As a twenty-year veteran in the finance industry, Aaron has developed this concept of the evolution of the real estate investor. You can imagine it as an hierarchical structure or similar to what you might find in an organizational chart with a company. Aaron explains that it is an evolution where you start out working with real estate investors who spend money by investing in real estate, who then evolve to a position as a business owner in possession of several properties, to being a chief operations officer and having within their organization people that are going to work with new investors to market the properties and find more. He shares that understanding each level of this evolutionary structure will help make the team become more efficient in doing their particular tasks and also enable them to work in harmony with the other levels.
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I wanted to do something a little different. I’m bringing on a good friend and one of our preferred mortgage bankers, mortgage brokers and mortgage lenders, Aaron Chapman. Aaron was on years ago, and we talked about non-owner occupied real estate investing and getting loans in the mortgage environment. If you haven’t seen it, go back and read that episode because there’s a lot of foundational information about mortgage lending there. He has this very interesting concept that he refers to as the evolution of the real estate investor. He explained this a couple of times and I found it very interesting because it’s representing a hierarchical structure of what you might find in an org chart with a company, you, being the CEO of that company.
Aaron is a 20-year veteran in the finance industry and he focuses specifically and only on real estate investors. He does investment loans and he has a great team of a total of ten staff members that help him do these loans. He’s been married for 22 years and has four kids. He’s a very active guy and a lot of fun and he does a lot of stuff outside the investment and loan industry. He helps out with his local sheriff’s department in the rescue unit. He has been doing this for nine years as a technical off-road and helicopter rappel rescue technician.
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Evolution Of The Real Estate Investor
Aaron, welcome to the show.
How are you doing?
I’m doing great. It’s good to have you back on.
A lot has happened. So many things that have occurred and compressed and I talk about that as Aaron’s Theory of Time Relativity. When you are a kid, a day seems like a long period of time because you didn’t have a whole lot of experiences to go from. We get later in life and three years seems like six months because we have so much going on all the time that you’re compressing it all into that window of perception.
That’s why everybody says time flies. They seem to fly through the days and the weeks and then the month so quick. Your kids grow up so fast. I’ve noticed my daughter’s approaching eleven years old and I’m still wondering, “What happened to five and six and seven?” It’s a perceptual thing, because time doesn’t change, but it keeps going faster and faster. The main topic of the show is this concept that you refer to as the evolution of the real estate investor. Start off telling us how that all came to be, because it’s an interesting twist on how you view yourself as a business owner and as an investor.
It is in evolution. When you start out working with real estate investors, you start seeing that it’s being reviewed like a consumer. Spare a person spending money and going into debt. That was in a way indicative of the investor when I first started finding this as a niche in 2000 to 2003. As we started seeing the turnkey model gaining some traction, I started realizing that individuals, when they’re buying investment real estate, they’re evolved to a position of a business owner and not a person consuming a product. They’re buying this piece of real estate, spending a certain amount of money, then they have this conception, or this thought process that they’re going into debt because they’re taking on this loan.
The debt scenario definitely does make sense where they are in debt when you’re talking about person buying a home to live in, not necessarily buying a piece of real estate. When they start to get a little more traction, I’m able to help them envision themselves sitting at the board table. There’s certainly going to have all the audience put themselves in this position. Put yourself sitting at the board table. You’ve got two rows of chairs, one on each side. I would invite the audience to fill the seat on the right with your presence. You are now taking the role as their Chief Operations Officer because you have within your organization people that are going to work with those investors, to find the markets that makes sense, who, within those markets, would believe would want to work with based upon what their goals are as their real estate investment firm, and then they’re going to then take down the properties, rehab them, manage them and maintain them.
When you consider all those chairs being filled the entire right, their board table is filled up with an operations division. The interesting thought process that helps one to gravitate towards this is to think that they are getting an operations division for free. Most of the time, if you’re going to build a company, you’re going to want to go in and you’re going to want to start getting all the necessary equipment to be able to do the job. You’ve got to hire the people and you’ve got to fire those who sold you a bill of goods on their resume and you have to sort through trying to build the right team. It took me fifteen to eighteen years to get a solid team. While they have been able to in this scenario to fill every one of those seats almost instantaneously because everybody in that seat has a long history of doing what they do and have worked their way through the problems to make it successful, then all that success goes right to the real estate investor. In a way they have purchased a business with an operations division for the market value of its sole asset.
That is a very massive thing. It’s not something we need to glaze over or ignore because if you look at the S&P 500, a business is being valued at 31 times earnings, which is ridiculous. Given that consideration, if they were trying to buy a property, if the piece of real estate is being traded on the S&P and it was a making a thousand dollars a month in revenue, how much would they be paying for that? 31 times the annual revenue. That’s way above what a person’s buying it for. They’re buying its market value. When you’re looking at an appraisal, you’re going to see three different values on there, the market value, the replacement value, and they’re going to see the cashflow value. We all have looked at these and nine times out of ten, the market value is the lowest of them. The investor is buying this business just for the price of that property and they’re getting for twenty cents on the dollar because they’re only putting 20% down the average.
Now that we filled up the right side of their board table, when I am talking to them for the first time, I’m applying for CFO. I know that my business is to get the loans done, but in reality, that is a way for me to generate cashflow for our business so we can stay in existence, but what we do is we take our experience and put that to work to help that real estate investor to build their business from a financial perspective. We closed 676 units for real estate investors. I ask a lot of people if they’ve heard the term, “Good judgment comes from experience and experience comes from bad judgment.” What kind of experience does one have when it comes to judgment being used when they’re doing 676 transactions a year? I get to see a lot of people’s decision-making skills. I could see a lot of judgment at work. I get to see people who listen to us and don’t listen to us, and what the outcome of that is. We apply those principles to every single investor to help them make the proper decisions. I always tell them, “You’re the CEO. You’re running the show. You make the decisions. You can’t bore meetings when you feel you need to, but for the most part, you get to decide whether or not it makes sense to work with us and then get to decide how you go about your business based upon the information we provide from our experience, and the information provided from your side, from your experience.” That should help them to have a better result than they would on their own.
You get to fire, not just hire. If people aren’t working out for, Robert Kiyosaki talks about real estate investing being a team sport and it is. It’s not just you. You surround yourself with people who are better and smarter than you because you’re going to be the general, you’re going to conduct, and you’re going to let the team execute the vision and the investment goals that you have. I know that I have had to “fire” people on my executive team. It’s my evolution of me being real estate investor. People didn’t work out. I’ve literally had a property manager who stole thousands of dollars from me and I didn’t know it at the time, but ultimately, I found out and that was a quick and abrupt end to that relationship. You can hire the right people and fire the people that don’t work out. They say you have to have the right people in the right seats on the bus and this is how you make sure of that.
You’re also doing it with people that have a history of putting seat on that bus. One of the things that help others when they decide, “I’m going to go out and see what I can find on my own.” What if things do go wrong? We mentioned a property manager. Let’s say the property manager goes wrong and Joe is trying to figure out what’s happening with this property, called the property manager, they’re not responding. When he calls up, all it is is a guy named Joe calling up asking about that one property. That property manager could have 600 doors underneath their management. One person named Joe was not going to stand out. Say he’s talking with Melissa and you’ve been working with Melissa. He calls her, “I’m having a problem with this property manager,” Melissa from Norada calls who is acting as his Chief Operations officer then it gets some attention because it’s not just Melissa calling for Joe. It’s Melissa calling in behalf of every single investor that has ever worked with Norada. That’s an army on the phone calling up and saying, “We need to know about this one deal.” You get a lot more attention when you have that type of strength behind you that’s why I encourage a lot of people to work with your team and I work closely, because it’s not just them by themselves. They have an entire army of people associated with you that’s making that phone call on their behalf.
I refer to that as leverage. It’s more or less the same thing, but we have leverage on a lot of service providers because we don’t just send them one or two clients. There are dozens and dozens of clients that they get from us through a referral and us working with these investors. When they hear us get on the phone and talk about a communication issue or a little problem or something that has to be resolved, they look at that very seriously because they realize exactly what you said. They’re not dealing with one individual. They’re talking to someone who represents a lot of past business and a lot of potential future business so it all comes down to leverage. Let’s talk about this map. You are the CEO of your company, your acquisitions team and the people who are helping you build that real estate portfolio is what you refer to as your Chief Operating Officer, your COO, and then you’ve got your lending team as your CFO, your Chief Financial Officer. Does it go deeper than that? Who else is on the right side of that table? You must have a CPA and some other people?
Usually, we’ll work with the individual. Most of the investors have a CPA and that’s us on the financial side when necessary and if it’s something that does come up where we need to get involved with the CPA. We will communicate with them, set up those times to talk, right now is not such an easy time to get them on the phone, and then go through how we can strategically plan out things for them and for their future as far as their incomes reported. How they go about setting up their systems and understand what they’re CPA is trying to do for them, but then also let them know what they’re trying to accomplish with their vision on their real estate investments and how those need to intersect. There are definitely many CPAS out there that are very good at their job, but maybe don’t have a whole lot of history in working with real estate investors and understand what they’re looking at.
One of the things we’ve run into a lot is how they report it on the taxes. It’s maybe overly aggressive or they may incorrectly play how many days it was actually a viable rental. Some of those things have an impact on their ability to qualify for the future. We need to make sure that there’s accurate data there, so we help them to understand the impact of overlooking one or two little things on the schedule that will impact them significantly for the future. We have those conversations if we have the opportunity to, but for the most part, it’s helping them to strategically plan out how they use their finances wisely and not put them at risk.
We think about this at least as the mindset of most people. The consumer mindset is, “I’m trying to get a loan and these banks are being a pain and there’s too much paperwork.” I get all that, but when you come to the point as a business owner and you realize that when you’re leveraging this property, you’re literally being able to acquire a piece of real estate that’s a cashflowing business for twenty cents on the dollar. Somebody else is going to pay off the existing 80% note for you. Eventually they’re going to give you the title to that cashflowing business for free and you get to also write it off on your taxes. You see the growth here is not necessarily like a cash-on-cash return model anymore. This is literally a multiple times over type model where you’ve never spent a dime when you get down to the details of it. That’s a whole other conversation.
Do you have a title for other team members like your property manager? What would you title those guys?
The property manager, I would put them underneath the regional operations division. You, yourself, as COO and then within your team, you’ve got people that work directly with you such as Steve, Melissa, Michael, Jennifer, and Ron that are working directly with you on that operation in the chief’s office. Then you’ve got your regional operations manager, which would be your local market turnkey guy. Whatever state you’re working, you’ve got people out there that are turning properties. There’s your regional operations manager. They’re going to have their maintenance team, they’re going to have their management team, all of them are going to fall under the regional operations division. You have multiple different layers to your division and then you can have multiple different regions.
You don’t have to stay in one region. A person can go to Tennessee, a person can go to Missouri, a person can go over to Indiana. Now you have three divisions at three different regions and you can break those regions up into various people within the region. It can be an org chart or however you want to lay it out. On the finance side, I’ve got myself as the Chief Financial Officer just from a perspective of helping you engineer it mentally. Then you’ve got my operation manager, Ellen, and then down to the processors themselves and the individuals that are aiding the processors and moving it through. Her whole job is to start to strategically plan out your leverage strategy to be sure that you have the money there to keep expanding the business as you see fit.
All of this is not a way to make something that is fairly simple sound complicated. This is a mindset or perspective on how you should look at your business and how you should look down upon your business in order to see the pieces and understand that you’re the one that’s driving the ship, maintaining control, setting directive, and communicating with your frontline people in order to run the business as a business, not to treat it as a hobby. It’s a fancy way to look at something, but it’s essentially another perspective or a better way to look at how your business is structured. Would you say that’s true or am I off the mark here?
You’re a 100% accurate because mindset is everything in our lives. If a person goes at it with the wrong idea, they look at things too lightly. Passive real estate investing is part of a catch out there, and passive is another mindset of saying, “You can go about and make money by not doing anything.” In reality, a CEO doesn’t have to do anything but make good solid decisions, but they still have to be good at thinking and making a concerted effort to be sure they’re making the right decisions. I remember a very successful CEO one time saying that he tries to be the dumbest person in the room. If he has to come up with the answer to the question or he has to come up with the concept or the way to solve the problem, then he’s got the wrong people with him.
That’s what I put back on each investor and say, “You as CEO has to take the time to put the energy and thought into deciding who is going to be at that board table with you. Once you develop that level of trust and you have developed the right team of people, get the right people on the ship, you can sit back a little bit and make it a little more passive, but on occasion, you still have to make a decision and it needs to be a good decision.” Labeling them as CEO, you put that onus on the individual to be sure that when they are considering the growth or even starting into this business, that they take the time to make very good decisions because ultimately it falls back on them. If they didn’t listen to the advice properly or they didn’t take the time to even ask for it or even take the time to get the right people on the ship and stays with whoever was perceived as the cheapest, then the only one to blame is themselves.
You don’t have to be the smartest, but you have to know enough to ask intelligent questions and then let people who are hopefully smarter than you help you make the right decision. I always envisioned myself as being the general and setting the direction and the marching orders and then bringing on the right people to help execute the plan. This is another way of looking at the same thing.
It is definitely the same way to look at it from a slightly different perspective and it puts the onus on the right people when you park it in that manner.
When you say the evolution of the real estate investor, what are you trying to say? Is this an evolution in that perspective?
The fact that people have decided to take that role on as CEO and take ownership of it, because as a consumer, when you’re a consumer spending money going into debt, then you’re laying blame on everybody for why it might not be working or not working the way you perceived it. People buy right now. Let’s think about the consumer. The consumer is responsible for 72% of the US economy. I also heard an alarming statement from an economist that 19.6% or 19.7% of the global economy is the US investor. That’s a pretty alarming thing when you consider how consumers go about what they do.
Let’s take flat screen TVs for instance. There are major manufacturers that sell through multiple different sources. If they’re going through a Walmart or a discount direction, it has been stated openly that they have a different manufacturing process for that. It’s not near as good of components. It looks like the exact same thing. It shaped the same. It does the same thing. It has the same model number, but it has different components within it. They’re inferior versus going down the street to an actual audio or visual store that has the exact same model but has better components. They go where it’s about 50% cheaper. Consumers go where it’s cheaper even though they have to replace it three times as often. That’s the mind consumer, “Where do I go to get it cheaper?”They’re cutting their own throat in some respect because of that. When we’re talking about that thought process, they’re more willing to blame somebody else when things don’t go right. That’s why we had a lot of the crash that went on. People demanded more than they could afford, and it was given to them. When it fell apart, they blame somebody else by saying, “They didn’t tell me right,” or “They’re the ones who gave it to me and let me have it so it’s their fault.” Nobody took onus on themselves to say, “I shouldn’t have done that. I should have been wiser with my financial decisions.”
As they are evolving to a CEO or evolving to a business owner, they’re thinking a little bit more about it. They’re taking on the onus of the saying, “I need to make a conscious decision as to which property I should buy.” As they’re doing that and they’re involving themselves with the right people, they’re going to dig in more into the rest of their finances and understand, “How do I maintain this business? How do I keep this going? Now I have an objective, I’m not just buying a piece of real estate because next month, it’s going to be worth $50,000 more, like it was in the mid-2000s. We’re going to buy a piece of real estate and hold onto it for long-term to cashflow and then trying to develop something that we can walk away from our normal day-to-day business and have something that will keep growing and keep sustaining us.” They have a vision for it, not some splash in the pan potential. That is where the evolution has come from, that they’re looking more down the long-term. They’re more interested in the long term and not interested in what’s going to satisfy their urge today.
I’ve heard you say mindset multiple times and it plays in heavily at every level when you’re a real estate investor and when you are working on your finances. This is something that we’ve adopted long ago because we are who we are, and we push forward but to me, investor mindset comes down to this. It’s knowing what you want and then it’s setting those goals, thinking positively, acting the right way, having determination and grit, making a decision, and taking action. When you put all those things together, it’s almost inevitable that you will achieve some level of success. What is this investor mindset to you?
The mindset changes from individual to individual. They slowly evolve into seeing the success that can come from one deal in real estate. My personal thought is that sometimes we’ve done too great of a job to get the mindset going because sometimes they just buy one then they’ll buy ten. “This is awesome. I’m go dive into it all in and try and see what I can make happen immediately.” It’s because we are creatures of “Never enough.” The mindset in my mind, at least how it works for me, is trying to focus on what we want. For me personally, it’s becoming a slave to good habits. It has helped me to generate the right mindset towards things and looking at things from a right perspective. We’ve seen interest rates move to a negative position. They have unraveled their balance sheet quite a bit when it comes to mortgage backed security. One of the things I’m trying to help real estate investors take a look at and get their mindset where they were basically pulling out of investing into the mortgage-backed securities market and into treasuries and all the other parts of the US bond market.
I can’t remember how many billions of dollars a week they were not putting into it, so therefore shrinking the amount of money available. What was happening is the interest rates jump from high fours to the high fives within a 30 to 40-day period. A normal consumer is going to look at it and I’ve had many investors call me and say, “We closed on a transaction a month before at a certain rate and then a month and a half later we’re looking at interest rates potentially locking at a point higher.” When we’re looking at a $100,000 transaction with 20% down, that’s an $80,000 loan. They were seeing the cashflow on an annual basis decline by nearly $600 a year. It’s $594 a year as a drop-in capital. It’s pretty alarming, so as one who is a consumer thinking, “I’m losing $594 a year,” that was the thinking. I asked him to take a little bit deeper look into that. If your income dropped by $594 a year, that means your tax liability dropped. Then we want to look at the other side, what caused that drop? The drop of course was when the interest rate went up. One $80,000 loan, 1% increase in interest equals $800 per year in interest paid. Who’s paying the interest? The tenants pay the interest but yet that investor got to write it off. They’re dropping in revenue $594, but increasing in right off by $800. Is it a $594 loss? No, it’s not anymore. You’re only getting paid a percentage on taxes, but it’s not $594. The difference is a consumer sees the monthly loss of cash going into their pocket. An investor or a business owner or CEO sees that there are dozens of different ways to make revenue. Revenue is coming in because you go and do your taxes, and because you did your taxes you have now saved what you will spend anyway. Either way money is still going to be flowing in, it just flows in a different manner. It’s a matter of getting your mindset right to understand where it comes from, what are the different ways you get it to come to you, and that it’s not all about what the dollars that hits your bank account.
That’s a matter of perspective. Having the right mindset is critically important. You could look at something as a bad thing, but the way you’ve explained it and taken a deeper dive in looking at what it means at the end of the year, at the end of the day, it isn’t that big of a difference. You’re still having triage, the real rate of return in terms of what your interest rate is on the loan versus what the cap rate and performance of the property is. There’s still enough of a difference there where the investment still makes a lot of sense financially and it will only improve as the years go by, so it’s not that much of a setback.
Eventually, you’re getting the property for free because somebody else was paying it off. You made cashflow as a result of holding it for them and letting them use it, and you got to write off all the expenses on it, so even if you’re just barely breaking even or just slightly over, you’re still winning. You’re winning in a big way, it’s just a matter of getting your mind right.
You could have also said that to think back in the 1980s, interest rates were as high as 19% plus. Not that that made a whole lot of sense in terms of investing in real estate, but they still were in the 19% range. Having a 5.5%, 6% mortgage loan today is far less than what it was for many decades.
It’s still a gift. I’ve seen the mindset go the opposite direction. I had one guy who spent a lot of time on Bigger Pockets, great information on there, it’s an excellent resource for people, but from all the stuff he was reading on the posts, he believed that anything less than 14% cash return you are losing money. We had got to the point where we are getting to finish up this transaction and he was looking to back out of it because he’s getting 13.2%. He’s like, “I’m losing 1%.” “How are you losing 1%?” “I ran the numbers and it was 14.2% when we started. When I finally get the end result on my insurance, the end result on the taxes, and all that added up, I’m literally down to 13.1% and it’s not worth it for me anymore.” I couldn’t quite wrap my head around it. Again, it was a mindset and a perception. One of the failures there was he was too busy looking at what people were posting about their big wins and instead of realizing that the average after was much lower and still a big win for him to even get in 9% or 10% but his perception was off. Because of that, he walked away from $65,000 acquisition that was cashflowing $300 plus a month, because in his mind he was going to be the only guy getting less than 14%.
When you think about going online and what people are posting, that’s a lot like going to the tabloids at the grocery store. A lot of these fashion magazines are not going to have a picture on the cover of somebody when they get out of bed. It’s going to be right after that $10,000 makeup job. That’s exactly what they’re posting online. Nobody wants to post about a normal day. They want to post about how they kicked ass.
They want to talk about the home runs, not the singles and doubles, but 90% of all the done out there are singles and doubles, maybe the occasional triple, to use baseball analogy. The thing is, anytime I can get a 30% cash-on-cash return on my money, not including tax benefits, not including equity growth and appreciation, that’s a huge win. It’s hard to find a 13% cash on cash return today in any of the good neighborhoods. Neighborhoods like A’s and B’s, you’d have to get into C’s and D’s to achieve double digit returns like that, so that sounds like a good deal given the numbers you’ve mentioned.
It was a ridiculous deal. That was a couple of years ago, you can never invest because you can’t find that deal. You used the baseball analogy. Let’s talk about my business for a quick second. I closed 676 units. My average loan size, because I’m working with real estate investors nationally, is pretty low. When you compare me to the rest of the top 1% of my field nationally, there are guys closing a lot of big numbers out there in total volume because their average loan size is like half a million bucks. My average loan size is $95,000. When you’re talking about grand slams, these guys are hitting them out of the park every single deal. I’m ranked in the top 1% because I’m bunting. I’m going to be bunting every deal, but I’m still getting on base every single time. For a person to think that they have to hit a home run every time is wrong, and a real estate investor who thinks the same thing is setting themselves up for never getting on plate. You need to get up there and be willing to even take the little bunts on occasion and get yourself on plate.
It’s like playing poker. I play in the world series of poker every year, and a lot of people seem to think that winning poker is what you see on TV and these big consistent wins. The reality is you don’t need to win that often, and when you win, you need to have a small win here and a small win there. You preserve your capital, in the case of poker, you preserve your chips, you build your chip stack, you do at singles and doubles at a time, and it doesn’t have to be that frequently. If you do that, you’ll make it deep in a tournament or you’ll walk away a winner in the cash game. Unless you come across a smoking deal because of a distressed seller or some unique situation, you’re going to be investing in singles and doubles. You’re not going to find that deal of a lifetime all that often. I’d like to say that the deal of a lifetime comes by once every week.
Because if you’re out there looking, if you have the right team and you have the right people that you’re working with, they’re going to continually bring you good deals. It’s a matter of stacking those deals continuously that one day you’re going to look back, could be three years, five years, seven years down the road, and you realize, “I have accumulated ten properties and I’m cashflowing $4,000 a month. I’m doing quite well now.” That’s the mindset you have to have, is you have to realize that if you set the bar too high for yourself like the guy did with that 14% cash on cash return, you’re setting yourself up for failure before you even get started and you may never end up investing. You might end up talking yourself out of investing before you even get started. I can’t even imagine myself in that situation, so I feel bad for that guy.
To your point on those who are looking for the big pot wins instead of going for the singles and doubles or the small wins and preserving their chips, there are people there are making fortunes off of those trying to make the big grand slam. Every time you’re trying to jump in and think you’re going to make that big deal, sometimes like the old adage, it’s too good to be true, someone else is going to make a fortune off of you because you’re not willing to put in the work for the small steps. It’s what you’re trying to take, the big leaps, that you ended up getting the rug taken out from underneath you.
Do you want to say anything about interest rates? Any forecast on that? Where are we today? Any issues?
We’re seeing the market has found what appears to be a floor. When I talk with the investors, we will review the mortgage-backed securities and how they trade. I spend about $1,600 a year to have access to the actual minute-by-minute charts as their trading to see where they’re going. I listen to different analysts that talk about what’s going on in the economy and there is talk. It could be preemptive talk, they’re more of a bubble forming in the stock market. We talked about S&P and it’s where computers are being valued at. We’re watching where those trades or money’s moving within the mortgage-backed securities market and people are starting to get what looks like more footing and the desire to invest back into those markets since the Fed took that massive leap and pulled so much money out and divested so much from it.
There is belief that we might see more of a return of investment into those pools and improving the rates going forward. It’s not going to be a ton. We may never see the low to mid fours again for real estate investors, we may never even creep into the fours again when it comes to 20% down or 15% down, but we could be close to that on the 25% down. It’s a matter of us spending time, CEO and CFO talking through the strategy. Is it that big a deal that we hit those marks again with the rates? I don’t know that it is. If you’re able to cashflow it all, secure piece of real estate and have somebody else pay it off in your behalf, it’s a win. It’s a massive win. Take advantage of that now. Take advantage of it while you have the capability, because we don’t know what the market’s going to do down the road.
Have you heard any more about the chatter that I kept hearing about Fannie and Freddie raising the ten-cap limit on how many conventional loans investor could put on their credit?
There was a lot of chatter about that, and I found that interesting that all of a sudden, rather than raising the cap of ten, they released what was called their collateral underwriter. A lot of us are familiar with desktop underwriter, which was an electronic system that allows them to underwrite a person’s income, assets, and credit and determine their ability to get a loan. They created another one called collateral underwriter that underwrites the appraisal. Back in the late 2000s, they had changed the format of the appraisal, and it was so those appraisals could go into a system and they could store the data on it. It’s after about six or seven years of storing data, I could be wrong on that, they had released a system that was going to analyze that. Their real big push right now is being sure of the values on it because there are still a lot of people pulling crap out there. There are still a lot of people out there doing fraudulent things when it comes to properties and their values and people are being taken advantage of. Fannie does not want to be indemnifying loans for an investor, putting up the money for us to lend out on something that’s not worth what it is. They’re doing their best to create some system to hold the appraisal portion accountable for accuracy.
Now that they’re working on that and trying to fine tune it, and it’s not fine-tuned at all. It’s very difficult. We’re fighting through it a lot. You and I have actually experienced a lot of that recently in certain markets, but they’re going to refine that more and once they get a lot more of a stable position with that, they may revisit that. I can’t speak for them on that. I haven’t had any conversation about that direct with anybody over at Fannie or Freddie. They’re trying to make sure that they’re doing good, solid business and I want them to solid. I want them to stay safe. I want them to have good solid basis for doing the transactions because the longer they’re in business, the longer you and I can keep doing our business. I pray that they’re going to figure out how to get that fine-tuned and be able to determine the true risks of a turnkey property, because that’s part of where their system is having a hard time figuring it out.
You have a property that was purchased in January for $20,000, but it’s now selling in April for $70,000, and the system can’t understand that $30,000 worth of rehab was done to it. They gutted that thing down to the studs, redid everything, it’s practically a new home, so the system’s not able to read that and considers it could be risky. We’re trying to fight through that, but once that is established, my personal feeling or guess is that it might be back on the books to consider because they might feel safer in these properties. They’re not increasing their risk of having more properties with one person that could have a handful of those in there with poor evaluation that could cripple the real estate investor because they end up with properties that are not worth what they paid for it.
They’re trying to avoid fraudulent transactions like what used to happen many years ago. Because it boggles my mind that they can’t figure out the fact that you take an ugly property that you buy at a distressed price. You add value by putting money into it and fixing it up and then turning it around at fair market value. That’s called a value added transaction. It’s been going on for decades, and I have a hard time believing that they can’t figure that part of it out. I just think that they’re trying to avoid fraudulent transactions and they’re like a rubber band. They’ve gone a little too far. They’ve had a knee-jerk reaction too far to the other side, and then ultimately what will happen is they’ll pull back and they’ll realize, “Most of these transactions, the vast majority of them, are actually legitimate transactions.” Hopefully they’ll make things easier for us to get loans.
It’s going to take a human touch to be able to look at that and say that. If you’re trying to lean on an electronic system to simplify it and make it scalable, an electronic system is only going to recognize the difference. It’s going to take some really good artificial intelligence to be able to look at that and understand that. Maybe they’re still trying to formulate it, I can’t speak to that, I know that we have put things in place with people in our organization. I look at those appraisals that score negatively to say, “This makes sense.” You look at the comps and we look at what’s going or makes sense. We’ve also seen some that comes back scored and they’re looking at us like, “We’ve done the research and even the scoring model is wrong because these things are not spitting it out right.” The thing that’s interesting about that is we as the organization writing the loan, we have to take onus if something’s wrong. They’ll make us buy it back and it gets very expensive when you have to buy that loan back. Sometimes have to transfer to a different source and with interest rates being volatile, it can get really expensive. We’re all trying to be very careful how we go about it. I don’t disagree with you at all in them trying to avoid fraud and it’s amazing how much it’s still going on out there. You and I have had conversations before about people pulling the wool over somebody and taking advantage of them, and the best thing you and I can ever do is keep a big wall between them and work with good, solid people in each market.
There’s no replacement for some common sense, so ultimately the underwriter is the person who’s going to make the decision, not the computer.
It helps in that respect to have good people on our side to paint the right picture for the underwriter because you have a person that doesn’t have a lot of familiarity. I know that when you’ve got all these banks in the world and all these mortgage companies, it’s been proven you give a monkey a phone and some training and it can close loans but it has to be simple stuff. The real estate investor, all you guys are your own special snowflake and we have to be able to take that square peg and fit it into that oval hole, because it’s not even around anymore, and then try and paint that picture. If we have enough experience, and we do, between me and all my staff, we have over 200 years’ experience at working strictly with real estate investors, we’re able to help them get through that to make sense of it.
What do you have to say about gratitude?
I’ve determined that that’s probably the most important thing that we can ever try and instill in our daily lives. It is one of the most powerful forces on the planet. We all are familiar with The Secret. It is a great book and there was a movie put out about it. It talks about the attitude of gratitude. It talks about the law of attraction. One thing I’ve noticed, everything that’s been put out there has yet to actually tell me what the practical application was. All I could ever get from anybody as an explanation is that it changes how you feel, and I don’t disagree with that. If you do truly come into something with a sense of gratitude, it does change how you feel. It changes how you approach things and it helps you go about your day in a better attitude. I don’t disagree with that, but I did find myself in a situation where I was able to contrast gratitude and ingratitude to understand the practical application.
I had an employee at one point that when we hired her on a specific wage and bonus, and the stipulation was after 90 days to six months. We re-evaluate her performance and then we about re-evaluate her income. That time had come, and I had a number in my mind that I was going to increase her wages by, and when I started looking it up, the average wage increases out there for a first wage increase was 2% to 3%. I called a friend of mine at a larger company who was an executive there and they told me the same, 2% to 3% average. I contacted my direct supervisor because I don’t own the firm and I said, “Here’s what I’m thinking, 10%.” “10% is unheard of. We’ll do maybe 3%.” I pushed back because 3% was nothing. I said, “I really want to push for this.” They said, “You’re going to have to give us something to go off of. We need you to dig in, show us what she contributed and why she would want that big.” At that point, what I did was I dug through all kinds of emails. She had instituted and showed where she had made a major contribution to our business. When I went back to my corporate guys with all this information, it took me about two weeks, they approved it.
I was extremely ecstatic that they were willing to approve this, and I could give this to her because she deserved it. When the time come, she sat down to my office, we talked over everything that I showed them, all the things that she contributed, how she had benefited the business, and then I went to show her my gratitude with the package that we had designed for her, which was a 10% bump in her in her wages, and a 30% bump in her bonus with certain metrics. Put yourself in my position here. Put yourself in the position of being able to do this for somebody and how it’s like your child when you’re getting ready to give them that bicycle that they have been dreaming about at Christmas time. You can’t wait for them to open it up. I slid this over to her. She looks at it and she looks up at me with this look that’s saying, “That’s it? You couldn’t do better than that?” What’s your gut reaction? I’m not talking about you as a business owner and a coach. What is your gut reaction? What would you do to somebody that treats you with such ingratitude?
I would’ve swung from positive expectation to complete disappointment. It would’ve taken me back in surprise.
I was definitely taken aback in surprise, and then almost instantaneous from surprise to anger. My natural inclination was not only will you get the raise, to hell with that. Go clean out your desk. I want to tell her, “You’re fired, get out.” Then there’s also another thing. It’s like, “Why not drop your car key because you don’t deserve that either?” I was that angry, but I’d let my mind take over and not my gut, and I start coaching through the process. When you’re in this type of situation that you may want to look at a little bit of thank you. What would it take to go to this point? Start asking questions, but I started trying to coach her through this, but it didn’t change the fact that I was angry about this. Then later on that week, I’m exiting the freeway to come to my office. There was a homeless man standing on the off ramp. He’s standing there with his cardboard sign and there something about this guy. I reached to a spot in my truck because I had been hiding money in there for years because there was a point in my life I was so broke I had to scrounge for changes to get enough gas to get home. Now I had cash, I rolled down my window, I reached for this one bill was at and I held it out. He walked up, he accepted. He said, “Thank you.” He turned to walk away and he unfolded it. He stopped and looked back at me and he held it up. He goes, “Are you serious, man?” I’m like, “Yeah.” He goes, “This is twenty bucks.” I said, “Yeah, cheers.” He walked back to me, had my arm up on the window of the truck, he reaches for my hand, pulls it towards him, bows his head and says an audible prayer of thanks to God and a blessing on me.
With tears streaming down his cheeks, he looks up at me and thanked me profusely for changing his life. At that point I was hit with an overwhelming sense of guilt because I only had $20 cash. I was thinking, “Do you have a square, because I’ll swipe my card.” I would have willingly given him any cash I had on me because of the feeling that I had. As the light turns green, the people behind me are honking and I start to leave and then it hit me like you wouldn’t believe. That’s the practical application of gratitude. One person, three days before, I was giving $10,000 a year increase in income to and she downright spat in my face. I’m angry enough I’m going to take everything from her, not just the raise. I want to take the job, I want to take everything, so you don’t get a damn thing for me ever. On the other side, a man was so grateful to me for $20 that I was willing to give him anything I had. That’s what works. Think about how that would go within our world if everybody acted in that same manner.
It makes me think of Doris Day, she has this great quote, “Gratitude is riches, complaint is poverty.” If you think in terms of gratitude and you appreciate what you have, and you work towards something more and you help people along the way, you can’t help but become successful and rich. Gratitude is so important. My whole family has a gratitude journal and we try to write in it every night. We don’t every night, but we try.
There are always little tweaks that somebody can do to try and get that feeling to come about. I was in a meeting where a presenter spoke about gratitude and he had said, “Never get out of your bed until you have three new things to be grateful for.” After about three weeks I started running out of new stuff. I’m never going to get out of bed so I’m going to get out of bed. Because of that homeless man, I started instituting something different and I start realizing I do have new things every day. I’ve got Melissa, I’ve got Steve, I’ve got Michael, I’ve got yourself, I got Jennifer, I got Amy, everybody’s sending me referrals every day. I started writing down those names, the name of the person being referred and the name of the person referring them. Now I take those and do exactly as I was taught by that homeless man to present myself to God with those names in my hand as grateful for them and asking blessing upon them as well, and it’s changed my business.
The person you’re referring to that wakes up every morning with the three things to be grateful for is Dean Graziosi. I actually did Episode 87and we were talking about Millionaire Success Habits, and we titled it The Gateway To Wealth And Prosperity. He’s a big believer in gratitude and having a gratitude journal and being thankful for everything and living your daily life that way in an attitude of gratitude.
Anybody in any industry can apply it somewhere. I tell that story to Uber drivers when I’ve got a long drive and I tell them, “You’ve got names that come up on your phone every day. You can apply that same thing. If you’re asking a blessing upon those people and their travels and having a prayer of gratitude to God for that person being in the seat of your vehicle so you can bread your table, it’s only going to make your business better.” I’ve noticed that every single person, if we’re able to institute something like that into our world and what Dean talks about in your gratitude journal, there’s no reason you’re going to ever have a bad day.
You set yourself up for success right from the get-go. It’s the right way to the right way to live. I am also grateful for having you on the show. You’re a wealth of information, great stories, good information. Thank you for coming on. Please tell our audience how they can find you.
The best way to get me is AaronBChapman.com. It’s going to have all my information out there, my NMLS ID, all the things you need to know about me. You can also directly contact me via email. There should be a system in there to be able to accomplish that too. To circle back around, thank you, Marco, for always being willing to work with us, for the trust that you put in me and my team here, and the friendship. To me, more than anything is having friends that are in the business that understand what I understand and to interact with each other. I don’t have clients. I have a hell of a lot of friends across the country or across the globe.
It’s great being part of your network, so thank you very much.
Thank you.
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