Brew Johnson, the co-founder and CEO of PeerStreet, usually starts his day by drinking an iced tea and checking in on his employees – despite the rather mundane sound of his mornings, Johnson is anything but nonchalant when it comes to running his company.
PeerStreet, the brainchild of Johnson and co-founder Brett Crosby, is a marketplace where accredited investors can put capital into private real estate loans. The company provides access for investors, funds, and institutions that have previously been inaccessible to players in the real estate market.
“I think you’re insane if you do business the way we’ve done it,” Johnson quipped. “Our marketplace combines a real estate company, a law firm, a finance company, and a tech company.”
But where, you may be asking yourself, does this conglomeration of components stem from? Or rather, where did Johnson come up with this idea? As it turns out, his background is as complicated as the company’s individual mechanisms. After graduating from USC with degrees in international relations and history, Johnson earned his JD from the UCLA School of Law – from there, he worked as a technology attorney at Brobeck Phleger & Harrison, and as a real estate attorney at Allen Matkins Leck Gamble & Mallory. Before co-founding PeerStreet, he was general counsel at VirtualTourist, where he oversaw the company’s $85 million sale to Expedia/TripAdvisor.
“It’s a long story, and it was a long journey to bring PeerStreet to where it is,” Johnson said. “Serendipitously, coming out of the turmoil of the .com blow up I got involved in the real estate industry on the legal side of things. I ended up practicing real estate law until around 2005, so I finished the .com experience and got into the real estate market as the housing bubble was starting to inflate.”
During his time in the real estate business, Johnson said he worked with a variety of clients from national home building companies to major banks.
“At the time, there were a lot of things happening in the market that didn’t make a lot of sense to me. I became dismayed with the decisions that our clients were making because it seemed to me that there was a lot of problems in the market that weren’t sustained by fundamentals, it was more the idea of making money and utilizing liquidation. It became obvious to me very early on that it was a house of cards that I thought was going to crumble,” he said.
Throughout the early stages of this ‘housing bubble,’ Brew said he spent his spare time devouring information about the market and its many intricacies – initially, Johnson said he thought about setting up a vulture fund once the housing market exploded, but instead he left the law firm he was at to work at his brother’s company, acting as general counsel during the company’s sale to Expedia/TripAdvisor.
While Johnson was working at the company, then called Virtual Tourist, he said being involved with the day-to-day operations of a technology company opened his eyes to the possibilities of technology in a number of different fields.
“In the early stages of alternative lending online, I said to myself ‘when this financial crisis unfolds, if we can apply the technology to fill the void left by the banks, we can connect investors to people looking for capital,’” Brew said. “I thought that could be a really powerful thing – it is one of those businesses that I worked up for a fairly long time because there was so much going on.”
While Johnson was making hard money loans, buying foreclosures, and buying distressed notes from banks, he noticed something; even though he was a lawyer with a seasoned insight into risk, there were not many avenues to raise capital for real estate deals. This was one of the factors that led to PeerStreet’s founding.
“Even with my kind of pedigree and everything it was kind of difficult for me to raise private capital to grow a business,” Johnson said. “So at that point I said what if I could use the learnings I developed from working at these tech companies, these platform approaches, and use that to connect lenders to capital. I thought it could be a really powerful thing.”
In addition to his experience with technology companies, Brew said there were many components that contributed to PeerStreet’s founding, including his understanding of the housing market and personal experience. In 2013, Johnson said it was finally the perfect time to build his platform.
“Really what we were trying to do is take a lot of learnings from the traditional finance market and traditional mortgage market – while understanding the issues that led to the financial crisis and the issues of the traditional securitization market,” Johnson said. “Taking the positives from that market and applying them to the private money lending space, and also learning from the negatives and trying to make the space better.”
This idea could not have come to Johnson without his diverse background – taking pieces of information from his careers in law, technology, and the real estate market.
“With the idea of the platform for PeerStreet, similar to how Fannie Mae and Freddie Mac provide this secondary market for traditional mortgage lenders to make loans and sell them off using the securitization market, we are applying that same concept to the private lending market,” Johnson said.
Part of the reason for doing that, Brew said, is to utilize his background in law to understand the intricacies of the lending space. He also said that this marketplace idea adds great value to people looking to invest in a wide variety of loans while also allowing lenders to acquire more deals (and make more money in the process.)
“The background of [PeerStreet] is kind of a really weird thing because I was a real estate lawyer and had a distinct view of the securitization market and the issues plaguing it, and then I just happened to get involved in the tech world and started understanding those platforms. Being able to pile those experiences together has been very valuable,” he said.
Johnson said building a platform for lenders by itself is meaningless unless the platform carries value for the lenders. Although Brew’s background was conducive for the establishment of PeerStreet, he said there are a number of challenges associated with applying a marketplace mindset to the private lending sphere.
“The challenge of the private lending market is that it is so fragmented,” Johnson said. “The fragmentation of the market is both a challenge and an advantage – and there are many reasons to say that. The reason it is fragmented to begin with is because private money lending, hard money lending, or however you want to describe it is you have loans that aren’t ‘cookie cutter’ and fall outside the traditional lending market.”
Because of this fragmentation, Johnson said it is traditionally difficult for lenders to access large pools of capital. Historically, he said there is easy access to ‘friends and family money,’ or funds that don’t come from financial institutions, but on a large scale it has been difficult for investors to access capital at an institutional level.
“The real challenge for me was when I looked at the private lending space, I always thought ‘wow, here you have lenders out there who are making loans at 10 or 12 percent interest, and their cost of capital is very high,’” he said. “When I looked at that, it seemed very weird to me – when a loan is done correctly, I don’t see that there is as much difference in the risk between a well-done private lending loan and a loan on an office building for example.”
Johnson said traditionally, real estate lending was more of a ‘local game’ that relied on art as opposed to science. He added that on the borrower/lender side of things, this fragmentation made it difficult to access larger pools of capital with lower interest rates.
“I thought originators and lenders caught the capital too high, and I thought borrowers caught the capital too high,” he said. “But knowing that there are thousands of hard money or private money lenders around the country, you could create a platform that allowed all of those lenders to pool their loans. That asset of a very large, diversified pool of loans would be much more attractive to a pool of investors.”
If a company could get broad diversification for investors, Johnson said this could help drive down the cost of capital – this idea was one of the most crucial in PeerStreet’s founding.
“Knowing a lot of struggles that hard money lenders have and knowing their high cost of capital allowed us to create this platform that a bunch of different lenders could tie into,” he said. “By them binding together into this marketplace, they could access different types of capital and drive down the cost so they can do business.”
The ‘lynchpin’ of PeerStreet, Johnson said, is to have a lower cost of capital so more deals can be facilitated. Brew also said an important aspect of his business is to not only create a marketplace where these deals can occur, but empower investors so they feel more comfortable making high-volume transactions.
This empowerment, he added, happens when marketplaces like PeerStreet act as an intermediary between investors and lenders, and as an intermediary say “when a loan comes through this platform, you can know that it’s been curated, and you can know that it has been homogenized so you can make an investment decision on it.”
“Everybody wins in that situation,” Brew said. “Investors get access to this great asset class and get much broader diversification by spreading their capital across a number of different loans, for example. For us, a powerful technology platform creates value for all of its participants.”
Backtracking to the idea of the private lending sphere as an art and science, Johnson said there are a number of distinctions to be made there.
“There is a science to the mortgages that Fannie Mae and Freddie Mac will buy, a very specific box they can fit into, and they are based on things like loan size and low FICO score, but it’s a very commoditized product so there is more science attached to it,” he said.
When discussing the art of private lending, Johnson said an example would be a ‘fixer-upper’ property, where a potential investor and lender would look at things like property value and the cost of any renovations.
“Real estate is such a hyper-local business, so when you’re doing any type of deal that has a value-add component there’s inherently an art to it,” Brew said. “I think it would be very difficult for me to sit behind a computer in Los Angeles and make an independent investment decision on what the future value of a property will be.”
Although Johnson said he would have difficulty ascertaining the value of a property that is far-removed from his location, he would be able to know more about a deal that is closer to him. This knowledge is what causes a disconnect between the local business aspect of private lending and large-scale deals.
The divide between the art and science of the private lending field is something that Brew noticed early in his career, and said he wished to bridge with PeerStreet.
“How you keep the best of both worlds, where you have the art of the local, boots on the ground real estate experience and the capital you want to connect that to is through data transparency – the idea there is if you are a lender who has a really great track record, we should be allocating you more capital, higher advance rates, and more constant capital,” he said.
Once the art/science divide is ‘healed,’ Johnson said the next step is allowing lenders and investors to establish a positive track record. Over time, he said these track records can help potential lenders feel more at ease throughout deals. Data transparency also plays a role in the marketplace itself; if lenders and investors can see clear-cut results from previous transactions and real estate deals, it increases the propensity of players to participate in the marketplace.
For those in the real estate world who aren’t aware of PeerStreet, Johnson said it can be easy and incredibly difficult to summarize what his marketplace offers to investors and lenders.
“What we do is we have two sides of the marketplace,” he said. “On one side we have investors who are looking to invest in high-quality, first-position real estate-backed loans. On the other side we have lenders who want to sell loans and fund their loans via this marketplace – and I mean when you think about a marketplace, there are two sides.”
Johnson said PeerStreet can be analogized to eBay, for example, because of the buy/sell component. Where this analogy starts to dematerialize, however, is in its level of intricacy. When buying something on eBay, you see the item, purchase it, and it arrives at your doorstep. In the private lending and real estate market, there are nuances that make it much harder to navigate.
“In this marketplace [PeerStreet,] buyers and sellers aren’t interacting directly,” he said. “When we function as an intermediary that benefits both sides – sellers in our marketplace can access billions of dollars of capital but they only deal with one counterparty. I guess the two-sentence takeaway is that we are a marketplace for investing in real estate-backed loans and real estate debt, and the value we provide is we connect lenders to the worldwide capital market. On the flip side we connect investors to high-quality real estate loans.”
Looking forward, Johnson said he hopes more lenders and investors start to realize the benefits of being part of an online marketplace for real estate deals. As of right now, PeerStreet has over 150 employees and has plans to grow in the future.
“The idea of how this marketplace benefits everyone is really important, and I think most lenders out there understand that we’re trying to create value for them,” Johnson said. “The whole idea of this source of capital should be there in any market condition is important too – we’re trying to create this platform that will allow any lender of any size to compete with the most sophisticated financial institutions.”
For more information about PeerStreet and its co-founder, visit peerstreet.com