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DMV Real Estate Investing and Lending with Clear Sky Financial · Private Lending Insights

• Rocky Butani (00:00) Welcome to Private Lending Insights. I'm your host, Rocky Batani. This episode is focused on the Washington DC metropolitan area, also known as the DMV. It includes Washington DC, Maryland, and Virginia. I interviewed Charlie Einsman from Clear Sky Financial in Virginia. They offer rehab loans primarily for investors in this region. They've been doing it for a long time. Charlie provides a lot of insights about the metro area and what's happening in different parts of it. So we'll start with that. Then we'll get into ClearSky's unique loan program for residential rehab investors. And then we'll get his thoughts on the market and a few other things. So I think you'll find a lot of great information this episode if you're interested in this region. Use the chapter links in the description if you want to skip to certain sections of the interview. But here we go. Let's get started. Rocky Butani (00:56) All right, Charlie, thanks for joining us for this episode of Private Lending Insights. So let's talk about your area, the DMV, the DC Maryland Virginia. area. Tell us a little bit about what's happening in your area in terms of real estate investing, some of the trends you're seeing and what you think is going to play out next year or in the next year. Charlie Einsmann (01:22) Okay, for us, we have three separate markets in the DC, Maryland, Virginia area, and they're all behaving totally differently. So like you, I think you're in Silicon Valley in California. So my guess is that your real estate market is probably hot with limited inventory, correct? Okay, so that's the same thing with us in Northern Virginia. In Northern Virginia, there is absolutely no inventory. Rocky Butani (01:42) Yes, absolutely. Charlie Einsmann (01:50) when a property hits the market and sells. And so for fix and flip investors, if they find a really good distressed deal in Northern Virginia, it's absolutely gold. Because if they buy correctly and they execute, they're going to make a ton of money. Now, what's going on in Washington, DC is probably similar that might be going with you in San Francisco. Washington, DC, the office buildings stand vacant. Nobody is going into work. And so what's happened is there's been a lot of crime going on. And so a lot of parts of Washington, DC, where we normally would lend into have actually decreased 20 to 25 % in market value off of the after repair value. So we're having to change our lending criteria in Washington, DC to be a little bit more conservative. Whereas in Northern Virginia, we're very, very aggressive. So for example, one of my lending parameters is lending the loan to value to the after repair value. Every decision that we make on the lending side is based on this thing called the after repair value. And so in Washington, DC, where I would lend, let's say 70 % loan to value of the after repair value, I'm now down around 60, 65. Now, with that said in Northern Virginia, where I would be 70 % loan to value of the after repair value, I'm actually at 75 % in some cases, because if there's limited inventory on the market, and I know that it's a bull market, which means prices are going up, In that subdivision, I'm going to be a lot more aggressive in lending into that deal. Okay, then the third marketplace that we are working with is actually Maryland. Maryland is a cross between DC and Virginia in that properties are coming down in certain counties, but then again, in other counties, depending upon where you are, there's no inventory. So in our case, in our area, you really have to understand the market at what's called the sub-development level. or the neighborhood level at its most granular fashion. Because where you have one neighborhood priced out a certain way, let's say there's no inventory, you might have another neighborhood in Washington, D.C. that's got maybe 10 or 12 active listings, maybe one under contract, and only five or six have sold in the last 90 days. So you've got to be careful into which marketplace that you're buying into. And so one of the things that we do on the hard money side is we have a, you know, we have a... pool of investors that literally follow us around. And so they're constantly coming to us with a lot of deals and having me evaluate them. And so I'm constantly educating them at the subdivision level of the particular marketplace. Rocky Butani (04:26) And within these areas, let's just start with Virginia since that's where we began. When you say Northern Virginia, are we talking about Arlington, Alexandria, or is Alexandria too far south from what is a hot area right now? Charlie Einsmann (04:41) no, you're absolutely No, we're talking Arlington County. We're talking about Alexandria City. We're talking about Fairfax County, which is a really big county. We're talking Loudoun County to the west, Prince William County to the south, Stafford County to the south. So all those counties make up Northern Virginia. And so I'm talking about a lot of different counties and a lot of different square footage and a lot of mileage. So we're talking a pretty broad area. Rocky Butani (05:09) And what about Lorton? Is that further outside of what you call Northern Virginia? Charlie Einsmann (05:13) Nope, Lorton is part of Northern Virginia too. Lorton is in Fairfax County. Rocky Butani (05:19) so anything south of let's say Woodbridge, is that, is that where you get into central Virginia? Charlie Einsmann (05:26) Yeah, no, for us, us, believe it or not, anything south of what's called the Rappahannock River. So that's where Fredericksburg City is. There's a Fredericksburg Stafford County. There's a Fredericksburg City. There's Spotsylvania County. So Spotsylvania County basically is the start of central Virginia. And that runs all the way down to really Richmond and areas out west. But we lend and we, you know, we lend in the entire state. So I will, have a lot of stuff going on in Richmond. I have a lot of stuff going on in Virginia Beach. which is south of us, I have some Norfolk stuff, you know, areas like that. And so we're all throughout Virginia, just like we're all throughout Maryland, we're all throughout Washington, DC. Now, we've been able to expand also into Florida, Louisiana and North Carolina. Now, that's not that doesn't excite us that much. But because what's happened is our fix and flip investors that have done a lot of properties, some of these guys have relocated into these other areas. And so they've wanted us to continue to lend to them. And so we've done that. Rocky Butani (06:28) all the areas that are, let's say, central Virginia, how's the market performing over there? Is there sufficient inventory? Is that just what you might call a normal market at this time? Charlie Einsmann (06:41) Yeah, very normal market. so for us, Richmond, which is more central Virginia, is very similar to what I call the urban market versus the suburban market, right? So for example, inner city Richmond has the same problem going on to like Washington, DC. You know, there's a lot more crime, property values in some areas are coming down, the suburbs of Richmond are very hot. And so anytime that we do deals, whether it's throughout Virginia, North Carolina, I make sure that I do what's called cookie cutter subdivision lending. In other words, I'm not going to lend on anything that's rural. I'm not going to lend on anything that's hard to comp and figure out the ARV on it. I'm not going to run anything that's on well and septic that's been vacant for a year because you might get a surprise and need a totally new septic system. And so we try and stay away from those asset types. Rocky Butani (07:33) let's say an area like Fredericksburg, Virginia, where, you know, there's a big stretch between Fredericksburg and, and, you know, the, the, the actual metro area of, of Washington, DC. Does Fredericksburg also have kind of a hot market right now, even though it's a little outside. Charlie Einsmann (07:51) Oh, it's hot. It's totally hot because just like in California, whether you're off of 101, right, in Washington, D.C., in Northern Virginia, there's two major thoroughfares. There's 95, which runs north and south. I think everybody in the country knows what I-95 is. And then we also have Route 1 that runs north to south, too. So anything within the 95 corridor or the Route 1 corridor, especially if you're in Fredericksburg City or even into Spotsylvania County, these are still hot areas. There's limited inventory. know, everybody else is like this. It's like the suburban sprawl, right? It's all moving south for us in Virginia, just like in Maryland and D.C. Everything's moving north off of 95 into Maryland. And so we'll go up to Baltimore City in Maryland, even though we don't really care for Baltimore City, just because it's the same thing. It's right now it's the urban plight. So we try and stay away from the urban areas. If I see a downward trending marketplace and there's a lot of crime so we'll stay away from it. Rocky Butani (8:53) Going back to Washington, DC, you mentioned that values have come down. There's a lot of office vacancies. What, what's driving that? Is that just work from home and just like the rest of the country? Charlie Einsmann (09:07) Yeah, I'm really glad you asked that question because believe it or not, it's a twofold answer and I have to get into something that's very, very important for everybody to actually know about. Yes, number one, there's a lot of vacant office buildings because everybody's working from home. Now, the problem with the office space vacancies is the net operating income of these rental streams has come way, way, way down. I'm seeing a lot of these big time office buildings. especially in the L Street corridor where there's a lot of law firms, lot of politicians, a lot of lobbyists. These buildings are getting foreclosed. So where a building was worth $250 million, it's now only worth $25 million. Well, oh, by the way, guess who's holding the loan against those buildings? Around here, the Class B, Class C office space, the community banks are holding onto a lot of this paper. Well, one of things that you're going to see happening in probably February or March, once this administration gets in play, is the FDIC is going to really bear down these community banks who have really poor balance sheets. And so I think there's going to be a lot of bank takeovers from the small community bank space. We're already seeing it as well. And so that's something you've got to keep an eye on. And it's not only a Washington, DC thing, it's a nationwide thing. So these community banks that have troubled balance sheets because of their lending into this commercial office space are in trouble. One of them around here was a bank called Sandy Spring. Once Silicon Valley Bank took over, they listed a top 10 bank list of banks taken over by the FDIC. Well, as you might have it, Atlantic Union Bank has recently are buying Sandy Spring Bank. So I think there's going to be a lot more crisis in this community bank level. So stay tuned. Rocky Butani (10:53) But regardless of the office space debacle, Washington DC is the capital. It's still got a population of 600 plus thousand. I figure housing would still be in huge demand. Is that not the case? Or are a lot of people just leaving and not really buying in the city? Charlie Einsmann (11:12) A lot of people are leaving because of the crime. So what has to happen, just like in San Francisco, just like in some of these bigger metropolitan areas, is Washington DC is going to have to repurpose the way they do business. And what I say by that is they're going to have to get similar to Paris, France, people don't... So people are going to come to the city for more reasons than to just work. They're going to have to build up their arts, right? They're going to have to do a better job of bringing people into the city other than just to work there. Now, we do have a lot of monuments, I get it. There's a lot of history in Washington, D.C., but they're gonna have to do a better job of converting these office spaces into, whatever that might be, residential and other things. And so stay tuned, they're gonna have to repurpose themselves. They're not on good straights right now. Rocky Butani (11:59) Do you get certain parts of DC that seem to be hot and they'll always be strong markets? Charlie Einsmann (12:06) Yeah, yeah, anything, anything in Northwest by, you know, Bethesda, Maryland, Chevy, Chase, Maryland, upper Northwest, you know, D.C.'s in four quadrants and anything on the Northwest side up in those areas is really, really good. And it's always going to be good. Now, there are some parts of Northwest, closer to this place called Georgia Avenue that are have a little bit more crime to them. And so people are actually moving away from those areas, whereas these areas used to be up and coming. They're no longer up and coming. And so. Again, it's very subdivision specific. It's very street by street specific. You really, really have got to know these cities in and out. You just can't get lucky. There's no such thing as luck in these cities. Rocky Butani (12:44) So since you mentioned Baltimore, let's start there and work our way back. within, know, you've got Baltimore city, obviously your core urban area. What about an area like, Owing mills? Is that, is that something a bit more desirable since a little further outside? Charlie Einsmann (12:58) Yep. We love we love Owing Mills. As a matter of fact, we like anything in Baltimore County like Owing Mills. I like Glenn Burney. Now, Glenn Burney is in a county called Anne Arundel County. We like anything around that. called 695. So 695 is the beltway that goes around Baltimore City. So anything on the outside of 695 we love and even mostly everything inside of 695 we like to. It's just that if I see. particular asset. So let's say I'm talking about a townhouse or in the city around here, they call them row homes. It's an attached unit. If I see any assets on the market or selling or under contract for like $120,000 or less, then I'll stay out of those areas. I'll do a 10 by 10 block search on it and anything under $120,000. If people are getting properties for that cheap, that tells me we just got to wait a minute, wait for that area to rebound and then we'll lend into it. We're not really leaders into those sort of areas. We're sort of followers. Rocky Butani (13:59) And what are the main challenges with that aside from having a smaller loan amount? it just the value doesn't hold? Is it more crime? Charlie Einsmann (14:11) Yeah, for us, number one, the value doesn't hold. Number two, remember, I'm an asset-based lender, right? And you hear the business as hard money lending or the new terminology I think they're calling is real estate transitional loan and private lending. But at the end of the day, we are still a hard money lender. I'm an asset-based lender. And because the way we got into the business is that we have fixed and flipped over 400, 450 houses, And so we built a pretty good capital stack. So I don't really check income. I don't check credit. If I like the deal, I will lend into the deal maybe because if I would to, if my rule of thumb is if I would have purchased that property for a fix and flip for our portfolio, then I'm going to lend against it. And so it's very simple. So in these areas, I don't want to lend on assets that I wouldn't buy. And so it's pretty much a simple rule of thumb for us. If that makes sense. Rocky Butani (15:08) But in, yeah, definitely. in, let's say the case of inner city Baltimore or even Washington DC, if the value is not an issue, is it just a matter of if you had to take back the property and own it and finish the project, you just don't want to be in that crime-ridden area. Is that really the main concern? Charlie Einsmann (15:28) That's right. Well, not me personally. I don't want my contractors there because we have a big following among contractors in this area too. So I've probably got about four to six different general contractors in this area that have about 20, 30, 40 people working for them. And so, I'll depend upon where in the area we have the property. They'll pretty much go there whenever I need them to go there because we've given them so much business. And so it's not really us per se. I just don't want the contractors there, but they'll go for us. I just don't... don't want them there. Rocky Butani (16:00) Sure, makes sense. How about other parts of, sorry, go ahead. Charlie Einsmann (16:04) Well, no, but the other problem with the inner cities too, especially whether you're talking Baltimore City, Richmond, Washington, DC, is that as a investor, right? So if you're a fix and flip investor, you have to understand what's called the first time home buyer programs. So each jurisdiction is going to have their own first time home buyer programs. And one of the things that you have to understand is not only the program or programs, but you have to understand if they're funded. Because a lot of times these first time home buyer programs run out of funding. And so a lot of these different properties that we're talking about are what's called entry level properties. And so you really have to understand that as well. And so one of the things that we do is we help educate our investors, our fix and flippers, because for example, in Washington, DC, there's a first time home buyer program called HPAP. That particular program gets funded every year, October the 1st, but a lot of times it runs out of money. you know, and March of that year. And so the next six months, the first time home buyers really, you know, it's very hard for them to buy houses. And so that impacts the rest of the market in certain areas. Rocky Butani (17:15) Interesting. So, so because those homes are just lower priced, you're not going to have your your typical home buyer looking to acquire those properties. So you have a limited pool of buyers is what what you're saying. Charlie Einsmann (17:28) That's exactly right. You have a limited pool of buyers. Now, the other thing with some of these certain areas though, which is good, is that you also have a lot of buy and hold investors buying into these areas because let's say one of our rule of thumbs is buying a buy and hold property is what's called 100 times rents. So especially in Baltimore, you could get much better multiples. So 100 times rents means let's say if the rent is $1,500 a month. As long as I can buy that property and renovate it for 100 times 1500, in other words, $150,000, that for us is usually a good sign to buy it and use it as a buy and hold, 100 times rents. In Baltimore, you can pick up properties at 200 times rents, which is pretty good. I'm sorry, you can pick up properties 50 times rents, which is pretty good. So, you can get them for much cheaper, and so it's a really good cashflow. But the problem though, with buying those kinds of cash flows in certain neighborhoods is that you're not gonna get price appreciation. You're gonna get good cash flow, but your price appreciation might not be there. Rocky Butani (18:34) Sure, makes sense. How about other parts of Maryland? What do you think about, let's say an area like Annapolis? Charlie Einsmann (18:40) We love Annapolis. Anything in Annapolis is gold. You've got the Naval Academy there. If you look at Annapolis on a map, it's surrounded by water. So you have a lot more higher dollar properties that are on the water. from an economic standpoint, it's very, very healthy. Anything in that corridor, it's called the Route 50 corridor, anything that leads from Route 50, which is the 495 DC metropolitan area, all the way out to Annapolis, that's all suburbia. That's gold. Fix and flip investors, it works. For buy and hold investors, it works. There's another county called Charles County, which is close to Annapolis. That's a very good county for not only fix and flips, entry level fix and flips, but it's also another good buy and hold county as well. So there's a lot of good counties out that way in Maryland that are good for investors. And the way I know about all this is because remember, people are coming to me with deals that they're purchasing. So I know the areas that are good because I know that's where all the investors are bringing me deals. So I could tell which is good and what's bad. Rocky Butani (19:48) Right. how about the other direction? let's say, Gaithersburg and going up to Frederick, how's that area performing at this time? Charlie Einsmann (19:57) Great, great. Okay, so Montgomery County is Gaithersburg. So you have Rockville, Bethesda, Gaithersburg, Germantown, that's considered Montgomery County. Those areas are very similar to Northern Virginia. There's not that much inventory. There's a lot more buyer demand than supply. Montgomery County is not the best as far as housing starts is concerned, even though they've got a lot of rural grounds up towards Frederick. Frederick County is another good investing area as well because it's very similar to Charles County. and that you can get good entry-level pricing and it's a good fix and flip market as well as a buy and hold market. And then you have Frederick City. So all of those areas is called the 270 corridor. All those areas within the 270 corridor are very good as well in Maryland. You've got Hagerstown and you've got Cumberland, Hagerstown is more of a buy and hold area. It's not very good for fixing and flipping. That's off of what's called I-70. So I-70 pretty much takes you across the country from east to west. We try and stay out of Hagerstown and Cumberland just because the assets are smaller in value. And so for us, the only time we'll lend there is obviously to a buy and hold investor. We have to make sure that they're in this case, even though I don't pull credit, I have to make sure that their credit is good enough to get what's called a debt service coverage ratio loan, a DSCR loan, so that we can refinance out. The number one question I ask any borrower when they come to me for a loan, the number one question is, what is our exit strategy? How am I getting paid back? Is it a fix and flip? Are you going to refinance me out with a DSCR loan? Are you simply going to pay me back? How am I getting my money back? That's the number one question. I have to feel comfortable about that. And so if it is a DSCR refi, then I do have to know your credit score at that Rocky Butani (21:48) Sure, yeah, I get those loan requests a lot where someone says they want to hold a rental for a long term, but their credit score is 600. They think that a hard money lender doesn't care about their credit, but the point is you're not going to be able to exit the loan because you can't qualify for a DSCR loan without a 680 or so credit score. So that makes sense. Charlie Einsmann (21:58) Right. You got it, 680 is number. I've seen 660, but no, you're right, 680 is the number. You've got to have at least a 680 and higher. as you know, on the DSCR side, let's say you have a four member LLC and they all own 25%. Well, each one of them is going to have to get their credit pulled, right? As opposed to a 50%, 50%, only two of them have to get their credit pulled. So both of them are going to have to have a 680 or better. Rocky Butani (22:32) Exactly. Yeah, definitely. When I see lenders advertising 660, I'm not sure what the conditions are. I'm a little skeptical. Maybe there's, you know, there's other factors that they have to make up for with that. But 680 seems to be the magic number with those loans. Charlie Einsmann (22:54) But even at 660 they're going to make them come up with more cash into the deal. It better have a bigger DSCR ratio. So instead of a 1, 1.1, 1.2, they're going to want to see a 1.3 or higher. So it just all depends. That credit score could really cost you. It could also cost you an interest rate. I mean, there could be a full 1 % higher. Points are going to be higher. So what folks don't realize out there is that your interest rate is gold. I mean, your credit score is gold. mean, the higher that credit score is, the lower these interest rates are gonna be, and that's gonna save you money and make you more money in the long run. Rocky Butani (23:26) Absolutely. Yeah, that's amazing what a difference there is between in pricing where you're in that 680 to 700 credit score range or 720 and you have all these tiers and it just makes a big difference. Charlie Einsmann (23:27) Yeah. It does. makes a big difference. Now for us as a lender, we don't do what's called, we don't portfolio any DSCR products, right? So the only thing that we keep in our portfolio is all of our originated loans, which are not DSCR loans. It's the fix and flip loans. I call it the buy and hold loan, but honestly, it's a buy and hold loan where the borrower uses us for a short term. They buy the property, they renovate it, they get a tenant in there, get the property performing, and then refinance us out. And then the other thing that we do is we lend money to wholesalers as what's called a transactional loan. Let's say if the assignment fee is too high, they don't want the seller to know about it. We'll give them an eight hour loan or one day loan. They will come and buy the property and then go ahead and sell it to their cash buyer. Yeah. Rocky Butani (24:25) And do you see a lot of those transactions or is that kind of a limited part of your lending program? Charlie Einsmann (24:29) Yeah, limited. You know, it's only, I would say it's maybe one or two a month of that. We actually like it because, you know, we actually make our points, get in, get out, get paid back. And that's, you know, that's what we like. But yeah, maybe one or two a month of that. It's not, it's not prevalent. Rocky Butani (24:45) Sure. And with the buy and hold loans, is that a big part of the business or do you find that most of your borrowers are flipping properties? Charlie Einsmann (24:56) I would say in our business, 80 % fix and flip, 15 % buy and hold, and then maybe that other 5 % are warehouse, I mean, a transactional loan. That's probably, most of our business is fix and flip. It's always been that way. That's our forte in this area and everybody knows it. Rocky Butani (25:17) Sure. And I guess in an area like the DC metro area, maybe the values are so high that a lot of properties wouldn't even cash flow if they wanted to hold it for a rental, right? Charlie Einsmann (25:29) No, that's exactly right because it doesn't fit our 100 times rents rule. You know, you might be able to get a property, let's say in Gaithersburg, you know, there might be a townhouse in Gaithersburg that you might be able to buy, let's say for, you know, $500,000, but the rent itself is only $2,500. And so, you know, when you're spending 500 grand and only getting a $2,500 a month cashflow, you know, 25 times 12 is $30,000 minus all your different expenses. That's not a really good return on 500 grand. So you're absolutely Rocky Butani (25:58) Yeah, they'd have to have a lot more equity in the deal in order for the numbers to work. Right. Okay. So let's dig a little deeper on your lending program since we started off talking about that. Tell us about leverage. How do you structure your loans in terms of a down payment and the rehab loan to cost and the after repair value? Charlie Einsmann (26:02) Yeah. Yeah, that's right. Yeah. Okay, so for us, the first thing that I look at, let's say it's a fix and flip loan, right? So obviously they're gonna send me the address, they're gonna send me the purchase price, they're gonna send me the renovation budget, as well as pictures, because I have to see the pictures so I can see if the renovation budget at least is on par. Then the next thing I have them send me is what they think the after repair value is. Okay, now I'm going to have what I think the after-repair value is because I have access to this thing called the MLS, multiple listing services, so I'm going to run my own comps because we don't really order appraisals. I am the appraiser. I'm the gatekeeper for all the money. Then what I do, I'll depend upon what area it is in, Northern Virginia, Montgomery County. Then what I'll do is I'll go up to, I'll look at 72.5 % of the after-repair value. I'll get a loan amount. I'll then take another parameter called the loan to cost. The loan to cost is the purchase price plus the renovation. I get a number. Then what I do is I look at 90 % of the loan to cost. I take that number plus the loan to value of the after-repair value. I compare both numbers and I say, okay, I can loan a certain amount of money towards this deal. Now, if the deal is very rich, and they buy into a lot of equity, then I could lend up to 100 % loan to cost as long as it meets the 72, 75 % loan to value, the after-repair value. So I am constantly changing all of my underwriting variables to lend into a deal because the deal itself predicates what I loan into. I don't have a fixed down payment. I don't have any of that. You know, in Washington, D.C., I might take the same deal. Instead of going out at, let's say, 75 % of the loan to value of the after repair value, I'll only go to 65%. Maybe some cases, if it's a full gut job, a $250,000 renovation, I'll only lend at 60 % loan to value of the after repair value. And then I might only lend 85 % of the loan to cost or 80 % of the loan to cost. It all depends upon the deal itself. And so we're very, very flexible. And one of the things that we do to separate ourselves from not only the nationwide lenders and my regional lenders is that we go higher than anybody else. As far as LTV, the ARV, I go higher loan to cost. And the reason behind that is, is we're not scared on the underlying asset. If I have to take it back, which I don't want to, then we'll go ahead and take it back. Because remember, our philosophy is, if I would buy that asset for that price, I'll simply loan on it. Rocky Butani (29:11) And since you're really the appraiser in-house and you don't do external appraisals, are you going out and looking at the properties, meeting the borrowers and really digging deep into the location and other factors? Charlie Einsmann (29:26) I am, if they're first, second, third time borrowers, in other words, if they've only done, let's say this is their first project or second project or third project, then yes, I'll do it. But remember, our business was built on what I call repeaters. So I've got a lot of guys that have done 10, 20, 30 deals with us. And so when they send me a deal, I'll basically carte blanche it. I'll say, okay, your ARV looks good. I know you're a contractor or I know what kind of work you do. And I know how you can... budget for renovations and you do a good job, I won't put that much effort into it. It just depends on who the client is. And one of the things that we like is that I'm not scared of new clients. I love new investors because new investors become experienced investors. And so one of the things that we provide is we provide our guidance. We provide our contractors if we need it. We provide advice on fixtures and finishes and all kinds of things. We show them how to sell the house into a certain types of market. We'll provide them with a stager. If they're using a realtor, we'll make sure that realtor has a property stage so they can sell for the maximum amount of money. So we provide a lot of guidance to our clients if they need it. And so what we do is we keep an open communication with them because once we provide them a lot of guidance and they understand and they make a lot of money, then the bond has already been built, right? The trust bond is there. So even though if I go out, let's say, know, 12 % interest only, three points or three and a half points, my competitor is going out at 11 and a half and maybe two and a half points, they're always gonna use us because of that trust bond. They're not gonna go to one of my competitors, whether it's a nationwide competitor or another regional competitor to get the loan, because they already trust us. They know that the money's gonna be there, we're gonna close in a week or less, and they just know that our draw schedule's easy. You know, the way we distribute draws, it's easy. And so that's what they like. They like simplicity. And we're gonna lend them the highest amount of money into that deal compared against my competitors. Rocky Butani (31:31) And are there any other requirements if someone's a newbie investor? They've never done a flip or any rehab project before. you change the leverage, increase the pricing? Charlie Einsmann (31:42) No, they don't do anything. What I do do though, is I really scrutinize their contractor. I have to understand who the contractor is doing the work. Now obviously one of the things that I try and do is if they come with me without a contractor, then I'm going to give them one of my contractors that we've used in the past. And so that contractor really at the end of the day is the one mitigating my risk. Because remember, I've already evaluated the deal from a number standpoint, right? I know that it's a good deal. And I believe in rewarding investors for finding these good deals. Because in essence, what I'm doing is that we're building a region of bird dogs. So bird dogs are coming to me with wholesale deals that we can buy under Clear Sky Properties. Bird dogs are coming to me with maybe deals that they want to fix and flip. So I'm helping them make money. And so it's a two-way street, and they really, really like that. Rocky Butani (32:39) And how about financials? When you evaluate a borrower, if you're not looking at their credit, what do you look at in terms of their financial background or how much liquidity they have? Charlie Einsmann (32:51) I don't as long as they're not putting a second trust on top of us. So in other words, what I do is when I build a loan, I'll build a deal and I'll send them what's called a loan builder and I will send it to them and they understand how much cash they have to bring in to close the deal. As long as they're okay with that, then I'm okay with that and that cash shows up to close the deal. Now, if it's a second trust, nope, we don't do it. And if they're getting what's called gap funding, I don't know if they have gap funding out in California, but around here they do have what's called gap funding. If I understand that they're getting their money from a gap funder, then odds are I'll probably pull out. won't do the deal. It just depends on the spread. Rocky Butani (33:28) in terms of starting the rehab project, does the borrower need to front the initial costs of getting materials or getting started? How does that work? Charlie Einsmann (33:38) That's the beautiful thing about us. See, one of the things that we've had to do in this area to keep our interest rates and points so high is that we've had to create these things called a separator, right? Separators. My loan to value to the after repair value. That's the separator. My percentage of the loan to cost, separator. This question that you asked is our third separator. We do what's called a pre-draw. So let's say you have an $80,000 renovation budget. We make you obviously give us the budget, we also make you give us what's called in this case, I would have them give me a four draw schedule. And so I will pre-draw them the day they close. Once it's been recorded, the next day I'll send them their first $20,000. Now, in order to get their second $20,000, they have better met every single draw one milestone that's in their schedule, or they won't get draw two. People love that because why are people coming to hard money lenders or private lenders? They're coming to us because they don't have that much cash. They want us to provide the cash. I don't have a problem with that. But like I said, you had better have done your draw one schedule milestones or you're not getting second draw. What that does though, is that lets us know right out the gate if we have a problem with that project and we can help them save it. And so that's very, for us, that's very efficient and it works and our borrowers love that. Rocky Butani (35:04) That is absolutely unique. haven't, I've heard of a few lenders that have done that, but in different areas. So, so that's definitely a huge plus. Love it. And then how about the draw process? Are you sending an inspector out there or are they sending you photos and videos? Charlie Einsmann (35:23) Yes to everything. It's funny because my inspector happens to be my partner Sam Jacknin And so remember, he was the one managing all of our projects, the fix and flip projects, our rental portfolio projects. So he has more experience than anybody else. And so we send him out there, if it's a new investor, or they've only done two or three projects, or we've never worked with this contractor before, I send Sam. And so Sam goes and reviews it. Now, if it is somebody that's done, let's say five or more projects with us, then pictures are fine, videos are fine, and that's okay by us. And most of our borrowers though are repeaters. And so for us, it doesn't sound as big as it is. I probably only do each month, I do 10 to 12 loans a month, average $400,000 a loan. So we're probably doing almost 4.8, 5 million a month. So we're still a pretty small shop. So I'm able to execute our business with just me and a partner. Yeah, and it works out fine. Rocky Butani (36:29) and let's talk about pricing you touch on that a little bit as far as the interest rate and points and maybe other fees You mentioned earlier around 12 percent and three points. Is that pretty standard for most of your deals? Charlie Einsmann (36:42) Yeah, that's been standard for us for about almost 13, 14 years. And you know, I'm kind of a simpleton, right? I like that 12 % because it's simply interest only. It's simply 1 % a month. So if you have a $400,000 loan, your interest only payments $4,000. It's simple. The three points, we've just kept it that way. Now, in the Joe Biden days, and we'll see what Trump does with the interest rates. Once the interest rates went up, we did change our pricing a little bit. We went to 12.5%, 12.75 % interest only, and I went from three points to three and a half points, four points. So we did change the pricing a little bit, but now as the interest rates have come down, and if our borrowers ask us, let's say I go out at 12.5 % and three and a half points, if they know I'm going to go out a little bit cheaper and I like them, and they say, hey, they come back and say, hey, well, you do it at 12.3%, I always say yes. I just use that maximum leverage just to get a back and forth going with our borrowers. So I mean, it's flexible. I've done deals that, you know, 11 and a half percent, 11 and two and a half, just depends on who the borrower is, but we're very flexible in our pricing and it changes all the time. As a matter of fact, at the beginning of January, I changed a lot of my loan programs to only six months. I want that money in and out in six months, especially if it's a Northern Virginia fix and flip, especially if it's a Montgomery County fix and flip. You know, it shouldn't take you more than six months to be in and out of that deal. I want you to execute on that deal, get our money out there and get it back. So I've changed some length on some of these loans because we're trying to increase our return on our money. So if I go out at, let's say, 12 % and three and a half points, and I can make sure I get that money back, then my rate of return on that money is 19%. I've got the constant 12%, and then I've got the three and a half times two, which is seven. So seven plus 12 is 19. So we're constantly looking at ways to increase our yield. Rocky Butani (38:42) And what about prepayment penalties? Do you have any? If they finished the project early. Charlie Einsmann (38:47) We don't have any prepayment penalties because the reason why we don't is the incentive is for that borrower to get our money back as fast as possible to limit their holding costs so that they make the most money. Right? I mean, obviously we're going to make money on points and fees and everything else, but we want our end user fix and flippers. We want to reward them for a good fix and flip. So if they're in and out in 60 days, 90 days, we actually love that because we make a bigger return on our points. Rocky Butani (39:16) What about if the project goes a little bit longer? Do you offer extensions as it occurs basis or do you plan that in advance? Charlie Einsmann (39:27) No, we plan in advance. So each one of our notes has a built-in three-month extension, usually at three points, four points. But what we have to do though, is once that six months is up and they haven't fixed and flipped it, if the property is on the MLS, and they've done a good job on the renovation, it just hasn't sold for whatever reason, then we'll give them that extension. Now, however, even though the extension is built into our promissory note, we still have to get the investor sign off on that extension before we actually apply it. Now they don't really have much choice because the other part of that is either you accept the three or 4 % extension for three months or the loans in default and you don't want the default provision. know, a hundred percent of time they always say yes, but we have it built in. Rocky Butani (40:16) And what if it's a project where they know it's going to be a bigger project? There's no way it's going to be done in six months. Do you ever write a 12 month term? Charlie Einsmann (40:25) I do. do. know, in Washington, D.C., before the market corrected 20%, I was writing Washington, D.C. years all the time. You know, then I would extend them. So that was a 12-month loan. And then we'd extend them another three months per the promissory note. So that really went into a 15-month note. The issue is because prices have come down in so many different areas of Washington, D.C., these investors haven't been able to sell their fix and flips, and they've had to go to Plan B. And plan B was renting that property out refinancing us out with the DSCR loan. And sometimes with the DSCR loan, they're going to have to bring a lot more capital to the table. And so that wasn't pretty. And so that that's been happening to us a little bit lately. Rocky Butani (41:06) how about borrowers that, that are, have a little bit of a unique situation? Do you ever lend to four nationals, for example? Charlie Einsmann (41:14) All the time. As long as foreign nationals have a LLC with a tax ID number, we do it all the time. And that's the other way we built up this business is because my number one client right now, they're Hispanic ex-contractors. So a lot of these contractors doing the work are finding good deals and they come to us with deals. So we make sure that they have an LLC. Now, a lot of times for us, we like what's called a single use entity LLC. So for example, let's say you're buying 1234 Main Street, Washington DC, I'm going to want you to create an LLC, 1234 Main Street, Washington DC LLC. Create a single use entity LLC, we'll lend to that LLC. You fix and flip the property, get us our money back. Because what that also does, by lending out to single use entity LLCs, it also helps us in bankruptcy court in case they have to file a bankruptcy, in case they get behind on their... renovation in case they stop paying us for whatever reasons, because not everything goes smoothly. There are problems in this industry, especially with contractors, maybe not, you maybe it's a $90,000 budget. Maybe they ran over like 60 grand, right? They under budgeted it. Like these things happen. And so we want to make sure that we have access to our asset in case we do have to come in and foreclose. Now, we don't like to foreclose. Most times we'll offer a deed in lieu foreclosure. But a lot of times if they put a second trust on top of us that we didn't authorize, then sometimes we do have to foreclose. It's just part of the game. Rocky Butani (42:47) And as far as a deed in lieu, that's just, that just means that, Hey, you know, I didn't really do this project as successfully as, as it was planned. Here's the keys. You guys deal with it. that what that is? Charlie Einsmann (42:58) That's it. That's exactly what it is. The market's corrected 10, 15 percent. I can't sell it for what I thought I was going to sell it for nine months ago. The numbers don't make sense. Here are the keys. And so we like that better because what we do is we release them from future liability because for us, we want that house back so that we can go in there and fix up whatever bad work that they've done, get our contractors in there and get that thing on the market to sort of limit our losses if there are any. And so a lot of times there's not really losses on our end. It's just maybe not getting a certain rate of return that we were expecting, so we just have to forfeit some of that. That's all. Rocky Butani (43:36) Okay. And in the past two years with the interest rates changing and valuations changing, have you had to deal with a lot of foreclosure situations? Charlie Einsmann (43:47) Yeah, I'm probably running at about one and half percent. So let's say I have a hundred loans out there. You know, I'm probably foreclosing on, you know, maybe two a year, two percent, something like that. So it's not something that we that we do a lot. Maybe one hundred twenty loans, maybe three houses, something like that. Lately, you know, in marketplaces that are coming down, we'll do it more so than next. We took back a property two weeks ago. in PG County, Maryland, and we stopped giving this borrower a draw. They were just in over their heads. So nobody showed up at the courthouse steps. Well, some folks showed up at the courthouse steps. They didn't feel comfortable bidding on the asset. We had to take it back. We're waiting on the judicial process in Prince George County, we're gonna get the property back and we're gonna go ahead and either, we're either gonna wholesale it, we'll fix and flip it ourselves. We haven't decided what we wanna do with it yet because there's a lot of room in it. Rocky Butani (44:42) One thing I didn't ask earlier as far as your lending guidelines is your loan amounts. What's your minimum and your maximum? Charlie Einsmann (44:49) That's a good question. Okay, so for us, my minimum is about $150,000. I'll go all the way up to about $1.2 million, $1.5 million, because we have about $40 million out there right now on the street. I don't like to go at anything above 2.5 % of that $40 million. So I like to cap it out at about million bucks. I'll go higher if it makes sense, because I do have some people ask me to do commercial lending. So I'll lend on some commercial assets as long as I really, really, really like the cash flow. So if the net operating income is good and the cash flow is good, or if it's a land development deal and it is a certain what's called a buy right use, let's say it's, I don't know, four acres of land and it's zoned R4, R4 means four houses per acre. If they could get 16 lots out of it and they're only buying it for the cost of one four acre piece, I'll be aggressive and lend into that. It just depends on the deal. Right, but we are taking back houses every now and then, but not that much, not like our competition in this area. If you don't know what you're doing in Washington, D.C. and PG County, a lot of these national players are getting, they're getting cooked in this market because they don't know what they're doing. Rocky Butani (46:02) And it seems like the DMV area has so many different counties. Is it kind of painful to get permits and deal with all these different counties? Is there a lot of variation there? Charlie Einsmann (46:15) That's a wonderful question. And that's exactly what the national players don't understand. I call them the non-regional players, right? So I'm big in this market regional-wise. Washington Capital Partners is my big competitor. We're good friends with Daniel Huerta's. And so we're regional players. We're probably the top. He's the number one regional player. We're probably the third one up here. We're probably number three or number four in this area from a regional standpoint. And the big issue is when these national guys show up, they don't know the permit process county by county by county or even in DC. They don't know how long it takes to get permits issued in Washington, DC from building of housing. They don't know how long it takes. Virginia, it's a lot easier. You don't need permits on certain projects. But if you're adding a basement or you're adding a bathroom or a bathroom or a bedroom, you need permits in Northern Virginia and all the counties. You have to understand what county, if you're in PG County, Maryland, you need at minimum a renovation permit. And if you don't get a renovation permit, somebody's going to tell on you, the neighbors, and you're going to get a stop work order. And you don't want a red tag on your door. And so, yeah, you really have got to understand the permit process, and we do. Rocky Butani (47:31) one thing I didn't ask earlier as far as pricing, do you charge any other fees in addition to the points? Charlie Einsmann (47:39) Yeah, we'll charge you what's called a $450 broker price opinion. We can't call an appraisal fee because I don't have my appraiser license. It's basically me going out there on a right in the deal, running some cops. It's not a bad fee. We've got $995 document prep fee. We have an assistant who's preparing all of our docs. All depend upon the jurisdiction. We don't use the Geraci's Document Processing Center. We do our own. So that's $995 It all depends. I might have an underwriting fee of $995 a processing fee. I might have a draw. If it's a new borrower and they have four draws of $20,000, $80,000, and they're using a contractor that we're not familiar with, I might charge them $250 draw fee. It's all variable. It all changes. It all depends on who the borrower is. If it's one of my borrowers that I borrowed 20, 30 times from us, they already know what the term sheet's going to look like. It's the skinniest I can get at $995 doc prep and a $450 BPO and that's it. Plus points. It just depends, right? Everything is negotiable. Everything is variable and nothing is static. That's for sure. Rocky Butani (48:50) And how long does it typically take to close most of your deals? Charlie Einsmann (48:54) Well, I always tell people we can close in 24 hours. Now, that's predicated on a title binder being pulled and usually that's when we replace out another lender. But my average deal is a week. It's a week or less. And that is all predicated upon the title company getting us back clean title. So of course, every deal that we do needs lender's title insurance. And so as long as the title company can get back that title work, I always tell people... we can close in 24 hours or less. most of my deals, I would say a week or less, which people love that. That separates me from everybody else too, because if you're a nationwide lender coming into our market, they're running a three week close because they've got to their appraisers, they've got to do this, they've got to do that, they've got to underwrite the deal and minimum timeline is three weeks for those guys. And so again, it's just another one of our separators and investors love it. Rocky Butani (49:48) tell us a little bit about your your company of the operation. How many people do you have? You know a little bit about the background. You don't have to go too far back in history, but just tell us a little bit about clear sky Charlie Einsmann (50:00) It's simple. Clear Sky Financial. So I am the senior loan officer. You're gonna laugh. I'm the chief credit officer. I'm the underwriting guy. I am whatever it is, right? I am still the gatekeeper for all the money. I'm the tip of the sword. And then we have my partner Sam, who does, once the loan gets into production and it's a live loan, then Sam takes it from there and he does the inspections. He sends out the draws. He then communicates with the borrowers. I pretty much go away. I'm not communicating with the bars at that point. It then transitions over to Sam. And then we have another girl, her name is Karen, and she runs what's called the mortgage office. And I'm sure you've heard of the mortgage office. All of our loans and everything goes on this mortgage office. And we use the internet part of the mortgage office. And all of our borrowers, they submit all their payments online. So we have this thing pretty efficient on the back office side. So basically, it's myself. It's Sam, it's Karen running the mortgage office. And then we have one other person who's a contractor. Her name is Alejandro and she does all of her loan docs. So if it's a DC loan, it's a separate set of loan docs. If it's a Maryland loan, it's a separate set of loan docs. If it's a Virginia loan, separate set of loan docs, North Carolina, Louisiana, Florida. We have loan docs for each different jurisdiction. And so she handles a loan doc piece of it and she does a great job. that's a very small shop and we've been this way for a long time. Rocky Butani (51:25) And tell us about your capital structure. You mentioned that you're keeping all of the loans. So do you manage a mortgage fund? Charlie Einsmann (51:32) Yeah, good question. So our capital stack is simple. So we have a 506B fund and a 506C fund. They're both $30 million debt offerings. And so most of it is my and my partner's money. We're pretty heavily invested in it. We always have been. And we have a bunch of investors. So for example, let's say it's a $30 million fund. $10 million is my partner's money and my money. The other $10 million, maybe $12 or $13 million is investor money. And then the rest of it is our relationship with our lender who gives us money so that we can expand, contract, expand and contract. So we do have a lending partner that is very flexible with us. And so that's basically how it is. And so what we do is we keep track of what's called our blended rate. So our investors get between, you know, they get between my new money is coming in at about 8%. But if it's an existing investor, they're getting between maybe eight and a half and nine and a half percent. And so And so between our money and that money, we're always working on our blended rate. So my blend is probably running at about 9.06 over the entire platform. And we're always looking for ways to reduce that blended rate. But our target return though is an 18 % return because I'm looking to lend that money out at 12%, three points every six months. So our target return is 18. Our blend right now is about 9.06. And so all the money is our money. It's our capital stack. And then we've never sold a loan off. Everything we keep, we keep in our portfolio, we service it all the way into the end. So if you're an investor borrowing money from us, you're with us from day one to the last day you fix and flip that house. Rocky Butani (53:15) And you mentioned a lending partner. Is that just a bank credit line or is that some external investment? Charlie Einsmann (53:20) You know, it's yeah, it's like, it's like, it's an additional $20 million line, but I wouldn't call them a bank because they are not a financial institution. They are another private lender. And their marketplace is like $80 million, but they don't have $80 million of loan demand. They might only have 60. And so my, you know, 10, 15 million, whatever I have out with them, we're part of their loan demand. And so they have a lot of incentive to lend to loan to us. because they're just making a 2 or 3 % arbitrage off the money that they're lending to us. And they like that. That's fine. They're older guys. They like it. Rocky Butani (53:59) What are your thoughts on your lending business and real estate investment activity in the DMV area for 2025? Charlie Einsmann (54:07) Well, we're excited about it. You know, we're still growing because we're so small and we have so much demand. We're still growing. So right now I have about 40 million out there. I could jump to 60 million in six months to a year. But that would mean another 20 million of cash infusion. That would mean maybe hire another loan officer, another processor, right? We don't want to really get into the corporate world. So for us, as long as the interest rates stay similar, then we think it's going to be a big year because everything around here is predicated on supply and demand as far as the inventory is concerned. In Virginia, we have low foreclosures. Maryland, D.C., the foreclosures are higher, so there's a lot more distress assets going on. So there's a lot of opportunity for fix and flip investors in this area. So we feel that 2025 is probably going to be 10 to 20 % higher than it was last year. And last year was 10 to 20 % higher than the year before. So we're very bullish on this year. Now, we've got to keep an eye on the current government and all these policies that they're passing, we're getting a little bit nervous about the immigration laws because what that's going to do is the people that are doing the work, we don't want them to get sent out of this country because they're doing all the work. And so a lot of these folks own houses. A of these folks are fixing and flipping houses. So we've got to keep an eye on that as well and other government regulatory policies. So I don't know. It's hard to say right now, but we're pretty bullish on this year. I'm pretty excited. Rocky Butani (55:34) Sure, and it's a little early to tell, but just thinking ahead to, but there's a new government. Washington, DC has a lot of government employees. Do you think the market would be affected by cuts and budgets or any of those kinds of moves? Charlie Einsmann (55:55) Yeah, it certainly will be and that's the other thing that's going on. But our marketplace though has a lot of technology here. We have a lot of biotech. We have a lot of private industry. So where maybe 20 years ago the government was propping up this area, it's no longer the case. We've got a lot of big companies here. Amazon has HQ2 here. We've got Meta here, which is Facebook and... Facebook and Instagram, we've got Google, we've got all kinds of technology companies. We are also what's called the data center capital of the world. We have so much infrastructure around here, data centers, and now AI is going to make that grow even more. So the other policies that this government recently passed was I think they want another $500 million into the AI world just on data centers alone. And so because we're the data center capital of the world, people are going to need to buy land. And so that land isn't going to be used for housing, which means there's going to be less supply. There's still a constant demand. So there's just so many forces that are impacting our market. And it's not a government exclusive marketplace anymore. It's a high tech marketplace more so than a government. So I don't know. We'll see. Rocky Butani (57:08) And that's a wrap for this episode of Private Lending Insights. The DC metropolitan area is fascinating. I learned a lot from this episode and I hope you did as well. This episode is sponsored by Clear Sky Financial. They have not paid for sponsoring this episode per se. They pay us a monthly fee to be listed on privatelenderlink.com. So if you want to learn more about them and find their contact information, you can go to our website and do a search in DC, Maryland, or Virginia, you'll find a link to their profile. If you want to get to their profile just by typing it into the browser, here's a short URL. It's PLLK.IO slash CSKY. That'll get you to their profile page on LenderLink. Thank you for listening all the way to the end. If you have any feedback for us, please use the comment section in YouTube. We've got a lot more interviews in the pipeline, so stay tuned to Private Lending Insights.