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You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim. And my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, be a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.
Kevin Kim:
All right, guys, welcome to another episode of Lender Lounge with yours truly Kevin Kim. Today we have a very special guest Sharon Koh with 1839 Asset Management. Sharon, please introduce yourself to our audience.
Sharon Koh:
Hi everyone. This is Sharon Koh with 1839 and Kevin, thanks for having us, for having me.
Kevin Kim:
Absolutely. Tell us a little bit about 1839 Asset Management.
Sharon Koh:
Well, we started, I would say one of the earlier firms in this space. We started in 2013. Frankly, we started investing our own money in this space in 2012 before being in this space as a company. It’s interesting how we even got into this space, but that’s a different story. So we’ve been in this space since 2013 before a lot of the Wall Street firms that are in here.
Kevin Kim:
And your company is an asset manager. You’re not an investment banker, you’re a registered investment advisor, correct?
Sharon Koh:
That’s correct. We’re a registered investment advisor and we manage money for mainly now several groups of insurance companies.
Kevin Kim:
Okay.
Sharon Koh:
Yeah.
Kevin Kim:
That’s great. So let’s talk about the history of the company, because one of the things that we like to talk about in the show is a lot of people have entered the market recently. A lot of our guests have started in the space right around when you guys joined in having different perspectives on it. And we haven’t had an asset manager on the show. We haven’t had investment advisor on the show. And so it’s really good to have that perspective. So tell us about how you guys got started in the space, because I remember seeing you guys at my very first AAPL conference, and I remember having dinner with Vince and it was like I walked into some… It was very much a different industry at the time. It was very much a close knit universe and learning about it back then was… and thinking about it, how it was back then and giving our audience and idea, and then how you guys got involved as well.
Sharon Koh:
Well, so this takes us back, I would say in 2012. My husband Vince, he started this business in 2013. We bought a house in Brooklyn or in Queens. The realtor offered us hard money loan. And we’re like, what is a hard money loan?
Kevin Kim:
Right.
Sharon Koh:
You’re buying the house to gut and to live in. And then the realtor described to us the loan and described to us the terms, and then we go, okay. So the next day Vince has a revelation. He says, “Wait a minute, I want to make that loan. I don’t want to take that loan.” So we started to do research and ended up starting… We invested our own money in it. We started with $25,000. We were really cheap-ish. So started with $25,000 and then it worked, and then we put more money in. And then friends and family started to ask like, “Oh, could you help us invest in this space?” So that’s where the 3(c)(1) fund started. So we launched a 3(c)(1) fund friends and family. And then through some connections, because Vince as you know, he worked in Wall Street entire career, he had just left Soros and so we were looking for the next thing to start. That’s all pretty much post 2008, where everyone’s trying to figure out what the financial world might look like.
Kevin Kim:
Right. The world had ended and we were trying to figure out what we’re going to do next.
Sharon Koh:
Yeah, that’s right. That was before there was COVID. So the [crosstalk 00:05:51].
Kevin Kim:
Right. Oh, gosh.
Sharon Koh:
Yeah. So anyway, we had this opportunity to manage a very small pool at a time for single insurance companies. So we basically tried it out and [crosstalk 00:06:07].
Kevin Kim:
This is back in ’13?
Sharon Koh:
That’s back in ’13. Actually the first company started in 2015. So we had the fund from ’13. And then in ’15 or so they said, “Okay. I’ll give you a small amount of money. Let’s try it out and see how it works.” And as you know, it’s a very good class of assets for insurance companies and the capital providers. So that worked out. And what was interesting was I was towards the tail end of my job as the CFO of a manufacturing company. I have a very eclectic career background but anyway-
Kevin Kim:
We’ll get into that. Definitely want to ask about that [crosstalk 00:06:48].
Sharon Koh:
I was at tail end of that. And then I was like, “Okay. What’s my next challenge?” And as luck or life has it, the company came to us and said, “Hey, we are going to take this bigger. Can you put a hundred million dollars to work?” So we had about 10 million off their money and they said, “Can you put a hundred million dollars to work?” And then we’re like, sure. So then we started to call the originators and say, “How much can you put to work safely?” And so that’s basically how we started. And in 2017 we had a hundred million dollars and we said, “Okay, let’s put it to work.” So that was when we had to grow up. And just like many other players in this space, you have to get a lot more organized. I mean, as you know, this was very, very fragmented space and things were done very-
Kevin Kim:
Especially back then, there was no standardization in practices, no credit boxes. It was very, very much sue your pants. I mean, ’15 to ’17 was when the market started growing up a little bit.
Sharon Koh:
Yeah. That’s right.
Kevin Kim:
So let me ask you, it was all New York at the time? You were in New York during this point in time?
Sharon Koh:
Yeah, we were in New York at that time. And frankly back then when we first started, just like everyone who first start, you work in the basement and then you move into a WeWork. Vince’s first employee was an intern of my old job. And worked out really well, very smart kid. And then we moved into briefly with the capital providers like office space at the time when you’re starting out, just like any startup.
Kevin Kim:
Right. I mean, that’s an immense challenge though, because as someone who comes from your background, your CFO background, this market was immensely fragmented. And the fact of the matter was that the Northeastern market was even more fragmented because you had… I mean, to this day you have different types of transaction styles and methods of dealing in the five boroughs. Every single borough is different. And then you also have to navigate the means of deploying capital as a capital provider. Because the loan originators are doing all kinds of deals and the structures are all screwy because of the way the New York real estate is. So in ’15, you guys, was all of your activity back then, was it purely capital providing type solution or were you also direct retail originating? How was the business back then? Was it just purely just funding loans and buying loans?
Sharon Koh:
Yeah. We were purely just table funding or buying loans. I would say we almost never originate. Our strategy, our belief is that real estate is such a local business. I mean, one street is different from the other. The houses on one side of the highway is different from the other side of the highway. What do I know about South Side, Chicago? What do I know about Newark, New Jersey or San Antonio? So we rely on the local originators and partnering with them. And many of these guys we’ve been doing business with them for years. I mean, it’s been a very good relationship. I think the loyalty generally goes both ways. And I must say that most of them have stuck because when we say we fund a deal, we do. We don’t take that lightly because they’re basically representing our credit box out there and telling borrowers that yes, we can do the deal.
Kevin Kim:
Right. When did you guys start expanding outside of the Northeastern markets? Because you’re currently in Texas now, right?
Sharon Koh:
Yes, we now are in Plano. I would say in 2019, we moved. We moved in 2019 Q1. And one of the reasons is because from the a hundred million, we were given yet another a hundred million to put to work. And then that was when we decided that it’s so hard to find mortgage and people in New York. I mean, I can’t find an investment banker really easily. To find someone in mortgage operations is really hard. And my family live in and around this area, in the DFW area. And this area also has a lot of mortgage company, so we decided this was going to be a good home. So now we are in Plano, Texas, right at the border of Frisco. And of course we lucked out, we moved the year before the pandemic.
Kevin Kim:
Yeah. And you guys moved before the great migration and Plano became… It was on my list because during COVID I was thinking about moving and I basically looked at cities that had Korean markets and all of a sudden Plano pops up. I’m like, “Wait a minute. There’s a H Mart in Plano.” It was on my list of places to move. And then my wife was like, “We have small children, so we probably shouldn’t just up and move right now.” So I haven’t done it yet. But it’s very cool because you guys took it upon yourselves to move to Plano, find more originators. And now what’s your approach now? Are you in all 50 states or [crosstalk 00:12:38].
Sharon Koh:
Yeah. I mean, I would say we are in all 50 states. As you know, not all states are made equal for lenders. We have grown Texas tremendously. I think Texas have been on our radar for a long time. We believe the growth is going to be where employment is, population growth is. I mean, maybe based on my background, I’ve always been into numbers and analytics. We actually study population growth. We study housing prices and so we love being in Texas, Florida and New Jersey. Just because we are so familiar with New Jersey, we have a lot of loans in Arizona.
Kevin Kim:
Yeah. Back to density. Phoenix is growing massively right now.
Sharon Koh:
Would love to be in California, but the rates California is [crosstalk 00:13:43].
Kevin Kim:
Don’t come to California. From an investment standpoint, the rates here just are awful.
Sharon Koh:
Yeah.
Kevin Kim:
And it’s so competitive here to be a new originator too.
Sharon Koh:
We were very strong in Illinois, but not so much anymore. It’s been a very, very challenging regulatory environment to work with.
Kevin Kim:
From an investment standpoint, they’re not very friendly. No.
Sharon Koh:
Yeah. So we would like to be in the Carolinas and Missouri and places like that because [inaudible 00:14:12] on those markets.
Kevin Kim:
Right. And back to your point on data. So I want to ask you more about your background because I know your background, you have a very, very interesting background, but we talked about this before, so let’s talk about that. So you didn’t have a background in real estate at all. You were more on the financial side?
Sharon Koh:
Yes. So I’ve always been in finance my entire life. First job out of college, went to work at Deutsche Bank. And then I did love that big institutional environment. But I’ve always stayed entrepreneurial. Most of my career have been spent fixing financially distressed company. So I was a turnaround consultant for a big part of my life. And it runs the gamut on the type of company.
Kevin Kim:
Rescue CFO. That happens a lot, I’m guessing?
Sharon Koh:
Yes. Right. But I think that’s an important part of that foundation. Because basically I look at every business as common sense and every business is the business. So you tear into it, you break it down and then you rely on people who know the business to help. That’s how Geraci has been for us and many other professional firms. And then I also spent quite a bit of my career in project finance. So in the company we developed commercial scale wind farms. So that is very similar to when I started in this fixed and flip business, I looked at the draw process. I have to say, I rolled my eyes a little bit and I go, “Wow, that’s really informal.” I mean, in [crosstalk 00:15:58].
Sharon Koh:
So I implemented some of the best practices in commercial construction, large scale construction into our draw process. And that was earlier on. I had to roll things out a little bit at a time. Because it was a huge shock to the originator as well. This is really formal. You’re asking for a lot. But I think as the space mature, it starts to make a lot of sense. And now this is a common practice, like draw inspection, bin waivers and stuff like that. These are things that on a commercial scale you ask for and there’s no questions asked.
Kevin Kim:
Right. You were constructing those types of draw programs from a much larger commercial construction project before you-
Sharon Koh:
Mm-hmm (affirmative).
Kevin Kim:
Okay. So there’s that real estate component and that’s huge. And you guys were known earlier on to be the ones that would take down construction loans. There were no asset managers before, no loan buyers before that would take on construction. And now everyone buys construction. But back when, when this was starting to happen, no one else was buying construction loans. I remember you guys were the only ones that I knew that would buy construction loans.
Sharon Koh:
Well, I think also I was comfortable with it because maybe just coming from that background I said, “Of course we can manage this.” And then I also build our process around focusing on construction draw. So we can find our draw in a day. And that’s because the backbone of how we manage our processes focus around… Because if you are a contractor, if you are a borrower, you need that money to move along your project. If that stops, your contractors, walk away. Their success is our success. I mean, I basically looked at the pain point of this business. Again, my turnaround experience, I basically break down the whole company and the whole process and say, “What do we focus on? What’s important to us and important to my capital? And what’s important to the borrowers.”
Sharon Koh:
I find that common ground, find a weakness and fix it. So we focus a lot on the draw process. We focus a lot on the commitment of the loan and then our credit box to make sure that our capital provider is comfortable with. And then the reporting around that. So actually, because we were so resource constrained, when I first started, I actually programed our own asset management system. I did. I sat in our basement and programmed it.
Kevin Kim:
So not only are you building the best practices associated with draws, which didn’t exist at the time, it was completely ad hoc, but you’re also being the software engineer. So that’s pure startup mentality. See a need, fill a need, wear every single hat when needed. But today, the company, you guys are… I mean, tell us about the company today, the growth now. You guys started in ’13 it’s now 2021. You guys have seen the industry grow. How much has the company grown internally?
Sharon Koh:
So we went from just Vince and then I had my CFO job and then a part-time help to Vince, to having three people including myself. Now we’re in Texas. We have seven people plus my IT is outsourced. So I have a firm or a guy. Again, he was an entrepreneur in the beginning and now he has his own firm, but he was our guy. So even my homegrown system has to grow up. So it’s using the base of my so-called system and now we are revamping it and putting all the security bells and whistles around. So I have another group of IT guys that are outsourced.
Kevin Kim:
So pretty lean considering how much AUM you guys are managing. I mean, at this point currently today, you guys are… What’s the size of the book now? You guys have grown significantly in the past few years.
Sharon Koh:
So we have 200 million committed by our capital. So we still have room to grow. I can tell you why we can be so lean. Because we do not originate.
Kevin Kim:
You don’t have to have an army of LOs.
Sharon Koh:
Exactly. So we have a group of underwriters that we underwrite what those LOs do, but then we are not starting from scratch. Everything is delivered to us in a clean packet. And through years of collaboration with these guys, they have gotten to know what we want and what we expect and what would be a good loan to us. So I would say that we approve about 95% of the loan that comes through our portal. And that’s a very, very high ratio because they know what not to submit to us because it won’t work. And so the biggest challenge for us often is in bringing new groups of originators, because they have to learn our way, they have to learn what type of loan we are looking for and our process. But once they are onboarded with us, it’s smooth sailing. The people we do most business with, we don’t talk with them.
Kevin Kim:
Right.
Sharon Koh:
They come through our portal, we process and then boom, it goes out. I mean, you can’t find a loan in two days. I mean, if you send me the loan and it works because you know it works, especially if it’s a repeat borrower, you have the full packet title is done. I mean, in two days it’s out, we’re funding.
Kevin Kim:
Well, I want to ask you about that transitionary period from ’15 to ’17, when Wall Street suddenly just jumped in. I mean, you guys were one of the first kind of people that would say we’re not a lender. We’re just a capital provider. We’ll fund your loans. We’re an asset manager. You guys were probably the very first to have a formulated program around that. I mean, there were other trusted investors, but they weren’t doing it at the volume that you guys were. Let’s talk about ’15 to ’17 when all of a sudden now Wall Street starts paying attention. I mean, that must have been challenging for you guys. How did you keep up with that?
Sharon Koh:
Super.
Kevin Kim:
Yeah. I mean, all of a sudden now you’ve got… at the time there were probably three or four very well funded aggregators buying everything they could get their hands on. And that continued until 2020. But ’15 was a shock to the system in my opinion. I always look back on it. How was it for you guys?
Sharon Koh:
Well, it is challenging for a variety of reasons. And that’s also one of the reasons why this space doesn’t really work for private investors anymore, unless you [inaudible 00:24:11] effort. Because the returns that private investors were used to was like 12% return, 10% return. These days the notes are not even that. The note rate is like 9.9 on a good day for a fixed [crosstalk 00:24:26]. So I think where we would draw some of the differences is we, ie. our capital provider keep all the loans on our balance sheet. So we do not securitize, we do not sell our loans. So I think that in a way is able to help us differentiate somewhat because we have control throughout. We have control on the draw.
Sharon Koh:
So if the loan that is presented to us that we accept and we fund stays the way it is until it exits. If it does not exit, if we have to restructure, we have to work out something with a borrower we are in full control. So I think that sort of creates distinction. And many of the originators out there, their reputation is at stake. They are the front line with the borrowers. So if they continue to work with us and I don’t give up control of the loan, they feel comfortable because their ultimate goal is also to have this as a repeat borrower. So if it’s a difficult situation for them, because the loan is sold-
Kevin Kim:
They’re going to lose that borrower, especially as things got more competitive.
Sharon Koh:
Yeah, absolutely. It cost a lot for them to win a borrower. They’re going out there marketing, social media-
Kevin Kim:
You’re making it easier for the originator to maintain that borrower relationship.
Sharon Koh:
Absolutely. And by keeping it on the balance sheet, and also, I think we were able to prove that through COVID. I know you’re talking about ’15 and ’17.
Kevin Kim:
Well, let’s talk about it. I mean, it’s an obvious discussion point. COVID was a very, very tough time for the aggregators specifically. We had a massive liquidity challenge in the space. A vast majority of them pulled out. Some pulled back, some jump back in early, but we had a liquidity challenge in the space. You guys didn’t suffer that much, right?
Sharon Koh:
We funded throughout. In fact, we were able to bring in a few more new originators who were selling their loans to other providers who were kind of stuck.
Kevin Kim:
They needed a new home.
Sharon Koh:
Right. We actually helped a group who was stuck with a bunch of loans. Because it was not great. Many of these guys now have a line of credit and they’ll fund the loan and then sell it but they were stuck. The rate at which they’re paying their warehouse line of credit, it’s much higher than the note rate because some of the 30 year note rates were really low. They’re quickly in an upside down position. And then of course, if the bank calls on the line of credit, if you have subordination or personal guarantee, that gets ugly quickly. So we were able to help some people out during that time. But business, as usual for us. The only challenge for us then was no one had the crystal ball up of how would we emerge? I think it surprised all of us that housing market became stronger.
Kevin Kim:
Yeah. That was surprising. We were kind worried because of the eviction issues and the foreclosure issues, but somehow… I’ve had this discussion on multiple episodes. I mean, what do you think about this? I mean, I hear what you think about this, because we’ve had different ideas on the issue. Some folks say it’s supply and demand issue, some folks say it’s just the pure rate. It’s the low, low rates. I mean, what are your thoughts on the issue?
Sharon Koh:
Well, I think for as long as people are buying the loans, we continue to get bailed out.
Kevin Kim:
So liquidity out there.
Sharon Koh:
Absolutely. I mean, we are also in a interesting segment of the market. So 1839 likes to fund the most generic homes, the homes in the middle of the market. We call it the workforce housing, the middle income.
Kevin Kim:
What is your average introduction size actually?
Sharon Koh:
Average boring. No trophy homes.
Kevin Kim:
Yeah. So what dollar amount usually is your average transaction size?
Sharon Koh:
It depends on the market. In New Jersey, it’ll be higher and in [crosstalk 00:29:18].
Kevin Kim:
But you’re still going middle of the road houses. You’re not looking at…
Sharon Koh:
Exactly. So people often ask me, what’s your typical sizes? We’re really, really market dependent. I mean, if you look at New York, a typical home is maybe $800,000. So I think what’s interesting for us is that because we focus on that segment of the market, we believe that that market will always stay strong because there’s such a huge shortage of home in this country. And the homes are generally old, the inventory is kind of worn and it needs to be refreshed. So we believe that there’s always going to be fix and flip in that segment of the market. There will be always the newly weds that want to move into a home and raise a family. And I think what COVID and the stimulus has done is really supported that segment. We had no problems. The only thing I’m seeing is we’re seeing more extensions, loan extension because they aren’t able to work on the projects during the pandemic. As you know the infamous material shortage.
Kevin Kim:
Yeah. I mean, cost over run, material short shortage, labor shortage, our cost [crosstalk 00:30:45].
Sharon Koh:
But that’s where we come in because we hold the loans on our books. We are able to extend the loan, make a decision quickly because the loan is not securitized and sold off to another invest.
Kevin Kim:
When it comes to that transition in 2020, we had a lot of topics that came up. The market has shifted toward a renter’s mentality. We saw DSCR pop up about two years ago in our space, but it didn’t really take off until about last year. And now it’s now it’s white-hot and everyone’s doing it. And it’s become this really crazy trend. Tell me about when you guys jumped onto that and when you guys started getting involved on the DSCR train.
Sharon Koh:
So we had a five year program for the longest time.
Kevin Kim:
Oh you did?
Sharon Koh:
Yeah, we did. For the longest time we had a five year program and so it’s amortizing over 30 years.
Kevin Kim:
Yeah. Five in 30.
Sharon Koh:
Most performed really, really well. Not a single default, not a single late. We are not in the 30 year because there’s a so called maturity mismatch for us. I can see why the 30 year is so popular, because they can securitize it. And sometimes I look at the programs and the question is, for the bulk of it, it seems like they’re all healthy loans because I’m always looking for what’s going to come up behind us like ’08, like the pandemic. I mean, no one could predict the pandemic. But ’08 frankly many people saw it coming. Many people on Wall Street saw it coming. So no one can say we didn’t see it coming. So I’m always looking at that and I go, okay. Now there’s a group of loans that are below 1.0 DSCR. Those are the ones that I kind of question. And then some people are pushing the LTV because they have [crosstalk 00:33:02].
Kevin Kim:
Well, that some people. It is being pushed aggressively. And rates are coming down. That’s the scary part.
Sharon Koh:
That’s right. Because they have to fill the securitization market. They have to fill the buckets.
Kevin Kim:
So you’re analogizing this product line, the 30 year product, not the five and 30 product, the 30 year product to some of the subprime stuff we saw back in 2008, the amount of risk that’s being taken.
Sharon Koh:
That’s right.
Kevin Kim:
But the counter to that has been that we’re headed toward a market of renters. A lot of people have said that they’re not as concerned because we’re headed to that market of renters. You have these massive institutions that are basically… I think I saw it in the news a few months ago, it was like, Blackstone just bought a small city in Texas or something like that. It’s happening to that scale. And so they’re deploying trillions of dollars to acquire rental homes. And this is going to drive millennials and Gen Zs towards a market of renting. And does that bolster the 30 year product? And it raises the question because I don’t have an answer for it. I’m not smart enough to know, but as an asset manager who’s saying no to the 30 year stuff. Are you guys going to continue, even if this trend stays on fire? It is amazingly hot right now and the market seem to support it too.
Sharon Koh:
Yeah. So maybe to clarify my point, I’m not saying that the 30 year product is bad, because I think if I found a capital that could have a good maturity match between the 30 year asset and [crosstalk 00:34:45].
Kevin Kim:
Because you’re balance sheeting. You’re pure balance sheets.
Sharon Koh:
Yeah. I would absolutely do it. Now, doesn’t mean that my credit box would be the same. So I think the 30 year product makes absolute sense because it fills this hole that is left by the banking sector.
Kevin Kim:
Yes. Agree with that. You’re saying there’s so much risk being taken because of the heat in the marketplace?
Sharon Koh:
Correct. But I think because of how low the rates are today, I think they are able to break the pool of loans into different tranches. So now they can have a very high LTV, low DSCR kind of loan and still be able to sell it because someone out there is willing to buy that pool. And now I worry that I don’t know how long from now, I’m not that smart, but how long from now, if that blows up, is it going to attract the attention of the regulators?
Kevin Kim:
Well, it’s also the regulators, are they watching for it? I mean, the challenge we had in ’08 was… I don’t think the regulators are actually watching for this stuff because we’re seeing the same… A lot of people just don’t talk about this, but we see the same type of risk being taken in the non QM sector. And ATR being what it is, that’s true, but the level of documentation risk and borrower quality risk is still a challenge. It’s not as bad as it was leading up to ’08. And the DSCR stuff, you’re right, there is too much risk being taken because they can sustain it on a securitization, but you couple that risk with the point that I made earlier about there’s so much renting going on. People are renting more than ever before.
Kevin Kim:
And does that drive the conversation toward, if the market is heading toward a rental strategy instead of home buying, that means this is going to be an increased demand. We enter a recession on a consumer sector. Does that cause more risks to be taken? And do we have this compounding like another ’08? It’s an interesting way to look at it because I agree with you, I’m seeing the same kind of risk. I always go based off the loan apps, like what kind of applications will you take? And I see the same kind of risk from that standpoint. And it is white-hot and so it’s interesting time to be had about that. I really don’t have an answer for it, but I agree with you that there’s significant risk being taken compared to the amount of return you’re getting for your money. As an investor it’s almost in your-
Sharon Koh:
And frankly, this space has changed because the lender, the capital used to get most of the coupon. But now not anymore. So basically of a 9%, 10% loan, if you securitize it, the ultimate lender is getting, if you’re lucky half of it, because it goes into spread and then the servicing and so and so forth.
Kevin Kim:
And so you’re having an elaborate [crosstalk 00:38:11].
Sharon Koh:
I think the risk reward, it’s tipping. And frankly, it makes Vince and I pretty uncomfortable sometimes because we first started off lending with our own money. So even though it’s the money of the insurance companies, we treat it like ours. Every loan that comes through this 1839, we treat it like our money. I’m the person to do all the workouts in the firm and I treat it like my own money.
Kevin Kim:
Right. And that mirrors the sentiments we’ve had with guests on the show who are fund managers. They’re representing investors and they’re managing their assets in that context. And that raises another interesting question is that the market has become very institutionalized, very standardized, if you will. And the conversations that are being had, are we headed towards… Someone said it on a panel, I was on, this market is going to look exactly like conventional in five years. And I had to stop them, are you serious because I don’t want to be in this space if that’s right. Because it’s totally not in my opinion. But what are your thoughts on that kind of stuff? We’re changing so much. The market is changing so much and Wall Street is flooding it, not just domestically but overseas. And the amount of risk, is this conservative type mindset when it comes to asset management, can it survive?
Sharon Koh:
You mean how it’s getting closer to the QM, non-QM?
Kevin Kim:
Yeah. Is there still room for someone like an 1839 that has a similar or approach to what I will consider a balance sheet asset manager. Whether you have a fund or whichever approach you have? Is there still going to be room for that?
Sharon Koh:
We all have to grow up. And eventually there’s going to be… My take is eventually there’s going to be more regulations around this when it gets too big. I say when you’re very small, no one is interested in you. And then when you become somebody or the space becomes big enough… I mean, look at Facebook, for example. It used to be college kid and try to meet friends and [crosstalk 00:40:34]. And then now you are like, you have to face Congress. So I think when the industry is small, when it’s doesn’t make a big impact adversely or risk to society as a whole or the financial system, no one pays attention. But I do think you can see that already. So in the beginning, appraisals were not common. And then the credit report, background check. Now we are looking at bank statements. And then the 30 year product is like a regular QM loan.
Kevin Kim:
Well, that’s the thing though. And so I’m seeing programs being offered for the 30 year program, but it’s like the old no DOCTYPE program.
Sharon Koh:
I haven’t seen that.
Kevin Kim:
I’ve seen it recently and I was shocked. I mean, that reminds me of what I used to see in ’06 and ’07. And you’re right in the sense that there… But this kind of thing requires a crisis. This type of congressional regulatory oversight requires some kind of crisis to be had. And I don’t think fix and flip is big enough to warrant that and short term assets too. So it’s not big enough to warrant it, but DSCR is a whole different story.
Sharon Koh:
DSCR is a different story.
Kevin Kim:
Because when you have that many trillions of dollars flooding into that sector and also the mortgage banks are doing it too, it begs the… And we’ve always had this thought process when we talk about regulatory stuff, like let’s stay out of trouble so we can avoid a Dodd-Frank coming after us.
Sharon Koh:
If you think about it, who’s the end purchaser of this securitized mortgage? I mean, it’s going to be pension funds, it’s going to-
Kevin Kim:
True.
Sharon Koh:
You’re right.
Kevin Kim:
It’ll be main street investors buying into some crazy structured ETF that has this on their books or a 401(k). So yeah, you’re right.
Sharon Koh:
Yeah.
Kevin Kim:
I mean, I hope we don’t see as much corruption as we saw in ’07 and ’08, but it does beg the question. We had this discussion about the fix and flip space probably three years ago, talking about the race to the bottom. There was so much aggression in the space that rates were plummeting and risk was increasing. And I want to ask you about that. How is 1839 adjusted its underwriting guidelines over the years as the market has changed? Lately I feel like I’m fixing and flipping construction and the core asset class of our space, it’s gotten a little bit calmer. But for a long time, it was getting really, really hot and heavy, really aggressive rates, really aggressive LTVs. And then pre COVID. How did you guys manage during that to stay true to your underwriting guidelines?
Sharon Koh:
Well, I have to say, we have to sacrifice. We have to sacrifice volume.
Kevin Kim:
To say no. And you’re comfortable saying no.
Sharon Koh:
Yes. I think saying no is difficult, but I think it’s one of the most powerful underwriting tool. It’s very tempting to say yes to loans, but then many loans don’t make sense. So we look at how profitable this project is going to be. We have seen loans that it doesn’t make sense for the fixed and flip guy to do. So we’ll say no, because it’s you really shouldn’t undertake this project. You’re better off not work because you’ll lose money by the time you pay all the debt service. And so at the expense of growth, we all want to grow our company. But then you have to also stay true to what you think is the right thing to do for your capital. I cannot say enough about the way we treat our capital is like our own money and I don’t like to lose money.
Kevin Kim:
Right. And you’re a fiduciary. You’re an investment advisor. You have a fiduciary duty. And so a lot of our fund manager clients, they have their duties to their investors. And I felt like that kept our market quite conservative for many years, until I feel like recently it’s been a little bit… I mean, with rates being what they are, but even on the availability of leverage, that’s topic for another show, but there’s more leverage available than ever before right now.
Sharon Koh:
Oh yeah. I mean, anybody can go to the bank and get a $5 million line of credit and start originating loans and then selling them to someone who securitizes it. I mean, it’s so easy now but not everyone should be in this business.
Kevin Kim:
Right. Let’s talk about something a little more positive, because it’s so scary sometimes. I mean, real estate being what it… We’re all scarred from ’08. And people have short memories in our space, but the folks that came in early and I feel like those folks are going to are going to stay true and be in this for the long haul. I mean, I’d really to know more about you personally, because I was looking at a little research for the show, you have a background in finance, but you have a culinary arts background as well.
Sharon Koh:
Yes.
Kevin Kim:
This was so surprising to me because this is… I like to ask about cool things beyond lending, because we want to get to know the sponsor. Get to know the guest. So tell me about that a little bit.
Sharon Koh:
So I actually studied French pastry arts.
Kevin Kim:
Like culinary school, pastry school?
Sharon Koh:
Pastry school at the French Culinary Institute that is in New York City.
Kevin Kim:
Was this something that you always wanted to learn? When was this in your life? Was this after college?
Sharon Koh:
No. So I grew up in Singapore.
Kevin Kim:
Oh, okay.
Sharon Koh:
Yeah. Born and raised in Singapore. I went to the National University of Singapore. I worked there for two years and I decided, I guess, young and restless decided… I called my sister who lived in New York I said, “Hey, I think I want to move to New York.” So I found a job in New York where I could get H1B and I worked in finance here and then the rest is history. So 2008, I was working at the wind energy company, the commercial utility company in project finance. And I think maybe I was there until, I want to say around 2010. So we developed and build the last of the projects. And as you know, financing was very hard to come by then. So pretty much all of us were laid off. So I looked to my husband, Vince, I said, “There aren’t really many jobs out there. Let me go do one of my bucket list.” [crosstalk 00:48:03]. I always wanted to study French pastry arts. So I did. So after I graduated from French pastry arts, I worked as an intern for no money at Sean Bakery in [crosstalk 00:48:17].
Kevin Kim:
Oh really?
Sharon Koh:
Yes.
Kevin Kim:
Wow.
Sharon Koh:
4:00 AM pastry, or rather they call it the baker’s hours. 4:00 AM I have to show up at the bakery. And I was an intern. I made $0 and it was actually a really interesting time. It was very humbling. I’m blessed. I always have good jobs. I mean, I did well in school. I had always good jobs. And working side by side in the kitchen was really humbling and interesting. And I realized that there’s this huge community in this economy, in this society that can hardly afford to got to work because the work doesn’t pay them enough to commute to work. So I remember when the bakery had to cut over time and the stories I’m hearing, I might have to quit my job because I have to take the Long Island Rail Road and then to the Metro then to the subway is costing me this much. If I don’t have the overtime, I can’t afford to work. To me that is like, what? And this is happening it in and around us.
Kevin Kim:
Right. In America
Sharon Koh:
Yeah, in America. So I think in every experience we learn. From every experience we’re in, as long as we’re moving and keeping our eyes open no matter what we are doing. And that really gave me insight into a whole segment and maybe think more about them.
Kevin Kim:
Yeah. I mean, working in kitchen is a totally different universe, just in general.
Sharon Koh:
And before we write a negative Yelp think about these [crosstalk 00:50:25].
Kevin Kim:
Oh yeah. I always tell people, you guys have no idea what kind of labor goes into this food that you’re eating?
Sharon Koh:
That’s right. And now we are Yelping zero and no star.
Kevin Kim:
Yeah. With servers too. I mean, I used to wait tables. Before you go and yell at your server, remember this person is handling your food and this person may have had a bad day and this person’s also making $5 an hour in tips. So how about you think twice before you yell at the guy?
Sharon Koh:
That’s right.
Kevin Kim:
I mean, that’s super cool. I mean, we always like to learn about other things about our guests and I’ve never… We’ve had people who do magic, people who do martial arts, people who race cars, but pastry is something that I’m personally very passionate about. I bake bread as a hobby.
Sharon Koh:
Oh, cool.
Kevin Kim:
You would never think that looking at me, but that’s so cool. Do you ever still do it at home or are you no longer in the thing.
Sharon Koh:
Yeah, I do. Well, unfortunately I have to go gluten free, but that allows me to make gluten free stuff. I still make [crosstalk 00:51:36].
Kevin Kim:
Even more challenging, right?
Sharon Koh:
Yeah. But I still make bread. I have never bought, I think a loaf of bread for the home for a long, long time.
Kevin Kim:
Awesome.
Sharon Koh:
So bread making is wonderful. Keep doing it.
Kevin Kim:
Yeah. It’s one of the most interesting hobbies because for a lot of people, they think it’s like, oh, it’s so precise, but it’s actually very… You use your hands a lot and that’s what I like about it. I get in there and I get my hands dirty.
Sharon Koh:
Yeah. I think it also takes me away from work. When I’m [crosstalk 00:52:07] my hands baking, you focus on just that one task. And it’s so hard for me to check out of work. And that’s my greatest form of therapy.
Kevin Kim:
Yeah. A hundred percent. Being able to focus on one single… What I meaning it’s like, I don’t to worry about emails. But nowadays the hardest part for me is now my daughter will run up and try to she put her grubby hands in there. I’m like, no. Oh man. All right. Let’s go back to real estate now.
Kevin Kim:
I always ask our guests about where the see the market headed. Because this is very interesting. Because you guys have been in the space for so long. You’ve seen it grow up and you have a different perspective. You are asset managers, you have fiduciary duties, you’re investors, but you’re doing the workouts and you’re watching data and you’re looking at it like an originator is looking at it as well. I want to get your thoughts on where we’re headed in our sector and residential as a whole. Because it’s very strange right now. Because I’ve been talking to a lot of conventional mortgage bankers recently and they’re worried. Over the past month or two months, they’re starting to say, “Well, we’re kind of worried because the rufubing was over. Rates are not what they used to be.” For them it’s literally like 10 basis point change [inaudible 00:53:40] amount. And it’s of course inventory. And so they’re starting to feel the pressure. But in our space, everyone is saying super bullish, very white-hot. I wanted to get your thoughts on things where you think things are headed for us.
Sharon Koh:
I think for the private money space, I think you’re going to see some mergers and consolidation.
Kevin Kim:
Yeah. We’ve heard that a lot.
Sharon Koh:
We’re already seeing it. Like [crosstalk 00:54:20], was it RCN or one of those. And I think you’re definitely going to see more of that. And I don’t have the crystal ball, what it will look like, but where the originators asset manager and the capital. But some layers are going to go. There are bad actors in this space over time that… There will always be but I think that will shake out when things get tougher. I think honesty is the best policy.
Kevin Kim:
Hundred percent.
Sharon Koh:
So if you stay intellectually honest. I would say every underwriting is all about intellectual honesty. So I think the people who cannot stay true might fall out of our ecosystem. I think there’s going to be a lot of new construction in certain markets for sure. We are seeing a lot in Atlanta. We’re seeing a lot in Texas.
Kevin Kim:
I mean, in Texas, that’s basically all they’re doing, isn’t it? I mean, fix and flip is not really a thing in Texas anymore.
Sharon Koh:
It is a thing but then there’s also going to be a lot of infill, the gentrification. So you’re taking two 800 square feet house that is sitting on acre lot. Now you have two acres and they’re building six single family.
Kevin Kim:
Right.
Sharon Koh:
We see that a lot in San Antonio. So there’s going to be a lot of that. And I think the 30 year is always going to be there. I mean, there’s going to be that market that is underserved by the banks. That big surge might slow down, because a lot of frankly, those people were financing their rentals with traditional hard money, renewing annually. They’re taking up a one year hard money loan. They call a bridge loan, not a fix and flip, and they’re putting renters in there. But this 30 year product has allowed them to refi into what looks more like a regular mortgage
Kevin Kim:
Conventional mortgage.
Sharon Koh:
Yeah. But I think that there’s a spike in volume because there’s that whole segment that was using the wrong tool. Maybe because the banks weren’t offering the product, but now there’s a different option.
Kevin Kim:
Yeah, that’s definitely the explanation behind it. I mean, there wasn’t a solution before, now there is. But then that raises another question is, well, what happens when UWM and Rocket Mortgage and all these guys get wind of this and then just take our legs out? And that’s been expressed by a lot of people. And that raise interesting questions. That leads us down another path of commoditization even further.
Sharon Koh:
Yeah. And I think we are definitely rates taker now. We used to dictate the terms and now with competition you can see everyone’s offering a different flavor of the same product. When you look at all the rate sheet and you tear into it, after all the adjustments, it come up to the same thing. I mean, there’s no longer the abnormal profit. So I think where people are going to survive is in consolidating and you see that. I mean, you see some lenders going direct and creating a different brand and so on and so forth. I think that’s inevitable.
Kevin Kim:
Yeah. At all levels we’re starting to see it at the retail level, we’re starting to see it at the institutional level. I mean, everyone knows Genesis is back on the market for sale. There’s a lot of this discussion happening at all levels of the industry, but it begs the question of whether is that leading us to a, I guess, industry culture that mimics the conventional space where we’re so commoditized and the industry is just an army full of Los?
Sharon Koh:
Yes and no. I think maybe in the 30 year. And then I think maybe you’ll start to see the bifurcation of the 30 year and the fix and flip. The fix and flip is still very hard to make it a commodity. Because every deal is so different. I mean, there are-
Kevin Kim:
Because you’re building at the end of the day. It’s so different every time.
Sharon Koh:
Yes. And then the strength of the sponsors, where it is, how many units. Every corner of the market, even in the same city is so different. You can’t really put it through an algorithm and spit out on the other end, yes, this is the answer. We look at all our fix and flip deals individually. And when it doesn’t work for us, we suggest the different… how about we do it this way, because it will work. And that’s when you can’t automate. So I think that the fix and flip would look more like what it was and what it is than the 30 year.
Kevin Kim:
If someone once told me that fix and flip is going to survive because it looks a lot like… on the commercial side, the small balance bridge space. It’s so different every time. Every sponsor got his own way of doing things. Every locale has just different cost structures and because of that. And I hope that that keeps it hyperlocal. I have a lot of clients that are immensely successful, but they only lend in four markets. And I think that I hope personally is where we’re going to stay, but fix and flip is in some ways being somehow securitized in its own right, and that begs the question. And I always have had difference of opinions on this from different people.
Kevin Kim:
I’m personally in your account because I form funds for a living, so I prefer things to be kind of small, and driven by high net worth investors and balance sheet strategies. But when we see the institutions paying so much attention to it, it begs the question. And you raised it in an interesting way, is this asset class… Is it possible to commoditize the asset class? Because your argument is that it’s no, because of the nature of the borrower.
Sharon Koh:
Right. The 30 years, yes. So I’ll say that the fix and flip is like a custom wedding cake. So going back to my pastry art.
Kevin Kim:
Yeah. I like it. I love the analogy.
Sharon Koh:
And then the 30 years is like the antimins.
Kevin Kim:
Right. Because the bride is going to want different flavors per tier and different decorations. That makes sense actually.
Sharon Koh:
And different parts of the country like different types of cake and the different flavors. And depending on your culture what’s a lucky color and what’s not.
Kevin Kim:
Oh yeah.
Sharon Koh:
So I really think it’s really harder to commoditize the fixed [inaudible 01:02:40] loans.
Kevin Kim:
And with the popularity construction, that changes the game even more. I mean, that increases the level of customization. And that’s an interesting way to look at it. And let me ask you this then. So you guys have been buying loans as your primary business model. And from my standpoint, my clients are lenders, originators, fund managers, loan buyers, all types. And the question has become, the model of balance sheet strategy, for either an origination company or a company like yours that buys loans. Can that continue when Wall Street is buying everything they can get their hands on, including fix and flip?
Sharon Koh:
Yeah. So we buy loans, but primarily over 90% of our loans we table fund.
Kevin Kim:
Okay. You’re a funding source. You’re not buying it after close.
Sharon Koh:
Yes. We can buy after close if they so prefer, but we are a funding source, so we can table the fund. I think that’s also one of our major differentiation between us and Wall Street. And I get that. But I think what Wall Street ends up buying is something really generic because they need to cram it back into three different boxes.
Kevin Kim:
Right.
Sharon Koh:
Right. And so [crosstalk 01:04:00].
Kevin Kim:
And it’ll have the antimins.
Sharon Koh:
… I see. So we got to cram it, but I think back to the fix and flip, which is why we have not given up. We are still Uber ultra focused on fix and flip because it is not what that I believe is going to be so commoditized. The 30 year, it’s just like any other home. I mean, it’s just non-owner occupied basically. It’s a rental.
Kevin Kim:
At the end of the day, it’s written like a conventional mortgage.
Sharon Koh:
That’s right. No construction involved, no construction risk, no draws. Because draws throw in kind of a difficult element in this, because some loans… In fact, some of our loans have zero first day funding and it’s all hundred percent construction. How do you account for that? And of course these days you’re paying interest on only the funded amount. And some of our borrowers are so well capitalized they only take half their draws and then they can [inaudible 01:05:10] home. So how do you manage that? I mean, the cash drive that they have to consider for a fund. Because you have to have reserves. And then for securitization you go from zero to a hundred, but over what period of time? Whereas a 30 year mortgage is so plain vanilla, absolutely a commodity. And it works as a strategy for many capital source. It works as a strategy for Wall Street, but that’s where we are not ultra focused on at this time.
Kevin Kim:
So you’re liking the idea of custom fitted, bespoke lending product, which is fixed and flip and sticking to your guns there? And that seems to be the path of success. A lot of my clients who are balance sheet players, whether they’re fund managers or however they are set up, they don’t even do the DSCR. They’ll broker it out essentially. They don’t stop their primary business model.
Sharon Koh:
Because you cannot beat their rates. You cannot.
Kevin Kim:
No, you can’t. And they’re not interested in it either.
Sharon Koh:
[crosstalk 01:06:19] the Wall Street buyers.
Kevin Kim:
Right.
Sharon Koh:
Yeah.
Kevin Kim:
Very cool. All right. So last question for you. The closing question we’ve asked on the show is, so the next three years, we’re not exiting COVID, because with this stupid Delta thing. But we’re on our way out. Although someone just told me there’s this thing called mu now and I’m confused.
Sharon Koh:
Yes. I read about that last night.
Kevin Kim:
Yeah. I was like, “Oh God, another one.” And the market is white-hot and clients are growing and the industry is growing. For next three years, bullish bearish for the private lending industry?
Sharon Koh:
I’m bullish. I would say I’m bullish. I think, like I said, you stay in your lane, you stay intellectually honest, you make good loans and you partner with the right people. People who have integrity. I mean, we’re huge on that. Because at the end of the day, we own the problem and we own the problem and so I’m bullish.
Kevin Kim:
Very nice said.
Sharon Koh:
We have to take some short term as we’re not opening up a credit box so much that… because I want to survive to play another day.
Kevin Kim:
Right. And playing conservative is most likely going to serve you best in the long run anyway. You guys aren’t doing this for the next two, three years. This is the long game for you guys. And lot of our clients too. That’s the hope. I mean, with the consolidation questions, some folks are saying, “Well, we’re doing this to be sold.” And you can be a cowboy if you want. But if you’re doing this for the long run, that integrity is going to take you very far.
Sharon Koh:
Yeah. Then you have the agency principle problem. I’m doing this to be sold. Who are you serving?
Kevin Kim:
Exactly.
Sharon Koh:
Yeah.
Kevin Kim:
All right. Well, I think that’s all the time we have for today. Sharon, thank you so much for joining us on the show.
Sharon Koh:
Thank you for having me.
Kevin Kim:
And t’s all the time we have for today. Thank you very much for listening and see you on the next one.
Thanks for listening to Lender Lounge with Kevin Kim. I hope you’ve enjoyed this episode as much as I did. If you did enjoy, please leave us a five star view on your podcast platform and be sure to follow our show to be notified of new episodes. If you’re on YouTube, don’t forget to smash that like button and hit subscribe for more content from all of us here at Geraci. Lender Lounge with 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.
