Non-QM Loans Explained: Mortgages for Self-Employed and Nontraditional Borrowers

Efri Argaman (00:00)
there were people that on paper could have bought the property sometimes twice in the money that they spent on rent. And I started to explore this and I found out that there is discrepancy in the market because the way that borrowers are underwritten today, so the way they’re underwritten today is basically focused.

on people that fit a certain scheme. They have to be either employed, have a W-2, be sufficiently educated to know to keep their utilization low. They have to have certain average age of credit.

Cody Crabb (02:15)
Hello and welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Efri Argaman with me. Efri is the founder of OwnEZ, a non-QM lender, helping qualified borrowers become homeowners through a different approach to underwriting, while also giving investors a way to be the bank, not the landlord. Efri, thanks so much for joining us today.

Efri Argaman (02:38)
Well yeah, Cody, thank you for inviting me.

Cody Crabb (02:40)
Yeah, I’m glad I’m glad we were finally able to make this work. so to start out, I’d love to hear we we chatted a little bit before the podcast. You told me before some something that kind of caught my attention. You didn’t actually come from real estate or lending, is that right?

Efri Argaman (02:55)
that’s true. So although I’m an economist in my background, educational background, I spent many years running medical device companies and wow. Yeah, and and and actually I I bumped into real estate by coincidence. in two thousand and nine, a year after the the big crisis. I had a small exit in one of the companies that I was running.

Made a little bit of money, wanted to make an investment, and I figured out that the market is in a good opportunity point for investor to step in.

Cody Crabb (03:26)
Yeah, if you getting a getting a big chunk of money right around then is to get into real estate is probably not the worst idea. Yeah.

Efri Argaman (03:33)
Yeah, it was more luck than wisdom, but it happened.

Cody Crabb (03:36)
yeah. Well that’s cool. Yeah. So you you kind of are an accidental investor in that way.

Efri Argaman (03:40)
So yeah, started as an accidental investor. I made my due diligence. started investing initially in in residential rental properties, mainly in markets that suffer the most during the crisis, aka Las Vegas, Phoenix, Orlando. started initially very slowly buying a few properties, and a couple of years later I had a significant number of doors under my belt.

And I realized that if I wanted to be a passive investor, having a nice success spreadsheet, collect some money, I ended up being a landlord.

Cody Crabb (04:13)
Yeah, and so if I remember correctly from our previous chat, you being a landlord was, to put it kindly, maybe not the number one thing on your on your wish list, right?

Efri Argaman (04:23)
So back in the time I still had a day job, other than my job today. And and at a certain point, once you have certain number of doors, you get like every other day a phone call from a property manager with some kind of a problem. although I made money per properties, it was pretty much volatile and the operational burden was something that I didn’t think about when I started doing this this line of investment.

Cody Crabb (05:36)
So what once you realized there had to be a little bit of a better way, or maybe just it for for someone that it that’s not a good fit for there had to be a better like another option, what did you do differently that makes own easy different than from what a traditional lender might do?

Efri Argaman (05:54)
So I guess again it was it was by coincidence. Things happen by coincidence. So in twenty twelve I left my day job. I started to focus on real estate. I did almost everything and anything in residential real estate. I was flipping, I was building, I was buying, I was renting. and during my journey I realized that in some of my rentals I had tenants that I would call them chronic renters.

there were people that on paper could have bought the property sometimes twice in the money that they spent on rent. And I started to explore this and I found out that there is discrepancy in the market because the way that borrowers are underwritten today, so the way they’re underwritten today is basically focused.

on people that fit a certain scheme. They have to be either employed, have a W-2, be sufficiently educated to know to keep their utilization low. They have to have certain average age of credit.

And basically I thought that these elements are not necessarily the right prediction point to

figure out if somebody will pay their mortgage or not. Moving forward a few years later, in 2017, I started ONEZ. And the idea was on one hand to convert chronic renters to become homeowners, but at the same time to provide investors like me that want to be hands-off an option to be exposed to this asset class on one hand. Enjoy non-correlated

non volatile yield, have a security investment, and avoid any of the operational burden of of holding residential real estate.

Cody Crabb (07:51)
Hmm. Yeah, I think it’s it’s the classic story, right? You see you see something and you kind of go, why does that not exist? And you kind of start researching and you kind of go, Well, I guess if it doesn’t exist now. I I kind of like the phrase chronic renters because chronic is like you don’t think of that as a good thing usually. Chronic is like something that keeps coming back when you don’t want it to necessarily. Can you kind of paint a picture of who

who a chronic renter typically is, like like what is it that makes them get into this situation?

Efri Argaman (08:23)
Sure, so I would say that chronic currencies may be people that work in the gig economy, self employed, people that they don’t have a monthly stable income. they don’t have W two, they might be an ITAN borrower or anything that doesn’t fit the Fannie Mae, Freddie Mac set of rules. these might be people that

Can afford buying a home. So chronic credits in my eyes are people that can afford buying a home, have the means to buy a home. They want to buy a home, but they have no access to conventional lending, not because they’re not good borrowers, it’s because the way that the system is structured. Because basically, unless you were born here, raised here, educated here, and that you have to have like 12 credit cards.

and a credit line of $100,000 in order to maintain your utilization at 10%, let’s say, and be awesome. Or that you have to have diversity of lending sources, meaning it’s not enough that you swipe your credit card and you pay your revolving credit meticulously on a monthly basis. If you never had an instalment loan, then you have a problem. And I found people that

would be considered to be super prime borrowers, but they prefer to buy their car with cash rather than finance it. And all of a sudden there’s no car alone on their credit history. So there are a few points down in their credit score rather than be great and awesome because they have cash and they don’t need to borrow.

Cody Crabb (10:32)
Yeah, and like me on the other hand, like I’m just some guy, but my my sister, when I was little, was like, I should get him started on stuff. Before I even knew it was happening, I was like an authorized user on her credit card that had a big limit and stuff. My credit was amazing when I started out because but through no nothing I did, it was it was pure luck. And on paper, I would look like a better borrower than some of these people, and that is just ridiculous. Let me just tell you that. That’s I don’t

Efri Argaman (10:59)
I agree with it. my youngest is a college kid. he’s a sophomore at UT and and and basically I did the same, since he was 14, he’s been an authorized user on on my credit card, on my accounts. And now that he became independent, all of a sudden his score is up in the sky.

and I can assure you that still he is pretty much dependent. it will take a minute for him to finish school and become independent, but the system scores him very highly because I, as his parents, I’ve been responsible. So when we started the company, we started in 2017, we started with our own funds. we started initially in Indiana, and it was

A good place for us to spend the first two years to build and check our model. So we’re a technology-enabled company. We design an algorithm that looks into data points that are more relevant to this target audience. So just to give an example, I care more if a prospective borrower paid his rent meticulously in the last two years. I care how much they paid for rent because my assumption would be that if they paid for rent a couple of grand per month.

They would probably pay a slightly higher amount for their own home and and will continue to pay. I cared to see, for instance, if there’s a big gap between between how much they paid for rent and how much they are approved based on their debt-to-income ratio. This is a concern for me because there’s no vacuum, people.

If they have money, usually they consume it. But if they’re financially responsible and they manage to save this gap, then it means that they’re good. So and I know I want to know if the prospective borrower is not a villain who is repeatedly doesn’t pay their loan. So we collect all kinds of information and eventually we come with a conclusion for how much of a prospective how much a prospective borrower can actually

how much of a house can a prospective borrower actually buy? and and with the idea of building the company to scale, we based everything on technology that we developed. We developed our own system, we call it KEZ. And the algorithm itself is non-discriminative, meaning that it’s all about numbers. the prospective borrowers, it’s a full doc loan, they apply.

Cody Crabb (13:01)
Yeah.

Efri Argaman (13:22)
They provide the information, we put it into the machine, the machine will crunch the numbers and issue an underwriting recommendation. And then obviously there is an MLO licensed loan officer that will review the file and make sure that everything is in line. And if there are any compensating factors that we didn’t look into, they have the discretion to make other a decision that is slightly different than their recommendation. But we want to be in a position that we give ever

Anybody and everybody that wants to become homeowner an opportunity.

Cody Crabb (14:34)
what I find really crazy about this is you’re saying, like, yeah, unlike the actual system, our system doesn’t discriminate. Like it’s crazy that the default is so like prone to that kind of thing, where it’s it’s almost like gaming the system where if you just happen to be the perfect exact kind of picture perfect person, like I know people that make twice as much as I do, but they get paid erratically because they do contracts and they do things like that. And so

Efri Argaman (15:02)
And

and and the economy has changed tremendously if you think about it, especially after COVID. people today they have platforms. you might be a freelancer that you get your work through Fiverr or Upwork or any other any other platform. And yes, your income is not predictable, but to be very honest and sincere.

Even if you work for the government, your income is not predictable anymore. We had a the shutdown a couple of months ago, and people couldn’t pay their mortgages because they were not paid, and and they’re supposed to be the most confident people having fixed income and so on. It doesn’t work this way. In our era, and especially with the introduction of AI, the the the labor market is changing constantly. And

And the and and and the lending system is just behind, the majority of our borrowers are young families, most of them are first-time home buyers, average age 35 to 44, small and young families. Many of them are skilled blue-collar laborers, and on an annual basis they make decent income. yes, there were the there were strong months and weak months.

But they make their payments. They they’re financially responsible. They know that they have to leave some money on the side when they have the season and and pay during the slow season to have enough money to pay their mortgage. And it works pretty well. And and and the the the banking system is not structured yet to accommodate such borrowers and then they want to become all of a sudden chronic renters out without choosing to be such.

Cody Crabb (16:41)
Yeah. So I mean it sounds like your philosophy really is just you’re trying to measure the actual ability to repay, not the ability to fit a formula. So is that would you say that’s a fair way to put it?

Efri Argaman (16:51)
This this is this describes exactly what we’re trying to do. I want to know if a prospective borrower can pay their loan, period.

Cody Crabb (16:59)

It’s cra it’s pretty wild that that’s that’s not just how it works. Like it should just be v much simpler, right?

Efri Argaman (17:04)
It it should be much simpler, for sure. For sure. But even I personally I went through these hoops when I wanted to buy my own home because being a business owner, I used to live on rental income. My taxable income, if you’re a real estate investment and you do it correctly, so your taxable income is not necessarily what you get in in cash. And

And being and living out of of dividends and rental income, I didn’t fit the the formula. on the other side of the equation, we are managing our we’re managing a fund which is our largest forward flow buyer. The fund is is basically the entity that buys these or finances these loans.

And as I said before at the beginning, I initially I was trying to find a solution to be exposed to this asset class without having the operational burden. But we yet what but yet what we ended up doing is is to to build a fund system that basically invests into these loans. So currently we’re raising our fifth fund and the investors are enjoying

stable income which is not volatile and more important is not correlated to the stock market. Of course now we are after three years that everything has been going up. with this tide everything is floating, but if people have slightly long memory to 2022 when the SP 500 was diving down, then we remember that we can never time the market.

So our funds are providing quarterly distributions and they’re not correlated with the with the stock market as opposed to let’s say real estate investment trust that the asset class might be stable, but as if they are traded, then when the market goes down, they will go down. Market goes up, they will go up, and there will be like spiky movements in the value of of the of the read.

so I would consider our fund to be the most sexiest, non sexy financial product. people that want to preserve wealth on one hand, want some exposure to risk, but not crazy risk, and want to balance their portfolio of other stuff that they might be doing, which is more volatile and more correlated.

Cody Crabb (19:11)
Yeah, I so so who would you say is the ideal investor for that for the fund? Like who who would get the most value out of it, you think?

Efri Argaman (19:31)
So first of all, we’re open for business only to accredited investors. but the profile our typical investor would be high net worth individuals, family offices, small institutionals, everybody that this profile fits the investment philosophy. and also sometimes

Less sophisticated investors that want to have some kind of a balanced investment that is on one hand protected with a real asset, because we have a real asset here behind all of this. There is a house, piece of land, and want to have some premium over low risk financial products.

Cody Crabb (20:09)
So looking ahead a few years, I mean, what do you where do you see OwnEZ in the next five to ten years? It sounds like you’ve kind of you started expanding, you’re raising multiple funds. I mean, what’s what’s the big vision here?

Efri Argaman (20:21)
So, like in any other company, I think we finished our startup stage and now we’re at the scale up stage. Our short-term goal is within the next 24 months to multiply our assets under management. we are currently licensed on the origination side in 11 states. we are expanding only into markets where this supply of

affordable houses that cater to our target audience and on the other hand there’s demand for people that need our products. so the the big plan moving forward is just growing.

Cody Crabb (20:57)
Yeah, for sure. Well, I I’m excited for you. It sounds like things are are really this sounds like things are at a really exciting stage. and things are kind of hopefully you can kind of make a dent in this kind of very strange world of of trying to play the system and and things. Hopefully you can kind of create a s a system where maybe there’s some change and some people can get financing that that may not be able to normally. so if you if people want to learn more about own easy, connect with you, learn more about the fund.

Where can they go online to do that?

Efri Argaman (21:26)
Sure, so all the information is at www.ownez.com. you can always look for me on LinkedIn. It’s Efri Argaman. and and always you can call 1-888-55-OWNEZ. (888-556-9639)

Cody Crabb (21:42)
Gotta love a phone number. Love a good old phone number in here, yeah.

Efri Argaman (21:45)
yeah, well to tell the truth, I managed to pay twelve bucks for this. But I when we when I just started a company, we did it with our own funds. It was a it’s it’s a bootstrap company and for me it was a new experience because all my other companies are doing the right way. You come with an idea, you go and raise big money.

I took two of my companies public, it’s other people’s money, everything is big, you have a nice office, a statue in the lobby, the whole thing. when you start a company with your own funds, you become extremely efficient. you find that flying spirit, may them rest in peace, works as as as good as flying with the major airline.

Cody Crabb (22:17)
Of course. Yeah.

yeah.

Yeah, you’re like is there a standing room option that’s cheaper? ‘Cause I’ll do that. Yeah. No

Efri Argaman (22:34)
And and you find a ways to to buy the vanity number for twelve bucks.

Cody Crabb (22:38)
Yeah, exactly. That’s awesome. Well, everyone, if if this sounds interesting to you, if it sounds like you’re you would be a good fit, definitely reach out to Efri and and find out more. Thanks so much for for giving us some time today. And yeah. And audience, we’ll see ya on the next one. Catch you later.

Efri Argaman (22:52)
For having me. I enjoyed it.