The Official Magazine of AAPL July/August 2018
LENDER LIMELIGHT
Romney Navarro, Jadon Newman and Chris Ragland Discuss the Future of Private Lending LEGAL CANNABIS
Creating new opportunities for real estate
LOAN SERVICING Handle in-house or outsource?
MATURING HOUSING MARKET What the numbers tell us
JULY/AUGUST 2018
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PRIVATE LENDER
CONTENTS
JULY/AUGUST 2018
07 WHAT'S CURRENT
12
Tr ending I ndu s t r y Topic s and N ew s Fr om A r ound
t he Wor ld o f Pr i v a te L ending
12 BUSINESS S TR ATEGY
12 5 L oan Ser v ic ing T ip s f or Pr i v a te L ender s by J ef f Levin
18 Tr end s and Pr e dic t ion s f or t he Flipping Space by B obby Mont agne
22 T he I n s and O u t s o f L oan Ser v ic ing by Rosie Meyer
26 L eg al C annabi s B r ing s N ew O ppor t uni t ie s by Pete A smus
30 LEGAL
26
For eign N a t ional s' Real E s t a te Pur c ha s e s Slow Dow n by N ema Daghbandan, E sq.
34 LENDER LIMELIGHT
W her e I s Pr i v a te L en ding H ea de d?
wi th Jaden N ewman, Romney Navar ro and Chr is Ragland
44 C A SE S TUDY
46
B r ook l y n B r ow n s tone: Renov a t ion I s Re quiem
46 MANAGE & LEAD
46 C ommunic a t ion St y le De ter mine s O u tcome s by Eddie W ilson
50 Your B u s ine s s I s L os ing M oney by K at Hunger ford
54 IR A APPROACH
C an L oan Ser v ic ing H elp Your I R A? by Clay Malcolm
60 ALTERNATIVE ANGLE
60
I nve s tor Financ ing H ea t s Up by Rober t Greenberg
66 L A S T C ALL
Per s ever ance and D r i ve C r ea te N ew O ppor t uni t ie s
wi th B enjamin D onel
JULY/AUGUST 2018
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FOCUS...
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C a ll R C G Today
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www.RollinsConsultingGroupLLC.com or 386-562-3016 PRIVATE LENDER
PUBLISHER'S LET TER
R. MICHAEL WRENN
PRIVATE LENDING INDUSTRY CONTINUES TO HEAT UP
Chairman, Affinity Worldwide
Summer is in full swing and as its energy heats up, we at
EDDIE WILSON
the American Association of Private Lenders are contem-
CEO, Affinity Worldwide
plating the momentum of the private lending industry. We
LINDA HYDE
Executive Director, AAPL
have talked with boots-on-the-ground industry leaders and
CHRISSEY BREAULT
those who examine the data. Based on these conversations,
Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
it is clear the industry is, and will continue, evolving how business gets done at the Main Street level.
TIM DRAPE
Senior Account Manager, AAPL
KELLY SCANLON Copy Editor
SPRINGBOARD CREATIVE Design
CONTRIBUTORS
Pete Asmus, Laura Chalk, Nema Daghbandan, Benjamin Donel, Robert Greenberg, Kat Hungerford, Jeff Levin, Clay Malcolm, Rosie Meyer, Bobby Montagne, Eddie Wilson
COVER PHOTOGRAPHY Errich Petersen
Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.
SUBSCRIPTIONS
Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.
BACK ISSUES
In this edition, our Lender Limelight interview is with
three Noble Capital partners: Jadon Newman, Chris Ragland and Romney Navarro. They discuss current trends and future projections for the private lending industry. Both Robert Greenberg and Bobby Montagne address in their articles why more investors are turning to private lenders to fund their flips—and why they expect this trend to continue.
Several contributors—Clay Malcolm, Nema Daghbandan and Kat Hungerford—help us to see how processes make our businesses run more smoothly and profitably.
We are inspired this month by Eddie Wilson and Benjamin Donel, who remind us that how we choose to think and speak determines our personal and business
outcomes. I love Benjamin’s quote, “You are your own stumbling block, and only you can overcome it.” I appreciate the wise words of both gentlemen.
I hope you find this issue educational and inspirational. As always, thank you for reading and being an important part of our community.
Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250.
For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.
LINDA HYDE
Executive Director, American Association of Private Lenders
www.aaplonline.com Copyright © 2018 American Association of Private Lenders. All rights reserved.
The American Association of Private Lenders is an Affinity Worldwide Company. JULY/AUGUST 2018
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PRIVATE LENDER
WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING IGNITE FUNDING
SURPASSES HALF
BILLION MARK IN TRUST DEED INVESTMENTS
In May, Ignite Funding
surpassed half a billion dollars in Trust Deed
investments. The 970
real estate investments provided 41 borrowers in 11 states with the
ability to acquire and develop more than
10,000 acres of land,
7,000 residential lots
and 600,000 square feet of commercial space.
CIVIC FINANCIAL SERVICES CLOSES $190 MILLION SECURITIZATION
Civic Financial Services has completed CIVIC 2018-1, a $190 million securitization. It is believed to be the largest known securitization pool in the history of private residential money lending. The offering consists of 548 real estate investment loans originated 100 percent by CIVIC. The average loan amount is $346,715.33, with terms between one and four years. The first for the company, the securitization consists of “fix and flip,” bridge and repositioned loans issued to real estate investors. All loans in the securitization are secured by residential and multifamily non-owner-occupied properties and were originated in-house by the private money lender.
GER ACI AT TORNEYS HONORED Anthony Geraci, the managing shareholder of Geraci LLP, has been honored with a membership in the Forbes Los Angeles
Business Council. The council is composed of small business owners in the Greater Los Angeles area and focuses on growth and networking opportunities for locally-owned businesses. Invitations to the council are extended to applicants who display depth and diversity of experience, as well as a commitment to the Los Angeles business community. Nema Daghbandan, partner, and Melissa Martorelli, associate, have both been selected for the Super Lawyers Rising Star list. This marks the third year that Daghbandan has been honored, and the first time Martorelli has been named.
JULY/AUGUST 2018
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WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING
PEERSTREET HITS FUNDING MILESTONE, RECEIVES HONORS, MAKES KEY HIRES PeerStreet, a platform for investing in
The company recently announced two
$1 billion in loan funding since the
of chief real estate officer and head of
real estate-backed loans, has announced company’s launch. This announcement comes after PeerStreet announced the close of its $30 million Series B in April. A year ago, the company announced that it had funded $300 million in loans. By September, it had surpassed $500 million. Having historically focused on shortterm bridge loans on non-owner occupied residential properties, PeerStreet is now expanding into other
senior real estate hires, filling the roles commercial real estate to help expand
these programs. John Devereux joined
the company as chief real estate officer. And, Greg Galusha joined the company as head of commercial real estate.
Both will be based in PeerStreet’s headquarters in Los Angeles.
The company’s progress has been
honored numerous times. Just recently, it won Comparably’s 2018 Culture
Awards in the following categories:
real estate asset classes, including
B est CEOs for Diversity
buy-to-rent, multifamily and small
B est CEOs for Women
balance commercial real estate loans.
B est Managers B est Leadership Team
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PRIVATE LENDER
Other recent accolades for PeerStreet include being named one of the 10 Best Startups to Work For in Los Angeles and one of the Top Fintechs to Work For. The company has also been included on lists such as the CB Insights Fintech 250 and HousingWire’s Tech 100. The company’s manager of underwriting,
Nia Patel, was also recently named to
HousingWire’s 2018 Rising Stars list of young leaders to watch in the housing industry. HousingWire’s 2018 Rising Stars list recognizes talent that demonstrates leadership and innovation, inspiring not only those within their company, but also their communities and the industry at large. Patel began at PeerStreet as an entry-level real estate analyst and quickly climbed the ranks to her current role.
KC INVESTOR
GROUP ACQUIRES
FIRST CONSULTING
A group of investors that
own Affinity Worldwide and
National Real Estate Insurance Group (NREIG) and led by Tim Norris, has purchased First
Consulting and Administration Inc., a Kansas City-based
insurance compliance service
company established in 1969
AT TOM DATA SOLUTIONS L AUNCHES ONLINE MARKETING LIST PL ATFORM
ATTOM Data Solutions has launched ATTOM List, an online marketing
list creation platform that gives users access to public record tax, deed, mortgage and foreclosure data for nearly 155 million U.S. properties. Users can create targeted direct marketing lists in minutes. ATTOM List replaces a marketing list platform that ATTOM offered through subsidiary RealtyTrac. The new platform features an expanded data footprint with more than 30 million additional properties and more than double the number of data selects for more precise targeting of prospects. There is no cost to register or run counts on ATTOM List, and multiple pricing options are available. Users can register for an ATTOM List account at https://list.attomdata.com.
and previously owned and
managed by Francine Fetyko. The purchase was finalized
in May. The terms were not disclosed. The new owners
plan an expansion of products and services. First Consulting and Administration will retain its current name and location.
AFFINIT Y WORLDWIDE INVESTS IN OWNAMERICA Affinity Worldwide has made an equity investment in OwnAmerica. The
purchase deepens the partnership between OwnAmerica and two of Affinity
Worldwide’s real estate-related entities, Think Realty and National Real Estate Insurance Group (NREIG). The terms of the investment were not disclosed.
OwnAmerica is a leading platform that operates a national marketplace for single-family rental portfolios. Affinity Worldwide’s investment connects Think Realty members with OwnAmerica’s online tools, which help them find and secure properties and scale portfolios according to their personal investing goals. NREIG is now the preferred insurance program of OwnAmerica. “This partnership is in line with Affinity Worldwide’s vision to provide real estate investors with valuable education, services and tools for success,” said Eddie Wilson, CEO of Affinity Worldwide and Think Realty. “OwnAmerica has one of the largest databases of investment properties in the nation and tools to help investors find the right properties for them. This partnership will make investing easier.”
JULY/AUGUST 2018
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WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING COREVEST EXPANDS LENDING PL ATFORM
CoreVest has expanded its bridge lending platform to include large-format multifamily
properties of up to 150 units. The offering includes both credit line and single-asset bridge loans. The loans, ranging in size from $250,000 to over $25 million, can be used for both purchase and refinancing. Rehab funding options are available as well.
TOOR AK CAPITAL PARTNERS GETS MORE
INVESTMENT, REACHES LENDING MILESTONE KKR has increased its investment in Toorak Capital Partners to $250 million, after initially committing $75 million in 2016. Toorak recently reached the $1 billion total loans milestone. Toorak invests in small balance real estate loans throughout the U.S. and the U.K., including single-family rental loans, commercial and residential bridge loans.
SHARESTATES SURPASSES
$1 BILLION IN LOAN ORIGINATIONS Online real estate investment platform
Sharestates has surpassed $1 billion in
loan volume. To celebrate the achievement, Sharestates is giving away $100,000 to one of their investors. The giveaway will be in the form of Sharestates credit. For every referral by a current Sharestates investor, the referring party will receive three chances to win, and any new registered accredited investor will also receive an entry.
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PRIVATE LENDER
VALUATION PARTNERS L AUNCHES HOMEBASE Valuation Partners, a national appraisal management company with access to more
than 10,000 independent fee appraisers in all 50 states, has launched HomeBase, a proprietary tool designed to increase transparency and minimize delays associated with appraisal appointments. Available through a secure link, HomeBase provides all parties involved in a residential transaction with real-time access to details about the appraisal appointment, including details on the appraiser, the appraiser’s name and contact information, the kind of vehicle they drive, as well as information for buyers and sellers about what to expect when the appraiser visits the property. In addition to details about the appraisal appointment, HomeBase provides a single point of contact for all parties involved in the transaction to verify details about the appointment and the appraisal order.
SUNSET EQUIT Y
ANNOUNCES MOVE
Sunset Equity, a
nationwide private
lender specializing in fix and flip and
construction loans, has relocated its
headquarters to a LIMA ONE CAPITAL L AUNCHES LOAN PROGR AM Lima One Capital, a national specialty finance company that focuses on investment
property lending, has launched a new loan program for portfolio investors that specialize in single-family rentals. The new loan program, Rental30 Premier, is designed to provide financing for larger investors with portfolios of single-family rental properties. This product will complement Lima One’s current Rental30 loan program. The Rental30 Premier product offers loans on portfolios valued at $500,000 and higher that consist of five or more properties. Investors can borrow up to 80 percent of the portfolio’s value, securing 30-year, non-recourse, fully-amortized loans. The Rental30 Premier product does not have a maximum loan amount.
new office in Silicon
Beach, California, to accommodate the company’s rapid
growth. According
to CEO Ben Donel, the company’s employee count has doubled in the past year.
JCAP OPENS TWO MORE OFFICES JCAP Private Lending has opened branches in Texas and Pennsylvania. Michael O’Brien, who has more than 20 years’ experience in the mortgage industry, will be the regional manager of the Texas office.
Kate Radivojevich, president, and Minnette Clepper, director, will head up the Pennsylvania office, which will serve the eastern U.S.
JULY/AUGUST 2018
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BUSINESS STR ATEGYÂ
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PRIVATE LENDER
5 Loan Servicing Tips for Private Lenders by Jeff Levin
BECOME FAMILIAR WITH FANNIE AND FREDDIE The government mortgage guarantee programs offer
lucrative opportunities for
private servicers and subser-
vicers. Fannie Mae, of course, refers to the Federal National
Mortgage Association (FNMA), which the federal government created in 1938. Freddie Mac
is short for the Federal Home Loan Mortgage Corporation
(FHLMC), which was launched
Private lenders who strive to become best-in-class servicers will set themselves up for healthy profits.
in 1970. Most readers are familiar with the fact that
Fannie and Freddie, as well as Ginnie Mae and the Federal
Housing Administration (FHA)
L
oan servicing has historically been a rather ho-hum industry, long the domain of the traditional bank. Today, however, servicing is a critical value driver for mortgage originators and investors alike.
The playing field between large and small servicers has leveled out—particularly with federal government guarantee programs like Fannie Mae, Freddie Mac and Ginnie Mae. Although banks dominated mortgage lending immediately after the 2008 financial crisis,
they now face stiff competition from Quicken Loans, Freedom Mortgage, LoanDepot, Caliber Home Loans and many others. Nonbanks issued nearly half of mortgages sold to Fannie Mae and Freddie in 2016, compared with 8 percent a decade ago. Now they are taking a bigger slice of the servicing business as well.
to rising interest rates, which serve to reduce demand for refinancing and thus retain borrowers longer. Not surprisingly, consolidation among servicers and subservicers alike is now in vogue. And technology advancements are likely to disrupt old-line thinking and push early adopters to the front of the pack.
The stakes are higher with servicing though. That’s because of regulatory and compliance hurdles, as well as the overall trend in the market where originations are tougher to come by due to inventory shortage. Still, servicing can boost profits due
Whether you service mortgages directly, subservice them, or are thinking about entering the field, there are five steps you can take to build a profitable operation to enhance your relationship with borrowers and reduce your risks.
were formed to stabilize the U.S. residential mortgage
market and expand oppor-
tunities for homeownership
and affordable rental housing. Today, these quasi-private
federal entities invest in or
insure more than 90 percent of mortgages in the U.S.
Fannie’s original purpose
was to buy mortgages from struggling banks to free up
capital for more lending. The goal was, and still is, to make more affordable mortgages
available to low- and middleincome buyers. Fannie Mae typically buys loans from
JULY/AUGUST 2018
13
BUSINESS STR ATEGY
lenders of all sizes, including banks, credit unions and private lenders.
Servicers of Fannie Mae
loans are paid a servicing fee by the federal government, whether they originated or
currently carry the loan. The
process is automated, so the fee amount appears on the
trial balance report produced by Fannie Mae’s investor
reporting system. Because
servicing fees are computed on the same basis as the
interest portion of the bor-
rower’s monthly installment payment, the servicer gen-
erally can base its servicing
fee calculation on the interest collected. However, when a mortgage loan is in default and undergoing negative
amortization, servicing fees are based on the interest
amount that is accrued, rather than on the amount that was
collected. In either case, the federal government guarantees the payments.
reporting tools to reduce the
access to a crucial stockpile
The servicer is still obligated
reporting. Servicers can man-
go sour. The new Freddie
payments to the mortgage
friction in compliance and
age loss mitigation workout
cases and monthly deficiency reporting exclusively online. Fannie’s platform provides
for real-time evaluation and
Working with Fannie is less
decision-making, again level-
think, so private lenders are
the big banks and the smaller
banks that deploy significantly
This year Freddie Mac quietly
time-consuming than you may
ing the playing field between
on an equal footing even with
privately-held businesses.
larger staff. The agency
deployed a suite of online
started extending credit to
of cash if their home loans credit lines, which haven't
been publicly announced, are
PRIVATE LENDER
longer collecting any money from the borrower. Eventu-
tions. In its list of 2018 goals
reimburse the servicer. But in
oversight board, the Federal
serious cash crunch. Naturally,
(FHFA), said they should find
because they are deposit insti-
servicing liquidity.
have this additional cushion of
mortgage-servicing opera-
ally, Fannie or Freddie will
for the companies, Freddie’s
the meantime, there can be a
Housing Finance Agency
banks can absorb this shortfall
ways to support mortgage-
tutions—but nonbanks don't
Freddie Mac lending is wel-
help the companies maintain
because things can turn
come news for private lenders, problematic for a servicer
when the borrower defaults.
14
investors even though it's no
meant to support nonbanks’
nonbanks that issue mortgages, a move it says will
to keep sending monthly
liquidity. Until this year, they
would have to borrow against
their future income stream. But
now, with Freddie stepping in to
Development (HUD), Ginnie
banks can compete even harder
affordable housing finance by
offer additional credit, the nonagainst traditional lenders for servicing or subservicing.
providing market liquidity to
federally-sponsored mortgage lending programs.
A Ginnie Mae guarantee allows G ET
GOING WITH GINNIE MAE In the past, it was almost
always banks that insured
loans with the Government National Mortgage Associ-
mortgage originators—banks, credit unions or private—to underwrite loans to lower
income people who otherwise may not be able to qualify or
afford a higher cost of financing. It guarantees the loans,
ation, called Ginnie Mae for
so they can obtain a higher
are originating the majority of
resold in the capital markets.
short. Today, nonbank lenders
Ginnie Mae loans. This serves as a highly effective way to
level the playing field between
price when bundled and
Lenders then can use the proceeds to make new mortgage
loans, advancing Ginnie Mae’s
banks and private lending
mission of creating more
support backstops the loan.
opportunities for families.
institutions, since taxpayer
If a borrower defaults on their
mortgage, Fannie and Freddie are responsible for the losses
on the loans they guarantee to investors, while Ginnie Mae is financially responsible for the
bond payments to the holders of Ginnie Mae securities.
spent an average of $482 to deal with a nonperforming
Mae’s mission is to expand
affordable home ownership Ginnie Mae also enables
existing “seasoned” loans
CREATE TECHNOLOGY TO CUT THE COST OF SERVICING It’s no surprise that banks
are usually not “early adopters” when it comes to using
technology to service loans.
This is an area where nimbler private lenders may not just
level the playing field but beat the banks. It all comes down to finding ways to use tech tools to reduce the cost of servicing and risk.
In general, the cost of ser-
vicing loans has increased
dramatically since the 2008
financial crisis. Banks as well
as nonbank institutions were required to add staff and
lenders may be unaware that
rules issued by the Consumer
under FHA, VA or RHS/USDA
that Dodd-Frank created.
loans originated and insured
Finance Protection Bureau
program of the 1960s to
be met for modified loans
As a wholly-owned federal
pool to be securitized. But
ment of Housing and Urban
process for new loans.
are a few conditions that must
promote home ownership.
or those purchased out of a
corporation within the Depart-
the approach is quite like the
higher to get servicing right, especially with borrowers
who are underwater or fall behind on payments.
Servicers can use technology
for more reliable platforms and
processes. For compliant loans, this means adopting new applications to replace labor costs
and improve reliability for the mundane work of managing
escrow accounts, collections, investor remittances, reports and reconciliation. When it
comes to nonperforming loans, it is even more valuable to use technology to build relation-
Imagine the value of keeping
legislation, as well as new
as part of the Great Society
means the stakes are much
consumer protection put in
with the tough new rules for
guarantee. Many private
tized with Ginnie Mae. There
staggering increase. This
ships and a closer connection
place by the Dodd-Frank
Ginnie Mae was established
of $2,586 10 years later—a
new procedures to comply
to be securitized with its
guidelines can also be securi-
loan, compared to an average
to borrowers.
borrowers engaged and communicating 24/7 year-round with an interactive, artificial intelligence platform. Think how convenient borrowers
An Urban Institute study
would find it, for example, if
2015, the cost of servicing a
modification payments using
more than three times, from
Zelle or Venmo.
much greater for nonperform-
help servicers and subservicers
indicates that from 2005 to
they could make weekly trial
performing loan increased
a peer-to-peer mobile app like
$59 to $181. Naturally, it’s
Furthermore, technology can
ing loans. In 2005, servicers
reduce risk by segmenting
JULY/AUGUST 2018
15
BUSINESS STR ATEGY
When servicers and subser-
borrowers based on their
vicers retain their borrowers,
likelihood of becoming compliant again. For example,
sentiment analysis of their
social media presence can predict how likely certain
borrowers are to improve their financial condition, especially considering how little slack
BECOME BEST IN CLASS AT CUSTOMER SERVICE When it comes to lending,
strong customer service capabilities make companies more profitable and reduce risk.
there is in the labor markets
This is especially true when it
reduce manpower costs and
A good servicer or subservicer
to servicing.
the risk of damage to the origi-
today. Technology can both
comes to troubled borrowers.
strip out risks when adapted
can reduce both defaults and
nator’s brand name by employing highly effective customer
management methods and pro-
PARTNER WITH A BANK OR CREDIT UNION TO BE THEIR SUBSERVICER
cesses. Rather than each lender duplicating this effort in-house, the industry has split out ser-
vicer and subservicer roles to
There’s the adage—if you
allow for functional expertise to
vate lenders should consider
Servicing and subservicing
can’t beat ’em, join ’em. Pri-
approaching banks and credit unions with new opportuni-
ties to handle a wide range of responsibilities as a subser-
vicer. It often makes sense for
lenders to originate loans and then pass over servicing to
more expert firms. High-quality subservicers can keep
delinquency rates low, ensur-
ing originators and investors a secure and reliable source of capital for new loans.
bloom for servicing.
will become more important
to the mortgage value chain as originations become scarcer due to both the shortage of
housing supply and the rising interest rate environment.
Interest rates are expected
to continue to steadily climb, which is great news for client
retention. In a rising rate environment, borrowers are likely to stick with their existing
loans rather than refinance. For servicers, retaining
existing clients is much more profitable than signing up
new service contracts and
onboarding new borrowers. 16
PRIVATE LENDER
it’s easier for them to reap
ABOUT THE AUTHOR
some efficiencies of scale that benefit the bottom line.
This is a good time to be a servicer or a subservicer because there’s a terrific tail wind. Housing values are growing steadily, as the burgeoning millennial generation become first-time homebuyers. But due to the constricted supply, originations will not be quite as valuable a line of business as before. Servicing is where the action is. As housing values climb, there’s more equity both for the homeowner’s balance sheet and for the mortgage investor. And the recent robust returns in the stock market add liquidity that can continue to pour into the housing markets even in the rising interest rate environment. By getting engaged with the governmental guarantee programs from Fannie, Freddie and Ginnie Mae—as well as adopting new technology, partnering with banks and credit unions as a subservicer, and adapting best-in-class customer service— private lenders can readily compete with banks. The market has shifted, and private lenders who set a strategy to become best in class as a servicer or subservicer will reap healthy profits for years to come. ∞
JEFF LEVIN Jeffrey N. Levin is the founder and president of Specialty Lending Group (SLG) and
Pinewood Financial, which
together provide a full suite of boutique private real
estate lending services in the Greater Washington,
D.C., area. Before launching
SLG, between 1993 and 2007, Levin was a co-founder and
CEO of iWantaLowRate.com and a co-founder and
president of Monument Mortgage. Levin is a
recognized authority, lecturer and panelist. He is also a
member of the American Association of Private
Lender’s Education Advisory Committee. He earned a bachelor’s degree from
The American University in Washington, D.C.
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BUSINESS STR ATEGYÂ
TRENDS AND PREDICTIONS FOR THE FLIPPING SPACE by Bobby Montagne
18
PRIVATE LENDER
Predictions about the maturity of the current housing market and the potential effects on the flipping and private lending industries abound. Some experts cite statistics on continued housing price increases as well as these prices relative to income growth as cautionary signs. Others point to more positive barometers: The number of days on market for houses in most cities isn’t increasing, and unsold inventory isn’t piling up.
The reality is that no one has a crystal ball. Still, analyzing the wealth of current data we have can provide us with some clues about where we are in the cycle and how to get the most out of the current market.
INTERPRETING THE DATA The ATTOM Data Solutions first quarter 2018 report released on June 6 contained some interesting and seemingly contradictory statistics. Flipping gross profit for first quarter 2018 was $69,500, the highest since ATTOM started tracking this data in first quarter 2000. Yet the average 47.8 percent return
on investment of these same flips is down to a nearly threeyear low. Highest profits in a decade, yet falling ROIs? “The 2018 housing market is a double-edged sword for home flippers,” says Daren Blomquist, ATTOM’s senior vice president. “Rapidly rising home prices boosted by low available inventory of homes for sale or rent are padding profits at the back end when flippers sell, but those same market realities are eroding flipping returns at the front end by forcing flippers to pay more to acquire homes to flip.” Core urban areas with large populations and stable job markets, where “after renovation” prices remain high, are understandably and consistently popular with flippers. But
flippers are finding that these are increasingly more competitive and expensive areas to buy distressed properties, which squeezes their profit margin. And the sheer numbers of flips in these markets with these reduced ROIs affect the national ROI averages. But the lower ROIs being realized by some flippers can also be interpreted as a sign of a healthier market, one with so much end-user demand that more and more competitors are looking to buy and flip the same properties. How does this affect the private lending space? Generally, properties with higher purchase prices are harder for flippers to finance on their own. This can translate into more demand for capital from private lenders. In fact, the percent of flips reportedly financed for the initial buy was 35.7 percent in first quarter 2018, 2 percent more than a year ago and a 9 1/2-year high. Some MSAs have even higher rates. In Greater Washington, D.C., for example, 44 percent of flips are financed, nearly 9 percent above the national average. The housing shortage is the greatest supply shortage in 60 years, partially because millennials are finally buying. For the second year in a row, millennials have been the largest group of home buyers in the nation, purchasing nearly
1 in 3 homes sold each year. And numerous studies show us that millennials want to buy homes that are “move-in” ready, though they aren’t the only ones. Buyers from all age groups tell real estate agents that they are looking for “turnkey” properties that require little to no repairs or improvements. All of this bodes well for the fix and flip industry, which creates exactly those types of properties that buyers are looking for, across many price points. Housing and job markets are resoundingly regional, as is the fix and flip industry. Metropolitan Washington, D.C., for example, has been a hot flipping market for many years running, because it has the elements critical to fix and flip success: a high density of homes, a stable job market and a strong local economy. Local Market Monitor, an organization that tracks more than 300 MSAs, counties and Zip codes, collects and analyzes regional data such as home prices versus income, future construction needs and business growth reports. This data is used to help them predict, among other things, the medium-growth and high-growth areas across the country.
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BUSINESS STR ATEGY
USING DATA FOR STRATEGIC EXPANSION So where are the best regions, cities and Zip codes in the country to renovate homes and fund those renovations? ATTOM Data Solutions’ quarterly and annual reports are a great place to start for identifying and analyzing everything from the volume of flips, flipper profits, ROIs, percent of flippers who use financing and even age of housing stock. When you
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PRIVATE LENDER
overlay their data with other metrics such as jobs growth and housing affordability data, you get an even a clearer picture of potential markets for strategic expansion. Here are a few other metrics to consider.
01 Percentage increase in
population with a bachelor’s degree or better.
College-educated buyers have the salaries to afford the trade-up flips. And those with a bachelor’s degree or better have higher
homeownership rates than those with only a high school degree. So, the more of them there are in a target market, the better.
02 Increasing median
household income.
In areas where good jobs are being added and the economy is expanding, median household income typically rises. This is a tricky metric because you can’t look at the raw data in isolation. Memphis may be a top flip
market in the country right now, but an upper-middleclass income there won’t buy even an entry-level home in San Francisco.
03 Housing affordability. This metric, calculated by the National Association of Realtors, measures how much of the population in an MSA can buy the median-priced home. Looking at changes tells you how income and housing prices are moving in local
markets. Rising home prices backed by rising income is a positive sign. Rising home prices accompanied by falling or stable incomes is more of a warning sign.
04 Days on market. The percentage of homes selling in 10, 30, 60 or 90 days is a good news/bad news kind of metric. In a hot market, a flipped home will sell quickly, but it’s also harder to acquire homes to flip because properties sell so fast. On the other side, a market where it’s taking 90 days to move most homes is probably not desirable.
05 T he delta between as-is and improved trades.
This measure is difficult to pin down because so many indices track bought and sold prices without capturing what the flipper had to put into the deal. Knowing you bought at $300,000 and sold at $600,000 tells me little unless I know you only had to spend $100,000 to get the property to market. A good expansion market has neighborhoods on the cusp of gentrification where you can still find good buys.
The best expansion markets have up-and-coming neighborhoods where you can ride a bike to work.
06 H ow tight are zoning
restrictions? Is the permit process reasonably fast?
Flipping a dozen homes in Houston can be easier than flipping a single home in San Francisco. Expansion into a development-friendly county or city is always easier than expansion into a heavily regulated housing market. When you consider entering a market known for being tough on renovators, be sure you can accurately price the cost of delays (and have permit expeditors on speed dial).
07 I s the market already saturated with private lenders?
The more competition you have, the more likely it is that margins are compressed. If you have to borrow at 8.5 percent, then lending in Los Angeles, where fierce competition has driven private money into the 8’s, is obviously not a good option.
08 D o I have reliable
partners on the ground?
Private lending requires loan-level supervision to
ensure borrowers are on track with renovations, but we would never limit ourselves to only contiguous markets. Where we don’t have local talent, we partner with national inspector and appraiser groups. What is necessary is having someone local doing business development. Caveat: Others would argue that volume, artificial intelligence and a large loan loss reserve fund can replace local eyes.
by using the available data to strategically choose what regions to focus on, we can protect ourselves further while expanding. ∞
ABOUT THE AUTHOR
09 O ther factors. In addition to the metrics listed above, there are a number of other factors to consider when researching new markets. Among these are a rising local economy, quality of life, competition from new multifamily and single-family development, remodeling costs, stock of distressed properties and stock of improved properties. We still see significant runway ahead in the fix and flip space. Consistent job growth, the housing shortage, record returns for flippers and higher rates of financing fix and flips are all positive signs. Because private lenders operate primarily in the space of residential properties with a short shelf life and frequent property churn, we can also protect ourselves from long-term loan exposure. And
BOBBY MONTAGNE Bobby Montagne is the
founder of Walnut Street
Finance, a leading private lender in the mid-Atlantic
and member of the American
Association of Private Lender’s Education Advisory Committee. Walnut Street Finance
is the sponsor of the Walnut
Street Finance Fund II LLC, a $30 million private lending
fund offered under SEC Rule 506. It allows investments as
low as $50,000 and provides a preferred dividend of 9 percent with no fees.
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BUSINESS STR ATEGYÂ
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PRIVATE LENDER
The Ins and Outs of Loan Servicing Should you service loans in-house or outsource? by Rosie Meyer
Loan servicing is a process through which a company collects interest, principal and escrow payments from a borrower. Loan servicing is a key process within any mortgage company. The process includes sending monthly payment statements, collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance, remitting funds to the note holder and following up on delinquencies. This process continues until the loan is paid off.
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BUSINESS STR ATEGY
There are a few ways that a business can execute loan servicing: I n-house T hrough a bank T hrough a third-party company
Loan servicing plays a key role in any financial institution. A few years back, loan servicing was commonly handled by banks. Banks originated loans, so they would typically end up handling the servicing of the loan and be responsible for the
administration of the loan. This all changed when the market crashed in 2008. Banks began applying stricter guidelines and tougher lending practices to ensure regulatory compliance. Businesses were obligated to adapt to the new guidelines. Since the crash, the market has seen exponential growth. The private lending industry has now grown to a $68 billion industry. As a result, there is a higher need for loans, which in turn means a higher need for the servicing of loans.
For private money notes, real estate contracts and investments Designated lender services representative for each lender Servicing of performing and non-performing notes We welcome portfolios of any size Multiple payment options available
Providing peace of mind for over 40 years
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PRIVATE LENDER
Loan servicing has now become an industry itself.
IN-HOUSE OR THIRD PARTY? Being in the lending industry can be tough. It is constantly shifting, and it can be difficult to keep up with it. Lending businesses that choose to do loan servicing in-house must juggle the challenge of spending time servicing the loans versus originating more deals. Companies will need to decide whether to assign the loan servicing responsibilities to existing staff or hire more employees to implement the servicing. This can be a pro or a con depending on the number of employees needed to get the job done. One benefit of in-house is that you have a firsthand look at the servicing, which can speed up decision-making. You do not have to contact another company to service the loan, which gives you control of the overall loans and helps increase cash flow. With in-house loan servicing, you can likely develop a better relationship with your borrower. Maintaining a good relationship can lead to future loans. Outsourcing loan servicing can be expensive. You also
forfeit the firsthand knowledge and relationship, which may slow decision-making. There are also concerns with flexibility and what can be offered to the borrower. The greatest benefit of outsourcing is the ability to eliminate risk. Loan servicing can be risky if you don’t follow the rules. A good third-party loan service company will follow all state and federal regulations. While they deal with all the loan servicing, you can do what you do best: originate loans. By using a third-party loan servicer, employees in the office have more time to focus on originating loans and lending. Focusing on more originations gives the company the opportunity to generate more revenue.
WHAT TO CONSIDER When it comes to determining whether to keep loan servicing in-house or whether to outsource it, consider the following. Staffing // Staffing should be
one of your main concerns as you decide whether to service in-house or through a thirdparty company (TPO). Do you have the experienced loan servicing staff or the ability to recruit and train one? If you hire a third-party, they will already have a fully experienced staff whose main job is to effectively service loans.
Hardware and software //
Do you have the software and hardware to run the loans? Many third parties already have their own systems set up. If you decide to service loans in-house, make sure you have the necessary technology to effectively service the loans. Up-to-date software keeps your system secure and relevant. Security is important. You want to make sure your borrower always feels safe and secure. You must keep backups and firewalls invulnerable to ensure no one bypasses your software. Flexibilty // Would you like
flexibility when it comes to servicing the loan? The ability to change a business line right
away or change accounting practices can save large amounts of time. Being flexible allows lenders to shift their loan products as the market changes. Servicing loans in-house can often provide more flexibility. Data accessibility // Accessi-
bility can make or break a deal sometimes. By having access to your data, you can have a firsthand look at what is going on. You can also choose to have your data be seen by your underwriter, or loan officer. Most third parties will give you a limited view of your data. When it comes to understanding the loan servicing process, you must
understand the workflow and who needs to do what to have a successful outcome. There are constant moving parts within the business and you don’t ever know what could happen. As your business starts, grows or changes, it is crucial that you ask yourself: Should we loan service in-house or outsource to a TPO? Business is an ever-changing game, and especially in this industry with our market so unpredictable, staying relevant and matching the market is key. ∞
ABOUT THE AUTHOR
ROSIE MEYER Rosie Meyer is the executive
assistant/marketing director at JCAP Private Lending.
Meyer prioritizes relationship and communication details to ensure that clients are happy with the services.
JCAP Private Lending is a
direct lender that closes and services investor-funded
short-term real estate loans.
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BUSINESS STR ATEGY
Legal Cannabis Brings New Opportunities Here’s how it's impacting the real estate industry. by Pete Asmus
The legalization and decriminalization of cannabis is creating ripples in real estate. Because the real estate industry is directly related to land, which is necessary for growing the plant. But how, specifically, is cannabis, once criminalized and demonized by law, disrupting U.S. real estate?
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PRIVATE LENDER
C annabis growers’ rush to own property
Why?
Since legalization in Colorado, for example, Denver now has twice as many cannabis dispensaries than it does Starbucks. When considered from a statewide level, Colorado has more than three times as many cannabis storefronts as
S hift in property prices
Starbucks. That’s according to a 2016 report from Rocky Mountain PBS I-News. Among the other ways legalized cannabis is impacting real estate in this country: G reen exodus in states where cannabis has been legalized
C hanges in property vacancy
D emand for building materials
Let’s take a closer look.
THE “GREEN EXODUS” Colorado is a state that others can learn from when it comes to legalized cannabis and population growth. Notably, the state’s legal framework allows counties to determine if and how they want to legalize and regulate
cannabis. Consequently, areas that have legalized the plant have attracted more homebuyers and workers. These include cannabis investors and job seekers. The explanation here is simple: As more retailers and growers pitch tent in the state (and others), the need for workers rises, leading to a need for more housing. And, real estate investors who want to take advantage of higher property prices are flocking there. This means that they will need workers to run their new offices. It is not surprising to note that after legalizing cannabis, Colorado has joined the club of top 10 states with the highest annual
growth. For instance, according to the U.S. Census Bureau, last year alone Colorado saw 75,000 new inhabitants.
PROPERTY PRICE RIPPLES Cannabis legalization is creating a rise in property values. According to the National Real Estate Investor, states that have legalized pot for medical and recreational use have experienced the highest property price increases, including Maine, Massachusetts, Nevada, California and Colorado. In the last year alone, two cities in Orange County, California,
have experienced increases in property values. And, in Denver, Colorado, the average asking lease price for warehouses increased by more than 50 percent between 2010 and 2015. In the same state, structures that were formerly zoned as light industry and have been vacant for years are now extremely desirable because of the Green Revolution. They are selling so fast that real estate companies with enough cash are now buying properties, getting licenses and selling the entire packages to smaller businesses. In yet another example, two siblings say they bought a 40,000-square-foot warehouse
in Denver in 2014 for $2.5 million and sold it for $6 million a few months ago. The owner of the warehouse had spent a mere $1 million to construct it. In Monterey County, California, some of the greenhouses that used to grow roses and tulips are now growing pot. An agent with one of the country’s leading realty companies in the same county said that they have closed more than 20 key transactions amounting to over $100 million. He notes that last year a buyer would have paid about $2.5 million for a 10-acre parcel with greenhouses, but today that buyer would pay $5 million.
THE RUSH TO OWN PROPERTY You might conclude that the steep rise in property prices could be a deterrent to some young investors; however, some growers who are committed to the industry for the long term are taking a different viewpoint. According to a June 20, 2014, Inc. magazine article, they are rushing to buy and own their properties because they want to enjoy long-term security without leasing price fluctuations. Also, they are rushing to own property as a form of banking in an industry that has yet to
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BUSINESS STR ATEGY
attract the favor of conventional banks. Remember, the federal government has yet to legalize cannabis. As a result, bankers require more compliance work when dealing with cannabis corporate clients. This, in turn, makes account maintenance expensive, with some companies spending $3,000 monthly. Since banking cannabis profits is costly, these companies are resorting to real estate as a safe alternative for storing their hardearned gains.
A NEW RAW MATERIAL FOR ECO-FRIENDLY BUILDING Legalization of cannabis is creating innovation in construction materials. For property developers seeking eco-friendly construction alternatives, cannabis products fill the bill. The New York Times has reported on a new cannabis-based material called “hempcrete,” coined from the words hemp and concrete. According to the article,
hempcrete is generating interest in the construction industry. Hempcrete has been around since the 1980s, but due to the legal ban on the plant, the material didn’t have a market. With the legalization of cannabis, hempcrete is coming back into vogue. Hempcrete is constructed from lime, water and cannabis. It contains less than 0.3 percent of THC, the main psychoactive component in marijuana. Moreover, it is already a darling in other countries. The technology is beneficial due to its energy-
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saving abilities and negative carbon footprint. Also, it does not emit gases like other artificial construction materials. Currently, American construction companies that value hempcrete need to import it because of the domestic restrictions on its production. However, the National Real Estate Investor report says that its growth prospects are promising, as it hails its use and contribution to commercial and residential real estate in cities like Denver, Colorado.
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PRIVATE LENDER
PROPERTY VACANCY: THE COLORADO CASE In Colorado, between 2009 and 2014, 36 percent of all new industrial tenants were in the cannabis business. Also, about 4 million square feet of industrial space went to the growth of the plant in 2015 alone, representing around 3 percent of Denver’s warehouse space. Moreover, vacant houses in the city dropped from 7.5 percent in 2010 to a mere 3.7 percent in 2015.
WHAT TO KNOW BEFORE DEALING WITH CANNABISRELATED PROPERTY So, what does all this really mean for real estate buyers and sellers? What should you know before buying or selling properties with cannabis? Here are a few considerations. S elling Property // If you want to sell your property with cannabis on it, disclose it to your potential buyers. Otherwise, you could be hit with a lawsuit. Also, you must disclose it because
“Since its legalization and decriminalization in many states, cannabis has impacted American real estate in many positive ways.”
ABOUT THE AUTHOR
PETE ASMUS
if the buyer wants to get a bank loan, some lenders could shy away from the deal because of the federal government’s legal position on the plant. uying Property // Even B though you might sue a seller for not disclosing that they were growing cannabis on their property, no law compels them to do so. So, if you want to buy property and you suspect there may be cannabis on it, it is appropriate to ask the seller. Alternatively, you can check for cannabis signs such as wood rot from irrigation, damaged or modified vents, mold spores on walls and attics, and contamination resulting from excess fertilizer use. F ederal Illegality // Remember, cannabis is still
illegal according to the federal government. This means that houses that were constructed or insured by the Department of Housing and Urban Development still view the crop as such; therefore, growing, possessing or consuming cannabis on such properties is illegal.
Pete Asmus is a real estate
investor who specializes in marketing, branding and
raising capital. He has a well-
established history of securing capital for projects such as
flipping high-end residential
properties and creating small
businesses. He has personally purchased and invested in
mobile homes, single-family
homes, restaurant franchises,
Y our Local Homeowner’s Association // Finally, consider this association in your local state. Even though your state may have legalized the plant, your local county could have laws that prohibit the plant’s growth in residential areas.
and commercial buildings.
Since its legalization and decriminalization in many states, cannabis has impacted American real estate in many positive ways. Although there are still legal restrictions from the federal government and some individual states, cannabis is quickly changing many areas of the real estate sector. ∞
more than 2.5 million investors
Pete has spent the last decade learning, teaching and speaking, making connections and
building relationships with top deal makers in the industry. Additionally, he is an editor
at Investor Quarterly and an
award-winning radio host. He also manages a database of
and owns the world’s largest
LinkedIn real estate investment group with over half a million members. He is the author of
“Force Your Dreams into Reality,” “The Question Factor” and
“The Stock Market Refugee.”
JULY/AUGUST 2018
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LEGALÂ
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PRIVATE LENDER
FOREIGN NATIONALS’ REAL ESTATE PURCHASES SLOW DOWN by Nema Daghbandan, Esq.
Tips for lending to foreign nationals in the current environment
During the economic boom of the late 1980s, foreign investors poured in and snatched up real estate across the country. During that land rush, Japan went on a buying spree. However, like all spending sprees, it eventually come to an end. By 1992, Japanese property buyers dropped by 61 percent as their nation’s economy slipped into a recession.
In California, foreign buyers’ impact on real estate ebbs and flows with changing economic conditions. After the recession of 2008, foreign investors, primarily Chinese nationals, took advantage of a slumping real estate market and began buying up perceived bargains. By 2013,
foreign investor purchases made up 8 percent of total real estate sales.
WHY THE SLOW DOWN? As the real estate market in California started to recover,
values started to rise as available inventory was squeezed and bargains became harder to find. This change in conditions ushered in a cooling down period for foreign buyers. Foreign investment has been slowly declining for about five years now. But, starting a few years ago, the number of international buyers dropped sharply, by more than 3 percent from the previous year. Last year, foreign buyers made up only 3.1 percent of all real estate sales. According to the California Association of Realtors, the median price for homes that foreign investors purchase has also seen a decline. The median price for homes in 2015 was $812,500. By 2017, that median
price dropped to $667,500. The numbers indicate investors are moving away from high-priced locations such as the Bay Area and looking to more affordable housing in the Central Valley and Southern California. Some of the slowdown is attributable to tightening monetary restrictions under Chinese laws. These laws restrict the amount of money a person can invest outside of the country. That number stands at $50,000 per year, per person. As a result, Chinese homebuyers are getting more creative so they can continue to invest in U.S. properties. As the amount of potential domestic homebuyers shrink, realtors are taking classes
JULY/AUGUST 2018
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LEGAL
“Foreign national purchases may be down, but historical data show us that the tide will flow again.”
to learn how to attract more foreign buyers to other regions, such as Atlanta and Seattle.
making a loan to a foreign national borrower.
In California, brokers continue to see the Golden State as a desirable destination for new foreign buyers, mainly Chinese immigrants, remaining second in the nation behind only Texas and Florida.
Anti-money laundering is an issue with all borrowers, and it is particularly acute with foreign national borrowers. Certain countries are particularly problematic, for example, Iran and Cuba. The Office of Foreign Assets Control (OFAC), which is a U.S. Treasury organization, primarily targets individual participants rather than countries as a whole. OFAC offers a free search tool available at: sanctionssearch.ofac.treas.gov.
LENDING TO FOREIGN NATIONALS Below are some of the unique issues lenders will incur when
KNOW YOUR SANDBOX... THEN EXPAND IT
Continuing to add
NEW MARKETS IN 2018
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PRIVATE LENDER
Anti-Money Laundering //
Any lender considering making a loan to a foreign national borrower should, at a minimum, run an OFAC search. Lenders should consider running a more detailed background check in addition to the OFAC search. Lenders should absolutely require that borrower funds are sent through an American bank account, as the banking system in the U.S. is under strict regulatory control regarding anti-money laundering. Finally, lenders should require that all borrower funds are sent through a single wire to
ABOUT THE AUTHOR
the title company rather than through numerous smaller wires, because the smaller wire transactions tend to have a higher incidence of underlying illegal activity. In California, more than 100 illegal cannabis grow houses were seized by the federal government recently. The loans were exclusively financed by private lenders. The fact pattern revolved around foreign national borrowers who stated they were residents of states outside of California. When the time came to wire in closing funds to the title company, small wires were sent from numerous accounts and participants throughout the country. While there is nothing per se illegal about the use of numerous small wires, such a practice should raise alarm bells to a potentially larger fraud or scheme. Recourse // Reduce the loan-
to-value ratio when making
loans to foreign nationals. Even though the foreign national is likely a very high net worth individual, enforcing a personal guaranty will be extremely difficult, if not impossible. Typically, most of the sponsor’s assets are held outside the country, and seizing a foreign asset is very impractical and expensive. Effectively, these types of loans should be treated as nonrecourse, and the collateral is all the lender will have. This is particularly important in states with long foreclosure horizons such as New York and New Jersey, where the foreclosure process takes years, eroding any potential equity cushion built into the underlying loan. If the borrower has any assets located in the U.S., a lender would be wise to cross-collateralize those assets as part of the loan. Quasi-Consume // Many
lenders fail to ask why the foreign national is purchasing the property and automatically assume the loan is for a business
purpose or that it is not owner occupied. Contrary to popular belief, most second homes and vacation rentals are considered owner occupied from a statutory perspective. The Truth-in-Lending Act deems properties as “owner-occupied” if the borrower resides in the property 14 or more calendar days per year. When lenders ask how often the borrower intends to reside in the home, the answer tends to be a few months out of the year, turning the loan into a consumer purchase subject to the myriad state and federal lending and licensing laws. The same rules would apply if the intent is to have the children of the foreign national live in the property while they attend school in the states. The loan should be treated as a consumer loan, even though the borrower technically does not reside in the property. It is paramount to confirm the borrower will use the property for a legitimate business purpose such as a rental property.
NEMA DAGHBANDAN, ESQ. Nema Daghbandan is a partner at Geraci LLP. His practice
encompasses all facets of real estate transactions. He also leads the firm’s non-judicial foreclosure practice and
advises clients on all defaultrelated matters.
Daghbandan graduated
magna cum laude from the
University of Miami School of Law, where he served as the
managing editor of the University of Miami Inter-American Law
Review and received the Lillian R. Levi Award for Excellence and the Most Outstanding Third Year Student award. Before joining Geraci Law Firm, Daghbandan was
a summer associate with
international law firm Dechert, LLP where he assisted in the securities department.
He served on the American
Association of Private Lenders’ inaugural Ethics Advisory Committee and currently
serves on their Education Advisory Committee.
Foreign national purchases may be down, but historical data show us that the tide will flow again. ∞
JULY/AUGUST 2018
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LENDER LIMELIGHTÂ WITH NOBLE CAPITAL
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PRIVATE LENDER
WHERE IS PRIVATE LENDING HEADING? The partners at Noble Capital discuss current industry trends and reflect on how private lending will impact the U.S. economy. by Laura Chalk
JULY/AUGUST 2018
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LENDER LIMELIGHT WITH NOBLE CAPITAL
Private Lender by AAPL conducted a roundtable interview with the partners at Noble Capital: Jadon Newman, Romney Navarro and Chris Ragland. Newman founded the company in 2002 to create alternative investment opportunities that provide shelter from the volatility associated with other investment models. Navarro and Ragland joined the firm as partners later. The growth that ensued led to three divisions: private lending, retirement and real estate. The three partners have built the company on four core values: growth, stewardship, candor and expertise. Among the trends they are seeing are Wall Street’s entrance into private lending and the rise of various lending platforms. In this excerpt from the interview, the three partners discuss what these developments mean for smaller private lenders and the U.S. economy.
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PRIVATE LENDER
WHAT TRENDS ARE
YOU SEEING WITHIN THE PRIVATE
LENDING INDUSTRY? ROMNEY NAVARRO
Wall Street has entered our space. That’s the biggest trend. So now that institutional capital is here, we’re competing against those guys and it’s great—they’re welcome. There’s
more money flooding the space, which is good. It brings a little bit of a spotlight to it. CHRIS R AGL AND
Yeah, I think Wall Street entering is the biggest, latest thing in our industry, and for me, it’s a validator. I mean, thank you for coming in and validating the product that we have from an investor standpoint. I can’t wait
«T he partners at Noble Capital discuss where the private lending market is headed. Left to right: Romney Navarro, Jadon Newman and Chris Ragland.
to go back to Main Street and raise more money now. Thanks for the headlines. I used your ad or your headline in the Wall Street Journal to show my investors that what we’re doing has just been validated. A lot of it is going to be very disruptive, but I think it can be positive at all levels. It’s going to help the ecosystem of private lending become stronger.
Some of the weaker players are not going to be able to compete with that—that’s very true. If you don’t have a platform that’s scalable, if you don’t have proper asset management to back you up when things go wrong, if you haven’t thought through proper servicing of your paper, if you don’t have that infrastructure, you are at a disadvantage.
But otherwise, it’s helping legitimize our space. JADON NEWMAN
Wall Street swaps and trades and moves paper around very well. We’ll never be able to compete with those big institutions at swapping and trading paper. Where we come in strong—our competitive advantage—is our platform.
We’re on the street, and we know what’s going on in the real property market, in the marketplace that we do business in. Real estate—while you can swap it and trade it and move the paper around—has to be more of a hand-to-hand, face-to-face business. RN Wall Street entering our space has also done something
JULY/AUGUST 2018
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LENDER LIMELIGHT WITH NOBLE CAPITAL
JADON NEWMAN Founder & CEO Entrepreneurial Inspiration // I have known I would be an entrepreneur from the age of 10. My mom and dad are both visionaries
and, growing up, they were the model of entrepreneurship I based my career on.
10-year Goal // I hope to be retired from the day-to-day grind but still providing leadership in the capacity of speaking, mentoring and giving back to the industry.
Legacy Wish // My family. My son Noah, 17, and my daughter Kate, 15, will carry on the family legacy. In business, we hope what we
are building with Noble Capital will influence and shape an entire industry and inspire many of our fellow entrepreneurs.
else. There is now enough money, enough capital on the streets, to where you no longer have to raise the money the way you used to have to raise money. Case in point, we’re getting bombarded daily with money from institutional capital. Banks telling us, “Here’s all the money you ever needed.” And we’re raising money one investor at a time. So, those days are not necessarily over, but those days are changing. So, these hard money lending and private money lending shops have essentially become
sales forces for Wall Street. That’s all great, but here’s the problem: Wall Street makes the rules. They’re so big, they make the rules. Down here on Main Street, we can still make the rules with the end consumer in mind. The disruption I envision is that we can come in here at the ground level and do the same thing they’re doing and give operators, hard money lenders or private money lenders the opportunity to scale and run a business, not just go out there and be somebody’s salesman. CR Yeah, I think I can button that up. We’ve spent years telling large institutional players,
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PRIVATE LENDER
“No thanks.” And it’s because we’ve been through the ringer a couple of times and we realize that some of the constraints or the structure that they wanted to create is not going to work out. If you got me into a stressed-out deal or there was a change in the economic condition, we wanted to do it on our terms. And that’s started to pay off now, because now we do have players that want to give us capital and they want to do it on our terms. What that’s done is create an environment for us where we have access to a lot of capital.
WHAT IMPACT DO
YOU THINK, OR HOPE, PRIVATE LENDING WILL HAVE ON
OUR ECONOMY? CR Because of the unique
challenges in this space, banks are never going to return like they tried to do before. I really don’t believe they are. They know better. But I believe at the same time, this kind of private lending is like a new sector that is being legitimized by Wall
Are you a lender looking to meet investors that can fund your deals? Are you an investor who is looking to find new business opportunities?
Then Captivate West & East are where you need to be!
THE
MONEY $HOW August 26-28, 2018
October 16-18, 2018
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THE FONTAINEBLEAU MIAMI, FLORIDA
To inquire about speaking, contact us! J.Pelache@GeraciLLP.com or R.Keys@GeraciLLP.com
JULY/AUGUST 2018
39
LENDER LIMELIGHT WITH NOBLE CAPITAL
Street. It’s being paid attention to by regulators, so you’d better make sure you’re doing it right. That is really a big piece. So, I think there is a new sector of the industry being created right now in the finance industry that’s going to become accepted, ubiquitous and it’s going to be: Who has the best platform and who can originate loans? It’s going to turn into that and it’s going to have its own little market maker. There are already states that are providing new licensing specifically for this type of lending. You’re watching something brand-new right now being created in the finance industry. I think it’s fascinating. RN I think it’s the concept of utilizing this for retirement income planning. That’s the knock-out punch we’re now starting to pay attention to, and that’s the model we’ve been working on proving. That’s the Main Street model, so you can utilize stocks, bonds, life policies, annuities, different types of insurances, you name it, to create an income plan. But the most forgiving and most rewarding of all those things that may exist out there? Private lending. So, I think the future of this thing is really becoming a staple in the world of retirement. »P hoto captions here.
40
PRIVATE LENDER
ROMNEY NAVARRO Partner & Chief Marketing Officer Education // B.S. in Business Management Favorite Food // Being born and raised in Miami, the son of Cuban immigrants, that’s an easy one. Cuban
food. What specifically? This may seem weird to some but “Rabo Encendido,” or stewed oxtail.
Biggest Success // My biggest success is yet to be
written, but if I were to write it and seal it in an envelope, it would probably say something along the lines of, “We have successfully helped thousands across the country achieve success in real estate investing.”
Legacy Wish // A man with passion who loved his wife dearly, fathered two wonderful human beings and
positively impacted every person he had the honor and pleasure to get to know.
HOW DO YOU HELP
TO LEAD THE PRIVATE LENDING INDUSTRY?
CR A few things we’ve done
at a very base level is try to improve some of the education and certification standards. We’re trying to raise the bar in terms of what it means to be a private lender or hard money lender in the U.S. And, out of that was born some other initiatives.
We’ve been talking a little bit here about out-of-the-box ideas for raising capital. I think what we’re trying to bring is this Main Street attitude that we don’t all have to raise capital from an institutional investor. There are ways to organize that capital and put it to work in your ecosystem of these guys who are flipping houses or building spec homes or new construction. We’ve spent years crafting that business model, and we’ve gotten very good at it. That’s what we want to do. I think we want to take that
on the road and start helping people understand that they can own their future in terms of where their capital is and control that capital. I think that’s where we want to take this message. RN That goes for the “Main
Street” investor, but also for the hard money shops across America raising this capital. They’re not necessarily adding this next level of thought into their clients’ investments, and we can really help mold it into something a lot more complete
than just a deal. Because that’s what we see: “Here’s the deal, here’s the loan.” It’s like, no, here’s a plan. And it’s easier said than done. We’re still working on it daily, but that’s what I think we can bring to the space that is going to be different. I also think there’s probably a couple of other things. For example, the concept of operating a business and growing it to scale the way we’ve done it is something that I
JULY/AUGUST 2018
41
LENDER LIMELIGHT WITH NOBLE CAPITAL
CHRIS RAGLAND Partner & Chief Operating Officer Education // B.A. in Entrepreneurship and MBA in Global Entrepreneurship Long-Term Goal // I would like to be a mentor to business owners. That’s
where my passion lies, in helping others realize their dreams. As time goes on, I would like to be more than just an investor or a board member, but a true mentor to people coming up in the industry, just like I had.
Definition of Success // Being able to take care of my family. It’s simple, but
family is very important to me and is every part of what success means to me. Legacy Wish // That I build something that lasts and provides an opportunity that may not otherwise have been available to those who come after me.
know, for certain, there’s a need for, after we’ve been involved in multiple education and ethics committees. There’s a lot of disorder and just, rogue cowboys, as they call some of us, in the space. I think there’s this desperate need for a little more order and structure and direction. So, people want the tools but can’t necessarily access them because we’re all kind of paving the way right now. JN I have a heart for entrepre-
neurs, and I respect men and women who go out there and hang on to a dream and a vision to build a company and be successful. It’s not easy in any industry. Specifically, in the
42
PRIVATE LENDER
private lending industry, there’s not a blueprint out there. You don’t go buy a “Private Lending for Dummies” starter kit off the shelf. It’s one of these things where we’ve put together this platform purely on blood, sweat and tears. But, we’ve got this wonderful platform. We are not afraid of competition. In fact, we want to empower our competition and our fellow entrepreneurs, and we would love to create an open, transparent community of entrepreneurs who are sharing, empowering and inspiring each other. We would love to be a leader in that charge. So, we see ourselves taking on some role, some leadership role in helping shape the industry and really taking the
best ideas, the best business practices and the best concepts—and not just specific to the private lending platform. What’s the best way to fire up your marketing machine? What’s the best way to fire up your back office and your servicing? And what’s the best way to manage your relationships with your capital? It goes on and on. We would love to be able to empower others and really be a beacon in this industry. That excites us because we believe that if we can help as many people achieve their dreams and goals, we’ll always have what we want. ∞
ABOUT THE AUTHOR
LAURA CHALK Laura Chalk is public
relations manager for Affinity Worldwide.
She can be reached at
(816) 398-4111, ext. 86172 or
lchalk@affinityworldwide.com.
2018
Do you know an extraordinary AAPL member who makes a positive impact on the private real estate lending industry? Nominate them!
CATEGORIES • Lender Member of the Year • Service Provider of the Year • Community Impact Award • Emerging Leader (Rising Star)
PRESENTATION AAPL Excellence Awards are presented at AAPL’s Annual Conference Awards Ceremony.
REQUIREMENTS Nominees must be AAPL members, in good standing, at the time of the nomination and award announcement.
NOMINATE NOW Nominations are being accepted electronically www.aaplonline.com/awards
Deadline: August 1, 2018 JULY/AUGUST 2018
43
CASE STUDY BROOKLYN BROWNSTONE
RENOVATION IS REQUIEM A
group of developers is
converting a dilapidated
3,784-square-foot brownstone in a transitional
Brooklyn, New York, neighborhood into luxury condominiums with
views of the Freedom Tower. There is already a luxury apartment building across the street from the project.
The investors will purchase the property, completely strip it down to studs, renovate it and convert it into
44
PRIVATE LENDER
four separate luxury condos of approximately 946-square-feet each, which they will sell individually. The first-floor unit will include one bedroom, a full bathroom, kitchen and living room. The unit will also include part of the existing basement to create a two-story condo featuring walkout access to a backyard area. The condos on the upper floor will be two-bedroom units. Due to New York state regulations, the borrower needed to get approval from the New
Breathing new life into a dilapidated brownstone.
York state Attorney General to convert the multifamily dwelling into a condominium. Due to the exit strategy of selling each condo individually instead of selling the whole building, the investor was required to order five appraisals: one for the ‘as is” value of the whole building and one for each of the four units that will be sold off, to determine their after-repair value. This will help the investor determine the final selling price once the renovations are complete.
SUMMARY OF OPPORTUNITY Creating a luxury condo in a transitional area of Brooklyn, New York, is an opportunity, but a major project. The developers are looking to add square footage to the building by converting the basement into a living space and adding a rooftop patio area. The first-level condo will include the new living area the basement created, creating a two-floor condo with basement walkout access to a private backyard area. The first-level condo will be the largest in the building and will be the only one with access to the yard space. The second level will be the simplest condo. It will have no access to the roof or backyard area. The third and fourth level will have access to each resident's section of the new rooftop patio area. Since the brownstone was built in the 1900s, the structural support of the building needed to be updated. The investor added in new beams and metal framing. The original building shows a lot of exposed interior brick, and the developers are keeping this in mind as they plan their designs. Like some other buildings they have renovated, they like to highlight one wall as all brick or highlight the brick in “window” cutouts in the drywall to add character to the new luxury feel of the condos. With continuous customer service and support from RCN’s loan officer Alex Crivelli, the project has been able to continue smoothly from the closing, to the first inspection and rehab draw. The investor anticipates completing the project before winter 2018. ∞
Project // Converting brownstone into condos Financer // RCN Capital Originally Built // 1905 Original Architecture Style // Residential multi-unit brownstone Location // 162 Washington Ave., Brooklyn, New York Loan Amount // $2,457,000 LTV // 73 percent based on the as-is value LTC // Approximately 83 percent Credit Score Considered // For this large of a project and to qualify for the 18-month fix and hold program, credit score is highly considered. Borrower Experience Level // The investors have a high level of experience.
They are property developers who have worked on other large apartment-style complexes in New York. They specialize in the Manhattan, Brooklyn, Queens and Bronx markets. Currently their portfolio of work also includes renovating another 35-condominium unit project in Brooklyn, New York. Their real estate investing portfolio includes more than 20 properties. Interest Rate // 9.5 percent Length of Loan // 18-month fix and hold Anticipated Rehab Costs // $957,000
JULY/AUGUST 2018
45
MANAGE & LEADÂ
Communication Style Determines Outcomes by Eddie Wilson
Understand the difference between two communication methods and how to effectively use each one. 46
PRIVATE LENDER
At its core, marketing is the management of perception. Communication style is one of most important factors in creating that perception. Whether you are trying to be more effective in marketing, with your staff or in your personal relationships, consider two different methods of communication: disgust (negative motivation) and esteem (positive motivation).
DISGUST Many people communicate from the position of disgust, frustration or fear. What they are communicating is the problem with society, with the marketplace or with an employee. They use the frustration they feel as a motivator to make a compelling argument. They contrast that disgust with the opportunity that change can bring. Disgust is a common workplace communi-
cation tactic. It has a negative slant. It is always pointing out what is wrong versus what is right. Occasionally, motivating from a place of disgust is necessary and effective. For example, when the speaker wants or needs the listener to take immediate action, disgust can be effective. In Dr. Martin Luther King Jr.’s famous “I Have a Dream” speech, he began by declaring that 100 years after the signing of the Emancipation Proclamation: “… the life of the Negro is still sadly crippled by the
JULY/AUGUST 2018
47
MANAGE & LEAD
manacles of segregation and the chains of discrimination; one hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity; one hundred years later, the Negro is still languished in the corners of American society and finds himself in exile in his own land.” In this speech, Dr. King effectively and rightly began from a place of disgust and frustration, pointing out the obvious
48
PRIVATE LENDER
injustice that meant his brothers and sisters were still not truly free, nor seen as equal members of society. He then shifts into a contrasting view showing how the correct change can bring hope for tomorrow. At times, leading with disgust, frustration or fear, as in King’s speeches about racial injustice, is necessary. But, in most communication efforts, outcomes are more positive with the second type of communication: esteem.
ESTEEM The second method of communication is esteem, or positive motivation. People who communicate or market out of esteem, or respect, are typically more effective. This style of communication seems to have a longer-lasting, more positive result. It focuses on what is right and on the
ultimate positive direction it is taking the listener or reader. A good visionary leader can see past the problems of today and communicate the positive aspects that will ultimately lead to a beneficial tomorrow. Winston Churchill utilized this style in a speech to the British House of Commons on June 18, 1940. Instead of focusing on
the failure of the world to stand up to Hitler’s Nazi regime, he focused on what it would be like to live free from tyranny and with complete freedom. He focused on the hope of gain. While he did outline past mistakes that hurt the British military’s effectiveness, he clearly stated that it was time to leave the past behind, “on the shelf,” and move forward. He closed this speech with the famous line: “Let us therefore brace ourselves to our duties, and so bear ourselves that, if the British Empire and its Commonwealth last for a thousand years, men will still say, ‘This was their finest hour.’”
TWO STYLES AT WORK Let’s look at how these two communication tactics play out in our modern, day-to-day lives. Take a fast food chain, for instance. If the chain runs a campaign stating that a certain special is a limited time offer, it is, in fact, stating that if you don’t act immediately, you may miss out. This is the first type of communication. It is based on the fear of loss.
“Whether you are trying to be more effective in marketing, with your staff, or in your personal relationships, consider two different methods of communication: disgust (negative motivation) and esteem (positive motivation).”
ABOUT THE AUTHOR
EDDIE WILSON Eddie WIlson graduated from The Ohio State University
with a degree in broadcast
sales and marketing. He also
studied marketing at Georgia Tech and business manage-
In contrast, a gym membership is marketed as: “Hoping to get in shape and look your best?” This line focuses on the hope of gain rather than on the negative. Consider this one final example: An employer tells an employee that if they don’t improve their performance, they will be looking for another job soon. Here, the employer is communicating from frustration and disgust, and this would result in the employee fearing the loss of his or her job. An employer who chose instead to communicate through positive motivation, might state that if the employee’s performance increases, the employee could be looking at a raise or promotion. That would give the
employee hope—a sense of gain. The employee would most likely steadily increase productivity and effort over time, and overall, become a happier and more productive member of the team. The above scenarios demonstrate how negative communication offers an immediate reaction, while positive communication garners a long-lasting response. If you read much marketing philosophy, you may see an argument for or against either of these methods. As you strive to be a better communicator, consider how the use of each can ultimately determine your outcome in business and in life. ∞
ment at Emory University. He is most known for taking a
talk radio station in Atlanta to the level of “Most Listened to Station in the World” (Radio
and Records Magazine, 2002). He has owned his own adver-
tising agency and worked with clients that included Pepsi,
Procter & Gamble Co., Buffalo Wild Wings and Mail America. He is now the CEO of Affinity
Worldwide and speaks across the country, including at
well-known universities on the topics of branding, marketing and innovation in business.
JULY/AUGUST 2018
49
MANAGE & LEAD
Your Business Is Losing Money How you're doing business is costing you money—no matter how profitable your company appears to be. by Kat Hungerford
Y
ou may have a sales pipeline
that's more of a sales water
main. Perhaps your compet-
itors are side-eyeing you at
tradeshows, trying to ferret out the source of your bril-
liant marketing. Maybe your accounting books are a veritable sea of black ink flowing toward record-breaking profits.
It doesn't matter. You're still losing money because of the way you do business. Unfortunately, 50
PRIVATE LENDER
you won't find the root cause of the cash you're hemorrhaging in your KPIs. The culprit has a name: process. Your processes can stretch limited resources, streamline for greater efficiency, instill accountability, protect you legally, and help you define true opportunity versus useless—but shiny— pennies. Or, do the opposite. In short, process is the engine that powers your business. Whether you realize it or not, it already exists throughout every
facet of your company today. (Yes, “we do it different every time” is a process; it's just a bad one.)
WARNING SIGNS So what are some signs that it's time to take a closer look under the hood? It's the Wild West in deal flow // Not having set processes for every step and decision in deal flow not only slows you down, it can bring lawyers knocking at your door.
Lawyers first // The Fair Housing Act applies to private lending too. Even if you don't think you discriminate, if you can't show how you arrive at decisions and that you're treating all potential borrowers equally, you're begging for the kind of legal trouble that results in lawschool case studies. Defining your policies puts your actions and inactions under a microscope before the public does. Beyond that, process creates repetition and rhythm, which
leads to speed. That speediness lets you make the kinds of promises that bring in more leads and prevent you from losing out to other lenders. (How would you like to market “Decisions in a day, money to you in two?” Streamlining your processes can get you there.) Someone takes a vacation— and it all goes to hell // That's your best-case scenario, because that person eventually comes back. A more permanent absence can stall
you for months or years if you don't know exactly what a key employee did or how they did it.
also means you'll have a better understanding of what you need in a potential hire.
That lack of understanding can also lead you to fire an employee on bad intel or keep someone on when they aren't preforming. Knowing the processes your employees follow to fulfill their roles means you know their worth to your company, can hold them accountable and keep crucial tasks moving in their absence. Having a grasp on all processes
You're perpetually hustling, but it feels like a hamster wheel // Process will show you the source of a problem. It could be that most of your time goes to administrative tasks when your focus should be on sales. It may be time to automate, hire or outsource the work. Perhaps you're closing a higher percentage of deals, but there are fewer deals in your pipeline
because you're spending less time prospecting and more time working with each client. You need a way to streamline or hand off your customer service, or remove something else from your plate. When you know the steps and factors contributing to a result, you can then measure and hold yourself accountable to complete the actions to reach it—or realize that you can't physically do it all and that you need to cut or optimize. JULY/AUGUST 2018
51
Construction Risk Management is not puzzling…
MANAGE & LEAD
…when you know what pieces to look for.
THE FIX SO HOW DO YOU IMPROVE HOW YOU DO BUSINESS AND RECOGNIZE WHERE YOU'RE LOSING OUT?
When it comes to construc�on risk management and inspec�ons, look to the leader in the construc�on inspec�on field.
YOU DEFINE WHAT IT IS YOU'RE ALREADY DOING.
Baseline Inspection Progress Inspections Cost of Construction Reviews Cost to Complete Reviews
WRITE IT DOWN.
STEP 1
No frills, no fuss. Bullet a list for how to get from Point A to Point B, exactly as you do it
today. In finance, it doesn't exist unless it's in writing. This is no different.
L ist key processes for all core functions (sales, marketing, operations, admin, HR, etc.).
S et a timer for 30 minutes. Write down the cornerstone tasks first, filling in the more granular details only if you have time. At
30 minutes, move on to the next key process. I nclude who does the task and how long it takes.
I dentify your Black Box processes: anything that gets done, but you don't know how or
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who does it. Don't touch it for now, just note it and move on.
Remember that this isn't First Date You, this is Sweatpants You: Write it out how it really is.
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inspects@cisinspects.com
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52
PRIVATE LENDER
STEP 2
ABOUT THE AUTHOR
RID YOURSELF OF BLACK BOXES. F ind the process owner and have them take no more than 30 minutes bulleting how they accomplish the process using the same guidelines as you did in Step 1. C larify any items you don't understand. Don't touch on whether it's “right” or “the best way to do it”—just make sure you get it. N ote any items that still magically reach a conclusion but don't have a defined way to get there. These are your "We do it different every time" processes.
KAT HUNGERFORD Kat Hungerford is business
STEP 3
development manager
at Affinity Worldwide, a
family of companies with
ON A SCALE OF "FORGETTABLE" TO "BUSINESS KILLER," ASSIGN VALUE TO EACH TASK. A scale of 1 to 5 works best. D on't stew—go with your gut and go quickly.
more than 50 operating
divisions spanning a broad
spectrum of industries. She specializes in operations,
project management and marketing. Hungerford
works with several real estate investing brands, including
STEP 4
PRIORITIZE, BRAINSTORM AND SOLVE.
RentFax, Private Money
Lending Guide, LoanMLS
and the American Association of Private Lenders.
Congrats. You now have your business on paper as it exists today. Don't shove the file in a mental (or physical) drawer. It's your business. Keep it out. S tart working on it however you want: your Business Killer 5s, the one that itches at you most, the one your spouse is tired of you complaining about, your “We do it different every time” Black Boxes. Y ou will not take Rome in a day. Spread it out on a schedule you can realistically manage. I nvolve employees across lanes and experience level wherever possible. When you meet, the purpose is “Find a better way to do X. Go.” If you don’t have employees, make friends. O nly change what you will follow through on. The important thing is to start working on your business processes. It may seem messy, but no more than just allowing the processes to take on a life of their own. ∞
JULY/AUGUST 2018
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IR A APPROACHÂ
54
PRIVATE LENDER
CAN LOAN SERVICING HELP YOUR IRA? Discover how it can reduce stress and offer advantages. by Clay Malcolm
L
oan servicing has helped take the stress out of lending and has opened the door for those who may have otherwise been apprehensive about entering the space.
In many ways, concerns about originating loans mirror those of putting alternative assets to work in a self-directed retirement plan. Some people may believe (falsely) that both require too much work and that the returns, even if they put stock dividends to shame, aren’t worth the effort. This was largely untrue even before loan servicing entered the equation. And the convenience of working with a third-party
loan serving professional has only strengthened the value proposition. Perhaps you’re sold on loan servicing, but you’re still not sure about private lending with a self-directed individual retirement account (IRA). It is possible that the former could help alleviate your concerns about the latter. If you use (or are thinking of using) loan servicing in the day-today lending activities that contribute to your personal income, you can do the same if you elect to originate loans with your tax-advantaged retirement dollars. Let’s examine some of the key benefits and other factors worth bearing in mind when considering this course of action.
LESS WORK FOR YOU After years of doing business for yourself, maybe you would prefer a more hands-off approach to retirement. A more traditional investment strategy with stocks or mutual funds could offer this, but your expertise may not reside in the stock market. You are a private lending expert, so that’s how you should build your retirement. Can you make this idea a reality without the hustle and bustle of everyday lending practices? You absolutely can. The beauty of self-directed investing lies in your ability to control the process. You choose the investments that suit your
JULY/AUGUST 2018
55
IR A APPROACH
skills and oversee transaction procedures to your satisfaction. That could mean handling all details short of “providing services” on a personal basis, or it could mean allocating duties to independent parties like loan servicing companies. As the account holder, you can qualify your borrowers, determine interest rates and establish payment schedules and loan durations. However, once you’ve tackled those familiar tasks, composed the loan documentation (and security documentation if you want) and issued the funds to fulfill the loan, a loan servicer can take the reins and help lighten your workload. Passive investing is relatively common among long-term retirement investors, but they usually entrust their hardearned money to the whims of Wall Street. Incorporating loan servicing into your self-directed IRA lending strategy can provide the same passive feel of publicly traded funds, but with the ongoing and familiar income of debt investments. Plus, exercising more control over your retirement will never compromise the tax-deferred or tax-free benefits of your account if you follow IRS guidelines.
56
PRIVATE LENDER
IRA COVERS ALL EXPENSES You will never have to pay for any expenses related to your IRA-owned note from your own pocket. In fact, the IRS prohibits such payments. Just as any IRA income must flow back to the account, IRA costs can only be covered by proceeds from the account. As such, whatever your loan servicer charges can usually come out as a percentage of the interest payments your IRA receives. This can even be done automatically as part of the servicing process, leaving you with one less bill to pay.
A REDUCED LIKELIHOOD OF PROHIBITED TRANSACTIONS Hiring a loan servicer for your IRA-owned notes can provide an added degree of distance between you and your tax-advantaged assets. That may seem counterintuitive to the nature of self-direction, but it may prove useful under certain circumstances. Remember, it is critically important to maintain clear separation between your personal funds and your retirement funds. Commingling your accounts would constitute
“If you use (or are thinking of using) loan servicing in the day-to-day lending activities that contribute to your personal income, you can do the same if you elect to originate loans with your tax-advantaged retirement dollars.”
a prohibited transaction, draw the ire of the IRS and could result in the forcible distribution of any applicable assets or your retirement account in full. A loan servicer that acts only on behalf of your IRA would have limited (if any) access to your personal accounts, so the likelihood of committing a prohibited transaction is greatly reduced. When it comes to self-directed retirement, maintaining IRS compliance is just as essential as choosing the right investment opportunities.
AVOID DISQUALIFIED PERSONS Prohibited transactions can also occur if your IRA derives benefit from or provides benefit to a disqualified person or entity. Such individuals or businesses could not provide loan servic-
ing for your IRA investments. Disqualified persons include, but may not be limited to, the account holder, linear family members like parents or children, any spouses of those individuals and anyone with fiduciary responsibility over the account in question. Any businesses or other such entities (including self-directed retirement accounts) that are owned or controlled by disqualified persons are equally disqualified. This means, for example, that you could not hire your father’s loan servicing firm, even if your father doesn’t provide direct services to your IRA. Nondisqualified persons include nonlinear family members like siblings or cousins. Trusted friends or business
partners are fair game as well, provided they don’t also fall under a disqualified category. Any of these individuals or their businesses could service your IRA if you so choose.
DUE DILIGENCE If you work with a loan servicer when lending your non-IRA funds, you can hire that same individual or business on behalf of your self-directed IRA (provided they are not disqualified
in accordance with the criteria discussed previously). On the other hand, if you’re new to loan servicing and you’re not sure who to go with, be sure to follow a comprehensive due diligence process in selecting the individual or company that will have access to your retirement assets. You may qualify loan servicers in the same way you qualify potential borrowers, though you will likely find yourself asking questions you would not necessarily ask a potential borrower:
H ow much is this going to cost? H ow do you communicate? How often will I hear from you? D o you understand that my IRA money cannot commingle with my personal money?
You should open a business relationship with a loan servicer only when your risk tolerance has been completely satisfied, regardless of whether you intend to lend personal funds or IRA funds.
UNDERSTAND COMMUNICATION AND CONFIDENTIALITY IRA custodians (at least the ones that actively work to protect your sensitive nonpublic information) will not speak with your loan servicer without explicit written permission from you. Without this permission, they will only discuss matters related to the account with the account holder. Considering recent events involving data sharing and con-
8% - 10% interest rate
2325 East 14th Suite 202 Brooklyn NY 11235
JULY/AUGUST 2018
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IR A APPROACH
ABOUT THE AUTHOR
CLAY MALCOLM Clay Malcolm is the chief
development officer at New
fidentiality, consumers are more concerned than ever about what information companies collect, how they use it and the level of transparency (or lack thereof) exhibited in the “terms and conditions” provided by these companies. A quality IRA custodian will take these concerns very seriously.
only individual company representatives are typically eligible to become interested parties; full companies may not have access to your account. This can help ensure that your sensitive contact information will never be disseminated to advertisers or data collection firms in an unfavorable manner.
To authorize your IRA provider to share account information, you should have the option of designating your loan servicer or another such trusted individual as an interested party. Interested parties have access to relevant account information (transaction histories, available balances, etc.), but they should not have the authority to execute new investments, request withdrawals or update your contact information. In this regard, designating your loan servicer as an interested party can help keep him or her in the loop without ceding control of your account. Bear in mind that
If you decide to let your loan servicer pull the strings a bit more, you may grant power of attorney on behalf of your IRA. Limited power of attorney can generally be granted without too much hassle from a paperwork standpoint, though your loan servicer, as the title implies, would be limited in the transactions he or she would be able to execute. As with anything related to self-directed investing, your personal comfort level will dictate the extent to which your loan servicer will have access to your IRA account.
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PRIVATE LENDER
Self-direction creates flexibility, which is an important
quality in promoting retirement success. Few professionals can build tax-advantaged wealth with the skills they’ve acquired throughout their working lives, but that’s not the case for private lenders. As discussed, the methods you use in your everyday lending practices will largely reflect the ones you would use for a self-directed IRA investment. Such methods include engaging a loan servicer if you’re so inclined.
Direction IRA Inc., a self-
All business carries a certain degree of stress, but adding a loan servicer to your selfdirected retirement team can help diminish that stress without jeopardizing the returns you’ve come to enjoy as a private lender. As you continue to pursue the strategies that will give you the next financial edge, a private lending investment strategy that embraces loan servicing should be on your radar. ∞
self-directed IRAs to current
directed IRA provider that
assists nearly 17,000 clients across the U.S. He oversees
most avenues of marketing, teaches continuing profes-
sional education and informal classes and webinars, and facilitates the training of
business development and
client relations teams. Malcolm has more than 20 years’
management experience in
various roles and draws upon his teaching background to impart knowledge about and prospective clients.
Malcolm received his bachelor of science degree in
communications from
Northwestern University.
newdirectionira.com/education.
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JULY/AUGUST 2018
59
ALTERNATIVE ANGLEÂ
60
PRIVATE LENDER
INVESTOR FINANCING HEATS UP Flips purchased with financing rise to 9.5-year high by Robert Greenberg
H
ousing analysts have recently expressed caution about the residential real estate investment market due to rising home prices and competition. But, investors continue to find deals and set records while increasingly tapping the debt markets to finance their flips.
Home flipping set a record during the first quarter of 2018 when homes flipped sold
at an average gross profit of $69,500—the highest average gross flipping profit since first quarter 2000 (when ATTOM Data Solutions began tracking flips). Average gross profits were up 4.8 percent from $66,287 in the year-ago period. The percentage of flipped homes purchased with financing this quarter reached its highest point in nearly 10 years. Homes purchased with financing and then flipped represented 35.7 percent of all homes flipped during the quarter, up from 33.5 percent a year ago and the highest level since third quarter 2008. JULY/AUGUST 2018
61
ALTERNATIVE ANGLE
can get on home flipping deals, and also technology has played a big role compared to 10 years ago during the housing boom.”
These technologically advanced online lending platforms have enhanced the speed and availability of financing, while also compressing the rates, a virtual “hat trick” for borrowers.
WHY FINANCING IS ON THE RISE The number of lenders catering to the fix-and-flip market has expanded from the traditional hard-money lenders of yesteryear, a potential factor contributing to the rise in financing for flips. This new breed of lender is often found online, where borrowers get introduced to lending platforms that use sophisticated algorithms to determine if a potential borrower is a good credit risk.
Many of these new lenders are digital and national, making it easier for real estate flippers to access financing no matter where they are based. The new lenders in the space have made financing more competitive, leading to better interest rates for real estate investors seeking financing for their deals.
“We are seeing a lot of emerging lenders in this fix-flip space that are well capitalized and have deep pockets backing them, ready to lend money,” said Daren Blomquist, senior vice president at real estate data company ATTOM Data Solutions. “There is a lot of capital chasing the returns that lenders
“I think another piece is that as (home) prices are rising,
HIS TORIC AL U.S. HOME FLIPPING COUNTS & R ATES Single Family Home and Condos Flipped
Home Flipping Rate (Pct of Total Sales) 10%
120K
9% 100K
8% 7%
80K
6% 5%
60K
4% 40K
3% 2%
20K
1%
Q1 2018
Q1 2017
Q3 2017
Q1 2016
Q3 2016
Q1 2015
Q3 2015
Q1 2014
Q3 2014
Q1 2013
Q3 2013
Q1 2012
Q3 2012
Q1 2011
Q3 2011
Q1 2010
Q3 2010
Q1 2009
Q3 2009
Q1 2008
Q3 2008
Q1 2007
Q3 2007
Q1 2006
Q3 2006
Q1 2005
Q3 2005
Q1 2004
Q3 2004
Q1 2003
Q3 2003
Q1 2002
Q3 2002
Q1 2001
Q3 2001
Q1 2000
Q3 2000
0%
Source: Attom Data Solutios
62
PRIVATE LENDER
flippers are more in need of financing,” Blomquist said.
METROS WHERE FINANCING IS HIGHEST Of the 136 metro areas analyzed, 61 (45 percent) posted a yearover-year increase in their home flipping rate in the first quarter, led by Baton Rouge, Louisiana (up 70 percent); Lincoln, Nebraska (up 62 percent); Madison, Wisconsin (up 55 percent); Columbia, South Carolina (up 48 percent); and Atlantic City, New Jersey (up 43 percent). Baton Rouge is experiencing a ripple effect from catastrophic flooding that occurred there in August 2016. As these flooded homes went into foreclosure or were put up for sale, flippers came into the market to buy them at distressed prices and are now flipping them for profits. Natural disasters provide an opportunity for real estate investors to buy housing economically and flip it for profit while improving severely damaged neighborhoods in the process. There’s typically a delay in seeing these flipping numbers show up in property data. Houston, which was devastated by Hurricane Harvey during August and September 2017, is an example of this trend. Flipping in Houston was down in the first quarter, according
to ATTOM Data Solutions statistics, because of the time it takes to acquire, renovate and then flip a home. Blomquist, however, believes flipping numbers likely will rise in Houston before long. Miami is another large market that saw a double-digit decline in flips in the first quarter. The downturn could be related, in part, to damage from hurricanes Irma and Maria last fall and the delay that results in acquiring and renovating damaged property. Further up the coast, Atlantic City, New Jersey, saw its flipping rate increase by 43 percent in the first quarter. Atlantic City is an interesting city to observe what is happen-
“The number of lenders catering to the fix and flip market has expanded from the traditional hard-money lenders of yesteryear, a potential factor contributing to the rise in financing for flips.”
ing in terms of residential real estate investment. The city has struggled economically and has a high foreclosure rate, which likely is providing an opportunity for real estate investors to buy at distressed prices.
A LOOK TOWARD THE FUTURE What does the future portend for fix and flip investors and the lenders that finance their deals?
Just as lenders have evolved since the housing crisis, so too have real estate investors. Blomquist notes that some real estate investors who were flipping homes have decided to move into new home construction. An example is Alex Sifakis. He’s the president of JWB Real Estate Capital, a real estate investment company based in Jacksonville, Florida, where the home flipping rate is down 7 percent compared to a year ago.
The company told ATTOM Data that it expects to flip about 200 homes this year but will build about 400. The majority will be in older neighborhoods where the company is buying teardowns or vacant lots. This evolution is creating new opportunities for lenders who have been lending to the fix and flip market and are now open to lending on new construction. As flippers move into new construction, it’s advantageous JULY/AUGUST 2018
63
INVESTOR PERSPECTIVE
HIS TORIC AL HOME FLIPPING PROFITS & ROI Gross Profit
ABOUT THE AUTHOR
Gross ROI 60%
$80K
$70K
50%
$60K 40%
$50K
ROBERT GREENBERG
$40K
30%
Robert Greenberg is chief
marketing officer for Patch of
Land. His professional experience includes over 25 years
$30K 20%
in marketing, working with
familiar consumer brands such
$20K
as Pepsi-Cola, Anheuser-Busch 10%
$10K
and Sara Lee as well as B2B
experience in retail, technology, finance and real estate. Q1 2018
Q1 2017
Q3 2017
Q1 2016
Q3 2016
Q1 2015
Q3 2015
Q1 2014
Q3 2014
Q1 2013
Q3 2013
Q1 2012
Q3 2012
Q1 2011
Q3 2011
Q1 2010
Q3 2010
Q1 2009
Q3 2009
Q1 2008
Q3 2008
Q1 2007
Q3 2007
Q1 2006
Q3 2006
Q1 2005
Q3 2005
Q1 2004
Q3 2004
Q1 2003
Q3 2003
Q1 2002
Q3 2002
Q1 2001
Q3 2001
Q1 2000
Q3 2000
$0K
0%
Source: Attom Data Solutios
for experienced borrowers to be able to rely on the same lender to finance new construction as well as their fix and flip deals.
AREAS TO WATCH The report showed that total flips were down 3 percent from a year ago to a two-year low, but the decline could be attributed to dwindling inventory. The return on investment also dipped in the first quarter. The average gross flipping profit
64
PRIVATE LENDER
of $69,500 in first quarter 2018 translated into an average 47.8 percent return on investment compared to the original acquisition price. That’s down from 50.3 percent in first quarter 2017 to the lowest level since second quarter 2015—a nearly three-year low. This decline could have to do with rising home prices. The number of entities flipping properties in first quarter 2018 dropped to 37,873 entities from a 10-year high in second quarter 2017 when nearly 45,000 entities were flipping. Tight inventory
is likely a key reason for the recent decline, but there is a trend toward operators who can effectively manage multiple flips at a lower cost per flip and, therefore, can stay profitable at a lower gross profit per flip. Going forward, we expect to continue to see rate compression making the cost of financing flips more favorable to all-cash deals and experienced flippers moving into the new construction arena. ∞
Recently, he led the marketing efforts for B2R Finance, where
he helped originate more than
$1 billion of real estate investor loans that led to the industry’s first-ever multi-borrower sin-
gle-family rental securitization. At B2R, he was responsible for branding, corporate commu-
nications, lead generation and integrated marketing efforts.
He was responsible for leading the development and implementation of the marketing
automation and CRM platform that helped to deliver sales
management and operational efficiencies to enhance the
customer experience for real estate investors nationwide.
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JULY/AUGUST 2018
65
L AST CALL WITH BENJAMIN DONEL
Perseverance and Drive Create New Opportunities
A
fter the sudden death of my father, my family and I moved from Iran to the United States. I was a young boy, upset and scared in a new country, struggling with the void left by my father's death and my lack of knowledge of the new language and culture. My family was without money,
but in a new place to begin again. At the age of seven, I decided to fulfill my father’s dream of success for my family and myself. I could not control the circumstances of my younger years, but I could choose what to make of them. Growing up, I never had the role model that could have been a positive guide in my life. Since I knew I was by myself, I was more driven. I was motivated because I knew I had to continue moving forward. I had a strong desire to succeed. Since childhood, I have been fascinated by real estate. Growing up, I would watch the construction of office buildings and homes, while also following real estate moguls in the local paper. Wanting to learn more about the field, I earned my real estate license at the age of 18. At this time, I could not sustain myself financially, but my passion was real estate 66
PRIVATE LENDER
After building an understanding of hardmoney loans as a borrower, I launched my own direct-lending company. Since opening our doors, I have enjoyed working as a menEven in early adulthood, I did find tor and helping investors make returns by some success selling houses, and I used utilizing leverage and mezzanine debt. I want the money that I accrued to purchase to support investors because I have personal a dry-cleaning franchise. During that experience with the intricacies of acquiring period, I also decided to work toward my the right loan for real estate projects. I would law degree at night. While I attended law school, I sold properties and simultaneously have never been able to build my real estate business if I had not ran daily operations at created my own my dry-cleaning busiopportunities through ness. Upon graduation, “I would have never incremental growth, I sold the cleaning franbeen able to build my even when none prechise and invested in real estate business if sented themselves. fix-and-flip properties I had not created my to pursue my aspirations Over time, I have in real estate. own opportunities realized that we make development, so I tagged along with a friend who worked in construction to gain exposure to the house-flipping process.
through incremental our own destiny. Even I built on these early growth, even when none though life leaves us experiences working in in situations that we real estate to develop presented themselves.” cannot control, we all my business. I went on have the power to make changes through to learn the trustee sale aspect of property hard work and perseverance. purchasing, and then I started buying and selling properties for a positive return. In my I have made positive investments, but some career, I ended up flipping more than 1,000 have failed. I continue to learn and change single-family homes. when investments don’t go my way. No one When flipping houses, I obtained hardmoney loans for my purchases and became interested in the private lending industry.
wins all the time.
You are your own stumbling block, and only you can overcome it. ∞
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