31 Oct Ep. 3: Building New, Contracts, Motivation, & Loans
In this episode, Adam talks about using a realtor when building a brand new house, a lesson learned from not using specific enough wording in a contract, a new 2 family building he may buy if the numbers are right, & happiness vs. convenience when it comes to investment properties. Adam also interviews his mentor, Trey Malicoat, about what makes a great realtor & John Charlton from Midwest Mortgage Capital tells a story about how he got a friend’s 5.5% 30 year loan down to a 3.375% 15 year loan.
Email Questions To: PODCAST@HERMANNLONDON.COM
Host – Adam Kruse https://hermannlondon.com/realtor/adam-kruse/
Facebook – https://www.facebook.com/HermannLondon/
Twitter – https://twitter.com/HermannLondon
Instagram – https://www.instagram.com/hermannlondonrealtors/
Address – 7350 Manchester Rd, St. Louis, MO 63143
Phone Number – 314-802-0797
Search For Homes on http://www.wizah.com/
Producer – Joey Vosevich
Theme Song by Trastornobeats
Segment 1- Adam talks about using a Realtor when building a brand new house, a lesson learned from not using specific enough wording in a contract, a new 2 family building he may buy if the numbers are right, happiness vs. convenience when it comes to investment properties.
Welcome everybody to this week’s podcast. Today is Tuesday, October 28th, a couple days before Halloween. I hope you have your costumes ready.Today’s podcast is possibly going to be a long one. We’ve got a couple of different guests in here. I’m really excited. We are going to have Trey Malicoat come in here pretty soon. I keep calling him our office’s communication guru. He is my mentor–my coach, and he helps with our agents. We are going to talk about some problems that I’ve been seeing lately on deals we’ve been doing with loan commitment dates. I want to talk a little about working with a Realtor if you are going to buy a new construction home or build a home. I want to share a lesson that I learned this week on a deal that I was doing. I’m going to get real detailed and go through the numbers of a two family building that I’m considering purchasing with a friend. Rant a little bit about how it is not all about the money with an underline under the word all. I already mentioned we are going to have Trey come in. Last but not least we are going to have John Charlton come in and give us a little update on some loan stuff. I’m going to jump right in to talking about working with a Realtor for new construction. I was out of town this weekend and I’ve been working with a few buyers, a couple, and we’ve been looking at homes all over the Fenton and Ballwin area. We’ve been looking at existing homes. We’ve been talking about new construction though because I think that’s what they are going to want. The homes that we walk into that are basically brand new are what seems to excite them. We’ve been looking at different options for builders; build on an existing lot, buy a house/tear it down/build a brand new house, or find a house in a subdivision where the builder owns the entire subdivision and hire that builder to build a home there. While I was out of town they went to a subdivision and basically fell in love with homes that could be built. There was already one that was built there. I just want talk a little bit about working with a Realtor when you’re buying a new construction home. First of all, should you work with a Realtor when you are buying new construction? Of course I’m going to say yes, but I think that it’s for lots of different reasons. It’s not just necessarily for negotiation because because negotiating with the builder on a new construction home can be a little bit complex. Sometimes you can negotiate the price of the home. Sometimes you can negotiate some of the upgrades like upgrading the flooring. Sometimes you can negotiate the lot premiums, that type of thing. There is some negotiating to be done but your Realtor can help you with that. Like I would say to any buyer that’s buying a property,”Why not work with a Realtor? Why not have someone that is on your side representing you, helping you through the process that you’re not paying them anyway?” When you do go to a builder’s site, if you are not with your Realtor, make sure you tell the builder that you are working with a Realtor and sign them in. They all have little cards that you fill out and just put on there, yes I’m working with a Realtor and here is their name, and the Realtor can basically help you understand their process. The builder’s going to put a lot of things in front of you and there’s a lot of numbers thrown at you. One example is talking about lot premiums. My buyer was like, “Yeah. Yeah! What’s a lot premium?”. Essentially, and every builder does things a little bit differently, when you see a sign that says new homes can built here from the $400’s, you are probably not going to pay $400,000 for that house. You might end up paying $450,000 but you could do updates that might turn it into a $600,000 home depending on what you want to do. Do you want to add a third car garage? An example with a lot premium is the builder may charge extra for certain lots in the subdivision if they are overlooking water or if they have a walkout or if they back up to the golf course instead of backing to the woods. When you use a Realtor to help you buy an existing home–show you the homes, negotiate the deal, working through inspections, understanding financing–it only makes sense to use a Realtor to help you buy a new construction home. That includes all the things I just mentioned plus all the details that go into building the home. Negotiating all that. What upgrades should I do? As an example, you want to custom tailor the home to be comfortable for you and your family so you are going to enjoy living there, but there is some upgrades that I suggest that you don’t do. We were looking through a home recently and the guy that built it really really custom tailored to himself so he turned one of the third bedrooms into a much smaller bed, basically only big enough for his tanning bed to fit in there. I guess he was a single guy, a bachelor, and he wanted a tanning bed. Was that a smart move for him? Maybe, I guess, if he really likes it. For a resale? Definitely not. My clients were like, “Absolutely not. This home won’t work for us because that is not really a third bedroom.” There are some updates that you really don’t want to make that will devalue the home or make it not a great resale property. There are some that you might make like if you can add a three car garage at this time for say $10,000 or $12,000 it might be a really smart move to do now because you can’t really add a third car garage to the house six years from now when you are going to sell the home. That is my commentary about working with the Realtor for building new construction. Next up I’m going to talk about my lesson learned of the week. I try to be humble so I can share examples of mistakes that I’ve made. My lesson that I learned this week is to be specific. I already knew this. I always tell my agents when we are doing trading to be specific. Try to be as extremely clear as you can. Let’s solve problems before they happen. Let’s make sure everyone knows what’s going on so you don’t have to fight it later. On our sales contract there is a paragraph called inclusions. Basically most of the things in the home like the stove and the light fixtures and the garage door opener and all that stuff is considered to be real property. It is not personal property. It automatically goes with the home but then there are few things that you have to be specific about, for example, the washing machine, the refrigerator, a flat screen T.V. if you want it, and your Realtor should really write in there those specific things. Now I always write in ALL PRESENT AND EXISTING FIXTURES AND APPLIANCES CONVEY. Most of the time I’ll also write in ,WASHER, DRYER, REFRIGERATOR. Right–being specific. But to me the words ALL and the words EXISTING and the words APPLIANCES is pretty specific. Basically all appliances that are in the home when we wrote our contract convey, meaning, pass on with the home to the new owner. In this case I didn’t write refrigerator, washer, and dryer. When we went on the final walk through the washer and dryer were not in the home but the refrigerator still was. I call the agent and said, “Hey, the washer and dryer are not here and they are supposed to stay.” She said, “No they’re not. They are not supposed to stay.” So we had to debate that topic. My point was that it is very specific, the words ALL EXISTING APPLIANCES CONVEY is very specific. Here point was that it is not very specific because that could include the toaster. It could include the blender. It could include everything. Of course I said, “Yeah, it does, and you are lucky that we are not asking for the toaster.” Anyway, we ended up getting it worked out. Ultimately we wanted to do what was best for the clients. The seller had already sold the washer and dryer so we had to get them a new washer and dryer. The sellers ultimately did that but it would have been a problem that wouldn’t have happened. I could have solved the problem before it happened if I would have done what I normally do which is write in there WASHER, DRYER, REFRIGERATOR. In the future I may even be more specific–KENWOOD WASHER, WHIRLPOOL DRYER, LG REFRIGERATOR IN THE THE KITCHEN–just to really clear up any issues–THE TV IN THE BASEMENT–that type of thing. We may even be more specific. My lesson learned was be specific. I don’t need to be just saying just all present and existing appliances convey. I can also add in the refrigerator, washer, and dryer just so everyone really knows what is going on because ultimately even if I was right, we want to make sure everyone is happy. There is no reason to have the sellers be unhappy and they kind of felt tricked, I think, and that certainly wasn’t my intention. Anyway, lesson learned. Be specific and there are a lot of different things on the deal that we could be specific about and I think it just helps everyone to have good feelings about the deal. When you sell a house you want to be happy about the new buyers and when you are buying the house you want to feel like you got a good deal but you want to feel like you are buying a happy home. Moving on from that, I guess I’ll talk a little bit about the problems we’ve had with loan commitment dates. I’ve got a few calls from agents in the last week that have related to loan commitment dates. I guess the new term is loan contingency date. A loan contingency date is something that I call a problem that you only have to deal with if it becomes a problem. When you’re writing an offer on a home and you are going to buy the property you make a contingent on a bunch of different things–the inspections, the loans, an appraisal, insurance, reading the seller’s disclosure statement–those types of things, and one of those things is this loan contingency date. Typically the loan contingency date will be something like ten days before closing and essentially you have until that day to be extremely comfortable that you are going to be able to get a loan on the property or else you are going to have to get a loan denial letter and back out of the deal. The problem that comes is that sometime by this loan contingency date your lender is not ready to say, “Absolutely, 100%, without a doubt, I will give you a loan on this property.”. Notice that I said, “Will we give YOU a loan and on THIS property.” By now they need to be totally comfortable with you. You have already been pre-approved but you need to have gone through their underwriting system and sent them all your paycheck stubs and your bank statements and your proof of this and proof of that but they also need to have completed the appraisal on the property and the appraisal needs to have gone through the underwriting process too so they say, “I can absolutely give YOU a loan for the purchase amount and I can absolutely give you a loan on this property.” What I saw twice this week was; today is loan contingency day, the lender says, “Hey, I think we can give you a loan but there are a couple stipulations,”, and the agent is saying, “What do we do? Do we just go on with the deal and hope it goes through or that they can close on time, and close at all, or should we back out of this deal all together?”. The ideal thing would be to have dealt with this a week ago. When a realtor calls me I can’t say sorry, you should have dealt with this a week ago. We have to figure out a solution now but ultimately, that’s what you should have done. Be on top of keeping the deal together for your clients. Talk to the lender ahead of time. Make sure they are getting everything they need. If you call the lender and say, “Hey, the loan commitment is next week. How are we looking?”, and they say, “Well, your client hasn’t been getting me this and that that I need.”, then the agent can call the buyer and make sure that is happening. When it comes down to the loan contingency date and you have to make a decision whether to send over a loan denial letter, which is kind of hard to get these days, and a mutual release ending the deal, or should we send over an amendment that extends the loan contingency date–not necessarily extends the closing, but at least extends the loan contingency date–or should we do both? What if I just sent the amendment and the seller is not responding and I’m freaking out, what do I do now? Now you are in a tough spot where you might want to send over a loan denial letter and a mutual release, but like I said, it is hard to get a loan denial letter. It is a real stressful moment and this is a problem that can be solved if you deal with it ahead of time to make sure that everyone is getting everything that they need a week or two weeks before the loan contingency date. That’s my commentary about the loan commitment date. Next up I want talk about this two family building that I’m considering buying with a friend of mine. On the first podcast I went over a four family building that I did buy with a friend of mine and those numbers were so obvious and easy that it just make perfect sense and we had to buy it or else we were crazy. Now those type of deals only come around every once in a while and I don’t want to only wait for that to happen before I buy real estate again so I’m considering other options. This particular property is a duplex. It is a two family building. It is in south city. It is currently vacant. When we walked through the property no one was living there. There’s no furniture there. We were able to look at everything. Do I like that it is vacant? Sort of because then I can make my updates to it easily and I can charge what I consider to be market rent. Usually we are good at getting strong market rents. Do I wish one of the units was rented so that we had some cash flow while we’re rehabbing the other one? Sure. Let me break down the numbers for you. I’ll try to be quick. I love making a spreadsheet so I have it printed out in front of me. The way I make my spreadsheets is that if you change the purchase price it will affect all of the other numbers. Let’s say that we are going to buy this property. It is an investment property. We are going to get a loan. Most lenders are going to require that we put down at least a 20% down payment. There are two investors, myself and a friend, that would buy the property. What I had to figure out is how much rehab are we going to have to do to the property? How much money can we make in terms of cash flow each month? How much is going to be my out of pocket up front. Ultimately, what is our return on investment. Let’s look at a purchase price of $100,000 for this property, it is actually listed a little bit higher than that, but let’s say we can get it for $100,000. We would have to put down a down payment of $20,000. I also made other estimations, for example, our estimated holding cost for six months. In this case that is figuring out our mortgage payment including principal interest, taxes, and insurance, which I believe broke down to $650, so our estimated holding cost for six months is about $4200. I set a minimum holding cost if we only had to hold it without any rent for two months broke down to be about $1,400. The rehab charges will include putting in new windows, painting, patch some of the roof, do a little bit of waterproofing to the basement. I like to be conservative so I put in a general unknown number of $2,500, so my total rehab cost in this case was $7,300. Again, purchase price of $100,000, a down payment of $20,000, total rehab cost of $7,300, plus our holding cost, so my calculations say a max out of pocket total potential cost we could ever incur would be about $31,500, which per investor would be about $15,700. This doesn’t exactly fit into my HEY, WE’LL BOTH PUT 10,000 INTO A POT AND BUY A PROPERTY type of thing but I have to know what the numbers are before we do it? Will we end up spending up $31,500 on the property? Maybe, maybe not. We don’t know how long our holding cost will be. Maybe the general unknown of $2,500 won’t have to be spent. There are some variables there. Maybe we could do some of the work after we have some tenants in there later. I like to be conservative so that’s the numbers we got. Running through the rest of the numbers, I’m assuming we could rent both of the units out for $700 each so we have a total rent of $1,400. We would use Hermann London Property Management. I’m just conservatively assume they would charge us 10% which would make the management fee $140. Our monthly payment is about $610. I like to put $100 per month into a reserve account so every month that reserve account is building until maybe we have our six month reserve built. I like to have money in there in case the air conditioner breaks or the toilet leaks so we can go use that reserve money instead of using our out of pocket money. Basically, total rent is $1,400 a month, minus the management fee, minus the monthly payment on the principal on the loan, minus the reserve amount, we are going to have net income of $552. Per investor we would be making $275 a month. To me that is not that exciting, especially if I just wrote a check for $15,000, it is not that exciting to get $276 in my account each month, but ultimately you have to look at the return on your investment. If we did this deal my estimation is that it will take 52 months to get our investment back which is just under four and a half years and the return on investment that I’m calculating is about 21%. Although I don’t consider $276 to be that exciting, a 21% return on investment isn’t that bad of a deal? Will we end up buying this property? I’m not sure. Like a said, I’d prefer to put $10,000 into a pot, not $15,000. Some of the considerations we have to have is the location, which is a great location, and this particular friend that I’m looking at buying this property with, I don’t know how handy they are so we might have some higher rehab charges. That’s the deal we are considering. I’d love to hear your feedback on if you think we should do it. I’d love to hear your feedback if you’d want to partner on a future deal. Send me a message. Next up, I do want to talk about–it’s kind of my rant, I guess. It’s called, IT’S NOT ALL ABOUT THE MONEY. Underlining ALL because it is about the money but it’s not all about the money. I kind of think that this applies to several different facets of life–whether you are talking about an investment deal, the real estate company that you want to work for, the job that you have available to you–I say it is not all about the money. Like I just mentioned about this investment deal, could we make a little bit more cash flow on a different property that is in an area of town with higher turnover and lower rents, we might make higher cash flow but then I’m going to have to drive thirty minutes every time that there is a problem instead of driving five minutes from my house. Is it a great building that is in good condition so that I won’t have to do as much rehab to it over the years? Do I think it’s in an area with families and they might live there for five, ten, fifteen, twenty years instead of it being a turnover area where there are students moving in and out every year. Will I have to pay to find a new tenant, carpet, and paint every single year. There is kind of a convenience factor there and an unknown turnover factor. My girlfriend own a two family building, and when she bought it there were tenants living there and those same tenants are still living there today six years later, and hopefully they will stay living there forever. That’s great! Maybe she’s not getting as high of rent that she could get if it was right next to Washington University and the students were paying top dollar, but what is the convenience of not having to find a tenant every year, put in new carpet, and fix the property up? I think that has to be considered. With investment deals it is not all about the money. With a real estate office, it is not all about the money. One of my agents could come to me with a spreadsheet and say, “It looks like you are charging me this much and I could make this much at another company. That’s what I’m basing my decision off of.”. What I have to say to that person is, “What should be considered that doesn’t fit on your spreadsheet? How about the culture? How about the lifestyle? How about the friends that you’ve made? How about the convenience for you? How about the things we do for you and your business? How about those things that don’t exactly fit on that spreadsheet?”. I think happiness is something that you can’t really measure on a spreadsheet and it has to really be considered. What about jobs? I was talking to someone last night about jobs and, again, to me, it’s not all about the money. Someone could call me right now and say, “Hey, this big corporate company in town wants to hire a new real estate manager guy and they are going to pay$400,000 a year. Do you want the job, Adam? It requires you to sit at a desk for sixty hours a week.”. I would say no to that job even though it is a lot of money. I would turn down that job because I really like doing what I do. I’m very happy with owning the Hermann London Real Estate Group and my lifestyle. Again, it is not all about the money. Sometimes, and I hesitate to say this, maybe enough money is enough money. You have to consider that sometimes it is not all about the money. Coming up next we have Trey Malicoat. I mentioned him at the beginning of the podcast and I’m really excited to bring him in. He’s got a lot energy so turn up the volume and get ready to go. Here comes Trey.
Segment 2-Adam’s mentor and Herman London’s communication guru, Trey Malicoat, talks about what makes a great Realtor.
Adam-Up next here we’ve got Trey Malicoat. He’s our office’s communication guru, I like to call him. He’s been putting on seminars for us, and meetings, helping us with recruiting, helping our agents become more successful, and holding them accountable. Trey, I have to ask you one question; what makes a successful realtor? Trey-Oh man, Adam, thanks for asking me. The truth of the matter is when you look at real estate agents across the United States, what I see is one clear crop of people and they are all average, frustrated agents. They are sitting on their heels. They are waiting on something to happen and they think real estate is an industry that you can jump right into and it is simple. Here are my five tips on how to be really fantastic real estate agent. What makes the great great and what makes the good just kind of mediocre. Point number one; if you want to be a great real estate agent you need a clear and simple marketing plan. It is about knowing where you need to be with whom and how you need to be having the the sales conversation. So point number one is you need a clear and simple marketing and sales plan. Number two; you need to set a schedule every day to have consistency with your prospecting. A general rule is one hour day will build your business. If you do two hours a day we are in the game of volume. Which leads me to point number three; deliberately intersecting with the highest number of people on a weekly/monthly basis. We’re in the business of volume so you’ve got to be in front of people. Where are you connecting? What networking meeting are you going to? Where are you asking your friends for referrals? It’s about being connected to as many people as you possibly can. The fourth point I want you to think about, as a great real estate agent, you need to be really great at relationships. Most people think you need to be slapping hands and kissing babies and I think to be really great at relationships you have to just be really interested in people. So as a good agent, lets get really interested in people. Lastly, I think the great agents, the people that really superstars have one thing that no one else has, and that is an outstanding attitude. They stay in the game. They don’t get discouraged. They focus on success and they know that if they work hard, they work their plan, they keep their head in the game, they treat people right, and they intersect where they need to, they will have success beyond measure. There you go Adam. That’s my secret tips for how to be a great agent. Adam-Okay, thanks, but don’t run out the door yet because I appreciate that, and you’ve been teaching a lot of those things, and this is great. I think that some of us probably know this stuff. Once they do know this, how do we get to the real issue? What is causing them not to do this? I’ve hear it before. You’ve heard it before. “Oh, I don’t have my business cards so I’ll wait a week and a half until my business cards come in before I do anything.”, or, “I made ten calls and not twenty because I don’t have time because I’ve got my kids so that’s why I’m not successful.”. How do we dig deeper? One of the things I love about you is you help us dig deeper and help us get past the proxy issues. Trey-That’s a great question. I can tell you straight up–and I would imagine that in my business I’ve probably personally counceled over a thousand people just as business folks–and the one thing that I’ve realized is that no matter what you look at, when somebody has a plan that they are not working, when somebody has a desire to grown and they are not growing, when somebody has a relationship that they want to improve and they’re not improving it, when somebody wants to show up in the world differently but they are choosing not to do it, it comes down to one clear thing; do they understand the hidden fear? Here’s what’s interesting, Adam, there is always a hidden fear beneath the surface. If you say, “Hey, I want to build my business but I’m only willing to make ten prospecting call rather than twenty prospecting calls.”, what you’re really saying is I’m fifty percent afraid that I’m going to afraid or that I’m going to succeed. If you can have a conversation with yourself where you really get to the core issue; what is the fear that I am holding that’s preventing the action? The fear that I’m holding is preventing the attitude or the preventing the interaction. The fear is what drives our mediocrity. Does that make sense? Adam-It does. It’s interesting because I’ve been growing as a manager and as a broker over the years, if someone were to come to me and I would say, “Hey, why haven’t you done any real estate deals?”, and they say, “Oh, because I don’t have any business cards.”, my first reaction is, “Well, here is a few of mine. We can scratch out my name and write your name on them. Great, now you are going to go sell, right?”, and then they don’t, and that’s the thing that is crazy to me; it’s not about the business cards. It is like you are saying, it is deeper. It is the fear or there is something. Is it always fear? Trey-I think fear is on one level but I think there is a sub level that you can even go to that is more significant. When you really look at how people live in the world, how many people do you know that actually get out of bed every day and feel great about who they are, confident about their work, thankful and greatful for their abilities and their skills, they’re celebrating their own unique gift, and they use unique gift to make the world better? There are not a lot of people that do that and I don’t care what industry you are in. Here’s what I know; it takes a certain level of confidence to believe that you deserve success. Now get your head around this, okay. How many agents have we met who say, “Oh, I don’t have enough business cards,” or ,”I haven’t made enough appointments.”, or “I haven’t done this or I haven’t done that.”? Adam-They’re avoiding for something. Trey-They’re avoiding for something and I believe fundamentally that avoidance is because they don’t feel very good about who they are deep down inside. Sure, there’s a superficial fear but deeper, on a much more profound level, they don’t believe they deserve success so they have a narrative that says that they should show up small or that they are insignificant in the world or they live with compare and despair where they’re constantly thinking about how they are metric-ed against someone else when the truth of the matter is that we have one decision and that is to determine the success that we want and to make it happen. Here is the thing, I don’t care who is standing in the way or who you think is in the way or who is even on the same road as you, the truth of the matter is you are going to choose success or someone else is going to and it really has nothing to do with anybody else. Let me tie a bow around all this for you. I think that if people can look at those things that they are throwing up as road blocks, and then the second step to that is to say, “Okay, I’ve thrown up a road block. What is the underlying core fear beneath that road block?”. Then you take it a step deeper and say, “How do I really feel about myself in relation to this task or to this job or to this opportunity?”. If you are coming at things from an insecure perspective you won’t ever have the success that you need. It is about showing up big. It is about showing up bold. It is about faking it until you make it sometimes and it is about being the person that knows you have a gift, a purpose, a mission, and a value to this world, to this life that you’re living, and you had better just show up and do it. Here’s the bottom line–can I get bold? Can I get bold for just a second? Adam-Let’s get bold. Trey-Here’s the bottom line; when I see people that are kind of half way doing life, they’re choosing to half way do life because they don’t believe that they deserve a fantastic life. I want you to get your head around the idea that if you showed up every day and you said, “I deserve a life that is insurmountably bigger than I can even imagine, what would be different?”. Now that’s the charge. If you think about you are defeated in certain areas or discouraged in others or want success in other areas and you simply say to yourself, “What can I do different to make that success happen?”, and then you lean in as fast and as hard as you can and you drive. Sometimes we have to fake it a little bit but when we show up we show up big. Adam-I love it. I tell you what, I could sit here and talk to you for another ten days. Trey-We might need to do that. Adam-We might need to make a whole new podcast. I won’t keep you anymore. I know you’ve got an appointment and I appreciate your time so thank you very much. Trey-Ok. Thanks guys. Have a good day. Adam-We’ll have you back. If you guys have questions for Trey, submit them and we’ll have him on a future podcast. Next up I’m going to bring in John Charlton so we can talk a little bit about lending stuff and I’ll give you the updates on what we’re going to talk about next week and we will wrap it up.
Segment 3-John Charlton of Midwest Mortgage Capital tells a story about how he got a friend’s 5.5% 30 year loan down to a 3.375% 15 year loan.
Adam-Up next we’ve got John Charlton here with Midwest Mortgage Capital. As you know, John Charlton is our money man. He is our money guy. When I’ve got money questions I call John. John, tell me a little story this week about saving money. That is what I want to know about. What have you been up to? John-I wanted to tell you a specific about a friend of mine, Matt Green, a guy that I’ve known for quite a few years. Adam-…getting specific. I like it. John-Hey, Matt. What’s going on? The story that I wanted to tell you is that a lot of times people think about saving money just in terms of can I lower my monthly payment. This is a situation where we are talking about saving a ton of money over the life of a loan. Matt had a 30 year mortgage that he got in 2009. He was concerned about his equity position. He was concerned about the amount of interest that he was paying. We decided to go ahead and get an appraisal done; take a look at doing a 15 year mortgage. Basically this house, once again, that he bought in ’09, so he’s about 4 years, 5 years into the mortgage, he was paying over 5% on his 30 year rate. We were able to put him into a 15 year mortgage, lower his interest rate to 3.375%, and that only increased his payment by about $30 a month. Adam-So his payment went up. John-His payment went up, but where is he saving money? He’s saving an immense amount of money in interest. He was up somewhere around 5.5% on his 30 year mortgage. He’s dropping that to 3.375%, cuts ten years off the loan, drops the interest rate significantly, he’s going to improve his equity position a ton here in the next couple years so when he and his future wife, since he is engaged, decide to go buy their dream home they are going to have a nice asset there to sell or to rent or to do whatever they want with. Adam-Okay, so it doesn’t have to be a story where you just saved somebody $300 a month but you put them into another 30 year mortgage or whatever. This is a case where he’s paying a little bit more a month but you are saying his principal is going down drastically every month. John-Every month. Having a 15 year mortgage, and I’m privy to this because I have one myself, is a game changer as far as mortgage payments because most of us that have a 30 mortgage don’t even look at our balance each month because it’s kind of depressing. It’s kind of like you are paying a bunch of interest, just a little bit of principal, and that loan isn’t really going anywhere. A 15 year mortgage flips that on its head. You are paying a ton of principal down each month and it looks good and you want to look at your statement each month because you are excited about how much you are dropping your principal each month. Adam-Is he planning on living in that house for a few more years? John-I think he said probably somewhere in the neighborhood of about five more years. His break even on the loan is super quick because of the low closing cost structure that we selected. He’s basically breaking even on the loan in less than six months so after that it is all candy. Adam-So if he would have said, “Hey, I’m going to live in this house for one more year.”, you might have said, “Let’s not even bother refinancing you.”? John-No, actually, people would be surprised that there are ways that I can structure a loan where a person doesn’t have any closing costs. If I can save you money and have zero closing costs then there is zero reason not to do that loan even if you are going to sell in a year. Adam-If he would have said, “Hey, I’m going to live here another ten years.”, would you have still have done the same loan? John-I think so because he could afford it. It was basically his payment that he was already making but dropping ten years off the length of the loan. Ultimately, being without a mortgage is pretty sweet too. Most of us don’t get to that point until we are old. He could be a 40 year old guy without a mortgage if he wanted to be. Adam-That’s great. So when he calls me in five or six years to sell or he calls The Hermann London Real Estate Group in beautiful downtown Maplewood, Missouri to sell, he is going to have a whole lot more equity, is what you are trying to tell me. John-He is going to have a whole lot more equity and it is not really costing him more on a monthly basis. Yes, it’s costing him $30 more a month but for that $30 more a month he’s getting basically $250 additional drop in his principal monthly. Adam-That’s good to know. I’m always trying to figure out what people owe on their mortgages. When I look on their tax records or our Realist system to see that they got a mortgage for $200,000 in 2010, I’m always like, so four years ago they owed $200,000. They probably owe $196,000 now. Your mortgage doesn’t go down by that much. John-Your mortgage doesn’t go down that much when you are in a 30 but if you’re in a 15 you might be down $20,000, maybe more. Something that I would say is it’s always good coaching for somebody you know that is going to be upgrading their home, to have a look at a 15 year mortgage because the last thing that you want is to have somebody that can not move because they are basically in a position where if they sold their house they would lose money. It maybe that that’s the case if a guy stays in a 30 year mortgage, but in a 15 year he is building equity every month. He’s going to be in a great position when he does want to move. Adam-Can I ask you a zinger? John-Go for it. Adam-This is sort of not on the topic of what we were talking about but it is on the topic of money. A few years ago the government had that thing where if you bought a new house you were getting something like a $5,000 forgivable loan or an $8,000 this or that. A couple years ago they had these programs. John-$8,000 tax credit which you actually had to repay which nobody knew at the time. Adam-And they had three or four of them that kind of changed over the couple year period that’s why I’m sort of being vague about them because a lot of different people got a lot different programs. Is that causing people to not be able to refinance right now? John-No. None of that would matter. There is no loan that you can’t refinance out of because of a tax credit that you got. There is nothing like that. Adam-Do they have to pay those off to refinance? John-Specifically if you are talking about the main program that they rolled out a couple years ago for one year, they basically gave everybody an $8,000 tax credit to buy home. Basically a free $8,000 is the way it was advertised by the government but in reality you are repaying that when you do your taxes each year and it doesn’t have really anything to do with your ability to refinance or sell the property. It’s not a tax lien or anything like that. It’s just something straight with the IRS. Adam-I’ve talked to a fair amount of people who got one of those programs, whether it’s the $5,000 one, the $8,000 one, the this or that one, and I think they feel stuck in their home and they want to turn it into a rental but they can’t or they want to move but they can’t or they want to sell but they can’t or whatever, and I guess before they just assume that they’re stuck maybe they should give me or you a call and we can figure that out because they might not be so stuck. John-Yeah. There’s all kinds of misinformation that’s put out there. A lot of banks do it. A lot people do it to themselves because they think they understand something when maybe they don’t. The best thing always is to get with a professional so they can have look at what you have and see how best to help you. Adam-John, how much does it cost to call you? John-Zero. Adam-Really? What’s your phone number? John-314-744-7851 Adam-Why don’t we just go ahead and go over your NMLS number. John-It’s 188910. Thanks for mentioning that. Adam-You have it memorized. Nice. All right, John, thank you very much and thank you to everyone for listening and stay tuned to the next podcast. We are going to have a couple more guests. We are going to have Darren Hafkin on and he’s going to talk about investing. He’s kind of a guru. He goes travels and teaches classes so I’m excited to have him in. We’ll have a couple more rants, a couple more lessons learned, and a couple more deals of the week. Thanks again to Joey Vosevich, our producer, for putting this all together for us. We really appreciate you, Joey. Take care.