Kevin Kim: You are listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping those in the private lending industry grow, improve, and streamline their business. I’m Kevin Kim, partner at Geraci LLP, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending who are eager to share their years of wisdom and best practices with lenders, borrowers, brokers, investors, and more.
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Kevin Kim: Hey, guys. Kevin Kim here with another episode of Lender Lounge. We are in season five. Today, we are in the computer. I am interviewing someone I’ve been wanting to talk to for years. And we finally have connected. Mike, please introduce yourself to our audience and let’s get started.
Mike Hoffman: Sure. My name is Mike Hoffman. I am the CEO and founder of Longhorn Investments. I’m a lawyer. Don’t practice much law anymore. And I’ve been in the lending space. I started doing loans in 2008.
Kevin Kim: Now, I’ve been wanting to talk to someone from Longhorn for a very long time. And we’ve been in the business since ’08. Actually, ’07. And we always knew about Longhorn here at Geraci, “Oh. Yeah, those guys. Those guys.” For some strange reason, over the year, I don’t know how or why, we made inroads in Texas probably around 2012. And we would like to think that we’ve got a good feel on the Texas Market. But we never were able to connect with you guys. I’m so glad that we’re able to talk today. And, hopefully, we can talk after this.
But one of the things I like for you to tell the world about, our audience, is kind of tell us about Longhorn. Tell us about the story. I would consider you guys kind of like legacy private lenders. Have been around – you started during the recession. And you guys are kind of a traditional private lender. You’re not institutional. You’re not conventional. You’ve kind of followed that formula. And you’re also in the great state of Texas. Give us a little bit of background about the company and yourself. And then we’ll go into the questions.
Mike Hoffman: Sure. Sure. I feel like I have a very nonconventional way into this business, right? I tell everybody when they ask, “How did you get into hard money lending?” I was like, “I stumbled into this business.” Very simply, I was working in a law firm. I did not do real estate. My background is personal injury litigation. Both plaintiff and defense work. And I left the firm I was at. And I left with a partner of mine. And she had a boyfriend who was a mortgage broker.
And so, she said, “Hey, while we are starting our law firm up, we should start doing some title closings to make some additional funds while we get things going.” And I was like, “That sounds great, except neither one of us knew anything about title.” And so, I contacted a friend of mine who – in Texas, you don’t have to be a direct operation. You can be a lawyer and could be a fee office of a title company.
I talked to a friend of mine who was a fee office. He introduced us to a title company that said you can be a fee office. You have to hire an escrow officer. We ended up hiring an escrow officer. And through title closings, I met folks that wholesaled homes. And this is in 2008. And I did not know what wholesaling of homes was. I had never heard of it. Didn’t understand it. Didn’t know what was going on.
Kevin Kim: Auctions were on fire in ’08 in Texas. They were just so busy.
Mike Hoffman: The auction business had started. But for me, I wasn’t part of that world, right? So I didn’t know what was happening. And so, I ended up – I’ll give a shout-out here to Mark Bloom of NetWorth Realty. And Mark and I became friends. And he introduced me to the wholesale business. And one day, we went to lunch and he said, “You ought to be a hard money lender.” And I said, “What’s a hard money lender?” And so, he explained the A to B, B to C transaction and said, “C’s got to use cash or hard money.” And so, I said, “Great. I’ll give it a try.”
And so, literally, my mom and I funded the first loan. A buddy and I funded the second loan. Now, I’m out of money. And so, I did my two deals. And I had another guy who was sharing office space with me at the time who I explained to him what I was doing. And he basically said, “Mike, you’re crazy. Y ou don’t know what you’re doing. At least let me do the loan docs to protect you.” And I said, “Great.” And so, he did the loan dos for me. And after we did a couple deals, he was like, “You know, maybe this could be a real business.” And so, we had met each other at the University of Texas. And so, that’s where we were friends. We started Longhorn. And the one and two were taken. Longhorn III Investments LLC.
Kevin Kim: Oh, that’s why you’re three? That’s the only reason?
Mike Hoffman: Yeah. There’s nothing special. It’s all we could get.
Kevin Kim: And the name haven’t changed. That’s awesome.
Mike Hoffman: We got a DBA four years later of Longhorn Investments. Technically, we can use Longhorn Investments. But, technically, we are Longhorn III Investments. That happens. We start doing loans. And, look, I am the traditional guy. I’m dialing for dollars. I am calling friends, families, relatives saying, “Hey, I’ve got these hard money loans. They’re paying 14%. I’m getting the points. I’ll get the points and fees. I will manage the loan for you. I can foreclose for you if we need to.” And that’s how we got started. And you’re putting an individual’s name on a note and deed of trust.
Kevin Kim: A co-lender or multi-lending early on. Okay.
Mike Hoffman: Yep. That’s how we got started. And, look, I did that for a couple years. But it’s a hard way to run a business. It’s a hard way to know if you’re going to have enough money to fund the next deal.
Kevin Kim: Yeah. That’s been my soapbox for 15 years is like, “Guys, fractional doesn’t work at scale.”
Mike Hoffman: It’s hard. It’s hard. And so, we talked about starting a fund. But we hadn’t done it before. Wasn’t sure it was going to work. Wasn’t sure we’re going to get our investors to move over. Because we had a stable pool of investors that wanted deals. And then we had to convince them also that they were getting the 14% interest. And at some point, it’s like, “Look, this is a lot of work and effort to make some points in fees. We’ve got to make some more money on this. We’ve got to get part of the spread.”
And so, I basically tried to convince my investors that I only have your money in play while the loan is in play. And you’re tied to that one loan or that two loans that you’re on. And if those loans go bad, then your money’s – if I got a foreclose, take the property back, your money’s not working.
If we go to the fund model, you’ll be protected because you’ll have a lot more loans that you’ll be part of. And your money is going to be in play consistently. Versus one loan pays off. I send you the money back. I call you and let you know when we have the next loan. I mean, that’s a challenging way to grow your business. And you’ll giggle at this. For us to really get confidence to start a fund, we got – I found out about Pitbull Conference.
Kevin Kim: Yeah.
Mike Hoffman: We go to the Pitbull Conference. We meet Leonard Rosen. And we are in there listening to Pitbull. And my partner and I at the time we’re looking at each other and going, “This is the right thing for us to do.” We need to start a fund. This gave us the confidence that, “Yes. We need to go do this.”
We end up starting a fund. And we did a little tester fund. We raised $3.6 million that a fund was supposed to last for three years. After six months, we saw that it would work. We started our second fund, which is called Trident Realty Investments, which is my current fund. And that’s what we pushed our investors to get into. Raise more capital into. And Longhorn is the marketing arm, the originator, the servicer of our loans. But Trident is the actual lender on the note and deed of trust.
Kevin Kim: Right. And so, all this is happening roughly when? Around ’11?
Mike Hoffman: Yup. 2008, we start doing the individual loans. 2010, we start our first fund, which was called 3565. And 2011, we started Trident. End of 2011, we started really going with Trident. 2012, we started funding a lot of transactions. Trident’s been around for a dozen years now.
Kevin Kim: Trident is a legacy fund in the space. 10 years old or more. Very few of those left.
Mike Hoffman: Yup.
Kevin Kim: And the model – I mean, mean I’d like to ask you. As a fund manager and as a kind of more of an old-school hard money lender, the market has shifted so much in the past even just five years, in the past 15 years. The market has changed, especially in the great state of Texas where it just suddenly became the most popular state to lend in. And we saw kind of glimmers of that in ’11. But we really saw it in ’14, ’15, ’16 when that’s really started to become a popular market. How did you guys react as Texas started to become kind of the darling of private lending in those early years?
Mike Hoffman: It was good and bad right that that that happened. Lots of deals to be had in Texas. But I always had a philosophy though, early on, Kevin, I did not want to be all my eggs in one basket. I didn’t want all my loans. I’m in Dallas. So I didn’t want all my loans in Dallas. We started doing Dallas. Then we started Houston. Then we started San Antonio. And we started spreading out.
And then as Texas becomes more popular and everyone wants to do loans here, I kind of looked at it like, “Look, I want to do more loans in Texas. But I want to branch out.” And so, Missouri was our next state.
Kevin Kim: Missouri. Of all states.
Mike Hoffman: Yeah. We went to Missouri. Two reasons. At the time, my partner was licensed to practice law in Missouri. And judicial foreclosure state. We wanted to go places – originally, we thought that we could do judicial foreclosure. Of course, that dovetails my next state, which was Indiana, which is not a judicial foreclosure state. But we were getting calls from a broker constantly saying, “Your product will work here. I can sell your product. Will you come to Indiana?”
And so, look, we started growing over time and going to other states. The majority of our loans were still in Texas. But I wanted to branch out a little bit and not be tighter because it was also becoming super competitive. When I first started, 14% four points. And all borrowers said was thank you. They were happy there was a lender there. 2011, 2012, if you were 14 and four, they were like, “Hey, I can get it at 11. I can get it at 12. I can get it at 10. What are you going to do for me?” And so, we had to lower prices. We had to lower our prices. And I wanted to start reaching out and going to other states. And so, that’s what we did.
Kevin Kim: That’s a very unique – you’re probably the only lender that I’ve ever met that went to the Midwest that early on. The Midwest has always been an underserved hyper-local market. I mean, it sounds like because of the licensing of your partner, that allowed you to get into the market. You must have been the first – at that point in the market, you must have been the first out-of-town lender in town.
Mike Hoffman: Yeah. It was funny. Actually, we were worried about that. And so, we actually registered the name Arch Lending. Because we thought we’d go to St. Louis, we didn’t want to be known as Longhorn Investments. A bunch of Texas boys trying to come to Missouri and all that.
But we quickly found out that – I go to P.T. Barnum, “All publicity is good publicity.” And that they remembered who we were. Even though Longhorn didn’t fit into Missouri – And, look, we got push back some local lenders, “What are you doing in our space?” People hear you’re not local. But, look, one of the things we did also is, when we went to a new state, we wanted to hire someone boots on the ground that represented us. It wasn’t just purely us being from Texas or some remote location running the loans. We would hire local people on the ground to be our salespeople and to be our boots on the ground.
Kevin Kim: And they have an office. Or they kind of like just working out of their houses at the time. This is the middle of 2010. Work from home didn’t really exist back then.
Mike Hoffman: No. No. But they were our salespeople. They were used to working from home. And, look. Frankly, a lot of people had day jobs. Longhorn wasn’t their original because most of our borrowers came from folks that were in real estate investment clubs. And the real estate investment clubs met at night. That’s where our people had to go. And we call it preaching the gospel of hard money. Teach them why hard money’s good for their transaction if it works. And we tried to educate people. And that was the whole goal, is we wanted to educate people on why and how to use hard money. And if it worked for them, great. And if it didn’t work for them, we didn’t try to sell it. We understood. And so, our salespeople oftentimes were real estate investors themselves. They fixed and flipped. And so, they were part of the ecosystem already. And so, then it was easier for them to go out and preach what we do.
Kevin Kim: I mean, this is probably the first case I’ve ever heard of anyone going to the Midwest first. Indiana leads to Ohio, obviously. You guys are in Ohio, right?
Mike Hoffman: No. No. No. Ohio came later. Much later. Yeah.
Kevin Kim: It’s a much bigger market. I would assume that you guys would go to Ohio right away.
Mike Hoffman: No. No. No. No. We didn’t go there. Because, look, we kind of dip our toes into markets. We don’t just run and jump in off the diving board. We kind of just dip our toe in. Figure it out a little bit. I think our next state we went to was Tennessee. Tennessee was next.
Kevin Kim: That early on. Interesting. Okay.
Mike Hoffman: Yup. Judicial foreclosure state.
Kevin Kim: Yeah. Very strange usury laws.
Mike Hoffman: Correct. Correct. Correct. We had lots of discussions about those. But we went in there. And Tennessee was next. North Carolina was next.
Kevin Kim: Okay. You decided [inaudible 00:14:44] into the southeast. Okay.
Mike Hoffman: SEC, ACC country. Right? That’s where we started going next. And, I think, then Alabama. Then Georgia. Then back to Ohio. Then Arkansas. Then New Mexico.
Kevin Kim: Was it mostly more of an opportunity thing where deals are coming from? Driving all that?
Mike Hoffman: Yeah.
Kevin Kim: Which makes sense. Those Southeastern markets were growing very fast right around the mid-teens.
Mike Hoffman: Right. And so, we were getting calls. Look, we were getting calls from places. We didn’t do those loans. We had borrowers go out there. That’s why we started doing deals in those places. Check out the judicial foreclosure laws. But, look, there was a lot of data that we wanted to know that wasn’t readily available. ForCasa didn’t exist. Right?
Kevin Kim: No.
Mike Hoffman: SFR Analytics didn’t exist. And I wanted to know – I wanted to understand how many of our types of loans were being done in the market. I just wanted to know in Texas. And Texas A&M had a college of real estate. It was fairly well-known in the state of Texas. We called them and said, “Would you do a study and tell us how many hard money loans are being done.” Our types of loans are being done in Texas.” And they said, “Sure. Pay us $200,000. We’ll commission a study and we’ll get that done.” And so, it’s like, “All right. I don’t want to know that bad.” I don’t want it up there. We’ll kind of go anecdotally and figure it out.
But ForCasa and SFR Analytics came around, it was a revelation for us. Because then you could really kind of narrow down how many of our types of loans are being done in the space. So then you could be much more specific. Like, why you’re going to a place? Who’s doing loans there? Will our product compete? Because, look, the other thing, Kevin, you’ll laugh, we haven’t changed our product much at all in 15 years.
Kevin Kim: Yeah. Let’s get into that so. I mean, I know you guys are doing what we’re calling hard money. Is it fix and flip construction? Or is it is anything else that you’re doing?
Mike Hoffman: Nope. We do fix and flip. And then the borrow either sells it or they refinance out. Hold it and create a rental. And, literally, that is what we’ve done the entire time.
Kevin Kim: Right. With that though – okay. One of the things that happens for a lot of our – we noticed a trend in Texas where, when I first joined the firm, everyone was doing fix and flip in Texas. And then, all of a sudden, local lenders in Texas started gravitating more to ground-up construction because everyone was a builder. True ground-up construction. Folks that said, “Hey, I’ll never do a construction loan.” Three years later, were started doing it because of the man. And then, now, today – well, not right now. But for a while, people were trying to figure out DSCR in Texas. And it doesn’t pencil in Texas right now. Well, in Northern Texas, it does. In Austin, it doesn’t really pencil.
The market has been changing a lot. You saw a lot of institutional attention starting in ’16 into Texas. I mean, the institutions love Texas. And so, that’s a whole other kind of formula comparatively speaking and just sticking to your two products there. Did you have ground-up construction early or was it just –
Mike Hoffman: No. We never did it. We shied away from it. But we started doing it a few years ago. Just the demand was there. And so, we started a few years ago. We will do new construction. Little different criteria for us on the borrower. Different locations that we’ll look at. We want to know the neighborhood better on new construction. We want the borrower to have some experience doing new construction. One of the things unique about us, Kevin, is that we would do newbies borrowers from day one.
Kevin Kim: New builders. Yeah.
Mike Hoffman: Yeah. I mean, new investors. And, look, a lot of our investors, they’re not builders. They’re not traditional real estate guys. Much more people that –
Kevin Kim: Yeah. Investors. Yeah.
Mike Hoffman: They want to supplement their income and stuff.
Kevin Kim: And that’s a need that – well, it’s kind of funny. Because a lot of lenders used to track those guys and kind of teach them to become lenders. I mean, better investors and better builders. And that’s now today becoming a target audience that are certain institutional players are actually going after via software and education platforms. It’s not a new formula. Definitely has proven to work.
Now, I have to ask. Longhorn has been around for a long time. And, also, arguably well-known in circles. Whenever we talk about Texas, whenever we have kind of sit-downs with people and we do roundtables at conferences, you guys come up a lot. But we don’t see you guys out there. You guys don’t do a lot of marketing. When are we going to see you guys at an AAPL or at one of our conferences one of these days?
Mike Hoffman: We went to the first AAPL conference. We were at the very first one and everything.
Kevin Kim: The tiny little one? That conference room.
Mike Hoffman: No. Well, second one. I guess it might have been the second one there. Anything. It was in Vegas. We went to that one. And then we had gone to Pitbull for a while. But, look, for us, we really just wanted to focus on the core of what we did and really want to be very thoughtful and mindful of who we’re trying to target and everything. And we did things differently. Look, I’m not from a traditional mortgage background. I’m not looking to do things exactly how everyone else is doing it. We’ve kind of stuck to a certain way of way we do things. It’s been successful. And so, I just tried to keep growing it and keep doing that.
Now, my sales guys have been to the AAPL for the last two years. They like to go to that stuff. And, look, when we go to these conferences, at this point now, I’m happy to speak. And I think I would be speaking to most of the people there that are brokers or small fund managers and want to become bigger fund managers and manage that. And there is no magic formula. There is no secret to it. It’s a bunch of hard work.
Kevin Kim: A bunch of hard work. A lot of grinding. Yeah.
Mike Hoffman: And the way we do it too makes it more challenging. Because we have to raise the capital. There’s a whole thing of that. And we haven’t gone the institutional route. We have not gone – we are 355 different individual investors in our fund. And bank lines of credit. Now, we’re a fairly large now size sophisticated bank line of credit. Here, I’ll give my shout-out to my lines of credit. Veritex Bank. I’ve been with them since 2012.
Kevin Kim: [inaudible 00:21:24] Texas. I like it. because those guys are doing very well for themselves. And they really came on strong, especially in Texas. They’re a good bank. Yeah.
Mike Hoffman: And they’ve been great to us. It’s a fun story that they started out with a million-dollar line of credit. I like to tell the story that I – think about me going to banks in 2010, 2011 for lines of credit. Everybody said no. I mean, we just got shut down.
Kevin Kim: Yeah. There were institutional programs out there. But they were very expensive. And mark-to-market is sketchy stuff. Yeah.
Mike Hoffman: It was too complicated. We’re simpletons. Right? And so, we didn’t want to make it super confusing. Veritex has been great. They’ve grown with us. We’re still with them 12 years later. And then, recently, just this year, we closed the line of credit with Atlas. Atlas SP.
And so, look, I never thought we’d be where we were. Our original PPM said we could raise $40 million of capital. And, right now, we’ve raised $155 million of capital through 355 investors in our fund. And we’ve got $400 million of available leverage between Atlas And Veritex.
Kevin Kim: Roughly about half a million dollars AUM total. Now, let me ask you this. In the life cycle of the fund, one of the key questions I want to ask from that is like was there a moment when it started to really click and started to hum?
Mike Hoffman: Yeah. Listen, the key was it took some discipline in the very beginning. Our individual note holders did not want to go to the fund. Right?
Kevin Kim: Yeah. Very rarely want to transition over. It’s very hard. Yeah.
Mike Hoffman: They don’t. And so, it was hard for me. But I had to tell them I wasn’t going to send them any more deals. And we were basically playing – listen, we were playing poker a little bit.
Kevin Kim: No. But it works.
Mike Hoffman: Right. But I didn’t have the money necessarily to fund all the deals.
Kevin Kim: No. I know. It’s scary. It’s so scary. Because that’s proven to work. You know it’s a thing that’s going to – it’s all reliable. Yeah. Kudos to you. Yeah. That’s –
Mike Hoffman: Yeah. You had to be disciplined and just say, “Look, we’re not going to send you any more deals.” And so, look, I had a bunch of investors that did not come over. And then they call three months later and go, “Hey, you haven’t sent me any deals.” And I’d be like, “I told you I wasn’t going to send any more deals. If you want to be in the fund, you can be in the fund.”
Kevin Kim: I always tell my clients on the fund side, “This is a kind of an all-or-nothing kind of arrangement if you’re doing trust deeds.” You can’t. You can’t scale a business in trust deeds. And your fund becomes a second option to your investors. Because they’re always going to go the all reliable. The ones that like that stuff, good luck getting them to – you can’t twist their arm into it unless you actually force their hand.
Mike Hoffman: You do.
Kevin Kim: And what’s funny is that, actually, this formula – recently, there’s a client of mine in California. He’s in San Diego. He did the same thing. The exact same thing. Hey, clients, it’s fund or bust. I’m not doing trust deeds anymore. Come on over. And they finally did. I mean, listen, that’s one of the hardest lessons to learn for people is you have to gamble on yourself a little bit. You have to believe in yourself. But it works. I’ve never seen it not work. I’ve always seen it work. Because investors, at the end of the day, boil down to the relationship with you. I mean, it’s not the deal as much. I mean, they come back to the table because you guys find good deals.
Mike Hoffman: I mean, if you delivered for them for the last three or four years, they don’t want to let it go. I mean, let’s also be honest here. There’s a little greed tied to it. They have this investment. It’s been churning. It’s working really well. And you tell them, “Hey, we’re gonna change a little bit. But here’s the return you’re going to get. It’s going to be consistent. You’re going to be safer. You’re not tied into one deal.” It’s a leap of faith. Everyone’s got to take a little bit and everything.
Look, my favorite was I had one investor call me like six months later and he’s like, “All right.” He goes, “You win.” He goes, “Can I put money in the fund?” Because he wouldn’t do it. He wouldn’t come over. He’s now been with us over 10 years. And he’s been a great investor. But we giggle about it. Him and I talk. And he’ll be like, “Yeah. I didn’t want to come over and all that.” He goes, “But I wanted those returns still.” And I was like, “Yeah. Yeah. We can provide the returns. You just got to trust us.”
Kevin Kim: Right. Let me ask you this though. You guys have been raising money in your fund now for 10-plus years. Is there anything – not necessarily the asset class. We know what the asset class is. We know what the return model looks like generally speaking. But is there anything else on you as a sponsor, you as a fund manager, as capital riser to tell our audience? Because most of my clients listening, a lot of them are emerging managers. A lot of them are existing managers. Hey, this really, really helped us when we’re out there raising money. Was it doing events? Was it doing luncheons? Or was it getting out there and just dialing for dollars every week? Or was it an auto-dialer? Is there anything that you guys did that really helped move the needle?
Mike Hoffman: Yeah. There’s a couple things I think you need to do. And it’s fundamentals. Number one, do what you say you’re going to do. If you’re going to report to your investors every quarter by the 15th of the month, report to your investors every quarter by the 15th of the month. That’s number one.
Number two, tell them when something goes wrong. I think being honest and candid with them builds you a lot of credibility. And number three, get audited financials. Get your financials audited as soon as you can. And it’s a pain. I mean, in the beginning, it’s a pain in the butt. Because you’re small. It’s expensive. It’s time-consuming. But if you will do that, it builds your credibility with your investors. And those are the things you got to do.
And, look, we’re 506 Reg B. Not Reg C. We’re not out there marketing, soliciting, anything like that. It’s word of mouth. And, look, the other thing, at the end of the day, I’ve learned, if you deliver the performance you say you’re going to deliver, your investors are your marketing arm. Because they are out there. Everybody loves to tell their buddies how smart they were to invest with this guy, and they’re making this return, and he’s been doing it forever is the best referral source you can have.
Kevin Kim: Now, all these years later, have you guys started ta into some of the bigger ticket investors, the advisor communities and all that? Because at your size where a lot of folks are thinking about like, “Okay, we need some bigger ticket investors.” Or has it been more of like, “Okay. Let’s keep growing this organically?”
Mike Hoffman: We have not gone registered investor route. It’s all been organic. We have not done any big-ticket items. Look, here’s the other thing, too. I’ve talked to plenty institutional folks that have said, “Hey, we’d like to put money in your fund.” “Great. But we want our own deal. We like a sidecar deal.”
Kevin Kim: Yeah. They always do. They always do. Yeah.
Mike Hoffman: They always do. And I’ve said no to everyone. Because I’m just like I think I would alienate my current investor group if I gave someone else a special deal. Now, you can justify it by saying, “Well, hey, you put in $250,000. They put in 10 million bucks.” It warrants a special deal. But I just haven’t wanted to do that. I’d rather work a little harder. See if I can raise the capital. I’ve worked harder on debt the last three years. I’ve worked really hard on debt. Getting it to a certain level. Which, by the way, that is its own challenges for guys like us in our space.
Kevin Kim: Not a lot of options. There’s only at best maybe 10 players. It’s tough. Yeah.
Mike Hoffman: And even then, they’re going to institutionalize you. One of the beauties of our space is, if you want to do a deal, you could do a deal. If you had the capital, you were running a fund, you want to do a deal, you could do a deal. If you want to go get some of the bigger boys’ money as debt, those days are over. You better be disciplined. You better be conformed. You better be doing things. If you have underwriting guidelines, you need to make sure you follow your own underwriting guidelines.
Kevin Kim: Right. Well, did you have trouble adjusting? Because the first thing that banks instituted in our space for leverage was always, “Listen, you don’t have to run FICO up front. But we’re going to need some kind of soft credit pool. We’re going to need some kind of desktop to back fill.” Those kinds of issues. And in traditional hard money, FICO and appraisal has never been something we want to do.
Mike Hoffman: Except the way we got started. We pulled credit from day one. We’ve always pulled credit. Always. And we always got an appraisal.
Kevin Kim: From day one. I think you’re the first Texas lender I’ve ever met that started with appraisals and FICO. That’s unheard of in Texas hard money. I mean, let me know more.
Mike Hoffman: I mean, look, a couple things. Number one, we didn’t know anything about hard money. We were lawyers and we were trying to mitigate risks, number one. But number two, when you’re raising money and asking someone to do it and they’re like, “What underwriting have you done on the borrower?” And, look, from the very beginning, we pulled credit and we had last three months of bank statements. That was from the very beginning.
And then number two, we got appraisals on the property. By the way, 2008, RicherValues didn’t exist. Desktop underwriting, that’s only for the big boys. We didn’t want to make up the value. We got independent third-party appraisers. And that was a great selling point to our investors also is that, “Hey, someone real is determining the value of the property.” Even though it is the after-repair value. And, obviously, you run the risk of the repairs being done, or not done, or done well. And so, we’ve done it from day one.
It was never an adjustment for us to go get – when we went to get our first line of credit with Veritex, we explained them what we did. They were good with that. Ultimately, when we got to Atlas, some of them were kind of laughing because they’re like, “You don’t have to do that. Under $400,000 value. And if you want to use desktop, or RicherValues, or something like that.”
But it would also helped us in dealing with the borrowers. And that there was no arguments about the value of the property. We tell them up front, “Hey, independent third-party sets the value. We lend based on that.”
Kevin Kim: Especially early stage. Did you feel like it would kind of put you at a disadvantage from a competitive standpoint? Because your competitors in Texas weren’t doing it. We know for a fact they weren’t doing it. How do you compete with that? Yeah. It’s a challenging issue when you’re dealing with a – especially an inexperienced borrower.
Mike Hoffman: Look, we thought that it would help the borrower. We’re like, “Look, we’re on your team here.” We don’t want to do a loan just to do a loan. We want to do a loan that you’re going to be successful at and come back and do another deal with us. And so, we’re gonna get independent third-party appraisal. You can look at it. You can decide what you think. Because, look, the wholesaler – not to disparage wholesalers. Because they’re a huge part of our industry. But they’ve got an incentive to sell the property. And so, the higher the value of the property is, the better their – the more spread it is on the deal that they’re selling to the borrower, the better it is for them.
But for us, it’s like, “Look, we’re putting more money out there on the deal than the borrower is. We want the borrow to be successful and get a good deal.” I do not want to take back properties. You take back a property, it’s a loser. We don’t get the good ones back. You only get the bad ones back. Look, if there’s a lender out there that’s making money on taking back on REOs, let me know. Because I haven’t been able to figure out how to do it for 15 years now.
Kevin Kim: And I’ve been telling clients for years, you can’t expect to make money on REO. You can’t. It means you’ve taken back a loser. You expect to make your money back at best. Even in certain markets, you can’t –
Mike Hoffman: Oh, yeah. You’re going to lose.
Kevin Kim: That way, you don’t set any weird expectations with investors. I’d like to ask you about kind of the later stage, the past few years now. Because we’ve seen a massive disruption of the state of Texas and other markets that you’re in as well. Tennessee became just inundated. And now, North Carolina is becoming inundated with new lenders and flooding in markets – lenders are flooding into that market. But at the same time, we’ve also seen a significant increase in “institutionalization”.
Now, your model doesn’t strike me as too “old-school private money”. I mean, I still view it – because of the FICO and the appraisals. You’ve been a private lender, if we’ll use the [inaudible 00:34:14], early on. Did you guys ever start selling paper? Or working with the institutions in that regard? Or was it just leverage? Because the market was probably chasing you to sell them some loans in around ’16.
Mike Hoffman: We did. We’ve talked to a lot of folks over the years about selling notes. But I’ve never wanted to sell notes. Because, look, if I would sell notes, I should have done it years ago when they get paid you more spread. What’s happened over the last – look, we saw – here’s what happened to us. 2017, 2018, 2019, we saw price compression. Like I told you guys. 14 and four. That didn’t exist anymore. We were down to 12 and three. And even then, we were at the high end of the market. And so, it was more challenging to get deals.
Our little competitive edge at that point is we’re 100% LTC. We’re a pure ARV lender. We will do 100% LTC. We don’t question it. Just depends what the ARV is. That was always our competitive edge. 2022, end of 2022, everyone can see interest rates are about to go up. And so, that’s when things got interesting for us. because we felt we were built to handle that. That it wasn’t going to really affect us that much.
But what we thought happened was, all of a sudden, interest rates – look, my line of credit December 31st, 2022 was at 3.75% fixed. January 1, 2023, it went to plus 3.10 variable rate. It doubles overnight essentially over the next six months. And so, a lot of the note buyers, the spread was gone. I had taken – I don’t know. I’d sold $5 million worth of notes in 2018, 2019 just to see if I could. I was just curious if we could do it.
And I will say the 100% LTC makes it more challenging. The note buyers were looking for 90, 95%, 85% LTC. 100% LTC made it much more challenging. We had sold $5 million worth of notes. But once the interest rates went up and there wasn’t – from my perspective, a lot of our competitors went away. Some note buyers disappeared. People got out of the space because now it wasn’t the easy money. It wasn’t the spreads you were making. It became much more challenging. And our loan volume went up dramatically.
And I’ve had to sell – over the last two years, I actually sold, before we got the Atlas line done, about $50 million worth of notes just because the loan volume had increased so much. And the capital raise couldn’t keep up. The debt couldn’t keep up. Look, now we’re at the place now where our debt has kept up. And so, now, I’m looking to raise more capital and thinking about different ways and different strategic ways that we can talk about on part two of our podcast we’ll do next time. About different strategic ways about raising capital without going the institutional route. Without going to some big investor that puts it in or wants a sidecar deal. Or says create a second fund and I’ll help you do this. There’s some ways we’ve been thinking about how to attack that. And, hopefully, I’ll have some good stories for you in a couple months that we could talk about that.
Kevin Kim: Well, actually, I want to ask about the loan. Purely, the only reasoning was it’s not creative. The spreads weren’t there. You never had any, I guess, philosophical resistance to it. You can’t make much money off of it? Or are there business reasons beyond the economics?
Mike Hoffman: Well, yeah. I mean, look, I think originating the note – look, I think large institutional players, they want to put tens of million-dollars in play at a time. Fundamentally, we’re different. When I first started, the average side loan was $125,000 that we did. 15 years later, my average loan is $230,000. I still do small. But grinding it out one at a time doing those loans. To me, that’s the hard work of it. And then to sell the note off and just make – and now, just make a tiny little bit of spread, that I feel like I’m giving it away.
Kevin Kim: You work so hard to get the loan in door and take care of it.
Mike Hoffman: Yes.
Kevin Kim: We had another guest on the show had that same philosophy. I get it. It makes sense. The interesting part though is you mentioned spread and stuff. Currently, it’s September 16th. And we’re all waiting. We’re all what wondering what’s going to happen. And I got bets with friends about what the number is going to be. What the cut is going to be. And we’re headed toward a kind of adjustment in that regard.
Le me ask you this, if the market were to change – we do know for a fact capital markets is just dumping capital into the space. Very attractive. All the rated deals and unrated deals on the securization side that’s happening. There’s going to be folks breaking down your door to get volume. I mean, if the market – would there be a point in time where you would reconsider that? Or is it more, “Hey, philosophically, even back when the spreads were good, it wasn’t the best for us.” Is it more like that?
Mike Hoffman: Philosophically, I’d rather not. I’d rather not. And, look, part of it’s probably the lawyer me. A little bit of a control freak on it. I don’t want to sell my notes. I want to be in charge of it. If I’ve got to work deals out with the borrower, it becomes much easier if we hold the note rather than we sell it.
Kevin Kim: You service, too. You service your own loans.
Mike Hoffman: We service our own things. We don’t want to use third parties. Look, third parties, honestly, for us, it delays everything. There’s a third-party servicer, it just takes longer to get stuff done.
Kevin Kim: It jeopardizes your borrow relationship, too, significantly.
Mike Hoffman: Yeah. I don’t want to – now, securitization and that, we’re just trying to understand it exactly. Because the rates sound great but they don’t tell you how much it cost to actually get a securitization done. When you factor that in, what is the rate you’re really getting?
Kevin Kim: You’re looking at about a million dollars. Probably a little bit more than that in your first one. You’re paying a bunch of people. You’re paying much more expensive attorneys than I. And then you’re also paying bankers and diligence. And it’s going to be a lot. It’s not going to be cheap.
Mike Hoffman: And it’s a lot of work that you’ve got to do.
Kevin Kim: All because your entire tape has to be diligence. You have to run diligence. You have to now have the banker try and to take your [inaudible 00:40:52] market. The offering documents put together. But interestingly enough, if the volume is there, annually, a lot of times, people – as this thing grows, I think that price point is going to come down. I think a lot of it’s going to become commoditized in its own right for multi-lender securitization. We don’t know where it’s going to end up. But next year will be a much more attractive year than this year.
I tell you, if you are a high-volume lender, if you can do about 3 to $500 million a year, it’s worth looking at just because the amount of leverage that you can get through this makes a warehouse line look like a joke. Just comparatively speaking. Creativeness to your investors is just massive.
Mike Hoffman: It does. It does. But you’ve also raised a bunch of capital. If you’ve raised a bunch of capital and you do securitization, then is your capital making a return?
Kevin Kim: Oh, yeah. And that’s the challenging issue. With lenders that have debt funds, “Well, how do I make sure that I take care of my investors and fulfill my fiduciary obligations?” But there’s ways to skin that cat. I’ve had conversations with a lot of clients who are like larger fund managers. Half a billion, a billion. And they want to do a securitization. They want to explore. Let’s talk about it. You’re in the unique camp, I would say. A very few balance sheet lenders that actually do run FICO and appraisal. You’re ahead of the curve. Because a lot of folks just don’t do that. And they’re going to have to adjust to it. You’re already doing that. I think you’re in a good position to think about it. I’m happy to talk about it offline. But it’s a really, really interesting strategy. And most people in your position are just like, “That sounds like so much work. Because we have to change our underwriting.” Well, I don’t think you might not even have to. And that’s an interesting way to look at it. And balancing that with your investors. There’s ways to make your investors align with you and participate in the upside.
Mike Hoffman: No. That’s the key. And, look, you take a portion of your book. You take a portion of your book I think is the way to do it. Right now, we’re at about 350, 360 million in loans on our books. If you took 200 million and did a securitization, I think that’s probably 175, 200 million. That’s kind of the right number.
Kevin Kim: Yeah. I think smaller deals will start penciling in probably next year or the year after. It might be worth looking at. And I think any larger fund manager should – because if you utilize leverage anyway, I think it’s worth considering from [inaudible 00:43:20] standpoint.
And let me ask you this. When it comes to the fund itself, over the years, there must have been kind of iterations for you. The core question is why have you been sticking with just the same fund for 10 – actually, no. 14 years now?
Mike Hoffman: 12 years. Yeah.
Kevin Kim: Why have you been sticking with the same fund? Because a lot of sponsors in your position may start on number two. Markets just all over the place. Rates are dipping. What’s kept you sticking with the same open-ended fund?
Mike Hoffman: I guess I’d ask the question why do they do multiple funds? That to me is the better question. Because, look, for us, it’s one fund. We’ve set our PPM up. We’ve set what our goals are. What our investor goals are. What we’re trying to do. And if we start a second fund, aren’t we competing with our first fund? And so, that’s the way I kind of look at it. It’s like look if we’ve got this one fund and we’re successful at it, why do we start a second and third? And then you’ve got to worry about, “Aren’t we going to be doing the same thing I did way back when and trying to transition people from fund one over fund two?” And you potentially could lose investors there. And so, I haven’t heard a good explanation yet from someone on why have multiple funds. To me, that’s just a lot more work. Another set of audited financial.
Kevin Kim: You guys mitigated your rate compression issues and taxes because of the other markets you’re in. I mean, those are still doing solid numbers. 12-plus returns. Right?
Mike Hoffman: Yeah. Also, you want to have realistic expectations for your investors. Our goal is 10%. Our goal is to get our investors 10%. And when you hit that mark, or get a little above it, or maybe a little below, typically they’re okay with it. And so, as long as – I feel like the market will talk to you. If all of your investors start – or large chunks start exiting your fund, then you probably need fund number two and you got to retool and figure out what you want to do.
Kevin Kim: That’s a good way to look at it. And that’s probably usually the reason – I mean, if you think great compression in Texas is bad, California was seeing 8.5% mixed and flip deals. That was a lot of times when lenders were starting to look at retooling to fund number two because of rate compression. And their fund was built for a vintage that they can’t sustain anymore. Okay. Cool.
Now, from a business standpoint, I’d like to ask – tell me more about the company. Because when you started, it was you and your partner. Both attorneys. It’s very rare to see attorneys jump into the space. I can only name a few others. And now have this huge business and lending in multiple states, give me an idea of what the team looked like back then, and when you guys started adding people, and how you guys did it.
Mike Hoffman: Yeah. Yes. Started out two of us right. And you just added one at a time. And got a loan processor. And then we had someone that went out, marketed for our loans. And, look, one of us was the back end. One was the front end. And we rotated. It was a lot of grind.
Kevin Kim: Oh, back and forth.
Mike Hoffman: Yeah. And so, we figured out what we were good at. Hey, you can do this. I can do this. I mean, we both would go to events and speak. Come back to the office. Have to pull out the spreadsheets, right? Before software. Tracking the loans. Tracking the money for the investors. And then slowly over time, we started adding people. And now, today, we’ve got about 55 people on the team. 22 salespeople. And then about 30. We got processors. We have underwriters. Finance team. REO managers. Draw managers. It’s a full-blown operation now beyond where I ever thought we would get to. But you got to do it.
Kevin Kim: How’s the weight? Back office versus front office. What would you say where the weight is?
Mike Hoffman: The front-facing is the sales guy. There’s 22 of those folks. That they’re out there. We still preach the gospel of hard money. And then about 30 on the back end. Because, look, you got to run audits. Auditing reports. Managing the financials now. Look, for us, when you have multiple debt instruments, then we have multiple entities. It’s consolidated financials. Far more complicated.
The more loans you do – one of my favorite things, Kevin, is when people tell me they’re in the business, they’ve never had a loan go bad. And I’m like, “Then you’re not doing enough loans.” Because that’s not possible.
Kevin Kim: Yeah. Large numbers. Loans are going to go bad. It’s going to happen. To me, I don’t understand that long. It’s not possible.
Mike Hoffman: No. If you do 2% to 3% foreclosure rate and you’re doing 500 loans a year, and then you go to a thousand loans a year, or 1500 loans a year, the amount of REOs you’re going to have is more.
Kevin Kim: It’s going to happen. Yeah.
Mike Hoffman: Now you got to deal with more of that. Look, it’s always – you’re trying to balance it out. Money, loans, people, work to do. It’s a constant balancing act.
Kevin Kim: With an emerging manager though, right? We have a lot of clients. They have a lending business. Good amount of volume. And they’re starting up their new fund. And it’s a small team. Principals. Maybe a staff member. Account assistant. What would you tell them, “Hey, your first hire should be this?”
Mike Hoffman: Get somebody in the title business.
Kevin Kim: Closings.
Mike Hoffman: Get somebody that understands title closings. They understand the speed of what we’re trying to work. They’re going to be able to recognize a whole bunch of different problems that you – maybe you’re the front-end guy, the mortgage guy. You don’t understand on the back end. They can help you with servicing. They can help you with processing.
A lot of our people are former escrow officers. We have a bunch of lawyers on our team, and not legal positions, but just lawyers. And then we have a bunch of people that were escrow officers. Because, look, we’ve also learned that – look, when I first started, I wanted to close loans in three to five days. Why can’t we do that? But traditional folks from the traditional mortgage world, they’re not used to that.
Kevin Kim: And so, hard time adjusting. Escrow officers, they’re used to everything happening in the last minute. Closing fast. People yelling at them. Scrambling to get stuff done. I found that they’ve been much more equipped to handle the pace of what we do.
Kevin Kim: And they’re also equipped with some detail orientation. They understand closing. They understand loan processing. They understand what a checklist looks – how that works. That’s actually a really great point. It’s a good resource. Because one of the things that – the number one recruiting request that I get is, “Hey, Kevin I need someone to help me run underwriting or run processing.” I don’t have anyone for that. All we can offer is Melissa’s team as a loan doc service provider. We’re a law firm that closes loans. But it’s like – well, that’s different. You need someone to – an employee. That’s a good point. I like that.
Kevin Kim: Yeah. Yeah. Yeah. Next question I like to ask you is looking forward into the future. Because you guys have been around since 2011. And there’s very few outfits that have been around since that long. And I would like to ask – actually, ’08, really. You guys are very, very few in number. And in Texas, there’s probably a handful of guys that have made it through. And I like to ask you. Kind of now, looking forward, because we’re looking into an interesting environment. We still have a lot of deals to do in resi. There’s so much opportunity. But Texas has become quite challenging. In the markets that you’re in also, the Midwest is starting to become attractive to a lot of lenders. What are the things that you guys are working on and excited for come ’25 and in the future?
Mike Hoffman: We’re trying to grow. I mean, we’re for sure trying to grow. Obviously, experienced established salespeople I think are hugely important. And then, look, new products. New construction. We started that a couple years ago. We want to grow that. And then, look, one of the interesting things of working with an Atlas is maybe come up with some products that are unique, that are different, that can help us stand out from other lenders. Not just the same old, same old. There’s a couple things we’ve been working on for a while that we would like to get rolled out there to become more attractive to people.
Kevin Kim: Foreray into commercial real estate a little bit maybe? About multi-family?
Mike Hoffman: No. No. No. No. No. Not commercial. Better products on the single-family side. I want to focus on that. Because, look, that’s what we do. That’s the core of what we do. I don’t want to go away from that. But I do think there’s some products out there that people have tried for a long time that haven’t been successful at it. If we could get the right financing partner involved, we think could be successful. Looking at that.
And then, look, like I said, I got to raise more capital to do that. I’m working on ways to bring more capital into the fund because that allows you to do more things. That’s really the focus for us. I’m going to really focus on the 10 states that we’re in. I want to do a little bit better in every state that we’re in. Capture a little bit more of the market. Just incrementally, right?
We go look at the ForCasa data, the SFR analytics data. Where we are? Okay. Can we pick up a little bit more in these places? What do we need to do? What could distinguish ourselves? But, yeah, it’s about to be super interesting again. Because rates go down again. It’s gonna get very competitive.
Kevin Kim: Yeah. I think so. I think, also, capital markets is going to make balance lenders’ lives quite difficult over the next few months. But I also think that they got to push harder on the DSCR product. It seems to be much more created to everybody right now. I mean, cuts not going to be that meaningful. I mean, it’s what? 50 basis points? 20? Even 100. It’s not compared to where we were in ’21.
Mike Hoffman: No. No. No.
Kevin Kim: Yeah. We’ll see. We’ll on that. I mean, you guys don’t touch DSCR. Do you?
Mike Hoffman: No. We got in at the worst possible time. We started to try to do it in like what? March of ’23?
Kevin Kim: Oh, yeah. That’s awful. Awful timing.
Mike Hoffman: Terrible experience. Terrible experience of the borrower. It did not work so well for us.
Kevin Kim: Right. I mean, listen, it’s looking worth looking at now. Rates have come down below. Conventional mortgage is fascinating where it’s at. Yeah.
Okay. Well, I think that’s about all time we have for this episode. Mike, thanks. I mean, this has flew by. Thanks for doing the episode, the interview. I really appreciate it. For those of you guys who want to learn more about Longhorn, you guys can check them out online. You can also reach out to Mike. We’ll put information out on the pod. Mike, I hope we can do the round two once those mission critical ideas have manifested. Let us know. We’re happy to bring you on the show and talk about it. We love talking about kind of big events in company’s life cycles. So please let us know.
And for all of our listeners out there, thank you for joining us for an episode of Lender Lounge. This is Kevin Kim signing off
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