JF1331: Hear What This Lender Wants To See Before He’ll Lend To You with Bill Koder
Bill is a manager of COGO Capital, a private money company. If you’re in need of capital or maybe would just like another option for funding deals, you should listen to what Bill shares in this episode. We’ll hear how he’s able to be more creative than a lot of other lenders and banks. He also tells us what he needs to see from his borrowers before he’ll lend to them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Bill Koder Real Estate Background:
- Manager at COGO Capital, a private money company
- November 2017 Bill took over his current position as the Branch Manager of COGO Capital
- Former Senior Loan Officer at COGO Capital by closing more than 350 loans to date
- Based in Coeur d’Alene, ID
- Say hi to him at https://cogocapital.com/lp/
- Best Ever Book: How to Win Friends and Influence People
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Bill Koder. How are you doing, Bill?
Bill Koder: I’m great, how are you doing?
Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Bill – he is a manager at COGO Capital, which is a private money company. He’s been there four years. It’s based in Coeur d’Alene, Idaho, and we’ve got the company’s contact info – you can just click that link and go check their company out.
With that being said, Bill, do you wanna give the Best Ever listeners, a little bit more about your background and your current focus?
Bill Koder: Yeah, background includes eight years as a conventional lender. I started out with HSBC, moved to MetLife, and moved over to COGO Capital in 2014. In the past four years I’ve closed over 400 loans with COGO Capital to private money investors who are looking for funding on fix and flip properties or buy and holds.
Joe Fairless: Got it. What type of loan is your sweet spot? We’ll start with that.
Bill Koder: I would say our niche market, our sweet spot is for the investor who is looking for purchase and rehab funds, typically under $500,000. Anything more than that, we have a lot of due diligence that we have to take care of… But anything under 500k, we’re able to get those funded really quickly, with little to no effort.
Joe Fairless: What do you do with above 500k that you don’t do with below?
Bill Koder: As far as what we do with loans that are above 500k versus below – we are very unique in the fact that we sell all of our notes to one-off investors like yourself or myself. Those investors typically don’t have an appetite for jumbo style loans. We have partnered up with other lending institutions out there to get those larger deals funded.
Joe Fairless: And what about below 500k underwriting – what do you do?
Bill Koder: Loans below 500k as far as the underwriting goes, what we wanna look at is first and foremost the property itself. We wanna know the value of the property, and how we determine the value is a full appraisal. We wanna look at both the as-is and the after repair value on these properties to determine which loan structure works best for our clients.
We also wanna look at the client himself/herself, and we wanna make sure that they have the capacity to service the debt; we wanna make sure they have some reserves. We wanna see if they have any experience (that always helps), and we also wanna look at their contractor, making sure that they have a qualified contractor that’s licensed and bonded. We find that that definitely expedites their rehab portion.
Joe Fairless: Yes, contractors are important. I’d love to dig into each of these categories – the property itself, the client, the experience and the contractor. As far as the property itself goes, you said you want to get the appraisal for the as-is and the after repair value to determine which loan structure works best for the client… So what loan structures do you offer?
Bill Koder: We can lend both on the as-is and the after repair value. If somebody’s purchasing a property that’s got minimal to no rehab required, we’re gonna be looking at the as-is value most likely. The as-is value is gonna get you a little bit better rates, because it’s less risky for us to lend on the as-is value, since there’s no construction. And if we’re looking at the after repair value, we wanna take a look at the contractor bids, submit that to the appraiser, so the appraiser knows which comps to pull from to determine his value.
Joe Fairless: Okay, makes sense. With the client piece, you said they should have some reserves – specifically how much?
Bill Koder: Specifically, we require that they have three months’ worth of payments in an account somewhere that they can show us. So if your payment is $1,000, we wanna see three thousand in one or all your accounts combined. We also wanna see 10% contingency for the rehab, so that you can get the project started so that we know that you have enough reserves in case something goes wrong, that you have some funds to contribute to the transaction.
Joe Fairless: And three months of payments for the mortgage, or what?
Bill Koder: Yeah, for the note itself.
Joe Fairless: Okay. So you’ve gotta have three months of payments for the note itself, plus 10% of whatever the contractor is estimating for the repairs.
Bill Koder: That’s correct, and the 10% contingency for the rehab does not need to be liquid; it can be on a line of credit, for example.
Joe Fairless: What about the experience? How much do they need to have?
Bill Koder: Experience is not required. However, if you do have experience within the last 24 months and you can show the HUDs when you purchased it and the HUDs when you sold it for a fix and flip, that would give you better pricing.
Joe Fairless: What are the ranges (just giving us an idea) of beginner with no experience, to someone who’s got a couple under their belt, in terms of price differences?
Bill Koder: As far as rates and terms go, we start at 9% in one point, and go up based upon the risk associated with the file. I would say our very experienced rehabbers – they’re gonna be looking at the 9% and one origination point, versus our brand-new beginner that might be looking at a 12% and three points.
Joe Fairless: Got it. And with the contractor, you said make sure they are licensed and bonded… Is that the only qualifier that you look at, or do you look at other things?
Bill Koder: As far as the contractor goes, that’s all we require – that they’re licensed and bonded. Now, there are some counties that don’t require contractors to have a license, which is fine; that’s no big deal. We just need evidence that that’s one of the counties.
Joe Fairless: So if it’s a contractor who just created his/her company, they have no experience but they are licensed and bonded, then that would be fine?
Bill Koder: Yeah, that’s correct. No season requirement on licensing or bonding.
Joe Fairless: What’s been a tricky loan that you had to work through? I mean, you’ve done over 400 of them… Can you tell us a story about that?
Bill Koder: I can tell you that every loan is unique and individual in itself, which is why I like the challenge of private money versus conventional. One of the most unique transactions that stands out to me is I had a property in Chicago, Illinois, that was in one of the (I guess) rougher areas of the neighborhoods of the town – Englewood, you guys might have heard of it…
Joe Fairless: Up to no good…
Bill Koder: Yes, yes, but we have some issues with theft. So I had a borrower that went out there, and it was a large rehab; he purchased a property for 70k, he was putting 150k into it, and it was gonna be worth 400k after all said and done. However, everytime he would buy materials and bring them on site, there was theft; somebody would break in and steal, whether it was copper pipes, whether it was windows, whether it was drywall… So we actually had to go and redo the loan and budget in for a property manager, so somebody would be there around the clock to make sure that everything stayed on site.
Joe Fairless: That could be fairly pricey, I think. How much does the property manager cost around the clock to make sure no one steals stuff?
Bill Koder: Well, the property manager was actually someone that we knew and we had close contact with. He basically just took a percentage of the equity when the property was sold; he took a percentage of the profit. They negotiated out a term on that.
Joe Fairless: Okay, cool. So it ended up being an equity partner, so there was no out-of-pocket cost; the person putting the deal together just made less money.
Bill Koder: Right, right. We had to go back and buy more materials, obviously, with the theft.
Joe Fairless: Right, that’s true. With the over 400 loans, describe the differences in your process, from your first loan with this company, with COGO. Obviously, you had previous experience coming to COGO, so I get that, but I’m sure your process has evolved, from your first loan with COGO to now over 400. What’s the difference in your process?
Bill Koder: The difference in the process would be just the documents that we require. When I came aboard we didn’t have the structure that we currently do now. We have underwriting guidelines that we never had before… Just general practices to reduce the exposure of us as a lender. We wanted to make sure that our default rates were lower than they were when I came aboard, so we put practices and procedures in place to ensure that our default rate was lower for our investors.
Joe Fairless: Those underwriting guidelines – what in addition to what we’ve talked about comprises of the underwriting guidelines?
Bill Koder: Previously when I first came aboard, we didn’t require an EIN letter for your business entity. We do lending to businesses only, so you have to have an LLC, a trust, a self-directed IRA or a corporation in place for us to do a loan… And when I came aboard, we didn’t require the documentation to prove that you were, say, the sole member of the LLC or you were the sole member of the corporation. We didn’t require documents like the operating agreement that reflects the ownership percentage or by-laws for a corporation that reflected ownership percentage. That’s just one example of our underwriting, [unintelligible [00:10:02].19] things up and making sure that we can watch our default rate and decrease that default rate.
Joe Fairless: Why would you want the borrower to have an LLC, versus borrowing personally? Because I think borrowing personally, you’d be able to go after them if they were to disappear, versus LLC?
Bill Koder: Well, for us it’s a licensing issue. We can only lend to LLCs and businesses for licensing purposes – we can lend in 44 states without having to hang our MLO or NMLS license in every state. So it gives us the freedom and flexibility to lend in states that we don’t have anybody or a brick and mortar in place.
Joe Fairless: Oh, okay. So this is a bit of a sideways conversation I’m about to take us on, or maybe it’s just a question… So for someone who wants to lend money to a local fix and flipper – say a Best Ever listener is listening, and they’re like “Oh, this is great. I’ve got some money, I’d like to lend it. I know Samantha has a fix and flip, she’s always asked me to lend her money, so I’m gonna do it.” Just someone who is a regular person, not a lender, other than they just have the money – should they adhere to that? Should they only lend to Samantha’s LLC and not actually Samantha?
Bill Koder: That’s up to the individual. I would obviously check with your attorney and run the transaction by your attorney first… But that would be up to the individual if they wanna lend it out just to Samantha or Samantha’s LLC, or require Samantha to have an LLC. That’s totally up to them.
Joe Fairless: Okay, got it. What’s something else that would be helpful for the Best Ever listeners who are real estate investors to know that we haven’t talked about?
Bill Koder: Some of my best advice that I would give out to investors would be, first and foremost, know your market. Don’t just count on your realtor to provide comps for you. Make sure that you do your due diligence, understand your market, and know exactly what you can and can’t offer if you’re buying a property. So you wanna know what the values are, you wanna know how to put an offer in that’s gonna yield you the returns you’re looking for. And like I said, you don’t wanna trust your realtor; appraisals are far different, versus CMAs, versus BPOs.
The second piece of advice I would say is find a good contractor. The biggest thing I see as far as the lender goes is if that contractor walks or the borrower has a disagreement with the contractor and they have to find a new one – that’s always challenging in the middle of trying to get a transaction funded, or even give them the rehab money that’s put into an escrow account for the rehab purposes.
Joe Fairless: What is the number one reason why borrowers run into trouble after you lend to them?
Bill Koder: The number one reason that I see that borrowers run into trouble after the loan has been signed is their budget. They don’t have a contingency, their budget is very thin. What I mean by thin is there’s not enough room there in case they find some other things that go along with the rehab process. You don’t know what’s behind the walls really until you get in there and take a look.
So what we find the biggest mistakes that our borrowers are making is they’re not giving themselves enough wiggle room to make additional repairs that are gonna be needed on the property.
Joe Fairless: And what’s the process with you on that? You just lent to me, and I’ve got my loan, I just tore open some walls, found some stuff, I don’t like it, didn’t have that in the budget… I have that 10% reserve in my bank account, but it’s gonna be about 50%, so I don’t have that 40% difference.
Bill Koder: Right.
Joe Fairless: I don’t know what to do. I call you. What happens?
Bill Koder: Well, I can tell you right now there’s gonna be some issues, as far as — we need to take a step back and look at this. For us as a lender, we have to protect ourselves; we have a draw schedule that the borrower or the contractor creates. We have to hold them to the draw schedule, because if we don’t, it seems they never finish the project. So if they do get inside the wall and they realize that something is terribly wrong and they need additional funds to fix that project, I would encourage them to looks at possibly — if they don’t have the money and they can’t borrow it from a friend, family, anybody else, I would encourage them to possibly look at getting a personal loan or even possibly some sort of line of credit to cover the additional expenses, the unforeseen expenses.
It happens. It’s obviously not the best for the borrower or the lender, but those situations happen, and at the end of the day we want our borrowers to be successful, we wanna make sure they can get out of these loans… We’re not a loan-to-own program, so we don’t want the property back, we want them to be successful and come back to us again and again.
Joe Fairless: It makes sense. I know you said, to quote you, “Some of my best advice ever”, but I’m gonna ask you THE best advice, and then I’d love your thoughts. What is your best real estate investing advice ever?
Bill Koder: My best real estate investing advice ever is to know your market. You have to know what you can put in as an offer in your market, you have to know how much the rehab is gonna cost you before you put that offer in, to make sure that you’re getting the return on your investment. So the maximum allowable offer is the best piece of advice I can give. Make sure you know that equation, so you know that there are unforeseen rehab/repair budgets that are gonna pop up; you have to know that you’re gonna be able to make money at the end of the day, otherwise you’re not gonna be rehabbing for very long.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Bill Koder: Sure!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Bill Koder: How To Win Friends And Influence People, by Dale Carnegie.
Joe Fairless: Best ever transaction you’ve been involved in?
Bill Koder: Best ever personal transaction I was involved in was with my second flip. I made $180,000 by finishing my basement in my primary residence, and staying in there for two years and then selling it.
Joe Fairless: Will you elaborate on that deal? Tell us a little more about it.
Bill Koder: Yeah, so I purchased a home in Spokane, Washington, right out of college – my second home – and ended up finishing the basement. It cost me a lot of labor, a lot of friends to come over and helping me, but at the end of the day I was able to sell it for $180,000 profit… And since I was in it for more than two years, that avoided capital gains for me.
Joe Fairless: Beautiful! Cha-ching! What’s a mistake you’ve made on a transaction?
Bill Koder: First mistake I made on a transaction was my first fix and flip, and I overpaid for it. I didn’t know my market, I thought that I could get more on the sale after I completed the rehab, so I ended up losing about $25,000 on that deal. That taught me to know my market, which is my best advice I can give.
Joe Fairless: Best ever way you like to give back?
Bill Koder: The best ever way I like to give back is I like to give my time. We educate a lot of individuals here at our corporate office. I like to be able to step in and give my time, and help those people and teach them the mistakes that I’ve made over the years and some of the best practices I’ve seen from other investors to ensure that they are successful and come back to us.
Joe Fairless: How can the best ever listeners get in touch with you?
Bill Koder: You can call my office, 800-473-6051, or you can shoot me an email. Email address is email@example.com.
Joe Fairless: Well, Bill, thank you for talking to us about your expertise, first and foremost, and talking about how you and your team underwrite the deals, the four categories, the property itself, the borrower, the experience level of the borrower – the borrower’s cash position, and then the experience level of the borrower, as well as the contractor, and getting into the details and specifics of each of those four categories… As well as the number one reason why borrowers run into trouble, on the rare case when that happens, and things we can do to mitigate that from a budget standpoint. And then when pressed into a corner, in that scenario, some potential solutions to do.
Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Bill Koder: Thanks for having me.