Episode 4 | Fix & Flip Lending

00:00

You’re listening to Real Investor Radio with Craig Fuhr and Jack BeVier, where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey, welcome to Real Investor Radio. I’m Craig Fuhr with my co-host Jack BeVier. Jack, how you doing? Good, man.

Jack

00:16

Good. Good to see you.

Craig

00:17

Episode four coming at you today. We’re gonna talk today about the evolution of fix and flip and where we’re heading and when I’m speaking of fix and flip here, Jack, maybe we should go into a little glossary of terms here. You mentioned that there’s now don’t really call ’em hard money loans anymore, right? We call ’em r t l loans, fix and Flip loans, residential Bridge loans. You know, so when we’re talking about fix and flip here in this episode, folks, we’re not talking about the rehabers out there who are, we’re not gonna teach you how to do a rehab on this show. What we really wanna talk about is this capital markets, sort of how your funding, your fix and flip business, how that’s changing, and how you can adapt with these changing times. So let’s jump in. You ready? Yeah,

Jack

01:03

Buddy.

Craig

01:04

So man, why don’t we just take a, you know, just take a look at sort of where the business has been starting with that old school hard money lender who has been around for decades, probably had a very ho hyperlocal business. Some guys in in Baltimore here will only in invest in certain zip codes with you. So Yeah, talk about that real quick.

Jack

01:28

Yeah, sure. So that was actually my first foray into the business. I, I interned for my partner now partner, Fred Lewis, who started Dominion Financial in 2002. And we were lending at 15% interest in five points. Completely asset-based loan.

Craig

01:45

Didn’t care about the jockey.

Jack

01:47

Yeah, no, yeah. No documentation whatsoever. It was all about the asset. And, you know, the, the, the theory behind it was that we’re buying in these neighborhoods. If we like our basis in the real estate and we know who the operator is, we can go out and, you know, touch the real estate that we could, we could make good loans. And, and that industry of course still exists today. That, that there are still lenders who do exactly that and how robust do that approach. Robust. There was a big gap between kind of that local hard money lender and then working with a, a, a local bank to, to get money at a much cheaper rate. But of course you had to fill out their forms and present your tax returns and have lunch with them on a, you know, semi-annual basis and tell ’em how business was going. But the kind of the in-between really didn’t exist. And fast forward now 15 years, there’s every piece of that spectrum in between that has been filled in. And it’s been a super interesting ride. We’ve actually changed our approach to the business and picked a different point in that spectrum for, for how we approach the business. But there’s still lots of options. There’s more options for borrowers and more better options for borrowers today than, than there really ever have been before. Yeah,

Craig

03:03

It feels like the business really changed in like 2015 ish.

Jack

03:07

Yeah. Yeah. It was in the, really, in the wake of the great recession, when institutional money started buying single family houses, once they had decided that they were gonna be the equity, they said, well, if you know, if we’re gonna be the equity, then we might as well be the debt as well. And the idea and, and they started to learn, right? Like literally like we’d meet ’em at conferences and they’d be like, oh, you have this lending business, like, tell me about that. And we’d say, oh yeah, we’re lending money at the time, we’re lending at the money at 12 and four. And they just, they’re, they just like, they just, you could just see the shock in their face, like, oh my God, for a, for a one year term you’re getting a 16%, you know, I, you know, a p r and secured by residential real estate. Like that’s, you know, ridiculous. And they, you know, we explained, you know, the nature of the business and that it’s a basically just small balance construction lending. And they were very, very interested. Right. Like the, the, those a p r, you know, high yield, short duration, you know, wall Street loves that.

Craig

04:05

Relatively low risk.

Jack

04:07

Yeah, exactly. Yeah. Secured by real estate, relatively low risk, 70% loan to value, fully funded, just, you know, yeah, gimme more. And so that was really the attitude from 2015 forward. The industry matured very, very quickly.

Craig

04:22

Talk about some of the guys who jumped in sort of in that 2015 frame, some of the, some of the Wall Street companies that were jumping in during that time. Yeah,

Jack

04:30

Absolutely. So, and

Craig

04:31

What they were doing.

Jack

04:32

Yeah, so I mentioned on a previous episode, kind of the elu evolution of like the long-term financing business. There was a colony, a colony backed company called Corevest. They did long-term loans. They also got into the, the bridge lending business. So Corevest was an early name, an early New York name. B two R Finance was the Blackstone backed company. They created to do the bridge business. They did finance, they created Finance of America commercial to do their fixed, their kind of their bridge lending. And then K K R was backed first key. They were, you know, first key was their long-term re rental loan business. And they set up shop as first key and they actually started working with other lenders. So we actually had a very early joint venture with them where they put up 95% of the money, we’d put up 5% of money, the money, and we were the operations. It allowed us to scale very quickly as an originator. And it gave them access to, to good yields on, you know, on on these bridge loans. What

Craig

05:37

Was the reason for the 95 5? I never quite understood that. Just, just alignment,

Jack

05:42

You know, just to demonstrate alignment

Craig

05:44

Skin in the game.

Jack

05:44

Yeah. That we had skin in the game on the loans that we were originating. They didn’t want to feel like the sucker. And for us it was about cost of capital. You know, we, it was cheaper than equity and we were fine with the alignment ’cause we loved the paper that we were originating. And so it allowed us to, to scale given, given a limited balance sheet, which was really the case, right? For like all the, or the vast majority of the, of the smaller private lenders who that were in business prior to 2015, everyone’s capital constrained, right? Because it’s all local real estate entrepreneurs. And so if you wanted to scale that business up, you needed some kind of institutional institutional capital partner to do that.

Craig

06:24

You mentioned Anchor and Genesis that were sort of mostly West Coast companies and how they evolved quickly over time as well.

Jack

06:33

Yes. They, they were kind of, they, they were, as you mentioned, mostly California based, or mostly West Coast based in the early in the business, even before some, even before us I think. And had that, had the West Coast, kind of the West coast private lending business matured a lot earlier than the, than east of the Mississippi. The dollars were bigger, there was more institutional capital out there. And because there were larger dollars out there, and so there was a always a tighter connection between money and the street in California than, than east of the Mississippi. So Genesis and Anchor were kind of born out of that, born out, born out of that environment. Were early, you know, early platforms that were, that, that got involved with institutional capital ’cause they were already deploying a lot of money.

Craig

07:19

Yeah. So, you know, I think what Jack and I are trying to do over the course of these first few episodes, sort sort of lay the historical predicate for, you know, where we’ve been and you know, where we’ve come from. And that’s a lot of what we’re doing here in, in in this episode as well. It’s to sort of lay the groundwork for future episodes, but man, something changed fairly dread like the, the, the fix and flip, R t l residential bridge loans, whatever you wanna call it. The hard money business has matured very, very quickly. Yet in many ways it’s still very much in its infancy stages. What happened in 2017 that really changed the game.

Jack

07:56

Yeah. So right around that period of time, you know, money was getting much cheaper. There was tremendous appetite for the space and while Street was getting much more comfortable with it. And so kind of two important things happened in the 2017, 2018 timeframe. One was the emergence of a secondary market for the loans. So all of a sudden you could sell your hard money loan, you could sell your bridge loan, which

Craig

08:21

Was completely unheard of in the past. Yeah.

Jack

08:24

I mean, you might, you know, if you knew somebody, if you, if you knew your, you know, somebody from down at the courthouse, maybe you could sell him alone because you just needed to get some liquidity. But the idea that you could do it on a flow basis and originate a loan and then sell it a month later and always have that takeout, was really a game changer. So guidelines got put in place by mostly private equity firms at the time.

Craig

08:47

So your companies like Pure Street, you mentioned Alpha Flow. Yeah,

Jack

08:51

Some of the bigger, some of the aggregator platform. I think the first entrance were really just purely private equity companies who just thought that this was a great yield. Like, like alternative debt investment managers got into this very early. And then out of that, actually platforms got put in place to try to create some standardization and act as really kind of a marketplace. So you had, like you said, P Street, alpha Flow, Tora was early in that as well. Churchill. Yeah, they, they came a little bit later but, and have, have still been around the, so they really kind of created a set of standardized guidelines, a set of standardized protocols, and they started reaching out to all the small originators all over the country. They started finding these guys and girls Lo lending in their local market and said, Hey, wouldn’t you like to, you know, you, I bet you’re capital constrained.

Jack

09:41

You probably have more deals than you have money, don’t you? And everyone said, yeah, that’s right. Like, I wish I could, you know, you know, do the, do more of this. And so they said, well, you know, you can sell your, you can originate those loans and then sell ’em to me, you know, scrape the points. Or if, you know, if you originated at 13%, you know, you can actually keep a little interest only strip and make a little bit of money on the backend, and you, you stay forward facing to the borrower. So like, it’s your relationship. I’ll just be the money behind you to help you grow your origination platform.

Craig

10:09

And just as long as you check our boxes, right, you can sell us these loans all day long.

Jack

10:13

Yeah, exactly. Wow. So that really emerged in that 2017, 18 timeframe and en empowered, empowered local originators to real, to grow and grow very quickly, some even to become national originators based off of that, that secondary market takeout. So that was definitely game changing for the, for the originators. The other thing that happened was the emergence of the securitization market for, for Bridge loans for R T L loans. Avi was really, you know, really the, the, the one who kicked this all off and, and did the heavy lifting of getting bridge loans into a, a structure that would work for Wall Street. So they created this revolving, I don’t know if they created it, but they applied residential transition loans to this revolving securitization structure. So you’d have to, the loan could pay off and you could replace it. And as long as the, the replacement loan met the eligibility criteria that you had agreed upon beforehand, you could have a loan pay off and then replace it. And so it acted more like a revolving line of credit for the originator.

Craig

11:23

So explain how that differed from what the Pier Streets and the Alpha flow were doing.

Jack

11:30

Yeah, so Pier Street and Alpha Flow were really acting as a marketplace. So they would say, Hey, upload your, your bridge loans here. I’ll go find somebody who’s willing to buy ’em, and then the money will flow through me. They take a fee for having played matchmaker and, but the whole loan was being sold to the private equity company who was interested in buying these loans. Whereas in this, in the securitization side of things, it’s really just a company in this case, well, they were lending home at the time, they later changed their name to Avi, but Lending Home was just wanting to raise debt. They didn’t wanna sell the loan, they just wanted to lever the loan, they wanted to get debt secured by their loans. So it was a way for them to, it was a way for them to just get more leverage on their balance sheet.

Jack

12:17

They take that, you know, just like you’d borrow from a bank, just, you know, when you do it at scale, it’s called a securitization. So instead of borrowing from your local bank and having a warehouse line, in this case, you’ve got a revolving securitization. And what was really game changing for them was that they got into the securitization market early. They were, they were a venture capital backed company, and they did, they were doing, they did five securitizations before anybody else did any. And so they were early to a cheap debt market with a product that Wall Street loved. And they raised a lot of cheap money. Yeah.

Craig

12:55

Basically like an endless bucket of capital.

Jack

12:57

Yeah. And so for,

Craig

12:59

For, you know, for lack of a better word, hard money guys who wanted to scale, who wanted to go nuts. Oh no,

Jack

13:07

They’re, they’re just a competitor. They’re just, they’re just a big hard money company now. They’re just the big hard money company now. Got it. So this is just them, they’re, they’re just the first originator who went straight to mar to who went straight to the securitization market to raise debt and did it way cheaper than, and, and we’re getting debt way cheaper than the banks would give a company like us money at. So they just had this couple hundred basis point cost of capital advantage over all the other originators in the country. Just like we were talking about last episode, that the, the, the institutional, like the public REITs who have been buying houses across the count country had a cost of capital advantage over all the main street investors because they were able to do their own securitization. Same idea here. This was the first time there was really an institutional fix and flip lender doing their own securitization.

Jack

13:53

And they had as, and as a result, they’ve got a cost of capital advantage over everybody else that they’re competing with. So that really enabled them to drop rates, like push rates down and squeeze competition. And they just bought a ton of market share lending to le you know, they were just the cheapest guy in town f for a very long period of time. Fantastic for consumer. Yeah, absolutely. Fantastic for the borrower, right? Like the bar who Yeah. Borrower’s like, yeah, like who’s cheaper? Like, I don’t care why you’re losing, you’re just losing to this guy. Right? Okay. Like if he can offer me money cheaper at the same terms, I’m gonna go over there.

Craig

14:29

And I would assume that they, that the service levels are roughly similar.

Jack

14:34

Yeah. It’s always debatable. Everyone’s got their opinion on like what they, what they like to provide, what they don’t like to provide, what they L t c they’re looking for. But, but yeah, let’s use like broad brush, but, you know, broad brush, they weren’t like much worse.

Craig

14:46

Okay. So we’ve gone from, you know, secondary markets emerging with, with companies that are basically sort of the middleman between, you know, the, the, the, the people who are gonna find the end buyer for a loan that you wanna sell to, then a company like Avi setting up their own securitization that they can be direct lenders with really low cost of capital, but then something else happens along the way. Yes, sir. Where I think where the insurance companies jump in as a Yeah. Right.

Jack

15:15

Yeah. So the, the market, you know, really matures. There are other originators that do a securitization, we did a securitization as well to kind of, which really helped level the playing field and we can now offer just as good rates. But that became, you know, it kind of became table stakes, right? Like you either had it or you didn’t. Right? And so what, and then co and then, so covid hits and everyone just freezes for a little while, but then the real estate market picks right back up by third quarter and everyone’s off to the races and we all have, and now cost of capital is extremely low. Real estate values are going, you know, gangbusters 2021 was the best flipping year probably ever. And so every originator, you know, money was flowing freely in, in the 2021 timeframe. And a lot of people just slammed the, you know, just slammed the gas down on, on growth because there was e easy capital, everything was paying off. No,

Craig

16:17

No Horizons baby.

Jack

16:18

No loans went into default, right? Like even if you made a crappy loan, the market just bailed you out. So like no loans were in default to speak of. And then 2022 hits, right? 2022 hits, Powell goes on the war path, starts increasing interest rates, and all of a sudden it was, at the time you could sell, you could sell a fix and flip loan for 7%. So if you had, if you originated a fix and flip loan at 8%,

Craig

16:46

Which

Jack

16:47

Almost bank rates, right? If you originated a fix and flip loan at 8%, you could sell it to the secondary market and still get a check each month for the extra a hundred basis points there. Can

Craig

17:00

We, can I slow you down enough to kind of put real numbers to that, that, that that wouldn’t have everybody glazed over if they were listening? Can we do that real quick? Yeah. Hit me. What does that look like? So you, let’s say dominion rights alone for, can we say 200 grand? Yeah,

Jack

17:17

Sure. At

Craig

17:17

What interest rate

Jack

17:19

At the time? 8%. Alright.

Craig

17:21

And I don’t know what the, you know, how, how does that look when you go to sell the loan? So normally if you guys kept the loan, you would make some spread between the 8% and the, and the cost of your capital and you’re happiest punch that you’re making that spread, that’s the business, right? But then you sell the loan.

Jack

17:41

Yeah. You sell the loan, you stay on as the servicer. Got it. And the check comes in from the investor, the 8%, you know, check monthly payment comes in from the investor. You give 7% of it to the insurance company or the private equity firm that bought that, that bought that loan and you keep the one. Oh, so you were able to scrape the points, you just able to keep the origination fee on the front end and you were able to keep a piece of the interest payment that kept coming in.

Craig

18:11

I was always of the mindset, forgive me, I’ve not done a securitization before. So I was always of the mindset that when you sell a loan, you get sort of a lump sum payment from whoever you sell it to. Yeah.

Jack

18:25

You’re still, you’re still getting your

Craig

18:26

Discount back discounted rate of, you know,

Jack

18:29

You can, you can also structure it that way where they, where you sell them a $200,000 loan for 200, $2,000 and they actually give you the, the payment upfront. Depends how you structure it. Doesn’t

Craig

18:40

Matter. Doesn’t matter. It’s six and

Jack

18:41

One half dozen. Yeah. Six and one half dozen the other. Yeah. I got,

Craig

18:43

Got it. So, so you get this loan and now you’ve got sort of, I was kind of shocked to hear this Jack, that like insurance companies who generally buy a class assets, when I think of insurance companies buying up assets from, you know, investors that I’ve coached and know, these are guys that are doing big, big a class multifamily. They’re doing a class mobile home parks, a class self storage, and the insurance companies will take that stuff all day long.

Jack

19:12

Sure. Big loans.

Craig

19:13

Guess I was probably a little surprised to hear that they’ll be buying up loans for houses in Baltimore City. Yeah.

Jack

19:20

Yes. So they started buying, so in 2022 when interest rates started to go up, now insur by the way, insurance companies were already buying loans prior to 2022. But when the securitization market, when interest rates went up the securitization market, all the sudden that cheap cost of capital disappeared. And so you only were doing a securitization if you were forced to do a securitization because the cost of capital was, was not very good. Both the, the index rate was up as well as everyone’s risk, you know, what they were pricing the risk at was up as well. So, you know, Avi went from doing securitizations at a 3% cost of capital to an 8% cost of capital. And so they had to, they’ve had to obviously increase rates as, as, as a result of that though, they’re still got some older securitizations that was, sorry for that aside.

Jack

20:15

Sorry. The, the, but the, so the reliance, so it became very interesting that in 2022, if you had built your company with a reliance on that secondary market, those note buyers and the securitization market, that was very choppy waters in 2022. So all of a sudden this, the, the, the asset that you had a connection to the secondary market, the securitization market all of a sudden became a liability if that was your only out. And so a lot of originators didn’t make it through or pulled back significantly because the, the platforms, the pure streets and the alpha flows and the tox and the Churchills, they were having to deal with that backdrop as well. You know, their, their money was telling them to press pause because it was, it was kind of scary times. And so they just turned the spigot off, right? Like all of a sudden the water just gets turned off if you’re the originator because they just don’t wanna buy that loan or they wanna buy it, but they wanna buy it at above the rate that you originated it at.

Jack

21:26

And so su during time, yeah. Super difficult time to, to operate a business in that context if you’re a, a private lending originator. Right. And the kind of the, the kind of the last man standing in that kind context where, so in, in 2022, the banks, we talked about this on an earlier episode. The banks had a super cheap, it still had cheap deposits in the second half of 2022, really started to increase their cost of capital in the fourth quarter of 2022. In the first quarter of 2023 is when it really increased. But if you were a bank or if you were backed by a bank or if you had a warehouse line from a bank, the second half of 2022 was, was good because you still had a cheap, you know, cheaper cost of capital.

Jack

22:13

The other actor who was kind of had its heyday and really kind of continues to is the insurance companies, as you mentioned, they’ve always, they’re always kind of like two levels removed from from Main Street though some originators have got direct relationships with their insurance companies right now. Absolutely. Right. And they’re doing very well as a result of that being that insurance company money because it’s, it’s backed more, it’s backed by the, the insurance policies that we’re taking, you know, the life insurance policies that we’re taking out, the annuities that, that our parents are buying those, that cost of capital is more stable than, than Powell’s interest rates and then the, than the bond yields of, of 2022. And so having a relationship with an insurance company has been is, is a, is is, has been a really important competitive advantage and, and well, has been really important as, and has become a competitive advantage over the past, I’d say like year nine months.

Craig

23:14

So are, are there additional boxes that you have to check with these if you wanna sell your loans to them or,

Jack

23:22

Yeah, so it’s super, it’s super interesting in that the insurance company is not working with a, you know, some market program. Like they have opinions about credit, they’ve got things that investment committee is comfortable with that they’re not comfortable with. And so when they do a, when they create a relationship with an originator or an aggregator, they are, they have opinions on what they think is important from a credit point of view. And so they will design their own box. And so what the, what the, what the ma what borrower gets is the, the box gets a little bit tighter, but the cost to capital goes down and then they just decide whether they think it’s worth it, you know,

Craig

24:01

Jump through the hoops. Jump

Jack

24:02

Through, yeah. To jump through that hoops or make it conform.

Craig

24:04

Can you explain what that looks like versus like other lending criteria that, that might be from, you know, other aggregators or, or no buyers?

Jack

24:13

Yeah, sure. So for example, in the third quarter of 2022, there was a lot of concern about how much home prices were gonna go down. If they were gonna go down, how much were they were, they were gonna go down where they were gonna go down. And so we started to see insurance company, insurance company overlays on certain geographies, for example. We didn’t have a, a reliance on that fortunately. So we didn’t have to put those overlays into our program. But it’s something that we started to see on a, on a common basis was that

Craig

24:40

A, we don’t want to buy loans in these areas or if we’re going to be in these areas, we’re gonna have to be at a different loan to value or

Jack

24:48

Exactly. Yeah, exactly.

Craig

24:50

So what’s it look like for the end borrower?

Jack

24:54

Yeah, so today, kind of fast forward to today, the, all the connections, all the pipes are in place, right? Like the, that cheap money area air, that cheap money era put in place a lot of pipes to connect main street borrowers to having the cheapest cost of capital available. And so from an advance rate point of view, from an interest rate point of view, things, well, right now, interest rates aside from a, from a program’s point of view and from an access to capital point of view, things, the, the, the pipes are all built. But today, there’s just a relative to a year ago today, there are a lot fewer bids for the paper than there were because the securitization market is not a good execution right now. Hmm. And it was a phenomenal execution in 2021, you know, 19, 20, 21, it was a phenomenal execution. Today it’s not good.

Craig

25:46

So what you’re saying is you’ve got a stack of loans that you wanna sell and maybe there’s just not as many buyers as there was Yeah. A year or so

Jack

25:55

Ago. Exactly. There’s not as many buyers. And so, and there’s not as many buyers. The interest rate index is up, people are still concerned that the coast is not fully clear on because, you know, mortgage rates are still at 7%. So it’s still possible that real estate values come down. So there’s still a lot of like, risk being priced into those deals. So where I mentioned before the reference point that you used to be able to sell a hard money loan at seven with a seven or with at 7% today, that’s 11. So it’s there, it’s up 400 basis points. The secondary market for, for selling hard money loans. So if your local originator is, if his exit, you know, if what he’s doing with your loan is originating it to you and then selling it to, to one of these aggregators or an insurance company, he’s, he’s only making what’s above 11%. And, and within that he’s gotta pay his people and cost of capital and, you know, loan officers and all that jazz. And so the, the rates to borrowers have gone up, have gone up a lot. They haven’t gone up as much as, frankly, they haven’t gone up as much as the, the cost the money has.

Craig

27:01

What’s a, so gimme an example. What, where from like year over year? Yeah.

Jack

27:06

Yeah. So if the, like the, the securitization market, the cost of capital is up 550 basis points, but the lenders have only passed through 400 basis points of that to the borrower. So the lenders still getting squeezed right Now you’re why if you’re an investor who cares? Like who Caress though, right? What was

Craig

27:26

Like, why would you eat that as a, as an originator? Volume?

Jack

27:29

Volume? You, you don’t wanna, you wanna keep volumes up. Everyone’s can

Craig

27:32

Make up, can make up crappy deals in volume.

Jack

27:34

Everyone’s trying to keep the lights on. No one wants to lay off more people. Everyone’s are like, oh, we’re gonna get to the other side of this. It’s just six months from now we’re it’s gonna be better. We’ve been saying six months now it’s gonna be better for a year. But everyone’s still saying six months from now, that’s where, that’s when it’s really gonna bottom out and things are gonna start to get better. So no one wants to dismantle the platform that they’ve built over the past several years because, you know, if we just make it to the across, above the, you know, over that next hill, everything’s gonna be fine. So they’re all just eating it right now to keep volumes up to keep people on staff from a borrower perspective, you know, you don’t really care, right? Like as long as the, as long as your lender can execute. Now, of course, like if they go outta business, that’s a problem, obviously. And if you’re having, like, if they’re having liquidity issues because they’re running outta money, that’s a problem. ’cause they can’t fund your draw. So yes, there are things that would affect a borrower, but in general, it’s still a very competitive market. The borrower is, is still doing, you know, relatively well relative to you.

Craig

28:35

And I know a lot of borrowers, you know, if I’m, if I’m a borrower and I’m waking up, you know, yesterday or three months ago, am I seeing some of these companies out of business that I may have borrowed with in the past? Yeah.

Jack

28:48

So the, the most glad you brought that up. So the most, that’s what

Craig

28:52

I’m here for, Jack.

Jack

28:53

The most, the one that made headlines recently was Civic Financial. Civic was owned by Pacwest Bank. Okay. And Civic and Pacwest Bank was one of the big regional banks that came under tremendous pressure in the wake of Silicon Valley and Signature and First Republic. And so frankly, civic was doing too good of a job, right? They were, they were originating a lot of loans. They were the, the behind avi, they were the second biggest originator in the country and they were creating a lot of loan, you know, creating a lot of loans, going onto the bank’s balance sheet at a point and, but not bringing any deposits with those loans, right? The, you know, the, the D S C R loans and the fix and flip loans don’t come with a a, an operating account requirement. So like, like your local bank, you know, might, might ask you to.

Jack

29:47

And so Civic was creating a lot of paper, creating a lot of loans for the bank, but not creating a lot of deposits. Mentioned this on a, on a previous episode, the loans to deposit ratio is a very important one for banks and one that came under pressure. And so Civic was just a few weeks ago really kind of forced to shut it down and they, they ended up selling the brand to, to Rock Capital who’s a funder of a lot of, of of smaller originators. And so they’re gonna rock’s now gonna make that part of their, part of their kind of portfolio of brands. Hmm. They recently Rock recently also bought, bought Finance of America commercial, which rewind back to 2015, 16 timeframe was the, the Blackstone backed side of things. But they decided also just like a few months ago that, that that wasn’t a business that, that they wanted to stay in. And so Rock bought that, bought that brand as well.

Craig

30:45

Again, I feel like it’s like to the end borrower, you know, what do they care? You know, it’s not company bought by another company, you know, it’s still the same, but like, but to a guy who is an originator, you’re seeing a lot of movement, a lot of movement in this industry as it matures very, very quickly. What does it say to you?

Jack

31:04

Yeah. So I do think it matters to the borrower, otherwise we wouldn’t be talking about on this podcast. ’cause that’s, that’s why we’re here. Well I,

Craig

31:11

What I mean is, look, I, I got a house, I need to get it funded. I wanna make a call, get a term sheet, looks good. I don’t care whether it’s rock owned or civic owned or whatever. As long as I get the service and I get my money and I’m, you know, I’m happy. Right. Well, and

Jack

31:24

And that’s really the issue is that it has resulted though, like the, the, the, the volatility of the past year has resulted in some operational impacts. For example, example, if you were borrowing from Civic, you are not, well, you know, you, you’re probably not anymore. If you were expecting the term sheet from 90 days ago to look like the one, you know, expecting the term sheet tomorrow to look like the one 90 days ago. It’s not gonna, and so it’s important I think for Main Street borrowers to keep tabs on this stuff. Not necessarily like, you know, you still shop, you still get the best terms. ’cause at the end of the day, as long, you know, execution is, is table stakes. Right? And an attractive cost of capital is table stakes, but it’s, you know, so, you know, the borrower, you know, requires both of those things from whomever they’re going to work with.

Jack

32:16

But it’s important to understand these dynamics, what’s driving kind of the movement in the, in the lending market so that you don’t get the rug pulled out from under you. Right. Which the rug has been pulled out from under a lot of originators over the past year. And it has resulted in a lot of borrower disruption. We, we get calls on a, we, we, we’ve gotten calls in on in different periods of time. You know, you’ll, you’ll get a rush of calls because somebody’s funding source just got pulled out from under ’em and they just walked from ’em two days before the table. Well, so it’s single sourcing to somebody right now is not a great idea. There’s a lot of volatility still in the originator space. Yeah. So single sourcing to one originator right now. Not prudent, in my opinion

Craig

33:01

As an originator, an astute originator. Do you see this coming? Or are these, are these, you know, companies getting bought out, companies going outta business? It, it feels like it happens very sort of instant. You know, like, you know, we, we woke up this morning, we all went to work and you know, this, the, the, the civic sign was no longer on the side of the building ’cause we just got bought. Do you see these things coming? Can the average investor on the ground see these moves coming? Like, I’ve got this great lender who I’ve been with for a few years and all of a sudden I wake up one morning and they’re not in business. Can we see it coming? I

Jack

33:38

Think gen generally, no general, you know, someone sees them coming but doesn’t make the decision until they make the decision. And you know, they, they have a hard conversation. They decide to just move a different direction. But as some something that has, as the, as the industry has become more mature and more connected to Wall Street, that’s a double-edged sword, right? You get a better cost of capital, but you also get a, you, you, but the person with who’s controlling the money has less or no relationship with you relationship. Whereas back, you know, 10, 15 years ago where everyone was working with somebody, you know, in their local market that they, you know, knew their cell phone and had lunch with on a regular basis, there was a, an actual relationship there on the, on the Wall Street side of things, when someone makes a pivot, you know, someone at a private equity firm decides that the return on equity we’re getting here is, is not good enough given the risk profile. They just make a decision and they just get out of that business. They’re not, there’s no debate about all the relationships and all the people that we’re gonna have to like, that might be impacted by this. They, they’re just making a business decision, all right? And so they’re, it’s a double-edged sword there, right? You get a better cost of capital, but you get much less relationship.

Craig

34:53

Okay. So then, you know, if I’m the guy on the ground and I wanna do my 20 to 30 flips a year, I guess it behooves me to have more than one lender at more than one originator in my quiver.

Jack

35:08

Yeah. I think that’s prudent. I I think that that, I think that that is the prudent way to approach it. I mean, you know, for, for our borrowers, I’d love to get a all of their business, but if somebody is working with a couple folks, I frankly think that’s just a smart decision. The, because, you know, because it’s a capital intensive business, it’s in the life, it’s the lifeline of your business and particularly in an environment right now where it’s so hard to find a good deal. Yeah. You have to be such a good acquisitions person that when you get a good deal, having it come on, you know, come undone at the table is a, is a problem. You know, like is a, it’s always a problem and it’s always been a problem, but now it, it really, really stings. Yeah. Because there’s not another one right behind it. Yep.

Craig

35:49

It it takes so much to find a deal these days. You have to have the capital aligned to take down any great deal that you find. Absolutely true. What’s give us, give us, you know, we’re, we’re talking about sort of the evolution of the industry here. What do you see on the horizon? Yeah. What, what’s, what are the changes that are coming? Yeah,

Jack

36:08

So it’s an interesting kind of throwback that’s happening right now where the balance sheet lender, somebody who was originating their loans and keeping them,

Craig

36:17

Keeping them on the books Yeah.

Jack

36:18

On their books because it was, their money is kind of having a resurgence right now because they’re not losing on a cost of capital from a cost of capital point of view. They’re not losing as badly as they were before because they didn’t have access to the securitization market. That’s less today of a competitive advantage than it was in the past. And so the spread between what your, the spread between what your Wall Street backed private lender can offer in terms of your interest rate and what the local guy who’s lending his own money is gonna offer you. That spread is tighter today by a lot than it was two years ago. And so, and you have all of the, you know, and you have all the upsides of of of relationship and in

Craig

37:04

The market Yeah.

Jack

37:05

Generally, yeah. Being in the market. Exactly. So that’s, we’ve really seen kind of a, a shift back towards in favor of the ba the local balance sheet lender, the local lender who is selling all the loans, they’re still having a tough time because they have to ride the wave of the capital markets. But the guy who’s lending his own money or maybe has a, a small, you know, warehouse facility, lender finance facility, but who ultimately makes the credit decision themselves with their own capital. They’re really kind of, you know, the, the, the pendulum is swung back towards them right now.

Craig

37:42

You know, it’s funny in an era where there were so many, you know, I’m just gonna say it, hard money guys who were local and then they became regional and then became national. Much like, much like dominion. You would think it would be very difficult for the small guy who’s got maybe a slightly higher cost of capital to even compete and not go outta business. But those guys didn’t go outta business by and large, you know, this, the small local hard money guys are very much the, as we were talking about it, you, you have dinner with these guys once a month that you’ve had for years. Now some of these guys are just still that local guy with his own capital and he’s doing quite well right now. Yeah,

Jack

38:25

Yeah, absolutely. And, and he’s close to their markets. They have a good sense of what’s going on from a, you know, from a credit point of view. So

Jack

38:35

I think the, that that’s still, that, you know, that’s, that’s an industry that isn’t going anywhere. I think that, I think that the balance sheet lender approach to the, the fix and flip it, fix and flip lending business is, is gonna be something that endures over time. It’s, it, you know, as an aside, it’s the way that we’ve built our company to have to invest in our own balance sheet so that we, and to diversify our cost of capital, or sorry, our sources of capital so that we d don’t have the, the fluctuations that, that others have had.

Craig

39:06

Can you drill into that real quick? You’re, you’re, so you keep some loans on the books? We

Jack

39:11

Keep all the loans in the books. Okay. Yeah. We keep, we keep all of our loans on the books and we service everything ourselves. We did do a securitization because it gave us a tremendous cost of capital advantage at that p point in time. We’ve got bank lines of credit, we’ve got a repurchase line, which is a fancy form of a, a warehouse line, another bank line of credit, basically. And we’ve been able to, so, so we haven’t had to sell into the secondary market and we’ve still got a very attractive cost to capital because we can move loans from different, from, from one line to another line based off of kind of volatility in, in the world. Sure. And the, the tail’s not wagging the dog.

Craig

39:52

Is that unique in the business that, or do you got, do you find yourselves unique in that sense, or

Jack

39:57

It’s not, it’s not purely unique. I think it is. I think it is certainly a trend though in the, the companies that are continuing to grow are balance sheet lenders. If you built your platform based off of the reliance in the secondary market, it was, it became very unpredictable and so hard to continue to invest in the platform with that kind of, you know, when the tails wagging the dog. So I think for the, the companies that have a long-term view of the business are taking this balance sheet approach to the business at any scale, frankly. And we do think that those are gonna be the entities that we’re competing with in the long term.

Craig

40:32

Yeah. All right, Jack, so we covered obviously a lot of ground here in terms of the hard money, the evolution of the hard money business, call it r t l call it fix and flip loans, call it bridge loans. It’s obviously an industry that has garnered a lot of attention from Wall Street and private equity companies. You know, so, you know, we’ve talked more importantly, I think that we’ve, we’ve just discussed exactly sort of what it means to the guy on the ground to that individual investor who is, you know, an operator. He’s doing a bunch of deals. The ground has been shifting underneath of that guy’s feet considerably over the last year, year and a half. But it feels like it’s sort of calmed down. We’re not out of the woods yet in terms of, of, you know, what you might expect from your fix and flip lender, but, you know, it feels like things are sort of calming down a bit. Would you agree with that? Yeah,

Jack

41:31

I think that’s fair. And I, I think that things are gonna stay calm and, and grow in a little bit more of a measured way on a going forward basis. Because because capital is expensive right now, it’s not easy to grow very quickly right now if you’re an originator. So I think that that means that, I think that, that, that means, sorry, one other aside, please. I also think that, I also think that on a going forward basis, the fix and flip business is going to be, is going to have kind of like a, a resurgence in 2021. Obviously it was great to flip stuff because prices just went up so much.

Craig

42:08

One can make a lot of mistakes and, and get covered over with a bonus appreciation, right?

Jack

42:12

Yeah, exactly. E exactly. And I think that the, from a going forward point of view though, there’s gonna be less competition to buy as is houses from landlords because their cost of capital is high. And, and I think it’s gonna stay high for a little while. And as a result, I think more deals when you look at ’em through the lens of, Hey, should I keep this or should I flip this? I think that more deals are gonna make sense to flip than they are, than, than they did before on a percentage basis. Sure. And so I think people may start to retool their, their real estate platforms back more towards the, the fix and flip side, particularly because it’s a source of affordable housing in an aging, you know, in, in a, in a country with, with aging housing stock, with affordability issues and in and in a low supply environment.

Jack

43:05

The house that has been recently renovated, sorry, in a low demand environment, the, the house that has been recently renovated is the one that is, is, you know, moving quickly and getting multiple offers still. So I think that it’s, it’s harder to find deals right now. Yeah. But it’s, but from an execution point of view, as a fix and flip investor, things are actually getting a little bit better. And margins I think are gonna get a little bit better on the fix and flip side than we, than we saw in the runup to Covid put it that way.

Craig

43:34

Couldn’t agree more. At the same time, I think it’s important to just reiterate it’s a time for relationships. You know, if you’re not strengthening the relationship with, with your loan originator, if you’re not strengthening the relationship with your local bank, now’s the time to do so, to have multiple arrows in that quiver for when the deal comes around and you gotta get it to the table. Yep.

Jack

43:56

Absolutely. It’s, that

Craig

43:57

Is the time as, as we find people getting in and out of the lending market. Right. So I think we’ll wrap it there for now. As always show notes, we’ll be@realinvestorradio.com slash notes. You can download ’em there, Jack. Thanks once again. Pleasure.

Jack

44:15

As always. This

Craig

44:16

Is Real Investor Radio, I’m Craig Fuhr, Jack Bevier. We’ll see you next time.