Be The Bank S4 Ep14 - The Triple Closing
On episode 14 of season 4, Justin Bogard is with out a co-host for the first time!!
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
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Interested in real estate. How about wealth? Well, they go hand in hand and here you'll learn all about it, about it. Welcome to be the bank, a podcast where we discuss and debate the topics centered around real estate. Investing your host, just in Bogar shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done, right? Walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank bank. This is be the bank brought to you by bright path notes. Now here's your host, Justin . BogardJustin Bogard:
Welcome back to another episode, episode, number 14 of the be the bank podcast. I'm your host, Justin Bogar. And today we talking about the landscape of what's going on with the home affordability and the interest rates rising and a little surprise at the end. We're gonna do what I call the, the wholesalers triple closing. And we're gonna walk through what that looks like . This episodes brought to you by bright notes . We're back for episode number 14, I'm your host, Justin Bogart again, and I don't have any co-host today. This is a surprise. This is actually a first for me not to have a co-host for the podcast. So I'm gonna see if I can make my way through this. So in the opening package there, I talked about the home affordability. So I went to black Knight , inc.com . It's black Knight , inc.com and they have a data report. And this is what we talk about during our monthly live YouTube broadcast that we do, which is the second Wednesday of every month, by the way, coming up on July 13th, if this is gonna air the same day, you can catch that as well on our YouTube channel, the bright path notes, YouTube channel, by the way, you can check out the video cast of this particular podcast on our bright te bright path, YouTube channel as well. And so the landscape, I get an idea from the black Knight financial data. They have a data report, they have an originations report and they have kind of like a mortgage monitor report. And I specifically looked at the mortgage monitor report and I hadn't looked at it since , uh , probably a couple months ago. This report just came out. So it has all the may data in there and some of the June, 2022 data as well. And the first thing that stuck out to me was the national delinquency rate was already down to 2.75%. So that means anything that is non-current as a , as a , uh , as it is for a mortgage. It would've fallen this category. So that means 2.5 2.75% , uh , is the national delinquency rate , uh , for this, this month. So the month of may, which is continually going down just a little bit, little bit, a little bit. So it's down about 2% from the last month, not two whole percentage points, but 2% relative to whatever the last month is , which may have been like 2.8% or something like that should be the foreclosure starts are down as well. In January of 2022. I had to think for a minute, I think we started off with about 35, 30 9,000 foreclosures that started that month, which sounds like a big number, but in the grand scheme of the entire country, it's not that big of a number relative to what we typically see. It's gone down kind of each month , each month, 30 35, 32, 25, 20 20 . So it's down to about 18. I'm my screen here . 18,800 starts , which is still well below the pre levels as well. Uh , something to point out here is that the cash out refis I thought was interesting , uh , to know , and you can look at this total report, like I said, this is on the black Knight black Knight inc.com website. And you can go down on the data report for this. And so even though the mortgage delinquencies are improving, as far as we're seeing less delinquencies, the cash out refis are, are interesting as well. So I need to get to this slide here for just a second. And so, as the interest rates has been going up, we've talked about this before about we're calling it three, four months ago, interest rate for the mortgage, let's call it the national average for a 30 year fixed mortgage was around 3% or so. And today fast for today, it got up to about 6%, not too long ago. I think today, as I'm recording this on July 7th, it is around, I wanna say 5.7%. So it's , it's getting up there. So as we notice as the interest, rate's gone up, some kind of some interesting things have been going on. So we'll just kind of talk about that for a minute. So the cash out refis are actually down by 50% year, over year, as it comes to this month, we'll call it the may of 2022 data. So you could probably attribute that to the fact that the interest rates were so low. Everybody was wanting to do a cash out refi, right? Makes sense. Right? You could lower your mortgage payment and all the equity that's built up in your house because of the home appreciation. You can tap into that, which we call tappable equity in the form of a cashout refi. So it's like getting your own HeLOCK at a super low rate. So that interest rates have gone up as well. You'll notice a lot of people are trying to do helos on their house because home appreciation is still up pretty high and they can get a better rate pulling out a HeLOCK and they can getting a mortgage rate typically depending on your bank. So what also was interesting to note was that the credit scores for cash out refi qualifier were interesting as well. Try to read some notes here. I got, so the credit scores in the mid 20 twentys to do a cash out refi, you had to be around a 7 55 credit score, which is pretty high. That's a , that's a pretty good credit score. That's probably close to an exceptional credit score. I believe it . I know it's somewhere between seven 70 to seven 80 possibly or seven 50. It's really close to that. And now it's less than 700 in a credit score to go with cash that refi . So we see some , uh, you know, just disproportion here as interest rates go up, the credit score goes down for the cash out refi specifically that that segment of, of the mortgage industry. Um, as we look into the home affordability part of 2022, you skip down some slides here. We noticed that the annual home appreciation fell to 19 3% from a, in April. It was 20.4% making it the largest single month deceleration of since 2006. So what does that mean? It doesn't mean that we were negative appreciation of 19%. It means that we are starting to see a cooling of the market. We've seen this a little bit the past couple of months, but now we've got some data and now we can see the trends after three months, I think we can really call it a trend. And so that is starting to show that the market is kind of cooling as a nation. So there are some markets that are really strong and appreciating more or staying the same or, or cooling more. And so overall it looks like it's cooling. It's starting to show it's a little bit more inventory, at least locally here in Indiana. We're starting to see interest rates. We saw them come up a little bit last month. Now they're kind of come back down just a little bit. So we don't know what's gonna happen the rest of the year. We always hear that the rates are gonna go up, but you never know until it happens. Right? So we see this little cooling period and which leads me to the regions of the country. And I see here some markets with the highest home price growth rates, and you probably would find this shocking. Um, I don't know if that's shocking. I didn't think this was the case, but Florida had a lot of their cities with still really high home price, growth rates. And this is annual growth rates. So the number one was Tampa floor . It was a 34.6% annual growth rate from I'm guessing it was may of 21 to may of 22 . And by the way, may is typically the highest , uh , grow growth month for annual home sales, according to this report as well. So let's kind of run down the list. So Tampa Raleigh, Nashville, Miami Jacksonville, and Orlando kind of , kind of capped out the top six there from about 29 and half percent all the way up to 35% in Tampa. Uh, the second five for the top 10. So the second four would be Phoenix, Arizona, Dallas, Texas, Atlanta , Georgia in Las Vegas, Nevada Las Vegas, Nevada is about a 27.1% increase. Let's look at the flip side of that. So the lowest home price growth are , uh , Washington DC had a 9.9% , uh , annual growth rate. So that's still, that's still a pretty decent growth rate right annually. Then we have Minneapolis coming up next, Pittsburgh, Baltimore, Detroit, Chicago, new Orleans , uh , St . Louis, Missouri, Milwaukee Louisville. So those are all kind of the bottom 10 markets with the lowest growth rate . So going from 13% to about 10% an annual growth rate . So I thought that was pretty, pretty interesting. So you remember back in the 220 and 2021, people were talking about how Austin Texas was just blowing up. And it was probably the city that was most known for the most appreciation, a quick growth rate, even month over month, just appreciating like crazy and people were having, you know, multiple offers on a house and some houses were selling like a hundred thousand over what the list price was. It was getting like ridiculous. Well , so they've had a deceleration and they've had actually had the biggest deceleration surprise surprise of 12.2% of annual home growth rate. So it still have growth rate. It's just, it's not as fast as it was. So you notice like Boise Spokane stock and Phoenix and Seattle, they were all really high appreciating, very fast appreciating during the 2020 and 2021 timeframe, they actually have a good deceleration. So they're , they're kind of cooling back off. So we'll notice if you look to this report, you'll notice some of those markets that were super hot are definitely trying to cool back a little bit to what normalcy is and the markets that, that kind of had average growth, they kind of stayed the same. And some of the markets that had low growth, they've kind of stayed with, with , uh , low growth as well. So overall, it's kind the market starting to show a little bit of a cooling right here. That's , that's not a big, a big jump in cooling. It's just, it's just a cooling period. Let's see what , what my , what do my notes say here? My handwriting is so bad. I need to , I need to have somebody write stuff down for me, right? So the national payment to income ratio is always an interesting stat. So as of what they're calling today, which is like I said, the May, 2022 data that came in for the black Knight , inc.com the data report for the mortgage monitor, you can download this yourself. It's all free. You can go to the website. It's great information. It's a lot of information to take in. It's got about 24 slides to it. If you will, or 24 pages, it's a lot to read, but it's always interesting to see these little trends. And anyways, so a 36.2% ratio is a result of both rising interest rate and story home values, largely driven by historically low inventory levels is kind of the caption here. So what they're saying is, is that it takes 36.2% of wait call here the median household income to make the mortgage payment on the average priced home purchase. So I think it's saying the peak in July of 2006, it was 34.1% was the amount of the median household income that it would take to make a mortgage payment on the average priced home in the country. So the that's awesome in here. That was pretty cool to read. So I wanna read this whole stat for you. So it says with 30 year rates hovering close to 6%. We know as of today, this report came out, the rates were a little bit higher, but as of today, it's just, you know, just north of five , 5.7, let's call it. It says the rates hovering close to 6% and home prices up nearly 11% since the start of 2022 portability is at its worst point since the mid 1980s, when sharp fed hikes led to high double digit mortgage rates that resulted in greater than 50% payment to income ratios. Interesting. So those of you that had a mortgage in 1980s, or heard about mortgages or looked up mortgages in the 1980s, you'll see how those were severely high, double digit interest rates, meaning like they were north of 12, 13, 14, 15, 16, 17, 18%. I've heard some higher than 20% before. Uh , so that, that wasn't interesting time because , um , that was just an interesting time, right? We won't get into the economics of that. See , so the they're saying here, the affordability challenge back then was almost entirely driven by the interest rate environment. Well , income's largely kept up with home price growth. So they're saying, you know, as of mid June, 2022 , you know, that's where that 36.2% of median household income takes to make the mortgage payment on the average priced home purchase. Right? So we talked about this before, I think on the last episode, how Richard and I were going over, what, you know, what we saw that the medium priced home was and what the payment would be versus , uh , at 3% versus 6%. And we saw a significant difference between the two. That was interesting. You can go back and listen to that in episode number 13. Um, what's also interesting to note is that the average home prices now more than six times, the median household income, six times, that's a lot, that's a big jump. So those are kind of the facts of the mortgage, the mortgage monitor for the may of 2022. And you , like I said, you can tell us on the black Knight in.com website, you can download the data report for that for the may of 2022 . Right ? And now we're gonna transition into another segment. And I wanna talk about the wholesalers triple closing. I think you guys are gonna like this. It's pretty interesting. We've been doing several of these lately and they're pretty cool how they work out. We just kind of stumbled upon this . So stay tuned. This episode is brought to you by bright path notes, The trifecta, this is the wholesaler's triple closing. And what do I mean by triple closing? So let's step back for a minute here, and we're gonna be talking about a wholesaler. So wholesaler by nature by definition really is somebody that goes out and finds a blighted property or a motivated seller of their home. And they get that home under contract to purchase whether they purchase it themselves with their own money, whether their intention is to flip it to somebody else like a fix and flipper, and they sell that assignment or they sell that contract to that flipper and the fixed and flipper goes in there and they can fix it up and resell it, or they can have it rental. So that's the wholesaler that we're talking about here. So the wholesalers that we have been running into lately has been, has been interesting. They've been more of an advanced and sophisticated wholesaler, and they're starting to get creative and understand seller financing and understand the need for the borrower to have them the seller be the bank. So they're becoming seller financeers. So this triple closing is pretty interesting. So a typical wholesaler closing, or a typical closing in general, right, is where you have a buyer and a seller. The buyer buys the house, the seller sells the house and you have a closing, right? That's that's one closing , um, wholesalers sometimes do a double closing and they would do this in the instance of where they, they get the house under contract. They buy it from the borrower, but they may be using somebody else's funds at the same time, and they resell it to somebody else. So it's like a , it's like an ABC type of closing where they have the seller. The wholesaler is the first buyer. So they're the B. So you got the, a and the B and they have the C, which is the next person. That's gonna actually be the investor on it. And so they can resell it to the investor. Technically they can use C's money to pay for A's property and they can be in the middle and make that little spread. So that's typically what the wholesaler will do. So now we're gonna have a triple closing, right? So the creativity behind this kind of stems from a more sophisticated wholesaler to where they do the same thing, they get the property under contract. They figure out what they're gonna pay for it. Now, instead of them having the fixed and flipper, excuse me, sorry. I'm not sure if you heard that or not . My internet kind of went out on me for just a brief moment. And so now the fix and flipper is not going to be in the picture. It's going to be a borrower now. So now they're looking for a homeowner to almost home. And typically these homes, they may need some slight repair, but they don't need major repair by any means. It's definitely livable as is maybe not rent ready condition, but it's, it's ready for some TLC. We've seen some that are moving condition and some that really need some TLC. So they are finding a borrower through just their local marketing. So they are finding these borrowers that can put down a sizable down payment, meaning a 20% or higher down payment. And they are carrying back terms. This is the wholesaler carrying back terms to that borrower. And so they'll come to some sort of agreement and then they can proceed forward. And the stipulations for that borrower now is that that wholesaler is going to underwrite them. And they're gonna use a third party underwriter. And that, or third party underwriter is not gonna be like a bank originator. It's just gonna be, you know, an originator that's licensed to just kind of go through the underwriting process of it. So I shouldn't use the word originator. I should use the word underwriter, right? So the underwriter's gonna go through and take all of their income and all of their expenses and figure out what their ratio is to make sure that they can afford this type of mortgage payment, similar to what a bank does, but the credit score isn't as important as it is the ability to repay that debt. So the wholesaler finds this borrower. This is all in conjunction with their two or three week period. They have to buy this property. So they kind of , they typically have somebody in mind , that's looking for a property they've kind of built kind of a , a , a seller financier list. And they kind of know who's gonna fit that. So they get the property on a contract. The wholesaler does, they have this borrower in the background where they're going through they're financials and they're underwriting them and they get ready to go to the closing now. And so then they could have an ABC transaction as well, where they got the, the seller of the house. The wholesaler is the B transaction. And then they have the C, which is this seller financer that's coming in. That's gonna actually buy the house, but this wholesaler's gonna carry back financing for them. So that's still a double closing right there. So the extra layer on here, the triple closing comes into play, where we, as the note investor are gonna buy that paper at the same time, right? Triple closing, you got the wholesalers deal with, with them, with the seller and then being the buyer. And you got the borrows deal. The second closing, right? Where you have the wholesaler, that's selling it to the new borrower buyer. That's gonna carry back financing for them. And then you got the note investor. Now that's gonna buy the paper that was just originated, triple closing, excuse me. I had to get drink of water. So this becomes a little bit complicated. It becomes complicated talking about it, right, without illustrating it on like a fancy PowerPoint, but it also comes complicated because you got a lot of moving parts here. Everything's gotta line up to work, right? It's uh , it's like you remember playing the game when you were a kid, I it's called telephone, right? Where you , you and the students in your class are kind of lined up in a row. Maybe there's 5, 6, 7, 8 students. And you're all sitting down and a teacher starts with the first student that's up front . And they say something to that student. And a student turns around to the second student and they say something else. And they may lose something in, in conversation to the, the third student. The third student talks to the fourth student to the fifth student, the sixth student, so that they get to the back. And the person in the back has to stand up and say, Hey, this is what I was told. Is that correct? So you see what's lost in translation as you go all the way back. So you have to be really careful in these triple closings or what I call the trifecta, because you want to be able to manage this project accordingly. So it can get a little dicey, but if you're detailed, if you're thorough and you follow up with stuff, it can be a very, a very lucrative closing for you as the note investor. So typically when we get these wholesalers to work with us, we are kind of orchestrating this entire operation. We're helping them with the terms. We're getting them to an underwear they can use. We're making sure that the documentation is correct and what we're trying to buy . So we're really, we're really harvesting our own no inventory, but we're not having to do a lot of the , um , the manpower, if you will, because the manpower is coming from the wholesaler, that's finding the property, working with that seller, finding the borrower, figuring out who fits that, that criteria and working with the underwriter. Then we're just kind of orchestrating as far as the terms and figuring out how the final pieces of the puzzle work and what we want to buy. So we kind of get to be selective with our menu here, as far as having a chef make a custom order for us, if you will, which is really cool. So that's what we call it , the trife and the triple closing. So again, we've got the wholesaler that's going after the property, and they're gonna turn around and sell our finance it to a borrower. At the same time, after a seller finance, we're actually gonna buy the paper. And , and we'll pretty much table fund these deals, which is awesome. So that, that wholesaler becomes the lender, right? They are the originator of the loan. The borrower comes to the table and puts their down payment. They make their first monthly payment and all that stuff. And then basically we're buying it right there through an assignment of mortgage de to trust and a launch. And then we're also taking over basically at the second or third payment. Uh , so it's ABC , ABC D type of closing, right? And it's called , uh , the whole sales triple closing, or what we call the trifecta. That's about all we have for today on episode number 14, I'm by myself running solo. So shoot some comments here in the comment section on YouTube or , uh , on any of the podcasts directories that you are listening to this on. And let me know how you did or what questions you have about the triple closing, or even if you want me to bring up a different topic for the next episode. I'd love to hear from you guys. So don't forget to check out our channel on bright path notes, the YouTube channel, so you can watch the video cast of this version and the previous episodes before that next time , guys , talk to you later .Narrator:
Thanks for listening to be the bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our bright path notes, channel on YouTube and follow us on Facebook and Twitter at be the bank and on Instagram at be the bank podcast. Be the bank is sponsored by bright path notes. Thanks again for listening.