In this episode of Underwriting Gangsters, host (Speaker A) and guests Hudsy and Becco walk through the underwriting of a $175,000 property using a Morby Method structure. The deal is deliberately chosen because it falls just short of the host’s underwriting threshold (match score 69% vs the required 70%). The episode details the deal’s financing assumptions—50% cash to seller, 50% seller‑financed at $100/month, 75% bank financing at $918/month—along with rent ($1,750), vacancy (5%), PITI ($1,289.64), and a 10% property‑management/CapEx reserve. The resulting cash‑flow analysis shows a gross cash flow of $106 and a net cash flow of –$59, highlighting the danger of a break‑even position. The host discusses buyer surplus (target $20‑$25k) and the cash needed at maturity ($44k), concluding the deal is over‑leveraged. Various levers—bank LTV, seller contribution, refinance horizon (8‑10 years), and exit‑refinance LTV—are examined to see if the over‑leverage can be reduced. Despite a decent DSCR, the host deems the deal unsuitable for his personal criteria, though it might work for others. The conversation is informal, punctuated by child interruptions, playful “trophy” competition, and meta‑comments about the live broadcast. The episode ends with a light‑hearted award of a trophy to the guest who “underwrote” best.
Chapters
Welcome back to Underwriting Gangsters. We got another episode with our special guest, Hudsy and Becco in the house. Say what's up, everybody.
What up, buddy?
Say hello.
Uh, how are the sucker puppy and uncle puppy?
They want a sucker and a cool puppy. We're going to be doing this podcast every day, Monday through Friday, as much as we can. Usually they get a sucker and they were very disappointed to know that they can't get a sucker every single day that we do this. So that is a disappointment already.
Daddy?
Yes?
Want to get a sucker puppy? Want to get the bull puppy and the bunny puppy? I want both.
You want both? Yes. Okay. All right. Well, let's do both. Deal. You guys want to underwrite a property today?
Yeah.
Yeah, let's do it. We have a property that is $175,000. This is structured as a Morby Method, and I intentionally picked this one out because it did not pass my underwriting standards, and we're going to talk about why it didn't pass my underwriting standards. So this was just on the cusp. My underwriting standards is a match score of 70%. This is at 69, and we're gonna walk through it. So the initial structure is 50% cash to seller. Hey, can we stop playing with that, please? Yeah, I understand, but you're making a lot of noise. So then we have seller financing at 50%, and we are going to structure this as a $100 monthly payment. Apparently I put him to sleep already. We've lost one guest. Hey, you're not gonna get your salary today if you don't Are you gonna participate?
Yes.
Okay, we gotta make sure you get— you gotta earn your salary, buddy. I don't know what his salary is. I think it's, um, probably bars. I think that's his salary for the day. Uh, well, I take that back. In alliance to the IRS, he will be getting paid for this episode. Hey, don't hit him in the head. No, no, no, no, no, no. Let's calm down. Okay, that's enough, that's enough. We don't hurt him. Okay, so we have bank financing at 75% is how we're structuring this. So the monthly payment is $918. Hey, monthly rent is $1,750. Okay, so we have some vacancy in there at 5%. We have our PITI with our property taxes and insurance. Can you say PITI?
No, I can't.
Say P-I-T-I. There you go. You say it.
What?
What?
PITI.
That's what we're doing. So PITI is $1,289.64. Then we have $100 a month monthly payment. We have 10% for property management and CapEx. So let's look at the bottom line. We have gross cash flow at $106, net cash flow, negative $59. So we are essentially breaking even at a slight loss. Now that looks fine on paper, but I will tell you from experience, I have gotten— hey, we're not hitting him on the head or you're going to be off the podcast. Okay. So I will tell you from experience that being at a break-even point is a very, is a very dangerous position to be in because real estate is expensive. No, dang, no. Real estate is very expensive and what all it takes is one month of vacancy and your entire annual cash flow is gone for the whole year. We want to make sure that we have some stuff on the bottom line. So now when we look at buyer surplus, this is cash that you would be getting paid at closing. So I like to have it structured to at least around $20,000, around $20,000 to $25,000.
Okay, okay, okay.
Around $20,000 to $25,000. But the major problem that's with this deal is that our cash needed at maturity is $44,000. So what that means is we're actually overleveraged quite a bit. So you will want that as close to zero as possible, or even negative, because if you, if you get to the point where you refinance this loan, so if we go— do you need to sit on my head? So if we get to the point where we refinance this loan, which is a period of 8 years, you can see that we are overleveraged. This episode's going well.
Okay, that's enough sticky fingers.
Okay, so if we adjusted this years to refinance upwards, we would see that number even at 10-year balloon. That means we're still $30,000 overleveraged. So what that means is when you get to that 10-year period, you're gonna have to stroke a check for $30,000. Okay, okay guys, hold up. We have to pause the broadcast. Okay guys, we gotta have a talk. We can't do this anymore on the podcast because you're gonna get fired and you're gonna get fired. You don't want to get fired. Yeah, you're gonna get fired. You're gonna get fired and you won't be on the podcast anymore. You'll have to go upstairs if you're not going to participate. We're not going to touch the microphone. Fired means you don't have a job anymore. Okay. Okay. So we want to be good. All right. We're going to sit and listen. You can be silly and have fun, but we can't touch the microphone anymore. Okay. I know we'll play here in a second. Okay. We have to underwrite the property to see if we're going to buy it or not. Does that sound cool? Okay. Okay. All right. Okay. So we moved this to 10 years refinance. We're still overleveraged. So the only levers that we have to pull is bank LTV. Well, there's actually a couple levers. So we're going to lower this bank LTV, which lowers our overall leverage. And you can see that dropped it from $30,000 down. The other lever you can pull is giving the seller more. So now we've gotten this down to $13,000 or almost $14,000 overleveraged. But the problem is now we have to bring cash to close on this deal. So in this Morby Method type of structure, it's not exactly how I would like to structure this. So right now, as it sits, this is looking like a deal that would be really hard for me to actually make work. Um, So if we look at, okay, okay, no hitting, guys. Yeah, no, we're not going to be hitting. Okay, leave it alone. Leave it alone. So you could continue lowering this leverage down to 65% to make this to where the cash needs at maturity is a workable deal, or you could increase the refinance. So typically what I see on my end, very, very difficult for you to do that. You can also make some adjustments. You see here I have a 75% LTV, so you could make a little bit more aggressive assumption that you can get 80% LTV on your exit refinance loan, and then that'll pretty much bring you to a break-even point, which would be a really good point to be at, and then you can potentially make this deal work. However, you're not really getting much buyer surplus at closing. So I can bring this up slightly to get that number back up, but it's kind of like a, um, calm down.
Don't get my trophy! Don't get my trophy!
They're fighting over pretend trophies. Okay, whoever is gonna get— whoever is gonna underwrite this property the best is gonna get the trophy. Okay. Those are the rules. Are you going to underwrite this the best?
Yes.
Or is Hudson?
Me.
You are?
Yes.
Okay, well, let's— hey, part of underwriting is we have to be good and we have to— we have to watch the numbers. We've got to pay attention to the numbers. Okay? Because if we don't pay attention to the numbers, we lose cash flow and then we lose cash flow, then we go broke. Okay. Well, yeah, we don't want to be broke. Okay, 'cause then we don't have a house.
The house?
Yeah, that would be bad. So we have to make sure we make good decisions or we lose a lot of cash flow. Okay. Okay, all right.
Sexy be angry with that.
What?
Sexy be angry with that.
I don't know what you said. Be angry with that? Be angry, what? Okay, moving on. So, Let's take a look at this deal structure. So again, this is, this is why the deal's on the borderline, and we're still kind of at this 69% mark here. And ultimately, when you're looking at these numbers, there's the— it's just hard to make this deal work. The revenue is just not high enough. The, the debt structure is not where I would like for it to be in order for me— that in order for this deal to work for me. Now, this may work for other people, but it doesn't work for me. And notice how the DSCR is actually pretty good, but when you start to layer in the other debt structure, uh, hold on, let's see. Is this going to be sent out? I'm watching this on my cell phone and I really can't see, so I'd like to have a link. This is actually live on my Facebook and YouTube, so, um, you can check it out there. And then this will actually be a formal podcast episode on my YouTube channel as well. So, uh, if you can navigate through all the children screaming. So again, overall, overall, this deal is not a good deal for me. And that's it from Underwriting Gangsters, and we'll see you guys next time.
Bye-bye! Bye! Get trophy!
Bye! He got the trophy! Good job, good job! You got the trophy.
I got a trophy.
You got the trophy. Good job, good job, good job, good job.
