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You're listening to Lighting Up Real Estate with your host, Candle Locket.
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Episode 35. Today, we are lighting up financing new construction with hard money. As always, the goal of this show is to shine a light on people's strategies, systems, and ideas to help you get started in real estate investing. On the show today, I have Kenneth Edway of Baker Collins, a lending company that can finance deals throughout the United States. He breaks down everything you need to know from the people you need on your team to the 30 rule. If you're thinking about solving this housing market crisis and the shortage of homes right now in the United States by building new construction, grab a paper and pen because this one is for you. Let's get started.
Hey Kenneth, welcome to Lighting Up Real Estate.
Hey Daniel, how are you today?
I'm doing pretty good. It's kind of cold today, but hey, we were definitely because we did it. Very much so, very much so. 100% agree.
All right, so we are here to talk about how to finance new construction with hard money loans. And, uh, the reason why I want to do new construction is because of this housing market crisis that seems to be going on.
Yeah, and there's not enough houses out there. So, of course, you've got to start looking at this land, which is earth day, and building on it. So I think it's pretty amazing that you guys do new construction, which I didn't even know about. So I started doing research on you guys, so I definitely want to talk to you about how we can start new construction with a hard money.
Yeah, no, yeah, absolutely. So one of the things that we're doing more of because of all the, um, the lack of inventory and specifically the metro Atlanta market and also other major markets in the Southeast, we are doing a lot of new construction files. And many people are completely unaware that something that we do, but that is a good, uh, portion of our business. So I absolutely love it because what it does, it allows for a lot of folks to get into the market and not necessarily have to do the traditional fix and flip that so many people are accustomed to.
Right, right. Okay, so what exactly, let's start with the, this is for beginners. What exactly is hard money?
So hard money, uh, to be honest with you, I'm not particularly fond of that term. Um, really, uh, in my opinion, this is just my opinion. I'm a former investment banker, so I like to be very specific with things and as to how I, you know, share with people the overall auction term is private money. Hard money is essentially a sliver of private money. And so obviously, we can escalate between the terms hard money and private money. Many people are really, uh, they're comfortable with the term hard money, they understand what hard money is. Uh, it's simple to use. But one of the reasons why I'm just not that big of a fan of the term is because it assumes that we're going to have kind of an adversarial relationship, like this is going to be a tough deal to get done, it's going to be hard. So as a, as an industry, we're trying to change the narrative, like, look, it's not hard, it's not going to be a challenge, we're not going to be in a game of thrones joust. This is going to be a partnership that we're going to create. It's going to be a mutually beneficial one. And so what we do is we do the deals that a lot of traditional banks will tend not to do. For example, we will finance the projects where a lot of folks will, a traditional bank, if you were to go into, let's say, Wells Fargo, Bank of America, Chase, any one of those very venerable institutions, we have a relationship with all of them. They will want to fund financial deals that have the least amount of risk. They typically do not want to fund deals where the property that is half gone, or there's fire damage, or there's a significant amount of foundation issues. They're going to say, well, you know what, thanks, but no thanks. We want the move-in ready, the rent-ready properties. So that's where we come in. We are in the business because we do the deals that they typically will shy away from. Specifically for new investors, and so inexperienced investors typically, they can go out and get a credit line that allows them to do that with some of those banks. Those deals, so we give the buyers monies, investors, we only work with investors. We give monies to acquire the property, uh, the money is to renovate the property, and the money is to hopefully so therefore they can buy it, renovate it, and sell it. As for new construction, we're going to give you the monies to buy the land, if you need it, buy the property if you plan on tearing it down, and also we're going to provide you the funds to renovate, build the property new as well. So that's what we do. We do not look at things such as, uh, well, not to sound crass, but things such as tax returns, income verification, employment verification, things that a bank is going, a traditional bank is going to want to and require. Other things that necessarily aren't that, um, big of a deal to us. Some hard money, they're still asked for them. Most of them are not. We place the most value on the property, number one, number one, we place the property. The property doesn't make sense, or if the deal doesn't make sense, it's not gonna be a fit. Fit for us. And then we look at, obviously, the borrower's experience. We're gonna get credit scores, we're gonna look at liquidity. But that's what separates us from the traditional men, and that's what hard money, preferably private money, is as well.
Okay, now let's break down everything you just said, okay? Because there might be somebody listening right now like, okay, well, how in the world is, how do I know I'm experienced enough? Like, what do you mean by experience?
How many deals as an investor have you completed? So many people will come and tell me, hey Kenneth, I'm a real estate agent. I have listed 40 houses over the last couple of years. And I'll, I'll say, man, that's great. Obviously, it doesn't necessarily count as experience. Or a wholesaler, someone who's an investment property locator, they're going to come to me and say, hey Kenneth, I've wholesaled 20 homes in the last couple of years. And I'm going to tell them, I'm sorry, that doesn't work as well. A general contractor will say something similar, hey, I've built, I've been a GC for 50 homes over the last couple of years. The only thing that we will use as experience is how many deals have you taken ownership of as an investor? Whether it is a rental property, or whether it's a fix and flip, whether it's a new construction. We want to know how many projects have you taken ownership of. That's how we define experience. And we look at it, we'll do a five-year look back over the last five years. So if you're someone who had a ton of deals and let's say 2007 and 2008, great for you. Um, but unfortunately, it doesn't count because obviously so many things have changed since then as well.
Okay, so you say take ownership of, is that saying like, just how many properties we own? Not necessarily saying that we need to fix to flip them. We just happen to own these properties, correct?
Yeah, we can give you credit for the rental properties. That's your portfolio. We can give you, we've actually financed a project for a young lady. She owns 40 pieces of land. And so we're giving her credit for the land that she owns also because that lets us know that you are a true investor. This is something that you're not doing as a hobby. This is something that you're doing as a lifestyle. This is something that you're doing as a business.
Okay, so what if we're just starting out? Like we have it, we don't own anything, we're currently renting. So experience?
And so everyone has to start somewhere, you know, no matter where you're at, whether you're Warren Buffett or Donald Trump, you know, um, Sam Zell. These are real estate, these are real estate tycoons, right? They start off somewhere. And so we do finance folks who have never done a deal before. Now, what's going to change is pricing and leverage. And how, what I mean by leverage is how much money can we give you? How hard, how much of a loan can we provide to you? The folks with significant experience, obviously, they should be rewarded for having successfully completed projects. The folks that are kind of new to the business, necessarily, they are kind of a, I wouldn't say they are a, um, a less, a riskier bet, a riskier play, but we will still finance them, whether it is a new construction project or a renovation project as well.
Okay, so what about our credit?
Credit, credit, credit is a major factor. One of the biggest differentiators that one can change or one can manipulate is their credit score. And so if you are starting out, I would be very, um, uh, I want to make sure that your credit is as high as you can get it. Um, even if it is a little challenged, that's fine. Typically with us, we like to see a credit score over 650 or better. In some very rare cases, we can go a little lower than that. But credit is the one thing that you can kind of say change or you can kind of improve upon. If you're starting out, we know some people have to start at some level, certain that they get into the game at some level as well. But that's what credit would do. Credit, as well as, you know, liquidity.
Okay, so what if I'm working so hard on establishing business credit? Can I use that, or does it still have to go back to my program?
So glad you asked that question. So, um, business credit doesn't necessarily affect what we do. So I encourage folks to go out and obtain business credit, but it is, and again, I'm not to sound crass, but it's almost irrelevant to private warming, hard money lending. You know, Kendall, I get that question asked at least four or five times a month. It's like, hey, I'm going to get business credit and I'm going to raise. Like, I'm sorry, that's great. I recommend that you go get that business credit, but it just doesn't really kind of move the needle for us. What we look to is, we do look at the personal credit of the borrower. Residential properties, if you're financed, if you want us to finance residential new construction projects, we are going to look at your personal credit. And one of the main reasons what we look at is obviously we're going to take a look at the scores, we're going to look at the accounts that you do have. But one of the biggest reasons why we as lenders do look at personal credit is because we want to make sure that there are no major judgments. We don't want to walk them into bankruptcies, foreclosures. Things like this are the reason why, you know, we really pay attention to someone's credit. Now, if you have a couple of collections, we get it. Things happen. It's, it's, it's, it's life. But those are the three things that we're looking for. And we're looking at the scores. Most hard money lenders, private money lenders, I know I'm not a fan of that word, hard money, but I'm gonna go back and forth between, okay, um, but most of them are looking for number one, the score. We're looking for at least three accounts that you have had for at least 24 months. And number four, we're looking for one. Number three, we're looking to make sure that there are no major derogatory items. And some lenders are going to go as far as even doing a background check to check and see if there's any criminal activity in addition to. But one of the biggest reasons looking for tax liens. Many times, especially very experienced investors, witness their taxes. And for whatever reason, that happens. We've had a number of situations where a prime borrower, great credit, great experience, great scores, do a quick a background check, and guess what? You know, $50,000 worth of tax liens. That's a problem. So these are kind of the things that you definitely want to look into or be mindful of when trying to obtain financing for construction.
Wow, okay. The tax liens completely threw me off. They throw most people off. Most people are like, oh yeah. And then you, you bring it to their attention. And most, uh, and here's the, here's a way, here's a workaround. We don't expect the folks, we would prefer for them to kind of cure that lien prior to closing. But we know someone who may not have 30 or 50,000 because, you know, when you get a lien on your credit report, yeah, it's going to be a sizable one. It's not like a, wow, or a thousand dollar thing. You know, we want to see some evidence that you've worked out with, whether it's a state tax lien or federal tax lien, it's your payment plan. And most hard money lenders or private money lenders are going to accept some type of payment plan that you've been able to work out with whatever institution put that lien on your property, on your person, as well.
Okay, okay. So now that we've gone through all that, it's okay. We still want to apply. How does that look?
So we reach out to you. We have to have a conversation to see if we're a good fit, or how does it work? If we, the process of getting a hard money. So everything, right? Um, I like to get on the phone with folks. I like to have a conversation with them. I like to understand, number one, why did you choose this? Yeah, like, you know, and I, I always tell people, what we do, and this is going to sound a little, you know, counter-intuitive, a private lender, a hard money lender, our job is not necessarily to tell you if you have a good deal or not. Our job is to tell you if you have a financial deal. There's a big difference. And so we want to make certain that the deal that you're providing to us does work. And so we're going to have a conversation with you and we're going to just want to understand, hey, why did you choose this deal? Why the location? What separates this deal than the other, some of the other judges you've been working on? So at our firm, we try to make things very simple. Um, we will send the borrower or the individual who's interested in getting financing a link. And so that link is essentially, they'll send that, we'll send a link. It's a very short link. They'll, it, they'll put in a couple pieces of information. Um, from that, we're going to get back some information from them. And so that's going, that information is going to include, what's the property price? Do you own the property? How much are you paying for it? If you did, when did you take ownership of it? If you already owned it, um, what's the construction budget? What do you believe the final value will be? Things like that. And so we get that back, we're going to review it, and we definitely, of course, want to get on the conversation, have another chat with you. And from there, one or two things are going to happen. We're going to say, hey, look, this still makes sense. Here is a term sheet. Here's what we can do for you. Or we're going to tell you, this still just doesn't work, and here's why. And so one of the reasons why we always encourage our clients to kind of have that conversation is because we are an objective set of eyes for your project. So, you know, to us, it's, if the deal works, it works. Esther, you know, this deal could be kind of something that they've been working on, and if they can get it done, you know, it's gonna change, it's something for especially a new investor, it could change your life. No, right, will change their life. And so we have to kind of take the emotion away, and we have to use essentially go off of the numbers and make sure that the numbers work. Not just the technical analysis, but there's also that fundamental analysis as well for every deal that's attached to it. So it's our job to make certain that that does work and it makes sense, so therefore it's a successful project.
Okay, that was something profound you said about taking, uh, the emotion away. Because I mean, as the investors, like, oh, we see it, we know it's gonna be fine. It was kind of, you guys, we call you guys and like, they're gonna break our heart right now. Like, we don't see it.
Handle. When I got into the business, I, I was always told, hey, you know, investors are, they're unemotional. They only work with the numbers. And, you know, they're not like traditional homeowners. And like, that, I don't know. I should just go in there. Tell the people who told me when I got to that, that is so not true. It's not true. We put our hearts into this thing.
Exactly. You put your hearts and hope into it. You put your analysis in it. You're spending, uh, you're burning midnight oil to review these documents, to review these numbers, only to come for some to send it over to me. And sometimes I have to be the bearer of bad news.
Yeah, just look at it from a numbers perspective. Hey, or I'll also take a look at some of the other items as well. And I have to be the set person to tell you, hey, look, this deal just may not work. And here's why. But at the end of the day, it's always to safeguard you. So we try to prevent and we try to save a lot of our clients from themselves. And so that is our goal as well.
Okay, so have you ever had a situation to where you really didn't see what the investor saw, and then you required them to put down more money?
So that's possible. I, I admit, we've been wrong as well. I admit times when, in some cases, we'll pull comparable sales. We'll try to figure out what the completed value. In new construction, this is me being technical. Um, when you're doing a renovation property and you're renovating it, and you're going to sell it at a higher price point, obviously, you're hoping to see a high, an after-repair value. The term, the technical term is the as-completed value. And so in some cases, we have been a little more conservative with the as-completed value. And some clients will sell the property for significantly more than it has completed value.
Wow, yeah. It is comical because it's a, hey, can I see what I did? I sold a $30,000 one. You said it was like, you know, only thing I can say is, well, great. You should have a great, and you should be paying me for love for dinner, or you should buy dinner for me because, you know, we want to make sure that you're in a protect. We protect our investors. And we're going to be a little more conservative. But we don't want our investors to overshoot their after-repair value because the, the reverse of that happens more often than selling for more than what it normally it should as well.
Wow, okay. So let's get into, um, using you guys, a private lender, hard money lender, for new construction. What is going to be the difference between doing a deal flipping versus new construction?
Very good question. So, um, let me kind of go off of the overall industry that I'm going to be into our company. So the overall industry, one of the things that COVID really changed was new construction is one of the hardest pieces of debt to resell onto the capital back to the capital markets. What I mean by that is many times when we originate a loan, we will originate the loan, we're going to package it up, we'll pull these loans together, and then we will sell it to some very larger, much bigger bond buyers or buyers of debt. And so renovation loans, those are essentially simpler, simple loans. Those are projects in the sense that you're buying a property that's already there. If you're, if you're just renovating the interior, or you're probably going to add a couple, uh, uh, square footage, that's fine. When you're dealing with new construction and you plan on tearing down a property, or you're building from ground up, that is a different skill set. And so many lenders on a national level from an industry perspective, they want to make certain that they're dealing and working with very experienced investors. So you will have a requirement for many investors, many lenders, hey, because this is a more, this is going to be a more involved project. And we always look at it from a function of a foreclosure of worst-case scenario, what happens if we have to take back this property? If we have to take back a renovation project, we can literally insert a general contractor, uh, and just finish the project.
Right, right. Nothing, I mean, I mean, yes, no one wants to do that. We have that. Now, let's assume that a new construction project defaults and you're literally, let's say, 25% complete. Now we have to find a general contractor. We have to go find certain plans. We have to go find, get the permits in place. There's so much more that has to happen there, right, to be kind of for it to be successful. So many, essentially, national lenders and many folks in our industry are going to require a minimum of three new construction projects in their background. So with us, we're a little more lenient and we put in measures that allow us to not be as kind of, um, as rigid. So we can work with a new investor, no problem whatsoever. Um, obviously pricing and leverage will be a little more, um, won't be as attractive as this is completed a couple of deals. So, but we can work with investors. Typically, what we like to do, I don't want to throw out interest rates because interest rates are really consistent. They're really contingent upon the strength of the investor. But do anything, we're between 70 to 80% as far as loan to cost, subject 70, 65 to 70% of the after, as completed value. So we can finance new investors as well. But that's one of the biggest differences between, um, kind of new construction as well as fix and flips. They're just a lot more involved process if the project does go into foreclosure. That makes sense.
So, do you recommend a new investor doing a couple of flips and getting it under their belt before they go right into new construction?
I recommend that, highly recommend that, but I don't require it. Okay. If you're a new investor and you're looking to get into new construction, um, and if you're just adamant and you're just wanting to get into new construction, um, I recommend that you find a general contractor as well as a very good architect and put together a very strong team that has, that can make up for the experience that you lack.
That would make us feel very comfortable. So if you're brand new and you're looking to do a new construction project, find a general contractor that understands that space, that understands, has completed, let's say, a couple of new construction projects, that is licensed, insured, you know, you can check them out, go to their projects, find work. Go work with an architect, obviously, maybe even consider working with a, um, some other folks in your team, uh, that way your, the probability of success increases exponentially by working with folks that are significantly more experienced than you are. But if you're, but again, I prefer for new investors, all right, with a 50 or 70, 650, 60 or 70,000 dollar renovation, you know, get your feet wet, understand the process, understand how to work with folks in this industry, and then kind of segue into the new construction process, project.
So what if we already have land that we're sitting on? We've inherited it, we bought it, but it was cheap. Okay, we want to put a house on it and make some money, help solve this housing market crisis right now. Can we do that, or do we have to purchase the land and rehab and build with you?
If you've purchased, if you have inherited land, if you own land that is owned free and clear, the beautiful thing about what we do is we can actually apply whatever that land is currently worth per an appraisal to your down payment. Let's assume that your payment is essentially 20% of the total project cost. Uh, I'm gonna give you a scenario. If the land is worth $80,000, say $50,000, the construction budget is, it's $120,000. That's a $170,000 total project cost. We typically want borrowers to bring 20% of that 170, which includes $34,000. And so if the land is worth $50,000, um, we're gonna apply that $50,000 to your down payment. So many cases, your only cash to close would just be the, uh, what the insurance and whatever the attorneys charge when we do close. So we love it when folks own land free and clear. Many investors have no idea that we can apply that to your down payment. So we're doing, we do tons of deals in that way. Um, I love doing that because, you know, whenever we as lenders hear, hey, I own a property free and clear, you know, we start doing work, we start doing a little happy dance in our head because we know, okay, great, this is awesome.
This is awful. Yeah, we're gonna be talking because I have some land free and clear and I did not know this.
Yeah, yeah, yeah. We do it quite often. It's super fun. You see, we, we get that. And you know, I'm actually doing, uh, we're doing one in, um, in, uh, Birmingham, Alabama, similar situation. It was been, it was a family for years. And she did, she went with another, initially, she went with another lender, and the lender was only going to give her credit for what, um, they, what she purchased it for. But we can give her what it's actually worth.
Nice. So per an appraisal, probably that the, it makes sense to us. We should be fine there as well.
Oh, that is, I'm so glad I asked that question. I'm so glad. Yeah, you know, one of the things people are completely unaware of how new construction financing works. And we just love having this conversation because it's, it's fun. You know, it just allows people to really understand. I mean, there are a lot of folks that own a lot of land and they just don't want it, um, or they don't know what to do with it. And they don't realize that there are options that allow for them to truly create wealth, whether it's a scenario where you can build, um, a new property and even sell it, or many of our clients are building properties and holding on to the property. That they hold on to so they can just keep them in their portfolio from the cash flow that this property generates for the next 10, 15, 20 years.
Yeah, that's my best friend, Melanie. That's what she swears by. She buys land, she builds, and puts tenants in it, and she's like, this is retirement. It's apartment. It's retirement portfolio.
Yeah, I, I like buying land myself. I'm a land buyer as well. So, yeah, I, I love it. It's, it's fun. It's super fun.
Okay, so once we've applied, we're at the closing table. You mentioned earlier the fees that we'll be paying. Were there any other additional fees that we have to pay upfront at closing?
For the most part, it's just really prior to closing. Uh, you're going to pay for an appraisal, obviously. And that is not an upfront fee. I like to consider that a due diligence fee. And that typically is paid to the appraiser. And that appraiser is going to try to find comparable sales of what you plan on building. Um, now, let's back up a tad. So closing, one of the things we always, and always want a new construction, um, individual, a new construction, um, investor to consider or start getting is preliminary plans and a budget. So if it's, if you own the property, we need to know. We need to have a settlement statement of when you bought it, or we need to have some type of ownership, um, evidence of ownership. So we will need to have three things. We want, if you own the property, we want to have a settlement statement and or some type of evidence of ownership. We want to have a construction budget, which we can send you guys a copy of and we can put that together. And we want to have preliminary plans. We want the appraiser needs to know what he or she is appraising. What are you building? Are you building a 2,000 square foot property, four bedroom, three bath home? Are you building a four bed, our three bedroom, two bath, uh, 1200 square foot property? We need to know that. Um, and so that's what we would need to know prior to even if you can't put together preliminary plans, um, provide us with some type of sketch that allows us to understand what you plan on building. Because the appraiser cannot go out to the property until he or she knows what they're praising. At closing, now, what you're going to pay for, obviously, this is one, assuming if you own the property free and clear, you're going to, there are closing costs that the attorney is going to charge. Uh, yeah, there are probably, there'll be a processing fee, uh, that will be, uh, charged and things of that sort. So there'll be some fees there. Um, but that's what we want. And to kind of back up as well, if it's a purchase, instead of a settlement statement, we would just replace that with a purchase agreement. But we would still need building, um, we would need preliminary plans. We would also need preferably architectural drawings in addition to. We would also need a construction budget.
Okay, okay. I guess, I guess an important question I didn't ask. We also need to be in a business entity, correct?
Very much so. We do not lend to individuals. We only lend to, um, a business entity. We can't tell you what entity to set up. It can be an LLC, an S corp, a C corp, whatever entity you desire. This is where you get to play the CEO of your company.
Inside, just tell people, everybody who's watching this, if you don't have an entity, go get one. And no matter what part of the country you're watching from, that is the very first thing that we do. Um, now, you will have to personally guarantee that it's a team. So you will, that's one of the reasons why many private money, hard money lenders, we will pull credit. And we will, that will allow us to figure out a couple of things, obviously pricing, as far as leverage, but we also will require you to sign a personal guarantee because you are, to a degree, personally guaranteeing this debt. Um, now, what that means is, in some cases, not to get too technical, if there is a foreclosure, there's what we call a deficiency judgment. If need be, we can file that. But have we ever done that? No. That's why we lend at these and certain LTVs because we protect ourselves prior to. Um, but, you know, this is essentially what we call recourse debt. Typically for residential lending, it's recourse debt. Another way of saying that, respond, recourse is another form, another way of saying responsibility. It is your responsibility to repay back this debt. To some of the larger commercial deals, typically prefer to two to three million and above, now there's what we call non-recourse debt. But for residential new construction, 99% of lenders are going to require to suppress, do, um, a, uh, recourse debt and have you sign a personal guarantee.
Okay, okay. And that's even with new construction, even in flipping as well, correct?
Most folks are going to, I know that there are some folks that do non-recourse, but you know, typically because these are short-term loans, 12 months, it will be recourse debt. And that, that kind of gets us more, that makes us feel, gives us the warm and fuzzies and allows us to feel more better about that also.
Yeah, that makes sense. I, I get it. I get it because you guys are putting a lot of stake as well. Okay, so we've got to the closing table. Um, I'm going to ask this, if I've never done a hard money loan before, but I'm just bringing this out there at closing, will I get any money?
No, you will not. No. I get that question quite often. You will not get any money. So back in the day, we used to advance investors money at the closing table to start their project. And when I say back in the day, we're looking at five, 10 years ago. Guess what? The housing market crashed. Or the housing market, well, even, even after the housing market, guess what happened? Take a wild guess of what people would do when they got that $10, $20, $30, $40, $50,000?
You're gonna go to the club.
Exactly. They would go buy cars, club, vacation, I mean, everything but put money back into it. So the industry changed. And so now what happens now is it's based off of a reimbursement schedule. One of the things that we like to do is we like, I, we, we have what our office calls the 30 rule. What I mean by that is we typically like to see 30% of liquidity, uh, that you have available to you in multiple forms. Whether I preferred what I to kind of give an example, going back to the initial scenario that I provided where the construction budget was, the land was $50,000, the construction budget was, let's say $120,000, total project costs $170,000. We prefer to see 30% of 170. 30% of 170 is approximately $51,000. Right? So I would like to see that in your bank statements. I would like, or a combination of stock portfolio, bond portfolio, IRA, 401k, money market, anything along those lines. Because that makes me feel comfortable. And that makes me know that four things are going to happen. Number one, you have enough money to bring to closing. Number two, you have enough money to make your monthly payments. Number three, you have enough money to start the renovation or start the construction with your own resources, and then we're going to reimburse you back. And number four, and most importantly, you still have enough money to live after all those other three. Many people look at the first three like, oh, great, sure, I have that. But we still want people to make some resources to live. We do not want investors to overextend themselves. That's a challenging day. And so I'm saying all that to say, when you start to come at closing, obviously you're going to go out and get your permits. If you own the land, here's a hint, or here's another note, please try to get your permits before you close on the land. You will do yourself a significant favor by doing it. You will save yourself a lot of money if you can get the permit prior to closing. Um, uh, with us, you can literally, and if they're fully approved, you can start essentially, uh, building the next day. Um, for some folks who tend to wait to that process, depending on what, what municipality you're in, it could be 30, 60 days, 90 days. I've seen sometimes where it's taken six months to get permits. But guess what happens? If it takes that long, you're still making interest payments. So I always tell people to make certain that you try to get your permits prior to closing if you own the land free and clear. Now, if you look, live land, obviously that's a different, that's a different scenario. But if you own the land free and clear, try to get those permits as best as you can, as fast as you can. Because every day without a permit, that's another day that you still have to make that interest payment. And we look at interest payments on a daily interest rate schedule, so daily, uh, payment schedule. So every single day, this is when the clock starts ticking. So yes, we will, it's based off a reimbursement schedule. You have to start to work with your own resources and reimburse yourself back. We reimburse you for the work that we can verify as completed.
Okay, so you talked about monthly payments, and that was going to be my next question. Is it flexible with your monthly payments? Like, can I determine the date that I want to make these payments, or do you guys tell us the date? Do I get some grace periods around this thing? Because we're trying to make as much money as we can. I mean, I'm just saying, we're all gonna get paid in the end.
So that is the first time I've ever been asked that question. Um, can I set it up on this date? Or does it, unfortunately, the answer to that is no. Um, typically for most lenders, they're going to require, as us as well, to that to be paid on the very first day of the month. And we're going to give you some type of grace period. We typically will give you a five-day grace period before there's a late penalty that will kick in. Um, so be mindful. And many lenders, ourselves included, will require you to have that to be deducted or auto-drafted from your account. Right. Um, some lenders may not. Some lenders expect, expect that to happen. That said, in some situations, we can defer payments until you exit out of the loan. So for some lenders, for some investors, some very experienced investors, um, we can defer those payments until you exit out of the loan. So you don't have to necessarily make a payment while you actually hold the loan. You can exit that. You can, we can recoup those payments from when you actually, uh, when you sell the property retail, or you decide if you want to keep the property, if you decide to refinance out of our construction loan into a more permanent loan, that's when we can collect those payments. But that's on a case-by-case scenario as well.
Okay, okay. So let's talk about inspections. Okay, I think a lot of people have misconceptions about inspections. Because they are truly working for you guys, they're not working for us. That is correct.
Yeah, you should say that one more time. Okay. Inspectors, or the hard money lenders, do not work for you guys, the investors. They do not protect us. They are not thinking about us. They are working for the hard money lenders.
Correct. So we, this is one of the things that we do have to kind of educate a lot of our newer investors about because this is kind of, um, the tough part for them to truly understand. We, it's based off of a reimbursement schedule. So you're going to start to work with a portion of the rehab. So let's assume your construction budget is $120,000. You're building a 1200 square foot property for $100 a square foot. Um, and you've put in, let's say the foundation. And foundation cost, let's say $5,000 for this 1200 square foot property. So you're going to have to, um, get the, the, the foundation company to pour the foundation. We're going to send an inspector to review that the foundation, or to confirm that the foundation has been poured and been poured correctly. If the inspector can verify that, then we're going to reimburse you back whatever you paid the foundation company for that. We do not advance you money for work that's not complete. We only reimburse you for work that has been completed. Some lenders have, and so many newer investors are scratching their because, you know, as this is one of the things that, you know, we like to teach and we educate. We, you know, what people know how this works. But some lenders aren't necessarily as, um, I don't want to use the word forthcoming. Some folks aren't necessarily, they assume a number of things. And, you know, they assume that the investor already is aware of this, especially the new investor. So when the new investor kind of gets into the project, they are, um, they, they, they assume incorrectly. You have to start the renovation with your own resources. That's why we adhere, in our office, we adhere to the 30% rule. We need to know that you have the monies above and beyond closing to start the renovation with your own resources. So that when the inspector comes out there, they reimburse, we reimburse. It typically, and this is a process that takes anywhere between 48 to 72 hours from the time that you order the inspection, from the time that you actually will receive your, your reimbursement monies, either through a wire or check. I always recommend folks take a wire. My boss used to tell me, checks are for children. Get one. That's his words, not mine.
Got it, got it. Okay. Question. Okay. When these inspectors come out, and I guess it's just a little pet peeve of mine, and I've heard other investors say this too, so I'm just gonna put this out there. Why can't we change our scope of work multiple times?
Um, for us, you can, as many times as we need to. Um, we don't prefer that. But yeah, the budget itself can increase. If you're, what is $120,000, it cannot move from $120,000. However, if you want to kind of shave, let's say, um, it's flooring, and you want to add more to painting, then we're fine. But it does become a little bit challenging because, you know, you want to make sure that you're as accurate as possible. But we know construction is fluid. And just never, there may be a new design that you may want to go with. The market may have changed. You may get, you may hire a new realtor who probably has a ton of experience in that micro market, and they're telling you, well, you know, you want to go with this type of flooring as opposed to that type of flooring, or, yeah, for granted, as opposed to, you know, laminate. You know, so we understand those things. So we're okay with it. But the budget cannot move.
Okay, 20, it's 120. Because you don't care how it's going to be spent. I don't care how it's going to be spent.
Okay, so that's not our concern.
Um, okay. It's, it's fluid. Okay. That was a great answer. Okay. Not a clerk question to us as well. Okay. So once we get our inspections and everything is going smooth, do we still have to, like, maybe stay in touch with you guys? Would you guys reach out to us to see what's going on, or you just use the inspectors for that?
Yeah, so we typically use the inspectors for that. We're always, well, you're always welcome to give us a call. And we'll say, the goal is for us to, uh, we want to create a long-lasting, mutually beneficial ratio for borrowers and make sure that they're taking care of it every step of the way. Outside of the inspection, you're going to have questions. You're going to, things that the inspector can't answer. And so we're here. Um, you know, in our office, we're fully staffed. We've got a good amount of folks who can kind of answer whatever question that you do have. Maybe you want to chat about another deal. Maybe you want to chat about this deal. Maybe you want to consider, hey, maybe you, maybe want a resource for, um, you know, something that we may have. And we consider ourselves to be a very resourceful firm in the sense that, you know, whatever, with the exception of contractors, who I do not recommend. That's just a personal thing. I think I've recommended like six contractors over the last six years. Three of them have turned into lawsuits. So I do not recommend contractors anymore. Um, but I can recommend.
Everyone else in the real estate, uh, in the real estate family. Um, but yeah, so we want to make sure that our doors are open, our phones are open for our borrowers to just give us a call whenever they need to as well. Okay.
So when you mention the contractors, I'm thinking about time frames. Yeah, and schedules. Is there a time frame when we get a loan with you guys? Like, it has to be complete within six months, or do we have flexibility with that? How does that work?
We offer 12-month terms. Uh, and I think new construction, specifically for new construction, I wouldn't do, no matter who you go with, I wouldn't get a loan for less than nine months, preferably 12 months. And the logic behind that is because you just never know what might happen. And you are some loans that are available for six months. I do not recommend taking a six-month new construction loan because what will happen is, even if you, um, you know, when you work towards getting your permits, you have to account for possible permit delays. You have to account for possible, obviously, uh, you know, there's labor costs, material costs, and of course, you know, we, one of the biggest challenges right now that we're experiencing is the price of lumber. The price of what we've gone up like exponentially over the last year because obviously the lumber facilities have just been, they've, because of COVID, they've had to kind of reduce their staff and, you know, that's just kind of changed the way we do things. So I would always want, um, an individual who's looking to get a new construction loan to take a minimum of nine-month loan, preferably a 12-month loan because once you ex, once you are out of that 12-month loan or nine-month loan term, now you're in the what we call the extension, uh, fee phase, and that's not pretty. That can get to be very expensive.
Okay, explain the extension phase. Is that what you said? Yes. Okay. I've never heard of this before.
Let's assume that you have a 12-month loan and you are still in, you're still building. Yeah, you're still in the construction phase. You've, you're 80% complete, but you have a 12-month loan and it's just, let's say you got the loan to January 1st. Now, January 1st of 2020. Now it's December 31st of 2020, and you know you're going to go past your 12-month term. Right. Day. Now you're in the extension fee phase. And now some lenders will charge anywhere between a quarter of a point or half a point on top of whatever your chart, whatever you're using for every month that you hold on to this debt. That becomes expensive. So now, if you're 80% complete, you still got 20% of the project to be complete, and then you still have to put it on the market and hope that it sells within a time frame. So if it's 80% complete, you still may have three or four months left. So you've got now, you may be being charged, you may be charged an extra 50 basis points or to describe basis points, essentially half a point against that number, um, for every month that you hold on to it. So you made that, you may have incurred an additional five, six, seven thousand dollars when you go try to sell this property retail. And so that's going to be added to the payments on top of the loan. So be very mindful about what your terms are, and you want to try to be as efficient. And I never tell people to be fast, you want to be efficient. That's why one of the biggest things is especially for this, this is another reason why a lot of lenders typically do not like financing new investors because they, I mean, it's like reason number 2075. It's just like they make certain that the, the experienced investor understands time frames. The inexperienced investor probably has a crew that they're working with and they have, yeah, excellent plan, you know, they have these things in place. The new investor is trying to figure it out. Yeah. And so that's why it can become brutally expensive if you don't get out of this loan within that 12, uh, month period. So something to think about. You know, we want to make sure that people really understand what they're getting themselves into, uh, and decide if it may or may not be for them. You know, I always tell folks, hey, look, I, we definitely want this deal, but, you know, here are the pros as well as the cons to, uh, getting into this project.
Off-subject, have you had anybody just call and say, Kenneth, this isn't for me, take this house back? [Laughter]
Yeah, yeah. What has happened? That is what we call a deed in lieu. Yes. Okay. We have, uh, we've had a couple of folks who've just, you know, thrown their hands up and said, you know what, this is not for me. Um, I'm going back to corporate or something else. And there's nothing wrong with that. You know, tell people at least if it's something that you've tried, it's something that you tested, you had the courage to go forward with it. But I tell a lot of folks, real estate investing may or may not be for you. But I would also say, don't let one deal dictate your real estate investing career. That's the quote right there. I like that. It should not be because to me, the way I look at this is, we are in the business of our mission has always been when we started 2015, we are helping investors create and preserve wealth through real estate investing. At the end of the day, it's about creating and preserving wealth. Real estate, it means to obtain wealth. That is essentially why people are in the drudges, why they're going into the municipalities and working with contractors. They're spending, right, 15, 16, you know, hours working on this stuff because they're trying to create wealth. They're trying to create a better lifestyle for themselves. But never let one deal dictate what you're going to do in this career, in your real estate investment career. This may not be the, uh, the deal. Just made one salary. I've had a client who actually their second deal was much better than their first deal. Their first deal was a complete headache. Their second deal, it was just went well. And conversely, we've had clients who their very first deal was like, lock in the park. And so it made it, gave them a false sense of security. Their second deal was a lot more difficult. Again, reason number 2,700 more than what. So many lenders love experienced investors. And experienced investors have gone through and understand that every deal is going to have its share of challenges. But do you have the intestinal fortitude to come out on the other side? Yeah, that's true. That's true.
Okay, so we have made it through the trenches. It's under contract. We're at closing. We just pay you guys what we borrow from you. That's correct. Yes. That is that is correct. We are not equity partners. We're just your debt partners. When you just back what you borrow and that's it. And you go out and you know, go celebrate, go do something fun. I'm a big fan of doing something fun. Success. You got to celebrate the small wins. You got to celebrate the big wins. And now you have a process. And the beautiful thing about that is, especially as a new investor, now you have a skill set that you can use for the rest of your life. Yeah. Anywhere in the country. Yeah, that's the powerful thing about real estate investing. You can do anywhere in the country. We're, I believe we're both in Atlanta, Georgia. The beautiful thing about this is we have clients in Birmingham, Alabama. We have clients in Houston, Texas. We have clients in Los Angeles. We have clients in Washington. And the person who does this in Atlanta can literally take this same skill set and do it in Houston. They just have to understand that local market. Yeah. And the local market, understand those things. But that's the beautiful thing about what we do. Investors can do this anywhere in the country. Just have to understand what your, your local market does as well. That's true.
So, do I have to wait until closing to do another deal with you, or how soon can I start looking for another deal?
Immediately. So, yeah, we'll have to wait for another deal. Um, we do want to make certain that you do have enough, the investor still has enough resources for the 30 rule even after closing. Okay. No, we just don't want someone to just jump into another deal. We want to see that liquidity there. And we're still looking to write the deal. So we tend to allow new investors to do four deals with us, uh, initially. But again, we're still going to underwrite for each deal. So if you're looking to do that, $170,000 total project cost, still that we mentioned the $120 purchase plus the $50,000 construction, we want to see $51,000. If you had, let's say, $150,000, then we'll allow you to do two more deals with them. Um, so again, it comes back to the strength of the deal, the credit score of the borrower, and the quality of the of the borrower as well, or what we call the sponsor.
Okay. Okay. Let me ask you, has COVID-19 changed any of the, oh yes, the race and everything with your company? What has been, has changed?
So with COVID, you know, March 13th of 2020 was a pivotal day. That's when, uh, former President Trump, uh, announced that COVID was a national emergency. That day, that week was the capital markets, our bond buyers, just everything just went haywire. And so a lot of investors, a lot of lenders fell into three categories. Some folks just kind of went out of business because they had no idea what was going on. And, you know, these, these are companies that were, you know, had been in business for 20 years, and I would have never thought that then to kind of go out of business, and they went out because of obviously the uncertainty. Second category, a lot of folks decided to, um, kind of suspend operations. And, you know, they were still in business, but this is a suspended lending altogether. Third category, folks just decided, hey, we're still going to lend, but we're going to modify our leverage amounts, our loan amounts, we're going to mod, and we're going to increase our, um, uh, pricing due to the foreseen, the unforeseen risk that's available. So for up until, I would argue, um, September of 2020, we were pretty, don't even argue, we were pretty conservative with pricing and leverage. We reduced it from 70% ARB to 65% ARB. We would, we increased our interest rate significantly as well because we had to kind of compensate for the unforeseen risk. Now that we kind of understand what we're dealing with with COVID, things are a little bit more back to pre-COVID levels. In fact, even more, they're, you know, and we're getting a lot more folks in the mix because a lot of folks that were out of the market from last year, they're trying to play catch-up because, you know, we work with professional investors. I mean, this is all they do. They don't have a W-2. They don't, they don't work a full-time job. This is their job. This is their income. And so they had to make up for that. So yes, COVID has definitely affected it. But now I would argue that we're back to pre-COVID terms, pre-COVID price points, pre-COVID interest rates as well.
Okay, so what do you predict about the housing market for 2021?
Um, 2021, I think it's still going to be strong. Um, I don't see it slowing down anytime soon. Um, we're still kind of, you know, in addition to this, is one of the first times in history that price points, home prices have gone over $300,000. And so you're starting to see a lot of folks in the market. Um, there's a lot of liquidity being poured into this market, not just on the private side, but also on the public side. A lot of people, the real estate market is extremely strong right now. We've got a lot of folks that are kind of really taking advantage of it. A lot of fix and flippers. We are starting to see a lot more people hold on to these assets. So the folks that are buying and fixing, they're not just selling now, they're holding on to them because they're wanting to benefit from the cash flow. In addition to because of COVID, people are buying bigger houses. Yeah, where footage, uh, has increased, price points have increased. Um, it's just a good time to be in real estate at this point. I agree. I don't mean down for, in my opinion, at least the next year or two.
Okay, so you said something about, um, holding on to them. We have the option if we decide, oh my gosh, I built the most beautiful home, I decided I want to keep it and put tenants in place. We can do that with you guys. Absolutely.
How you exit out of the loan, we just want our money back, man. You can, you can sell it, you can rent it. Well, no, you can't live it. I'm sorry. You can sell it, you can refinance it and keep it as a rental. You can benefit. And one of a lot of our clients are keeping these as rentals, and they are keeping them as not just long-term rentals, but also short-term rentals. So Airbnb has played on the short-term rental market. Airbnb, VRBO, and all the companies, they've really played a mark, played a difference in how people hold on to assets. Also, yeah, we've got a lot of clients now that are actually buying duplexes and triplexes and quads, and they're renting one out on a long-term basis, and they're renting another side out on the short-term basis. And so we've got a lot of getting real creative with some holding assets. And that's why we tell people, don't sell all your real estate, keep it, keep it in your portfolio. But, you know, the second part of our mission statement is to preserve wealth. Creating wealth is obviously when you get a fix and flipper, you get a new construction project, and you sell it for a good amount of cash. That's great. What happens? You got to pay capital gains on that tax. Capital gains tax. Like you don't do a 1031 exchange. But if you just were to convert it into a rental, now you benefit from the cash flow, you benefit from the appreciation, you get from the tax advantage, you benefit from those other, other factors that allow you to create and preserve wealth. To preserve wealth. That's right. Right.
Kenneth, this was so amazing. Awesome, awesome. My body wasn't too bad. I was trying to do a makeup show. Oh, you're good.
So how can we get in touch with you?
Sure. You guys can go to, uh, number one, bakercollins.com. Uh, you can definitely go there. Um, you know, we love to have that conversation. Uh, you can, and the office number, um, you can reach us out at, um, loans@bakercollins.com as well. And, uh, just ask for Kenneth. You can ask one of our folks at our office. And, you know, if you ever wanted, you know, in us, um, we want to make certain that people just, um, we're really in the business of making sure that people really understand what they're doing. And I really pride myself on making sure that people, uh, get the best experience possible. And, yeah, so just give us a shout. Um, love to chat with you. Someone at our office will reach back out to you sooner than later. If you have a project in mind, there's an option on the website that allows you to submit for a project and submit for someone to give you a call back, or just submit a project. Or if you just want to get pre-approved, um, you can do that as well. But yeah, a lot of conversational, whomever. Yeah, we'll have the link as well on lininguprealestate.com too.
Kenneth, thank you for being a light. Thank you. You definitely enlightened me today. Thank you for having me, by the way. I truly, I love doing this. Thank you. Yeah, no problem. [Music]