Private Lender by AAPL

Page 1


The Official Magazine of AAPL | Summer 2021


Kristina Sawyer

Piecing the Puzzle Together




Planning for the Appraiser Shortage

Housing Market Forecast

Reforming Bankruptcy Laws




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0 6 K ey Proces s es for



Succes s f ull y Managing C ons t r uc t ion Loans

14 T he Benef i t s of Ou t s ourced Fund Adminis t r a t ion

18 A n A ppr ais al Indus t r y Cros sroads I s Impac t ing

22 L oan O per a t ions and Insur ance


36 2 021 Mul t i f amil y Lending Mar ke t Trends

6 0 W inning a t Bank r uptc y Games

64 T he 20% Quali f ied Deduc t ion


T ownhome Projec t in For t Wor t h ’s Wes t 7t h Dis t r ic t


72 “ I ’m t he CEO, and I A pprove T his M es s age”

76 H ow C an Pr i va te Lender s H elp Prevent Bor rower s From Ge t t ing Sc ammed?


I nside t he Deal


W hy E xcel is K illing Your Lending Busines s


I ns t i t u t ional Inves tor s v s . Inter nal Funds

Busines s Income

32 I s Real E s t a te Topping Ou t?

D on’ t Le t Rela t ionships Fool You

More Housing Inventor y

P iec ing t he Puz zle Toge t her


26 MARKET TRENDS 2 6 3 Trends Point to

44 B uilding Your Profile for


Online Marketing Plat forms



Wor k for You

10 5 St r ategies for W inning W i t h Da t a

4 0 Pu t V ideo Mar ke t ing to



W ha t Do You Want to Be W hen You Grow Up?

B or rower s in Bank r uptc y Par t 3






YOUR ASSOCIATION UPDATE The first half of 2021 has been full of mainly positive news from our


private lender members and their service providers. Business is mostly


back to usual. Although uncertainty exists around how forecasted


post-moratorium foreclosure increases will affect the market, many

Managing Director, AAPL

lenders are confident this will alleviate present inventory shortages.


On the association side, we are pleasantly surprised 2021 is shaping up

Executive Editor

to be one of our best years yet.




Katie Bean, Daren Blomquist, Edward Brown, Rocky Butani, Shannon Faries, Matthew Gunter, Elizabeth Hillestad, Beth Johnson, Kevin Kim, Jerry King, Erica LaCentra, Beeta Lecha, Elizabeth Morales, Brandon Rickman, Lee Rogers, Erica Sikoski, Eric Stewart, Ray Sturm, John Tedesco, Marc Weitz

COVER PHOTOGRAPHY BlushPix Photography

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.




Visit, email, or call 913-888-1250.

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

Our 12th Annual Conference — which serves as the main support for our initiatives year-round—is expected to beat our best pre-pandemic attendance and sponsorship numbers. We see this as an excellent sign that private lenders and service providers are hungry to both network in person and absorb the latest best practice and market insights. If you haven’t already, register for the November 14-16 conference at Caesars Palace Las Vegas at Next, as you have (hopefully) already heard, we’ve launched our private lender survey—the first such survey to regularly poll the industry. The survey is currently open for its third quarter of data canvassing. Respondents receive the AAPL Market Insight Report as a thank you for their contributions. Sign up to respond at Finally (hear it here first!), we’re excited to announce three new initiatives. First, this month will see our inaugural All-Member Meeting. During this meeting, we invite our members to listen in on never-before-shared data from the industry survey, learn important information about must-know AAPL initiatives, and hear updates on legislative advocacy efforts. We’ll also host a member discussion on an industry hot topic. The meeting is scheduled for July 27, and registration links will be emailed to AAPL members. Second, our popular Certified Private Lender Associate course will be arriving online this fall. The highly-sought-after designation explores in-depth our Code of Ethics, compliance, underwriting, documentation, loan servicing, loss mitigation, and intro to securities topics. Stay tuned for more information and the official launch date. Third, to better assist the industry in developing and maintaining best practices (and helping to support our claims to legislators that the industry does not need further regulation), we will soon be launching our Code of Ethics Compliance Portal. The portal will offer in-depth articles and case studies that highlight do’s and don’ts. It is the first of its kind available to and customized for private lenders. That’s it for this quarter. As always, thank you for your continued support and feedback as we work to safeguard and promote the private lending profession. Copyright © 2021 American Association of Private Lenders. All rights reserved.


Managing Director, American Association of Private Lenders




KEY PROCESSES FOR SUCCESSFULLY MANAGING CONSTRUCTION LOANS Following these suggestions for project review and loan draws will help you define repeatable processes and reduce risk. by Shannon Faries


onstruction lending can be highly profitable, and the demand for

this type of financing continues

to grow. However, profitability is closely tied to managing risk and proactively addressing potential failure points within a project.

To successfully manage construction projects to completion—on time, within budget, and without failure— you need the right processes and tools. These help to ensure repeated success despite changing market tides, and they will protect the interests of your business, customers, and investors.

PROJECT OR FEASIBILITY REVIEW Before you close on the construction loan, a best practice is to complete a 6


construction project review or feasibility review. This review will inform you of project readiness and determine whether the project meets your minimum risk profile. You will need to determine which factors are important to you. You may want to consider the following: Budget line items. Review budget with

line items in detail. For example, try comparing the proposed amount for a new roof to the average amount for new roofs in the area. This comparison will verify the right budget is allotted for each line item and you aren’t funding significantly under or over the actual scope of the project. Plot plan with specs. A review of the

plot plan with specs is an important part of a project review. You may find, among other things, that the planned setback does not comply with local zoning regulations or a utility pole is missing on the

plan. Reconcile discrepancies to verify the plot plan is as accurate as possible. Plan compared with the budget. With

the line items and plans in hand, compare them to each other. Perhaps the plans include three bathrooms, but the budget only accounts for two. Not uncovering these kinds of discrepancies before the project starts could cost time and money to make things right later, jeopardizing the timely completion of the project. You may also choose to review the flood certification, appraisal report, and surveys. They each provide information that’s important to a project. Define your hard stops. Every pri-

vate lender needs to set up their hard stops—triggers that indicate the loan cannot proceed until the need is satisfied. Suggestions for hard stops: non-executed documentation or the plans and specs

“If you are working with a borrower for the first time, make sure they are a good fit and will follow your policies and processes. ”

not aligning with the provided budget and appraisal, if applicable. Any inconsistencies within the loan documents should be addressed immediately. Set expectations with the borrower.

Before the project starts, review the plan with the borrower. Review the draw process, what is required to submit a draw request, when they can expect to receive funds, etc. If you are working with a borrower for the first time, make sure they are a good fit and will follow your policies and processes. Also, know the exit strategy. Is the borrower going to be able to exit at a profit?


oping the right tools to manage draw disbursements post-close and understanding your risk are critical to success. Efficiency is key to adhering to project timelines, and visibility at all levels will help you proactively manage risk if issues arise. Spreadsheets are a very common tool

Just as important as creating pre-closing processes such as project reviews, devel-

lenders use to manage draw disbursements. Spreadsheets can be an adequate

tool when loan volumes are low, but as your programs grow in capacity and complexity, the flaws inherent to spreadsheets will become readily apparent. What are the drawbacks of using spreadsheets for draw management? First, they introduce more risk. Manual data entry is tedious and can be heavily prone to errors. Sharing real-time data is SUMMER 2021



not possible, leaving borrowers and lenders operating with different sets of data. And, there is no built-in risk tracking.

pose (e.g., to obtain funds from one source to use on an alternate project). View days between draws. Being able

need to hire and train additional staff.

to observe how many days have passed since the last draw was submitted and received will bring your attention to possible problems or confirm everything is running smoothly. You have only a finite number of days on the loan, and draws should be taken at appropriate intervals.

Third, visibility is limited. Report-

View days until the loan completes.

Second, you can’t scale. Manual pro-

cesses will limit your capacity to grow

with demand. Most people can successfully manage only a finite number of

loans on spreadsheets. As you see your construction portfolio grow, you will

ing can be a difficult, manual process. And, you can’t control access based on roles or permissions.

Lenders with growing construction

portfolios often use software designed to manage draw disbursements. Software intended for this purpose can

improve process efficiencies and better manage risk and transparency.

No matter which tool you are using, make

sure you evaluate your processes to ensure they can perform the following with ease: Ensure the budget is always

in balance. A basic of budgeting,

tracking inflow and outflow is always important. Make sure you can view

the real-time budget every time you

look at the loan file. Be sure to check in on anything that doesn’t add up.

Track disbursement of funds com-

pared to work completed. Before you

release the draw funds, you will want to

see the work that has been completed to warrant the draw request. Often, there

is an imbalance in the funds compared to work completed. Sometimes it’s a mistake, and sometimes it’s on pur-



Understanding completion is, of course, important; however, you can also view this metric as a means to pipeline health. As one loan is completed, do you have one or two replacing it? Track expirations of key docu-

ments and permits. The loan file is

not complete without a list of permit expirations. If you use spreadsheets, you’ll need to set external reminders or work into your process a checking mechanism on key documents so the project doesn’t take on more risk.

View overall loan pipeline health. Just as knowing the “days until complete” on a singular loan can help you monitor your pipeline, take time to view the health of your entire loan pipeline. Each loan needs to be reportable, and you’ll want a method to aggregate all that information in one place so you can make the best decisions possible. Although these are a few key processes for managing your construction loans, you may want to add additional tools for your particular situation. Use the suggestions that will work best to help you define repeatable processes and reduce risk. ∞


SHANNON FARIES Shannon Faries started as a loan officer,

and throughout his career, he has focused on construction and renovation lending, A&D loans, and builder financing.

In his role at Land Gorilla, Faries oversees consulting services and new product development. He works closely with

lenders looking to enter the construction lending space and helps provide best

practices for loan program development and risk management associated with

construction lending. Faries also provides consulting services for Land Gorilla’s

industry partners, including loan closing doc providers, MI companies, insurance providers, and government agencies.

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5 Strategies for Winning With Data Private lenders can master the art of earning repeat business by leveraging customer data. by Elizabeth Hillestad




n a world of infinite choices

know what they need, what they loathe, and what pain points need to be solved.

capturing their repeat business

Simply put, your data can be the compass that guides (and even course-corrects, if needed) your customer experience. As a customer yourself, it should be no secret to you that the customer experience is critical when determining whether you will continue giving your business to someone.

at your customers’ fingertips,

might seem far-fetched. You’ll be

surprised to know you already have

what it takes to make this happen...

Data. In today’s real estate industry, private loans are sometimes perceived as commodities rather than as relationship-based products. In that environment, leveraging data you already have to earn repeat customers is

So, let’s look at five ways you can use your data to improve the customer experience and earn repeat business.

more valuable than ever. You—and only you—know your customers best. You

UNDERSTAND THE TRUE MEANING OF CX. On the surface, “customer experience” (CX) might easily be confused with “customer service” (CS). Be warned— they are very different things. In the simplest terms, CX is a holistic experience, while customer service is a specific interaction. CX is the result of every interaction a customer has with your business. In the private lending space, there is a long journey of touchpoints that impact the total experience. When a customer first reaches out, how is their experience? Is your website user-friendly? If a customer calls your company, does someone who is professional and helpful greet them, or do they go to voicemail? Does your company follow through and communicate clearly throughout the loan process? From a customer’s initial contact, through origination, funding, and beyond, CX is everything that impacts your cus-

tomer’s perception and their decision to keep coming back—or not. Keep in mind that the customer experience journey also includes any interactions your customer has with servicers or third-party providers that work on your behalf until the loan is paid off. CS, on the other hand, is associated with a specific event or issue that prompts a customer to reach out for help or support during their journey. CX is associated with the ongoing relationship. CS drives CX, and both are vital to the long-term success of your business.

EMBRACE THE POWER OF 5%. In today’s market, real estate investors have more financing options than ever before, so you need to make a meaningful impression with customers if you want to retain their business. According to an analysis in Harvard Business Review, increasing customer retention rates by 5% increases profits by 25%-95%. Let that sink in for a minute. This means when a company is successful at not only acquiring new customers but also satisfying existing customers, the ROI is powerful. The numbers speak for themselves. Thinking about your business as a relationship-driven operation—one that prioritizes the customer experience— will deliver business results that impact the bottom line. But if you’re thinking about your business only in a transactional context, focusing on metrics like cost per loan and number of units funded, you can expect that mindset to translate directly to your customers’ SUMMER 2021



experience. Customers will naturally feel like a number. The next time they need a loan they can simply turn elsewhere. If you focus on customers as custom-

ers, and not transactions, the possibility for having a relationship exists.

The American Express Customer Service Barometer found that 86% of custom-

ers are willing to pay more for a better

experience. So, embrace and focus your

“Don’t let a negative experience with you be the reason your customer pays a premium elsewhere.”

energy on the power of 5%. Don’t let

a negative experience with you be the

reason your customer pays a premium

elsewhere. Look at service not as a cost, but as an opportunity to earn your customers’ business over and over again.

IDENTIFY THE BASICS OF MEASURING. How can you measure CX in a mean-

ingful way? Here are some of the most

common scores to become familiar with: Net Promoter Score (NPS). Measures overall satisfaction and long-term loy-

alty and determines which customers are brand ambassadors versus which customers could impede growth.

Customer Satisfaction Score (CSAT).

make to get a problem solved is a higher indicator of customer loyalty than delight.

resource allocation required to deliver

Research conducted by Bain & Company showed that 80% of participating companies believed their customer experience was great. Yet only 8% of customers agreed with that statement. This is a classic case that demonstrates how companies are quick to pat themselves on the back without surveying actual customers.

tomer expectations in accordance

Regardless of which methodology you use, making it a priority to measure your customers’ experience is a giant step in the right direction.

through “old school” customer surveys

allows you to ask a variety of ques-


Customer Effort Score (CES). Mea-

sures how much effort a customer must

exert to get an issue resolved. Reducing the amount of effort a customer has to



To understand customer expectations,

start collecting and analyzing customer

feedback. According to Hotjar, customer feedback is the No. 1 driver of success-

ful CX strategies. The best methods for understanding individual customers is and calls. Use whatever intel is available to inform your plan, including: Know your customers. Segment

data set, understand who they are and what makes them tick, and design the

optimal customer experiences for each.

tions about improving specific areas,

processes, interactions, or touchpoints.

with the goals of the organization.”

unique personas from your customer

Measures the short-term happiness of customers. It’s a versatile metric that

experiences that meet or exceed cus-

To improve CX, you need to start with a strategy. To create a strategy, you need customer feedback.

Discover why you lose customers. A

A CX strategy, as defined by Forrester, is “a plan that guides the activities and

you to identify (and resolve) why loans

gap analysis between internal capabil-

ities and customer expectations allows fall out or you lose repeat business.

Improve the loan process experience. From application to funding and beyond, use the data to identify and remediate competency, data, and process gaps.

DON’T REINVENT THE WHEEL. You can learn from the companies

that have successfully embarked on the CX journey. Pioneers in private lender customer experience have

much insight to offer. As you pre-

pare to put CX at the forefront of your strategic goals, here’s an overview of how to become a CX champion:

Start small. Start with “old school” calls and surveys. Consider dedicating one

employee to resolving customer issues. With the right plan in place, resourcefulness will do the job perfectly.

NPS insight. Start measuring NPS after a

loan closes. Using the feedback you gather, you can glean whether a lot of customer pain points occur after funding, often

related to servicing issues or construc-

tion draws. With this insight, you will be able to prioritize the major issue areas

and begin making improvements. With

improvements in place, watch and track

whether they result in an improved NPS

score—and an increase in repeat business. Keep going. Although positive metrics can be exciting, don’t let them distract you from the progress that needs to

be made. As you drill into the scores,

Tailor the journey. Variances can lead to further questions. Consider surveying customers at different points in their journey. Then track NPS for those groups and use the differences to inform customer segments. And, although NPS is a measure of long-term loyalty, it doesn’t tell the whole story. Be sure to include CSAT questions, which are more versatile and allow you to identify specific areas, processes, and touchpoints in the customer journey that have room for improvement.



Shift your focus. As your CX function evolves, don’t be afraid (or disheartened) to shift your focus. New information will prompt you to pivot, but that’s the beauty of digging in. For example, your focus may shift to (1) improving your understanding of the unique customer journey across segments and/or (2) adapting your process to meet the delta in customer expectations.

Elizabeth Hillestad is senior vice president

It’s easy to get mired in the data (especially in a quant-heavy space like lending), so be sure to separate anecdotes from qualitative insights and home in on the information that is actionable and will reduce friction for the customer.

communication, and marketing initiatives,

At the end of the day, data may only be one piece of the CX jigsaw puzzle—but it’s a big, critical piece. To truly achieve a superior CX strategy and reap the benefits of relationship-based repeat business requires a customer-centric culture, alignment with the company’s business goals, and a knack for always seeking ways to improve. With the right focus on CX, your company is on its way to new heights. ∞

of marketing for CIVIC Financial Services. Throughout her 30 years of experience,

she has forged a successful track record of driving record revenue, expanding market share, building brands customers love,

and creating leadership positioning for

companies in the healthcare, technology and mortgage industries.

Hillestad leads CIVIC’s full spectrum of customer experience, education,

including strategy and planning, branding, advertising, reputation management,

events, social media, digital and content

marketing, as well as marketing technology and automation.

Before joining CIVIC in 2019, Hillestad

served as vice president of marketing for Lennar Home Mortgage. She previously held marketing executive positions

with Skyline Home Loans (now Finance of America), OnQ Financial, TriWest

Healthcare Alliance, and

identify variances across sales channel

type, level of real estate experience, and prior experience with your company.




The Benefits of Outsourced Fund Administration Hiring a knowledgeable fund administrator can help relieve you from non-core, operational back-office functions and enhance your business. by Beeta Lecha


growing trend among

investment fund managers is to outsource back-office accounting and adminis-

tration. Outsourcing allows fund managers to focus on deal mak-

ing and securing capital while an

independent third party manages

regulatory compliance, risk mitigation, and providing credibility and peace of mind to their investors.

HOW MUCH ASSISTANCE DO YOU NEED? The services administrators offer are usually on a spectrum between accounting and investor-facing functions. Some may even provide asset management support through loan servicing. As a fund manager, be careful during the selection process to ensure you hire the appropriate administra-



tor for the service level you seek. Here a few questions to consider:

Net asset value (NAV) calculations.

D oes the fund have in-house

ing software, or other technology.

support that seeks to outsource a limited number of tasks, or does it want to offload the accounting or back-office function in its entirety?

D oes the fund manager have an exist-

ing investor capital base or will it be raising capital from new sources?

Service Level Agreements (SLA) or Scope of Services (SOS) lay out the daily, weekly, monthly, and annual tasks the administrator will provide. Spending a little time upfront to review the SOS will mitigate the risk of tasks falling through the cracks later. Generic service-level agreements may cover much more than the specific needs of your fund and its investors, but they may not provide the proper support to the fund manager. Consider a tailored SOS that reduces overlaps in tasks your internal accountants or third-party CPAs and loan servicers already provide. This can also help achieve a smooth integration between the fund manager’s internal team and external providers as they begin working side by side. Some of the services a fund administrator may provide include (but are not limited to): Financial statement preparation. B ank account reconciliations. C alculation of investor

income allocations.

I nvestor onboarding and cap-

ital account tracking.

I nvestor statement prepa-

ration and delivery.

I nvestor portals, hosted account Tax return and Schedule

K-1 preparation.

Support services to the fund’s

financial statement auditors.

A nti-money laundering (AML) or

Know Your Customer (KYC).


enhance their reputations by showing a history of consistent delivery without needing intermittent “true-ups.” M itigating risk. The fund adminis-

trator can help you navigate increasingly complex regulations, thereby

reducing business risk. Information technology systems continue to be

a target to businesses, and a quality

administrator will safeguard the fund’s financial data. Management may also

leverage the administrator’s knowledge of best practices and efficiencies.

Most benefits to using a fund administrator are related to the term “back office.” Fund managers can leverage the administrator’s infrastructure in place of their own and advertise the administrator’s independence and expertise. Here are a few of those benefits: G rowth and scalability. The knowl-

edge and experience of an administrator better equips you for the challenges of a growing fund. Staffing flexibility allows you to respond quickly to increases in the volume of transactions while reducing the cost of hiring new or idle staff.

C redibility and independence.

A significant benefit of using a thirdparty administrator is the credibility you gain by having financial professionals oversee the accounting functions. Investors can have a sense of comfort knowing there is additional oversight on their investment.

T imeliness and accuracy. A cornerstone of successful fund administration is the timely delivery of reports and distributions. Fund managers can

R educed costs. The amount you pay

today may be significantly less than the intangible costs you pay down the road. Any of the other bene-

fits listed could have a significant

impact on the time you might spend on disruptions to your operations.

ABOVE AND BEYOND Hiring the right fund administrator

alleviates you from spending time on

non-core, operational back-office functions and enhances your business.

A knowledgeable administrator goes

beyond simple data entry and implements best practices. A good administrator can exceed expectations by simply entering

a transaction in QuickBooks, providing an investor statement, or preparing a

Schedule K-1. Additionally, the admin-

istrator should be able to walk through a complex accounting transaction and

provide options, assist with answers to

investor questions on their statements,

and work with you on tax planning and mitigating negative tax consequences.




Consider using a full-service CPA firm that offers accounting and administration, tax compliance and planning, and assurance services. Working with a firm with in-depth knowledge of the private lending and real estate industry gives you insights into recent trends and hot topics. It also allows you to leverage the administrator’s existing relationships with other service providers within the industry.

Partnering with an outsourced, independent fund administrator provides you with the flexibility to focus on your core services—raising capital and making


deals. Consider integrating an administrator as part of your team to save time, enhance business credibility, and set a solid foundation for growth. ∞

Beeta Lecha is a principal at Spiegel Accountancy Corp, leading the Taxation and Fund Accounting practices. Lecha has 13 years of private equity and alternative investments experience, primarily focusing on private lending and real estate funds.

Open and ongoing communication throughout the year leads to better business decisions. Using an industry expert niched in private lending allows you to ask the tough questions about accounting and the tax impacts of loan loss reserves, delinquencies, foreclosures, and many other transactions.

In addition to fund accounting and investor reporting, Lecha provides tax strategy, tax planning, and tax compliance for fund managers and real estate investors. Lecha is a member of the American Institute of Certified Public Accountants (AICPA) and the California Society of CPAs (CALCPA). Lecha serves on the Education Advisory Committee of the BEETA LECHA

American Association of Private Lenders (AAPL).



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AN APPRAISAL INDUSTRY CROSSROADS IS IMPACTING LENDING The appraiser shortage is forcing alternative solutions. by John Tedesco


his year, like never before, we’ve felt the appraiser

shortage across America. It’s

reached an industry tipping point — and consumers are demanding alterna-

tives. And let’s also throw in a global

pandemic in the middle of a mortgage boom with a national housing crisis.

So, with all this in play, how is it impacting private lending—and how is the industry adapting?

FIRST, THE ROAD TO HERE A slew of regulations followed the 2008 crash—some good, some bad. Among these were HVCC, Dodd-Frank, CFPB, TRID, and many others that impacted the appraisal industry. Two key changes for appraisers were the expansion of appraisal management 18


companies (AMCs) across America and the changing education requirements. Early on, many independent appraisers were reluctant to work with AMCs because they felt AMCs were taking larger shares of their fee and shifting how they were compensated. This drove some, particularly older, appraisers to retire earlier than they might have. Then, the shift to require a bachelor’s degree and expanded trainee programs quickly shrank the new applicant pool. These factors, combined with increasing liabilities and other regulations, shrank the appraiser pool drastically over the next 10 years and pushed the average age of an appraiser closer to 60. By the middle of the past decade, the alarm bells were sounding. Conventional lending still represents 90% of mortgage activity, and the government-sponsored enterprises (GSEs—Fannie and Fred-

die) represent nearly 90% of that activity, driving most appraisal demand in

America. As the appraisal pool shrank

and volume grew, the GSEs began looking for alternatives to help reduce demand.

In 2017, the GSEs added appraisal waivers if a loan met certain criteria using a new technology portal called Direct Under-

writer (DU). Many factors determine waiver eligibility, but primarily include these: (1) the home had a previous appraisal in the past few years on file in their Collateral

Underwriter portal and (2) the borrower down payment was 20% for purchases. They then began evaluating the use of bifurcated (hybrid) reports and auto-

mated valuation models (AVMs) in certain circumstances with varying thresholds.

Although these efforts helped, they were

not enough. In 2018, the National Associ-

ation of Realtors reported 27% of delayed

closings were due to appraisals. Also

that metric suggests. AI’s annual report

and the distance appraisers were trav-

are currently working in the field as more

reported was the rising cost of appraisals eling to assignments. In 2019, we saw

record demand in most major markets

as baby boomers downsized, millenni-

als moved out, low rates drove refis, and

investor communities continued to grow. The surge added to delays and costs, and more appraisers had to travel further.


shows that only about 32,000 appraisers appraisers choose to work for in-house

lenders, AMCs, government agencies, and

other organizations. Again, that is only 32,000 licensed appraisers spread (unevenly) across

3,143 counties in the United States performing all the residential home appraisals.

appraisers who would not or could not go back into the field for a while due to health concerns. An industry that used to compete for five- to seven-day turn times pre-2018 had already been slipping to seven to nine days on average in most conventional markets during 2019. By summer 2020, we saw those times

Entering 2020, demand continued to rise.

climb in many parts of the country to

Americans, including our appraisers, even

In November 2020, Freddie Mac reported

When COVID-19 struck, it hit many older harder. For a short period the industry

The Appraisal Institute’s (AI) Appraiser Fact

froze, but then the race was on. Everyone

2019 report highlighted a 10-year trend

out equity for remodeling projects, or

ers and applicants, rising average age of

downs were more stringent. All these

Sheet reports annual appraiser data. Their

stuck at home wanted to refinance, take

of a declining number of field apprais-

move out of urban centers where lock-

appraisers, and rising workload demand.

situations added to demand for appraisers.

Though the number of active licenses

At the same time, the aging appraiser

is at a record low, it is much worse than

as well as an increase in the number of

population saw even more retirements

15-18 days, with prices skyrocketing. on the volume of appraisals uploaded to the Uniform Collateral Data Portal (UCDP) in their “The Effect of COVID19 on Appraisal Volume” report. The report shows a month-by-month breakdown for refis and purchases. The report cites an average growth of 9% in new unique appraisals year-over-year between 2014 and 2019 compared to a 40% SUMMER 2021



gain from first quarter to third quarter 2020 over the same period in 2019.

Even after waivers and hybrids, the

combined refi and purchase appraisals

submitted to the UCDP for third quarter 2020 alone was approximately 3.4 mil-

lion—for the same 32,000 field appraisers in one quarter. That figure does not include many appraisals that did not

go through the GSE’s UCDP portal in

that period (e.g., VA and USDA loans,

THE ROAD AHEAD Demand is stabilizing a bit as we shift to purchases instead of refinances, but we are still at dramatic peaks. Industry-wide we are seeing a rise in alternative reports such as hybrids and/or desktop appraisals. These can sometimes save a little time and money, but again they depend on the same network of 32,000 residential field appraisers.

government housing agency appraisals,

A hybrid report uses another party

those used for REO activity, apprais-

the photos, perform the inspection, and

and the hundreds of thousands ordered

an AVM platform to generate a mod-

those used by other banking institutes,

(broker, home inspector, agent) to take

als ordered for divorce or tax disputes,

then send it to the appraiser who uses

for the private lending community).

ified desktop report with a supplied



list of recommended comps from that system. These have limitations, especially in rural markets. In addition, the appraiser pool is expected, once again, to retire significantly more appraisers this year than those that enter the field, so hybrids alone won’t solve the problem. During the coronavirus peak, Fannie and Freddie were allowing alternative reports such as desktops and exterior-only reports. Some appraisal management companies have developed adaptive technology that that made those alternative reports possible. For example, some tools allow borrowers to use their phone or tablet for the inspection photos. Borrowers are led step-by-step

“Most industry experts expect demand to be high for 12 to 24 months.” through the inspection process, with photos geo-coded and time stamped to ensure it is the specified property at that point in time. Technology like this may have even more promise moving forward, but ultimately we will need investor exemptions since the borrowers are involved in the inspections. Some investors may be OK with such waivers for highly qualified deals at limited thresholds. Although moving forward technology may help the situation, it is not enough to return us to pre-pandemic numbers for demand, costs, and turn time results anytime soon. Most industry experts expect demand to be high for 12 to 24 months. The only other answer may lie in how lenders and secondary markets use the valuation products in the underwriting process. As the private lending community has become more institutionalized, the demand for full appraisals has increased to satisfy secondary market requirements. An increasing number of lenders and investors are feeling the supply pinch and are pivoting in specific situations. Some lenders are now willing to use hybrids for certain loans and at various thresholds or to change the way they use the appraisal in general. Loans for flips, in

which the borrower has a certain number of experiences, low LTVs, loans under certain price points, and other scenarios, may merit a hybrid or desktop for lenders who can get investor approval. Key secondary market players in the private lending community have been allowing it according to certain thresholds: $250,000 loans and under or $400,000 loans and under can use a hybrid instead of a full appraisal. Other lenders are essentially self-insuring strong deals by highly qualified borrowers to guarantee their top borrowers a good experience. They are ordering AVMs or hybrids on the front end for screening and then ordering the full appraisal for the files later, knowing it likely won’t be in for underwriting and closing purposes. The private lending community in general is more sensitive to turn times and cost of appraisals for their investors than conventional lenders. As the appraisal industry faces some continued turbulence for the near future due to declining appraiser availability, rising fees, and growing demand, private lenders should work to adjust their borrower expectations.

products are taking longer to get into the supply chain. As such, builders are changing expectations for completion times and costs. Doing so will likely be the new norm for appraisals for some time. Still, private lenders, unlike GSEs, may be best positioned to adapt to new technologies and adjust lending and underwriting practices. ∞


JOHN TEDESCO John Tedesco has served as senior vice president of development for

Appraisal Nation for 10 years, helping to oversee record growth. During his

tenure, Appraisal Nation has become America’s fastest growing AMC and one of the nation’s fastest-growing

businesses overall, being recognized five years in a row in the Inc. 5000.

Under Tedesco’s leadership, Appraisal Nation has evolved to the No. 1

valuation provider in America for

private lenders. The company performs more than 150,000 appraisals annually. In 2018, Mortgage Professional

America named Tedesco one of

their Hot 100 helping to reshape

the American mortgage industry.

In this new economy, builders now know lumber costs more, and many SUMMER 2021



Loan Operations and Insurance Make sure you have the correct insurance processes and operations in place, so you and your borrowers are fully protected in the wake of a catastrophic event. by Lee Rogers


et’s face it —insurance is

flip lender, it is recommended that you

many lenders verify before

builders risk insurance. For a long-term

often one of the last items

closing a loan. As a lender, you can take several steps to streamline

your insurance process on the front and back ends of the life of a loan.

Let’s take a look at a few that will make a difference in how fast you can close loans and better protect you and your borrowers.


require any renovation project to carry loan, this coverage may not be required. If you aren’t sure whether your insurance requirements are adequate or whether they should be reviewed, there are companies that can assist you. They’ll help ensure that what you’re asking your borrowers to insure isn’t onerous and is also not putting you at a competitive disadvantage against other lenders in your market. If you are lending in multiple states, make sure your insurance requirements are

Although the focus here is not on insur-

compliant with state laws and statutes.

ance requirements, understanding what

Finally, if you are lending on multi-

they are can make things run much more smoothly for you and your borrowers. The types of loans you offer should dictate

family or non-residential assets, there can be a host of additional coverages to consider. What is required for a resi-

the type of coverage you require. For

dential loan may not be required for a

example, if you are a residential fix-and-

commercial property and vice versa.



FLOOD Determine the flood zone for each property you are lending on. Every property in the U.S. is mapped into a flood zone. Properties in a zone containing the letters “A” or “V” are in a flood zone where there is at least a 1-in-100-year chance of a flood occurring. Federally backed loans will require that collateral located in a 1-in-100-year flood zone must maintain a separate

flood insurance policy. Most properties in the U.S. are in the “X” flood zone; however, just because a property is not located in a flood plain does not mean there is no risk of a flood loss. Find a reliable source to help you determine flood zones. Companies like Service Link and CoreLogic have programs you can affordably access. You can also search for an address through, and the appraisal process will also typically uncover the flood zone.


to quote coverage for all your deals, you

You may have a preferred insurance provider you enjoy working with. If not, create a process with an insurance broker that can provide your borrowers with a compliant, competitively priced policy.

Additionally, if you’re ready to fund and

It is important to have a broker that is licensed in all states in which you are lending so they can provide a policy specific to each state. By creating an upfront process that allows your insurance broker

can also use their quote to price your loan. you’re having insurance compliance issues, you have a go-to resource to get coverage placed and your deal funded. Finally, if you run into any insurance questions you can’t answer, most insurance brokers will gladly be your resource for those answers in exchange for the business you refer them. SUMMER 2021



COMPLIANCE REVIEW One of the most important steps in your insurance process is compliance review.

The type(s) of loans you offer can determine your internal insurance review process.

Most lenders will handle initial review of single-asset loans by training their staff to review insurance declaration

pages or certificates. Equip your staff

with enough insurance knowledge to be

able to read and comprehend the various forms they will receive from insurers.

Each insurance company or broker your

borrowers deal with may have their own



language or formats for sending you information to review. It’s important to understand there are many different terms used in insurance that may mean the same thing, so empowering your staff to review and accept or decline coverage is key to compliance. The complexity of the loan may also dictate how you may most efficiently review coverage. A portfolio loan of multiple properties all secured by a single loan can present unique insurance policy structure. Mark Thomas, vice president of credit implementation and underwriting for Finance of America Commercial, says that for portfolio loans, the company

uses a third party to review coverage and provide outside quality control. “Our third-party vendor reviews insurance and communicates all changes and concerns directly with the insurance provider,” he said. “Once our thirdparty vendor has approved, then the insurance is approved for the loan. A diligence review will then be completed by our QC Team prior to closing. We outsource the insurance review, given the complexity of the insurance policies—master policies, multiple properties, multi-family properties, etc.” Indeed, there are several providers that will review insurance for your complex deals.

TRACKING It is also important to have a system for tracking insurance once the loan has closed. Many lenders use loan servicing companies to handle ongoing loan administration, including insurance. Although this is the preferred way to handle insurance compliance, what if you’d like to keep these services in-house? In that situation, creating good processes for reviewing the various insurance documents you receive is critical. Correspondence you may receive from an insurer include renewal notices, billing statements, and cancellation notices. Develop procedures for how you will handle these important dates and notices. If you are equipped to require escrows for your insurance premiums, it is highly recommended that you do so in order to eliminate any cancellation notices for non-payment of premiums. Additionally, an outside servicer will typically handle legal notices and keep you in compliance with various state and federal requirements.

FORCE-PLACED AND REO COVERAGE In the unfortunate event you cannot verify adequate insurance coverage, it is vital to have the ability to force-place coverage on your borrower. Pricing and product availability will vary, depending on the volume of loans you write. If you have to foreclose, then you will need REO coverage. If your loans are serviced by a third party, the servicer can typically provide both of these types of policies.

However, if you do not use a servicer, or if your servicer cannot handle this need, then go ahead and set up a policy that is able to accept these risks.

BINDING RESTRICTIONS During widespread loss events like a hurricane, flood, or wildfire, it is not uncommon for an insurance company to impose binding restrictions for several days before the event through several days after the event may have passed. For example, hurricane season for the Atlantic region runs from June 1 to Nov. 30, and often insurance companies will restrict the ability to bind or purchase coverage when a storm has formed and may target a certain area. Due to the volume of storms and unpredictable nature of where landfall may occur, all insurers will protect their interests by suspending the ability to purchase new coverage or change (endorse) existing coverage until the event has passed. If you lend in any area that may be prone to natural disaster, it is important to understand that your loan funding may be delayed due to the inability to place insurance coverage. Often, these restrictions may extend to adjacent states that are very far inland but can still incur damage from the remnants of a storm or event.


the event of a claim, both you and the borrower are the payee on any claims check. This will allow you to endorse the check so that proper repairs can be made. In the event of a total loss, you can also ensure the proceeds are used to pay off your loan. All the above practices should allow you to create more security around insurance and your borrowers. The goal is to create a system that is understandable and logical for both you and your borrowers, while protecting your interests as fully as possible. ∞


LEE ROGERS Lee Rogers is the president of

realprotect, an Atlanta-based insurance brokerage that specializes in working with residential real estate investors. He and his team insure billions of dollars of residential investment

real estate across all 50 states, and

he frequently consults with leading SFR lenders to advise on insurance

If your borrower has an insurance claim, be sure you have a procedure in place to protect your interests. You should be properly listed on the insurance policy so in

requirements, coverage, and risk management.

Rogers can be reached at lrogers@ or (770) 718-5214.




3 TRENDS POINT TO MORE HOUSING INVENTORY Supply influx converging with affordability-weakened demand would dampen price appreciation. by Daren Blomquist


n imbalance between low supply and high demand has pushed U.S. home

prices up by double-digit percentages for nine consecutive months, capped by a record 19% increase in April.

The April existing home sales report from the National Association of Realtors (NAR)


New Homes Inventory



shows 1.16 million homes for sale, representing a 2.4-month supply. NAR said those supply metrics continue to hover near all-time


lows since it began tracking them in 1982. But three pandemic-related housing trends


point to increasing housing inventory over the next six months: (1) a pandemic surge in new home construction, (2)


emerging supply from homeowners who

prevention efforts during the pandemic.



Sources: NAR, Census

























tory kept off the market by foreclosure




and (3) a backlog of distressed inven-

0 Feb-19

feel safe to sell as the pandemic fades,

SURGING NEW HOME CONS TRUC TION New Housing Starts (thousands)

New Housing Units Completed (thousands)







































Sources: Census

At best, this coming influx of supply could start to correct the supply-demand imbalance, slowing the torrid and unsustainable pace of price appreciation. At worst, those additional sources of inventory could converge onto the market even while demand has begun to weaken because of out-of-reach home prices. This worst-case scenario could then lead to a correction in home prices.

the pandemic. This is already contrib-

Here’s a more in-depth look at each of the three trends driving the coming influx of housing supply.

levels in April 2020, when uncertainty


uting to new supply and will continue

to do so in at least the next four to nine

months—the time it takes from start to completion for most new home builds, according to the U.S. Census Bureau.

The annualized pace of new housing starts increased 67% in April 2021 compared

to a year ago, according to census data.

The sharp increase is partially due to low was rife in the immediate aftermath of the pandemic declaration. Although anoma-

lous in its size, the April increase was consistent with a longer-term trend in which

the annualized pace of housing starts has increased on a year-over-year basis in 10

First, builders dramatically ramped up the construction of new homes during

of the last 11 months. The average increase over that 11-month span has been 16%.

Housing completions are following suit, increasing in nine of the last 11 months, at an average pace of 9%. The annualized pace of housing completions was up 22% in April after reaching a nearly 14-year high of 1.515 million in March, according to census data. Meanwhile March housing starts hit a nearly 15-year high of 1.733 million—the highest level since July 2006. That 15-year high in housing starts should result in another surge in completed housing units around September, six months later. If that pace of new construction continues, it could finally start to make a dent in the housing supply deficit that ballooned in the decade following the Great Recession, as the pace of homebuilding lagged the pace of new house-




ANNUAL CHANGE IN EXIS TING HOME INVENTORY 10% 5% 0% -5% -10% -15% -20% -25% -30%































Sources: NAR

hold formation. A May 2021 analysis by

Freddie Mac estimated this deficit to be

3.8 million units as of the end of 2020, up from a 2.5 million-unit deficit in 2018.

Already, the inventory of new homes for sale has been trending higher, up on a month-

over-month basis in five of the last six months and rising to a 12-month high of 316,000 in

April 2021, according to the Census Bureau.

PENT-UP SUPPLY FROM MOVE-UP SELLERS Second, more housing inventory, particularly starter home inventory, should feed



into the housing market in the next six months as more homeowners decide to list their homes for sale. More homeowners will arrive at the decision for two primary reasons. First, more new homes being built will give these homeowners more options for finding a new place to live. Second, the fading pandemic will help many homeowners move out of the hunker-downat-home mentality that was necessary and pervasive during the pandemic. The pandemic’s hunker-down-at-home mentality exacerbated the low home inventory environment that was already present leading into the pandemic. It did so on the supply side by dissuading many

homeowners from listing their homes for sale. It also did so on the demand side by eventually driving up demand from prospective buyers who wanted their own home in which to hunker down. The impact is clearly seen in housing inventory numbers from NAR. Housing inventory was already on the decline before the pandemic, down by 12% from a year ago in January 2020 and down by 10% from a year ago in February 2020. But the pace of inventory decline doubled to 20% in April, following the pandemic declaration. The trend toward steeper year-over-year declines in inventory continued through February 2021,

in April of 6.31 million on a seasonally adjusted, annualized basis. That is 460,000 more than the actual number of existing home sales reported by NAR for the month—5.85 million on a seasonally adjusted, annualized basis.


April 2021 Actual Existing Home Sales (Seasonally Adjusted, Annualized, NAR)

April 2021 Potential Existing Home Sales (Seasonally Adjusted, Annualized First American Model)




*First American model based on the historical relationship between existing-home sales and U.S. population demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market.

when inventory hit a new all-time low

concerns tied to the pandemic recede.

and was down 30% from a year ago.

Of course, another surge in the virus

Since February, for-sale inventory has

would quickly reverse this trend.

increased for two consecutive months,

Homeownership tenure data indicates a

indicating more homeowners are slowly

significant amount of pent-up supply from

starting to list even as demand has

existing homeowners. The First American

continued unabated—as evidenced by

April 2021 Potential Home Sales Model

the accelerating home price apprecia-

shows an average homeownership ten-

tion. Despite two months of increases in

ure of 10.56 years, a new historical high.

February and March 2021, April 2021 was

The First American analysis calculated

still down 21%, similar to April 2020.

that “existing homeowners staying put

This gradual upward trend in existing

accounted for more than 15,000 fewer

home inventory should continue into

potential home sales in April 2021.”

the summer and fall as more new home

Furthermore, the First American model

inventory becomes available and health

shows potential existing home sales

The pent-up supply of existing retail homes for sale could start spilling into the market at about the same time that another source of pent-up supply begins to emerge: distressed home supply held back by a nationwide foreclosure moratorium combined with widespread mortgage forbearance. An analysis of delinquency and forbearance data estimates this building backlog to reach as high as 445,000 as of September 2021, the final month of forbearance for mortgages that entered into forbearance on the heels of the pandemic declaration in March 2020. The nationwide moratorium on government-backed mortgages likely will be lifted by September. As of the writing of this article, the moratorium was scheduled to be lifted July 31, 2021. The bulk of this distressed backlog is comprised of properties secured by mortgages that never entered forbearance or have already exited forbearance. Black Knight data shows that as of the end of March, 211,000 seriously delinquent mortgages— those where the borrower was at least 90 days behind on mortgage payments—had never entered forbearance. An additional 89,000 seriously delinquent mortgages had exited forbearance but had no loss mitigation plan in place to help get the mortgage back to reperforming status.




FORECLOSURE BACKLOG: 445,000 Among 2.1 million seriously deliquent mortgages as of end of March 2021 500,000 450,000 400,000 350,000


300,000 250,000


ply. The influx of supply, which should begin in earnest around September, will at the very least cool down overheated and unsustainable home price appreciation. If this inventory influx comes at a time when demand is weakening—most likely triggered by affordability constraints caused by too-high home prices or rapidly rising mortgage rates—it could result in a home price correction. ∞

200,000 150,000 100,000





Source: analysis of data from Black Knight

Added to that non-forbearance backlog of 300,000 are an additional 145,000 seriously delinquent mortgages still in forbearance but projected to exit forbearance by September, with no loss mitigation in place. The 145,000 represents 15% of the 975,000 seriously delinquent mortgages scheduled to exit forbearance by September, according to the Auction. com analysis of Black Knight data. The 15% is based on MBA data showing the to-date rates of forbearance exits that result in still-delinquent mortgages with no loss mitigation in place. The estimated distressed backlog of 445,000 properties will not all hit the market at once after the forbearance program expires and the foreclosure moratorium is lifted. The backlog will likely be spread over many months, and even years, as lenders start or restart the foreclosure process on these loans. 30


The length of the foreclosure process varies widely from state to state.

This is also true for the other incoming

sources of housing inventory. The pent-up supply of retail homes for sale will most

likely not hit all at once, nor will the new

homes now in the construction phase. But

come September 2021, the stage will be set

for a shifting tide when it comes to housing

DAREN BLOMQUIST Daren Blomquist is vice president of market economics at In this role, Blomquist analyzes

and forecasts complex macro and

microeconomic data trends within

the marketplace and greater industry

inventory. New home completions will

to provide value to both buyers and

helping to free up inventory of existing

Blomquist’s reports and analysis have

likely be surging to a nearly 15-year high,

sellers using the platform.

homes. Along with a fading pandemic, that

been cited by thousands of media

gives current homeowners more confidence to list their homes for sale. Meanwhile, the distressed property tide will more rapidly

outlets nationwide, including all the major news networks and leading

publications such as The Wall Street

Journal, The New York Times, and USA

rise as barriers to foreclosure are removed.

Today. He has been quoted in hundreds

The loosening of the housing inventory

has appeared on many national network

logjam should be good news for most

in the real estate market, including real estate investors hungry for more sup-

of national and local publications and

broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

















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Is Real Estate Topping Out? Or, is there still room for higher values? by Edward Brown


uring most of 2020, as

end of the market did better than other

ened, some real estate

larger homes anticipating work-from-home

coronavirus cases height-

investors were nervous, believ-

ing that after a seven-year run-up in residential real estate values,

we were headed for lower prices and possibly even a bubble.

Uncertainty is not good for real estate investors. COVID-19 presented lockdowns, work-from-home situations, and other unknown factors that had would-be investors and potential homebuyers holding off real estate purchases. Mark Hanf, president of Pacific Private Money, noted a drop off in loan requests at the end of first quarter 2020 and the first two months of the second quarter. However, the situation did not continue for several reasons. Investors sitting on the sidelines, waiting for the bubble to burst, were flummoxed: Prices did not decline; they increased in most markets. Compass Realty, a major real estate sales company, reports the higher 32


sectors because homeowners clamored for was going to be a long-term situation. For example, Compass reported that

Marin County, an affluent county in the San Francisco Bay area, saw a 70% sales

increase from 2019 in homes priced above $3,000,000, and a 35% sales increase in homes priced between $1,250,000 and

$1,999,999. These were would-be homebuyers who had saved or made money during

the previous seven years and had the means to make a move to a more expensive house. The question a buyer always ponders is

whether “now” is the right time to buy or whether to wait for prices to decrease. Let’s consider a few factors that may

impact the buy now/buy later decision.

WORK FROM HOME With the economy opening back up and increasing confidence that we’re “get-

ting back to normal,” homeowners are trying to decide whether making a real estate move is right for them. They are trying to answer questions such as “Will my employer allow me to work from home?” or “When will my employer ask me to come back to the office?” These types of questions consider the aspect of commuting to work. For example, workers who will need to return to the office must consider whether a longer commute is worth moving further away to get a larger or less expensive house.


energy market, has increased from $45

of a rising real estate market often pushes

to $63 per barrel, as of this writing.

would-be buyers to purchase more hastily,

Some economic pundits are also fore-

These two economic factors may cause

casting that we might start experiencing a sharp increase in inflation as well as interest rates hikes in the near future. In December 2020, Federal Reserve chairperson Jerome Powell acknowledged the economy could see some price pressures, perhaps from rising energy.

real estate buyers to pull the trigger earlier rather than later. Investors may attempt to lock in lower rates before they rise, and typically real estate rises during inflationary times. Such activity may drive real estate prices even higher. Compass reports a surge

before real estate prices increase beyond their reach. Conversely, as interest rates drop, real estate buyers typically try to ride the rates down before pulling the trigger, as we saw during the Great Recession.


in prices of homes as well as volume, with

Powell’s prediction has proven true.

multiple offers for houses being common

One other factor at play is generational

Oil, one of the leading indicators in the

in the current marketplace. The perception

behavior. Many millennials watched SUMMER 2021



their parents lose their houses or saw prices drop during the Great Recession and decided it was better to rent. With the recession almost 10 years in the past, these millennials have started families and saved money during the pandemic. They are in a position to invest in real estate by buying their first home or purchasing a rental property. They see what appears to be a real estate frenzy, and they don’t want to miss out.

OTHER FACTORS Factors such as unemployment, cost of materials, borrower credit and monetary policy may also play a role in causing real estate to decline soon. Unemployment. Unemployment may have crested, because it appears some employers are having a hard time filling jobs. Building materials. When it comes to building materials, as their cost increases, it stands to reason that real estate prices follow suit. Homebuilders must factor building costs in when pricing houses to buyers. Recently, the cost of plywood (as well as other materials) has doubled and even tripled in some markets. In addition, delays on appliance deliveries have stretched for months in many cases. As a result, new home building prices are expected to rise and be delayed for delivery. This should increase the price of existing homes as well, as homeowners will likely choose to purchase an existing home in situations where time is of the essence (e.g., a change in job location).



Monetary policy. In terms of monetary policy and credit to borrowers, regulators so far have not eased up much on the credit issue. Credit was too readily available to borrowers during the Great Recession, which was the major reason real estate prices fell. During this period, banks were more interested in posting loans on their balance sheets rather than practicing prudent lending. When borrowers failed to make mortgage payments, especially when interest rates increased on adjustable loans during the reset period of the loan, banks were in the undesirable position of having to eliminate the challenged loans off their books and take tremendous write-downs. Unlike the Great Recession, borrowers today must prove their ability to repay, and qualifying for a loan is still taking a long time. Many regions in the U.S. are reporting a housing shortage. In California, the fires in 2017 and 2018 removed over 10,000 dwellings. Replacement of those houses has been relatively slow. Texas has seen a surge in house prices, especially in metropolitan areas such as Austin. Thus, we are seeing more demand than supply, which is pushing real estate prices even higher. Although during the pandemic we saw somewhat of an exodus from the cities to the suburbs (San Francisco, for example, looked almost like a ghost town), many people have been vaccinated and may start to feel more comfortable returning to the city. In addition, some employers are starting to request that employees return to the office rather than work remotely. Return to work should push the demand back to major metropolitan cities, because many people want a short commute.

Based on these factors—low inventory, expected inflation, higher material costs, and an expected rise in interest rates—we may see another run up in real estate prices across the board before we see prices heading lower. ∞


EDWARD BROWN Edward Brown is in the investor relations department at Pacific Private Money. He is the host of the long-running

radio show “The Best of Investing” and has multiple published works. Brown has appeared on CNN and has also

served as chairman of the Shareholder Equity Committee, protecting 29,000 shareholders in a $500 million REIT. Brown was also a recipient of a prestigious MBA Tax Award.

OUR AUDIENCE IS WAITING FOR YOU. Each week, 1,300+ real estate investment aficionados download our podcast across 16 of the medium’s top platforms. Think Realty Podcast is their source for the latest industry trends, hard-hitting insights and news. Contact us at to reach our ever-growing audience now.




2021 Multifamily Lending Market Trends Optimism continues to be the mood of the year for the multifamily industry. by Eric Stewart

Editor’s Note: We is used as a reference to “the investor.” Rate quotes in this article are sourced from TMUBMUSD10Y | U.S. 10 Year Treasury Note Overview | MarketWatch.


Treasury yield of 0.92% and fin-

returns for their investors. We have seen a number of new bridge lenders reestablish credit facilities and enter the lending arena once again. This is positive because it creates a very attractive capital structure for borrowers looking to offset the additional cost of raising higher-priced renovation monies from investors.

75-basis point increase to 1.74%.


The increased cost of debt did not curb investors’ appetite for multifamily assets, and deal volume remained strong. This strong investor interest to move into the multifamily asset class has created an extremely competitive bidding process to lock down purchase contracts.

Although a 75-basis point jump in the 10-Year treasury is a substantial increase within a 90-day period, agency lenders maintained their typical rate discounts for rent affordability and green initiative property improvements.

Fannie, however, was much more competitive on larger deals through their DUS Loan program. Their approved DUS lenders found that delegated authority was very valuable in expediting processing and closing deals quickly. Freddie Mac requires their lenders to prescreen loan requests before issuing an application and funding, which can sometimes slow processing during periods of heavy volume.

Additionally, this strong demand has helped maintain low cap rates, and many investors are expanding their scope of investments to include more value-add, renovation projects to find the desired

We also saw each lender target a specific space to aggressively go after deal flow. Freddie Mac proved to be the more competitive lender in the small balance space, and Fannie Mae often

As they have for decades, Fannie Mae and Freddie Mac continue to provide an industry standard for multifamily debt structure and underwriting guidelines. Each agency lender structures its own

irst quarter 2021 was one of continued optimism

for the multifamily indus-

try. Although we saw a notable

jump in the 10-Year Treasury yield, loan volume remained steady. We started the year with a 10-year

ished the quarter with a more than



found itself priced out of those deals. This may have been a function of the jump in Treasury yields and Freddie Mac’s pricing structure, because they establish the rate at application rather than locking rates shortly before closing, as is the case with Fannie Mae.

specific COVID-19-related initial debt service reserve requirement and implements other protective measures as it relates to leverage, debt service coverage ratios (DSCR), and ownership experience. Their protective policies were always short-term in nature on acquisitions and R&T (rate-and-term) refinances. As always, a more conservative approach was used with cash-out refinances, but even then the terms were healthy. Neither Fannie nor Freddie reduced leverage on cash flowing market rate acquisition loans, which is representative of their bullish position long term. It’s important to note this going forward, because they continue to reduce or eliminate the COVID-related principal and interest reserve requirements.

BRIDGE LOAN MARKET The bridge loan market is much more fragmented and does not have that dominant national lender presence to set the industry standard. The lower-priced, more attractive short-term bridge lenders are seeing heavy volume given the increase in value-add transactions. You will find attractive bridge debt priced in the 4% range on a 24- to 36-month term at approximately 75% loan to cost. Higher leverage is available; however, you will likely see a higher coupon or accrued interest structure associated with that debt. The next tier of bridge lender you will see is priced in the mid 6% range and will offer 75% of the purchase price and 100% of the renovation budget. Although it’s a slightly higher rate than other loan programs, this is still a substantially lower cost of funds than typical equity returns. These lenders

can usually close approximately 30 days from engagement, which is also a competitive advantage when trying to win a purchase contract. Private money lenders have also been quite active for the deeper value-add deals and very fast closings. Although this debt structure can be quite

expensive, these lenders offer tremendous value in the form of fast closings, higher leverage, and more creative rate structures. Some investors have turned to these lowpriced bridge lenders for their acquisition funding to avoid the principal and interest COVID reserves agency lenders have SUMMER 2021



imposed. Although these reserves are

scheduled to be returned to the borrowers within the first year of operations, many investors have found that acquiring an

asset using bridge debt, with the anticipa-

tion of refinancing into long-term debt at a later date, has proven to be quite attractive. Healthy appreciation has allowed

investors to pull out equity at refinance

and really boost their investment returns.

COMMERCIAL MORTGAGE-BACKED SECURITIES While the Commercial Mortgage-Backed Securities (CMBS) market came to an



abrupt halt between early and mid-2020, many conduit lenders reestablished their credit facilities and reentered the market with attractive loan terms as well. Although CMBS execution is historically more expensive with limited options compared to agency loans, some lenders are now offering what could be considered a more flexible loan structure. Rather than offering loan terms of only five or 10 years and prepayments structured with defeasance, these lenders are offering loan terms of five, seven, or 10 years with step-down prepayment penalty options. This offers borrowers agency-style flexibility without the heavy COVID reserve requirements, which in

some cases were as high as 18 months of principal and interest payments.

IMPACT OF COMPETITION The multifamily sector has proven to be

a haven not only for existing multifamily

operators but also for investors from other sectors (e.g., retail and hospitality) who

were looking for more predictable returns.

Although hospitality is currently making a solid comeback, multifamily deal volume has not seemed to slow as of the time of this writing. Many operators are taking

advantage of the low cap rate environment and choosing to sell. This has created a

large number of 1031 buyers looking for higher yields in secondary and tertiary markets across the country. The increased competition for multifamily deals has forced investors to get more aggressive on more than just price to make their offers more attractive to sellers. We are seeing more aggressive purchase offers in the form of non-refundable earnest money at signing, expedited due diligence periods, and subsequent closing timelines. These types of aggressive terms offer sellers greater certainty of execution, and buyers have a greater commitment to close. This situation will often have a greater influence on who wins the contract than just price alone. In addition to finding creative ways to make an offer more attractive, this increased competition for deals has forced investors to reassess and potentially modify their conventional investment strategies to consider both smaller deals and smaller markets than they would normally entertain. Overall, market fundamentals are strong. Although there are pockets of COVID-19 related delinquencies, the majority of multifamily operators report better-than-expected collections. As government rent relief programs continue to support renters who reach out for assistance and owners continue to work with their tenants, multifamily operations on a national level remain healthy. A first quarter 2021 uptick in rental rates throughout the majority of the U.S. was also a very bullish indictor of market health.



Optimism has continued to grow into the summer 2021 months. Capital markets continue to fuel the buying frenzy and offer exceptionally low cost of funds to multifamily investors. This is coupled with an overall easing of the restrictive COVID-19 reserve requirements that have been in place


for most of 2020 and first quarter 2021.

Eric Stewart is the owner of Atlantic Business

In mid-May 2021, we saw both Fannie

advisory and brokerage firm. Stewart has

Mae and Freddie Mac either drastically reduce or altogether remove their COVID-19 principal and interest reserve requirements. This action can be viewed

Capital, Inc., a full-service commercial lending been structuring finance solutions for both

commercial real estate investors and business

owners since 1996, with products ranging from equipment leases to commercial real estate

loans. He also offers assumption representation

as the most positive indicator of an end to

and consulting.

the pandemic to date and a huge vote of

Atlantic currently specializes in structuring

confidence in the health of the markets. Some investors who may have been sitting on the sidelines may be encour-

finance solutions for investment opportunities in commercial real estate nationwide. Atlantic

leverages direct relationships with both agency

and conduit lenders for permanent loans as well

aged to get in (or back in) the game.

as hedge funds and insurance companies for

The combination of healthy market

funding solutions for select properties within the

fundamentals, low cost of funds, and an investor base that is eager to acquire assets is extremely encouraging. Couple that with existing owners who are open to transitioning out of their properties and reinvesting those proceeds into higher yield markets, and it creates very positive expectations for the remainder of 2021. Although we haven’t officially seen an end to the COVID-19 pandemic, current market characteristics indicate we are

interim financing. Atlantic also provides equity domestic United States.

Stewart provides an advisory platform for

commercial real estate investors. The platform

is based on more than two decades of working

with clients who are addressing the challenges

of financing commercial real estate acquisitions. In addition to providing debt and equity

solutions to commercial real estate investors,

Stewart currently holds partnership interest in

multifamily assets throughout the Southeast and

Midwest. Additional holdings include residential and mixed-use properties in the Midwest.

moving in the right direction, and investors are clearly positioning themselves for a return to normal in the near-term. ∞




Put Video Marketing to Work for You The popularity of video marketing in the private lending industry continues to skyrocket. by Erica LaCentra


ccording to the State of

the Video Market report from Wyzowl Research,

86% of businesses currently incor-


porate video as part of their mar-

Given the amount of video consumers

85% in 2020 and 61% just five years

sites, pop-up ads, and social media,

88% of businesses reported video

can be difficult. As you develop a video

In spite of video’s popularity and positive results, developing effective video content seems to challenge many marketers. Businesses not only need to develop engaging topics that translate into good video, they also need to determine the kind of content their audience wants to watch.

about the kind of content your audience

spective of your future audience in

sage you want to throw at consumers.

ate are a means of connecting directly

So, what exactly makes for engaging content?

said they “choose to engage with videos

keting strategy for 2021, up from

are bombarded with each day on web-

ago in 2016. In the same survey,

capturing the attention of your audience

gave them positive ROI in 2020.

marketing strategy, remember to think

As you develop content, keep the per-

wants to see versus the kind of mes-

mind. Make sure the videos you cre-



It turns out a majority of people want to view video content purely as a means of entertainment. In a study conducted by

corporate pitch video probably isn’t going to be your best bet for hooking viewers.

with your audience, highlighting not just your company but also the people and personality behind the brand.

Accenture Interactive, 67% of participants

Letting your brand’s “personality”

for entertainment.” This means a stiff

of the best ways to engage prospec-

shine through in video content is one

tive clients and make an audience feel like they are connected to more than just a corporate persona.

The video could feature a fast-paced walk-

For example, if you are a private lender who wants to attract investors that specialize in fix-and-flips, consider creating a short video series showcasing a property you’ve funded. Featuring the property before, during, and after renovations not only highlights a project your company has funded but also allows potential clients to envision what they could accomplish if they used your services.

through. Alternately, it could tell a pro-

through of the property with a member of your company whose personality shines

fessionally edited, well-crafted story that provides insight into the investor behind a particular project. Or, it could take a

humorous angle and show the potential

mishaps of a renovation. Regardless of the

angle you choose, know that it’s often more

Focusing on the loans themselves doesn’t exactly translate into a good video. Showing potential clients what others have been able to accomplish as a result of working with you is how you make your content appealing and relatable.


important to think about how to get your

Remember too that people are mainly

viewer rather than what the point itself is.

needs. A recent Coresight Research

point across in a way that sticks with the

focused on their own interests and





Currently, the top location to share video content is social media. Platforms like YouTube, Facebook, LinkedIn, and Instagram are clear front-runners.. However, note that videos are not a one-size-fits-all solution across social media platforms. People have very different mindsets as they browse through LinkedIn than they do when they use Instagram. Tailor your video’s length, tone, and topic based on where it is being displayed. According to HubSpot, these are the recommended timeframes for videos on the different social media platforms: Instagram // 26 seconds Twitter // 45 seconds

Report noted that 72% of consumers prefer video to text for receiving branded marketing information. And, the previously cited Accenture Interactive study reported that 54% of consumers rely on video to learn how to use a product.

Plus, audiences retain more information

Facebook // 1 minute

when they view video than when they

YouTube // 2 minutes

Creating informative and educational video content potential clients can put to use shows you are listening and focusing on their needs rather than marketing at them. You want your audience to feel like they are getting value from your content.

news or updates to ensure you get some

Develop videos that include major points your clients need to know about your products and how to use them, or answer commonly asked questions. For example, your current clients probably have pain points related to your origination process they would like you to address. You can easily do that via video. Something as simple as addressing your process timeline for each loan product and spelling out step-by-step what is required on the client end will get views. 42


readinformation. Retention of important information sets you up for smoother client interactions in the long run. You can also highlight industry-related eyes on your videos. Think about producing a 60-second industry highlight reel at the end of each week to condense everything a real estate investor would need to know before they wrap up for the weekend. You’ll be providing valuable content and also positioning your company for future success by showing that your company is an industry leader.

HOW TO REACH YOUR AUDIENCE Once you’ve figured out the type of content you want to create and which topics to cover, consider where customers are most likely to view your video content.

The good news is you probably already have company profiles on most, if not all, these platforms. Now it’s just time to put them to work. Facebook and LinkedIn investor groups are great places to start. Find the right audiences tailored according to investment strategy, area of the country, specific property type they invest in, etc. Since you can easily identify who your audience is based on group demographics, it makes it incredibly simple to develop content just for them. Also, consider using any existing forums or platforms where you already have a good presence or that have an investor audience. Boost what you’re already doing by also incorporating video. For instance, if you are on sites like PrivateLenderLink that allow your company to have a customizable profile, add video. You already know potential clients are on the site and coming across your profile,

ABOUT THE AUTHOR so do more to entice them to work with you versus your competitor. Finally, think about how consumers are viewing your video. It probably comes as no surprise that more and more people are shifting to viewing videos on their phones rather than on their computers. This means that unless your videos are optimized for mobile viewing, you could be missing out on a huge segment of the market. Also, believe it or not, a whopping 85% of video is viewed with sound off. It turns out that a lot of folks don’t like intrusive or unexpected noise as they’re scrolling. That’s why it’s critical to include captions or sub-

titles for videos that can’t get their point across with visuals alone.

ERICA LACENTRA Erica LaCentra is the


director of marketing

at RCN Capital, where

Video marketing is a big trend right now in the private lending industry, and it won’t be going away any time soon. Whatever path you decide to take with your video marketing efforts, treat video as you would any other marketing channel. Get started, and build from there. Develop your strategy, set measurable goals and be willing to adjust as necessary. Remember, the idea is to create consistent, meaningful, and engaging content. There’s no time like the present to start. ∞

she is responsible for

planning, developing,

and implementing the

company’s marketing plan and overseeing the marketing department.

Joining RCN Capital in 2013, LaCentra led a

strategic rebrand to position the company for

nationwide expansion. LaCentra’s ongoing efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand.

LaCentra currently serves as a member of AAPL’s

Education Advisory Committee and is the marketing and communications chair for AREAA Boston.

She holds a B.S. degree in advertising with a minor in fine arts from Suffolk University in Boston.

AAPL’s annual Day on the Hill returns fall 2021! Join us as we advocate for private lender and real estate investor-friendly legislation, telling the story of what we do and why we matter. Fall 2021 dates TBA soon. More information and registration at

2019 Day on the Hill SUMMER 2021



BUILDING YOUR PROFILE FOR ONLINE MARKETING PLATFORMS A well-written company profile on social media platforms and directory websites can help you generate leads. by Rocky Butani




our company, like most

financing for a property purchase, refinance or equity cash out.”

probably has a profile on var-

a profile for a conference’s mobile app.

W here you lend. In which states or metro areas do you lend? If it’s more than a handful of states, it may be best to use a region instead (e.g., Northeast, West Coast, DMV, New England, etc.).

In addition, you likely have per-

P roperty types. Do you lend on resi-

private lending companies,

ious directory websites, social media

platforms, and other online marketing channels. You may have even created

sonal profiles, or bios, on many of these same platforms.

But are these profiles working for you

as powerfully as they could be? Are they generating leads?

Let’s take a look at how to put your profile to work for you.

WHAT TO INCLUDE The whole point of having an online pro-

file is business development. As such, most of the content should first focus on what

your company offers. Here are some of the

items that loan originators should include: C ompany name. It’s OK to restate your

company name at the beginning of the

profile, even though it probably already

appears, along with your logo, at the top of the page or screen. If your company

is known by a shorter version, add it in

parentheses after the full name and use the shorter version throughout the rest of the bio.

L oan types. Mention the types of loans

you provide: bridge loans, fix-and-flip, ground-up construction, long-term

rental, land development, junior liens, etc. Don’t hesitate to get specific. For

example, if “bridge loans” seems a bit

broad, you can elaborate: “Short-term

dential, multifamily, core commercial real estate, or specialty commercial properties? Instead of simply saying “non-owner occupied residential,” consider stating “residential investment properties.” It’s not necessary to include condos, townhomes, and 2-4 units. Most people know these are residential properties.

B enefits of doing business with you.

What differentiates your company from your competitors? Most lenders can fund fast. Go deeper than that. Mention your company values. If you target brokers, mention that they will be protected. C apital structure. You don’t have to reveal your capital sources, but do clarify that you’re a direct lender. If you’re not, mention that you have access to capital. If you manage a fund, include it too—it may attract accredited investors. E xperience. What year was your company established? If it’s too recent, add how many years of combined experience the company’s principals have in real estate or lending. L oan volume. Mention how many loans

you’ve funded since inception, or in the last year. It shows your experience, transparency, and the size of your lending operation. Some borrowers and brokers may prefer to work with a smaller lend-

ing firm, and some want to do business with the big national lenders. If you’re seeking additional capital, this may help attract capital providers that want to work with lenders of a particular size. O ffice location. Even if you lend

nationally, most people will want to know where the company is based. If you have multiple offices throughout the country, or regional sales representatives, mention those locations.

CREATE MULTIPLE VERSIONS Each platform will allow a maximum number of characters. Create a few versions of your bio so it will fit each of them. Below are some sample profiles of different lengths. Short version (28 words, 192 characters) “XYZ Funding is a direct private lender for residential property investors in the Southeast and Texas. We offer high leverage, fast closings, competitive pricing, and excellent customer service.” Medium version (98 words, 591 characters) “XYZ Funding, based in Miami, is a direct private lender serving real estate investors in the Southeast and Texas. We specialize in rehab and ground-up construction loans for all types of residential investment properties, with loan amounts ranging from $100,000 to $5 million. We can fund up to 90% of purchase and 100% of construction costs. XYZ takes pride in providing excellent service, with very competitive pricing, and we always execute on schedule. We have funded over $200 million in loans since 2015, with over 150 clients. Our team of private SUMMER 2021



“If you ... invest the time upfront to generate an effective message, you should see an increase in your leads.” lending experts is ready to discuss your next project.” Long version (187 words, 1,129 characters) “XYZ Funding is a direct private lender serving real estate investors in Florida, Georgia, Alabama, the Carolinas, and Texas. We specialize in rehab and ground-up construction loans for all types of residential investment properties, with loan amounts ranging from $100,000 to $5 million. We can fund up to 90% of purchase and 100% of rehab/construction costs, and draws are paid out very fast. XYZ takes pride in providing excellent service to our borrowers and brokers, with very competitive pricing, and we execute on time. We have lots of capital in our fund, and we make all the funding decisions in-house. Our company was established in 2015, and we have funded over $200 million in loans for over 150 satisfied clients that continue to partner with us for their projects. We



are headquartered in Miami but have additional offices in Atlanta, Charlotte, and Dallas. Our founders had rehabbed and built over 100 homes before founding XYZ and understand the needs of real estate investors.

If you want to add a little something to the end, it could be a short call to action such as “Send me a message, and let’s schedule a call” or “I look forward to helping you close your next deal.” Creating a strong company profile and personal bio can be a painful task. But if you follow these guidelines and invest the time upfront to generate an effective message, you should see an increase in your leads. ∞


We have built a great team of lending professionals who love helping investors and brokers succeed. We look forward to being your private lending partner.”

INDIVIDUAL VERSUS COMPANY If you’re writing a profile for an individual rather than a company, you will still use the content of the company bio. Simply add a few words to the beginning of the profile, and maybe to the end too. For the beginning, just mentioning your role or title is enough. For example: “I’m the Business Development Manager at XYZ Funding, a direct private lending …” and then fill in the rest with your company profile that’s the appropriate length for the platform.

ROCKY BUTANI Rocky Butani is the founder and CEO of, a website

where investors and brokers can easily find direct private lending companies, mortgage investment opportunities,

and industry service providers. He has been in the private mortgage industry for more than 10 years, focusing on lead generation for lenders.

Calling all Private Lending Industry stars into the spotlight. Nominations are open for the 2021 American Association of Private Lenders Excellence Awards. Now through August 25, nominate the leaders and changemakers who represent the best the private lending industry has to offer. Then, stay tuned as we publicize them for popular vote. We’ll announce the honorees on November 15 at the AAPL Annual Conference in Las Vegas. They’ll also be featured in this magazine, on social media, and at 2021 AAPL Excellence Awards Categories: Lender Member of the Year • Service Provider Member of the Year • Rising Star • Community Impact

Nominate today at



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Piecing the Puzzle Together Kristina Sawyer draws on experience in all aspects of real estate to offer a cohesive product and experience. by Katie Bean


hen she was young,

landlord, lost money in the downturn,

thought she’d work in real

every aspect of the real estate industry.

Kristina Sawyer never

estate. As it turns out, she’s worked in nearly every aspect of the business, giving her valuable perspective for

her role as vice president of lending at Arixa Capital in Los Angeles.

made a lot of money. I have exposure to I’ve worked on commercial acquisition

company’s framework from the ground up—the systems, teams, closing and servicing processes and procedures,

and the proprietary platform that runs

teams and started my career as a property

the business.

manager. So, I’ve touched almost every

She says operations was a natural fit. As

segment of the industry, and I’ve worked in almost every position.”

a problem-solver, she always thinks about

how to create better processes and how to

Sawyer grew up in Bakersfield, California, where her mother was a high-performing CCIM in commercial real estate. Though she initially imagined she’d follow a different career path, at age 21, before the Great Recession, Sawyer bought three investment properties—two five-plexes and a four-plex. That investment gave her a taste of cash flow and building generational wealth through real estate investing, and she’s been active in the business ever since.

Sawyer says her wide-ranging background

make tedious tasks less painful.

has been instrumental to her success,

“The way my mind works is very system-

“I’ve worked in the industry for 23 years,” she said. “I’ve been an investor, been the

ago as its third employee. As the oper-

particularly in operations.

atic. I think I’m an unorthodox thinker,”

“What’s made me so knowledgeable is that

she said.

I’ve worked in so many positions. I under-

Her interest in improving systems ben-

stand the mechanics and the pain points, and I bring that to every role,” she said.

GROWING WITH ARIXA Sawyer joined Arixa Capital nine years ations manager, she helped build the

efitted her and the company as she led

the development of Arixa’s technology

platform. Though she doesn’t have a tech

background, she says she enjoyed learning how it works. None of the off-the-shelf

solutions had everything she wanted, so she customized based on her likes and dislikes of existing options.




“I tip my hat to the powers that be that made that decision [to keep building], which saved a lot of jobs. That, plus low interest rates, were the recipe for success.” —Kristina Sawyer “I consider myself a translator where I understand our business. I built our system, so I understand all the workflows, and then I’m able to translate that to the developers to build it,” she said. “[Other] people may understand our business, but most people aren’t operationally minded. I kind of see the matrix and how it flows.”

LENDING NEW PERSPECTIVE As someone who loves a challenge, Sawyer recently moved into her new role as vice president of lending. Rather than operations, she’s now focused on originations and building new product offerings in the commercial and multifamily space. What hasn’t changed is her focus on empowering her team and helping people find the right roles. “I think a big part of managing and being a leader is not expecting someone who likes squares to be a circle,” she said. Sawyer’s transition comes at time of company growth. Arixa largely focuses on California and the West Coast, but it has also opened a new Arizona office. Sawyer said the company continues to expand its footprint organically by following top clients as they invest in other markets around the country. The new product she’s creating will be available nationwide. The company also is offering



a new product for long-term rental investors. Sawyer said these buy-and-hold investors are often sophisticated buyers who own property portfolios and who didn’t have has many options for loans as other types of investors.

INDUSTRY TRENDS The COVID-19 pandemic created disruption at many levels within the real estate industry. Sawyer discussed some of the trends she sees taking hold. First, historically low interest rates are driving the real estate market. During COVID-19 shutdowns in 2020, Sawyer said, there was a brief glimmer of higher rates. Some lenders pulled back, and those who kept lending, like Arixa, could charge about 50 basis points more than they had previously. That only lasted about four to six months, she said, and now rates are low again. In terms of the market, demand is outstripping supply for single-family homes nationwide. Buyers are paying top dollar while sellers reap the rewards. “Most of the frenzy is because of low interest rates,” Sawyer said. She’s watching the situation carefully. Homeowners are refinancing to take advantage of lower rates, and many people are in the market to buy. In the Greater Los Angeles metro, Sawyer said, it makes more financial sense to buy than to rent. While that’s great for the economy, it’s a tough time for some investors. Right now, she said, there’s more money chasing good deals than there are good deals to be had. For investors who want to flip a property or create added value, paying high prices for properties just doesn’t make sense.

THIS OR THAT ? T E X T O R C A L L? Text. I’m a multitasker, so it’s quick and to the point. But there is a power of the call—it’s just a different experience. If it’s client-related, I’m definitely going to call.


CO F F E E O R T E A? I’m not a big coffee or tea drinker. I’ll usually get a dirty chai, which is coffee and tea.

M O U N TA I N O R B E AC H ? I’m a beach girl. I snowboard and love the mountains, but definitely if I have a choice, it’s the beach.

RAIN OR SHINE? Definitely shine. In California, we don’t get rain very often, so I actually really enjoy it. But I love the sunshine.

N I G H T O W L O R E A R LY B I R D ? Early bird. I’m usually up by 5 a.m. I meditate and I work out. Those are the two things I have to get done for my day to be right.

However, there are still plenty of deals being made. Sawyer said lenders are busy, and many are even looking to staff up if they can find qualified candidates. Arixa has been fortunate to hire talented




originators during the past year, she said, and they’ve paid off: Arixa had its biggest origination month ever in April 2021. Last spring, amidst uncertainty, Arixa continued lending, Sawyer said. “Once we got through the first couple months [of the pandemic], people were buying again,” she said. Though Arixa had to work with a few borrowers to create forbearance agreements, it’s been fairly smooth sailing for the company.

FAVORITES? THING TO DO O U T S I D E O F W O R K: I love to travel, whether it’s

little weekend trips or big trips.


I spent two weeks in Costa Rica (earlier this year). It has the nicest people I’ve ever come across, and it offers everything. I spent a few days in

the jungle, a few days at the natural hot springs by the volcano and some days at the beach. It

was so clean and lush and beautiful. I was very

impressed by the country overall and the people.

G U I T LY P L E A S U R E: I definitely love sweets. It doesn’t matter if it’s chocolate, ice cream, gummies.

T V S H O W:

Bridgerton, The Marvelous Mrs. Maisel



Sawyer attributes much of the industry’s resilience and continued success to the fact that construction continued during the pandemic. With such low inventory, new construction has filled a need in the market. In Los Angeles, that includes a mix of infill redevelopment through teardowns and greenfield development. If they had stopped construction, it would have been “catastrophic” to the industry, she said. Homes that were in progress couldn’t be left open to the elements without sustaining damage, so the decision was made to push through and continue the work. “I tip my hat to the powers that be that made that decision [to keep building], which saved a lot of jobs. That, plus low interest rates, were the recipe for success,” she said. Another trend in construction is the accessory dwelling unit (ADU)—an apartment or separate building on a residential property that contains its own kitchen and bathroom. Also known as granny flats or mother-in-law suites, these additional living areas add value to the existing property. In Los Angeles, Sawyer said the city is encouraging construction by implementing a one-day permitting process. While the ADUs can provide much-needed housing, Sawyer is interested in the ripple effects. For example, property owners who turn parking spaces into ADUs will exacerbate the scarcity of parking.

Along the same lines as ADUs, some developers are adding density by tearing down existing structures and creating small-lot subdivisions, Sawyer said. Lots that previously had single-family homes could be rebuilt with four condos, for example.

new remote-work communities, whether

Sawyer said she’s already seeing growth in inland California thanks to work-from-home policies that allowed employees to do their jobs remotely instead of being tied to the metro where their office was located. Workers benefit by getting more home for their money, and the cities may see an eased burden on infrastructure with fewer commuters.

response that impacted real estate inves-

Though Arixa is willing to follow its developers if they decide to chase the boom to

those are suburbs or smaller towns, Sawyer said they avoid “second-home areas,” which tend to have more volatile markets.


Beyond shelter-in-place orders that led to demographic shifts, another pandemic tors was the eviction moratorium. Sawyer had several tenants unable to pay rent, with no recourse option to mitigate. The moratorium also caused many multifamily investors to pump the brakes on new purchases. “Why buy when tenants aren’t paying rent?” she asked. Still, she expects deal flow to pick up

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.

again later this year when renters can no longer defer payments. ∞




DON’T LET RELATIONSHIPS FOOL YOU No matter how well you think you know a person, be sure to perform fact-based due diligence before you make a lending decision. by Beth Johnson


o you place significant

value on your relationships with your best borrowers?

If you do, you’re not alone. And because

you value those seasoned, well-qualified

investors so highly, you—like many insti-

tutional private lenders—likely offer tiered rates and terms to accommodate them.

For private lenders just starting out, this strategy could prove troublesome. Let’s take a look at some consider-

ations private lenders, especially nov-

ices, often overlook when working with a borrower they already “know.”

Although it’s true that past behavior is a

strong predictor of future behavior, in some circumstances, you should set aside your

subjective opinions of an individual’s expe-

rience and capabilities in favor of hard facts.



COMMON MISCONCEPTIONS Many of the “gotchas” that occur when relationships are favored over facts are rooted in common misconceptions. Here are a few of them: O nly lending to people you know. Perhaps the person is a young family member and you want to support their investing journey. Or, maybe a close friend or colleague tells you their amazing fix-and-flip stories over lunch. Whatever the relationship, the tendency is to trust these people implicitly because you know them on a personal level. But you may not know much at all about their professional reputation, spending habits, or business experience. O nly lending to people with expe-

rience. Although experience should be

a strong consideration, even the most seasoned investors can fall victim to a market correction, general contractor gone M.I.A., or global pandemic shutdown. Experience may help some recover faster, but no one is completely immune from market fluctuations, including you. You know the borrower is “good for

it.” You see the flashy cars, the social media posts flaunting recent project wins, the fancy watches, and designer wardrobe. Their appearance wreaks of success, right? It’s common for novice private lenders to get carried away with the public fanfare of investors rather than verifying their background and experience. T he borrower came highly recom-

mended. Referrals in the real estate industry are critically important to success. Relying solely on another’s opinion or recommendation, however, should

not override your own due diligence. As Ronald Reagan said, “Trust, but verify.”

MAKE DATA-DRIVEN LENDING DECISIONS Verifying facts about the borrower is important to be a successful private lender. Even if you already know the borrower as a friend, family member, or colleague, how often do you conduct background checks, pull credit, or ask about their annual income? The process for underwriting a borrower should be similar to how landlords conduct tenant screenings. A few things to fact check would be:

credit reports, you can still see the borrower’s open credit lines and payment history. This can typically provide a true assessment of their current liabilities. P ast experience. Ask for a schedule of real estate and past projects and verify the person’s project experience through the tax assessor’s records. Make sure to verify the borrower was an actual equity partner vested on the title on past projects. F inancial health. Request personal financial documents that will substantiate liquidity and sources of income and prove the borrower can cover project expenses and monthly carrying costs.

within the borrower’s control but that could impact their ability to pay you back. Execute your due diligence on the borrower’s intended use of loan proceeds by collecting relevant documentation and asking some simple questions to ensure you are comfortable proceeding. Here are a few important questions you should answer before funding a deal: D oes the borrower have relevant, verifiable experience? A re the borrower’s project plan and budget realistic? W hat are the market conditions where this project is located?

T he Character. A background check can give you insight into legal matters the person hasn’t freely shared.


I s the general contractor reputable, licensed, bonded, and insured?

C reditworthiness. Although credit scores usually are not provided on free

After completing due diligence on the borrower, consider outside forces not

D oes the borrower have multiple and reasonable exit strategies?




D oes the property have sufficient equity to cover you in a worst-case scenario? A re you willing and able to lend more money on the project if it exceeds budget? Do you have enough experience and knowledge to underwrite this type of project?

UNDERWRITE YOURSELF This last question is one of the most important and self-reflective to answer. No matter what information you gather about (and from) your borrower, if you cannot distill or verify this data because of lack of experience or little understanding of the current real estate market, you might be in over your head. Whether lending your hard-earned savings or through your self-directed retirement plan, the primary goal for new private lenders should be return of principal, not return on investment. Here are some ways you can overcome this obstacle and ensure your private loan investments are safe and secure: S tick to what you know. If you only know about flips, then stick to fix-and-flip loans and turn away requests for complex construction loans or asset classes outside of single-family residences. C onsult with real estate experts. Reach out to people who can help vet your borrower’s general contractor proposal. Contact a local real estate agent (or pay for an appraisal) to find out more about market conditions and property values. Review with a real estate attorney. J oin an investor club or association. Attending local real estate



meetups can greatly improve your network and the knowledge base you’ll need to assess a loan request. You may even find investors who have experience in private lending, both as the borrower and as the lender. L end through a trusted private lender. Established private lenders can help you source, underwrite and fund your first few loans. Find a local lender who facilitates direct placement of trust deed investment as opposed to investing in a pooled mortgage fund where your participation is more hands-off. Eventually, you may feel confident to proceed independently.

GIVE YOURSELF TIME Private lending can be attractive as a passive investment if you are seeking ways to earn money on your money. However, you must take responsibility upfront to protect your investments. Although your intuition is important, knowing someone socially is not a good enough reason to avoid the hard work of fact finding. In many ways, lending to someone you have an existing relationship with can be even more difficult, because you are starting out with preconceived notions about this person rather than a clean slate. So, if you value and want to preserve your personal relationships (and your principal investment), focus on the critical thinking required to properly underwrite a business loan. The information you need to make a sound financial decision often doesn’t come through in everyday social conversations. ∞


BETH JOHNSON Beth Johnson is co-founder and

managing partner of Flynn Family Lending, a family-owned private

lending business offering creative financing solutions in the state of Washington.

Before getting into private lending, Johnson spent 20 years in the tech and telecom industries managing

all aspects of corporate training and

communications, while investing in real estate on the side.

As a real estate investor, she and her husband have experience in

wholesaling and flipping, and they now prefer to invest in small multifamily properties.

In her spare time, Johnson enjoys

spending time with her blended family

of five, running, traveling, and playing a little poker.





Winning at Bankruptcy Games A borrower’s bankruptcy filing can be one of the biggest headaches lenders face. by Matthew Gunter




in losses to lenders, generally the

losses with fewer new loans. Finally, there are likely greater losses than benefits to society at large since the real estate asset is tied up in bankruptcy and will be unable to contribute to the housing needs of the community.

greatly outweigh those small losses.


ankruptcy protection is

designed to give a debtor, whether an individual or a

business, a fresh start. Although in some cases bankruptcy may result

societal benefits of this fresh start

The wisdom of that design, however, extends only as far as the societal benefits do, in fact, outweigh the losses. In the case of the typical borrower in our commercial lending industry—an LLC or corporation owning a 1-4 family residential property— the benefit/loss calculus is much different. In the eyes of private lenders, borrowers benefit greatly from current bankruptcy laws. Borrowers who file a bankruptcy petition generally do so on the eve of a foreclosure sale in order to stall the foreclosure. This gives the borrower more time to negotiate a deal with the lender. There are, however, those few who file solely for spite—a clear abuse of an otherwise useful system. These delay tactics can backfire because a bankruptcy hurts a borrower’s chances to refinance, can derail a potential sale of their property, and add extra costs to their loan payoff. These petitions are often eventually dismissed, or relief is granted to the lender due to the abusive nature of the filing, though the damage is already done. The losses to the lender are greater because (1) the cost of capital is much higher and (2) the lender requires a larger volume of new loans to make up for the single loss compared to a bank or credit union, which can absorb the

In 1994, Congress amended the bankruptcy code. Among other things, the requirements for a debtor in a Single Asset Real Estate (SARE) case were tightened. Borrowerdebtors who file bankruptcies classified as SARE cases have moderately heightened requirements they must follow through on more quickly to avoid dismissal or a lendercreditor’s relief from the automatic stay. Among the requirements are the debtor’s filing of a reasonably confirmable plan (if Chapter 11 filing) or their resumption of non-default-rate interest payments. Although these requirements are helpful, there are significant limitations with both their application and the structure of the requirements themselves. SARE cases, of course, may only apply to a certain subset of borrower-debtors. SARE excludes residential real property with 1-3 units, which is a large, if not majority, share of the assets or loan types in the private lending industry. Thus, a borrower-debtor with a single-family, duplex, or triplex property will not qualify as a SARE case and will not be subject to the heightened requirements. Further, even if the borrower-debtor fits the SARE definition, it is not

the borrower-creditor’s responsibility to self-identify as a SARE case. The onus is on the lender-creditor to file a motion for determination.

REFORMING SARE A change in the definition of SARE and other reforms would help reduce bankruptcy filing abuses. The first change that would help lendercreditors is to expand the definition of a SARE case to not exclude 1-3 family residential properties, at least when the borrower is not an individual. Such a change would further the goal of SARE cases—to prevent abusive bankruptcy filings to obtain the automatic stay—without harming individual borrowers who are most likely consumer-borrowers. Second, require borrower-debtors to self-identify as a SARE case, with penalties for failure to do so in good faith. This change would save lender-creditors significant time and money by reducing the need to have attorneys file and prosecute motions for a SARE determination. Third, eliminate the requirement for lender-creditors to file a motion for relief from the automatic stay in SARE cases. Rather, a “show cause” hearing would automatically be set for some short period of time (e.g., 14 days) after the filing of a SARE case or a court determination of SARE. The hearing would require borrower-debtors to show why relief from the automatic stay should not be granted.




In this example, relief from the stay would be granted 14 days after filing or

lender-creditors time and money by reducing attorney expenses and making SARE

determination without a motion from

cases much more likely to end quickly.

a lender-creditor—unless the borrow-

Fourth, prohibit refiling of bankruptcy

er-debtor shows it has started to pay the non-default-rate interest and if a Chapter 11 bankruptcy convinces the court the

within one year or longer if the SARE

granted. This change furthers the goal

of preventing bankruptcy filing abuses.

confirmable plan within 90 days. Failure

The SARE designation is helpful, but

from stay being granted automatically as of that date. This change would save




case is dismissed or the automatic stay is

debtor will be able to file a reasonably to file such plan would result in the relief

would go a long way to making the SARE designation far more useful in our industry.

currently only in limited circumstances and without much cost-savings for

lender-creditors. These four changes

Other changes could be made to the bankruptcy code, whether linked to SARE or not. These include the following:

01 Make clear the bankruptcy estate of an individual/natural person debtor does not include assets of

such debtor’s business entities, even if the debtor has sole membership or is the sole shareholder. Although the bankruptcy estate contains assets pursuant to the relevant state law, the bankruptcy code could clarify that it is not intended to encompass the property of a legally distinct entity unless the underlying state law makes it clear that it should be included.

02 Exclude from the bankruptcy estate any property that was owned by a business entity and conveyed to a member or shareholder of that entity within 30 days of a bankruptcy filing of that member or shareholder (or vice-versa). Such an exclusion could be reversed and the stay (no longer an ”automatic” stay) could be imposed after motion by the debtor and order of the court.

Commercial mortgage loans often are made to business entity borrowers and have natural person guarantors, who are usually the principals or shareholders of the borrowing entity. Bankruptcy petitions are frequently filed by the individual guarantor, who then includes the borrowing entity’s real estate on their schedules of assets. Occasionally, guarantors will go further and transfer ownership of the real estate to themselves from the borrowing entity immediately prior to their bankruptcy petition. The former situation could stop a foreclosure in some jurisdictions, or even relatively randomly, depending on the views of the bankruptcy judge. The latter almost universally works. Both are resoundingly unfair. These recommended changes would help put a stop to these tactics.

AAPL’S POSITION Bankruptcy filings create an expensive problem for lenders. The legal fees and accumulated interest during the inevitable delay will be passed on to borrowers; therefore, the borrower (and their guarantors), the lender, and the community where the property is located are often worse off because of a bankruptcy filing. The lenders in our industry are small businesses, not banks and credit unions. It is our industry that lends to these business entity borrowers most frequently in the 1-3 unit range and have the most exposure to the ills of bad-faith filings. These suggested changes would not only minimize lost time and reduce costs but also discourage frivolous bankruptcy petitions. AAPL and the Government Relations Committee support generally any changes to the bankruptcy code that would help lenders in our industry. We consistently advocate for expanding legal mechanisms that promote better business conditions for making business-purpose mortgage loans. That includes reducing legal and collections risks.


MATTHEW GUNTER Matthew Gunter is assistant general counsel for RCN Capital. Gunter

focuses on 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. He

presently practices in the Connecticut state and federal courts.

Bankruptcy protection is a vital and cherished aspect of the American legal system and our society. When its results promote efficiency, it works as intended. When its results are inefficient, it does not work as intended and should thus be altered. AAPL and the Government Relations Committee are committed to joining the conversation with our congressional leaders to share these and our other ideas to further build and protect our industry. ∞




THE 20% QUALIFIED BUSINESS INCOME DEDUCTION Here’s AAPL’s position on IRS code, section 199A. by Kevin Kim


he Tax Cuts and Jobs Act

enacted Section 199A of the

Internal Revenue Code in 2017.

This legislation created a 20% tax

deduction for qualified business income for pass-through companies (e.g., limited liability companies, subchapter

S corporations, and limited partner-

ships). It also authorized a 20% deduction for qualified REIT dividends.

This specific tax deduction greatly impacted not only small busi-

ness owners nationwide but also the private lending industry.

the worst housing shortage in decades. The private lending industry is funded by a combination of institutional capital and Main Street investors, and more than 80% of the private lending industry are small to medium businesses.

SECTION 199A’S IMPORTANCE Section 199A has significantly boosted growth in the private lending industry, which directly increases housing stock, affordable housing, and rental opportunities.

Through these types of financing prod-

It reduced the tax liabilities for the small business owners who owned and operated mortgage origination businesses that originate, fund, and service these types of loans. Section 199A allows them to grow their operations and reinvest into expansion, thereby directly creating even more housing stock, affordable housing, and rental opportunities.

created millions of units of housing during

In addition, Section 199A further incentivized Main Street and Wall Street

Real estate private lenders offer

financing opportunities to real estate developers, real estate investors, flip-

pers, and wholesale purchasers. These financing opportunities are usually bridge loans, construction loans,

and perm loans for rental homes. ucts, the private lending industry has



investments into mortgage REITs, mortgage funds, and other finance companies that originate, fund, purchase, sell, service, and portfolio these types of loans. This directly expands origination capabilities across the country, also creating more housing stock, affordable housing, and rental opportunities. Since enactment of Section 199A, Limited Partner (LP) investment into the private lending space has increased by more than 35%. Institutional investing into the private lending space has increased by more than 50%. This translates into significantly more loan production. In 2020 alone, the private lending industry generated more than $100 billion in new loans for fix-and-flips, rental home investments, bridge loans, and new construction for 1-4 family residential and multifamily properties. The result is that new homes are being built, aging inventory is being rejuvenated, and more homes are being put on the market.


AAPL OFFICIAL POSITION For these reasons, the American Association of Private Lenders (AAPL) wholeheartedly supports Section 199A. Further, AAPL endorses making Section 199A permanent.

KEVIN KIM Kevin Kim is an experienced corporate and securities law attorney with AAPL’s general

Here’s why:

counsel, Geraci Law Firm. He is dedicated

01 AAPL’s membership is comprised of small to medium busi


nesses, most with fewer than 50 employees. Small businesses are the heart of the American economy.

02 Not only does this law support small businesses, it sup

ports an industry that is directly responsible for creating renewed housing inventory, more affordable housing, and more rental home and apartment inventory. ∞

to providing reliable and innovative legal

Kim focuses on real estate matters, including

private placements and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs. His work

includes seeing that clients are compliant with applicable securities laws, structuring strategic partnerships, and creating innovative solutions.

His securities and corporate practice also includes preparing complex private and public securities offerings for alternative investment platforms for clients throughout the United States and abroad.


MEANS SOMETHING. Join the first national association representing the private lending industry as a viable alternative for borrowing and investing. As a member, you’ll gain prestige through our: CODE OF ETHICS







AAPLONLINE.COM 913.888.1250




TOWNHOME PROJECT IN FORT WORTH’S WEST 7TH DISTRICT A development project near the West 7th neighborhood in Fort Worth, Texas, provides much-needed housing inventory in one of DFW’s hottest districts.


he DFW area has experienced astounding growth in recent years.

Companies like Charles Schwab, Toyota, and Amazon have moved to the area, and in 2020, DFW ranked

The new townhome project is also situated

The entire Swiss Avenue team quickly got

near Texas Christian University (TCU), a

to work, secured a capital partner, and

top-tier university with more than 10,000

quickly processed the closing.

undergraduates living on campus. TCU is in growth mode, and the university will


need additional housing for undergrads

first in raw population growth.

and professors.

The population surge and business growth

Smith Builders, co., the borrower, has

tion with 14 identical townhomes. Seven

more than 20 years in multifamily new

units are inverse to the remaining seven

have also brought increasing demands for housing. To meet this demand, Swiss Avenue Funding has been teaming with developers across Texas to provide project funding. One of their recent projects is a new townhome project in the West 7th neighborhood. In Fort Worth, the five-block urban village of West 7th bridges downtown and the Fort Worth Cultural District. It offers residents access to one of the most convenient “live-work-play” developments in the Dal-

construction. Company CEO Mark Smith grew up in DFW and has a grasp of the opportunities available in neighborhoods like West 7th. When he approached the Swiss Avenue team about the project, he said, “We want to build new construction that will help modernize historic Fort Worth, while preserving the historic charm.” This vision laid the foundation for developing the 14-unit, two-bedroom, two-bath-

The project is a ground-up new construc-

units to create symmetry. The project will be completed on a cleared lot of 14,200 square feet. Units feature a modern kitchen with granite countertops, custom cabinets, tile backsplash, and stainless-steel appliances. The bathrooms will include a shower/tub combo, granite countertops, tile backsplash, and tile flooring in all wet areas. Other features and amenities include heating and air conditioning units, carpeted

las/Fort Worth area. The neighborhood is

room, 1,250-square-foot townhomes.

home to high-end nightlife, unique shops,

Swiss Avenue CEO Zach Ghormley under-

garbage disposal, and a landscaping pack-

and fine dining.

stood the needs of Smith and his team.

age for added curb appeal.



living areas, ceiling fans, dishwasher and


Lender // Swiss Avenue Funding Borrower // Smith Builders Co. Location // West 7th Entertainment

District, Fort Worth, TX

Architecture Style // Contemporary Year Built // 2021 Square Feet // 1,250 per unit Loan Amount // $3,765,462 LTV // 70% ARV // $5,380,000



Credit Score // Yes Client Borrower Experience //

Expert developer

Interest Rate // 8% interest only Loan Term // 18 months Construction Budget // $3,000,000 Exit Strategy //

For Sale Townhomes and extending project timelines. DFW Devel-

eye for design to integrate the aesthet-

opers are not unlike most developers experi-


ics of a multi-unit build into an existing encing similar issues during the pandemic, yet community with so much history. When their unique ability to push the city for permit a borrower and lender can come together approval, complete major project milestones,

The borrower is a highly experienced

and contain rising costs with imaginative

builder who has completed many similar

solutions proves they are one of the best in the

projects during his 20-year career. Yet the


team faces challenges with rising construction costs and labor scarcity due to the


lingering effects of the global pandemic.

on a vision for introducing a modern twist while respecting a community’s historic feel, it’s one of the keys to making the private lending industry so successful. The West 7th Entertainment build showed true ingenuity to create real value for a

These challenges have affected the

There is an irrefutable beauty in the ability

neighborhood and satisfy a community’s

intended ROI by increasing material costs

to create from a blank canvas. It takes a keen

demand for inventory. ∞ SUMMER 2021




hen a borrower files for bankruptcy, the automatic stay comes into

force. It prevents private lenders from taking legal actions, such as fore-

closure, to collect on their loan. The

previous article analyzed the actions a lender can take immediately when a borrower files for bankruptcy.

This article focuses on how to get the most out of your claim if you’re stuck in the bankruptcy, including filing a proof of claim, adequate protection payments, verifying that your claim is correctly reflected in the debtor’s plan, cramdown and lien stripping, abandonment, and sale of the collateral property.


Borrowers in Bankruptcy Part 3 Get the most out of the bankruptcy: Know your rights and what you can and can’t do. by Marc Weitz

As part of a series of articles discussing strategies for private lenders to work with bankrupt borrowers, this piece examines options for getting the most out of your claim during bankruptcy proceedings.



A proof of claim is your filing with the court demanding what the debtor owes you, backed up by evidence. Proofs of claim are relatively easy to put together and file. There is a form, with instructions, on the U.S. Court website. Along with the court form, submit the debtor’s statement of everything owed to you as of the petition date, including late fees, default interest, etc. Include the promissory note and the deed of trust. Many courts allow creditors to file electronically, and it is possible to do so without an attorney. However, you still should consult local bankruptcy counsel to make sure what you’ve filed is correct. Filing a proof of claim should be your first step. Always file one! Although there are exceptions when one is not necessary, don’t bother with those and make

a mistake. Just file it. Be aware there is a filing deadline, depending on the bankruptcy chapter. In theory, you’re supposed to receive notice of this deadline. Given that filing is a relatively straightforward and inexpensive process and you already have all the backup handy in your system, just go ahead and file early.



If you tried to move for relief from stay and were unsuccessful, you should have asked for adequate protection at the same time. Adequate protection refers to the payments to secured creditors that protect them from a diminution of their collateral during the bankruptcy when they are unable to get relief from stay and foreclose. Adequate protection payments are more likely to be granted when the secured creditor has a small equity cushion.

CAREFULLY MONITOR YOUR CLAIM IN THE PLAN The goal of chapter 11 or chapter 13 bankruptcy is to confirm a plan to pay creditors. When the debtor files the plan, make sure it correctly reflects your claim, including the principal, interest, term, etc. If you find any inconsistencies, contact the debtor’s counsel to fix the errors and object to the plan, if necessary. Don’t let the debtor slip one by you by changing the terms of the debt without your consent. Once a plan has been approved, it is too late to object.

CRAMDOWN/LIEN STRIPPING In some instances in chapters 11 and 13, the debtor can force a change to your claim through the plan. This is called cramdown or lienstripping. You will receive notice of a cramdown and can either object to the cramdown or vote against the plan. A cramdown in chapter 13 is really the partial stripping of a lien from a secured debt. A debtor can split an undersecured mortgage into two pieces and reduce the lien to the secured portion. The unsecured part joins the pool of other unsecured claims. For instance, let’s say you’ve lent the debtor $1,000,000 on a home. The home is now worth $800,000. That means the loan is underwater, and $200,000 is unsecured. The chapter 13 debtor can split, or bifurcate, that debt into an $800,000 secured portion and a $200,000 unsecured portion. Your lien is stripped down to cover only the $800,000, and the remaining $200,000 becomes an unsecured debt. A debtor makes payments to the unsecured creditors as a whole.

Your portion is the pro-rata share of the total unsecured amount owed. Any unpaid portion at the end of the chapter 13 plan is discharged, which means gone forever. However, your lien on the $800,000 survives the bankruptcy. Before you get too nervous, there are restrictions. It cannot be done on the debtor’s primary residence. That means the debtor is usually only cramming down his investment properties. Second, in California, the lien can be stripped if the secured portion of the loan is completely paid off during the 3- to 5-year chapter 13 plan. For chapter 11, the debtor divides its creditors into classes who, as a whole, vote to accept or reject a plan. Debtors may force or cramdown the plan on a non-accepting class, subject to restrictions. The plan must be “fair and equitable” to the non-accepting class. For a non-accepting secured creditor, like a mortgage holder, a fair and equitable plan keeps the lien in place and provides cash payments with a present value equivalent to the value of the collateral.




sale is subject to overbid at the hearing approving the sale. A secured creditor may even use what it’s owed as a “credit bid.” As a secured creditor, bankruptcy law allows you to recover your costs to the extent you’re oversecured. The trustee or debtor will ask you for a payoff demand. Make sure you include post-petition interest, expenses, late fees, legal fees, etc. Be vigilant of your claim in an ongoing bankruptcy. Know your rights. Know what you can and can’t do.

Another fair and equitable plan sells the collateral property with a lien attaching to the proceeds. A third way is to give the indubitable equivalent of the creditor’s secured interest. You’ll rarely see this, and it’s not well defined, but it may be the offering of a lien on another property. In both chapters 11 and 13, make sure your rights are protected under the plan and the cramdown of your secured claim follows the rules and restrictions.

ABANDONMENT As you recall, a chapter 7 trustee is appointed to gather the debtor’s assets and liquidate them for the benefit of creditors. Property that has no value to the estate or is too burdensome will be “abandoned” back to the debtor. When calculating the value to the estate, you must include the debtor’s exemption. For example, California now offers debtors a $300,000 to $600,000 exemption on

their primary residence, depending on the county. A $1,000,000 property with an $800,000 loan would not have $200,000 in value to the estate, because that equity is exempted. As such, there is no benefit to the estate for selling the property. So, maybe you were unable to get relief from stay because the debtor had equity in the property, but there was no value to the estate because of the exemption. In this case, the chapter 7 trustee will likely abandon the property back to the debtor. It is very important to remember that abandonment does not end the automatic stay! To foreclose, you must wait for the case to close or move for relief from stay.



loan, or prior to bankruptcy. ∞


MARC WEITZ Marc Weitz is a California bankruptcy and real estate attorney helping

private lenders recover investments from borrowers in bankruptcy. With

It is good news when the debtor decides to sell the property. While it is not as fast as a foreclosure, sales lead to higher prices.

a combined 23 years’ experience

The debtor or trustee will hire a broker to market the property. Moreover, the

and legal side. Weitz is also a

Disclaimer: This article is for informational purposes only and is not meant to be legal advice. Consult your local bankruptcy attorney. 70

The next article in the series will discuss risk-management strategies you can take before granting the

between the law and investing,

Weitz has a unique knowledge and

understanding of both the investment Chartered Financial Analyst (CFA), a

California licensed real estate broker, and an investment property owner.

Become a Certified Fund Manager from the comfort of anywhere. Our highly sought after course is now online. CFM bridges industry practices, investment theory, ethical issues and professional standards to provide investment analysis and portfolio management skills. Topics include: •

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Register for $349 at* *CFM and other AAPL designation courses are available to AAPL Members Only.




“I’M THE CEO, AND I APPROVE THIS MESSAGE” Before you approve any advertising campaign, make sure it adheres to ethical and legal guidelines. by Erica LaCentra


hen you hear “attack ad,” you probably

think “political ad.”

Although mudslinging political ads may be the most recognizable example of attack ads, these ads are commonplace in many industries, including among private lenders. Playing up your own company’s strengths by pointing out your biggest competitor’s shortcomings may seem like an easy marketing strategy. But, companies that run these ads often walk a very fine line between smart advertising and unprofessionalism—and even unethical practices. Private lenders that belong to the American Association of Private Lenders (AAPL) agree to the association’s Code of Ethics. Running attack ads runs afoul of the code in two areas. The first specifically addresses truthfulness in advertising. The second addresses honesty in relationships in general. Let’s take a closer look at each.



TRUTHFULNESS IN ADVERTISING AAPL’s Code of Ethics explicitly states: “Advertisements shall be truthful and will adhere to all laws, specifically defined through the Truth-in-Advertising Act under the FTC.” Whether or not you are a member of AAPL, at the bare minimum, private lenders should follow the law when it comes to advertising content. Per the Federal Trade Commission: “When consumers see or hear an advertisement, whether it’s on the Internet, radio or television, or anywhere else, federal law says that ad must be truthful, not misleading, and, when appropriate, backed by scientific evidence. “ This standard applies regardless of where the ad appears. This area of truthfulness is where many private lenders get into trouble when

developing attack ads. It’s easy to get carried away and exaggerate or fudge the truth slightly to make your company look better than a competitor’s. Some private lenders may think that because they are running a smaller advertising campaign with a limited audience, the risk is worth it and there’s little chance they will be caught. Think twice about that. Running such a campaign, no matter how limited, is potentially damaging to the reputation of your business. And, and this is a big “and”—it’s illegal. RCN Capital has had several firsthand experiences dealing with untruthful ads about our company. In one example, a service provider posted a website testimonial claiming to be from our CEO. RCN never provided or approved this quote. It had been fabricated to give this company more clout. Another service provider alerted us to it, and we requested it be removed immediately.

In a close-knit industry like private lending, it’s not a matter of “if ” you

are caught, but “when.” The legal and reputational fallout will not be worth the few customers you may attract.

In cases where you want to compare specific products, rates, terms, etc., in your advertising to show you are superior to a competi-

tor, you must be ready to back those claims

with hard evidence. If your claims can’t easily be fact-checked or supported anecdot-

ally—or you’re not comfortable citing where you got specific information about your

competitor—don’t include it in your ads.

HONEST DEALINGS Attack ads may also violate a second, more general section of the Code of Ethics, which states:

“Members will be honest and forth-

right in all their dealings with their

borrowers, investors, financiers, ser-

a private lender lies about a competitor

vice providers, and the association.”

to gain customers, what other measures

As mentioned, the private lending

are they willing to stoop to to get ahead?

industry is a pretty tight-knit community,

In yet another example of RCN Capital

and most private lenders have at a least

being the subject of nefarious advertising

cordial relationships with their compet-

claims, last year in March, at the begin-

itors too. Being truthful, upfront, and

ning of the pandemic when COVID was

professional when dealing your direct

already causing enough confusion and

customers as well as other players in

uncertainty, a competitor blasted an email

the space ensures the reputation of the

saying we were closing permanently,

industry as a whole remains positive.

claiming instability in the capital mar-

Private lenders that run attack ads start

kets took away our ability to fund loans.

to fall into a grey area. They really aren’t being upstanding in their dealings with

Although we may have had to put a brief pause on originating, we were honest

others in the industry, which is not in

with our customers and told them so.

line with what AAPL expects from its

The news that RCN was closing for good

members. This type of behavior often

couldn’t have been further from the truth,

casts a negative light on the industry as

but it caused a significant amount of fear

a whole because it casts doubt on the

and chaos and forced our company into

legitimacy of lenders in the space. It also

damage-control mode. We addressed the

calls the offending lender’s own reputa-

concerns of customers who had received

tion into question. Think of it this way: If

the email, and then we took action




against the company and the individual that had been the source of the claim. Although RCN managed to come out unscathed, I cannot say the other company fared as well, especially reputationally. From the perspective of any current or future customers, you can imagine how hard it would be not to be suspect of a company that was willing to widely broadcast a lie about a competitor to try to get ahead during a time that was already so challenging for most in the industry. And, any other lenders or service providers in the industry that saw the claim and learned it was false would likely think twice about having a relationship with a company willing to broadcast something with such far-reaching implications. Pulling those kinds of tactics could cause you to be blacklisted throughout the industry. Save yourself any potential future fallout: Avoid this type of advertising tactic entirely.

ON THE RECEIVING END Now you know how to avoid running advertisements that cross legal and ethical lines. But what happens if you are the target of such an ad? It’s not out of the realm of possibililty that you will be, if you haven’t been already. According to AAPL, RCN hasn’t been the only victim of attack ad tactics. The association has received numerous Code of Ethics violation complaints from



members who have been the subject of false or misleading attack ads by competitors. You may have seen one of the very public apologies that resulted from AAPL’s enforcement of its Code. If you are on the receiving end of an attack ad that is false and damaging to your company, seek legal advice to find out what steps you can take to stop the advertisement. Knowing your rights will help you determine your next steps and minimize harm to your company. Next, if it also breaks the Code of Ethics, report it to AAPL. You don’t need to be an AAPL member to file. Easy, step-by-step instructions for filing a complaint online or by mail are on AAPL’s website. Taking action against these bad players helps preserve the integrity of the private lending industry. This step not only holds the perpetrator accountable but also helps ensure that other members of the private lending community won’t face a similar issue with the offending company in the future.



ERICA LACENTRA Erica LaCentra is the director of

marketing at RCN Capital, where she is responsible for planning, developing, and implementing the company’s

marketing plan and overseeing the marketing department.

Joining RCN Capital in 2013, LaCentra led a strategic rebrand to position the company for nationwide expansion.

LaCentra’s ongoing efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand.

LaCentra currently serves as a

member of AAPL’s Education Advisory Committee and is the marketing and communications chair for AREAA

Boston. She holds a B.S. degree in

Some private lenders may still choose to walk a tightrope and run attack ads. Keep in mind these ads are often perceived negatively and are often discounted. It is better for your reputation and the industry as a whole to take the high road and highlight your own company’s strengths in your ads rather than sling mud. ∞

advertising with a minor in fine arts from Suffolk University in Boston.



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Sample of a fake “Lender License” used by a scammer. AAPL does not issue licenses, and members must use the association’s “Proud Member” emblem.



Each quarter, we ask one of our committees to weigh in on a topic. These broad, open-ended questions allow for a wide range of responses to better explore the full scope of an issue. This quarter, we asked our Ethics Advisory Committee to tell us what they think private lenders can (and should!) be doing to help prevent their customers from becoming the victims of scams.



Managing Partner, Investmark Mortgage The first thing private lenders can do is analyze the deal to see if it makes sense and meets the borrower’s expectations. This is especially critical when the deal is coming from a wholesale channel where values are commonly exaggerated, and the amount of work needed to complete the project is routinely minimized. The lender’s knowledge of the market and expertise in determining whether the scope of work is sufficient to complete the project will help the borrower decide whether they are on target or overpaying for the deal.

Second, private lenders can encourage borrowers to deposit all earnest money checks with the title company—and not issue them directly to the wholesaler/ seller. If a transaction cannot close for some reason, the borrower will have an easier time getting their money back from a title company versus chasing down a seller that is not returning their calls. Finally, if the transaction is moving forward, and the borrower is required to wire money to the title company, have them call the title company directly to verify that the wiring instructions they received are correct, and they are not a victim of an email phishing scam.



President, Prospera Private lenders fit into a niche category of a less-regulated financial sector, which is

one powerful reason for AAPL to exist. Less regulation creates innovation and freedom to make loans that are more flexible for

borrowers, but it can also allow bad actors to hurt others without consequence.

Within and beyond AAPL, private lenders

can unite to protect the industry and learn

from one another. Although some would generalize private lending as “hard money” and

expect loan quality and processes to be min-

Establishing a standard of due diligence and underwriting quality is one way to show scammers the private lending industry is a force to be reckoned with. As information is received and analyzed, it must be verified beyond the rigid loan criteria to ensure a submission isn’t a mere façade for a scam. Borrowers are sometimes shocked to find a rogue lien has been filed, a document has been manipulated, or a criminal has misrepresented something. So, as good loans are made through quality underwriting and work flows, borrowers and others can be protected from the rampant scams and fraud that would otherwise poison the industry.

imal, foregoing a disciplined underwriting

process opens the door to scams and fraud.






Partner, Geraci LLP Emphasizing key components of the underwriting process typically uncovers major issues for any size real estate project. Lenders should follow best practices in their underwriting guidelines, because fraud the borrower suffers is likely to spill over to the lender. Sight visitations, seller due diligence, title reports and records, transaction histories, and the specifics of the purchase agreements should all be evaluated carefully.

Another key component is to evaluate the experience of the borrower. First-time borrowers are more likely to be targets for fraud. Inexperienced borrowers will need additional education and handholding, but this may create a stronger working relationship for the future. Private lenders can also educate their borrowing base with their educational campaigns. This will not only attract new borrowers, but also inform them of common fraud tactics out in the marketplace.

FA C T S , E V I D E N C E , L O G I C


Co-founder, Rehab Financial Group Ultimately, it is the borrower’s responsibility to think critically when dealing with an unknown lender. The borrower needs to examine facts, evidence, and logic. A lender’s presentation to a potential borrower should be geared toward satisfying all three. Rather than rely on websites and social media, a borrower should do their own due diligence and then back up their findings by having a live conversation with a lender they believe can meet their needs. All private lenders have a responsibility to back their words with real examples and tools that make borrowers feel safe.



Facts are universally true—they don’t just pertain to the individual lender but also to the organizations they belong to and the ethics, culture, and customer service commitments the lender subscribes to. Logical inferences can be backed up by common sense and common knowledge. Evidence consists of positive customer reviews, testimonials, and other complimentary internet impressions along with the borrower’s own feelings about their interactions with the lender. The lender should be upfront and forthright, but it is the borrower’s responsibility to evaluate the lender, based on facts, logic, and evidence! Trust needs to be earned, not assumed.



they are guided by that experience, and it makes trusting subsequent lenders tougher.

Bull Funding Corp

Upfront fees the borrower does need to pay after signing an LOI/term sheet are the appraisal and other third-party fees, which is standard practice in regular bank loans as well. Standards for private lending should not be expected to be less.

Principal Managing Partner,

Keeping borrowers from being scammed requires openness and transparency. An

ethical private lender will charge limited fees. Legitimate private lenders (in my experience) do not require an application fee. That is the

No. 1 sign of a fraudulent lender pretender. A

lender that funds deals does not build wealth collecting an application fee.

A borrower needs to do research. Look up the company. Look up the loan officer. Have conversations. Listen to your intuition. Be proactive, not reactive!

I believe this unethical practice hurts our industry. Once a borrower gets scammed,



Regional Sales Director, Civic Financial Services

I prefer to use “investor” versus “borrower.” Although both terms relate to someone who borrows debt against collateral, there’s a subtle difference. “Borrower” feels closely related to a consumer-based request, whereas “investor” clearly refers to a business transaction for business purposes. As private money lenders, we have an obligation to create process, guidelines, and communications that prevent any partner from getting scammed (inside or outside the organization).

A few of the most noteworthy ways for preventing bad business interactions are (1) conducting an appraisal report through a third party, (2) running construction analysis on any projects that involve value-add, ranging from minimal construction all the way to ground up construction, and (3) a full underwrite on the preliminary and general. Each of these three steps tests the collateral, the investment strategy, and the people upon which the repayment and construction are contingent. At any one of these points, it is our responsibility to communicate our findings and collectively make the best possible decision. When we make a choice to partner with an investor, broker, or lender we are choosing to protect each other.




TOO GOOD TO BE TRUE? Important questions to ask include: Does the borrower know the lender or have a

personal referral? How can a borrower tell whether a lender is legitimate?

It is important to research a potential

lending company. In most states, anyone

can do a business search on the Secretary of State website to check whether an

entity exists and is in good standing. You


should also confirm they are licensed with

Founder and Principal

the National Mortgage Lending System

Spiegel Accountancy Corp

(NMLS), if required to lend in that state. Request their NMLS number and verify

There are warning signs to look for when seeking a loan to avoid scammers.

it is active. If you are working with a loan

officer, call the lending company to verify the officer represents it.

If the lender offers terms that sound too good to be true, be wary. Watch out for lenders offering 100% of the asset value or an unusually low interest rate. Private lenders generally will lend up to 75% of the underlying collateral, with interest rates ranging from 7% to 12%. Another red flag is large, upfront fees, especially if they are non-refundable. Finally, scammers often try to pressure borrowers for an immediate answer. If the lender’s offer is for a limited time only, consider this a deal breaker. Taking time to do due diligence before agreeing to a loan can help ensure you are working with a legitimate business.



CEO, RCN Capital When private lenders set transparent guidelines and openly communicate, borrowers

can more easily identify unsavory practices. For instance, many reputable lending

companies speak out against charging a large application fee. Why? Because it’s

common for scammers to pocket this fee and walk away. When reputable compa-

nies are vocal about scammers’ practices, borrowers become more aware of potential issues before they fall for them.

Another way private lenders can subvert

scammers is to have a thorough underwriting



process for all loan files. Having a set process for each loan not only protects lenders, it also ensures that any red flags are caught and brought to the borrower’s attention. It’s not uncommon for a newer investor to come to us with a “great deal” on a property. A savvier investor recommended it to them, but the sales price seems high. Our underwriters will perform additional due diligence to see whether the price was artificially inflated by repeatedly flipping it to quickly increase the property’s value and ultimately pawn it off on an unsuspecting newbie. By setting industry standards, adhering to best practices, and performing due diligence, private lenders can help prevent borrowers from being scammed. ∞

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Inside the Deal Understanding when to work with certain types of lenders saves project time and money.

rather than on your personal relationship with the lender. Notably, their inter-

nal requirements can (and do) change

without any notice to their borrowers. For example, recently I worked with

a private lender on a package of nine properties I acquired. The total loan

amount I needed was $745,000. Because it was such a large loan amount, I chose to finance it through a private lender. I had a “rate sheet” from the private lender showing what my total costs

would be for each loan. I submitted the nine-property portfolio to the private

by Brandon Rickman

lender based on the rate sheet I had. The request was then sent to underwriting for review. Little did I know, the private lender had updated their rates.


The underwriter came back with terms s a real estate investor for

more than 20 years, I have

had the pleasure of working

with both “private lenders” as well

as “private investors.” It is important to develop relationships with both

types of lenders, because different projects have different needs.

WORKING WITH PRIVATE LENDERS My experience with private lenders is they are more structured in their investment criteria and require more information to evaluate your loan request. There are pros and cons to working with private lenders. One of the pros is they generally have more money to lend at any given time. Because they pool money from other investors or have a fund they invest



from, they can be very helpful for larger projects or multiple projects. They usually underwrite the property based on the property itself and the numbers you provide. Many do not require financials such as tax returns, credit checks, etc., so they are investor friendly. Some of the drawbacks to working with private lenders? They generally cost more than private investors. They will usually charge points up front, doc prep fees, loan fees, etc., as well as 10%-14% annual returns. They also require a borrower to put down some amount of the loan amount. This could be as little as 5% or as much as 20%. Although that may not be much on a single house flip, it adds up when you are scaling and working on five or 10 projects at one time. Also, private money loans are based on internal requirements

that were not as favorable to me as I had expected. I thought I was going to have to bring little or no money to the clos-

ing table and ended up having to bring

$70,000 to close. Because it was so close to the closing date, I did not have time to find another lender. The fact that I

had developed a relationship with this

private lender did allow them to give me some concessions on the points upfront, but it still cost me quite a bit more than I expected. They also held back a portion of the rehab funds, so I will have

to pay for the rehab and then get reim-

bursed after completion of the project. All told, I will likely be into the properties for more than $100,000 out of my pocket. However, they did approve the loans and

did not require me to jump through all the hoops a traditional lender would require.

WORKING WITH PRIVATE INVESTORS A private investor, on the other hand, is a person who knows you and your business and trusts you. A private

A private investor will usually wire money within two or three days, and they don’t require all the paperwork and supporting documentation traditional lenders or private lenders require.

investor will negotiate terms with

The downside is that private investors do

than a private lender’s terms.

loan out, so they are limited to the number

you, which can be more favorable

Private investors usually do not charge

not typically have as large of a fund to of deals and size of deals they can loan on.

points up front and will also give you

A loan I recently completed was with a pri-

rehab money needed. They usually

was loaning money to me out of his 401(k),

as well. They do not charge the addi-

spoke to him by phone and explained the

title transfer fees, flood certification

knows me and trusts me, he was willing

the full purchase price and all the

vate investor who is a personal friend. He

even loan enough to cover closing costs

or from his personal savings account. I

tional “junk fees” (document prep fees,

property and the opportunity. Because he

fees, etc.) that private lenders do.

to do the loan. He asked me to send an

email explaining what I needed, along with a picture of the house. He then wired me the total $85,000 I needed to purchase the property ($80,000 purchase price, plus $5,000 in closing costs). It took less than 24 hours to get the money from the private investor, and I was not required to show any documentation. The deal was based solely on our personal relationship. I knew what to expect going into the deal, and he did not change any of the terms on me. He did not require me to put any money down, and he loaned me enough to buy the property, including closing costs and rehab funds. Also, if I need to extend the loan payoff date, he is flexible as long as our agreed-upon rate and terms still apply.




ASSESS YOUR SITUATION As you can see from these loan examples, a private investor is much easier to work with than a typical private

lender. A private investor allows you to keep more money in your pocket


because you don’t need to put money down or pay points and “junk fees.”

But, many of my investor friends flip 200– 300 houses a year. Because of their vol-

ume, they work with private lenders, pri-

base their terms more on their history and personal relationship with a borrower.

vate investors, and institutional lenders.

However, now with the market at its peak,

As a smaller “newbie” investor, it would

lenders are beginning to pull back for

with both private investors and private

crept up, requirements for down pay-

will want to establish a relationship

back onto the closing. Values of prop-

be beneficial to develop relationships

fear of the next downturn. Rates have

lenders. As your business grows, you

ments have risen, and points are tacked

with a traditional lender such as a local

erties have escalated so fast that larger

or regional bank. They typically have

much lower rates, but they do require

more financial information, tax returns, etc. before they will approve your loan. From an investor’s point of view, the

perfect scenario would be to have a lender who has the capacity to loan on bigger

projects or multiple projects at one time but also operates more like a private

investor, with a focus on the personal

relationship. Perhaps after a few deals

together, a larger lender would loan the

full purchase price and rehab costs with no money out of pocket? Lower points

lenders are hedging their bets. Private investors are still active and still maintain favorable terms, but there aren’t as many of them out there. And it takes more time to develop a personal relationship with them once you do find them. The property stands as collateral for the loan in either case, so both types of lenders are protected. A private lender, though, would rather have the property at 75% of after repair value plus 20% of the loan out of a borrower’s pocket in case they do end up taking the property back.

up front would be preferred as well!

Perhaps one day we will once again get to

In the recent real estate market, lenders

experience “relationship banking” from

the competition has been fierce. Some

that make sense to the lender but are

their borrowers “outside of the box” and

small businesses to scale and grow. ∞

have had plenty of money to lend, and

larger institutional lenders—with terms

lenders have been willing to work with

also favorable to the borrower and allow




BRANDON RICKMAN Brandon Rickman has been active in

real estate and construction for more than 25 years.

As a licensed commercial and

residential general contractor, he

has owned remodeling companies and built nearly 100 new homes as

well as built and remodeled fast-food

restaurants throughout the Southeast. To finance his investments, he’s raised money from private lenders, private

investors, and traditional lenders for fix-and-flips as well as buy and-hold

properties. Rickman is also a private lender to other investors.

In addition, Rickman owns and manages his own residential rental portfolio and currently owns an office building.


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WHY EXCEL IS KILLING YOUR LENDING BUSINESS Simple spreadsheets may seem like an easy way to manage your leads, deals, and client data; however, there are better solutions. by Erica Sikoski


rom the get-go, many private lenders use Microsoft Excel

as the software solution for

tracking all aspects of their busi-

nesses. That’s really not surprising, given its familiarity and versatility.

It is a well-known tool among employees and is feature-rich, allowing you to manage customer data, create formulas for quick calculations, and keep all your information in one spot. Perfect, right? It’s not that simple. Whether you are just starting out as a private lender or run a well-established business, you might want to look at solutions that can help you scale your growth even better. Here are three reasons to consider switching from Excel to a proper Loan Origination System software platform. 86


COMMON EXCEL DRAWBACKS Lack of team collaboration and shar-

ing capabilities. Excel has limited ability

for private lending teams to collaborate. Of course, users can email an Excel file back and forth, make changes, save the file and resend it, but no real-time collaboration functionality is available.

gain access and only allows certain members to view full client information, Excel spreadsheets can generally be circulated to anyone via email. Remember, as a private lender, you typically store client and deal information in these Excel spreadsheets. You don’t want to leave your entire pipeline and leads list open for misuse. Manual data entry invites errors.

to share internally, they are too easy to

Data must be entered manually in Excel. Entering and updating customer data can be time-consuming, and it opens the door to human error. And, as we all know, human error can lead to costly mistakes. In 2012, JPMorgan lost more than $6 billion in what’s known as the “London Whale” incident caused by Excel spreadsheet errors. In that case, an employee copied and pasted data from one Excel sheet to another, introducing errors that were not caught until it was too late.

share externally. As opposed to a secure

Scalability. As your business and client

You cannot have more than one team member in the file at the same time. The content of the file can become outdated, and team members may get confused about which version is the most recent. Additionally, it becomes difficult to divvy up leads and clients when you’re working in Excel, as there can be overlapping messaging and missed lead opportunities. As difficult as Excel spreadsheets are

software that requires users to log in to

lists grow, your Excel spreadsheets get big-

ger. However, the larger the spreadsheet, the more likely it is to contain errors. In addition, as you expand your team, more people will need to share the information in the spreadsheets. Remember, Excel does not allow real-time collaboration. Similarly, the larger your client base, the more data you are tracking in your spreadsheet. You may have already been frustrated by the experience of wading through hundreds or thousands of client notes to track and follow up with these clients. Overlooking important notes and other data can lead to missed opportunities and dead files.

MORE ROBUST SOLUTIONS You might have heard the expression “What got you here, won’t get you there.” Whether you are just starting out or have been running your private lend-

ing business for years on just Excel, you might want to consider whether it’s really getting the job done for you. There are many Loan Origination System and CRM software solutions and platforms available to the private lending industry. Many of them allow you to take care of virtually everything in your business operations, thus streamlining the entire private lending process, from intake to closing. As you begin considering various replacement systems for Excel, determine which of a system’s features are crucial for your business to succeed in the long run. Here are a few important features to think about: Cost and implementation. When you

purchase any software, you need to view it as investing in your business. The upfront pricing and subscription fees will be offset by improvements in efficiency, productivity, and organization. Compare the

software solutions, and make sure the cost of the service not only fits your budget but also matches the size of your team and workflow. Keep an eye on the differences between the number of users and features to ensure you’re getting the most for your team for a reasonable price. You don’t want to be spending money on features your company will never fully use. In addition to startup and subscription costs for the software, consider the cost of implementation and training. New software solutions always come with a learning curve. Before purchasing new software, understand the implementation, onboarding and training costs, and timelines. Spending months learning a new software, even for the right price, can slow your business to a grinding halt, and that may not be worth the time necessary for onboarding your team. Cloud-based and integration

options. Cloud-based software appliSUMMER 2021



cations make life and business much easier, because everything is accessible to the entire team. Instead of storing each document on different computer desktops, the documents are stored in the software itself, enabling multiple people to work on the same loan file, share documents, client information, and lending terms all in the same platform. Additionally, keep an eye on which of the software providers makes their Application Programming Interface (API) public. The API allows you to expand your possibilities to integrate with service providers, marketing platforms and others. Ask about (1) the current providers each software solution is partnered with and (2) the process of integrating with any partners your business is working with. Consider credit and background solutions, appraisal management companies, referral marketplaces, and others. Integrating disjointed software solutions is one of the most common challenges businesses face. Most applications are not connected with each other, resulting in little islands of data not easily accessible to team members. Being able to share lead and client data among applications streamlines your workflow. Data security. Beyond cost and imple-

mentation, data security is the most important factor to consider when shopping for a new software solution. To understand how your proprietary information is protected in the software, ask these questions:



H ow is client information protected? W ho has access to clients


and loan files?

W ho can upload information and documents into the system?

C an my clients log in to the system, and what can they see and do?

Loan Origination Systems and CRMs

are designed to protect your informa-

tion. Using software that requires users to log in with their specific email and password adds an extra layer of security to your valuable client, lead, and

sales data. Many software solutions also enable you to set permissions for what

each user can view and modify within the system. And if an employee leaves your

company, it’s not a problem. You simply

deactivate that person as a user, transfer their pipeline to your other team mem-

bers, and know that your data is secure. When it comes to running your private lending business, traditional

Excel spreadsheets can seem like a

good solution. Upon scrutiny, how-

ever, Excel has a lot of shortcomings. If you’re struggling to operate within the confines of Excel spreadsheets,

it may be time for an upgrade. Loan

Origination Systems and CRM software solutions offer a better way to manage client data, lead lists, and pipelines.

They also make it much easier to share data across teams and applications in a secure, easily accessible format. ∞

ERICA SIKOSKI Erica Sikoski is senior marketing

specialist at Bridge Loan Network. Joining the company in 2018, her

focus has been on creating informative and thought-provoking content to

strengthen Bridge Loan Network’s

marketing and tradeshow initiatives.

Sikoski manages Bridge Loan Network’s

social media channels, email campaigns, and digital and print campaigns. She graduated from Eastern

Connecticut State University, with an

honors degree in communications with a concentration in advertising.

Where will your network take you? The top echelon of the real estate investment and private lending industries meet in one place: the Presidents’ Circle. Circle members build deep connections across the REI landscape, learn tomorrow’s trends from leaders driving the industries, and step into the spotlight via Think Realty and the American Association of Private Lenders’ powerful media outlets. Will you be there?




Institutional Investors vs. Internal Funds Understand your options for diversifying capital as your lending business grows. by Ray Sturm


n the private lending space, businesses are built on a

foundation of strong relation-

ships. Your borrowers will hopefully

be clients for years or even decades.

Before you became a full-time private lender, you may have already been lending to these folks for years out of your own bank account. You have now proven through your track record that you know how to underwrite well, have the ability to attract and retain good borrowers, and ideally, have the skillset and experience to deal with loans that go delinquent or into foreclosure. In short, you are ready to expand your business—and that means increasing the capital you have to lend. Your growing borrower base needs you to be fast, easy to work with, and reli90


able, which means you need the same thing from your capital sources.

a handful of law firms specialize in

The two main strategies we see lenders follow as they diversify their capital are:

lenders launch them within 45 days.

1. R aising an internal fund. 2. Partnering with a firm to bring institutional capital into your capital base. Let’s dive into what each entails.

INTERNAL FUNDS Many of the best lenders in our industry began as successful contractors who loaned money to other flippers in their network. Over time, friends would hear about their returns and ask to loan money through them, so they would launch a small fund to organize these friends and investors. Today,

setting up these funds and can help PROS

The three pros to this approach:

01 C ontrol. Although funds generally

have eligible investment restrictions, the capital is under your control to make loans without approval from a third party. Markets shift and a risk officer at a bank may choose to adjust your credit box or rates. With a fund, you are in full control during the life of the fund.

02 F lexibility. When raising a fund, your LPs (limited partners, aka

investors) are ultimately investing in you and your expertise. As a result,

and other annual requirements, is a tremendous commitment. Many funds often hire one or two additional employees just to handle the administrative requirements.

03 L imited size. With most lender funds backed by individual investors, many of them friends or acquaintances of the lender, it is often difficult to get beyond a $10 million fund size.


you can often define the types of loans you’ll be doing and the documentation requirements needed.

03 S tability. Funds often have a lock-up

period, which restricts your investors’ ability to pull their capital back at any point. In addition, capital from these types of non-institutional (typically high net worth) investors can be incredibly sticky and not be called upon for several years. When markets lock up and capital is scarce—a time when private lenders often see their businesses grow!—funds can be an incredible tool for not only surviving but also thriving.

The difference between an incredibly successful fund and a disaster that brings about a lender’s personal ruin lies in the paperwork’s details—which many

people overlook. Enlisting great counsel from a law firm that has experience not only in launching funds but also in the private lending space in general is critical to protecting yourself. CONS

The three cons to this approach:

01 E xpensive capital. One of the big-

gest reasons we see experienced lenders eventually swap out internal funds for institutional capital is the cost. Individual investors often demand 25-50% more in returns than asset managers, creating less profitability in healthy markets and above-market burdens when rates drop.

02 S ignificant work. Both raising a

fund and dealing with the monthly distributions, in addition to auditing

Institutional capital can be a great way to effectively increase your balance sheet. By selling loans to these investors—either as you originate loans or out of your fund to free up space—you are able to recycle your capital. The largest lenders in the country almost all have institutional relationships at this point, empowering them not only to grow their current businesses but also to expand into new product lines and geographies. The best institutional investors can even shift from being a counterparty to servicing as an extension of your business, providing resources such as technology and industry data. PROS

The three pros to this approach:

01 Infinite capital. Firms that can pro-

duce the type of loans that match the requirements and criteria institutional investors want have effectively infinite capital to make more loans, and the business becomes focused primarily on finding and servicing great borrowers.

02 H igher profitability. Investment

banks, asset managers, and REITs investing in the private lending space SUMMER 2021



are typically willing to buy loans without any sharing of origination points and an interest rate that leaves a substantial strip for the lender.

03 P roduct flexibility. Hard money

lending was built on short-term bridge loans to a great degree because it aligned with the capital available to lend. For products that have long terms or huge construction projects that require tens of millions of dollars, institutional investors are key.

With non-owner-occupied real estate loans continually moving away from

banks and into the private lending industry, institutional investors will likely represent an increasing share of the capital

that funds our loans. From single-family rental to large new construction, new

products are bringing additional sources of profit to lenders with great borrower networks and local market knowledge.



The three cons to this approach:

01 I nconsistent reliability. Not all

institutional partners are the same. Some burned relationships in 2020 by urging lenders to keep originating loans and then failed to follow through on commitments to buy, creating huge issues for lenders. Finding a trustworthy partner is key.

02 S pecific requirements. While you

may have been doing loans in your city for decades without certain document requirements, institutional investors often have third-party appraisal and other verification needs. Unlocking huge amounts of new capital sometimes comes with an operational price.

03 H idden fees. Comparing institu-

tional investors can be tricky. Some lead with pricing that does not capture all fees, and lenders are surprised when they receive a significantly lower monthly interest strip than expected. As with forming a fund, using experienced counsel to vet these agreements is essential.




RAY STURM Ray Sturm is the CEO of AlphaFlow, a

In an industry built on strong relationships—where being a reliable partner

is often paramount—prudent business

planning demands you have diversified

sources of capital. A fund can be a ballast during turbulent times, when the capital markets freeze. Institutional capital can be a great source of fuel to grow your

business to new heights. Many lenders have access to both types of funding,

giving them great options as the private lending industry surges to new heights. Whether your investor is an individ-

ual or an institution, always (1) assume this will be a long-term relationship and get to know your backers well and (2) consult great legal counsel so you’re protected at each step.

The private lending industry’s importance to the U.S. real estate market

increases every year. With this growth,

we’ll see even more capital entering the

space. Those who build a diversified set of capital sources will lead the industry

as the economy surges and will be most resilient when things slow down. ∞

capital partner to private real estate

lenders. AlphaFlow works with private

lenders around the country and invests

on behalf of some of the world’s largest institutional investors.

Before launching AlphaFlow, Sturm founded RealtyShares, one of the

industry’s top platforms for real estate investing. His early career in finance

included investment banking at Bear

Stearns and Lazard Frères and private equity at CCMP Capital.

Sturm has a bachelor of business

administration degree in finance from

the University of Notre Dame and a J.D./ MBA from the University of Chicago.

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RESOURCE GUIDE If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Resource Guide is your starting point. Each issue, we publish a cross section of service


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National Lending Experts Leverage San Diego Tuesday September 28th 2021

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eard of lather, rinse,

repeat? In life and business, it’s plan, pivot,

adapt. Repeat. If you went back to the day your third-grade teacher asked

you what you wanted to be, would you say exactly what you are doing now?

I bet you a lunch, the answer is no. Life has a way of taking us on a different journey than we plan for. Although I love what I do now, when I was in third grade, I didn’t say I wanted to be the CMO for the most powerful software in the private lending industry. So how exactly did I get here? Born and raised in Bogota, Colombia, I came to the U.S. when I was 15. In Colombia, I attended a great Catholic school. I was president of the classroom, a biology and math tutor, and the only student to whom the nuns gave a copy of the classroom key. I was also president of the basketball team and a very fast track runner.

omore years, I would be a sophomore.

As a teacher, I fell in love with data. I

a translator, and asked my counselor

what you do, you can’t improve it.

Six months later I went back, without

strongly believe if you don’t measure

for all the finals. I walked in a fresh-

In spring 2014, I found myself holding a

man—and walked out a sophomore.

pink slip, along with thousands of others

I graduated at 17 with high honors,

who were laid off. I’d already finished

and pursued my dream of music. I also

was looking for a marketing director.

mother who worked multiple jobs.

anyway. What’s the worst thing they could

earned a free ride to a state university,

my MBA, and Applied Business Software

waited tables to help my mom, a single

But software? I don’t code. I interviewed

After a couple of musical auditions, I was selected to tour as a backup singer for a

famous act. I was only 20 years old—and I was getting paid to do what I loved!

say? Don’t call us. We’ll call you. Next! I got the job! Now run with it!

Marketing a product like The Mortgage Office software is a delight. After all,

Just when I thought it couldn’t get any

how many people can say they work at

cal—”Working,” by Studs Terkel. I wasn’t

for 42 years? Amazon/1994, Google/1998,

my dream. I auditioned to get myself out

Office/1978! It was built by visionaries

worst thing they could say? Don’t call us.

cutting-edge technology. Working here

auditions I got the part! Now run with it!

Touring for so many years taught me to

better, I was cast in a Broadway musi-

a software company that’s been around

looking to go to Broadway—that was never

Microsoft/1975, Apple/1976—The Mortgage

of my comfort zone. Besides, what was the

who continue to rock the industry with

We’ll call you. Next! After three exhaustive

is more than a delight—it’s an honor.

I left all that for a new country. At my new public school, I used a translator to tell my high school counselor I didn’t want to be a freshman. I was told I’d been put back a year because I didn’t speak English. I asked my translator to say: “Tell him I don’t now, but I will soon.”

Both Broadway and touring were always

read people better. Loving data allows me

so I became a substitute teacher for those

Being around artistic people gave me a

me I would fall in love with teaching. They

Being a teacher gave me a sense of how

student who “gets” what you’re teaching

all those combined and so much more.

The counselor said if I could pass all my finals for my freshman and soph98


Wednesday through Sunday engagements,

to make decisions quickly and accurately.

two extra days a week. Someone warned

better sense of what people want to see.

were correct. Seeing the expression of a

people want to see it. Being a marketer is

is a feeling like no other. I was impacting

Get out of your comfort zone and

lives in a positive way at an early age.

run with it! ∞

The ® Your Ultimate Lending Platform




INVITED Join us for the 12th year at the largest national private lender event from the industry’s oldest and largest association. 2021 will bring you 2 days of packed sessions, 60+ exhibitors and 500+ attendees with whom to network and learn.


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NOVEMBER 14 - 16, 2021




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