Welcome, everyone. Thank you for joining us for this episode of the podcast, Lender Lounge with Kevin Kim. Good morning to you, Curt. Thank you very much for joining us today. Really appreciate it.
Curt Altig:
Good morning. It’s great to be here.
Kevin Kim:
Well, Curt, you are the founder and CEO of Builders Capital, and-
Curt Altig:
No, I’m actually the founder and chairman of Builders Capital.
Kevin Kim:
And chairman, and chairman.
Curt Altig:
I’m not the CEO. We have a-
Kevin Kim:
Chairman of Builders Capital, and I really appreciate you joining us today because Builders has always been… You guys have been kind of the sleeping giant out where you guys are, and we’ve been following you guys for a long time. We recently started working together, and we did that short interview with Armanino a few weeks ago, and I really wanted to spend some more time with you and get some more insight from your end because it was a really, really good interview. First of all, thank you for joining us today. So, do you want to give the audience a little bit of background about Builders and about yourself?
Curt Altig:
You bet. You bet. So, Builders Capital was founded in 2009. I had spent from approximately 1991 to late 2008 in the traditional mortgage banking business. I ran a division or region for First Horizon Home Loans, based here in the Northwest, and we had a heavy emphasis in home builder finance. It was a key to the volume that we achieved while in the agency side of the mortgage banking business. When the Great Recession came and we began to withdraw credit from home builders, as did every other national bank for that matter, thus was born the idea that there’s going to be a hole in the market, there’s an opportunity to fill that hole privately, and thus was born the idea of Builders Capital.
Curt Altig:
So, we started the company in 2009. Kind of funny story, if you will, I was fortunate enough to meet the gentleman in April of ’09 who consider to be my co-founding partner, Robert Hadley. Robert Hadley is a third-generation commercial development family office, and actually, our first customer, which we closed in May of 2009, was Rob Trent, who is now a partner in the business and the company’s current CEO. So, Rob had the same idea that I had, which was that the home building business is going to have kind of a vacuum for a while as builders deal with the implications of the Great Recession, and so much like I started a home builder finance company, he started a home building company, and he started that in the summer of 2008.
Curt Altig:
We funded our first project with him in the spring of 2009, and by 2011, Rob Trent’s company was the third-largest home builder in Washington state. He sold his business to Richmond American Homes, a publicly-traded home builder out of Denver. That happened in mid 2011. He became an investor in our first fund. In fact, he was our first fund in 2012, and we had a two-year commitment to manage money for him, essentially, and when we came to the term of that, we invited him into ownership in the company, and it’s been the three of us ever since. So, one of the stories that certainly wasn’t the plan when I started, but as most things happen in life, if you kind of keep your ear to the ground and your eyes wide open, you never know what may crush your path. So, we got building and-
Kevin Kim:
That seems to be the truth in our industry, though. You guys are not the only ones like that, right?
Curt Altig:
Yep, correct.
Kevin Kim:
I mean, your very first borrower becomes your first investor, becomes your partner, becomes your… So, that’s great.
Curt Altig:
Exactly. Exactly. So, we’ve been on a path since really-
Kevin Kim:
So, keep going. Yeah.
Curt Altig:
Our vision from early on was to have a growing presence. Of course, initially, we attacked the Pacific Northwest. We’ve tried to be pretty methodical in how we’ve grown, and making sure that we have the stability under the company, but in terms of finance and operations, to continue to pursue that growth. So, here we are today setting aside how bizarre 2020 has been, but I think we closed $10 million our first year. Last year, we closed something north of 550 million, and we’ll have a business plan going into 2021 that is in excess of a billion. So, it’s been an interesting and pretty incredible ride over the last 11 years.
Kevin Kim:
I mean, 11 years, the industry has shifted gears and changed priorities, and people have entered and left, and you guys have been here for 11 years now. About 2009, private lending was very different back then, right?
Curt Altig:
Yep.
Kevin Kim:
There was no Dodd-Frank. The licensing rules were not what they are today. Securities regulations weren’t what they are today. Describe for me how you guys entered the market, because a lot of folks who are getting started, they have a big question mark. They come from origination. They come from mortgage banking. They come from another shop. They’ve got a great book of business, but it’s a big question mark for them on how do we… What things do we need to make sure we have in place when we get started? Right?
Curt Altig:
Right.
Kevin Kim:
You guys talked about stability, steady growth and stability. I mean, that’s one really good takeaway our audience can hone in on, but besides that, ’09 was a chaotic time. Right?
Curt Altig:
Right.
Kevin Kim:
From a regulatory and legal standpoint, I was watching all that, but from a business standpoint, private lending was in its infancy, and especially with construction lending being just completely decimated, and then folks kind of coming in to fill the gap. So, describe to me what that was like, and what are some things that… For you, what are the things that you look back and say, “You know what? That was the right move. These were the right key things that we had in place that allowed us to scale in 2011, 2015, and onward”? You know?
Curt Altig:
Yeah. Yeah, it has changed. It’s changed dramatically, and there’s been a couple, I would say, kind of milestone events along the way. So, I’ll kind of start with I was 40 years old when I started this, and always had kind of an entrepreneurial itch. I had a great job. I had 18 years into a career on the mortgage banking side, but I had this entrepreneurial itch that I had to scratch, but I will never forget day one, which was basically January 3rd, 2009, leaving the comforts and, frankly, the compensation of what was in my rear-view mirror and stepping out to the abyss of private ownership, and the reality of that. I went out immediately to raise capital.
Curt Altig:
I was not funded when I started, aside from provisioning for my family, frankly, and I will tell you the first three or four months of 2009 was brutal because people were so fearful of mortgages in general and anything real estate-related because the economy was collapsing around what was often referred to as the subprime disaster. Truly, Kevin, by the grace of God, I stumbled across, and I literally mean stumbled across Robert Hadley, probably the one guy in the Pacific Northwest that had an appreciation for why this was so critical.
Kevin Kim:
Well, how did you guys meet then? How did you guys meet? Where’d you guys meet at? Was it at an event? Were you playing golf? What was it?
Curt Altig:
No. It was referral. I was involved in an organization for about 15 years called Vistage. It used to be called TEC. My Vistage chair in a one-on-one that if I’m honest, I was frankly questioning what have I done to myself and to my family, if I’m brutally honest, and Jim tried to give me a pep talk and said, “Hey, you just got to keep putting one foot in front of the other.” I had a transaction. I had fully vetted Rob Trent’s transaction, and I was literally T minus three weeks from closing. I had no capital commitments, and it was a $5 million funding. So, I’m talking to my mentor and my Vistage chair, and we leave that meeting and he says, “I don’t know any real estate people, but I know a lot of Vistage chairs. Let me reach out and see if I can make the connection for you.”
Curt Altig:
Literally in the next 48 hours, I get a call from another Seattle-based Vistage chair who connects me to Robert Hadley, and we had a meeting the next day. We travel out to the site. We meet Rob Trent, and literally three weeks later, closed on a transaction. You’d have to interview Robert Hadley to ask him why in that moment he made that decision to entrust that level of capital, and of course, it was structured properly. There were protections in place, given the newness of our relationship, but that’s where it all started. So, as I think about folks entering it now, that was obviously a huge milestone event for me. If I was to do it again, I’m not sure I would do it without having that groundwork laid. It was, in a sense, probably naïve for us to move forward and not have that capital secured, and therefore required probably divine intervention for it to actually…
Curt Altig:
But the market’s changed a lot too. I mean, the Jobs Act… When we started this business, and the business continues to be this way to some degree across the nation, it’s fairly bifurcated. You still have a lot of regional players. There are certainly national companies now that didn’t exist back in 2009, but in part, that kind of hyper-local layout of the industry existed because there wasn’t a steady stream of institutional capital supporting the industry, and if you wanted to start a fund and you wanted to lend $10 million, let’s say, in year one, you had to go find at least five of it, and probably five of leverage, or you got to fund the full 10. Now that’s not necessarily the case.
Curt Altig:
Now, 2020, COVID has changed this a little bit, although I see this marketplace returning. The aggregators coming on the scene in what, late 2016 and ’17, dramatically changed the barrier to entry to the industry, whereas in 2009, if we wanted to do 10 million, we needed to raise 10 million. In 2021, presumably, you want to do 100 million, you probably need 10 million or five million.
Kevin Kim:
Not even.
Curt Altig:
You need enough to find and-
Kevin Kim:
You don’t even need that. Yeah, yeah.
Curt Altig:
… turn over the business. Now, I would say we all got a major wake-up call in March of this year when the repo market collapsed, and all of a sudden that $100 million origination channel being supported by $4 or $5 million worth of equity, and the ability to turn those loans over quickly with the aggregators, that shut off overnight, and that should be a wake-up call to anybody in this industry operating on that platform. You darn well better have a backup plan or capitalize at a higher level, or your business is at risk to something that you have zero control over.
Kevin Kim:
Right, and that’s been… I’m the fund formation guy at the firm, so I’ve been preaching that for near 10 years now, but how does someone say no to that easy money? I don’t blame them. I always tell them, “If I were in your shoes and someone was dangling that easy funding in front of me, I understand,” and I’ve always advised my guys, “Listen. Just think of it as a tool. It’s a great tool, but it’s not your only tool.” You know?
Curt Altig:
Yeah. That is not the only tool, and that’s a great thing, Kevin. Something that’s been true with us all along is we have been… I would say we have been really disciplined about making sure that all of our eggs are not in one basket. We don’t have one institutional capital partner. We never had… When we had a fund, we didn’t have one fund. When we came into the end of 2018, we had five funds and 11 bank lines, all of them relatively small, none of them able to tip the business over. Now, we had multiple funds, so we didn’t have 11 banks. We had multiple banks that spread out lines across multiple funds, but we did that… It’s difficult to manage. It requires a greater level of sophistication around how you allocate loans, how you service and respond to investors, how you address the investor concerns, like how do I make sure I’m not getting bad loans and the other fund’s getting good loans?
Curt Altig:
You have to address all of that, but it’s much safer for the business, and even as we brought on our first major what I’d say institutional-grade capital partner, we kept a fund of some size so that we had a lifeboat, if you will, and again, no one saw black swan COVID coming, at least no one in our camp, and thank goodness we had our funds to rely on during those months where the industry came to a screeching halt.
Kevin Kim:
Yeah, yeah. So, let’s go back to the growth trajectory of the company. So, you said you started your first fund in ’11, but before that… So, you had just been funding them directly, whole loans through this investor, Mr. Hadley, Robert Hadley? Is that how it got started?
Curt Altig:
Yep. Yeah. Yep, who again is the principal in the business, so we started with a… Again, I guess you could all that a fund, but we funded internally, if you will, for the first couple of years. We added our first bank facility to that in the summer of 2010. We added a-
Kevin Kim:
You were able to get a bank line in 2010?
Curt Altig:
Yes.
Kevin Kim:
That was no easy feat.
Curt Altig:
No. No, not at all. We got a second line in the summer of 2011, almost exactly a year later. We then did all the PPM work, and actually, we went out to market with our fund in early ’12, but it was about that same time that we approached Rob Trent, who had sold his company, and said, “Would you be interested in investing?” He said, “I will, but I don’t want to be a blind fund. Is there a way that I can be a single investor?” So, we paused our kind of public-facing fund. We spun up a similar fund for him, just mimicked our public fund, of which he was the only investor. We added some leverage to that, obviously, with his approval, and then we deployed that capital over maybe a nine-to-12-month period, and we went back out with our public fund in the summer of ’13. We were actually… Another kind of milestone event for us, again, we kind of, frankly, stumbled across… We ended up getting picked up by RBC Dain Rauscher in their alternatives group, which we had no idea how rare that is for a Wall Street firm-
Kevin Kim:
That’s very… Yeah.
Curt Altig:
… and it was only… I think at the time, it was a $20 million raise, and we were naïve enough to pursue it, and we just caught them at the right time. They were under pressure. They were losing investors at a local level to a lot of registered investment advisories that could offer alternatives, and historically, the Wall Street firms, if they’re going to do alternatives, they have names like Starwood Capital. They’re not small ventures, but they decided to do a local alternative.
Curt Altig:
So, they took on the fund. They filled it in literally three months, so we now had, in essence, two funds, and we kept that pattern really from 2013 through 2018. We added another family office who once again wanted their own fund. We set some limits as to what the minimum investment size. If memory serves, it was 10 million to have your own fund, and you had to agree to sign up for some leverage, which we arranged. We did all the heavy lifting around figuring out, again, how do you address the inevitable concern that investors raise, which is, well, how do I make sure I’m not getting bad deals or self-selected deals? So, we generated a computer-based algorithm that selected funds on a blind rotation, and-
Kevin Kim:
Randomizer?
Curt Altig:
Yep, with a randomizer, and so we did that, and again, it wasn’t until… That took us to about $350 million in annual production. It started-
Kevin Kim:
This is what, 2012, you said?
Curt Altig:
No, no, no, no. This is probably now 2015 or ’16.
Kevin Kim:
Okay. That’s when the industry got real hot, ’15 and ’16, right?
Curt Altig:
Right.
Kevin Kim:
That’s when things were just rocking and rolling. Yeah.
Curt Altig:
Exactly. Exactly. So, we then organized… Gosh, that takes us into 2017, and we did a very deep planning exercise in 2017, and really kind of set the course for the next three to five years for the business, and the key things that came out of that are where do we need to invest in the business, and where does the business need to be for us to pursue a national footprint? So, we designed some practices around how we select markets. We made a decision at that point to make what has turned into a massive investment in our own technology platform, which we have built from the ground up because we couldn’t find a solution off the shelf that had the customization that we wanted, and we went to work on our capital structure and set out a vision for how do we ultimately get to institutional capital that falls outside of hedge funds and private equity. That means you’re into pension or insurance or some other form of capital that was a little bit more permanent, and it had a much lower return threshold than, again, a typically hedge fund is going to require.
Curt Altig:
So, we went out to market with investment bankers, and really, through that process in 2018, we came across our first, again, what I’ll call institutional capital partner, and that was OneChart. We were different in that they were buying a lot of basic fix-and-flip business, so we spent about six months with them, five or six months, working on how to make their platform and our platform work with construction loans, and we crafted kind of a unique program with them. They made a significant commitment to us, and that allowed us to consolidate our five funds into one fund, and then to run that alongside our relationship with OneChart. That has really taken us through, and immediately, we bumped our volume up to, well, 550-some million in 2019. We went back out to market with Saluda Grade, who I know you guys know well, and who has been amazing.
Kevin Kim:
Yep. Shout out to Ryan. I think he’s coming up on another interview. I asked him for an interview.
Curt Altig:
Yeah. That’s great. They have been an amazing partner to us in so many ways, but we went to market with them, and actually, as we went into COVID, we had a signed term sheet for a substantial new commitment. COVID kind of scuttled that for six months. We got them back to the table. I should say Ryan got them back to the table, kind of early summer. We just closed on a new $500 million commitment in October that really sets us up to cress that billion-dollar mark, knock on wood, hopefully in 2021. So, as we sit today, we still have our fund. That’s a critical, again, component, and we have two institutional capital partners, if you will, one in OneChart, which is more of a selling relationship, if you will-
Kevin Kim:
[crosstalk 00:23:28]
Curt Altig:
… and one with the insurance company that’s actually got room to continue to grow, as well as our business grows.
Kevin Kim:
I think an insurance company’s a really good fit. A lot of folks think they have to find some kind of institutional LP or some kind of institutional actually Wall Street head. I mean, you’d be surprised what the insurance companies will do.
Curt Altig:
Oh, yeah.
Kevin Kim:
They are more flexible.
Curt Altig:
Exactly.
Kevin Kim:
I mean, what’s interesting I’m hearing, though, I’m hearing a couple unique themes, though. So, from foundation until 2016, in six years the company’s balance sheet goes from zero to $350 million. Right?
Curt Altig:
Correct.
Kevin Kim:
But you coined it as God’s grace and stumbled upon, but first I want… The importance of networking and asking, and a lot of folks, they always ask me, “Kevin, how do I go out and do this? Where do I go and find these people?” A lot of these guys are originators, the former originators, mortgage bankers. They’ve never professionally raised money before. I tell them, “Well, you either got to have the traditional deal guy, money guy kind of format, or you got to get out there pound the pavement, shake hands and kiss babies.”
Curt Altig:
Yep.
Kevin Kim:
But a lot of people don’t know how to start.
Curt Altig:
Yeah.
Kevin Kim:
I mean, do you have any advice for them on that? Because you say you stumbled upon it, but I feel like it wasn’t just… You had all the right circumstances. You’re part of Vistage, you said. You’re part of… Is that a leadership organization?
Curt Altig:
Yeah, yeah. Yes. It’s the old TEC. It’s CEOs and business owners, predominantly. It’s by design very diverse. There were 15 people in my Vistage group, and it’s a full day commitment once a month. So, that is quite expensive, and it’s a massive commitment. You can do part of the same thing, I think by exposing yourself to things like AAPL, Pitbull conferences. Now, they’re harder to find, but there are constantly investors perusing those events. We had great success with the Fairway America platform. They host an event-
Kevin Kim:
The Northwest? Yeah, they did a lot with the Northwest. Yep, yep, yep.
Curt Altig:
Yeah, absolutely. So, they obviously, again, last year, this year being unique, but we’ve attended, I think, five of now seven or eight events where they ensured that there’s going to be real estate investors involved. But you’re absolutely right. You have to set your mind to getting out and getting in front of and exposing yourself to the marketplace, and what I found was… Look, I say stumbled across because to some degree, in that moment I was quite discouraged. I probably had, I don’t know, 20 meetings that… Mind you, it’s the spring of ’09. Right?
Kevin Kim:
Yeah.
Curt Altig:
The eye of the storm, and I’m getting-
Kevin Kim:
Yeah, it smells like a mortgage is not going to be interesting to an investor.
Curt Altig:
…but construction mortgages? I had people ask if I had read a newspaper or watched the news at all in six months, but yeah, being exposed and keeping an open mindset to it just takes one. I didn’t really think it only took one, but it convinced myself that it just takes one to find the right one.
Kevin Kim:
I mean, today’s marketplace setup makes it even better. Right?
Curt Altig:
Oh, totally.
Kevin Kim:
If you can find a $1 million investor, a $500,000 investor, he has two friends, but-
Curt Altig:
Absolutely.
Kevin Kim:
… it’s about asking, and I find a lot of people just can’t get out of their own way and won’t ask.
Curt Altig:
I guarantee you it’s in their network.
Kevin Kim:
Yeah, that’s what I said. You probably know some people that’ll invest you just got to get out there and ask.
Curt Altig:
Or they know some people. Right?
Kevin Kim:
Right, right. The hardest part is saying, “Can you introduce me to that person?”
Curt Altig:
Yes.
Kevin Kim:
You know?
Curt Altig:
Right.
Kevin Kim:
Well, I also want to ask you about who is doing what, because during that six-year growth period, a lot of our clients, a lot of our listeners, and myself included, want to know about how you built it from a personnel and process and operation standpoint. Was it just the three of you guys for six years?
Curt Altig:
No, no.
Kevin Kim:
Yeah.
Curt Altig:
No, no, no, no. No. Early on, probably for the first three or four years of the business, we had a very skeleton crew because, again, you’re growing a business, and there’s only so much profitability and/or OpEx to go around.
Kevin Kim:
Sure.
Curt Altig:
So, accounting is such a critical, critical, important function, especially when you are managing other people’s money. So, we focused early on on making sure we had tight controls around accounting. In the early days of the business, I handled… Again, we didn’t have a ton of capital to go around, but I handled almost all the originations for the most part for probably the first four or five years of the business, three to four years of the business.
Kevin Kim:
So, at that time were you CEO, or were you still chairman, or what?
Curt Altig:
No, no, no, no. I was CEO, and generally I don’t really love that title, but it was the only thing we could think of. I made a shift. Rob Trent is probably one of the most talented executives, business owners that I’ve ever worked with. He has an incredible knack for our technology platform. He’s a proven entrepreneur, built a business in three years and sold it to a public, and frankly, after 11 years of grinding at that wheel, I was ready about a year ago to transition away from direct responsibility for our staff, and to really focus more on our capital strategy, some of our new markets, new products, and so Rob stepped into the CEO role in January of this year. Really, up until… Robert Hadley has always been alongside the business. We co-office together here in Seattle. He doesn’t hold a functional role in the business because he is the president. I don’t know what they call his title, but basically, president, CEO of Hadley Properties, which is a very active commercial development family office.
Curt Altig:
They have a master plan community that is still in production in Colorado Springs. They have a quasi-second home master plan here in Central Washington. They’ve got a massive operation over in Honolulu, Hawaii, commercial real estate. But he is ever present, always available. The three of us are always together on anything critical around the business as it relates to capitalization or strategy, and so that’s kind of the way that the three of us interact. Partnerships can be tough. As my father used to say, they really aren’t like marriages because marriages are based on love, and partnerships are generally based around economics. Right?
Kevin Kim:
Yep.
Curt Altig:
I would speak for myself, but I think the two would agree we’ve been really blessed in our relationship. We take a kind of unanimous, we’re either all in or none in, approach to things, not every decision, but major decisions, and it’s really, really worked. But back to the early days of the business, I guess I was CEO up until, again, January of this year. Accounting was a critical function as the business built, making sure… When you’re doing construction loans, different than, I think… We’ve never been a big fix-and-flip or bridge lender, so I only know construction, but understanding where the projects are at consistently is critical.
Curt Altig:
Having in-house ability to assess and make decisions and guide what are we going to… Projects get off track, so we’ve always had that capability to some degree. I mean, we use a third-party inspection service that early in the days had a gentleman in-house who was actually a general contractor. It was a ton of help to us, and then as volume began to build, we began to round out processing, customer service type roles. It’s in large part why we made the investment, though, starting in 2017 that we’ve made in our technology platform. We had to figure out a way for technology to give us scalability, and-
Kevin Kim:
Now, describe the platform. Is it an LOS platform? Is it a processing platform? Is it a-
Curt Altig:
It’s all of the above. It is literally… We’ve built it from the ground up, and we really started with the accounting function and worked forward, and I say that because ticking and tying all the… So, imagine a time when we’ve got five funds that are all different. All have kind of a similar waterfall structure, but all different, then migrated into an institutional partner that’s more of a selling relationship where you’ve got B pieces and waterfalls and extension fees and different ratios for different things, and now to a third or a second institutional partner, but a third tranche of capital, keeping all of that straight, you have to have technology. You cannot run that on itself.
Kevin Kim:
No way. No way. No way. Yeah. I mean, had you guys tried out other options?
Curt Altig:
Yeah.
Kevin Kim:
I mean, accounting-wise, there’s a huge suite of accounting softwares out there. You know?
Curt Altig:
Yeah. So, we poured into NetSuite.
Kevin Kim:
Okay.
Curt Altig:
So, we’re not running all the… It’s exporting to NetSuite, but in terms of tracking all the loans, keeping track of all the waterfalls, managing all the draws, everything, our philosophy is it’s a one-database business, and we want everything in that database to be able to be as close to one entry as possible, all the way up to when the client comes in and enters in that application information. It begins to feed through the system, and we’re not re-keying that information.
Kevin Kim:
So, it’s front office, back office, and also loan processing as well?
Curt Altig:
Yep.
Kevin Kim:
Wow, and fund administration.
Curt Altig:
Correct. Well, fund administration to a degree. In other words, we do… So, we have a NetSuite interface for accounting, and we do keep track of our basic investor accreditation, et cetera, balances, notifications through, oh, gosh, Juniper. I think it’s Juniper.
Kevin Kim:
Yeah, yeah.
Curt Altig:
So, it’s third party. We use the very basic functionality in all of that, but everything else is inside what we call LMS, Loan Management System.
Kevin Kim:
That’s cool.
Curt Altig:
It’s proprietary. We have in-house, in essence, a chief technology individual. We have now two full staff developers. That is something that we continue to invest in very, very heavily, and we think is a key, and frankly…
Kevin Kim:
It’s kind of a unifying theme, though. Every lender I’ve met that has a full on operation, they fund the actual direct lender operation, over 200 million, has made some type of investment into proprietary software, and that makes me wonder what… That goes to the point of how fractured our industry is, if you think about it. If you look at the conventional mortgage space, there’s no one making their own software there.
Curt Altig:
No, no way.
Kevin Kim:
We’re not that different, if you think about it. So, it’s always made me wonder, and I’d like to hear, because you came from the conventional space originally, before-
Curt Altig:
Correct.
Kevin Kim:
So, you’ve always been in the mortgage business. Why is our industry so fractured, and can we get to a place where it’s unified like the more conventional markets? You know?
Curt Altig:
Yeah. I would tell you two key things. There’s no Fannie Mae, Freddie Mac, or Ginnie Mae.
Kevin Kim:
Yeah, I agree with that.
Curt Altig:
Right?
Kevin Kim:
Yeah, yeah.
Curt Altig:
Securitization, it would be key, and I will tell you, I think it’s a little bit of be careful what you wish for, Kevin. The key to our industry is the ability for customers to get what they need when they need it without jumping through all the hoops. Look, there is a great… Again, and I only know… Builders Capital is our name for a reason. It’s the most elegant way to describe what we do. If you wonder, we provide capital to home builders. That’s our market. We’re crystal-clear on that. So, I’m not as… A lot of people say, “Well, whatever. You can do a construction loan. You can’t do a fix-and-flip loan?” Well, we can do a fix-and-flip loan. We just can’t do it as well as everyone else out there that you know that are experts in that space. But we would stack ourselves up with anybody, analyzing and executing on construction loans.
Curt Altig:
But back to the bifurcation, that’s part of it. The way that we do it is a little bit different than, I’m trying to think, than Genesis does it, and that type of… What’s true about the mortgage banking business is standardization. You don’t have a lot of… Sure, you’ve got bigger lenders that have different contracts with Fanny, Freddie, and Ginny, but they’re not that different. At the end of the day, maybe based on performance, they’re getting… I don’t even know if this is true anymore. It was certainly true back in the day. We might get a little bit more expansive program parameters because we’ve had excellent performance on our pool, and so we’re getting a little bit more accommodation there. So, again, I think the private industry needs to be a little bit careful for what it wishes for.
Kevin Kim:
I’m not advocating for it. Personally, I love the fact that it’s kind of a if you can dream it, you can build it kind of industry, because it’s commercial, actually. What we’re doing is commercial lending, so we don’t need to worry, and it doesn’t need to be that type of industry. Frankly, if we had that, I think we would all run away, and you would get significant regulation, not just from the government, but from the agencies. Right?
Curt Altig:
Right.
Kevin Kim:
What I was worried about was I started seeing that, sort of, when the aggregators started to come to our space, but even then, it wasn’t standardizing. A lot of our clients were seeing that that shouldn’t be the only answer. We’re not going to standardize under that flag.
Curt Altig:
Exactly.
Kevin Kim:
We’re going to do what you guys did, and other things. I mean, personally, I wish for it. You know?
Curt Altig:
Yeah. Even with that, what’s interesting, and I’m so thankful for that relationship that we have. So, please know this as I say that, but even that segment of the industry is starting to be controlled by the repo providers.
Kevin Kim:
Yeah.
Curt Altig:
In my mind, that is the reason why that business shut off in March. To my knowledge, it wasn’t because the aggregators themselves were like, “Well, we need…” It was wise to take some sort of pause, but come on. By May 15th, it was pretty darn clear as data started coming out for April, and certainly by June 15th, when data was coming out for May, that hey, single family is proving to be highly resilient to the COVID-related issues, but it was the repo providers in the background holding the keys to the kingdom that, as I understood it, has said, “No new business. We’ll meet our continuing obligations for draws on fix-and-flips or construction or whatever.” So, again, there is still, I think, a wide open field outside of the aggregators for business that’s quality business that for whatever reason doesn’t fit that mold. It’s true portfolio lending.
Kevin Kim:
Right, right. I think that because we’re not truly consumer, we’re mostly commercial, and there’s kind of these random niches all across the space.
Curt Altig:
Yeah.
Kevin Kim:
There’s so much room for everybody, and I actually think that we thrive in the fact that it’s kind of fractured, and we can collaborate more as opposed to the conventional market. I was just worried about it, and some folks say that it’s coming. I don’t necessarily believe it because of the fact that of the fund, the need to have discretionary capital is going to keep those types of standardizations at bay, but we’ll see. We talked about the past, and you’ve told us your story, and I think it’s amazing one. I mean, wow. Actually, I do have another question. When did you guys make the decision to hire a general counsel? Because I know you have a general counsel, right?
Curt Altig:
Yeah.
Kevin Kim:
When was that decision made?
Curt Altig:
Let’s see. Catherine, probably ’18… We may have actually made the decision almost two years ago, but then Catherine’s been with us I think about 18 months at this point. Now, I will tell you, we probably would’ve made that decision earlier, Kevin, were it not for the fact that we have benefited massively from Robert Hadley’s organization having internal counsel. There is really a fourth key person that’s been alongside the business for, gosh, seven years now, I believe, and that is Robert Hadley’s counsel, Jeff Bashaw, who is a rockstar. I mean, the guy has got capacity beyond, that I have great respect for. He knows our business intimately, meaning Builders Capital, but we started to stretch, so Jeff directed traffic for us on all things kind of legal-related for a number of years before we finally said, “Okay. It’s time that we bring someone in-house direct.” As you guys know, we still continued to farm out a fair amount of business.
Kevin Kim:
Of course.
Curt Altig:
Really helpful to have that person inside for day-to-day stuff that can be addressed just immediately, and also make high-level decisions as to what needs to go outside, and what can stay in-house.
Kevin Kim:
So, if you’re looking back on it, if you didn’t have that, I guess, secondary in-house counsel before that under your partner’s business, would you say you’d add one right around… I don’t know. We’re using assets under management as a kind of threshold. The 100 million mark, 50 million mark?
Curt Altig:
I would say probably, as I think back through the years, it probably would’ve been around… We were probably in that 150-to-200-million mark.
Kevin Kim:
That’s about right. Yeah. I agree with that. I think that’s when you started hitting that threshold of work where you’re so diversified, and there’s so many random little things that come up, the GC seems to be a good idea. All right. Well, I want to ask your thoughts on where we’re headed, and because right now especially with… I mean, there’s another stimulus coming. We just had the election. There’s talk about PPP forgiveness being problematic for our industry, but then you also commented on it. In June of this year, we all realized that resi was going to be just fine. So, I’d love to hear, if you can get your crystal ball out a little bit, and we’re going into ’21, and things are looking good on my perspective, so what do you think?
Curt Altig:
Yeah. No. We’re very bullish on 2021. Look. I mean, I’m no economist. I think the discussion around stimulus or no stimulus is almost comical in the sense of it’s analogous to me to doubling down on a bet in the spring. The conditions haven’t changed. It’s clear it’s the right bet, and yet there’s hesitation to do it. Well, we never should’ve done the first bet if we didn’t think we needed to follow on and protect small business. I’m really in concern about how that comes home to roost in the absence of further stimulus. But assuming people smarter than me, I guess, ultimately figure that out and make the right decision, the single-family space is unlike, certainly anything I’ve seen in my almost 30 years of being in this industry. There is a massive and growing shortage of inventory nationally. It’s present in every market that we operate in. There has to be more liquidity pushed towards the space.
Curt Altig:
Now, again, our concentration is home building. I think the biggest risk our builders face, whose biggest competitor, whether they realize it or not, are the nationals, is the shifting balance of the landscape. Historically, we’ve been nationally about a 65/35 split, private builders to national home builders. That is changing rapidly, and it’s changing rapidly because there’s not enough liquidity in the land acquisition and land development space, and the only ones that can afford to do it, because they can do it with, in essence, public funds, I don’t mean government funds, I mean they’re publicly traded, are the nationals, and they double up every massive-
Kevin Kim:
Every development now is a Toll Brothers or a Lennar, or…There’s no private flags being thrown anywhere.
Curt Altig:
Exactly.
Kevin Kim:
Yeah.
Curt Altig:
So, it’s concerning because while there is a massive shortage of inventory nationally on the single-family space, thus an incredible opportunity for home builders to fill that need, there’s got to continue to be more liquidity into our space privately to provide that, because it’s clear after 12 years now, the national banks are not going to solve that problem.
Kevin Kim:
No.
Curt Altig:
They are not going to come back into this space anytime soon to the way that they were pre-Great Recession. So, we think there’s an incredible opportunity. It’s a concerning opportunity, nonetheless, for the reasons I just described. Interest rates, interest rates, interest rates.
Kevin Kim:
Yep.
Curt Altig:
The biggest threat that I think we have, and I don’t care if you’re doing fix-and-flip or you’re doing construction loans, or frankly, bridge loans for that matter. Interest rates are the one thing that can turn this market on its ear overnight. I don’t think there’s much risk of that. I think economically, we need a continued low rate environment to spur growth, but it is the one thing to keep a kind of careful eye on. But aside from that, assuming that vaccines and therapy treatments are going to start to unlock our world, and people are going to be out and about a little bit more, which will help the resell market come back, there is just a great opportunity. So, we are very bullish on 2021 kind of looking forward. I think it’s just hard to see outside of that, given a change of administration and just other general unrest in the world, again, COVID-related, but we are super bullish on 2021.
Kevin Kim:
You guys are planning to go beyond your core markets, right?
Curt Altig:
Correct.
Kevin Kim:
You’re trying to go into… Is it more eastern markets now, heading east or heading south?
Curt Altig:
Well, yeah. Since we’re Seattle-based, it’s definitely east and south. We’re operating in many of those markets today, but we will continue to push very selectively. We have kind of a philosophy around and some metrics that follow where we want to be nationally. Now, there’s no great secret. Most of them are the hottest markets in the country, but we’re actively, of course, in Washington, to a lesser degree, Oregon right now, because Oregon has some kind of draconian house code 214 that-
Kevin Kim:
Foreclosure laws.
Curt Altig:
… although that market continues to be pretty strong, and that will pass, and I imagine we’ll be back to being a little bit more aggressive in Oregon. We’re pretty conservative right now there. Idaho, huge growth market for us.
Kevin Kim:
Yep.
Curt Altig:
Colorado continues to be. We’ve got boots on the ground, Denver, Colorado Springs, and we’ll continue to grow there. Texas, particular Austin, Dallas, are markets that we continue to fund business in or are interested in, kind of Central and Northern Florida, Georgia, the Carolinas, markets that we’re active in and will continue to grow in, of course, Tennessee as well. We’ve just funded some business in Kansas City. So, we will continue to look selectively, and again, predominantly east or southeast, if you will. You guys will continue to help us with some licensing-
Kevin Kim:
Oh, yeah.
Curt Altig:
… and we’ll open up California. Yeah, big growth for us as we look into 2021.
Kevin Kim:
And all going to be focused on construction loans, residential construction loans. That’s beautiful.
Curt Altig:
Residential construction loans, kind of A, D, and C, acquisition, development, and construction.
Kevin Kim:
Yep, and I want to tell folks this. A lot of people come into this market, and they try to jump to national, especially with the aggregators being available and all that Wall Street money being available. They jump national, and how long does it take your team to decide, “We’re going to enter this state,” and what are some factors you guys look at when you’re deciding that?
Curt Altig:
So, we have a couple of different things that help us from a technology perspective. We actually have a partner that’s a big data background, multiple companies built and sold, I think both to Microsoft, that is now a major investor in our private fund. They provide us with a tool that was built around… Oddly enough, we outlined for them probably three years ago now, “Here’s kind of the way that we analyze the market,” and they said, “Well, take a look at this, what we’ve built,” and it’s a 40-data point algorithm that basically gives a bond rating for every zip code in the country. So, we use that with every transaction that we underwrite. The data changes quarterly.
Curt Altig:
We also have another, I’ll call it, kind of a CMA type tool that’s pulling data from MLS that also gives us a market strength score, which is a more micro view that zip code, but at a high level, as we look out at markets, we stack rank the top 20 markets that we were interested in based on about 15 criteria in 2017, many of them I’ve just mentioned, many of which continue to be hotbeds around the country, and that really drove our first layer of diligence as to, are these things true about these markets? Are they then markets that we want to pursue? We then got boots on the ground. As an ownership group, we spent a lot of time on the road, a lot of time on the road, a lot of times on the road together in these markets, be it Florida, Georgia, Carolinas, D.C., Texas, Colorado, Idaho.
Curt Altig:
We spent a lot of time on the road putting our boots on the ground and surveying, is what we think real about this market real, and then we go through a pattern of what is the licensing criteria, what are the statutes in the state relative to foreclosure, receivership, our default remedies, making sure we understand that, then making sure that our loan docs are provisioned for whatever nuances we need to deal with at a state side. So, I would say, gosh, it’s not less than a 120-day process from the time that we say, “We’ve assessed, and that’s where we want to do business. Now let’s see if we can attract a customer and see what we get with relationship to local customer,” because something that you talked about earlier that is quite unique to our industry is there isn’t a standardization. There’s no Fannie Mae, Freddie Mac, Ginnie Mae.
Kevin Kim:
No.
Curt Altig:
So, we need to make sure we can also make money in that market, and we can get pretty competitive at this point, but making sure that we’re going to be able to put forth a program that people are going to welcome, and it’s going to allow them to be successful, and for us to be successful. So, I would say, Kevin, on balance, every state’s different. California’s going to take us a year, probably, from the time we said go to go, but I would say probably on average, it’s somewhere around a six-month process.
Kevin Kim:
Right, and a lot of it is market data and actual local-level transaction data, right? You’re looking at that.
Curt Altig:
Correct.
Kevin Kim:
That’s something that’s overlooked as a lot of folks, they expect the transactions. “Oh, yeah. It’s a friendly state,” this and that, and then they don’t look at the actual transaction size, and their minimum closing is $500,000, but the average closing size and transaction size in that size or that county is 125,000. Well, you’re not going to make much business there.
Curt Altig:
Right, right. We try to stay away from that. I mean, really, we would like to have our average per unit be 250-plus. There’s a good business, I’m sure, underneath that, but just in terms of our per loan OpEx and making sure it’s worth to deploy the capital in, we really try to stay at that…
Kevin Kim:
What is your… So, it’s 250 to what? What’s your usual sweet spot per transaction?
Curt Altig:
Our per unit average, and when I say per unit, we’ll do loans often that have multi units. It’s a six-unit town home, but 415 is our current average.
Kevin Kim:
Okay. That’s a good size. It’s not too big and not too small. You’re not dealing with the random small shacks. That’s great. Well, okay. So, I want to close out with some advice to our audience, and you built this company. You’ve had some great success over the past few years. You guys are going to kill it going forward with that new partner of yours. I’m very excited for you guys. Over the years, with all this in the rear view, and looking forward, what are some pitfalls that a newer market entry can avoid? You’ve kind of seen a lot of it. You’ve grown organically. You’ve done a lot of things that I would say are best practices. For the up-and-coming fund managers that are growing, or up-and-coming lenders that are growing, what are some things that they can avoid to make sure that they are successful like yourself?
Curt Altig:
Yeah. I didn’t certainly make up this saying, but slowing down so you can go fast is never truer, I think, than in this industry. When things go wrong, they really go wrong. In other words, even if… We talked about 415 is not a large average transaction size, not too big, not too small, but it’s a real pain in the ass, excuse my French. When it goes wrong, it’s a lot of capital at risk.
Kevin Kim:
Oh, yeah.
Curt Altig:
So, look. I would say spend enough time up front to make… Avoid the rush to get in, making sure that you’ve thought through your capitalization, and you’ve provisioned for rainy day scenario. No one planned for COVID, but making sure that you’re not under pressure to make loans and make them fast, which means don’t do it if you’re not properly capitalized for expenses to carry the business for, I’d say, six to 12 months, but at least six months, because being in a hurry to deploy capital is bad in this industry. Being thoughtful around that, therefore in the fund formation as well, as you know, getting a fund done and getting it done right, it isn’t inexpensive and shouldn’t be inexpensive. You got to spend the time to make sure it’s structured right, so being thoughtful, therefore, around expectations with investors I think is really important.
Curt Altig:
We’ve done, I think, now eight funds, seven or eight funds. I don’t know that we have plans to do another one, but in the last six of them, the time spent up front setting proper expectations with the investors… Now, we would allow them to make investment and have it start earning almost immediately, aside from our very first one, but setting the expectation that, “Look, this is the target that we’ve set, but it’s a target. Here’s whatever the structure is, preferred plus profits,” but whatever it is, and letting them know, “Look, it’s probably a year before we start hitting whatever the…” I don’t know want to say promise because it shouldn’t be promise, but whatever the expectation is. Right?
Kevin Kim:
Right.
Curt Altig:
Because again, there’s nothing worse than missed expectations around…
Kevin Kim:
And being methodical. I mean, I’m hearing the same theme, being methodical in your planning.
Curt Altig:
Exactly. Plan your steps. Plan, plan, plan, and then provision around what you’ve not planned for, because it’s bound to happen, and make sure you’ve got enough, again, capital. Forget fund capital, enough capital to support the business so you’re not under pressure to make bad decisions, and then set an underwriting discipline and stick to it, because you’re going to realize right out of the gate all of a sudden, there’s all sorts of competitors and separating what’s true from what’s not true, and I fear it puts an operator, and I’ve been in these moments where it’s like, holy cow, I got to get this capital out, and I’m facing competitive pressure. I think with proper planning and provisioning, you can avoid a lot of that, and quality underwriting, quality, quality, quality underwriting is just… Even with that, you’ll make mistakes, being thoughtful about what are we going to if something goes sideways.
Curt Altig:
I’ll tell you something that we adopted after going through a pretty scary situation with our largest customer in, I think, 2016, is we development a different strategy around how to deal with projects that have gone wrong. Time is almost always the enemy, and we used to be, and this is in part my nature, probably, that, well, gosh, this or that happened, and let’s give them more time, or let’s refi them and do a new deal and kind of reset the clock. We fundamentally do not do that. This probably goes back now three years, at least. We do not refinance ourselves out of our own problems. We deal with the problem inside the credit that we set up front, and we certainly have tried to apply some grace and understanding that things don’t always go right, but we are pretty quick to pull the trigger to start more aggressive action if we don’t see a major turnaround, because what we realized is, frankly, it’s rarely good for us, and I would argue it’s rarely good for them to just continue in a situation that’s untenable. You are-
Kevin Kim:
Well, you’re just digging yourself deeper if you refi yourself out.
Curt Altig:
Exactly.
Kevin Kim:
Yeah.
Curt Altig:
Exactly.
Kevin Kim:
That’s great. Well, I would say it’s so easy if you think about it. Just do the right things, have the right plans, be conservative, stick to your guts. Stick to your guns. Don’t deviate. But it’s so easy in this industry for people to deviate, and you see people out there just at the same risk, after risk, after risk, and I wonder if it is because… Is it because of the need to deploy capital, and they just got to get it out there, and they’re not comfortable with having dry powder?
Curt Altig:
I think it is, yeah. I mean, I see it a lot. I think it is.
Kevin Kim:
Thank you very much, Curt. We are running long, and once again, everyone, Curt Altig, Builders Capital, founder and chairman, and thank you for joining us today, and we’ll get this all put out there for audience, and thank you for joining us today. I appreciate it.
Curt Altig:
Awesome. Thank you for having me, Kevin. I really appreciate it.
Kevin Kim:
All right, take care.
Curt Altig:
Have a great day.
Kevin Kim:
You too.
Curt Altig:
Bye.
