Thank you to our sponsors for this episode, PCV Murcor and The Mortgage Office.
PCV Murcor
PCV Murcor has been managing appraisals and valuation since 1981. While PCV Murcor’s processes and technologies have evolved over the past 40 years their focus on excellent customer service remains the same, to develop and maintain strong engagement and collaboration with their clients. If you want to experience the best service in the appraisal management industry, PCV Murcor is the AMC to align your business and trust with. Learn more at pcvmurcor.com.
The Mortgage office
The Mortgage Office is used by the most reputable and experience private lenders across the country and abroad. It has been the industry leader in low management software for over 40 years recently they launched a fully web-based origination platform. And they’ll soon be launching a fully web-based servicing platform as well. The mortgage office is also SOC 2 compliant to make sure you and your customer’s data is safe. Recently they’ve launched the ARM module. It’s second to none. It automatically ties to indexes, support ceilings, floors, initial and periodic rate caps, carryovers and negative amortization. TMO’s, revolutionary approach to lending software changed the industry forever and they continue to be the cutting edge technology provider in their trusted development. Enhance your communication, provide transparency and automate your back office today with The Mortgage Office, the ultimate lending software.
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:
Hey everyone, Kevin Kim here. We are coming to you live from Derossi headquarters. We have a friend and colleague and client, and just overall cool guy joining us today on the show. Ray with AlphaFlow. So why don’t you give us a little introduction of who you are and then we’ll get started.
Ray Sturm:
Well, great to be here, Kevin. Thank you. I’m Ray Sturm. I’m the founder and CEO of AlphaFlow. We are a technology driven asset manager that really works between the private lending space and the capital markets connecting those two, hopefully through a platform that we want to build out and out and out and build an operating system for the entire industry.
Kevin Kim:
And give us a little more detail on the technology, ’cause I know you guys spent a lot of time on that. And I want to make sure that we highlight that because that’s a little bit of a differentiating factor for you guys.
Ray Sturm:
Yeah. I think that’s where we start, and asset manager comes after then. And I would say that’s different than most folks in the space, where they start out as an asset manager. What we saw just stepping back is just a huge industry that used 30 different tools, none of which talked to each other. A lot of them, they weren’t the best software because you just couldn’t charge on its own enough for it to build great software.
Ray Sturm:
And so what we saw is this industry that was just starting to take in tens and tens of more billions of dollars a year, and it didn’t know how to talk to Wall Street. And that’s where I started my career. That’s where I really built my career. And so the idea was if we could connect those two, that gets interesting. And so diving into that, what we started to just see is really an operating system that says the same information that the lender has, can we get that over to Wall Street in the same format that they need? And if we can do that, does that make everything easier, faster, cheaper for everybody? So far, so good.
Kevin Kim:
I actually haven’t heard that kind of part of the story. And that’s really cool to hear about. We’ll get to that in a second ’cause I want to expand on that. So I mean, very, very simple first kind of question for the show is, we like to get to know more about you as a person, as an entrepreneur, as a founder and CEO of the company.
Kevin Kim:
You know, I remember seeing you guys… I think my first exposure to you guys a couple years back at at APL, you had the booth right next to us. I was like, “Wow, these guys are coming in strong.” You had the tech platform, you had all these different reps and I was talking to your people and I was like, very impressed with what the value proposition was. And then come in a year later, you guys had just taken on VC money and you guys had new partners. A mutual friend of ours, Señor Craft in Aspen, had invested. And all these great things had happened for you guys.
Kevin Kim:
Let’s take a step back. You weren’t always in the lending game. Right?
Ray Sturm:
Absolutely not.
Kevin Kim:
And I think you’re an attorney, aren’t you?
Ray Sturm:
I went to law school a long time ago. Yeah, I did. Yeah. Started out on a very different path. Yeah. I came out in ’07 and my friends were bold and they wanted to go to something crazy in the startup world and I wanted to go to something safe. And so I went to-
Kevin Kim:
Did you go to school in the bay area too? You’re from the bay area, right?
Ray Sturm:
I grew up in LA, live in the bay area now. But I went to law and business school in Chicago.
Kevin Kim:
Oh man.
Ray Sturm:
Yeah. And so that was brutally cold, needed to get out. And I wanted to go to something safe and stable. And so I went to Bear Stearns to start my career over.
Kevin Kim:
Oh yeah. Oh yeah. Sold.
Ray Sturm:
Yeah, really. What could go wrong?
Kevin Kim:
What could go wrong?
Ray Sturm:
Yeah, exactly.
Kevin Kim:
2007. But I remember, I was in law school in 2007 and it was the same thing. We, as law students, we had no idea.
Ray Sturm:
No, yeah. There was no-
Kevin Kim:
And things seemed fine from our perspective.
Ray Sturm:
Yeah. We were part of the last class coming basically into Bear Stearns. And so summer of ’07, we started. That was-
Kevin Kim:
Were you an attorney yet?
Ray Sturm:
No, I was in an investment banker. So I went into the leveraged finance group doing LBOs, all the leverage buyouts and that’s what I was focused on. And you’re right. Everything seemed fine. But that was the summer that really the two Bear Stearns hedge funds started to blow up. And that started to ripple across Wall Street over the next six, nine months. And things got a little gnarly.
Kevin Kim:
Everything started just…
Ray Sturm:
Yeah, exactly.
Kevin Kim:
Right, right, right, right.
Ray Sturm:
Got interesting.
Kevin Kim:
So you were on the ground floor during the crisis.
Ray Sturm:
Yeah, we were right there. The first bank it happened to. Thought it was the end of the world in a lot of ways, honestly. Terrible for a lot of people that lost life savings. But as a junior person there, amazing for my career because all of a sudden from no network to all my friends went to all the other banks, you had a network. Look, you fall off your bike once and you realize it’s not the end of the world.. It makes riding a little more fun and you get more adventurous. And so there was some of that too.
Kevin Kim:
Part of that kind of, I guess, comrade in arms kind of concept
Ray Sturm:
And you realize it’s not the end of the world to get laid off. Things are okay. And I think this is one of the things that’s going to be interesting this year. There are a lot of folks in their careers that have only seen bull markets. And-
Kevin Kim:
Yeah. I mean, it’s been a 10, 12 year run.
Ray Sturm:
Which is amazing. It’s great. But a lot of folks I think are going to realize that it’s okay to start over. It’s fine.
Kevin Kim:
Right, right. I graduated law school during the recession, I had the same kind of approach. Like, let’s go super conservative. Right? And I was trying to go work for the government, that didn’t really work out. But let me ask, so just to be clear, you went straight into Wall Street. You had graduated from law school. Was it a JD/MBA?
Ray Sturm:
JD/MBA in ’07. Yeah. And decided to go to the Wall Street route instead. And yeah, I did my summers in law firms and it just wasn’t as much for me.
Kevin Kim:
Smart choice, by the way.
Ray Sturm:
Great people, Sherman and Sterling, loved them, they’re nice folks and all that. But yeah. I love the folks at Bear, honestly still to this day. I remember years ago I met Ron Suber who was running Prosper, and literally the way he introduced himself to me is he says, “Hey, former Bear guy here too.” So there’s a little bit of a comradery there still. And so great place to start. But the other nice lucky thing was before the rest of Wall Street fell apart we had a chance to go look for jobs and find something real.
Kevin Kim:
Yeah. An early chance. Yeah. Yeah. Yeah. And so after the crash, right? A lot of our clients had their start, and all our guests had their start during the crash. But I joined this firm in ’14. I was involved in banking since about ’11-ish. But this industry, we saw you guys I think at my, I think, second or third APL. So when did Alpha get started then?
Ray Sturm:
Yeah. We didn’t start AlphaFlow until 2015. I stayed on Wall Street for a few more years to… Yeah. I was in restructuring.
Kevin Kim:
So you did battle somewhere else? Or-
Ray Sturm:
Yeah, I went to Lazard, did restructuring there. The law thing honestly kicked in where, whether it was in Lev Fin or if it was going to restructuring. Debt is ultimately contract, right? And so it was just working through that. And so was really lucky to get amazing experience sort of getting my face ripped off during the downturn. All the companies were falling apart-
Kevin Kim:
Trial by fire. Best way to learn.
Ray Sturm:
Tons of experience, basically. And then came out, did a few years in private equity. Amazing job. Great place to be. But at some point, this idea of a company that already had it figured out stopped being very interesting. And my parents, all three of them with my stepdad, basically, are all entrepreneurs. And so I grew up all around that and they wanted something safer and more stable for me. I understand why. But that seemed so much more interesting. And then I went and started my first company.
Kevin Kim:
Well it’s in your DNA, man.
Ray Sturm:
It’s just there. It’s… Yeah.
Kevin Kim:
Okay. So wait, so that’s a little bit different of the story though. ‘Cause most of the folks that we’ve had on the show and who are clients who come from Wall Street have either come… They’ve been interacting either one or two degrees apart from the mortgage space to some degree. Right? Whether it be the conventional, the former subprime world or… So it doesn’t sound like you were actively involved when you were at Bear and when you were at Lazard, you weren’t dealing with a lot of the subprime mortgage stuff. The…
Ray Sturm:
No. I’m not an old mortgage pro. And I think that’s been one of the interesting things about building technology for this space is, you come in and you look at things, not the way they were, but-
Kevin Kim:
Different perspectives.
Ray Sturm:
Yeah. Just from a fresh set of eyes of, why would we ever do that? And if the idea is, we’ve only ever done that, that gets interesting. I’ve heard even listening to some of your interviews on those, people talk about that you can’t do certain things. Well we actually do a lot of those things that they said aren’t possible and it’s not because we’re smarter. We just didn’t know any better. So we asked for it.
Kevin Kim:
Right, right. I mean, I’ve been on random phone calls. I’m walking through a gate and you called me like, “Kevin, we can do this this way, right?” “Yeah you can do it this way.” It’s a, can do it this way, they’re not used to doing it that way because of their constrictions from their former lives as mortgage bankers. That’s very true. And this industry doesn’t have those strictures. You can get creative as long as your counterparties on the institutional side are comfortable with it.
Kevin Kim:
So leverage finance, private equity. Did any of that experience kind of, I guess, translate? ‘Cause you guys took a technology approach to business and you did take on… Not the average institutional investors that we’re used to seeing in the private lending space today, but you took on venture capital and also private equity investments into the company on the operating company side.
Ray Sturm:
Yeah, exactly. So my first company was a company called RealtyShares, and it was a real estate crowdfunding platform.
Kevin Kim:
Yeah. I remember RealtyShares.
Ray Sturm:
And it got to be one of the biggest ones in the country, if not the biggest at some point. And that was my introduction to the startup role, about how venture worked, about how company building works. I mean, you walk into a private equity firm, everything works and you figure out how to run payroll even on your first company. And so I caught the bug there, but at the same time to-
Kevin Kim:
So the advent of crowd funding, like FinTech crowd funding,
Ray Sturm:
Yeah. Just getting in there. And we grew like crazy. And we raised from these incredible investors. And I had an amazing co-founder where the company was his idea. So I was following his vision and it was great. And at some point about a year and a half in we had built this big company. And I just wanted to go left and they wanted to keep going right. I saw something from the inside as a finance professional earlier, that I think has hurt crowdfunding ultimately in the end. Is it’s a magnet for adverse selection. It’s the local lenders-
Kevin Kim:
That’s a good way to put it.
Ray Sturm:
Yeah. These folks that people are already going to, it’s the loans that they’re saying no to. So they’re getting online.
Kevin Kim:
Yeah. I mean, frankly I was a critic of RealtyShares to some degree, and a critic of the different FinTech and crowdfunding platforms back in ’14 and ’15 when it became a thing, because of the fact that they weren’t investing in that relational aspect. And at the time both real estate and private lending, and even commercial, was still a very much relationship driven game. You saw companies that were just so entrenched in their local communities doing-
Ray Sturm:
100%, it was a solution to something that wasn’t a problem. People liked dealing with these.
Kevin Kim:
Exactly. They thought that mortgage could serve… But then again, if you look at today’s market we see the same kind of solutions being applied at the conventional level. But they did solve for the interpersonal relationship aspect in the sense that they do have LOs and originators at the ground floor level, dealing with people.
Ray Sturm:
Yeah. Look, there’s a difference. If you and I are going to buy a house we might do that every four years these days, it was eight years beforehand. I’m okay with a one off transaction if it’s online and that type of thing.
Kevin Kim:
Yeah, yeah, yeah. But flippers.
Ray Sturm:
But if I’m… business purpose, I want to know that I can call that person. What we see it closer to is something like the insurance industry where you’ve got big money behind it, but we’ve got our guy Kevin. And I like to call Kevin, Kevin takes care of us. He delivers Anthem, but I don’t like calling Anthem. I like knowing I have Kevin.
Kevin Kim:
And did that inform you? ‘Cause at the time, with RealtyShares, at the time, right, the aggregation model didn’t really quite exist. It was starting to peak around. We started to see a few. Loan buying and table funding and that kind of solution started to become a thing. And was that the initial, I guess, mission for AlphaFlow when you started it? Or was it something else?
Ray Sturm:
No, it’s evolved. And that’s one of the things I took away. After the first company I realized the idea of moving a little bit slower, raising less but continually and experimenting all the time.
Kevin Kim:
Trying different aspects.
Ray Sturm:
Yeah. And so what we started out was as an asset manager saying, “Great, if online investing’s going to be huge we’re going to build an asset manager that basically runs portfolios from people from the best, all over the place.” And that worked great. Honestly, we had negative churn on that. The average account was two and a half X within a year. But over time we started saying no to more and more and more. And eventually we started saying no to about 95% of the loans presented to us. You can’t build a business that way. And so this was part of the challenge with crowdfunding, was if you’re relying on venture you have to grow continually.
Kevin Kim:
You need to say yes when you shouldn’t be saying yes.
Ray Sturm:
Exactly. The easiest way to grow is to move your underwriting bar down. And you’ve seen that happen again and again, and investors got wiped out. And so we shifted, and at some point, basically 2019, we shifted to a fully institutional model, stopped doing retail and changed the business. And that’s closer to where we are today.
Kevin Kim:
Oh. I mean, I knew that, but that’s a really interesting way to look at it. Because a lot of people kind of are kind of scared to experiment today because there’s like… A lot of people view that there’s a blueprint. I mean, at the time there was a little more room to do so. There was a little more runway. The industry was still not where… Compared to today, not as commoditized or standardized. I mean, staying back with the growth story of… When did, as an asset manager in doing retail… I agree with you, there’s a challenge to find good quality deals at that type of approach when… You guys, you’re based in California at the time too, right?
Ray Sturm:
Yeah.
Kevin Kim:
Yeah. I mean, at the time California was, and still is, kind of the most saturated market. But was it RealtyShares that gave you the private lending bug? ‘Cause they were kind of doing a little bit of everything.
Ray Sturm:
Yeah. I think what I learned was this enormous industry that I barely knew was out there. My dad is a hard money lender in LA but I’d never looked at the wider industry. I just knew what he went to work at. And at some point I started realizing these folks are all over the country, the best borrowers want to come to them. And what they really needed was a bank. They needed someone behind them. And there’s two ways to do that. Originally we said, “Great, we’ll be a transaction partner.” Which is us coming in, we’ll buy loans and we’ll go back and forth. And you see that in our space today. When we went institutional, one of the things we shifted towards is, and it’s sort of counterintuitive, but in wanting to deliver better for our investors we had to sort of forget about them for a minute and obsess about the lenders.
Ray Sturm:
And when you get into the lender universe you realize the best borrowers want to come to them. The best borrowers want them to solve more of their problems as they arise. “Hey, can you do this type of loan? Can you help me out with this type of thing?” And that these people really didn’t want to learn. Didn’t want to get into Wall Street. It was fuel they needed, but this wasn’t an expertise that was core to what they wanted to do. And so actually just building something in that would be… I think if you were to ask our partners today, they wouldn’t think of us as much as a counterparty, as an extension of where they go to sell their loans, not to whom they sell their loans. It’s really that. And so-
Kevin Kim:
But there’s a lot of implications in that statement nowadays. And I made this statement on different interviews and podcasts and also on panels. It’s almost as if nowadays the institutionalization of the space and commoditization of the space has created… The capital providers and the loan and the aggregators have become commoditized in their own right. And now you guys are competing for business and you guys are trying to solve more problems for your counterparties. And it’s becoming more of a transactional relationship, it feels like almost.
Kevin Kim:
Is it the future? Is it where we’re going? ‘Cause there are more aggregators popping up every day, right? And more single institution backing multiple different programs. I mean, does that take away that relational aspect of things?
Ray Sturm:
It depends if you want to be that, but I think what we’re starting to see is what a lot of people would say our competitors are today. You’re starting to see a difference. And it doesn’t mean we’re better or worse. These are really smart folks. But the idea is they want to just be a transaction partner and that’s okay. But that means they’ll come and go when the math changes. And what we’ve started to become more for these people is infrastructure in their companies.
Ray Sturm:
And I’ll give you an example. Something that we’re launching the next couple weeks, basically, that we’ve stood up already, is credit lines. And it wasn’t because it’s this enormous-
Kevin Kim:
I heard about this, yeah.
Ray Sturm:
Yeah. It’s not because it’s an enormous money maker. The idea was this industry has gotten so much bigger than it was 10 years ago. And what used to happen in this industry when rates changed like this, everyone would go out of business and they would rebuild again. They would go out of business and rebuild. Well we want to stabilize the industry. And so when you start walking into… I was at one of our lenders in Texas the other day. Amazing entrepreneurs that have built this business out at nothing. And basically at first they said, “Look, that rate felt a little high.” And then we described the reason for it and how we got that capital, because the reason the rate’s high is it’s committed for four years. They can basically stabilize for four years. That’s a different approach. Now it’s not transactional. If the only lever you have is price, you’re right.
Kevin Kim:
And that’s been a common thread on the show. We’re not relying solely on price. We’re not competing on price. And that’s what a lot of folks have been saying. But there has been that approach by some of the originators out there that kind of like, “I’m going to treat you like like a vendor.” And that’s become okay to some degree.
Ray Sturm:
I have no problem with that. What they can’t do is dance between that and, “Please save me.” That and, “Please save me.”
Kevin Kim:
Very much so. Yeah. If you’re going to treat me like a commodity then you can’t expect me to come to the rescue.
Ray Sturm:
Right, exactly. And we’ve had to step away from some lenders that want the best bit and then all of a sudden it disappears.
Kevin Kim:
But they’re investing with you and partnering with you in a true relation. So we’re maintaining that relational aspect in the sense that you’re trying to help them stabilize in the long run.
Kevin Kim:
Now I mean, I didn’t want to get to this this early, but it is a very weird time right now. Right now it’s toward the end of May, almost June, we’ve had two rate hikes? Two rate hikes, we’ve got another one coming. You’ve all suffered for it. Everyone’s been suffering for it. Volatility has become a problem and asset classes have come and gone because of it. And we’re starting to see long term ramifications with different programs. How are you guys facing that challenge and how are you guys… And talk to us about kind of what you had to overcome over the past, I guess, six months-ish now? It’s been six months of kind of chaos, right?
Ray Sturm:
Honestly, the last 60 days is when things really picked up. But we were early to that. So my partner Noah Martin is just like, capital markets, amazing savant. And he went ahead of this and he was telling people, “It’s time to move your rates up. You’re going to get stuck with loans.” And everyone thought we were crazy. And we got calls saying, “Look, I believe that you believe what you’re saying, but you’re the only one saying this.” And within 48 hours they said, “Everyone called me and said the same thing.” And so that’s when things I think really got hairy.
Kevin Kim:
I think we talked about that at APL last year. We were chatting about it and no one else was. And I remember we had to do the end of the year, next year outlook.
Ray Sturm:
And it was so hard, yeah.
Kevin Kim:
Well, everyone else in the office, all the other partners were talking about… They were trying to be positive. I was just like, “Doom.”
Ray Sturm:
No, there were too many things that were lining up for this. And so what we tried and line up with our lenders was just to be basically aligned between Wall Street, between them. And not everyone was going to get on board. We’ve had one investor out of many that pulled back and said, “I want to pause.” But most of them said, “As long as the quality is there this is actually what I like most,” because in a raising rate environment or an uncertain rate environment you want short duration. And so fix and flip is nice. It lets them get in and out, won’t-
Kevin Kim:
And they can probably predict what their cost of capital’s going to be so they can figure out, “Well, let’s figure out numbers-”
Ray Sturm:
Yeah. They can hedge against it, something like that. And they don’t need to lock up for long periods of time. And so we did that and then we’ve been going back to our lenders saying, “Okay, some things are going to be gone from the box for a while. Or they’re going to be really small.” For example, ground up construction. That one’s going to be tough to do for a while. This is where people in ’08 got burned, where they got lots that were basically half done.
Kevin Kim:
Well I’ll tell you, it’s still very active right now. And a lot of people are searching to sell it. Right? But I mean, that means you guys tightened that up pretty early then, right?
Ray Sturm:
Yeah. Really our buyers basically have come back and said, “This needs to be a smaller pool of what we buy.” And so at the end of the day that’s going to ripple down all the way. And so we’ve tried and give that guidance of saying, “You can go keep doing that, but I can’t promise you that there’s always going to be a takeout for it.”
Kevin Kim:
Right. And then talk about the, I guess, operational challenges that come with that fluctuation. ‘Cause at a C-level, executive level, this is a policy decision, right? And once the policy is set, now we have to talk about execution at the retail level, with your counterpart, now your originators. I mean, that must have been very challenging. I mean…
Ray Sturm:
Yeah. What’s hard is not just rates move. Not just boxes. But to your point, the operational side of things, when the market’s flush and it’s good and everyone’s eager, ops are easier. You’ve got scale so it’s cheaper to work with things. Things like TPR, with third party review, you let things slide that didn’t use to slide. Now everyone goes back to the contract and says, “We’re going to make sure everything’s there to the letter,” and it slows things down. And that causes some stress in the system if lenders-
Kevin Kim:
Everyone’s spoiled, kind of.
Ray Sturm:
Right. Exactly. So we’ve got to work-
Kevin Kim:
[inaudible 00:21:58] just being spoiled. Yeah.
Ray Sturm:
And so what we’re trying to really convey to people is that this isn’t about adjusting to this new environment. It’s adjusting to adjusting constantly. This is going to be something that changes consistently over time. And we only saw rates go one way for years and years and years. We’re going to go up and down. We’re going to have new products. We’re going to be at back out I think within a few weeks with rate locks, with rental loans for example. So you can do it, but it’s got a rate lock and it’s got timing and it costs something-
Kevin Kim:
But it takes time for you to figure that out because it’s moving targets.
Ray Sturm:
Yeah, exactly.
Kevin Kim:
Well I mean, that’s better than what we faced during COVID, so it’s, you know…
Ray Sturm:
Exactly.
Kevin Kim:
Yeah. And I think a lot of folks are still not so upset about it because of the drama that happened during COVID. And so at least that’s not what’s happening to them. But I have had a lot of originators kind of stress out about it, and I’ve told them, “Well, that’s probably why you may want to have something on your balance sheet with a credit line. And so that way you can kind of work with these folks on a full basis, but you’re not 100% reliable on them.”
Ray Sturm:
Yeah. If you’ve got something that you can’t build your business on, you’ve got to move slower. And so we’re-
Kevin Kim:
[inaudible 00:23:04] just slow down.
Ray Sturm:
Yeah. What we’ve told everybody is, “You’re fine with quality.” We gave them some specific boxes of, “If you do this you can do this all day long without looking. You want to do ground up? I need to review it specifically before.” Things like that.
Ray Sturm:
And you’re just trying to basically look at the best lenders who weren’t just taking advantage of a sales cycle, and just doing that. But people that built enduring businesses, and making sure that those things have stability to get through this cycle. They might make less money. But one of the things they can focus on, the CRO of one of our lenders was saying this, he said, “This is a perfect time to focus on the little things. This is when those things matter.”
Kevin Kim:
I like that. Execution.
Ray Sturm:
Yeah. You can clean up things like draws and making sure everything is really tight so that when things pick back up you’ve taken advantage of the top of the funnel getting a little bit slower.
Kevin Kim:
Right, right. And that allows you to move fast once things get kind of more…
Ray Sturm:
And keep the borrowers that matter, not the tourists that were in and out when this seemed like easy money. But the ones that this is what they do for a living, you make them even happier. You go, “Okay, look, things are a little slower, more expensive. But wow, things are tighter now. This works better.”
Kevin Kim:
Right. Right, right, right. And they’ll appreciate the discipline for that. It’s just a tricky thing. It’s a kind of feeling of uncertainty in the sense that there seems to be a little bit of a curtain behind the scenes. And I appreciate you kind of telling us about what you’re hearing from your buyers. Right? Your investors are telling you… That’s not always the case. Right? And so it’s a little bit of a black box to our listeners, a lot of them who are originators and selling loans who are like, “Well I don’t know what to predict next.” It’s one surprise after another is how they feel, you know? So…
Ray Sturm:
It’s one of the things that helps, honestly, of not being the asset manager. Is that if you are someone that just puts out bonds you’ve got to talk your book. If you’re a rational person, and you and I, we believe in incentives. If their incentive is to fill that bond up they’re going to tell you to keep doing loans until it’s not in their interest anymore. And that’s not always the best thing for the lender. You know?
Kevin Kim:
No. Yeah. Oh man. That’s a really good way to [inaudible 00:25:03] That’s a really good way to look at it too, ’cause it’s just one of those… We’ve always talked about that, securitization is kind of one of the… It’s one of the double-edged swords. Kind of like the same concept, what you mentioned earlier, the FinTech thing, the crowdfunding thing. It’s like, you’re kind of forced to say yes to [inaudible 00:25:17] that you really shouldn’t be.
Ray Sturm:
You really shouldn’t be. Yeah. And so people, they’ve got to keep bonds full. They’ve got to fill something up. They’ve got to clear balance sheet. And for us, what we’ve been fortunate with is we have plenty of clients we sell to who securitize, but there are others that sit on it. You’ve got insurance money that just needs to clip the coupon. And they’re okay. It’s not even levered. If you have a variety of those, the price should go up and down for our lenders, but it stays flowing at least. It stays liquid.
Kevin Kim:
So from a historical standpoint, you guys also did your own securitization, didn’t you?
Ray Sturm:
We did.
Kevin Kim:
Four years ago?
Ray Sturm:
So Saluda Grade did one.
Kevin Kim:
Right. Señor Craft.
Ray Sturm:
Yeah. Ryan Craft is an incredible person. He’s built an amazing business at Saluda Grade there. So they invested in the company and they did a securitization that we basically work with them on and we use as a warehouse line, effectively.
Kevin Kim:
Right. We interviewed him a little bit before. And he was telling us about his strategy about that. And it was so much different. So it acts basically as like a warehouse line for you guys.
Ray Sturm:
Exactly.
Kevin Kim:
And it’s a revolver, so…
Ray Sturm:
He’s brilliant with the things you can do, the levers you can pull there. What we needed to do coming back in 2021 is let lenders know, not only trust me, but there are structural reasons why our money won’t disappear overnight. And so that partnership with Saluda Grade was incredible for us to get things going.
Kevin Kim:
You think that was one of the big… ‘Cause you guys really took off after COVID. It was really great to see you guys grow. It was really fast. It was really painful to see everyone struggled during COVID, but once COVID kind of was over you guys just went… Right? It was great for you guys.
Ray Sturm:
Yeah. Part of it was that. And part of it was, I can’t tell you how lucky I feel to work with the executive team we have today. Just amazing leadership. When you have that level of experience, similar to the lenders, each of us wants to be able to run full speed. Not worried that finance is falling apart or servicing’s falling apart. And the people we have now have just let us grow, grow, grow really quickly. And so hopefully through the same cycle, a lot of folks have been down, we’re actually up. And so yeah, it’s just continuing to move up.
Ray Sturm:
And I think things like credit lines are just saying, “Let’s take advantage of the trust we’ve built with our investors that we’re not going to bring them garbage.” Because even though we’re not the asset manager, if you show them bad things and say, “You should keep doing 90% LTC ground up construction with no experience,” they’re going to look at you funny. But you do that, and the lender basis I think figured out that, “Okay. Even if they agree with us or not this isn’t something for our bond to try and just keep it full. This is something different.” And so if we can put more infrastructure in and take advantage of this time and that trust we built? Great.
Kevin Kim:
I like that. I mean, it’s been challenging for folks, I notice. It’s a matter of kind of reacting, almost. Everyone seems to be reacting and reactive, but I’m hearing a common thread of kind of getting ahead of things and trying to be proactive on your end as much as possible by becoming more disciplined, right?
Ray Sturm:
Yeah. And trying to really guide both partners on both sides towards that. For example, if institutions come in and they just draw a line and they say, “No more loans like this,” and the pipeline is just left there, that will kill off a huge part of the industry. And that’s a lot of what happened in 2020, with people just getting hurt there. And so being able to talk to them and say, “Great, we’re going to draw a line, but let’s draw that three weeks out from now.” Clear the pipeline. And if you do that they’re not being benevolent. This is a capitalist idea. But the idea being you’re going to continue to get great flow and we can move the box to exactly what you want, which is more experience, less cash out ReFis, simpler projects, that type of thing.
Kevin Kim:
Well then here comes the challenge, right? How does capital markets at AlphaFlow now convey that message to sales, right? Convey that to your originators. That’s the ultimate challenge because there’s a lot of risk of reputational damage there, right? And if you deploy it the wrong way…
Ray Sturm:
If we clear the pipeline we’re okay. If we don’t clear the pipeline, that’s a problem. At that point they say, “We’ve got something in our system that we didn’t intend to be this special, but it turns out our lenders tell us this is what matters most.” Soft approval confirm, basically saying once we get there, they know that as long as all the paperwork shows what they gave us, it’s a buy. They rely on that. They said it’s transformed their businesses because now we can actually wait-
Kevin Kim:
Yeah. That’s fantastic. Because otherwise they’re just kind of sitting and waiting. They submit a tape, like literally waiting for an email.
Ray Sturm:
Right. Exactly. And that’s how it works with others. And so now what we’ve gone to our buyers basically and said is we can’t hurt that soft approval confirm. That is reputation that took years to build up. And now that we have that… So as long as we’ve basically gone to people and said, “Great, anything in there.” And then we put a timeline on that. We said, “Great. That thing can’t last more than two weeks though. If the loan drags we’ve got to re-review because the market’s moving.”
Ray Sturm:
And so far this is where it’s amazing to have Dana Georgiou as a partner. She’s gone out to our lenders. She’s someone that comes very earnestly caring about them and their businesses. And they understand that. Sometimes it’s not the best news, but that also helps to build trust that she doesn’t just come with a sugar high. She tells them what’s really going on and where she can deliver for them. And we’ve said, “We’ll clear the pipeline. We’ll let you know what the new box is. And every time it changes, we’ll have a little bit of look back on-”
Kevin Kim:
So you’re still making sure you have that human trust building aspect through people like Dana and your sales team.
Ray Sturm:
Has to be. Yeah. If we had just purely transactional people I don’t think they’d be very happy at AlphaFlow.
Kevin Kim:
Right. Right, right, right, right.
Kevin Kim:
Well, let’s talk about the tech real quick. I mean, I wanted to bring up earlier when you were explaining the tech is like, I guess the word is modality. I guess the key feature that I heard was you kind of took the idea of what FinTech did for the crowd, if you will.. But you said, “No, no, no, no. We don’t care about the crowd. We care about the institutions. And we want to make it easier to communicate and transact with the data that the institutions want to see.” And that is novel from my perspective, because it basically took the FinTech idea and made it scalable. Because the issue with FinTech is you have a lot of scale in the sense of operational capital. You got a lot of capital on the books. But you may not have that much deal flow ’cause they’re not thinking institutional flow and all that other stuff. And there’s a lot of operational challenges there. Was that intentional at the forefront of this? You guys decided the institutions have a demand of data, was that what it was? Or…
Ray Sturm:
It was a requirement. So it was really thinking about what the need was in the whole ecosystem. And really the need was with the lenders, that what wasn’t broken was customers wanting to go to them, borrowers coming to the lender. That part didn’t need to be innovated on. And if it was going to be innovated, the lender was going to innovate. not some crowdfunding platform right there. What they needed behind them was reliable capital. If you talk to these people, Alex Morris, one of the owners of HouseMax for example, he said if you give him his priorities, it’s reliability, it’s speed. Then it’s price. They care about price. And I still think speed is really just a proxy for reliability of, are you going to perform or not? And so we realized they need reliable capital, that they can move their pricing around because borrowers aren’t going to go somewhere else.
Ray Sturm:
You walk in a Home Depot and you don’t like the price of the two by four. You’re not walking out. You’re going to grumble a little bit, but you just take it, basically. And so they’ve got a resilient business, but they need reliable capital behind them. And so really when you talk about the institutions it’s saying, “Great, what are the ways that I can create reliable capital?” You can do the crowd, and some companies have done that. But it’s less reliable, it’s finicky and it’s really expensive to grow that capital. Or if you show up with what we had, which was a great track record, our first deal as a six person company was a $500 million deal with Jefferies. We were a six person company at the time but we knew how to invest in this asset class.
Ray Sturm:
And then you talk to them and their love language is clean accounting. And they need precision. And to your point about FinTech, where Fintech’s sort of fallen on its face is sometimes it’s too tech, which is you get people that don’t know anything about finance. They build beautiful UIs that no one ever wants to use because it’s not a problem. And they-
Kevin Kim:
It’s not a problem. And the language that they’re using is not financial language.
Ray Sturm:
Yeah. They’ve done their way of doing numbers, but sorry, there’s something called gap accounting and that matters. And then you go the other side, which is Fin and it’s all Fin and great. I added a website to a finance company and I want a tech multiple. That was a lot of crowdfunding too.
Kevin Kim:
That was almost all of crowdfunding. Yeah.
Ray Sturm:
It’s a finance company, an army of people in there. And so one of the measures we have that Noah and I constantly talk about is monthly UPB over headcount. And just saying how can we basically get that number as optimized as possible? Because if we’re building more tech, that’s a great way to measure that it actually matters if we’re not hiring more and more people for it.
Kevin Kim:
So effectively you translated the important KPIs and accounting, and not just accounting features, but the KPIs that matter to the institutions. And translated that in a system that was basically tech based.
Ray Sturm:
Yeah. And if you can make that easy, what you do is you go back to the lender and say, “Look, I know you used to do it this way. You don’t have a lot of religion about it. So if you do it this way, I can bring you endless capital. As long as you match these types of things.” And it’s worked great for both sides.
Kevin Kim:
Well, that’s actually kind of… It takes me back because there’s a lot of folks that had trouble kind of adjusting to this new market back in ’17. And then by 1920 it had become kind of widely adopted. Then COVID happened. And then ’21, everyone tried to make it kind of… There was a new model. And I mean, talk about that real quick. How much did you guys change your asks of your counterparties on the origination side?
Ray Sturm:
So one of the things we did early on, we got asked by all of our institutions, “How do you know that they’re underwriting well?” And we said, “You don’t, we check everything right again.” And so one of the things that changed between ’17 or ’15 and now is a lot of these shops went from underwriting to qualifying. And that’s okay, that’s the incentive we gave them. We said, “Hey, if you do this, I will buy it.” So they’re really qualifying for the box, even if they don’t like it or… Their idea is it’s not going to be on my books, if this group with this bond has figured out ways to hedge, I’m not their risk manager. Good enough.
Ray Sturm:
And so we were doing that early on. And by last year I think a couple things happened. People got too loose with that because the idea was just, “Let me just qualify and push anything through,” terrible things. We were never the most aggressive on that side of things. Because again, if you’re infrastructure and you light everyone’s money on fire, no one uses that pipe and rail, you know? So we needed to be a little more conservative on that. And the other part was we had gotten pretty good early on at standardizing and just… People go through TPR half the time after these things are bought, and it’s kicked back to lenders and it screws up their credit lines. Well, with our with our tech we’re basically underwriting these files in a couple of hours. And some people come in and say it takes them a week and they’re fast. That’s crazy. Our people are going nuts after a few days. That’s great.
Ray Sturm:
And so if you can do that really quickly, you now give them no uncertainty. We have a few TPR kickbacks every month, but for the most part we’ve already done that work. And so the lender can, again, run without worrying that, “Okay, half my credit line’s going to get eaten up when the bond buyer kicks back these loans. And I got to figure out how to put them somewhere else.” Yeah.
Kevin Kim:
So I kind of want to kind of switch gears a little bit and talk to you about kind of where we are as an industry, because I’ve participated and seen you on many panels, and I still laugh at the baseball analogies [inaudible 00:37:08]
Ray Sturm:
Nema. Nema and his innings. No more innings, Nema.
Kevin Kim:
I want to ask you about it because I think we’re going to air this a little bit later in the year, by that time things will probably be worse, but it’s just going to continue to get more challenging I feel like. We talked about rates earlier, but one of the things that I’ve noticed is that there is a desperate attempt by conventional, and we call owner occupied, your average QM and non QM owner occupied lenders, right? They are now scrambling to jump into the space. And they have similar and different types of capital sources, and some of them are retail. some of them are institutional.
Kevin Kim:
And I fear, and we were always worried about this, does that have negative effects on the space in the whole sense of that qualifying concept, right? If anything they’re worse, right? On their side of the world. And their originators are really [inaudible 00:38:10] qualifying. So it frightens me to some degree because this industry’s always been very entrepreneurial and also been very commercially oriented. We have a commercial real estate mindset in everything we do. Does it change the industry even further toward a blueprint that looks [inaudible 00:38:31] similar to the conventional world? ‘Cause I made a comment a couple years ago. I thought this industry started looking more and more like the conventional markets. And does it just exacerbate that? Or do you think we kind of stay true? What do you think.
Ray Sturm:
Yeah. I think those firms coming in are going to struggle a little bit because I think going to consumers and going business to business, effectively what a lot of hard money is, it’s a different mindset. It’s a different group of people that you’re speaking to, that you’re hiring, that you’re training a culture around. One’s a repeat person you’re going to see again and again. It’s a different type of marketing, get in now, that type of thing. And if you’re dealing with repeat customers they demand more of you, and they demand more operational items. Whereas a lot of these conventional shops are… It’s paperwork and get it out.
Kevin Kim:
One time. Done.
Ray Sturm:
Yeah. Get it out, qualify it, get it pushed. Well, we’ve got an average of I think three plus draws, 3.2 draws basically per loan right now.
Kevin Kim:
Well that’s what’s driving them to the space, right? Because they’re done. ReFi boom’s over.
Ray Sturm:
ReFi’s gone. Yeah.
Kevin Kim:
Right. And they see that. And we’ve seen it already. There’s a good amount of shops that have a massive conventional arm to their business.
Ray Sturm:
And look, so we work with a couple of shops that have… Or we’ve worked actually in the past, but not as much anymore, that do both. Their quality was always worse. It was just continuous. Even if they were really successful on the conventional side of things, it’s a different beast. And so it might happen. It’s more money coming into the space possibly. But what I’ve seen actually instead is more money coming in through some of the same channels, but they’re earlier money than normally would’ve come to us. We’ve got teacher’s pension funds talking to us now. That didn’t happen remotely near what we’re doing two, three years ago.
Kevin Kim:
And it probably is because to them, it’s the same credit and this helps translate it. It’s [inaudible 00:40:19] credit
Ray Sturm:
Now there’s a track record. They can stand behind it. And they’re saying, “Why am I paying an extra 200 basis points to some intermediary asset manager? That’s-”
Kevin Kim:
I’ll go direct to you.
Ray Sturm:
“Great brand name.” Yeah. And now you start to build enough of that saying, “Great. Can we get in there as well?”
Kevin Kim:
Yeah. I mean, I’ve definitely seen a lot of that. Life, pension, foundations are really starting to jump head first. I mean, they always follow the asset managers. And the asset managers did it very early on to get a captive pipeline. But I guess the concern has always been like, with ReFi being completely dead and there’s no volume for them… We always mentioned this, is it a matter of time before Rocket jumps into this space? Right? And that’s kind of scary with the scale that they have and the technology that they have, that kind of stuff, right?
Ray Sturm:
It could be. I mean, look, we saw with Kiavi, LendingHome. They started around the same time we started RealtyShares. And we’re close with that group. One of their founders is on our cap table. So we like them a whole lot. It turned out there was a ceiling to what you could build. Now is it going to be a nice big company? Absolutely. But the original thesis, which was totally fair to go test, again, it’s VC, it’s about testing at some hypothesis, was saying if we bring cheap capital, and they were before everyone else with the cheap capital, could we basically take out all these local folks? Turned out not, you know?
Kevin Kim:
I like that. As a person that works a lot with local originators, and my book of business is primarily local originators, that’s really… Warms my heart.
Ray Sturm:
Yeah. I don’t think you’ll find many better technologists than Matt Humphrey in Silicon Valley. And you’ve got James Herbert, who’s brilliant on the finance side, was at Colony. It was the perfect team to test out that hypothesis. And by the way, in no way am I saying that’s a failure, it’s an absolutely astoundingly successful company.
Kevin Kim:
Yeah, it is. Yeah, yeah, they’ve scaled significantly.
Ray Sturm:
Yeah. It just didn’t kill the rest of the industry.
Kevin Kim:
Right. If you’re trying to kill… You mentioned it earlier, right? So that’s a problem we shouldn’t be trying to solve. It’s not a problem.
Ray Sturm:
Yeah. It’s not broken. And so-
Kevin Kim:
It works wonderfully. I mean, if we analogize, my neighbor works for UWM. UWM is this massive conventional shop. They have all these local guys on the sales side, on the origination side. They need that. You need that because you still need the human touch. So…
Ray Sturm:
What we’ve seen as the problem is… One of it’s redundancy of work. And so the borrower gets together a file, the lender looks at it. We look at it. TPR is looking at it. The buyer’s looking at it. It’s ridiculous that same work is done so many times. And so this is part of where we look at our thesis and say, “If we can build the workflow software, this operating system for the industry, it actually benefits everybody. And I honestly think a lot of people that we talk about as competitors today, they’re going to be clients tomorrow because they’re-
Kevin Kim:
Well I was going to ask you about that. So is this operating system going to be… You haven’t taken that out as a product, like-
Ray Sturm:
No, today it’s something that’s basically free for people that we buy loans from.
Kevin Kim:
Okay. So they have to work with you on the business side. You guys aren’t going out there as a SAS… This operating system’s not becoming a SAS product that AlphaFlow is going to be offering.
Ray Sturm:
I don’t think so anytime soon. If it is, it’ll be some somehow in conjunction with everything else. But the idea is saying there should be pipes and rails for local lenders to log into to really… Today it’s, can I sell this? It should originally be, can I manufacture this? And just starting out and going all the way through. This has been done in conventional, we don’t need to reinvent this. The pain point in this industry is, why are there seven different pipes from any one of these really high quality lenders to Wall Street? It should be one. It should be one simple pipe where if our friends in New Jersey are really good at issuing bonds, that’s what they’re good at. Not building operations around the country. So they should just be buying loans off of their… And issuing their bonds. That’s more efficient for the whole market. And again, if you were to step back, not know anything about the industry, veil of ignorance and say, how should this exist? You wouldn’t see that everyone should have three different power companies to this building we’re in here.
Kevin Kim:
Yeah. But I think that’s a virtue of the entrepreneurial spirit in the space that you just don’t see in other mortgage related industries. Kind of see it in the small balance commercial world because it’s so fragmented. And I like that because it allows for creativity, right? It allows companies like AlphaFlow a test and create a thesis and push the boundaries of what it can do. But it also allows for local originators to try out new ventures and try out new strategies. And maybe I’m going to experiment with Alpha on this move and I’m going to experiment with someone else on this move, right? And figure it out for myself. So I like that aspect of things too.
Kevin Kim:
All right. So one of the things that we’d like to talk about kind of just general market conditions, is kind of just feel for where we’re headed as an industry. ‘Cause it’s hard to put our crystal balls out right now and it’s really hard to figure that out. But I want to get your thoughts on kind of where we’re headed. ‘Cause you guys have a very good line of sight into capital markets. You’ve been through the shit storm. That was ’07, right? You were on the floor at Wall Street. So I kind of want to get your thoughts on things right now, where we’re headed.
Ray Sturm:
I’m already scared of when this is going to go live and how wrong I’ll be at that point. But you know, we’ll see.
Kevin Kim:
Well maybe, you may be wonderfully right, too, you never know.
Ray Sturm:
Yeah, we’ll see.
Ray Sturm:
I think something that we started to see kick off, that I probably heard in a lot of conversations but haven’t been said out loud, is a flight to quality. And so I think a lot of things don’t get priced worse. Don’t get more expensive. They just go off the menu altogether. So zero experience new construction, if you want to do that you got to do old school hard money where someone keeps it on their internal fund that they’ve set up with you and-
Kevin Kim:
Yeah. And they’re managing the construction. Like-
Ray Sturm:
Yeah, someone that’s okay with saying, “Great.” And that might be actually a good path for some of these lenders to take. If they really believe in their local community right there, not the national footprint, and saying, “Great, I can go take that project over.” And you can probably charge a high amount for that. But-
Kevin Kim:
And I just got back from an Arizona, private lender’s association trade meeting. And they’re very much into that kind of stuff. And that’s fine. And that’s perfect for them. ‘Cause they can go to the property, they can manage the borrower in a much closer way
Ray Sturm:
Yeah. And figure that part out. So I think those things are going to move out of these pipes right here and you’re going to get something that’s a lot narrower, probably smaller. And I think what you’re going to see is the lenders that don’t want to accept that new reality are driving themselves right off a cliff. And we’ve had a few come to us already that 60 days ago we warned about rates. They didn’t adjust because they wanted to win business. And now they’re stuck with full credit lines that are so far below that you can’t even sell them at par at this point.
Kevin Kim:
Right. Just ignoring, hopefully they’re not in the long run, [inaudible 00:46:55] errors, but it’s happened so many times. Happened around COVID, happened in ’08. It happened in that weird blip we had in ’13. So it’s such a common thread, and with all the different line products out there, there are a lot of these short term line products out there now. So it gets kind of scary. Yeah, you’re right. Yeah.
Ray Sturm:
It’s just what the incentive is, and what’s hard is if you’re a lender today you get paid in one way. It’s origination. And so if you’re one of the owners you can pull back, but your LOs are going to rage for a while because they don’t have equity in the entire org. And so they get paid one way, as their commissions. Some of them are going to figure out how to make money. And we’ve heard some lenders say that, “I’m going to try and pull the best LO’s that aren’t getting paid elsewhere and just sort of pull out of my pocket to build a bigger footprint.” That might be a path. But I do think there’s a lot that we still continue to see that are fighting us on things that are so far off of reality that we’re saying that, “Okay, if they’re doing that with us what else are they actually getting through? Piling onto their balance sheet?” That’s going to be bad for the space.
Kevin Kim:
So discipline is going to be the incentive to follow then, it sounds like. And we talk about this on the show all the time, saying no, being disciplined, getting ahead of things. It’s always wishful thinking to do that for a lot of our people. ‘Cause they’re running a business. But you know, the nice part of this space is that they can make adjustments if they wanted to, relatively quickly. If they just talk to their bankers and their credit line providers and their buyers and their investors, they could easily do it. It’s just a willingness to kind of have a little bit of pain.
Ray Sturm:
Yeah. And accept what’s actually there. It’s not a choice they get to make, this is gravity they’re dealing with.
Kevin Kim:
Well it makes me wonder though, is like how much those reality checks are being given, right? I know you guys have, ’cause I’ve been on the other side of it with clients of mine that are selling to you guys. And you’ve had those honest phone calls with them, and giving them the reality check. I’ve seen it happen firsthand. But with other folks, I’m hoping by the time this episode airs we’re not getting as many phone calls of people being surprised.
Ray Sturm:
I think there are a couple of groups out there that have bonds out that have room. And so they’re not lying. They’re telling people, “I can keep buying at this rate.” But once that’s full there is no money beyond that. There’s no ReFi-ing out of that. And so we’re trying to explain that of saying, “Great, if you have that bid, hit that. But just understand when that’s going to stop, because it’s not forever. There isn’t-
Kevin Kim:
And it’s not in their incentive to go out and telegraph when that runway ends. Yeah. Yeah.
Ray Sturm:
Right. So yeah, these are groups trying to buy market share and that’s okay. It’s just the lenders need to not go out of business as a result.
Kevin Kim:
Right, right. And actually begs the question is, how much are you guys collaborating, you and your colleagues and competitors? How much are you guys kind of communicating and collaborating? Talking? I mean, with lenders it happens all the time, right? That’s what trade shows are all about. We’re talking to each other, figuring out what they’re doing, how can we collaborate? How are you suffering? How am I suffering? How are you winning? How am I winning? I hear that sometimes in New York, a few of them do, but I don’t know how national… You’re on the west coast so it’s also… You’re one of like a couple, three or four shops out here, west coast. But like, I mean, how does that happen?
Ray Sturm:
Yeah, all the time. And it’s funny, lenders will mention, they’ll say, “Hopefully you’re not offended I was talking to them.” I say, “No, I had lunch with them yesterday.” It’s, we’re all friends, type of a thing.
Kevin Kim:
That’s good to hear. That’s good to hear.
Ray Sturm:
Yeah. We’re pretty close as a group because we’re trading notes on what’s going on different parts of the market.
Kevin Kim:
That’s good to hear. Yeah. Are you guys giving each other feedback? ‘Cause a lot of times what’ll happen is you’ll have a high volume, high quality originator that’s selling to all three of you guys at once.
Ray Sturm:
Sure. Yeah. We try and stay away from specifics for the most part-
Kevin Kim:
Oh yeah. Confidentiality for sure, right? But like the idea of sharing notes along the…
Ray Sturm:
We’re competitive with each other still. We’re friends but we want to win. You know?
Kevin Kim:
That’s true. That’s true.
Ray Sturm:
So there’s some of that. But getting together and just talking about what we see is happening in the market-
Kevin Kim:
That’s good to hear.
Ray Sturm:
How we think about different products. Who’s going out with what bond and if they’re having challenges or not. Things like that. That’s absolutely common, weekly chatter that we’re having.
Kevin Kim:
I guess it boils down to those types of meetings, but then getting it back to the execution, right? Getting it to the operations and sales and executing on that is going to be one of the key things.
Ray Sturm:
Yeah. And it’s about figuring out where you want to get better and where you want to innovate. I mean, one of the things you talked about earlier was the idea that for some lenders, they want to have a few different pipes to test different things out. I’m actually not against that concept. I guess what we’re saying is whoever’s on the end of the pipe, they should be innovating and that should be cycling, but you just don’t need more than one pipe. And one day it might be Morgan Stanley doing this, another day it might be this hedge fund doing that. And if they can keep innovating because that’s what they want to do all day? Great. And if the borrowers want to work with the lenders and innovate all day on what they should be doing together? Great. It’s if you try and do multiple of those things you run into basically mediocrity, because you’re against someone that does something all day long. Doesn’t mean they have to be smarter. It just means this is all they’re focused on and focus matters.
Kevin Kim:
Back to discipline. Yeah. It’s a common thread on the show is being able to be disciplined and challenging yourself to do it. Yeah. Yeah.
Kevin Kim:
All right. So I think we have to now start on our lightning round, a new segment of the show. We have a few rapid fire questions that we want to ask, and it’s get to know you as a person a little bit better. So first things first, what was your very first job?
Ray Sturm:
I was a Papa John’s deliveryman.
Kevin Kim:
Whoa. ‘Cause you grew up in LA, right?
Ray Sturm:
I grew up in LA. So-
Kevin Kim:
Where in LA did you grow up?
Ray Sturm:
I grew up in Woodland Hills and I was doing this-
Kevin Kim:
Oh, okay.
Ray Sturm:
Yeah. I was doing this in Canoga Park and Woodland Hills out in Calabasas. I was a Papa John’s driver. And it was the best driver in my stick shift Ford Ranger [inaudible 00:52:23] running around with that magnet on top of the car.
Kevin Kim:
Right, right, right, right, right.
Ray Sturm:
Most of the night you’re running around listening to music, so it wasn’t bad.
Kevin Kim:
Right, right, right, right. Delivering pizza to potheads. Stoners. Yeah, yeah, yeah.
Ray Sturm:
A lot of fun people. A lot of interesting stories out of there, but it was a fun first job. Yeah.
Kevin Kim:
That’s cool. Did you learn anything that you still use today?
Ray Sturm:
I’m not sure I took away anything except that I love pizza, and it’s unfortunately a lot.
Kevin Kim:
Yeah. Who doesn’t love pizza? All right. Second question. All right. If you weren’t where you are currently, career wise, if you weren’t AlphaFlow what would you be doing instead? What do you think?
Ray Sturm:
Not saying AlphaFlow like that, but still. Besides that, I think if I left this tomorrow, if I sold this, if I, whatever this is, my other obsession is wine.
Kevin Kim:
Really?
Ray Sturm:
Yeah. A friend and I from 2010 to basically 2016 made Pinot up in Oregon, and that’s something to try and get back into at some point. AlphaFlow just took off and I just didn’t have the time anymore to focus on that.
Kevin Kim:
So you actually make wine.
Ray Sturm:
Yeah. And so the great thing about the wine industry, which is terrible at the same time, it’s a horrible business model. And so everyone is willing to sell you grapes, sell you time, sell you space, because it’s such an inefficient industry. But it’s incredible. And so if you just look at a hedonistic lifestyle taking in just flavor and everything, greatness… I mean wine country’s never ugly wherever you are. They’re gorgeous places-
Kevin Kim:
Oh it’s beautiful. I’ve been lobbying for years to do a conference in Napa Valley. But it’s just a pain to get to.
Ray Sturm:
Yeah, that’s the thing. It’s just a little bit out there. But I’d be in the wine world I think.
Kevin Kim:
Okay. Well that’s very cool. Oh, I did not know that about you.
Ray Sturm:
A little twist, yeah. There’s a little too much wine in my house.
Kevin Kim:
‘Cause I don’t see you drinking wine at conferences. We have some wine people in the office and they drink wine every chance they get.
Ray Sturm:
Well you ever come over, you’ll see the whole… Emily and I have put together quite the collection.
Kevin Kim:
Oh, fantastic. Very cool. All right. Okay. The question is, when you’re not dominating the lending world-
Ray Sturm:
Or drinking wine.
Kevin Kim:
Or drinking wine. What do you do for fun? And not drinking wine. What do you do for fun?
Ray Sturm:
Yeah. I think everything in the outdoors. So basically honestly, if I’m not working on AlphaFlow it’s either cooking with wine, something like that. Or it’s something hiking, camping somewhere.
Kevin Kim:
‘Cause you’re currently living in San Francisco, right?
Ray Sturm:
I live in San Francisco. So Yosemite’s sort of our happy place. We’re there all the time in the back country and that type of thing. It’s pretty hard to be annoyed about some employee issue or a credit line issue or something like that when you’re looking at a 3000 year old Sequoia tree and realizing it doesn’t care, it’s been through all of this. Puts things into perspective. And so that’s sort of my happy place.
Kevin Kim:
You do those like early morning hikes up to-
Ray Sturm:
Oh yeah. Sunrise. It’s a thing, it’s a tradition watching the sunrise over lake Tahoe or one of these places. It’s incredible.
Kevin Kim:
Any favorite spots?
Ray Sturm:
Every time we go to Yosemite there’s one day where we always do the tunnel view, watching the sunrise up there. Right there.
Kevin Kim:
That’s awesome. Yeah. Yeah. Yeah. All right. So this is now kind of getting back to business, but what’s the weirdest question that a borrower or originator has ever asked you? Actually originator for you guys, probably. Yeah.
Ray Sturm:
Yeah. It ends up being the same question because it’s for the borrower. And it always starts the same way, “Hypothetically…” So it’s good.
Kevin Kim:
You know, in the practice of law it’s the same way.
Ray Sturm:
You get a little bit of those too. Right away you’re just like, yeah. And they often have to do with religious entities of, “Why can’t we loan to a church? Why can’t we loan to some type of temple that definitely will pay back?” And all of this, and it’s like, “What’s the issue?” And all that. I don’t know if it’s weirdest, it’s just the most awkward because it’s not that you don’t trust, it’s that if you’re one of our institutional investors who really cares about their brand name they cannot be on the other side of suing a church.
Kevin Kim:
Oh, for sure.
Ray Sturm:
Things like that.
Kevin Kim:
Headline risk all day long.
Ray Sturm:
It’s a real thing.
Kevin Kim:
As a former banker who used to do a lot of church loans I think they’re barking up the wrong tree. That’s a commercial loan. They shouldn’t even be talking to you guys to begin with. I have a lot of clients on the commercial side that’ll do that in a heartbeat, but they’re all balance sheet guys. There’s no institutional aspect to that because of the headline risk.
Ray Sturm:
Yeah. It’s crazy.
Kevin Kim:
The last thing you want to do is evict…
Ray Sturm:
No one wants to be there doing that.
Kevin Kim:
Evict Pastor John.
Ray Sturm:
Exactly. They will go very public very quickly right there.
Kevin Kim:
Oh yeah. That’s the one that they can rely on. Yeah. Or another thing is you like, you don’t want to be going up against diocese or anything like that.
Ray Sturm:
No, it’s just trouble. Yep.
Kevin Kim:
All right. Okay. Last question for you. And this is a really good entrepreneur’s question. What is one business tool that you cannot live without?
Ray Sturm:
A actual tool to go [inaudible 00:56:46] Evernote. Every time I get a new device or anything, one of the first things I’m downloading is Evernote. So-
Kevin Kim:
So for the uninitiated, what is Evernote?
Ray Sturm:
So Evernote is effectively, it’s a notebook, it’s an app with a notebook that you can have different topics of notebooks, and it syncs between wherever you are. And if you’re me, I’m insanely task driven. I like my lists every day. Even if I’ve done something I’ll write it down just to mark it off and just sort of get that done. And for every business trip, for every part of our business, I’ve got a list on what we’re working on on product, what we’re working on for these, that type of thing. I would be very stressed out without being able to put those down and Evernote is where I live on those.
Kevin Kim:
And it’s on every device that you have, right?
Ray Sturm:
Yes. Every device. [inaudible 00:57:24]
Kevin Kim:
And it’s just seamless for… That’s cool. Yeah. Yeah. I tried it out. I’m not a list person, so I just can’t… My problem is if I don’t write it by hand it’s not in my brain. I’m one of those people. So yeah, I’ve always had that trouble. If they could figure out a way for me to write without… That’s the problem, right? Writing that doesn’t look like chicken scratch.
Ray Sturm:
Yeah. I judge myself every time I hand write for like, yeah, how did I go to school and come out like this? What’s wrong with me?
Kevin Kim:
I feel like lawyers, anyone that has a law degree and they’re all like… Our handwriting goes to crap, right? Yeah, yeah, yeah.
Ray Sturm:
You all say this, but you have beautiful cursive then all of a sudden.
Kevin Kim:
That’s true.
Ray Sturm:
You’re L is off a little bit and you’re just so upset about it. Yeah. Thanks Nema.
Kevin Kim:
All right. So I guess the last kind of closing segment for the show, and I just want to get… We always ask our guests this. And we have the outlook and the industry outlook thing, but I kind of want to get your feel for the future of AlphaFlow. What are you excited about in the coming… You know, this is going to air in kind of the middle of the year, second half of the year. So let’s talk about the end of 2022 going 2023. What are you excited about?
Ray Sturm:
I think finally basically expanding our technology platform out significantly. Because the idea is today, I think we’ve done a good job with both our sets of partners, our lenders and our investors. But still too much of it is transactional and outside of regular workflow. And one of the things we did early this year is build out basically our software team. We brought in a CTO who’s incredible. He had basically built an airline from the ground up before this from a technology standpoint. So Gabe is amazing. And again, fresh eyes, didn’t know anything about the mortgage industry. And so asks the most basic questions which are critical to understanding what matters and what doesn’t. And we’ve taken these things that would normally have taken five, six days to hours, again and again. We’re just rolling that out. So I think by the end of the year you’re going to see a much larger platform
Kevin Kim:
Well, and when you say workflow, this is for your originators to process the loans internally? Or…
Ray Sturm:
Yeah. So like, if I can talk a little more, I guess, about the credit line, I didn’t want to come here and pitch this thing.
Kevin Kim:
It’s okay.
Ray Sturm:
But we’re just excited about it. So the idea is we think credit line, all of us imagine a bank in our minds of what we’re looking at. But the idea was, that’s just a little piece of it. To get something onto a credit line you need four to six different documents. But if you want to sell, whether it’s us, Churchill, Toric, anyone, it’s something about 20 some docs. So for us it’s 24 different documents you need. We’ve figured out basically how to automate about 11 of those right away. So now the work coming on is right away.
Ray Sturm:
And then when you’re taking loans off of there, if you have all the information for a loan, you have the physical collateral because someone’s mailed it to you. Any one of us can price that loan automatically now because we know all the attributes. So now for the first time, instead of phone calls, instead of this and that, it’s literally one click and you sell. And so if you do that, now you’re actually changing things [inaudible 01:00:07] getting a little simpler. That’s what I’m excited about, to finally get there. Because the things that we all build headcount for are silly. That tech could easily do and does for so many other industries, we’re still emailing and saying, “Hey, Kevin, what was the price on that? When can you clear?
Kevin Kim:
Yeah. That’s the problem with technology. You try to solve problems that aren’t problems. We talked about that earlier. And you’re identifying one of the most painful gaps that every lender that has a credit line feels, which is fantastic. That’s great, yeah.
Ray Sturm:
And if you tie that into the rest of the business, it’s asynchronous information where you know if we’re buying or not, I don’t, so I have to call you. That’s a waste of both our time. Conversations can become dashboards and everything gets faster, easier, cheaper.
Kevin Kim:
Right, right, right, right, right. Yeah. Phone calls are time. Yeah. Time equal money, so…
Ray Sturm:
That’s what we’re working on.
Kevin Kim:
That’s cool, man.
Ray Sturm:
Thanks for talking with me [inaudible 01:00:53]
Kevin Kim:
Yeah. I want to see that, that’s going to be really cool. And I know you don’t want to put it out there for other people to use, but man-
Ray Sturm:
We’ll see.
Kevin Kim:
That could really make everyone’s life a lot better.
Ray Sturm:
I think so. I think we’ll try and get it out as much as possible because that’s the whole purpose behind it. [inaudible 01:01:06] Can we build a system that’s used? And like I said, a lot of these competitors, they’re the first people we want to talk to at conferences because they’re friends. They’re great people. So we’ll find ways to work together.
Kevin Kim:
I like that. I like that. All right. Well, I think that’s all the time we have for this episode of Lender Lounge with Kevin Kim and my friend Ray.
Ray Sturm:
Thank you.
Kevin Kim:
Thank you, buddy.
Thanks for listening to Lender Lounge with Kevin Kim. I hope you enjoy 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 Derossi. Lender Lounge with Kevin Kim 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 Kevin Kim signing off.
