PLP-043 Tom Berry Discusses How Investor Loan Source Was Funded Without Bank Money
After being hit with the financial crisis of 2007, Tom Berry needed to work on something to get him back on his feet. He went off buying properties and investing in real estate. What separates him from the rest who attempted to go the same path is that he and his team never used a penny of bank money to source for money. He is a seasoned investor, teacher, and the founder of Investor Loan Source which is one of his primary vehicles for assisting fellow investors. Tom shares his journey on how he built Investor Loan Source and provides great wisdom on private lending and how you can also do the same.
Listen to the podcast here: http://privatelenderpodcast.com/plp-043/
Tom Berry Discusses How Investor Loan Source Was Funded Without Bank Money
I have a question for you. Are you an investor looking for funding for your next fix and flip or maybe your next rental? Or maybe even you’re owner finance or seller finance or looking for some funding that you can wrap to sell to your end client, to your buyer or tenant. If you’re an investor or a lender who is looking to passively invest in real estate while others do the work, then you’re in luck because Tom Berry will loan you money for your deals and/or he will put your money to work by lending it to mortgages backed by real estate. This is really geared for accredited investors. You and your spouse have to make $300,000 a year or you as a single person can make $200,000 a year or have a $1 million net worth that does not include your homestead. I’ve been waiting to get Tom on the show for a while. I’m very happy he agreed.
I’m more than honored and pleased to introduce to you Mr. Tom Berry who is with Investor Loan Source and is the reason that I have this podcast is that I’m a private lender. Tom, welcome to the show. Thank you for joining me.
Thanks for having me. I appreciate it.
I met Tom at Quest IRA in Houston. He was looking for money. He has a great hero background story. How did you get into real estate? I know you came from a different background like most of us in real estate. Can you give us your background story?
My wife and I had a financial services firm. We moved from Ohio down to Texas about a year before the financial bubble burst. In 2007, we lost everything. We went from riding high in 2006 to nothing in 2007. We were part of a lot of people that were out there looking for work and trying to figure out what we were going to do next. I couldn’t find a job. I put out resumes. I couldn’t even get a phone call. I told my wife one day, “If nobody’s going to offer me a job, I’m going to make one.” She’s like, “What does that even mean?” I said, “If I don’t have a job, I’ve got to do something. I’ve got to start some little business, a little company or something.” I’ve always wanted to do real estate and my other job and my other career never allowed the opportunity timing-wise. I guess the opportunity was given to me and it was a blessing in disguise. We didn’t look at it as such at the time, but it allowed me to get into real estate. Like most people that are starting where we were financially, we started out wholesaling. Then we figured out how we can do a couple of fix and flips. We figured out, “We could keep some of these rentals.” We accumulated 425 doors, made over $100,000 a year every year including our first year in cash and were completely and totally financially independent and multimillionaires.
Just because you said you’ve got to do something and no one would hire you.
It pissed me off.
I guess necessity is the mother of invention.
I’m not a person to sit around on my hands and wait for somebody to come to give me something. If there’s no opportunity out there, I’m going to go make one. That’s what it was. I was angry not at anybody in particular. I was angry at my position and my situation at that point in my life. I was over 40 years old and I couldn’t get a job. That is the first time in my career that I couldn’t get a job.
If you don’t know how to vet a deal, then you shouldn’t be a private lender.CLICK TO TWEET
What were you doing prior to the crash?
Prior to that, we owned our own financial services firm and then prior to that I was in corporate management. I was what’s called a turnaround specialist for companies that have a problem. It might be one store that’s not profitable or one depot that’s not profitable. I always took the non-profitable ones and the challenge for me was to see how quickly I could beat the profitable ones.
I see the parallel into flipping in real estate.
I was trained for this. I didn’t know it.
I remember you telling your story. I remember thinking, “This guy has got a lot of hustle in him.” A lot of people will go and you meet them in REIAs, Quest events or Meetups. I still have your original business card. It’s got a palm tree on it in one of the corners. I pulled it out when I was getting ready for this. I was like, “Look at that,” I couldn’t believe it. How much in that time before you got into Investor Loan Source and whatnot? How much money did you borrow from private lenders from Quest or any other IRA custodian?
The first eight years we bought roughly $18 million worth of real estate and of that $18 million, I used $1,000 of my own money. That’s a whole different story on why I did that. I bought a house for $1,000. It would have cost me $450 to get the legal docs done to borrow the money. That wouldn’t have made financial sense. I did suck up my pride and used my money for that particular purchase. Other than that one oddball deal, we’ve never used our own money. We’ve done a lot of other things with private money too. We purchased some houses is what we started with, but then we bought apartment buildings and then we moved up to buying apartment complexes. We bought office buildings. We bought self-storages. I bought a dumpster rental and excavating company. I started a pawnshop and a gun store. I bought a hunting ranch. I’ve done a lot of stuff with private money outside of buying single-family homes as well.
With the $18 million, are the most of it from IRA clients?
I would say IRAs probably made up over half of it. Probably 60% if I were to put a percentage on it.
We were both at the Quest Expo in Dallas. That was a great experience. I always tell people to go. These people put on free events all the time. Go meet with investors. Go meet with other lenders and compare notes and swap secrets. I didn’t realize it was 60% all private. I remember you telling a story once that a private lender had called you and said that he had a problem that he needed to put money to work because he didn’t want it back in his accounts. You being Johnny Hustle is like, “We’ll find a place to put it. Don’t worry about that.” You and your partner came together and tell us about how you came to create Investor Loan Source.
Investor Loan Source came out of necessity. Pretty much every company I have has come from necessity. With Loan Source, the problem was we were selling off our apartment complexes at a rapid rate in 2016 and ‘17. The prices were to the point. I was getting offers. Honestly, I didn’t think the properties were worth what they were offering. I was more than happy to let them go. That created an issue. It created an issue because now for the first time in my career since being in real estate, I had some cash. I was getting some of that equity. On paper, I looked good. It was just on paper until we sold those properties and saw that equity in our bank account. That was a problem. What do you do with that? When you’re in the market cycle, it doesn’t allow for finding really good deals like we were finding in prior years. The other challenge that we were presented with was all of my lenders were howling at me. They’re getting these massive amounts of money back and they don’t want it back. They want to continue to get their interest payments from Melissa, my wife who makes payments. I was literally inundated with phone calls, “What do you mean you’re paying?” I’ve got a payoff request. What’s happening? Why are you doing this? We don’t want the money back.” We were literally looking at millions and millions of dollars that were available and there’s nothing to buy. For the first time in my career, I had way more money available to me than I had deals.
Prior to that, it was always I had plenty of deals on the table and I was scraping, scrounging and making phone calls to get the money put together. This time it’s a totally opposite situation. I said, “What can we do to fix this?” I called up Donald Sutton who was my fourth private lender. Donald I knew had been raising capital from folks in his hometown for years and years. He had a pretty good little pool of cash, his families, his friends, and other people in the area. I said, “We ought to start a lending company together,” and he says, “I have X number of dollars.” It was $6 million at the time. He says, “What do you have?” I said, “I could kick in $1 million or so,” and he’s like, “I don’t understand how that’s equitable.” I said, “Here’s how it’s equitable. You don’t know how to lend. You got lucky with the borrower. You have never known how to lend. Any other borrower, you could have got your butt handed to you. You got lucky you were lending to me and I knew how to vet deals.” This is instructive for people that want to be private lenders. Most people should not be private lenders because they don’t know how to vet a deal. They don’t know how to vet a borrower. They don’t know how to vet the paperwork. They don’t know the legalities involved. They don’t know how to read a title commitment and know what it means. They don’t know what title company endorsements they need on the title policy, on their lenders.
I could go on and on about the things most people who are trying to be private lenders don’t know how to do correctly. In Donald’s case, he didn’t know how to vet a deal and he didn’t know how to do the numbers. He didn’t know anything about repairs and he didn’t know anything about vetting a borrower. That could have been extremely detrimental to him given the amount of money we have of his. At one point we had over $3.5 million of his money. Giving money to people has to be a methodical thing. Private lending is great if you know what you’re doing. It can be a horror story if you don’t. He’s great at the details. He’s great at knowing the title policy stuff and what should be a note and what should be in a deed of trust. How the assignment of rents and all the other things that go along with lending should be. That’s stuff I don’t want to deal with. I don’t want to learn it. I don’t ever want to be good at that.
What I’m good at is real estate and I’m good at the people part. I can vet the people. I can vet the deal. I can go walk a property and know if the repair estimate is reasonably close and correct or not. I explained to him, “Putting your talents and mine together, I know you think you’re doing great right now but it’s because you got lucky. You’ve got a good, big borrower. Without that good, big borrower, you’re going to get your butt handed to you at some point.” He agreed. We started that company. He had a little office in his house. I had a little office in my house. We kicked it off. We have 21 employees now.
The last time I had counted it was around nine or so. You’ve already double.
We run out of two offices. I handle the marketing side. I handle creating new loan products. I handle opening new markets and going into different states. All of those types of things as far as growth orientation are on my plate. We also handle in my office vetting of the deals. All the underwriting takes place in our office. Once we’ve got it underwritten, approved, and we say, “This is a great deal. We’d love to lend on it,” then that file is taken to Donald’s office and he takes it through to closing and beyond in the servicing.
How do you source your funds? Is it yours and Donald’s money?
Private lending is great if you know what you're doing. It can be a horror story if you don't.CLICK TO TWEET
That’s what we started with but we quickly ran out of that. We brought out some unique loan products. There are few hard money lenders that have products like ours. In fact, I would argue we have some but no other hard money lenders have. It’s because we created them. We invented them. I created those products based on what I know as a real estate investor and what I wish I had when I was starting out as a real estate investor. That has given us an opportunity where we don’t have any competition. We are constantly growing. Every month is bigger than the one before, it seems like. I know that’s probably an exaggeration, but certainly every year has been larger than the one before. We are constantly out of money. It’s been a joke with us. We were out of money when we had $6 million. We’re out of money when we had $10 million. We’re out of money when we had this $15 million and on and on.
As we grow, the amount of money that we keep in play, we still always have a huge appetite for more. We wrote $46 million in loans just in 2017. We may not double that this year but I know we’ll certainly eclipse it. That’s the volume we’re riding. To answer your question, the one thing we don’t do for sourcing money is we do not and never have, to this point, ever used a penny of bank money. I’m using the same rule that I used when I built my real estate portfolio. I never used bank money ever. Not a penny. Now that I’m to where I am with my portfolio, I am refinancing out of a lot of those private loans. I’ve got my lenders howling again because banks are throwing money at me cheap now. That’s a great opportunity. We’re taking those lenders and moving them to ILS and we’re still taking care of them. We’re still able to put their money to work for them there as well.
My goal with this podcast is creating and training private lenders on how to do it, how to do it right, how to do it safely and taking banks and brokers out of the equation. That’s been your MO from the start. The fact you’ve done all these loans without bank money. That’s the whole point and the beauty of being a private lender. Even lending into something like Investor Loan Source where the professionals vet it out and they put the money to work. You get that mailbox money every month. When your lenders get a lump sum back, that makes me nervous. I want to see my money working for me.
That’s constantly what I hear from my lenders when we’re paying off, whether it was when we were selling apartment complexes and we were paying off huge amounts of money then. I refinanced 34 single-family homes. That put a lot of money back into my lenders’ hands. I was prepared. I knew the phone calls, emails, and texts would start coming in. This time, I had a quick fix for it. The quick fix for it for them was really simple. They could move the money into our private equity fund, which then we use to make short-term loans on a fix and flip properties. We give that profit back to the investors in that fund. If they don’t like fund investing for whatever reason and some people are weird about it. Some people have to have a first lien position deed of trust in their palm, that’s fine. We’ll sell them some of our long-term notes. As we write these notes, we can’t sit on them for ten years, twenty years, whatever the case may be. We’ll sell those notes to IRA holders or people with some cash that are looking for a good, strong yield and don’t want to go to the stock market to get it. It’s backed by a first lien deed of trust on a rental property with a tenant in it. It’s cashflowing. It’s about the safest piece of paper you could buy. It works well for IRA holders in particular.
That’s why I love it, especially now that we’re somewhere long in the tooth in this market cycle both from a real estate and stock market standpoint. If the market’s like we’re a nine-inning baseball game, what inning are we in? I’m thinking we’re in the 14th inning right now, so far beyond the “normal” with what history has shown.
There are a few things that have propped that up and elongated this cycle. I do a lot of study on market cycles. That’s how I made my wealth is playing market cycles. We bought houses when no one else would buy them and put tenants in them and cashflowed them and held them. Now, I’m selling off a few months because the prices, in my opinion, are to a point where I can’t afford to sell them off. We did the same thing in 2011 and ‘12. We started buying apartment complexes because the brokers couldn’t give them away. I had huge brokerages up in Houston that would call me. They had my cell number. They called me back then and would ask me, “Tom, will you go by such and such apartment complex and tell me what you’ll give for it? I don’t even want the listing of you won’t buy it because you’re the only guy buying down there.” I had those conversations in 2011 and ‘12. Those same brokers have forgotten my name now. When I do run across them at a meeting, I always joke with them, “Hang on to my number. Don’t delete me from your phone because we’re not too awful far away from you calling me again.” I mean that sincerely. They of course take issue with that. I’m joking but they know I’m not at the same time.
If somebody is reading this and will say, “I want to be a private lender,” I’m one of those people I want that first position lien and that is what I tell people. That’s your most secure thing. You get into funds, it’s a little bit different of a conversation at that point in time. I’m a fan of both. I’ll tell you why. One, I could hand over some money to Investor Loan Source and sit back and relax. You have the fiduciary duty to do the due diligence and to put that money into a sound investment vehicle. I’m probably not going to get a huge return but I get a constant return on my investment that I don’t have to go and work it every six months or every twelve months, to me that’s worth.
I always thought exactly what you said. I know now through experience that that is not entirely accurate. Let me explain. Let’s take the short-term fund, for example, where we do fix and flip loans out of. We write those loans anywhere from 11.99%, 10.99%, and 13.99% interest rates. Say there’s an equal mix in the fund of those rates and that makes it 11.99%. Obviously, we’re going to lose 2% for fund management. We’re down to 9.99% and you would think that’s pretty much what the expected return will be. I’ll be honest with you, when we wrote the private placement memorandum for that fund, that’s exactly what we wrote. We wrote that we believed the fund will return between 10% and 12% interest. Here’s what we found. We found some places on Wall Street. We found some places out in California that would like to have pieces of our loans. We call it fractionalizing. Let’s hypothetically say we sell 80% of an 11.99% loan for 7.9%. We keep the other 20%. My partner is a quantitative mathematician by trade. I’m not. I’m pretty good at simple math but he’s good at the complex math. He built a spreadsheet to quickly throw these numbers in. That example that I just gave you returns a yield of over 20% to the fund.
Because you’re selling off some of that income stream.
We’re selling it at a premium. On 80% of that loan, we’re making 4% annualized and we have zero dollars in that 80%. Match that with the other 20% that we get 11.99% on because we own the full 20%. Now you can see how a sharp and shrewd financial guy could take 11% loans and turn them into a much better return than what you might expect.
I’ve never said this before and you can certainly ask my wife that I’ve never been so happy to be proven wrong. I never thought of it like that. At the same time, you’re still doing all the work. If I’m in that fund, I’m gaining some of the benefits of that. We’ve got all the benefit of the upside but as far as not doing the work.
As are we because we own 20% of the fund. We’re working for ourselves and our investors side by side. We know how to do this. We know how to make money but we want to do it on a larger scale so we’ve said, “Come along with us. Let’s throw some cash together and come along with us.” Normal everyday guys and gals that have that job, they’ve got a W-2. They’ve got a 60-hour work week. They don’t have time to do the things that we do. They can still put their money in and get the benefits of our experience.
I didn’t realize this to that extent. I’m happy you interjected there.
That’s just one strategy. That’s one good, easy example of how a yield can be much larger than what you might expect.
If I’m at an REIA meeting and they see Private Lender Podcast, they automatically assume that I’ve got tons of cash and I’m loaning it out. They’re like, “What are your rates? What are your terms?” I’m like, “No. It’s not that simple.” In your case, it is but it isn’t. You get into the quantitative and the fractionalizing of it. Ray Sasser, another Houston heavyweight recommended the Jim Napier book, Invest In Debt, and it has changed my life reading that. Full disclosure, I failed business math in college three times. I dropped it three times. I dropped it twice and I took an F. I ended up having to go to junior college to finish up my degree with one math course. As shameful as that is, it’s the truth. However, once I read how it broke down and how you can sell a portion, a percentage of that loan off. How it can increase your yield. What looks like 7% is going to be a lot more at the end of the day.
What we find is there’s a lot of large money out there that is happy with a 7% to 8% yield. Can we take that money, leverage it and provide an opportunity for investors? Absolutely. Those guys most generally they don’t have the contacts we have. They don’t have the ends in the communities that we have. They rely on us to be able to bring them this paper at those types of yields. They’re tickled to death to take all of what we can bring them.
Everyone’s appetite for risk and yield is different and like you said, “Leverage it.”
In full disclosure, to be involved in this fund one would have to be an accredited investor. I’ll want to make that full disclosure. That brought up another challenge. What if somebody is not an accredited investor and they don’t have a lot of experience with rehabbing, construction or flipping? It means they probably shouldn’t be lending on a fix and flip loans because there is a chance you end up with that challenge. You end up with that property halfway through the project. How could we help those folks? I said, “Let’s sell them our long-term paper. We’ve already vetted these long-term loans. The long-term loans around already fixed-up properties. If we qualify somebody for one of our rental loans, that property is already in good enough condition. It’s already rented out. There aren’t any fix and flip issues, construction issues to have to mess somebody up along the way. We sell them that paper and they can ride that yield. We sell it at par. If we’ve got $80,000 out, we sell it for $80,000.
We don’t try to market up or anything. They can shift that in their IRA or send it off to the side and ride that yield to maturity. If they don’t want to keep it for the full twenty years or whatever the term is, on all of our long-term loans when we sell those to investors, we have a five-year buyback guarantee in the paperwork. Which says if you held it for five years or more and you need that cash for something else, no questions asked we will buy that paperback from you at any time after the 60th month. Why wouldn’t we? Think about it. Does paper get more or less valuable the further the debt is paid down?
Everyone's appetite for risk and yield is different. Leverage it.CLICK TO TWEET
Why wouldn’t I be willing to pay face-value to take that debt back and pay them their principal back and let them move on? I’ll turn around and sell it to somebody else. Now, it’s been seasoned five years. I can probably go to Wall Street and sell it at a premium.
You could plug it into the hedge funds and whatnot.
Why would I not be able to offer that guarantee? It’s a guarantee that I know I’ll rarely ever have to do, but if I do I’ll be happy to because that paper will be worth more at that time.
My thing is like, “You’re guaranteeing.” I’m like, “Never guarantee.” That comes from my insurance background. You don’t ever guarantee anything. That’s a great philosophy and you’re right, especially if something is seasoned and is performing. There’s a lot of marketability there. Not just back to you but to somebody else.
Going to performing, the other guarantee that we have in those same notes is that if you ever have to foreclose on the property, we’ll buy it back at the total unpaid balance. We can do that because those long-term notes, we have $16 million track record. We’ve written $16 million of just those notes. We know that out of that $16 million that represented 200 notes. Of those 200 notes, one of them were foreclosed on. That was on a $52,444 loan. We did buy it back from the note holder, just like we said we would. I turned around and sold that house to the tenant for $72,000 on owner finance terms. Why would I not give that guarantee? Just because the guarantee is in there doesn’t mean that the note holder has to sell it back to us. I want to make that clear. If they want to do what we did with the house and make that extra $20,000, they are more than welcome to do that. For those that don’t have an appetite for handling those things, the guarantee is there to give them the comfort that they’ll never have to deal with it. If they just want their $52,000 back, no problem. We will pay the full unpaid principal balance and we’ll deal with the property for them because we are equipped to do that.
It’s creative and it’s an option that’s already written in. There’s the right but not the obligation to exercise that option if something goes south. Speaking personally, with my first loan I didn’t sleep that night. I was nervous about it. That removes a lot of the indecision and the negativity out of it. I’m going to get par back on what I loan plus what’s been paid up. The same question but from a lending and a borrowing perspective. I know you are in Texas. Do you loan on properties in other states? I assume you accept money from lenders from other states, but do you loan out in other states?
We can accept investors from other states and do. We have some from out of state already. We do not lend outside of Texas. I will tell you that there are huge plans being worked on through our tech team and our compliance team. We’re working diligently to be able to launch into four to five other states by the first year. I cannot at this moment say which states simply because we’re still working through the compliance issues. If they are too onerous, I may change states between now and then. We have picked our favorite five and we are working to see if we can make those happen. If some are a real pain in the tail to work with, I may go to my second choice on a few of them and circle back later.
I’m going to assume that the foreclosure laws are similar to Texas and that they’re speedy. If there is an issue, I would assume you’re not going to be lending in New York. I would suggest nobody do that. Let the big banks do that. Let them worry about that foreclosure process. I will certainly want to circle back at the beginning of the year once you do get the states vetted and definitely broadcast that back out to the Lender Nation. Fortunately, the podcast started here in the Houston area but it has branched out. People are getting communication from Tennessee, Washington, DC, Washington State and California. Fortunately, it’s branching out. I don’t want to be just Texas-specific, but I like Texas because of our foreclosure laws, which if something goes south it’s a quick remedy to take that house back or foreclose or wholesale it out. Sell it to another investor or sell the note. I like that you’re Texas-specific but you’re branching out. When it comes to the borrower, it sounds like you loan on pretty much any asset: single-family, residential, apartment, multifamily and do you loan commercial as well?
Basically, any asset class. You do industrial?
Absolutely. We’ve got two crazy deals that we’ve done here. There was a Forbes.com article written if you wanted to look up online, Falstaff Brewery project in Galveston, Texas. That particular project is a massive undertaking. This brewery complex had been vacant since the 1980s and a gentleman that I know went in and bought the whole complex. It’s a big industrial complex. It had about five buildings to it. He went into one building at a time and started repurposing those buildings and rehabbing those buildings. We’ve been involved in three of those particular projects so far. We’ve got another loan. A gentleman bought an old country club and golf course. It was 50 some acres that had been abandoned for decades. Went in and he replotted everything and built it into a waterfront community. He made 47 lots out of it. We were the money behind them. We’re still in that deal. He’s probably 90 days away from pouring the streets. Once he gets that done, he already has the lot sold to a premium builder in the area. We’ll be out of that project once the streets are laid because a bank will then come in, take that over and give him cheap money from that point forward. We help with the ugly part. When the banker wouldn’t possibly go look at that project, that’s when you use us. We help them get the projects pretty. Once they’re pretty, then the banker can see it. They can come in with their cheap money and cash us out.
Banks will never get you to your desired lifestyle; but once you do get to your desired lifestyle, bankers will come knocking.CLICK TO TWEET
You bring up a good point about the banks. The banks won’t lend you money when you need it. They only lend money when you don’t, as an individual anyway.
That is 100% accurate. I always put it this way, “Banks will never get you to your desired lifestyle, but once you get to your desired lifestyle, bankers will come knocking.”
This is something I know that not only is a product that you have it advertised but it’s something that I would love for you to explain to our audience. In the owner finance game, let’s say a house is not performing and Chase Bank has the mortgage. The investor goes in and would buy it, who would then turn around and sell that house on to owner financing and essentially put another mortgage and wrap it around the original one. Banks will not allow that but you guys will come in and say, “We’re going to loan the principal money upfront. You’re going to give us whatever the terms are. You can then, Mr. Investor, turn around and sell it with owner financing.” The end-buyer pays the investor who then pays you. Is that correct?
That’s correct. I invented that product. I’m not very creative, so I named it the Wrapable Loan. I wasn’t creative enough to come up with anything better. In our office, we just call it the Wrap for short. Essentially, that one came from an investor friend of mine named Rudy who works in the Houston market. He does some fix and flips but he loves to do owner finance. He loves to buy property, fix it up and then sell it to a family on owner finance terms. Somebody either doesn’t want to or can’t get a bank loan. By doing that, he can charge usually at full retail or even maybe 10% above full retail for the property. He doesn’t have to deal with appraisals and whether the appraisal is going to come in or not because he’s the lender. He’s not going to require an appraisal. He’s not going to have to deal with home inspectors typically because he’s the lender. He’s not going to require a home inspection. He’s not going to have to make concessions on the price. He’s not going to have to pay realtors fees. He can put a couple bandit signs in the yard and have it sold in a week.
What happens is he’s going to end up with a net on that property of somewhere between 15% and 25% more than if he would have listed it with a realtor on the MLS and paid the typical realtor fees, closing costs, concessions, buyer contributions to their closing. All the other stuff you get hit with as a seller. It’s more things taking away from your potential profit. When you use the owner finance strategy, you don’t have any of those things. In my best estimation, it’s somewhere between 15% and 25% swing. Rudy comes to me and says, “I love doing these. I’ve figured out how profitable they are but I can’t get the underlying money for it every time I sell one. If I sell it on a fifteen or twenty-year note to the family that’s going to live in it, I can’t hold that paper for fifteen or twenty years. I’d be out of money in one year of doing this. That’s if I had a big pocket full.” I said, “Rudy, it’s not done. Banks and lenders put something in the terms called a due-on-sale clause that would then trigger if you did sell it to your family on owner finance terms. If they know about it, they’re going to call the note.” One could argue it’s done a lot. Banks are big enough that they don’t find out about it. It’s always the worry about, “What if they do?” Rudy, being the guy he is, he says, “I know it’s not done. I’m asking why? Why can’t it be done?” I’m like, “I don’t know. I’ve never thought about that.”
I gave it a lot of thought over the next six or eight months with consultations with my partner, with our attorneys and with other people in the industry. I said, “I don’t see a reason it can’t be done.” I don’t know why banks don’t like it, but it was started back after the ‘80s when a lot of people were assuming cheap notes. That’s where it all originated from. Prior to the ‘80s, there was no such thing as a due-on-sale clause in most notes. When rates were cheap and had 30-year terms and then rates skyrocketed to 15%, 16%, and 17% on a note or occupant 30-year loan. A lot of people couldn’t afford that so they said, “Instead of me going and getting a new loan at these ridiculous rates, why don’t I take over and assume yours?” A lot of the people were taking advantage of the bank. People will always find a way around the rules. That’s where it originated. It was a protection for the banks against being stuck in low rate loans longer than they would typically need to. We in the lending industry and banks included know that a 30-year loan is not going to go 30 years. The average 30-year loan is going to go five to eight years because that’s how long between people selling their home typically. Will some go 30? Yes, but some will also go one or two. They’re going to average somewhere between five and eight years. The banks did not want that average to go up by people being allowed to assume. Now, a 30-year loan would be a 30-year commitment to that interest rate.
Growing up in the Houston area in the ‘70s and ‘80s, I learned at around ‘82 what an eviction notice was because they built this brand-new neighborhood behind my house. It took away our playfield in the woods and built all these starter homes. Outrageous interest rates were being charged and people couldn’t afford them. A neighbor a few houses down from us moved in. She had gotten divorced. She and her daughter moved in by assuming the note on the house. She said that’s the only way she could do it because she couldn’t afford a 15% note buying a retail house. I do cast banks in an evil shadow and an evil light. They’re not all evil. I do understand the due-on sale clause. I don’t like it personally as an investor. I certainly understand it. As a lender, I want to protect my position. I don’t hold that against the banks at all.
That’s where it came from, The Wrapable note. We said if we charged a reasonable enough interest rate to hedge against the risk and we reduced the timeframe that we’re not doing 30-year notes. The Wrapable note is a twenty-year note. I say, “If we found the sweet spot for a rate that met the market’s needs, but it also protected us against rising rates, we could do that. We could lock in to twenty years with the due-on-sale clause.” No, we do not have a due-on-sale clause, including Wrapable.
Anyone who wants to do owner financing, I would suggest looking into that product. When I saw that you were doing that, I was like, “That’s innovative and something that’s definitely needed in the market.” If someone came to you and said, “Tom, I want to start off in private lending or private mortgage notes,” what piece of advice would you give them?
The first thing I would want to know and I do this all the time with people is there are a few questions they’ve got to ask themselves to determine where they want to start. The first question is what capital they are working with? The second question is what experience do they have with rehabbing, with fix and flips or construction? I always use my mom as an example. My mom is 72 years old. What would I want her to have? Would I want her out there doing fix and flip loans? Heck no. She’s not going to be able and capable and doesn’t have the network to handle a foreclosure. If she had to foreclose on a fix and flip project that was only half completed because that’s when all of this foreclosure is when they’re half completed. You’ve got to go in and pick up all the pieces. It’s never when it’s done, it was done right and it’s beautiful and ready to sell at a premium. No, it’s when the stuff that was done needs redone because it wasn’t done correctly. That’s when you take over those projects on a foreclosure basis.
I come from the finance world and when I was selling mutual funds and things like that for a living, we had something that we had to fill out every time somebody brought us money. The FCC required it in every file. It was a huge fine if you didn’t have it. It’s something called a suitability checklist. What it meant was every single client that brought us money to invest in a mutual fund, an annuity or whatever it was, we would sit down with them and ask five to eight key questions. That would determine what type of investment was suitable for them. I still use that as my basis, even though it’s not required in our industry. I feel it should. I use it as a best practice in our company. I want to know what’s suitable for that person. The last thing I want to see is somebody losing money when they thought they were going to be making money. I’ve been around this a long time. I’ve seen it more often than I like. What are their resources? What are their talents? What is their experience? Based on those things, that will lead me to explain what they should do first.
The only reason for this podcast is nobody is out there telling people how to be safe or how to look out for themselves even. No investment is fool-proof or fail-proof. What are you working with? What’s your background? What are you comfortable with? Do you like the 100-yard dash or a marathon? I got into real estate because to me the stock market was like the biggest casino ever. I got lucky but I knew what I was doing. That account got closed a long time ago. There were no funds left, I completely messed up. I like your suitability. That’s key and no matter what, whether it be stocks bonds, mutual funds and real estate notes, you’ve got to match the personality with the investment vehicle. How do people get in touch with you if they want to loan or borrow?
Both can be accomplished at our website. It’s a really easy website address to remember, www.ILS.cash. You could go there and learn about our loan products if you’re a borrower and looking for funds for your real estate project. There’s an Invest With Us tab at the top that talks about investing through our private equity fund. It is a registered fund Exemption C. I am allowed to advertise it. There are no problems with that. I do have to mention it is for accredited investors only. If somebody is not comfortable with the fund, has to have that first lien provision, deed of trust in your little paws. That’s fine. If somebody that is may be not accredited but wants to get involved with us and wants to use our vetting process to do that, take a look at the Purchasing Notes page. We can certainly walk you through that process. Alex is our note salesgirl at the El Campo office. She would be happy to have as many telephone and email conversations with you as necessary to get you comfortable with the process so that you can do that.
Tom, I’ve got one final question. What book are you reading right now?
I was talking to a friend and she said, “You need to read The Richest Man In Babylon again.” She knew that I had already read it. Pretty much everybody in our circles has read it at least once. She’s like, “I got it out the other day and I read it again. There was some new stuff that jumped out at me. If you haven’t read it in a while, get it out.” I’m going to get that one out and read it again. My favorite book and I’ve read it seven times so far, I do keep track and I still learn something every single time is Success Is Not An Accident by Tommy Newberry.
Give us a quick rundown. What do you like so much about it?
This book was referred to me by a mega-millionaire that I knew way back before I even got into real estate in my previous career in finance. This gentleman probably was pulling down $3 million a year. He had at least a $100 million net worth. I was fortunate enough to be in a small group that was invited to his house to talk to him. We’re all standing around in the kitchen and he’s got this book laying there. One of us asks about this book and he says, “It’s one of the best books I’ve ever read in my life.” Coming from a guy as successful as him that resonated with me. I said, “Why do you think that it’s such a good book?” He says, “I can’t even put my finger on why there are so many things in it that hit me. In fact, it hit me so hard, I hired the author of the book as my personal success coach. I looked him up. I found him on the internet. I called him and I hired him as my success coach.” This guy is a millionaire and he hired the guy as a success coach. If that doesn’t tell you ought to read the book, I don’t know what does.
Every time I read it, I get something else out of it that I didn’t before. The whole crux to the book is success is all within us. It has nothing to do with outside things. I’m such a huge believer in that anyway. We live in such a particularly more and more entitlement mentality society. This book crushes all of those thoughts. All of those little fragments that may be running around in your brain up there that are holding you back. You could get through two chapters and throw it down and say, “I don’t like this book too.” That is the danger of that book, but it is brutally honest. It’s like me. It is what it is. You either like it or you don’t.
I’ve been a fan ever since I met you. I’m definitely going to run out and get this book or at least get it off of Amazon here and get into it. Tom, I want to thank you for taking the time out of your day. Your most precious asset is your time and giving it to myself and the Lender Nation. I wish you all the best.
I certainly appreciate the opportunity to be on your podcast. Thank you very much.
I’d like to thank Tom Berry for a great interview and sharing his knowledge with us. I hope you enjoyed it. I’m going to ask you to please go and rate and review the podcast on iTunes, Stitcher and SoundCloud. Wherever you’re listening to this, please drop me a rating and review. I appreciate a review. I’d love some feedback. While you’re at it, go ahead and connect with me on social media, Facebook, Instagram, LinkedIn and The Private Lender Podcast. I want to say thank you again and to let you know that I’ve carved my goal in stone and I’ve drawn away in the sand for a date.
The Private Lender Academy will be launching on January of 2019. I’m going over to a completely free training on private lending and this will be for newbies. If you’re already into the mix, I would still love you to go ahead and take the free course and provide your feedback. Tell me what sucks and what you like. What’s missing or what’s not coming across clearly? I hope you guys are going to be on board with me. I wish you all happy investing and happy lending and the successes that you can measure. I’ll see you in the next episode. Take care.
- Tom Berry
- Investor Loan Source
- Quest IRA
- Invest In Debt
- Falstaff Brewery project in Galveston, Texas
- The Richest Man In Babylon
- Success Is Not An Accident
- The Private Lender podcast on iTunes
- The Private Lender podcast on Stitcher
- The Private Lender podcast on SoundCloud
- Keith Baker on Facebook
- Keith Baker on LinkedIn
- The Private Lender Podcast on Facebook
About Tom Berry
Tom Berry is a seasoned investor and teacher in the greater Houston area. He and his wife Melissa began their first real estate company in 2008, selling distressed wholesale properties to rebuild their lives after losing everything in the financial crash. Since then they have owned and managed over 500 units of real estate and have built a flourishing portfolio that is worth millions. Now they help and teach other Houston investors to achieve financial freedom too. Tom is also an owner of multiple companies that focus on asset-based lending, real estate, development, and local entrepreneurship. Investor Loan Source is one of Tom’s primary vehicles for assisting fellow investors. Investor Loan Source offers the most comprehensive product suite in Texas – created by investors, for investor. “We place more emphasis on the hard asset and value of the collateral (property) and less on the borrower.” Tom consistently strives to bring the tools, services, and resources needed to this under-served market.