Special Loan Products: The Ultimate Guide for Realtors and Investors

00:00:13 - Morgan Smith

Hello.

00:00:13 - Mike Mills

Hello out there to all you real estate survivors. So I got a question for you. Have you ever watched a homebuyer hit a financial wall and wished that you had some sort of magic wand to help him out? Well, today is your lucky day. So welcome to the Texas Real Estate and finance podcast. I'm your host, Mike Mills, a north Texas mortgage banker with Mike Mills Mortgage and Finance. And together, we're going to uncover the wizardry behind special loan products today. Now, these aren't just tricks up your sleeve. These are actual real solutions for your clients biggest hurdles. So what if I told you that the difference between a client's dream home and a missed opportunity could be as simple as knowing about a special type of loan? In a complex world of real estate, knowledge is more than power. It's the thing that makes deals happen. And today, we're going to get into the deep end on those special portfolio loans that can make all the difference in your business and ensure that you're always one step ahead of the competition. So if you're curious about these game changing potential about the game changing potential of these types of out of the box loans, I would imagine that many of your fellow real estate professionals are as well. So if you find this episode helpful today, show us some love by liking, sharing, and commenting. Each little interaction by you helps us grow and continue to provide insightful content that could revolutionize your approach to real estate. All right, let's get on to the show. So imagine if you had a swiss army knife in the world where everyone else was holding a single screwdriver. That's what talking to our guest Morgan Smith feels like, especially when it comes to navigating the labyrinth of all these different options. So Morgan's here to arm us with the tools, like my shirt says, of knowledge, turning each one of you into a real estate welcome to let's welcome the master of mortgage creativity, Mr. Morgan Smith, to the show. Morgan, how you doing, budy?

00:01:54 - Morgan Smith

Good. Thanks, Mike. Thanks for having me on. Appreciate it.

00:01:56 - Mike Mills

You got it, man. Thanks for joining me today. I know. So I'm in Texas and you're in Oregon, so we got quite a little different timescale here. So I appreciate you hopping on with, um. So let's just kind of get right into it. I want to start just with a basic question. So when I say special loan products, when I say portfolio loan products, a lot of people don't really know exactly what that is or they may have some idea of it, but can you just give kind of a brief overview when you hear loan officers or realtors talk about these kind of things. What generally type of products are they talking about?

00:02:27 - Morgan Smith

Sure. Kind of to your opening. It's actually a lot more simple than you think. Right. Private lending is the second oldest business in the world. It's been around for a long time. But when we refer to private lending or portfolio lending, or some people might call it hard money lending, really, it's companies or folks loaning their own capital on projects and houses, on buildings and such. So we call it portfolio because we keep it in the portfolio as opposed to, as, you know, Mike, being a mortgage professional, I mean, the majority of the mortgages that are originated today are packaged up securitized and sold on Wall street or sold to securitized Fannie Mae, Freddie Mac, Va, Fha, all that stuff. So those mortgages are gone, and they're set to a certain criteria. And the reason that they get purchased is because people know what they're buying when they buy them, because they have to meet certain guidelines. Right. Well, portfolio lending is different. Portfolio lending is. It's kind of as simple as you're loaning your own money. Would you make a transaction? Would you be willing to invest in a transaction? So it's true mortgage investment, I would say. And so we call it portfolio because it stays in the portfolio. We prefer that term. Like I said, a lot of people refer to this business as hard money business, and that's, know, they say the loans are hard to get and they're hard to get out of.

00:03:58 - Mike Mills

I didn't even know that's. That's where that kind of originated.

00:04:01 - Morgan Smith

A little rough around the guy. The guy, Joe, at the corner store, you go down and you'd borrow money from it. It kind of developed, kind of out of loan. Right. That's. That's kind of a little bit of the history.

00:04:16 - Mike Mills

So if we don't pay you, Morgan, are you coming to break my kneecap?

00:04:20 - Morgan Smith

That's right. And I got Vinny. Vinny comes over and pays you a visit. But there's a little bit of that in its history. So we try to differentiate ourselves from that group. But more specifically, we're in the business of loaning money, and we're in the business of getting our money back. And a lot of people think, like, oh, it must be great to foreclose and take houses back and do all this stuff. It's really not. It's really a pain in the ass. And so really what we want to do is we want to develop strategic relationships with borrowers and help them and become a financing partner of them. That's really how we look at it, so that they can be successful and then pay us back so that they can do it again.

00:05:04 - Mike Mills

Well, I guess you probably get a lot of repeat clients, too, because once somebody goes through the process, they kind of have a mode, especially when it comes to investors. Like they use you on a regular basis because you have that relationship and you're more willing to do the lending in that regard.

00:05:17 - Morgan Smith

That's right. And that's how we look at it. Mike, as you know, we've got one product that kind of caters to the owner occupant market, which is our signature bridge loan that we call a transition loan, which we can talk about in a second. But besides that, our loans are business purpose primarily. So we're loaning to builders, investors, realtors, sometimes contractors, not on primary residence, but on deals.

00:05:42 - Mike Mills

Right.

00:05:43 - Morgan Smith

And so I've had this conversation many times with investors. People say, well, isn't private money or hard money more expensive? I go, yeah, I mean, it depends on what you're going to compare it to. Right. So is it more expensive than traditional agency or fha money? Yeah, it is. Is it more expensive than a partnership? I don't know. So, Mike, you find a house and do you want to buy in north Texas? And you call me up and you say, I need a couple of hundred grand to buy this house. I think we can flip it and make 75,000 really quick. And I say, all right, so I put up 200 grand, and you go buy the house. What would be fair for me to ask you in return for that? I think it'd be pretty fair for me to ask you for half the profits. That'd be a good deal. Like, okay, I'll put up the money, you do the work, half the profits. Well, what's the interest rate on that charts? Right? Or you know what, man? Okay, I'll lend you the money, and I like you to put up 20 grand of it, though. And then I'm going to charge you ten and a half percent in a couple of points, and I want you to make payments to me. So that's kind of a contrast to what I'm talking about. So, yeah, we're financial partners. We're seeking financial partnerships with people that they can prosper from and we can prosper from, and then we can repeat them. And so our main goal for our borrowers is that they make money on their transaction.

00:07:11 - Mike Mills

Yeah, that's the idea, generally speaking.

00:07:13 - Morgan Smith

And they can come back and do it again on our owner occupant stuff. On our transitional stuff, the desire is a little bit different. We want to be happy. We want them to get the house of their dreams. We want their transaction to work the way that they want to work it, but it's got to be a win for them.

00:07:30 - Mike Mills

Sure.

00:07:30 - Morgan Smith

That's really the basis of private lending is what's kind of cool about it is it kind of just makes sense. And if it makes sense, then we'll probably do it. And if it doesn't make sense, we won't do it. Even though there's traditional loans that really don't make sense sometimes, right?

00:07:47 - Mike Mills

Yeah. Well, especially these days, there's quite a few of those that are happening, it seems like. So it kind of depends on the scenario for the most part, is what you're saying, more or less, and every scenario is going to be a little bit different. And you kind of mentioned a little bit the fix and flip and the bridge. Can you give me some general scenarios in which these type of loans are going to have the most benefit for people? So obviously the bridge loan, you can kind of talk about that a second and then the fix and flips and how these things work. But primarily, what scenarios are we looking at where these are going to have the most benefit for a buyer or an investor?

00:08:18 - Morgan Smith

Absolutely. And I would start with there's a common theme in most private money lending, portfolio lending, and what we look for, above all, we look at everything. We still look at the three c's like you do, credit capacity, collateral, but we really look at collateral. And so if there's a common theme in private lending, it's that we don't loan over a certain percentage of the asset, and that number is typically 60 65%. Because at the end of the day, our goal in private lending, number one, is to get our money back. Yes, a number one. And so any private loan that you look at, for the most part, that's going to be a feature that is going to come up every single time. So there is no 95% private money loans out there that doesn't work.

00:09:10 - Mike Mills

They don't exist.

00:09:11 - Morgan Smith

They don't exist. They don't exist because what a private money lender wants to do is hedge his bets, and he wants to make sure that if the transaction doesn't go the way that it's supposed to, he's got a really good chance, he or she has a really good chance of recapturing their money in the event that they have to foreclose and take over the asset. It's really that simple, right. Particular loans are kind of broke up into three different categories. So we've got a transition bridge loan, and that's a loan in which this is kind of a cool story. This loan came out during COVID We dreamed up this loan because if you remember how crazy the housing market was in Covid. And so all these people, they wanted to buy a new house, but first of all, they had to sell their old house. But they were so scared that when they sold their old house, they wouldn't be able to find a new house, they'd be homeless, that the whole market was kind of like, freaking out. We were brainstorming one day and said, what if we had a product where someone could buy their house before they sold their other one? That'd be cool. And then they could move over and get settled and then go back and get the other house all dialed in, list it, sell it, pay us back. And that's exactly what our transition loan does, is we take a loan position or a lien position on the house that a client is buying, and we take lien position on the house that they're leaving. And we put those together, and it allows them to basically close on their transaction before they sell their other one. So it's kind of a reverse. Okay. That's our probably most popular product, especially around the real estate community, because almost everyone can benefit from that. Right. And it solves a lot of problems. It removes the contingent offer. Nobody likes the contingent offer. Buyers don't like them. Sellers don't like them. Realtors hate them.

00:11:15 - Mike Mills

And even with the market slowing down, it's still competitive right now, especially in certain parts of the. It depends on where you're at. But if it's a desirable home in a good neighborhood and a good price, it's going to be competitive. So you're going to be in situations where contingencies just don't work.

00:11:28 - Morgan Smith

Exactly. And if you're competing with cash buyers and such. So this transaction or this loan type kind of makes it feel like you're a cash buyer.

00:11:37 - Mike Mills

Right.

00:11:38 - Morgan Smith

Because you're able to go and say, yeah, I'll pay this and I'll close this fast, and here's how that's going to work. So that's our signature program, and that's probably the one. I think, like I said, your viewers would probably benefit from the most, especially the real estate community. I've talked to you and other folks about it in the company before. I highly encourage mortgage professionals to figure that product out and to get it out it's a great tool in the toolbox, and it's also really convenient. It's like, it's really nice. How many times have you had that deal where they're trying to close on the house, and then they got all their shits packed up in the U Haul, and then the closing doesn't happen, and then they're staying in a motel six with all their stuff in the U Haul, and then this person's mad, and then it's like a chain reaction because they're selling their house to somebody else. Somebody else. And the whole thing screwed up because one loan officer lied and didn't get the deal done on time or something. Right. Or one underwriter woke up and had a bad day and conditioned something on an appraisal, whatever the deal is. So it's cool. That's a cool product. And I think that your viewers could.

00:12:42 - Mike Mills

Really benefit by on that one specifically. Can you get into a few of the requirements for it? Just because a lot of times, even for realtors and lenders both, we hear about these and we know them, but then they seem so complicated that it's like, I don't even know if I can do this. And I think a lot of lenders especially, and I figured this out getting into the business originally. I've been doing it almost 15 years now, but I remember when I first came into the business, I was told that condos were really tough. Other loan officers just said, just stay away from them. Don't even touch the condos. Don't even deal with them because they're too hard. And I'm like, I mean, okay, I didn't know any better, so I was like, fine. So then once I got my first condo, because that's just kind of how it works. Sometimes you just end up with one of these and you get into what the steps actually were. It really wasn't that hard. It's pretty simple.

00:13:30 - Morgan Smith

There's a couple of steps need to know about the association. Right? Yeah. There's a few little extra hoops. Yeah.

00:13:35 - Mike Mills

That you got to jump through and be aware of and ask some questions. And there's a few other pieces, but outside of that, it's still just a regular loan. There's just a few other parts to it. So when it comes to the real quick, is there a difference between the transition loan and the bridge loan, or are they basically the same thing?

00:13:49 - Morgan Smith

A transition loan is a bridge loan. We coined it that because it's kind.

00:13:55 - Mike Mills

Of transitioning from one to the other.

00:13:57 - Morgan Smith

From one house to another. And so that's a little bit of marketing, but a bridge loan. And we'll talk a lot about different kinds. But a bridge loan is why they call them bridge loans, because they get you from one place to the other. Right. That's all they are. Right. They're just a bridge. Right. Not a freeway forever. They're a bridge. And so they're meant to come to an end at some point. Also. That's the thing about bridges.

00:14:21 - Mike Mills

They're short term.

00:14:21 - Morgan Smith

Yeah.

00:14:22 - Mike Mills

They're not long term.

00:14:22 - Morgan Smith

They're short terms. And pretty much every loan that you and I will talk about today, and every loan on our portfolio, for the most part, is relatively short term. We're not securitizing 30 year private money mortgages like FHA. So our loans, on average, are six months to two years.

00:14:40 - Mike Mills

Right.

00:14:42 - Morgan Smith

Occasionally we'll get a three to a five, but that's pretty much it. But anyways, to answer your question, it's really simple. Full disclosure, transition loan. You got to have some equity. You're using the equity of your house that you're moving out of and coupling it with the new house. But it's as simple as this. You take the value of your departing residence, you take the price of your new house, you add them together. That's the total value, okay? You take the total value, and you multiply it by 65%. So 500, we got a million dollars of total value. I'm going to take 65% of that, right?

00:15:21 - Mike Mills

Yeah.

00:15:21 - Morgan Smith

That's $650,000. That's the max amount of money I'm going to loan you.

00:15:26 - Mike Mills

Okay?

00:15:28 - Morgan Smith

You owe a couple of hundred thousand dollars on that house. Maybe we take that 650, we pay off that 200, we go in first position on both places. We're going to deliver $450,000 to the closing table. Right? You're buying a new house for 500. You come in with 50 grand, we close the deal. Okay.

00:15:44 - Mike Mills

So you make up the difference on that. Okay, that makes sense.

00:15:47 - Morgan Smith

Most of them close without that. Most of them close with zero out of pocket cash from customers because they typically have enough equity. It works really well. First of all, you got to have a little bit of equity. It works really well on a lateral move or it works amazing. Like a downsize.

00:16:07 - Mike Mills

Downsize. Like the older family or older couple down.

00:16:10 - Morgan Smith

We do that every single month. We'll have an older couple getting out of a $750,000 house somewhere on the east coast and jamming down to Florida and buying that condo over $500, gliding in, moving, being happy, turning around and listing it. So it's as simple as that. We'll only 65% of the value of your homes, and we got to pay off any debt. We stick a mortgage on both properties, we close, you go do your thing, move in, list your other property. When your other property comes up for sale, we will provide a payoff. Typically that's not enough to pay off our entire loan. Right, because we both assets, but it usually pays off two thirds to three quarters or whatever. And so in essence, what we do is we take all of the cash from that transaction, we reduce our overall payoff to make it so that there's zero out of pocket from the borrower. And then we take a partial pay down. So that $450,000 loan or that $650,000 loan goes down to 200, and it's now sitting solely on the house that they've purchased because they've sold the house that they've left. Right. And then mortgage professional like you goes in and refinances them. Sometimes we have enough equity that it just goes away or it ends up being a nominal amount and they pay off, but most of the time. And the reason that I think this loan is really great for our fellow mortgage guys is not only is it a solution for a borrower and a referral partner, but it also leads to another loan. Right. You're going to ultimately probably end up with a refinance at the end of the transaction.

00:17:47 - Mike Mills

Yeah. You're helping with the purchase and the.

00:17:48 - Morgan Smith

Refinance both, but it'll be a nice low LTV refinance, probably, and it's better deal and all that stuff.

00:17:55 - Mike Mills

And the benefit for the buyer is that they are able to do this quickly because you're just like you said, you're looking at the asset more than anything. Obviously, credit and income are a consideration because someone doesn't be concerned about that.

00:18:11 - Morgan Smith

That's right. It's quick, it's painless. I'm not going to say we don't have any income restrictions because we make sense, but it's not a hardcore underwrite like a 30 year mortgage is, because it's a bridge. We're going to the other. And quite a lot of times, Mike, there's enough equity that we loan them the payments, too. And then whatever payments they don't use, it just gets credited on their payoff.

00:18:36 - Mike Mills

And then on the lender side of thing, we're going to basically pre approve them anyway for the new house to make sure it all fits based on those. So we're kind of looking at that stuff ahead of time, regardless.

00:18:43 - Morgan Smith

Spot on. And that's a really good point that I would bring that across everything that we do. And obviously, we deal with a lot of mortgage professionals like yourself. The question I'm going to ask you nine times out of ten when you bring me a deal is, hey, Mike, what's the exit strategy?

00:18:58 - Mike Mills

Right.

00:18:59 - Morgan Smith

How are you getting out of this?

00:19:01 - Mike Mills

How are we getting done? Yes, how are you going to get this done?

00:19:03 - Morgan Smith

Well, the exit strategy is going to fix up the house and sell it. All right, cool.

00:19:07 - Mike Mills

Okay.

00:19:08 - Morgan Smith

The exit strategy at six months, he's going to have two years of self employed tax returns done, and I'm going to get him approved with Sally, the underwriter. But she told me I couldn't do it, so there was two years. Okay, cool. That's a good one. Okay.

00:19:20 - Mike Mills

So that's another thing that can actually make a lot of sense, too, if you have somebody that is needing to do something and they need that bridge between when we can actually qualify them, because I didn't even think about that. When you have a person that has self employed income or they've started a new career or something like that, or maybe they've gone from a w two to a commission employee or something along those lines, and you need that extra six months of time before you can get them there, then sometimes you can make that work.

00:19:45 - Morgan Smith

That's right. And like I said, primarily we're dealing with investment properties, but that comes up all the time in investment properties, too. Getting a fanny Freddie 30 year non owner mortgage isn't that easy, especially for self employed guys. And so, yeah, we solve that problem a lot in a lot of different ways. We solve that problem with income sometimes, like you just said, we solved that problem with seasoning, whether that's seasoning of assets or seasoning of down payments or seasoning assets, whatever. You call me up and you say, hey, I got this investor wants to pay $300,000 for this house. He's got 150 grand, but he got it from his brother yesterday and it's not seasoned right. I don't care.

00:20:30 - Mike Mills

Yeah, you're fine. You got the money?

00:20:33 - Morgan Smith

Is it real money? Yes. Well, if the title company takes it, that works for me. Or, hey, Mike, my mom passed last month, and we just got through last year and we just got through probate, and I just inherited her free and clear house in Fort Lauderdale. It's worth $500,000. And I'd really like to take some cash out and do some things. I got to fix it. I got to do some other stuff and. Well, okay, but it's a traditional loan, right. He's probably going to have to season that for a while. He's probably going to have to own it for a certain amount of time before he can do cash out. We'll just loan it to him the next day because this makes sense for us.

00:21:11 - Mike Mills

Right.

00:21:12 - Morgan Smith

It makes sense because it's not risky. It makes sense. And so that's what we try to do. We try to make sense.

00:21:21 - Mike Mills

And I know it's going to vary depending on the size of the loan. So you can speak in percentages or whatever it is, but what kind of costs would a buyer be looking to incur on doing the bridge loan versus. Well, yeah, because there is no option otherwise. So what would they be looking to incur in that situation? Generally speaking?

00:21:36 - Morgan Smith

Generally speaking, you're going to pay a rate in the high eights to high.

00:21:41 - Mike Mills

Nines right now because right now rates are in the seven.

00:21:44 - Morgan Smith

Right. Comparatively. Not that bad discussion, and I'll go off on a tangent, but when you were selling 3% 30 year fixes, I was selling nine and a half percent fix and flips and bridges. Oh, wow.

00:21:59 - Mike Mills

Okay.

00:21:59 - Morgan Smith

When you're selling seven and a quarter, 30 year fixes, I'm kind of still selling nine and a half to nine and three, quarter to 10%. So our rates, while they're higher traditionally than the market, they don't necessarily escalate.

00:22:12 - Mike Mills

As fast as they stay pretty consistent, regardless of what the other rate.

00:22:16 - Morgan Smith

Pretty consistent, because the goal of our fund, and just to back up a little bit. So we manage about $70 million capital. It's friends, family, high net worth, people that want to put their money to work, and our goal is to try to get them a double digit return.

00:22:32 - Mike Mills

Right.

00:22:32 - Morgan Smith

And so our fund is, I'm proud to say our fund has a historical inception to date, return net to our investors of about ten and a half. And that's after we pay our people and we do everything else. We're trying to hit a double digit yield. So when you take 9%, you add a couple of points on it, and it's a twelve to 13% yield. That's kind of how that works. And then after management fees and such, that's what our investors get. But going back to the question, you're going to be in the high eights to nines, and you're going to pay anywhere from a point and a half to three points on the transaction, depending what the mortgage professional is doing. Our lender fees are typically a point and a half on a six month loan and two points on a twelve. And then a mortgage professional is typically going to get the same thing. So call it 8.95% and three points. It's interest only. It's quick. The money doesn't usually come out of your pocket. It's already financed. It's financed.

00:23:30 - Mike Mills

It's just added to the loan. Most of the time when you throw.

00:23:33 - Morgan Smith

In your title fees and all that stuff, I think it's realistic to say you're going to pay four and a half percent to execute that transaction. So it's not free, obviously. Is there convenience?

00:23:45 - Mike Mills

There's a need for it.

00:23:47 - Morgan Smith

Nothing's free.

00:23:48 - Mike Mills

Well, and even on the rate, and this is something I run into.

00:23:52 - Morgan Smith

Right. Because you have it for 60 days.

00:23:53 - Mike Mills

Yeah, that's my point is. Yeah, the rate is not a problem because I always have to explain to people, like, rates are functions of time, they're not functions of money. Like the longer you have a rate, if you have a 3% interest rate for 30 years, you're going to pay a lot of interest regardless of what it is. If you have a 30% interest rate for one month on a certain balance, your difference in cash payout is much less. So the rate is very much a function of time. It's not a function of money.

00:24:21 - Morgan Smith

Yeah. So let's say it's four and a half percent. So what's that worth? Well, that's worth being able to buy a house before you sell your others.

00:24:29 - Mike Mills

Or getting a house, really.

00:24:30 - Morgan Smith

Sometimes. Maybe just getting the house.

00:24:32 - Mike Mills

Yes.

00:24:33 - Morgan Smith

That's not unreasonable. The houses get butt up 2%. Right. I like to make the case, obviously, I can't prove it statistically, but I like to make the case that when you come in armed with a product like this and you're making a cash like offer, you're going to get a better deal. Yes. You're going to get a better deal than you are on a contingent offer.

00:24:53 - Mike Mills

Well, you're not going to win if you're in a competitive situation. If you put up a. You're not getting the house.

00:24:58 - Morgan Smith

And the only way you're going to win a contingent offer if it's a competitive situation is if you pay more.

00:25:03 - Mike Mills

Yeah. Well, yeah, that's true. If you way overpay, possibly you could win an issue.

00:25:09 - Morgan Smith

That's kind of how it shakes out. Not an issue. It's not an issue that, obviously it's important that people know what things cost, but there's really no negotiation on that. It's like, well, this is what it costs. It's a convenience. I'd love to help you out and do it. If you don't want to do it, that's cool, right? We're the only guys that do it and people like it. So that's kind of how that works. We can typically close them, and we don't like to do it all the time, but we've closed them in five days. That's hard. But we can absolutely close them faster than a traditional loan.

00:25:46 - Mike Mills

Well, the other thing, too, is the bridge loan has been out there. The idea of the bridge loan, let's call it, has been out there for a long time. But my personal interaction with other companies that have been offering this is that reason I asked the cost question is because a lot of people don't. There's no transparency. There is no, like, here's what it is. They find out once they've kind of agreed to a few terms on it, they're under contract. And like, oh, wait a minute. What is this costing me? Well, this is what it is. I didn't even know that. It's like, look, if you're up front with people and you're like, hey, this.

00:26:15 - Morgan Smith

Is what it is.

00:26:16 - Mike Mills

Here's the situation, which is why I appreciate this approach to. It's like, here's what it is. And it's kind of like a take it or leave it kind of a deal.

00:26:23 - Morgan Smith

Because here's what it is, part of the deal. That's how it works. And there's all kinds of other methods. I'm sure you've tried. And I've tried. There's the key lock on the departing residence. That sometimes works, but that always kind of ticks them off when you pay it off 30 days after you originate it. And then you know all too well about recapture. So big cash out, refinances, and then they turn around and buy something else and pay off your loan. And then you get the note from accounting that says you owe them $13,000.

00:26:55 - Mike Mills

For the Aaron calls me commission.

00:26:58 - Morgan Smith

That you've already spent. There's no recapture on this product. We know what the deal is, and honestly, that's why there's points, because we can't make it. We can't sell this product, secondary market, make any money. We're not going to hold it for long enough to really make any money. So that's why it's set up.

00:27:17 - Mike Mills

Yeah, you make the money on the transaction. All right, so let's get into some of the. That's a product that's going to be beneficial to a home buyer, a home seller, in that case, working directly.

00:27:30 - Morgan Smith

That's a product that every real estate professional, whether they're in real estate sales or mortgage, should know about. Yeah.

00:27:37 - Mike Mills

Should be aware and be able to speak intelligently on. All right, so then let's talk about your bread and butter, which is the investment stuff. So the flicks and switch. Excuse me? Flicks and switch, the fix and flips, even some of the new construction stuff that you're doing. So tell me a little bit about some of those and how that works.

00:27:54 - Morgan Smith

Sure. Like I said, everything else we do we call business purpose. Business purpose being that we are loaning, not on somebody's primary residence. We loan to corporations, llcs and people. So that's kind of a unique thing compared to traditional lending, where it's hard to get.

00:28:18 - Mike Mills

Hard to get business, the business and.

00:28:21 - Morgan Smith

All that kind of stuff. But basically we're loaning money to either buy or buy and rehab or ultimately build properties. Right. So our fix and flip loan, our renovation loan, is probably our most popular. And you have to been under a rock for the last ten years not to see some type of hdtv flipping show right there everywhere. My wife watches them all the time, even though we've renovated our house. I'm like, why are we still watching this?

00:28:48 - Mike Mills

I was actually on one of those, by the way.

00:28:50 - Morgan Smith

Were you?

00:28:51 - Mike Mills

Yeah, my wife and I were on a show called Lakefront Bargain hunt renovation.

00:28:57 - Morgan Smith

Oh, yeah.

00:28:58 - Mike Mills

We bought a lake house in place down here in Texas and renovated it and did the whole thing. So I existed in that world for half a minute.

00:29:08 - Morgan Smith

Well, there you go. And hey, there's a really good reason that that world exists, and it's a world that needs to exist and expand. I mean, we all know there's a housing shortage. There's been a housing shortage since the first crash, the first major crash that I was involved in. Six, seven, eight. And it's never recovered. The home building has never quite recovered. There's never been enough lots, mainly because like half the banks that used to do the non vertical financing, which is non vertical, would be horizontal, we call it, which would be lot development, land development, all that stuff. The riskiest, hardest part of the trade. They're out of business, by the way, because they all went out of business in seven and eight and nine, and the ones that stayed were banned from forever doing that. Right. Which is one of the reasons that private money has flourished. I'm kind of all over the place, but people say, well, why do people come to you for loans. And I go, because there's banks. And if you've ever dealt with a bank, then you'll know why you don't want to borrow money from a bank. But more specifically, there's just a lot less banks now. And the banks that we have are bigger and stodgier.

00:30:21 - Mike Mills

Well, and there's going to be less continuing, by the way, too, because there's.

00:30:25 - Morgan Smith

A lot of be less continuing. So the market needed capital and so guys like us came out to meet the demand.

00:30:34 - Mike Mills

That's really private money.

00:30:35 - Morgan Smith

Private money. That's why private money exists is because there's banks or there's not banks. Right. And I joke that and I have friends that are bankers and I've even worked in banks and owned a bank, part of the bank at one point in time. But yeah, you know what the problem with banks?

00:30:53 - Mike Mills

Where do you want to start? I don't know if we have enough time.

00:30:55 - Morgan Smith

Well, it's really simple. They're run by bankers.

00:30:58 - Mike Mills

Yes.

00:31:00 - Morgan Smith

That'S the problem. Right. That's the problem with banks. Anyways, fix and flip. Fix and flip. So the nation has a shortage of housing. There's a ton of houses that were built in the are dated, that are in good neighborhoods or coming neighborhoods, and they need renovation because let's face it, when new home buyers come in, especially the younger ones, they don't have any perspective. They can't dream, they can't see any potential. And quite frankly, it's really hard for lenders to make loans on dilapidated houses. Right. You want houses that are done. So there's this conundrum. You've got all these people that want to buy houses and you got all these shitty houses. And so somebody's got to bring those houses to market. And that's what fix and flip is. That's really where that whole renovation Craze came into. And so we'll loan money to purchase a house, we'll loan the money to renovate a house. And we do that kind of like a construction loan. And we do it in basically a process in which we administer draws. So again, kind of going back to our original premise, like what's the number one thing that we care about as private money lenders? Collateral. Right. We're not going over 65% loan to value. So how do we do that? Well, guy buys a house for $200,000, wants to put $50,000 in it. Well, we'll loan him 90% of that number, but we're going to hold back that $50,000.

00:32:33 - Mike Mills

Right.

00:32:34 - Morgan Smith

Then he's going to go out and he's going to tear all a bunch of stuff out and replace it and call us up and say, hey, I got all the drywalls done and the sheet rocks up and we're ready to go, and I need to draw. And so we send an inspector out and we go, yes, that's true. So we're going to release some money to them. Why? Because the house is that much more valuable now, right? So we're keeping our loan to value the same the whole time. I mean, I'm sure there's a lot of guys that ask us, I don't understand why you just don't hand me that 50 grand and let me go.

00:33:04 - Mike Mills

I go, well, because you might run away, man.

00:33:07 - Morgan Smith

You might run away with my 50 grand. Exactly. Where's the incentive there? And so we make sure that it gets done.

00:33:16 - Mike Mills

That's a normal, any type of construction, and that's a thing that I deal with home. My favorite home buyer is the young couple that calls me and says, we found this piece of land and we want to build our dream home on this land. Right? And they're like, I want to get a loan to do that. And I'm like, well, do you have $100,000? And they're like, what do you mean? I'm going to get a loan? That's how this is going to work.

00:33:41 - Morgan Smith

It doesn't work that way.

00:33:42 - Mike Mills

And I'm like, well, the bank's not going to loan you money on a piece of land that you don't own for a house that you haven't built yet. They're going to want skin in the game for you to be able to do that. You can't get an FHA loan on this raw land out.

00:33:57 - Morgan Smith

You're spot on. And renovation lending, construction lending is dangerous. It's high risk for lenders.

00:34:05 - Mike Mills

Their job or they die or they run away. Then you're stuck with this land and property that you got to finish.

00:34:10 - Morgan Smith

Then you got to finish. That doesn't always work out. I've been on the wrong side of a bunch of them. So we're really careful about that. And that's why we really care about the extent of the remodel. But probably what we care about the most is the competency of the person. Right? Have you ever done this before? No, but I watch tv on and it looks pretty good. Easy. It's like, well, yeah, but it's not that easy.

00:34:37 - Mike Mills

I've heard that I have a friend of mine who does quite a few of these. I've done a couple, but not a ton. And that was one of the things that he says. Some of these banks, when they go to, it's like, look, how often have you done, when have you done this before? And who's your contractor? Who's your builder?

00:34:52 - Morgan Smith

Who's doing these things?

00:34:53 - Mike Mills

Because it matters to us who's happy? Because if it's just your brother in law that's never built a house before, then, no, I'm sorry, we're not doing that.

00:35:01 - Morgan Smith

That's right. So that's part of the underwrite for sure. And we absolutely work with inexperienced renovators or less than fully experienced renovators, but it also depends on the scope of work. Right. So not all remodels are created equal. You go by that 80s rancher and you want to go in and do some paint and carpet and replace some cabinets and some appliances. Okay, that's not that difficult. You go buy that 1918 house in the inner part of Boston, and you're going to try to go up and put a second story on it or whatever, take out a bunch of. That's the different story. Right. So not every deal is the same, for sure, but basically, kind of going back to the premise, we will loan money to purchase and renovate a house, and we will manage that process through with the client. And while we call it fix and flip, it also can be fix and hold. A lot of them are fix and hold as well. So a lot of investors are going in and they're performing it like they were going to sell it, but then they turn around and they rent it.

00:36:08 - Mike Mills

They rent it out, then they'll do, like, permanent financing, and then they bring.

00:36:11 - Morgan Smith

In their permanent financing.

00:36:13 - Mike Mills

Right.

00:36:13 - Morgan Smith

So again, as a mortgage professional, fellow mortgage professional, a chance to get a couple of loans and what we care about, like we always talk about LTV. So in this case, again, we're back at that 65% number. We're going to loan you no more than 65% of what this property is worth when it's done.

00:36:33 - Mike Mills

Right.

00:36:33 - Morgan Smith

Might be 90% of what it's going to cost you to buy and renovate it, but we're going to loan you 65% of what it's done, and we're going to control that process. And people are always like, I don't understand why you don't loan more. I said, well, let's talk about that. So 35%, that's your gross margin. That's all the money you're going to make. Let's start with that, here you are. You're a home renovator, and you're starting off with a 35% gross margin. That's before you've made a single interest payment. So let's figure you're going to probably pay five, six months of interest. That's 3% you're going to have the pleasure of paying, likely some realtor, 5% to 6% when you sell it. Right now, we're up to ten to 12%. Or, said another way, we're down to 22%, 24% gross margin. I don't know if you've ever done a renovation project, but they tend to take longer and cost more. Not the opposite.

00:37:32 - Mike Mills

Absolutely. I've done three of them and every single time. And mostly it's because I get my wife involved. She's like, we should do it this way. I'm like, that's a lot of money.

00:37:41 - Morgan Smith

Scope creep, project creep, whatever. So chances are you've underestimated. Now, your 22 goes to 1815, and that's if you sell it on day one. So is it reasonable to make a ten to 15% net profit? Yeah, that's about it. Right. Otherwise, what are you doing? Why are you taking all that risk? While that's obviously self fulfilling for us because we're trying to protect ourselves, it's also mutually beneficial. Right. We want you to make money on that transaction. You got to make something.

00:38:19 - Mike Mills

Why are you doing it?

00:38:20 - Morgan Smith

Why are you doing it? Right. This is not a nonprofit. This is. And if you can make 15 or 20%, that's a pretty good deal. So that's kind of how that works. So we do a lot of fix and flip lending, renovation.

00:38:35 - Mike Mills

I'm really curious what you're seeing right now on that, especially because you said it a minute ago, right now, housing is in short supply. We've been that way for a long time, and quite honestly, I don't see where that is going to change. I actually think it's going to get worse, because if you look at housing starts just in the month of January, they are way down compared to where they were. Builders are pulling back how much they're building, and there's a myriad of reasons and possibilities as to why that's happening. And then there's also another trend where people are staying in place longer. So now you have the average home used to turn over, say, back ten or 15 years ago. It would turn over in six and a half, seven, eight years. Now the average has moved all the way up to twelve. So now people are staying. And then when you add in people locked into two, three, 4% interest rates and the rates are high. That number is going to just continue to grow. So my question is, what are you seeing because you deal with this every day? Is there still a market out there for these fix and flips? Are there still homes?

00:39:35 - Morgan Smith

Absolutely. I think the question you really want to ask is what markets can you actually make money fix and flipping, right? Yes, because to your point, they're so competitive already that there's not a lot of margin in a lot of properties. But absolutely, there's markets, typically lower priced markets where there's some pretty considerable upside left in fix and flip. But I do believe, like you, that it's going to continue. The demand for housing is just going to continue, in my opinion, despite what happens, I'm never going to make the call, but I do believe interest rates will come down at some point in the future. Not that that even matters, probably in a while because people just need to buy houses. I've thought about the baby boomers as they start to pass away. They own a lot of houses. Not that that's going to be a glut of houses. But what I look at is that's going to be a lot of houses that need renovating.

00:40:43 - Mike Mills

Well, it's going to be a slow drip. It's going to happen over time. But it also, again, to my point, I live in an area in North Texas where we live near a country club. I don't live on the country club, but I live near it. And so the neighborhood that surrounds our area has, it's all older. I mean, it's been around for 30, 40 years. It's an older neighborhood or area. But my son goes to a junior high there. And the attendance, or I should say the enrollment for the junior high has significantly declined over just the last five to ten years. Because what's happened is that the older population that bought these homes in, say, the early ninety s or late eighty s or whatever, even late ninety s, I forget how old I am. But they're not moving. They're staying there. And so we don't have new families coming in to that area to help bolster the schools. And so the enrollment's shrinking and the teacher's like, what's going on? That's because none of these people are moving. They're staying where they're at. They're not going anywhere.

00:41:45 - Morgan Smith

You have in Texas. Everything's big in Texas, right? But you guys have land.

00:41:51 - Mike Mills

Yes, we have a lot of land.

00:41:52 - Morgan Smith

You have a lot of land. A lot of, you know, you kind of can drive until you qualify. Right.

00:41:59 - Mike Mills

Okay, I'm using that. I'm going to use that in one of my videos. Drive until you qualify.

00:42:04 - Morgan Smith

That came from when I used to have an office in then Plano and then Frisco. And then you just drive north until you qualify and then you get into Oklahoma. Now that's where it's, you know, there's a lot of differences in a lot of different mean. I think you have a robust renovation market because you just have a lot of people on a lot of houses. But you guys also have the ability to crank out subdivisions as much as you want. Yeah.

00:42:33 - Mike Mills

Nowadays all the subdivisions are looking to. A lot of them actually are built to rent. So you see these big subdivisions coming up.

00:42:40 - Morgan Smith

Yeah.

00:42:41 - Mike Mills

They're popping up everywhere. And you're like, oh, what's this one? And you're like, oh, it's 100 townhomes and they're all for rent.

00:42:46 - Morgan Smith

None of them are Wall street hedge fund. So you got to consider those factors. Land, you go to a place like where I live, Portland, where it's really conservative in terms of what we have, urban growth boundaries, know there's really tight zoning. There's a lot of that in the west coast in like it is what it is, man. There's only so many lots. And so they're going to have to renovate those houses because there's no other place to go. So it's a vibrant part of the market. I think it's going to continue. Yeah. It's definitely not created equal in different parts of the country. There's areas where it's a lot harder to make it work than others, but it's a robust part of our business and we enjoy it. We support it.

00:43:37 - Mike Mills

So I'm curious where you think or what your opinion on. Well, real quick, before we get to this, this is maybe a longer question. Is there any other specific products that we haven't talked about? We talked about fix and flips, bridge loans.

00:43:48 - Morgan Smith

Yeah, we do offer a limited amount of what we call ground up construction.

00:43:55 - Mike Mills

Okay.

00:43:57 - Morgan Smith

Which is building a house from scratch. The way our funds manage, we have certain allocations and so we only have so much allocated to that because on a risk scale for us, that's the most risky of all. And so to be smart about how we manage our funds, we only have so much. And so it's always sold out, to be honest. There's kind of a waiting list for it. But we do do that on deals that make sense. And if we have 190 loans in our portfolio today. We have maybe nine or ten that are ground up construction loans. But then lastly, what we do, which is kind of what we've been talking about the whole time, but I'll just kind of highlight it. We do a lot of investor bridge loans, and that's just loan, right? That's just a loan. And there's a million reasons why that is. But it's typically like, besides the fact that people hate banks, it's typically like, I got to close fast or I got a property that's got deferred maintenance or it's screwed up somehow, but we can see the intrinsic value of it and so we'll close on it well.

00:45:12 - Mike Mills

Real quick on the close fast thing because I think a lot of people that would watch this don't understand, like close fast. Okay, great. But here's why that matters especially is because when you get into the world of investing in properties, there are what we would call off market properties. Right? When you drive down the road and you see the little sign, the little yard sign that says we buy houses, okay, what that is is that's a guy or gal that is calling home, like just dialing for dollars. They are calling homeowners and saying, do you have any interest in selling? They're pretty much just the middleman. And that middleman has a list of investors. You could be on those lists if you want, because there's hundreds of these guys out there, guys and gals, and once they find someone that's like, yes, I want to sell, then they shoot it out to all their investors. So the point is that these homes never hit the MLS. You're never going to see it on zillow. It's not the foreclosure list where you show up. These are homes that are only being offered to people within that group because this middle guy decided to go knock on doors or make phone calls.

00:46:14 - Morgan Smith

You're right, homes.

00:46:15 - Mike Mills

And that's how it works.

00:46:17 - Morgan Smith

A new phenomenon. Like, I mean new in the last 15 years, these wholesalers, they call them, which are quasi legal, but whatever, they're like in between the wall and the wallpaper. But they serve a purpose. That's what they do.

00:46:34 - Mike Mills

But you got to close fast because.

00:46:35 - Morgan Smith

They'Re like fast because you're in competition with cash buyers. When you look at any hard, private money, hard money loan, whatever you want to call it, at the end of the day, it's a financial transaction. So how much does it cost? Well, it doesn't matter really. Within reason, depending on how much you're going to make. So you call me up and you say, I can buy that house down the street from the estate for $200,000, and I can flip it for three and a quarter in three weeks, and it costs you $10,000 to get the financing.

00:47:06 - Mike Mills

Sounds good. Sign me up.

00:47:07 - Morgan Smith

You made 115 grand instead of 125.

00:47:11 - Mike Mills

Or you can make no grant or zero. Yeah, zero grand.

00:47:15 - Morgan Smith

So bridge loans, we do a lot of those. And like I said, it's typically because the house is in a situation that's not financeable conventionally, but we can look at the intrinsic value of it. The borrower is in a spot for some reason that he can't pull it off traditionally, but we'll be able to in a certain amount of time. Like I said, needs to close fast. We do refinances also. Like, you've got a free and clear property or something without much debt on it. You're trying to raise capital to close on something else. We'll do that. We'll do that money quick, and then someone like you can come back and do a long term refinance. So basically, down and dirty quick lending, equity lending, 35% down on purchases, probably no more than 60 on cash outs. Quick down and dirty deals. Right. That describes a lot of what we do, and that's just like, situational. Like the guy who inherited the house and he needs to take cash out in a week and all that kind of stuff. So that's basically what we focus on, kind of. In summary, I go back to, we're collateral. We're collateral based. And so, like 65%, if you have a loan request that's 65% or less loan to value, then there's a chance, pretty good chance we'll do it, especially if it's business purpose. It's kind of that simple, right? We may do it differently, depending if the guy's got a 720 credit score or a 580. And we will look at character, but ultimately that's what we do.

00:48:56 - Mike Mills

What do they say? If it makes dollars, it makes sense, right?

00:49:00 - Morgan Smith

Yeah, something like that. And so that's kind of our products. There's a million different ways that they take form. And I could sit here and talk to you about them all day, but it's just like, stuff happens. How do you get these loans? Stuff happens. Just happens that way. I'm being nice, but just because life happens, people need things, right?

00:49:29 - Mike Mills

Well, you've been doing this for a long time. You've been in the world. Real estate lending, other side for quite a while. So I'm curious, just you pay attention to what's happening out there. Where do you think we're headed as a real estate market in general? I always want people's opinion on this because we're going through so much turmoil right now between real estate commission lawsuits and interest rates being high and affordable housing crisis and builders pulling back and all this stuff, especially now in the last year, our industry as a whole has just shrunk dramatically between realtors and lenders just getting out of the business because the money has dried. So where do you think things are going? What's Morgan's two cent on this market and where it's headed?

00:50:18 - Morgan Smith

That's a good question. It's like asking me about interest rates. If I knew that question, where interest rates are going, I wouldn't be on this podcast. Right.

00:50:25 - Mike Mills

I don't have a crystal ball, but.

00:50:26 - Morgan Smith

I'd be in my condo somewhere in the Bahamas. But my belief. I mean, I have a few beliefs. Like we touched about it earlier, I do believe there's an overall shortage of housing, and there has been for some time. And I believe that a combination of factors like the amount of skilled labor, the availability of materials, the availability of ground, and not necessarily in Texas, but the more difficulty of city and county and municipal planning departments and red tape and permits and all that garbage that screws everything up is going to keep that down. Right. I don't see an oversupply of houses coming anytime soon, potentially in certain markets.

00:51:18 - Mike Mills

Real estate is a very local thing.

00:51:20 - Morgan Smith

Real estate, local? Yeah. Could they overbuild in north Texas? Yeah, they usually do, but it usually corrects itself because they're big home builders and they don't go out of business, and they turn them into Rentals, like you said. And will they overbuild in Orlando again? Yeah, probably. And areas where there's no, you know, as a whole, I'm pretty bullish on, you know, I believe that things revert to the mean over time, and so real estate seems to go up, like two and a half to 4% a year. Right. So when it goes up 35% in one year, like it did, I'm thinking it's got to revert to the mean. Right?

00:52:02 - Mike Mills

Got to come down.

00:52:03 - Morgan Smith

Yeah, got to come down, or at least got to stabilize when it's stabilized. Right. I think you've seen that. You saw that happen from the peak of COVID when some markets are up a third to some depreciation, not massive amounts of depreciation, but certainly some depreciation in some of those markets and absolutely flat. Right. So now we're almost two years after it, and if anything, it's gone down. So that 33% is starting to revert to the mean. So I don't see a lot of short term, massive appreciation, I guess. I would agree. And that's because of that simple revert to the mean concept. But also, there's a limit on what people can pay.

00:52:53 - Mike Mills

Well, and that's the problem that we're running into, is that, yeah, it's becoming very much a haves and have nots. I mean, it's getting to a place where if you don't have access to a substantial amount of cash or make good income, it's going to be very difficult for you to purchase a house going forward because saw, I did a story recently on a market update episode that I ran. So in San Antonio, which is here in Texas, obviously, Dr. Horton, I believe, is building homes under $160,000.

00:53:24 - Morgan Smith

That's amazing.

00:53:25 - Mike Mills

Sounds amazing, right? Well, you want to know what the catch is? It's a 665 square foot house.

00:53:32 - Morgan Smith

There you go.

00:53:34 - Mike Mills

Now it's available. It's there. It's a price point that can work for many people. But the days of having the three bedroom, two bath, 1500 square foot house and getting it for an affordable price, unless anything can change. Technology and innovation is obviously the big driver in all walks of life. And you could see there's things that we're not even thinking about that could come along and make that change. But my concern even being in this industry is just in the sense that I just think that it's going to get more and more unaffordable because like we talked about, there's no wave of inventory coming and they're not building homes. So unless there's some sort of economic that doesn't have to do with homes, but just an economic collapse or fall or downturn or whatever you want to call it then, of significance, by the way, because the lower income, like we're going through, I think a bit of a downturn right now, whether we realize it yet or not, I think we will look back in twelve months or 24 months and go like, okay, that's kind of when it started to occur. But most of that is affecting lower income individuals right now. It's not affecting the high net worth, high earners yet, or it may not get to that point, but those are the people that can afford to buy homes. So their impact is going to be lessened simply because they're not impacted by small economic downturns. So in order for us to have a significant shift or revert to the mean, like you said, there would have to be a pretty significant thing occur, like what happened in 2007 and 2008. And it's not going to be related to housing, by the way, because with rates and the underwriting requirements and all the stuff that's gone on, there's very few opportunities for.

00:55:18 - Morgan Smith

It's always different. Right. It's different every time something's going to happen.

00:55:23 - Mike Mills

Something commercial real estate.

00:55:24 - Morgan Smith

I mean, who would have predicted that housing would have gone up so much.

00:55:27 - Mike Mills

Because of COVID Yeah, cheap money does that.

00:55:33 - Morgan Smith

But kind of going back to predictions. So I don't feel that there's a massive crash coming. I do think that there's been a continual slowdown, and it's a grind. And if you're in this business, you know that because you're grinding every single.

00:55:48 - Mike Mills

We're the canaries in the coal mine, all the lenders and realtors out there struggling.

00:55:53 - Morgan Smith

Right. But what I do know is that people get older, they want to move out of apartments, they want to have kids. Some of them don't have that opportunity, but a lot of people want them. And there's a drive, there's a desire for homeownership. And I remember ten years ago, we were all bitching about the millennials because they wouldn't do anything, and now all of them want to own houses.

00:56:16 - Mike Mills

Yes.

00:56:17 - Morgan Smith

Right. Whether they're 600 square foot houses in San Antonio that cost 170 grand, or their row houses or their condos, or there's something, they're going to continue to want that. And so I think the housing business is overall pretty stable. I think it's going to be kind of crappy for the next few months.

00:56:38 - Mike Mills

Going to be slow.

00:56:39 - Morgan Smith

Slow. Not devastating, but slow. I do think we've had some more depreciation than people want to admit, but nobody's selling anyway, so it doesn't really matter.

00:56:49 - Mike Mills

How would you know if you're not selling? You have no idea.

00:56:52 - Morgan Smith

Right, exactly.

00:56:54 - Mike Mills

Realized losses that everybody's concerned about on Wall street right now, especially when it comes to commercial real estate.

00:57:00 - Morgan Smith

Yeah. So I think it's kind of going sideways, and, yes, it'll absolutely be affected by interest rates at some point in time. And I think it's not going to take much for the people to jump off the fence and start buying again. I write a newsletter every quarter to my investors, and I always have a part that's like, what keeps me up at, um, homeowners have never had so much debt people have never had so much debt.

00:57:30 - Mike Mills

United States has never had so much.

00:57:32 - Morgan Smith

Debt and the United States has never had so much like, and I keep wondering because Aaron talks about all the, is the, why is it so hot? Why is this market so mean we should start failing pretty soon? Why does it just keep borrowing? We just keep borrowing. Got to feel like there's got to be a level at a state level and at a personal level. And so that never ends well. No, that's the part that I don't know the answer, but that's the part that I keep an eye on.

00:58:06 - Mike Mills

Yeah, I don't think anybody has an answer for that. And I think there's a lot of people asking that question, which is why I think especially on the investing side of the world where you're looking at people going, what are we going through and what's going to happen? I think there's a lot of hesitancy because, and the debt piece is a real big piece of it because know as long as inflation keeps staying, let's call it sticky, right. It hasn't gone to the level. Know the Fed and Jerome Powell would want it to get to, or at least it hasn't indicated that it's headed in that direction enough. As long as that stays the course, then rates are not going to come down. And if rates don't come down, that cost of borrowing just stays high and that debt just almost, we may be now, I don't know if we're there yet, but we are spending or close to spending as much or more on interest on the american debt than we are on defense, which is by the way our biggest expenditure. And we're spending more on interest right now. And that is not sustainable for the long.

00:59:06 - Morgan Smith

Not sustainable. I agree. And I think you're right. I don't know that to be a fact. I've heard that said a couple of times is that interest just became our largest expense, which is, well, you borrow $3 trillion like we did last year. I can't even tell you what a trillion is without really, really thinking about it. Concept of that mind boggling.

00:59:27 - Mike Mills

It's a number that we don't understand.

00:59:28 - Morgan Smith

Million billions. I think it's a million billions. That's a lot. That's a lot of money. That's got to have to put a tamper on it. So yeah, houses might go sideways for a while, but I got in the mortgage business in 1993. I wrote my first 30 year fix and sold it to fleet mortgage at eight and a half percent. And that was the best rate you could get at the time, by far. And I did it for my uncle because nobody was going to give me a shot except for him. And I took him from eleven and a half to eight and a half. Okay, so it's all a perspective. Then we went into the sevens and we thought that it was off the charts amazing. And back then, I mean, this is like almost pre Internet, I'm so old. But we had a sandwich board that would stick out in front of our office. And the day they went under seven to 6.85, that 6.875 was on that sandwich board and people were pulling over and playing it. And then I remember it went to 5.875. And then I remember when it went to 4.875.

01:00:32 - Mike Mills

The problem is, as that rate was going down, the home price was going up. So when you were selling 8% interest rates, it was on $120,000 house or a $90,000 house. Now we're selling nine 8% rates on a $500,000 house.

01:00:46 - Morgan Smith

That's right. So it's all changed. Right. But it's all kind of the same in a way, too. So it's like, well, what was consistent about the pricing of houses back then? It didn't go up very fast. Didn't go up very fast when it was eight or 9%. It may not go up very fast for a while in this market, which is okay, because then maybe wages will catch up, maybe something will happen. The only thing I know is that it's got to change, right? So the only thing constant is change. We'll never know exactly what it's going to be because this market is always interesting. But I see a sideways market for a while, I see a grind for a while. But we're going to survive. This company will survive, you'll survive, I'll survive. Because the best people will. And then we'll come out of the other side of it and all the amateurs will have gone back. They will be out of it. Most of them are already out of it.

01:01:41 - Mike Mills

They're coaches now, right?

01:01:43 - Morgan Smith

Or with no disrespect to Uber drivers or Uber Eats guys or whatever, but that's where half the real estate community is doing that right now. And we'll come out the other side. I think that's what's going to happen. But again, it's like revert to the mean. But nothing that was so good can last forever. No, I want the days when it's just okay. Just.

01:02:13 - Mike Mills

We don't want it to be the ocean.

01:02:15 - Morgan Smith

It was fun. To close 30 deals a month during COVID but it was stressful. It sucks to close three deals a month. I kind of like when it's normal. So I'm yearning for those days to come.

01:02:25 - Mike Mills

Yeah, just a little bit of balance is not a bad thing.

01:02:28 - Morgan Smith

Balance would be cool. But whatever the case is, we get up every day and we look at our opportunities like you do and we try to help people out. And if you do a good job and you help people out, love your borrowers and love your partners and do the right thing, then the good people survive. And that's how it works. Right.

01:02:52 - Mike Mills

Well, and that was the point of today, was just to learn how to help more people by learning, because the more you understand about different products that are available and the stuff that's out there, and you don't just stick your head in the hole and stick with the basics, then you're going to be able to help more people. And these days, with the market being as tight as it is, the more you understand about all the options available to folks, the more people you're going to be able to help and the more deals you're going to be able to close and you're going to be able to survive. And that's what we're all trying to do.

01:03:16 - Morgan Smith

Yeah, absolutely. So I will say this kind and know I'm, I'm more of a wholesale lender. So I work with mortgage professionals like you. So to any people that are listening, that want to access these products, you talk to Mike. Mike represents our products. Right. That's how that works. He's my partner. We're on the backside, he's on the front side. And we depend on those relationships for our survival and that's how our partnerships work. So we'd love to help anybody out there with any of our products and I would encourage them to reach out to you.

01:03:49 - Mike Mills

Well, thank you very much, Morgan. I appreciate that. Well, thanks for coming on with me today and dropping some knowledge on us. I really appreciate know there's a ton of opportunity out there. Sometimes you just got to look in unusual places that you haven't been looking for a long time. And so now's that opportunity. It's a little bit slower now you got to expand your book of knowledge a little bit, which is what I mainly reason I wanted to have you on here today. So I wanted to learn a little bit. So I really appreciate your time and for hopping on with us today. So thank you for everybody that stuck around to the end. I'll be back on Tuesday with another market update. And we will actually, next week we're going to stick on our little products theme, and we're going to be talking about reverse mortgages. So there's a whole other world of reverse mortgages that I don't think a lot of people are aware of, especially as we're moving into, to the baby boomers starting to age out of homeownership and what their options are going to be. There's an entirely untapped market that you probably aren't aware of that you could take advantage of. So we're going to go into that a little bit next week and then see where that goes. So thanks again, Morgan. Appreciate it. And we'll see everybody next week.

01:04:52 - Morgan Smith

Thanks, Mike.

01:04:53 - Mike Mills

Yes, sir.