The Real Estate UNLOCKED Podcast
REALEST Real Estate Podcast on the Planet!
The Real Estate UNLOCKED Podcast
What Is The Morby Method?! | Episode 18
In this episode of the Real Estate UNLOCKED Podcast, we break down one of the hardest Creative Finance strategies there is, The Morby Method. A powerful tool that can solve the problem of your seller requiring a large down payment. This creates a whole new avenue for opportunities but you've got to be bankable and you have to understand how to execute this properly!
Join host Joseph Marohn as he explores how to navigate the challenges of large down payments and unlock lucrative off-market deals with special co-host Ingryd Hernandez (The first student EVER to do the Morby Method in Subto) 🎙️
What You'll Learn:
- What the Morby Method is and how it works
- How to identify motivated sellers needing large down payments
- Creative financing solutions that enable higher purchase prices - Real-world examples and tips for implementing the Morby Method effectively
Whether you're a seasoned investor or just starting, this episode is packed with valuable insights and strategies to elevate your real estate game. Don’t forget to like, subscribe, and hit the notification bell for more content on creative finance and real estate investing!
What up everyone and welcome back to the Real Estate Unlocked podcast. I am your host, Joseph Marohn, and today we're going to be diving into a game-changing strategy to enhance your real estate opportunities. I'm talking about a creative way to structure the deal when nobody else can, One of the only ways to navigate the challenges of large down payments. Today, we're going to be covering the topic of the Morby Method. The Morby Method is a unique, creative finance strategy designed for acquiring properties when sellers require a large down payment. It consists of two key transactions First, securing a non-recourse loan to cover majority of the purchase price, followed by bringing in a private money lender to cover the remaining amount. Second, after the transaction closes, the funds provided by the PML to fulfill the down payment are returned, allowing the homeowner to now seller finance that portion. In other words, you're purchasing a property that required a large down payment, yet still little to no money out of pocket. Now, if that's a creative finance strategy you're looking to add to your tool bag, then stay tuned because we're going to show you exactly how to start using one of the hardest creative finance strategies there is today. Now you know how we do it on the Real Estate Unlocked podcast. If we're going to do it, we got to do it right. We can't just bring on anyone to speak about the Morby Method. We got to bring on the very first student ever to do the Morby Method method.
Joseph Marohn:Today, our special guest on the podcast is Ingryd Hernandez. Ingryd is a seasoned real estate investor with a compelling personal story. Immigrating from Colombia to the US as a young child, Ingryd journey from facing early hardships, including reliance on Section 8 and food stamps, to becoming a successful real estate professional is nothing short of inspiring. Today, Ingryd is a licensed real estate expert specializing in buying properties using methods like creative finance, DSCR loans and cash strategies. She also excels in flipping, wholesaling and lending on real estate properties. Her extensive knowledge was launched by joining the Sub2 Mentorship Program.
Joseph Marohn:If that wasn't enough, Ingryd co-hosts the popular weekly live podcast Explaining with Ingryd and Steven, where she and her co-host dive into real estate strategies and financial tips to help listeners explore new opportunities and navigate property investment. Ingryd joins us today to share her knowledge and experience with the Morby Method and help us break down such a unique real estate strategy that can open up a lot more opportunities. Real estate strategy that can open up a lot more opportunities. So, without further ado I've been talking long enough, Everyone if you will, please allow me to formally introduce to you Ingryd Hernandez. Ingryd, what's up? How are you doing today?
Ingryd Hernandez:Hey, Joseph, that was quite the introduction. I think it takes the cake for sure on anything I've ever been on.
Joseph Marohn:Thank you. I appreciate it. Yeah yeah, the intros is kind of like my forte. I love doing that. I get a lot of good feedback from it, so I appreciate that.
Ingryd Hernandez:I'm going to call you Dr Marone instead of Dr Dre.
Joseph Marohn:Love it. Yeah, I'm doing my little MC thing here. How's your day going?
Ingryd Hernandez:It's going. I mean, it's another day being a real estate investor. I think you and I were chatting before we got started a little, we had a guest flood, one of our properties by not knowing how to turn off the water in one of the bathrooms the toilet water.
Ingryd Hernandez:But we also set up a brand new STR that we bought subject to literally bought. It had the utilities turned on on Tuesday and by Thursday night we had guests staying in the house from the quick turnaround. We did Never done such a fast turnaround in my life, so yeah, it was pretty neat.
Ingryd Hernandez:So yeah, lots of highs and lows and that's kind of what the adventure becomes and you kind of have to enjoy the process. And even somebody flooding my property, I'm like you know makes for great content. That's the reality of what someone experiences. I would say Ingryd three years ago would be crying on her knees Ingryd today. It's just you reflect back and you laugh a little. You're like, wow, I can't believe that I could stomach something like this now versus then.
Joseph Marohn:So yeah, I guess asking the tenants to turn off the water is just a little bit too much, huh.
Ingryd Hernandez:Truly, oh my goodness, yeah, yeah.
Joseph Marohn:Okay, cool. Well, Ingryd, welcome to the Real Estate Unlocked podcast, a place where we bring value to new and intermediate investors by bringing on guests who are extremely knowledgeable, such as yourself, to cover real estate topics on a very basic entry level. Now I know you got a crazy schedule, so thank you for making time for us to come hang out with us today. Appreciate it.
Ingryd Hernandez:Yeah, my pleasure. I'm really excited to talk about a strategy that is somewhat complicated. So if anybody out there feels like they have something that matches understand that maybe your first step is just to recognize it and to actually fulfill it. Might be something different, but that's why your girl, Ingryd Hernandez, is ready to help you, especially if the property is here in Arizona.
Joseph Marohn:Okay, cool, Okay, so we're going to talk about the more we met here today, right, talk about the Morby Method here today, right? And the goal is for you to not only fully understand how this strategy works, but when and how it's applied when structuring a creative finance deal. Now, we are both fully aware that most people they get this strategy confused, right? I mean even myself. I think I watched Pace Morby's video about four to five times just trying to wrap my head around it all. It's one of the toughest creative finance strategies there is to understand because there's a lot of moving parts. So, with the power of Ingryd and myself, we're going to do our absolute best here today to simplify this topic so everyone here can leave out of this episode knowing exactly how to do the Morby Method. But before we do that, I want to put the spotlight on you, Ingryd.
Ingryd Hernandez:Yeah.
Joseph Marohn:Ingryd is one of the OGs in Sub2, and in fact the very first student to actually close on a Morby Method deal inside of the community, and because of that it landed her on page 59 of Pace Morby's book Wealth Without Cash. Very impressive, Ingryd. But I want to make sure that we don't just label you as an investor that only does Morby methods. I know you do a whole lot more than that, but I'm sure you can agree that it's much easier if someone that's done it has walked through with somebody that's about to do it right.
Ingryd Hernandez:The Morby method is really a method that's traditionally used in commercial lending. So when we talk about multifamily deals, deals that have a very specific capital stack structure, in which can this? What I'm saying right now can kind of go over some listeners heads, especially if you're a beginner to maybe slightly intermediate but when you're, when you're buying multifamily, especially something with a syndication that's attached with some commercial lending product, it requires that capital stack. Likely, the commercial lending product is in first position, the syndication funds are likely in second and beyond, depending on what that looks like with the people who actually put the syndication together. So it's taking that philosophy and bringing it down to the single-family residential level. So that's all the Morby Method is, which is coined by Pace Morby, my mentor in sub two. But I will say he coined it because he's a great marketer.
Ingryd Hernandez:But it has been a philosophy or methodology that's been going on for since we've had banking available as a lending tool for products. So I just want to make sure people aren't like, oh well, this is some sort of scam or some sort of something. No, this has been around a long time and it's a philosophy used all the time in commercial lending. It's just something that you kind of parallel back down to single family. You're like, oh, it's the same thing, You're just capital stacking that structure different. You're the same way you would multifamily, but at a level with just the seller participating as a part of it.
Joseph Marohn:So yeah, Right, thank you. Okay, cool. So before we start diving into the Morby Method, I know I've had the pleasure and honor to meet you, but for the people that don't know who Ingryd Hernandez is, why don't you tell us a little bit about your journey into real estate and how you landed in the creative finance world?
Ingryd Hernandez:Yeah, absolutely. Well, you covered a little piece of it, which is I am not from this country. I moved from Columbia when I was almost seven and I did just become a US citizen this past year, march 2024. Wow, just become a US citizen this past year, march 2024. It was a long journey, but a great one in terms of how good I feel about finally being able to vote and things like that.
Ingryd Hernandez:But the reason I got into creative finance was because back in 2017, my husband and I both licensed agents. At the time, we had well, I had been licensed since 2013. He got his license in 2017. But we fixed up our house that we lived in, that we had rented out the previous two years. The renters did a number on it, so we had to put a lot of sweat, equity and work with a contractor to fix it up. We sold it. We had some money in the bank around and work with a contractor to fix it up. We sold it. We had some money in the bank around $40,000 or $50,000.
Ingryd Hernandez:I can't recall anymore after paying some debt off and we're like this has to be enough for us to get started. I hear all these wonderful stories through other platforms that talk about investing and I was like this has to be enough. Got a hold of a hard money lender, and they're like this has to be enough. Got a hold of a hard money lender, and they're like nope, it's not enough. And I'm like I don't get this.
Ingryd Hernandez:I've known people who have started. You know, from a much worse position than me. What am I missing? Right? You should always point the finger back at you. It's like what are you doing that you don't understand you. It's like what are you doing that you don't understand? There's a greater something out there. So, like any good older millennial, we just got on YouTube and started searching stuff. So, youtube, we found the BiggerPockets platform. They were talking to a couple of local Arizona investors, so I took their names down and I started looking on YouTube and then it ended up. I ended up listening to Jerry Norton and then Jerry Norton just didn't quite give me all the things I needed to understand. Take the next move other than to buy into his mentorship.
Ingryd Hernandez:But, then I but, like, that thread led to Pace Morby. So this was in 2020, when we were all stuck in our houses, kind of um in like the fourth quarter. Um, he was having a local meetup. After I stayed up till 2am to watch, to watch his 27 Ways to Exit a Property Through Creative Finance, and I was like what.
Ingryd Hernandez:So I was already kind of wrapped up around his awesome marketing and I met him in person and he was at a Mesa flip that he was doing giving away tacos. So you know, a way to my heart is definitely tacos.
Joseph Marohn:Definitely the tacos. Yeah for sure.
Ingryd Hernandez:So that was like December of 2020. I met him. I met his project manager, anna Martinez, his sales guy, tino. There was another guy that was with him Nick, I don't remember his last name and the following. I was like these, these guys are really real. They're actually doing what they say they do. We were. We were trying to figure out which mentorship we were going to join, and so I joined his mentorship and it was the best investment I could have ever made.
Ingryd Hernandez:Quite frankly it changed my life. It was a life-changing investment, but I do want to preface it was life-changing because I was ready to receive everything I was about to learn, but it was life-changing not at like the snap of my fingers. I had to put work into it. So, um, that was January 2021. Like you said, I'm an OG. He started his mentorship, I think May of 2020. So I was somewhere in the thousands. I was close to 2,000 people had joined and yeah, and now there's like what, 14,000, 15,000 people joined. So, yeah, it's definitely grown and, as they say, the rest is history. Really, that's how I got started. I joined the mentorship, put in a lot of time and effort and try to be resourceful and helpful in the mentorship, and that's how I kind of got a leadership role in it too.
Joseph Marohn:Yeah, you know you touched on a good point. You know, um, a lot of people, they they think they can just buy into a mentorship, right, and then automatically they're going to start finding success. Right, and you can't buy success. You have to be a go-getter, you have to be driven, motivated. And you got it. Like you said, you got to put in the work Right, and, um, I personally thought like mentorships were like all scams.
Joseph Marohn:I didn't think any mentorship was legit. And you know, I just was getting on my journey and I was reading books and whatnot, like you said, you mentioned Bigger Pockets. I was watching some podcasts, reading some books and I happened to come across Pace's, you know Wealth, Without Cash book, and I didn't even know who Pace was, without cash book, and I didn't even know who Pace was. But you know, reading that book and then you know, learning more about him and his story and I was like, dude, I got to know more about this guy, this sounds interesting. So I found my way into the mentorship and, like you, best investment I've ever made for myself, you know, it's completely changed my life forever. So and I'm I'm excited to see where you and I both end up. You know we'll see. We're on that journey, right, so yeah.
Ingryd Hernandez:And look I went to the university, so, like I went to Arizona State, go devils. But I would say, if I had to choose between the mentorship and going to ASU, the mentorship every single day and twice on Sunday, for sure, every single day and twice on Sunday for sure.
Ingryd Hernandez:One of the things that I made, or one of the mistakes I made in at ASU, that I was luckily listening when I was in the mentorship is that you have to network, and going to college, college the biggest opportunity or the biggest ROI, is really networking, and I didn't realize that until now, being an old fart, like okay, wait a second I didn't take advantage. Like I remember all these people I don't remember their names, I didn't take down their emails, their phone numbers Like these are people who had committed to something and were going to make something of themselves, and I was too into myself, right, like I didn't think about everybody else. And coming into this mentorship, I think that was one of the biggest differences in my psychology. Behind it, which is no, there's other people with more experiences, more money, more um like knowledge than me. I should know all of them if I can. So right.
Joseph Marohn:Yeah, for me it was more of like an ego thing. I'm like I could figure this out on my own. I don't need why do I got to cut this person in on my deal. I can figure this out. But you know one thing that you know, pace really harped on in the beginning was go out and make 50 friends, Right. And I'm like, okay, I'll go make some friends, pace. And man, that's that was the best decision ever, right, because I started meeting people that really helped me out on my journey. When I was actually running into issues and running into hurdles, I was able to reach back to these people and they helped get me through the finish line. So without them and without the community, I would not be where I'm at.
Ingryd Hernandez:So yeah, absolutely yeah, I mean and one of the values that he provides. I think it's one thing to go network and being be told to go soldier through that. I think the other is how he already prefaces the expectation in this mentorship, which everyone has to be a go giver. So it sets the right tone for people to help each other out. No-transcript lower bar of, let's say, getting started with wholesaling. Totally different strategies in terms of when you're wholesaling, it's all about active income. So your commitment to something is really surface level in terms of you're not going to own assets, you're just transferring paper. Right, you're getting a piece of paper and selling a piece of paper and making the difference in between when, when you start owning assets, there's a different expectation there. Now, the reason Step 2 is so amazing is because it has, I'll say, a lower bar of entry. Why? Because you don't have to be bankable. You don't technically have to have reserves, although any good investor will tell you you should always have reserves. The equity aspect or the appraisal aspect is not something that you'd have to worry about per se. One of the things that you mostly worry about in a sub-2 deal is whether or not you'll cash flow or at least break even, because there's a lot of other advantages to owning assets. But, putting all of those things aside, that's why buying sub two is more or less a beginner strategy.
Ingryd Hernandez:When you start talking about Morby method, there is a level of maturity that goes into it. You do have to be bankable, you do likely need reserves, you do need to make sure that the property appraises to your target, otherwise you'll have to pivot a little, which I've had to do with my second one that I purchased using that methodology and you have to be patient because you're going to getting a DSCR loan, you know a institutional financial product and those things take time. Both of mine took at least 45 days, which was, you know, really tough for me because I was like I thought you guys said you could close this in 20 days and that's absolutely not how it works in the real world. And so all of those things will like will bring challenges, especially if your appraisal comes back and there's some contingencies involved. That's what happened with my very first one, even after I asked is there any contingencies? Let's take care of them ASAP, cause I'm somebody who, like I want to.
Ingryd Hernandez:I don't like having tasks to do. If I have a task to do. I want to get it done off my plate as soon as possible and I generally move faster than the bank. So, like I'm, I'm a great banking client because I'm probably waiting on you versus you waiting on me, because I'm probably waiting on you versus you waiting on me, and I take pride in that. That's awesome. But this one I will say, like I told you, I had that overflowing toilet in one of my properties that flooded and I didn't cry. Going through my first Morby method, I 100% cried.
Joseph Marohn:I believe you.
Ingryd Hernandez:This is so painful, so yeah, for sure.
Joseph Marohn:Okay, well, you brought up your deal and I want to hear more about it. So if you don't mind, maybe walk us through that first Morby Method deal you did. I haven't heard all the specifics on it, but I know the deal got a little hairy from what I was reading in the book and you know we don't we don't have all the details right there but maybe if you can walk us through and do a breakdown on structure, on how that, how that played out.
Ingryd Hernandez:Yeah. So, like I mentioned in the book, I'll never use that lender again and that you know, mark my words that that still holds true, just because they made it so difficult. Because they made it so difficult, so painful, but as I matured in the experience of being a great client to an institutional lending company, a lot of it also had to do with me not being as prepared with what is required. And totally up for your listeners, if you do want to have an institutional loan at some point and you want to be better prepared so you don't have, you know you don't end up crying like I did. They can definitely DM me on Instagram and I'll send them a presentation of how they can get themselves organized in preparation for a loan. Because if they're bankable which is something I can't control meaning they have good credit, good DTI, so debt to income ratio, this strategy is great for you. It's something for you to consider.
Ingryd Hernandez:So a couple of things about the Morby method before we really get started on this first example. So, for example, it truly is still a distressed or slightly distressed scenario with sellers meaning they want a certain number, they can't get that number, the market is not giving it to them and they're stuck on that for one reason or another. For me, that's still not necessarily somebody who's just looking for gain, because a reasonable seller because you know normally it's like a seller is either in it for pain or for gain.
Joseph Marohn:Yes.
Ingryd Hernandez:When somebody is in it for gain but they're reasonable, they know they have to lower their price point. But when somebody is an unreasonable gain seller, then you have to figure out what's their bunnies Like, what is the problems you're trying to solve for them. So with this first example that I had, the seller actually had a free and clear property. The property was like they owned nothing and they wanted to get at least $500,000 for for this house out in Phoenix.
Joseph Marohn:Was it an investment property or was it their primary?
Ingryd Hernandez:No, it was their primary home. The homeowners were landscape, they had a very fruitful landscaping company and they actually made good money. But the wife did not want to sell because this was their like dream home that they finally purchased and paid off and paid off, and so the thought of moving away was a very disheartening, stressful thing for them and their family. And although their property had been on the market for months, the only people who would have been able to help them was an investor. So I don't have all the details, but they had a judgment and an IRS lien against the house, and so a judge said you must sell your house to rectify these loans. Which, if he had a better lawyer because this is a homestead technically they could have probably fought that judge technically. But who knows, maybe he was just tired of fighting, I don't know he didn't want to go through the hassle.
Ingryd Hernandez:Probably, and so most of the times when a primary home owner is in a distressed situation and there's liens and judgments against it, knowing that it's a homestead property can actually help you rectify some of those liens and judgments where you can negotiate them. But because he was in the middle of going to court, around all of that, there was limited things that he could do as far as negotiating. So when I entered the picture, the property had been on MLS. I had a wholesaler bring it to me, you know, and say, hey, here's their situation. Do you think you could meet with them? And their agent said, yeah, certainly. They spoke Spanish, so they felt way more comfortable talking to me as well, because I could say it in their native tongue and they could better understand the scenario, which was also something that was ultimately extremely important in this situation.
Ingryd Hernandez:So I met with them. I understood that their house was free and clear. They needed so much money to pay off these judgments. I'll be honest with you, because this happened back in like April 2022, which is like two and a half years ago or something. I don't have all the numbers as exactly as I'd like them, but it was around, I'll say $130,000 or $160,000 that they needed to clear and he did not have the credit to be able to go get a loan because, due to these judgments and all of that, it also messed up his credit.
Ingryd Hernandez:So, when somebody says, well, why wouldn't they just refinance their house? Well, he was not in a position to refi and his wife didn't work, so she was not in a position to refi. So truly an investor. Despite all the crap that people talk about investors, we were the only ones who could really help um this, these sellers and again, I, yeah, yeah, I went and I bonded with them.
Ingryd Hernandez:You know I I talked to them and I was like I walked them through as much as I could, again in their native tongue. And so they were. They were attached to me after having those conversations, you know they they felt they could trust me and they could understand what I was trying to offer to them. So because their property was free and clear. Another nugget about a Morby method is that, at least in this market right now, with slightly higher interest rates I would say a 6% or more interest rate you have to make sure that the property has around 40% of equity of what you believe the house will appraise for Okay. The reason is is when you go and do a loan to value meaning you want to go get money out, if, if you need to get 50 to 60% out minimum to pay off whatever to a huge down payment to the seller, help them pay off certain liens, like the situation here was for sure.
Ingryd Hernandez:That's what I ended up doing and it was the way that I was able to really lock this up, that I was able to to like really lock this up. So what I told them was like this is going to be two transactions. The first transaction will be completely through the brokerage with your agent. The second transaction will not. So that it was clear that this what I call a two-legged transaction for one deal. So that it was clear. And what I did is I actually sat there and I documented it through paper and pen and made sure they understood each step. So when you submit a Morby method with a brokerage, it looks normal. I'm buying this property. So this one in particular I believe we bought for 510 was the purchase price 20% down and then the 80% was the loan to value.
Ingryd Hernandez:Now at the time the rates were in the fives and what ultimately was the money that they were going to like I was going to give to them was enough to cover all of their liens and things and then have them put some money in their pocket as they try to rectify, you know, some of their debt situations and whatnot. So ultimately that first transaction looks just totally normal. Their agent gets their fee. I did incorporate into there being able to pay the wholesaler with the amount that we were taking out, and then any of the fees associated with getting the loan the seller would cover. With getting the loan, the seller would cover Again.
Ingryd Hernandez:I knew the situation was a pretty distressed one and of course I'm putting my neck on the line because I'm having to go through the process of the loan. You have to pay for an appraisal. An appraisal was like 650 bucks or something like that Ridiculous, and then the appraisal came back with some contingencies, meaning there were some things that they had to actually fix in the house in order for the appraisal to say it was sure, hey, if there's any safety concerns, because there was some things that were showing up that were kind of off like hey, was there leaky roof? Because why is this drywall messed up over here, you know, and so certain things needed to get fixed. They had a pool with a kid who lived there and no pool safety stuff, and out here in Phoenix you have to have a pool fence or you have to have like auto closing sliders so that the safety of the children are managed. So, like safety issues and things like that is something that you do have to deal with on occasion on appraisals. So we went through that process right. So the first leg is again looks normal.
Ingryd Hernandez:But at the time I had accumulated some capital from doing wholesales. So I'll be frank in this first deal that I did, I didn't have to get a private money lender. I was my own private money lender, own private money lender. The second one I did, I did have a private money lender, which we can go through that one fairly quickly too. But on this deal I sent in an offer 510, 20% down. All the fees were being covered by the seller, and then it gets funded through the bank and I had that cash in my bank accounts. So through the process of the loan, the lender makes sure that I do have reserves. You have to have reserves A lot of times with these banks, you have to have like six months worth of rental reserves for the record and you have to have the down payment, both of which I had, and so I put in the money.
Ingryd Hernandez:The first transaction gets closed. The title company is one of the most important partners in this I know they're a new partner, but it's an important partner to have in this and that is that they will hold that down payment, transfer it to a new escrow account, a new escrow number, and then they will switch that money with a note, indeed, of trust that you've already created with them, under whatever terms. So in this scenario it was like around $127,000 and some change. They kept that, or they refunded me that money, replaced it with a note with the seller, and then the seller agreed to keep the note silent for three years. Okay, so that was my circumstance for this deal, because I already know that they're going to buy the house from me on a wrap. So I'll end up making more.
Ingryd Hernandez:I don't want to complicate it more, but just know that they're going to buy the house from me on a wrap, so I'll end up making more. I don't want to complicate it more, but just know that at the end of the day, if you know your money math, you will make money, like that's what this scenario is here, but anyway. So now I have a loan at 80% on the property and then I have their note in second position with the 20% that I put down, that I got refunded and it's sitting silent on the property.
Joseph Marohn:Right, meaning you're not making any payments to it. There's no interest on it whatsoever. It's more like a balloon payment, correct? Yeah, it's a non-interest bearing savings account, if you will.
Ingryd Hernandez:So it's just sitting there for them, for the seller, not for me, correct? Yeah, it's a non-interest bearing savings account if you will. So it's just sitting there for them, for the seller, not for me, right, it's still a debt that I owe to them technically.
Joseph Marohn:Okay. So you pointed something out that's really important. You said that the title company is your partner. They're the most important piece on this. Right, you have to physically give them these instructions, right, because they're not going to know how to do this, so you have to give them the instructions. Now, did you find that the title company was giving any pushback about this? Like they're like hey, I've never heard of this method, this strategy. Did you run any hurdles with that?
Ingryd Hernandez:So I was very preemptive about this. I didn't just choose any title company, I chose a title company who had worked with Pace Morby out here in Arizona several times and I wouldn't say title company, but escrow officer, who was very familiar with creative strategies.
Ingryd Hernandez:So I cleared this plan with her before I even put the offer in. And I would say, it doesn't matter what state you're in, make sure you're clearing this strategy with your title company before you open title, because you want to make sure that they can help you and that they're going to deliver on what they said they were going to do. Obviously we're in sub 2. So they had templates for us for this, holdback instructions, essentially to escrow. So I had holdback instructions for the second leg transaction of this deal and clearly it says from the first transaction hold this amount. That's one set of instructions we sign, so I sign, the seller signs, and then the second set of instructions says OK, release this back to to myself and in exchange you'll get this note with a summarized level of terms right, like high-level terms, not the actual note, but you do attach the note to that instruction because you want to say, ok, give this money back to Ingryd, and here's the note that's going to replace that money. That's the exchange and honestly, that was it. And so what they'll do is they'll record that second note.
Ingryd Hernandez:We did ask for a delayed recording, because most DSCR lenders do not like it when you put a lien in second position. But I will say the timing matters more than that. I had to do like replacing an AC unit or replacing plumbing something significant that just required me to go get financed and putting a lien on the house, which is very common in the investor world. Too bad, so sad DSCR. I'm going to put that second lien against the house.
Ingryd Hernandez:What they care about the most is, in the first three to six months, that the note looks like it's stabilizing so that they can sell it in the secondary market. What does that mean? Mortgages or your brokers when you go get a loan, they create all these requirements that you have to satisfy so that they give you money. Now, when they have this really pretty note, this promissory note that that lending transaction creates, now they go sell that note. So if they're going to go sell that note and you've put a second lien on that property, it makes it harder for them to sell it. So now you've made it harder for them. So in my opinion, the best thing you can do is delay the recording of the secondary note, the seller finance note, so that they can do what they have to do, which is stabilize and sell the note while you're still securing the seller through that transaction. So they'll have a copy, you'll have a copy, and then you'll both agree on when you'll send the note for recording.
Joseph Marohn:Okay, so what's the standard there? How long did you have them delay it? And is that a typical amount of days that you should typically have it, uh, delayed, or is there a standard there, or because I've?
Ingryd Hernandez:heard. Here's the silly part. For this one, I like, waited more than six months for my next one.
Ingryd Hernandez:I did it right away okay so it just, I guess one would say. But it just depends on how you want to roll the dice. I know I had enough assets now when I did the Morby Method. It was one of my first transactions. It was literally the second house I've ever bought and held when now I have other assets. So I know that the worst case scenario if a lender comes to me and says you can't have this in second position, otherwise we're going to make your note due right away Do you know what I would just do? I would detach that note, attach it to one of my other assets, wait till the heat dies down probably like six months a year and then go ahead and reattach it smart.
Ingryd Hernandez:So those are ways that you can mitigate it. Now that you, I feel more comfortable in my own skin, right Like I know how I could problem solve some of those things. But I will say, when I first did this first deal, I didn't have assets like that. So I don't think I would feel as confident or as comfortable in saying something like that. But now I'm like, what would I do now that I have, you know, 15 assets to choose from? I would just do it right away.
Joseph Marohn:Okay, so you may or may not know the answer to this, but, like, let's say they did find out, you know what type of repercussions would? I know? You mentioned that maybe they can accelerate it, you know, call it, do on sale, but what type of repercussions could someone face if they have, if the DSCR loan was to find out about this? Second, you know lien on the property.
Ingryd Hernandez:Well, the first thing that could happen is you could just have a conversation with them and say, hey guys, am I making my monthly payment? Are you seeing my performance? Then, chata, you know, like there's nothing else to talk about here.
Ingryd Hernandez:That would be one. I would say that would be number one. Number two is kind of what I just declared right now, which is, take that second note, attach it to something else you own, allow them the ability to sell the note which is probably what they're trying to do and then, after you know six months, a year or so, reattach that note if your seller is good with it. I would say, if your seller is not good with it and the acceleration does come, like you know, you may have to go find another lender. That's the unfortunate piece, but I just don't. After going through all that process, I'll promise you the reason. I'll tell you why. They likely will not call it due right away, because now they have to pay, they have to take money back that they've already given.
Ingryd Hernandez:So there's a broker involved, there's loan processors involved, there's all these people that these loans feed, and now you're asking them to take that money and give it back, and so it's a really tough process for the bank to mitigate. That's why the likelihood of a due on sale on any kind of performing note and I say performing note is unlikely, because there's so many repercussions at the person level, like a, like an employee, that makes it really difficult for them to do that. Now, if you're not performing that you know that triggers all kinds of other stuff and that's why those are easier to say. Well, they're likely going to call it due, but when you're performing you know it's hard for them to tell you what to do.
Ingryd Hernandez:Yeah, Okay, cool Nobody told Michael Jordan not to travel on the basketball court.
Joseph Marohn:He does what he wants, yeah right.
Joseph Marohn:Love it. Okay. So now that we all understand you know, the issue that the Morby method solves is that you know our sellers pretty much want a larger down payment, right. So pretty much that kills deals for us, why Most of us that buy real estate, you know, utilizing creative finance or whatever method, we want to be in the deal with little to no money out of pocket. I can't tell you how many deals I've actually walked away from, Ingryd, because of this and not knowing how to structure it any other way.
Joseph Marohn:But there's actually three things that you can do when a seller wants a large down payment. One, you can just get better at negotiating, right. You know a lot of us have to work on that. If you're getting a seller that wants a larger down payment, there's ways you can negotiate that right, and that's going to come down to your skill. Point Number two would be we can ask the seller to do a cash out refi, right, so the seller takes out a loan against their equity. Then they seller finance that to us. So essentially we buy the deal on a hybrid, and the third method would be the Morby method. Now, Ingryd, if someone wants to start utilizing the Morby method, what are the initial steps they should start taking.
Ingryd Hernandez:Okay, one is be bankable, or know somebody who is bankable that they could wholesale the deal to, like your friend Ingryd Hernandez, who's on your podcast right now. So that's one.
Joseph Marohn:Okay.
Ingryd Hernandez:Two, after you've gotten through that is, understand what you believe the house will actually appraise for. So this is where you can't pretend you know how to comp and pretend you know how to figure out the ARV. Understand that a professional will be walking that property and figuring out what the house appraises for. So this can't be who's better at negotiating. This is a very direct, clear and transparent conversation with the seller to make sure that they understand that that a lot of this is going to fall on the appraisal.
Ingryd Hernandez:Three, get a TC that really knows how to put this together so it's not confusing. I love to use TC deal pros out here in Arizona. Perla Argyle is my gal, so she's helped me with these, although I've personally did my own TC on that first one because I'm a licensed agent out here and so it was easier for me to put the paperwork together. But that's who I rely on a lot now. And then fourth, make sure you have that title company that you can walk through what this process looks like, so that when you see this come across your desk you're not scrambling to figure out who would you go with. I would say those are the four things that you really need to be aware of. The fifth is more or less understanding how to comp these. So let's say my same deal at 510,000 and he wanted a little bit more.
Ingryd Hernandez:The most I could possibly give him was 80%. But what I'm seeing with these rates being in the you know high sevens, low sevens, I'm not seeing any deal really work as well with an LTV higher than 60% right now. So 60 to 70%, maybe 75%. So if a property is worth, let's say, 400,000, the most cash you're going to be able to take on something like that from a lending institution is $300,000 and still make the numbers work to cash flow. So you do have to practice underwriting and I first started, which was go pick a house, pretend I had a deal with that house and understand where my numbers had to be in any method, whether I was doing cash, a Morby method, a seller finance, whatever it needed to look like so that I understood what my numbers needed to reflect and that's what I call the money math calculations, like if you don't know your money math then you don't, then you won't know.
Joseph Marohn:Absolutely so. One thing you said. You said we got to be bankable. Wait, Ingryd, are you? Are you telling me that I have to go apply for a loan? I thought we got into creative finance because we didn't have to go run our credit. What's going on here?
Ingryd Hernandez:Well, bankability comes in all different ways, and so, yeah, unfortunately, this is where you have to have your big girl pants, your big boy pants, and you have to actually look good for any institution, regardless of what any guru tells you about any kind of creative finance worth. If you're not bankable, you are not growing. In my opinion, you have to eventually convert yourself to a bankable person, because when you start thinking bigger and you start thinking more like nationwide or or like if you have a true business that can grow, if you are not bankable, you have yet still to make it.
Joseph Marohn:Correct, and you know this is the only creative finance strategy that a bank is actually involved. Morbid method involves your credit and, to be clear, they pull your credit, but the deal itself is not based off your credit, correct?
Ingryd Hernandez:Correct. It'll still be based on the debt service ratio coverage, which is a DSCR. Usually that's the product you'll use, unless you use a more conventional like second home loan, and that one is totally based on you, your credit and your reserves. A DSCR says here's how much I have for my mortgage on one hand and here's how much I have on my other hand that the rent covers. If the rent is covering exactly your mortgage, that's a 1.0 ratio If the rent is covering above your mortgage and then it becomes a math calculation. Usually DSCR loans are trying to hit a 1.25. So let's say your rent and your mortgage is or, excuse me, your mortgage is $1,000. That means your rent needs to be $1,250 to hit that 1.25 ratio. So if it's $2,000 mortgage and it has to be $2,500. So yep, that's the way it works.
Joseph Marohn:Got it Okay and I know Pace he uses myinvestorloancom. Is there a DSCR lender that you prefer to use that you can recommend?
Ingryd Hernandez:The answer is yes. I'm actually working with something with Pace right now that goes beyond my investor loan, so people probably have to follow me on Instagram to stay tuned about when we're ready to go to market with that. So, yeah, not quite ready to say it out loud.
Joseph Marohn:Okay, got it. No, no worries. So I just want to make sure we don't lose anybody here. So, Ingryd, can you explain real quick what a non-recourse loan is?
Ingryd Hernandez:Sure. So a non-recourse loans is a loan that you can go and get without personally guaranteeing it, meaning, if you default on it, yes, you're losing the asset, the property it's attached to. But you, Ingryd, for example me in this scenario, like I wouldn't be personally guaranteeing, or like all my other assets or my personal home wouldn't be at risk over getting a non-recourse loan I will say I'm seeing less and less options for a full non-recourse. I'm seeing way more DSCR loans that have a level of personal guarantee to them. So I don't also want to fool your, your audience. Um, those are harder to come by. They're harder to come by but they're great if you come across them. But usually they're reserved for people who have strong financial positioning. So the better more bigger assets and portfolio you have that you can showcase, or more experience the better the deals you'll get in those non-recourse products that are available.
Joseph Marohn:Okay, and now I think the part you know, because we've talked about in this beginning of the podcast that, the more we met, there's a very complicated strategy and a lot of people get confused on it, and I think the part that most people get lost on, and so I really want to hone in on this, is for the PML portion of the deal, right? So for the listeners who are unsure about the need of a transactional PML, could you clarify its role and why a DSCR lender requires you to bring that money to the table?
Ingryd Hernandez:So a DSCR lender wants to see that you're putting some skin in the game and, to be frank, they're kind of blind to the fact that you are going to have that replaced as a seller equity note. Because, as far as the DSCR is concerned, the lender, the seller, is getting all the money right. Everything that you're offering the seller is getting all the money right, Everything that you're offering, minus whatever fees and stuff that are associated. But if a borrower has some skin in the game, they're likely to stay performing and not default. When you have zero skin in the game, you're more likely to default in terms of your responsibility to that asset. So that's why a DSCR lender wants to see you putting something in it.
Ingryd Hernandez:Now I think this part will be a little bit more difficult to explain. Again, this is a more advanced strategy. So my first deal I was my own lender. I had that money in the bank. The second one that I did, I actually took a loan, or cross collateralized is the way that I'll say it I took a loan against one of my properties with one of my PMLs.
Ingryd Hernandez:I secured it with a different property. I had them put that money in my bank account, not into the title company, but they were already secured. So think of it as like a secondary transaction. I just did so. I went to my lender. I said, hey, I have all this equity in this other property. Will you lend me this $107,000 for this really short time two or three weeks is what I said because sometimes Morbid Methods can get a little bit complicated at the end in terms of when the lender will actually close, because they'll promise you you'll close one day and then actually don't close until the next week. So I like to be a little bit conservative around that. So he lent me that money. I secured it with a deed of trust and a promissory note and said, hey, I'm going to pay you these terms. The goal is less than four weeks. Literally I only kept it for one week, but I was kind of like worst case scenario with him. I took that money. Now it's in my bank account and that money I use towards the Morby method.
Ingryd Hernandez:I would say that's probably the easiest thing that you could do with a private money lender. Why? Because DSCR loans expect you to put your own skin in the game. So if your private money lender is not a part of your LLC with that down payment now you have to explain where that money came from. You probably have to keep that money for at least 30 days to season.
Ingryd Hernandez:If you're not prepared in a significant way, like if it wasn't a transaction against an asset, like I just talked about, it gets more complicated because the bank wants to understand where that money came from and generally they don't want to accept more debt against the property you're trying to get a debt against, right?
Ingryd Hernandez:So that is why it makes it tougher.
Ingryd Hernandez:So a workaround is to have your private money lender be a short-term partner in your LLC and you can show that in your entity docs back to the bank as a part of that down payment and then, after the transaction's done, then you can restructure your corporate structure for your LLC to take that private money lender back out. So that's another way of doing it, so that when that money comes into your bank account it's easier to explain where that money came from and how you're going to pay it or sitting in escrow. So that's another approach, right? So both of you you and the private money lender on an LLC. The private money lender gives instructions that they send it to title. Title holds on to it while you're going through your first leg of your transaction and then, when it comes to the second leg, the holdback just says give this money back to this private money lender along with the fee that they're making for having that money in escrow. And then you, the borrower, are responsible for making sure that fee is paid for.
Joseph Marohn:Man, that is gold right there. Ingryd, you're dropping bombs on us today. Okay, so I know there's several ways you can structure the seller's note. Now, correct me if I'm wrong, Ingryd, but another way to do it is you can actually structure a partner ownership in your LLC with the seller right. So, essentially, you're structuring a partnership agreement without having to create a second note that's recorded against the property.
Ingryd Hernandez:That is correct. That's another way to do it seller be a part of the LLC so that the down payment component of this doesn't have to go through a transaction lender. It's already a built-in component of the transaction and it really will then come down to how the lender will allow for that structure to take place. So I would actually advise against this approach, even though it is something you can do Now. If this was my mom, okay, I'll do it that way, but the fact that there's so many factors that could really implode, I don't recommend this approach. But all of you have to be adults about what decision you want to make. And you could have the seller be a part of the LLC so it's easier to mitigate that down payment and it's kind of seen like a gift as a part of the process, so that you don't actually have to bring the down payment, and it's kind of seen like a gift as a part of the process, so that you don't actually have to bring the down payment with you as a part of the loan.
Joseph Marohn:Yeah, I think I agree with you right there. I would feel more comfortable doing a silent second. I don't know about putting them, I just know that that's another way of going about it. So there's just.
Ingryd Hernandez:I think you're buying a lawsuit when you do it that way.
Joseph Marohn:Yeah, there's so many different creative ways you can do things. But you got to be careful because it can get hairy quick Right. So Right. Okay, so how does the Morby method empower individuals to achieve financial independence and get more creative in today's real estate market?
Ingryd Hernandez:At the end of the day, just gives you more tools in your toolbox. So the more leads you have in front of you like I can honestly say, if I have an able and willing and motivated seller, there isn't a reason they shouldn't do deals with me and those reasons would be unreasonable, like unreasonableness, like what they want the money. Math isn't mathing and that's usually the way that I like to explain things to my sellers is like here's all your options, here's how the math works and here's how I make money. I want them to know how I make the money. Even when I disclose in my contracts because I am a licensed agent in the state of Arizona, I tell them I'm in this to make money and I'm the principal and here's how I'm going to make this money. Period. And if it doesn't work for them, then usually it's because they want too much or, in my opinion, they're being unreasonable.
Joseph Marohn:Yeah, definitely Okay. So before we close it out, Ingryd, any final tips or encouragement you have for the listeners who are considering doing the Morby Method for their first investment.
Ingryd Hernandez:Gosh, if they're considering the Morby Method. Like I was saying before, there's some things that you have control over that you have to prepare. A lot of them is how you communicate with the lender, how bankable you are, how organized you are. Again, I'm available to give you a free presentation on what that looks like and then understand that you're going to have to be patient. This requires patience. This requires patience. This will likely require some investment, like having to pay the appraisal and the inspection, that sort of stuff, which is a very traditional way of buying and have faith. So, as long as you have the right partners in your favor, like TC Deal Pros or your title company, and everybody's on board on what you're doing, really, it's just a matter of like not quitting. As Alex Hermosi says, you can't lose if you don't quit. So Awesome.
Joseph Marohn:Well, Ingryd, you absolutely crushed it here today. Super impressed by you. You brought a lot of value to us all and it's almost like you know what you're doing over there. Yeah, no, but seriously, you're extremely knowledgeable in this space and I'm sure everyone tuned in here today gained a lot of value from this. So thank you.
Ingryd Hernandez:Yeah, no, thank you, and I'm honored that you have me on this podcast and I really appreciate that I was invited over and I'd be happy to do it any other time.
Joseph Marohn:Absolutely. We may have to do a little deeper dive. There was still quite a bit that I wanted to dive into, but I want to be respectful of your time, so maybe we could do a part two on this.
Ingryd Hernandez:All right, sounds good.
Joseph Marohn:Okay cool.
Ingryd Hernandez:Now, Ingryd, how can people get a hold of you if they want to bring some deals your way? Yeah, the best place to reach out to me is Instagram. It's Ingryd I-N-G-R-Y-D, underscore Hernandez. I'm definitely in my DMs a lot. That's the best method to reach out to me.
Joseph Marohn:Awesome. Now, if you guys are finding value from this podcast, don't forget to show your boys some love. If you like what we're bringing you, don't forget to subscribe. It helps us continue providing value to others by reaching a broader audience. We're out here to serve, providing value to others by reaching a broader audience. We're out here to serve, learn together and help as many people as possible. So it'd be much appreciated and I'm super pumped to say that we just reached the 1000 subscriber mark. So super pumped about that.
Joseph Marohn:Stay tuned, because we're going to be doing a giveaway on this channel and that's my appreciation to you guys for continuing to watch this podcast. So thank you. So don't forget to also smash that like button and drop a comment down below on one thing you learned today about the Morby Method. How many deals have you lost out on not knowing this strategy? Appreciate all the continued support and, guys, stay tuned, because we're pumping these episodes out every two weeks. I got some awesome topics and guests coming up next. That will change the entire way you do business. You definitely don't want to miss out. Best believe I'm going to keep bringing you that fire. Thank you, Ingryd.
Ingryd Hernandez:Thank you. Thanks for watching.