VETERAN BUSINESS SPOTLIGHT
Business Idea Born As Edwin Epperson Served his Country
The Official Magazine of AAPL November/December 2017
REAL ESTATE VALUES
Impact of Severe Weather on RE Prices
TRUST DEED INVESTING
Avoiding the Pitfalls, Part 1 of 3
ANTHONY GER ACI DEFINING HIS VISION EARLY HAS PROPELLED SUCCESS.
NOVEMBER/DECEMBER 2017 1
CONTENTS NOVEMBER | DECEMBER 2017
Trending industry topics and news from around the world of private lending.
by Carrie Cook
by Jeff Levin
Pitfalls of Trust Deed Investing
To Bank, Or Not To Bank
Real Estate IRAs: Donâ€™t Be Afraid to Start from Scratch
Impact of Severe Weather on Real Estate Prices
How to Reduce Losses Through Active Forbearance
by Clay Malcolm
by Mark Melikian
by Bobby Montagne
Tools for Reaching New Heights
Private Lending and Technology
Standard Fiduciary Rule Moving Forward
with Anthony Geraci
Feature: Veteran Business
by Harry Singh
by Melissa Lucar
Realizing Entrepreneurship While Serving My Country
Holiday Traditions Shared by Private Lender Contributors
Endorsements Every Commericial Lender Should Consider
by Edwin Epperson
Award Nominees AAPL Excellence Award Nominees
Real Estate Investment, Alternative Lending Lead Strong Housing Market by Robert Greenberg
by Jason Powell & Abhi Golhar
Failure is Part of Success
with Pete Asmus
NOVEMBER/DECEMBER 2017 3
Reflection Brings Insights R. MICHAEL WRENN CEO, Affinity Worldwide
President, Affinity Worldwide
Executive Director, AAPL
HEATHER ELWING-DIXON Editorial Manager
Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
Senior Account Manager, AAPL
Pete Asmus, Carrie Cook, Heather Elwing, Edwin Epperson, Abhi Golhar, Robert Greenberg, Jeff Levin, Melissa Lucar, Clay Malcolm, Mark Melikian, Bobby Montagne, Jason Powell, Harry Singh
COVER PHOTOGRAPHY Thu Huyen Photography
Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.
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This time of year, we bring together family and friends for fun, friendship and delicious food. I love spending time with those dearest to me, but I also value the professional reflection and anticipation this season brings. I reflect on progress made, challenges overcome and how what may seem like a failure at the time can be a springboard to future success. I anticipate and plan next year’s goals and agenda, leaving room, of course, for the unexpected. As we close out the year here at the American Association of Private Lenders, we’re focused on the military veterans active in the private lending industry and their contributions. In this issue, several of our contributors remind us that success is a journey and there is much to learn by failing. In Pete Asmus’ gripping piece, he relays how failure had once made him contemplate ending his life, until he remembered his loved ones and became determined to learn from his failure and succeed. His is an important story. Edwin D. Epperson III shows us how initial failure in real estate investing doesn’t have to be the end of the story. He went on to become a Green Beret and used the skills he learned in the military to become a dedicated and diligent student of the real estate investing industry, ultimately leading to his business success. Bobby Montagne illustrates how he is creative in helping his borrowers succeed and learn from even the toughest of circumstances, utilizing active forbearance instead of foreclosure. Progress, success, challenges and failures . . . most likely, we’ve all experienced each of these in some form this year. Take a moment to reflect and see them for the teachers and gifts they are. My hope is that we learn from and let every experience propel us to even greater things next year. ■
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Executive Director, American Association of Private Lenders
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The American Association of Private Lenders is an Affinity Worldwide Company.
NOVEMBER/DECEMBER 2017 5
PrivateLenderMagazine.com 6 PRIVATE LENDER
to maximize your impact and make your mark in the private lending niche
in your brand. Donâ€™t put it in the back seat, stand out.
Remember that no brand is too small to make a giant, remarkable splash
customer acquisitions and sales. Boost trust in your business
Trending industry topics and news from around the world of private lending
Loan Growth for PeerStreet PeerStreet announced they have surpassed more
LendingOne CEO Honored Bill Green, founder and CEO of LendingOne, received the Think Realty
than half a billion in loans funded with zero losses to
Honors Private Lender of the Year award at Think Realty’s 2017 Atlanta
investors since its official launch less than two years
national conference and expo. The 2017 Think Realty Honors recognizes
ago. This announcement comes after many other
the leaders and change makers who represent the best in real estate
milestones, including monthly origination volume now
investing and lending. Green was honored with this distinguished award
surpassing $50 million. At this time last year, they had
for his great achievements as a leader in private lending as demonstrated
funded approximately 300 loans, representing about
through the course of his career and the continued growth of his company.
$100 million. To date, the company has funded well over 1,200 loans and growth has been fueled by an increasing investor appetite for this asset class. “While we are excited about the growth, this is just the beginning of our journey to transform the industry,” said co-founder and CEO Brew Johnson. “Our goal remains the same as when we started: to level the playing field between Wall Street and Main Street by providing access and transparency to a market that had previously thrived on opacity.”
CIVIC Does Civic Duty CIVIC private money lending headquarters in Redondo Beach, California, closed all operations on Sept. 14 to give back to the Houston community. CIVIC’s 100+ employees assembled 1,000 Dignity Backpacks for Hurricane Harvey evacuees. Each backpack included essential supplies such as towels, socks, toiletry items and snacks, along with a note of support and encouragement.
“Along with the ongoing growth in our business, I am incredibly proud of the culture and team we have built,” said Brett Crosby, co-founder and chief oper-
Faster Verification Process
ating officer. “We’ve found amazing talent across all
Kingdom Trust and VeriComply announced a strategic relationship
divisions of the business and were recently honored
to accelerate document verification. The result is a verification process
to be named one of the Top 5 Startups To Work For
up to seven times faster, with costs averaging 50 to 80 percent less than
in Los Angeles.”
other traditional verification options. This strategic relationship opens more
A new member of the team is Louis Nees, who
opportunities for those seeking investments in private lending assets. In
joined PeerStreet as head of capital markets. Nees
addition, loan originators, warehouse lenders, ABS sponsors and other
is responsible for leading PeerStreet’s Capital
professionals could also benefit from the new relationship.
AAPL and PMLG Partner American Association of Private Lenders (AAPL) has partnered with Private Money Lending Guide (PMLG), bringing together an association that provides education, ethics and networking opportunities for private money lenders. This tool assists with deal-flow that enables borrowers and lenders to find the appropriate counterpart for their deals. The partnership will work to better serve, educate and connect the community of private money lenders and borrowers. “We want our lenders exposed to AAPL’s resources, education and peer networking. AAPL raises the bar for the industry by providing ethics and best practices education for lenders. The result is that buyers have a better experience. The more confidence buyers have in the process, the more the private lending industry will thrive,” said Erica Ruzicka, director of PMLG. NOVEMBER/DECEMBER 2017 7
Sell your loans to PeerStreet quickly and efficiently PeerStreet provides unprecedented liquidity to the private lending industry. We are a platform for purchasing first-lien residential and commercial real estate backed loans.
PeerStreet can be your capital and technology partner Here are just some of the benefits of working with PeerStreet: • Free up capital so you can originate more loans • Reduce your overall cost of capital • Take the hassle out of working with multiple counterparties • Benefit from access to PeerStreet’s diversified investor base • Maintain borrower relationships • Gain a partner, not a competitor
This notice is issued with and forms an integral part of information supplied in the form of a printed document (“Information”) and should be particularly noted in connection with that Information. This document has been prepared by Peer Street, Inc. (“PeerStreet”) for informational purposes only and without regard to the particular needs of any specific recipient. All Information is indicative only and may be amended, superseded or replaced by subsequent summaries and should not be considered as any advice whatsoever, including without limitation, investment, legal, business, tax or other advice by PeerStreet. Any such advice should be sought from an appropriately qualified and/or authorized professional. PeerStreet does not guarantee the accuracy or completeness of the Information which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. All opinions and estimates are given as of the date hereof and are subject to change without notice. The Information is not intended to predict actual results and no assurances are given with respect thereto. The Information is not an invitation, offer or inducement to acquire or dispose of, or deal in, any interest in security, or to engage in any investment activity. Strategies or investments of the type described herein involve risk and the value of such strategies or investments may be volatile. Such risks include, without limitation, risk of adverse or unanticipated market developments, risk of counterparty or issuer default, risk of adverse events involving any
PeerStreet’s Lender Platform
Please contact us to learn more about PeerStreet: Lender Onboarding Team firstname.lastname@example.org
(844) 733-7787 x707
underlying reference obligation or entity and risk of illiquidity. This brief statement does not disclose all the risks and other significant aspects in connection with transactions of the type described herein.
8 PRIVATE LENDER
Trending industry topics and news from around the world of private lending
New Customer for ABS RCN Capital has become Applied Business Software’s (ABS) latest customer. ABS announced that RCN Capital has chosen The Mortgage Office® software to automate its back-office servicing operations. “We are excited about moving forward with The Mortgage Office® as our loan servicing platform. Our complex investment business models require robust software to handle high volume of transactions. We had various systems in place for many years but absolutely love how tailored and specialized The Mortgage Office® is to our type of business,” said Jeffrey Tesch, managing director of RCN Capital. “We are thrilled to welcome RCN to the ABS family of prestigious clients. We are humbled by being the preferred choice for private lenders in loan servicing software for almost 40 years,” said ABS CEO Jerry Delgado. ABS also noted the upcoming update to The Mortgage Office® Loan Origination System will be ready for the collection and reporting changes of the 2018 Home Mortgage Disclosure Act and Regulation C (HMDA). The upcoming enhancements will enable LOS users to easily collect and report the loan data as defined in HMDA 2017 LAR by the Consumer Financial Protection Bureau (CFBP). The data required under the current rule collected in 2017 must be submitted to the CFPB between January 1, 2018 and March 1, 2018. ABS also announced that Elizabeth Morales has been selected to be featured in the Elite Women in the Mortgage Industry issue by Mortgage Professional of America Magazine. The issue features only 75 women at the vanguard of America’s mortgage industry. Morales was chosen from hundreds of nominees.
Bloomfield Acquisition Bloomfield Capital and VAR Capital Advisors have
New COO for Sharestates Nicole Joseph joined the executive team at Sharestates as the new chief operating officer. Joseph will partner with the company’s CEO Allen Shayanfekr
entered into an agreement under which Bloomfield will
to run operations and compliance while broadening infrastructure to support
acquire the consulting platform and key leadership
the firm’s continuous growth. The addition of Joseph is accompanied by the
from VAR. Renee Lewis, founder of VAR Capital, will be
completion of the company’s SOC 2 Type 2 Certification, affirming Sharestates
named a managing partner of Bloomfield.
now meets the security requirements and parameters for storing information
Bloomfield Capital is a real estate private equity
on the cloud as laid out by The American Institute of CPAs (AICPA). As part of
firm focused on investing in opportunistic and special
her responsibilities, Joseph will ensure the company continues to operate with-
situation debt and equity transactions. Since 2008,
in these policies, guaranteeing customers the highest level of data security.
Bloomfield has deployed more than $500 million in
“I am joining Sharestates for the opportunity to be a part of an innovative and
capital across nearly 30 states. The firm manages
experienced organization that is driving industry change,” said Joseph. “I am
three institutional private-equity investment funds
impressed by what the senior management team has accomplished, and I’m
with over $180 million in assets under management
excited about their vision for the future. My intention is to support the company’s
as of Sept. 30, 2017.
strategic goals by helping them build a world class organization.” NOVEMBER/DECEMBER 2017 9
10 PRIVATE LENDER
Trending industry topics and news from around the world of private lending
Geraci Name Change Geraci Law Firm officially transitions to Geraci LLP with the successful launch this year of its media and consulting divisions. The media division currently hosts three annual conferences (Innovate, Activate and Captivate) and a monthly magazine, Originate report, which targets loan originators looking to place its loans in the alternative non-bank lending and traditional banking space. Geraci’s goal in adding these two divisions to the Geraci name is to be the primary “go to” for professionals in the alternative non-bank lending, private money lending and hard money lending space. “We are constantly striving to provide value and peace of mind to our clients, which is why that is our brand purpose,” said Christina Geraci, managing shareholder of the firm. “We are building a megaphone to tell the world about the benefits of the alternative non-bank lending space. We hope to pair investors with great loans that work as a fixedincome product for their investing portfolios,” said Anthony Geraci.
New Website for Tarlton Tarlton Corp. has launched its new website. The October launch coincided with an important mile-
New Wholesale Partner Channel CoreVest announced the introduction of a new wholesale partner channel that offers mortgage brokers a way of gaining access to the rapidly growing investor loan market. To lead CoreVest’s wholesale channel efforts, the company recently hired Samuel Bjelac as vice president of Wholesale Lending. Bjelac previously served as divisional vice president with Carrington Mortgage Services, manager of correspondent and wholesale lending for Flagstar Bank, and area sales manager of wholesale lending for First Magnus Financial.
stone in Tarlton’s history—Founders Day, a day of companywide celebration each October 2 marking the birthday of Art Elsperman, one of the firm’s founders and first generation of leaders. The redesigned site offers enhanced content, improved functionality, quick access to essential information and insight into the
Toenjes Joins Capstone Capstone Financial welcomes Trisha Toenjes to the firm as operations manager, further
company’s capabilities. The website features bold photographs and a comprehensive overview of Tarlton,
developing their national loan origination operations. Toenjes comes with a wealth of
in business since 1946. A WBENC-
experience within the real estate and private lending field. Joining in advance of the launch
Certified Women’s Business
of Capstone’s new loan origination platform and Capstone Fund 5, she plans to continue
Enterprise, Tarlton is the recipient
her success in developing streamlined efficient delivery.
of numerous local, regional and
Founder Tyler Stone said, “Trisha’s wealth of experience and
national industry awards for its many
real estate knowledge has already made her invaluable to the
projects and is one of Engineering
Capstone family. Her joining us is a product of Capstone’s
News-Record’s Top 400 Contractors
commitment to improving quality of relationships with our
nationally. Among the new website
customers and employees. I am thrilled we were able to find
features is a filter that allows visitors
someone of Trisha’s character to fill this role. She is my right-
to search Tarlton’s projects by size,
hand woman. I am confident Trisha will play a key role in providing
market type and/or specific attri-
and implementing better loan funding processes for our growth.”
butes such as LEED-certified or historic renovation.
NOVEMBER/DECEMBER 2017 11
12 PRIVATE LENDER
Pitfalls of Trust Deed Investing PART 1 OF A 3-PART SERIES
Conflict of Interest
by Carrie Cook
he comments are all too familiar. “It’s too good to be true...”
Mortgage brokers seek, or are approached
by, homebuilders and developers (borrow-
“You’re going to lose all my money in
ers) who need financing for their real estate
“Trust deed investments are for suckers…”
for investors to lend their money to these bor-
that real estate deal…”
“Real estate investing is too much work,
with minimal financial reward…”
If you know what the pitfalls of trust deed
financing are, then you will know how to avoid them and have a better chance of experiencing real estate investing success. There are three
major pitfalls and solutions every aspiring real estate investor should understand: 1
Conflict of interest
Lack of diversification
project(s). Mortgage brokers also advertise
rowers with the intent to invest in a collater-
alized real estate investment earning passive income. The mortgage broker serves as the
middle person in the real estate transaction
to bring the borrower together with the investors to fund the real estate transaction. This
is a standard practice with mortgage brokers who offer trust deed investments.
The conflict of interest occurs when a
mortgage broker arranges the closing of the transaction to include an origination fee at
a rate of 6 to 10 percent of the loan amount.
Trust deed investing is generally con-
This may not seem like much, but when you
traditional investments. However, like any
the mortgage broker, it may begin to matter
borrowers. In this three-part series, we will
at an 8 percent origination fee charged by
tackle loan-to-own underwriting and lack
a lucrative payday for the mortgage broker,
sidered a safe investment, even safer than
look at how this correlates to the payday for
investment, there are risks to investors and
to you. A $3,000,000 real estate transaction
start by tackling conflict of interest. We’ll
a mortgage broker equals $240,000. This is
of diversification in subsequent editions.
even before the investment performance of
PITFALL #1 – Conflict of Interest
mortgage broker should not get paid for
the real estate loan. This is not to say the
A conflict of interest may arise with how
originating and underwriting the loan. The
the mortgage broker consider the borrower or
does not service the loan and instead passes
Should it be both? That is for you to decide.
tially, the mortgage broker is getting paid
and when the mortgage broker is paid. Does
concern arises when the mortgage broker
the investor to be their client? Can it be both?
the servicing on to another company. Essen-
NOVEMBER/DECEMBER 2017 13
upfront and walking away with $240,000.
But, what happens if the borrower stops
The second and third scenario are argu-
Why not stay involved? The mortgage broker
making payments? You won’t receive your
ably worse than the first. Can you imagine
else since they completed the underwriting
the servicing company won’t get their fee
call to cover expenses of a foreclosure, or
company stops getting paid, they have a few
to the direction to proceed? Getting every
should know the loan better than anyone
process and should be able to stand behind that loan.
If the mortgage broker is getting paid
regularly scheduled interest payments, and for servicing the loan. When the servicing options. They can sell the loan to a collec-
upfront by the borrower to sell the loan to
tion company, communicate to the investors
performance, then the broker is only incen-
costs to the servicing company to attempt
investors and has no interest in the loan
tivized to sell the loan to investors. If the
broker is not servicing the loan, their client is the borrower, not the investor. In that
case, what is the incentive to the mortgage
that they need to send in an assessment of
collection of the property, or hand the loan over to the investors and suggest they find
an attorney to begin the foreclosure process. If the loan is sold to a collection company,
broker to uphold quality underwriting
the company will charge you to sell the
sure the investors will get their interest paid
will collect a commission of up to 6 percent
standards? What’s their incentive to make
on time and their principal returned? There isn’t any. This type of mortgage broker’s job is over before your investment begins. They outsource the servicing of the loan and move on to the
next real estate transaction. This is referred to as originate, fund and done. If you are the
loan. A little research will tell you that they upon the sale of the property in addition to
recouping any hard costs they spent to take back the property.
When do you see your original invested amount returned to you? That depends
on the sale price the
collection company negotiates for the property. This
by the market
happens next? broker has
servicing to another
company to collect payments from the borrower.
The loan servicer is responsible
also be defined
conditions at the
time. If the market
conditions are good
and the property sells
above the original loan
amount and there are additional
for collecting the payments from the borrow-
proceeds from the sale after the 6 percent
distributing the remaining interest payments
collection company may return 100 percent
make regularly scheduled interest payments,
the rest. Keep the rest? Yes, that is the
er and earns an agreed-upon servicing fee,
commission and the hard costs, then the
to the investors. If the borrower continues to
of your original invested amount and keep
everything is great. 14 PRIVATE LENDER
reward they get for doing a good job.
getting 100 percent consensus on a capital
100 percent consensus from all investors as investor to pay their prorated share of the expenses and having them collected by a reputable representative who knows the
proper course of action and allocates the
investors’ funds with their best interests in
mind to successfully take back the property is like giving a 2-year-old $100 and asking them to hold on to the money for you for
four months until you ask for it back. You are certainly taking your chances with
the outcome. Or how about electing one
investor as the representative for a group of 50 investors to determine the best course
of action? This person would be taking the input and consensus of 50 people to make decisions on how to proceed with taking
back the property, cost allocations amongst
the group, and the sale price accepted for the property—which will ultimately determine the capital return to the investor, good or
bad. When is the last time you heard a group of 50 people who were all on the same page when it comes to money?
Where is the mortgage broker that sold
you that investment? Nowhere to be found.
SOLUTION #1 – An Invested Mortgage Broker The solution to this pitfall is not
complicated. Find a mortgage broker who
is not only compensated through the origination fee, but the actual performance of
the loan. Learn to distinguish between the originate, fund and done types and the
mortgage broker who is not defined as only a “broker.”
Working with a mortgage broker who is
invested in the loan performance defines the mortgage broker not only as an originator
but also as a loan servicer. This distinction
This mentality aligns the mortgage bro-
ker’s interests to their investors. If the loan is not performing, they are not getting paid.
As with all investments, there are inher-
is important because they are not just paid
ent risks, and you must consider the “what
loan servicer and will continue to work with
most do, then great. Your concern should
upfront. This mortgage broker is also the
the borrower’s and investors’ best interests. Just as a third-party loan servicer gets paid for the service, so too does the mortgage
broker now in the capacity as loan servicer.
This implies that if the loan is not perform-
if.” If the loan pays interest and pays off as not be this scenario. Your concern should be the scenario of a borrower not making
the regularly scheduled interest payments. How is that situation handled?
Because the mortgage broker is aligned
ing, the loan servicer is not getting paid
with the investor in this scenario, the
loan servicer acting in your best interest,
borrower throughout the duration of the
either. You now have a mortgage broker/
beyond the point of funding the loan. Keep in mind that no one knows the details of
the property or borrower better than the mortgage broker who did the analysis of underwriting the loan.
There are a lot of services a mortgage
broker can offer. An investor-minded
mortgage broker will offer cradle-to-grave
services that include but are not limited to:
underwriting, origination, capital fundraising, loan servicing and collection/disposition of a property should the need arise.
Are there mortgage brokers who provide these services under one roof? Yes!
Why would they perform these duties?
Because it is good business. A mortgage
mortgage broker maintains contact with the loan. Typically, the mortgage broker pro-
vides the borrower a payment schedule that includes a due date for interest payments and a grace period before action is taken
to secure the property. As the grace period with the borrower to determine if an issue is imminent or if the payment is in route.
If the borrower for any reason is unable or
unwilling to make the interest payment, the mortgage broker who is cradle-to-grave will communicate to the investors and propose the best course of action to secure the real estate asset.
This process is completed in a controlled
environment, unlike the alternative defined in the pitfall. Remember, this is a mortgage
ly skilled professionals who believe in the
borrower and the investors. The mortgage
duties implies they are staffed with diverse-
broker who has the best interest of both the
investments they are offering. They are not
broker acting in the capacity of loan servicer
brokers who handle a trust deed invest-
present to the investors in a communication
gathers all the intel from the borrower to
ment with the cradle-to-grave mentality
that also includes a ballot to allow the major-
origination and loan servicing to create a
of action—either to proceed with the borrow-
also spread out their income earned from reasonable, yet consistent, stream of income from the services provided.
Trust deed investing is generally considered a safe investment, even safer than traditional investments. However, like any investment, there are risks to investors and borrowers.
nears, the mortgage broker will be in contact
broker who is willing to perform all those
in it only for the origination fee. Mortgage
ity loan holders to determine the best course
er and/or to ultimately take back the property through foreclosure or Deed in Lieu.
Upon the majority consensus from the
investors, the mortgage broker turned loan servicer now takes on a third role—default
loan resolution coordinator. In this capacity, a good mortgage broker stands behind the loan they underwrote and ultimately sold
to the investors. A mortgage broker who is
a default loan resolution coordinator has a
vested interest in making sure investors get as much of their original invested amount returned as soon as possible. In some
cases, the mortgage broker will pay for the
expenses to take back the property on behalf of the investors, instead of doing an investor capital call, as the mortgage broker works to resolve the default. It costs approximately 3 percent to 5 percent of the original loan amount to foreclose on a property. If the mortgage broker funds the costs of the
foreclosure process, they are invested in the NOVEMBER/DECEMBER 2017 15
outcome. They’re getting paid when inves-
a mortgage broker who acts in the capacity
ABOUT THE AUTHOR
the mortgage broker will recoup the funds
broker you want to be investing with. Make
investors’ behalf. This is a really important
default rate has been historically and their
Carrie holds three executive level roles as president of Ignite Funding, CEO of Preferred Trust Company and COO of iManagement Group Shared Services. Since assuming the role as president, Cook has led the team to fund more than $315 million loans with investor capital. As chief executive officer of Preferred Trust Company, Cook oversees the custody of approximately $250 million in client investments and cash holdings. In addition, Cook also serves as the chief operating officer of iManagement Group since September 2013 specializing in managerial services of investment funds.
tors get paid. When they sell the property,
described above is the type of mortgage
outlaid to take back the property on the
sure you ask the mortgage broker what their
point in that the mortgage broker as a com-
track record for recouping investor capital.
for the “what if.”
Do your research and find a mortgage
will go into foreclosure, it is when. You are
services, collects and sells a property should
pany has taken the proper steps to prepare Remember, it is not a matter of if a loan
fooling yourself if you think you will not
experience a real estate investment that is subject to default or market correction. It
will happen in your investment lifetime. It is
how you or the mortgage broker reacts to the situation that matters. When it does happen,
16 PRIVATE LENDER
Not all mortgage brokers are the same.
broker who underwrites, originates, funds, the need arise. This is a mortgage broker
who does not have a conflict of interest—
one who is working for both the borrower
and the investor, wants the loan to perform for all parties involved and has a stake in making sure that it does. ■
Equity Participation - Construction - Fix n' Flip Loans
ACCREDITED INVESTORS ONLY
9.0% 90% 2YEAR NONE NOVEMBER/DECEMBER 2017 17
To Bank, or Not to Bank? Construction, commercial and land financing in today’s climate by Jeff Levin
hings have gotten noticeably chillier when it comes to bank loans for the
construction, commercial real estate and land markets. Developers are suddenly
Bankers’ mentality today brings to mind
a famous Shakespeare quote: “There is
nothing either good or bad, but thinking
makes it so.” Because the current cycle has
getting the cold shoulder from previously
such positive fundamentals, lenders and
is a bit curious given strong GDP growth,
has neared or passed its peak and can only
helpful local banks. This change in attitude low unemployment, and only inventory for
multifamily is nearing its long-term supply
their regulators speculate the market cycle trend down from here.
In addition to their concern that the
high water mark when considering all the
economy may be overheating, lenders face
for other segments, like medical-offices, are
regulations as well as nominally higher
property segments. Meanwhile inventory
only at a fraction of their long-term supply
levels. Although the present outlook is rosy,
banks are facing increasing regulatory pressures and are concerned about the possible
end of the current boom cycle, leading many of them to become much more conservative
when it comes to lending. Fortunately, developers can look to other sources of funding,
including insurance companies and private
“hard-money” asset lenders, to start and/or complete their projects.
a combination of worrying challenges from interest rates. The expectation of continued economic expansion is priced into the
stock markets and interest rates, but lenders are being cautioned by regulators to have a downside strategy when it comes to construction, commercial real estate
(CRE) and land risks. Let’s examine these in detail from the bank’s perspective.
Rising Interest Rate Risk When interest rates rise, the banks charge
a 600 basis point spread (BPS) between the
more. So, why do banks find the rising rate
Libor rate and cap rates, and a greater than
The current expansion, which began
borrowers in construction, CRE and land?
Treasury notes and cap rates. This meant
fourth longest in U.S. history. The stock
just a short-term upswing in interest rates
had strong project-fueled cash flow that
profits and expectations of meaningful
off the accelerator of quantitative easing. In
capital and pay a return to their equity
been clear that the historically low interest
interest rate on floating rate loans will take
In first quarter 2017, there was greater than
naturally resulting in lower debt service
Why Are Bankers Nervous? after the Great Recession ebbed, is now the market is booming, fueled by corporate tax reductions from Washington. The
unemployment rate is down to 5 percent in the most recent quarter, according to the Bureau of Labor Statistics.
18 PRIVATE LENDER
environment to be risky regarding their
First, it’s clear that the U.S. is not facing
a 400 BPS spread between the 10-year
that borrowers benefited greatly when they
due to the Fed temporarily taking its foot
allowed them to earn back their initial
fact, this is a seminal change. The Fed has
investors. But more recently, the rising
rate environment is permanently ending.
a bigger bite out of borrowers’ cash flow,
coverage. If the interest rate is fixed, then when borrowers refinance a project, they
will likely not receive either the same free
cash flow or a similar level of loan proceeds
as was available to them during the previous low interest rate cycle.
Simply put, higher borrowing rates will
result in fewer loan dollars, assuming that
advance rates hold steady. As a result, borrow-
support refinancing the note. Naturally this provokes some anxiety with the banks.
Bank Lending in Todayâ€™s Environment Banks are still originating construction
loans, but theyâ€™re pushing back regarding
leverage and insisting that borrowers bring
more equity to the table. Of the construction
ers will need to increase their rental rates and
loans banks will originate, for the most part,
to generate enough cash flow to ultimately
clients who are proven operators with
more tightly manage their operating expenses
they are looking to finance longstanding
projects in attractive submarkets. The more speculative projects, or ones with newer
builders, are not likely to find a home at the
local savings and loan or commercial lender.
Larger banks and S&Ls are also being forced to be more stringent with the quality of their construction loans due to the new Basel III rules. There is a requirement in Basel III
that banks examine and determine whether certain transactions should be classified as high volatility commercial real estate
(HVCRE) loans. This rule impacts any bank
NOVEMBER/DECEMBER 2017 19
Because the current cycle has such positive fundamentals, lenders and their regulators speculate the market cycle has neared or passed its peak and can only trend down from here.
workhorses, for many commercial deals,
because they are more susceptible to
want to see how absorption rates in each
loans at all, it is only for the top-tier hotel
banks are hesitating to lend because they market will trend.
chains, and only in major markets.
Where to Go in the Current Market
ically shown that they won’t stretch to win
Although the banks are pulling back from
are filling the gap. Life insurance companies
a gateway market for a non-multifamily
land deals, nontraditional lending sources
and private lenders are becoming more com-
petitive in this space. Insurance companies are more conservative in selecting projects to finance and generally steer towards
a developer has a top-tier opportunity in development, the insurance companies are probably not going to be a fruitful lending source.
For everything below that top-shelf type
larger ones. The benefits the insurance com-
of project, the private lenders (often called
and enabling a developer to close on perma-
asset” loan collateral) are a source of fund-
panies offer include prevailing interest rates nent financing for the project well before
borrowing process that they do with banks. with more than $0.5 billion in assets, and
Typically, they first receive a construction
requires the banks to hold an additional
they have to refinance it to a different
fall into this HVCRE category. For example,
the borrowers receive
past and had to hold $2 million in reserves
for the project in a
all savings and loan institutions. Basel III
loan. Then, once construction is complete,
50 percent of cash reserves for loans that
note. With insurance lenders,
if a bank did an $8 million loan in the
against that loan, now if the loan is classified
hold $3 million in reserves That, of course,
ers prefer Class A
negatively impacts its capital ratio.
office buildings in
do, it’s clear that they have become increas-
kets, plus shopping
prefer to finance projects that offer them the
C properties, particularly buildings with
nue track record. Insurance
continue to remain fairly desirable for banks
ested in Class B properties, or areas that
ingly picky. Regarding CRE loans, banks
centers anchored by
comfort of proven cash flow. Class-B and
that have a strong reve-
long track records of good operating history,
companies are much less inter-
as cap rates remain low. But outside of these
aren’t really considered gateway markets
20 PRIVATE LENDER
deals, and they won’t lend on anything that
doesn’t look like triple A quality. So unless
does not need to follow the typical two-step
Looking at the types of loans banks will
However, insurance lenders have histor-
many segments of construction, CRE and
actually breaking ground. The developer
as an HVCRE, then the bank would have to
economic slumps. If they do hospitality
“hard money” lenders because of the “hard ing. Most hard money loans are for commercial projects lasting from a few months to a few years. These lenders don’t face the
regulatory hurdles that banks and insurance companies have because the private lending market has always been unregulated by
state or federal laws, although some maximum limits
on interest rates due to state usury
laws can restrict hard money
operations in some states
like Tennessee and Arkansas.
in place after the
meltdown require lenders
of residential loans to evalu-
ate a borrower’s ability to repay the loan on
primary residences (or face big fines for non-
compliance), hard money lenders only make
indicates their decision-making is based on
turnaround and flexibility. When the
risk of the loan being classified under the
to be financed. Also taken into consider-
project, the hard money lender may be the
commercial loans so that they don’t face the Dodd Frank, TILA and HOEPA guidelines.
The primary criteria hard money lenders
use is the liquidation value of the collateral
more than just the LTV and the type of asset ation is the quality of the developer and
management team. Experienced hands—
banks refuse to finance an otherwise worthy right fit to make the deal a reality. ■
as well as newer borrowers who have done
ABOUT THE AUTHOR
of the project or creditworthiness of the
projections, and are easy to communicate
will always want to calculate the Loan to
for projects that banks would simply turn
that backs the note, not the income potential borrower; therefore, hard money lenders Value (LTV) either by determining the
liquidation value of the asset through a broker price option or an independent
third-party appraisal. In contrast to a bank offering a 75 percent loan-to-cost construction loan, private lenders might be around 65-70 percent for new construction.
However private lenders are known for
having greater flexibility than banks, which
their homework, provide buttoned up
with—can win support from private lenders down. Certainly, the interest rates on hard money loans are higher than the rates for
traditional business loans. That’s because
the cost of capital for the lenders is signifi-
cantly higher than what banks pay. Interest rates can range from 10 to 18 percent and higher, so projects with weak earnings
potential are unlikely to get much traction.
Jeffrey N. Levin is the founder and president of Specialty Lending Group and Pinewood Financial, which together provide a full suite of boutique private real estate lending services in the Greater Washington D.C. area. Before launching SLG, between 1993 and 2007, Levin was a co-founder and CEO of iWantaLowRate.com and a co-founder and president of Monument Mortgage. Levin is a recognized authority, lecturer, panelist and is also a member of the American Association of Private Lender’s Education Advisory Committee. He earned a bachelor’s degree from The American University in Washington D.C. and lives on Capitol Hill with his wife, Dunniela, a Canadian trade lawyer, and his two sons, Jack and Charlie.
However, private lenders are known for fast
RATES AS LOW AS 8.50% AZ, CA, CO, FL, GA, HI, NV, OR, TN, TX, UT, WA
• Funding in as few as 4 days • Non-owner occupied SFRs, 1-4 units, multi-family & condos • 1, 2, & 4 year terms
• Line of credit financing • Loans up to 90% of the purchase price (Max LTV is 75-80%) • Foreign National program
NOVEMBER/DECEMBER 2017 21
Real Estate IRAs: Don’t Be Afraid to Start From Scratch Self-directed retirement accounts can own property just as individuals can. by Clay Malcolm
he secret is out: IRAs, 401(k)s and
health savings accounts (HSAs) holding
alternative assets not only allow investors to
prominent—and potentially lucrative—
option for hands-on retirement investors.
A self-directed retirement account can
use their existing business talents but can
own property in the same way an individual
rities when executed well. Among alternative
passive investments like stocks and mutual
consistently outperform publicly traded secu-
assets, real estate has emerged as an especially
22 PRIVATE LENDER
can. Unlike employer-driven plans with
funds, self-directed IRAs allow plan holders
to implement their personal preferences
within their retirement strategies. Rental
properties, fix-and-flip projects, and other such opportunities have been popular for retirement and nonretirement investors
alike, but the development of raw land has
flown under the radar as a viable approach.
certain rules that need to be followed to
If I don’t have the money but would
scenarios tend to arise that illustrate
IRA achieve partial ownership?
from personal ones, so let’s review a few
technology and expanded online offerings.
maintain the tax benefits. Common
these rules and distinguish IRA investments
Equity crowdfunding has established itself
I personally own vacant land.
in alternative assets without making five-
residential or commercial structure? No. In keeping with IRS rules pertaining
your risk tolerance, identify a piece of land
that best suits your needs and contact your IRA provider to arrange payment for the
acquisition. You may then hold and flip the property once it appreciates, lease the land
to a business, develop an income-producing improvement to the property or direct your
investment in another direction as you see fit.
Rules to Know While tax-advantaged accounts can invest
in the same assets as a person, there are
connect investors with up-and-coming
companies, but real estate equity can be
your IRA. The same is true of the reverse
equity shares purchased via crowdfunding
you may not use your own money to fund
you own personally may not benefit from
dance with the Internal Revenue Code (IRC),
relationship; if your IRA owns raw land,
are perfectly allowable in self-directed
Are there any key distinctions with
hands that IRA investors must avoid. Plan
physical development, repair or other
know about the possibilities for residential
by their IRAs. This may prove particularly
exist for retirement investors interested in
ment, as investors may be drawn to such
a piece of commercial property for sale or
expertise. To develop a piece of IRA-owned
you could with personal funds. As the IRA
from the IRA in the same manner as
ities like collecting rent payments, provided
holders are unable to provide services—
You could perform due diligence to satisfy
or six-figure commitments. Many issuers
acquired using similar platforms. In accor-
Personal funds aren’t the only helping
tent with that of a personal investment.
as a way for prospective investors to dabble
to self-dealing, a piece of raw property that
a development project there.
Self-directed IRAs can obtain vacant
Yes, all thanks to recent advances in
of them here:
Can I use my IRA funds to build a
property through a process that’s consis-
rather avoid debt, can my
Those familiar with real estate probably
such upkeep activities—to an asset owned
properties, but those same possibilities
challenging in the context of land develop-
commercial property. Your IRA can develop
projects because of their construction
rent to another business or entity just as
land, any costs would have to be paid
holder, you could oversee key business activ-
your personal money never commingles
If my IRA doesn’t have partners or the cash it needs, can I still close a deal? You can overcome a capital deficiency
with income from the IRA-owned asset.
Could my IRA finance someone else’s development project? If real estate isn’t your forte, your IRA
or boost your IRA’s purchasing power by
funds could finance another investor’s
non-recourse loan, the personal funds or
the property itself, your IRA would collect
as payment or security on the note. The
Depending on the flexibility of your IRA
only collateral involved in this model.
secure the note, qualify prospective borrow-
acquiring non-recourse financing. With a
endeavor. Instead of earning income from
assets of the IRA holder may not be offered
interest on the loan that “built” the property.
IRA-owned property itself would be the
provider, you would have the freedom to
NOVEMBER/DECEMBER 2017 23
ers to your satisfaction, and decide on the
is the separation of personal money (or that
incorporate multiple owners and investors.
This can attract investors and borrowers
Because IRA income bears considerable
of a vacant lot and your IRA could own the
such money never ends up in the investor’s
could arise in this instance:
interest rate, term and payment schedule. alike as entrepreneurs avoid the hassle of groveling to banks and waiting weeks or months for the money they need.
When acting on behalf of my IRA, can I collaborate with whomever I want? IRA investors are restricted from con-
of near-personal people) and IRA money. tax advantages, the IRS is adamant that
pocket before distribution from the IRA.
Conversely, an IRA holder may be tempted
to write a personal check for an emergency
expense, but this is equally disallowed. Any and all income for IRA-owned investments must return to the plan, while any and all
ducting business with certain individuals.
expenditures inherent to said assets must
work with friends, family or anyone else you
could involve full or partial distribution of
They could work as property managers,
significant tax consequences for the holder.
to improve or uphold the property. Perhaps
isolate personal matters from retirement
For example, your spouse could own half
other half. Here are a few situations that
I f you were to sell the lot in full, half of the proceeds would go to your spouse
and the other half would go to your IRA. The same is true for any other income derived from the asset.
I f you want to sell your IRA’s half but
your spouse wants to keep his or hers,
If you buy land with personal funds, you can
be paid by the plan. Prohibited transactions
trust to make the most of your investment.
the retirement account, which may result in
business partners or perform other services
It would therefore behoove investors to
I f you and your spouse elect to develop
they could provide income if they need a
business whenever applicable.
to be paid equally to reflect even
tenants. These options may not be available
Can I ever work with disqualified
finance the entire project alone, nor
trustworthy landlord and you need reliable to IRA investors. Per the IRC, an IRA or its
persons on the same investment?
among others, direct family members
an investment, there are ways to involve
holder may not yield direct benefit from, (parents, children, grandparents, etc.), their spouses, any fiduciaries to the IRA and the plan holder him/herself. Qualified
persons include non-direct
family members (siblings, aunts/
uncles, etc.) and
friends or business partners without
direct ties to the IRA.
The primary concern
surrounding disqualified persons
24 PRIVATE LENDER
When determining a course of action for yourself, your IRA and your disqualified persons if you so
choose. The separation of money is more
ever when you
you may do so provided you, your
spouse or any other disqualified person isn’t the buyer.
the raw land, any expenses would have ownership. One or the other could not could they pay any more or less than their percentage of equity.
J ust as you couldn’t pocket IRA money for yourself, your spouse could not
accept any portion of income attributed to your IRA’s ownership percentage. In other words, your IRA’s slice of the pie could never be received or retained by your spouse.
As you can see, you may conduct IRA
business in tandem with a disqualified person if handled properly. By titling
everything correctly and maintaining
separation between personal and retirement
money, adding trusted business partners
can help alleviate the stress of day-to-day
activities and strengthen your investment
as a whole.
Building Your Future Retirement These additional factors may seem daunt-
ing when weighing the pros and cons of
personal investments and IRA investments,
but a quality IRA provider can provide
critical guidance for uninitiated retirement
investors. The IRS mandates that all retirement plans remain in the custody of a trust entity or third-party administrator. These companies help navigate the waters
of the IRC so their clients can keep their focus where it belongs: The opportunity
to build a strong retirement portfolio with successful investments.
Just because youâ€™re literally working from
the ground up doesnâ€™t mean you should be intimidated by a pre-developed land
investment. Even before (and if) you elect to construct a residential or commercial
building, the state-specific cost of holding
ABOUT THE AUTHOR
diate factor. That being said, the potential
Clay Malcolm is the chief development officer at New Direction IRA, Inc. a self-directed IRA provider that assists more than 12,000 clients nationally. He 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. Malcom, who has more than 20 of years management experiences in various roles, draws upon his teaching background to develop the educational aspects of New Direction IRA and impart knowledge about self-directed IRAs to its clients and prospective clients. Malcolm received his Bachelor of Science degree in communications from Northwestern University. www.newdirectionira.com/education.
pre-developed property could be an immereturns in these types of investments are
certainly worth considering. Throughout the investment world, business-minded
folks have historically earned the most by
building a quality something from a relative nothing. Self-directed IRAs embody this
spirit by empowering investors to take con-
trol of their retirement and build the future they envision for themselves. These two
financial vehicles working in concert can
allow investors to combine profitable assets
with the tax benefits provided by retirement plans. As global events continue to dictate
the financial landscape, exploring any possible edge in the alternative asset arena could pay off in a big way. â–
NOVEMBER/DECEMBER 2017 25
The Impact of Severe Weather on Real Estate Prices National trends provide some answers, but every local market is different. by Mark Melikian
redicting real estate prices can be like predicting the weather. We can analyze all the major national trends, see where the
cold and warm fronts are moving, and guess what the impacts will be for the local markets, but we can never be 100 percent sure.
26 PRIVATE LENDER
The same is true for real estate. National macroeconomic trends
definitely impact local markets, but each neighborhood is different.
Some are better protected from trends that might negatively impact others. Prices in one market can react quite differently than in
another, even when the macro-economic trends impacting them are the same. As any broker will tell you, when it comes to real estate, every local market is different.
The one time this may not be as true is when major weather patterns
impact regional real estate markets. There are no weather patterns
more major, at least in our hemisphere, than the Atlantic hurricane. The season, which began June 1, 2017, started rather weak with a
Insurance will fund the rebuilding of many impacted neighbor-
hoods, with flood insurance providing up to $250,000 in rebuilding costs and more money on top of that to replace belongings. When
the new homes are complete, they will have the benefits of current
construction technologies, and in time could be more valuable than
the existing homes would have been under the same circumstances. Unfortunately, most of this insurance coverage will support
series of smaller storms that gave many a false sense that the season
rebuilding of commercial and multifamily dwellings. Normal resi-
(TSR) Consortium at the University College London wasn’t as certain.
when they take out a mortgage, doesn’t cover this type of event.
would end without any dangerous weather. The Tropical Storm Risk Its preseason outlook, which it issued December 2016, called for 14
dential hazard insurance, the kind most people are required to buy In fact, according to The Washington Post, less than 20 percent of
named storms, six hurricanes and three major hurricanes.
the homeowners living in the eight counties most directly affected by
seven hurricanes, a Category 1, two Category 2s, one Category 3,
analysis of Federal Emergency Management Agency (FEMA) data.
Since the season began, we’ve had seven named storms and
two Category 4s and two massive Category 5 hurricanes, Irma and Maria. Irma was among the strongest hurricanes ever recorded
outside the Caribbean Sea and the Gulf of Mexico. It smashed into
Harvey had flood insurance coverage. That result came from the Post’s The rest of the homeowners will rely on the government for
support or be forced to use bankruptcy law to protect themselves
the Florida Keys as a weakened version due to its impact with Cuba. Two weeks later, Maria surpassed Irma to become the most intense hurricane of the season by central pressure, but was later reduced to a tropical storm.
A Category 5 hurricane is a very dangerous storm, but the
hurricane that devastated the most real estate so far into the season
was the Category 4 storm Harvey. It was the costliest storm of the sea-
son, doing approximately $190 billion in damage. It was the first major hurricane to come ashore in the U.S. since Hurricane Wilma in 2005. Hurricane Harvey did more damage than hurricanes Katrina
and Sandy combined. In the process, it destroyed the lives of the
thousands of people it left in its wake, even those who were insured. Its impact on the value of the land itself is not likely to be extreme,
WITH A CLICK OF A MOUSE See Every Investor Deep Dive Every Deal Monitor Every Competitor
however, at least not in the long term. There are a number of reasons this is true.
Insurance and Government Funds Will Be Leveraged to Rebuild According to Reuters, the insured damage Harvey caused will
run just north of $20 billion, making it one of the 10 costliest storms ever to hit the U.S. As you would expect, this has already taken a
toll on insurance company stocks, but this loss is not large enough to threaten that industry.
NOVEMBER/DECEMBER 2017 27
from mortgages on homes that no longer exist. Fortunately, there
At the time of publication, we still didn’t have a good idea of
is aid available. Federal grants for disaster victims can be used for
the total amount of financial and other aid donated to support
also be available, including rental payments and grants to replace
hundreds of millions.
temporary housing or emergency home repairs, and other aid could personal property. Government efforts that will have the most
impact on future property values are its grants to make damaged
dwellings safe, sanitary and functional and its low-interest loans. Not everyone will stay, but if they choose to rebuild, there are
resources available to help them do so.
Less than 20 percent of the homeowners living in the eight counties most directly affected by Harvey had flood insurance coverage.
victims of Hurricane Harvey, but the final tally will be in the
Even so, there can be no doubt that some residents will leave.
Many of those who never expected a hurricane to make landfall and
blow away their homes and personal items will not face the same risk again. But for every person who moves away from the water, many more are waiting to take their place. It’s the single biggest reason property values rebound in the wake of every major storm.
Why Flood-Prone Properties Will Always Hold Their Value The last time we wrote about the impact of natural disasters
on property values, we were considering the potential impact of the Zika virus on property values in Florida. We predicted that
any negative impacts would be short-lived, and it appears there
were few impacts at all. Nevertheless, it is important to ask these
questions, especially if we are in the real estate business.
There can be no doubt that flooding will have a short-term
impact on the price of real estate, but how severe it will be and how long it will last are difficult to estimate. The research indicates
Americans Are Ready to Help Victims Get Back on Their Feet For some, rebuilding will require a more hands-on approach.
there is no norm and that a storm that does a great deal of damage can have a very short-term negative impact in real estate values in one community, while the impact could last longer elsewhere.
They will pick themselves up, as they always do, and begin to clean
This is the local nature of real estate again.
new disaster, Americans seem more willing to offer a helping hand,
Candy Evans did a nice job on an analysis she published on her
up and reconstruct their lives. But they won’t be alone. With each
What can we say with certainty? North Texas real estate pro
and a check.
blog, CandysDirt.com. Her research indicates that property values
high-profile stars step up to draw more attention to these disasters,
effect will not be permanent. This fits well with my experience.
the end of August, American businesses had pledged more than
but it could take a while. It could be eight years or more for some
companies had donated $1 million or more.
rebuilt. But if the property is within a short distance of water, it
Samaritan’s Purse are sending in relief workers to help with the
and we feel better when we live in close proximity to it.
floodwaters have receded. These are being added to the ranks of
London has suggested “that our ancient ancestors were devotees
It may be social media’s impact or the fact that the media and
but consumers and businesses are stepping up to help out. As of
$157 million to relief efforts, according to CNN. Sixty-nine of those Meanwhile, nonprofit organizations like The Red Cross and
cleanup and prepare the ground for new construction, now that the construction industry workers that have descended on the area.
28 PRIVATE LENDER
will fall from 10 to 30 percent in the wake of a major storm, but the How long will it take for prices to recover? That varies as well,
storms. Some properties destroyed by Katrina still haven’t been will very likely be rebuilt. It’s human nature to seek out water,
Neuroscientist Michael Crawford of the University of North
of the sea, and that their devotion paid off by allowing the human
species to develop large and complex brains.” His ideas were
addition, you will have many borrowers to choose from and
University, who was pondering online why she felt so good
shared by Meredith F. Small, an anthropologist from Cornell during a seaside vacation.
It’s not just academics who realize that property with an ocean
view is intrinsically more valuable to humans. Any study of real estate will show that the more expensive properties, when the
the possibility that the homeowner could also tap some
Like every real estate deal you invest in, underwrite carefully.
However, this is one time when it may be profitable to run toward trouble when everyone else is running away from it. ■
structure of the house and other variables are comparable, will be those closer to water.
ABOUT THE AUTHOR
The Bottom Line for Real Estate Investors
What does all this mean for private lenders? From my perspec-
tive—and as long as you don’t take this as advice since the specifics
Mark Melikian is chief valuation officer for Summit Valuations, where he oversees the performance and training of the quality assurance team, product development, and is the company’s valuation expert. He can be reached at email@example.com.
of each real estate transaction differ—it may mean that if you’re
looking to lend in areas where properties are likely to appreciate
greater than the overall market in a decade or less, consider lending in communities that have fallen prey to recent hurricanes. In
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NOVEMBER/DECEMBER 2017 29
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30 PRIVATE LENDER
How to Reduce Losses Through Active Forbearance This alternative can provide a win-win situation for all parties involved. by Bobby Montagne
renovation projects and collaborating
Why Use Active Forbearance?
jerk reaction of many private lenders is to
causing delays and cost overruns.
Forbearance to avoid foreclosure.
expensive process in most jurisdictions that
lender can exercise its first lien position and
up in a project, you don’t have it to lend to
Active Forbearance offers an alternative
can then finish the project, market and sell it,
obligations to pay your investors regardless of
possible, the lender may also return a portion
borrower. Vacant properties tempt vandals
foreclosure only if the borrower is unwilling to
depress values for surrounding properties.
hen a borrower’s renovation project and loan payments stall, the knee-
initiate foreclosure. That’s a lengthy and
ends when the lender takes back the property. route that can get a borrower’s renovation project back on track, get the loan reinstated and
with the borrowers to solve the problems If there’s no way resolve the problems, the
take over as general contractor. The lender
and pay off the loan with the proceeds. When
There are three reasons to use Active First, it’s smart. When your money is tied
someone else. Aside from that, you have
the challenges you face with the property and
lead to a profitable resolution for all parties.
of the borrower’s equity. The lender pursues
and thieves, and foreclosure sales typically
involves stepping in midstream on stalled
agree to the forbearance agreement and terms.
Both can harm surrounding property values.
A good Active Forbearance process
NOVEMBER/DECEMBER 2017 31
Second, it’s moral. It may fly in the face
it gets to market and your loan is repaid.
of being a for-profit lender, but we think it’s
When a borrower runs into trouble and is
before resorting to foreclosure. The borrow-
keep making payments.
somewhere. They can go to a lot of seminars
not getting the property back to sell any time
experience because every deal is different.
state. If you can keep the project moving
morally right to try Active Forbearance
ers who are new to the business have to start and read books, but nothing can replace
Sharing experience and expertise with
others grows a better client base. Keeping projects on track helps develop business
people who are loyal to you and better at flipping houses, which reduces your risk next time you lend to them.
Third, it’s practical. The more quickly you
financially stressed, they’re not going to
You’re not getting payments, and you’re
soon, especially in a judicial foreclosure ahead, you avoid foreclosure.
Active Forbearance produces win-win
results, as lenders can return capital to investors and borrowers as:
T hey know more about successfully renovating and selling properties.
get the property back on track, the sooner
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32 PRIVATE LENDER
T hey have equity from the original deal to fund a new project.
T he lender-borrower relationship remains intact.
T here’s no foreclosure “black mark” on the borrower’s record.
Active Forbearance at Work Surprisingly, it’s not poor credit that
tends to cause defaults in private lending.
The two most common reasons borrowers
and projects run into trouble are:
1 A lack of construction experience. 2 An inability to stay on top of the many tasks involved in renovation projects.
A lender who has been in the trenches has
the unique skills and insights to help rehab-
bers succeed. They can show borrowers how to avoid mistakes, share best strategies on
Here’s an example of active forbearance
After more weeks went by without permits,
in action. It shows how things can go wrong,
Jim was frustrated by the very slow pace of
An experienced and repeat renovator, who
They had several meetings at the property,
even for seasoned flippers.
the project and went looking for solutions.
vetting vendors and suppliers, and provide
we’ll call Jim, bought a house at a substantially
within budget. They have contacts, know the
coming Washington, D.C., neighborhood.
a job isn’t usually smart or cost effective,
ultimate power to make or break a project.
tor to perform the work, teamed up with a
helped Jim bring in new, more seasoned
construction draws, so they notice when
contemporary floorplans and, ultimately,
insight on key methods to stay on time and local players and understand who has the They’re in and out of projects overseeing
deadlines start to slip. When that happens,
undermarket value in Eckington, an up-andJim selected a well-known local contrac-
skilled architect to produce streamlined and
and discussed the best course of action.
Changing contractors in the middle of
but in this case, it made sense. The lender contractors who pulled permits quickly.
Jim also agreed to put the high-end design
elements back in the plan.
nications that clearly define what’s going
ule due to permit delays. In response, Jim
do to get the renovation back on schedule.
that could negatively affect the exit price.
they step in and begin a series of commu-
wrong and what they expect the borrower to
Fairly quickly, the job fell behind sched-
decided to cut costs. He made design changes
The lenders created a forbearance Extended the loan term and increased the loan amount to allow for cost overruns.
Stipulated monthly payment procedures. C alled on Jim to pay an extension fee
and contribute additional money into the project.
A mended Jim’s LLC to appoint the lender manager of the project (allowing the
lender to manage the contractors, increase the construction budget, if needed, and oversee the sale of the home).
The agreement also stipulated that the
division of proceeds would be disbursed in the following order upon sale of the house: costs, i.e., real 1 Transaction estate commissions. of all property obligations 2 Repayment such as loan pay off, taxes and utilities. 3 30 percent of profits to be paid to Walnut Street Finance. profits to be paid to 4 Remaining the borrower. The new contractors had the old work
fixed and inspected, and made some positive
NOVEMBER/DECEMBER 2017 33
design changes to the interior and exterior. Within six weeks, the project was finished and under contract to sell.
In this case, the market moved with the
the business, those dreamers are inevitably going to hit some rough patches.
When that happens, a lender has two
options in the way they choose to approach
project, and the exit price was even higher
the situation. The first is to immediately
nearly as much profit as he had originally
the foreclosure process. The second option
moved on to his next project.
lenges. Replacing the adversarial foreclosure
forward for those traditionally ignored by
ing people grow their construction project
than projected. After the sale, Jim had
claim that the loan is in default and begin
planned, there was no foreclosure, and he
is to work with the borrower to resolve chal-
Private lending provides a pathway
banks. Entrepreneurs with skills and the
determination to work hard can turn a profit by rehabbing old properties. As they learn
34 PRIVATE LENDER
process with Active Forbearance and helpskill just feels a lot better. ■
ABOUT THE AUTHOR Bobby Montagne is the founder of Walnut Street Finance, a leading private lender in the mid-Atlantic and member of the American Association of Private Lender’s Education Advisory Committee. Walnut Street Finance is the sponsor of the Walnut Street Finance Fund II LLC, a $30 million private lending fund offered under SEC Rule 506. It allows investments as low as $50,000 and provides a preferred dividend of 9 percent with no fees. The fund sponsor is Walnut Street Finance, a developer and private money lender with more than two decades of experience. The loans in the fund’s portfolio are generally short term—one year or less. All loans are collateralized by the underlying properties, and each borrower provides equity of 15 percent to 25 percent the property’s value. This article does not constitute an offer to sell, a solicitation to buy, or recommendation for any security.
Need funding? Find an ethical lender AAPLOnline.com/Member-Directory
LET’S TALK PRIVATE LENDING 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. JOIN AAPL TODAY!
913.888.1250 NOVEMBER/DECEMBER 2017 35
LENDER LIMELIGHT WITH ANTHONY GERACI
PERSONAL GROW TH & MOTIVATION
TOOLS FOR REACHING NEW HEIGHTS Anthony Gera ci sh ares his motivations, how heâ€™s been able to grow his ventures and create a strong lega c y. by Heather A. Elwing
36 PRIVATE LENDER
NOVEMBER/DECEMBER 2017 37
LENDER LIMELIGHT WITH ANTHONY GERACI
“What motivates me
is that I get to work with my friends, and together [we] get to
achieve something bigger than myself,” said Anthony Geraci, managing shareholder
in charge of vision and culture at Geraci Law firm.
Private Lender: When did you establish your companies, and where did the ideas originate? Anthony Geraci: The idea to start the firm with my partner Christina came from serving the ever-growing private lending market. I believed we could deliver services better and cheaper than any other law firm. Our media and consulting divisions started in 2016 to serve the additional private lending needs of deal flow and capital raising. What was the biggest challenge you faced while setting up and running
He never expected he would get to where he is now. Growing up with not much money, Geraci knew he had to work hard to ensure his life had purpose and to eventually reach his own definition of success with those he holds closest: family, friends and colleagues. Geraci’s journey began gaining momentum after he received his bachelor’s degree in history from Auburn University at Montgomery. He went on to earn his Juris Doctor from Chapman University School of Law. When he took his first position at a small
the law firm? How did you overcome those obstacles? The biggest challenges have had to do with me. Even though I’ve been a manager since I was 17, I had never run a company before. This also was during times of huge growth for the firm. I first had to learn how to work with a team to achieve our common goals. Then just three years ago, due to growth, I needed to form a management team and then learn how to use them.
firm that practiced private lending law, he
In Originate report, in the letter
was hooked. In 2007 he and his partner,
from the editor, you state you want
Christine Geraci, opened their own firm.
the magazine to be the Playboy
This year they celebrate their 10-year busi-
magazine of the loan origination
ness anniversary. What a decade it has been
industry. Do you have a plan to
for them—from the growth of their practice
make this industry sexy?
to the launch of their magazine, Originate report, and the Geraci’s Speaker Series. Private Lender sat down with Geraci to discuss his motivation, leadership and how he’s been able to grow his ventures during the past 10 years.
38 PRIVATE LENDER
I think the returns are already sexy! What I meant by that is I want Originate report to be read for the articles like Playboy. Historically, Playboy had award-winning, cutting-edge articles that were enjoyable to read and were
just as newsworthy as mainstream media. We want the same as it pertains to the loan origination market. What is your philosophy and vision for your conference series? To add value every way we can. It’s not just our vision and philosophy for the
conference, it’s our vision and philosophy
My greatest achievement is my personal
of our firm. We want to help our clients do
growth. I think the greatest search anyone
business together in frictionless settings
can do is to get to know who they are,
where they can maximize their time and
be comfortable with that and fully accept
do business together.
their flaws as well as their strengths.
What do you feel is your greatest achievement so far?
Then they can be at peace with themselves. I get closer to achieving that goal every day.
What are some of the things you enjoy most about what you do? I’ve always enjoyed teaching and coaching. I get to mentor our team and teach them everything I’ve had the opportunity to learn. I get such a thrill out of seeing them grow and seeing how they take that seed and
NOVEMBER/DECEMBER 2017 39
LENDER LIMELIGHT WITH ANTHONY GERACI
make it grow into a huge tree. And for me, to see the impact I have on the lives around here takes my breath away. Marcus Aurelius said, “What we do now echoes in eternity.” We all have our rough patches. What are a few things you tell yourself when the chips are down? Bob Parsons has had an immense impact on my life. He wrote “16 Rules for Success in Business and Life.” When times have been especially tough, I read two of his rules. In the first, he says: “Very seldom will the worst consequence be anywhere near as bad as a cloud of ‘undefined consequences.’ My father would tell me early on, when I was struggling and losing my shirt trying to get Parsons Technology going, ‘Well, Robert, if it doesn’t work, they can’t eat you.’” If it doesn’t work, they can’t eat you. In the second rule, he reminds us that no matter
“ We want to help our clients do business together in fric tionless set tings where they c an m aximize their time and do business together.” -Anthony G era ci
40 PRIVATE LENDER
how difficult the situation, you can get
Personally, I admire Swami Parthasarathy
through anything one day at a time. I would
and Ajahn Brahm. I have grown so much as
even shorten it to say you can get through
a person due to their writings and speeches.
anything one minute at a time.
They have provided the personal guidance
Was there ever a low point when
I have needed to move to the next level.
you almost called it quits? If so,
Do you have any daily rituals that
did this influence the eventual
help you grow as an entrepreneur/
writing of your article about grit
that appeared in the inaugural issue of Originate report?
grew up poor and without anything, and I
feeling gratitude. By this time, my kids wake
wanted to make sure I didn’t stay that way.
up and I spend time with them, take them to
There’s a certain peace and calm in not
school and then get into the office. If you could offer one piece of advice to other entrepreneurs, what would it be? Have passion for what you do. You’re going
It’s one by Marcus Aurelius: “It is not death
to fall, and fail, often. Even if it works out
that a man should fear, but he should fear
the first time, it won’t stay that way.
never beginning to live.” There are variants
Continue to invest first in yourself, then
of this quote everywhere, but if it has to be
in your business. Only if you grow can
summed up in two words, then “carpe diem,”
your business grow.
or “seize the day.” It’s an important reminder that all time is borrowed. I must remember to live life like there is tomorrow, because one day there will be no tomorrow.
for motivation or inspiration? As I noted previously, I grew up poor. I keep a $1 food stamp from the 1990s on my desk. It’s a reminder of where I came from. It’s also I don’t continue to put in the work.
I need to get done. Then I spend 10 minutes
What is your favorite quote and why?
your life that you reflect upon often
a motivator for me of where I could end up if
never have I thought of calling it quits. I
so I better not fall.
Are there one or two moments in
morning and start off exercising. Afterward I’ll create a to-do list of my top three things
and nothing to catch me on the way down,
every week, every month and every year.
I get up between 4 a.m. and 5 a.m. every
I’ve had many low points in my life. But
having a safety net. If you fall, there’s no one
are the result of doing the work every day,
Surely many individuals look at you and think, “There is no way I could accomplish as much as he can, even though I am trying!” If
Who are the individuals you admire,
you could tell others one thing,
in business or in life? And why?
what would it be?
In business I admire Richard Branson,
Two things. First: kaizen. It’s a Japanese
Verne Harnish and Gary Vaynerchuk. They
concept which to me means small daily
have impacted my professional career many
improvements lead to a lifetime of results.
times over, and I have given Verne credit for
Everything builds on the previous work
the inspiration behind our current business
done and is a reminder that everything
expansion. He’s a great person to talk with
can be improved. Second: habits. Accom-
and learn from.
plishments aren’t the result of luck. They
If you could be anywhere in the world right now, where would you be? Sicily. I would like to have a place there or in Venice. Italy is absolutely beautiful, and I am second-generation American coming from Italy. What do you think you would be doing if you hadn’t decided to take the path you are on now? I don’t know. I don’t spend too much time thinking about things, and I don’t regret where I am in life. I did apply for the Naval Academy and made the final cut but was likely not selected because of my vision. At the time, they only accepted 35 percent of applicants who needed to wear glasses or other vision items. If I did qualify, likely my life would be completely different today. ■ ABOUT THE AUTHOR Heather A. Elwing is editorial manager for Private Lender and editorial assistant for Think Realty Magazine. She is a licensed Realtor in Missouri and holds degrees in journalism and public relations. She is dedicated to the education of those interested in private/hard money lending and real estate investing.
NOVEMBER/DECEMBER 2017 41
42 PRIVATE LENDER
Private Lending and Technology Are we ready for peer-to-peer lending? by Harry Singh
he private lending market has been
A government that wants to slow down
around for as long as there have been
the supply of mortgage funds available to
events. And, itâ€™s natural for every borrower
down the amount of borrowing) may look
when it comes to borrowing money.
by imposing additional guidelines or by
unforeseeable circumstances and major life to expect the lowest possible rate and fees
Traditional Lending Model Traditional banks generally are the cheap-
est sources of funds for borrowers. They can
do this thanks to the rock bottom yields they
provide to their investors in return in the
name of security, which in Canada originates
borrowers (an indirect measure to slow
to restrict or limit the securitization activity imposing a maximum ceiling on what an institution can securitize. The measure
would slow down the supply of credit and indeed reduce competition, which would
put upward pressure on the cost of borrowing for borrowers.
The Canadian governments have, over
from depositor insurance provided by Canada
the last nine years or so, been grappling
Federal Deposit Insurance Corporation in
rates needed to be kept low while keeping
Deposit Insurance Corporation and the
the U.S. Additionally, it is easier for banks
to securitize mortgages, at least in the U.S., where the capital markets are a lot more robust than in Canada.
The concept is quite simple: raise capital
from depositors like you, pay minimal return on the deposits with minimal risk, lend the
with a unique situation where the interest the consumer debt to income ratios and
boisterous real estate markets in certain
parts of the country in check. The Canadian government using its watchdog, the Office
of the Superintendent of Financial Institu-
tions (OSFI), chose to restrict the mortgage credit availability through a progressively
funds at higher rates to borrowers, pool the
tighter set of guidelines that have shifted
via third parties to investors to replenish the
previously would have been funded through
mortgages into portfolios and then sell them capital. Well-capitalized financial institutions with large and deep balance sheets are diversified, while institutions that are not as well
capitalized run the risk of restrictions on the
a significant share of the business that banks, alternative institutions over to
Mortgage Investment Corporations (MICs) and private lenders.
Private lenders and MICs have previously
securitization process or viability. This may
funded a relatively insignificant portion
tization model, but it captures its essence.
in the Canadian market, but over the last
perhaps be an oversimplification of the securi-
of the overall mortgage credit outstanding
NOVEMBER/DECEMBER 2017 43
to narrow the universe down to one to
three private lenders, which precludes the borrowers from truly benefiting from
competition among various lenders.
Time for P2P Lending? As we approach 2018, technology
undoubtedly will shape the landscape and an age-old business like private lending
will undergo tremendous change. Consumers, with the availability of information
on the internet, are much better informed regarding trends and opportunities.
Peer-to-peer (P2P) lending is around the corner. Sites are starting to pop up that facilitate lending from one person to
another, cutting out the middlemen and creating a process that is both cheaper
for the borrower and more lucrative for
the lender. The predictable and ongoing obstacle will be regulations in the name
of protecting the public; however, the
regulatory framework around Uber and
bitcoin are classic examples of how market nine years, private lenders and MICs have
down payment. The cost of marketing to
efficiency will prevail in the end. Predict-
Coincidentally, the increase has aligned
resultant borrowers may not fit a private
bank in North America is chasing fintech
regulations imposed by OSFI. Indeed, the
private lenders and MICs in Canada choose
noticed a dramatic increase in their portfolios.
ultimate borrowers is expensive and the
ably, it is not an accident that every major
with the introduction of credit tightening
lenderâ€™s requirements. For this reason, many
investments and acquisitions, as they too
number of private lenders and MICs has also
to deal with mortgage brokers.
is plenty of business for private lenders and
vet the borrowers and in turn match them
the assumption is that brokers will be
ing skills of an average person in under-
as they tend to be not as straightforward
lending. However, with bottom of the barrel
over, the number of private lenders in any
and volatility of mutual funds, investors are
track of. Most mortgage brokers will tend
and perhaps the same logic might prevail
noticeably increased in Canada. While there MICs in the market, it continues to be done Private lenders that are focused on
dealing with the ultimate borrowers find it challenging since borrowers generally do
not know whether they are a fit for a given
private lender, let alone the gap that needs
to be filled regarding rates, fees and equity/
44 PRIVATE LENDER
The idea is that a mortgage broker will
see the writing on the wall.
Practical Challenges One of the more practical challenges of
with a suitable private lender. Of course,
P2P lending focuses around the underwrit-
knowledgeable regarding private mortgages
standing the risks versus rewards of private
as a cookie-cutter prime mortgage. More-
returns on savings, retirement saving funds
marketplace is an elusive number to keep
hungry for stable yield. At least in Canada,
in the U.S., as more quality business shifts from traditional lenders to private lend-
ers, investors can have higher yields while
reduce costs for borrowers while enhancing the yield for investors.
From an innovation perspective, 2018
tion through property valuations and other ancillary services that further enable an investor to lend. ■
taking on risk that their banks would have
will be an exciting year, in terms of both
forcing them not to do so for reasons other
mortgage lending. With record breaking
ABOUT THE AUTHOR
starve for yield, the macro environment is
Harry Singh is the founder and editor in-chief of Private Matters Today, the leading magazine for Canadian mortgage professionals in the private lending and investing arena. Harry is also the president and CEO of Indigoblue Mortgage Investment Corporation. For more information, contact firstname.lastname@example.org
gladly accepted if it were not for a regulator than credit risk. Additional credit/lending education and perhaps use of cheaper but
knowledgeable underwriting hubs could be a solution that may also solve the problem of needing a license in some jurisdictions
unsecured lending and secured private
bank profits and margins while investors very conducive for P2P lending models.
The private lending world naturally lends itself to such a model, as does unsecured
to deal in mortgages. Effective web mar-
lending, which tends to be a much smaller
across the country—so that investors/
marketplaces that facilitate P2P lending
ketplaces that amalgamate business from lenders can in real time peruse available
opportunities—will be highly effective and
ticket item in terms of dollar amount. Web models will be sought after, particularly
ones that build an element of risk mitiga-
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Securities and Exchange Commission Moving Forward on Standard Fiduciary Rule Harmonizing their rule with DOL is a priority. by Melissa Lucar
fter Republican lawmakers pushed hard for a postponement of implementation,
the U.S. Department of Labor (DOL) proposed a delay to the applicability of certain fiduciary rule conditions until July 1, 2019, namely, the Best Interest Contract exemption, Principal
Transactions exemption and PTE 84-24 (insur-
Tim Scott, R-S.C., told Clayton that the DOL
fiduciary rule has had a “negative impact” on
many Americans and that the restrictions the rule places on financial professionals makes
it harder for average Americans to get access to financial advice. While Scott said he was
“pleased” that the DOL decided to delay imple-
ance and annuities). The DOL also issued
mentation of their rule, he also said, “The last
PTEs’ prohibitions against class action
to get experts out of the households, which is the
non-enforcement relief from the related
waivers and qualifications.
Work With DOL In the latest development, the Securities and
thing we need to do at this point is to find ways
unintended consequence of the fiduciary rule.”
Investors must have a choice so they aren’t pushed into a narrow set of circumstances because of whatever steps we take.
Clayton responded to questions about his
agency’s coordination with labor by thanking Secretary of Labor Alexander Acosta for
of person they’re dealing with and they know
“reaching out to say we should work together on
the obligations owed to them.”
with the DOL on finalizing a harmonized rule.
of consistency in any rulemaking saying, “If you
senators about the plan and laid out the four
Four Steps Proposed
facing the same person—a retirement account
on a harmonized rule.
reviewing the public comments regarding a
be consistency with respect to those accounts.”
advisors on the effects of the DOL rule and
state regulators are working in coordination
the agency planned to work with the DOL to
dards of conduct” regulations. Clayton closed
fiduciary rule. ■
bogged down in regulations issued by multiple
agency is proposing in implementing a new
ABOUT THE AUTHOR
Exchange Commission (SEC) announced that a standardized rule is their top priority, and
harmonizing their rule with the DOL is high
on the agenda. SEC Chairman Jay Clayton told steps the agency will take in pushing forward During a Senate banking committee
oversight hearing on Sept. 26, lawmakers
were eager to hear from the chairman on how ensure that financial professionals are not
agencies. Sen. John Tester, D-Mont., asked
Clayton pointedly when he believed a fully
harmonized rule would be released. “This is a priority for me. Everything can’t be a
priority for me … but we’re pushing this one,” responded Clayton.
this.” He went on to commit to working together
According to Clayton, the SEC is now
request for investors’ opinions and financial what is expected moving forward on “stan-
Third, the chairman stressed the importance
have two different types of accounts, but you’re and a nonretirement account—there ought to
Lastly, he stated that the SEC, the DOL and
to devise a way forward with a standardized
the hearing with describing the four steps the
First, Clayton said, “Investors must have a
choice so they aren’t pushed into a narrow set of circumstances because of whatever steps we take.”
Second, he stated that there must be clarity
in the rules, so that “investors know what type
Melissa Lucar, Esq., is an associate attorney in the Securities and Corporate Department and focuses her practice on helping clients raise capital via private placements offerings and other alternative investments. Melissa also ensures compliance with all applicable federal and state securities laws and advises clients on how to organize and structure their business. NOVEMBER/DECEMBER 2017 47
FEATURE: VETERAN BUSINESS
Realizing Entrepreneurship While Serving My Country Serving in the Green Berets provided the foundation for my career as a fund manager. by Edwin Epperson
hat does a fund manager look like? And how does a fund manager—a
person who may have hundreds of millions of dollars at their discretion to make loans, secure investments, develop a dream and
capitalize on building trends—get shaped for such a career? To make those kinds of
decisions? This is the journey of one such man, Edwin Epperson, whose military
service established the foundation for what would become his private lending career,
leading him down the path of becoming a real estate fund manager.
Call to Service On Sept. 11, 2001, Edwin D. Epperson III
was working two full-time jobs. Those of us who are old enough to remember can recall exactly where we were that day when we
heard and watched the terrorist attacks. Like many, Epperson felt a patriotic passion rise
from within and answered the call to action of our late President John F. Kennedy: “Ask not what your country can do for you, ask what you can do for your country.”
Private Lender asked Epperson to share
Photos courtesy of Edwin D. Epperson III.
48 PRIVATE LENDER
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FEATURE: VETERAN BUSINESS
Veteran-Owned Business Stats Veteran entrepreneurs are a thriving part of the U.S. economy. Learn about their strengths as well as areas of potential opportunity for growth.
Veteran-Owned Business at a Glance
in Sales Receipts
in Annual Payroll
States with the Most Veteran-Owned Businesses CALIFORNIA TEXAS FLORIDA
Ownership // Veterans owned a larger percentage of businesses in these
industries compared to all other U.S. businesses in the same industries.
States with the Highest
Finance & Insurance
Transportation & Warehousing
Mining, Quarrying, Oil & Gas
Professional, Scientific & Technical Services
<10 employees <20 employees
Source: U.S. Small Business Administration, Office of Advocacy; U.S. Census Bureau Survey of Business Owners; U.S. Department of Veterans Affairs
$15 BILLION Federal Spending Last Year
Source: National Veteran Owned Business Association 54 PRIVATE LENDER
& Receipts Attributed
Hired Help // Veteran-Owned Employers & Number of Employees
Percentage of Sales
MAINE VERMONT NEW HAMPSHIRE
my mentors, and I met a few others who
doing, how we could make sound investment
my mentors’ leadership and guidance, I
else, and protect our downside, basically
have helped shape my life as well. Through began to educate and train myself on how to analyze loans, understand key metrics, perform underwriting and make sound
decisions by shifting the risk to someone
borrower could rehab these properties and sell them for a profit.
As much as I would like to say I cut my
mitigating our risk. Some of my Green Beret
teeth during those early years of my private
of managing a rehab. It was something they
three loans. My “Ah Ha” moment occurred
buddies had the experience and background
lending career, I can honestly say I did only
decisions for how to invest in mortgages
grew up doing, or they worked with family
he adamantly taught me was to never chase
capital after a short deployment to buy a
and we were taking the fight to several
the upside will take care of itself,” he would
ital to do the rehab. Because we all worked
fighters. We had snuck in that night to our
way through my career (I got way overcon-
only made sense that these men would
and deeds of trust. One of the first things
who did that type of work. They had the
the returns. “Cover your downside, and
small house, but they did not have the cap-
say. I violated that one rule, just once, halffident) and it cost me—big! After studying
for more than a year and reading books and
together, and we all trusted each other, it be my first borrowers.
I would be the deal sponsor and the
attending seminars, I still had a question:
other Green Berets and myself would do a
“Family and friends, Ed, family and
who had the knowledge and experience to
“How do I loan money I do not have?”
friends,” he would say.
So, I went to some friends I served with
in Special Forces. I told them what I was
fractional note to another one of our friends take on a renovation project. We, of course, would be in first position, but we would
get our monthly interest payments and the
in Afghanistan in 2014. We were in the Shah Wali Kot district in southern Afghanistan
enemy strongholds harboring known Taliban attack positions along the side of a mountain and were preparing to assault the first of
what would be many enemy strongholds.
As is often the case, after all preparations were made and positions set, we waited.
We had to wait on our ISR platform (drone) to confirm the target had arrived at the
stronghold. So, as I waited, thinking of home and my two boys, I started to think of my private lending business.
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FEATURE: VETERAN BUSINESS team is only 12 men. Of those 12 men on our
be a fund manager of an international fund.
email with my loan documents to the closing
By the end of the deployment, we were
ber is even now written on a single check I
position loan in two days. â€œAre you serious?â€?
my resolve to exit the military and turn my
Then it hit me, just 18 hours earlier I was
sitting in front of the computer sending an
agent. We would be closing on another first I asked myself out loud. My buddy John
turned around and looked at me, thinking
I saw movement on the objective. I waved
team, seven would become incapacitated.
operationally ineffective. This only affirmed full attention toward building a private lending business.
him off with a big grin. I had just realized
private lender. Scalability without regard to
out to California to meet my mentor. We
where in the world. As I sat there on top
to becoming a private lender. He agreed that
one of the biggest benefits to becoming a geography! I literally could do this anyof this 7,000-foot mountain, I began to
dream of sitting on a sailboat in the Caribbean
When I returned to the states, I flew
discussed my desire to fully commit myself I had what it would take, and he voiced his support. That meeting was in July 2014.
typing away on a computer making loans. It
I also told him something that became a
I simply could not see myself staying in the
committing to. I told my mentor that I would
was that night that changed my path forever. military with the freedom that I could now
taste. That assault on the stronghold would end up spanning several days, involve hours and hours of gunfights, and many times I
thought I might not make it out alive. That
deployment was a tough one. A Green Beret
56 PRIVATE LENDER
goal, set before I knew what I would be fully
I even gave him an exact number. That numhave framed to remind me of my goal.
By October 2014 I had found a very close
group of private lenders looking to master-
mind and grow through shared experiences. That same month I declined to re-enlist
in the military and was removed from my
team. This was hard, as many of my team-
mates took it as a stab in the back, as if I was violating a sacred trust. I relied heavily on my faith in Jesus, my wife and the master-
mind group for support. Over the next year, I studied and began to learn foundational
best practices for making loans and becoming a deal sponsor who had a reputation of
transparency, honesty and integrity. During
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NOVEMBER/DECEMBER 2017 57
FEATURE: VETERAN BUSINESS 2015 I sourced, vetted, underwrote and
courses of action just like when we were
closest to me, and established on the truths
quickly and swiftly act to reduce fallout on a
ships. I look forward to continuing to share
originated more than 11 loans. My investor
planning a raid or an assault has helped me
reaching new investors wanting to borrow
loan going bad. And, most importantly, the
database grew by word of mouth, and I was funds every week. In October 2015, I was
honorably discharged from military service,
free to pursue my dream of becoming a world
class private lender, soon to be fund manager.
Lessons Learned and Applied So many of the disciplines and practices
trust that is built between my investors and
myself is akin to the trust built among Green
sponsors. Make no mistake, the business we
Edwin D. Epperson III served in the U.S. Army for 13 ½ years. During his time in service, he deployed to Iraq, Kuwait, Egypt, South America and Afghanistan. He attended many Army schools, which include Airborne, Air Assault, Pathfinder, Combat Diver, Ranger, Special Forces Selection Assessment, Special Forces Qualifications Course, SERE (High Risk), among many leadership courses. During his last years in the military, he began a real estate private funding company.
our business as private lenders and deal are in is not finance—it’s relationships. This article started with a simple
people through some three-letter agency
fund manager, and I may not come from a
Being able to read people has served me very well since starting to do this business. Find-
ing risk and having secondary and tertiary
58 PRIVATE LENDER
Green Berets into the financial world. ■ ABOUT THE AUTHOR
question: What does a fund manager look
cross training I was privileged to receive.
my story, and bringing the qualities of the
Berets on a team. Trust is the currency of
of being a Green Beret fit so well into this new life I was creating. I knew how to vet
that all businesses are founded on relation-
like? Well, I may not look like the typical
standard “fund manager” background. But I
know I have the qualities and characteristics of a highly trustworthy individual tested by the fires of war, refined by the loss of those
Resources for Veteran Business Owners Veteran Business Outreach Centers The SBA provides assistance to veterans
SBA Contracting Support for Small Businesses
Institute for Veteran and Military Families
in their local communities through Veteran Business Outreach Centers. The centers
The SBA also offers resources for service-
can help veterans access resources such as
disabled veteran-owned businesses looking
A program of Syracuse University, IVMF
to procure federal contracts.
toward veterans re-entering the workforce or
business training, counseling and mentoring, right in their local communities.
Veteran Fast Launch Initiative From SCORE, the Veteran Fast Launch
Initiative provides mentoring and training,
along with free software and other services,
This non-profit organization connects
mentorship and career advice.
Association is a membership-based program
U.S. veterans to business leaders for
BusinessUSA The BusinessUSA Veterans Resource tool
Veteran Entrepreneur Portal
business owners find the most relevant
vantaged Business Utilization, the Veteran Entrepreneur Portal provides access to a
number of business tools and services, from
is an interactive guide to help veteran
federal, state and local tools to help start
The National Veteran-Owned Business
that advocates for veteran business owners.
The association works as a watchdog to hold the federal government accountable to its veteran contractor mandates.
21 Gun Salute Initiative
and grow their businesses.
The GSA’s program to support service-
includes an action plan aimed at meeting
business education to financing opportunities.
The VA’s VetBiz site provides information
Boots to Business
tion’s verification process for veteran-owned
Boots to Business is another program of the
looking to start their own businesses.
American Corporate Partners
to military veteran entrepreneurs.
A part of the VA’s Office of Small and Disad-
provides a wide variety of resources geared
about the Center for Verification and Evaluabusinesses looking to gain eligibility for the
disabled veteran-owned businesses
or exceeding the goal of reserving 3 percent of contracts to service-disabled veteranowned small businesses.
VA’s Veterans First Contracting Program.
course and an eight-week online course that
Entrepreneurship is an organization that
and other essential elements of early busi-
provides a portal for businesses looking for
SBA. It’s a two-step entrepreneurial training program that includes a two-day classroom
offer instruction on forming a business plan
The Federal Business Opportunities website
active federal contracting opportunities.
Veteran Women Igniting the Spirit of
provides resources, courses and mentorship to female veterans who have started businesses or are looking to do so.
National Veteran Small Business Coalition
This organization supports veteran-owned
As part of the Global Entrepreneurship
Collective, Inc., Victory Spark is an accelera-
EBV Foundation’s Entrepreneurship Boot-
tor program focused on startups led by U.S.
experiential training in entrepreneurship
small businesses by promoting policies that
encourage participation of veteran-owned businesses in federal contracting opportunities.
military veterans. The program includes a
12-week mentor-driven Lean LaunchPad Program, along with grant funding for entrepreneurs who complete the program.
camp for Veterans with Disabilities offers
and business management to post-9/11 veterans with service related disabilities. List courtesy of smallbiztrends.com NOVEMBER/DECEMBER 2017 59
Spirits Bright Holiday memories & traditions from the Association of Private Lenders staff, contributors & members.
What is your most embarrassing holiday moment?
Jeff Tesch I was taking a 38-pound
Abhi My dad told a joke and I laughed so
and landed right on the floor. Did we still
hard that I snorted eggnog.
eat it? Absolutely!
Chris I once went on a holiday trip to a very
Melissa The year my parents put a
had been lost. So, I was stuck wearing the
I was traumatized.
Christmas turkey out of the oven one year. As I lifted it up, it slipped out of my hands
remote area, only to find that my luggage
piece of candy coal in my stocking.
exact same clothes daily for 10 days. When
Nema Being the only person in an ugly
I washed them each evening, I had to sit around a fire in my underwear.
Erica I was born on Thanksgiving, so my
family regularly calls me a little butterball.
My favorite memory was when [my father] bought me a really nice radio that I wanted, even though it had a lot of parts that could break. BOBBY MONTAGNE
Christmas sweater at an Ugly Christmas
ar Abhi Golh Summit & Crowne
Linda Hashbrown casserole Melissa Lasagna on Christmas for lunch Mike My aunt’s stuffing (two sticks of butter are required for the recipe)
Nema A sandwich consisting of the following: a well-brined turkey, fresh cranberry
sauce, stove top stuffing (real stuffing is for
suckers), brioche roll and fresh-made gravy. Sohin: Dosa
Sweater party. Not cool.
Susan Sweet potatoes with bacon
What is your favorite holiday dish (excluding dessert!)?
What is your favorite holiday memory as a child?
AdaPia It’s tradition in Italy to make a fish-
Abhi: Shopping in downtown Chicago in
and that’s usually what I make on the 24th.
AdaPia Any Christmas where my
based meal on Christmas Eve. I love fish stew,
the snow with family and friends
Bobby Prime Rib
grandfather came to visit from Italy
Bobby My father was a very practical
Erica Sweet potato casserole with mini marshmallows on top
Jeff Levin Fried potato latkes and applesauce during Hanukkah
Jeff Tesch Butternut squash with
cinnamon and butter, but it has to be creamy, not lumpy.
Kellen Day-after Tofurkey on a Rhodes
roll with mustard 60 PRIVATE LENDER
person, always saying that fancier things
“just have more parts to break.” My favorite memory was when he bought me a really
nice radio that I wanted, even though it had a lot of parts that could break.
Erica Finding hidden presents in the Christmas tree from “Santa”
Jeff One time my parents took my brother, sister and I to Club Med over winter break.
We grew up in Milwaukee and we had cold,
Mike Hanna Investment Mor tgage
Linda Hyde A A PL
Kellen Jones Cache Private Capital
Specialty Lending Group
snowy winters. On Christmas Eve the staff
spreads of cured meats, cheeses, etc. to
It’s the only time of year my grandma makes
Claus water skiing. At that point in my life,
Jeff Levin Living each day to its fullest
Nema Setting up a Christmas tree after
at Club Med had a motorboat with Santa
I had never been away over winter break and thought that it was so cool that Santa Claus could water ski!
Kellen One year we built a nativity scene as a family, ate like they would in Bethlehem and did service projects throughout the
holiday break. We only got one gift from
Santa. That year outshined even those when Santa brought me John Stockton’s rookie card or my first guitar.
Nema My mom worked in hospitals
nibble on before dinner.
Kellen Seeing the looks on the faces of my wife and kids as they open gifts and feeling like no one expects me to return an email for a day or two
Sohin Reflecting on
recent experiences and
hopefully learning from the same
my whole life and was almost always working
What is your favorite holiday tradition?
the morning on Christmas Day so we could
Erica, Jeff Levin and Susan enjoy eating
on Christmas. She would wake us up at 5 in
open up presents together. I never appreciated this sacrifice until I had my own kids.
What do you look forward to the most? Nearly everyone responded that they
squid sauce for pasta—and it’s fantastic!
Thanksgiving. As a family we make hot
cocoa, throw on Pandora holiday
and have a mini dance party. We turn on the tree and it
starts the holiday season in my heart.
Sohin Reflecting on
recent experiences and
hopefully learning from
Do you have a favorite holiday movie? Which one?
Chinese food on Christmas Eve or
Bobby, Melissa and Mike Hanna
that others shared:
Abhi It’s the Great Pumpkin, Charlie Brown
Abhi Full contact football during
AdaPia Rudolph, in stop-animation has
Christmas Day. Here are a few traditions
It’s A Wonderful Life
a special place in my heart!
enjoyed visiting with family and friends,
AdaPia Watching movies after having
including seeing their college kids at home
Story and Home Alone.
over break. A few other notable responses:
Kellen Christmas Eve PJ’s and
Jeff Tesch and Linda Hyde
AdaPia When I’m visiting with my family,
I look forward to the traditions that we grew up with, mostly around food and meals, like making homemade ravioli or setting food
Melissa My family is Italian and on
Christmas Eve you’re not supposed to eat
Erica It’s a tossup between A Christmas
The original Christmas Vacation Kellen Nightmare Before Christmas
meat. So, we have a bunch of seafood dishes. NOVEMBER/DECEMBER 2017 61
e et Walnut Str e c n a in F
Susan Naftulin Rehab Financial Group LP
Looking back over the year, what are you most proud of?
Mike My daughter’s award as the Ideal Waldemar Girl
What are you looking forward to in 2018?
AdaPia I’m thrilled and proud to have
Sohin I have started cooking regularly,
Abhi Working on growing my media pres-
completed my home rebuild-remodel. Two
something I was hoping to discipline myself
ence and influencing more investors than I
on for years!
Susan My children and the amazing friends
AdaPia I’m looking forward to seeing
have in my life.
balanced and empowering workplace for
Melissa I’m proud of how far Geraci has
What are you most grateful for?
some bad actors/companies serves to create
have been able to start at such a wonderful
Abhi Waking up in the morning
long years of DIY-work have paid off. I love my home and what it represents for the
future of the up-and-coming community and City of Inglewood, California. Chris My team grown over the last year. I am grateful to
firm right out of law school and have been given the opportunity to excel and grow along with the firm.
and family that I am fortunate enough to
Bobby: Always family Erica I’m looking forward to whatever
the New Year has in store for me.
Jeff Tesch Family and everyone being
When I’m visiting with my family, I look forward to the traditions that we grew up with mostly around food and meals, like making homemade ravioli. ADAPIA D’ERRICO
62 PRIVATE LENDER
in good health
Kellen God, family, health, career and AAPL (in that order)
Linda My relationship with my mom and daughter!
Mike That my sister is still cancer free. Nema We just had a healthy daughter. I’m already wrapped around her tiny little fingers.
how the shift toward a more inclusionary, women shapes up. The bad press around
awareness and make meaningful changes. There is a big opportunity for male-led
companies to create better cultures and
more profits by empowering the women in
their organizations to participate and lead. Erica I’m looking forward to whatever the New Year has in store for me.
Jeff Levin Watching my two boys continue to grow
Jeff Tesch I’m looking forward to my youngest son graduating college and doubling RCN’s volume.
Linda Where it will take me, guess I will wait to see.
Melissa An even busier, more productive year at work! And maybe a few fun trips thrown in.
Mike Enjoying life! ■
NOVEMBER/DECEMBER 2017 63
Endorsements Every Commercial Lender Should Consider Endorsements can enhance the coverage of the title policy for commercial lenders. by Jason Powell & Abhi Golhar
ndorsements are used to expand or otherwise modify the
coverage of a title insurance policy on real property. Although
endorsements can modify any part of the policy, endorsements are most typically used either to extend or to expand the title policy
Letâ€™s take a look at the specific endorsements commercial lenders should consider before making loans secured by commercial real estate.
The American Land Title Association (ALTA) has promulgated
for more comprehensive coverage in order to address a particular
conveniently numbered standard or uniform endorsements (see
Endorsements are available for both ownerâ€™s and loan title policies.
ticular endorsement varies from state to state and from transaction to
title issue affecting, or potentially affecting, the real property.
Endorsements are not automatically issued; the owner or lender must specifically request them. 64 PRIVATE LENDER
www.alta.org/policy-forms). A title companyâ€™s ability to issue a par-
transaction, depending on whether the endorsement is even allowed
in the state, and the specifics of the particular transaction. There are
times when a specific ALTA endorsement is not available, but a
California Land Title Association endorsement may be available. From the lender’s perspective, every commercial real estate
transaction must be evaluated on an individual basis to determine
Usury A Ursury endorsement insures against loss by reason of
invalidity or unenforceability of the lien of the insured mortgage resulting from violation of the usury laws of a specific state in
what level of title insurance coverage is appropriate. The use of
effect at date of policy.
and circumstances of a commercial loan and the matters that
Section II). The list below is not intended to be comprehensive.
will not lose priority due to provisions in the mortgage that provide
used in commercial loan transactions.
loans). This endorsement does not, however, insure against the loss
any specific endorsement below will be determined by the facts appear on the preliminary title commitment (see Schedule B,
Rather, it highlights some of the more common endorsements
Access An Access endorsement provides affirmative coverage that
A Variable rate endorsement insures that the lender’s mortgage
for changes in the interest rate (i.e., variable rate, adjustable rate
of priority resulting from a usurious rate or violation of consumer protection laws.
the insured property (1) fronts a public street, (2) that the street is
publicly open and maintained and (3) that the insured has the right to use existing curb cuts.
EQUITY PARTICIPATIONS | TRUST DEEDINVESTMENTS AVAILABLE OPPORTUNITIES
Zoning A lender should request a Zoning endorsement to obtain
affirmative coverage of the applicable zoning classification and
allowed uses under that classification. This endorsement can be
issued with respect to unimproved land, land under development
and improved land. For unimproved land, this endorsement insures certain zoning matters as they relate to unimproved property. The endorsement specifies the zoning classification and the use(s)
permitted for the property. Issuance of this coverage requires an examination of the applicable zoning ordinances and amend-
ments to determine the particular zone and permitted uses of the real property covered by the title policy. For improved land, this endorsement describes the zoning classification and permitted
uses for improved property. In addition, this endorsement provides coverage against loss resulting from a court order prohibiting the
insured use or compelling the removal or alteration of a structure
or improvement on the land due to certain specified zoning violations, including floor space or setback requirements according to applicable law or regulation. This endorsement is available only
on already improved property when a determination can be made regarding the zoning classification of the property, permitted uses of the property and any zoning restrictions as to building and building site size.
CALL US AT 866-897-6966 EXT. 110/112 We have Whole & Fractional Equity Participations and Trust Deed Investments that can be invested with Capital Accounts and Retirement Accounts such as Self Directed IRA's, Pension Plans, 401k's, Roth's and many other qualified accounts. We are third party custodian friendly.
NOVEMBER/DECEMBER 2017 65
Tax Parcel (Single or Multiple) For single parcels, this endorsement insures against loss
(3) surface use of the land for mineral exploitation and oil and gas leases arising from mineral reservations and oil and gas leases
resulting from the property not constituting a single parcel for
affecting the land.
or in the event that the permanent tax number identified in the
real estate tax purposes, separate and apart from other property, endorsement affects other land in addition to the insured land. The multiple tax parcel endorsement is used when there are multiple parcels involved.
A First Loss endorsement provides that a loss will be recognized
whenever a title defect materially impairs the value of the collateral without requiring maturity of the indebtedness by acceleration
of the debt and without requiring that the lender pursue its
Restrictions, Encroachments and Minerals This endorsement is also known as â€œComprehensiveâ€? because
of the breadth of its coverage. It is designed to extend affirmative
coverage that the lender will not suffer any loss or damage arising
remedies against collateral. Without the endorsement, the lender
would normally be required to foreclose or pursue other remedies to prove this loss before being able to make a claim.
from the following matters not of public record: (1) present and
Commercial Environmental Protection
(the future violation must arise before the lender acquiring title
the lender with affirmative coverage that the insured mortgage will
future violations of existing covenants, conditions and restrictions by foreclosure or other means), (2) encroachments of improve-
ments across setback lines, servitudes or adjoining property and
66 PRIVATE LENDER
A Commercial Environmental Protection endorsement provides
not lose priority to any environmental protection lien (1) recorded in the public records or filed in the district court where the property is
located, as of the date of policy or (2) provided by specific state
statute as of the date of policy, except any specific superior lien statute cited in this endorsement.
(2) the location of the foundations does not violate the covenants, conditions and restrictions referred to in Schedule B of the title policy.
Survey The Survey endorsement insures the lender against loss or
Contiguity In the event that the insured mortgage covers multiple lots or
parcels of land, a lender may request a Contiguity endorsement if
the insured mortgage covers multiple tracts and it is intended that no
gaps or gores exist between the tracts. In addition, this endorsement should be requested if the lender wants to know that the insured
parcel is contiguous to another parcel not being insured and which is already owned by the borrower. The title company may require
a current survey to issue this endorsement.
damage sustained due to violations, encroachments or adverse
circumstances that would have been disclosed by an accurate survey of the property. A lender may also want to request this endorsement
to ensure the boundaries of the property. A current survey will have
to be reviewed and approved by the title company before issuing this endorsement. If the owner does not have a current survey or will not obtain one, this endorsement will not be available.
Additional Considerations In addition to the above, if the lender is making a construction
Creditor’s Rights The Creditor’s Rights endorsement provides affirmative coverage
against loss or damage sustained by the lender due to the insured
mortgage being set aside due to the violation of applicable federal
loan that will have draws, the lender should consider the combination of the Construction Loan (Loss of Priority) endorsement and the Disbursement endorsement or a pending disbursement
and state bankruptcy laws or similar creditors’ rights laws.
endorsement or clause.
Deletion of Arbitration
free, while others range from a nominal amount to several thousand
The Deletion of Arbitration endorsement deletes the arbitration
clause from the 2006 Owner’s Policy. The 2006 policies contain arbitration clauses providing for compulsory arbitration at the
request of the insured or the insurer, if the policy does not exceed $2,000,000 and if such provision is enforceable under state law.
Subdivision The Subdivision endorsement provides affirmative coverage
that the land securing the mortgage is a legally subdivided parcel created pursuant to an identified subdivision map.
The cost of endorsements can vary widely. Some endorsements are
dollars. In some states, the rates for endorsements are frequently
negotiable, based in part on the size of the transaction, the number
of endorsements requested and many other factors. Other states, by
contrast, are “filed rate” states, with the cost of each endorsement set by the state insurance department.
Endorsements can greatly enhance the coverage of the title policy
for commercial lenders, and each endorsement should be evaluated in light of the preliminary title commitment and the facts and circumstances of each particular loan transaction. ■ ABOUT THE AUTHOR
Foundation The Foundation endorsement is used with the ALTA lenders
policy where a construction loan previously has been insured and
the lender, before making an advance, requires assurance from the title insurer that the foundations do not encroach upon adjoining
lands or violate existing covenants, conditions and restrictions affect-
ing the property. Typically, following a physical examination of the
property, the endorsement may be issued that will assure the lender that (1) the foundations of the structure under construction on the
subject property are within the boundary lines of said property and
Jason Powell is a corporate, securities and real estate attorney. Jason focuses much of his practice on representing real estate operators, developers, and lenders looking to raise capital to grow and expand. He can be reached at email@example.com.
Abhi Golhar is the host of Real Estate Deal Talk and managing partner of Summit & Crowne. Abhi 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. Abhi holds a bachelor’s degree in electrical engineering from the University of Michigan. You can find him on Twitter, Snapchat, and Instagram - @AbhiGolhar.
NOVEMBER/DECEMBER 2017 67
AAPL AWARD NOMINATIONS The Association of Private Lenders has announced the nominees for the AAPL Excellence Awards. The inaugural awards ceremony will be held at AAPLâ€™s 8th Annual Conference at Caesars Palace on Tuesday, November 14, 2017. The award nominees by category:
CEO of JCAP Private Lending firstname.lastname@example.org
Peer Street email@example.com
Emerging Leader/Rising Star
Nema Daghbandan, ESQ. Partner at Geraci Law Firm firstname.lastname@example.org
Chief Marketing Officer of American Life Financial email@example.com
Co-Founder & CEO at PeerStreet firstname.lastname@example.org
68 PRIVATE LENDER
President of Ignite Funding email@example.com
Founder of InstaLend firstname.lastname@example.org
Managing Director of RCN Capital email@example.com
“” Member of the Year
VP of Sales at Applied Business Software, Inc. firstname.lastname@example.org
Marketing Manager of RCN Capital email@example.com
Kurt Power Think Realty
PLMG & RentFax
We have an incredible group of successful entrepreneurs and seasoned professionals that we couldn’t be prouder of. They help elevate standards of excellence to raise the perception of private lending. The Excellence Award Committee judges have their work cut out for them this year. LINDA HYDE Executive Director of AAPL
Allen Shayanfekr CEO & Co-Founder of Sharestates
NOVEMBER/DECEMBER 2017 69
Housing Market Finishing the Year Strong Real estate investment and alternative lending are big reasons. by Robert Greenberg
he overall housing industry looks to
finish the year strong, as the real estate
investment and alternative lending sectors continued to gain traction.
Daren Blomquist, senior vice president
at ATTOM Data Solutions and the keynote speaker at the American Association of
Private Lender’s (AAPL) national conference, said the 2017 housing market chalked up
strong numbers that allowed for continued
growth with a few challenges thrown in the 70 PRIVATE LENDER
mix. He predicted 2018 would see a con-
supply. Median home prices on existing
witnessed this year.
tember. The full year is on track to be the
track to be down about 8 percent in 2017 over
2013—an indication of continued demand in
tinuation of many of the things the market “At first blush, existing home sales are on
2016, and typically that’s not a good sign and could show weakness in demand, but at the same time we are seeing accelerating price appreciation,” Blomquist said.
Those two factors taken together may not
indicate weaker demand as much as tight
homes were up 7.8 percent through Sepstrongest home price appreciation since
the marketplace amid the nation’s ongoing housing supply challenge. By comparison, prices for 2016 were up just 6 percent.
Certainly, some markets saw weakening
demand due to rising mortgage interest
rates and affordability. This was particularly
Hurricanes in Texas and Florida temporar-
ket grew by four points in October to 68 on
the South in September, causing a drag on
Wells Fargo Housing Market Index (HMI).
material costs are negatively impacting the
builders view conditions as good than poor.
ily and severely disrupted homebuilding in the economy. Labor shortages and rising
home construction industry, especially the
the National Association of Home Builders/
Any number over 50 indicates that more
affordable segment. In California, massive
of homes in an area already suffering from
have received much of the credit for the mar-
these natural disasters to the housing market
finally turned a corner from the financial crisis
wildfires in October destroyed thousands
acute housing shortages. The total impacts of were still being sorted out as Private Lender went to press.
Homebuilders for the past few years have
focused on more expensive single-family
housing as rising labor, land and material
costs put pressure on margins. These highercost homes have largely kept first-time
homebuyers on the sidelines as student debt cramps their ability to qualify for a mort-
gage. While many factors have played a part in the country’s declining homeownership
When it comes to existing homes, investors
ket’s rebound, as they should. When housing and Great Recession, it was because institu-
tional investors swooped in and bought houses in 2012, helping raise prices off the floor. These large investors, who bought up foreclosed
houses by the tens of thousands in key markets that suffered massive declines in value, pro-
vided the momentum that the housing market needed to turn the corner and begin a price appreciation phase that has been sustained for five years running.
Today, though, the credit for housing’s
rate, it should also be noted that part of
continued growth goes to smaller, non-
noticeable in higher-priced markets such
Millennial generation’s growing interest
investors have pulled back amid rising prices
foreclosure crisis unfold and became skep-
Blomquist said. “2017 looks a lot like the
homeownership rate stands at 63.7 percent,
interest rates that cooled demand a little bit.
slightly from the bottom, 62.9 percent, which
the decline has been attributed to the as San Francisco, San Diego, Dallas and
in renting long-term as they witnessed the
institutional investors. As large institutional and reduced distressed inventory, smaller
investors have come in to fill the gap. Institu-
“We saw a similar trend back in 2014,”
tical about homeownership. The current
2014 market when we saw a (slight) rise in
according to the U.S. Census Bureau, up
The somewhat puzzling thing is that price
occurred in the second quarter of 2016.
strong housing market.”
time, energy and capital since the end of the
forecasts existing home sales to close the year
further exacerbating tight single-family
a much smaller scale, just a handful of
showed significant signs of cooling in the
to drive housing activity and boost demand.
appreciation is accelerating. It’s still a pretty The National Association of Realtors
Builders have also focused much of their
housing crisis on the multifamily market,
at 5.44 million, down from 5.45 million in 2016.
supply. However, the multifamily segment
Housing Starts and Natural Disasters
second half of 2017, while single-family was
Housing starts as of October were on pace
to be slightly above 2016 numbers when the
year ends, but far below historical averages.
continuing to grow.
Despite some headwinds, builder confi-
dence in the newly built single-family mar-
tional investment in the single-family housing market was as high as 8 percent in 2012 and
2013, Blomquist said. “Now we are seeing them account for 2 percent of purchases; first-time
homebuyers have not really filled that gap. It
has been smaller investors who have followed
the path of the bigger, institutional investors.” These smaller investors are buying on
properties per investor, but that continues In addition, these smaller investors aren’t
singularly focused on distressed property. Instead, they are competing side-by-side with owner-occupants.
NOVEMBER/DECEMBER 2017 71
In 2016, ATTOM Data Solutions
recorded a record number of home pur-
The Effect of Rising Prices The rising prices the housing market
chases by non-owner-occupants, 33 percent,
saw this year can be a double-edged sword
when the housing data company formerly
Homeowners often view rising values and
statistic. In 2017, ATTOM data has contin-
housing market as their equity rises. But
investors buying up residential properties
which they are doing currently, that can
are willing to buy properties that may
and challenge the affordability equation
averages. To be sure, affordability isnâ€™t
as big an issue for investors who are buying based on cash-flow opportunities for
for investors and owner-occupants alike.
rentals and on price appreciation for flips.
known as RealtyTrac began recording that
higher home prices as a positive for the
Alternative Lending Market Still Hot
ued to show mid-tier and mom-and-pop
if home prices outpace the rise in wages,
been tapping into an alternative lending mar-
for investment purposes. These investors
dampen enthusiasm from first-time buyers
need significant renovations that an owner-
for homeowners who want to trade up.
to consider. Some are being fixed and
400 counties studied by ATTOM Data
are being rehabbed for use as long-term
historic averages. A year ago, only 21 percent
according to data that goes back to 2000,
occupant may be unable or unwilling
In the third quarter, 45 percent of
flipped to owner-occupants, while others
Solutions were less affordable than their
were less affordable than their historic
72 PRIVATE LENDER
Single-family real estate investors have
ket that emerged in the wake of the housing
crisis, as traditional mortgage credit became exceedingly tight. These new opportunities for financing, which have grown and blos-
somed over the past five years, have caused
more real estate investors to seek financing for their residential real estate purchases. ATTOM data shows that 35 percent of
homes flipped in the second quarter of 2017
were purchased by the flipper with financ-
ket. Those seeking financing are attracted
the highest level since third quarter 2008—
as loans are often approved within days.
ing. This is up from 32.3 percent a year ago to a nearly nine-year high.
Is alternative lending playing a role in this
increase? There have been several trends
underway in the alternative mortgage lending sector. First, we’ve seen the traditional big banks, which paid out billions in fines
to the speed of these alternative platforms The U.S. Treasury has recommended that
current limitations on investments in crowdfunding offerings be waived for accredited investors as defined by Regulation D of the Jobs Act.
In addition, Regulation Crowdfunding,
for their role in the mortgage crisis, back
or Reg CF for short, may become more
wake of the Great Recession. This is for a
more easily reach its funding goals. For
away from the mortgage business in the
variety of reasons, including risk, regulation and low margins. Their void has been filled by private money lenders who are mainly focusing on the traditional 15-year and
30-year fixed-rate mortgages to owner-
occupants. This group of nonbank lenders includes several who have embraced
attractive in the future if a company can non-accredited investors, the U.S. Treasury Department is recommending that the
crowdfunding rules be amended to have
investment limits based on the greater of
annual income or net worth for the 5 percent and 10 percent tests, rather than the lesser. Supporters of Reg CF are also lobbying
technology to offer an online application
to get the funding cap raised to at least
providing speed and enhanced efficiency.
$1.07 million to allow companies to lower
and underwriting experience geared toward We’ve also seen dozens of alternative
lenders launch crowdfunding platforms to
serve both real estate investors and borrow-
ers. These sites, operating online via robust
the offering costs per dollar raised while
empowering a broader group of emerging
companies to participate in this exemption.
The Bottom Line
as new investment opportunities for both
market give pause, optimism from consum-
Though some areas in the U.S. housing
accredited and non-accredited investors.
ers, as indicated by Fannie Mae’s Home
can participate in crowdfunding real estate
bode well for the future. Fannie Mae’s Home
by brick-and-mortar real estate.
in September to 88.3, the most recent data
Both institutional and individual investors loans offering attractive yields and backed Proposed changes in crowdfunding
regulations could further enhance this
fledging sector of alternative lending, which
continues to grow in stature while attracting investors who see the benefits of being able to diversify their portfolios while earning
returns that can outperform the stock mar-
2017 looks a lot like the 2014 market when we saw a (slight) rise in interest rates that cooled demand a little bit. The somewhat puzzling thing is that price appreciation is accelerating. It’s still a pretty strong housing market. DAREN BLOMQUIST
$5 million a year from the current
technology platforms, have created a new source of financing for borrowers as well
Purchase Sentiment Index, continues to
Purchase Sentiment Index rose 0.3 points
available, matching the all-time high set in June. Opportunistic real estate investors
may see fewer opportunities in this market
to capitalize on dramatically moving trends, but most people likely prefer today’s gen-
erally predictable housing market that has been without wild movements.
Still, the outlook for the housing industry
remains decidedly positive into next year. A healthy economy, low unemployment,
growing wages and historically low mortgage
rates all bode well for the future of housing. ■ ABOUT THE AUTHOR
Robert Greenberg joined Patch of Land earlier this year as Chief Marketing Officer. His professional experience includes over 25 years in marketing working with familiar consumer brands such as Pepsi-Cola, AnheuserBusch, and Sara Lee as well as B2B experience in retail, technology, finance and real estate. Recently, he led the marketing efforts for the B2R Finance where he helped originate more than $1 billion of real estate investor loans that led to the industry’s first-ever multi borrower single-family rental securitization. At B2R, he was responsible for branding, corporate communications, lead generation and integrated marketing efforts. He was responsible for leading the development and implementation of the marketing automation and CRM platform that helped to deliver sales management and operational efficiencies to enhance the customer experience for real estate investors nationwide.
NOVEMBER/DECEMBER 2017 73
LAST CALL WITH PETE ASMUS
“” Failure is in every part of success—it’s in its DNA. Until you can accept failure as a necessary step, success will always be one “step” away. PETE ASMUS
Failure Is Part of Success If you aren’t failing, you don’t really want it!
ailure is in every part of success—it’s in its DNA. Until you can
accept failure as a necessary step, success will always be one “step”
away. Most of the time your greatest successes are on the flip side of
your greatest failures. Sometimes failure is God telling us not to go in
that direction. Ultimately, how you handle failure decides your future. I should know.
Eight years ago, I was sitting in my car outside of LA Fitness, contem-
In that moment, the greatest secret of all revealed itself to me:
By blaming others and letting their words affect me, I gave them the
power to control my life. When I accepted the responsibility for what
happens in my life, I took back the pen of my future.
I even got a tattoo to remind myself that it’s up to me to “Go Make
Something Happen!” So what did I do? I knew everyone advertises to raise capital. I
plating suicide. I felt like a complete failure, and I had no idea how to fix
focused on how I could not only use those sources and funnels but
remember sitting there thinking, “I can drive off a cliff—that way I won’t feel
in order to reach this goal, and I’ve failed many times. But, I now own
No one was there to tell me it was going to be ok. No one was there to
My reach on LinkedIn is more than 1 million, with another 3.5 million
things. I grew up in a group home, so I didn’t have resources like others. I
it.” I remember the feeling of helplessness as the tears ran down my face.
lift me up. I felt alone in a car deciding my future. Just as the thought of driving off a cliff entered my head, the thought of my girls graduating
high school slammed in, shattering any thought of suicide. Thinking of my family created an emotion that him me like a semi.
In that moment, I realized I couldn’t leave my girls or my wife alone.
Then and there, I decided I was no longer going to be a victim. The
path back started with me accepting it was my fault for where I was and no one else’s. I realized that because it was my fault, I could do something to change it! 74 PRIVATE LENDER
also own those platforms. Since then, I’ve done whatever I needed
the largest real estate group in the world, with over 575,000 members! on our HTML database.
Here’s the point: If I hadn’t failed, I never would have kept trying
to figure out a better way. If I hadn’t been kicked and told I’d never
make it, I wouldn’t have fought so hard to prove those people wrong. Every time I fail, I learn. I have focused on how to fail forward. It
might be painful or uncomfortable, but growing outside of your comfort zone always is.
Pete can be reached at pete@GreenZoneProps.com. ■
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Nov. 4-6, 2018 #AAPLAnnual
e t a D e h t e v a
nfe o C l a u n n rs’ 9 A e d n e L e t f Priva o n o i t a i c Asso
AAPL hosts private lending professionals from around the country to enable you to network, share ideas, and discover solutions to today’s challenges.
At AAPL’s 9th Annual Conference, you’ll have access to the largest gathering of your peers. People who you can relate to, learn from, and actively contribute to the best thinking in private lending.
Join us at Caesars Palace as we seek to shape the future of private lending together!
76 PRIVATE LENDER