How Loan Rangers Jay Thomason and Daniel Earhart Wrangle Bank Financing for Land

192: Jay Thomason and Daniel Earhart have been friends of REtipster for many years now. I first talked with them in episode 50. This is a great place to start if you want to hear their backstory, how long they’ve been in the business, and so on.

(Show Notes: REtipster.com/192)

In this episode, I wanted to learn more about how they’ve been pretty successful at getting bank financing for their land deals. Most land investors have a hard time with this because most banks aren’t interested in lending on residential vacant lots unless the owner has an immediate plan to develop it.

When I caught up with Daniel and Jay at the Land UnConference this past year, they explained a little bit about how they did this, and I thought the whole REtipser audience needed to hear about this. After all, if we can unlock bank financing and the lower rates that come with the package, this would be a very helpful financing alternative for those of us who don’t have the funds ourselves, don’t want to take out much more expensive hard money loans, and don't want to give away huge amounts of our profit to funders.

Transcript

Seth: Hey everybody, how's it going? Seth Williams here. You're listening to the REtipster Podcast. This is episode 192.

Today, I'm talking with my good friends, Jay Thomason and Daniel Earhart. These guys have been friends of REtipster for many years now. The first time I talked with them on the podcast was back in episode 50, a long time ago now. If you want to look back in time and listen to that and get caught up on their story and how they got into the land business and all that, it's retipster.com/50.

I was able to catch up with these guys a couple of months ago at the Land UnConference. I'm lucky enough to see them every couple of years at the different conferences we both happen to be at. As we were hanging out there, I heard them mention that they've been pretty successful at getting bank financing for their land deals, which is something many of us land investors have kind of a hard time with.

In many cases, not all, obviously, but in many cases, banks just aren't interested in lending on residential vacant land unless there is an immediate plan to develop it, or unless the property is huge, or unless your personal financial strength is really strong. But generally speaking, they don't lend money on vacant residential lots the way that they do on houses. It's just a different asset class.

So, Daniel and Jay were explaining a little bit about how they did this. I immediately thought that the whole REtipster audience needed to hear about this because if we can unlock bank financing at the lower rates that come with the package, that can be a pretty helpful financing alternative for those of us who don't have the funds themselves, don't want to take out much more expensive hard money loans, or don't want to give away huge amounts of our profits to funders. If this was actually attainable for even some of us, that'd be kind of a big deal.

So, we're going to dive into that and learn more about how they were able to make this work. So, guys, welcome. How's it going?

Jay: Doing great. Thanks for having us.

Seth: Yeah, you bet.

Daniel: We appreciate that though. You mentioned that you still like each other a couple of weeks ago or months ago. So, always good to catch up in person.

Seth: Absolutely. So, we're not going to get too much into your history and like when and how you got into the land business. Because again, that's back in episode 50. But let's just jump right into the bank financing stuff.

So, when you talk about getting a bank loan, let's start with what kinds of land deals are we talking about here? Like what is the size in the acreage or like the value of the property itself? What you hope to sell it for. And then what are you buying it for?

Daniel: Gotcha. I'll kind of back up how we got into the Bank of America.

Jay and I early on, we had gone and were looking for just basically a line of credit. And we went and talked with probably close to 20 banks, meeting people in person, explaining our business. A lot of them liked our business model, but it didn't work out for what they were trying to do for the product they had. So, we went through all that, tucked in our shirts and all that other stuff, meeting with these different banks, and it didn't get anywhere.

We kind of let it lay for a while. Then we started building some other relationships with other investors and had a guy who had a relationship with the bank introduce us. That's kind of how it started. Just a conversation over breakfast one morning with the guy who was a banker. It was a more rural bank, smaller community, and they certainly understood more farmland, land deed, and that asset class.

And that’s kind of how it started.

Seth: Did I hear you right—that you talked to 20 banks and all of them just said no?

Daniel: Yeah, some of them said it nicer than others, but yeah.

Seth: I guess that doesn't surprise me, but I'm curious, what kinds of banks should you not even think about talking to? Just don't even waste your time versus you might want to talk to this one because of X, Y, and Z.

Jay: I'll make a little caveat there. Originally, when we talked to those 20 banks, we were asking the wrong question. We were looking for an unsecured line of credit. We were wanting them pretty much just to give us an open checkbook, with the thought being that the reaction time to a bank would take too long. Once we found a deal, we needed to be able to pull the trigger immediately.

And so, that's why we had it in mind that we needed this line of credit. Daniel and I were both willing to personally guarantee any line of credit, but still, the banks were like, "Thanks, but no thanks. Best of luck to you." The big difference maker was using a specific piece of property as collateral on the loan. That was the game changer.

But to answer this specific question you asked there, Daniel touched on it, that we borrowed money from 20 different banks. Both of them are local smaller banks. I think you could maybe do the same thing with small regional banks, but our business account and both of our personal accounts are with a regional savings and loan, and they didn't have too much interest in it.

So specifically, I think if you get into banks that are used to making more agricultural-type loans and deals, they understand the value of land better than a general bank. They're able to identify this asset class because they're used to people buying and selling land all the time.

Seth: Well, so on that, these properties that you've gotten financing for, are they agricultural in some way? Is that one of the important factors of why it clicked for them, or is that not really the case?

Daniel: The properties we've been financing have been both recreation and agricultural lands. They’re just standalone land, vacant land without a structure on it. They certainly understand that concept more than trying to figure out, "Okay, if it doesn't have a house, how do I even appraise this?"

Seth: Yeah. So, if one of the important issues is that they're using the property itself for the collateral value to back up the loan. So why are these properties so easy for them to understand in terms of collateral? Like, is there something about these that allows them to get comfortable or the appraisal or the appraiser to get comfortable with it?

Because usually that's the big hang-up because the appraiser doesn't even know how to value this thing. And so, the bank doesn't trust it. But it sounds like that's not an issue here. Right? Are there a lot of comps for these properties, or why is that such a—if easy is the right word—why is that such a thing that allows this to work out?

Jay: I think it has to do with their familiarity with raw, vacant land. Although generally, it is agricultural, it's raw crop land or cow pasture. They know that just dirt has value in and of itself. They see those appraisals coming across their desk every day. And a lot of these banks do loan money to end buyers just for recreational land. They are just used to that exact, specific asset class. They have the appraisers in their Rolodex and in their phone books already that are familiar with just rural vacant land.

So it's not that weird a question that when we went into a downtown Kansas City bank and told them what we were doing, they were just like, what are you even talking about? Who would want to buy that land? What would they do with it? These small town banks out in the same areas where we're buying and selling, they are familiar with it. They know what the end use is going to be.

Seth: Did you have a chance to look at the appraisal that came back on any of these properties to understand like, oh, okay, so that's the logic the appraiser used. Those are the comps they use. That's why it makes sense. And if so, did you agree with the comps that they picked? Because I've seen vacant land appraisals before that I frankly thought were way off, but whatever, the bank accepted it. But have you had a chance to look at how these appraisals are made in your case?

Daniel: What we've worked with in the past is they've typically got a threshold internally that they'll do their own in-house appraisal. And I think it was somewhere from $500,000 to $750,000, kind of in that threshold. Beyond that, then they'll go out and actually get a higher appraiser.

And I found on ours, they're pretty conservative. I mean, that's just, I think, the nature of what they do is that they would err on the side of caution versus the others. So in terms of how it looks, the comps that they're pulling and comparing against are somewhat similar. I mean, it's so much easier when you're pulling comps for a house, but the comps that I've seen in our appraisals are pretty representative of what we're buying and selling on this stuff.

Seth: Okay. So you mentioned between $500,000 and $750,000. So does that mean is that the acquisition price, what you're paying for it, or is that what the property is worth?

Daniel: What the property is worth overall.

Seth: Okay.

Jay: The lowered amount is what that was based on. And the good thing, so the continuation of Daniel's explanation there, less than $500,000, this is another really important factor of these small town banks. You want to build a relationship with the decision maker.

And so this particular bank that we've done most of the deals with, less than $500,000, it doesn't have to leave this guy's desk that we are dealing with the chief loan officer of this branch. And so he has the authority. And so he calls a couple of real estate agents and says, "What do you think this property would sell for?"

Of course, we are still looking to buy the properties at a discount of market value, but our general business is we're going to force appreciation onto it. And so we're able to pay a higher percentage of market value than a lot of times what you would see in our niche of the real estate business.

Seth: So let's talk more about that. So if I'm hearing you right, the value of this property as it is, is between $500,000 and $750,000. But this loan officer you're talking to, they can approve anything up to $500,000. So I assume your purchase price was below $500,000. Is that accurate so far?

Daniel: Yeah. Yeah. We've been on both sides of it, but yeah.

Seth: Okay. But your plan is to actually improve it and make it worth more. So what was your plan to improve it and how much more would it be worth? And how much does that even matter to the bank? Do they just care about what it's worth today? Is that really the bottom line for them?

Daniel: I think it's easy for them to look at it, especially if they've got an appraisal and they understand what we're doing. But typically we're doing subdivides. We're bringing in utilities. It varies by property, but we've explained this to them whenever we bring it in. We've got a full performer that we pull and put in front of them, go through all the numbers. So they're very well-versed in what we're planning to do. And we're very conservative on our performance as well. So we certainly like to under promise and overperform on these.

Seth: Okay. So does that mean that your plan for what you were going to do to the property to improve it and make it worth more, that is an important thing or that doesn't matter?

Daniel: I think it's important. I certainly think it's important that they understand what we're doing, where our plan is.

Seth: Like the appraisal you get, is there an as-is value and then an as-complete value? Like when these things are done, then it's going to be worth that amount or does it not even go there?

Jay: The banker is more concerned with the current value of the property. Is this collateral they're holding? If Daniel and I were to let this thing go back, would they be able to recoup their loaned amount just by liquidating the property? In this particular bank, loans up to 80%. And so that's the dollar amount. I think he's most concerned with that.

Here's the biggest reason, going back to what we talked about of actually building a relationship with this guy because we got the experience with him and he understands our business model. He knows that we're going to turn it quickly and we're going to make money on it. He's been involved in these things with us enough that he's certainly interested in what our exit strategy is and what those dollar amounts look like.

But I feel like the bank itself is more interested in just being sure that its loan, its collateral, is at a value to validate the money they're going to loan on it.

Seth: So on that whole relationship-building thing, I think you had said you met this first banker. Was he a friend of a friend or something? Or somebody introduced you to him? And if so, how important was that? If there was no connection, you're just a cold lead and you knock on his door one day, he doesn't know you from Adam. Do you think you would have been able to build this relationship anyway, or is it critical to find somebody in your network that can introduce you to this person and make that connection?

Daniel: No, I think we would have built that relationship regardless. The time to get to where we are now certainly decreases if you have a mutual connection like that.

But whenever we did this, we started out with small properties just to kind of get our feet wet. Just both us and the bank, we're both learning about each other. And then the size of our properties dollar amounts have gone up as we've done each deal. And so, the more and more we get comfortable with each other.

But I think relationships are key to our business because now we can go in and talk with the bank. And the last deal we did with them, we talked about the property for probably five minutes to ten minutes. We spent the other 30 minutes talking about kids and what their kids are up to and how their family was doing.

So regardless of what you're doing, I think building those relationships, whether it's with the bank, with an appraiser, with agents, those are the relationships that are gonna make your business successful.

Seth: Yeah, it's interesting. I remember years ago when I was in the banking world, and there was a member of our board that I was having lunch with and he was telling me, he was much better at sales than I was. And he told me something that gave me kind of a light bulb moment. 

He's like, in sales, when you're talking with these people and building relationships, you'll go out to lunch, kind of like we're doing right here. And 90% of what you'll talk about won't be banking. It has nothing to do with why you're working together. It's more about like, who are you as a person? Tell me about your family. What are you passionate about? It's building that relationship.

And I was like, oh, so it doesn't have to be all business. That's actually not like that's a very small segment of the whole conversation. It was, it's almost like he gave me permission to just be myself instead of having to be this, you know, straitlaced business person all the time. So it was interesting.

Jay: For sure. That being said, it's also important, especially, you know, that first time we had a pretty good pitch deck put together. I was showing our past deals, tiny deals we were looking for. Days on market, the returns that we were making.

And so even though it was a kind of an informal breakfast meeting, we were still certainly selling ourselves and selling our plan. I think that's real important.

So this guy, we've done five bank loans that we counted up this morning. One with one bank and four with this other bank. And we can get into terms. But right now, the way those four have worked, we set up to make quarterly interest payments. And we've only had to make one interest payment that everything else that we were able to get the improvements made and get everything sold out within three months, within 90 days. And so we have a good history with them.

Seth: Let's talk about this pitch deck quick. So when you say “pitch deck,” what is this? Is this like a PDF? Is this something you're printing off? What is on this pitch deck? Like how many pages is it? Tell me everything you can about that, just so we understand exactly what you're talking about when you say that.

Daniel: Yeah. So it's basically, you know, it starts out with who Jay and I are, what our company is, what we've done in the past. Just general information like that. And then it goes into all the properties that we've done, as far as numbers, just like Jay said, what our profits were by sell days on market, all of that stuff, just so that they can thumb through this and look at it pretty quick and say, okay, I now understand what it is that you guys are doing.

So we have that as a PDF. We have a hard copy too, and we'll get it professionally printed. So we'd have something for them to look at and hold. But then the other thing we'll do is email them the PDF, because oftentimes they'll share it with other people in their office. We also include a link to a website, things like that. But we've also got a Google My Maps setup that has all our properties so they can click on it and see, okay, this is where it is. This is what it looked like. Here are the numbers on it. I think it's important for them to be able to interactively go in there and look at that.

Seth: No, that's awesome. And I think Jay, you were saying you got yours designed on Fiverr or something. Like how important is like the numbers versus like the design looks pretty and that kind of thing. Is it kind of like a website or like a good design can just kind of sort of instill confidence that like this person's put together? It doesn't necessarily mean anything tangible because the numbers tell that story, but I don't know how important or how much should a person obsess over the design of this thing?

Jay: Yeah. I think that it's sort of a professionalism. That's what we're looking for. And I paid 25 or 30 bucks to somebody on Fiverr. If you just pitch deck in and the topic search, you'll have a million people who want to do something that looks pleasing to the eye. We still give them the pictures and the numbers and stuff like that, but they're able to just manipulate all that stuff and make it look really nice.

And Daniel was talking about, you take that thing to the UPS store, spend an extra buck and a half or whatever for spiral binding on this. And when you slide that across the table to somebody, they automatically recognize it as something worth thumbing through.

Well, ultimately, it's going to go in somebody's trash, most likely. And that's okay. But the first impression, though, is that these guys are real business guys in here to talk real business. It's not just a couple of dudes with a legal pad; some pictures drawn on it in crayon.

Seth: Would you say that having all of your deals laid out showing like, this is where it is, this was the buy price, this was the sell price, this is how long it took, this is what we did to it. Like, is that really what made the pitch deck valuable? And if so, like how many of those examples of deals did it take? I don't know if the banker ever told you like, man, when I saw this piece of information, that was what sold me on you. Any insights into that?

Jay: That would be an interesting conversation. We know this guy well enough now that I would be willing to ask him that.

So the thing with Daniel and my business we’re so tight geographically, I think that is important to the banks that we're working with because they're able to look at the properties and the areas that they're familiar with. If I was showing them a map of desert squares, it may not mean anything to them. But if I'm able to show him a piece of property that's just down the road from where he lives, I think that hits home.

Seth: How close does the bank need to be to the properties that they're financing? We're only going to do stuff that's in our same county or a 10-mile radius or in this state. Like how far would be too far away for them to be like, "Ah, we're not going to do that. We don't understand that market."

Daniel: I think it certainly depends on the bank, where we live and work. I mean, we're in Missouri, Kansas. So crossing the state line is not a big deal. Most of the time, they've got a geographic footprint set up that they're going to say, hey, here are the areas we're going to work in, but it's going to be bank-specific.

Seth: Yeah. I know several banks near me, it's all over the place. Some of them will only work in their county. Some of them will go within three counties. Some will do this half of the state, like the West half. Others will do the South half. Others will do the whole state. Others will do multiple states. So I think it does depend a lot.

But in this case, it sounds like you found the guy or girl or whoever, the person who has loan authority. And it seems like that's kind of a key component to this because you don't have to go in front of a whole loan committee or something to get 20 people to say yes. It's just this one person to say yes and they can do it very quickly and easily, right?

Daniel: Yep. No, that's been extremely helpful, is talking directly to the decision maker. And even if we do get to that threshold where they have to go in front of a loan committee, they're our advocate at that point. I mean, they're the ones that are convincing the loan committee that, yeah, these are respectable people. I'll stand up for these guys.

And so that's huge. I mean, because anytime you have a mailman, things get modeled together. And that conversation goes from relationship-based to just transactional at that point.

Seth: Yeah. And if you're just walking into a new bank that you haven't worked with yet and you're trying to find this person with loan authority, assuming there is somebody like that, I think some banks might not even have that. Like everything has to go before a board. I guess I'm not totally sure.

But say you were walking into a new bank and who is this right person to talk to? Like how do you uncover, okay, that's the guy with loan authority. We need to become his best friend. You know how to go about finding them?

Jay: I think when you Google up whatever bank and look at their page of our team, I'll look for somebody with “loan officer” under their name. And better yet, if you can find vice president of loans or something to that effect, that's most likely the person that you'd want to take out to launch at some point.

And just, I think a good first step is to come from a place of curiosity. “Hey, here's kind of my business. This is what I do. I would like to start a relationship with your bank. What would you need from me?”

Daniel: One thing that's very important is that whenever Jay and I are going to all these banks and the current banks we work with, obviously there's a lot of paperwork that they require on the front end. So having all of that stuff assembled and ready to go, because they're going to want all your tax returns, business financial information, or profit and loss statements and all those things, as well as your personal financial statements. Having that stuff ready to go so that when they ask you for it, you can fire it off. And the goal is then not to have to ask you for anything else and they say, okay, yeah, thank you for sending in all this over. This is exactly what we need. I think that goes a long way toward making their job a whole lot easier.

Seth: So I've heard that the property itself being used as collateral, that is an important factor. I'm also hearing you say that your track record as land investors and land flippers, that's also an important thing.

What is more important or maybe like, what is the balance? Like how much of the emphasis is on your track record versus the property itself? Like, is it possible that maybe the property value is a little shaky? We're not quite as sure about that, but we really believe in Jay and Daniel. So we're going to do it because they're awesome.

Or is it the other way around? Any thoughts on that?

Jay: I think at the beginning, it's definitely going to be more numbers-based until they develop that personal relationship and that personal trust with you.

Seth: You mean numbers-based based on the property or based on you?

Jay: Based on the property itself, based on this specific deal for the first deal that you're taking to, I think you need to bring a home run type of deal. Something that is clear-cut, a good deal that you're buying and a very sound exit strategy on it.

Seth: You mentioned, Daniel, earlier that the first deal that you did with them was smaller and you kind of worked up and expanded. So how big was that first deal? If somebody's trying to start this conversation or start this relationship, what kind of size should they have in mind? Or, I guess, what size did you have in mind in your case?

Daniel: This one was under $200,000. It was one of those deals where we certainly could have taken it down ourselves and not had to pay the origination fee, interest, and all that stuff. But it was worth it to us to start this relationship and think of that it's more of a marketing cost than anything else. But yeah, so it was underneath that $200,000 acquisition cost.

Seth: And then what was it actually worth?

Jay: It turned out to be a pretty good deal. It was 40 acres that we split into thirds. We did a minor subdivide putting three driveways. And I think we sold each one for $110,000, $115,000, something like one person bought a mall and turned it back into one whole property. We made over $100,000 on that deal. Certainly some expenses in there, like surveying and the work we did to it. But it was a good deal.

Seth: I'm wondering, how important is it that you are doing something to improve the value? If you were to just buy it and do nothing and sell it, does that make it easier for the bank or harder for the bank, or does it make no difference? Because that’s all they care about, the current value as you buy it—to start with?

Jay: It makes a ton of difference because we got a bigger property and were able to buy it right. We made minimal improvements to it and are still selling it as one piece. They were still very interested in that deal. We've done another one where it was a big job.

So, again, I think once you get the relationship established, it's not as critical. Just at the beginning, you need to be able to validate your exit strategy. Not only is the bank going to be able to get their money back, but you are going to do well too. That's really what the bank is looking for—somebody who can build a relationship that's going to make money and continue to want to borrow money from them. They're looking at this relationship from a business standpoint too. They want you to be a successful business and keep coming back.

Seth: Now, earlier when you said you're looking for a small town bank, I totally get that. It makes sense. Is there a certain way that you quantify or measure that? Just to understand what you mean when you say that, is it based on, like, okay, this bank has only five branches. So that's a small town bank now. Or where's the cutoff where it's like, okay, that bank, it exists in more than one state, so we're not going to talk to them.

Or I don't know. Just trying to think of how to save people time. Which banks should they not talk to and which ones should they talk to? Is there any measurable way to determine that? Or is it just kind of a gut feeling? That seems like a bigger bank, so nah, we'll not talk to them.

Daniel: You know, for me, the biggest thing is who's close to where your property is. If there are bigger banks, if they have close to 20 branches, I'm still happy to talk to them as long as they've got the local presence there. Like somebody that has a presence in the area of the property that you're working, I think that's the biggest part.

Jay: And I don't know this for a fact that we could maybe go in and talk to some of those 20 banks we talked to earlier. And now that we know the different question to ask, maybe we would have had some different answers.

But my gut tells me that like Bank of America or Wells Fargo, Chase, any of the big national banks, that it's going to be too deep in the decision makers. Because that point I made earlier, all that is still critical. When we go in and talk to our guy at the bank, we still need to know within a day or two, are we going to be able to get this pulled off because we need to get this thing under contract.

If you go to Wells Fargo, you talk to somebody and they get to talk to their boss, who has to talk to another boss, who has to talk to a loan committee that takes place next week, they just aren't fluid enough to be able to do anything.

Seth: So let's get into that. You kind of mentioned earlier on that when you first started trying to do this, you were kind of asking the wrong question and looking for the wrong type of loan. And if I recall correctly, so you started by trying to find an unsecured line of credit and that was the wrong thing.

What are you looking for? What kind of loan is this called when you start the conversation? Say, Hey, we're looking for a blank. What is this you're looking for?

Daniel: I'll answer your question here in just a minute. As we started talking to more and more banks and more we've done this, all of the terms are very different and negotiable. I think whenever you go in and talk to somebody and say, “Hey, here's the project I'm looking at. Here's my estimated timeline. What product do you think would fit this best? We've got a property that we anticipated having a three-year hold on it.”

And so that those terms are much different than some of these properties that we expect to hold on to, we may do a minor subdivide and we expect to exit this thing within 12 months. So they're very different product types, very different terms, all those.

Seth: So the types of loans that you've had, has it always been the same product type or different? And what are those called?

Daniel: It's been different. I don't know the technical term, I'm sure the banking industry has a technical term, but a lot of these properties that we expect to turn relatively quick (12 to 18 months) is a typical term.

And the way those are set up is it's a fixed interest rate. We pay quarterly interest payments on that. There's an origination fee and that is just a balloon at the end. And also within those are discussions about partial releases.

So one property we had, it was our plan is to pay you back first on anything we sell. So that's not so much of the big banks like fine, or we may negotiate, hey, we need to spread this out a little bit further, get our capital back as we're going. So that release percentage may be a little bit different.

Seth: And so you mentioned that there's a balloon at the maturity date. So when is the maturity date? Does this last for like a year or two years or five years? Or when does that happen?

Daniel: It's property-specific. We usually do 18 months just to give ourselves plenty of time. So we have to switch gears and have a different exit strategy. We can certainly do that within that 18 months.

Seth: And if you couldn't pay it off at 18 months, would you just have to refinance or something? Or the bank could just kind of yank it all away from you if they wanted to?

Daniel: Well, we would refinance it would be the route we would take.

Seth: Would you refinance with that same bank or try to find another one who's willing to do this?

Daniel: At that point, I'd probably refinance with that current bank just because of that relationship and they already know the property. So I think that makes that transition a whole lot easier.

Seth: Gotcha. And with this partial release thing, just in case people aren't familiar with that, so this is a very common thing when people are subdividing or developing stuff and they have a loan with the lender or maybe even the seller if they bought it with seller financing.

And there's a condition in that loan agreement where the lender will “release” that respective portion of the land once it gets sold so that the new buyer can then buy a lien mortgage-free piece of land because the original lender has kind of let go of that.

That's correct, right? That's what you're talking about.

Daniel: Yep. That's exactly right.

Seth: Gotcha. And the interest rate, is it based on prime or something, or is it a higher interest rate because this is riskier with land or anything like that? Or is it like what you would normally get on a 30-year mortgage? What does that look like?

Daniel: No, it's a little bit higher than what you get on a 30-year mortgage. I think we've been paying anywhere from 7% to 9%, depending. And you can certainly shop rates. I mean, you can shop rates against each bank. And so the other thing comes into play is what type of origination fees they might have as well.

Seth: Yeah. What are those?

Daniel: Typically we're paying 1% origination fee.

Seth: And then that quarterly interest payment, has it always been a quarterly interest payment? Nobody's ever made you do it monthly?

Daniel: No, it's always been quarterly. Just that's kind of what we talked through, what gave us a little bit more freedom in our cash flow.

Seth: And that's interest only, right? So no principal tied up in that?

Daniel: Yep, that's correct.

Seth: Gotcha.

Daniel: We had another property that we were going to hold for a while. That property was set up on I think a 25-year amortization. And so that was interesting, principal payments monthly is the way that was set up.

Seth: Okay. So if there was a 25-year amortization on one of them, was there still that 18-month balloon? It's just that the payments were sort of amortizing in the meantime or you could have taken 25 years to pay it off?

Daniel: I think that one was set up on a three-year note, is how we had it planned.

Seth: Okay. And I guess the way that these terms get altered, like you said, it just depends on the deal, like how fast you anticipate it getting sold. And is that the main thing? Just how quickly you think it will happen? Or does it have more to do with its value or something? Or any other ideas on what would make that change?

Daniel: A little of both. I mean, the bigger the deal, the more probably we're worrying about with the bank as far as negotiating rates, things of that nature. Obviously, if they know you're going to be taking it, you're going to move this thing quickly, and they may try to up their origination fee to recoup a little bit more cost.

Seth: So this isn't a line of credit, right? I should know this as a former banker. I don't think it is because it's not like a revolving line that you pay back and then you draw more. It's not that. It's just a collateralized loan, interest only, 18-month of charity, maybe a three-month of charity. I don't know if there's a name for that. I should ask ChatGPT what that's called.

Jay: So I wouldn't call that a packet of loan documents. And under the promissory note, it's just labeled a commercial, single advance. So it's a commercial loan that you're just getting to draw one time upfront.

Seth: Well, that's actually really good to know because once it gets into commercial territory, the norms sort of change. That 7% to 9% interest rate, commercial interest rates I'm getting quoted right now are like 8.25%. So that's right in line with what that is. So that sounds right. And yeah, that's really interesting.

And I think Jay, at some point, you had mentioned something about how you were willing to give a personal guarantee. Is that something you had to do?

Jay: Yeah. That is still my name and Daniel's name tied to the bottom of these things, that, if for whatever reason it goes belly up, we're still on the hook for it.

Seth: Yeah. So there are several different kinds of personal guarantees. There's an unlimited unsecured, and then there's a limited secured. And basically, just the difference ties into like, does this guarantee name specific collateral that the lender can take, or is it kind of just an open-ended one way or another that Jay and Daniel will make good on it.

Do you know what kind of personal guarantee it is?

Jay: I don't know what those names that you went through were, but yeah, when we did our personal financial statements and stuff and list out all of our assets, I assume all of those are theoretically at risk. If this thing goes bad, that's what they're going to be coming after. They'll take those same personal financial statements and start going down the list, trying to figure out where they're going to get their money.

Seth: Sure. Yeah. I think the difference is when it's a secured guarantee, they literally have a mortgage on your house. Like, let's just take it. Otherwise, they might have to kind of battle you a little bit to get it, but they can still get it, that kind of thing. Just makes it easier to get to what they want to be made whole.

But I'm wondering if, like, sometimes you can do a loan that is bad in every conceivable way, but the personal guarantee is very, very strong. And that's what makes the lender comfortable doing this. So I'm wondering, is that a pretty important part of this? Like we're willing to take the risk on land and do all this stuff because, personally, you're pretty strong and we know we can get it from you if we ever have to.

Daniel: Jay and I, we both come from the side that we don't want the bank to see anything as risky, that I don't want if it's not something I would take on myself, which I mean, which essentially we are with the personal guarantee.

But I mean, I certainly, whenever we're doing these deals, we've gone through our due diligence and are confident that the deal one way or the other is going to go through fine. I don't want to put the bank in a position where they would look at something and think it's risky, just because I personally wouldn't want to do that either.

Seth: Yeah. And that risky thing is kind of a subjective word because a lot of lenders will see land as risky, even though you and I know it's not. That’s just how they look at it because they don't understand the collateral side of it.

But I guess that's another thing just to be aware of for anybody out there who ever wants to borrow money for anything, or maybe even buy a property with seller financing. I mean, one way you can sweeten the pot for the lender, if you're willing to go there, not saying you should, but you could, is offer up your personal guarantee. Say like, “Hey, I promise I'm going to make this good. And here's the proof that my promise is worth something, because look at my personal financial statement.”

Or you could even say like, “Hey, take my car, take my house as additional collateral. I'll put a hundred grand in this CD and you can take that as collateral too.” It's only a risk if the thing falls apart.

But if there was ever a situation where for some reason, you needed a loan for something, and you were very confident and you're willing to put that other stuff at risk, you could potentially go down that road. Some banks might care, some might not.

Jay: Certainly. If you're going to borrow a hundred thousand dollars, but you've got $250,000 in the savings account at that same bank, that certainly makes their tummy feel good about it.

Seth: Yeah. I wonder if you could even use that as leverage to bring the interest rate down. Because like, look, this is a no-risk deal for you. Look, my money's right there. Like, I don't know, maybe it might make a difference, maybe not.

Jay: That's one of the things that we've learned in this process. There is a whole lot of negotiation that's available out there and the stronger your balance sheet is, the more leverage you have.

We learned that from the guy who introduced us to this banker. He comes with a very strong balance sheet personally and so is able to dictate terms in a way that we're not able to. But that's based on his experience and the money that he brings to the table, where some part of it they're still after us for our business accounts. They'd like to see us transfer over to our personal accounts.

So, again, there are other things that you have that they want that can come into play in those negotiations.

Seth: Yeah. When I got my storage facility loan, one of the requirements was that I had to bring my business bank account over to them. I didn't necessarily have to have a certain minimum balance or anything. They just wanted to know whether it was with them and not somebody else.

Were you required to do that or they just kind of made it known? We liked that at some point.

Jay: It was the second or third loan, it'd be like, it sure would be nice if we had an account or two with you guys. Okay, cool. Got you. Well, let's open up a checking account. And the same thing, nobody was putting any minimums or dollar amounts in it. It's just like, hey, let's start doing some other business together besides me just giving you money.

Seth: These bankers that you work with, are there job titles? Is it like vice president of commercial banking or business loan officer or anything like that?

The reason I ask is because there might be a clue to listeners out there. The person at the bank you don't necessarily want to talk to is like the home mortgage department, because that's for lending on people's primary residence. Who you do want to talk to is like commercial loan department or the small business banking group or something like that.

Daniel: Yeah. I think commercial loans is a big part of it. So anytime, you know, as you're doing this as a business, they're going to look at it as a commercial loan. So here's the loan officer's typical title.

Seth: Have you guys ever explored getting hard money loans before?

Jay: We looked at and played with about every way there is to get money out there. When we first started, I thought Daniel was a genius because he came up with the idea of a debt investment product. And so we had a lawyer draw that up and we secured some money that we still have to this day.

We looked at hard money and private money that we very first got started, had some equity partners and realized that wasn't the path we wanted to go down very long. So we've looked at a whole lot of different ways of constantly building our capital and giving us tools in the toolbox to do work.

Seth: How big of a deal has this been for your business? Like if you had never figured out how to get bank loans, do you think you would be way behind where you are now or is this just like mildly helpful? Like you would have figured it out some other way.

Daniel: It gives us the opportunity to go after a lot bigger properties. When we started out, it was smaller properties and we were shooting for a 100% ROI on it. And this gives us the ability to buy bigger properties, so bigger dollar value. We don't have to make as much profit per acre as we would for those smaller ones. So you're getting closer to that market value. So you can give them, when you're buying it, the seller, you can give them more money. It's opened up a whole lot of options and there's less competition out there.

Seth: If both of these current banks that you've been working with, if they were to fold or just suddenly say, "Nope, no more. We're not doing any more loans with you," how easy would it be for you to find another bank to do this for you given what you know now? Like, do you think you'd be able to figure it out in pretty short order or would it be a lot of work?

Jay: I think that we could have another bank tomorrow that comes from working with both of these banks and just how eager they are as soon as we get one paid off. And when you can be back with the next one, text us and call us, "Hey, you guys working any deals right now?"

So I think that now that we know and have a proven track record, that yeah, we would be able to get a new relationship started with minimal effort.

Seth: Yeah. I know every bank is a little bit different, but many of these banks, the loan officers and vice presidents even have quotas that they need to hit each year. Like to do your job, you need to be lending out $10 million a year. I don't know what the number is. It's probably different for different banks.

But the takeaway for that is to realize that they want to say yes more than they want to say no. It's just about like giving them what they need to see and getting them comfortable with that. And of course, that's different for everybody, but I'm wondering, if you were to pick up today and move to a different market, say you're doing this in California now or something, how hard would that be to find a bank in a completely different place where you don't necessarily understand the culture and the norms?

Daniel: I would give my ticket, head out to California. There's a whole lot of value to do this stuff face to face and being able to shake somebody's hand. The conversations you have face to face are much different. You decide conversations are way different.

It's a whole lot easier for me to ask somebody about their family and glean that information from them sitting there talking to them versus calling somebody up. "Hey, I'd like to get a loan, but first, what's your family look like? What do you do for fun?" I mean…

Seth: Man, you're creepy.

Daniel: So I think it's effort, but I mean, it's networking too. It's all about relationships and that takes effort and time and money, but it's very fruitful as well.

Seth: So any other big discoveries come to mind about the right or wrong way to go about looking for bank loans like this? Anything I should be asking you that I haven't asked you yet?

Guest: You know what? One thing, as you're talking to these banks, if they don't do a whole lot of land deals or things like that, market yourself as something diverse so that they don't have all their eggs in one basket.

You may talk to them about, hey, this is something that might be a little bit different product for you guys. Have you thought about diversifying a little bit over here? Because a lot of banks will look at that and think, okay, yeah, this might be something good to look at, something unique.

Seth: I do wonder how much this varies based on the condition of the market. If you were trying to do this in 2010, would this be a lot harder? I know there's no way to really know that, but I just know, and that was an extreme scenario. I remember seeing banks back in 2009 that would just kick their borrowers out left and right. Even though there was nothing wrong. Everything was fine. They just were trying to liquidate everything they could. It was crazy.

But I wonder how much of this is achievable due to where the market is right now, and if it would be easier or harder five years from now. I don't know. Maybe it doesn't matter at all. Maybe it's more just about you as individuals. It's hard to say.

Daniel : I would like to say that we've got deep enough relationships just with these two bankers that even if they were being ready to kick us out, they would be willing to go to back for us and say, "Okay. Hey, this is a bank decision. Here's somebody you may want to go talk to.” Certainly give us contacts that way.

Seth: Is there any kind of a ceiling on how much these banks will lend to you? Say if you had enough for the 20% down payments. Could you go out and get like $50 million worth of loans for this kind of thing? Or is it like, "No, you're done after five million. That's when we're cutting you off." I don't know if you've ever had those conversations.

Jay: We've borrowed $500,000-plus on a couple of different occasions. It is easier to have those loan applications and that conversation than it is to go in and open up a checking account. I told the guy that. The same time where he's like, "You need to open up some accounts with us." It took a lot longer, and it took a lot more effort to go in and open up that checking account than it did to sit across from him at his desk and get approved for $560,000.

But Daniel and I, to get back to your question,walked out of there and looked at each other and were like, "I don't know what the number is. Where does he say, 'You know what? Boys, we need to talk about this in a little bit more detail.'" It would be good to know the answer to that question before it comes up.

But right now, I don't know what the number is.

Seth: Is there anything, and maybe you just haven't explored this yet, you might not know this, but anything weird about the source of your injection for these loans? It can't come from these sources. Like for example, when I built my storage facility, I took out a HELOC and a good portion of my down payment came from that. I learned in looking into SBA loans, I never ended up getting SBA loan from mine, but apparently SBA, you can't use a HELOC as your source of injection unless you take all the money out, you put it in your checking account, and you let it sit there for two months in its seasons. And then after two months, then you can use it. But if it's still sitting in there today, like, "Sorry, you got to wait two months before you can use that money."

Or like say, if you got a bunch of these business lines of credit or credit card type things with 0% interest for 12 months, and you use something like plastic to pull that money out and use that as your injection. Like anything that it's like, "No, no, your injection has to come from this kind of source and not that kind of source." You know anything about that?

Jay: I do know, just looking at SBA loans, that SBA will not recognize a speculative land purchase as a viable loan option. I can tell anybody that across the board, SBA is not the place or the loan type that you're looking for when you walk in the front door. It has to be some hard asset for SBA to consider.

Seth: I think the issue is it would be considered inventory with the land that you're purchasing and they don't (well, depends on the SBA loan type), but yeah, you're right. Spot on.

Jay: Anything else that's real peculiar or particular to any of the loans that we've done?

Daniel: I'd said this earlier, but just make sure that everything you're filling out, you fill it out. Every box is checked. Because the easier you make it for them, the more apps they're going to bend over backwards for you and accommodate you.

Seth: Awesome. Anything else I should be asking you or did we cover it all?

Jay: This is only slightly related to the topic at hand, but Daniel and I took a stab at finding the banks ourselves. It was only through the introduction of another guy that we were able to get our foot in the door and just how much of our experience in the land business comes from that. 

I've seen you at three or so land events and then to that many more. Both of us have a lot of personal relationships in the land business. I just think that it's so critical to continue to grow and operate at a higher level. It's a team sport and there's a whole lot of people out here with a whole lot of knowledge that are willing to share with you if you put yourself out there and ask them. I certainly encourage everybody that I meet at these things, get out there and shake hands and kiss babies, ask lots of questions. Most of the time, people are willing to share it.

Seth: Yeah, that's very true. And to your point, Daniel, about a face-to-face connection, like if I get a random Facebook message from somebody that I know I've met face-to-face at some conference, like I remember them, I remember what we talked about, like that is a totally different conversation than somebody who I have no idea who you are. You're messaging me something and you want something from me. Like it's way easier to ignore something like that versus somebody that's like, I know you, like I care about you, that kind of thing. 

nd really going to those kinds of conferences, that's a very powerful way to do that. I don't really know of a better way, honestly, unless you went out of your way to schedule a one-on-one meeting with somebody and most people don't want to do that. So, but yeah, that's a very good point.

That person that connected you, was that like another banker or something, or why did they have any influence in that situation? Did they know the banker from something?

Daniel: We had met him through an agent, a real estate agent that would sell one of our properties. So that's how that introduction came about. From there, we started partnering with him on a couple of deals. And so we've had a very strong relationship with him. His background is banking. And so that's kind of how he had some contacts.

But again, all those things wouldn't have ever happened had not, where our agent gave us his name, we're quick to reach out to him. And had we not, we wouldn't have any of those connections right now.

Seth: So thank you guys both for your willingness to sit down and chat about this. I know you certainly didn't have to, but I found it very helpful. I'm sure a lot of people out there will learn a lot from this, just in terms of whether they should be exploring this, and if so, how to go about doing that.

If people want to get a hold of you, you don't have to share anything, but anything you want to plug or anything like that, you’re more than welcome to.

Jay: Royalinvestmentproperties.com will let you learn a little bit more about us. And I think Daniel and I both have links on there. If not, it's Daniel or Jay at royalinvestmentproperties.com. But yeah, always happy to have a conversation.

Seth: Awesome. And I will include links to all that stuff and a bunch of other stuff we talked about in the show notes, retipster.com/192.

Jay, Daniel, thanks again. Appreciate it so much. And hopefully we'll talk again soon.

Daniel: Sounds great. Thanks, Seth.