so, I don't know, um maybe six or eight years ago, they came out with this DSCR product that looks at the rent ratio to what the mortgage payment is.

And as long as the rent is one and say 1.2 two times what the mortgage payment is, they they qualify you for it, which makes it where you don't get disqualified because your debt to income's too high. Gotcha. Okay. So, it's the idea of saying, listen, your income as the business is the rental money coming in to cover that mortgage that each house has their own kind of income coming in and as long as they have a equation using one quarter. 1.25 that covers it. They could put a second loan, a third loan, whatever they want to put on there as long as the coverage is there. That became a huge avenue for a lot of people who had a lot of equity over the last five, six years.

Yeah, it's been a it's been a game changer because there's been people that have just come out of nowhere and um I mean I've got a friend that has 50 doors in Phoenix. he could have never done that qualifying himself. But with a DSCR uh mortgage, it's all selfsufficient within each deal. So, you're right, it's it's really opened it up and it's it's a great niche for those that want to own rentals. So, let's get back to the thick of things. you're in short-term notes, which is different from DSCR, which is different from a lot of these things because a lot of those, you know, the typical mortgage that all of us all bought are 25, 30-year mortgages.

How short or long are the notes you typically create? Well, for me, the shorter the better, right? Because our yield goes up. If you know, if the money's out less time, we make more. But So, let's explain that real quick, though. Let's explain why is yield go up for those who are brand new. Why does the yield change with the time rate? Can you give us some numbers so they can explain? Yeah. So, you know, for if it's just interest rate that you're charging, then nothing really changes because the rate's the rate. But what happens is we make we make points or fees on the front. Um well, both lender fees and points.

So we we make both of those and then on the back when the deal closes, we're doing an equity or profit participation on the back. So the faster that that closes, you've got the money out for a shorter period of time, which just means your rate of return just goes through the roof the shorter time that you have the loan out. So the points doesn't matter if it's a month or a year, you get paid the points. the quicker you can get the money back and re get more points, the higher that return will be. So if you're at 12% and they pay off in two months or 12 months, you're still going to get 12% annual.

But if you charge two points, you can do that typically six times in a year if they pay off in two months and make additional 12 points. And for those who don't know, points 1% of the of the the the loan. And that's a that juices up your returns quick because you can do one or six in a year. That's amazing. Yeah. And I mean I would say to you our average, you know, through the decade that I've been doing this, the average borrower keeps a fix and flip loan for somewhere between six and eight months is the average timeline it takes a fix and flipper to do it. And so if you get one that pays off in four months, well, in theory, you've doubled your yield, right? Yeah.

Yeah. So, yeah, turn and burn. The faster you can you can turn that around, more money you're making, right? Yeah. Yeah. So, for those people who are interested in doing this kind of stuff, what are some of the gotchas? Um, I'm giving you a softball question here that does it matter if that person owns the property and lives in the property or does that differ? Yeah, I mean, you know, so the the the issue is is that um there is a lot that could be said here, but the short the super short response is um non-owner occupied investment properties generally have what's called an exemption uh from having a licensed mortgage loan originator to originate it.

Now, I'm gonna I think it's super super important that uh you see my dollar fidget here. Ah, that's awesome. So, um anyway, the the there there are like five or six states that you have to watch out for. And I'm going to put this out there just so that someone just doesn't go out there and take this information and think they can do it. For example, we did a we brokered two loans in Oregon and um ended up getting a cease and desist and a $15,000 fine because I was not I was licensed as a mortgage loan originator, but I didn't have and I was a broker in the state of Arizona, but I did not have that in Oregon.

And my attorney that I paid $7,000 to told me that Oregon had an exemption. Well, they don't. So, I'm I'm I'm making it super clear that states like Arizona, Oregon, uh Utah, and I'm pretty sure California, you regardless if it's non-owner or owner, you have to be licensed. But here's the cool thing. Like 45 states, you don't have to have a license and you fall within that exemption. So, check with your attorney and verify. But that's the idea. And so, how much work is it become licensed? Is it a fee? Is it a test? Well, I'm I'm just going to tell you straight up that based on what I do today versus what I did all the other years.

I the licensing when I started, I had to take a federal test. I had to take an Arizona test, California test, and and then every year you have to be uh you you have to renew with continuing ed plus you have to do a background check, credit check, net worth if you're a broker. There's lots of things that go into that. So, you can bypass all that if you do non-owner occupied investment properties. Gotcha. And the key to it though is your paperwork. And in our paperwork, in our loan docs, we have like on six different pages, this is a non-owner occupied investment property. It is a commercial loan that you will not uh occupy.

So, it's those things. Awesome. So, let's go back here for a second because you you've talked about you you've done private lending over the years and then um what you're doing now and you've you've changed it up from what you were doing before. The key phrase in there that you mentioned that I know that we've talked about before is is you do a profit participation and can you explain a little bit about that and and how that works? Yeah. So, I have to go back to um this guy Peter that I met and is this a $30 million guy this eight years? Well, and that's just a crazy story. Like I mean, how many people do you really do you know right now that that have 30 million liquid? I mean, I don't I just don't.

And so I met shy a penny or two. So I'm gonna put a plug into, you know, attending events like, you know, going to the event you host, Nathan. DME. Yeah. DME. and going to these different events because it was at an event that I met this guy and um anyway the short the super short version was is that in the hallway talking and I said, "What are you up to?" He goes, "Oh, I'm a private money lender and I loan out my 401k." And I thought, "Yeah, okay. Well, there's nothing there, right? I mean, people have three to 400,000 in a 401k. That's a month worth of me lending." And and anyway, but I don't want to act like I don't work with people like that.

I do. My average client that works with me has 100,000 or whatever, but but when I was talking to him, he uh he made it nonchalant, so I didn't think anything about it. And then uh I was in he lived in Tampa and he said, "Hey, if you ever come to Tampa, look me up." Well, I went to Tampa um for another event and I just said, "Hey, I'm in town." And I and anyway, I was able to sit down with him and he asked me, he goes, "Hey, how's it going?" I said, "Dude, I'm just getting it handed to me." And he goes, "What do you mean?" I said, "I bought," this guy called in, wanted to borrow 500,000 on uh six homes in Fatville, North Carolina.

And so instead, I bought the homes. I bought them. I mean, I just bought them and I said, "Hey, I'm gonna flip them." It was it was a nightmare trying to do remote flips, contractors. I I mean, we could talk for the hour about it, but here's what he said to me. He goes, "Man, you're working too hard." And I said to him, "Well, what would you do if you were me?" And he goes, "I would just flip capital and let someone else do all that work." Flip capital. I love that phrase. And he says, 'Instead of flipping the house, just flip the capital. And I said, 'What are you talking about? And Nathan, that's where he said, get a participation in every deal that you do.

Now, I had heard people that had done this here and there, but that was his business. And so, here I was for the last eight years brokering loans, making 2500 a loan. And every deal he did, he was making 25,000 alone. And I was like, "How how are you how are you pulling that off?" And he just said, "You need to find someone that's looking for a capital partner. Stop trying to be a lender and talking rates and fees. Find somebody that needs your help. Solve their problem." And anyway, um, so his whole secret is he works with contractors, uh, that are tired of doing all the work for the flippers and he partners with the contractor and says, "Hey, go find the property.

I'll split the deal with you." And so he provides the money, they own the home, he owns the loan, and they split the profit. So, you're really merging the borrower and lender into one entity, lack of word, and saying, "Borrower, you're going to work with me. I'm going to put up the money and the skills. You're going to put up your skills and maybe a little bit of money, right? And we're going to buy this house together. You're going to do the work. I'll do the finances and I'll make the draws and stuff like that." And then split the returns. and top of that this participation, you know, split.

Talk a little bit about Yeah, if you saw my settlement statement from yesterday that we closed out this deal, I mean, I'm just going to go through it rapidly for you, but just understand that on the settlement statement, there was 5,000 in origination. There was 2500 in lender fees. So, add those two together. That's a good number. And then um and then on the back end we have a profit participation in this loan that is 15K. So and who gets 15K? Yeah. Who gets a 15K? So the profit that he is projecting is 45,000 on this deal. So, I have a I have a rule that if you don't make $30,000 uh on the deal, I'm not funding the deal.

And I need to make something as well. And so, on this deal, it was 45 when it was going to the projected profits 45. He's going to take 30. We're going to take 15, but we also got 5K on the front, 2500 on the in lender fees, and then the interest rates 15%. And you're like, dude, that's crazy. that those numbers, you're ripping that guy off. And it's like, time out. Uh-uh. We are a capital partner in the deal. And all we did is we said, "Hey, this deal is going to make this amount and we're going to put that money in these buckets." Why are we putting it in those buckets? Should be your question.

Because if the deal makes it all the way through and we don't make the 15 on the back like we're supposed to from the profit on the front, we got paid really well. on the front. We got, you know, 5,000 on the front. We got 2500 in lender fees and the interest is 15%. That deal by itself is a very, very good, you know, private money lending deal, which I split with my co- lender. Co- lender comes in and puts the money in. I manage the whole thing and I split that front and that back with them. And so that's what gives them that yield that's way up there. So the contractor is doing the work. He's managing the project for you.

You don't have to find a new contract because the contractor bringing the deal to you and you're saying, "Great. I'm partnering with you in this deal. I'll buy it. I'm going to charge us the lender's going to charge us 15% to buy it plus a bonus money." Right? So let's let's give some numbers here. I think it'd be a little bit easier to see. So, can you give us what the the purchase price of the home is? Yeah. And so, I want to make a key distinction here. The the borrower or the person that brought the property, they own the home. I don't own the home. Gotcha. We own the loan. And we provide the capital in the form of a partnership.

So, when I'm doing if you know people talk about JVS, you know, hey, uh would you be a a joint venture partner on this flip? And my quick answer is no. I'll be a JV on the capital side, but I won't be a JV on the buying side. Why? because I need access to the foreclosure laws to protect our capital in the deal. Right. That's fascinating. So, it's a that's a different twist on Yeah. on notes, isn't it? Oh, it's and and this all came from a simple conversation that made the light bulb go off, right? Made what? Made the light bulb go off in your head going, "Oh, yeah. Yeah. Holy God, that makes your whole situation totally different than it was a few months ago or days ago in that aspect.

Yeah. So, so I mean, if you look at the math and I was a I was a broker for I've been a broker in theory for 27 years, but but the last decade I was making 2500 alone. And let's say we did 800 of those. That's a couple million bucks. Sounds pretty impressive. 250 a year. That's a good income. Yeah. But but when I sat with Peter, he said in the same eight years, I made $30 million. Yeah. And it and it was all because he just instead of putting your money out and getting 10 or 12% interest and a point or two, he just says, "Look, let me be your capital partner." It's a whole different conversation.

let me help you solve your problem. And then after you agree to the terms of the deal, you just say, "Now listen, my part of the deal, I'm just going to take my money and I'm going to put it in these different categories um just because I'm I'm in lending and I'm just going to take So, if I'm making um 20K on the deal or 25K on the deal, I'm going to take 5K and put it in origination. I'm going to take a couple K and put it into lender fees. And instead of the interest rate being 10%, I'm going to put it at 15. And so I'm going to take some more of my money and put it into that. And why? Because that protects me in the deal.

I get all that as the deal's going. And so it's a good deal for me throughout the deal. And then when it pays off, you get the participation. But here's the other thing I learned from Peter. If the if if my part of the participation is supposed to be let's just say like this deal 15K I put that in my loan docks it's I get 30% or 15k whichever's greater. So, if the flip goes the course and the total flip only makes, call it 20K, well, contractually I'm due 15 and he's due five. Now, I would not do that. I would I would be more generous, but because I want to do multiple deals with this contractor, but but now you're getting your head around why Peter made 30 million and I made a couple million in the same eight years.

Yeah. So then the then the the next question is, so why is the borrower in for that kind of a deal? Why aren't they going around rate shopping and trying to just undercut? So, let me tell you specifics. I mean, because this is a deal I just did. And so, when it when someone calls me, first question I they say, "Hey, what's your rates? What's your fee?" And I say, "Oh, dude, you don't want me." Yeah. I mean, I do I do profit participation. We only have so much money to work with. You don't want me. Call one of the thousand lenders that's out there and ask them that and they'll help you. And then I say to them, "Hey, if you can't get the deal done, call me back.

If you're willing to share profits, I I'll help you structure this deal and we'll get it figured out. Well, I only need two or three of these a month to have a great life. Yeah. Yeah. And that profit participation for them is is is a golden home run for them because crap like I got a deal. I got a lender who's involved, right? I got someone who really kind of cares about me and make sure that I make some kind of profit here and make sure the deals run well besides the lender who's just passively saying, "Give me my money." Right. They're part of it. No. And if I'm the borrower, if I think it's a good deal, then that profit participation is no no problem.

Yeah. I mean, if I'm happy with what I'm getting in the end, then who cares? Yeah. It's not about rate and fees. That those deals are everywhere. And so, like, I had another guy call me yesterday and he said, "Hey, I heard he's he's flipped three homes and he said, "Hey, I heard you would you do assetbased lending and that you you might be able to fund a deal for me and we could split it." So, the other contractor told him to call me so that he could get this deal. And I just said, "Yeah, man. I just we provide the money and we look to split the deal with you. Are you o if you're open to that, let's let's discuss it.

So when what could what could go wrong in these deals? Yeah, there's a there's a lot that can go wrong. You can underwrite the borrower wrong. So first thing that I what I told this guy, he goes, "How do we what do we got to do to get started?" I said, "First thing we got to get got to do to get started is uh you got to do a background check and a credit check for me." And he goes, "What?" I said, "Well, look, we're partnering up here. I got to know who I'm partnering with. And um I said he goes, "Well, what are you looking for?" I said, "Felonies, you know, and do you lick a stamp?" Yeah. Do I be afraid of something here? Yeah.

What What should I be looking for? What are you talking about, man? And I said, "As long as your background's clean and you lick stamps, meaning you pay your bills, um, we're I just got to clear the deck on that because my most important job is to protect my co- lender." And if I put a co-ender into a bad deal, then it's it's bad for all of us. So So that's what can go wrong is you can get the you can get bad actors um that are trying to run a scam or whatever. And so I have to weed those those those ones out. Another thing that can go wrong is that if you if the rehab is 40k and you send them all the money, well that's going to go wrong.

So yeah, how does it work with that, right? So those who are curious about this whole thing, if someone's going to borrow 100 grand from you into a rehab project and they'll probably work 200 they're in their rehabs, it'll be about 50 grand. How do you structure that? Yeah. So first of all, it's the calculator. I can within a minute I can run the numbers and I can make sure that that the projected profit to the buyer or the borrower in this deal is at least 30 and we're making at least 15 or so on the back at a minimum. But what's that? Yeah, let's say that those are Let's say this deal is good, right? A lot of people have been reaching out to saying, "Listen, this draws thing is new to me." You know, how is that paid? How do you verify from a contractor far away? How do you do that? Yeah.

So, the the short answer is is that I will give them probably 25% of the money and we'll have agreement that what they're going to do with that money, meaning the roof. like we just funded one and um we gave them enough money to do the roof and the HVAC and so I sent them the money. They sent me the the u invoices that they were working with and so I sent them the the money to get that done. A step better than that is just send it directly to the trade person and and have them do it. But um so so yeah, you've got to piece that along. if you don't um what what tends to happen in the world of contracting is um your money ends up at another job they're trying to finish.

And and so we don't So the so the the bottom line to all this is you don't release additional money if they don't do what they said they were going to do with the money and you send out a real estate agent uh or a home inspector. a home inspector will go there for a hundred bucks and inspect it and tell you that it's been done and and that's pretty easy um to get for those who are new. What you're saying is, hey, this guy's saying he's putting a new roof on there. Go inspect it. Make sure the roof's put on there. It cost him 10 grand and then release the 10 grand. So it basically reimbursed him for his costs.

Is that how it work would work? Yeah. So on this particular, so I would say someone starting out that would be ideal. They would have the person have at least 10K to fund it and then they'd reimburse them. And that's how all the institutional lenders do it. Um, and the deal that I just did, because I've done four deals with this particular contractor, I I have a relationship with him and he goes, "Hey, I need the money to get this guy paid." So, I sent him the money. I would say to you, if you're just starting out, you don't you do the reverse. You have them pay for it and you reimburse it. That's the simple answer.

Yeah, makes sense. And do you guys service these loans yourself? Do you use a serer? Yeah, it's all it's all in-house. And so, when I sat with this guy, Peter, I was astonished because I said to him, "How do you how do you do this?" And he pulled up a spreadsheet and he says, "The loans for six months. I put six columns in it. I click it." Now, this guy's a CPA. He says, "I click the button to show that they paid the payment and then I just I have QuickBooks and I manage it." And so, um, you're bringing up something really interesting. He has one virtual assistant and he has a hundred loans out.

Um, I think 106 loans has one virtual assistant. And so, it's it's the kind of business that you can keep it small and you can keep it all. You don't have to have a big team. uh once you know what you're doing. Yeah. So, I think a lot of people get lost in I see Cindy made a comment that she does short-term loans uh and she requires a scope of work as part of the rehab plan in the package. Absolutely. Thank you, Cindy. So, it's it kind of sounds to me like what you're doing requires a little bit more more touch. You're doing a little bit more than just a passive lender where you just send it out there and pay me back.

So, my role, look at me as the lender and then you've got a co-ender. Got it? A co- lender is someone that's going to put up the capital and participate in the deal with you, right? And there's some tricky things that need to happen. And so I'm going to give a disclaimer here to make sure that according to my attorney, my securities and lending attorney to make sure that you don't get into this situation where you're um offering a security, you have to have that co-ender to take an active role in the in the deal. And what does active mean? Yeah. um they have to approve stuff and then you have to in your in my co-ender agreement I just stipulate you know the things that they need to do.

So if we run into any challenge we have to um have a conversation about that and they have to they have to give feedback on what they want to do. So they they have to be active in the deal. I'm very active. But but I'm going to make a statement here, Nathan, that just to clear the viewers viewpoint of this. Doing the loans that I do are 90% less work than processing a brokered loan. Wow. Interesting. I think people don't realize that, right? I think though most people where you're different, right? If I'm brand new in the notes space and they're brokering notes is usually they don't have any money.

You're raising capital outside to fund these deals with no money your own, right? So, I think the the caveat that you have versus someone who's brand new trying to broker notes is you are finding capital partners that you're not funding this deal yourself most of the time. Yeah. So, let me tie this down. When I met Peter, I asked him when he when he kind of pulled back the curtains and told me the truth of what he was doing, I said, "Peter, how'd you get started?" He said, "I went to a Meetup group." And this is really good for your listeners. I went to a meetup group and there was a guy there that had a hard money lender who was funding a deal and they gave him 90% of the acquisition or purchase price.

And so he needed the 10% down um and he needed the rehab money because he had a really good deal. And he walked up to this guy Peter and he said, "Hey, if you give me 40k um you'll go in second position, I'll split the deal with you." And Peter knew nothing. This was his first meetup. He knew nothing about lending, whatever. And so Peter said, "I don't have the 40k, but I have a friend that has the 40k." So he went to his friend, got the 40k, they funded the deal, and you know, luckily everything went great. Six, seven months later, here comes back his 40k plus they got 20k. So Peter split the 20K that he got with his co- lender in the deal.

That co-lender made a 20 25% cash on cash return. Yeah. And the co- lender said to Peter, "Hey, if you get another one of these, let's do it again." So Peter went back to the guy and said, "Hey, go find another one of these and let's do it again." Well, that's how his business started and he grew it from nothing without having his own money. Now, I want to tie this down. If you have the money, instead of splitting 25K on a deal, you make all of the 25K. Yeah. Right. And that is what happened to Peter about three years into it. He built up his his own money to over two million. And at that point, he was just using his own money and he was keeping all of the 25.

And so for your listeners, they could start with nothing and they could build this business up over two, three, four years to where they're just putting their own money out. Yeah. And if you are someone that's saying, I'd never raised capital before. Uh we had an episode, episode 111 with Steve Lloyd on raising capital. Um you make it harder than you think it is at times because you say the wrong words. and he talks about how he raised capital from mom and pops, school teachers, janitors of that. And it's how you communicate and the relationships you build because the better the relationship, the better the person.

And most likely, as Scott and Nathan know, the person that looks like they have no money or the person that has money. It's very strange. The person who looks broke usually has money and the person who looks like they have tons of money are typically broke. It's just odd. So, I challenge you guys to go out there and I think Steve Lloyd made a sense. He's just tell people you raise capital for real estate. That's your job. You raise capital and just start having conversations. People around you have 401ks, old 401ks. And then what you could do is what your self-directed IRA, we had a call about that.

You didn't fund this deal from someone else's old 401k or their IRA or whatever it is. and you go and like Scott's saying is you go find a contractor who needs money and you co you help them with your co- lender to fund this deal and you make this money instead of making $2,500 brokering a note to you know Joe SMO. So Scott, when you're doing these kind of things, what's typical time frame that these hard money loans are taking to come back into your pocket? Well, so I mean I've had I've had I don't know a handful of them pay off in four months, but the average is six to eight months. Okay. Is what what's typically occurring.

Are you seeing any changes recently with the market shifting in certain sectors of the country? Yeah. And you bring up something. I'm glad you asked this question. And so a lot of people will bring me a deal. Like I had a deal in Arizona and a guy's like, "We're gonna make 200 grand on this. You're gonna make a hundred. I'm gonna make a hundred." And I said, "I'm passing." And he's like, "What is wrong with you?" And I said, "Let me tell you what's wrong with me." Um, success leaves scars. And And I've got a few scars. I've I've over the years I've had five people like walk away from a private money loan that I did for them.

And I've went back and I analyzed it and I tried to figure out what did I do wrong here. Um, and I got too greedy. Meaning I was taking more and by the time it was done, they ended up not going they weren't going to make what they wanted to make. So they just walked away. They're like, "Ah, I'm out. So here's how I do it." Now, one of my underwriting questions is I only do affordable homes and these are base hits. you know, base hits win the game, right? So, these are base hits that I'm doing. I'm looking for affordable housing where the mortgage payment that they're paying us does not go above what the rents are ah in the market.

And so if I had, think about this for a second. If we got paid upfront, 5,000 to originate it, a couple thousand in lender fees, and we had 15% interest as an interest payment. Now, I want you guys to think about this for a second. as note investors, if if if I had a seasoned note that was at 15% interest, could I sell that to one of you guys or one of the people in your group and just I would shut down the call real quick and just have a real private call and push Nathan on the side. Yeah. Who wouldn't buy that deal, right? Yeah. So, so that's how I underwrite them. I don't let the the mortgage payment go exceed um or the it has to align with the rents.

And here's the secret. I'm not something like special. The way I figured it out is the DSCR lender. I underwrote it the same way the DSCR lender underwrote it to make sure that it would work. Got it. And and so when the guy called me in Arizona and we were going to make 200,000, I was like, I've seen that deal. It doesn't sell. The mortgage payment you owe me is four grand and the rents in the area are two grand. You can't do anything. Yeah. He has He can't sell it. He can't rent it. He can't do anything. And I think a lot of people don't realize that, you know, you need as many exit strategies as possible.

you when you're done enough deals, you realize that that what you thought was going to happen typically doesn't. You need to have backup plans to say, "Crap, if this doesn't happen, what can I do?" And I think Scott's perfectly on here is that if all hell breaks loose, he can sell a note to me. And Ethan, that wasn't his first plan or B plan. That's a C plan. Like that's awesome because if he didn't write the note the way a note buyer would buy it, he's in a situation where he only has two options now. Well said, Scott. Yeah. Yeah. And so I had a call yesterday with a co- lender, a new co- lender that was, "What happens if it loan doesn't pay off?" I said, "Magic happens because we're we our interest rates 15." I mean, do you know how many note buyers are looking for, you know, that kind of yield? I mean, we might get par pricing 100% because the the rate's so high anyway.

So, what's your LTV that you're typically lending at? What do you what do you think it is? Or I would say no more than 70. Okay. And I try to be closer to 60. Good. So, for those who don't know, we're talking about that if the property is worth the $100,000, Scott's trying to get between 60 and 70,000 of lent money, including the rehab and stuff that that gives the market a room that if the property is not worth 100 and it's worth 90, they can still maneuver that and shake that down a little bit. But if the blown goes bad, he's in a position to take that that property at 70% of value and then sell it as is with that in mind.

But typically, he's not put up the whole 70 grand. He may put up 40 or 50 grand of that money because the other money is raw. So, if that makes sense, right, Scott, is that accurate? Yes. So, the caveat I'd say it's not if the if the loan goes bad, I'm not probably not going to be able to sell it to a note investor, right? But when I say, let's use a different term. If if they can't sell the home, like they renovated it and there's no buyer that's buying it and then they put a tenant in it, a section 8 tenant, whatever. They put a tenant in it and it's renting and that borrower with me is like the terms that I have with him say he has to pay me off in six months.

I have one built-in three-month extension. So what do I do then? I go in and I find a note buyer and I say, "Hey, what terms do you want on this?" I go modify the note to fit that and I show them that the that the tenant is covering um more than covering uh the payment in it and we negotiate and then I modify that note. That's a bad note for me that didn't they didn't flip out and we didn't make our profit on the back, right? But we were able to sell it and recapitalize. Yeah. Yeah. To to a whole group of buyers that are eager eager for those kind of rates. Yeah. You know, we're looking we're we're in the process of purchasing a few hard money loans right now.

And it it allows people like Scott to be able to more money out without having to sell the note and whatnot. So, we're looking to fund them, maybe even hypothecate with some people. um which is really interesting game plan because these people it's not that you're buying the house right and for those note buyers out there is we mentioned in our group and all that I'm not buying or funding the house I'm trusting Scott and his experience of doing this as the operator to do my due diligence say this property is a good situation and Scott says I wrote this note of 15% Dave and I've worked with this borrower five or six or seven times and he's paying back x times so now we have our operator ator with a really good borrower who knows what he's doing.

Scott says, "Hey Dave, I'll handle the draws. He handles the back and forth." Guess what happens? You step in as a note buyer. The only negative me to mention our call Wednesday is it's a nine-month loan, right? Us note buyers used a 20-year notes. I got one I think still my longest one's 2016 when I bought it. But listen, if you're not buying notes, you have cap on the side. Why not go get 14 15% and and in the in for what I'm doing with the fund, those short-term notes are actually pretty great. Um, with a longer term note, I have to sell that at some point to regain the capital. So, if it's a short-term note that's 6 9 12 months, whatever it is, and I know that I'm going to get my capital back once that term expires, great.

Then I don't have to go and resell anything. Then that that takes care of that for me. So, that those are very interesting as well. So for me it's either really short or really long, but it's that in between anything, you know, five to 15 years. Those are no good for me. I need them really short or really long. Yeah. So Scott would have the Billy link in the chat. It will be on YouTube as well. If someone wanted to participating with you, do you have the ability to use some more money? Um, of course. Yeah. I mean, right. So guys, listen. If you want to get involved and you have money on the sideline and Scott's been around for a long time, I recommend use affiliate link, get his information, and shoot him an email and say, "I'm in." That makes you more passive, right? Take your IRA and, "Hey, Scott, let's talk." Doesn't mean you don't do due diligence.

Doesn't mean you don't value the property and take a look at the collateral. Do all that. Scott's not going to be afraid of you doing that. He knows what he's doing. gives you opportunity to do this kind of stuff and maybe learn a little bit on the side, right? Scott is a great welloiled machine. When did you meet Peter? I see Sydney made a comment that um it changed her mind too. Scott, when did you meet Peter? What year was it? So, I met I met Peter about three years ago. Uh but it wasn't until September of 24. Wow. That I retoled my entire business. That's amazing for you. Good for you. That's great.

All right, so I think we're winding down here. So, one last question for you, Scott. What do you see? We're in a kind of evol time right now. We've got some different things going on in the market and just the whole landscape is changing. What do you see coming down the pipe? What do you see in the next 6, 12, 18 months? Where is the market going? What do we see coming down? Well, I would say to you when uh uh when COVID hit, I was just licking my chops. I thought it's happening again. We're going to get back in. We're gonna we're gonna kill this. And guess what? It went the opposite direction.

Yeah. So, what do I see? What do I know? I don't I don't have a crystal ball. I keep this one on my desk here just in case. Ju but never had anyone bring that. But what I would tell you is um what we do works great in an up market and works incredibly well in a down market because all the flippers come in in a down market and they know how to ride that wave and how to cash in like nobody's business. Sure. So that's the best I've got for you. All right. Very good. Do you see the market changing? Do you see the market going down? Yeah, I see it. So, I've got uh one of the properties that we put money out on, they listed it to sell and it's not selling.

So, all of a sudden, I've got a note that I'm going to then come back to you guys and say, "Hey, here's a here's a deal. It's a gorgeous home. It's completely renovated and the rents are are high uh section 8 rents." And anyway, but the the point is is that uh the joke in the hard in the hard money lending space is is that when the market shifts uh you become a landlord, right? And and so I would just say uh those that don't understand it, we become we're node investors. It's either short-term or long term. Yeah. Yeah. Absolutely. Well, Scott, hang on for after hours. Thank you very much for joining us.

Uh we'll be back next month, later in the month. We're taking the summer a little bit easier in the show. Um but we'll be back soon. Uh if you are have any interested questions, feel free to reach out to us. Um we'll also be reaching out over the summertime uh to share some more stuff. Uh DME is not open yet, but hold your horses. It will be it will be soon. Hang on. Hang on. Hang on. Right. Give me a minute. We just finished. Gosh. Yeah. But I know the fact that if you have any questions about this, feel free to reach out to us, reach out to Scott. If you are looking for notes to buy or get your money capitalized, don't be stuck in a box.

Start looking outside and educating yourself on this market of the hard money loans because it's everywhere. When we first got started, it was 14 and four. It went to 8 and one, I think 8-2 around 2014, 15. It's back up to 14 15%. Why not take it? Thank everyone. Be well. Be safe..