You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim. And my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, be a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.
Kevin Kim:
All right, guys. Welcome to a special edition of Lender Lounge here in Las Vegas. We were getting set up for the Captivate Conference. I’m here with my good friend, Mike.
Mike:
Hey, hey.
Kevin Kim:
What’s up brother? Thanks for joining us here. We are live with video here in Las Vegas. We’re a little casual because we just got off the plane.
Mike:
All right. Yeah.
Kevin Kim:
We’re not all fancy dressed up yet. We’ll be tomorrow, but Mike, you’re with Sharestates. Before COVID, we saw you every month. We’re going to about to see about every month now, right? So introduce yourself and the company and we’ll get started.
Mike:
Awesome. I mean, Sharestates now, it’s about seven, eight years now. We’re a private lender. Believe it or not, Sharestates actually launched during the crowdfunding boom seven, eight years ago.
Kevin Kim:
I remember that.
Mike:
So we were originally an equity crowdfunding platform. We switched over to debt a little bit into it. Our investors preferred that more, so we actually crowdfunded debt. Did it through private family offices, etc. Our originations far surpassed our family office capabilities. We went the institutional route and grew the company. And now we do everything in the private lending space. So we’re different than some of the shops. We do the one to four family fix and flip, mixed use small family commercial ground up, DSCR rental loans, and we do the DSCR on one to four mixed use, and multi-family also.
Kevin Kim:
You guys are basically doing a little bit of everything-
Mike:
A little bit of everything.
Kevin Kim:
…and doing it well. I know that. Give me a little bit of a history with you. When you joined Sharespace, founding member, or…
Mike:
So there was the three founders of Sharespace. I was the fourth guy into the company.
Mike:
Oh, nice.
Kevin Kim:
And then I got kind of just jumped into the origination side. So we started like that. Believe it or not, I didn’t know much about hard money or loans when I started.
Kevin Kim:
What were you doing before all this?
Mike:
Before all this, before I even got into working with my partners now, I actually used to manage all the real estate for the MTA in New York. So Metro North, New York City Transit, Long Island Railroad.
Kevin Kim:
Wow.
Mike:
So believe it or not, they’re like the largest land holder in New York.
Kevin Kim:
I’m sure. So, government employee to private sector.
Mike:
Yeah. From there, two of the founders Ray and Radni Davoodi had a title insurance company. I joined them. I had a lot of people in my network and then Sharespace started launching and I was like, “I could sell that too.” So, I started working in that and then we started most actually on the direct side, we worked with a lot of guys on direct and then we grew a big broker business. And from there a couple other things, we have White Label and we have a new version of Correspondent on its way as well.
Kevin Kim:
Fantastic. So when you guys transitioned, because this is very uncommon, we don’t have a lot of lenders in the space that transitioned from equity to debt, right? And so what was crystallizing moment in your business that realized, “Okay, we got to move to debt. This is no longer viable.”
Mike:
So there was two things that happened. The first thing was the investors who were working with at that point, they wanted a quicker return. So you have monthly returns on your capital.
Kevin Kim:
They didn’t want to wait.
Mike:
They didn’t want to wait on the platform. And you had a quicker return of principal. So typically a hard money loan was 12, 18, maybe 24 months. If you went into equity, it might not recapitalize for 36 months or more than that.
Kevin Kim:
That’s true.
Mike:
So, if you’re doing ground up projects or something… That was one of the driving factors. The other one was the demand. A lot of the people we spoke to, they’re like, “I don’t want to give away half my project,” or “I don’t want to give away equity. Let me just borrow money, pay you back quick.”
Kevin Kim:
What year was this?
Mike:
This was about eight years ago now. So when was that? ’13.
Kevin Kim:
Okay. So very early when the industry was still growing and getting off the ground. And was this New York only at the time or…?
Mike:
When we first launched, we were in New York, New Jersey, Connecticut, Pennsylvania, and then we started adding on other states.
Kevin Kim:
Now you’re nationwide, right?
Mike:
Now we’re in about 45 states. A couple that-
Kevin Kim:
Essentially nationwide.
Mike:
A couple of states we just don’t want to be, but we are nationwide. I think companies like Geraci helped us scale to nationwide. So being able to do closings everywhere, so that’s pretty cool.
Kevin Kim:
That’s cool Thank you.
Mike:
A little shout-out.
Kevin Kim:
Yeah. And we love hanging out with you and we’ve had a lot of good times with these shows, but I love seeing your guys’, you know, how active you are in the space. Right? And how energetic you are and you barely sleep. I mean, we know this. This is known in the industry,
Mike:
doesn’t sleep. Right? But the industry is so booming now. It’s white hot right now. And compared to when you guys started in ’13, cause we started in ’07 and we really started getting serious in ’12, right? So when did you guys start seeing like, “Okay, wow, we’re really making a difference. We’re starting to really get tailwinds on this and start really expanding.” What was that like?
Mike:
I think the moment was when the institutional world kind of jumped into it.
Kevin Kim:
’15, ’16ish.
Mike:
Yeah. ’15, ’16. We were one of the first people on the institutional side. And originally, hard money was at 12 and 2 money. And once you started getting people into single digits and scaling their businesses, and we were able to help people scale. So if we knew they needed properties, we able to help them on that. We partner people together. Someone ran into an issue and you realize like, “Oh, this guy has an issue with his project, but I have a guy who’s doing the same thing, probably could partner up, help them out. They can get to the finish line. I could get them more money.”
Kevin Kim:
Right.
Mike:
So you started seeing a lot of synergies like that happening. And then once the DSCR loans got into it, that’s where it kind of even boomed even more. That was like three, four years ago. And I think that was originally, what was it, a Fannie Freddie product 10 years ago?
Kevin Kim:
Absolutely. And that’s what’s interesting about you guys because in the past three years, as DSCR really took off, a lot of companies doubled down on Razi. They used to do commercial. They used to multi-family and they just stopped. You guys have stuck by your guns and haven’t abandoned the commercial. And I’ve seen you guys at commercial real estate development shows, at opportunity zone shows. You guys are there active in those spaces as well. So, talk about that a bit, what do you guys lend on in that space, besides just the traditional one to four, and multi-family? Mixed use is a tricky thing to underwrite, right? So what are you guys looking for on that?
Mike:
We do both types of mixed-use, so we’re actually underwriting a file right now that’s in California, which is retail on the bottom and office on top.
Kevin Kim:
Interesting.
Mike:
So, that’s one type of mixed use. That’s about a $9 million purchase, and we’re getting 75 of their purchase on a bridge, which is higher than the typical bridge lender that would be at 65 on commercial like that.
Kevin Kim:
So you’re doing perm rental on a…
Mike:
No, this is not perm. This is a bridge loan on that one. But outside of that, on mixed use, typically on normal mixed use with residential component, we are looking for 51% of the property and more being residential. You’re looking for a majority of the rent. So I think like a 60% plus of the rent’s coming from the residential end of the property. But that’s typically… and we can do that on a bridge and permanent financing. We’re also looking for experienced borrowers on that, so not like a first-time guy buying a mixed use. These properties weren’t as popular in the heart of the pandemic. A lot of people were scared with retail spots, but right now they’ve picked back up and they’re doing really well.
Kevin Kim:
So on the commercial stuff with a residential component, is there a size that you guys are lending on, like max cap or anything like that?
Mike:
With all our loans in general, like a single family, like one to four, we’ll go up to three and a half million, and then multifamily mixed use commercial properties we’ll go up to 20 million.
Kevin Kim:
Okay.
Mike:
And we’ve done ground up. We’ve done ground up construction loans as big as 15 million on multi-family. So, we’ve got a mix of it.
Kevin Kim:
Fantastic, and so diversified from that standpoint, compared to a lot of your colleagues and competitors. And I think that’s giving you guys some longevity. I mean, a lot of folks who take into the institutional route, we’ve seen folks come and go since ’13, right, because we’ve been active since ’13. A lot of folks come and go, a lot of folks suffered. You guys bounce back real hard with a quickness during COVID, right? I mean, I remember hearing about your guys’ efforts to bounce back and…
Kevin Kim:
All right, guys, well, sorry for the change of scenery. We’re now in the exhibit hall at Captivate. The hotel wanted us to move it inside so we moved it inside. So, sorry, bear with us here. Let’s continue,
Mike:, let’s get back going. That was a little awkward. We were talking about how diverse you guys are from the product offering standpoint. And one of the things that I find very interesting in today’s market is how much capital there is in the space. And you guys have gone institutional, right?
Mike:
Yes.
Kevin Kim:
But you also have a direct origination capability. You’re not pure correspondent or loan buy or something like that. You’re staying on the street and working. How are you guys balancing that as an internal operation because you are working with other lenders, too, right?
Mike:
So we are working with other lenders as well. We’re able to finance, we have white label. We have white label capabilities for them soon, full correspondent with a close in their name.
Kevin Kim:
Right.
Mike:
We do service almost all of our own loans as well. So, to help that out as well, we actually changed the servicing company name. So that’s going to be under Investors Loan Servicing. People will be able to do that and we also had our institutional buyers that like the way we service loans and how we operate.
Kevin Kim:
So, you’re working with the various buyers out there.
Mike:
So we work with the various buyers. We have our own capital as well. We have our own balance sheet capabilities and we have our platform still. So we still make loans available to our investors online.
Kevin Kim:
Oh, so still operating. Okay.
Mike:
The crowdfunding aspect is still operating and we don’t want to pull that away from people. People still enjoy getting that. The returns are great. So, that’s still rolling.
Kevin Kim:
Let’s talk about the crowdfunding component real quick, because you guys didn’t do the heavy, VC type fed crowdfunding we saw back in like ’12 to ’15, right? The guys who had a massive operating balance sheet debt and big VC or hedge fund type overlord. You guys really did it yourselves, kept things lean, and it’s still operating successfully. You guys didn’t do that big type of like, kind of a Fintech type of approach, but I would wonder like, you probably were approached, right? To take that approach?
Mike:
We always had that approach and we have investors that come to the company, but a lot of what we do is technology based, but it’s on our own technology. So our loan submission platform, our loan servicing platform, everything is our own technology built from the ground up. So you can submit a loan, you can go onto your platform, you can go onto your pipeline, you can see your loans. You can see how much is, you could submit your draw from our platform. You’re able to see how many loans outstanding you have, what your balances are. You can change your payment dates, etc.
Kevin Kim:
But from that standpoint, you guys have grown this for a long time. It’s still flowing well and succeeding, unlike a lot of your colleagues from the crowdfunding businesses that started back in ’13. Right? And so what do you guys attest to? What do you guys credit for that, that long success at a crowdfunding operation?
Mike:
I think it’s just adapting to the change in the industry. So still keeping that component, but if the institutional capital came along, doing that. When it got into DSCR loans, doing that. Then growing with our borrowers. If you had a borrower that’s flipping homes for a bunch of time, and they’re like, “I want to buy a five unit or 10 unit and fix it up.” And if you’re not able to help them at mixed-use or multi-family, you might lose that client. So we jumped into that.
Mike:
We actually got into the commercial space, believe it or not, we actually rolled the dice with a bar where he came in, he said, “I’m buying a warehouse.” He goes like, “I’m going to make a million dollars when I’m finished.” And we’re like, “You’re not going to make a million dollars.” And the guy’s like, “I’ll pay you 12%. I’ll pay you the interest ahead of time. Just give me the loan.”
Kevin Kim:
That’s how you started in commercial?
Mike:
Our first loan was on an actual warehouse, and the borrower bought it. He did the work to it. Right. He actually didn’t refinance this one. He ended up keeping them after a while, but he was full flipping them. He’s fixing them and selling them. And on that warehouse alone, he made about $1.5 million.
Kevin Kim:
Fantastic. But that’s an interesting proposition, right? Because most lenders, when they enter, it’s not driven by a borrower demand. It’s typically driven by whatever data sources or backgrounds or whatever, have you, right? Has that been the primary driver of your guys’ diversification and growth, like repeat borrower need and demand?
Mike:
A lot of it is repeat borrower need and demand. Another part of is, if someone’s a real estate veteran, if you look at their track record of the REO Schedule and they own like 20, 30 different types of properties, most of the times that success is on luck. So, if that person comes with a scenario situation, you can look into it a little further, maybe not just pass it away right away and see how you can make it work for them. It’s worked over the years and we’ve also created programs from the ground up.
Kevin Kim:
And that’s interesting as well, because you guys are doing… I mean, now a lot of folks are now doing construction loans, because Wall Street will buy them. You guys were doing them very early on when no one would do them.
Mike:
We were doing ground up from when we started. I think it was popular. And the heavy rehab.
Kevin Kim:
Right. For our listeners who are thinking about starting on the construction side, it’s a completely different loan underwrite. Any best practices or tips there?
Mike:
So if it’s for a borrower, I would say definitely do your due diligence. It’s definitely different. Definitely look at the building codes, look at the whatever town you’re doing it in. If it’s a single family home, make sure-
Kevin Kim:
Municipalities, right?
Mike:
Municipalities or villages. If you’re in a village, there’s an ARB board and sometimes they will push your plans back, stuff like that, so I definitely would suggest looking into that. Material costs, I think in the last year, everyone has seen lumber go up and down, then it went to vinyl, then it went to windows, then delivery time on those items.
Kevin Kim:
And shipping is all delayed now.
Mike:
Shipping is delayed. We also always catered our products towards the client’s need. So it was a ground up project, to give someone either like a nine month or a 12 month loan, you’re sometimes setting them up for failure. So if you’re doing a ground up or a heavy rehab, or someone’s doing an extension, adding on a floor we always knew from that loan, it should be an 18 month loan. So we always set it up-
Kevin Kim:
Where do you pick that up? Because if you don’t have any experience in this new product, how are you…? What resources on the team do you guys have to add those underwriting capabilities?
Mike:
We’re a little bit different also. I mean, myself and the other partners, we were guys that were in real estate that got into finance. There was a lot of people from finance that got into this real estate. So they were doing MCA loans or wherever, even in the institutional world. Our first buyer that worked with us on the institutional side was doing an MCA and real estate through us. We just kept telling him, “You should do the real estate.”
Kevin Kim:
Well, because you have that builder’s background, that real estate background. So you can understand beyond just the underwriting. It’s actually the asset. You know how to value the asset, how to manage the asset, and how to essentially build it if you needed to. That’s interesting. Okay. So, let’s talk about kind of… We always have about 2020, the pandemic’s not quite behind us, but I like to say it is. 2020 was quite a year. I mean, we had our hard times and March and April of 2020 was rough for us. And I felt like the industry kind of bounced back soon after. How was that for you guys last year? I thought you guys bounced back pretty quickly, but…
Mike:
I think it was pretty quick. I mean, March, we had like, what was it, the first or second week? We had 20 closings we canceled because just everyone didn’t know what was going on.
Kevin Kim:
Was it evaluation concerns?
Mike:
It wasn’t evaluation concern. It’s just secondary market shutdown, so you’re going to sit down on your balance sheets. It’s tough to sit there hold back pay penalties, etc, so you wanted to make sure everything’s running smoothly. But we got back into it, I think it was by August, September, we got back running again. And towards the end of the year, it started really picking up. And then last couple of months it’s been pretty busy and it’s back to the normal trends. It was the crazy May and June, and then July and August still busy, but quiet summer months, everyone’s back in camp, vacation. And then the end of the year, boom in this industry and in real estate in general.
Kevin Kim:
Right. And so a lot of folks are saying hotter now than ever before, right? Would you agree with that?
Mike:
I think in certain markets. I think it’s also more difficult. You might think hotter because of delays or issues or problems, but when you have appraisal issues, it doesn’t mean it’s a hotter market. I think the DSCR market is the hottest you’ve ever seen it because the rates have never been lower.
Kevin Kim:
Exactly.
Mike:
Stuff like that. Fix and flip. Everyone always mentioned inventory issues. I think it’s still a busy market. And then ground up is busier than it’s ever been. There’s still an inventory shortage of homes. So, that hasn’t gone away.
Kevin Kim:
Yeah, and that’s a kind of common thread on the show. We’ve been talking about inventory, inventory, inventory, there’s no houses, right? So, where do you see things going in the markets that you’re big in? How are you guys seeing things change?
Mike:
I think investors are learning how to change their Value-Add. If you were typically buying a fix and flip and you were putting maybe buying a house for $200- and putting $30,000 into it, and if the future value wasn’t there, there was no value in that anymore. It was changing with the market. So I have borrowers that were like, “All right, that’s good, and I can make money on that. But if I add a floor and extend it, I can make a lot more money.” So it was creating more space
Kevin Kim:
More density…
Mike:
More density. I think it became more popular. Everyone knew that the three bedroom, two bathroom house is the most popular home in America. So if you had a two bed, one bath, etc., or something different, it was to make the correct extension or change the layout so it fit the buyer pool.
Kevin Kim:
And that’s a pretty common thread you’re seeing across the country.
Mike:
I think I’ve seen a lot across the country. I’ve seen a lot more for community developments in ground up. So people are buying land and asking for, they were looking for more horizontal than vertical. So they were able to get entitlements put in, electric, plumbing, roads, and seeing a lot of that popping up in all different neighborhoods.
Kevin Kim:
Okay. And being in 45 states, I did want to ask you about this because like the great migration, as I called it on another episode, it’s like we’ve had secondary and tertiary markets, which were kind of like not very interesting, all of a sudden become massively interesting, right? I mean, Nashville, Tennessee.
Mike:
Memphis.
Kevin Kim:
Memphis, Tennessee. Tennessee as a whole it’s like just… I have never gotten so many phone calls for new lenders in Tennessee and the Carolinas, Florida, Arizona. So where are you guys aware of some new markets that you guys are really paying more attention to?
Mike:
Memphis. Like you mentioned, Tennessee has been crazy and I’ve seen Knoxville and other places pick up.
Kevin Kim:
Fantastic.
Mike:
The Carolinas. Florida in different areas than normal. So if that makes sense or not, but used to other places in Florida. Now you’re seeing everywhere in Florida. Texas, same issue there. Not an issue, but…
Kevin Kim:
Popularity.
Mike:
Popularity. We cannot get our appraisal back sooner than like 30 days there now. Then you have the Alabama area.
Kevin Kim:
Really? Alabama?
Mike:
Alabama, and this is the two of the most shocking ones. Indiana, all of Indiana, very popular. And part of it is because of job creation with the Amazon warehouses, etc., and Cincinnati, so you see a lot. Before it was regular Cleveland and other areas around that. But downtown Cincinnati, Ohio, very popular.
Kevin Kim:
And that’s another kind of interesting topic that we’ve kind of touched on before and I’d like to hear your thoughts on this. The Midwest has largely been kind of a overlooked marketplace as a whole, for private lending, right? We don’t see a lot of folks who are concentrating in the Midwestern markets and we’re starting to see some attention being that you mentioned Ohio, Indiana. I mean, Michigan’s kind of on my radar, but not really. It’s starting to.
Mike:
Picking up. Pre-pandemic, Detroit was picking up a lot. Detroit had a big problem before. They had the fire homes, zombie homes, and you saw a lot of those starting to change. I think it’s getting back to it. Before the pandemic it was doing great. There’s a lot of development. You had a lot of big guys in there. You know, you had, what’s the Quicken loans guy? Dan Gilbert. So they put a lot of money into and you saw it pick up and then other places as well, you see a pop. I think one of the biggest driving factors to what you’re mentioning in the Midwest is now people are able to work remote. So if you can live for half the amount somewhere else and still do the same amount of work or be just as productive, then why not move?
Kevin Kim:
So you’re seeing a lot of folks who are in coastal markets, moving to the Midwest and that’s influencing people like you who want to do business there, right?
Mike:
Even you’ll see people that were living in Brooklyn, they’ll move upstate New York. So they’ll still be in New York, but it will be just in a different area because they don’t have to go to the city anymore. They don’t have to travel. They could be somewhere quiet or they could be by the water. So, it’s a different lifestyle. I think people’s lifestyles have changed in the last year.
Kevin Kim:
Definitely. I agree with that. Us in California, we’re kind of spoiled in the sense that we’ve got large suburb spread and urban sprawl in Southern California, but we see this. A lot of our clients, like in New York, tell us all the time, “People are moving and they’re not coming back. They like it up there and there’s no reason to come back.” Have you moved? Are you still in the city or…
Mike:
No, I never lived in the city. I live in Long Island-
Kevin Kim:
You live in Long Island?
Mike:
…and my office is five minutes from the house so it’s awesome, and the airport is 20 minutes.
Kevin Kim:
You’ve always been in a nice spot and never had to really leave. We have a lot of discussions about this, people leaving New York and whether… That’s an interesting question because of our listeners on the multi-family side, our listeners on the commercial side, and our investor clients who have always loved New York. Has New York bounced back.?
Mike:
I think New York has bounced back. You go to the city now, it’s busy again. People are going back to work. A lot of companies mandating get vaccines and come back to the office, so it’s come back. People have moved back to the city. My friends who own multi-family in Manhattan, those people have come back. They’ve given rent concessions, etc., but they said, people are coming back.
Kevin Kim:
That’s good to hear.
Mike:
They’re getting usually the same types of tenants. So…
Kevin Kim:
I mean, at the end of the day, it’s still the financial hub of the world, right? And you just can’t ignore that and you can’t run a financial services business or investment bank remotely. You just can’t. You got to be at the trading desk.
Kevin Kim:
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Kevin Kim:
So let’s talk about Sharestates’ involvement on the DSCR side. You guys do a lot, right? And DSCR is a very hot topic these days because of how interesting it is from a market standpoint, at least from my perspective. I don’t serve a lot of clients. I’m more on the investment side. So my clients are yield hungry. It’s not really something for them, but it’s a topic that’s being discussed because it starts to blur the line with the conventional side. And we’re starting to see more of our industry try to break into that side and more of that industry try to break into our side. What are your thoughts on that? How are things progressing for you?
Mike:
I mean, I think ever since hard money itself in general got lower, it’s been doing that. People are like, “Oh, it’s a first time investor. Oh, it’s this, or this guy owns multiple rentals.” I think it’s important to not mess up the industry or to give it a bad name or to bring in regulation. I think the lenders have a big responsibility to make sure that you use QC the files properly.
Kevin Kim:
Don’t screw this up for us, guys.
Mike:
I think that’s very important. You see people come and go in the industry, like you mentioned before, and you don’t want to see that happen. You want to see it grow. You want to see it stay. You don’t want to see this product go away. I mean, it left Fannie, Freddie years ago. It came back and I think it’s important to make sure you do the proper underwriting, QC the client properly, and if you’re getting those weird questions where it is leading towards like, “Sounds like this guy is going to live here,” then you kind of kill the loan, not just be hungry for that one loan.
Kevin Kim:
Right.
Mike:
I think it’s very important.
Kevin Kim:
I’m starting to see, and this is a micro version of this, but like I’m starting to see where I would say shades of subprime in the DSCR stuff, right? And I’m starting to see it and it’s starting to get me a little bit nervous because I don’t ever want us to face that type of crisis. I don’t think we will because of the short term nature of most of our products, but the DSCR is a whole different animal. They’re 30 year loans.
Mike:
That’s why I think, just like anything else, when you’re not creating enough of it, you kind of try to make it easier. So you loosen guidelines, etc. Hopefully people don’t stick to loosening them any more than they are now. I think they’re at a good spot right now where if you know the bar well enough, and I think that’s what’s great about having repeat borrowers, you don’t have to look for a lot of that. You know, that’s what that guy does and that’s what the industry is and he’s been doing this forever. The liquidity is there. His credit is good. So you look at certain aspects of the loan and make sure you want to stay, but I have seen guidelines change from when these products first came out until now and they’ve-
Kevin Kim:
Rates have come down significantly, but underwriting guidelines have loosened so much that I’m starting to see advertisements for almost like “no income” and other things like that. It reminds me of subprime and I’m starting to see some concern for people who have that longterm industry health perspective. So you’re arguing that it’s on us. We have to really stick to our guns on that.
Mike:
I think it’s important. It’s very much on us. I think it’s very important on the vendors. If you have an appraiser go out there. Unfortunately, it’s very tough on them now, too. I think the stats given by some of the large AMCs that are at the conference are saying there’s about 80,000 active appraisers, but 40- of them are actual, they’re doing the inspections. And then you have 2 million conventional loans they’re doing a month plus the DSCR products. It’s not [inaudible 00:26:04] so I think responsibility falls on both sides. I think it’s important, but I definitely don’t want to see this product going anywhere. I think it’s great for the industry. I think it’s a great backup to, let’s say someone is fixing and flipping townhouses and they end up selling five and keeping five. So I think it is a good backup to the industry itself.
Kevin Kim:
It has allowed this industry to expand significantly beyond the banking engine, the conventional space, because we’ve now taken it out of their hands. Build-to-perm is now a thing. You couldn’t do that five years ago. And the opportunity that that creates on the stickiness, because you guys have a lot of repeat borrowers. You’re talking about working with the borrower, right? And that creates so much stickiness with the borrower from a longterm standpoint. But I guess, my fears have always been we’re going to do ourselves in almost, right? Because it’s a fear of a race to the bottom. And we saw that in fix and flip. We saw that, too much leverage risk, too much rate compression, and we’re seeing kind of the same trends with much higher velocity with DSCR, not to mention now the conventional shops are competing with you guys. That’s actually an interesting angle to think about. What do you guys do to combat those guys, because those guys have horsepower, man. They’ve got reps all over the country and…
Mike:
If they have reps all the country, I think you work with them. I don’t think it’s something you put away, but if they have a client that’s an investor, sometimes they can’t handle portfolios. A lot of their products are geared towards a single asset. So you’re able to help their clients and kind of help them with their loans. Also, a lot of the clients are doing fix and flips or the banks don’t offer. So they’re still able to come to you on that.
Kevin Kim:
You’re collaborative with these guys then?
Mike::
I think it’s important to be collaborative with people. A lot of times people always… you walk into a room like this, like a convention hall and everyone’s like, “Oh my God, look at all my competitors.” I don’t think should look at it like that. It’s your peers in the industry. There’s plenty of business from everyone.
Kevin Kim:
That’s how I’ve always viewed it.
Mike:
So you sit there.
Kevin Kim:
Right. We’re all colleagues. At the end of the day we’re all trying to grow the industry together and rising tide lifts all ships. And I think that’s why I think it’s so important that we get involved with various different means of creating that kind of industry best practice, self-governance. Right? If we screw it up, then all of a sudden CFPB comes knocking…
Kevin Kim:
EFS, some regular comes knocking. Who knows what’s going to happen and all of a sudden we got another Dodd-Frank on our hands. So to our audience, make sure you’re sticking to your guns. Be ready to say no. And that’s an interesting question for you. How often do you guys say no?
Mike:
We say no a lot. Like, a lot.
Kevin Kim:
Okay. Tell me more about that.
Mike:
You have people call you with scenarios all the time. It comes in and you’re like, “That’s rural.” It was like, “No, but it’s a good area.” I’m like, “There’s no population anywhere to be seen.” Or you have someone call and he’s like, “Oh, he’s a great borrower it’s just his credit got hit because of a divorce.” I’m like, “Everyone’s credit got hit from a divorce. You got divorced and don’t pay their bills.” so you hear that one. After eight years of doing this, we’ve done almost 3 billion in loans, the amount of different stories I’ve heard, and you just have to know when to hold them and fold them, I guess, now that we’re in Vegas.
Kevin Kim:
But at the same time, you see that level of competitiveness and that kind of, you don’t want to lose a customer. And balancing that is tough.
Mike:
It’s definitely tough, but I don’t think it’s losing a customer, if it was going to make you look bad.
Kevin Kim:
The credit risk isn’t worth it.
Mike:
No, I don’t think it’s worth the credit risk. It’s very hard to build a name in any industry.
Kevin Kim:
Sure, sure.
Mike:
Do all that and to take one bad apple and to mess up what you’ve put together, I don’t think it’s the best idea.
Kevin Kim:
And it can just take one.
Mike:
Yeah.
Kevin Kim:
Right. And you touched on something there that I want to kind of pull out a little bit, is credit. Credit has been an interesting topic in our space. DSCR, you have to, but with a lot of the fix and flip and the bridge stuff, and the traditional asset class for “hard money” or private money. Running credit has become a new trend, in my opinion. For the longest time, it was never a topic. And I feel like COVID was the year when all the lenders who are in multiple states said, “Okay, we’re no longer going to ignore credit.” Right? So, tell me about you guys’ evolution on running credit. Was the same way, or was it before that?
Mike:
From day one, we ran tri-merge credit. We wanted to see trademarks.
Kevin Kim:
Really? In ’13.
Mike:
I think it’s important to see a bar’s liquidity and experience. So if you have a regular mortgage on there, have they been paying their own mortgage. Outside of that, do they have credit cards. How many years has it been a revolving account? I think it’s important to see that. Also to see how much space they have on there. You’re giving someone a construction loan, and even if you’re financing a hundred percent of it, they do have to have money to put in on it. So you want to make sure their credit’s available. I think it’s important, especially on a ground up project, more than anything. The borrower is going to be ordering windows lumber, a lot more than what for typical. You’re going to have to put deposits down now for excavation, foundation, etc.
Kevin Kim:
So you guys have been running credit since…?
Mike:
We’ve always been running credit from our first loan.
Kevin Kim:
Wow. I guess maybe it’s more of a west coast thing then.
Mike:
We also had different underwriting guidelines. We were originally a crowd funding platform. We have to raise money online and you have to show the person’s credit. You have to show someone’s worthiness. So we had their track record.
Kevin Kim:
It’s true. Credit is super important for crowd funding.
Mike:
Super important. I don’t think that’s changed either. I think for your institutional investors, that’s even more. They’re big on data.
Kevin Kim:
Yeah. And that’s the one thing that I do really like about the standardization we’ve seen is the importance of credit. Right? As a former loan officer myself at a bank, credit was kind of a foregone conclusion, but when it came to this space, I was like, “You guys don’t run credit? You guys don’t run appraisals?” And my underwriter was like, “Wait a minute.” But then, clients, it’s their business. I’m the lawyer, right? But nowadays it’s become a very much kind of standardized approach and everyone essentially does some form of credit run.
Mike:
They do. I think also when the industry was first starting, people were trying to mimic the mom and pop shops. So the mom and pop was 12 and 2. They were trying to mimic that.
Kevin Kim:
You’re being compensated for that risk, I mean, 12%.
Mike:
You’re being compensated, but those guys also know their borrowers. It was the same guy buying five houses a year, but now that guys wants to buy 10 houses and he wants a lower rate. So he’s going to have to show a couple more docs.
Kevin Kim:
That makes sense. You see the expansions also. You’re pointing out that the expansion of the marketplace has insisted on the fact that we standardize practices. Okay. I like that.
Mike:
I think, in general, as the prices came down and different securitization, they added different steps in there to, I guess, protect the risk.
Kevin Kim:
It’s true. And Wall street has short memories, but I’m sure they’re still stinging from ’08. Credit was a big topic. With securitization, I mean, are you guys involved in that kind of stuff as well?
Mike:
We haven’t done our own securitization, but…
Kevin Kim:
Your buyers are working with you guys a lot on that kind of stuff.
Mike:
Correct.
Kevin Kim:
Yeah. We’re at an interesting time in the market for that too because it’s hotter than ever. I mean, not just for DSCR, but for non-conforming fix and flip loans and construction loans, it’s starting to be bought for securitization purposes.
Mike:
Yeah.
Kevin Kim:
Yeah. And that brings a new level of Wall Street to the space.
Mike:
I think it’s a new level of Wall Street. I think it’s a new cost of capital. If the direct lender is not doing securitization, they’re out to sell the loan and that’s just more, I guess, yield and rate compression.
Kevin Kim:
Taking it back, taking that piece back. As a lender in 45 states, yield compression has always been the hot topic for the past, I would say, 10 years now. How’s it going for you guys? I mean, are you seeing it across the country now?
Mike:
When we first started, our rates were 12%. And now you see on fix and flips, you see certain companies… I mean, we don’t go as low, and I don’t know what paperwork they ask for, I’ve seen people as low as 6% on a fix and flip.
Kevin Kim:
I’ve seen those. Yeah.
Mike:
So you see anywhere from 6 to 12 still now. I haven’t seen anything lower than that, but what shocks me more is still the rental loans. Like you’re in the mid to like even low 3s on some of the programs.
Kevin Kim:
I was predicting in another episode that we’re going to probably see 3, and then it’s eventually going to compete with the mortgage loans. It’s going to get nuts.
Mike:
I wouldn’t be surprised. I think it’s similar also, the fix and flip loans. When they came in and there was so much space to make money on these loans that everyone wanted to get in this space. I think it will also kind of drown out the space a little bit right now.
Kevin Kim:
And there’s a lot of people arguing that fixed and flip is on its way out, right? And what are your thoughts on that? Because I am of the belief that there’s so much old inventory in the country, there’s no way this can go out.
Mike:
I don’t think fix and flip’s on its way. You have two things, you have the auctions coming back, the REOs, you have a lot of people that didn’t-
Kevin Kim:
Foreclosures are back.
Mike:
Foreclosures are back. Figure this right now, how many people had their mortgages on deferment right now? So you have all those guys in deferment that now it’s over and they don’t want to pay their bills or they don’t want to live in that house anymore. They’re going to move, and chances are, they’ve been there awhile. You also have distressed cities.
Kevin Kim:
Oh, significantly. Yeah.
Mike:
People are going to go in and fix those. So I don’t think the loans are gone. It might change a little bit, but it’s here to stay. It’s a business now. There’s shows on TV revolving around it.
Kevin Kim:
Oh yeah. Oh yeah. We know it. We have some clients on the HGTV. We know about it. And it’s now mainstream. And what I love about the industry is that now what used to be considered almost loansharking back when I first started… I remember because when I first started Geraci, my father, 30 year banker, and he was like, “Wait a minute. Is that loansharking?” I’m like, “No Dad.” Then I explained it to him. He’s like, “Oh, I didn’t know that existed.” This is back in like ’13, ’12. Now it’s so mainstream. And I want to ask you like where you see this market headed, because we’re at new market entries. We’re seeing new market entries. It’s never been easier to be a new originator. It’s never been easier to be a new lender, right? And I don’t think the assets are going away, but where do you see the industry headed?
Mike:
I see the industry as still growing. I think you’re going to come, hopefully, everyone hoping, but I think as the pandemic really will hopefully end at some point, I think people will go full force into everything.
Kevin Kim:
I like it.
Mike:
don’t see it slowing down. There’s certain places, and I think we were discussing this before it started, where my flippers that say their open houses went from 50 to 15, but he goes, at the first time they were doing them half the people were there just they had nothing to do. So he says it’s the same amount of serious buyers. People are still looking for houses. Pricing hasn’t changed. It’s still going at ask or above a little bit, so they’re being priced properly and hopefully it sticks. I could tell you the next couple of years, I think it’ll still be hot. Two, three years.
Kevin Kim:
Always my question on the show. Bullish, bearish, foreseeable future. Next two years. You’re very hot.
Mike:
Very hot. For the next two years, definitely. After that, I can’t tell you what’s going to happen. But you still have a shortage of inventory, so one has to build. The people still need somewhere to sleep.
Kevin Kim:
People need still somewhere to live, and that, I just finished an interview on this question and I want to get your thoughts on this. While that’s still the truth, the popularity of rental, and the massive appetite of Wall Street institutions now buying up large swaths of rental houses. I mean, I heard that a certain investment bank went and bought a small city, and how does that impact your operation on the rental side?
Mike:
I still think it helps out. I think people find us a big business. You’ve heard the word Burr. So everyone’s doing the Burr effect and renting homes. I think we’re in a new world now where people also, we talked about this earlier, you can work remotely, right? So if I could go rent a home in one state for a couple of years, I could live around the world now. I’ve seen people even doing that during the pandemic. They moved three times. They’re still doing the same work, same job, nothing else. There’s just made it easier.
Kevin Kim:
The question that I have about it has always been, doesn’t that create a scenario where we’re almost trying to… Won’t lead to almost like a society of renters and disincentivize the homeowner. And with the prices being what they are, too. It’s kind of interesting. It’s so hard to buy a house. There’s no inventory. It’s so expensive. And now there’s just this glut of rental houses out there to rent from. And so it’s like, does that reduce this incoming generation of wealth from buying homes?
Mike:) I think it ruins the concept of community more than anything. It does. It does a little bit and it doesn’t. People will still, if they want to live in a community, you’re going to go to a community where people-
Kevin Kim:
Where you want to live.
Mike:
Where you’re going to actually live, and it’s going to be for the schools and the taxes are going to go towards the right things for you to go there. But we’ll see. I mean, it’s been popular. It also, a lot of times it’s a lot easier for people to afford. We’ll see if that changes. But I do think right now with the mortgage rates where they are, you’re still going to see a big buying boom.
Kevin Kim:
I hope so.
Mike:
I don’t think it’s going to go away.
Kevin Kim:
I hope so. And I really hope that an incoming generation of wealth isn’t boxed out. I think that’s so important. The best way to build wealth in America is to buy a home.
Mike:
I actually think that during the pandemic, I think one of the big things you’ve seen was people who lived in apartments and other stuff, once you got actually locked into your box, you’re like, “Why am I doing this?” And you’ve seen a lot of people move out and they’re like, “You know what?” And when they went into the home, they realize this is actually great. And you design the home how you like it. You’re not renting anymore.
Kevin Kim:
That’s true.
Mike:
I mean, the maintenance is a pain in the ass, but…
Kevin Kim:
Yeah, but… That’s a good point. I’m part of the great migration, right? A lot of folks are moving to smaller… I contemplated moving here to Vegas or moving to Texas. I’m still getting emails from some clients, “Hey, move out here. There’s a great ranch waiting for you,” that kind of stuff. I don’t know if I could do it, but it’s been done. A lot of our clients have moved into smaller cities and bought homes at more affordable prices and that kind of stuff. So, hopefully there is hope for that and I am optimistic as well. All right. Well, I want to close with one question for you,
Mike:, that’s very unique for you because we see you at all the shows. You’re a very busy man. And this year we’re going to see you at the show after this, right? The Originator Connect show?
Mike:
Yes.
Kevin Kim:
But the APL, we’re not going to be able to see you because you’re having a baby.
Mike:
Having a baby.
Mike:
Oh, congratulations, sir.
Kevin Kim:
Thank you. Second?
Mike:
Second one. Yes.
Kevin Kim:
Boy or girl?
Mike:
We’re not sure.
Kevin Kim:
Okay.
Mike:
It’s a surprise.
Kevin Kim:
Okay. All right. Oh, you don’t know at all?
Mike:
No, we don’t know at all. We didn’t do it the first one either.
Kevin Kim:
Awesome. Awesome. Well, congratulations.
Mike:
Thank you very much.
Kevin Kim:
I want to get your thoughts on where we’re going as an industry with these trade shows, right? Are you excited to be back and…
Mike:
I think trade shows are great. I always think business in person is better and different than… When you can have a drink with someone, eat dinner with them-
Kevin Kim:
100%.
Mike:
… shake their hand. I’m very big on that. Almost all my clients I’ve worked with, other brokers, I’ve actually met them. I’ve had a drink with them. I’ve had dinner with them.
Kevin Kim:
Personally.
Mike:
Personally. I think it’s very important.
Kevin Kim:
These aren’t going away anytime soon.
Mike:
I don’t think trade shows are going. I mean, right now we have this. You have companies like ICS. They’re doing two this year because they missed a year.
Kevin Kim:
That’s true.
Mike:
And people want to get out. You also learn a lot. If I come here and I meet someone who’s a lender from the middle of the country and they weren’t lending in New York or something, I might’ve never met them another way.
Kevin Kim:
Right.
Mike:
So I think it’s important.
Kevin Kim:
Well, I appreciate this because we really do believe these are here to stay. We’re not going anywhere with this one either.
Mike:
We’ll be at the next one.
Kevin Kim:
Yeah, we’ll see the next one. And for those of you who are listening in, when this goes live, it’ll be after the Captivate Conference, but you’ll see a lot of great footage from that. And so you’ll see this guy all over, I’m sure, because he’s going to be everywhere, but this is
Kevin Kim:
for Lender Lounge here at the Captivate Conference during set-up and we’ll see you on the next one. Thank you for joining us,
Mike:.
Mike:
All right. Thank you.
Kevin Kim:
All right.
Thanks for listening to Lender Lounge with I hope you enjoyed this episode as much as I did. If you did enjoy, please leave us a five star review on your podcast platform and be sure to follow our show, to be notified of new episodes. If you’re on YouTube, don’t forget to smash that like button and hit subscribe for more content from all of us here at Geraci. Lender Lounge with is available on all podcast platforms. Referrals really help us spread the word, so please send this over to someone you think might enjoy it. See you next time. This is signing off.
