Saving on Escrow Fees with Nate Cater

Nate Cater is based in Los Angeles. His company is PHOCIS which specializes in providing escrow services for smaller independent private lenders. The value proposition is to save on escrow fees. As always, perform your own due diligence. Request state-by-state escrow or money transmitter licenses. Ask for copy of regulatory compliance policy and legal opinion on FBO structure. Request a tri-party or bank confirmation letter confirming the FDIC-insured FBO account setup with Wells Fargo or secondary banking partner. To connect with Nate, visit https://phocistech.com/ ------------ **Real Estate Espresso Podcast:** Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1) iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613) Website: [www.victorjm.com http://www.victorjm.com/](http://www.victorjm.com http://www.victorjm.com/) LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce) YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734) Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso) http://www.facebook.com/realestateespresso%5D(http://www.facebook.com/realestateespresso) Email: [[email protected] mailto:[email protected]](mailto:[email protected] mailto:[email protected]) **Y Street Capital:** Website: [www.ystreetcapital.com http://www.ystreetcapital.com/](http://www.ystreetcapital.com http://www.ystreetcapital.com/) Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital) http://www.facebook.com/YStreetCapital%5D(https://www.facebook.com/YStreetCapital) Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)

• 0:02Speaker 00

  Welcome to the Real Estate Espresso Podcast, your morning shot of what's new in the world of real estate investing. I'm your host Victor Manash. This is the weekend edition where we interview notable people from the world of real estate investing. Today is no exception. We have a great guest all the way from Los Angeles. Welcome to the show Nate Cater.

• 0:17Speaker 01

  Thank you for having me Victor.

• 0:19Speaker 00

  Well, great to have you here. You're doing some fascinating work in the world of fintech, financial technology, and I'm excited to have this conversation. But before we dive into the details, maybe give the folks who you have met a little bit of your backstory and how you got to this point in your journey.

• 0:33Speaker 01

  A lot of mistakes that seemed to spiral into something decent. I started in Los Angeles. I was in the Marine Corps. I left the Marine Corps. I went into residential lending. I did that for about five to seven years. I then went into residential development. I then went into private money and that all kind of centered me around the fact that escrow charges the people that own the money to move their money, which is the only financial leverage which that happens. Normally, if you're the person that owns the cash, you don't pay the fees. If you're putting money on somebody else's books, you'll usually earn something from that. And when I noticed how much escrow is taking off the table with

• 1:14Speaker 01

  post-closing funds or management of escrows or management of private capital, whether it's real estate funds or development funds, or even bridge lending. Once fintech came into play, we realized that we were able to run an entire escrow platform for free by using a banking license. So we have really turned escrow into a software and we're looking to try to shave off everybody's escrow fees by this time next year on all commercial transactions across America and hopefully Canada.

• 1:43Speaker 00

  Of course, this is a wide universe. There's folks that are borrowing funds and often those funds get submitted in draws. Often, if we look at, for example, the traditional construction loan, money is going to get advanced only when that collateral, which has been installed in the building, can form part of the security for the lender. So there needs to be some verification process because a pile of two by fours on the sidewalk can't be collateral for the lender. There's this give and take between when can money get advanced in the process. This occurs at all different levels. At the institutional level, at the very high end, there's quantity surveyors, the architects do the draw walks, there's

• 2:25Speaker 00

  a whole process. But at the smaller level, this is an area that is maybe a little bit of Wild West and open to a whole bunch of different processes. Where does your focus fit?

• 2:37Speaker 01

  Our focus was on bringing what the bigger capital institutions had readily available, the access that they had to banks and infrastructure with the way that they move their flow of funds, especially post-close. We wanted to bring that to the regular consumer. So let me give you an example. A nationwide lender, and I don't want to say their name, but let's say a nationwide lender that averages about $100 million a year in post-close funds being put. So any construction, any cash out loan. If you have $100 million or more, you can walk into any banking institution and say, hey, listen, we're going to put $100 million on your books and you're going to assist us with running our escrow. And they're going to say absolutely. But if you're a small mom and pop guy that's just putting $10 million out on the street every year, or you're running your own banking infrastructure, especially

• 3:20Speaker 01

  in specific states within America, along with three provinces in Canada, you legally have to remove those funds from your books. And if you don't have a $100 million balance that you can then transfer to a banking institution, instead of now, instead of you earning money on that 100 million, because you don't have it, you're now going to be charged to go to escrow. Now, escrow is your only respite, if you will, and it's always going to come with an invoice. So we partnered up with a couple of different banking institutions. We ended up falling on Wells Fargo, number one for name recognition, number two, because they allowed us to move our funds that we wanted to. But really what we're doing is we're offering what the bigger nationwide lenders are offered. We're giving that to the regular mom and pop. So we're putting that on in the street and our goal is to

• 4:01Speaker 01

  shave off anywhere between 3% to 5% in escrow fees on every transaction that they're moving, based on them holding their funds on our books post-close. So really, it's not revolutionary what we're doing, but it is the first to market for the regular Joe. And that's what we would like to do is is give the mom and pop lenders or the regular individuals who are just running their lives. We want to give them the opportunity to be able to combat these bigger lenders who are coming into the private credit space. I remember at the beginning of this year, reading multiple news outlets about how JP Morgan Chase was just dumping money into private markets. And the more I saw the amount of money that they were dumping in, the more I realized that the regular mom and pop that's selling

• 4:44Speaker 01

  money at nine or 10%, that they can't compete with Chase at seven and a quarter at one point. But if we can shave off margins with escrow or title or other ways that we can figure out how to give them access to a third-party platform, again, that's either free or paying them in APY based on their AUM, we can now make them competitive to the bigger lenders. And I'll stop after this, but I have one example. One of our first lenders that we onboarded out of Manhattan Beach, if you did one fix and flip with them in the past, and they essentially knew that they were going to fund the loan for your fix and flip, now they were offering free appraisals. So that was just one way to get people in the door. I'm going to save you 500 bucks on appraisal on the front end because they know on the back end, they're going to put their funds on our books and they're going to save

• 5:27Speaker 01

  5% to 7% on the back end, which is probably a three to five multiple on the 500 that they gave on the front. So it's not apples to apples where they're selling nine and a half and Chase is selling seven and a quarter. But maybe if I'm selling nine and a half, I can get it done in 15 days and I give you a free appraisal. Now, you might be able to go up against a Chase who's going to take 30 to 45 days, have a little bit more of a regular onboarding process where the mom and pop can maybe do things a little bit quicker. But anyways, at least it's giving them an advantage. It's giving them a hedge. So our biggest goal was to bring power to the people, if you will.

• 6:02Speaker 00

  Well, when I think about choice of lender, there's a number of things that drive that. Certainly, of course, is our ratios. So for example, a large bank like a Chase is going to certainly be much more conservative in terms of loan to cost, loan to value, amount of reserves that the borrower has to post and so on, than a private might be. And of course, that private is going to charge a premium in accordance with that. They're also, in many cases, going to be much faster to close than a bank that has to go through their entire compliance process. Private might be able to do in two to four weeks what would take a commercial bank 90 days. So that's a factor as well. In terms of choosing

• 6:46Speaker 00

  a lender, from a borrower's perspective, where does what you're doing show up? Or is it strictly a benefit to the lender?

• 6:54Speaker 01

  It's a fun question because we want to stay away from the borrower as much as possible because our client is the lender and that's where our allegiance is. And we don't want the lenders to ever think that we're stepping on their toes. But we do give lenders suggestions. And I just gave you one example where one lender in Manhattan Beach was offering free appraisals. There's different ways that lenders can leverage our technology in order to bring in more clientele. And like I said, the easiest thing to do is for them to let their borrowers know that now there's no escrow fees on the back end. So every wire doesn't have to cost you 250 bucks to get released. Like, that's just like a small little thing. We don't have to wait two to three weeks for a release. We can release it the same day.

• 7:35Speaker 01

  So we're pushing lenders to use our technology for marketing purposes, but also they can run their bank how they want to. It's not our job to let them know what they should be or shouldn't be sponsoring. So I guess it depends on the lender. It depends on who we're working with and how they want to utilize our technology to better scale their banking infrastructure.

• 7:57Speaker 00

  When we think about the movement of money, especially in today's environment, there's so much that we have to worry about, even just from a safety and security standpoint. There's new and creative ways for fraud to be committed, especially now with AI. What kind of safeguards have you got in place that protect the lender, protect the borrower?

• 8:15Speaker 01

  So not to give too much of our infrastructure or our banking setup away, but it took me nine months of back and forth between underwriters and overlays with Wells Fargo in order to get this flow of funds. It took me another three months to get that done in Canada as well. I've worked in lots of banks. I've worked for lots of banks. I've run a couple of banks. And what I've noticed is that the number one rule in every bank is CYA, like cover your, you know what. So if you think about the CYA aspect of it, a lender, especially as big as Wells Fargo, would not allow me to onboard. And by the way, our average starting balance is about 325 grand. So we're not talking about 40 or 50 grand. Like, we're talking about bigger numbers. So to be able to pass our AML or anti-money laundering

• 8:59Speaker 01

  and to be able to ensure that we don't have to submit any CAC reports for incoming funds, one of the requirements is we have to have a final closing statement that needs to be sent with every wire. So the final closing statement does two things. Number one, it's going to verify who the end funds are for. It's going to verify the amount of funds we're supposed to be receiving. But also, most importantly, within the month, we're going to see the county records being updated with whatever the new lien amount is, on whatever the new property is. So we can now tie that into the actual banking record to verify that all of these funds are legitimate. These are where these funds are supposed to be placed. And then as the proceeds or as the funds are being divvied out, as progress is being made on the build, if that's the example that we're going to use, every lender

• 9:44Speaker 01

  should have some type of a calendar on how they're going to be distributing in their funds. So all of those come into play with validating and verifying, number one, the money coming in is legitimate. And number two, the money going out is going to the right person, in the right place, at the right time, for the right product. A last thing that we require before money is sent out, especially in California, are lien releases. Because if you have a lien release from the GC, then you know that it's free, that you're free to make that payment and you know that nothing's going to come back. So there's, it's not only a CYA on the banking side, but I think that as consumers, we've gotten so untrustworthy with banks that we forget that the bank CYA is the customer CYA. What the bank is requiring to make sure that all their AML stay compliant is the same thing

• 10:26Speaker 01

  that a hosting lender would also want to validate that these funds are accurate, that these funds are not being commingled, and of course, that these funds aren't fraudulent. So we have three or four different safety nets. And then the last thing I was going to bring up is we do have an AI compliance engine where contingent on the state that you're funding your loan in, you can automate the compliance engine based on your final closing statement, and then that will connect to the state that you're in, which will then pull out all the laws and legalities. It'll let you know that either you're compliant or you're not compliant in the type of fund or the account that you're opening, and then it'll actually spit you out a certificate. Between us, our certificate is basically worth what it's printed on. But at some point, at least it's a validation that you are in

• 11:07Speaker 01

  compliance with the state regulatory overlays to make sure that there's not going to be a three-letter agency knocking at your door, knocking on your door at some point to let you know that maybe something wasn't kosher. So the long story short is we're offering our clients peace of mind in the sense that if we're compliant with the banking infrastructure and HUD and the FDIC and the powers that be, then your funds are also going to be safely held, managed and regulated.

• 11:34Speaker 00

  Well, Nate, if folks want to connect if they want to learn more, what's the best way?

• 11:39Speaker 01

  Check us out at focustech.com. It's spelled P-H-O-C-I-S tech. Or you can text our AI bot. His name is Jack. The number's on the website. He'll answer any questions for you. It's not like a data mining thing, I promise. We just like to know what people are asking and what people are looking into. Because sometimes people's curiosity brings up whatever the next new nation is within our banking platform. Like, one of our first clients, for example, they're South Korean-based and a lot of their proceeds come from South Korea. And it took us about two weeks, but we were able to get an approval to start transferring international funds just for that specific client. So they can bring money into the state. They can lend it as they normally would on their balance sheet. And then the funds would end up back on our books. Once each closing state or each closing

• 12:24Speaker 01

  occurs, they'll push the funds over. This is a, it's been a fun ride. It's weird being the only ones doing it too. But yeah, if you guys want to find us, go to focustech.com. I know that we're new and I know that it's different, but we're really trying to shave off anywhere between 3% to 5% on every real estate transaction, really in North America within the next year.

• 12:44Speaker 00

  Well, Nate, great to catch up. And for the listeners at home, if you want to connect with Nate Cater at focustech.com, links will be in the show notes. And of course, with anything involving banking, you want to perform your own due diligence. We have not performed any due diligence on this offer. And in the meantime, have an awesome rest of your weekend. Go make some great things happen. We'll talk to you again tomorrow.