Cash Flow Guys Podcast

There’s no denying that everyone is talking about a market crash if that’s the case…where are these epic deals you might be wondering?  Deals are happening all around you, but you won’t be part of them if you don’t get good at discovering opportunities. Epic deals never get advertised until AFTER they close, that’s because deals are created by a buyer and seller negotiating, not by a Realtor or Wholesaler running an ad.  Therefore, if you are only focused on that which is “For Sale” it’s likely the real opportunities will be missed because of misguided focus.   How to get focused: What if you chose to ignore what’s “For Sale” in favor of finding problems to solve instead?  The likely outcome would be that you would find it much easier to negotiate with sellers that have true motivation beyond just price.  It’s a motivated seller that will be more likely to consider seller financing provided that the terms offer a practical solution to whatever issue they may be facing.  An example of this would be if a seller had a problem that required say…$25,000 to solve, yet their home was worth $125,000.  You could provide them the $25k and give them payments on the remaining balance over time.  They have a quick and easy $25k and you don’t have to make a mortgage broker rich in closing fees. It comes as no surprise that gaining the attention of a motivated seller is a huge challenge in today’s busy world.  Although it may be challenging its most certainly in reach of anyone who is known for being a problem solver.  Many years ago I came up with two nicknames for myself, one was “Cashflow Guy” the other was “Real Estate Problem Solver”  As you might imagine, the latter brought better quality seller leads to my front door which allowed me to build my portfolio more effectively than most people I knew.  Cash Flow Guy attracted those looking for funding for their deals which was NOT what I was hoping for. You see, because I focused on solving problems, I was solution-oriented which attracted people to me who felt I might be able to help them.  When you get sick, you don’t go to an appliance salesman for a checkup…you go to a Doctor because he or she can most likely provide a diagnosis and hopefully a cure to whatever ails you. Even if you are on day one as a Real Estate Problem Solver I am willing to bet that you know people that can help you solve problems.  The more people you meet that can help solve problems, the more tools you have in your toolbox!  

It’s a Perfect Storm... Currently, we are experiencing a global monetary crisis The oil and gas industry is a mess The US is in the middle of a mortgage meltdown... The Stock Market is a train wreck The current number of unemployed people in America is larger than ever before... The catalyst to tip the scales is the Global Covid 19 Pandemic! All of this lends itself to a rough market in real estate, buying confidence is at an all-time low.  When buyer confidence wains, we must work harder to sell big-ticket items. How you might ask? Well...Understand this...People will always want a deal and in this episode, I’m going to discuss how you can deliver them a deal while still keeping much of your profit in your pocket. When you bought your home you should have gotten an appraisal, now is a great time to have it reappraised if the construction work is finished.  If not finished, put together a statement of work to inform the appraiser of what is to be finished and when.  A good appraiser can use this info to complete your appraisal. Next, hire a Rockstar Agent to Sell it for slightly below appraised value.  A good Realtor who is an expert at marketing will use the appraisal as a tool to attract lots of buyers hoping for a great deal, even in these troubled times. Insist on high-quality professional photos along with twilight photography if it is a pretty house.  Your agent should already have one they use, ask for examples from previous listings. Insist on a professional quality video walkthrough, the photographer can often do it for you but sometimes they refer the video portion out, regardless, it will go a long way towards attracting people to your home. Insist on Facebook and YouTube Paid ads run by an expert in the field, this should be a no brainer.  You need to get a ton of eyes on this property in order to get it sold.  Most agents are not Ad Savvy so ask for proof of prior campaigns. Consider offering seller financing.  This makes it easier to buy your home by attracting a larger pool of buyers.  Yes, I know you need your money yesterday but you can sell the note after closing to an investor at a slight discount.  If you work with a note investor upfront they will likely walk you through how to structure the deal to make the note more desirable to buy. Whatever you do SELL NOW

In this episode I’m going to talk about some of the pitfalls regarding mortgage relief programs that are in play lately.  A term I hear often is “forbearance” which leads some people to believe they are going to not have to worry about paying their mortgage...this is FALSE. A forbearance is defined by Google as “the action of refraining from exercising a legal right, especially enforcing the payment of a debt.” Note that the above definition says nothing about forgiving debt, instead it involves the lender’s ability to choose to refrain from taking legal action. Many borrowers are being told by the “Facebook Expert Team” that they can call their lender and then be able to skip a couple of payments.  The reality is that although the lender may agree to avoid using legal remedies to collect a couple of late payments, however, those payments remain due and can be demanded in a short as a couple of months! Imagine thinking you were off the hook, and then you get a bill in the mail for several months mortgage payments that are all due NOW or face foreclosure. In many cases, a borrower can ask that the lender place the missed payments at the end of the loan, therefore extending the maturity date of the loan.  If you choose this route, be sure to read any agreements that are in place before you sign them. Be sure to fully understand what you are agreeing to and if anything is unclear, consult with a local real estate attorney in your state to be sure you are protected and making a smart decision. Note: In some cases where a lender forgives a portion of your debt such as is common in a short sale, you might be taxed by the IRS on that amount.  Hiring a CPA to consult you in this arena could save you a ton of money.  Although we are in unprecedented times, I can’t stress enough how important it is to communicate with your creditors.  Most mortgage companies have plans in place to assist you in tough times if you ask them.  Simply stopping payments and refusing to communicate with them certainly wont make the situation any better.  Ignoring the situation won’t allow it to go away, instead it will mostly like get worse if ignored. If you lost your job, apply for unemployment assistance as soon as possible, there are several programs recently voted into law to help people during these tough times. Unemployment does not need to be paid back (unlike a loan) and therefore are a better choice for many Americans. Whatever you do, please try to avoid debt at all costs!

Below is a link for you to get access to the stimulus package documentation on the Congress website. After getting caught in the Google Black Hole myself I figured this way was easier. That link is: CashFlowGuys.com/Bailout I'm sure you have noticed the misinformation out there about what is going on in the world right now. For Pandemic guidance, follow the World Health Organization and CDC. For many Americans there are lots of benefits available from the stimulus package.  I’d suggest you read the table of contents to see what may apply to your situation. Although we are in troubled times, I ask that you avoid taking on debt during this crisis unless it is necessary. Many of the options offered by the SBA are forgivable yet certain conditions apply.  Be sure to read those sections of the bill to be sure the terms are crystal clear to you. There are better ways to put cash in your pocket besides borrowing money from credit cards and such. (Think eBay) Before borrowing money, research what grants may be available to you at SBA.gov

WOW oh WOW Ladies and gents, please take a minute to read THIS: Written by Barry Habib, a very well respected economist in the mortgage industry. The direct link to his article is: https://mbshighway.com/mortgage-crisis.html The Coronavirus Meltdown The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around the capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend. Here’s How the Mortgage Market Works Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. The Investment Banker converts those loans into a Mortgage-Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts. The Servicer role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount upfront. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash. Servicer Dilemma As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio. But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position. I’m From the Government and I’m Here to Help In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility. But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.   Mark to Market This week, due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend. Question...Now do you see why it is important to to learn how to raise private money to fund your real estate purchases?  Youcan due that right now at PrivateMoneyCrashCourse.com Unintended Consequences The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage-Backed Securities (MBS). As Mortgage-Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes. If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage-Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS. Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper, the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised while removing market risk from the Lender.   But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage-Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset, on paper, by the potential market gains on the loans that the lender hopes to close in the future. But the Broker-Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls is staggering. They run in the tens of millions of dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock. Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in the process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing. Even Stephen King Could Not Have Scripted This It’s been said that the Stock market will do the most damage, to most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived. Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it. What Needs to Be Done Now Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same. We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

This week we are going to talk about how to avoid taking losses based on recent events. Stock Investors...Losses come from only two events, the sale of a stock or the permanent closure of the business in which you own stock If you are invested in companies that have solid histories the stock prices will rebound once consumer confidence is restored. If you are a buy and hold real estate investor do not sell now!  Instead, wait for markets to rebound.  If cashflow is low maybe you can refinance for a lower rate or if you have paid down equity refinance for a smaller loan balance which will reduce your payments and therefore increase your monthly cashflow. Another way to increase cashflow is to offer additional ametities if it makes financial sense to do so.  An easy way to to buy a washer and dryer and lease it to the tenants.  Adding a storage building can also be a huge profit additon. If you are a house flipper, it’s time to get to work finishing your projects and get those properties listed and sold.  DO NOT SELL THEM YOURSELF (unless you are an expert at marketing homes for sale). Consider reselling the flip property as is before making improvements.  Now is not a good time to speculate because the number of available buyers are decreasing daily with every news report.  People are confused and scared and the confused mind always say no. If you have uninvested funds sitting in a 401k plan from a former job, transfer that money into a self directed IRA.  The massive benefit of a self directed IRA is that you CONTROL what you are invested in. If you have no control in what you are invested in you are exposing yourself to loss of money. A word about buying, everyone is asking me if they should stop buying, my answer is :it depends… I would buy if the numbers made sense after allowing for 30-40% economic vacancy, meaning non income producing units or period of time without any income from the asset.  Outside of that don’t buy until you can structure a deal that leaves plenty of meat on the bone.

Today, we are going to learn about the different types of appreciation and how you can split the profits. Raising private money becomes much easier when your financial friends get more choices. There are five types of appreciation: Found, Forced, Phased, Inflated, Passive I dive deeper into how to use these in my Private Money Crash Course which you can find at PrivateMoneyCrashCourse.com It’s important to note that we can only control three of the five.  The two we cannot control are inflated and passive. Inflated Appreciation is what many people refer to when they mention hyperinflation.  When supply and demand are not balanced, appreciation will increase or decrease. When there is more demand then there is inventory “inflated appreciation” occurs.  That’s what many markets are experiencing now across the US. Be very careful in basing investor returns or gains on the inflated appreciation. Passive Appreciation is what occurs with the ebb and flow of market conditions.  It’s what's derived from timeline trends. There is nothing you can do to improve it, (besides maintaining the asset), it “happens”. Found Appreciation comes from undiscovered opportunity.  When I discuss focusing on doing deals when a property is not for sale, this is what I mean. Found appreciation happens when you negotiate a deal worth $200k down to $150k. Forced Appreciation happens once improvements or repairs increase the income or resale value. House-flipping is an example of forced appreciation as is apartment syndication. The net income of an income property determines its value. Phased Appreciation occurs when the value increases over time after finishing value-added improvements. Example:  Let's say you buy an asset with a buildable vacant lot attached.  Later, you build more rental units on that lot which increases its value. Another Example: You buy an existing building and then add more rentable spaces. In the northeast, many old factories are being converted to high-end rental housing.  This is another example of phased appreciation. In the south, larger homes are being converted to ALF's (Assisted Living Facilities).  Once converted the value of the home skyrockets. The bottom line is that the value changes over time.  You can use these future values as profits that you can share with your financial friends. Take the time to educate the prospect about these types of appreciation. Private money investors often focus less on what their return will be and more on where it will come from. When potential an investor understands how the deal will earn its profit, "yes" is easier to achieve.  

Today is going to be a private money crash course, in fact I have a ton of info to share so I am going to break this up over a couple of episodes. This week I made a post in the Cash Flow Guys Community Facebook page asking people to share with me the hurdles they were struggling with when it came to raising private money. The post received several great responses which inspired this episode. Below are some of the most common responses: Self-doubt can be overcome by understanding how to structure or “underwrite” a deal to be sure it is profitable.  Many folks I run into don’t really understand the “how” of deal structure.  They don’t really know what a good deal looks like.  Instead, they tend to just a deal by its initial asking price and don’t go much farther than that. A while back I decided to build a fix for this problem, you can get that fix FOR FREE at HowToMakeDeals.com Its a four-part video course (soon to be expanded) to help busy people learn the ins and outs of breaking down deals and structuring deals for solid predictable profits. Fear of asking for money was also a popular reason.  I remember struggling with this one quite often, for me it felt crippling. Here’s the good news... If done right, you should never have to ask anyone for money.  Money should be asking to do business with you. In my Private Money Crash Course, I teach an easy to learn and simple to present method of explaining deals to your financial friends. Once you learn this system, you can use it over and over on any deal that provides income. My method makes it easy to lay the cards on the table so that everyone can see what’s in it for them. The end result is people asking you to consider helping them invest their money with you. Fear of losing someone’s money is caused by not truly understanding how your deal will support itself.  Lack of confidence in this area can rip you apart emotionally which is why I made the HowToMakeDeals.com free course. When you have an overwhelming fear of losing someone’s money that usually means your deal is purely speculative which triggers your “risk nerve”. Fear of rejection was also popular, however, consider this...if investors are coming to you asking for help investing their money, where is the rejection here?   Imposter Syndrome is the final one that many new investors feel since they have not done a deal, or maybe their first deal tanked they are not “real” investors.  Feeling like an imposter leads directly to withdrawing which holds you back from doing anything that could be construed as forwarding motion. One of the best ways to overcome this is to bring more experienced team members into your deal to help you gain credibility and lessen the likelihood of expensive mistakes. To get started with my Private Money Crash Course, simply go to PrivateMoneyCrashCourse.com right now.

It comes as no surprise that sometimes sellers (and their agents) get offended when we make offers on properties listed for sale.  In this episode I will discuss how we can learn to make offers on investment property without offending the seller. In the beginning I would refuse to make offers in fear of upsetting the seller or their agent.  I looked at lots of properties but spun my wheels when it came time to writing offers. Then, when I mustered up the courage to make an offer I got shot down.  I thought about this perplexing situation a bunch, and then it hit me… Understand this….You can’t control the emotions of another person, but you can control the release of a trigger…and I was releasing triggers like crazy! More sales have started with the salesman’s mouth closed than when it was open. Eventually I learned that if I didn’t trigger them they won’t get offended.  To work through this problem I began to focus on communicating effectively by asking well thought out questions to learn more about the seller’s situation.  When I got shut down I did not make offers on those properties.  When I got my answers, I then made offers on those properties. The more I spoke with people and asked questions instead of making statements, the more offers I began to make and soon followed offer acceptance! Remember, you can win more friends with your ears than your mouth. Pro Tip: Ask open ended questions over the phone, not by text, email or social media. Before calling smile before you dial and stay smiling, it will come through on the phone. Understand why the property is priced where it is which happens by asking good questions. Asking good questions must be followed by good listening for the answers.  Once I began to focus more on them, than on myself I noticed people stopped being offended because they could tell I was invested in them and wanted to help where I could. I promise you if you start making practice calls today the process will not be painful for long, but every day you wait prolongs the pain in the process.