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A APL CONFERENCE HIGHLIGHTS SPECIAL SECTION

New York’s 20% Speculation & Flip Tax

BUSINESS TRANSITIONS

Scaling Your Private Lending Business

MARKET TRENDS The Official Magazine of AAPL Winter 2020

Inventory & Household Formation Impacts

LENDER LIMELIGHT 

Thomas Standen Automating His Way to Success WINTER 2020

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PRIVATE LENDER

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CONTENTS

WINTER 2020 

  07

07 NY FLIP TA X

0 8 

A A PL OPINION

A A PL O ppos e s A nti -

  42

42 MARKET TRENDS

4 2 

Flipping Ta xes /Spec ial C onveyance Flip Ta xes

12  T A X

IMPAC T

4 6 

N YC Home

2 0 

C  A SE S TUDY

Ocean V iew Proper t y Ge t s a M akeover

22 BUSINESS S TR ATEGY

2 2 

Your Produc t s Ge t t he Job Done D ur ing a M ar ke t Dow nt ur n?

2 6 

t he Deb t Y ield Ra tio

3 2 

3 8 

5 0 

 INTE RN ATION A L

Funding “ Dow n Under ”

54 LENDER LIMELIGHT

wi th T homas St anden

6 0 

6 6 

2019 E xcellence Awards W inner s

68 ECONOMIC FOREC A S T

B  USINE SS TR A NSITIONS

W hen Sc aling Your

 2  020 Economic and

 L e t ter f rom t he Edi tor wi th K at Hunger ford

82 MARKETING & SALES

 B ROCHURE S

12 C ompany Broc hure Wr i t ing T ips

86 TECHNOLOGY

 CH A LLE NGE

FOREC A S T

Lender s to Face More Tec hnolog y- Dr i ven

10 t h A nnual

INDUS TRY RECOGNITION

I s Your Loan Enforceable

78 LEGISL ATION

Challenges in 2020

C onference Highlight s

 B A NK RUP TCIE S

in Bank r uptc y C our t?

C ONFE RE NCE REC A P

Par t ner ships

5 Q ues tions to A sk

 C limb to E xcellence

60 CONFERENCE REVIEW

S  TR ATEGIC PA R TNE RSHIPS

4 Bene f i t s of Busines s

Br idge Loans Gi ve Po tential in 2020

 E BT R ATIOS D

T he Ad vant ages of

B  RIDGE LOA NS

L ender s Grow t h

P RODUC T S

Pr i va te L ender s: W ill

Zelman’s V iew

74 LEGAL

on 2020 Housing

Flipping A nal y sis

I NDUS TRY DATA

  54

93 RESOURCE GUIDE 98 L A S T C ALL

 Trouble is O ppor t uni t y wi th J on H or nik

Housing Forec as t

Real E s t a te Busines s

WINTER 2020

3


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FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE If you thought 2019 was a big year for AAPL, you ain’t seen nothing yet (to quote one of the top songs of the 70s and, yes, it’s Bachman Turner Overdrive, if you’re wracking your brain).

EDDIE WILSON CEO, AAPL

We’re opening the decade with our best foot forward as the private lending industry’s oldest and largest trade association. We remain strongly dedicated to promoting our members and the industry as viable alternatives for borrowing and investing. Every action we take supports that mission.

LINDA HYDE

Managing Director, AAPL

KAT HUNGERFORD Executive Editor

KELLY SCANLON Copy Editor

SPRINGBOARD CREATIVE Design

CONTRIBUTORS

Katie Bean, Daren Blomquist, Edward Brown, Marty Coyne, Abhi Golhar, Robert Greenberg, Matthew Gunter, Jon Hornik, Kay Hungerford, Ruby Keys, Beeta Lecha, Jeff Levin, Chris Ragland, Alexa Stephenson, Adam Tilley, Nancy Wallace-Laabs, Ivy Zelman

COVER PHOTOGRAPHY Efrain Valenzuela

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

SUBSCRIPTIONS

Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.

BACK ISSUES

Visit aaplonline.com/magazine-archive, email PrivateLender@aaplonline.com, or call 913-888-1250.

For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.

Here are just a few of the tangibles we already have for you in 2020: We are launching the private lending industry’s first benchmark data survey this quarter in partnership with Zelman & Associates. If you are an owner-operator or C-suite-level executive in the private lending industry, you should be signing up to respond now at aaplonline.com/industry-survey. The survey is quarterly, with respondents gaining access to the aggregate reports from the AAPL/Zelman Private Lender survey and Zelman’s most popular report, the Housing Market Overview. To see why this is a true business gamechanger for any survey respondent, check out Zelman’s article on page 46. Certified Fund Manager is now available as an online course for any and all AAPL members. As of the new year, you can watch videos, take the exam and download your certificate/CFM emblem from the comfort of anywhere you can access the internet. Our in-person courses will expand on the video course content. We are hard at work fighting New York Senate tax bill SB3060E, which, if passed, is likely to snowball across the nation. Check out Matt Gunter’s article on page 8 for why this kind of legislation will destroy the fix-and-flip industry. Specialty Lending Group’s Case Study on page 20 sheds light on why legislators are misguided in thinking flippers hurt affordable housing. And, Kat Hungerford’s article on page 78 outlines our legislative strategy. The 2020 AAPL Annual Conference is already off to a strong start. We launched our all-new conference site at aaplonline.com/conference, with registration now open for the nation’s single largest private lending event. We are also ecstatic to welcome back both 2019 Title sponsors: AlphaFlow for the third consecutive year, and Residential Capital Partners for the second. Check out our 2019 highlights with testimonials and photos on page 60. As always, we appreciate the support of our members, sponsors and advertisers. Your dollars have helped us achieve some very big goals. Keep your eyes open, because really, you ain’t seen nothing yet!

LINDA HYDE

Managing Director, American Association of Private Lenders

www.aaplonline.com Copyright © 2020 American Association of Private Lenders. All rights reserved.

WINTER 2020

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SPECIAL SECTION NY FLIP TA X

Understanding the New York State Flip Tax An Introduction for Private Lenders

Since July 2019, the American Association of Private

Lenders has been engaged in redirecting seemingly

isolated tax code legislation in the State of New York.

Although the bill is housed in the state’s Senate and Assembly, SB S3060E/AB A5375A applies to property transfers for one to five separate residential property units located in New York City’s five bureaus. The bill imposes a 20% conveyance tax on property sales if a property is transferred within one year of the prior assignment, and 15% if transferred within two years.

with states planning to pursue

a rise in regulation impacting

York City flip and mortgage

their own versions should New

multiple areas of our businesses.

data to statistically exemplify

York find success.

Until we change the perception

why perception of flippers and

that’s been cemented over

private lenders as harming

hundreds of TV episodes—

affordable housing is mis-

What real estate investors and private lenders are battling is not simply a business-breaking tax hike—although that’s plenty in and of itself. With the meteoric rise of the industry since the Great Recession, we are beginning to see the unintended fruits of our reality-TV-framed reputation. Legislators do not see us as small-business owners who support communities and

the true business risk or our community-boosting impacts— we will continue to fight battles against legislators who see us as the enemy of their voters: traditional homeowners. In this special section, we’ve worked with subject matter experts to show the true outcomes of high conveyance tax

help homeowners into proper-

legislation and our industry.

ties they would never have

 O n page 8, Matt Gunter,

The extreme nature of this tax

had access to otherwise. They

would effectively end the fix-

see us as making big-buck

and-flip industry citywide.

profits off anyone-can-do-it,

Further, if passed, the tax will

which never show our failures,

cheap renovations.

not remain singular to the

The discrepancy between a

nation’s most populous city.

flashy media-driven reputation

Our contacts in state legisla-

and our hard-working reality

tures indicate they are keeping

means that beyond tax-specific

watch on the bill’s progress,

legislation, we are likely to see

our Government Relations Committee Legal Chair, delves into why AAPL opposes high property conveyance taxes beyond their repressive shock to the private lending and real estate investment industry.

 O n page 12, Daren Blomquist from Auction.com uses New

guided at best. We’ve also created a handy infographic to visualize his argument.

 F inally, Specialty Lending

Group’s case study on page 20 examines the localized effects that recovery of a blighted, vacant Washington, D.C., property had on its surrounding neighborhood.

As you read, we encourage you to explore how your own story has contributed to your community. We need help showing why legislators should look to us as potential partners in their affordable housing goals, rather than viewing us as the opposition. Then, tell your

story by signing our petition and providing comments at

aaplonline.com/petitions. ∞ WINTER 2020

7


SPECIAL SECTIONÂ NY FLIP TA X

AAPL Opposes Anti-Flipping Taxes/Special Conveyance Flip Taxes Instead, promote incentives to increase economic activity and to create the change we all want to see. by Matthew Gunter

M

ost states

and are like most other

suffering from specific local

and takes an active role in

problems that require the

to generate revenue.

increased revenue to fund spe-

opposing their implementation.

governmen-

or other

tal subdivi-

sions that we are aware of impose what is known as

a conveyance tax, transfer

tax, sales tax or fee on the

sale of real property. These taxes are generally very

low in percentage terms

8

PRIVATE LENDER

taxes or fees—designed

On top of these taxes, governments occasionally levy additional taxes, fees or surcharges in smaller or incremental amounts, again to raise reve-

cial projects. These taxes are normal, passive and, to a large extent, appropriate. When these taxes are increased exponentially, however, The

WHY AAPL OPPOSES HIGH TRANSFER TAXES AAPL opposes significant transfer taxes for several reasons.

nue. But these are targeted

American Association of

to specific towns, districts

Private Lenders stands firmly

First, these taxes directly harm

or counties that may be

against such taxing schemes

our members by increasing


the cost of doing business—

total transactions will take

business-related transac-

will decrease, impacting the

whether it’s a lender or broker

place. This is due in large

contractors who provide these

whose borrowers take fewer

part to fewer business-related

tions and total transactions.

loans as their profit margins

transactions, because business

erode or other service providers

transactions acutely depend

whose business depends upon

upon profit margins large

these lender transactions.

enough to make an investment

The result is a decrease in

worth the time and the risk.

total business.

Second, they indirectly harm

By making it more expensive to buy or sell real estate, fewer

These industries include consumer-level and trade-level renovation service providers, retail and commercial construction materials providers, attorneys, real estate agents

services the most. Ultimately, it results in lower income and loss of jobs. Reduced income and job losses are felt across the board, which in turn touch all aspects of a local or

and title insurance providers,

regional economy.

other service providers and

among others. With fewer

Third, these taxes lead to an

industries that depend upon

transactions, home renovation

erosion of the very tax revenue

WINTER 2020

9


SPECIAL SECTIONÂ NY FLIP TA X

they were designed to produce,

harming the states or local com-

munities they support. As overall transactions decrease, there are fewer transactions from which the tax can be generated.

are not generally replaced by consumer transactions

that would make up the tax

shortfall. This is because the property is either a commercial property or a blighted,

Results like these are a

rundown, dilapidated, vacant,

quence when the transfer tax

move-in or consumer ready.

subsets of transactions, such

these types of properties,

particularly hidden conse-

residential property that is not

is increased on only particular

Consumers will not purchase

as business-related transac-

unless they are first converted

tions. When business-related

or remodeled via a business-re-

for example, those transactions

in total tax revenue results in

transactions decline due a tax,

10

PRIVATE LENDER

lated transaction. A decrease

fewer funds available for the various initiatives, often laudable, that the revenues were designed to serve. In short, the result is the opposite of what was intended.

of commercial property into

Fourth, the increases lead to a decreased rate of housing stock availability, particularly in the lower, affordable end of the market.

actions continue to take place,

As the increased cost of transactions decreases the business-related transactions frequency, there are fewer conversions

end consumer. Transfer taxes

housing or the rejuvenation of formerly vacant or derelict properties into useful and legal housing. In the limited instances in which these transit shifts to the higher end of the market, where the increased transaction costs can be hidden and more easily borne by the are generally regressive in their effect, harming lowerincome communities.


Fifth, but certainly not finally, higher transfer taxes are disincentives to homeownership and business-transactions alike. Homeownership is a universally acknowledged societal good, playing a vital role in helping to build strong, stable communities. Governments keen on promoting this institution should not be disincentivizing its growth and attainability. Ironically, a decrease in homeownership leads to an increase in rentals, putting pressure on the available rental stock, which results in higher rents. Nearly universally, landlord owners of rental property are business, profit-maximizing entities that are acutely affected by increased transaction costs. Increased costs result in fewer total transactions, fewer units available and, thus, higher rents despite the units being in worse physical conditions. In this way, higher transfer taxes have several significant effects on affordability, directly with respect to homeownership and indirectly in rentals.

INCENTIVES INCREASE ECONOMIC ACTIVITY While AAPL strongly opposes transfer taxes greater than a nominal amount, which disin-

“ ... we [AAPL] strongly support and advocate for any sort of incentive to directly promote economic activities that lead to these [thriving, lowercost] communities.”

ABOUT THE AUTHOR

MATTHEW GUNTER Matthew Gunter is an

attorney working for RCN Capital as their assistant

centivizes the activities needed to develop healthy, thriving, lower-cost communities, we strongly support and advocate for any sort of incentive to directly promote economic activities that lead to these communities. Incentives could, for example, take the form of a reduction in transfer taxes, either broadly enacted or targeted to specific areas or transaction types. With proper incentives, the result is more economic activity—more transactions that the remaining or reduced transfer tax rate can capture revenue from. It means cheaper access to housing. It means less risky real estate investments and, therefore, more available housing, further pressuring prices downward.

which in turn reduces crime and increases property values. When property value increases, it results in increased property tax revenue, further promoting the feedback loop that a reduced transfer tax can help initiate. AAPL and its members recognize the several struggles that housing in the U.S. faces, from affordable housing to blighted and crime-filled neighborhoods. We are supportive of efforts to address these problems, and our members want to be a part of the solution. Disincentivizing those with the greatest ability to help is not the way forward. Instead of governments attempting to raise revenue through additional taxation, governments should promote incentives to effect the change they want to see. ∞

general counsel.

Gunter’s focus is in licensing

compliance, mortgage finance transactions, foreclosures, REO property and tenant management, real estate closings, title clearing,

bankruptcy management,

business litigation, contract

management, and lobbying/ lobbying management.

Gunter received his B.A. in political science from

California State University

Long Beach and a J.D. from University of Connecticut, School of Law. Gunter

presently practices in the Connecticut state and federal courts.

Increased economic activity in housing also results in the removal of blighted properties, WINTER 2020

11


SPECIAL SECTION NY FLIP TA X

NYC HOME FLIPPING ANALYSIS b  y Daren Blomquist

Legislation aimed at deterring “property speculation and flipping in vulnerable neighborhoods” in New York City begs the question: Just how prevalent and harmful is home flipping in the five boroughs that would be impacted by the policy change?

State Senate Bill S3060E would

2018, according to the ATTOM

amend the administrative

data. Those 874 home flips

code of the city of New York to impose an additional transfer tax on properties sold within one or two years of a previous sale. The bill would impose an extra 20% tax on the transfer of properties that occur within

An Auction.com analysis

of public record data from

ATTOM Data Solutions shows home flipping in the five

demonstrates that investors are

shouldering the bulk of the risk involved with this speculation,

even while stabilizing neighbor-

boroughs of New York City

hoods by renovating distressed

of home flipping in the five

values and providing inventory

is on the decline, and the rate boroughs is lower than the

home flipping rate statewide and nationwide.

Furthermore, while it certainly holds true that home flipping is speculative in nature—

using the Oxford definition

of speculative as “involving a

high risk of loss”—the analysis 12

PRIVATE LENDER

housing stock, improving home that is more affordable than the

one year of the previous trans-

fer, and an extra 15% tax on

the transfer of properties that occur within two years of the previous transfer.

NYC FLIPPING BELOW AVERAGE

overall real estate market.

represented 5.6% of total home sales in the five boroughs in the first 11 months of 2019, below the 5.8% home flipping rate statewide and the 6.3% home flipping rate nationwide. The number of home flips in New York City climbed to an 11-year high in 2018, but the decrease in 2019 is likely due to shrinking potential profits for home flippers—a trend also playing out nationwide, according to the ATTOM Q3 2019 U.S. Home Flipping Report. That report shows gross home

Before diving further into the

A total of 874 homes were

in New York City, it’s worth

ond time within a 12-month

of the legislation. Titled the

of 2019 in the five New York

Anti-Speculation Act, New York

flipping returns nationwide hovering around 40% in 2019,

analysis of home flipping data

flipped—sold for the sec-

providing a quick overview

period—in the first 11 months

New York State Small Home

City boroughs. That’s down

63.1% in 2019, but similarly at

6% from the same period in

the lowest level since 2011.

the lowest level since 2011. Gross home flipping returns in New York City are higher, at


FORECLOSUREHEAVY FLIPPING Although on the decline, gross home flipping returns in New York City are well above the national average because home flippers there are taking on a higher percentage of foreclosure properties. Nearly half (49%) of all properties flipped in New York City in 2019 were originally purchased by the real estate investor at foreclosure auction or as a bank-owned foreclosure (REO). That’s compared to only 28% nationwide. Statewide in New York, 52% of 2019 home flips were originally purchased in foreclosure. Foreclosure properties tend to be in distressed condition, which translates into bigger potential discounts at purchase. But it also means more extensive property repairs that

come with higher rehab and holding costs. This all bears out in the data. In New York City, the average purchase discount for homes flipped in 2019 was 30% below full “after-repair” market value of the home. That was well above the average purchase discount of 24% for homes flipped nationwide in 2019, although it’s a bit below the average purchase discount of 33.3% statewide in New York.

21 PERCENT LONGER TO FLIP The bigger upfront discount available with distressed foreclosure properties in New York City comes with a cost: The average home flip completed in New York in 2019 took 216 days, 37 days longer than the nationwide average of 179 days.

The 21% longer it takes to flip a home in New York City means higher holding costs—think property taxes, utilities, basic property maintenance and financing costs. It also implies more extensive (and expensive) rehab, given that a home flipper is motivated to sell as soon as possible after completing any property renovations.

62 PERCENT PURCHASED WITH CASH Purchasing distressed foreclosure properties comes with another cost that may not be as immediately obvious: lack of available financing. At most foreclosure auctions, winning bidders are required to pay in cash on the spot, and lenders are less likely to approve financing on highly distressed REO properties. This lack-offinancing feature of foreclosure

purchases means that a higher percentage of New York City home flippers are purchasing with cash: 62% in 2019 compared to 57% nationwide. The high percentage of cash purchases on eventually flipped homes has two other important implications. First, buyers who pay with their own cash are taking on more risk than financed buyers, who share the risk with their lender. Second, most retail, owner-occupant buyers would not be able to purchase a foreclosure property even if they wanted to because most don’t have six figures in cash sitting around for use on a home purchase.

EFFICIENT RETURN-TO-RETAIL Given these implications,

cash-buying home flippers act WINTER 2020

13


SPECIAL SECTION NY FLIP TA X

as an important and necessary bridge between the distressed and retail markets, particularly in areas like New York City with more legacy foreclosures.

comparison, only 43% of homes

pers in New York City sold at

that reverted to the bank at

a lower price point, and lower

This distress-to-retail bridge is evident in national data from the Auction.com Q2 2019 Distressed Seller Strategy Report, which looked at what happened to more than 9,000 properties sold to third-party real estate investors at foreclosure auction in second quarter 2018. The report found that 56% of those properties were in the hands of owner-occupants a year after the foreclosure auction. By

are much more efficient than

foreclosure auction (REO) were owner-occupied a year later, indicating real estate investors banks at returning distressed properties to the retail market.

FLIPPED HOMES MORE AFFORDABLE

price-per-square foot than the overall retail housing market. New York City homes flipped in 2019 sold at a median price of $565,000, 14% below the median sales price of $660,000 for all existing home sales in New York City in 2019, according to an Auction.com analysis ATTOM home price data.

Surprisingly, the investor

The flipped discount was

return-to-retail function does

also in double digits on a price-

not come with a home afford-

per-square-foot basis: $439

ability penalty. On the con-

per square foot for flipped

trary, homes sold by home flip-

homes, 11% below the $495

per square foot for all existing home sales. Considering all this data, it’s appropriate to revisit the original question posed in this article: Just how prevalent and harmful is home flipping in New York City? The short answer is this: Home flipping is rare in New York City compared to other markets. And, rather than being harmful, home flipping in the five boroughs is helping to efficiently renovate and return distressed housing stock to the retail market at a relatively affordable price point.

It’s infographic time. Here’s a visual review of New York City’s flipping market and the impacts Senate Bill S3060E will have on the market.

NYC HOUSING PURCHASED FROM FLIPPERS IS MORE AFFORDABLE THAN TRADITIONAL ALTERNATIVES: FLIPPERS PROVIDE A COST-PERSQUARE-FOOT DISCOUNT OF 11% OVER HOMES PURCHASED FROM NONFLIPPERS.

For the purposes of the data set, a “flip” is any property that transfers ownership for the second time within a 12-month period, with the second transfer being an arms-length (regular market) sale.

 I n 2019, the median sale price of a flipped home in NYC was

Here are the key points.

$565,000, with a median price per square foot of $439. That compares to a median price of $660,000 and median price per square foot of $495 for all existing home sales in NYC.

2019 median price per square foot of flipped home sales in NYC:

$439

2019 median price per square foot of all existing home sales in NYC:

$495

14

PRIVATE LENDER


THE FLIP TAX WOULD ALSO HURT LOCAL BUSINESSES AND TRADE JOBS, LIKELY PULLING AT LEAST $46 MILLION AWAY FROM LOCAL RENOVATION SUPPORT INDUSTRIES SUCH AS CONSTRUCTION, ROOFING, PLUMBING, ETC.

other budgeted less than 10% of the purchase price for rehab

8% 8%

budgeted at least 30% of the purchase price for rehab

20%

 Auction.com’s 2019 Buyer Insights Survey Report estimates that 20% of flippers budget at least 30% of the purchase price for rehab, with 29% of flippers budgeting at least 20% of the purchase price for rehab, 35% budgeting at between 10-20% (conservatively rounded down to 10%) and 8% budgeting less than 10% (conservatively rounded to 0%). The remaining

35%

29%

budgeted 10-20% of the purchase price for rehab

budgeted at least 20% of the purchase price for rehab

8% responded “other.”  B ased on flips’ median purchase price of $346,500 and 874 flips in 2019, this means that NYC flippers budgeted around $46,334,673 in renovations.

FLIPPERS ARE TAKING ON DISTRESSED PROPERTIES AND ADDING VALUE THROUGH EXTENSIVE REPAIRS AND RENOVATION. THIS HELPS RAISE THE VALUES OF SURROUNDING PROPERTIES AND NEIGHBORHOODS AND INCREASES REVENUE FROM PROPERTY TAXES.  From 2011 to 2019, NYC home flippers sold properties for $191,808 more than they purchased them for, an increase

in value of 73.4%. In 2019, NYC home flippers sold for $218,500 more than they purchased, a 63.1% increase in value.

 From 2011 to 2019, NYC home flippers purchased at a 36% “discount” below full “after-repair” market value, and they sold for a 7% premium above market value. In 2019, NYC home flippers bought at a 30% discount and sold at an 8% premium.

Increase in value of flipped homes (2011-2019):

$191,808

73.4%

Increase in value of flipped homes (2019):

$218,500

63.1%

WINTER 2020

15


SPECIAL SECTION NY FLIP TA X

IN 2019, NEW YORK CITY FLIPPERS LIKELY MADE BETWEEN $114,550 AND $367,700. THESE FIGURES DO NOT INCLUDE FLIP HOLDING COSTS AND BUSINESS OPERATIONAL EXPENSES.  T he average New York City flipper likely only flips one or two properties per year. Of the 765 flips in NYC in

2019 net revenue after NYC flippers budgeted 30% of the purchase price:

$114,500

2019, 682 were by unique flipping entities, which implies

1.12 flips per flipper (although it is possible some flippers operate under multiple entities).

 B ased on a 2019 NYC flipper median gross sale price of $218,500 more than the purchase price and the

purchase price percentage that flippers budget per renovation from Auction.com’s 2019 Buyer Insights

Survey, NYC flippers budgeting 30% of the purchase price make back around $114,500 per flip, with

flippers budgeting 10% making around $183,850.

16

PRIVATE LENDER

2019 net revenue after NYC flippers budgeted 10% of the purchase price:

$183,850


FLIPPERS GET DISTRESSED PROPERTIES INTO THE HANDS OF OWNER-OCCUPIED HOMEBUYERS FASTER AND AT A HIGHER RATE THAN BANKS.  From 2005 to 2019, 24% of all NYC flipped properties were

homes sold to third-party buyers that were owner-occupied a year later

originally purchased by the home flipper in some stage of

foreclosure: default, foreclosure auction or bank-owned (REO).

In 2019, 49% were purchased in some stage of foreclosure in NYC.  A n Auction.com analysis of more than 9,000 U.S. homes sold

43% 56%

homes reverted to the bank that were owner-occupied a year later

to third-party buyers at foreclosure auction in second quarter 2018 shows that a year later, 56% were owner-occupied. By

comparison, only 43% of properties that reverted to the bank

at foreclosure auction (REO) were owner-occupied a year later.

IF THE FLIP TAX SUCCEEDS IN KILLING THE NYC FLIPPING INDUSTRY, IT WON’T AFFECT JUST FLIPPERS. IT ALSO IMPACTS LENDERS, BOTH INSTITUTIONAL AND PRIVATE.  F  rom 2005 to 2019, 54% of NYC home flippers have purchased with cash, while 46% have used financing to purchase. In 2019, 62% are purchasing with cash, while 38% are using financing.

38%

ALMOST ALL FLIPPERS WOULD BE HIT BY THE 20% NYC FLIP TAX, RESELLING IN JUST AN AVERAGE OF 216 DAYS.  I t takes an average of 194 days to flip in NYC

based on 2005 to 2019 data, with an average of 216 days to flip in 2019.

Average amount of days it takes to flip (2005-2019):

194

home flippers who purchased with financing in 2019 Average amount of days it takes to flip (2019):

216 62%

home flippers who purchased with cash in 2019

WINTER 2020

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SPECIAL SECTION NY FLIP TA X

Overall, SB3060E is misguided, creating more issues than it purports to solve. The tax will not only kill the flippers but also funders and construction-related trades. Further, it will diminish, if not eliminate, some of the more affordable housing in New York City. ∞

ABOUT THE AUTHOR

DAREN BLOMQUIST

FIX-AND-FLIP PROVIDING MISSING

Daren Blomquist is vice president of market economics

MIDDLE-MARKET HOUSING INVENTORY N ew Home Sales

at Auction.com. In this role,

Blomquist analyzes and fore-

F  lipped Home Resales

Median Price of Flipped Home Resales

casts complex macro and microeconomic data trends within

Median Price of New Homes

the marketplace and greater

2,000,000

$400,000

1,800,000

$360,000

1,600,000

$320,000

1,400,000

$280,000

1,200,000

$240,000

1,000,000

$200,000

800,000

$160,000

600,000

$120,000

400,000

$80,000

200,000

$40,000

0

0

industry to provide value to both buyers and sellers using the Auction.com platform.

Blomquist’s reports and

analysis have been cited by thousands of media outlets

nationwide, including major news networks and leading publications such as The

Wall Street Journal, The New York Times and USA Today.

Blomquist has been quoted in hundreds of national and local publications and has

appeared on many national

network broadcasts, including

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

CBS, ABC, CNN, CNBC, FOX

Source: Auction.com analysis of public record data from ATTOM Data Solutions and Auction.com’s 2019 Buyer Insights Survey Report

18

PRIVATE LENDER

Business and Bloomberg.


WINTER 2020

19


SPECIAL SECTIONÂ NY FLIP TA X

PRIVATE LENDER PLAYS ROLE IN RESTORING ROWHOUSE, REVITALIZING A COMMUNITY BEFORE

A dilapidated Washington, D.C.,

rowhouse is converted into mid-level condominiums to match the already transforming neighborhood.

T

he borrower had purchased this 5,000-squarefoot rowhouse but needed additional funds

to complete the renovation. The property was

blighted and vacant, but it had the potential to become

a taxable property and to change the neighborhood. The lender, Specialty Lending Group, was able to provide a 12-month loan, which covered seven months of renovation and provided a cushion for the borrower to sell the unit and fully repay the loan.

AFTER

20

PRIVATE LENDER


Lender // Specialty Lending Group Borrower // JL Ventures LLC Location // Washington, D.C. Architecture // Rowhouse Originally Built // 1929 Square Feet // 5,000 Loan Amount // $1,115,000 LTV // 69% LTC // 85%

BEFORE

Credit Score // Considered Borrower Experience // Very experienced Interest Rate // 9% Length of Loan // 12 months Rehab Costs // $600,000 Summary of Opportunity // All in all, the

renovation was good for the neighborhood. The borrower was able to change a blighted, vacant property into a taxable property while adding additional housing units to a popular, rapidly growing area of town. Opportunities such as these give investors and renovators/developers the opportunity to bring life back into neighborhoods that have previously experienced a period of neglect. In this particular case, the project increased the housing supply and added a high value property to the tax rolls.

AFTER

Given the initial state of the property compared to the final mid-level condominiums that were sold, the borrower was able to recoup on the investment and profit to their satisfaction. Overall, a great deal for everyone!

AFTER

WINTER 2020

21


BUSINESS STR ATEGY

Private Lenders: Will Your Products Get the Job Done During a Market Downturn? A real estate investor provides advice on developing creative financing strategies that could carry both lenders and investors through a softer market. by Nancy Wallace-Laabs

A

s a real estate

loan terms for every deal

years, I have

operating processes and

investor for 15 worked with

my share of private lend-

ers. During that time—and

through economic turmoil— I have seen the industry evolve from offering

individually-customized 22

PRIVATE LENDER

to standardized products,

made a private lender’s pro-

lets you offer better, more com-

cesses look more like a bank’s.

petitive products, and it helped

That is not a bad thing. It has

get me to close faster and at a

brought the industry to borrow-

lower cost to my bottom line.

ers who would never have had

But this standardization also

the opportunity or patience to

means a certain lack of flexibil-

institutional lenders will not or

work with private lenders oth-

ity for deals that do not fit into

cannot touch, but streamlining

erwise. And, it has elevated the

the (admittedly much wider

to finance more debt at a faster

industry to a “yes, I’m working

than banks’) parameters that

pace than ever has naturally

with a real business” stature. It

private lenders’ standardized

underwriting procedures.

These days, private lenders still take on the deals that


loan products and underwrit-

standard bank or private lender

Flexibility is what has kept

with. In harder times, lenders

ing allow. Standardization also

loan products?”

many private lenders oper-

who demonstrate their willing-

means it’s operationally slower

In markets that feel like they

ational while banks had to

and more difficult to change from modus operandi.

can change on a dime based on hundreds of competing factors,

receive bailouts. I worry that technology and ever-increasing structure around private

As the market shifts, whether

standardization cannot always

part of a natural cycle or as

serve. Private lenders need

part of larger economic issues,

to think long and hard about

real estate investors will find

supplementing their bottom

themselves thinking: “Contrac-

line with options outside of

tors are in short supply and

2 points/10% interest. They

the profit from fix-and-flips

must be willing to get creative

is just not there right now.

with borrowers. Working out-

But, I still want to focus on

side the box may be what helps

become less so.

real estate investment to build

keep both the real estate invest-

Following are some strategies

wealth and monthly cash flow.

ment and the private lending

I’ve seen developing and that

How am I going to fund my

industries afloat during the

have worked quite well for both

deals if they no longer fit the

next inevitable downturn.

me and the lenders I partner

lending will be a double-edged sword. These developments have served extremely well

ness to negotiate and customize their offerings will be the ones I go to first for every real estate investment deal I do.

THE BUY-ANDHOLD STRATEGY

during prosperity but may not serve as well when deals are thin on the ground and previously profitable loan products

With end-homebuyers struggling to find and qualify for traditional financing during harder economic times, many prospective homeowners will instead remain renters. Lenders who capitalize on this by switching gears from WINTER 2020

23


BUSINESS STR ATEGY

fix-and-flip terms to compet-

whom are considering getting out of the business entirely

itive—and longer—buy-and-

until the market corrects)

hold terms will find that the

should encourage them to look

market itself will help them survive as fix-and-flip demand retracts. With banks only

at different exit strategies.

THE OWNERFINANCING STRATEGY

willing to finance a certain number of loans from a single real estate investor, the private lending industry can do much to supplement this area as renting continues to grow. The same holds true for investors. Lenders having conversations with worried fix-and-flippers (many of

As affordable housing and

financing becomes unavailable

for many homeowners, investors will start looking for creative ways to get their properties

to prospective buyers. Owner

financing is one such solution,

allowing the real estate investor to “wrap” the loan. Coupled with longer-term loan products, this strategy would allow the lender to create structured programs for real estate investors that allow the underlying mortgage to be wrapped with the buyer vetted through the RMLO process.

THE EQUITYSHARING STRATEGY

relationships become the deciding factor on who survives and who doesn’t. Private lenders who take on an equity-sharing strategy will get to know their borrowers’ business practices and be able to form a solid lender/investor relationship. It’s a strategy I also suggest for private lenders new to real estate. They’ll get a closer look at the process, which will enable them to better figure out the right deals for their goals.

When the economy and

financing is on shakier ground,

Here’s a sample equity share to demonstrate:

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24

PRIVATE LENDER


SAMPLE EQUIT Y SHARE

 D  emonstrate

willingness to build solid relationships.

Purchase Price: $100,000

 D  emonstrate willingness

Terms

to negotiate flexible/

 15-year note

nonstandard terms.

 No points  Reduced interest rate of 7%  20% profit to lender after sale to end buyer

 H  ave an exit strategy if

the deal goes awry.

 H  ave a plan around

Owner-Financed Sale Price: $150,000

worse-case-scenarios

 E  nd buyer pays a minimum of $15,000 down payment

health issues.

 L ender earns $3,000 (20% profit from down payment, higher than $2,000 via points paid at origination)  L ender continues to earn interest on money loaned, plus a share of the monthly profit

This is just one of several scenarios that can be negotiated between investor and lender.

Other options for lenders not

keen on owner financing might

include a shorter-term businesspurpose loan, with the lender

instead taking a portion of the sale profits.

While equity sharing does

necessitate the lender taking

on higher risk if the profit isn’t there at the end of the deal,

combining equity share with a loan can mitigate some of this risk. It also allows the

ABOUT THE AUTHOR

earning of a higher rate of return than a more standard deal. As markets thin, equity sharing may mean the difference in the lender and the investor keeping their doors open until fairer weather. The lender earns more return on each deal, while the investor can now bring more deals to the table via a deeper partnership and more favorable loan terms. At minimum, lenders should

like death, divorce or

 C  an be diligent about the

structured agreement and length of partnership.

 A  re willing to make

regular reports (monthly

at minimum) to the lender.

NANCY WALLACE-LAABS Nancy Wallace-Laabs is a

licensed real estate broker

in the state of Texas. She has more than 15 years of real

estate investing experience,

owns several rental properties and manages properties in the North DFW area.

Her new book, “Winning

Deals in Heels,” hit No. 1 on

Although most private lenders

Amazon’s Best Seller List for

three strategies on a regular

She and her husband own

would prefer not to use these

Real Estate Sales & Selling.

basis because they require

KBN Homes, LLC, a real

acceptance of longer loan peri-

ods and/or additional risk than a more standard loan, they

should be carefully considering them now—ahead of any

financial crisis. The lender who can even temporarily abandon

old products in order to survive through more creative means

estate investment company

that’s making neighborhoods great again, one home at

a time. By actively seeking homes that are difficult to sell and compassionately representing owners in

distress, KBN Homes offers hope, relief and options to sellers while also creating

opportunities for investors.

will be able to capitalize ahead of competitors who rely on

market-mismatched products until too late. ∞

look first to investors who:  H ave a successful

track record.

WINTER 2020

25


BUSINESS STR ATEGYÂ

26

PRIVATE LENDER


THE ADVANTAGES OF THE DEBT YIELD RATIO Banks are moving away from DSCR, and private lenders should consider doing so too. by Edward Brown

For many years, banks have used the Debt Service Coverage Ratio (DSCR) to assess risk regarding a borrower’s ability to make mortgage payments after subtracting normal expenses from income. This ratio is crucial to determining a borrower’s ability to repay a loan, but it does not tell a financial institution about the impacts to its bottom line if it must foreclose on the property and sell at less than market value. As you may remember, this was an oversight that contributed significantly to the 2008 housing crisis.

WHAT DSCR DOESN'T ADDRESS Before 2008, the larger the

Debt Service Coverage Ratio, the more comfortable the bank felt making a loan.

For example, let’s presume a borrower is considering

applying for a $650,000 bank loan amortized over 20 years at 4%. The monthly payment would be about $3,939 per

month. If the apartment building grossed $8,000 and the

normal expenses were $3,000

(LTV) in conjunction with the DSCR. Presuming the

value of the apartment building was $1,000,000, a 65% LTV

loan would be acceptable to most banks.

In previous years, many banks were willing to allow a DSCR as low as 1.00, meaning the

NOI exactly covered the bank’s

monthly payment. The problem was that in a market crisis with borrower income shrinking,

exactly covering the net operating income wasn’t enough and defaults skyrocketed.

per month, the Net Operating

Following the Great Recession

per month. The DSCR would

protect themselves was to raise

course, the bank would also

with most finally settling on

Income (NOI) would be $5,000

in 2008, banks’ solution to

be 1.27 ($5,000/$3,939). Of

the DSCR to 1.15, then to 1.25,

look at the Loan to Value

1.35. This severely constrained WINTER 2020

27


BUSINESS STR ATEGY

many borrowers’ ability to finance their real estate projects. They either had to come up with more cash, negotiate for a longer term (25- to 30-year amortization periods) or request a lower interest rate due to the supposed lower overall default risk to the bank. These compromises allowed borrowers to borrow the total amount they initially needed while still meeting the more stringent 1.35 DSCR. While from many perspectives this would “fix” the DSCR problem, the issue is the bank was still at the same LTV. In fact, you could argue the bank was not compensated for the benefits bestowed upon the borrower in the form of a lower rate and longer amortization period. Just because the borrower met the new DSCR requirement did not put the bank in a safer position if default occurred due to another market crisis. It only addressed the borrower’s ability to make the monthly mortgage payment. DSCR does not address the LTV risk for the bank or give the bank a rate of return (ROR) should the bank need to foreclose on the property. Added to this, as banks were dropping interest rates and stretching amortization periods to help borrowers accommo28

PRIVATE LENDER

date high DSCRs, they were also forced to allow higher LTVs. Before 2008, banks were willing to lend at a high LTV. Historically, 60-65% was the norm; however, increased competition between banks pushed LTVs even higher to gain an advantage with borrowers. While the lower interest rates appeared to assist the bank with risk due to the relatively low (historical) mortgage payments, when market prices dramatically decreased, many lenders were faced with borrowers who were upside down on their loans. From all perspectives, DSCR was no longer a good assessment of risk because it only provided for a fair-weather scenario where the borrower remained the property owner.

ENTER DYR Enter the Debt Yield Ratio (DYR), which allows financial institutions to assess risk for when they must foreclose and possibly sell below market value. Although this ratio has been making the rounds with banks, many private lenders are still unaware of it—to their detriment. This ratio allows institutions to forecast scenarios in which the borrower’s net operating income is stressed. For example, in a booming economy combined with low

“Although this ratio [DYR] has been making the rounds with banks, many private lenders are still unaware of it— to their detriment.” interest rates, NOI drops considerably. The main reason is the confidence level of buyers needing only a marginal return and the perceived lack of risk, especially with desirable properties in excellent locations. For example, a four-plex in Sausalito, California, was sold at a paltry 1.76 capitalization (CAP) rate. The rents were at market level. If the economy suddenly turns negative, the value of this property could potentially plummet as would-be investors would command a much higher ROR (i.e., a high CAP rate). In this scenario, DYR effectively shows the bank what rate of return it would earn if it had to foreclose. The annual NOI for the apartment building was $60,000. Since the loan request was $650,000, the DYR was a healthy 9.23%. Although no bank wants to foreclose, it still must

face the fact that there are times when it will need to. When CAP rates are in the 4-6% range, a DYR above 8% gives the bank some leeway should it need to sell the property at less than fair market value and recoup its entire loan with no loss. The ratio itself is simple: Net Operating Income Debt Amount 100% % cash-on-cash return after foreclosure

You can see that although most real estate investors focus on CAP rates, the DYR zeros in on the ROR the bank will earn upon foreclosure. The DYR also ignores the interest rate the bank charges as well as the


amortization of the loan. The reason for this is the bank is focusing on what the expected income derived from the property is compared to its loan. It is strictly a ROR function. The DYR is vital in today’s low interest rate environment. As interest rates dropped over the previous 10 years, values substantially increased. Lenders do not want to get caught in situations where, all other factors staying the same, the fair market value plummets due to increased interest rates. Thus, the DYR focuses in on the ROR

the lender would receive if it were to receive the property upon foreclosure.

the bank is willing to lend

Of course, if interest rates rise, the bank would have liked to have had a larger DYR, but it is similar to an investor being happy with a bond that is locked in at 10%, even if interest rates rise to 12%. The main drawback for lenders using the DYR has more to do with closing loans. The higher the DYR, the less likely the bank will be competitive with terms they can offer the borrower, mostly having to do with how much

ADVANTAGE FOR PRIVATE LENDERS

against a specific property.

Where is the advantage to private lenders in all this? By requesting a high DYR, the bank will automatically limit its LTV. As banks get skittish, they will continue to raise their DYR. One large bank has already increased its DYR to 11%. Factors that may lower the bank’s DYR may be the location

of the real estate. Desirable and stable areas may command a lower DYR. Of course, these same areas also command lower CAP rates as well. The opportunity for private lenders is that the higher the DYR the bank requires, more borrowers will need private financing. The banks simply will not be able to provide the needed capital due to constraints applied by a high DYR. Of course, private lenders should look at their own DYR they impose on borrowers.

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WINTER 2020

29


BUSINESS STR ATEGY

Most do anyway because that is the nature of private lending. If the lender forecloses (and retains the property), the DYR suddenly becomes the ROR on the loan. Private lenders have more flexibility in assessing what DYR to apply, and each situation will be different depending on location, asset type, condition of the property and other factors.

KNOW THE EXIT STRATEGY

The main question for private lenders is “What is your exit strategy?” As banks get more conservative with their underwriting and have stricter ratio requirements, private lenders need to make sure the borrower will be able to meet the refinancing bank’s guidelines or see that the borrower plans to sell the collateralized real estate. Just as rates may vary when considering higher versus lower LTVs, bank rates may vary based on higher versus

Although banks using high DYR thresholds can open more loan opportunities for private lenders, there can also be drawbacks.

lower DYR. This makes sense when considering that banks price their products based on risk. From a borrower’s perspective, negotiations will now have to be looked at from not only

30

PRIVATE LENDER

the CAP rate and the DSCR rate but also the DYR. Borrowers who can make a larger down payment should consider all three ratios. A little extra down payment may go a long way toward receiving attractive terms from the bank or private lender. As a private lender, if you are not already considering your own or a prospective bank’s DYR when transacting a loan, it is a detriment to your bottom line should another downturn occur. The DYR, among other considerations, allows all lenders to better navigate and survive the vagaries of the real estate market and economy. ∞

ABOUT THE AUTHOR

EDWARD BROWN Edward Brown is in the investor relations department at

Pacific Private Money and is

host of the long-running radio show “The Best of Investing.” He has published multiple

works, appeared on CNN and has served as chairman of the Shareholder Equity Commit-

tee protecting 29,000 share-

holders in a $500 million REIT. Brown is also a recipient of a prestigious MBA Tax Award.


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BUSINESS STR ATEGYÂ

32

PRIVATE LENDER


4 Benefits of Business Partnerships No man is an island; neither is a business.

T

he idea that and autonomy are signs of

strength applies less and less as the business landscape evolves. While globalization shrinks the distance between us, technology is simultaneously giving birth to a more complex and decentralized business environment. Now, more than ever, it’s important to understand the value of business partnerships.

Let’s look at four areas where companies stand to benefit from partnerships with other businesses.

ADDING EXPERTISE The simple act of bringing in outside expertise strengthens your business in more ways than one.

by Chris Ragland

independence

Partnerships can be a good way to enter new geographic markets or industries where you might lack experience. The right partner can bring a familiarity with industry— with market-specific regulations and other particulars that can be invaluable for growing a business.

EXPANDING NETWORKS The potential to expand your network is a major incentive

for many companies to pursue business partnerships. By

network, of course, we’re not

talking just about expanding your contacts list.

Expanding your network

also means expanding your reach to generate more

business. A business partnership can expand your reach

geographically, helping to open the “fat” end of the marketing funnel and making potential leads more accessible.

Both strategic and tactical decisions will benefit from gaining additional knowledge that you might not have had in-house previously. This is particularly useful if your company is expanding its offerings or you’re planning to enter new geographic or business markets. You’ll have more immediate access to that new knowledge base rather than learning as you go, which can improve your strategy and speed the process. Partnerships also provide different perspectives that can enhance your business strategy, improve problem-solving, and potentially add creative capacity. The addition of outside expertise not only increases the probability of a positive overall business outcome, it can create education

conduits for the less experienced members of each party.

ENHANCING CREDIBILITY When two companies form a partnership, the assumption is that it will be beneficial for both parties. Each company typically conducts due diligence on the other before making a commitment. When two reputable companies show confidence in one another and place a certain amount of responsibility for their success in the hands of the other, it creates the outward appearance of validity for the partnership and establishes even more credibility for both parties. A business partnership compels both parties to be mutually accountable for the outcome of that partnership. Whether it’s the success of an investment or the creation and launch of a new product, each company has a stake in the success of the venture. Since they are relying on each other for their own success, there is an added responsibility for each party to act in good faith and fulfill their obligation to the partnership.

INCREASING RESOURCES Many companies probably explore a business partnership WINTER 2020

33


BUSINESS STR ATEGY

to increase their tangible

“ The modern business

resources. Unlike networks, knowledge and credibility, the

landscape necessitates

benefits of physical resources

a strategic advantage

be a little easier to understand

for almost any kind of business—perhaps even more so for businesses in the complex and

are much more visible and may and define. You’ve almost certainly heard that “it takes money to make money.” That is the basis for the first (and probably most obvious) resource that can

sometimes erratic

result from a business part-

financial industry.”

amounts of capital.

34

PRIVATE LENDER

nership—access to greater

The addition of capital can benefit any type of business. But the benefit of additional capital is invaluable when it comes to investment-based firms like private lenders where it literally takes money to make money on an ongoing basis. For a lender, more capital can help increase market share, expand geographic reach as well as add to operational capabilities. Partners often can avail themselves of the other’s technological capabilities. Whether they are in-house technologies or


outside third-party technology platforms, access to a partner’s platforms may allow you to pool your resources, which can result in cost savings. In addition to cost savings, systems and platforms can increase the accuracy of your operation, speed your processes and add other efficiencies to make your life easier and your business more profitable. You may also benefit from the marketing resources of a business partner. Perhaps a company you partner with has an

in-house marketing department that can help you freshen your brand, build a new website or provide collateral to promote your products and services. And it’s likely that, within a business partnership, your partner can do so at a cost lower than that of a thirdparty agency. Additionally, it is useful to pool marketing and advertising budgets with your business partners to stretch those dollars further than you might be able to with your own budget.

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There are other in-house resources that can be particularly useful for private lending companies that create partnerships. Gaining an entire business division is one of them. Your partner might have its own underwriting division or loan servicing division that is more experienced or more robust than your own and can accommodate a larger loan volume than you would be able to otherwise. Taking advantage of these resources can alleviate pressure on your own operations, increase your capacity for throughput and add substantial headroom for growth.

to grow your business. You can almost always strengthen your position in the market with carefully-planned strategic partnerships. It may take only a single person to build a viable company, but it takes a village to raise your revenue. ∞

ABOUT THE AUTHOR

Such resources can also improve quality or expand your current services and product lines, creating a better overall experience for your clients.

CHRIS RAGLAND

SUM AND SUBSTANCE

company’s chief operating

There are many motivations for forging strategic business partnerships, and there’s a bevy of benefits to be gained. The modern business landscape necessitates a strategic advantage for almost any kind of business—perhaps even more so for businesses in the complex and sometimes erratic financial industry.

Chris Ragland is a partner

and board member of Noble Capital and served as the officer for 10 years.

He has spent nearly 20 years

building firms that specialize

in finance, loan servicing, loss

mitigation, full-service brokerage, insurance, management, maintenance, rehabilitation and REO disposition.

Chris holds a bachelor’s degree in entrepreneurship and an

MBA in global entrepreneurship from St. Edward’s University.

Whether you’re seeking access, expertise, credibility or other resources, the goal is the same— WINTER 2020

35


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PRIVATE LENDER

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PRIVATE LENDER


QUESTIONS TO ASK WHEN SCALING YOUR REAL ESTATE BUSINESS Creating a successful business requires forward planning and strategic thinking. by Abhi Golhar

Before planning to scale your private lending business, it's important to gather detailed information that will help to inform your decisions. In the spirit of the internet’s buzzword “scale,” here are five questions you need to ask.

your strengths to build a solid

WHAT ARE YOUR STRENGTHS?

reputation that customers and prospects can rely on. Identifying your main strengths and learning how to use them to

Every business has its strengths and weaknesses. It doesn’t

your advantage is crucial for developing an effective long-

matter if you’re a private

term plan for your business.

money lender, real estate agent,

Focus on the areas of your

wholesaler or flipper. Successful scale works only if you use

business that provide superior experiences to those your

competitors offer. For example, as a private lender, you might have more local market knowledge, skills, experience or qualifications than your competitors. Or, perhaps you offer additional services, such as 24-hour customer support, a custom online portal for borrowers to request a loan outfitted with AI to help streamline the process and communicate regular updates

WINTER 2020

39


BUSINESS STR ATEGY

automatically, a sponsored meet-up where you provide a regular market update, next-day funding for seasoned borrowers, or a more personalized service. Business strengths can also

include benefits to the wider

make all the difference for some lenders, especially when the market competition is heavy.

WHAT ARE YOUR COMPANY’S VALUES?

community. For example,

many prospects also like to buy products from companies with a reputation for being socially responsible. So, is a certain

percentage of your basis points allocated toward a quarterly

donation to your favorite char-

ity? Communicating and acting on your passions like this can

40

PRIVATE LENDER

Honesty and transparency inspire trust and help build a positive view of your company. It's important to share your business vision and brand values. Some lenders try to appeal to as large an audience as possible, but this kind of strategy rarely works. People tend to

buy from businesses that share their values. Defining and communicating your values is an important part of your brand and marketing strategy and, ultimately, helps to scale your business more quickly. Start by identifying your company's most important values. Let’s use an example that’s in a different industry. If your company sells soft furnishings aimed at middle-aged parents, you might choose to focus on family values, the local community or children's education. If you're

selling health products aimed at young adults, you might focus on fun, fitness, independence or healthy eating. If you’re a private lender, what would you focus on? Take a few minutes to write down a few ideas.

WHO ARE YOUR BORROWERS, EXACTLY? As a private lender, understanding everything about your borrowers is the key to your business success. And if you’re like many lenders, the idea of


casting as wide a net as possible to catch every borrower you can seems compelling. However, creating a borrower profile provides you with a detailed portrait of your potential borrowers and makes it significantly easier to develop effective branding and marketing strategies to scale your business. Some of those strategies may be blog posts, LinkedIn videos or targeted podcast appearances. Don’t know where to begin? Start by gathering basic information about your ideal customers—age range, geographical location, marital and family status, annual income, number of completed projects in the last year, etc. Are your borrowers SFR owners, flippers, developers or focused on new construction? The more data you have, the better as you can use the information to research the interests, beliefs, values and habits of your borrowers. Now that you have a clear idea about who your borrowers are, where do you find them and how do you interact with them? Social media, forums and other public platforms allow you to eavesdrop on your borrower’s conversations, providing a great opportunity for you to research their habits. Pay attention to the subjects they talk about, as well as the books and publications

they read or the podcasts they listen to. This will give you clues about how and where to focus your advertising and exactly what to say in your messaging.

WHAT DO YOUR BORROWERS ULTIMATELY WANT? Once you know who your customers are, you need to find out what they want so you can scale your lending business quickly. Customers don't just get loans. They are looking for long-term relationships with private lenders for one main goal: to get wealthy with real estate. To make your prospective borrowers’ lives easier, your job is to discover which problems affect your borrowers the most and then find solutions to them. There are many different types of problems, some of which are deeper than others. For example, if you are selling child safety equipment, such as refrigerator locks and baby gates, your customers are probably worried about the safety of their young children and will be looking for products to help keep them safe. Rather than simply selling child safety equipment, you are selling peace of mind and helping to alleviate deeprooted fears. Put yourself in the shoes of your borrower and ask yourself: “What are my deep

problem areas and what do I need to look for in a lender to solve my problems?”

WHY WOULD CUSTOMERS CHOOSE YOUR COMPANY? The final question you need to ask when scaling your real estate business is why customers would choose your business over your competitors. It’s obvious that competition is tough, even with “joker brokers” with a developing brand. But, if you develop a deep understanding of your borrowers, know your strengths and have clear brand values, you should be able to answer this question. You should also take the time to research your competitors. What are their strengths? How do their strengths compare to yours? Are your competitor's products and services cheaper than yours? If so, why would borrowers pay for your loans? If your loan experience is of a higher quality, make sure your borrowers know they will be getting a better deal and significantly more value by choosing your company, even though they may pay an extra point in origination fees.

business relies on gathering the right information about your business, your customers and your competitors. Identifying your strengths and your brand values gives you a starting point to work from as you scale your marketing and business development efforts. In the end, it all comes down to understanding your customers and their needs so you can create an experience that fosters a longterm relationship. This means implementing smarter custom software, gaining visibility and, ultimately, building the relationship offline. ∞

ABOUT THE AUTHOR

ABHI GOLHAR Abhi Golhar is a three-time

nationally syndicated radio host, author and investor.

Discover tips for developing

smarter software to get better

leads and brand visibility faster at AbhiGolhar.com.

Creating an effective strategy to scale your real estate

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41


MARKET TRENDS

ZELMAN'S VIEW ON 2020 HOUSING Put the puzzle pieces together. by Ivy Zelman

The American Association of Private Lenders has partnered with Wall Street housing research firm Zelman & Associates to launch the private lending industry’s first and only researchfirm-backed benchmark data survey. This quarterly survey— which launches in April—will gather key data on everything from origination volume to loan terms and foreclosure rates. Respondents will gain access to aggregate reports from the AAPL/Zelman Private Lender Survey and Zelman’s most popular report, the Housing Marketing Overview. This benchmark data will provide respondents with a statistically relevant and ongoing view of our industry’s trends and forecasts for the first time—ever. The survey is open to private lender owner-operators and C suite level executives. Find more information and sign up to respond at aaplonline.com/industry-survey. In her article, Ivy Zelman provides a snapshot of the kinds of macro and micro information respondents gain.

42

PRIVATE LENDER


Z

elman &

Associates leverages

housing market

expertise, extensive surveys of industry executives and rigorous financial analy-

sis to deliver proprietary research and advice to

leading global institutional

“Heading into 2020, we remain confident in the underlying fundamentals driving the ongoing housing recovery.”

investors and senior-level company executives.

03 M ultifamily front-end

We publish detailed monthly

surveys of homebuilders, real

estate brokers, mortgage originators, apartment operators

and single-family rental com-

panies that provide perspective on nearly the entire housing

market. Our survey process and

KEY THEMES UNDERPINNING OUR HOUSING OUTLOOK

conclusions are unmatched,

Heading into 2020, we remain

sizes, synthesized data, action-

fundamentals driving the

correlation to macroeconomic

However, we balance our

Most importantly, the insights

outlook—including a demo-

vides enables us to connect the

pent-up demand and still-fa-

often ahead of other publicly

affordability—with supply-side

given their substantial sample

confident in the underlying

able conclusions and high

ongoing housing recovery.

and other industry data points.

positive long-term fundamental

our unique survey network pro-

graphic tail wind, significant

dots across the housing mosaic,

vorable absolute levels of

available data sources.

constraints that are likely to

To highlight our current out-

look, we walk through several

dynamics impacting the market and provide an overview of our 2020 expectations.

dampen the magnitude and, indirectly, home improvement spending growth. However, if inventory pressure grows even more intense in 2020, our unit sales outlook could be biased downward, whereas our home price appreciation estimate would be biased upward.

become more prevalent again as builder backlogs increase,

including tight labor and land development delays.

To summarize our views,

there are four key themes

01 S ingle-family spec

inventory is down yearover-year for the first time in seven years, setting the stage for a strong ramp amid robust entry-level demand. Interestingly, we estimate that new construction completions are still running 24% below normalized household formation and replacement demand, suggesting there is still a significant need for new supply to satisfy demand.

02 H  ome price apprecia-

tion should modestly reaccelerate, but excess supply and more tempered demand in the move-up market will

production remains steady, but completions continue to trail our expectations. The result is a mounting pipeline that is already at a 45-year high.

04 M ortgage rates are

unpredictable, but we assume any surprises would likely be higher than lower, putting pressure on affordability and total mortgage originations, but creating more competition among lenders in favor of consumers.

While mortgage rates remain a wild card, we take comfort in the fact that after a substantial drop in mortgage rates in 2019, the forward Treasury curve

underpinning our macro housing outlook.

WINTER 2020

43


MARKET TRENDS

suggests a benign outlook,

with an implied 30-year rate of 3.70% in 2020. That said, the

rate has moved at least 50 basis points between the high and

low of the year in each of the last 40 years.

The current state of the eco-

nomic environment and Fed policy would seemingly put greater

odds on an upward versus downward surprise. Another interest-

that is another headwind to inventory turnover because it creates an impediment to discretionary sellers, especially if rates rise further.

HOUSING ON STRONG FOOTING, BUT FORMATION SLIGHTLY DELAYED

ing dynamic on the rate front is

Underpinning our constructive

mortgage holders have mortgage

etary analysis of household

that roughly three quarters of

view of housing is our propri-

rates of 5% or lower. We believe

formation and demographics.

LIQUIDITY SOLUTIONS FOR PRIVATE LENDERS Smith Graham Investment Advisors is a dedicated strategic capital partner for private money lenders throughout the United States. Our platform helps lenders, like you, raise capital by efficiently selling loans. Since 2009, we have successfully transacted in over $1.5 billion of whole loan purchases.

Institutional Note Buyer

Common Sense Purchase Guidelines

Long Term Strategic Partner

140 Broadway, New York, New York 10005 contactmre@smithgraham.com 212-487-5086 www.smithgraham.com

44

PRIVATE LENDER

In 2017-18, total population growth fell to the lowest levels since World War II at less than 0.65% annually. However, due to unwinding recessionary effects and the makeup of the adult population, household formation has been strong the last four years, surpassing the annual average from last decade by over 20%.

residence) and non-owneroccupant purchasers. This might appear to be playing with semantics, but it is not.

We believe 2019 was similarly strong, although we estimate household formation of 1.260 million was slightly below 2018 at 1.290 million. Although we are confident that for-sale housing demonstrated seasonally adjusted improvement throughout the year, combining with still-solid rental housing demand, year-over-year growth has taken slightly longer to unfold. Less new construction supply was also a factor. Nevertheless, near record-low total housing vacancy rates continue to reward housing developers in the current economic environment.

02 P  urchased to hold and

SINGLE-FAMILY INVESTORS

To estimate the share of the market attributable to owners and non-owners, we triangulate numerous data, including from our proprietary industry surveys, robust mortgage disclosures, third-party providers, government surveys and public-company results.

In tracking housing demand, we segment the market between owner-occupant purchasers (i.e., those that will be using the home as a permanent

By our definition, non-owneroccupant buyers cover four main scenarios:

01 P urchased for use as a vacation or second home

permanently rent

03 P urchased to renovate (either marginally or materially) and resell

04 P urchased to hold and

speculate on home price appreciation (In contrast, other housing commentators have differing definitions of “investors,” which we have found has resulted in some misleading conclusions cited in the media and causing confusion among executives.)


ABOUT THE AUTHOR

IVY ZELMAN Ivy Zelman, CEO of Zelman & Associates and a highly

In aggregate, we estimate that

values. This was bad. From

their purchase volume is

were to non-owner-occupants,

that were attracted to dis-

established market, including

23% of 2018 total home sales

2012-14, cash-heavy investors

up slightly from 2017 but well

tressed asset values helped to

Additionally, while non-own-

put a floor under a downward

erally painted with a negative

undercutting all homeowners.

cyclical risk, we believe that the

More recently, iBuyers such

intent and leverage of the buy-

Zillow and Redfin have caught

below the 30% peak in 2011.

clear foreclosure inventory and

er-occupant buyers are gen-

spiral in home prices that was

brush given perceived higher

This was good.

focus should instead be on the

as Opendoor, Offerpad,

ers. From 2004-07, sales were

propelled by non-owner-occu-

pants using high leverage, with a greater share of investors

speculating on rising home

the headlines. These entities

are purchasing homes directly for a convenience fee and

then reselling to other owners or non-owners. Nationally,

immaterial, but in their most

Phoenix, Atlanta, Raleigh and

Charlotte, their share of home sales is reaching mid-to-high

respected thought leader for housing and housing related industries, has been guiding investors and corporate

executives toward business

success for roughly 30 years. In 2007, Zelman co-founded

single digits.

Zelman & Associates, which is

Overall, we care less about

firm nationwide, serving

the type of homebuyer and

more about the risk associated with a buyer. At this point, we believe cyclical risk is quite

low, as the shortage of single-

family home supply across the for-sale and for-rent markets

is constrained and leverage is still responsible. ∞

the leading housing research

institutional and private equity investors and corporate exec-

utives from the homebuilding,

building products, real estate, mortgage and finance and rental sectors and more. Zelman’s firm provides

in-depth analyses across

all aspects of the housing

spectrum. Her methodology, which puts Zelman & Associ-

ates in its own league, remains strongly rooted in the ability

Zelman & Associates is the leading Wall Street research firm specializing in housing. Every month, Zelman surveys nearly a thousand executives across various segments of the housing industry to maintain a pulse on current activity in order to provide investors, financial advisors and corporate executives with critical and real-time insights that can guide their investments and business decisions. Insights and analytics from these in-house surveys and other proprietary research offerings are available to institutional investors,

to perform thematic research overlaid with proprietary

surveys to produce unparalleled, differentiated, valueadded research.

corporate executives and others engaged in the financial and housing industries. The firm was founded in 2007 by Hall of Fame Institutional Investor Equity Research Analyst Ivy Zelman.

WINTER 2020

45


MARKET TRENDS

Bridge Loans Give Lenders Growth Potential in 2020 by Jeff Levin

Whether you’re a residential or commercial lender, bridge loans are a way to grow your revenue this year.

B

ridge loans

the loan lifetime is shorter than

and commercial

to charge higher interest rates

offer residential lenders intrigu-

ing growth opportunities in 2020. Economic and demographic trends make this

financing option relevant in the new year. Let’s find out

a mortgage. Plus, it’s customary for bridge loans.

HOUSING HEATS UP

why and discover how you

First, let’s look at residential

grow your business.

middle of its longest economic

can leverage bridge loans to

Consumer bridge loans give homebuyers money they can use to make a down payment on a new house, helping people buy their next home. This type of financing product is attractive for lenders because

46

PRIVATE LENDER

lending. The U.S. is in the

expansion in history. Home-

ownership in the U.S. increased in the third quarter of 2019 to

64.8%. But the housing market isn’t maxed out.

According to the U.S. Bureau

of Labor Statistics, residential

fixed investment (RFI) contributed 3.1% to U.S. gross domestic product (GDP) in the third quarter of 2019. RFI accounts for things such as single-family home construction and real estate brokers’ fees. For comparison, RFI’s share of GDP was 5.9% in 2005, two years before the housing crisis. In other words, there’s more room in the economy for housing to expand. As Fannie Mae Chief Economist Doug Duncan said in December, “Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years.”

Many economists believe there’s pent-up demand for houses, and a lack of homes for sale has constrained housing growth during the expansion. Realtor.com expects singlefamily home construction to grow 6% in 2020. Notably, housing starts increased by 3.2% in November 2019. More properties on the market could lead to an increase in annual home sales. Low interest rates may help fuel home buying. Rates for 30-year fixed mortgages are currently around 3.7%. This rate is 0.79 percent lower than a year ago, and down from 4.94%


in November 2018. Freddie Mac Chief Economist Sam Khater said rates may tick up to 3.8% in 2020, but he doesn’t expect the increase to depress home sales. “Our forecast is for the housing market to maintain momentum over the next two years,” Khater said. More people looking to buy homes can mean more buyers interested in bridge loans. This line of thinking is even more persuasive when one considers home prices—another reason why many economists expect housing to survive the next economic downturn.

WITHSTANDING THE NEXT RECESSION Low inventory is one reason

many experts think housing will

survive the next economic downturn. A drop in home prices

exacerbated the 2007 housing

crisis. Home values fell because there was a glut of available properties on the market.

There were about 4 million

homes for sale in the U.S. at the end of 2006. By comparison,

in November 2019, there were

only 1.66 million houses on the market. This scarcity should

keep prices high and prevent

negative impacts on housing in the next recession. Plus, many experts expect baby boomers to hold on to their homes. A recent report from realtor.com said: “With housing prices expected to stabilize and concern over economic uncertainty, there will be little incentive for Baby Boomers to sell in the coming year.” Boomers own about 40 million homes, which is a lot of inventory that won’t be available for younger buyers. Additionally, the rate of new construction is still low considering the country’s economic growth over the past decade.

Another reason housing could remain active during a downturn is borrower quality. Tight lending standards during the expansion means borrowers are more likely to withstand a downturn. Redfin Chief Economist Daryl Fairweather said, “Most of today’s financed homeowners have excellent credit and a cushion of home equity, making them unlikely to default on their mortgage even if their weekly grocery bill grows or their stock portfolio shrinks in the next recession.” Higher prices can make it

harder for buyers to afford a

down payment. If houses cost

WINTER 2020

47


MARKET TRENDS

too much, people may not

50% of homebuyers. In 2020,

buy a house, especially if they

about 5 million of those millen-

already have a mortgage. Given

nials will turn 30, the average

high home prices, you may

age of first-time homebuyers.

ask why bridge loans are an

Bridge loans, though, aren’t for

excellent opportunity for lenders. To answer that question, let’s look at the demographics of likely homebuyers.

GO WHERE THE PEOPLE ARE

people buying a home for the first time. They’re for people looking to buy their next house. Age 39 is when buyers tend to purchase their second house. And today, there are 21.5 millennials between 35-39 years old.

By spring 2020, Realtor.com

The census bureau states that

expects millennials to make up

about 60% of people between

35 and 44 years old were homeowners in third quarter 2019. That’s a large number of existing homeowners who may look to buy in the new year. High prices could scare some of these buyers from taking the plunge. Bridge loans, though, can help them get into their next house. Another demographic trend worth monitoring is the growth in Hispanic homeownership. Hispanics are 18% of the U.S. population. Yet during the past 10 years, this group comprised 63% of home sales. Also, 42% of U.S. Hispanics are age 36 or older, putting them in the age group that is looking to buy their second homes. It’s not enough to offer bridge loans to this growing demographic. You can make your product more accessible by providing literature and documents in Spanish and hiring Spanish-speaking loan officers. These actions can help you better serve Hispanic homebuyers. Doing so is an investment in your company’s future. Thirty-five percent of the generation after millennials, Gen Z, are Hispanic. There are about 91 million members of

48

PRIVATE LENDER

Gen Z, and 86% of them said they expect to buy a home one day. Investing in serving Hispanic homeowners in 2020 could support your business for decades to come. Location is another demographic trend to watch this year. Home sales grew in three of the four U. S. regions in November 2019. The highest increases came in the South and West. And many people are moving to cheaper cities. Cities such as New York, San Francisco and Los Angeles are losing people to places such as Charlotte, Phoenix and Charleston, South Carolina. This shift of people to more affordable cities can present an opportunity for your business. Are you in a market that’s experiencing an influx of transplants? If so, devote time and resources to reaching these potential buyers. Bridge loans


bridge loan to rehab a senior housing community in Phoenix. QuickLiquidity closed a $600,000 senior mortgage bridge loan in Kansas City, Kansas, in July. And Dwight Capital originated a $23 million loan on a 228-unit apartment complex in Hattiesburg, Mississippi.

LESS COMPETITION, MORE VALUE

ABOUT THE AUTHOR

JEFF LEVIN Jeffrey Levin is a bestselling author and the founder and

may be the help they need to move from where they live to where they want to be.

OPPORTUNITY FOR COMMERCIAL LENDERS

But they’re also an opening for commercial lenders.

The rental vacancy rate for

the third quarter of 2019 was 6.8%. That’s down from a

high of 11.1% 10 years ago. The

Mortgage Bankers Association Some of the factors influencing residential lending are also impacting commercial lending. For example, there are about 45 million people in the U.S. between 20-29 years old. Renters make up most of this age range. Some millennials are buying their first and second homes. Yet many are still unable to do so because houses are too expensive. Millennial homeownership is about 20% less at this stage than it was for boomers and Generation X. Higher housing prices are an opportunity for single-family lenders.

expects multifamily lending

this year to reach $390 billion, surpassing a projected $359

billion in 2019. Low rates are

also encouraging commercial

construction projects. The U.S. 10-year Treasury yield is trad-

ing around 1.75%, down from 1% in January 2019.

The market is active, but many banks still have tight lending

standards, creating an oppor-

tunity for private lenders, some of whom are already taking

If the housing market continues to grow as expected, mortgages and refinancings will continue to produce positive results for lenders. But in 2020, bridge loans may be an opportunity for both residential and commercial lenders. There’s a strong demand from buyers for their second or third homes. Many of these buyers, though, may need help acquiring their next home. And there’s still room in the market for more rental housing. These conditions provide possibilities for your business. Whether you’re a residential or commercial lender, bridge loans are a window through which you can grow your revenue in 2020. ∞

president of Specialty Lending Group (SLG), a boutique

private real estate lending

company servicing the Washington, D.C., metro area.

Prior to launching SLG, he

was the co-founder and CEO of iWantaLowRate.com and

Monument Mortgage. Levin

is a recognized authority on real estate investing and a

frequent lecturer and panelist. He is a member of the American Association of Private

Lenders and serves on its Education Advisory Committee.

He is the author of the Amazon best seller “The Insider’s

Guide to Private Lending,”

which details his experiences in private lending and advice for individuals looking to get into the business.

Levin earned a bachelor’s

degree from the American

University in Washington, D.C.

advantage. Last year, Thorofare Capital provided a $13 million

WINTER 2020

49


MARKET TRENDS

Funding “Down Under” Explore Australia’s private mortgage industry. by Adam Tilley

Private lending has been practiced in Australia for more than 100 years, although its origins are markedly different from how U.S. private lending evolved.

necessarily a better deal for

of unethical practices at the

scape changed after a series of

Misconduct in the Banking,

the borrower, and the land-

regulatory changes starting in

2000 that were predominantly designed to protect borrow-

ers from over-borrowing and

increase transparency of their contractual obligations. According to the Reserve Bank of Australia, it is estimated that the Australian private funding industry in 2019 settled $20 billion (approximately $US14B). Just as it does in the U.S., private loans in Australia can free up capital, provide greater control of fund distribution and allow clients to maximize tax deductions on interest payments. In addition, private funding in Australia has a higher approval rate due to its flexible nature and the elimination of the middleman, a hurdle often associated with mortgage approval within the banking industry.

50

PRIVATE LENDER

THE LAWYER CONNECTION In Australia, private lending was started by lawyers lending to their client via trust accounts. There were two main reasons that lawyers controlled this market. First, lawyers had money to

Second, loan documentation was facilitated by these very lawyers, which made it easier to get funding and documentation from the same place. It was not

Superannuation and Financial Services industry.

The Royal Commission found that many lenders were more

focused on generating income

than lending responsibly. This

The enactment of the

was evidenced by many people

Investment Act in 2000 meant

ing debt into retirement due to

be licensed to continue this

and property spruikers. Since

most of them ceased the prac-

market has become more strin-

tation side of lending.

paperwork requirements has

TIGHTER SCRUTINY

applications than ever.

Commonwealth Managed

being overindebted and carry-

that lawyers were required to

sales tactics by lenders, brokers

lending. The result was that

then, the residential lending

tice and stuck to the documen-

gent. Adherence to rules and

lend to their clients and knew their businesses intimately.

recent Royal Commission into

Across Australia’s banking

system, the major players have

all come under tighter scrutiny

led the banks to decline more

OPPORTUNITIES FOR PRIVATE LENDING

from the Australian Pruden-

The private funding sector is

(APRA). That’s due to findings

it is increasingly viewed as a

tial Regulation Authority

not immune to regulation, but


viable and easier option for

the purpose and character of

transaction. Clients who cannot

those looking to borrow. Today,

the individual behind the loan

prove their current earnings

the regulations of both the

is acceptable.

private lending and the bank

The amount of red tape appli-

lending industries in Australia are similar to those in the U.S. The consumer market is very highly regulated, and private lenders can still lend to newly created businesses if

cants must get through in order to secure a loan from traditional banking institutions for residential borrowing is highly

or who may have a poor credit rating often find it impossible to secure finance. Consumers are becoming increasingly frustrated with the long and cumbersome processes and are,

regulated and prohibitive for

therefore, turning to private

many on both sides of the

funding groups to assist them.

High net worth individuals and groups looking for opportunities to invest are turning toward online platforms, which bring investors and borrowers together in private or peer-to-peer lending opportunities. All across the region, peer-to-peer lending is gaining momentum, with Australia becoming the largest alterna-

WINTER 2020

51


MARKET TRENDS

tive (online) finance market in Asia-Pacific, excluding China,

“All across the region,

up 88% from 2018.

peer-to-peer lending is gaining momentum, with Australia becoming the largest alternative (online)

The similarities between the

 Q  uicker approval times

due to lower regulatory requirements

interest rate include the loan purpose, size, the loan-to-valuation ratio

ty yal Lo

Integrity

al ion ss

Innovativ e

PRIVATE LENDER

 O  ther considerations for

Pro fe

52

by the borrower’s credit history (risk), terms of the loan and loan assessment

Pre cis ion

Relia bili ty

er stom Cu Care

• Online Portals • Multi-lender Loans • ACH & Direct Deposit • No Note Minimum/Maximum • Property Taxes & Insurance payments • 1098’s, 1099’s, and CA 593-I’s • And more! Contact For More Information.

 I nterest rates determined

Australian and U.S. private

requirement

up 88% from 2018.”

Our Services Include:

for short-term investments for commercial, industrial or residential mortgage lending or property development financing

CROSS-CONTINENT SIMILARITIES

 L ower documentation

Pacific,excluding China,

with seasonal cash flows

 I nterest-only loans, ideal

lending markets are as follows:

finance market in Asia-

 P  erfect for companies

(800) 646-3445

noteservicingcenter.com newacct@noteservicingcenter.com


(LVR), exit strategy and loan term

 R ates can vary signifi-

There are a small group of

to provide a financial capacity

private lenders without licenses

statement that their client can

that can still trade because

cantly from lender to

there is no controlling body;

may even be lower than

gain investors’ trust and less

lender, and in some cases

however, they are less likely to

that of a traditional bank

likely to sell loans. A common

LICENSING ISSUES Most private lenders are licensed through the Australian Securities & Investment Commission and are governed by several laws. These licenses are referred to as an Australian Financial Services License (AFSL). Once they have the

belief is that within five years all private lenders will need to be licensed with an AFSL.

ADDITIONAL COMPARISONS Generally, there are several similarities when comparing the approaches of private funding institutions in Australia to

license, lenders are required

those in North America.

to be audited for compliance

Australia’s documentation pro-

each year and must employ

cess is very similar to the U.S.

a Responsible Manager.

system. In Australia, loan docu-

That person is required to

ments are prepared by the lend-

be approved by the industry watchdog, the Australian Securities and Investment Commission (ASIC). The Responsible Manager must ensure the private lender adheres to regulations and report in a timely manner any breaches they uncover. Investors in private lending do not need accreditation or licensing in Australia.

ers’ solicitor, and the borrowers then sign them with their own solicitors as witnesses. The borrower’s solicitor must provide a certificate that states the solicitor has fully explained the contents of the loan documents. A photograph of the borrower is also obtained ensuring two

afford the repayments. Most private lenders’ funds are sourced from high net-worth individuals or family offices. These investors do not need an accreditation or license to invest in a private mortgage fund. Some private lenders in

ADAM TILLEY

Australia have associations

Adam Tilley has more than

with larger hedge funds and similar institutions. All loans require clear exit strategies, and private lenders are happy to lend to pay out tax debts and facilitate access to cash, which is generally not allowed by the

30 years of experience in the

property finance sector in the Asia Pacific region. He has

experience in commercial and residential property finance and, to date, has overseen

approximately AUD$1 billion of funding in Australasia.

major banks and credit unions.

Tilley started his banking

In short, in Australia, like the

and his understanding of

U.S., there are opportunities for private lenders because of the more stringent regulations surrounding traditional lenders such as banks. And although historically Australia’s private lending industry has had even fewer regulations than its American counterpart, that is starting to change. Legislation during the past several

forms of identification are

years has tightened up lending

provided and certified by their

requirements, even for private

solicitor. In addition, the bor-

lenders. Still, for those who

rower’s accountant also needs

ABOUT THE AUTHOR

career at ANZ McCaughan, finance and credit has helped hundreds of companies and

corporations reach their goals. Tilley is a Responsible

Manager of Pacific 8 and

has the qualifications and

prerequisites to provide an

extensive range of services

to all sectors of the property finance market.

Tilley has a Diploma in

Finance, a Certificate IV

in Mortgage Broking and successfully completed an ASFL course for

Responsible Managers.

understand how the system works, opportunity exists. ∞

WINTER 2020

53


LENDER LIMELIGHTÂ WITH THOMAS STANDEN

CLIMB TO EXCELLENCE Thomas Standen IV has ascended the ladder of

success one service and one system after another. by Katie Bean


LENDER LIMELIGHT WITH THOMAS STANDEN

After stints as a firefighter, cook, waiter, housekeeper and construction laborer, a fateful broken wrist helped steer Thomas Standen IV into working at his grandparents’ business, Note Servicing Center.

company to adopt the Note Ser-

vicing Center name in 2005.

The company also has shifted

its focus over the years, to some extent hastened by the Great

Recession. Around 2007-2008,

the company stepped back from servicing all types of loans to In 2003, Standen was at a family party his grandparents, Tom and Roberta Standen, were hosting. Surprising everyone, Tom announced that he wanted someone in the family to help with the business he founded in 1984. There were no takers.

“One of Standen’s contributions to the company’s evolution is the automation of processes.”

About six months later, Stan-

den fell off a ladder while working construction and broke his right wrist. Unable to swing

a hammer, he decided to give the office job a try. Then 23,

ing loans, which resulted in “no extra benefit and just a ton of headache,” Standen said.

Today, he’s president and CEO

the automation of processes.

found he had a knack for it.

to the company’s evolution is

of Note Servicing Center.

“What I noticed as soon as we

Roberta remains the company’s

started working with brokers

director. Tom’s grandfather

wanted to know what was hap-

Thomas IV became president

Particularly when cash flow

owner and serves as a company

and private lenders is that they

died in 2015, which is when

pening all the time,” he said.

and CEO.

BRANCHING OUT

was tight during the recession, everyone involved wanted to know where the money was at every stage. Standen developed

The work that Note Servicing

an automated email system that

and that’s why we chose it,”

ever his company received a

Center does “is all in the name,

California Equity Corporation.

PRIVATE LENDER

loans were mainly nonperform-

One of Standen’s contributions

The company was founded as

56

loans. At that time, purchased

Standen learned on the job and

Standen said.

Standen talked to his grandfa-

As the company grew, it began

Standen couldn’t imagine being

evolved into more of a white-

ther briefly about the work, but

to service more states and

stuck in an office. He preferred

label back office operation.

to work with his hands.

focus on privately originated

Those developments led the

would email lenders whenpayment. “Then that blossomed into how much we received, and then it was how we broke the pay-

ment down, and then it turned into when can you expect the

payment and how much are you going to get,” Stranden said.


Some lenders also wanted to know when a borrower was

GET TING TO KNOW THOMA S

late on payments and how

many notices the borrower

had received. While all of this was being logged in an online database, Standen said, he

discovered that many lenders

THIS OR THAT

TEXT OR CALL? TEXT, BU T NOT IF YO U’RE A CUSTOMER. IN THAT CASE, EMAIL.

weren’t keen to log in and dig up the information. That prompted

him to create email notifications for all steps of the process.

“It’s the double-edged sword,

you know—some people hate emails, and others only want

email,” he said. “You can’t make everyone happy, but they just

learn to live with being overly communicative.”

ANDROID OR APPLE? APPLE IPHONE. IT WAS MY FIRST SMARTPHONE AFTER SWITCHING FROM A FLIP PHONE. I BO UGHT SO MAN Y APPS THAT I’M JUST TOO FAR IN VESTED NO W.

PEN OR PENCIL? PEN. O W N IT IF YO U’RE GOING TO DO IT. POOL OR POKER? POOL. POOL IS M ORE ABO U T ANGLES AND MATH, AND POKER IS M ORE ABO U T PEOPLE AND READING THEIR FACES.

MOUNTAIN OR BEACH?

The latest project Standen is

spearheading is automating the loan boarding process. Lenders will work through the website

IT USED TO BE M O U N TAINS ALL THE TIME AND BEACH NONE OF THE TIME, AND NO W IT’S A MIX OF THE T WO.

COMEDY OR MYSTERY? COMEDY. I’D RATHER SIT DO W N TO WATCH SOMETHING THAT MAKES ME LAUGH AND SOMETHING THAT I DON’T HAVE TO THINK ABO U T.

to set up their loan, and the

system will notify them of the documents and information needed to complete setup.

Standen said he’s creating the system in-house, and his “big frustration” is wrangling the

different systems the company uses into communicating with each other.

ALWAYS LEARNING Though much of his training has been on-the-job, Standen took college classes while work-

FAVORITES

MOVIE? I HATE TO DO THIS BECAUSE IT SHOWS YOU HOW BIG OF A GEEK I AM, BUT ‘AVENGERS: ENDGAME.’

PLACE YOU'VE TRAVELED? KAUAI, HAWAII, WHERE I TRAVELED WITH MY WIFE AND KIDS.

SEASON? SPRING BECAUSE IT’S NOT HOT YET BUT NOT COLD, EITHER. GUILTY PLEASURE? A GOOD HAMBURGER, SPECIFICALLY A BURGER YOU HAVE TO HOLD WITH TWO HANDS.

WINTER 2020

57


LENDER LIMELIGHT WITH THOMAS STANDEN

ing at Note Servicing Center to learn more about business, management, leadership and administration. He earned his MBA in 2009. “The more time I spent in the business and around the people in the business, the more you realize how important education is and staying up with regulations and things that are going on in the real world,” he said.

are what Standen says keep

Though those challenges can

Recession was one of the big-

him excited about his job.

be at times unnerving or frus-

gest challenges Note Servicing

trating, he said the challenge is

Center has faced in its 35 years

“I know it sounds odd to say, but it’s the challenge—the challenge of complying with regulations, the challenge of working with lenders, working with borrowers, working with people. And through all of these regulations, to make sure we’re still complying to make

what keeps him going. “Dealing with the everyday struggle—there is always something different, there’s always something new that you don’t know.”

PERSISTENCE AND PERSEVERANCE

sure that people are still getting

in business. “During that time, we talked about closing up shop,” Standen said, though he noted “it wasn’t a very big conversation.” Instead of closing, the team did whatever it took to keep the company going. The staff was cut to just five—Standen, his

Surprisingly, regulations and

what they deserve, what’s ethi-

Just as it was for many compa-

grandparents, an uncle and one

other demands of the industry

cal, what’s sound,” he said.

nies in the industry, the Great

other employee.

58

PRIVATE LENDER


The company’s growth is

“This is a tough business—it’s not always going to be fun. It’s rarely going to be easy.” — T H O M A S S TA N D E N I V

certainly worthy of Standen’s excitement.

“The amount of work we do now in a month is what we did in a

year back then. A couple of years

ago, we did that much in a week,” he said. “To sit back and see that kind of action, it’s incredible.”

ALL IN Standen’s advice to others in the industry reflects his experience. “This is a tough business—it’s not always going to be fun. It’s rarely going to be easy,” he said.

Standen elaborated on that theme: “It’s OK to make a mistake; it’s not OK to hide it, and it’s not okay to do it again. “We deal with other people’s money, we deal with their livelihood, we deal with their life, their homes, we deal with their investments. You can’t hide something that you did, even if you didn’t mean to do it, even if it was someone else’s fault. You can’t give excuses—this business doesn’t care,” he said. “When you make the mistake, you tell them how either you fixed it or you will fix it, and tell the truth, and write the check when you have to.” ∞

Lenders and originators have a long memory, he said, so there’s only one chance to make a first impression. There’s also no opportunity to take a He recalled stories of his

“We’ve been through all the

grandparents eating cereal

tough, hard times, and we’ve

for dinner. “Being the owner,

seen this type of thing play out

(Roberta) had to pay the

before. We know what actions

employees first when you need

to take in different situations

them to do the work so that we

because I’ve been through a

can keep moving forward,” he

lot worse.”

said. “We all sacrificed to keep

Having experienced those hard

the business alive.” The lessons they learned during that time benefit the business today.

times gives Standen perspective. “It makes times like this when we have 10-12 people here … that much better,” he said.

“We already know the answers

“I’m able to reminisce about

to the questions,” Standen said.

the bad old days.”

“me” day because every day is about the clients and employ-

ABOUT THE AUTHOR

ees. In particular, he stressed that others in the industry are watching because companies like his are dealing with other people’s money. He doesn’t take that responsibility lightly, and he recalled advice from his grandfather on the subject. “My grandfather always told me there’s no right way to do a wrong thing, so everything that you do, it always has to be

KATIE BEAN Katie Bean is a former newspaper and magazine editor

who loves telling the stories of businesses and great leaders. She is based in Kansas City.

right,” he said.

WINTER 2020

59


CONFERENCE REVIEW 10TH ANNUAL CONFERENCE HIGHLIGHTS E a c h ye a r, t h e A s s o c i a t i o n o f Pr i v a t e L e n d e r s h o s t s t h e p r i v a t e l e n d i n g

i n d u s t r y 's l a r g e s t c o n f e r e n c e. T h i s ye a r t h e c o n f e r e n c e w a s a l s o o u r 10 t h a n n i ve r s a r y c e l e b r a t i o n , s o i t p r o m i s e d t o b e o u r l a r g e s t — a n d b e s t — ye t . We f u l f i l l e d t h a t p r o m i s e i n s p a d e s .

3

"We are thrilled with the success of our 10th Annual Conference. Sixty sponsors and 550 guests came together to make this our best-attended event yet, and the largest the private lending

D AY S

industry has to offer. The feedback from everyone has been tremendous. It's exhilarating to see

20

build on this success for next year's conference."

how my team's work throughout the year has come to fruition. We look forward to continuing to LI N DA H Y D E | Managing Director, American Association of Private Lenders

SESSIONS & AC TIVITIES

60 SPONSORS

553 AT T E N D E E S

23,776 W H OVA E V E N T APP INTER AC TIONS 60

PRIVATE LENDER

T he AAPL team with former congressman Barney Frank. From left: Craig Johnson, Presidents’

Circle; Linda Hyde, managing director of AAPL; Kat Hungerford, project development manager at AAPL; Barney Frank, former congressman; Eddie Wilson, chairman and CEO of AAPL.


L  eft: From left: Jacob Sacks and

Danielle Salber of Corefund Private Lending in front of our giant Cube Stack. Photo Courtesty of Danielle Salber, Corefund Private Lending.

Right: Ray Sturm, CEO and

co-founder of Title Sponsor

AlphaFlow, during his main stage session. Ray gave listeners

never-before-heard market insight pulled from AlphaFlow’s wealth

of data analytics in the residential bridge loan market.

OUR CONFERENCE- GOERS AGREE WITH US! “AAPL has been the most impactful for us

because the owners all show up. That creates

an opportunity to go beyond biz dev and talk about company-shifting partnerships, have

candid chats about industry challenges and form relationships that can ultimately make your career. If you’re in the industry and haven’t been before, make it happen!" R AY S T U R M | AlphaFlow, Title Sponsor 2018- 2020

“This conference is the one in which key

principals of every major institution show up.

Effectively, this is a room of #decisionmakers." N E M A DAG H BA N DA N | Geraci LLP, Platinum Sponsor 2015-2020

“The AAPL Annual Conference gives our

"Appraisal Nation has attended the AAPL

while staying up to speed on best practices,

and attendance just gets better and better.

technological breakthroughs. It has been fun

lenders that use our services and nearly

growing industry these past 10 years.”

What a great place to meet all your clients

team the chance to celebrate our industry

for over 8 years now. Every year its content

legislative updates, new tax initiatives and

Appraisal Nation has over 800 private

to see AAPL grow the conference around a

half of them attend this one conference.

PAU L JAC K SO N | Residential Capital Partners, Title Sponsor 2019-2020

in one spot."

M I K E T E D E SCO | Appraisal Nation, Sponsor 2014-2019

“I have been to all the big private money

conferences over the last six years, and AAPL is truly in a league of their own. Every

prominent company in the industry is there,

and the keynote speakers are always fantastic.” JAC K H E LFR I C H | Civic Financial Services, Sponsor 2015—2019

WINTER 2020

61


CONFERENCE REVIEW

A APL’s packed exhibit hall, which featured 60 sponsors and hosted 550 attendees.

Sponsorship sold out for the third year in a row—this year more than eight weeks ahead of the event.

Power Networking hosted by AJ Poulin of

The Mortgage Office. Participants lined up

to give 30-second elevator speeches in this

highly energetic (and LOUD) activity, spurred on by AJ and the AAPL team.

62

PRIVATE LENDER


Eddie Wilson, AAPL’s chairman & CEO, during the State of the

Association, where he announced AAPL’s new ownership, online

certification courses, legislative successes, the launch of the new resource directory and more.

Top: Paul Jackson, principal of Title Sponsor Residential Capital Partners, during his main stage session. In a riveting diversion from more commonly discussed topics, Paul outlined how the

core principals of golf can be applied to private lending to ‘tee listeners up for success.’

Bottom: Our Certified Private Lender Associate course,

Thursday, Nov. 15; taught by Melissa Martoralla, Geraci LLP (AAPL’s general counsel).

WINTER 2020

63


CONFERENCE REVIEW L ive-prepared omelet breakfast with

mimosas and bloody marys in the AAPL Conference Exhibit Hall.

A ttendees of the AAPL/Think Realty

Presidents’ Circle Exotic Car Race Experience at SpeedVegas. From left: Marco Santarelli, Norada Properties; Eddie Wilson, AAPL;

Tom Olsen, Good Success; Michael Tedesco, Appraisal Nation; Linda Hyde, AAPL;

Rollin Hyde; Nancy Wallace-Laabs, KBN

Homes LLC; Brian Laabs, KBN Homes LLC;

Aaron Norris, The Norris Group; Jeff Levin, Specialty Lending Group; Kevin Kim,

Geraci LLP; John Beacham, Toorak Capital Partners; Melissa Martorella, Geraci LLP;

Nema Daghbandan, Geraci LLP; Ruby Keys, Geraci LLP; Craig Johnson, Think Realty; Michael Tedesco, Appraisal Nation.

64

PRIVATE LENDER


F ormer Congressman Barney

Frank during his keynote speech on the impacts and outcomes of his cornerstone legislation, the

Dodd-Frank Wall Street Reform & Consumer Protection Act.

L eft: AAPL/Think Realty

Presidents’ Circle members all

decked out for their Exotic Car

Race Experience at SpeedVegas.

From left: Nema Daghbandan, Geraci LLP (AAPL’s general

counsel); Kevin Kim, Geraci LLP; John Beacham, Toorak Capital Partners; Melissa Martorella,

Geraci LLP. Photo courtesy of

Nema Daghbandan, Geraci LLP. Right: For its 10th Annual

Celebration, AAPL booked the OMNIA nightclub. The sold-out and overcapacity

VIP reception hosted 250+

people for cocktails and hors

d'oeuvres, all overlooking the stunning Las Vegas strip.

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65


AWARD WINNERS C O N G R AT U L AT I O N S T O O U R 1 0 T H A N N U A L C O N F E R E N C E A W A R D W I N N E R S As the largest and first trade association for private lenders, we have pledged to champion the private lending industry as a viable alternative to conventional finance and to promote the industry’s reputation and future growth. We believe, as part of that mission, that it’s crucial to recognize those in the industry who look beyond their own businesses to elevate the private lending profession. Our Excellence Awards showcase peer-nominated members who have leveraged their resources to solve problems, advance the industry and professional performance, kick-start innovation and improve their communities. We announce the winners—by popular vote—at our Annual Conference. 2019 saw 12 nominees, narrowed to four winners.

During the single month that online voting was open, these winners earned a combined 631 votes and A  APL’s Annual Excellence Awardees. From left: Michael Tedesco, Appraisal

1,500+ views.

Nation, Service Provider Member of the Year; Nathan Schinder, Peerstreet,

The 2019 awardees are below, but first: 2020 nominations

Noble Capital, Private Lender Member of the Year; Jacob Therrien, Bridge

awardees will also be featured on the nomination page

Community Impact; Linda Hyde, AAPL managing director; Chris Ragland,

are now open at aaplonline.com/awards. Our 2019

Loan Network, Rising Star; Eddie Wilson, AAPL chairman & CEO.

until 2020 voting opens on September 1.

R I S I N G S TA R From Jacob's nomination:

What Jacob had to say about it:

expansion and evolution in the private lending space

the American Association of Private Lenders and their

“Jacob has been a major factor in the company’s

this year—Bridge Loan Network now has 251 active

lenders and close to 2,000 active brokers. He’s worked diligently to ensure users understand everything the platform has to offer.” JACO B T H E R R I E N

Bridge Loan Network

— Erica Sikoski, RCN Capital

“When I first came to Bridge Loan Network, it was clear members were the gold standard in the industry. The

Annual AAPL Conference and The Excellence Awards shine a bright light on the amazing work done by lenders and

service providers in the space. Being awarded this year’s Rising Star at the 10th Annual AAPL Conference was

beyond humbling. The opportunity to stand on stage

amongst the leaders of our industry and be recognized for all our hard work was truly gratifying.”

66

PRIVATE LENDER


MEMBER OF THE YEAR, LENDER From Chris's nomination:

What Chris had to say about it:

in getting its message out. Though credit is due to

by AAPL, but the credit goes to the amazing team of

“This year, more than ever, I have seen AAPL succeed the effectiveness of its leadership, this year Chris has

been one of those unique variables that has propelled AAPL’s value to its members, brand awareness and overall significance.” C H R I S R AG L A N D

— Romney Navarro, Noble Capital

Noble Capital

“It was a true honor being named Member of the Year people at Noble Capital. Our team has worked with so

many of our peers and strategic partners to further the continuing education programs, advocacy of healthy legislation, and town hall meetings of AAPL. It’s an

exciting time to be contributing and involved, and I look forward to the years ahead.”

MEMBER OF THE YE AR, SERVICE PROVIDER From Michael's nomination:

What Michael had to say about it:

contagious. He’s at the forefront of what’s going on

of The Year. Appraisal Nation has spent the last decade

“Michael brings a passion and expertise that is

in the industry, bringing his one-step-ahead insight to his clients and colleagues and providing a much-needed service to private lenders and their business processes.” M I C H A E L T E D E SCO

“What a humbling honor being named Service Provider dedicating our service and process to making valuations

for private lenders more reliable with less risk. This award signifies that all of the hard work protecting our clients has not only been recognized but appreciated.”

— Valley Matlaga, Appraisal Nation

Appraisal Nation

C O M M U N I T Y I M PAC T From Nathan's nomination:

What Nathan had to say about it:

product that has a direct impact on borrowers’

of PeerStreet's impact on communities across the country.

“Nathan led the charge in opening up a new loan ability to purchase and make more properties available for rent. The widespread impact in communities is palpable.”

— Rabekah Jack, PeerStreet N AT H A N S H I N D E R

“I was honored and humbled by AAPL's recognition AAPL's Excellence Awards highlight the meaningful

and lasting changes that an industry known for ‘fast

money' can—and should—have, with honest people

utilizing technology innovation to serve and improve our communities.”

Peer Street

WINTER 2020

67


ECONOMIC FORECASTÂ

68

PRIVATE LENDER


2020: WHAT’S ON TAP FOR LENDERS The housing market holds its own amid economic and political challenges. by Robert Greenberg

T

rade tensions,

continue to be challenges, just

ness invest-

As the nation’s economic

lackluster busiment, a volatile

equities market and politi-

cal uncertainty could create economic challenges in the

new year; however, the real estate industry—and the

lending market that supports it—remain on relatively firm footing.

as they were in 2019.

expansion enters its eleventh straight year, Fannie Mae

predicts real gross domestic

product growth to be around 1.9% in 2020, aided by the

return of accommodative fiscal policies, easing trade tensions and healthy consumer spending. In other words, decent

That’s not to say there won’t be

but not spectacular economic

lenders, real estate investors

the year ahead.

challenges in 2020 for private

growth appears to be on tap for

and others who make their

Volatility—be it in foreign

living supporting the real

estate investment market.

Indeed, constrained inventory

and affordability concerns will

trade or in the equity mar-

kets—was the norm during

much of 2019, but even with

such unsettledness, the hous-

ing market picked up strength during the second half of the year. In a late-year housing commentary, Fannie Mae noted that residential fixed investment grew in the third quarter of 2019 by a strong 5.1% annualized pace amid contributions from single-family housing construction, home improvements and brokers fees.

THE MORTGAGE MARKET For lenders, there’s stability, but not much growth expected in the mortgage market as the new year dawns. The Mortgage Bankers Association (MBA) expects total mortgage originations for 2019 to total about $2.06 trillion—the best since 2007 (which saw $2.31 trillion). Going forward, the MBA predicts a decline in total originations for 2020 to $1.89 trillion. The forecasted decline is attributed to an expected fall in refinances. A global economic slowdown coupled with political uncertainty kept mortgage rates in 2019 below experts’ forecasts, which gave refinances a big boost. Some of that refinance activity is expected to spill into the first half of 2020, according to Mike Fratantoni, MBA’s chief economist and

senior vice president for research and industry technology. Continued low mortgage interest rates will be good news for the real estate investors that private lenders count among their core clients. Should interest rates remain low, investors may be more inclined to continue using financing as opposed to all-cash purchases in the fix-and-flip and rent-to-hold segments of the housing market, especially in markets where home prices have reached new highs. This feels like really good news for private lenders. The most recent data available from ATTOM Data Solutions shows that for third quarter 2019, financing on investor residential real estate deals dipped to 41.5% compared to 46% in the year-ago period. Still, higher-cost cities showed higher rates of investor financing. San Jose, California, had the highest rate of investor financing (59.4%) followed by Providence, Rhode Island (56.9%), Seattle (56%), Boston (54.9%) and San Diego (53.4%). Profits in the home-flipping business are down. Investors reported a 40.6% return on investment in third quarter 2019 compared to the original acquisition price, down from a 41.1% percent gross flipping ROI in second quarter 2019 and

WINTER 2020

69


ECONOMIC FORECAST

down from 43.5% in the third quarter of 2018.

REALTOR.COM FOREC A S T FOR KEY HOUSING INDIC ATORS Housing Indicator // Realtor.com 2020 Forecast Mortgage Rates // Average 3.85% throughout

the year, 3.88% by end of year

Existing Home Median Sales Price Appreciation // Up 0.8%

Existing Home Sales // Down 1.8% Single-Family Home Housing Starts // Up 6% Homeownership Rate // 64.6%

As projected and realized profits on home flipping dip, some real estate investors are turning more of their attention to the buy-and-hold rental market. Many private lenders are keenly aware of this and have scrambled to fine-tune their lending programs in order to better serve the buy-and-hold market.

The MBA’s mortgage credit availability index rose for three straight months from September to November 2019 (Decem-

70

PRIVATE LENDER

ber statistics weren’t available at press time), an indication

that credit was loosening as the

year drew to a close. The jumbo index climbed to a record high,

as investors showed a penchant for buying purchase loans with lower credit scores and higher LTV ratios, the MBA said.

HOUSING PRICE INCREASES TO DECELERATE Affordability will continue to be a major issue for the


housing market throughout

home prices growing at a more

supply enters the pipeline via

2020. Single-family homes

modest rate. This should be

new construction but amid

and condos sold for a median

good news for housing afford-

tight inventory. Slowing price

price of $270,000 in the third

ability. Due to housing price

growth coupled with contin-

quarter of 2019, up 8.3% from

appreciation, tight inventory

ued low mortgage rates bode

2018 to a new high, according

and stiff competition with first-

well for the housing market,

to ATTOM Data Solutions.

time homebuyers, real estate

especially for millennial first-

Median home prices, the real

investors have faced acquisition

time homebuyers and investors

estate data company said, were

challenges, especially at the

operating in the affordable

not affordable for average wage

highly competitive affordable

single-family segment.

earners in 74% of the counties

end of the housing market

Realtor.com predicts home

it studied nationwide.

where many real estate inves-

prices will fall in a quarter of the

Price acceleration won’t hit

tors operate.

the brakes entirely in 2020,

However, housing experts

kets, including Chicago, Dallas,

although experts expect a

expect modest price increases

Las Vegas, Miami, St. Louis,

tapping of the brakes with

in 2020 as additional housing

Detroit and San Francisco.

100 largest metropolitan mar-

HOME SALES TO DIP Realtor.com also predicts that sales of existing homes will dip by 1.8% in 2020. The shortage of homes for sale could become particularly acute, perhaps even the worst in U.S. history, once the nation hits the spring/summer home buying season when more millennials are expected to enter the market. Lack of inventory is expected to continue to be a significant challenge for real estate investors in 2020.

HOUSING AND INTERES T R ATE FOREC A S T, 12/03/2019 Housing Activity Total Housing Starts

2015

2018

2019

2020

2021

1,178

1,209

1,250

1,266

1,303

1,323

713

786

852

873

885

920

925 399

Multifamily

395

392

357

377

379

383

503

562

617

615

591

708

712

4,623

4,822

4,907

4,742

4,769

4,885

4,928

New Single Family Sales

Interest Rates

2017

1,107

Single Family

Existing Single-Family Home Sales

2016

2015

2016

2017

2018

2019

2020

2021

Federal Funds Rate

0.38%

0.53%

1.38%

2.38%

2.17%

1.50%

1.45%

90 Day T Bill Rate

0.05%

0.32%

0.95%

1.97%

2.11%

1.45%

1.34%

Treasury Yields: One Year Maturity

0.32%

0.61%

1.20%

2.33%

2.13%

1.95%

2.05%

Ten Year Maturity

2.14%

1.84%

2.33%

2.91%

2.17%

2.13%

2.25%

Freddie Mac Commitment Rates: Fixed Rate Mortgages

3.85%

3.65%

3.99%

4.54%

3.92%

3.88%

4.01%

ARMs

2.94%

2.88%

3.20%

3.82%

3.56%

3.40%

3.50%

Prime Rate

3.25%

3.51%

4.10%

4.90%

4.97%

4.50%

4.45%

Data are averages of seasonally adjusted quarterly data and may not match annual data published elsewhere. Source: www.housingeconomics.com

WINTER 2020

71


ECONOMIC FORECAST

ABOUT THE AUTHOR

ROBERT GREENBERG Robert Greenberg is Patch of

Land’s chief marketing officer.

The inventory challenge has

strong. That is good news for

homeowners who are staying

this market. Rental housing

means they aren’t putting

for millennials priced out of

also been exacerbated by

private lenders catering to

in their homes longer, which

will remain a good option

inventory into the first-time

the market or who desire to

homebuyer pipeline. The typ-

remain renters.

years in their home before sell-

HOUSING’S DOWNSIDE RISKS

ical homeowner now stays 13

ing or trading up, according to

Redfin. That number was eight years in 2010, Redfin reports. The growing phenomenon of “aging in place” has also had

the effect of reducing the number of homes for sale. Freddie

Mac says homeowners between the ages of 67 to 85 are remaining homeowners longer and

are causing a shortage of 1.6 million homes.

Besides homebuyer demand,

demand for rental housing of all types also remains very

72

PRIVATE LENDER

The presidential election, meanwhile, is getting into full swing with a slew of Democratic

candidates campaigning. On the Republican side, the eventual election impacts of President Trump’s impeachment trial

acquittal remain uncertain. Besides political risks, consumer concerns about an

economic cycle long in the

tooth and consumer caution

that is inevitable in an election

year is a downside risk for the housing market. Although there isn’t a direct connection between a presidential election and the housing market, it is a potential wild card, realtor.com says in its Housing 2020 Forecast. “Business optimism and investments, along with consumer confidence and spending do influence economic output, and can also influence housing activity,” the report notes. “The 2020 elections will be closely watched by consumers and businesses for indications of potential changes.” Overall, it may be much of the same for the national housing market with supply-demand and affordability driving some housing markets to thrive and others to contract. ∞

His professional experience

includes more than 25 years in marketing working with

familiar consumer brands such

as Pepsi-Cola, Anheuser-Busch and Sara Lee as well as B2B

experience in retail, technology, finance and real estate.

Recently, Greenberg led the marketing efforts for 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 imple-

mentation 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.


Combining strengths to bridge industries. DEEP INDUSTRY CONNECTIONS. We’re partnering to help you build relationships across the REI landscape. A WEALTH OF EXPERTISE. Looking for a leg up? We have the answers that will catapult your business. EXPANSIVE MARKET REACH. Step into the spotlight with media that reaches tens of thousands weekly.

Join today at aaplonline.com/presidents-circle.

WINTER 2020

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LEGALÂ

Is Your Loan Enforceable in Bankruptcy Court? by Alexa Stephenson, Esq.

With bankruptcies on the rise, it is important for lenders to know the ins and outs to ensure full repayment.

A

As 2019

former heavyweights such as

number of

Barneys New York and Sugarf-

ended, the

Forever 21, Payless Shoesource,

bankruptcy

ina increase, the next economic

filings nationwide appear to have increased to a record high for the fifth year in

a row. Granted, the number

of bankruptcy filings in 2019

surpassed 2018 only by a nom-

inal 0.16%, with the American Bankruptcy Institute reporting 704,414 filings through

November 2019 compared to the 703,283 filings through

November 2018. Still, as the

number of Chapter 11 petitions and bankruptcy filings by 74

PRIVATE LENDER

downturn may be just around the corner.

ruptcy filings, foreclosures and repossessions in 2019. Montana and Georgia had over 30% more foreclosures statewide in 2019. Foreclosures in San Antonio, Texas; Portland, Oregon; and

For some areas in the U.S., the

Tucson, Arizona, were up over

rather than later. While

foreclosed on one in every 500

downturn may come sooner

median real estate list prices are down a few percentage

points nationwide, 23 states

saw record increases in bank-

ruptcy filings in 2019. Arizona, California, Florida, Georgia,

21%; and lenders in Maryland housing units.

WHY SO MANY BANKRUPTCIES?

Illinois, Maryland, Michigan,

So, why are we experiencing

witnessed increased bank-

of bankruptcy filings and

Montana, Oregon and Texas all

the record-breaking number

foreclosures that are slowly inching their way up to Great Recession levels? The American Bankruptcy Institute reported that personal expenditures have steadily increased since 2010, rising over $13.4 trillion by the end of 2019. With these expenditures inevitably comes an increase in consumer debt. As more consumers accumulate debt and fall behind on their payments, bankruptcy can be seen as a way to delay repayment. Indeed, many experts speculate that the current economic climate can be seen as the


result of a combination of increased spending, reduced interest rates, less stringent credit lending requirements, reduced business investment spending and trade conflicts. While the true reason is up for debate, all experts seem to agree that bankruptcy filings are steadily increasing, with no end in sight.

WILL I GET REPAID?

(like the property you took as collateral for the loan).

that your lien will be stripped

the ins and outs of bankruptcy to ensure you are repaid in

Although borrowers have a

Generally, you can and will be

to choose from, there has been

ruptcy case. If the debtor or

than ever for lenders to know

full. It is no secret that filing bankruptcy is a tool that borrowers do not hesitate to use to temporarily drag out or halt a foreclosure sale. Borrowers flock to the bankruptcy court to take advantage of the automatic stay that requires creditors to maintain the status quo the minute the bankruptcy petition is filed. The automatic

With ever-increasing chances of defaulting borrowers filing bankruptcy to avoid repaying their loans, it is more important

stay prohibits the creditor from taking any action against the debtor (i.e., the borrower), the estate and the debtor’s property

range of bankruptcy chapters an unprecedented increase

in Chapter 11 filings, which

involve a more complex set of procedures for both borrow-

ers and creditors. As a result,

secured lenders like you must deal with a longer and more

expensive time period before

you will be repaid in full. But, the news is not all bad—con-

trary to popular myth, if your borrower files bankruptcy, it does not automatically mean

or discharged in its entirety. paid in full through a bank-

trustee don’t take any action, you will be able to collect

default interest, late fees, principal, attorney’s fees and other costs—provided, of course,

that these charges are included in your loan documents. Most secured liens can get through bankruptcy unscathed and

are paid in full by the collateral being sold in the bank-

ruptcy case or when the lender forecloses after getting relief WINTER 2020

75


LEGAL

from stay or the case being

“Another myth is that your lien will be stripped (i.e., reduced) any time your borrower files bankruptcy. This is untrue.”

dismissed. As always, however, there are some exceptions.

INTEREST RATES, ATTORNEY FEES AND LIEN STRIPPING It is important to note that the bankruptcy court will enforce whatever state law governs your loan documents. For example, high rates of default interest in California may be deemed an unenforceable penalty that

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76

PRIVATE LENDER

cannot be charged on the loan under California state law. And, if you cannot charge high rates of default interest in state court, then you will not be able to charge that same default interest rate in the bankruptcy court either. If the debtor or trustee file a claim objection or adversary proceeding, you can find yourself fighting to keep the default interest and proving to the court that the default interest is rationally related to the damages you incurred when the borrower defaulted on the loan. Similarly, if your attorney’s fees provision in your note and deed of trust are not broad enough or are subject to a “reasonableness” requirement, the debtor may object to the inclusion of certain fees in your payoff demand in the bankruptcy court. As with most litigation, careful underwriting will prevent headaches in court later. Another myth is that your lien will be stripped (i.e., reduced) any time your borrower files bankruptcy. This is untrue. Debtors can strip or reduce your lien only in certain circumstances, which are by and large not the norm. For example, debtors can only strip a lien when the creditor is undersecured (i.e., the debt owed to the creditor exceeds the fair market value of the collateral). If the property securing your lien has


plenty of equity, you don’t need to worry about the debtor successfully stripping your lien. Furthermore, debtors are

prohibited from stripping

undersecured liens in Chapter 7 cases and cannot strip first

position liens secured by the

debtor’s primary residence in

a Chapter 11 or Chapter 13 case.

Also, in Chapter 11 and 13 cases, debtors cannot strip junior

liens secured by the debtor’s

primary residence unless the

junior lien is totally underwater. In other words, if there’s

some value in the property over and above the amount of any

lien senior to yours, you don’t

need to worry about the debtor

successfully stripping your lien. As you can see, the many exclusions on lien stripping prohibit your borrower from reducing

your lien balance as soon as a bankruptcy case is filed.

Overall, the general rule is that a secured creditor’s lien “rides through” bankruptcy unaffected. Nevertheless, you should still take affirmative steps to protect your claim, including, but not limited to, filing:

01 P roof of Claim to ensure the debtor, trustee and judge know how much you are owed as of the date the bankruptcy case was filed.

02 A n objection to the

debtor’s proposed plan to repay its debts if the plan does not propose to pay you in full.

03 A motion for relief from stay to allow you to continue to foreclose and/or collect against your borrower.

04 A n adversary proceeding complaint to deem

your debt nondischargeable so it will exist after the bankruptcy case is closed, especially if you are holding unsecured debt. Given that the average bankruptcy case (if the borrower is unsuccessful in reorganizing and repaying its debts per the proposed plan terms) is less than one year, having an appro-

priate strategy in place is crucial to ensuring you are repaid in full and as quickly as possible. Moreover, as bankruptcy

filings continue to increase nationwide, knowing the ins and outs of the bankruptcy court, your rights to be repaid in full per the terms of your loan documents and your procedural options are more important than ever. As Benjamin Frank-

ABOUT THE AUTHOR

ALEXA STEPHENSON Alexa Stephenson is an asso-

ciate attorney in the litigation and bankruptcy department

of Geraci LLP, AAPL’s general

counsel. Stephenson has more than three years of experience

helping investors, lenders, loan servicers, foreclosure trustees, brokers, real estate agents,

creditors, businesses, officers

and directors with a vast array

of legal and compliance issues in state, federal, bankruptcy and administrative actions.

lin said, “By failing to prepare, you are preparing to fail.” ∞

WINTER 2020

77


LEGISL ATIONÂ

LETTER FROM THE EDITOR by Kat Hungerford

78

PRIVATE LENDER


I

t’s officially been a year since we

launched the Gov-

ernment Relations

Committee. With that launch, we added advocacy to our

pillars, becoming the private

lender association for educa-

tion, advocacy and ethics.

As we closed out our first year as an advocate for the industry, we looked at our successes and struggles, evaluated how we might shore up our weaknesses, and thought long and hard about our strategies. Of paramount importance was appraising the ROI of our grassroots methods and considering what we might achieve by adding a lobbyist to our strategy. I’d like to delve into that discussion more, but first, the spoiler: We will continue to grow our groundswell efforts and reserve lobbying efforts for select needs that grassroots initiatives cannot easily fill. That decision is largely because of you, our members. But it’s also due to the position the private lending community currently holds within the larger financial industry. In early 2019, we convened on Capitol Hill, meeting with the offices of several senators on the Committee on Banking, Housing and Urban Affairs

“When our private lender cohorts met on Capitol Hill and in Florida and told their stories, staffers and legislators alike began to lean in.”

lenders tell the story of who they are and what they do. Our membership is not made up of faceless and publicly held entities. Rather, it consists of small, privately held business owners who, through hard work and care, have grown the industry to the size it is today. We are people who care about the communities in which we operate and who see firsthand that our financing serves more than the immediate borrower

and the Committee on Finance to discuss the Dodd-Frank Act and HMDA reporting

requirements. At the state level, we met with several Florida

legislators during our fight to

 A  fter private lenders have

and property. It also buoys

fulfilled their purpose,

local jobs through the largely

are the end lienholder via

of the loans.

institutional lenders often

property-improvement nature

traditional means.

These are not narratives that

 P  rivate lenders, more so

come across as genuine when a

loans, a piece of legislation

blighted and distressed

our private lender cohorts met

have snowballed to other states.

short-term loans to fix-

and told their stories, staffers

term loans to landlords.

lean in. It’s a powerful—and

prevent mortgage licensing for residential business-purpose

than banks, help recover

lobbyist presents them. When

that, if passed, would likely

properties by financing

on Capitol Hill and in Florida

and-flippers and long-

and legislators alike began to

Through these conversations with policymakers, we

found that legislators do not understand the following about our industry:

 B usiness-purpose loans

secured by real estate

are not the same as consumer mortgages.

 T  he scale of our

industry is in the

hundreds of billions.  V  ia the American Associ-

ation of Private Lenders, we are self-regulated.

positive—feedback loop. In the case of Florida, it’s why the mortgage licensing requirement for all residential loans remained absent in the governor-signed HB 7103 despite its presence in its Senate compan-

This educational hurdle sub-

ion bill, SB 1730.

 P rivate lenders fill a mar-

stantively encompasses most

Beyond that, private lenders

lenders cannot—and will

found that surmounting it is

ket gap that institutional

of what our industry is. We’ve

not—serve.

most successful when private

can do something more than

share their own stories: We can bring our business-purpose

WINTER 2020

79


LEGISL ATION

borrowers into the conversation with us. When it comes to keeping operational costs low and closings speedy, private lenders and real estate investors are usually on the same page. When our cost of doing business increases–and vice versa– so too does theirs. Licensing requirements, increased taxes, reporting to consumer loan regulators—all mean less money and opportunity available to do what we do. Not many institutional lenders can invite their clients into a

room and have those clients passionately and honestly argue for less governmental oversight. And again, it’s the kind of stance that only rings true when not repeated as hearsay. Outside of the in-person advantages of grassroots, there’s nothing like hundreds of calls and emails from people who vote or invest in a state to make a point. When legislators hear that local constituent votes, affordable housing improvements and both whiteand blue-collar jobs are on

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PRIVATE LENDER

One note: Our Government Relations Committee is firmly entrenched in cause, rather than political, advocacy. We do not show support or lack thereof for individual legislators. We do not tell our members who to vote for. We do not send money to reelection campaigns. We support or oppose legislation based on whether it is advantageous to the private lending industry. Although our educational efforts on the impacts of a bill may influence how our members and allies later fill their election ballots, our role remains to educate on issues. Added to that, strategically speaking, causes are often more long-lived than legislators’ office terms. Supporting or opposing causes rather than people lets us maintain a relatively neutral position when

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the line, what we have to say suddenly falls on very attentive ears. Although private lenders finance loans across the nation, it’s important to remember that these loans are rooted in real property. The much-lauded “all politics is local” phrase is never truer than for the private lending and real estate investment industries.

speaking on behalf of those

causes or encouraging grass-

roots contact campaigns.

Contact campaign efforts pro-

vide similar education opportunities as in-person meetings do. It’s not just the implication of

callers perhaps voting or donating to a legislators’ reelection

opponent or the stagnation of

private lender money into local economies; it’s the ability to share our story.

Despite the black-hat reputation of the lending industry, private lenders truly have

hero stories to tell— stories

that pass muster on both sides of the partisan aisle. It bears

repeating, but our challenge is

not necessarily that legislators

oppose us, but that they do not know about or understand us.

A groundswell of people shar-

ing the impact of the good that they do puts truth in numbers


behind the efforts of individual

sion on whether private lenders

As the largest trade association

reactive or proactive approach

tioned to quickly get the word

Throughout 2019 and fore-

lenders’ voices are heard. It’s

primarily reactive. We monitor

ate about because, above all,

eral and state levels, then mobi-

safeguard the private lending

bills applicable to member and

to conventional finance.

It’s a position that served us

in-person meetings. for our industry, we’re posi-

would be better served by a to advocacy.

out and ensure that private

casting into 2020, our focus is

a role we are fiercely passion-

proposed legislation at the fed-

our goal is to promote and

lize grassroots efforts when

industry as a viable alternative

industry interests surface.

While all this is the reason our Government Relations Committee and legislative advocacy

well as we built the Government Relations Committee, created relationships with

efforts have seen success in

potential ally organizations to

strategy (we even have a

the best methods for reaching

our ever-developing grassroots petition platform now at aaplonline.com/petitions!), we recognize that lobbyist efforts will likely hold a very carefully evaluated role in select future initiatives.

extend our efforts and learned and working with legislators— all while avoiding biting off more than we can chew.

Strategically, it sends a message to legislators and the pub-

lic that our first forays into

advocacy have been successful. We can’t afford to make a big show backed by weak effort if we want to enter this new arena on the right foot. As a trade association and industry we want a reputation of choosing our battles well—and when it really matters.

Washington, D.C., for our second annual Day on the Hill, along with our fight on New York Senate Bill S3060E (check out the special section on page 7 if you haven’t already), and the likelihood of Florida mortgage licensing regulation raising its head again.

Proposing new legislation proactively is an entirely different kind of effort. It’s one that, to be truly successful, requires deep knowledge of the internal workings and politics at play in state and federal capitals. Known quantities get further, with less time, hassle and money required.

Stay in the loop with everything we’re up to—and how you can help—by signing up for email updates at aaplonline.com/gov. ∞

Turning to lobbyist organizations is a good strategy when it comes to bill-proposal efforts. However, lobbyists do not come cheap, and our association has more activities than just advocacy to complete on behalf of our members. Over the next few years, we’ll be exploring the specific legislative action we want to take, along with the best outfit with which to work. As with our grassroots efforts, we will take a cautious approach to ensure that our first forays find fruition rather than failure. This year, our advocacy efforts are already well underway, with plans to reconvene in

ABOUT THE AUTHOR

KAT HUNGERFORD Kat Hungerford is executive

editor of Private Lender and

project development manager at the American Association of Private Lenders. She spe-

cializes in operations, project management and market-

ing. Hungerford also acts as

secretary for the association’s Government Relations Com-

mittee, which serves as AAPL’s advocacy arm in state and federal legislatures.

This role specifically harkens back to the ever-present discusWINTER 2020

81


MARKETING & SALES

12 Company Brochure Writing Tips

prospects to your website, but a brochure consolidates all your important sales information in one place. Brochures also

support other advertising and

online promotions and can be used as a sales tool by other

team members or associates. With that in mind, here are

12 tips for writing an effective

by Ruby Keys

lending brochure.

01 K now Your Audience // Write your brochure

from the reader’s point

The best marketing strategies are multichannel strategies, meaning they incorporate both digital and physical tactics. Multichannel marketing can help you attract and keep consumers by giving them consistent, valuable information wherever they’re interacting with your company—online or in person.

of view. This means the

information must unfold in a way that makes

sense even to someone

who has just been introduced to your business. Analyze what your

reader wants to know

by assessing the order in which your reader’s

questions will flow and

organize your brochure You know the value of your private money lending business, but others may not. Physical marketing collateral like brochures can help communicate that value to customers

First, it’s to establish credibility. People expect legitimate

businesses to have printed sales literature. Anyone can print

business cards and a letterhead, but if you want to look profes-

and business partners. Custom-

sional, you need a brochure.

ers, particularly in the lending

Second, printed marketing

industry, are cautious about who they trust to do important business with. A company needs printed marketing materials for two main reasons. 82

PRIVATE LENDER

materials save time. People

want printed material they can take home or to their offices

and read and review in their

own time. Yes, you can direct

in a logical sequence

following the reader’s train of thought. For

example, imagine you’re working with a real

estate investor who is

new to the business and has never worked with

a private lender before. You want to push your readers to schedule a

meeting, but given the nature of the business, your reader will need

rough price points answered before they sit down with you. Your brochure can answer those questions and give them information that is enough to get going and take an in-person meeting or call.

02 P  ut Your Best Foot

Forward // The first page your reader will see is the front cover. You want it to motivate the reader to look inside. Avoid technical jargon. Instead choose benefits-oriented, thought-provoking statements that make the reader want to know more. Grab your reader’s attention by teasing special features like exclusive invitations or free reports. Don’t be tempted to just put your company logo on the front. Although it seems like a clean design idea, it won’t catch your audience’s attention.

03 I nclude a Contents

Page // When brochures are eight pages or more, a table of contents is useful. Your list should be bold and separate from the rest of your text. Use it to sell the brochure. Rather than


naming sections of the

brochure with titles like

“introduction,” pick your most important sales point and use that in your heading.

04 Describe Your Services //

To write an effective service description, begin by listing your product features and adding the words “which define that…” after each point. Remember that

the reader may not be familiar with your services or industry.

05 M ake it last // Putting

helpful information in your brochure will encourage your reader to keep it or share it with others. For example, lenders in the real estate industry can provide a list of investment incentives for specific neighborhoods.

06 G et Creative with the

Shape // There is no law stating all brochures must be A4. Using your imagination to design your brochure can help you see better results.

According to Direct

Magazine, a recent

mailing by a company

that conducts customer satisfaction surveys for

car insurance firms and repair shops saw an

above-average response rate of 15% with a brochure delivered in a 32-ounce sports water bottle. The headline read: “Thirsty for more repair orders?” Don’t be afraid to think beyond the trifold.

07 A dd a Personal Touch // Experienced speakers choose a face in the crowd and speak to that face. Establishing WINTER 2020

83


MARKETING & SALES

a connection with one

your world by painting

love investing. Don’t

to make their talk more

brochure for a wood-

them things that don’t

person allows a speaker personal than if they

were addressing a mass of faces. In the same

way, the words in your brochure should use this technique and

speak to one single imaginary person.

a picture for them. A

burning stove doesn’t need to describe how

the stove works. Tell your reader about chilly, rainy afternoons and let them

picture how happy they’ll be when they purchase one of your stoves.

08 S et the Scene // Don’t

09 G et to the Point // Most

too technical. Instead,

know the history of your

let your brochure sound invite your readers into

people don’t need to company, or why you

waste their time telling convey a benefit.

10 F ocus on Your Reader // Similarly, don’t get

caught up in your interests. Stay focused on your reader.

For example, here is an excerpt from an

insurance company’s

brochure: “Insurance

is a complicated busi-

ness. Our company was formed in 1975 to help

our clients deal with the

looking for. Provide clear headlines throughout the brochure that catch your readers’ eyes.

12 C all to Action // Regard-

less of how you organize or design your brochure, it must end in a call to action. If you want your reader to contact you, include a phone number, email address and your website URL. To increase your brochure’s effectiveness, you should have this information on every page. ∞

process of finding the right insurance to suit

their needs. In the last

20 years, we have been selling insurance to a

ABOUT THE AUTHOR

wide range of custom-

ers from many different

walks of life. Our company’s reputation is unsur-

passed in the industry...” Bad. This insurance

company isn’t telling

their readers how they can solve their prob-

lems; they’re just talking about themselves.

11 D irect Your Reader // A brochure should be organized so readers can flip through the

pages and easily identify the information they’re 84

PRIVATE LENDER

RUBY KEYS Ruby Keys joined Geraci LLP,

AAPL’s general counsel in 2015 as the marketing coordinator for Geraci Law Firm. As

she enters her fifth year with Geraci, she is now the vice

president of Geraci Media, a

full-service marketing agency, which caters to the non-

conventional lending space.


The ® Your Ultimate Lending Platform

WINTER 2020

85


TECHNOLOGYÂ

86

PRIVATE LENDER


LENDERS TO FACE MORE TECHNOLOGY-DRIVEN CHALLENGES IN 2020 These external threats demand that companies invest significant resources to protect their customers and their businesses. by Marty Coyne

The list of challenges private lenders will face in 2020 is daunting. No longer will having a competitive product, the lowest rates or fastest turnaround time be enough. No longer will hiring the right sales manager, getting the LOS/CRM customized correctly or solving the lead flow dilemma equate to “being done.”

TRANSACTIONAL BEHAVIORS AND EXPECTATIONS It’s true that lenders have always had to adjust to changing economic environments. But the continued evolution of borrowers to online consumers is clearly the biggest driver changing the entire financial sector. Personal relationships and

Those internal decisions are

focus externally too. And

core to the ultimate success

those external threats will

of the business, but private

require more resources and

lenders in 2020 will need to

focus than ever before.

loyalty, face-to-face conversations and trusted sources are being largely replaced by online forms and chats with some faceless entity in the

cloud. Clunky processes, delays and paperwork are just not acceptable to today’s consumer seeking instant gratification. Amazon has changed retail profoundly. It has also redefined speed and convenience and removed the need for being local. Every business, including private lenders, must come to terms with this new reality. A flawless online presence, offering a seamless, convenient and hassle-free user experience and the ability to deliver on-demand information—whenever, wherever and on whatever device the consumer chooses—

WINTER 2020

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TECHNOLOGY

is the expectation, not the exception. Borrowers make decisions, evaluate credibility, judge viability and even trustworthiness based on a brand’s online presence and functionality. It’s also worth noting that consumers are not quiet about their interactions with companies. In the past, they would have just gone elsewhere if they’d had a subpar experience. Today, consumers often want to take the “offender” down, as if that is some badge of honor. Lenders who do not pay attention to

88

PRIVATE LENDER

brand reputation, online forums, social comments, ratings sites and reviews create a gaping hole in their sales funnel.

ENTER GOVERNMENT CONTROLS The changing paradigm of this consumer migration online has profound effects downstream. As more and more business is conducted online, it’s not surprising that government has jumped in to secure tax revenue.

It also follows that where government goes, regulation is sure to follow. More revenue, more consumers, more regulation. Lenders understand quite well what government oversight and regulation can mean under the name of consumer protection. 2020 is an election year, so the dialog on this subject will be front and center as the campaigns heat up. Meanwhile, regulation focusing on privacy, online consumer data and protected personal information has taken the next

step in the U.S. with the implementation of the California Consumer Privacy Act (CCPA). All businesses, regardless of location, need to understand this law, as many states are in the process of adopting similar legislation. Lenders need to make sure their privacy disclosures, terms of service, technology and processes are aligned to ensure compliance. There are a number of resources available online to get up to speed.


“As more and more business is conducted online, it’s not surprising that government has jumped in to secure tax revenue.”

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BAD ACTORS As government chases the unprecedented influx of capital into this brave young online world, bad actors have too. They are outpacing would-be legislation, and they are hitting e-tailers, financial institutions (including private lenders) and even tech companies by attacking gaps and a lack of readiness. Data breaches are common, and almost expected. No company, it seems, is immune. From Yahoo to Marriott and Equifax to the federal government even the most sophisticated and secured systems have been compromised. Wherever there is money, bad actors are sure to be attracted. Protecting infrastructure and following best practices related to data security must become a priority, regardless of the size of your enterprise. While CEOs may not understand the technical details, they can certainly ask their teams about risk, preparation and where their efforts are reflected in the budget. Perhaps the most sinister threat to lenders comes from scammers. Scammers impact private lenders in several ways.

The direct crime against borrowers is obvious, but beyond that, scammers drown out and dilute marketing efforts by flooding email boxes, texting and calling borrowers incessantly. Worse yet, they attack the entire private lender marketplace by eroding confidence in these alternative capital sources as more victims come forward. Lenders must educate themselves about how scammers operate. They need to understand romance scams, phishing and tech support scams. And, they need to help educate borrowers. FINRA’s Investor Education Foundation, the BBB Institute for Marketplace Trust, and the Stanford Center on Longevity published a study suggesting that people are much less likely to lose money on a scam they encounter if they’ve heard about it before. So, lenders must spread the word about scams. Some of the tools they can use in this educational campaign are email, blogs and podcasts. These efforts serve the public and establish brand trust. In fact, reducing scams extends beyond consumer protection; doing so reinforces consumer confidence in alternative capital sources.

www.walnutstreetfinance.com WINTER 2020

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TECHNOLOGY

ABOUT THE AUTHOR

MARTY COYNE Marty Coyne is the CTO at

PROTECT RELATIONSHIPS AND ASSETS There’s one final threat to highlight: ex-employees.

Clients, prospects, leads and marketing lists are all assets

that firms spend years devel-

oping and cultivating. A highly motivated, active real estate

investor is the gift that keeps on giving for a lender.

These relationships, lists and contact information are the

lifeblood of a sales funnel. And yet when loan officers leave,

often those assets go with them. Lenders need to be proactive

they set up forwarding rules in email that send leads to their personal email? Many lenders have a documented onboarding process for employees, but most do not have a process to verify a clean exit. Could there be anything more upsetting than losing a deal to a former employee who continued to receive leads after being let go? The external threats raised here are not new; however, they are topics that many private lenders undervalue and do not give the appropriate level of attention. Don’t get caught asleep on these issues.

and take intentional steps

Start by educating yourself and

Turning off access is likely not

team. Ensure the executive

loan officer set up notifications

are understood and carried out

to protect this information.

other members of the executive

enough. For example, did the

team sets proper priorities that

to go to their cellphone? Did

throughout the organization.

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PRIVATE LENDER

These external threats demand that companies invest significant resources (read: capital, people and time) in order to protect their customers and their businesses. Ignorance is no excuse. Laser focus and an investment in security are not optional. Speed to market is not an acceptable reason to leave a door unlocked. Consumers demand convenience and speed, but they will also hold businesses accountable for security and privacy. How a private lender deals with these issues can also create opportunity. An enterprise that can successfully maneuver through these issues, communicate their plans externally and execute can set itself apart and establish a strong brand of trust and loyalty—even in this new online consumerism. The companies that learn fastest will come out on top. ∞

Connected Investors, an online community and

marketplace of nearly a

million real estate investors. Coyne has been instrumental in the explosive growth at CI, including building the

largest online marketplace

for real estate funding, CIX, which generates more than

$5 billion per month in funding requests for its network of private lenders.

A technology industry

veteran of 30 years, Coyne

has specialized in identifying disruptive technologies and helping to bring them to

market, driving more than $1 billion in new business

revenue for his companies and partners.


M A K E WAV E S AT

FEBRUARY 20-21, 2020 NEWPORT BEACH, CA Interested in attending or sponsoring? Contact Alicia Carter at A.Carter@GeraciLLP.com Balboa Bay Resort 1221 West Coast Hwy, Newport Beach, CA 92663 949.379.2600 | www.geracicon.com

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YOU’RE

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PRIVATE LENDER


RESOURCE GUIDE

RESOURCE GUIDE ”Do you know any attorneys who specialize in working with private lenders? And not just people who work with financial institutions, but actual private lenders. The last guy I talked to was so confused.”

Replace “attorneys” with

businesses, we are building this

If one of those specialties sounds

“appraisers” “accountants,”

guide to be a complete service

like you, you can nominate your-

provider resource (hence, you

we at your friendly Ameri-

self for inclusion in future issues at

know … the name).

aaplonline.com/resource-guide/

Each issue we’ll publish a new

nominations. Because our goal is

“loan servicers,” etc., and

can Association of Private

Lenders get this question on a near-daily basis. We always have an answer in the form of one of our service provider

cross-section of service provider specialties:  W inter (this issue!):

Accounting, Legal, Default

members, but it got us thinking:

& Loss Mitigation

could we be doing more? Why, yes. Yes, we could.

 S pring: Property Insurance, Valuations, Development

Enter our brainchild, the Pri-

vate Lender Resource Guide. Whether you’re looking to

Cost Estimates

 S ummer: Appraisals, Lead

Generation, Raising Money,

compare service providers or

Note Buying/Selling

just interested in knowing who’s out there who actually knows a thing or two about what pri-

 Fall: Loan Origination

vate lenders need to run their

Software, Loan Servicing, Investor Reporting

building a complete list, rather than creating a money-making opportunity, there is no charge to be included, although as you’ll notice below, we give priority placement to AAPL members (*cough* hint *cough*). Oh, and one more thing before you dive in: We make the live, 24/7 list of all categories available online to AAPL members at aaplonline.com/resource-guide. So, members: You don’t have to wait for the print issue to find the latest updates!

KAT HUNGERFORD

Private Lender Executive Editor

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RESOURCE GUIDE

ACCOUNTING ATM PROFESSIONAL SERVICES

 a tmcpas.com  (301) 947-2860 S econdary Specialty // Valuations  S ervices // Governance, Risk & Compliance,

Business Services and Tax Services, including planning, preparation and resolution.

COHNREZNICK

 c ohnreznick.com  (818) 205-2622  S ervices // Advisory, Accounting and Tax Services for Private Lenders

SPIEGEL ACCOUNTANCY CORP

 s piegelcorp.com  (925) 949-5687  S ervices // Accounting, Tax, Fund Administration, Consulting Services for Mortgage Lenders, Small Businesses, and Individuals.

DEFAULT & LOSS MITIGATION NOBLE CAPITAL

 n oblecapital.com  (512) 492-3818 S econdary Specialties // Loan Servicing, Note Buyer/Seller

S.B.S. TRUST DEED NETWORK

 s bstrustdeed.com  (818) 991-4600  S ervices // Non-Judicial Foreclosures, Bankruptcy, Post

Foreclosure Options for Lenders, Deed in Lieu of Foreclosure

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PRIVATE LENDER


TOTAL LENDER SOLUTIONS

 TotalLenderSolutions.com  (866) 535-3736  S ervices // Non-Judicial Foreclosures, UCC Sales, Reconveyances, Education

DSI INC.

iSERVE

SERVICE LINK

 d efaultservicesinc.com

 i serverealestate.com

 svclnk.com

 (512) 382-0366

 (858) 486-4213

 (800) 777-8759

LEGAL ACTIVIST LEGAL

 a ctivistlegal.com  (202) 869-0804  S ervices // Legal services in the areas of real estate,

mortgage, banking and private investor transactions for non-performing loans and assets.

CABALLERO LENDER SERVICES

 (225) 328-1071

GERACI LLP

 g eracilawfirm.com

S ervices // Foreclosures, Bankruptcies and Real Estate Closing representation for lenders and investors.

 (949) 379-2600  S ervices // Foreclosures, Real Estate, Corporate,

Securities, Litigation, Banking & Finance, Bankruptcy, Consulting, Asset Protection

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RESOURCE GUIDE

HARTMANN DOHERTY ROSA BERMAN BULBULIA LLC

 h drbb.com  (917) 902-9617  S ervices // Legal representation of private lenders in multiple states

LAW OFFICES OF LAWRENCE ANDELSMAN PC

 a ndelsmanlaw.com  (516) 625-9200  S ervices // Real Estate Transactions for Lenders, Developers and Individuals

PRIVATE LENDER LAW/LAROCCA HORNIK ROSEN & GREENBERG

 p rivatelenderlaw.com  (212) 536-3529  Services // Legal Services for the Private Commercial Real Estate Lending Industry

SCHEER LAW GROUP, LLP

 s cheerlawgroup.com  (949) 263-8757  S ervices // Private Lender representation in Litigation,

Bankruptcy, Transactional, and Compliance Matters with offices in both Northern and Southern California.

HAJJAR PETERS LLP

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PRIVATE LENDER

 l egalstrategy.com  (512) 637-4956


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L AST CALL WITH JON HORNIK

TROUBLE IS OPPORTUNITY by Jon Hornik, Esq.

T

he time was 2008. The Great Recession had just hit, the markets were failing and it felt like the end of the financial world as we knew it.

Lehman gone; Bear Stearns finished. When all was said and done, it was ranked as one of the largest economic downturns since the Great Depression of the 1930s. By 2009, the U.S. gross domestic product dropped by 2.8% and unemployment hovered at around 10%. The entire country had a severe case of risk aversion. During this time, I had just been elected Mayor of Marlboro, New Jersey (a city of approximately 50,000 residents). Soon after, my partners and I launched LHR&G (LaRocca Hornik Rosen & Greenberg). We recognized the opportunity these troubled times presented. You see, America was trying desperately to lift itself out of economic turmoil. Right away, the government had approved the Emergency Economic Stabilization Act of 2008 (i.e., bank bailout money). They also 98

PRIVATE LENDER

passed the Economic Stimulus Act of 2008 to boost the economy and investors. While times were certainly tough, we knew the government was doing everything in its power to spur this economy back to life, which to us, represented a golden opportunity.

business model, which eventually allowed us to be the first to come up with fixed pricing based on product and loan size. It was a complete success and launched LHR&G into the next stratosphere of private lending.

I immediately focused my department at LHR&G on representing private lenders. I had a history at large New York law firms and with working with the largest private lending firm in the country, where I served as in-house council and sat on the firm’s credit committee. Post-housing crash, we saw the inception of a new era in lending—particularly in the area of fix-and-flip loans and short-term bridge financing.

Today, we are one of the top recognized leaders within the private lending industry. Our nationwide practice group, the Private Lender Group of LaRocca Hornik Rosen & Greenberg, focuses on real estate finance. We are fortunate to be actively representing more than 60 lenders nationwide.

These were opportunities that helped us land our first major client in 2011: RCN Capital. Back then, it was known as Entertainment Financial. The company is led by Jeff Tesch. At the time, they had three employees. Tesch had set his sights on taking his private lending brand to a national scale. He looked to us to help grow this vision. We did this by understanding the needs of the marketplace with ever-changing lending policies. We took the initiative, stepping in to help lead the way with our own ideas on deal structure. The catalyst for our innovation dealt with the small balance nature of loans. It was time to get creative. So, I drew from my experience—particularly from my previous stints at the top New York corporate law firms. The type of law I practiced helped me to recraft my

I also try to give back to the private lending industry by serving as an advisor to public and private companies in regard to secured and unsecured loan and equity transactions throughout the nation. Currently, we have more than $1 billion in closed deals and have no plans of taking a breather. Again, looking back, it’s crazy to even think about attempting to do what we did during one of the worst times in our country’s economic history. But as I always say, trouble is opportunity. Great reward comes with the ability to look at those problematic moments and realize that success can be found if you think differently and allow yourself to see the opportunity. Use your experience to take full advantage of what’s to come. I am looking forward to the challenges of 2020. We will adapt to meet them and hopefully continue down the road to success. ∞


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