PLP 110 – The Fastest Way To Start Private Lending With Paul Lamnatos
What is the easiest way to start private lending? We have learned from one of our previous episodes that the most passive way to do this is to lend your money to other lenders and let them do all the hard work for you. While this lending to lenders scheme certainly is an easy button, you still have to perform your own due diligence when doing deals. In this episode, Paul Lamnatos, Chief Lending Concierge and Managing Partner at BlinkLending, joins Keith Baker and gives us a ton of tips and advice on how to proceed in these deals. Make sure you settle down, take notes and learn how to make money in private lending – in a blink.
---The Fastest Way To Start Private Lending With Paul Lamnatos
I'd like to thank you for sharing your time with me. I hope everyone is doing well out there in this COVID. This is going out sometime in August 2020 and I'm already getting ready for my kids not going to school at least until January. Poor me. In episode 108, we had Jason DeBono on from NuView Trust. He discussed the most passive form of private lending and that is lending your money to brokers or hard money lenders and let them do all the heavy lifting. I call it the easy button as if there was such a thing. As a private lender, you still need to perform your own due diligence, but you don't have to worry about finding the borrowers. You don't have to worry about finding the deals. They facilitate that for you.
I had the privilege of speaking with Paul Lamnatos from Blink Lending, who delivers a ton of value. Read this when you're sitting down because he drops a lot of great value nuggets, knowledge nuggets, bombs, whatever you want to call it. He funds his own "hard money loans," but then he sells the notes to private lenders, like you and me. Get this, he guarantees his loans, which is something I never do. Enough of my jaw wagon, let's get down to the brass tacks into the interview with Paul Lamnatos.
I am stoked to have Paul Lamnatos from Blink Lending with us on the show. Paul, welcome to the show.
Keith, I'm happy to be here. Thank you for having me.
The pleasure is mine. Full disclosure, Paul and I have known each other around the Houston real estate investing community for a few years. I met him when he was over at with Zeus and readers know that. Paul has done something rather interesting and spectacular and he's gone off, got his own, he's got BlinkLending.com, where if you need a mortgage, a refi, the conventional, give them a look. There's also Ink Lending and that is what I want to talk to you about and the model that you have, because you're not a hard money lender, you loan out funds and then sell the loans to private investors, private lenders. Is that correct?
Yeah, that's right. You'll often hear private money, hard money lending. What's the difference between the two? Depending on who you ask one might say 6 and 1/2 it does or the other or tomato or tomato. At the end of it, I define it as where are you getting your capital from? Are you getting it from financial institutions like hedge funds, banks do lines of credits, or are you raising the money privately through your own funds and through your network of funds? Meaning people that have money sitting in an IRA account or a 401(k) or idle checking, savings account money. All of our funds are privately raised funds and because of that, we hang our hat on the private lending side of things like that better than hard money lending sounds better.
The easy button for becoming a private lender is to loan your money to someone who's already loaning it out a hard money lender or like yourself you're funding loans and then selling the loans to the private investors. You're doing all the hard work. For me, having someone else doing the work, you might become skeptical, but this is what you do. This is your day in and this is your day out. You’re not accounting for the oil and gas company and then flipping houses on the night. This is your gig. I'm happy you came on because I want to talk about your process. When you're looking at a deal, someone says, "I've got this awesome flip. I can be all-in for only 80% LTV." Walk me through that.
First, when you win, “I’ve got this awesome deal,” my brain went to, "I don’t want to hear about it. What's your credit score? How much money do you make? How much money do you have in the bank?" I like to say I'm a private lending investigator. I've even given myself an acronym, a CIA private lending agent. A CIA that has been on our federal guys, but I feel that at the same time we investigate as they do as private lenders. The acronym, CIA, is a reminder to me to always ask about Credit, Income and Assets. There's not one that's going to be an absolute crusher. If let's say credit's bad or income's bad, if you don't have assets, you're not a client for us. That 80% deal you're talking about, even if it's 60%, 50%, and the client has less than $20,000 in their checking savings account, accessible money, they're not a client for us. The reason for that is I want to prepare before things go bad. Why do things go bad in loans? People don't have funds to pay them back. Before I'm lending my money, I have the ability to look at their bank statements, not ask them how much money they have, but to request their actual bank statements. When I get their bank statements, they’re not just looking at the first page and how much money is in there. Let's go through and say, "How's your money coming in and out?"
You might have $80,000 in your bank account, but if you had a $78,000 deposit from PPP, that tells me that you're running a business with a $2,000 average balance. What is the average balance of your bank account? CIA is always check Credit, Income. Those two won't give me a note, they'll adjust my terms. Credit to me is someone's numeric representation of their ability to do what they say they're going to do. When I'm negotiating terms or discussing a transaction with someone, as a private lender, my number one concern is getting my money back. It's not the return on my money I'm interested in, it's the return of my money. That's a famous Mark Twain quote. At least that's where I found who said it or maybe it was somebody else, but the point is I want my money back. When I've eaten off the left side of the menu, when I haven't bought a new pair of shoes that I wanted, when I didn't get the tie clip or the cufflinks or the car, whatever sacrifices that I've made along the way to save every nickel and dime I have. When I go and lend it out, I love that sign you have behind you, "My money, my terms." I'd be shocked if next time you're looking in the back here, you don't see something like that because that's it, it's mine. I get to lend it out. Income, the reason I look at that, Keith, is because what's an exit strategy?
[caption id="attachment_2974" align="aligncenter" width="600"] Private Lending: Credit is someone's numeric representation of their ability to do what they say they're going to do.[/caption]
If there's someone who is a W-2 engineer, W-2 CPA or they're self-employed but have conventional qualified tax returns, meaning I can refinance them into a conventional loan, I love that. That tells me if they're wanting to sell the house and the market doesn't go as they like, I have a safe gap, exit strategy, and then I can refinance them out into a conventional loan. Being a fully licensed insured and bonded mortgage company, we have access to the same loans the big banks do, we do them at lower rates, much faster turn times and we don't charge their junk fees. Another program that we have access to is for the real estate investor who takes advantage of all of his God-given American tax write-offs as he should and is coming and saying, “Paul, I've got an 800-credit score. I’ve got a property that's cashflowing. Don't penalize me because I take advantage of my tax write-offs. What other programs do you have?” If we have an exit strategy to get them out, then that makes us feel good too.
It all starts with credit and then it loops around to the assets. I'm big fans of skin in the game. Our process, "Keith, you've got an 80% deal. That's great. We're going to lend up to 70% of this transaction. We need you to bring 10% of the cost of closing." For the person that qualifies for conventional financing, we'll go up to 75% of the after-repair value. The reason for that is terms are based on risk. If the risk is high, the terms are high. If the risk is low, we can get lower terms. When someone qualifies for that, we can give 75% because we have the ability to refinance date. Not to go into all these numbers back and forth, but that's where we would have started bringing cash and skin in the game.
Let's unpack a few things. Number one, you mentioned my number one pillar on the show is a return of investment. That is my primary concern. If I loan $100, I want to make sure I'm getting that $100 back before I get the 105 or the 110 or anything else. That's my pillar. I love that. I love the fact that you said that to skin in the game. That's where the, "My money, my terms," comes into play because we've seen people at Expos and whatnot, I'll teach you how to get private money. You don't have to put any money into the end of the deal. I'm always shaking my head. I'm like, "No." I have done deals like that. When I've loaned at 25% loan-to-value, all day long I was like, "You need closing costs? You’ve got them." I will do it but I would consider a normal 60%, 70% LTV deal. I want to make sure you can float that loan for 90 days and pay the first, draw yourself for the repairs before we started coming back. A lot of similarities and because I copied mortgage, hard money, and private lenders. It's all the same game with the different flavors, but I love your acronym of CIA, Credit, Income and Assets. If you ever see Paul speak, he has a presentation on the CIA. It's a lot of fun to go through because let's face it, money, insurance and lending, those things are boring.
When you find somebody who has to have some passion about it and some energy to it, one, it helps pass the time. Two, it also helps your learning process, the enjoyment. I'm being entertained. I'm not learning. That you're going to retain a lot more coming through that. Return of investment all the way skin in the game. We're going to set up a link later on for the show. I'm going to put and give it PrivateLenderPodcast.com/ink. If you would like to learn more about the private lending side and how you can get involved with Ink Lending. I know Paul a while he's quite active. If there is an easy button, this is it. I know COVID and everything else is going crazy, but your business is plugging along. Let's try to connect some people and hopefully you’ve got the Lender Nation that can learn something and it will be mutually beneficial for everyone. I was stubborn and talked to a lot of hard money lenders and mortgage people before I started private lending.
I was one of them.
Let's say someone like me who’s stubborn, I'm going to do it my way. I know you're an investor and a lender yourself. How do you go and look for borrowers as a private lender?
I don't know if you'd call it old school, new school, it seems to recycle itself. I enjoy getting to meet somebody face-to-face. I like paying attention to the mannerisms, how are they carrying themselves? How are they talking? As a potential client, someone I'm lending money to, feel how they carry themselves as to how they're going to manage the funds that I'm releasing to them. It's going to show the judgment of who are they going to hire for their contract, which that's a big thing for me blatantly. We changed something in that any client that we're going to lend to, we want to meet face-to-face coming to our office, even though it's COVID going on. If someone may be against it, let's do a Zoom as you and I have, but we want to meet our borrowers and clients. The other part is if they don't have the experience, we're okay letting first-time investors, whether they're fixing and flipping or buying and holding, but we want to see what their contractor’s experience is. What's the relationship with the contractors? Is the contractor insured, bonded?
Do they have a business phone number? Do they have a website? How can we verify the contractor? What I've noticed is first and foremost, the reason you have defaults, in 2008 when I was around, there were a lot of bad loans done, but here's the bad loan that was done. It had nothing to do with the 580-credit score or the adjustable-rate mortgages. No one put any money down. You don't put any money down, you don't have any skin in the game you can walk away from. We didn't talk about the theme of this but what's coming clear from it is the verifying the skin in the game and asking the questions. Getting them to bring money to the table takes care of foreclosures. The other part is bad contractors. If I could have skin in the game and verify their contractor, I feel safe and I sleep well at night with my money being lent out. Also in Houston, we require all of our houses, all of our loans to carry flood insurance. You don't know. When we're doing private money loans and we're not getting our money from banks and hedge funds, we don't have to lend our money based on somebody's opinion of value because that blows my mind.
It blows my mind how people will lend money on a third party a payment to value. It's your $100,000. You're going to hire that guy to tell you what the house is worth. You better get good at running comps yourself or get good at getting a team that can do it for you. At 1:00 we do the final pre-funding walkthrough. Before we fund a loan, we walk through the house. I used to look at houses two weeks before closing. You get the contract, then you go out to it the next day. I realized that when I went there, the people that were selling the house are moving out. They've been out of the house for ten days. The air conditioning units are gone. Let's look at the property right before closing to make sure that nothing has changed.
Another thing I did that saved my time. I realized when I was looking at deals early, if we have a title issue, if we have insurance issues, the client changed their mind. Here I am spinning my wheels at the time. I have been going out and looking at the property myself, and it gets me familiar with it. When you're asking a question of, “How to get involved?” Get out there. I know it's difficult with the events, but there are tons of Facebook groups. The 713Houston Facebook page is awesome. Landon has done an amazing job with that page. I know you're on the page. I'm on the page. There's been real estate. The point is even though we can't go to a Quest Trust and do a live event, we can still meet people online with it. I'm sorry I don't want to go off on a tangent with skin in the game, flood insurance, verify. I want our insurance policies for twelve months. In God we trust and everyone else you verify.
[bctt tweet="When you're doing private money loans, you don't have to lend your money based on somebody's opinion of value." username=""]
In God, we trust all of this has to pay in certified funds.
On draw process. I want to mention that because I came across a cool little trick about private lenders I like to pass on. We put a minimum. You have to be $15,000 work in rehab before you request the draw. Why I like that is because, from a safety standpoint, we’re doing 70% of the ARV or 75% if you qualify for long-term conventional financing, the first three deals, you're bringing 10% of the cost to closing. I love how as lenders, we have all these rules and all these exceptions that go in there. My rules are this, my exception is for the first three deals, you’ve got to bring 10% of the cost to closing. We do things that other private lenders don't do. We're not charging interest on money they haven't gotten. The rehab budget, we don't charge them money on that. We also don't charge them money for drawer inspections. When we go out to inspect to release funds, we're not charging $125 or $250 for that. We're also not charging wire fees, when we wire clients' money. We're also not charging them payoff fees to generate a document that tells them how much they owe us. That's asinine. Something else, we're not charging them extensions. All of our clients get two free 30-day extensions. We don't have any pre-payment penalties or minimum interest. If you get in and out of a deal in seventeen days, you pay us seventeen days of interest. That's it. I hate the two-story bill.
The story you get at the beginning of what your bill's going to be? The second story you get when you get your bill like Sprint. I hate them. $69.99 a month should be $69.99, not $82.17 or whatever they get me with. We stay away from that. Because we stay away from that, we attract the client that is okay bringing 10% to closing. After all, if I'm going after someone who’s got 720 credit scores, $100,000 in the bank, which there are many clients out there. By the way, let me backtrack. I'm debating on staying in Harris County, I see these other guys, they want to open sixteen offices in another state, we have almost five million people in Harris County. How many loans can you do? Your geography and in that five million people, you have many great borrowers. When there are only many loans to do, why not do it with great borrowers? They recognize bringing money to closing gets the better terms because if their risk is lower, they can turn to me and say, "Paul, you're asking me to bring you money to closing. Why don't you charge me less interest in points?" I get that. That's a valid request and it makes sense on both our part. They brought 10% to the closing, here's the cool trick on the rehab. We have them and all of this, as it's called upfront, is you have to do $15,000 of rehab work before making your first draw.
I did that because I started getting phone calls after they do $4,000 worth of work or they do the electrical rough, or they do the plumbing rough. I don't want to make time for all that. Because we don't charge interest until they've received the money, you can get an accounting nightmare, $4,000 on Tuesday, $6,000 on a Wednesday. The $15,000 helps us selfishly, but when they've put 10% of costs down and they've coughed up $15,000 of their own money before I give them any funds, how likely are they going to walk away from that deal? We're close to 200 transactions and we've only had one foreclosure. That foreclosure I know what I did wrong...