PL PRIVATE LENDER The Official Magazine of AAPL July/August 2016
+ Could Brexit Wash Ashore Here? + How to Keep the CFPB Happy + The Trouble With TRID + Debunking Private Lending Myths
ROBERT BUCHANAN Trend-Watching from Every Angle
COVER YOUR ASSETS! at the American Association of Private Lenders 7th Annual Conference
AAPLANNUAL CONFERENCE 2 PRIVATE LENDER
11 aaplonline.com NOVEMBER 13-15 | CAESARS PALACE | AAPLCONFERENCE.COM
JULY/AUGUST 2016 3
4 PRIVATE LENDER
CONTENTS JULY | AUGUST 2016
Is Brexit a Tidal Wave That Could Cross the Atlantic?
Viewing Investing Trends With 360-Degree Clarity
by Jeffrey N. Levin
with Robert Buchanan
Debunking the Myths About Private Lending by Charlie Fitzgerald
Regulation Crowdfunding: Where We Are Headed by AdaPia d’Errico
Factoring vs. Purchase Order Funding for Your Business
Breathe New Life Into Your Marketing
by Mike Ponamarew
by Chrissey Breault
Real Deal Perspective
Tips to Help Investors Acquire Financing
Up-to-Date Systems Will Keep CFPB Happy
by Abhi Golhar
by Elizabeth Morales
Ease of Use for Lenders: Past, Present and Future by Clay Malcolm
Residential Investing, Lending in Modern Era
by Nic Walling and Tim Leber
Question & Answer
On Learning, Leadership and Lending with Linda Hyde
Using Property Valuations To Spot Opportunity by Ron Ahlensdorf Jr.
by Matt Rodak
by Jaspreet Kaur, Esq.
by Anthony F. Geraci, Esq.
Is it the ‘Next Big Thing’ Or Dot-Com Bust Again?
The Continuing Trouble With TRID
Your Appraisal Fees At Risk Under TRID
JULY/AUGUST 2016 5
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REIGuard is the residential real estate insurance Program offered by National Real Estate Insurance Group, LLC and serviced by Affinity Group Management, Inc.
PRIVATE LENDER R. MICHAEL WRENN CEO, Affinity Enterprise Group
EDDIE WILSON President, Affinity Enterprise Group
LINDA HYDE Executive Director, AAPL
LINDA WIENANDT Editor-in-Chief
CHRISSEY BREAULT Director of Marketing & Member Services, AAPL
ROBERT RAKOWSKI Vice President of Media Sales firstname.lastname@example.org o. 913-599-2020 / c. 602-617-7410
DUSTIN THOMAS Sales email@example.com o: 913-888-1250 / c: 816-718-4091
EMILY BOWERS Graphic Designer
CONTRIBUTORS: Ron Ahlensdorf Jr, Chrissey Breault, AdaPia d’Errico, Charlie Fitzgerald, Anthony F. Geraci, Esq., Abhi Golhar, Jaspreet Kaur, Esq., Tim Leber, Jeffrey N. Levin, Clay Malcolm, Elizabeth Morales, Mike Ponamarew, Matt Rodak and Nic Walling
PHOTOGRAPHY: Cover/Lender Limelight: Ashton Leon Photography Q & A with Linda Hyde: Pro Focus Photography Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers.
SUBSCRIPTIONS: Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.
Old is New Again Now PL comes to you in print
For nearly three years, the American Association of Private Lenders, through our direct marketing efforts, has provided Private Lender e-zine as a go-to resource for the private lending industry—the people, the companies and services reshaping today’s real estate. We’ve grown up with the web and understand its magic. We know the power of imagery, educational articles and broadcast-quality videos. It made sense to us that we deliver through another medium we know our readers care about: print. Surprised? That’s the point. While others are running away from print, we’re embracing it to give our readers another resource for the industry. Our bi-monthly magazine showcases original work you’ll find in the magazine first, each piece reported and crafted by many of our own members, staff and industry leaders. In our inaugural print issue, you’ll find Financing Tips for New Investors by Abhi Golhar, Misconceptions of Private Money Lending by Charlie Fitzgerald and an exploration of what Brexit could mean for the U.S. commercial real estate market, by Jeff Levin, just to name a few articles. In the Lender Limelight, you’ll learn about Robert Buchanan of CCG Capital, plus you’ll learn a little more about me. The enthusiastic Chrissey Breault brings her alwaysentertaining perspective on marketing. Only Private Lender brings impacting stories for the private lending industry that matter to you, and now we’re proud to share them in print. •
BACK ISSUES: Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. Copyright © 2016 American Association of Private Lenders. All rights reserved.
Executive Director, AAPL
JULY/AUGUST 2016 7
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CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
RON AHLENSDORF JR. is president of Summit Valuations, LLC, where he is responsible for strategic partnerships, product development and revenue growth. He has over 15 years of relevant industry experience. He can be reached at firstname.lastname@example.org.
CHRISSEY BREAULT is a Pittsburgh native and hospitality major, who started a parttime photography and design business in 2009, while working full-time in local government communications. She is currently Director of Marketing and Education Services with the American Association of Private Lenders.
ADAPIA D’ERRICO is an entrepreneur, investor, and strategic business adviser. She worked in banking and finance in her early career, transitioning into entrepreneurial ventures in brand development and strategic marketing across the new media, consumer products and entertainment industries. Over the past three years, she has done a deep dive into the high-growth alternative finance space as Chief Marketing Officer at Patch of Land, where she is responsible for driving brand awareness, marketing and communications strategy, and partnerships and business development. She has positioned the company as a recognized leader in real estate crowdfunding, P2RE®, and marketplace lending. She is a frequent contributor and presenter on these topics, as well as on topics ranging from leadership and marketing, to real estate, economics and crowdfinance.
CHARLIE FITZGERALD, MBA, is Branch Manager/Senior Account Executive for Civic Financial Services, LLC, in Las Vegas, Nevada, and has served his community for over 25 years. He has worked for the past 20 years in banking and finance representing conventional/ conforming, alt-a/sub-prime, commercial and private money loan clients throughout the United States. Fitzgerald has personally originated in excess of $2 billion in loan volume and has been recognized numerous times as a Top 100 Originator in the industry. He attended San Diego State University, majoring in Political Science/Pre-law; Acton Liberty University – Business Administration (MBA); Kaplan University – Legal Studies and Policy Administration (BS) and a vast number of banking, finance, securities, legal and lending educational programs over his 20-plus-year career in the industry. Contact him at Charlie.Fitzgerald@civicfs.com or by calling 702-561-1056 or 877-47-CIVIC.
JULY/AUGUST 2016 9
CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
ABHI GOLHAR is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Golhar uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in electrical engineering from the University of Michigan. You can find him on Twitter, Snapchat and Instagram - @AbhiGolhar. #RealEstateDealTalk
ANTHONY F. GERACI, ESQ. is the managing shareholder of Geraci Law Firm. He is in charge of firm strategy and development of the Geraci team and culture. He is skilled in mortgage lending and securities law and has authored numerous articles on real estate finance and security subjects. Geraci is a leader in creating national mortgage pools and mortgage funds as well as sophisticated net branching arrangements among several mortgage companies.
JASPREET KAUR, ESQ. is an Associate in the real estate finance section of the Geraci Law Firm. Her experience includes representing lenders and brokers, preparing commercial, residential, and construction loan documents, assignments, and subordination agreements. She also has experience with non-judicial foreclosures and default related matters.
TIM LEBER is an analyst at Colony American Finance, a leading financier for real estate investors. Leber has spent his career in real estate finance. Prior to working at Colony American, he was an associate at Newmark Grubb Knight Frank, a commercial real estate advisory company. He also has held positions at Grubb & Ellis and Morgenstern Property Co. Leber is a graduate of the University of Arizona. Reach him at email@example.com.
JEFFREY N. LEVIN is the Founder and President of Specialty Lending Group, a boutique private real estate lender in the Washington Metropolitan Area formed in 2007. Prior to that Levin was a Co-Founder and CEO of iWantaLowRate.com, a regional lending company that he ran for over 10 years. During his career, Levin has overseen total loan production of over $750 million, with approximately 3,500 loans being generated. Prior to launching iWantaLowRate.com, Levin was Founder and President of Monument Mortgage, a regional mortgage lender from 1993 to 2000. Levin is a frequent lecturer and panelist on real estate investing. He earned a B.A. from The American University in Washington D.C. and lives in Washington D.C on Capitol Hill with his wife Dunniela, a Canadian trade lawyer, and his two sons, Jack and Charlie.
10 PRIVATE LENDER
••• CLAY MALCOLM oversees most avenues of marketing, teaches continuing professional education and informal classes and webinars, and facilitates the training of business development and client representative teams at New Direction IRA Inc. Malcolm has more than 20 years of management experience in various roles, including as the vice president of Jersey Films and as a director for Princeton Review. Malcolm draws upon his teaching background – including instructor roles with Colorado Outdoor Training Initiative and Ivy West Education – to develop the educational aspects of New Direction IRA and impart knowledge about self-directed IRAs to its clients and prospective clients. He received his Bachelor of Science degree in Communications from Northwestern University.
ELIZABETH MORALES is the Business Development Director for Applied Business Software, makers of The Mortgage Office, a leader in private lending loan servicing software. She has a proven record in senior operational roles and is known as an inspirational leader and a datadriven marketer. She has created full-scale marketing platforms; handles media, public relations and brand management for ABS; and is a strategic planner and forward thinker. Morales has a Bachelor of Arts degree in Spanish Literature and a Masters degree in Business Administration. You can contact her at firstname.lastname@example.org.
MIKE PONAMAREW joined the Factoring industry in 1999. He is the Founder and CEO of The Finance Institute and Managing Director of The InvoiceXchange. Ponamarew is a Factor member who managed $750+ million in transactions. He is an acclaimed industry educator that has taught over 5000 business professionals, consultants and business owners how to profit in the lucrative Factoring industry. He is a contributing author of industry publications and blogs as well as guest and keynote speaker for events. He established and vended three successful businesses prior to joining the alternative finance and private lender industry.
MATT RODAK is the CEO of Fund That Flip, an online lender that provides short-term loans to experienced residential real estate redevelopers. Accredited investors can invest in loans originated by Fund That Flip. Annual yields range from 10 percent to 14 percent over 6 to 12 month terms. You can learn more at www.fundthatflip.com/lender. Rodak can be reached at Matt@fundthatflip.com.
NIC WALLING is a Production Analyst at Colony American Finance, a leading financier for Real Estate Investors. Walling has spent his career in commercial real estate. Prior to CAF, Walling was an associate at Green Street Advisors, an equity REIT and commercial real estate research and advisory firm. He has also held positions at Turnstone Capital and Newport Coast Capital Management. Walling is a graduate of USC’s Marshall School of Business where he studied real estate finance. You can reach him at email@example.com.
JULY/AUGUST 2016 11
WHAT’S CURRENT TRENDING INDUSTRY TOPICS
APPLIED BUSINESS SOFTWARE ANNOUNCES MAJOR SOFTWARE UPDATE Applied Business Software Inc., developer of The Mortgage Office and The Loan Office software, announces a major update to its signature software The Mortgage Office. Among the new features of Version 2.1.7: •O nline payments that allow borrowers to make payments using their credit/debit cards or bank account information with instant confirmations. •E lectronic payments over the phone for real-time credit card and EFT payments. •A dded enhancements to QuickBooks and PeopleSoft integration, which allows posting of company funds to the general ledger. •E xcel import to easily import loans, co-borrowers, lenders, vendors, funding and more via the powerful import wizard. •C DFI certification from the U.S. Department of Treasury for the 2016 reporting year. Long Beach, California-based Applied Business Software, founded in 1978, is a market leader and global provider of software
be tasked with hiring Account Executives and ensuring the resulting team meets specific loan production goals through the establishment of ongoing business relationships with mortgage brokers, real estate agents and investors located within an assigned territory. Civic also is recruiting for the Account Executive position. That position is responsible for meeting specific loan production goals through the establishment of ongoing business relationships with mortgage brokers, real estate agents and investors located within the assigned territory. Civic is a private money lending group specializing in the financing of residential investment properties. Civic provides mortgage brokers, investors and real estate agents with a mortgage lending solution for investment property acquisition and refinance transactions in various states. Positions are available nationwide; for information, email firstname.lastname@example.org.
LAND GORILLA-PRECISION BUILDING GROUP PARTNERSHIP ANNOUNCED
systems and solutions to the lending industry. ABS offers
Land Gorilla, an industry leader in construction lending
a complete suite of software
risk management solutions, is expanding its commercial
products designed from
offerings by partnering with Precision Building Group
the ground up to specifically
to conduct Precision Commercial Project Reviews. Land
address the needs of those who
Gorilla offers cloud-based construction lending software
originate and service loans. For more
and services to address the many nuances of construction
information visit www.themortgageoffice.com, www.theloanofficesoftware.com or call 800-833-3343.
and renovation lending facing banks today as they balance increased opportunity for commercial loan growth with the inherent risks involved in construction lending. “In today’s highly competitive lending environment, bankers need to respond quickly to loan requests while
Civic Financial Services is currently seeking an
addressing the risks involved with project feasibility,
Account Executive Manager, with responsibility first
contractor pre-qualification and post-closing loan
for building a book of business. Eventually, this person will
administration,” noted Sean Faries, Land Gorilla CEO.
12 PRIVATE LENDER
“Expanding our offerings through this strategic partnership
more than $30 million of principal and interest payments
with Precision Building Group provides bankers with
to investors and funded more than 270 projects totaling
the tools they need to conduct thorough analyses of the
$130 million, with an average blended rate of return to
construction projects they underwrite in order to improve
investors of over 11 percent.
budget accuracy and ensure successful project execution.” Added Karl Vaillancourt, CEO of Precision Building Group: “Land Gorilla is doing exciting things for banks.
For more information, please visit www.PatchofLand.com.
PEOPLE IN THE NEWS
Today’s compliance requirements are daunting – especially for regional and community banks. Land Gorilla’s tech-savvy
Shea Pallante, Managing Director
approach streamlines the administration process for lenders
of Civic Financial Services, and
and takes care of the compliance headaches for them.”
Serena Yang, Director of Marketing,
For more information visit www.landgorilla.com.
PATCH OF LAND ADDS INSTITUTIONAL PARTNERS AS FRACTIONAL INVESTORS
are among the 2016 “Young Guns” recognized by Mortgage Professional America. MPA’s list of 42 emerging leaders under age 35 represent “the new face of the mortgage industry as
Patch of Land, a leading online marketplace lender for
they attain new heights in and out of
real estate, has added more institutional funding partners
the office,” MPA says. In addition, Yang
that invest fractionally on the platform. Prime Meridian
recently was recognized as a “Woman of
Capital Management, an investment management
Influence” by Housing Wire Magazine.
firm specializing in online Peer-to-Peer (P2P) lending
Pallante leads the firm’s focus on
strategies, and AlphaFlow, a P2P investor technology
providing nationwide private money
platform founded by a real estate crowdfunding veteran,
lending. He has over 13 years’ experience in the financial
have committed to invest in Patch of Land loans from
services industry, having started his career at NationPoint,
their real estate
a subsidiary of Merrill Lynch, where he managed retail
sales, marketing and product development, building
their originations platform to become a top-ten online
made on a fractional
mortgage lender. Yang has more than 13 years of real estate
basis on the Patch
marketing experience, and was Director of Marketing at
of Land platform, in
Colony American Finance, a subsidiary company of Colony
the same manner as accredited investors transact in their
Capital, prior to joining Civic.
individual loan selection. This is a key difference from forward-flow or whole loan purchasing agreements, in which an institution purchases an entire note. Patch of Land issued its first loan in October 2013, with
Opus Capital Markets Consultants, LLC was selected as the winner of a Silver Stevie ® Award in the “Company of the Year–Financial Services” category
a focus on real estate debt; diversified lending products,
in the 14th Annual American Business Awards. In
including short term bridge, commercial and rental loans;
addition, Jennifer LaBud, COO at Opus CMC, was
an innovative investor note structure, and the prefunding
named the winner of a Bronze Stevie Award in the
of loans. Since inception, Patch of Land has returned
“Woman of the Year” category. The American Business
JULY/AUGUST 2016 13
TRENDING INDUSTRY TOPICS
Awards is among the nation’s premier business
& Development with loanDepot.
awards programs. More than 3,400 nominations from
com where she built, managed and
organizations of all sizes and in virtually every industry
evolved many impactful training
were submitted this year for judging by more than 250
programs, including compliance and
professionals worldwide. Recognizing Opus in the new
best practices training for sales and
world of financial regulation and compliance, judges
commented, “Opus CMC deserves accolades for leading by example.” They further praised Opus’s submission for its well-written account of strong company outlook
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and growth in recent years. Likewise, judges noted LaBud’s “strong track record” and detailed her “high
Tickets are still
performance and visible effect on the growing success
available for NuView
of other women in the industry.”
IRA’s 4th Annual Alternative Investment
Ali El Wakeel and Summer Martinez, originators, are new senior account executives at Civic
Symposium Sept. 2930, 2016, at the Lake Mary (Florida) Marriott. “Planning For Prosperity” is a two-day investment
Financial Services, the lending arm
symposium featuring top real estate and lending
of Wedgewood Inc., one of the largest
experts from around the nation sharing how to move
distressed-real-estate acquirers on
from “earned” to “passive” income and ways to build a
the West Coast. Previously, El Wakeel
successful personal alternative investment portfolio.
was senior originator at Colony
Participants will have the opportunity to network
American Finance. He started his
with over 150 industry experts along with hands-
career at Auction.com, where he
on workshops and a self-directed IRA client panel
was a part of the team that founded
discussing how to successfully build tax-free wealth.
Auction Finance. Martinez started in the real estate finance industry over 12 years ago, beginning at First
To purchase tickets and for more information, visit: www.nuviewira.com/events/planning-forprosperity-2016/ •
Franklin and Lending Tree, where she held multiple roles from customer service management to loan processing. Martinez later worked at Auction.com and Colony American Finance. Her focus at Civic is developing the company’s line of credit program. Sophie Kim is now the Director of Learning and Development at Wedgewood Inc. & Civic Financial Services. She brings more than a decade of origination experience with reputable direct lending organizations and recently served as the Vice President of Learning
14 PRIVATE LENDER
submit your news
Send us your news, updates, or job opportunities for possible inclusion in our next issue! Submit details to PrivateLender@aaplonline.com
D E V I V R U IS E T A T S E L A E R
A Powerhouse Lineup of Industry Experts Converge for The Biggest Night in Real Estate on October 21
On October 21, 2016, join The Norris Group and our panel of industry experts at the Nixon Library in Yorba Linda, California for another award-winning evening. Get the inside scoop on top real estate trends from the leaders shaping our industry. Dress up, enjoy a spectacular meal in the Presidential East Room, network with successful real estate professionals from all over California, and help raise funds for kids with life threatening medical conditions.
Bruce Norris President The Norris Group
Nick Bailey Vice President Zillow
John Burns CEO
John Burns Real Estate Consulting
Doug Duncan Chief Economist Fannie Mae
Sean O’Toole President PropertyRadar.com
All funds directly beneﬁt Make-A-Wish and St. Jude Children’s Research Hospital. We’ve raised over $600,000 for charity since 2008.
Gary Acosta CEO
National Association of Hispanic Real Estate Professionals
Apartment Owners Association of California, Inc.
Auction.com Coachella Valley Real Estate Investors Association Coldwell Banker Town and Country Elite Auctions First Lending Solutions imortgage First Lending Solutions For Investors By Investors (FIBI)
In A Day Development Inland Valley Association of Realtors Jennifer Buys Houses Keller Williams Corona Keystone CPA Las Brisas Escrow Leivas Tax Wealth Management New Western North San Diego Real Estate Investors
Northern California Real Estate Investors Association Orange County Building Industry Association Orange County Investment Club Pasadena FIBI Pilot Limousine Real Wealth Network Realty 411 Magazine
Realty Executives Rick and LeAnne Rossiter SONOCA Corporation Spinnaker Loans uDirect IRA Services Westin South Coast Plaza Wilson Investment Properties
www.ISurvivedRealEstate.com or 951-780-5856
JULY/AUGUST 2016 15
Is Brexit a Tidal Wave That Could Cross the Atlantic? by Jeffrey N. Levin
rivate lenders are justifiably
UK’s Commercial Property Price Index
concerned about the implications
has more than doubled. Assets across
of “Brexit”—the British exit from
all manner of CRE investments were
the European Union—for the U.S.
paying off and attracting more buyers.
commercial real estate market,
However, during the spring of
considering the wave of uncertainty
2016, signs began to emerge that
that has washed across the UK and
the party was almost over and the
Europe. In the months prior to
hangover was starting to set in. Over
the June vote in the UK, the CRE
the three months prior to the Brexit
industry appeared to be flattening out,
vote, deal flow in the UK and EU
suggesting it had reached the peak of
slowed significantly, particularly in
across the investment world. The
its seminal business cycle.
London. Of the pending deals, many
official vote was announced: Britain
had contingency clauses that allowed
would leave the EU. Prime Minister
of any business cycle tends to be
lenders or buyers to exit the contract
David Cameron, chief advocate of
downward, but the question remains:
in the event Brexit passed.
the “Remain” side, stepped down.
Naturally the “view” from the top
Will Brexit be the catalyst that pushes
In advance of the vote, most polls
Brexit, Regret It. On June 24, pure panic set in
The ruling Conservative Party was
the U.S. CRE into bearish territory?
suggested the “Remain” side would
reshuffled and a new Prime Minister
Or will it prove to be a boon as interest
win by a couple of percentage points
selected. Meanwhile, nobody had a
rates stay low and investor liquidity
and the UK would stay in the EU
clear view on how a breakup between
flows to the safety of our shores? The
economic structure. However, prudent
the highly integrated UK and EU
answer will be determined in time.
lenders and buyers were nervous that
markets was supposed to proceed.
As this all plays out, private lenders
Brexit might somehow happen, an
Leaders on either side of the English
should carefully monitor what is
anxiety compounded by the localized
Channel could not even agree on the
happening across the UK and EU
shocks of grisly terrorist attacks.
start date for the untangling.
markets, as opportunities and new
Starting in early July, before the
For investors and buyers, the news
deals are sure to surface as a result, as
vote, several leading commercial
of the “Leave” vote and the calamitous
well as a hefty new dose of risk.
property funds barred withdrawals
political environment left in its wake
Prior to this year—and the
by investors who wanted to cash out
caused CRE markets in the UK and EU
instability associated with Brexit—the
as a hedge against a possible Brexit
to seize up virtually over night. Pundits
UK had enjoyed steady growth in
downturn. Given the vote to leave
declared it would lead to a severe
the commercial real estate market.
the EU, more funds are likely to
downturn of all world markets. The
Indeed, compared to its last peak in
adopt this approach over the course
public CRE companies trading in U.S.
2007, prior to the Great Recession, the
of this summer.
markets, as well as the London bourse,
16 PRIVATE LENDER
all took a big hit in share value. Global
purposes, thrown into one common
and other countries compounds the
and domestic banks immediately
bucket called the Brexit effect. No
feeling ordinary Europeans have
adopted a much tighter approach to
matter what the original root cause of
of being under siege. CRE service
buyer debt ratios. Meanwhile, the
these problems was—like Italy’s overly
companies across the EU have lowered
British currency plunged, causing CRE
aggressive track record in property
expectations, as deals have been
funds in Britain to lose billions of value
lending—the EU now has to deal with
canceled or downgraded.
in a matter of days.
the symptoms in a collective manner;
Banks across the UK and Europe were battered as a result of the vote
with, as usual, larger economies like Germany bearing the brunt of the cost.
and remain that way, with share prices
Will Brexit Impact the US? Prior to the Brexit vote, the U.S. CRE market was already showing signs of
tumbling and bond prices also under
Brexit, Terrorism and the
being at the peak of a lengthy business
pressure. According to an article in
Very Bad Summer
cycle, possibly at a bubble stage, with
the Financial Times, the cause is less
While the UK is ground zero, real
a potential market correction looming.
a direct effect of Brexit and more a
estate in the EU is under tremendous
function of what the central banks of
pressure and not simply because of
Europe are going to do about it: “The
Brexit. It was reported after the bloody
issued warnings about lending
medicine: very low interest rates, with
July attack in Nice, France, that one
practices in CRE transactions. Banks
little difference between short- and
of the main extremist aims was to
had over $1.8 trillion in outstanding
long-term interest rates, make it hard
destroy the economy of that country.
loans—billions more than the last
for banks to profit from lending.” Italian
Shocks that harm tourism, a vital
peak before the Great Recession. This
banks, the article went on to note, were
economic sector for most European
year regulators and lenders began to
in trouble long before the “Leave” vote.
countries, have a cascading effect on
carefully monitor the risk in CRE loans
Now, all pre-existing problems for
Regulators took notice. In 2015 the Fed, FDIC and others
investments in hotels, restaurants,
versus equity and are now backing off
the banking and CRE sectors across
airports and infrastructure. Similar
some loans. According to one report,
the EU can be, for political and policy
acts of terror in Belgium, Turkey
bankers are getting tougher regarding
JULY/AUGUST 2016 17
lending for more speculative projects,
unpredictable path ahead for the UK
lowering allowable loan-to-value
and EU in determining their economic
ratios. Expectations that the Fed would
engagement for the post-Brexit era.
market conditions are different and
increase interest rates, albeit slowly,
Investors and analysts reached this
require careful research, intrepid
created more cause for worry. It’s a stew
conclusion pretty quickly in the
private lenders may also find
of uncertainty peppered by terrorism,
aftermath of the Brexit vote. The
opportunities in the UK and Europe
an unpredictable presidential election
doom-and-gloom expectations for
in this post-Brexit environment.
cycle, a slowdown in China’s economic
major indexes lasted no more than
Even though there may be some great
growth and now Brexit.
three weeks, and by mid-July, the Dow
opportunities, without a doubt there
Jones Industrial Average jumped to
will be fewer overall CRE opportunities
several all-time records.
on the other side of the Atlantic.
London newspapers as well as some American media outlets likened Brexit to a contagion that would infect all the world’s markets. But in fact, the U.S.
increase as a share of the market. Furthermore, while regulatory and
While it’s very early in the process Be Bold, But Not Too Bold…
that will see Britain start a new
has been pretty well inoculated. This
Because of today’s high risk in the
course on its own, investors should
inoculation results from two factors.
CRE market across the UK and Europe,
stay upbeat and diligent. There will
and the fact that the US market—while
be gems out there for private lenders
philosophy is to use low interest
relatively more stable—still presents
looking for the right opportunities.
rates as a lever to support economic
a good amount of unpredictability,
The big drop in the British currency
growth. When the economy is
private lenders need to be more vigilant
against the dollar could offer as many
healthy, the Fed is supposed to ease
about risk while keeping the door
good deals as it discourages.
up on this lever so rates gradually
open to lucrative new opportunities.
increase. Last December, after seven
The risks are many: property and
European banks back off during the
years of the most accommodating
collateral values may fluctuate; funds
transition, by ratcheting up collateral
monetary policy in U.S. history,
and traditional lenders may pull money
requirements and making financing,
the Fed approved a quarter-point
out of deals; and buyers may bail out of
insurance and securitization of CRE
increase in its target funds rate.
contracts. Yet other factors may create
deals more difficult in a bid to reduce
The range for its target funds rate
positive conditions here. For example,
their portfolio exposure, many
went from 0 percent to 0.25 percent
investors who ordinarily would have
buying and financing opportunities
previously, to 0.25 percent to 0.5
pursued deals on the other side of
are likely to emerge for those private
percent where it is today. Prior
the Atlantic may flock to the relative
lenders paying attention.
to Brexit, there was widespread
safety of the U.S. as buyers find more
expectation of another 25 basis point
attractive possibilities here. Traditional
understanding that Brexit is the first
increase to come by the fall of 2016.
lenders getting the screws put to them
such divorce from the EU and could
Now, however, the “Brexit Surprise”
by regulators may leave prospective
result in further financial crises. The
caused the Fed to reverse course and
buyers hungry for private lending,
EU countries are fluid and economies
signal that the time is no longer right
despite a yield spread that will probably
like Italy could be in danger at any
for an additional interest rate hike.
widen over the next few quarters. While
moment. Private lenders will want
the total number of CRE deals may
to do more than their usual due
investor liquidity from the UK and
well shrink from the torrid pace of the
diligence, but the potential victories on
Europe are likely to flow to the relative
last few years, the percentage of deals
the other side of the Atlantic could be
safety of the U.S. market, given the
coming to private lenders may actually
well worth the effort. •
First, the Federal Reserve’s
Secondly, massive amounts of
18 PRIVATE LENDER
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360-DEGREE PERSPECTIVE Multidisciplinary approach gives CCGâ€™s Robert Buchanan a clearer vantage point to view trends and investing possibilities.
20 PRIVATE LENDER
JULY/AUGUST 2016 21
LENDER LIMELIGHT Robert Buchanan has one of the most established names in the private lending space. He leads the CCG Family of Companies, which evolved from the Pride of Austin companies in Texas, and is a founding member of the American Association of Private Lenders. AAPL asked him to share his story with the readers of Private Lender.
PRIVATE LENDER: Tell us a bit about your company, CCG. ROBERT BUCHANAN: The CCG family of companies—including CCG Capital, CCG Development and CCG Realty—is a group of affiliated companies that brings together a broad scope of real estate-related services under one roof. We are a small and
investors that give us key insights into
Marketing and Business Development,
flexible operation that is able to serve
what is and is not a good investment
Ryan Stewart – Construction Manager,
the real estate community in creative
in Texas and several other hot markets
Drew Buchanan – Realtor and Portfolio
ways and provide services outside of
across the U.S. We are keenly aware of
Manager, Dylan Chambers – Project
the traditional approach. CCG Capital
what will and will not work in terms of
Manager, and Gabriel Candelas – Site
provides real estate construction
location, form and function.
PL: What kind of management structure does your operation have? RB: I serve as the managing member
PL: How did you get your start in the industry? RB: In 2007, we were operating as a
for the CCG companies and am
single company providing residential
committed to the strategic and
construction services. Austin was
PL: What kind of an edge does having a hand in multiple aspects of the industry give you? RB: That enables us to be aware of
continual development of each
a hot market at the time, and our
affiliated company and the CCG team.
development company was acquiring
I lead a group of highly competent
more projects than we could secure
professionals who effectively manage
financing for as a newly established
movement and trends happening
their individual responsibilities and
business. That year, I received a mass
from the evolution of the original
often work as a team to get things done.
email from Leonard Rosen, “The most
idea throughout construction and
financing and manages two Regulation D Securities Funds. Our holistic approach is unique in that we also operate an in-house contractor and real estate brokerage services.
We run three companies with seven
interesting man in hard money.” His
with the end user. Viewing the
people, so I sought out staff that I could
message –“Be the Bank”—immediate-
market from a variety of perspectives
trust to be self-motivated and confident
ly caught my attention.
is a benefit to the projects we choose
within their roles. The CCG team
to finance and develop.
consists of Allyson Bruner - Director of
and with a degree in accounting and
Operations, Amin Noorani – Lending
career experience in auditing and
Associate, Tabette Stewart – Director of
bank loan reviews, I knew I had the
We are continually analyzing loan requests from smart real estate 22 PRIVATE LENDER
I have always been a numbers guy
••• potential to successfully build this type
of Austin, the Greater Austin Home
expect a lot from my team. I hire people
of venture. I started attending Rosen’s
Builders Association and the Urban
I can trust and supply them with the
Pitbull Conferences and within 14
Land Institute. Our team regularly
tools they need to succeed. I hold each
months I had attended three of them.
attends meetings and events held by
member of the team accountable for his
After extensively researching the
each organization to network and
or her responsibilities but don’t do a lot
ins and outs of starting and managing
continually educate ourselves on
a fund, I decided to take a plunge. I
changes in the industry.
I also tend to throw my employees into
had become acquainted with Anthony
As a builder and a developer, our
sink-or-swim situations, knowing it will
Gerarci (of Gerarci Law Firm) through
company is required to stay current on
help to develop their skills. My lending
the conferences and knew that he was
regulations and municipal ordinances
associate, Amin, can attest to that.
an experienced securities attorney. He
within the construction industry. Having
drafted the original legal docs for the
an ongoing awareness of these changes
fund, and the rest is history.
is extremely valuable when it comes to
Over the past five years, CCG Capital has grown from managing a portfolio of 12 loans with $10.3 million in assets to managing a portfolio of 47 loans with $72 million in assets. I’m very proud of the substantial growth we have seen during this period. The High Yield Fund just announced an 11.83% net yield to investors for the second quarter ending June 30, 2016.
PL: What types of things do you do to keep current? RB: I think it’s important to stay in contact with like-minded lenders from all around the country. I have a handful of people with whom I talk regularly who are working in different markets, and that allows me to see what type of loans they are financing and if anything is changing with their business. Being active with industry organizations is another great way to stay connected and current. We are proud to say that we were one of the founding members of AAPL and always enjoy seeing what’s new at the conference in Vegas. We are also active members of the Real Estate Council
underwriting construction loans and assessing the viability of projects.
PL: What kinds of mistakes have you seen professionals make when it comes to their investments? RB: Not staying within your lending
PL: What’s the most difficult decision you’ve made in the last two years and how did you come to that decision? RB: Last year we decided to go from two managers to one and completely rebrand the company. Taking over as the sole managing partner and changing the identity of the companies has been
parameters and getting out of your
very challenging and rewarding at the
comfort level just to make the deal.
same time. I renamed the company
I’m a stickler for this one. I have seen
CCG after my three children—Carson,
too many deals go wrong that started
Clayton and Grace—and rebranded
this way. CCG Capital has a simple
to reflect the business values and
set of parameters, and if the borrower
professionalism we bring to the table. I
doesn’t like them, they will likely
have built a team of hard-working people
find another lender to do the deal
who take pride in their work and are a
under their terms. Keeping it simple
perfect representation of the company
and consistent helps us to maintain
culture. We are a family-style company
fairness and transparency with our
doing honest work and are dedicated
borrowers and is just good business.
to providing exceptional services to our
Another mistake I have seen several
clients. I’m extremely proud of what the
business owners make is growing
businesses have evolved into and the
too rapidly without the capacity to
challenges created by these decisions are
sustain it. It is tempting in a hot
completely worth the gain.
market, but I think it’s important to understand your capabilities and prepare for long-term growth.
PL: How would you describe your management style? RB: We run “lean and mean,” so I
PL: What advice would you give to borrowers to help them establish their credibility with lenders? RB: Lay all your chips on the table. It is really important to me that borrowers be transparent and don’t try to hide JULY/AUGUST 2016 23
anything. If a borrower is trying
of tools and a cool car. In college, my car
elaborately falsified. Several years later
to hide something from his or her
was nicknamed the Batmobile. It was a
I’m still dealing with the REO property I
financial past, we will most likely find
low, stretched-out sports car with super-
acquired as a result. From that time on,
it. If we do discover in underwriting
dark, black-tinted windows. I was pretty
I do not take a pre-lease as evidence for
that a borrower has not provided full
cool back in the day.
a speculative project. It would have to be on the owner-occupied market.
disclosure, I generally will not do business with that person. hard as a conventional lender. As a
PL: What do you think the biggest misconception about you is and why? RB: I meet a lot of people over the
conservative lender, we ensure each
phone and I am very direct. I can come
borrower is fully vetted so that we build
across as short and unapproachable.
a portfolio of viable and profitable
I tend to cut off people who are full of
projects. If you come to us with a solid
fluff and get straight to the objective.
We have been told that we write as
team and a well-thought-out plan, the
People who work with me on a
process will run much smoother and
regular basis and have had time to
faster, and that way we all win.
get to know me, realize that it is not
at all my
My wife always tells me “this too shall pass.” She encourages me to never give up and continue working hard with the end goal in mind.
PL: What are three things you tell yourself when your chips are down? RB: 1. I turn to my faith. Pray for clarity. 2. I look at my family to remind me of why I do what I do. 3. And I reach out to others for advice. Find a professional who can provide expertise. Having been in the industry for a while now, I am keenly aware of the ups and downs. Now if a deal goes south, I just remember that tomorrow an even better deal will likely walk through the door, and there is probably a good reason the previous one didn’t happen.
PL: Who would win the fight, Spiderman and Batman? RB: Batman – He has a better collection 24 PRIVATE LENDER
intention to be rude and that I really am a nice guy. Once people
understand how I work, they usually quit taking it personally and find that it is easier to do business with me.
PL: Was there a person in your career who really made a difference? RB: I worked for a man named Claude Lindsey, who owned Lindsey Contractors in Waco, about 10 years ago. Though I only worked with him for a short period of time, his character and business values inspire me to this day. He started with a trailer and a backhoe putting in water and sewer lines in and around Waco and worked hard to build a successful general contractor business. His word was gold, and he was always on a level field. He demanded a lot from his employees but never failed to be the first one at the office each day. He had two sons who worked with him, and I admired their father/son dynamic.
PL: What’s the best advice you’ve ever received? From whom? RB: My wife always tells me “this too
It made me want to work hard to
shall pass.” She encourages me to
I could someday teach my children
never give up and continue working hard with the end goal in mind.
PL: Tell us about something that you did in the past, what did you learn from it and what would you have done differently? RB: I made a deal once where I accepted
become a business owner and build something that I was proud of so that the same strength of character.
PL: If you could be anywhere in the world right now, where would you be? RB: I would be at home with my family. I try hard to be at home with them as much as possible and not let work get
a pre-lease as evidence for a commercial
in the way of my time with them. It
spec project. I’m not sure there is any
is not always easy to do when you are
way I could have known at the time
managing multiple businesses, but I do
that the pre-lease documents were all
make it a priority. •
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Self-Directed IRAs and Ease of Use for Lenders: Past, Present and Future by Clay Malcolm
ince their inception, it has always
technological practices to bring
investing and crowdfunding more
been possible to use self-directed
retirement account management into the
accessible to investors of varying
IRAs to invest in private loans. This
modern era. Fully automated account
accreditations and income levels.
includes both originating loans or
management services means quicker
Borrowers and lenders of all variations
buying existing notes. However, the
disbursement of funds, along with quick
likely will be able to connect and utilize
private lending marketplace has
and convenient transaction processes.
their retirement accounts to extend
not always been optimized by selfdirected IRA providers. As retirement investing moves into
Online marketplaces have revolutionized the ability for lenders and borrowers
or purchase private loans quicker and easier than ever before. Innovative technological
the future, innovative technological
to connect and carry
processes have now made it easier
than ever for lenders and borrowers to
utilize their self-directed IRA accounts.
can easily compare
between IRA providers.
The Past Historically, self-directed IRA providers
processes is one of the main features that
services such as the
used paper processes for everything
online marketplaces so
from opening an account to purchasing
investors can utilize their
or distributing an asset. This caused the
retirement accounts to originate loans
via your desktop or smartphone are
disbursement of funds from accounts to
in one seamless process.
good indicators of whether or not the
be a relatively slow-going process. In the past, lenders who were looking to find a borrower had to do
ability to open an account and carry out transactions
provider prioritizes the modernization The Future As we look to the future of self-
of its company’s processes. Automated processes can also be a glimpse into
so manually, rather than connect
directed IRA investing, the evolution of
how much time and effort the account
to an online market. Similarly
investment and banking technology will
owner is going to have to spend
all due diligence processes (like
predictably allow retirement investors
managing his or her account.
credit checks, etc.) were performed
to purchase private loans at the touch of
manually and could be expensive.
a button. Advanced technology should
quick and easy to manage as your
make it easier for IRA transactions to be
bank account, so make sure you have
properly documented and tracked per
a provider who utilizes the most
cutting-edge technological practices
The Present To stay in-step with modern banking processes, self-directed IRA companies have begun to adopt innovative
26 PRIVATE LENDER
The maturation of the JOBS Act will likely continue to make online
Retirement accounts should be as
to bring your self-directed IRA into the modern era and beyond. •
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Debunking the Misconceptions About Private Lending by Charlie Fitzgerald, MBA
cquiring the finances necessary
lending sources and is assessed on the
for your real estate investments
basis of the strength of a real estate
flexible version of hard money
can be a difficult process. This
purchase rather than the financial
lending. Unlike hard money loans,
holds true for real estate veterans
credentials of the borrower. Unlike
private money can be acquired from
and for new investors alike. With
private money, hard money is still
friends, family, professional referrals
so much information available on
acquired from a licensed organization.
or business associates. The most
the web, it is often hard to discern
Hard money lending must adhere to
Private money lending is a more
appealing aspect of private money
which information is correct, a
a series of lending criteria. Established
lending is its flexibility. With the
misconceptionâ€”or just plain false.
by the hard money lending firm,
aforementioned lending criteria being
Traditional sources such as banks
each loan has a defined duration, an
â€œup for discussion,â€? both the lender
and other national lenders offer few
interest rate and a section of upfront
and entrepreneur can work out a
options when it comes to proper
points, all of which are discussed prior
business deal with fewer constrictions.
financing. Private money lending
to a loan ever being issued. These
Although hard money lending firms
and hard money lending firms have
three criteria often help investors shop
are more accessible, private money
stepped in to fill the void, helping the
for available options when considering
proves comparatively lower in cost.
real estate industry by creating unique
a hard money lending firm.
The tradeoff is that private money
ways of doing business. If you are an investor interested in real estate investment capital, it is important for you to understand the differences between hard money lending and private money lending, as well as the truths, falsehoods and misconceptions that follow them. Hard Money Lending Firms vs. Private Money Lenders Both hard money and private money are typically asset-based loans. Each is from non-traditional
28 PRIVATE LENDER
••• is more difficult to find without the
it could do just that without the
proper avenues of contact.
necessity of you, the investor. The
regulations take effect.) If you are a real estate investor, it
logic behind a private money lender
is in your interest to consider private
is to make money with money, while
money funding as an option when
you, the investor, derive income
acquiring real estate investment
about the roles of private money
from your properties. Together,
capital. This quick and affordable
lenders. Let’s look at four common
both entities generate a form of
process could help you acquire your
ones, in an effort to dispel the myths
income. What a private money
properties and/or pay for the costs for
that have grown up in the space,
lender really wants is to retain your
rehabbing them if they are applicable
based on opinions or incorrect
business. Successfully acquiring a
to your business model.
profitable business partner is far
Misconceptions Debunked There are many misconceptions
“Private money is too
expensive for me.” Not all private money lenders are expensive. Price depends solely on
more valuable than buying and selling acquisitioned properties. MYTH #3
“My bank can do a better
job for me than a private lender can.”
About Civic Financial Service Civic Financial Service is both a hard money lending firm and a private money lender. The company specializes in financing non-owner-
In today’s lending environment,
occupied investment properties and
money lender. Additionally, using
traditional bank loans have become a
can also provide mortgage brokers,
private money without making sure
very frustrating process and are tough to
borrowers, investors and real estate
that you are recovering the costs of
qualify for. The Dodd-Frank Mortgage
agents with funding for investment
that capital in your investment is
Reform legislation has inundated the
property acquisitions and refinancing.
where most people hurt themselves.
lending industry with layers and layers
As an institution, the company offers
Money is no different than any
of additional regulations and guidelines
loans for clients seeking to:
other “thing” you purchase for use
that have made acquiring a loan as
in your business. As a real estate
complex a process for the lenders as it is
• Fix & Flip
investor, money that you borrow is
for the borrowers.
• Buy & Hold
the deals you barter with your private
used to purchase property with the intention of earning a return on your investment. Think about the cost of the money borrowed as just another business operations expense. “Private money lenders
“I need my money quicker
than a private lender can give it to me.” “Time efficiency”—being able to move swiftly and fund quickly to turn your money over fast is the key. This
• Rate & Term • Cash Out & Refinance • Use Bridge Financing • Use Wholesale Financing Based in Redondo Beach,
is where you as an investor can benefit
California, Civic Financial Services
from private lenders. Private lenders
LLC is a leader in private money
have the ability to fund a loan for
lending services and has helped
a borrower in four to 10 days. That
numerous cities and communities
is not so much about acquiring
significantly beats the average of the
across America. The company
property as it is about acquiring,
30-45 days from traditional financial
specializes in short-term, non-owner-
building and retaining business
lenders. (This could be even longer
occupied and investment property
relationships. If a private money
after Oct. 3, 2016, when the next major
financing utilizing private hard
lender wanted to purchase property,
changes to the conventional lending
money and bridge loans. •
want me to default on my loan so they can take my property away.” False. Private money lending
JULY/AUGUST 2016 29
SOMETIMES IT HELPS TO TAKE A STEP BACK and look at things from a different perspective. AdaPia d'Errico, CMO at Patch of Land, explores some of the most interesting topics affecting real estate, like technology, online finance and crowdfunding.
e v i t a n r e t l A an
E L G N A d'Errico ia P a d A h wit
30 PRIVATE LENDER
The JOBS Act and Regulation Crowdfunding: What It Means and Where We’re Headed by AdaPia d’Errico
he JOBS (Jumpstart Our Business Startups) Act, a law
aimed at economic revitalization by encouraging the funding of small businesses in the United States, arrived in 2012. Upon signing, President Obama said, “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.” We will explore that watershed moment, whether and how small businesses have been fundamentally and dynamically impacted and whether entrepreneurs (and real estate professionals) are benefiting from the promise of expanded access to capital. Kicking off the JOBS Act, and remaining its core was Title II, which went into effect in September 2013. Also known as Reg D, Rule 506(c), it lifted the ban of more than 80 years on general solicitation and advertising for certain types of private investments. The caveat was that all investors had to be
Rapid Adoption and the Dawn of Alternative Finance Despite these limitations, changes brought by the JOBS Act have indeed been significant. Title II served as the launching pad for equity and debt capital raises, with volume of “crowdfunding” raises jumping to $1 billion in 2014, a mere 15 months after Title II was enacted. Real estate has been the biggest and most active category in crowdfunding. For nearly three years there has been a proliferation of new companies that
estate models are scaling rapidly, evidenced by the data below in the accompanying chart. In a recent commentary, Forbes noted that crowdfunding has already “permanently changed commercial real estate,” while reminding us that “behind stocks, bonds and cash, commercial real estate has emerged as the fourth largest asset class in the U.S. over the last few decades.” Title IV Before Title III In 2015 there was another major
have built online platforms from
development in alternative finance
which they offer real estate investment
and crowdfunding, when the SEC
opportunities to new investors.
adopted final rules for Title IV of the
Crowdfunding has firmly taken its
JOBS Act, known as Regulation A+.
place at the table alongside other new
Title IV was hailed as the fulfillment
forms of capital raising. Together,
of the long-awaited promise of
these new forms are called alternative
democratizing investment in startups
finance. A recent Cambridge study on
and small businesses in the U.S.
alternative finance, in collaboration
through equity crowdfunding. What
with KPMG, tracked a 212 percent
had only been partially democratized
increase in the use of alternative
(because of the limitation to only
finance from 2014 to 2015. Real
accredited investors) would now be
accredited, which means you have to have made $200,000 the past two years, with an expectation to make the same currently, or $300,000 for a couple. Or, you must have a net worth of over $1 million excluding the value of your primary residence. In short, crowdfunding opportunities were limited to the wealthy—
REAL ESTATE CROWDFUNDING
MARKETPLACE/P2P REAL ESTATE LENDING
**2015 OVER 2014
specifically, the top 8 percent.
JULY/AUGUST 2016 31
ALTERNATIVE ANGLE available to every potential investor. Regulation A+ allows startups and
••• exchange for ROI). Such investors—
impose disclosure requirements on
better known as “backers”—could only
issuers for certain information about
later stage, pre-IPO companies to
fund startup projects via platforms
their business and securities offering and
use equity crowdfunding platforms
such as Kickstarter or Indiegogo in
create a regulatory framework for the
to raise as much as $50 million from
return for a discount, swag or the
broker-dealers and funding portals that
both accredited and non-accredited
product itself. They did not own, or
facilitate the crowdfunding transactions.”
investors. There have been only a few
earn, anything beyond what they
Reg CF limitations include:
examples of Title IV put to use due
received in their “tier.”
For companies, a raise limit of $1 million in a 12-month period.
to many limitations. The regulation
Those who backed Oculus Rift
did not turn out to be as helpful as
(which raised a cool $2.4 million on
many had hoped in allowing non-
Kickstarter) may have received V.1 of
your financial statements, among
accredited investors into the space.
the headset, but they didn’t receive a
the other disclosures, need to be
However, Reg A+ isn’t a viable
dime from the company when it was
reviewed by accountants.
option for raising capital on a per-
bought by Facebook for $2 billion in
deal basis; there is still no option for
cash and stock just 18 months later.
worth or income below $100,000
offering single assets to unaccredited
And those who couldn’t invest in
can invest either $2,000 or 5
companies like Uber that raised early
percent of their annual income or
Fundrise, one of the first real
the sidelines watching as a $10,000
launched an e-REIT in December,
investment in Uber in 2010 turned into
2015. The product is basically a Real
an estimated $127.5 million today.
For investors, anyone with a net
net worth—whichever is lower.
rounds on sites like AngelList stood on
estate crowdfunding platforms,
Must be a U.S.-based entity, and
For portals, the approved ones are regulated by the SEC and FINRA.
Will this be the funding vehicle that
Estate Investment Trust (REIT)
Regulation Crowdfunding is the
the next tech unicorn needs, or can
offered digitally over Fundrise’s
last hope for unaccredited investors
utilize? And will companies want to
platform. This offering significantly
to find their Facebook, Oculus Rift
go through these requirements? Some
altered its business model, moving
or Uber. When the SEC officially
don’t believe so. One million dollars
Fundrise from a deal-by-deal play to
announced its adoption of final rules
is a small check in the eyes of a tech
a fund structure, able to raise up to
to permit companies to offer and
company looking for lightspeed scale.
$50 million using Regulation A+.
sell securities through crowdfunding
But there are plenty of companies
in October 2015, platforms like
that are not in tech, not looking for
SeedInvest, Crowdfunder and
magical “scale,” that don’t reside on
Republic (AngelList’s Title III
the outskirts of Silicon Valley and
certainly great leaps forward in
platform) all began gearing up for
that could easily use that million to
terms of democratizing investment,
crowdfunding—for a much larger
jumpstart their growth.
the “real” crowdfunding regulation,
Crowdfunding, Finally Though Titles II and IV were
Title III—also known as Regulation
As of May 2016, Reg CF permits
And, what about the thousands of small businesses, local businesses,
Crowdfunding (Reg CF)—still hung
individuals to invest in securities-based
that can now reach out to their
in the balance. As discussed, U.S. law
communities for funding? This is the
previously prohibited unaccredited
to certain investment limits. Per the
opportunity that Reg CF proposes. It
investors from investing in private
SEC’s statement, “The rules also limit
is meant more for them than the next
companies in exchange for equity (or
the amount of money an issuer can raise
Oculus Rift, mobile gaming or app-
in privately issued debt instruments in
using the crowdfunding exemption,
based meal delivery service.
32 PRIVATE LENDER
JULY/AUGUST 2016 33
It is meant for everyone else—and
example of bipartisanship in such an
small business owners who will
not the usual parties who already had
overheated political environment, as
take to the Internet, via authorized
access to capital—truly and finally.
of this writing also just passed the
portals, to raise much needed
“Fix Crowdfunding Act” by a vote of
capital—from neighbors, to strangers
394-4, and has sent it to the Senate,
across the country, and even from
where it is expected to pass easily.
angel investors. The crowdfunding
The AltAngle Take I’m an optimist. I see abundance and opportunity in everything. Like
The act was geared toward fixing
industry has come a long way in
many others, I want crowdfunding,
some of perceived limitations of
four years. Where it was once illegal
Reg CF and was sponsored by Rep.
to advertise a private placement,
whatever we are calling it—to unlock
Patrick McHenry (R-NC), one of the
thereby constricting access to people
the promise and potential that is
original co-sponsors of the JOBS Act.
who would have gladly invested, Reg
wasting away, sitting in depository
It sought to increase the 12-month
CF is expanding the pool of eligible
accounts, CDs and “investments” that
$1 million cap to $5 million, but that
investors from the 8.7 million
most people don’t care about. Though
was stripped by the House. This,
accredited investors to over 300
I’m not alone, there are still many
amongst other concerns about Reg
skeptics and critics.
CF, was not addressed.
For one, “Wealth Management”
What is left of the “fix” is the ability
This will expand how Americans view and conceptualize investing in the
ran a recent op-ed article that
to create a legal vehicle that will make
first place, which will eventually have
announced “Crowdfunding is a
crowdfunding a much simpler process
spillover effects in how real estate is
Failure,” a pronouncement to which
for a company via the creation of a
perceived, invested in and ultimately
many who have been working
Special Purpose Vehicle (SPV) that
revitalized and renewed, outside the
toward these regulations take
allows them to organize shareholders
purview of traditional, and often
into a single entity. Also, the numbers
physically remote, lending institutions.
It turns out by “crowdfunding,” the article actually meant “Title III.” And
and types of investors that can invest in startups will increase from 100 to 250.
while it acknowledged the change might help smaller businesses attract initial capital, it later decried too much transparency as one of the downsides, particularly the disclosures on any individuals who may own 20 percent or more of a given company. But it’s hard to put a genie back in a bottle once it’s been uncorked, and the trends, especially with online platforms where crowd participation—and nearly instant feedback—are the norms, is for more transparency going forward. Fix Crowdfunding The House, in another rare
34 PRIVATE LENDER
In comments to an Angel Investors conference in Washington, Rep. McHenry said
Will Reg CF Work For Real Estate? When Reg CF launched this spring,
it is “very important for us in the rest of America, the ones outside
many real estate crowdfunding
of large urban areas, to ensure that
platforms were asked, “Will you
entrepreneurs with great ideas have
now be offering your deals to
an opportunity to get started.”
unaccredited investors?” The answer
Martin Luther King talked about
to that, unfortunately, is “No.” From
the arc of the universe bending, over
Patch of Land to RealtyMogul, there
time, toward justice. On a smaller
isn’t a real estate platform that is
and more immediate scale, it is hoped
adopting Reg CF to issue any single
that the unfolding—and ongoing—
asset, multi-asset or fund offering.
changes brought by the JOBS
While Reg CF is still unlikely to
Act will continue to bend toward
have any direct, near-term effect
far more participation, far more
on real estate crowdfunding, it will
democratization, of investments than
be a fit for many entrepreneurs and
our economy has previously known. •
JULY/AUGUST 2016 35
Residential Real Estate Investing and Lending in the Modern Era by Nic Walling and Tim Leber
pportunities in the real estate space are often undervalued and
As we opine on the opportunities
office building, residential investment
presented by our modern markets, we
properties present investors the
overlooked. Perceived as static and
look to the strategies and successes of
unique opportunity to benefit from
illiquid in comparison to other asset
our predecessors. We have the benefit
both short-term rental income and
classes, the majority seem to opt for the
from learning from their experiences,
long-term market appreciation.
excitement of the stock market or the
good and bad. We should take full
stability of bonds. Generally regarded
advantage, adopting best practices in
large inventory of distressed assets
as a long-term and capital-intensive
the hopes of bettering our processes
available at the end of the last decade.
investment strategy, the inexperienced
and ultimate returns.
The tragedy of the last financial
investor generally looks to limit
The combination of a fresh
Many took full-advantage of the
crisis presented a great opportunity
his or her exposure to real estate,
perspective and the invaluable context
to creative, cash-rich investors who
outside maybe a personal residence.
provided by the transactions and market
amassed large portfolios of residential
Market players—namely institutional
of the past puts the modern investor
rentals at a considerable discount
investors—generally stick to the major,
is a position of power with limitless
to market. In the short-term, the
commercial asset classes: multifamily,
opportunity. Our ultimate success—
rebound of the market has already
retail, office and industrial.
coupled with historically, self-regulating
handsomely compensated investors
financial markets—is determined by our
via market appreciation. Thinking
Real estate misconceptions and
ability to learn from past experiences
creatively about residential investment
and apply new and creative perspectives
assets, innovative investors have
to modern opportunities. As we can
found ways to generate consistent and
estate is often misunderstood and
Even among the asset classes, real
all most certainly attest, balancing
impressive terms in a marketplace
under-explored. Traditionally, the real
the tradeoffs between creativity and
once thought to be too small and
estate investment market has largely
efficiency in today’s markets is no simple
disjointed to support long-term,
been focused on the commercial
task. Unconventional thinking lends to
asset classes, neglecting many of
the opportunities presented by the
Much of the recent success within the residential investment space is the
residential sector. In recent years,
Thinking outside the box as we live
result of creative thinking by some
as the residential investment space
in the box
commercial players. The opportunistic
continues to grow, generating sizable
Early adopters of residential real
investment in single-family homes
and consistent returns for strategic
estate investing are now reaping the
has become more attractive as it
investors, conventional commercial
rewards of strategic acquisitions and
provides a diversified alternative to the
investors are now delving into the
market timing. With likely a more
volatility of the stock market.
manageable monthly payment than an
36 PRIVATE LENDER
Savvy investors apply the lessons
and strategies learned in the
localized mom-and-pop investment
commercial space to residential real
fund, there is money to be made in
estate investing. Playing to their
the residential real estate market at all
lenders develop programs that are
strengths, these innovative investors
levels and scales.
strategically targeted to fuel the
have adapted commercial acquisition,
With time, the market often
contemporary investor. Thinking outside the box, these
continued investment and success in
management and financing strategies
rebalances. As these rental portfolios
the residential rental space. Applying
to this under-serviced sector of
continue to grow and new investors
commercial processes, these lenders
the real estate market. Investors of
enter the marketplace, the need
have adapted to meet the needs of this
all sizes have adapted real estate
for creative financing solutions
growing segment of the real estate
investment strategies as the demand
became more apparent. With
and investment market. Playing to
for rentals continues to grow. Whether
an ever-increasing demand for
their strengths, these portfolio lenders
a publicly traded residential REIT (like
financing, portfolio lenders entered
provide for greater opportunity (via
Colony Starwood, owner of 40,000
the marketplace with unique
access to capital) for investors in an
residential assets nationwide) or a
capabilities tailored to the needs of the
emerging class of misunderstood assets.
JULY/AUGUST 2016 37
STRATEGIC THINKING Savvy residential investors are
Long gone are the days of receiving
commercial brokers to focus on the
now seeking financing—outside of
high commissions baked into the
residential income property space.
rigid, government programs—for
yield spread on debt deals with
The first misconception to address is
their existing and growing, creative
compression in coupons for core and
that these pools of rental homes and
investment portfolios. In response
even secondary apartment deals. With
small multifamily properties will be
to this need, portfolio lenders have
so much competition among lenders
a time suck and ultimately will end
adapted commercial, blanket debt
and brokers to win the business of
up being broken up into different
structure to residential rentals. In
institutional multifamily and other
pools for each profile or broken into
providing commercial mortgages and
asset classes, there is often not room
individual mortgages. This notion
bridge financing for residential real
for brokers to fit their fee in the spread
may have been true 10 years ago,
estate investors, lenders have helped
and still win the business.
where the CMBS space had seen very
investors grow their portfolios at a much more rapid pace. Structured similarly to commercial
The core asset classes are too
few commercial blanket loans over
well understood to have large rate
pools of fractured asset class. Outside
volatility from lender to lender.
of some creative deals in which
debt, notes are secured by cross-
There is strong uniformity on shifting
i-banks or regional banks with large
collateralized pools of residential
spreads in the CMBS space with all
private clients would attack, mid-level
investment assets. These lenders
lenders adhering to similar ratings
and quasi-institutional investment
benefit from operating in both the
agencies when they securitize.
groups simply could not find a one-
residential and commercial real
Now, let’s take a step back and
stop-shop for their strategy.
estate markets, taking full advantage
analyze the reasons there has
The second major concern
of both retail and correspondent
not been a strong pull for true
that both mortgage brokers and
channels. This hybrid role allows for direct, investor relationships, as well as utilization of the existing infrastructure provided by the mortgage banking and brokerage industries. Two marketplaces. One financing solution. Residential real estate investing from the broker perspective Let’s take a look at residential real estate investing from the broker angle. With cap rates condensing and competition to win deals in the true multifamily space becoming substantially fiercer, there is a drastic shift in how real estate professionals and brokers aim to be compensated on transactions.
38 PRIVATE LENDER
••• borrowers share is the amount of
one-off residential assets which many
confidence they need when referring
cost and time associated with these
high-net-worth private investors plan
business our way. With the growing
large pools of residential assets.
on holding long-term.
need for borrowers to find creative
Commercial blanket mortgages have
More often than not, real estate
financing for an aggregation of
offered a streamlined solution to the
and mortgage brokers are given
residential real estate assets, the
high closing costs associated with
a “trial run” of a more difficult
space is becoming more and more
collateralizing hundreds of properties
portfolio for which to arrange
attractive. With the volatility in the
with individual mortgages all with
financing before private investors or
capital markets environment over
separate rates and loan terms.
large investor groups will give them
the past year, borrowers with long-
One pertinent way to think
a shot at their easily transactable
term holds are beginning to turn to
about it is that these loans are an
institutional-quality assets. Savvy
long-term commercial blanket loans
institutional multifamily loan but
brokers know that this an easy home
as a means to maintain certainty in
instead of units, you are looking at
run if they know where to turn.
an uncertain world.
separate properties. There will be less
With the asset class being not as
uniform assumptions associated with
well understood, brokers can bake a
the individual line items in the NOI
point, two points, or whatever they
calculation, but the ease of having one
are comfortable including into the
performance standpoint, the
rate, one payment and a drastically
yield spread, as less sophisticated
underlying fundamentals of real
less expensive and less strenuous
borrowers often do not understand
estate investment are relatively
closing cost schedule, most operators
spreads on these types of loans.
consistent across asset classes.
and borrowers will choose to use the
With fewer players in the space
Back in the shoes of a real estate investor or market player From a financial and general
Whether looking at office buildings
portfolio loan to save money up front,
and more ambiguity in terms of asset
or apartments, investors and
even though a cost of capital might
profile, it leaves the opportunity for
lenders alike are looking at the cash
be comparable to financing the assets
brokers to offer a high level of service
flow and market value of potential
individually in some cases.
to the client, do minimal amount of
investments. At the end of the day,
legwork from a broker standpoint and
rents are rent; income is income.
Commercial loans for
still get paid a premium that would
Whether it’s for a five-year lease of an
traditionally be ground down by the
office suite or a month-to-month one-
borrower/lender network in other
bedroom apartment, the underlying
more mainstream asset classes.
performance metrics are the same.
Companies like Colony American Finance are beginning to offer solutions for the “out of the box”
The true opportunity for brokers
A growing trend in rental
financing requirements that would
is not only to simply transact and
investment and with an increasing
have previously been the bane of real
execute at a high level, but in finding
amount of portfolios coming to the
estate professionals and mortgage
a new and creative way to finance
marketplace has triggered a shift
brokers looking to lock down
something that doesn’t fit the
in thinking. In this circumstance,
competitive debt solutions. Being
mold in the mainstream financing
those quick to adapt and meet the
that these commercial blanket loans
community. The strong track record
demands of the marketplace have
are a relatively new asset class (or at
and certainty of close that Colony
been the most successful. But again,
least not as well widely understood)
American Finance, for instance,
the line between innovation and
it offers real estate professionals the
offers its borrowers gives real
absurdity is blurred. Without risk,
opportunity to service some of their
estate professionals and brokers
there can be no reward. •
JULY/AUGUST 2016 39
Factoring vs. Purchase Order Funding for Your Business by Mike Ponamarew
n looking at which is best for your
creditworthy customers. This can be
business—factoring or purchase
useful if suppliers are not extending as
perhaps even a tarnished reputation. If word gets around that a company
order funding—we first need to
much credit as a business/vendor
is turning away business because it
define the differences between those
needs, or if the supplier is asking for
can’t afford to fulfill purchase orders,
upfront or C.O.D. payments.
customer trust is diminished. Other
As you can see from the definitions, FACTORING
The purchase of Business
customers who considered giving that
factoring involves funding AFTER
company their business will likely think
to Business (B2B) or Business to
performance of an obligation and
twice about placing orders.
Government (B2G) accounts
purchase order funding requires
receivable (current or outstanding
funding PRIOR to performance. A
advantageous. It is pretty easy to qualify
invoices) for goods or services that
small business owner who receives
for and much easier than traditional
have been rendered in the past at a
a purchase order but doesn’t have
bank financing. Purchase order funding
discount for services.
the money to pay for the product/
hinges mostly on the financial strength
merchandise from the supplier stands
and creditworthiness of the customer
to lose the purchase order, the chance
who has issued the purchase order/
term financing solution that provides
to receive future purchase orders and
contract with a particular business
100 percent of the cost associated in
possibly the customer relationship.
(vendor) and not on the business itself.
filling single or multiple customer
Having to turn the order down would
This makes it a viable option for new
purchase orders or contracts from
obviously mean loss of revenue and
and established businesses and those
PURCHASE ORDER FUNDING
40 PRIVATE LENDER
Purchase order funding can be quite
••• with average credit. There are five key elements that typically need to exist for PO funding
has paid out more money and the
example the funding source was going
payment for the purchase order is
to advance (factor) 85 percent of the
total invoice. The vendor will receive
to take place:
the outstanding 15 percent (called the How Purchase Order Funding Works
1 The business must be incorporated. 2 Purchase order must be from creditworthy customers.
3 Purchase order must be firm—no contingency sales or letters of intent.
We have a company (vendor) that is in the apparel business. The vendor receives a purchase order from a large
reserve) once Macy’s has paid for the invoice less the factoring fee. The advance would be calculated as follows:
retail box store (let’s say Macy’s) for 1,000 silk shirts at $20 each, for a
$20,000 x 85% = $17,000
4 The product/merchandise must be
total of $20,000. The vendor sources
Less Cost of Silk Shirts = $10,000 Less PO Funding Fee = $500
5 T he order must be shipped directly
the shirts from a domestic apparel manufacturer at a cost of $10 each
Total Advance = $6,500
for a finished good.
from supplier to customer.
or $10,000 total. The manufacturer refuses to ship the silk shirts until
Macy’s ended up paying the invoice
OK, so, if you put your funding
it receives the payment. In many
in 30 days. The funding source charged
hat on, would you advance money
businesses, cash flow issues exist.
a discount (factoring) fee of just 2.0
to a business and HOPE it ends up
There will be times when there is
percent of the total value of the invoice
performing so you can get paid back?
simply not enough money available
or $400 ($20,000 x 2.0 percent). The
Or, would you prefer to advance money
to cover the costs of doing business.
funding source will then deduct this fee
to a business after it has performed on
In this example, the vendor requires
from the remaining 15 percent (called
the purchase order/contract?
$10,000. The PO funding source
reserve) of the invoice that is still owing
provides the payment and the domestic
to the business/vendor (or $3,000 –
order funding with a request
apparel manufacturer ships the shirts
$400 = $2,600).
for raw material financing—the
directly to Macy’s. The vendor then
goods or materials a manufacturer
creates an invoice to Macy’s and
implementing this type of funding
converts into a finished good.
now the funding source factors (see
solution the vendor was not only
Unfortunately, this type of funding
definition above) the invoice and
able to fill the purchase order but
is hard to obtain, given the risk
advances cash less the cost of silk
also received $6,500 in immediate
involved (for the funding source)
shirts and purchase order funding fee.
working capital plus $2,600 at the
Many people confuse purchase
So, as you can see, by
end of transaction, totaling $9,100.
in the event the finished good is
Many times a business vendor feels
not manufactured/delivered to
Value of Purchase Order: 1,000
specification. The good must be
Silk Shirts x $20 = $20,000
it needs PO funding when all the
reworked and more raw materials
Cost of Silk Shirts: 1,000 x
vendor really needs to do is factor its
would have to be purchased and
$10 = $10,000 (amount paid to
current receivables to free up the cash
paid for by the funding source to
needed to pay suppliers.
fulfill the purchase order. Under this
Purchase Order Funding Fee:
scenario the vendor’s gross profit
for new startup and established
is greatly reduced and the funding
Value of Invoice = $20,000
companies, wholesalers, distributors, resellers, importers, exporters and
source is still out of pocket for the original purchase of raw materials,
Purchase order funding is ideal
Let’s say for the purpose of this
businesses with average credit. •
JULY/AUGUST 2016 41
Breathe Life into Your Marketing by Chrissey Breault
utbound marketing is not dead.
If your outbound strategies
and identify new trends along the
are customer-centric and tightly
way, just remember that it doesn’t
sent to an audience through TV, cold-
integrated with your inbound content
always mean that your targets will
calling, e-mails, direct mail and paid
strategy, you can see a significant
be jumping across the desk to pick
searches are alive and well!
improvement in your marketing.
up the phone. They may slowly
That’s right, those messages
come on board thanks to your best
as the future of marketing—has
78% of decision-makers have
inbound marketing efforts. Through
grown leaps and bounds over the
taken an appointment or
your outbound tactics, they have
last few years. Marketers across the
attended an event that came
been driven to your website, read
globe prioritize inbound marketing
from an email or cold call.
your content; downloaded your
over outbound. The decline of outbound marketing is a response to a fundamental shift in consumer
whitepaper, attended a webinar and you may have even followed-up with a
Now that you’ve created life-
phone call or e-mail.
behavior. People are in control of what
changing content for your website,
information they receive and how. In
blog and social media site and are
outbound marketing strategies
outbound marketing, the company
preparing to embark on a new
for solid business promotion is
is in control. Still, that doesn’t mean
outbound marketing strategy for new
not possible without 100 percent
that we should be making funeral
lead generation, you have some tough
understanding of the characteristics
arrangements for outbound marketing
questions to answer:
of each. Using these methods
strategies. Today’s B2B products and services have long, complex sales cycles and usually include multiple decision-makers which have made marketers realize that mass-marketing tactics with no thought to relevancy, timeliness or personalization just don’t work. Online content through landing
1 D o you understand what your top
Your market mix of inbound and
wrongly only results in frustration, resulting from wasting financial
target segments are?
resources and opportunity cost.
It’s Not Cheap
2 C an you clearly define your buyer 3 Do you have all the right tools? 4 Have you considered everything it takes to build a team?
5 D o your managers have the
Outbound marketing can be an expensive endeavor. The traditional (or old) way of telling people about your business or product is costly.
pages, SEO and social media aren’t
bandwidth to do everything it
TV commercials, newspaper ads and
always enough to build strong leads
takes to lead a team?
radio commercials are expensive
for your sales team. One shouldn’t rely solely on inbound strategies to build
6 D o the benefits outweigh the costs?
relationships and qualify leads. You can bridge the gap with thoughtful, targeted data-driven outbound marketing.
42 PRIVATE LENDER
and tend to make the most sense for advertisers with larger budgets. In outbound marketing, success is
When you have all the answers
directly proportional to repetition.
and have dedicated time to review
Repeated broadcasts can persuade
people, but repetition shoots the
budget through the roof.
marketers (and company cultures)
proving an ROI on marketing spend
must adapt. Marketers will also
is considered the largest challenge by
marketing is not as effective as
continue to face increased ROI
over 50 percent of both B2B and B2C
inbound marketing. Some estimates
challenges as the consumer
marketers, regardless of company
suggest that the average American
experience becomes more
size. Similarly, securing budget is
is exposed to 2,000 promotional
fragmented and competitive.
considered a top pain point for about a
It is fairly safe to say that outbound
activities a day. A CBS article
According to a Hubspot Report,
The right marketing mix begins with
third of marketers.
suggested a number as high as 5,000.
understanding the need. As a business
Although an accurate number is hard
owner or marketer, you know what
will look toward tactics capable of
to find, as the information varies from
keeps you up at night when it comes to
both reporting and delivering ROI.
study to study, one thing is clear:
marketing. If youâ€™re like most, finding
The reasoning is simple: the better
people are exposed to hundreds of
the best ROI is near the top.
they can demonstrate the impact of
To mitigate these issues, marketers
promotional activities each day. With that number of messages, a resistance
TOP CHALLENGES BY COMPANY TYPE
is built, and that only makes it harder
ROI is the thorn in the for-profit sectorâ€™s side, while nonprofits struggle most with website management
to get one of the most important factors in marketing: attention.
The biggest downside for inbound marketing is its reach. You canâ€™t target the entire nation with inbound
Proving the ROI of our marketing activities
marketing the same way you would with a TV commercial or printed ad.
Managing our website
Simply said, nationwide coverage is not 100 percent effective with inbound marketing because you can only promote to a willing audience. There is no marketing silver bullet
Securing enough budget
Identifying the right technologies for my needs
Every business is different. A variety of tactics is necessary to hit the right
Training our team
people in the right way. Your strategy is defined by how your users behave. Some businesses rely mostly on inbound tactics to drive qualified leads, sprinkling in outbound tactics
Targeting content for an international audience
Hiring top talent
as needed. Larger, more established business built their companies ONLY
Finding an executive sponsor
using outbound marketing tactics, but are now exploring new methods. As technologies develop and
consumers expect more thoughtful,
JULY/AUGUST 2016 43
••• INBOUND VS. OUTBOUND BY COMPANY SIZE
Inbound is the dominant marketing strategy for companies with fewer than 200 employees Inbound
1 to 25 employees
26 to 200 employees
200 or more employees
their marketing investment, the more
percent for inbound. For companies
inbound programs and well as reach
budget they will receive.
with more than 200 employees, an
prospects who don’t yet know they
equal amount of both inbound and
have a need—and come full-circle by
outbound tactics are used.
providing those prospects with inbound
Does Company Size Influence the Approach?
Globally, we are just focused on
content for awareness and education.
converting contacts into customers,
Just like you need to inhale and exhale,
more pervasive inbound marketing,
increasing the overall number of qualified
your marketing likely needs both
while larger companies are likely
leads generated and proving ROI.
inbound and outbound to survive.
The smaller the company, the
to deploy a mixture of both. For
No, outbound marketing is far from
It’s ultimately on each business
businesses with less than 25
dead. The trick is, can you breathe
to understand its customer journey
employees, inbound is used by a
life to the entire landscape of your
and the channels that lead to success.
whopping 84 percent, versus just 13
marketing strategies? With inbound
Companies with a focus on ROI,
percent for outbound. For companies
marketing, you can draw prospects to
regardless of size, should favor inbound
with less than 200 employees,
you through awareness and education.
tactics, while outbound tactics should
outbound marketing is deployed by
With outbound marketing, you can
be used cautiously and with a higher
27 percent of companies, versus 71
help qualify the leads generated by
degree of accountability. •
44 PRIVATE LENDER
MONARCH BEACH RESORT, DANA POINT, CA CONTEXT SUMMITS ANNOUNCES ITS INAUGURAL ALTERNATIVE LENDING SUMMIT, SEPTEMBER 28, 2016 Cutting-edge sessions will feature the frontrunners of the industry discussing trends that are shaping Alternative Lending. Gain solid leads, cultivate tangible opportunities and build meaningful relationships needed to drive success and grow revenue. Network with asset managers, allocators, and service providers within the alternative lending landscape. WEBSITE: www.contextsummits.com/ altlending
10% DISCOUNT CODE:
JULY/AUGUST 2016 45
ON LEARNING, LEADERSHIP & LENDING AAPL Executive Director Linda Hyde takes her cue from her firebrand, to-the-point Grandma Kate.
EDITOR’S NOTE: Linda Hyde, who assumed the Executive Director’s role at the American Association of Private Lenders in February, is no stranger to the organization. She joined AAPL in 2013 as Member Relations Coordinator, then moved up to Director of Operations and Member Services before her promotion to the association’s top spot. Here, she shares some of the experiences that brought her to this point and offers insight about the challenges of leadership.
46 PRIVATE LENDER
PRIVATE LENDER: Success very rarely “just happens.” Usually, there are mentors, confidants, bosses or colleagues whose help and guidance have been integral. Who has filled that role for you? LINDA HYDE: I can actually give that credit to two mentors I have had in my career. Craig, who was my boss at my previous company, and Brian, who was VP of Operations there, are both talented leaders who taught me many ways to improve my own leadership skills and also taught me the ins and outs of business. They both gave me someone to look up to in my position as a new leader at the time. I can say I owe most of my personal and professional development to them and their leadership.
LH: Because we are somewhat small-staffed, it is easy for us to be supportive of one another, not only professionally but personally, too. I believe that you need to take care of your own people before you can expect them to help others in a way that helps grow partnerships. There is a poster on my wall with a quote from Richard Branson: “Train people well enough so they can leave, but treat them well enough so they won’t want to.” I try to follow that, and I encourage others to, as well. PL: It’s apparent that you are a collaborative leader. But ultimately, the buck does stop with the person in charge. Give us an example of how you deal with that.
LH: The first time I was someone’s boss I was 18 years old and worked for a small contact center making cold calls. I learned that I was very immature and certainly not ready to manage a full team at that time. I had to take a step back to learn more about myself and what I wanted to do when I grew up.
LH: Yes, you are right that part of my style is to listen to all sides and give everyone a “place at the table.” A good example would be our planning for AAPL’s Annual Conference. Everyone has an opinion on what can be done better—which I appreciate. However, I have to keep our overall strategy in mind and so sometimes have to make tough calls that not everyone will agree with. But I always strive to deliver those messages in a way that still maintains integrity and respect for the relationship.
PL: And now you ARE grown up, and leading a dy-
PL: Can you recall an instance of being faced with a
LH: The toughest part of my job has got to be maintain-
LH: One challenging situation that stands out occurred when I was an Engagement Manager and had been trying to keep a group of employees focused and doing what was asked of them. It seemed as if every time I took my eyes off of them, they would get up and walk around. I recognized they needed additional responsibility to keep them busy, so I began grooming them to take over escalation calls from the reps. In the end, the “least likely to succeed” ended up being my most trusted and hardest-working employees, simply because I gave them a chance.
PL: Which is most important to AAPL—mission,
PL: What are the attitudes, skills or characteris-
PL: Tell us about your experience as a first-time
supervisor of others.
namic organization in AAPL. What’s your biggest challenge in this job?
ing our core values as an association and a team that wants to have a positive impact on not only the members but the industry. With a small team and the amount of growth we have experienced over the last three years, it is important to me that we always maintain our integrity while staying light-hearted. “Business” is not a word we like to use, as we build friendships with our interactions. Our goal is to be as supportive as possible to each and every one of our members. core values or vision?
LH: Certainly, they are all important, but of the three,
I have to say core values. Ours revolve around honesty, integrity, professionalism and mutual support. I believe without the structure of core values there is no vision or mission that is attainable for success.
PL: How do you encourage others in your organization to communicate those core values?
management problem that you were able to resolve in an unexpected or particularly successful way?
tics that you admire in other women leaders?
LH: I admire women who are strong-willed, direct and
opinionated. I have never been afraid to speak my mind or stand up for myself. Historically in my field, there have not been a lot of women to look up to in leadership roles. I got my strength and conviction from my Grandma Kate, who was a fireball of attitude and strength.
PL: As you have progressed in your career, has that changed in any way?
JULY/AUGUST 2016 47
I BELIEVE WITHOUT THE STRUCTURE OF CORE VALUES THERE IS NO VISION OR MISSION THAT IS ATTAINABLE FOR SUCCESS.
48 PRIVATE LENDER
••• LH: I find myself gravitating to leaders who have proven
success but are still grounded, humble and take an interest in developing those around them. It is refreshing to have somebody on your side who challenges you to meet your goals but supports you every step along the way.
PL: What do you see as the biggest challenge today for women in business?
LH: It’s equality. And I do not want to get into a political discussion here, but I can say my response is based on my personal experiences. It has a direct effect how I take care of my team.
PL: What advice do you have for other women aspiring to leadership roles?
LH: Find a mentor who supports you. Stand by your convictions. Leave your work at work whenever possible. And remember that tomorrow is a new day. I believe if you can’t find one reason to laugh throughout your day, then you should probably re-evaluate your goals. Additionally, I would urge them to find time to talk to others they admire, continue their education, read lot of books and join the American Association of Private Lenders. PL: How do you describe AAPL’s differentiating characteristics, in a nutshell?
PL: What sorts of things are you doing to ensure you continue to grow and develop as a leader?
LH: That should be an ongoing effort, no matter what
your industry or place on the leadership ladder. As for me, I read as many articles and listen to industry-specific presentations as I can, and I also try to learn as much as I can from my colleagues.
LH: This is the only association that sets professional standards for the private lending industry. Ethics. Education. Excellence. PL: What are the biggest challenges AAPL has faced since you joined the team?
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LH: Since we are a growing company, we face new challenges every day. So I am sure that any given day’s challenge would be the biggest one yet. I overcome them by talking through them with the team and with my boss. It certainly takes a strong team to build a strong foundation for a company. PL: What changes might we see
in private lending and for the American Association of Private Lenders this year and next?
LH: The results of the upcoming election no doubt will affect the regulatory bodies that have been created for our industry and their guidelines for how lenders conduct business. The same goes for the economy and housing market. Make sure you come to AAPL’s Annual Conference to hear Dr. Mark Fleming plus many others provide a glimpse into what’s to come. As for the association, you can expect great things to come, starting with this issue of magazine you are now reading. This is the first printed edition we have had for distribution. We’ve also just announced a partnership with Geraci Law Firm, which will be helping us update our educational platform. PL: Earlier you talked about
leaving work at work. So let’s end with a few questions about your non-work activities. What was the last book you read? And what did you like about it?
LH: “One Step at a Time,” by Josh Bleill. It’s the story of his mental and physical recovery from an IED attack that happened while he on patrol with fellow Marines in Iraq. I seem to be drawn to tragedies, but luckily they all have a happy ending. I was inspired by his undying enthusiasm, infectious joy and sense of humor as he shares his message of going forward, one step at a time.
50 PRIVATE LENDER
PL: What else do you do when you have time away from the office (and e-mail)? And what do you enjoy the most?
LH: Time with my little girl; she is my world. I spend as much time as I can with her. She is growing up so fast, and I don’t want to miss a minute of it. I also enjoy shopping—A LOT. •
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PERSPECTIVE Vital Tips to Help New Real Estate Investors Acquire Financing by Abhi Golhar
espite a certain level of volatility
• Fewer tax burdens
common methods of acquiring the
in the national and global
• Stronger borrowing and buying
down payment is through obtaining
economies, the U.S. housing market has rebounded strongly, opening the
power (increased capital) • Increased collective investing IQ
door for an influx of new investors. For seasoned real estate investors, the
what is known as a second mortgage. This is not always easy to do, but it is a viable way to come up with at
This collective has the power to
least 20 percent of the loan. There are
current upswing of the housing market
influence the approval decision of
agencies, like 14th Street Capital, that
has simply opened another area in
potential lenders. Lenders consider
specialize in helping investors obtain
which to play, because they find ways
numerous variables when assessing
loans that are specifically designed for
to make the market work for them
risk factors for potential investors.
despite any current volatility.
Working as part of a collective
With prices stabilizing in most of the
theoretically improves the chances of
Be a Strong Borrower There are a number of variables,
major markets, now is the ideal time for
being approved. Depending on the size
new investors to get their feet wet. Still,
of the group, the weak link (in terms of
including loan-to-value ratio and
many potential investors are somewhat
credit score) can be omitted from the
lender policies, that can impact the
apprehensive and question their ability
application, subsequently improving
ability of an investor to obtain a
to effectively procure investor financing.
the chance of loan approval.
loan. Of those, the one variable that
The truth is that there are abundant
When building an investment team,
will have the greatest impact on
methods for acquiring the funding
it is wise to ensure that each person
your ability to obtain a loan is your
necessary to invest in residential real
has something unique to add to the
credit worthiness. This is why you
estate, though many require creativity
team, so that the collective seems
should check your credit score before
strong to the lender.
attempting to do a deal. If there are
Have a Sizable Down Payment
Joint Ventures sits atop my list of financing tips for new investors
Although this is not always possible
any adverse entries on the credit report that can be challenged and removed, that should be done first. Due to some questionable lending
because it presents a number of
and there are ways around it, a sizable
practices that led to the financial
benefits in addition to the ability
down payment will open you or
crisis in the middle of the last
to raise capital. The best real estate
your group up to more conventional
decades, lending guidelines have
investors are not necessarily the ones
financing options. Mortgage insurance
become stricter with most lenders.
who have or know everything; they
does not cover investment properties,
Consequently, approval becomes
are the ones who are smart enough to
so in order to qualify for a more
increasingly difficult to attain as a
surround themselves with people who
traditional style loan, you will have to
FICA score drops below 740.
know what they don’t. Building a solid
put down a minimum of 20 percent. If
investment team is one of the best
you are able to put down 25 percent,
with a low FICA score cannot still find
ways not only to enhance financing
you will qualify for an even lower
financing; it simply means that some
options, but to increase the level of
of the more conventional avenues will
collective experience and expertise. Some benefits of creating a joint real
If you don’t have the down payment, there are some ways that you can come
This does not mean that someone
be closed to that borrower. One alternative you have if your
estate venture are:
up with it, especially if you prefer a
score is below 740 is to pay points
• Shared liability
conventional loan. One of the most
based on your score. This basically
JULY/AUGUST 2016 53
equates to paying a higher interest
creative starts to come in. Private
collateral and if the borrower cannot
rate for the property. This is not
money lenders are used quite often
pay, the lender will simply foreclose
necessarily a terrible thing, especially
by investors, because they can set the
on the property. Depending on the
if there will be a rapid turnaround on
terms and don’t necessarily have to
property and the terms of the loan,
the sale of the property in question.
jump through as many hoops. Another
a default may or not be reported to a
reason that private money is so popular
credit reporting agency.
Additionally, having reserve funds in the bank to cover any investment-
is that private lenders don’t have to
related expenses for a minimum of six
abide by all of the restrictions and
of deals can be higher than with
months after the property is acquired
guidelines that conventional lenders
conventional loans; therefore, it is
will also improve the chances of
do. Private money lenders don’t have
imperative that you figure the cost of the
being approved with a lower score.
to be concerned with certain risk
loan into the numbers associated with
When there are multiple investment
factor guidelines. In many cases,
the investment deal. There have been
properties, lenders now want to see
private lenders will totally disregard
occasions in which investors have lost
reserves in the bank to cover expenses
the creditworthiness of the investor,
money or barely broke even because
for each property.
as long as the property in question
they failed to properly account for the
has built-in equity or presents a great
cost of the loan. Private loans are rarely
opportunity to turn a profit quickly.
used for new home construction, which
The lender will use the property as
normally requires conventional or
Private Money Lenders This is where your ability to be
54 PRIVATE LENDER
The interest rates for these kind
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JULY/AUGUST 2016 55
PERSPECTIVE highly specified equity lenders.
Hard Money Lenders Hard money loans are similar to private money loans, with the primary distinction being that not all hard money loans come from private lenders. There are large lending
creditworthiness of the borrower.
them, rather than being seen simply
With the property as collateral, it is a
as another number entered into a
win-win situation for the lender. Hard
computer system. You will also be
money loans are ideal for investors
able to take advantage of a more
who are working on fix-and-flip deals.
proactive and involved philosophy
Stay Away for Big Banks Unless your credit is ideal and there
from the bank. These local banks will also have a better understanding of the local real
institutions that will provide hard
are no extenuating circumstances,
estate market, which will allow them
money loans. With a hard money loan,
you should avoid larger banks.
to better understand your investment
the terms of the loan are extremely
It is better to seek out smaller
strategy. If there are some problems
short term. There are many hard
neighborhood banks for financing
with improving your application, a
money loans that mature in as little
investment deals. These smaller
smaller bank will most likely guide you
as 60 to 90 days while others can
lending institutions will have more
toward the steps you need to take in
extend as long as three to five years.
flexibility in what they will be able
order to get approved.
Like private money loans, hard
to approve and the terms and rates
money loans place more emphasis
they will be able to offer. You’ll also
on the value of the property than the
get a more “personal” touch from
Pursue Owner Financing When you find a motivated seller,
Want access to qualified private and hard money lenders in one centralized directory? Start today at PMLGloan.com
CONNECT WITH ETHICAL LENDERS Members of the American Association of Private Lenders are the trend-setters in private real estate lending. From their voluntary adherence to a Code of Ethics to their knowledge of the private lending process, they are the gold standard for the industry.
AAPLOnline.com 913-888-1250 56 PRIVATE LENDER
Learn to Think Laterally
there is a good chance that that person
organizations offer a variety of loan
will be willing to owner-finance the deal,
options to investors to help meet
Being able to think “outside
especially when there is a promise of
their short-term financing needs.
the box” is vital to being able to
a rapid turnaround. This can be true
These organizations can offer a large
put real estate deals together. For
even when the owner of the property is
variety of loans that are specifically
instance, if you are working on a
a bank; however, this works best with
designed for investors, and they have
solid property that has the potential
private owners. There was a time when a
an exceptional amount of experience
to produce a high profit, you should
request for owner financing would make
in the real estate industry.
consider securing a down payment
a seller suspicious. This was because
Working with an organization
or renovation funds through home
almost anyone could qualify for a loan.
can really help simplify the process
equity lines of credit or even
With the tighter lending restrictions that
for a newbie. There is a lot to
using credit cards to get the down
are in place now, sellers are more likely
consider when entering the world
payment. There have been instances
to accommodate the request in order to
of real estate investing. By working
of investors who put down payments
expedite the deal.
with an organization that can
on a credit card with 60- to 90-day
help simplify the loan acquisition
no-interest and completed the deal
process, you can focus on other
in time to pay off the balance on the
strategic matters associated with
card before any interest had accrued.
your investment strategies.
The key is to be resourceful. •
Working with a Lending Organization As mentioned earlier, lender
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Up-to-Date Technology Will Help Keep CFPB Happy by Elizabeth Morales
ll lenders want to stay on the
regulatory actions; findings from their
what additional documents and
good side of the Consumer
prior examinations; servicing transfer
information are needed, along with
Financial Protection Bureau,
activity; the number, severity and
a reasonable date to submit it. Also,
particularly in light of the agency’s
trends of consumer complaints; as well
servicers must now foreclose on the
recent criticism of mortgage servicers.
as input from housing counselors and
date they have specified and not a
How best to do that?
other stakeholders about institutional
few days before, as examiners found
performance based on their experience.
in many cases of deceptive practices.
First, give great customer service. Second, stop using your hands and
What does that mean? Because so
Some servicers failed to convert
toes to count money. Yes, the CFPB
many homes went into foreclosure as
trial modifications to permanent
recently released a 21-page qualitative
the servicers didn’t properly notify the
modifications after borrowers
and quantitative report, a study from
borrowers of the foreclosure process
had successfully completed trial
January 2014 to April 2016, in which
and deadlines, servicers must now
modifications, resulting in their owing
it criticized mortgage services, their
notify the borrowers in writing within
higher amounts of accrued interest.
outdated technology and poor follow-up
five days to acknowledge receipt
of the loss mitigation application
Yes, but as quoted in The Wall Street
“Mortgage servicers can’t hide
Can I use Excel to service my loans?
and whether it is complete. The
Journal and Forbes, most recently, “88
behind their bad computer systems or
loss mitigation application must be
percent of spreadsheets have errors.”
outdated technology,” CFPB Director
received at least 45 days before a
Do you remember the JP Morgan Chase
Richard Cordray said in a press release.
foreclosure sale. If incomplete, the
“London Whale” incident, Barclays
“Mortgage servicers and their service
servicer must send a letter stating
offer to buy Lehman Brothers and the
providers must step up and make the investments necessary to do their jobs properly and legally.” The examiners found that other than deficient technology, “several mortgage servicers lack proper training, testing and auditing of their computer systems and software platforms and those of their service providers.” So what exactly did they look at in each servicer? Several things: the strength of compliance management systems; the existence of other
58 PRIVATE LENDER
••• Reinhart and Rogoff famous paper on
to the credit agencies of your choice,
requests this information in writing,
debt sustainability? A common error in
support Graduated Term loans, ARM,
your software should have the ability to
spreadsheets is hiding columns rather
HELOCs, commercial, construction
produce the proper reports or notices
than deleting (as in formulas, etc.).
loans, and many other features.
that would inform the borrower of their
If you are going to use spreadsheets,
In other words, do your homework.
current account status.
make sure you have a team to review
There are many providers out there.
them individually and then collectively.
Do a demo, ask questions, compare
his delinquent account status, make
If you have worked with spreadsheets
pricing and remember—you get what
sure that your software can produce
after a few hours, everything tends to
you pay for.
late notices based on rules defined
In order to inform the customer of
get blurry. Once you have done all the
In your research of loan servicing
in the software. For example: if the
checking on your part, there is a very
software perhaps the most important
borrower is 30 days late, send him a
big chance there still will be mistakes.
thing is to be sure that the calculations
letter stating that his payment is now
Finding one’s mistakes is very hard,
in the software are accurate. This
30 days late. If the borrower is 45 days
so have a committee for spreadsheet
may seem like a given, but the
late, you can inform the borrower that
checking. If you don’t want to invest
number of software companies in the
the loan is getting ready to go into
all those resources, then look for loan
industry that produce reports and
default. You should be able to email
generate transactions with erroneous
and print any report, notice or letter
What should I look for when
calculations is more common than one
to ensure the borrower receives the
purchasing a software system? You
would think. In order to avoid these
proper notification. Also, your software
definitely want to ensure compliance
inaccuracies be sure to try real-life
should be able to generate custom
with federal and state regulations,
scenarios before making a decision.
letters. Another important feature of
Dodd-Frank—and if you are in
In other words, when you are doing
your software should be the capability
California, BRE compliance, as well.
a demo, bring in your own numbers
to attach documents to a borrower’s
It would be great if the software has
that you know/think are right and
file. This becomes important when
Quickbooks integration, electronic
ask the presenter to put those into the
the borrower calls and says: “I didn’t
payment processing to be able to take
software. That’s a true test.
receive (something).” You can go to
payments online and/or over the
How can investing in great software
that file and see the exact day and time
phone, Microsoft Office integration, in
aid me in providing great customer
the report, letter, notice was generated
person and over-the-phone training,
service? The right software will give you
and sent either via email or mail.
technical support, website portals,
access to all of the loan’s information in
product updates, maybe an app for
order to accurately inform borrowers
in a software package that would
your investors to see their accounts
of their current account status.
help you keep the borrower properly
24/7 and for your borrowers to be able
For example, if a borrower who is
informed and may avoid their account
to go online and pay. Make sure you
delinquent on his account calls in
going into default and later foreclosure.
can print, manage and e-file 1098s and
and wishes to know what it would
In conclusion, do your job right—
1099s; have the ability to import loans
take to bring his account current, you
not because you can get caught
to reduce loss of data or inaccuracies
need to be sure that your software
doing something wrong, but simply
due to manual data entry; you should
contains a reinstatement calculator
because it is the right thing to do—
be able to email statements and letters,
that would provide the borrower with
and automate your back office by
have an event reminder system, track
all outstanding payments and fees due
purchasing reliable, accurate and
impounds and reserves, report info
as of a certain day. If the borrower
robust loan servicing software. •
These are prime examples of features
JULY/AUGUST 2016 59
Using Property Valuations to Spot Opportunity by Ron Ahlensdorf Jr.
or private lenders, the real estate collateral against which they lend
But private lenders who do not have large portfolios are better served by
is critically important. It often is the
another approach: Using property
deciding factor in whether the investor
values to locate opportunity, which
can avoid loss in the case of default. But
involves watching national property
valuation also serves another critical
function for the private lender. It can help identify opportunity. Most lenders use valuations on a case-by-case basis, testing
Watching the National Trends There are a number of national
each potential deal on a go/no-go basis,
organizations and large firms that
using property value as the filter. That’s
watch the housing market, reporting
a very time-consuming method, though
back to the industry on the trends
essential for good loan underwriting.
they observe. It can be challenging to
Looking at the market using a larger scale
aggregate all of this data into one place
is much more effective when it comes to
for analysis, but if you can accomplish
finding areas of opportunity.
that, you get a very good idea of where
There are generally two approaches
the month of May. Melikian’s most recent analysis
the opportunity lies in the U.S. housing
concluded that sales volume may
an investor can take when seeking
market. As a service to our clients, we
slow in the short term and values
opportunity by looking for property
compile that information each month.
may be steady in some markets.
value. The first is to systematically
We then include an analysis of the data
“Predicting future residential home
search through a portfolio of existing
from Summit’s Chief Valuation Officer,
values is very difficult, especially
loans to uncover those properties that
Mark Melikian, author of the report.
given the many differences we see
have experienced higher-than-expected
Each month, Melikian collects real
between regions,” he said. “However,
estate market data relating to existing
the data we’re seeing, when trended
homes, employment rates and interest
over the past few months, indicate
larger investors who have a portfolio
rates from the National Association
that we will likely see a drop in the
of loans to submit to a bulk valuation
of Realtors, the U.S. Department of
number of homes sold over the
vendor who will supply Broker Price
Labor and Freddie Mac, respectively.
next month or two and a continued
Opinions (BPOs) or some custom
This information is then used to
decrease in housing affordability in
report based on a broker’s estimate
perform an analysis of the real estate
of value. This is an effective approach
market nationwide. The most current
because BPOs are affordable and can be
report (at press time) included data
of housing, the pending home sales
delivered with a short turnaround time.
collected during June, which covered
index, the federal unemployment
valuation gains. Typically, this method works best for
60 PRIVATE LENDER
In May 2016, the month’s supply
rate and mortgage rates all decreased
Summit just issued.
year-over-year. The median sales
lead to an eventual decline in prices. Affordability concerns, which were
price and the seasonally adjusted
What the Data Mean for
addressed in the February 2016
annual number of homes sold
report, also impact home prices in
both increased during the month,
Melikian pointed out that a
areas where it now takes a larger
according to the data. Melikian says
decrease in sales volume, housing
percentage of personal income to
that the data suggest a decrease in
price affordability challenges in
afford a house. As a result, these
the number of homes sold over the
some markets and inventory levels
markets could see home prices
next 30 to 60 days.
remaining level in the past month
leveling in the near future.”
On a regional level, the South had
could result in a relatively stable—or
How the national real estate data
the highest number of existing home
even slightly lower—median sales
impacts the private lender’s local market
sales and the West had the highest
price in the next month.
will depend on many factors, but it
median price. The West experienced
“Long-term, home prices in
will most certainly have an impact.
the largest percentage increase in the
the residential real estate market
Finding a way to stay abreast of national
number of seasonally adjusted existing
continue to be driven by tight
trends will make it easier to spot local
home sales while the Midwest had
inventory, investor activity and
opportunities. To get on our mailing list
the largest percentage gain in median
interest rate,” he said. “An increase
and receive a copy of Melikian’s monthly
sales price, month-over-month. Charts
in inventory or interest rates, or a
report, contact me at ron.ahlensdorf@
to this effect are included in the report
reduction in investor activity could
JULY/AUGUST 2016 61
Is Online Real Estate Lending the ‘Next Big Thing’ or a Repeat of the Dot-Com Bust? by Matt Rodak
uring the dot-com bust of
lack of computer programmers to
This has normally meant developing an
the late ‘90s, hundreds of
meet hiring demands, weak payment
in-person relationship and, over time,
companies went broke. Now, nearly
technology infrastructure—and the
building up a level of trust. Put another
two decades later, a lot of those early
list goes on.
way, real estate finance is largely a
concepts have revived themselves as successful enterprises.
Over the next decade, technology and job skills caught up with the novel
relationship business that requires a high degree of trust.
From retail giant Amazon to
dot-com ideas. High-speed internet
streaming video service Netflix,
is widely available, more computer
is that borrowers are now more
just about any product or service a
programmers are being minted and
accustomed to developing “online
consumer could want can be found
an entire industry exists to allow
relationships.” They manage personal
online. There have, however, been a
companies to access all the backend
relationship on Facebook and Instagram
few laggard industries. Real estate
technology needed to spin up an
and buy other goods and services online
finance is surely one of those.
e-commerce site without the overhead.
without a second thought.
This lagging industry seems to
Much like the early dot-com failures,
The shift that is currently happening
As borrowers become more
be catching up. Since 2013, more
real estate finance has had a difficult
accustomed to operating online in
than 100 online real estate finance
time transitioning online due to
other aspects of their lives, developing
companies have cropped up. So the
customer behavior and technological
a relationship with an online lender
trillion-dollar question is whether or
limitations. However, now might be
starts to feel more natural. They
not these new companies are leading
the time for this industry to finally
can connect on LinkedIn with their
the shift online or are destined to fail
make its way online. Here are a few of
account managers, read online reviews
like the companies before them.
the previous barriers that have kept
and start to develop a level of “trust”
To answer this question, let’s
the industry largely offline and why
that would have been much more
that’s likely to change.
difficult to do with an online lender
look back to see what caused the dot-com companies to fail. A big reason had to do with the fact that the technology of the time wasn’t yet ready to support consumer
five years ago. Developing Trust Online to Acquire Customers Originating a real estate loan is a
Consider that Airbnb is a billiondollar company that built an entire business on homeowners opening
needs. Remember when web pages
complex transaction that involves
their doors and welcoming strangers
took minutes to load on dial-
hundreds of thousands of dollars and
to sleep in their beds! Online
up? Consumers didn’t have the
complex contracts. Traditionally, a
relationships and trust development
patience to wait for a page to load to
customer has needed some level of
are real and seemingly here to stay.
efficiently “shop” online. Then there
assurance that he or she is dealing with
This same dynamic is helping real
were issues around high overhead,
a reputable firm that can be trusted.
estate finance companies acquire
62 PRIVATE LENDER
customers via online channels like
other local “boots-on-ground” services
capital for traditional lenders.
allows an online lender to largely
These institutions tend to be very
replicate “local knowledge” previously
conservative and slow to move. This
only available to offline lenders.
has made it difficult for innovative
Underwriting and Origination Another barrier that has kept real
Similarly, information about
online lenders to scale, as these
estate offline is that underwriting a
borrowers is more available than
institutions are inherently skeptical
new borrower and loan has needed to
ever. Technology allows underwriters
of new methods of doing business.
be done very locally. Neighborhoods
to perform credit checks, verify
can be different street to street,
income and bank balances to confirm
estate finance moving online was the
and lack of local market knowledge
passage of the JOBS Act by Congress in
can cause a lender to make poor
More and more data is making its
Perhaps the largest catalyst for real
2013. This new legislation made it more
way online, which will help inform
efficient for lenders to source capital
Now, with technologies like Google
underwriting decisions. Combine this
through “general solicitation” online.
Maps, underwriters can virtually “drive”
with powerful computing engines and
through just about every neighborhood
talented engineers and an argument
originate loans and raise capital online
across the country. There are also
could be made that objective, data-
from millions of individual accredited
numerous data sources that allow easy
driven underwriting could outperform
investors. While this capital base is
access to comparable market data, crime
the “gut” underwriting done by those
much more fragmented than larger
statistics, school data, employment
with local knowledge.
institutions, technology and online
advertising allow for raising capital
information, income, demographics, lien searches, etc. Using these online data sources
This means that lenders can
Capital Formation Large financial institutions like
this way to be done efficiently. This new source of efficient capital
combined with third-party appraisal
banks, hedge funds and pensions
has allowed early online lenders
firms, construction draw inspectors and
have largely been the supply of
to syndicate loans to thousands of
JULY/AUGUST 2016 63
individuals who are more innovative
This may sound crazy today,
product will look like, giving the
and quicker to move. At the same time,
but imagine an underwriter ordering
underwriter further insight into the
individual accredited investors are
an appraisal that sends out a drone to
future value of the property.
able to invest in real estate like never
the property. This drone will fly around
before. It’s proven to be a win-win for
the neighborhood, providing photos
online lenders and individual investors
and live-stream videos. Further, the
looking for access to this type of asset.
drone could be let into the house and
As these new lenders have proven out their business models using
fly around the interior, reporting on the condition of the property.
individual accredited investor capital, the larger institutions have become more and more interested, allowing for the online lenders to further scale.
As the industry moves online
Data will continue to be
developed and used to contribute to underwriting. For example, there is now technology that captures sound volumes at properties. Are airplanes or trains passing nearby a property
Imagine a borrower
walking through the house with a virtual reality camera. The underwriter can sit in his or her office and do a
“walk-through” with the borrower. Further, the borrower could take the
there are other new technologies
underwriter on a tour of the
developing in parallel that could have
neighborhood, pointing out comps.
interesting applications for real estate
For construction loans or significant
finance. Here are a few that could be
rehab loans, renderings can be
interesting in the next five to 10 years.
developed showing what the final
regularly? What impact does this have on valuation? As technology-first lenders continue to develop their underwriting models, more and more data will be used to better inform lending decisions. In summary, there appears to be a perfect storm brewing around customer buying behavior, technological developments and capital formation legislation that’s enabling online real estate finance companies to form and grow. Further contributing to this is market timing. The real estate world was coming out of one of the worst downturns in history as this market was hatching. The big question hovering over the online real estate finance industry is: What will happen in the next downturn? While there is a high likelihood that not all of these new companies will last, it does appear that real estate finance has started its transition online. For those companies that make it as long-term going concerns, the future will be filled with many interesting new technologies to be further integrated into smarter underwriting. •
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The Continuing Trouble with TRID by Jaspreet Kaur, Esq.
everal months after the
perspective on the changes. While
average, closings take about four
Consumer Financial Protection
TRID does mean the work they face
days longer than they did before
Bureau (CFPB) finally implemented
may be more complicated, it also
TRID was implemented. However,
the new TILA-RESPA Integrated
allows the most competitive vendors
where exactly TRID is causing these
Disclosure (TRID) rules, mortgage
to differentiate themselves by
delays is less obvious since they tend
lending operations continue to
providing better and more efficient
to occur at various points throughout
struggle with the new regulations.
the loan process. Also, anecdotal
Critics of the rule argue that the
Some technology companies believe
evidence suggests that customers are
complexity of the regulations is
that lenders face difficulties when
causing delays in closings, which
they attempt to throw more personnel
leads to a rise in origination costs.
at a compliance issue, rather than just
performing physical workarounds
Furthermore, some investors are
investing in the technology necessary
for issues that may be caused by
either suspending or outright
to cope with the long-term changes.
paperless functions. Yet other lenders
rejecting acquisition of loans
In other cases, lenders may have
seem to be optionally adding a couple
originated under the new rules,
purchased acceptable technology but
days to their closing times as padding
fearing defects in the loans and
failed to utilize it properly within the
against expected TRID issues.
potentially significant buybacks.
context of the new regulations and
Whether or not the mortgage
industry will be able to integrate the new rules remains to be seen. Some lenders fear the worst, decrying
noticing the delays as well. Some delays may be due to lenders
While some of TRID’s kinks are still being worked out, the CFPB seems confident that most lenders
How Long Until Full Compliance Industry experts estimate that it
are now in an excellent position to identify roadblocks in the
TRID as an insurmountable disaster
may take longer for the mortgage
loan process and deal with them
from which the industry may never
industry as a whole to implement
accordingly. Whether or not the
recover. Others claim that the
new TRID-compatible technology.
increased costs TRID has created
current TRID fallout represents
Most analysts say that the date
in the loan process will continue to
the new standard for the industry,
effectively tends to land at about a
affect the industry moving forward
with its increased operation costs,
year to a year and a half out. While
remains to be seen.
high fees for keeping rates locked,
predictions vary as to how long it will
delayed closings and more regulatory
actually take the industry to reach
scrutiny. In other words, it is just
complete compliance, nobody can
Some believe that as time goes
part of doing business.
deny that the months since TRID’s
on, mortgage companies will have
However, in contrast to these
Implementing Full Compliance
initial implementation have been
invested in the proper technology
negative predictions, many mortgage
fraught with closing delays and other
and processes, resulting in a drop
issues thanks to the regulation.
in cost for lenders. Critics are
technology firms—have a positive
66 PRIVATE LENDER
Evidence demonstrates that on
skeptical, saying that while TRID
••• may be effective in its objective of protecting consumers, the cost is being passed along to mortgage companies, which will be forced to foot the bill for permanently increased costs. At some point,
Your Appraisal Fees at Risk Under TRID by Anthony F. Geraci, Esq.
ith the advent of the new TILA-RESPA Integrated Disclosure Rule (“TRID”), there is an issue to consider that will have an effect on both
appraisers and lenders once the rule goes into effect on Aug. 1. The new Loan
the extra costs will eventually be
Estimate (LE) and Closing Disclosure (CD) form will replace both the GFE
borne by the homeowner as part
and HUD-1 forms, and the appraisal fee must now be disclosed and signed off
of normal loan fees.
by the borrower before proceeding.
As the debate rages on about the
That means the new requirement will not allow credit card information to
long-term effects TRID, supporters
be collected, nor may appraisal fees be charged until the initial disclosures are
point to the RESPA reform in
signed off. As is already law, the LE must be delivered to the customer no later
2010, which created challenges
than three days after application.
for a few months after it had been
In addition, once the associated appraisal fees are included in the CFPB’s
introduced. While the new process
zero-tolerance section, they may not be increased except in instances where
was refined, it ultimately worked
a valid change of circumstance arises. Consequently, AMCs and appraisers
well. They argue that the current
cannot use standard “up” charges to cope with situations that may cost more,
situation with TRID represents
such as complicated property assignments.
a similar instance of the growing
The new rules specify that a rural or larger property appraisal does not
pains inherent in the course
qualify for the “change of circumstance” exception since the address of the
of introducing new rules and
home is known from the outset. One possible solution advocated by some
in the appraisal industry is a regular overestimation of the fee, followed by
Those companies who invested in the right technology early on are going to have an easier go of it. But
a refund of unused funds once the costs have been finalized. However, this solution seems to contradict directly the rules laid out by TRID. The appraisal fee can be increased when a valid exception exists.
for those who have concentrated
For example, an appraiser can run into a situation where the actual
on the manual workarounds rather
property did not match the description of the property on the
than the technology are now left
assignment, making it subject to an entirely different schedule of fees.
figuring out just what the cost
This instance would provide a valid reason to alter the amount of the
will be to their bottom line when
appraisal fees due to change of circumstance.
upgrading their technology. Mortgage insiders mostly agree
Industry experts have expressed that “padding” of the fees to create a cushion is not permissible under TRID. The rules clearly indicate that
that the new regulations will
the fees must be based on the best information available. It is therefore
benefit the consumer and is a
recommended that lenders evaluate the information about the area
complex challenge that needed to
where they are conducting business to ensure they are disclosing the
be tackled. However, even those
correct appraisal fees from the onset.
most optimistic about the long-
Regardless of how experienced the lender is, there will be certain
term success of TRID are willing
circumstances in which appraisal fees will need to be altered in light
to concede that the process of
of additional information or unforeseen circumstances. However, to
total TRID compliance will be a
remain compliant with TRID, altering the appraisal fees must not occur
lengthy and involved one. •
unless there is a valid justification to do so.
JULY/AUGUST 2016 67
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