Finding loans for mortgages or for new investors can be difficult. Luckily, there is a new breed of hard money lenders that provide full and ethical service to their customers, helping them with their mortgage loan needs. Jen Du Plessis discusses hard money loan and qualified mortgages with the CEO of Stratton Equities, Michael Mikhail. Michael talks about the difficulties of securing loans, and why his company works differently from other loan companies. Learn more by tuning in to Michael and Jen’s interview.
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Mortgage Loans And Hard Money: What You Need To Know With Michael Mikhail
Lots of times, we have done this on the show. We brought in investors, mortgage companies, private lenders, hard money, soft money and non-QM companies as well. This episode is going to be about that as well because it is so important for you as a loan officer, real estate agent or whoever you are reading that you expand your horizons beyond traditional financing. There are so many opportunities out there for you to grow your wealth. Getting back to Rich Dad Poor Dad and the four quadrants, you want to get to the point where you are an active entrepreneur and not just utilize this business to make a buck now and then spend it tomorrow.
Our guest is Michael Mikhail. He’s the Founder and CEO of Stratton Equities, the nation’s leading hard money and non-QM lender to national real estate investors, this is for investors, with the largest variety of mortgage loans under one roof, which we’re going to find out a little bit. I’m curious about it. He launched this company in 2017. He has been an entrepreneur for a long time.
You’re going to tell us a little bit about it but you had the foresight to see that this was going to be a big community. Here we are post-COVID and this is a huge community. People are buying and positioning themselves to buy. He noticed that the mortgage industry had transformed the regulations from Dodd-Frank and knew it was time to set out on something different. I am delighted to have you on the show. Thank you so much, Michael, for taking the time. I know you’re super busy.
Thank you so much. I appreciate it.
Let’s talk about this a little bit. Tell me your story. Were you in real estate or mortgage? Were you an investor, tried to get a loan and it was a nightmare? Where did all this come from?
I bought my first investment property at nineteen before there was any institutional hard money type of financing from the old school type of hard money where hard money was created, which is people that had money that wanted to invest in other people. I got in the mortgage industry in 2003 and the regular QM, Fannie and Freddie world. I worked for multiple companies at that time.
The crash happened in 2008. I got out of the industry and got heavily into buying real estate at that time because the best time to buy was 2009, ‘10, ‘11 and ‘12. 2012 and ‘13 are when more companies like Stratton Equities and other companies came about. It was when they found the loophole in the regulation and you can do certain loans, no-doc loans and no pre-verification loans as long as it’s in an investment property. They started to come out but at that time, it was primarily bridge loans. Fix and flips got popular and lenders pretty much aimed at bridge loans. That was their entire pipeline.
As years went on, we started to gain more into term loans. There are no-doc term loans. Our LTVs and rates are better than pre-COVID. At our rates, we are listing at 4.375%. They started on a no-doc term loan. It’s even lower than that. We had to change that in advertising. LTVs are up. They’re at 85% for a purchase. A big thing that I talk about is people who are new investors don’t know about these options and companies like ours because we’re working on changing that specific 20/20.
Companies like Stratton Equities and other companies don’t do mainstream advertising and marketing. There’s Scotsman Guide, in which we are in and other industry-specific publications. If you’re a new investor and you google something for investing, Credit Karma, NerdWallet or that type of stuff comes up. None of the companies in our space do any advertising or PR on any of those websites or magazines. We’re heavily working on that because when people are new investors, they go off into their bank or credit union.
I have a friend that has two investment properties in New Jersey. He went to your local bank or large mortgage companies and conformed to the guidelines. It was at 70% LTV. You had 30%. His father is a cigar friend of mine. He came to me and goes, “What can you do over this?” Not only was there a no-doc loan where we didn’t look at income, W-2s and tax returns but we were at an 85% LTV. If you’re a new investor, I’m sure you have limited funds, 15% down versus 30% down is a big difference for you.When somebody sends you an email, they never tell you the bad things. They only tell you the good things. Click To Tweet
You can buy two. That’s what I’m thinking. That’s more cashflow.
The average person that’s a new investor doesn’t know that. They go, “Where do I get a loan? I go to the bank, my credit union, wherever I deposit my money or ABC.” They’re not conforming to mortgage companies. They don’t know that unless you’re in this space, you bought a lot of properties, read the Scotsman Guide and go to the hard money and the private money expos. I was just at one in Atlantic City. I spoke at one as well in Lennox City. People don’t know about these options. I want to get these options out there because it will help a lot of investors. I wish this was around years ago. It would have changed my life.
We did step investing, so we had to save 20%. In the early years, we could do a 10% down with PMI. That was fine because PMI was tax-deductible. It was in expenses and investors but we would have to save money and then buy a house. We got to the point where it was 20% down and all of a sudden said, “What’s this non-QM thing? Who are these people?” For the last years of my practice, that’s what I focused on. It was non-QM but I wouldn’t say I focused solely on it.
We’re going to talk about this too because one of the things that loan officers need to understand and realtors who are reading is that it’s like the adage of VA loans with realtors that have been around for a long time. They’re like, “We don’t do VA loans because they’re tough.” Everyone is saying, “I don’t know if we want to do non-QM loans. They’re risky. They’re this, that and the other.” You and I were talking about that. The adage is doing that. When I was an originator, if I couldn’t do a loan with my company, no conflict of interest, I would run it through my other little side company. That’s how I started growing my company.
I don’t want to be in a position to tell people to do that. I’m not an attorney. I don’t want you to look at your contract and all that. If you can get your company to work with Stratton Equities or other companies like them, you’re going to open up so many opportunities. Let’s talk about this for a little bit. What are the opportunities that you’re seeing? Why do you think that it has grown exponentially? You have been a loan officer before. What are loan officers missing in not serving their clients and pitching these products?
Talking about loan officers and realtors, even a few realtors know about these programs. The way most realtors find out about us is that the borrower knows about us, not the loan officer. The borrower reached out to us and there’s a realtor involved. Their realtor goes, “I didn’t know this existed. I didn’t know you can do this and stuff.” There is a stigma about it, unfortunately. There are a lot of loan officers that I talked to that don’t venture much into this realm. I don’t know why. You make money in a niche and this is a niche. It’s a lot easier also to cultivate business because if you’re a regular QM agency, Fannie and Freddie loan officer, every single company in the world does this loan.
What makes you different?
Nothing. You’re only competing against rate. I hate that it but that’s what the rate is. The only thing about it is, “What’s the rate?” The program is the same. It’s a different company name and logo but the program is the same. With us, I created our programs. Nobody has our programs for the most part. We have competitors that on a purchase are going to 75% LTV. We’re at 85%.
We have multiple different types of programs that fit multiple different types of consumers and brokers. I couldn’t tell you too much. There’s a stigma about it. I’m not sure why people are staying away from it. If I was a loan officer, this is exactly what I would focus on. I would expand the company in other ways but this is where we are. This is our niche and we’re doing very well.
I still do these loans. I’m not licensed at all. I have no NMLS license whatsoever anymore. I gave that up, so I only work with companies that don’t require a license from me. I only do non-owner-occupied loans, multifamily, commercial and all kinds of fun stuff with it. Primarily, I’m doing it because I don’t want any of my coaching clients to say to me, “You haven’t been out in the street. You don’t know what it’s like.” I do know what it’s like because the agents that I worked with on QM and non-QM when I was originating, I’m still working with. I just don’t go out as often. I do everything over the phone and all of that.
It’s a good point because loan officers don’t like it when people gauge them on rate, yet I feel like a lot of loan officers are doing the same thing with this and saying, “You don’t want to do that stuff. Their rates are higher.” You haven’t checked them. My company is called Situational Lending because I had always called this situational lending. That’s exactly what this is. It’s your situation and all about a story. What you always want to know is the story. Where do loan officers fail when they try to get into this business and this side? Where are they failing at understanding and digging their teeth in?
There are multiple parts to my rebuttal on this. We do not do any structuring over email. When I started the company in 2017, you got a lot of people that are used to sending an email, “What’s the rate?” In what we do, there’s always a story. When somebody sends you an email, they never tell you the bad things. They only tell you the good things. There are days of going back and forth with you via email to get an answer. All of our loan officers operate like that. We don’t do anything via email. There are documents but we don’t structure along via emails, so we’re going over the phone because there is a situation, story and reason why you’re coming to us.
When you’re dealing with regular QM loans, it’s easier. Rocket Mortgage doesn’t even talk to people. It’s done by an app. You can’t do this via an app. What’s great is computers will never steal our job here because they can’t be done like that. You have to listen to the story, “Why did you do this? Why did you do that? Why did you not secure financing?” There are multiple reasons. There’s always a story and a backstory. If you submit a loan without knowing the backstory, that one’s going to die.
What we do, which I wish more companies did, is we don’t submit loans and let the underwriting decide if it’s going to live or die. Our loan officers kill more loans than they submit tenfold upfront. If it doesn’t fit, doesn’t comply and there’s something that doesn’t fit the guidelines, we are going to identify that upfront and either A) Pick one of the multiple programs that can fit the situation or B) Say, “Sorry, we can’t fund this loan.” Virtually everybody else, like the loan officers, just submit the application and leaves the loan in a closure, qualified or anything.
They shove it in down the writing, which they’re clogging up the underwriting and then your loan is denied in two weeks. We don’t do that. If we’re submitting a loan, there’s a 90% chance that the loan is going to close. You can’t foresee some things happening, phrasal or something else on the title. There’s a 90% chance of our loans closing because they are heavily structured and nitpicked upfront to make sure that we know everything.
That is the traditional non-agency method. Get the story, make sure you know the story, pitch that loan to a variety of investors and see which ones will bite on it. There are little quirky things with everybody. From a loan officer’s perspective, I still want to stay in this spot here a little bit because when a loan officer goes out and says, “Realtor, I got all these cool products.” The realtor is going to do the same thing that they have always done, which is calling you at 6:00 on a Sunday night and saying, “I have to have a pre-approval letter. I need a letter.” Talk about that.
Don’t do that. With mortgage companies, we don’t go after realtors at all. None of our loan officers do self-gen. Everything is internally based. We’re not knocking on doors, going to realtors’ offices and open houses. We don’t do any of that. Everything comes to us with our organic marketing. The irony of it is we’re only doing about 20% of the marketing we could do. We’re generating about 150 to 200 leads a day, which spun off on another company we have. We’re very niche in what we do and we don’t have brokers.
I don’t do new construction because I don’t like it. It’s a headache. We don’t do cannabis, assisted living or development. There are a lot of things that we don’t do. We don’t do owner-occupied non-QM. We’ve got to get 50 of those a day. I started another company which is Mortgage Leads, where we’re finishing to build out software and going to be selling those direct leads to other companies and loan officers that can take advantage of that and close those types of deals.
You’ve got to slow down to speed up instead of speeding up to slow down. It’s a mind shift. If you’re going to go into this market, you have to slow things down, make sure that the real estate agent isn’t running amuck and needing approval instantly overnight and take the time on the front side.
The only person that needs a pre-approval letter is a realtor so they can satisfy themselves. The pre-approval letter, as you and I know, means nothing in this world. I’ll tell you why. In the QM world, you’re buying a house with a CO that’s livable. As long as the mortgage, DTI, income and credit qualifies, you have a pretty good chance of that qualifying for a mortgage. That’s not how it works in our world because we qualify the property to this borrower, especially if you’re going to fix and flip.Banks are not designed to lend to real estate investors. They don't like it. That's why they give you a lower LTV. They make it very difficult to secure financing if you're an investor. Click To Tweet
If you do say, “Here’s my income,” which we don’t look at income anyway, “Here’s my ABC,” I need to look at the property. We need to approve the property to that specific borrower. We can’t say, “Here’s a random pre-approval letter. Go buy any fix and flip.” The ARV of that might be different and the crime rate. You look at crime rates. With QM loans, you have the crime rate because you can’t redline. In our world, if the crime rate is too low and better in certain areas, either you don’t do the loan because of the crime rate or the LTV has dropped. I can’t tell you a blanket, “Here’s 90% LTV. Go find wherever you want.” It doesn’t work that way.
You said the crime rate is low but you meant high. I want to make sure everybody knows. If you have no crime, we don’t want to do those loans.
There are a lot of factors that come into this that you can’t just have your approval letter.
One thing that people need to understand is suburban versus urban. There’s a lot of that and thankfully, there is a farming non-QM investor that’s out there that is focusing on the rural, which is cool. You’re still pulling and looking at credit. What do you think the average credit is? I can’t wait for the answer. I know what it is, but it’s going to blow a lot of people away.
I don’t look at credit because I haven’t run credit and do a loan in years, but I know for a fact from talking to our loan officer and seeing our team that it’s always lower than what people think it is. Most people go on Credit Karma or whatever. You’re always 20 to 30 points lower than where that is on Credit Karma or these apps. If you would generalize most of the population, they’re in the 60s and not in the 70s. Five percent of people are over at 720 or something close.
The reason why I’m asking this question is I heard this statistic at a non-QM conference that I was at. I don’t remember the exact number but the average credit score is only 40 points lower than a traditional 20% down 80% LTV. It’s perfect. You don’t need an appraisal, anything or a QM loan. A thing that people need to understand is that we’re not talking about people that are bottom-of-the-barrel with 500 credit scores. They can’t get anything any place else, so they’re going to go here. You can’t. That’s not for this.
We have a program, which is our actual hard money loan. I wrote an article for Scotsman Guide in 2019 on hard money versus fix and flip. It’s crazy. People would call and say, “I want a hard money loan.” It’s because everything is a hard money loan. A hard money loan is also going to be a bridge loan. A QM loan is not a hard money loan. You’re generally talking about a max of 65% LTV, so there is no 90% LTV hard money loan, and it’s truly an asset-based loan. If you have a bankruptcy, past foreclosure or a 500 FICO score, it doesn’t matter. It’s strictly a loan against the asset itself.
When I bought my house at nineteen, that’s what it was. It was a fix and flip loan that’s going to be 90% LTV on the purchase. It’s not a hard money loan. It’s a rehab loan. Don’t mix up the two. There is no such thing as a hard money term loan. A 30-year fixed and 5/1 ARM doesn’t exist. People think that non-QM loans are for lower FICO borrowers. That’s not the case. What they are generally self-employed borrowers who are investors or whatever the case may be, who don’t have perfect tax returns and don’t have their little ducks in order. We don’t care about the fact that you have a job history of the past 24 months like in a regular QM loan.
If you start a new LLC and it’s only 6-months-old or 1-year-old, it doesn’t matter to us. We’re not looking at that, so we don’t factor that in. Our programs were specifically designed when I designed them in 2017 for real estate investors. I stopped because COVID probably varies too high, but I have done 56 properties in my career. Before Stratton Equities, it was hard to secure financing. Banks hate lending to investors. You’ve got to realize that banks are not designed to lend to real estate investors. They don’t like it. That’s why they give you some lower LTV and make it very difficult to secure financing if you’re an investor.
For me, when I was doing it for the people that are reading, I would make every attempt to try to get it approved through QM to a certain extent. If you had too many properties, your DTI wasn’t right, your credit score was two points below and we couldn’t get it higher or you didn’t have the reserves and I couldn’t do the loan QM, then I went to non-QM.
I want to make sure that everybody understands that so that you don’t have a conflict of interest. I want to make sure that you’re doing the right thing for your company and trying to get the loan through the company. If you can’t get it to the company, then you want to have these outlets to be able to serve your clients.
Like you, I had the need. That’s why I started exploring. That’s pretty interesting. The other thing that I heard at this conference is that non-QM loans were performing better than QM loans during COVID because they weren’t taking on forbearance. That goes miles away to understand who these people are. If you’re a loan officer and a real estate agent reading this, this market and these people could not get loans when the rates were super low at 2%.
They couldn’t get loans because they had to shut down their businesses. Their tax returns are skewed. They didn’t have any income. How did they benefit? This fills that void to serve all of your clients. There’s no question about it. I love what you’re doing. You do private money and some hard money but most of it is soft money. You do a little bit of both. Tell us about the training that you provide for loan officers. What does it look like? Is it product training or positioning training? What does the training look like that you provide for loan officers that work with you?
When we first started the company, we didn’t have the ability and the training programs, so we trained people from scratch. We hired people that had the experience but that didn’t work. It’s impossible to retrain people with experience. We don’t sell, push and bait-and-switch. Honest to God, we’re the most ethical mortgage company there is. There’s nothing. There are no junk fees. It is what it is. We don’t twist things. We do things extremely differently here, especially when we’re working with brokers.
Everything I did worked for me then I implemented the training. When we hired people with experience, it was very hard to retrain people. I had this one gentleman that we hired out of one of the mortgage conferences. He couldn’t answer and pick up the phone. He wants to do everything via email. The company policy is we don’t do everything via email. We do pick up the phone. He couldn’t pick up the phone and everything is, “Send me a scenario.” I’m like, “John, we don’t do that.”
I can’t tell you how many times my husband says that. He’s a mortgage loan officer and was like, “Pick up the phone.” When a processor says, “I’ve emailed him four times.” “No.”
There are a lot of things we couldn’t retrain on people. I hired a gentleman that had a Harvard MBA and PhD that started with us in 2019. We saw the abilities that he had. He structured a training program with one of his Harvard professors. It was all based on psychology and how to train people. It teaches about even how you layout your desk, pens and everything from the ground up. He’s the president of my company.
We have three offices on the other side and he does our training. We go through 130 resumes to hire one person. We’re starting a new hire. We’re aiming for a class on January 10th, 2022, the second Monday. It’s about 3 to 4 weeks in classroom training where I’m being very honest. We weed people out like if it doesn’t fit.
You don’t show up on time and do the work.
It is like a boot camp. After the month, there’s a lot of psychology training. It’s pitching the words. Everything is possible by taking the baby and training them to be an adult from the ground up. Every single thing can be possible. How and when you answer emails, how you answer your phone, how you rebuttal this, your scripts, and the whole 9 yards. After about 3 to 2 weeks to as you get into the phone, what we do is we have tens of thousands of old leads.If you want to be a real estate investor, don't sit there and try to shop every single lender. Become a better, stronger borrower and people will want to lend to you. Click To Tweet
They start on old leads when they get on the phones first. They’re about month-old leads. There’s a lot of meat on the bones because when you’re dealing with an owner-occupied lead, your average person doesn’t own quite as long, which can be 10 years to 15 years or whatever the number is. When they’re an investor, they’re buying properties multiple times a year or it’s a broker lead of which we have 30,000 broker leads. Brokers are always doing new deals.
Those leads, even though maybe they’re aged leads, there’s still a lot of meat on the bone. We give them aged leads first and we have a dialer system. They don’t pick up a phone, text or call. There’s a complete dialer system. The system sends out an email and does it every day. We go through the dialer system and then there’s a month doing old leads, a month in change or whatever the case may be. That’s when we feel that they’re ready and know the program because in the first month, they’re lost and they don’t know how to answer. You have to structure a loan.
They don’t know the structure of the loan. They don’t know if they can do this or do that. It takes some time. By month three, they’re proficient and get on the new leads generally, which is faster than the average. They’re closing loans. We had this one class and it closed a loan at month 3 but they’re generally closing a pipeline by month 4. Generally, by month four, there’s a strive and pipeline. You got to keep in mind that endless leads are coming in and they’re not doing other work. They’re focusing on calls.
In the beginning, they’re calling God knows how many people a day. They narrow it down. You see that the longer they’re there, the fewer calls because they’re working on deals, gathering docs and doing this or that. They might start at the beginning with 500 calls a day like this class that we hired in the summer. We kept three people from this class. Sometimes there are 30 to 40 calls a day only from 500 because they’re working.
They don’t have time. That makes you be in demand, not on demand. It allows for you to not be scrambling around like a cat on a marble floor.
We don’t chase, go out and beg people. We have programs, rates and terms that don’t exist in the marketplace. If you think you can get better somewhere else, you go ahead.
What’s your forecast for housing? What are you seeing as far as competition for investors and writing offers on contracts versus owner-occupied? Are you seeing more of a move to multifamily, fix and flip come back again or as a lot of renovation loans happening? What are you seeing?
I can see more multifamilies which is my space. I do a lot of families. I love multifamilies. It’s a shame because a lot of lenders only had the fix and flip program. As you know, that program is dead because to qualify for a fix and flip loan, you have to buy a property under market value. When people are buying a house to live in or occupy, they’re paying $50,000 over market.
How are you going to get a deal with a $50,000 under market? Let’s look at the lenders. Many lenders are struggling that only have the fix and flip program because that was huge in 2012, ‘13 and ‘14 when you could buy things undervalue and now you can’t. Out of our pipeline, we might have 1 or 2 fixes and flips. Pre-COVID, it was almost 50/50.
Do you think that will change later? We have inflation and a lot of things that are going on.
The business cycle is always going to change. I haven’t bought anything in years because it’s too high. People might not be saying this, but I buy the crash.
That’s what we’re all waiting for. We sold off a bunch of properties when it started going up and we’re holding that cash and waiting for the next one.
One of the things we talked about, which I didn’t in a lot of interviews and articles, is to be a better borrower. When people have a 500 credit score, they have no this and that. They’re like, “I want to buy property.” Don’t buy property. You don’t have money to buy property. “I want gap funding.” If you don’t have the money, don’t buy any property. Fix your credit, become a better borrower, get your ducks in order, get a team, have your accountant and this and that, save money and then you can. That’s like going into the Lambo dealership and you don’t have a job.
It is a cycle, as we all know. Generally, it’s a 10 to 13-year cycle. We are past that at this time. It’s going to happen. I hope we have at least two more years because when the market crashes, mortgage companies get affected. The mortgage gets hit. When COVID hit, a lot of companies went belly up in the non-QM space especially.
We could land for a while the company down, but we couldn’t land. When we came back in summer, LTVs were low, rates were high and my cost was extremely high, which added to that to pass it on. I’m hoping we have a correction in the market and not a crash because if the secondary market and credit markets get hit, then we’re all in trouble.
It’s going to depend on who’s in office and that’s what we’re going to see over the next couple of years. Is there anything you would like to leave us with?
There’s a lot I can leave you with. There’s a lot of bad in this industry and space. Hopefully, the market will continue into 2022. I see that we are getting into a strong market but you never know what will happen and what’s around the corner. Hopefully, we will have a good market for a couple of more years. I want to leave people with, “Become a better borrower.” If you want to be a real estate investor, don’t sit there and try to shop every single lender there is. Become a better and stronger borrower and people will want to lend to you.
Thank you so much, Michael. I want to say thank you so much. I hope we run into each other. With Scotsman, you’re probably going to be speaking at some of the conferences. I’ll be speaking at some of the conferences in 2021 but now I have a reason to say, “I know him.” Thank you so much for sharing this information, for those of you that are reading, thanks again for spending time with us. Everything that I’m doing in the show is to give you more value to expand your business, your knowledge, other people’s businesses as well, those people that you’re working with, and certainly the wealth of your clients.
All of these things are helpful to you. Take some action and reach out to Michael. You can find out more information about his company, products and services. Thank you so much for reading. Don’t forget to subscribe to our YouTube channel and watch these videos just as much as you’re reading to them. We’ll catch you next time. Thanks again, Michael.
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About Michael Mikhail
Michael Mikhail is the Founder and CEO of Stratton Equities, the Nation’s Leading Hard Money and NON-QM Lender to National Real Estate Investors, with the largest variety of mortgage loans and programs under one roof.
Having launched Stratton Equities in early 2017, Michael has always been an entrepreneur and innovator in the real estate market, purchasing his first home at 19 using a hard money loan.
A serial entrepreneur with a foresight for business opportunities, Michael had a slew of small businesses prior to launching Stratton Equities. One of his most prolific ventures was a car wash connected to a gym he was affiliated to while living in Florida.
After traveling to 19 countries in 5 years, Michael knew two things; he wanted to start his own business and launch it in the United States. He knew that moving back to the states was the best place he could start something small and grow it into something infinite.
In 2017, Michael noticed how the mortgage industry had transformed after the regulations presented from 2008-2012, and knew it was time to set out something on his own, thus creating Stratton Equities.
Under Michael’s leadership, Stratton Equities has grown into one of the biggest leaders in the Mortgage and Real Estate industry across genres and platforms.