Hey everyone, and welcome to Passive Real Estate Investing. I’m Melissa Nash, your guest host jumping in for now. Let’s dive in.
Hey guys, welcome back to the show. And I have a special repeat guest with us today. Most of you know him, you know his name. His name is Aaron Chapman, and he is one of the best investor friendly lenders out there. So welcome to the show, Aaron.
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Thank you. I appreciate a repeat back on here. I, I don’t know how many times this is, but I’ll take it and I’ll keep coming back.
<Laugh>. Wonderful. Well, okay, so Aaron, because you are the go-to investor friendly lender, I came up with a idea and I wanted to grab you and throw you on the show really quick. You know, a lot of our listeners are new, some are experienced, some have done some things, some have done a lot of loans and, and I would say the bulk of our listeners are new. So under five doors they’ve purchased. And there are so many questions that people have to do with lending and I think people hesitate to call up a lender and actually ask them. I think people think that either their questions are dumb or they’re gonna sound silly, or the lender’s just gonna kind of talk over their head and throw out numbers or make them commit and run their credit that day. So I kind of thought that I would ask you this question, Erin. Now, I don’t know, I’m gonna throw this out there. I don’t know. Are you ready? You ready for this.
<Laugh>? Fire it off.
<Laugh>. Okay, so what is the number one question that somebody asks you or your team when they first jump on a phone call with you guys? What, what is your most asked question?
Well, everybody, I’m not gonna go with the one that’s the obvious one. The obvious one is what your rate, right? Well, interest rates are published, guys, they’re pretty close. You’re gonna see from lender to lender such a small margin that my opinion always gonna be, you shouldn’t be judging where you go based upon interest rates. You ba basing it upon who can help you become successful as a real estate investor. Because having a good team is gonna matter everything. If you just push only jump around to people who’s the cheapest out there? You’d have the, you know, you’d have one of the organizations there is ’cause there is no CEO that hires other members of the c of the, the C-suite, if you will, because they’ll take minimum wage, right? So let’s, let’s take that one off the table. I think the most common question that comes up throughout the entire process from the very beginning to the very end would be why do you need that? Everybody asks that question.
Okay, so expand on that. Are you saying, people are saying every single time there’s a line item on an application or on the closing statement, somebody says, why do I need that?
Well, let’s go into, really the first time they ask it in a process is when we’re going through our pre-qual process. You know, and it’s, it’s a lot deeper dive for when a person is buying a home. We, as the lender fall into the trap of, I just wanna be as, as simple as possible with the least amount of problems. I wanna make them happy to go with me. So I’ll pull their credit, get a pay stub, and I say, you’re qualified. Well, when they contact us and we’ll say, Hey, here’s the items we need to get your pre-qual done during, like, why do you need all that? Like, well, have you ever been through the process of a loan and you’re the week of closing, you have literally spent, you know, you got your pre-qual, you went hunting for a house for about three to four weeks.
You’ve finally gotten a contract on a home. You’re gathering all the stuff you need, you’re getting your insurance, you’re making sure you’re getting your inspections, you’re making you’re happy with this home. And then the week you’re supposed to close, you’re literally at that point you spent money on inspections, you spent money on appraisal, you spent money on, on new furniture. You know, you, you know, everybody’s really ready to go with this property. And then the lender wants all these documents. Like, why the hell didn’t you ask that a long time ago? Well, because I’m trying to be the guy who’s the least intrusive at the beginning. I want you to feel really good about the deal. I didn’t wanna bother you a lot upfront. I’m of the mindset bother the hell outta you when the stakes are small. ’cause When the time is clo the time clock is ticking, the last thing you wanna be is thinking everything’s done.
I’m at the last week of my deal, I can coast into closing and now I have to scramble. I have to find time in my calendar that I was not ready for, to start hunting for all these things to get that off to you so we can close on the day that we’re required. ’cause Sometimes there might be penalties if I don’t make it happen on time, I’m more of, Hey, you haven’t even found a house yet. You haven’t even gone out there looking yet. You’re just trying to find out what’s possible. Let’s gather everything we can. Now, one thing I have noticed that when we, when we fail to get something, that’s the one thing that bites us in the the last week of the deal. So let’s just get it all. So I spent my career since 1997 focused on what little things happen in every deal and analyzing, where’s the problem here, where’s the problem here, where’s the problem there?
And I’ll either find a document or a process or an individual to put into that process to try and limit those. Now are people coming up with new problems? Sure, they come up with new problems all the time. Other things that we run into might be you know what, you know, another, why would you need that? Let’s just say we deal with a lot of real estate investors who are self-employed and they’ll give us a copy of their personal personal tax return when we look at the tax return. And it shows that parts of your income are derived from other items, not just your W2. You have that we, there’s a reference of a 1099 in there. There’s a reference of a K one in there. So we’ll ask, Hey, can we get, can you get us a copy of that?
Then they send us a copy and it’s like, why do you need the 1099? Why do you need the K one? Well, we need to see where that money came from. It just says right there our reference of a K one. I need to see the K one. Well, then you get the K one in there, it’s like, guess what? You own 27% of this business. I need the business tax return. So why do you need that? Because when you own more than 25% of a business, we now have to look at the business itself and cash flow the business. Now believe me, when I ask for something like this, or remember my team asked for this and you hate to go get it, we hate a thousand times more to read it because it’s miserable cash for a business. We don’t ask it because we enjoy it.
We ask because there’s no way we’re gonna get the deal done otherwise. So that’s one of the big thing is why do you need that? Well, I already gave you what you asked for. Why are you asking for more? Because what you gave me created a new question. Now we have to get the answers to that question. Now it doesn’t mean when I get the tax returns we’re done ask three questions. ’cause It it can rabbit hole like crazy when it comes to that. As complicated as you make your life is as complicated as we have to make the loan. That would be one of the biggest issues with why do you need that? Another why do you need that would be stuff like why do we need a full appraisal, right? Why do we need to get an appraiser out there to go through the property when Zillow says it’s worth x and I’m buying it for even less of a Zillow says, because we need to have some sort of understanding of the sales in the area within the last ninety two, a hundred twenty days.
That shows us what’s really happening in that market. When you have certain things missing in the appraisal, we’re gonna have to charge, send the appraiser back out. ’cause He’s gonna say something like, you know, it’s a subject to appraisal so well we gotta send the appraiser back out there. When gonna get some of these things done? Well, why do we need to send the appraiser back out that’s another 150 bucks. Well, because we need to verify that work was done. When you have a contract built and you have in, in information within that contract that states certain people agreed to certain things, we too are required to verify that those things have been accomplished before we close. Otherwise, we could be held liable for closing a transaction for you where all the agreement was not met. So all parties kind of have to have a little bit of oversight that the agreement has been been held up throughout the entire process.
Yeah, and you know, one of the things that I tell people all the time is quit looking at your lender as the bad guy, because I get it, it can be stressful, especially if you’re not organized and you don’t have all of your information in a file. In fact, everybody should have a Google Drive or a Dropbox folder and, you know, try to be as organized as possible with your tax returns and any rental properties that you already own with there. The lenders are gonna ask you for the leases. They’re gonna ask you for the property management agreements. If you have loans under your name and you’re doing a loan under your name, DSCR loans are a little bit different if you’ve got that. Sometimes we, we’re not gonna get into that today, but regardless, we wanna say organized. But the lender, the way that I explain it to people is, let’s say you’re putting 20% down on a property. The lender is funding you 80% of the deal. They’re at a higher risk than you are. They’re, they’re, they’re putting more money out. So they wanna make sure that a the house is, you know, it’s not falling apart. And so when these, when you guys send the appraisal out there appraiser, so walk us through that. Like what are, what is the appraiser looking for in order to protect not only the bank who’s lending the money, but also the investor? What are they looking at?
Well, first and foremost, they’re gonna give an opinion of the value and verify that the property that is being sold to you is reasonably worth what they’re selling it to you for. Now, there’s gonna be some variance from appraiser to appraiser. They’re also gonna look at the quality of the construction. Is this something that is gonna be standing for a while, at least the term of the loan? They’re gonna look at for look for hazards in the property. Is there certain things associated with that property is gonna be hazardous to people occupying it that you wanna know that as a person buying it, it’s amazing how people get really, really caught up in what’s my value? You know, what, what’s, what’s you say is it worth, but you really wanna understand is this is an underwriting process for you as well to know whether or not you’re buying a property that’s safe for the tenant because you don’t want that coming back on you.
Other than you’re gonna look at is is the, the neighborhood and what, what’s happening within the neighborhood, especially as an as investment property. They wanna see what’s going on with the, with the rentals in the area. Is it renting for enough to make the payment? Right? We, when we get into DSR, we wanna know that you wanna know that it’s another level of underwriting. They’re also going to go to give you a little bit more idea of, of other things that are happening within, within the, the market as to valuation per square foot. I mean there’s, there’s a lot of data within there that you’re probably not gonna look at in, in entirety. But we are, as a lender gonna look at and understand that everything is, everything is functional. That there’s no obsolescence in this property. There is no, there are no problems.
They’re gonna come back and bite you in the later that we can see as he’s just walking through. They’re gonna call for certain things that really come out and frustrate Some folks when they call for a foundation cert means you’re gonna have somebody come in there and look at the foundation to make sure this thing’s stable. And he might say, well the, the seller told me he did all these things like you wanna make sure they did it right. So we’re gonna need an engineer and that costs money to go out there and verify that the foundation is solid. You want a good solid solid view of that other thing that you want to, if they see obvious pest things going on, they may call that out. I see I’ve heard of an appraiser going out there and there was no pest inspection required within the within the contract, but the appraiser noticed that there was an infestation of sorts and he pointed it out.
Now, it didn’t necessarily have a bearing on the value, but it’s something he wanted to make sure people are aware of. And you as an investor wanna know that. Are you gonna step into a property that has problems? Take all the people that are willing to go out there, that you hired to go out there and look at it, the inspector, the appraiser, every party and look and see what they’re making mention of and determine for yourself whether or not this is something that you want. If you are not looking at those things and you’re just deciding, hey, the lender will just close on the loan, there may be things that we look at that or things we fail, we don’t look at. That doesn’t matter us as a lender, but should matter to you as a, as a buyer of this property, the new owner of this property that you should pay attention to.
I tell everybody, you are the CEO of your real estate investment business. Just because I don’t see something and it doesn’t affect the loan I’m closing for you doesn’t mean you shouldn’t be paying attention to it yourself. Now, if you expect everybody else to do the job for you and point everything out to you, you’re, you’re expecting your, just expect problems because sometimes we don’t look through the same lens. The importance that you have on something may not be important to me and it might not be important to you, Melissa. That definitely might isn’t important to the seller. Seller’s offloading the house, he just wants to get paid.
Right? Well that’s, that’s so true. That last part that you said is, you know, if, if I went through something particularly on one of my rental properties or a house that I owned and I faced a problem with it, it’s gonna stand out in my mind. So now when I’m buying the next property, I might be a little bit more sensitive to that in an inspection report. You know mold is a big thing right now because I mean health, health wise, it’s a health and safety standard item. But, you know, it does cause health problems to the people living there. And so I know some people who were affected by mold in their main residence and so now when they get a rental property, they’re doing a mold inspection just for the tenants that are gonna be living there because it hit them so hard.
And so they’re extra hyper worried about it and cautious about it. And, and by the way, most mold can be fixed and remedied. It’s not the end of the world. It’s just a great idea to catch it early on if it is there. But yeah, so we definitely are all gonna be looking at things a little bit different and what’s really important to us based on our own life experiences. But then also, again, just to kind of reiterate that you guys remember again what I said, the lenders are there to help you <laugh> not only to close on this property to get you through the appraisal. Yes, the appraisal costs money. You’re not just paying for a drive by appraisal. And those are, you know, those are much cheaper. I know with Aaron’s team, you’re actually paying for the invest or the appraiser to go into the property to put some time and some thought and some effort into it. And guess what happens? I know for a fact with Aaron’s team, not all appraisers are created equal. They make mistakes. They are humans. And I tell you what, I have never seen anybody fight an appraisal more than Aaron and his team. So walk us through that, Aaron. What if, you know, somebody gets the appraisal report back and it’s way under value what they thought? What’s the first thing you guys do?
Well, let me 0.1, take one point here you made and just reiterate that guys we’re a partner of yours in the deal. Like Melissa said, we’re 80% in some cases of, of the, the funds that are going into acquire this. So look at us as a business partner that’s putting up 80% of the capital for the acquisition of your business. You’re putting up 20% of the capital plus costs and then you’re paying back your, your, your partner as interest. That’s actually diminishing with, with inflation. So you’re paying us less and less and less, but you get to keep the graduate, the asset that’s growing and growing and growing and the cash flow you win in the partnership. We put most of capital and we take the short end of the stick. You gotta look at it the right way and we can talk about a whole different thing.
In fact, I wanna put down a different conversation as to how is it the lender gets the short end of the stick in a 30 year fixed mortgage and you’re the victor and the one who wins and takes the majority of it as the 20%. You’re the 20% of the capital partner, but you are the majority owner. It’s a pretty wild concept and that’s not how it usually works in business. But when it comes to appraisal that you’re referencing there, one of the things that is the main thing you gotta really, really look at is this property. Is this gonna tell you about the property, bed, bath count, square footage, all these things? Is it matching up with what was being said to you? Now, there is certain things that get done in the bur world, everybody’s heard about that. Or people that are, or people that are selling houses will have a drive-by appraisal.
So they’ll sell you something. They say, I had this, this some quality of pre appraisal. I’ve had a an appraisal done. Here’s the drive-by. Here’s what the value should be before you go into contract and go to get your own appraisal. So you have an idea what that looks like. Well, when a drive-by appraiser’s doing that, they’re nine times outta 10 not even driving by, I believe. ’cause You can find the exact same picture on your, the appraisal they give you on Zillow or realtor.com. So I doubt they drove by and got that picture for you. They took that from, from the internet and then they pulled some comps in the area and they took a range to guess at what this is gonna be like when the rehab is complete. ’cause Usually these are done pre-hab. Well then you start to look at what they said, this, this drive-by appraiser said it should be worth.
And then we have a full blown appraisal go done for appraiser walks into the property, actually measures the property, walks through all the things, checks off the, everything is there that they said would be there. And if there’s anything different, we will know that. Now, some of the, the easy low hanging fruit, when I get a low appraisal come in, we’ll take a look at that, compare it. ’cause Then people send us, well here’s my drive-by and it should be related to this. Well, I’ll look at the comparable sales on the drive-by that was used versus the comparable sales that were used on the appraisal itself. Now often I have seen the drive-by appraisal that is done. They will use comparable sales of recent rehabs that might be very superior rehabs to the one that was done when the rehab was complete. You wanna be cognizant of that.
So if you’re buying a home that’s in the process of rehab that has a drive-by appraisal done, and you’re looking at this and it says, Hey, this is gonna be a $200,000 house. We’ll look at the comparable sales used by that drive-by appraiser. Look at the quality of the rehab, the interior photos and the exterior photos, and then just know if that’s what this is and mine will look like that. Then that’s what I should have. Well, then you get the final product. Does the final product look like a the comparable sales in the drive by appraisal? Or does it look like the comparable sales that the appraiser used when you walked through it? Which one has the best comparable sales? So then we have to argue that out. Well, I might be arguing with you and your seller saying, eh, they, the, the appraiser picked more appropriate comparable sales than what the drive-by appraiser did.
The drive-by appraiser did some fictitious ones that it might look like the real appraiser did it, what it actually truly looks like. So your valuation may not be the same. I have run into scenarios where we do have a valuation issue where an appraiser comes in with a value and they chose the, the, the comparable sales that had the lowest purchase sales prices in the area. Well, I’m looking at those comparable sales and I’m looking at the adjustments they have. Like, well, what other areas? I’ll contact the seller and say, this is what our value creation came in at. Is there some comparable sales they may have missed? So they’ll look at those sales say, yes, there’s this one, this one, this one, and this one that we believe is more comparable to our property because of the way the rehab is done than the ones that they have provided.
We will, we’ll look at those ourselves. We will do it an an internal analysis. We take a look and say, is there, is there any foundation to this? Look, look at the bed bath count, look at the amenities, look at the quality of construction, look at how they appear, curb appeal, all these things. And then we’ll submit them and say, and and just ask, is there a reason why these particular ones were not viewed or not used? We don’t tell them, use these comps. We want you to bring the value up. So we just ask the question, you know, is there, is there something about these that, that that made them not usable? Well, your co your, your appraisers will definitely take a look at that often and just say, Hey, you know, we did. Sometimes they’ll say, yeah, I, I didn’t even see these because they may not have been readily available comp to pop right up when they did their quick search.
They’ll do as quick a search as they can. They gotta move, they gotta move product quickly. So as a result of that, they might not come up with with they can come up, adjust their valuation or adjust their opinion based upon new data that’s provided. They may even come back and say, sorry, those don’t count and, and stick with what they’re saying, which happens on occasion. But it’s not a matter of us fighting it out. It’s a matter of providing better data or data they may have not seen to help them reassess what they came up with.
Yeah, I mean, gosh, <laugh>, we’ve been doing this for so long and at the end of the day, honestly, there really have not been that many appraisal issues that I’ve seen over, I mean, thousands of transactions. Obviously they happen. It’s real estate, it’s people, we can’t control it. It’s not the worst thing in the world when an an a low appraisal comes in, at the end of the day, you might get a better deal on the property. The seller might have to lower the sales price and you can get it for cheaper. And I recently was dealing with somebody that the appraisal came in, I think it was like $2,000 under and they were so upset and, and they were like, that means I have to come to the table with $2,000 more and I feel like I’m getting ripped off. And I wasn’t prepared for that. What, what do you say to that person, Erin? ’cause I, I literally dealt with that recently and I have a particular, you know, soft spot for people and I was like, I I get it. That’s $2,000 more than you were planning on. What is your answer to that?
Well, I, it’s, there’s two sides to it. How I look at that. So when I see one that’s a thousand or 2000 off the sales price, part of me is like, okay, Mr. Appraiser, you’re not so precise that you can come in within two grand on $180,000 house. That whatever percent. It’s not even, it’s not even 1%. You, you literally believe that they’re 2000 below it was sold at 180,000. It’s like, no, this is only worth 178. Come on. Right? That, that’s one part of me. But there’s really very minimal argument going in there and say, come on some two grand. I can’t really argue with an appraiser on that. So I come back to, to the the buyer say, Hey, this is what we’ve got. This is what they believe the value to be. And we as a lender, we are forced, we, we forced is a strong word, but we are, we are required to use the appraiser on how to base our loan.
So if it’s $180,000 purchase price, we’re gonna base it on 80% of 1 78. Well, when you consider 80% of 1 78, it’s really not quite 2000 bucks to have to come in with. It’s a little bit off that ’cause of the percentage, but we still, they still have to come in with more money. So I explained to them it’s like, listen here, here’s your, here’s your options. You can go back to the seller and say, Hey, wanna split the two grand with me, right? And that way, that way a little bit of offset ’cause I guarantee the seller’s not gonna lose a deal for two grand or one thousands put that they may lose it for two. They may be in the same situation, but I don’t know if they’re gonna lose it for a thousand bucks. Secondly, this is an expected thing. There is gonna be things coming up because if you are not capable of weathering a $2,000 hiccup in your transaction, I guarantee you can’t weather a turn on on that property when the tenant moves out.
There’s gonna be a lot of things you’re not gonna be able to do. We’re not gonna be able to weather the weather, right? It comes in and takes a tree off a branch off of a tree or peels a peels a tile off of the roof. There are things that are gonna happen as a real estate investment and you have to be prepared for that. And this is your first step into understanding things come up that you are not ready for, but you need to start getting ready. This is your, this is the easiest way to remember to start getting ready and start stockpiling as much as you possibly can in preparation when it comes to cash flow. I will, I’ll advise heavily to every investor. Do not use your cash flow to pay down your mortgage any faster than what it is. Keep that cash flow, retain that cash flow, use that to build up your reserves. Do not take the cash flow and put it in your pocket and now go use that to go vacation. That is for your real estate business period. And that’s one of the things I love about DSCR, utilizing LLCs, keep it within the confines of the companies to grow that business. Not to put money in your pocket. This is not about your pocket, this is about your business, this is about your future, this is about your kids and about your grandkids.
Yep. Oh my gosh, that’s so perfect. Well, I think, you know, when, when the client was upset about this $2,000 difference, I think it was more, for some reason they thought that they were getting screwed over. Like, you know, somebody sold them a property for $2,000 more and I think it was just, it wasn’t a thing they had the money to pay for. It was just like this like stubborn mentality. It was like, no, I, I wrote the contract for this price and this is the price I wanna get it at. And so to me it opens up a much, much, much bigger thing when we look at all the amazing benefits of real estate, you know, they’re gonna make that money back through cash flow, through appreciation, through inflation, through rental increases. Like they’re gonna make that money back. It’s so it’s, it’s a much bigger thing, which makes me go back and go, okay, let’s, let’s go back to the basics and let, let’s look at all the profits of real estate. Let’s run those numbers and then tell me if you think that, you know, if the seller split it with them, that thousand dollars. Let’s just kind of put our ego aside, our stubbornness aside and let’s really look at the true profits of real estate.
We do lose a lot in our careers. We lose a lot in our relationship. We lose a lot in business. We lose a lot in opportunity to stubbornness where people wanna hold that line. And if that’s the line you wanna hold, I guarantee somebody else will come in and take advantage of that particular line and they will win. There’s a lot of people out there taking deals from other people just because they’re willing to see the, the long-term benefits rather than being standing right here saying that this is the ground I’m gonna stand on. I’m gonna, I’m gonna, I’m going to take this hill, right While you’re taking the, in taking that hill, you took a great opportunity away from yourself.
Yep, yep. I agree with that. Well thank you Aaron. Today we are gonna wrap it up because this one is just gonna be a quick, quick episode, but once again you came with your knowledge bombs and I’m so grateful to have you as a resource and also you helped me out on an appraisal last week, which is why it was fresh in my mind. I’m an investor to you guys. I close on properties. I use the exact same people and the exact same resources that I’m telling you guys about. Aaron and his team absolutely killed it for me. There was a problem with the appraisal. They went to town, they worked with me, they worked with the seller, they worked with the appraiser. We got it taken care of and I ended up very, very happy. So thank you again to you and your team Aaron.
Well, and in that situation, just so you guys know, I’ve been doing this for 27 years. I have seen thousands upon thousands of appraisals. I have learned a lot about analysis and look at this and there’s a specific member of my team, Karen, that’s all she does all day is looks at appraisals. Our job is to make sure that we get it to the as close as reality as possible and know that there’s humans involved. We can’t influence. We can just give data and if the data works in your favor, it’s great. If it doesn’t, we just do the best we can with it and see how to re re readjust to the conditions of that transaction. But I appreciate you, Melissa, with the trust and another opportunity to be on here. Guys, if you need anything from me, air info@aaronchapman.com is the best way to get ahold of me or just go to aaron chapman.com. We’ll connect up.
Wonderful. Thank you again, Aaron. Talk to you again soon.
Thank you.
That wraps up today’s episode. Big thanks to Aaron and Melissa for bringing us another informative discussion. If you haven’t already, be sure to subscribe so you don’t miss future episodes. We appreciate you being here with us. Thanks for listening and we’ll see you next time.
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