Keeping It In-House | Scott Rerucha, Legacy Group Capital

lender-lounge-with-kevin-kim-scott-rerucha

Share This Episode

Sponsors
Lender Lounge White

Stay Updated

We send emails on the 2nd and 4th Mondays of the month to alert you of new episodes. Get links, behind-the-scenes content, and messages from Kevin himself.

For this episode, Scott Rerucha, CEO and founder of Legacy Group Capital in Washington state, joined Kevin to discuss the unique way the firm built their business and avoided a single foreclosure in their 10-year history. Scott discussed his background as a banker, investor, and private lender Scott and how that has affected his ideas about the firm’s growth, the Legacy team, and values as a company.

Scott is the CEO and a co-founder of Legacy Group Capital (LGC). Scott is a mortgage industry veteran possessing over 27 years of experience. From 2006 to 2014 Scott was the President & CEO of Legacy Group Holdings. His leadership saw Legacy Group Holdings become the 35th largest real-estate lender in the country. Scott’s industry experience and leadership will be instrumental in leading Legacy Group Capital to long-term growth and success.

Episode Transcript

Kevin Kim:
All right. Good afternoon, everyone. Thank you for joining us for another great episode of Lender Lounge with Kevin Kim. Today, I’m interviewing the CEO of Legacy Group Capital, based in the Northwest, Scott Rerucha. Rerucha, am I saying it right?

Scott Rerucha:
Rerucha.

Kevin Kim:
Rerucha, and you are the CEO and founder of Legacy Group Capital, correct?

Scott Rerucha:
Yes, I am.

Kevin Kim:
All right. Thank you for joining us today. We’ve had quite some time to talk before, and we recently started working with you guys at the law firm. I was pleasantly surprised when I first talked to you guys, it was with Brett, and I was pleasantly surprised to learn about your business and your strategies, and what you guys are doing up there. I thought, what better opportunity to learn from you today and share some of your industry insights to our audience. Please give us a little bit of introduction to the company, Legacy Group Capital, and yourself, and we’ll go from there.

Scott Rerucha:
Yeah. Sure. Well, thanks a lot. I really, Kevin, appreciate the opportunity to speak on your platform here. We have a unique business model here up in the Pacific Northwest. The great news is myself and the team, most of us have been born and raised in this area, and so we know the location and we’ve established a nice private lending company that lends a couple $100 million a year in private portfolio money onto the street, and we do a few other things as well that we’ll get into. But I guess backing up to start off, my background and experience started off in banking originally. I was a banker and a commercial lender in the beginning, I also went into residential lending and worked with a U.S. Bank for a number of years, went on to run a residential lending department, and then I’ve got the entrepreneurial spirit in me and decided to venture out and start something a little bit on my own.

Scott Rerucha:
I started a mortgage banking operation, a company back in the day that was called Bay Mortgage, and I started that from scratch and built it up to be one of the largest mortgage banking operations here in Washington state.

Kevin Kim:
Conventional mortgage lending?

Scott Rerucha:
Conventional mortgage lending, just regular residential loans, sowing them off on the secondary market is what we did. We got to be one of the largest in the state at the time. I had that company for about seven years, built up a great team. I’d actually taken that from a mortgage brokerage operation into a mortgage bank and operation where we closed loans in our own name and sell them off on Wall Street and whatnot. After that-

Kevin Kim:
Was this in 2000? Early thousands or in the ’90s?

Scott Rerucha:
This was in the mid ’90s, is when that was. Yeah. And so then, we went off from there, and I actually got involved with a small group that was going to open up a small commercial lending bank here in the Pacific Northwest called Enterprise Bank. There’s three guys that were going to start it, they actually asked me to partner with them and come in and build a residential mortgage lending mortgage banking piece to that bank. And so, we…a bank, was called Enterprise Bank, and we ended up having that bank for five years. It was one of the fastest growing banks in the state of Washington. It was a great experience for me because not only did I really get to learn the ins and outs of again, ground zero, setting up a mortgage banking operation, but also how it fit in with the regular banking, commercial banking system, and dealing with the FDAC and all the regulation that comes with banks.

Scott Rerucha:
It’s a little more restrictive than just being out on your own in the mortgage arena. So, I learned a lot of the banking rules, and sat in and was on loan committee for commercial loans, I was learning a lot about commercial lending as well. We had that bank for five years, and again, it was one of the most profitable startups in state of Washington. One failed swoop, Washington Mutual came in and bought us out, lock, stock and barrel, and so it was a quickly owned bank and built and grown, and then after that acquisition happened. I had the option of going to Washington Mutual and running a lot of their mortgage banking operations within the organization, but I was kind of a guy, I like building things from scratch, I like growing things, and so I decided to go out and start another company, and this was Legacy Group Lending, is what the original name was.

Scott Rerucha:
We started out with another mortgage banking operation, and I had a lot of the same team and people together, the people that had helped me build other stuff. And so, we brought in some mortgage guys and we started building this mortgage banking operation out. After we got a couple of years in to really establishing the foundation and becoming pretty large in size and scale, one of the things that I always wanted to do is enter into the private lending space where we could actually do hard money lending. We were doing, at the time, five to 600 loans a month on the residential mortgage banking side. And when you’re doing all that business, you’re doing 600 loans a month, you’re always going to have probably somewhere between 50 to 100 loans you’re turning down that don’t meet conventional guidelines, and thought, wow, out of those 100 loans, there’s a handful that are pretty good loans. These people need money, they’re willing to pay more, so we ended up opening this private lending piece called Legacy Group Capital.

Scott Rerucha:
We opened up a separate division, and we created an original fund called the Northwest Fund. What it was is really to catch some of the deals that didn’t line up in conventional lending that we could go out and do short term loans on. And so, we put three kinds of loans into that bucket, one, we called it a bridge loan. What would fall into that bucket would be a short term loan that somebody needed to acquire a property to just be even an owner occupied person buying a house that wasn’t qualified at the time or had some issue, but we knew that issue was going to be resolved soon, and then we would formulate a takeout down the road that we would take that person out. So, they’d come in and maybe get a one-year bridge loan, close on a residential property, and then within one year we would take it out.

Scott Rerucha:
And so, to give you a good example of a deal, I remember one specific deal, to give you an example, we had an airline pilot that was working for Alaska Airlines, and he ended up going over to United. These pilots, when they make a shift from one airline to the other, what happens is they’re making like 180, 190 grand a year being a pilot, and then they make the shift, and when they go to the new airline, they actually have to start out at a base rate, in this case, it was like $60,000. They do that for three months, and then it goes up to like 120 for another three months, and then it goes up to like 180, it was how they set it up. This guy was buying a property, and he had just made a shift to new airlines, and he didn’t qualify for the loan, but we had a contract and we knew what was happening.

Scott Rerucha:
Anyways, this is a guy that we’d go out and make a bridge loan, we lend the money at 10% and he’d pay a point and a half, and we’d give it to him for a year, and then we’d come back and do a takeout loan. So, a lot of the private lending we did in the beginning was we would set up out financing behind it, so short term lending to do that.

Kevin Kim:
Let me ask, when was all of this starting though? When did you start Legacy Group Capital?

Scott Rerucha:
Legacy Group Capital started in 2006.

Kevin Kim:
Okay. So, you were at a bank that that was bought up by [inaudible 00:07:44], that bank, and started Legacy Capital in ’06.

Scott Rerucha:
In ’06, yes.

Kevin Kim:
… as a conventional mortgage. You came back to mortgage banking-

Scott Rerucha:
Mortgage banking, that’s how we started with.

Kevin Kim:
That’s interesting, because a lot of lenders who started pre-recession, but they didn’t start like you did. They were not conventional … So, the whole private lending business was really just a catchall solution for your non-qualifying borrowers.

Scott Rerucha:
It was, that’s how we started.

Kevin Kim:
Wow. That is so different. I mean, you think that’s a logical explanation for those on the conventional side, but for the private lending industry, it’s a very unique story. A lot of folks do not come from that type of structure, and then they usually come from either Wall Street, or they were doing this stuff before, or they stopped mortgage banking altogether.

Scott Rerucha:
There’s a couple fundamental differences between most of the guys that start in private lending and how we did it, because one of the things we did is the way we were set up, is it was a catchall, and then we had takeouts for all this stuff that we were doing after the fact. So, we were far from a loan to own type of company, we were all about exit strategy. We’d make your loan as long as we could get you out of the loan in short period of time-

Kevin Kim:
Right. You’re underwriting them for the exit long-term.

Scott Rerucha:
Exactly.

Kevin Kim:
So, you weren’t really thinking of an asset based approach at the time?

Scott Rerucha:
No, we weren’t. And so, we weren’t even necessarily a collateral lender like most people are, because if you give them the collateral, I’ll give you the loan, and if you don’t pay me the money, I’ll take the collateral. I mean, that’s how it works. But that was not the case with us, that’s why we went through our first four years without ever foreclosing on a property or having to even work out of any big time trouble loans because our loans turn quick. Anyways, we created this platform, and it was a good one because it was being fed. We…raised money, and we couldn’t even raise enough money, we had a bigger loan demand than we had dollars of capital coming in, and granted, the ’06, ’07, ’08, era wasn’t the easiest time to raise money because the sky was falling and private lenders were going under and nobody wanted to put money into real estate funding, and that whole thing.

Scott Rerucha:
Here’s the other amazing piece that we jumped into at that time in ’06, not only were we doing these bridge loans, but we also started doing construction loans. It was interesting because at the time we hit ’07, there was almost no lender that I knew of in the city of Seattle that could do a construction loan in 2007. Banks were-

Kevin Kim:
…were back then. I mean, most lenders wouldn’t touch any kind of bridge financing loan production financing at the time.

Scott Rerucha:
No, but construction lending was like taboo in those days. It was like, you didn’t even touch the construction… And so, here’s what happened, all of a sudden, we had money and we did have a couple of lines of credits with banks that allowed us to lend and do what we wanted to do. We opened a small construction portfolio. Well, here’s what happened, since we were the only guys in the city of Seattle lending, we had a line out the door and around the corner of people that needed construction loans that couldn’t get them. What we found was our client that was coming in to get them were well-healed bank customers that had been with banks for years that had liquidity and everything, had great credit, but the banks couldn’t lend to them. So, we had a paper borrowers coming in to pay us 10% and three points on a construction loan, and our portfolio couldn’t be any stronger than it was at that time. Of course, the banks couldn’t react to that because they were shut down by the FDC, until they figured out their own portfolio, they couldn’t do any lending.

Kevin Kim:
Yeah. I remember,

Scott Rerucha:
And so, it was a huge opportunity, huge opportunity. So, we just went gangbusters out of the chutes, and we had a lot of good loans at pretty low risk. And so, we entered into that construction piece that was very, very profitable us. And so, the last piece that we throw onto the table was rehab lending. Those are the fix and flip guys that were out finding good deals that came in, want to buy a property, put 50 grand into it, or 100 grand into it and then turn around and flip it. All those guys, because we were a mortgage lender as well, we pre-qualified all those guys so if they couldn’t get out of their flip, when they came time to flip, we would just take them out in the permanent mortgage, and they would take that as a non-owner occupant and hold long-term financing audit. So, whether they sold it or not, we would get out of these properties one way or another.

Scott Rerucha:
That comes back to we still tout our record, ’06, ’07, ’08, ’09, not one foreclosure in our entire portfolio, not one property that we take back. And nobody can say that.

Kevin Kim:
I didn’t know that. That’s amazing.

Scott Rerucha:
Yeah. A lot of people don’t believe it, but it’s true.

Kevin Kim:
Yeah. I mean, because even the biggest lenders that … I have clients that manage multi-billion dollar portfolios, have been around 20, 30 years, they shrank to a fraction of the size [crosstalk 00:12:57] recession. So you guys are thriving?

Scott Rerucha:
We’re thriving. We were totally thriving. We loved the business so much that then we went on and into like 2000 … we took this model all the way up until about 2011 or 12, and we were just growing it steadily. But remember, while we were doing that, we had grown a mortgage banking operation that I think was ranked 25th in size in the country. So, we had 25 offices and we were set up in Washington, Oregon, California, Arizona, Idaho, a lot of areas in the Northwest. And so, we were thriving, but what happened is all of a sudden, when we got into that 2011, 2012, mortgage banking started changing.

Kevin Kim:
Dodd-Frank.

Scott Rerucha:
I’m home at night, every night, thinking about business strategy, what we’re going to do, and I have these warehouse lines of credit out there that we’re closing mortgage loans on for $100 million. We have these lines, and we’re originating loans that we don’t even know if they meet the criteria that the government has set up that we have to follow, and nobody knows. It was-

Kevin Kim:
[crosstalk 00:14:11] CFPB decided to start getting rules whenever they felt like.

Scott Rerucha:
Yeah. And so the question is, wow, I got 1,000 loans to sell here, I don’t even know if I’m going to be able to sell these loans because I don’t know if we did them properly. And so, it got really scary, and so what ended up happening at that time, we were having so much fun in the private lending sector, and it was really becoming profitable and doing well, we made the decision at one point to we’re going to sell off this mortgage company and put it with one of the big guys that already has huge infrastructures in there. They have legal teams that can do compliance, where we were going to have to bring in an extra $1 million of overhead to handle compliance and change all of our systems and the whole bit, why not go with someone that already has that in place, one of the big guys?

Scott Rerucha:
And so, we ended up doing a merger with the mortgage company and sold the mortgage company off, and they wanted our private lending piece too, which was called Legacy Group Capital. But we weren’t willing to give that or sell that to them because I always thought this is the business … at the time when we sold this off, I was late 40s, and I thought, the private lending business is really a business I want to retire in, and that’s what I really love doing. You can make real business decisions, you can actually make common sense loans, you’re not regulated nearly to the extent you are conventional or under the banking type of rules and regulations. And so anyways, we sold that off in 2013, and we took the Legacy Group Capital, and we ended up starting to really grow and build that model out. We had this original fund, and what the original fund did was it was a debt fund, and all it did was it did construction loans, bridge loans, and rehab loans. Those are the loans that went in.

Scott Rerucha:
The longest loan we’d make is two years, the average loan would turn in nine months, and our average fee would be about 10% in two points. When we were doing these bridge loans, you got to understand that a lot of these bridge loans would turn in three months. I mean, they’d be in and out-

Kevin Kim:
[crosstalk 00:16:16] market then at the time. I mean, [crosstalk 00:16:17]. You’re pretty competitive, I mean, 10% back then it was [inaudible 00:16:21] in Northwest, so you’re offering pretty aggressive rates for your borrowers. That’s pretty good.

Scott Rerucha:
We were. We were. We’ve stuck pretty close to that, and we’ve gotten a little more competitive, I’d say since then. But we stuck pretty close to that model because it’s always worked well for us. But here’s the one key, and it’s back to the original point. The reason I was telling the story about all this mortgage business and banking business, during all this, one thing that we learned really well is we knew compliance and we knew consumer lending. Okay. And so, we always maintained our consumer lending license. Even when I sold the mortgage company off, the mortgage company got bought and it went under a different company’s consumer lending license, we kept the private lending company and we kept our own consumer license that Legacy had already had established. What that allowed us to do is it allows us to do owner occupied loans on private money, basically hard money loans to owner occupants, which nobody else that I know in the state of Washington does right now, except for us.

Scott Rerucha:
Why that’s so important is because even today, we go out and we do high-end bridge loans for candidates that are buying … they’re buying a house for 4 million, and they’re selling one for 3 million. They need to buy this one right now because it just came on the market, and they haven’t sold this one yet, so they need a $3 million bridge loan to bridge the gap, and we make those loans day long. Again, even today, a lot of those loans are at 8.5%, and one and a half points, and we’ll write a six month loan, and there’ll be in and out of those a lot of times in three or four months, and [crosstalk 00:18:03] the bridge. Just a regular unoccupied bridge.

Kevin Kim:
When did you start doing those?

Scott Rerucha:
We’ve been doing those for five years.

Kevin Kim:
Way ahead of the trend then.

Scott Rerucha:
Way ahead of the trend. Yeah.

Kevin Kim:
That’s interesting, because I actually wanted to hear your perspective on this because you guys are known to beat on both business and consumer, but the concentration seems to be on the bridge side, so you guys don’t dabble in the non-QM sector, or do you also do those deals?

Scott Rerucha:
We do both. We do both. But I would say that our lowest risk moment, the reason we love doing the owner occupied stuff is because it’s much lower risks.

Kevin Kim:
Short term.

Scott Rerucha:
Yeah. Short term. And somebody’s not going to default on their own home as opposed to any ind of a business transaction. Our portfolio is broken down in three sections, and these bridge, which are owner occupied and non-owner occupied. So, we also bridge a lot of builders on transactions too. They come in, and they’re buying a house, and they’re going to tear it down, and they’re going to build a development on it, so we do the acquisition on that, which is a bridge for us, and then they come in, and then they’ll take out a construction on once they get permit on those things too. That’s our construction. Again, we do rehab, we do construction, we do bridge, and that was this fund, our original fund, the Northwest fund that was … started off, and be a $20 million fund, and we filled that up pretty quick, and then maxed it out, and then about four years ago, we opened up a new fund called the Legacy Opportunity Fund.

Scott Rerucha:
That fund was very similar, we do the same three type of loan. So, it was a lending fund again, but the difference was we created two totally different funds. The first fund was purely a debt fund and we paid … it was a note. When you invested into the fund, you received a note, and that note today resides at 9%. So, if you invest in that fund, you’re getting a 9% return regardless of how the fund does. It’s a note, and it’s secured to the assets that are in that fund. Our second fund is a membership unit fund, so you’re an owner in the fund. It’s called the Legacy Opportunity Fund, and in that fund, you invest into the fund, and that one makes those same three types of loans, so very similar types of loans, but we can reserve 25% of the equity that’s raised in that fund to go out and do real estate deals. So, we can actually do a development deal, bring it into the fund, take it all the way through completion, sell it out, and we have a 70/30 split with all the profits in that fund go to the investors, 70%, 30% to Legacy.

Scott Rerucha:
And so, we had a lot of attraction to that fund where we raised about $100 million in that fund, because we’d done very well on the first fund, and it was really the idea of our investors that came to us and said, when we opened the second fund, they go, “Hey, we really like investing in your fund, but how can we even get a little more upside?” The part of the story that I haven’t told you is during all this banking and mortgage lending, and over the years with a lot of the people that work here, and Kevin, you’ve met Brent Eley, who’s our fund manager who has worked with me for 17 years. Brent and I, we used to do two things on our own; before we did hard money lending, we used to lend the guys out just ourselves privately. And then, we would also do some real estate development and acquisition deals where we would acquire some real estate and develop it for profit, and we would invite some of our builders into those deals.

Scott Rerucha:
We would have investors and we would have our builders that we work with, and we would hire the builders that we know were good to help us build these projects. And so, these projects were returning during the time, I mean, I think we went a five-year run where we were averaging 25% returns on an annualized basis on these real estate deals, so people wanted them. So, when we went to open this new fund, we had gotten to a point on these real estate deals that when we got one, we would send out to 400 investors, hey, we got this real estate deal, we’re raising $1.5 million, who wants in? And we’d get like 50 people in like 10 minutes that all wanted to come in, then people would get angry because they didn’t get invited in or they didn’t make it in. So, they came to us when we opened the new fund and said, “Why don’t you bring some of these real estate deals in the fund, so we don’t have to compete for it, but you do something?

Scott Rerucha:
And so, that was the logic behind it. So now we have this fund that you know about that, that we do 25% of the fund, we use it for real estate acquisition, the other 75% is really a lending piece, and we lend out of the fund. And again, we do the construction, the bridge and the rehab. That fund, a big portion of what we do is we lend to the small to mid-sized builders, and we lend bridge financing for them to acquire deals, and then of course we do the construction on the way out. We built that model up pretty successfully over the years again, and if you look at our portfolio today, we have no delinquent loans, zero, and we still have that record of never foreclosing on a deal since the inception of Legacy Group Capital. Now, we have worked out of a couple of deals-

Kevin Kim:
[crosstalk 00:23:09] foreclosures. Wait, hold on. You guys have been in business since 2006, you said, right?

Scott Rerucha:
Yeah.

Kevin Kim:
You went through recession, you went through when private lending was in its infancy during the first five years, from ’08 until I would say until ’13, was still very, very nascent industry.

Scott Rerucha:
That’s right.

Kevin Kim:
All kinds of cowboy action going on, on the builder’s side. I remember those builder deals that were just … not a single foreclosure?

Scott Rerucha:
Not a single foreclosure. No.

Kevin Kim:
That is something.

Scott Rerucha:
One of the benefits that we have here is because we’re smaller and more nimble, and obviously not like a bank, but when we have a deal, we track builders pretty closely. And when we have a deal that isn’t working out or we see there’s going to be a problem, we sit down with the builder and say, “Okay, how are we going to execute till the end of this thing?” Sometimes the builders don’t have the ability, or they’re underwater on three other projects that we don’t have anything to do with, and it’s going to pull them down. What we do is we go grab one of our other … we have about a stable 50 builders here that we lend to. We grab one of our other builders, we bring them in for a fee, we finish a project, we just take it over, we sell it out and we move down the road-

Kevin Kim:
Right, because you have the capability.

Scott Rerucha:
Yeah. A bank is going to sit there and have it in their portfolio for two years, board up windows, and then fire sale it at the end of the data.

Kevin Kim:
[crosstalk 00:24:36] the lenders too, a lot of them don’t have the access. They don’t have the access to stable of builders, they don’t have the experience to build, they would rather just sell for loan, or buy it back and sell it at whatever they can sell it at. That’s fantastic. You guys are working it out with the builder. One thing that I’m hearing unique to the business is that you guys are taking a much more borrower centric and what I would consider relationship centric approach to when you’re lending with your borrowers. You’re not taking an asset based approach. And that hasn’t changed?

Scott Rerucha:
That hasn’t changed. That has not changed.

Kevin Kim:
That’s interesting, because a lot of our clients, they tout the fact that they’re asset based lenders, they’re really hard money, “private money”, all tied to the asset. But I used to be a banker as well, and I always raised my question in my ears like, why don’t they? And it’s become a trend since COVID, that credit has become a much more valuable thing to look at before they didn’t run credit. Some people disagree with that [inaudible 00:25:44]. But from an underwriting standpoint, you guys have always run credit, you guys always run appraisals, is that how it always been?

Scott Rerucha:
Always been. But our biggest deal was, where we differ from people is, we wrote these down and we have a little booklet here that when we tout our platform, but it always was number one for us, was always exit strategy. So, if we didn’t have a clear exit strategy to a project or what someone’s doing, or we didn’t believe in the exit strategy, it didn’t matter how good the borrower was, it didn’t matter how good the collateral was, we wouldn’t do the deal. For instance, I’m going to take it to the far side and the other side. There’s a lot of hard money lenders out there if you have the little 80-year old lady that owns a house that’s worth a million bucks and she doesn’t know anything on it, and she needs some money to live off of, so she needs a $200,000 loan, there’s a lot of people that would make that loan to her on a million dollar piece of collateral, and they’re not going to be afraid of ever losing money.

Scott Rerucha:
That’s a loan that we won’t make because we don’t have a clear … other than her dying, I mean, there’s no clear exit strategy to that loan for us. I know we’ll get our money back, but that’s not what we’re concerned. We feel that a lot of the clients that we lend to in the borrowers that borrow from us are repeat customers, and we want to be sure that they get in and out of our loans. And so, I’m not saying we weren’t concerned about the collateral or don’t look at it closely [crosstalk 00:27:05] asset lender like anybody, but that was our difference because a lot of people, if they got the collateral, they don’t really look at anything else.

Kevin Kim:
So when you insist on it and the strategy, in a extreme scenario, are you asking for an LOI from the lender, or is it more like-

Scott Rerucha:
Could be that. I’ll give you an example. Just the other day, we had a guy locally that came in here, and he had a project that he wanted us to lend on, and he wanted us to do the acquisition. He already said he had a construction loan set up with U.S. Bank that he was going to go get his construction financing, but he needed the acquisition from us. So, he came in, we looked at the whole deal, he told us what the property was worth, we went and ran our own comps on the property. And then what we did is we turned around, and we called U.S. Bank, and we know a lot of people at U.S. Bank, so we said, “Hey, we’re looking at making a loan to this guy. We just want to know how far through the process is he, and has he been approved for this deal, because he was telling us he was approved for construction and he just had to get the acquisition.” They said, “Yeah, we’ve heard about the deal, but we don’t know anything about it. This guy’s got three other projects.”

Scott Rerucha:
We’re definitely not going to say that we would just step up and make this guy a $3 million loan on this project without him clearing off some other stuff. So right then his story, all of a sudden becomes clouded over what he was telling us. And that’s a deal, because we looked at, would we make him a construction loan? He was borderline whether we would do it or not based on what he had, and so that’s a deal we ended up not doing, because we don’t want to get stuck, it’s not going to help him or us if we get stuck in a deal. And so, we’re pretty good because you got to remember, the banking side, the mortgage side and the private, we’re experts in lending across the board. I mean, if some guy comes to me today and said, “Scott, how do I sell 500 deals on Wall Street right now in the secondary market of conforming loans”, we can tell you how to do it, or how do I get rid of a scratch and dent loan on a private lending portfolio, we can tell you how to do it.

Scott Rerucha:
What banks will do on a take-out construction loan or whatever, we know it. So, that helps us in our platform a lot. There’s one other unique part that I wanted to wrap into this business because as we were building, every year, we set goals, how are we going to grow this company, and what is synergistic? Because when you’re growing business, you’re always looking for synergistic things that fit together. And so, we brought in one of my ex-employees that worked for me. I hired this guy 18 years ago in the lending business, and he had worked for me for five years and become a top lender in the area. And then he went off on his own, and he became a real estate developer. He probably over a period of four or five years, acquired $100 million in real estate in the Seattle area, was super successful. He’s a really smart guy, he figured it all out. Anyways, we brought him and his team back into Legacy because what they were doing is they were the best in Seattle for sourcing residential dirt deals.

Scott Rerucha:
They would go out in the inner city, and they would find these deals where you could buy a house, knock it down, build three town homes on it, and maximize the density, and these guys had studied code. He had a team that he had pulled some guys off the permitting department with the city that are working for them that knew how to get permits through. And so anyways, we created this real estate acquisition team that sources deals. And so today, we source on an annual basis about 100 dirt deals that come to us, and what we do with those, we acquire the dirt, we put together a proforma, we put together a site plan, we figure out everything from the utilities to everything you have to do, how long permitting is going to take, and we create a proforma, and we sit down with the builder and we say, “Here’s the proforma on this project, here’s how this deal is going to go, here’s comps on your sell out of this deal, and we’re willing to deliver this deal to you for a fee.”

Scott Rerucha:
They pay an assignment fee, so we actually assign the real estate deal to them, then we give them an acquisition loan so that they can close on it, then we take it through permitting forums. We have a whole department here that all they do is work on permits every single day, and we have probably 60 permits going with builders right now that we track, and we communicate with the city. So, we handle all their permitting, they go out and build, and when our permit comes in, boom, we turn into a construction loan, and they turn around and start building the project out. So, we get an assignment fee, we get an acquisition loan, and we get a construction loan all at the end. The builder gets a good project that they would have never found on their own anyways, because our guys source the best deals.

Kevin Kim:
I mean, I don’t know about Washington, but here in California, permitting is the bane of any lender’s existence. You guys have got this locked down. That’s awesome. That’s where a lot of things fall apart. That’s amazing. That’s fantastic.

Scott Rerucha:
Yeah. So now imagine this, if we’re out there lending on stuff, we have builders coming in on their own and they bring projects with them, and we don’t know, is it going to be five months to permit? Is it going to be two years? I mean, you don’t know, because we haven’t studied that deal. So, a lot of these projects, we’re the ones that are starting the project, and we’re the ones carrying it through. So, it’s more on us, and we know the timeframes. And so now, it makes our lending a lot stickier and it just makes it, we’re on track with things much better. Because the biggest thing when you’re lending to builders is timeframes will kill you, if they miss timeframes. The other thing, this is the last piece of our model that really works, and this comes back to why we don’t have any foreclosures and why we track our deals. The other part that we always struggled with builders is the accounting side. They were great at building houses, they were terrible on the business side.

Scott Rerucha:
And so right now, we require, when we deliver a deal, we require that set of books to be done by our accounting department, so we run books for the builder on that project. Right now we have about 70 projects that we’re doing books on for our builders. That way, if they get over their skis, if they have cost overruns, if they’re way behind, we’re going to know it, even sometimes before them. And then we can sit down and have those tough conversations in the beginning or the middle, not always at the end when things didn’t turn out the way everybody thought. And so, we’re really controlling the transaction from start to finish now.

Kevin Kim:
Yeah. You can [crosstalk 00:33:29] control to a whole new level. You’re controlling the accounting, and that’s smart because you see a lot of builders, they get a little cute with all the …

Scott Rerucha:
I mean, Kevin, you wouldn’t believe this, when we started doing the accounting, builders come in and they just dump receipts on our desk, and they’ve never been tracking them. And so, we’re like, so for some of these guys, it’s just a godsend.

Kevin Kim:
Yeah. I mean, you’re making their jobs easier, but from a operation standpoint, from a lender, it’s a whole new approach. I’ve heard of collateral monitoring, I’ve heard it’s really intensive funds control, but doing the accounting, you’re essentially an administrator for them, and that’s what catches your interests on all the … The cost doesn’t make it-

Scott Rerucha:
They pay for the accounting, so they pay us a month.

Kevin Kim:
[crosstalk 00:34:19].

Scott Rerucha:
Yeah. At first, when we did it again, we did it just for control, and then all of a sudden, after we’re about a year into it, the first year we ended I’m like, wow, this is actually a profit center, we’re actually doing pretty well here. And then the builders, the second thing that happened is the builders come to us and said, will you just do all of our books? Will you do our actual … instead of just our project books, will you just do everything for us? And we’re like, “Well, we don’t have an accounting department, you know, staff to that level.” But because one set of books on a project is easy, once you do one, you can do a lot. I mean, they’re all the same. You just got to run the numbers the same way, and be sure. But you think about this from a … we do draws every single day here, and when you have the accounting rights, and you can track everything and it’s all in house, and then you can line it up withdraws, it makes things so much easier than if you don’t know what’s going on, on a deal.

Scott Rerucha:
Again, it’s a control piece. And so, I think that’s a big part of our success-

Kevin Kim:
A huge piece. I’ve never heard of any lender taking that level of involvement with a builder. So smart. I mean, you are removing the possibility of the overruns.

Scott Rerucha:
Exactly.

Kevin Kim:
You’re being proactive, but it’s also see [inaudible 00:35:31] straight, your borrowers had a need, and I’m guessing it all came from that. There was like, “Hey, we need help with this.”

Scott Rerucha:
It all came from that. The other part is, these guys, now our builders rely on us so heavily, because imagine this if you’re a builder, Legacy is bringing you a deal, you’re taking it through permit for you, and they’re doing your books. It’s almost like I can’t function without them. I need to-

Kevin Kim:
Create customer loyalty, stickiness. That’s what we all want in the industry.

Scott Rerucha:
And so, when they come back and say, “God, you’re charging us 10% on this deal, I heard of another lender that will do it for us for nine.” We’re like, “Okay, good luck there. Are they going to bring you the deal? Are they going to do your-

Kevin Kim:
Right. I mean, you’re serving as broker, permanent consultant, back office administrator, accountant, and lender, and funds control all in the same place. I mean, it’s unheard of. That explains so much why you’re not seeing … I would say, construction lenders, the average default rate is a little bit above the average flipper, [inaudible 00:36:37] lender, and it’s like, if you have zero, there’s your secret sauce. It’s no more than just, you saw a need from your builders, and you’ve built it, filled it. Let me ask you this though, this goes into the question I wanted to ask you, you helped with this great story, but there had to have been a ton of people helping you get there. I mean, tell me about that. You mentioned Brent earlier, great guy, smart guy, really knows what he’s doing. But I mean, you’re talking about a massive executive team around origination and permitting and accounting. I mean, tell me about that journey. I know that must have been really hard to fill those seats.

Scott Rerucha:
Yeah. Probably the big pluses that we had at Legacy, and then my first company, and we built them pretty big. At one point, we had almost 500 employees, Mike had told you 25 offices, and we have a lot of good people in the lending side. And so, we could bring some of those A-players to the table that were already vetted out. But what I learned is you also have to … I would say for me, one of the challenges was I like hiring people that I liked, and so that’s always been a big deal for me. I had a really smart guy that was a lot smarter than me once say to me, “Scott, you hire a lot of these good people, but you also are a lot of people you like, and you want to hire people that are good, not just people that you like.” Over the years, I’ve struggled with that, but you really want to hire those A-players, and you want to pay for the A players, as opposed to getting somebody for a good deal or hiring someone I like that I hope can fit into that spot.

Scott Rerucha:
No, no, no, I’m going to hire an A player, and I’m going to pay that A player, because those are the people that elevate your business. So, we brought some of those A players because we’d worked with some great people. And then, A players tend to attract other A players into the game. And so, like this real estate acquisition division that goes out and sources these deals, I mean, we have one guy here who was the top guy at the city who approved all the permits in the city of Seattle for years, he was top guy. He’s on our team now, and guess what, when we call and try to get stuff in permitting and talk to the people in permitting, this is the guy that used to all work for. And so, it’s a big deal. Now, we had to pay this guy because if there’s a tree in the middle of the property, he knows that that tree can come down or if it can be built around or whatever. I mean, these are the kinds of things that nobody knows.

Scott Rerucha:
So, our team is so good on a real estate acquisition piece, that imagine that if you’re a real estate agent and you find an off market deal that you’re going to list, and it’s a developable deal. Most of them around here know Legacy, they do, they call us and they say, “Hey, I’ve got this off market deal. I’m about to list it this weekend, but I want you guys to take a look at it because I think you can get three units on this, maybe four, I don’t know, but can your team look at it and tell us what we can do? And then, we’ll make an offer to you, we’ll give you a chance to buy it before it hits the market.” We get these every single week, we get multiple deals that we get to look at like this, and they’re all off market deals. So everyone around Seattle runs around and goes, how does Legacy get all these deals? Well, the agents, the real estate agents are using us as a information source because we’ve built this team that is so strong.

Scott Rerucha:
Having a guy that came off the permitting desk, having one of the top developers in the city of Seattle, one of my partners, Chris Gurdjian, who is a big driver behind what we do, he’s the guy that sources a lot of the deals. He’s probably got 20 of the top real estate agents that bring all their deals to him that they source, and he gets first look at all those things. And then you have a guy like Brent Eley, who I’ve worked with for 17, 18 years. Brent started off, he was a lender for me, and then he started doing a lot of construction lending, very analytical guy that understands the risk. And so then, when we opened up our private lending fund, it was a perfect opportunity for him to jump in and manage that whole division and really be the guy, the fund manager. He’s remained there ever since, and he’s got a pretty good track record. You know, behind him with that fund-

Kevin Kim:
Yeah. You never had no foreclosures in those funds. I mean, come on.

Scott Rerucha:
Exactly. It’s pretty good. But what you say is, I think also creating an entrepreneurial culture is what-

Kevin Kim:
I wanted to ask you about that. So, it’s not just about attracting A players, but also keeping A players on board. A players, a lot of people want them, and they’re out they’re attractive.

Scott Rerucha:
They’re attractive.

Kevin Kim:
So, keeping them on board is a challenge. Compensation only goes so far.

Scott Rerucha:
Compensation only goes so far. But here’s why most of them come aboard. They love our model, and they know all of them are going to learn stuff because we have stuff going on here that they be really strong in one area, but they’re going to learn other stuff that they don’t know. And then of course, we’ve created a stock option plan because we want everybody in the company to be an owner in the company. And if you have that, because any true a player out there at some time point is going to want ownership, and if they’re driving business to your bottom line, I mean, they’re going to want to be a part, and so we want to make them a part. The other thing that we do here that really gets people on trench is that we do real estate deals ourselves here still, like one-off deals, we’ll do in the company. We’ll bring a deal in, we’ll do a deal, and we’ll let the people within this company invest in those deals right alongside of us. And so they-

Kevin Kim:
[crosstalk 00:42:15] your employees as partners, you’re giving them the same opportunities you have for yourself.

Scott Rerucha:
Exactly.

Kevin Kim:
That’s huge. I mean, talk about an entrepreneurial culture, it’s amazing.

Scott Rerucha:
Yeah. So they say, where else can I go? And I can get stock options in a company that’s growing very rapidly. I mean, our stock over the past five years went 10X of where it started five years ago. So, where can I be an owner? Where can I have fun and feel like I’m in an entrepreneurial good culture, entrepreneurial attitude within there, and then at the same time, I can get involved in some of the best real estate deals in one of the greatest areas in the country, which is the greater Seattle Washington area. It has been so strong. And so, I don’t know what more you could ask for, but it’s true. You have to make the commitment to these people that you’re going to make them a part of the business, and they have to give you the commitment. They’re going to bring their A game to the table too, and they’re going to treat your business like it’s theirs. You don’t get that with all people.

Kevin Kim:
Right. Tell me a little bit about … Right now, one of the common challenges a lot of our audience members and my clients have right now is recruiting. And so, tell me about how you guys go through recruiting. What are you guys looking for in an executive? What’s your process like?

Scott Rerucha:
Yeah. I’ll tell you where it starts. This is really interesting. About a year ago, we recruited some top end people. We would usually do the original thing where you go out, you take a look at their background, you ended up having a meeting with them, they give you their whole story, and you see how it fits with yours, and then you start talking about the position that you’re looking for and all the attributes and the comp package, and everything they can get with it. That’s the normal deal. We do it totally different now. What we do is on the first interview, we bring up … We’ve already looked at their resume and whatnot, so we know that they’re a candidate, but we bring them in, we sit them down, I go up on this big board. We have a big sheet that we put up on this board, or a video that we put up that breaks down everything we do in the company to earn revenue.

Scott Rerucha:
Because as I explained you, there’s a bunch of different pieces that we have in this company that make revenue, and we show them our whole platform, and we tell them, “Here’s what each division does, and here’s how they make money.” And we walk them through it. We tell them about some of the special things that we do that nobody else does, like, we’re the only hard money lending consumer licensed company in the state of Washington. So, if you’re a mortgage guy out there and you need to send a bridge loan somewhere to get done because you don’t have that product, it’s coming to Legacy. We have 400 mortgage guys on the street in Seattle that send us bridge loans when they have them, because they don’t have a way to get them done. And so, we tell them about our model, and it gets them really excited, we talk about our track record.

Scott Rerucha:
And then usually, we spend about five minutes hearing from them about what they do. And then the second meeting is after they’re excited about what we do, they’re like, “How do I become a part of this growing company?” Okay, well, let’s now talk about what you do, give us how you think you fit into our model, and let them start selling us on themselves into our model. It’s amazing what comes out when they do that. Like, here’s where I can be of value to you, and here’s what I can do, and here’s what you explained yesterday, but I’ll bet you guys could do it better by-

Kevin Kim:
And also, you’re testing for that entrepreneurial mindset too. Do they [crosstalk 00:45:41] see the opportunities, and are they realistic of what they can do? Are they honest about what they can do? Because a lot of people are going to sell you on the way they-

Scott Rerucha:
They’re going to sell you, but you can tell they get … Some of them get passionate and fired up because they like your model, and they come back, I can help you, let me tell you where I can help you. They start talking and we listen and we like that idea, or maybe we don’t like that idea, but you can tell when they’re passionate about growing. Where somebody else might come in and they might go, yeah, I really like your model. That was cool. What would my role in there be?

Kevin Kim:
You’re looking for the former?

Scott Rerucha:
I’m looking for the former.

Kevin Kim:
[crosstalk 00:46:17] ask you this, is it passion? Is that really is it? The guy who can see the [inaudible 00:46:22] opportunities, but also is very passionate about telling you, “Hey, I think I can do this for you based on what you told me.” Is that the kind of person you want? I mean, there’s some [inaudible 00:46:35] that that may not be the right kind of fit [crosstalk 00:46:37].

Scott Rerucha:
Maybe not for every position, but you can never have enough good leadership. And people that are passionate lead, and they want to lead, and they have good ideas, and they want to tell you those good ideas. Now, you do need some workers in there, some worker bees too, there’s no doubt about that. But if we’re hiring for a funder role, somebody that’s going to come in and just be funding and sit at a desk, we might be looking a little bit different. We still go through the same process, but we don’t need them jumping out of their chair, it’s on us, how we’re going to run the business, but we want to hear from them. But I got to be honest, we have fun here, and the people thrive off each other, and they all have good ideas.

Scott Rerucha:
And so, the other thing that we do is we have a leadership team here that we bring together that’s about eight people, and it changes over time, but we have people on the leadership team, one from each department, and they’re always there. We task them with problems to solve within the company, and they go as a group, and they solve them theirselves, and they come back and tell us what the solves are. And so, my point is, if you’re recruiting people, they want to know that they’re coming into an environment, most people, they want growth. That’s what they’re looking for. They don’t want to be stagnant, they don’t want to be capped, they want growth. And so with us, you can grow as big as the company grows. I mean, who’s going to run the company in five years? I don’t know. We got a bunch of good people here, and there’s a handful that can probably do it. I don’t know who it’s going to be. We’ll see.

Scott Rerucha:
But we want people that are not just sitting down at a desk working, but thinking about this like their business, and that’s how we tout it. If you have the person that’s comfortable in that environment, they seem to really thrive, like they can’t just go work for a big bank somewhere or work for the government because it just doesn’t feel the same.

Kevin Kim:
Right. And those people thrive in our industry especially because We’ve got the entrepreneurial mindset. And when they go out and do their own thing later, I mean, that’s also part of the risk. I mean, we’re getting some like that, they may always go do something else.

Scott Rerucha:
It is. But what I think is if you build enough loyalty and you compensate them right, and they have enough upside … I would say if you’re paying them fair market value for what they’re bringing to the table, I think … because when they go on and do it themselves, they might have the mindset to do it and they might have the knowledge to do it, but I wouldn’t really want to go restart a private lending company all the way from ground zero.

Kevin Kim:
[inaudible 00:49:04] I had started my own law firm back when I was forced to during the recession. You have to, but it’s the same idea, sponsored risk versus institutional back and support, and you get the same benefits. You have ownership mentality, or there’s opportunities, get a seat at the table. Why not?

Scott Rerucha:
The other thing I always tell people too, we built a good name in this area, so when I’m looking at candidates that we really like, I tell them, “Go out on the street and just ask people about Legacy. Go in the greater Seattle area, people are going to know us if they’re in real estate banking, lending, they’re going to know us, ask them about us.” Because the one thing about us is that we do what we say we’re going to do. I mean, are you ready? I mean, not only no foreclosures, never an investor loss in 13 years, and the lowest return investors ever got from us on an annualized basis is 8%. Ever.

Kevin Kim:
Fantastic. Even during COVID?

Scott Rerucha:
Even during COVID.

Kevin Kim:
Wow. Wow. That’s amazing.

Scott Rerucha:
Yeah. It was funny. One interesting little story I can tell you is we spoke … this was a few years back now, we had an event down in Scottsdale that we were asked along with, I think, eight other fund managers to speak at this event, and they brought in 500 accredited investors. It was a swank hotel, and everyone was there and these investors wanted to pick funds that they were going to invest in, and so we were invited down there. We’re here in the Northwest and our funds are cranking out eight to 12% returns basically over the years, earlier on, it was closer probably to ’12, ’13, ’14 in some years. But anyways, we went down there, this was in, I’m going to say 2013 or ’14 somewhere in there. And so anyways, how you do it is you speak in this big deal, and it’s really swanky joint, and they got these high-end people that are flying in on jets to come and visit and everything.

Scott Rerucha:
So, how it goes, Kevin, is when you get to the event, there’s a big stage, and it’s really set up nice, and you go backstage, the event starts 8:00 in the morning, all eight investors go and they pick out of a hat, they pick just a random number, and you get one to eight, and whoever gets one goes first and you get 20 minutes, and then they go 20, 20, 20 all through the day. There’s a lunch break in the middle. Basically, these investors have to sit there for a day, and listen to everyone, and then the next day, they get a free round of golf and they get to stay in a nice hotel, all paid for. Anyways, that’s the event. I picked number eight, I was the last guy to go when I picked out of the hat. So, I had to sit there and listen to everybody the whole day, these different fund managers.

Scott Rerucha:
I’m not kidding you the first guy … ad by the way, I put together a little PowerPoint. It was probably like 15, 20 minutes long. I had my receptionist two days before, help me grab some [inaudible 00:51:57] and put it together. But it was something that just [inaudible 00:51:59] pretty basic. In my returns, our targeted returns from 10 to 12%. So, the first guy comes out, he’s some guy from New York and he’s got a big apartment fund or something. And so all of a sudden, they announced this guy, and the lights go off on the stage, and all of a sudden, bam, the lights come on and this guy comes running out in his Armani suit and his Rolex watch, and behind him as a movie screen and in the movie screen, it’s got a picture of a Learjet coming down.

Kevin Kim:
Oh, God.

Scott Rerucha:
This Learjet lands, and this guy’s out there and there’s lights going and everything, and oh, fireworks on the side, there’s fireworks going. Anyways, I’m like, what is going on? And so, the Learjet lands and the door opens up, and him and a couple associates come walking out of the Learjet. They’re showing like when they flew into town. This guy goes off, and he’s got some 17% bond that’s returning all this money on these apartment buildings in New York and yada, yada, yada. I watched this thing and I’m like, oh my God. I mean, that guy must’ve spent 40 grand putting that whole production together. I don’t even know what that costs. And so, I look over at my partner, Brent Eley, who is our fund manager, he was there with me, now I’m the guy that’s supposed to do the talk, and Brent’s down there to just listen and meet some of the investors.

Scott Rerucha:
Anyways, I look over Brent, and I’m like, “God, they can’t meet all this way, because I got my little PowerPoint and everything.” Anyways, the next guy comes out, I kid you not, this guy comes out, they announce them, he comes out riding a go-cart and he’s doing figure eights. He’s got a helmet on in the thing and I’m going, “What is going on?” This guy jumps out of his go cart, and he’s talking about lending in Kansas city, and he’s got this fund that does 21%, and it’s just this big bling show. I was like, “Oh my God-

Kevin Kim:
[crosstalk 00:53:43].

Scott Rerucha:
Yeah. And so, I’m thinking about my little PowerPoint. These all go like this, and so finally it’s me. I come up, I’m the last guy. By this time, everybody’s tired. And so, I walk up on the stage and I stand up there, and I’m looking at everybody, and I’m thinking, these guys aren’t going to really dig my PowerPoint too much, and nobody even out there has toted like a 10% return. They’re all like up in the high teens. I’m ready to go [inaudible 00:54:14]. Anyways, I look at everybody, and I look at them and I say, “I remember the day, it was in 2007 and we had just opened up this private lending fund and we’d started it, and all the banking problems were happening. I’ll never forget this day, it was pouring down rain out, and I was running this big mortgage banking operation where we were funding hundreds of millions of dollars alone, and I remember I got a call from one of our warehouse lending banks to tell us that they had liquidity problems, and we had an $80 million line that they were turning off right as we were speaking.

Scott Rerucha:
And so all of a sudden, I had two days of $70 million of loans to fund with no bank financing to fund those loans with. Right about that time, I had a builder come in that knocked on my door after I finished this conversation with this bank and he said, “Hey, I got these four homes, I’m underwater, I’m buried, you guys got to take this off my hand. I can’t finish. Somebody lays four sets of keys on my desk and walks out the door.” I remember thinking like, [inaudible 00:55:19], Henny Penny, the sky is falling. We were in 2006, 2007.” All these people in this whole place, they’re just staring at me like, what is this guy doing? Telling a story about his doom and gloom. And I said, “I sat here in this thing all day to day for like eight hours listening to all these people come up and talk about their funds, and I saw 21%, I saw 25 and I saw 19, and I saw all these numbers. But there was one number I never, ever saw ever hit that board.”

Scott Rerucha:
I said, I never saw the number of 2007 or 2008 ever hit that board. Nobody ever talked about how anybody did. I said, “All I’m here to share with you is one thing, 2007, 2008, there’s this little group in Seattle, Washington called Legacy Group Capital, in 2006, they did 12.5%, and in 2007, they did 13, in 2008, they did 12, without any losses and without foreclosing on one property. That’s my message I’m here to bring. If you’re here to invest in somebody, you don’t want to hear the upside of what could happen, you want to hear what did happen. And so, that’s part of our story and that’s what we tell, and it’s true. And when people invest with you, they want to know the track record.”

Kevin Kim:
That’s what I stress all the time. A lot of our clients do ask me like, what’s the key to raising money on? [inaudible 00:56:43], our audience are new fund managers or aspiring fund managers, and one of the common topics is strategies in raising money. And I keep telling them, more important than what are you doing from a show perspective or whatever story you have to tell about what you’re doing in the future is what you’ve done in the past, more important to them. They care about your losses, your wins, and what you’ve done about it, and how you’re taking care of your investors over the past few years.

Scott Rerucha:
Absolutely.

Kevin Kim:
And there’s not a single lender that I know that has zero foreclosures from looking at that timeframe. That’s a trophy. I mean, seriously, I see actually getting you in trouble for that.

Scott Rerucha:
We’re proud of it. One of the things, Kevin, I was going to tell you, one of our, I guess our secrets too, would be that we have a partnership here. There’s actually six owners within the company that all have different various ownership, but they’re our partner group. And you probably have a lot of clients out there that have partnerships, and one thing, partnerships can be difficult. You have different personalities, you have leaders that all have different ideas and different thoughts. And so, I’ve been through a few of those to know that most of them don’t work out that great, because you’ve got strong personalities in one room, and one of the things that we did is we went and we found a group that is really good at working with leadership and partnership groups to how groups can function better together, and if you find the right people, I will tell you, it did wonders for our partnership that we have-

Kevin Kim:
Is it like an YPO kind of thing, or is it like maths was my [inaudible 00:58:23]-

Scott Rerucha:
Kind of like that. Yeah. We have a special small group here. I mean, they’re actually not big. I mean, they were one of the original guys that helped Starbucks get launched and stuff and how they put that company together. But they are also not just about business planning, but how you interact and how you guys get on the same thought process, and that everybody’s on the same page because too many times, people are not on the same page. And so, I would recommend to anybody that’s out there, that if you’re growing a business and you have partnership where you keep knocking heads … Brent Eley and I, we’ve known each other forever and worked together forever, Brent’s a guy that’s never seen the loans he’s liked, I’m a guy that loves most of the loans I see.

Scott Rerucha:
So, we have a difference of opinion almost all the time, but how you work together, it can’t be like this, it’s got to be like this. Anyways, we really figured out how to do that well. What happens is once you’re in sync, owners are in sync, the rest of their people become in sync. That’s super important, I would say.

Kevin Kim:
That alignment does trickle down throughout the organization. It totally does. We’ve seen that struggle here at law firms, we’ve seen that [inaudible 00:59:36], and partnerships fall apart every day, and it always has to do with that. They can’t get aligned. It’s a matter of meeting in the middle, something, whatever has to happen, but a lot of the challenge I see is that agitations are online, there’s no discussion about what’s happening next. They just go do their own thing and they’re gone.

Scott Rerucha:
Exactly.

Kevin Kim:
I want to shift gears a little bit, and get your crystal ball a little bit because we’re entering into a new year, and this is a very different time now. We’ve got the pandemic still going on, we’ve got a new administration coming in, the Seattle market is getting way more residents and transplants than ever before. I know you’ve got to focus up there in the Northwest, but what does that mean for Legacy? And what do you think it means for the industry? What things should we be looking out for? What things are you guys looking out for, and what opportunities that can come in?

Scott Rerucha:
We had a comment on that. First of all, back up, COVID-19 hits a year ago in March or whatever, and I can tell you, I was one of the first ones that was hitting the panic button, because I was like, whoa, I don’t know what’s going to happen, construction deals are going to be delayed, people are going to stop buying real estate. We were already starting to pull back and collect extra loan loss reserves and things like that, because we just figured, wow, it’s not going to be good. Now, I can only speak really to the greater Seattle market Pacific Northwest up here because that’s the markets that I know really well, so I’m going to speak to that. I’m usually pretty good at predicting markets, and this one was a total miss for me because we had our biggest year last year than we’ve ever had, which was just shocking. I mean, you could have knocked me off the chair with a feather because I would have never dreamt in my wildest dreams that could have happened.

Scott Rerucha:
But our inventory right now is so low up here compared to the people entering into the market. It’s crazy. In this area right here, it’s not uncommon to see eight offers on a house right now that comes up for sale even today.

Kevin Kim:
How fast are they moving on other days? Because here in California, a couple of days-

Scott Rerucha:
Yeah. Marketing time is so low. And then obviously, the other thing that we hit in the greater Seattle area, we hit a building stand still about a year and a half ago, right before COVID because the city had changed their whole permitting software. And when they did it, it delayed … They got a new system, and it basically shut everything down for six months. And so, there was this big delay in new construction deals because nobody was getting a permit. And so, it pushed all these timelines out. So, it made inventory even less than what it should be as of today. And so, the market’s been booming, we’re optimistic, but we’re still waiting for the last shoe to fall because we’ve been in this increasing market here in the Pacific Northwest, And so at some time in point, these interest rates are going to start to rise. And when interest rates rise, then credit markets tighten, then real estate does slow down. I mean, that’s what happens.

Scott Rerucha:
Now, the nice thing for us is we’re lending on small residential deals that are typically … our construction period is normally nine months, that would be our average, so we’re in and out in nine months. So, we’re not on a long two year type of deals or things like that where you can really get hurt in the market. So again, we know that there’s stuff that if we did have a pullback in the market, we would have to work through, but it would be fairly quick and we could work through most of that and feel, I think pretty good about it. The other opportunistic piece is remember, we’re real estate acquirers here, so we acquire over $100 million of real estate every year, whether it’s to go into our fund or we deliver out to other builders and sources like that too. So, when the market starts to tighten up and credit tightens up, real estate deals get better, because right now, we’re in a sellers market.

Scott Rerucha:
So when you’re going out trying to find good deals, I mean, unless you really have a team like we have, good luck, you’re not going to find them, because it’s very tough. In those markets, we can actually find them and there’s a lot more margin in deals, so we can actually do real estate deals. And then also remember, private lending companies, hard money lending companies, they do better when credit gets tight, because there’s not as many lenders out there and your actual credit quality gets higher.

Kevin Kim:
I mean, for portfolio lenders, that’s the truth. Then for the Wall Street back guys-

Scott Rerucha:
Totally different.

Kevin Kim:
[crosstalk 01:04:21], different conversation.

Scott Rerucha:
Different conversation.

Kevin Kim:
So, for the folks up there who are dependent on Wall Street and the aggregators, [inaudible 01:04:29] correction comes, we’re going to see a consolidation or shift away, and that’s where you guys can [inaudible 01:04:35] control, grab more market share.

Scott Rerucha:
Exactly.

Kevin Kim:
That’s what I’ve been telling my clients too. You’re in the best spot to be in when that happens. Until then, they may [crosstalk 01:04:45] or volume wise.

Scott Rerucha:
Exactly. The benefit we have been in the mortgage business for so long and being such a big lender, I mean, that was a scary place to be because a mortgage company, you can actually, in one month, you could go down 50% in your overall business on a market shift.

Kevin Kim:
When COVID hits, [inaudible 01:05:10], they shrink. I mean, 75%, 80%, a lot of them just abandoned non-QM and started doing conventional-

Scott Rerucha:
Absolutely. Absolutely.

Kevin Kim:
That’s one of the interesting way to look at it. If I’m a new lender or fund manager in the space, would you say, you should always have that real estate component in your business, be ready for that if you can do it?

Scott Rerucha:
If you can do it, if you can definitely do it, it would be the way to do it, for sure.

Kevin Kim:
Having an opportunistic option when things go …

Scott Rerucha:
Yeah. Because that way you’re diversified. The other thing that’s nice about us too, is again, in a down market, we’re not just tied to even just construction lending. Like I said, we do bridge loans, short term financing, just owner occupied stuff as well. So, our portfolio isn’t just all in one bucket, which makes us a little more diverse than a lot of other guys who have-

Kevin Kim:
[crosstalk 01:06:10] basically do all food groups in the residential space.

Scott Rerucha:
Absolutely.

Kevin Kim:
Right. A lot of our audience is concentrated in construction fix and flip, that’s basically all they do.

Scott Rerucha:
Exactly. Yeah.

Kevin Kim:
So it’s a good message.

Scott Rerucha:
But we have guys up here that are either … like we have one company that’s all fix and flip. That’s all they do. They don’t do even construction, it’s fix and flip. And then we have other guys that are just construction, that’s all they do. They won’t get into fix and flip. We do it all because those markets can weave, and depending on what’s going on at the time, those markets get hit differently. And so, we don’t mind changing, pivoting if we need to in a market to take a bigger market share of one product and back off of another product, I mean, [crosstalk 01:06:55] we need to do.

Kevin Kim:
Going into 21, right?

Scott Rerucha:
Yes.

Kevin Kim:
It’s almost the end of January, this one’s been a little bit weird, I feel like, it’s been a little weird rest of the year. From your perspective, bullish, bearish, what do you think? What do you think [crosstalk 01:07:12].

Scott Rerucha:
Yeah. I’m pretty sure that this year is going to be another banner year based on what I’m seeing here, simply because, and I wish I had the graphs to show you the inventory as it relates to sales and what’s going on right now. There’s just too many people, and the demand … and people keep thinking, hey, these prices have just kept going up, but everything keeps selling. That’s the thing. And so, that’s going to be built in throughout this year. Now, where it goes out to this year, I would never predict out that far because there is going to be a drop-off, but I believe rates are going to stay down or competitive to where they are-

Kevin Kim:
[crosstalk 01:07:49] a quarter point. I don’t see the fed raising things past the quarter.

Scott Rerucha:
No. It’s not going to be big. So we’re in for a good year. We’re in for another good year. But we’re always going to underwrite, when we’re doing well like this, when we’re in good years, we underwrite conservatively, because we’re always waiting for a drop and it’s going to come. I think it’s going to be next year where we’re going to see maybe a little more of a challenge of a market.

Kevin Kim:
Yeah. I mean, fed rates probably going to happen … It’s going to have to vote sometime, and maybe even as people settle into their new geographies, I feel like you guys are going to be benefiting from the migration. I think Washington is one of the number three state or something like that people are migrating to.

Scott Rerucha:
Yeah. Number three, number one population growth, [crosstalk 01:08:36] area is number one population growth anywhere in the country. I mean, Microsoft, Google, Amazon just right there is just crazy.

Kevin Kim:
Right. Right. And if you’ve got these other markets where people are leaving, exits from California, I know a lot of my friends are leaving the Bay Area for Seattle, some of them are moving to Arizona and Las Vegas, and they’re just getting out, and that means opportunity. We’re going to struggle here in California, I think [inaudible 01:09:08] some more inventory coming up pretty soon for sale here, which is an interesting play for the developers.

Scott Rerucha:
California ends up always doing well, sooner or later though.

Kevin Kim:
It’s a tricky place to be. You know what, I want to really congratulate you on all your guys’ success until now, and I’m really excited to see what you guys are going to do this year. For us, our listeners out there, if you guys want to get involved and work with the Legacy team, they are one of the best in the industry up there in the Northwest. They dominate that space, so we’ll make sure we give out Scott’s information, and please get in touch with him. And Brent, we’ll include Brent as well. Thank you for joining us for this episode, we hope to have you on another one or on a panel at a conference or something like that, so we can have some more fun.

Scott Rerucha:
That’d be awesome, Kevin. Thank you very much. I appreciate you and your time and all you guys do for us. And again, just a great opportunity to speak to some of your folks out there.

Kevin Kim:
Thank you very much for your time today.

Scott Rerucha:
Okay. Yeah. Bye-bye.

Kevin Kim:
Take care.