JF1401: When Denied For Funding, He Can Help Get You Approved with Sam Sharp
Sam is here today to explain how he can get people approved when they’re getting denied. Specifically, he tries to get people as many properties financed with residential financing. Since residential financing is the cheapest money around, this is advantageous for investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Sam Sharp Real Estate Background:
- Executive Vice President of National Sales at Guaranteed Rate
- Has funded over a billion dollars in loans
- Specializes in highlighting various strategies to ensure clients secure the best financing options
- Say hi to him at guaranteedrate.com/SamSharp
- Based in Chicago, IL
- Best Ever Book: Millionaire Agent by Gary Keller
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Joe Fairless: Best Ever listeners, 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, Sam Sharp. How are you doing, Sam?
Sam Sharp: I’m doing well, thank you. How are you?
Joe Fairless: I’m doing well as well, and nice to have you on the show. A little bit about Sam – he is the executive vice-president of national sales at Guaranteed Rate. He’s funded over one billion dollars – with a B, one billion – in loans. He specializes in highlighting various strategies to ensure clients secure the best financing options. He’s based in Chicago, Illinois. With that being said, Sam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Sam Sharp: Sure, I appreciate that. Yeah, actually we’re getting close [unintelligible [00:01:48].00] over 1.5 billion, so I look forward to crossing the threshold on the two billion market here. It’s a goal of mine to reach in the next – [unintelligible [00:01:56].11] probably by the end of next year.
I’ve been in the industry now for just over 16 years, I’ve been working heavily with purchase production, as you know, in the mortgage finance world. Now I work with residential financing, so I help people purchase residential homes up to a 4-unit property…
And as probably most of our listeners would know, financing has two main facets. One is the refinancing. A lot of people in the business will look to just refinance a loan to improve their status; other people look towards purchasing homes, so it obviously helps them to buy their home, or you can help them adjust their financing on their home.
I’ve started out in the industry and I immediately was drawn towards purchases, because I realized that if I helped someone buy their home, chances were that I’d have a good chance to help them refinance their home later on if there was ever [unintelligible [00:02:44].08] So I focused on this, working with a lot of first-time homebuyers [unintelligible [00:02:47].16] and then of course, as you start to progress in your career, this led me to come in contact with a lot of investors. Not only am I myself an investor and do I buy investment properties and invest in real estate, but I obviously now come in contact with a lot of individuals.
So I was kind of sharpening the tools in the shed, if you will, trying to help individuals go through and learn how to maximize their investment: how to leverage our cash, how to go through and obtain financing in a lot of cases from a more out-of-the-box perspective; what can they do that might help them overcome some of the restrictions.
At the end of the day there are going to be lending guidelines and restrictions that will keep some people from qualifying for a loan, so my goal is to figure out “How do we look for any options that are available? How do we navigate through those channels that are still open to help people obtain money?”, which of course is beneficial, because residential money tends to be the cheapest money available… So that’s why a lot of people will turn to me for my services.
Joe Fairless: And Best Ever listeners, just a little bit of background… I met Sam at Brie Schmidt and John Casmon’s conference, MidWest Real Estate Networking Summit in Chicago. I sat next to him, and we have some mutual friends and they spoke highly about Sam, so I was like “Hey, I’d love to have you on the show.” That’s how we got connected. So I have a little bit of context with what you do, but not a lot, because we didn’t talk a lot about your business.
So I guess what would be helpful, since we’re primarily real estate investors on this show, is to give maybe a case study — let’s start out with a case study of an example of someone you’ve helped and what their situation was as an investor, the challenge, and what the solution you all came up with was.
Sam Sharp: Sure, and I have a few different examples I could give you. I would like to use something that’s more immediately relevant, basically more recent. One of the things we love to do is we try to figure out how can someone obtain as many financed properties as possible using residential financing?
A client will come to me and figure out “How do I get into purchasing this property with a lower down payment, and how do I continue to repeat that?” So I focus my efforts on looking at options that will help a client go through and purchase a property and put as little down, obviously, and then what will be their option for the next 2, 3, 4, 5 properties as they look to move forward.
I have a client right now who’s looking to come into our market and wanted to purchase a unit; they’re gonna live in the property… So they’re gonna buy a 4-unit property, they wanna live in one of the units, and then they wanna rent the other three out. Now, they own another property, so they were gonna look to go through and set this up so that they can look to obviously move in and continue their investing.
Well, we have a conventional loan program that will allow someone to purchase with as little as 5% down on a 4-unit property [unintelligible [00:05:38].14] because it will allow for a competitive interest rate, lower mortgage insurance, and of course, you can have that mortgage insurance removed… So when someone puts less than 20% down on a property, they encounter PMI, so we always wanna look at that PMI, which is probably the mortgage insurance. We always wanna look to figure out when can we eliminate that, because that’s an added expense. We can improve their return on their investment by going through and eliminating that.
So the client wanted to see how could they take advantage of this. Well, unfortunately, one of the caveats with that loan program is that you cannot own another property. So when you’re going through, if you own another property, you [unintelligible [00:06:17].16] can no longer use the 5% down conventional loan, and that’s why my focus is usually to try and guide my clients to start with this type of loan. When I work with investors here in Chicago and they’re looking towards moving towards that multi-unit platform, and again up to four units, I’ll talk to them about them about looking to use this type of financing first, because it’s the only time they can do it; once they own a property, they’re in a position where they no longer qualify.
Well, in this case I have two borrowers who are looking to purchase. We started looking at it, and let’s just say one buyer could qualify without the other one, but that was the buyer who already had a property in their name… So what we ended up doing… We were able to set up and facilitate a transaction where the other borrower — we set it up to where they purchased that property from the first more qualified borrower; we’ll call him the co-borrower here, so as to keep things clear. I don’t want it to be confusing.
The co-borrower ended up buying the property from the borrower, and we used equity from the property as their down payment. We were able to use the gift of equity. So they didn’t even have to go through and use any down payment. We just basically rearranged their financing, so now our co-borrower had a property in their name, but the primary borrower did not.
Now they’re able to go through and they can look to purchase that property, and they’re buying that property with 5% down. So I was able to restructure it. Even though sometimes someone might have looked at it and been like “I’m sorry, but you own a property and you can’t qualify.” I looked into it and said “Okay, how can we try to rearrange your debt so that you could qualify.” After we’ve done that successfully, now what happens is they purchase that property with 5% down, and after they’ve been there for a year, now they can look to buy another multi-unit and this time go through and use FHA financing.
FHA financing is a government-insured financing that also allows for a lower down payment… So in this case it’s actually even than the conventional, 3,5% down. So when I work with the client, they’ll look to utilize that first conventional loan with 5% down, because again, if they own another property — if they would use FHA first, then they couldn’t use this options. We have to go through and we have to stay in order as far as how we use the loan program. So I structure this with my client; the guys are now going through and purchasing with a 5% down, then they’ll buy their next property with FHA, which allows 3,5% down… FHA doesn’t have any restrictions on either of them owning any other property, so now we’re able to put them both back on the next property together, so that they can continue to qualify without any type restrictions… Or if we start to need the income from the co-borrower or things of that nature, it’s not a problem.
So we’re able to now go through and I’ve helped them effectively leverage 8,5% to get into two properties which range up to about a million and a half dollars between those two properties, or actually closer to 1.7. So they’ve been able to leverage 8,5% to get up to about 1.7 million, and they’ll look to move forward after that and they’ll be able to actually move on and they could purchase a single-unit now and go back through — and if they were going to occupy that property (because sometimes investors decide they may not wanna live with their tenants anymore) now they’re going through and they’re able to use that, and they’re able to go through and purchase using conventional financing again with as little as 3% down.
Now if you’re following the math on that, that’s 11.5%… So basically, if you use the loan limits for conventional and FHA financing, that’s about 2.1 million dollars that they’ve put in their portfolio with only 11.5% into it.
That’s a really good example of how I’ve helped someone recently, who at face value did not qualify for this type of strategy; we restructured what they were doing, we got them into line to qualify, and now they’re well on their way to moving on towards their next property. Hopefully that gives you a good example.
Joe Fairless: Did you diagram that out for the investors, to say “Hey, trust me on this, here’s the approach…”
Sam Sharp: I have not — I’ll be honest, I didn’t have any type of written diagram. It was just a verbal conversation and more of a plan of attack. I do spend a lot of time with my clients, speaking with them and trying to conceptualize and verbalize those concepts to make sure that they have a good understanding… But I did a pre-recorded video on how to do this, and now I’m actually going through and we’re having that translated into not exactly a PowerPoint type of thing, but more of a written illustration. So it’s not something that I’ve done, but it’s something that I’m doing right now.
Joe Fairless: You mentioned earlier you have sharpened your tools now, as it relates to working with investors… What are some other types of challenges that you’ve come across with investors in a solution(s) to those challenges?
Sam Sharp: Sure. To give you a few examples… So right now — again, keep in mind, most of my focus is how we can use cheap money, and that being generally a few conventional methods of financing. Conventional financing has restrictions on how many properties you can have financed. You can only have up to ten properties using conventional financing, and after that you have to start looking for other avenues there.
Joe Fairless: How are you defining conventional financing?
Sam Sharp: Conventional financing is anything that’s gonna be following through the warranted guidelines through Fannie Mae and Freddie Mac, and in one case being FHA for one of those loans… But it’s anything outside of a hard money loan, commercial lender, portfolio product… Just basically defining it as conforming loan limits, conforming guidelines, adhering to the regulations that are dictated by Fannie Mae and Freddie Mac.
Joe Fairless: Got it. So it’s limited to ten properties for that conventional financing. Okay.
Sam Sharp: Yeah, and then the reason why that’s a benefit is because it’s cheaper. You’re gonna get a better interest rate, you’re gonna get 30-year fixed money. A lot of people don’t realize when they get into investing that most of your financing outlets are not going to be these long-term fixed products. There are some great products that are coming about in the marketplace, but they’re generally gonna be at a higher interest rate, so the best way to get a more stable return on your investment and to have that set ROI is going to be coming from working with this type of money. So when someone gets to ten properties, now they have to start looking for less conventional methods, which can be more expensive.
Well, what I’ve done to kind of sharpen the tools is that we’ve gone through now and we’re able to identify that these are — what defines those ten properties are gonna be conventional… Anything that’s financed on a residential property. Commercial property doesn’t count, so if you have a commercial loan, it’s not gonna go towards that limit of ten properties, but as you get through, once you have ten residential properties, we can actually move forward now and I can connect them with commercial loans that will allow them to blanket one loan over all ten properties, effectively financing that into one commercial loan. Now they get to start all over with that ten count.
So it was a way that I was able to work around and show like “Hey, you know what? You’re not locked in. We can improve your situation”, and that’s been really beneficial, because people are able to buy more properties now for cheaper money. That was one way, something that we’ve gone through and made that adjustment…
Another thing that would be relevant staying in that line – as I’ve mentioned before, a lot of these plans of action will be based off of the buyer living in the property. We’re still not even addressing the straightforward 25% down, because with a multi-unit with conventional financing, you generally have to have 25% down once you’re no longer gonna live in the property.
Well, what we look to do now is we’ve looked to form these partnerships and synergies with other investors that have clients who will go through and buy a multi-unit and they’ll look to put 5% down… Well, they have family members and other people who now wanna do the same thing, but they don’t have the capital. So they form partnerships with them, which is absolutely 100% legal, in which case they’re able to contribute the capital to where now their family or friends can go through and they can purchase this property, and they can live in that property. So now they can take advantage of a 5% down program again.
Now, in this case, in this instrument you’ve got someone who’s able to go through and leverage that investment. They’ve now figured an investment strategy where they’re helping other people benefit and follow that path, but they’re also able to hold on to ownership in those other properties. Their investing capital, they can have whatever investment agreements that they want with those partners, and they’re able to branch out and basically leverage their cash even further. So that’s another example of something I’ve done to kind of sharpen those tools in the shed, if you fill. A real play on my last name… [laughter]
Joe Fairless: For the ten properties that we then roll into a commercial loan, we then can start over at zero for conventional financing, because we don’t have any conventional financing – real quick, that’s true, correct?
Sam Sharp: Yes, that’s true.
Joe Fairless: Okay, cool. So I think it’s important for us to talk about the terms that are typical on that commercial loan, so that when we as investors are underwriting our deals and we plan to eventually do a commercial loan, we’re underwriting to those terms to make sure the deal works, not necessarily the original conventional financing terms, because we’re gonna end with that commercial loan… So what are the typical terms of that commercial loan?
Sam Sharp: These are expanding right now. I have partnerships with other banks that handle the commercial financing. I don’t actually lend commercial financing at all, I only handle residential financing because it’s what I’ve experienced to be my focus and it’s the best way that I can excel at that… But the partnerships I’ve formed with some of the commercial lenders – these will follow a variable type of programs. Some of them actually [unintelligible [00:15:32].23] fixed money that will go through, but as a lot of people may or may not be aware, commercial loans are more about (just as you said) the deal. This is something that’s pretty common that you’ll hear in the investor space – it’s the deal and what the deal looks like… Whereas conventional financing, to that matter, is based off of the personal guarantee and qualifications of an individual; well, commercial loans are based off of the performance of the deal itself.
Of course, looking through this, the idea is that if people are holding these properties long-term, they’re gonna wanna see a certain return on their investment from what they’re looking at, and hopefully they’re getting to a point where they have positive cashflow and they’re looking at something where that deal makes sense. So we look to make sure that our clients are getting involved — basically as they’re building the building blocks towards amassing those ten properties, we’re making sure that they’re in a position where those deals make sense, not only from a residential perspective, but from a commercial perspective, showing that outside of the personal guarantee for the person, that the deal makes sense from an equity position.
Keep in mind, for some people to amass ten properties can take quite some time, so they do see a greater appreciation through that property, but it also can be a matter of what type of deal they got on it when they invested from the beginning.
A lot of people – you’ve probably heard, I’m sure, and you maybe even said – you make money when you buy, not when you sell… So if someone got in a position where they got a good price on a property, there’s appreciation and whatnot, that’s gonna help lead to better improvements. But then further from that will be the cashflow on the property. So we’ll look to make sure that they’re structuring their investments to stay in line from a cashflow or as a return on their investment, as well as appreciation on the property and paying down the equity on that property, so that way when they blanket this together with the commercial investor, the commercial investor can look at all ten properties — and keep in mind, you can even have one of those properties that maybe doesn’t have a lot of equity; maybe it’s not even positive cashflow. But when you look at this as a portfolio and you look at all ten loans, they’re gonna say “Okay, well based on the group value, there’s this amount of equity, there’s this amount of net positive cashflow that’s coming out of it.” So we’ll structure it with them to make sure that that makes sense.
Joe Fairless: And noted that you focus on 1-4 units, residential property, so you don’t do the commercial loans but you partner with groups who do, but just based on your knowledge of the commercial loans, the typical framework for terms – what are they?
Sam Sharp: In the past it’s been more common that they’re gonna be five-year balloons; a lot of them are 20-year amortization 5-year balloons. Just recently I’ve formed some partnerships with some lending institutions that are offering fixed money, and they’re actually even looking to go into 20 and 30-year fixed terms. Interest rates are generally gonna be a little bit higher than what you see — if you go for the long-term fixed, the last structure I looked at was getting into them at sixes, which is still very cheap… But outside of that, a lot of times you’re gonna find money (from what I’ve seen) in the mid 5% range on the 5-year balloon, 20-year amortization… But that landscape is changing, as well… So I dare say too much, because it may be different by the time we even end this podcast.
Joe Fairless: Right, I hear you. What you’ve just mentioned is really helpful just to help set the framework for how we think about the loan package that we will get once we achieve ten properties… Or if we have ten properties now, the type of options that are available to us.
Sam Sharp: I think a better showcase is the attractiveness of the conventional loan package.
Joe Fairless: Sure. [laughs]
Sam Sharp: When you start to look at the normal structure… Basically, when you see that the money is cheaper, it’s like “Okay, well how do we get the cheaper money first?”
Joe Fairless: Oh yeah, absolutely. I love your approach of focusing on how to use the cheap money, which is conventional financing as much as possible. That certainly is key for 1-4 unit investors.
What’s a challenge with a borrower that you could not overcome and you could not work with him/her because of it?
Sam Sharp: Qualifying ratios… Unfortunately, with conventional residential financing we are still using a borrower as a personal guarantor, and we’re going to look at what we call the abilities to repay. We may be in a position where someone just doesn’t make enough money, or the property — combined ratios with how much cash is generated from the cost of the property, as well as that borrower’s income is not enough to qualify. That’s a problem.
Another unfortunate problem that we do run into – the credit requirements, and this is important to note… When you’re dealing with conventional financing, once you get above and you start getting into anywhere between 4 and 6 properties or more, you’re gonna need to have at least a 720 credit score. That’s a huge restriction.
Now, getting those up to first four properties, you still wanna have conventional terms and you still need to have fairly decent credit, so I ran into a lot of clients who, based off their entrepreneurial spirit, they’ve gotten themselves in situations where their credit is just not as good as they’d liked, and that can always a bit of a deal.
Joe Fairless: What is your best real estate investing advice ever?
Sam Sharp: Get started right away. [laughs] I think the best real estate advice — if I had to look at that, I would say surround yourself with like-minded people who have found success in these industries. Never turn away from the opinions that are given freely. I think that even though a lot of us are drawn towards the more successful people and the more successful mindsets, when it comes to any industry, I think that there’s something that you can learn from anyone… Because you’ll never know when someone who has a tremendous success in any of these industries is just getting started… And when you’re having that access and free access to their opinions – that may be very valuable. So keep your ears open, surround yourself with people who are like-minded, and I hate to say it, but don’t judge a book by its cover. Give everyone an opportunity to see what they have to say, and make sure you’re listening.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Sam Sharp: Oh no, I don’t know what it is. I’m not sure…
Joe Fairless: [laughs] You’re totally ready. First though, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve read?
Sam Sharp: Best ever book I read? Millionaire Agent, Gary Keller.
Joe Fairless: Best ever deal you’ve done?
Sam Sharp: Best ever deal I did was for a client, she was a veteran; it was one of the smallest loans I’ve ever closed, and she broke into tears at the closing table because she was truly that happy that she bought her home. It was a hallmark moment, but I’ve gotta tell you, it almost gets me choked up right now even thinking about it. You could tell she was that happy and that felt amazing.
Joe Fairless: That’s great. What’s a mistake you’ve made on a transaction, either as an investor or in your role as a lender?
Sam Sharp: I can tell you firstly one of the mistakes I made as an investor was purchasing a property and moving on a shortsale assuming that the deal was strong enough and taking the advice without doing the research. It didn’t come out to be sour, but it wasn’t as sweet as I thought, and I think that was the biggest mistake that I ever made, and it was also the best mistake I ever made, because it allowed me to never repeat that.
Joe Fairless: What specific aspect of the deal wasn’t up to par?
Sam Sharp: I could have got a better price. The agent I was working with at the time – I took their word for the value and where it was at, because it was a shortsale and people assume that you’re getting a great deal as a shortsale unless you’re getting it for less than it’s worth.
I got my hands in so many different cookie jars right now that I didn’t take the time until we were going through the process, the shortsale was approved and I got the appraisal, and I got the appraisal, and it appraised at the purchase price. I looked at it, I call the appraiser and said “I know this is for lending purposes, but what’s it really worth?” and he said “Well, that’s about what it’s worth.” I wanted to be that guy who got the shortsale and had $100,000 in equity out of the gate, but that wasn’t the way it works.
Joe Fairless: And shortsales usually aren’t quick, either… You probably waited on that for a little while.
Sam Sharp: Yeah, I was like seven months into it. Maybe that’s not the worst thing I’ve ever done, but it comes to mind.
Joe Fairless: What’s the best ever way you like to give back?
Sam Sharp: I find the best way to give back is trying to share — as I mentioned earlier, I listen to what people have to say, and share my opinion. I like to talk, I love people and I love interacting with people, and the best way that I can give back is just trying to be very open and transparent and to be straightforward and talk to people as much as they wanna listen and treat everyone equally. Don’t treat someone based on what benefit you think you can get from that conversation; treat someone because you’re actually interested in talking to them, and if they’re actually interested in what you have to say, then give them that respect and share with them.
Joe Fairless: On that note, how can the Best Ever listeners get in touch with you and learn more about what you’re doing?
Sam Sharp: You can feel free to call or e-mail me at any time. You can reach me directly at 312-217-4030, or you can feel free to e-mail me at firstname.lastname@example.org.
Joe Fairless: Sam, thanks again for being on the show. One of the main takeaways I got is you’re focused on how to use cheap money, and cheap money is defined as conventional financing, so really your focus is how do you get your clients in conventional financing as much as possible.
One challenge is once we reach ten properties, then we are no longer able to do that, so the solution that you discussed is rolling into a commercial loan, and now you’re back to zero conventional finance properties, and then you can continue to build from there.
The key is for us to have some foresight and know what type of terms we will get with that commercial loan, that way we can underwrite our residential acquisitions according to the terms of the commercial loan and make sure the numbers work there… Because if they work there, they certainly work with the conventional financing.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Sam Sharp: Thank you for having me.