Let's jump into the Morby method. What is the Morby method? I would love to maybe go through this with questions, but I want to get to the exact example itself. So, in the end, a Morby method is when you're purchasing a primary and you have a primary lender and you have the seller financing and you have a seller carryback note. Those two pieces together is the structure that this Morby method is creating. That's where That's the end result. It's all the steps getting there that sometimes confuses us. Transactional funding, the reason why we have anything to do with it is because we are temporary down payment money. So, a primary lender shows up, we put the temporary down payment money to close the transaction. The seller carry note gets dealt with after that. One of the reasons people love this is buyers can often purchase with zero money, no money down, or often times even walk away with cash. They're buying a property and they put cash in their pocket. We like to see that if they ever do that, the reason they're doing that is for renovation or something like that, not so they can go on a vacation. And the last line, absolutely not magic. You definitely want people with experience involved here. The sequencing of what happens really matters. The paperwork really matters. This is one of the few places that we really like to see TCs involved. In most of the deals we deal with, we don't really care that much if a TC is involved cuz they're not that complicated. In these, we really do like to see it. All right. Quick cast of characters. These are all the people that are going to be involved in the deal. Obviously, a buyer, a seller, some kind of primary lender, the first position primary lender, us as a transactional funder, or we won't care, right? Uh we care cuz we get to participate. Like I said, we like to see a transaction coordinator, and then of course, a title company, and often times two title companies. We'll talk about that a little bit later. And here's the high-level view and why we talk about a primary close and a secondary close. The primary close is when the primary lender is bringing funds and the transactional funder brings the down payment, the cash to close. The property is purchased. The new owner is recorded. Everything is just like a normal purchase, right? But inasmuch as the transactional funder is transactional and temporary, what happens after that is we go to secondary close. The secondary close is not changing who is on title of the property or anything like that. What happens in the secondary close is the seller's carryback note is issued. And the issuance of that creates a cash settlement that pays off the transactional funder and a few other people. The TC usually gets paid off there and a few other things. So, there's these two events. That's That's the high-level picture. We're going to use this example here. And so, a lot of these things can vary a lot by transaction. That's why we're going to jump over to the calculator and look at some other examples and how it could vary. But, we're using an example where it's a $500,000 purchase price. We're assuming that the buyer is got a 3% closing cost that they're going to have to account for. Seller's not paying for everything. Buyer's got 3%. And so, the total cost to close is $515,000. They're going to get a primary loan for 75%. It doesn't really matter if it's a DSCR or hard money lender, but that's what That's what's happening. And so, that That's bringing 375,000 into it. The cash that still needs to be covered is $140,000, but then there's also a transaction coordinator's fee. They're getting paid $2,500. There's a secondary closing agent. There's a second title company for the secondary close. They're taking a flat fee at 2,500 as well. We're the transactional funder based on this amount that we're funding in this deal. Let's just say we're taking 3,500. And then the buyer wants to have $20,000 money in their pocket. Okay, so the when this whole thing finishes, not only is the buyer buying with no money out, they're actually putting $20,000 in. This is a very non-traditional thing to happen in a transaction, right? Usually seller puts money in their pocket, buyer takes money out of their pocket. Um and so therefore, and you'll see in the calculations, the seller carryback that the seller's carrying is 168 500. Okay, this is the deal. You don't need to remember any of these numbers, but this is just showing them all in one place. Now, let's step through it and I'll stop from now on. I'm going to stop on each page. So, if you have questions already, let's talk about them after this page. I want to stop at each page and make sure we're on all on the same page, no pun intended, together. If you're not following, if you're still a little bit lost, that's normal. You should see this about three to 10 times before you understand it. If you've seen it once and you understand it, you might not. You might, but you might not. So, all right, step one, primary close. Money in to primary title. This is the in stage for us. Primary lender, per our example, is bringing $375,000. Okay? We're bringing $140,000. The title company has 15,000 in closing costs. And when this whole thing ends, the title company's actually going to wire $500,000 over to the next title company. That probably didn't make any sense. So, let me show it visually. Here's what's happening. I need to shrink this a little bit. How do I shrink? Can I Can I exit this header? Uh let me make this 130. Okay. I just want to make sure everything shows on the page. So, what's happening in this primary close? To buy this $500,000 house, the closing costs are being eaten up by the title company, right? We're bringing $140,000 into title. There's a cash wire. Primary lender XYZ funding, whatever, DSCR lender, whoever they are, is bringing 375. 375 + 140 is 515. Right? So, we funded 515. 515 in cash is sitting in this primary title's escrow account. They use 15,000 of it to close. There's 500,000 cash still sitting there, right at that moment. That cash is not being sent to the seller yet. Okay? So, the whole thing just closed. There's $500,000 left sitting in an escrow account. Title records this thing. The buyer is now on ti- on the the title. They own this property. And that title company, per an agreement that they've signed and that the seller has signed, transfers the $500,000 they have left sitting in their escrow account to a secondary title. This is not the only way to do a morb, but we're talking about the two location method, and this is the method we prefer. Another day we can talk about the the um operating agreement LLC method. There's other ways of skinning this cat, but we're doing the two location method here. I think the two location method's easier to understand, honestly. Okay, so, does everyone understand where we're at right now? At this moment in time, the house has actually been sold. It has a new owner. All the cash came in, the whole thing transacted. But instead of the normal process of title saying, "Okay, now I'm going to settle the cash and send it to everybody." Here's sellers, you know, the seller gets this much and whoever was supposed to get money. The agreement they have is their settlement is send all of the money to this other title company. Okay? I'm going to pause here for a second. Questions? Comments? Does anything in this seem weird? Anything not 100% clear? >> I have a question. I'm not sure why why you're going to another I'm not sure if I I understand what you're doing. I can see it working. I'm just not understanding you this for to hide it from the primary lender? >> Okay, great question. So you're saying, "Why are you using two?" And there's there's a number of reasons. One, so I would never say that the reason is we're hiding it from the primary lender. If the primary lender has a specific clause that says you absolutely, you know, if you do this then your loan can be canceled or whatever, which is super rare by the way. It's almost very rare to find those clauses. A lot of times the underwriters say, "We don't want to do it." That's fair. We're not necessarily hiding it from the primary lender as much as this structure is a structure of saying they are buying the house and then the seller is going to reinvest into the project. That's the mentality in this. They're selling their house. It's closing and then they're going to reinvest into it. One of the problems that happens in these transactions when they're in the same location is the title company starts confusing the pieces. >> Okay. >> It's a lot cleaner when you do one part of the transaction and then move the other part to somebody else. So, neither of them is dealing with all of the pieces. They're just dealing with their their close, not two closes. Um another reason is the secondary title, the escrow company that's often used, gives a flat fee. We know exactly what it costs, the seller, everybody knows what the costs are going to be for this transaction. Often times title companies that try to do this all at once, they'll put varying interesting costs on that second one. Sometimes it's much better. Instead of 2,500, it's 1,200. But sometimes it's 6,500. And so, this way from the beginning before even working that out, it's really easy to understand what are the cost of the deal. So, there's a number of really good reasons to separate it. But Billy, this isn't the only way to do it. This is one way. >> I got you. >> Those are some of the whys. Frankly, another potential why is that it avoids the primary title company from needing to talk about this whole thing to the primary lender cuz it's not has nothing to do with the sale transaction. >> Okay. >> So, it can avoid any confusion there. >> I have a I have a question on the the primary lender is giving 375. I don't see him getting paid back. Where or is the seller buyer carrying that or what is the deal? >> So, he's not getting paid back yet. He's the primary lender is lending. >> Uh-huh. >> They're not transactional at all. >> Okay. >> let's let's assume this is a DSCR loan >> Okay. >> based on this asset being a rental property. And the primary lender said, "Hey, the rent income justifies us lending this month much answer it could be a 30-year loan. >> So, how much of the 331,000 goes in the seller's pocket as his >> Oh, you're getting ahead. No looking at gray numbers. Come on, Valerie. Where are you going? >> I wondered how much he was carrying back and how much was going in her pocket. >> You're we're going to get to that. Yeah, you're you're you're running ahead. >> Sorry. >> Slow down. Hang out with us a little bit, Valerie. >> >> Sorry. >> No, no, that's awesome. That's awesome. You're you're just moving fast. Okay, so this is where we're at. We just finished the close of a property. The primary title company just wired $500,000 to secondary title. Secondary title just received a $500,000 wire. So, now we're going to go do the secondary closing. The secondary closing is where the seller gets paid out their 331,500. The buyer is getting their 20 grand that was built into this that they're going to walk with. The transactional coordinator that's been doing this is getting their 2,500 bucks. Um the closing agent on this second closing is getting paid their money to facilitate this settlement. They're essentially just doing a settlement, right? They're not recording The The thing that they are recording, to be fair, is they're recording the second lien for this seller carry note. And then transactional funder, we get paid back our original capital and then our fee. So, as Valerie is jumping ahead, it's in green here. So, all that 500 came in now. Pay back the transactional funder, pay the transactional coordinator, title eats up their cost, the buyer gets paid something, and the seller is getting 331, 500 theoretically. So, I might actually need to change the next page to account for that. The seller, though, to your point is not receiving the whole 331,500 because the seller is carrying back 168,500 to make this whole thing work. The seller carry back note, they're issuing a loan to the buyer of 168,500 under whatever terms they agreed to. Whatever interest rate for however long, uh you know, that there's an infinite number of options there. And so, to your point, they are receiving What is that? 331,500 minus 168,500. They are receiving $163,000 in cash and 168,500 in a loan note owed to them by the buyer. Does that answer your question, Valerie, that >> Yes. Yes. >> So, I might go back and adjust this to put two numbers here >> Yes. >> or something in brackets so that we know. So, that 331,500 is theoretically to the seller what they're really receiving is $163,000 in cash and a note for 168,500. >> From the buyer. >> Yep, owed to them by the buyer under whatever terms they agreed to. >> And what about the 20,000 he walks off with? >> That's part of that. That The reason it's 168,500 is because of that. If he wasn't walking with 20, it'd be 148,500. Yeah. Yep. And part of that 168,500, it's not just the cash to close we had to bring, right? But it's it's the cash to close plus the >> cost of the secondary closing fee, plus the cost of the TC, plus our fee, plus like you said the $20,000 the buyer walked with. >> Sure you >> All of those things combined >> Can you turn that down, please? >> Sorry. >> No. >> I was on >> All of those combined is the seller carryback. And then once all those funds are issued there's no money in any title companies. All the money is sitting in somebody's pocket somewhere or in a note. So, when the day ends on this, I'm going to go back to this page. When the day ends on this, what we really have is we have a buyer that has $20,000 more in their pocket than they did before. They have a loan with some lender for $375,000 and they have a loan with the seller for $168,500. The net result for the seller is they have $163,000 in cash and they have a note for $168,500. Wait. Yeah. It's I think I just said that all wrong, actually. >> Yeah, that I was thinking the same thing. >> I just said that all wrong. I Yeah. >> if you sold the property for half a million dollars >> Yeah. >> on the >> This is the cash the seller receives. Yeah, thanks, Canale. The cash Yeah, I don't know why I just netted those. The seller receives $331,500 in cash. So, we need to go back through that. What happens at the close is us getting funded back 143,500 and the transaction coordinator getting paid 200 2,500 and closing fees of 2,500 and the buyer getting 20,000. All of those expenses that got paid out are being paid for by the seller carryback note that's being issued. So, just forget everything I just said cuz that I was just thinking, "What am I thinking?" Okay. So, at the end of the day, the buyer ends up with $20,000 in cash, a $375,000 loan with a primary lender, and a 168,500, right? Yeah. Seller carryback loan. That's the That's the buyer's end and they and they're title on a property. The seller ends up with 331,500 in cash and a $168,500 seller carry note owed to them by the buyer. The primary lender ends up with just a note owed to them for 375. Transaction coordinator has $2,500 cash in their pocket. Each of the closing title companies got whatever they got and as a transactional funder, we ended up with $3,500 net cash. Okay, that's actually the correct cash. I'm sorry that I screwed that up, guys. All right. So, seller is holding 331,500 in cash and a note for 168,500 owed to them and that 168,500 was created by all these things, the money, the cash to close on the first half, as well as all these fees, and what the buyer chose to take home. Okay, now I'm going to stop for a second. Cuz now I'm afraid I just screwed it up by saying it backwards once. Any questions? Or anybody want to restate it a different way to help us all understand it better? Don't be shy. Okay, a couple things. Transactional funding is cash to close typically. It's not down payment money. It's cash to close cuz often down payment is part of cash to close. There's some closing fees and stuff. It is not a forever cash. This is very transactional, transient. It gets paid immediately through the secondary closing. And we typically as a business, we charge 2 and 1/2%. That's just the fees we do. If you negotiate fees about that, you just need to tell us very quickly before we start communicating with your borrower cuz we will communicate our standard fees. We have had people negotiate fees as high as 10% before on these deals. They've had borrowers that wanted to get this done and said, "If you actually can come to perform and get it done, what do I need to pay you?" And they said it's 10%. They said, "Okay." And so we then change our communication to use whatever they negotiated. It's their client, right? We're just servicing things from the backside. Uh quick synopsis of just our little world is we put out 143,000 and then get 104 or 140,000 and then get 143,500 in the secondary close. Right? All this other stuff going on is why there's a transaction coordinator making sure all the other stuff happens. We don't want to manage the whole transaction for somebody. And we shouldn't. We shouldn't be in the middle of their conversations with primary lenders and their conversations with everybody else. That's not our role. Our role is transactional funding. That's why we like to have a transaction coordinator in there. Couple of that back >> I've got a couple screens for me, please, sir. >> Back a couple? >> One more. >> One more? >> Right there. Okay. So 368 >> Those numbers add up. 140, 160, 247,85. Yeah. >> Okay, I had messed up one number. >> Oh, you weren't getting it to balance? Okay. >> Right, right. I was way off and I was trying to figure out >> Really, we're we're going to do this again without the slide and we're going to do a completely different deal with different numbers so we can all go through it. >> I I got it now. I got it. I just had I had a number wrong. >> >> Okay. I just want to go through a couple sets of numbers to see if it creates any other thoughts in all of us. So, some red flags. If we have title companies that are just unfamiliar and have not done this we you don't want to use them. They don't create all sorts of problems. Uh we do the same thing with double close. One of our first questions is how often do you double close? If they haven't, we want to get a different title company in so things don't get screwed up. These are relatively quick and move and you want somebody with experience. Um if the seller carry terms are just not clearly documented at all, that's a red flag up front for us. That's usually resolvable but that has to be really clear. That's between the buyer and the seller. This is their agreement. This should be an addendum to their purchase and sale agreement and it should be really clear between them. The transactional coordinator might be able to assist them and help them in creating that seller carry note. We are absolutely not getting involved in their promissory notes between each other. We're not party to that, but if they don't know what it is and it's not clearly documented, there's a good chance they're just not ready for this deal yet. Um if the primary lender just absolutely disallows financing or cash back coming out, then that's a big red flag cuz it could kill a deal. And uh I mean the the next one too many parts with no written wiring instructions. I mean we just make sure that everything is documented in the process. Uh and that kind of goes to the last one. Anytime that it's oh don't worry about the paperwork, we'll get that done. No. The paperwork is so critical in these. Each step and the fact that that 500 moves from one title company to the next, that doesn't just happen. That's not a you know, a wave of a hand. That's documents being signed up front by the right people ensuring that title has the instructions to do that at the end. Right? Really critical. What if they don't do that? We're not getting paid back, right? So a few red flags that can show up and then we already talked about why it can be a really good deal. Um for funders, it's usually a really good deal because it's so short-term. That's the biggest thing for us, right? Money goes out and comes back really quickly and can be reused. All right. So let's go do this with a different set of numbers. Let's make up a new deal. So I'm going to bring up a calculator. Let me see if I can make this a here larger. Let's see. Let's see. Can I go to it here? Yeah. Yeah, I don't want to make it too large. That's fine, though. Um, can everybody see that? >> Yes. >> A little bit hard. So, let's make up a new deal. You guys throw it out. What do you want to buy the house for? What's a house What deal sizes do you guys see in your markets? What's a rental property going for? Standard How much? >> 1 million dollar. >> Uh, Sunil lives in an expensive place. >> California. >> Oh, you're in California. Okay. Um, should we change the buyers paying? Make it 2%? Let's make things up. >> Sure. >> Now, how much is the primary loan bringing? How much is that primary lender bringing? What do you guys see from DSCR loans? >> 75% 780,000. >> 75%? Okay. And then the buyer, are they walking with any cash? >> Um, let's say 10,000 for now. >> Okay, so they're taking 10,000 out. We'll leave the TC fee, we'll leave our fee. You guys didn't negotiate a better fee, did you? >> Nope. >> And we have a secondary close at at this. Okay. So, let's look at what that means. I'm going to try to flip back and forth. Am I going to be able to pull this off? Okay. So, purchase price is a million, closing cost 20,000, total cost to close is a million 20, primary lenders bringing 750,000, right? So, this now is 750,000. Can I actually edit it? I'm not even going to try. That'll get messy. Um, 750,000's is in here. 20,000 closing cost. Cash to close from us is $270,000. So, we're bringing $270,000 in. All right? Just to attach the visual to the chart. In order to pay all these fees and pay us back our 270, the seller carry back note's going to be $291,750. So, when we look at the end result, that's kind of what this is down here. I'm going to look at the bottom here. Primary lender brings in 750, we bring in 270. That puts 1,020 in the title company. I'm going to I'm going to increase this a little bit more. Sorry. Is that a little easier to see since we're just focused on these? So, I'm going to repeat that. In the primary close, the primary lender is bringing in 750,000 in cash. Us as a transactional lender is bringing $270,000 in cash. That puts $1,020,000 sitting in the title company. Those two wires came in. Their escrow account has $1,020,000 in it. Closing costs on this are $20,000. So, that $20,000 gets eaten up in all the closing costs. You know, that laundry list of stuff. The the close occurs, everything's recorded, there's a million dollars sitting in the escrow account still that hasn't been used up in expenses. And instead of the normal process of now starting to issue out money, like when you go buy a house normally, what's happening right now is they have a directive to wire all remaining funds to the secondary title company. So a million dollars gets wired. So now everything's done in the primary, the the house was purchased, it's all over. And now we show up at the secondary close. And in the secondary close a million dollars came in, right? And here's how it's being distributed. $708,250 is being wired to the seller. $10,000 is being wired to the buyer. $2,500 is being wired to the TC. $276,750 is being wired to us as the transactional funder. Which gave us a almost $7,000 fee. And then the title company, the secondary title company is keeping $2,500 for their fee. That's the cash. Right? That's the cash, but now let's talk about where each individual ends up. So the buyer Well, let's talk seller first. Where does the seller end up? What is the seller holding now that the whole thing's done? They're holding something in their left and their right hand. Cash in their left a loan in their right. What are they holding? Anyone? How much cash are they holding in their left hand? It's hard to see everything on this. I'm going to shrink it just a touch. How much cash are they holding in one hand and what's the value of the loan that is owed to them in the other hand? Anyone? >> The seller carries 291750. >> 291750 is a promissory note owed to them in one hand. Great. >> Here yes. And I am looking for the other number. >> How much cash did they receive? So this day ended they got You're right. That's one thing they're holding is a promissory note. >> 708250 >> 708250 Yes. >> Yep. So the seller is walking away with the value of 708250 and the loan of 291750 they're walking away with a value of the full million. Right? >> Yep. Yes. >> What is the buyer holding in their three hands? The buyer grew an arm in this process. What's the buyer holding? They hold three things. >> Buyer's cash is 10,000. >> Okay, so they're holding 10 grand. >> The property. >> Oh, they have the property. They got four arms now. Okay, so the buyer's using their hands and their feet. They got 10 grand. They now have the property. Thank you Alex cuz I always forget about that. They actually got a property in this. Um which was the whole point. They're holding two promissory notes. What are the promissory notes they're holding? >> The seller carry back and the 750,000. >> Yeah, so they have a They owe 750,000 to one person and 291,750 dollars to another person. So the buyer has a property two loans and 10 grand in cash. >> Got it. >> Different than how they woke up them that morning, right? The seller woke up with a a property and now they have no property but they have 750,000 dollars in cash and they are owed $291,750 by the buyer. Perfect. >> Mhm. Got it.