SPECIAL FEATURE: AAPL'S ANNUAL CONFERENCE PREVIEW
The Official Magazine of AAPL | Fall 2021
STRATEGY Alternatives to Foreclosure
MARKET TRENDS AAPL'S Survey Data Report
CASE STUDY Affordable Housing Wins
Cindy Nasser Boldness and Bravery Defy Adversity FALL 2021
THE REHAB MARKET IS
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06 OPER ATIONS
0 6 P roper t y Valua t ion in an
10 T i t le Gli tc hes to Avoid
14 MARKET TRENDS
14 I ns t i t u t ional Homebu yer s A re Bac k ,
20 P roper t y Per s ever ance
24 U r ban /Subur ban / Rur al: Demogr aphic s A re
50 LENDER LIMELIGHT
60 C A SE S TUDY
32 A A PL's Mar ke t Insight Repor t
Hones t , For t hr ight and Profes sional
Fight ing Mis guided Legisla t ion
80 BA SIC S
T he Down - Low on Low Equi t y Loans
84 CONFERENCE PREVIEW 8 5 O ver v iew
O ppor t uni t y for Ever yone
8 6 Spons or s
6 4 S ingle - Famil y Home Ris es
8 8 Ac t i v i t ies
9 0 E xcellence Awards
A l ter na t i ves
70 ADVOC AC Y
78 A A PL Ad voc ac y Upda te:
to Forec losure
38 ETHIC S A A PL’s C ode of E t hic s:
Housing E x pands
66 S TR ATEGY
6 0 I nves t ing in Af fordable
From t he A shes
Forec losure Freezes
Impac t Real E s t a te
wi th Cindy Nas ser
28 F orec as t ing t he Fallou t From For bear ance and
B oldnes s and Br aver y Def y Ad ver si t y
Shi f t ing Pos t- COV I D
4 6 B or rower s in
74 4 Way s 1031 E xc hange Refor m C ould N ega t i vel y
4 2 N on - Real E s t a te A s s e t s
Bank r uptc y Par t 4
Bu t Not Bu y ing Dis t res s
as Sec ur i t y y
Upward Trending Mar ke t
70 M ak ing the C ase for Pr ivate Lender s' Value
94 RESOURCE GUIDE 98 L A S T C ALL
A pproac hing Old Problems W i t h N ew T hink ing
FROM THE CORNER OFFICE
YOUR ASSOCIATION UPDATE LINDA HYDE
Managing Director, American Association of Private Lenders
Year-end is always our busiest quarter, and this year we’ve been hustling more than ever. It’s also the time of year we try to take a few deep breaths and look at what we’ve accomplished.
s the nation’s oldest and larg-
that’s changed drastically, thanks to AAPL
est association safeguarding
employees’ tireless work and the steadfast
the private lending profession, we take our role seriously.
Since launching 12 years ago, AAPL has grown from the foresight of a few key private lenders and service providers who understood the problematic direction the industry could—and likely would— take without a guiding force. They set up checks and balances to provide for the industry’s growth, viability, and reputation. When I came on board in 2013, it still felt like we were selling air. Beyond the annual conference and this magazine, there wasn’t much to the association. But
support of top industry executives who believe in our mission. Today, AAPL is the central source for professionals to educate themselves on best practices, establish ethical standards and hold themselves accountable, and aid advocacy efforts that protect private lender interests. We continue to develop new programs and grow current initiatives under the mantra of “complacency is death.”
Education // 12th Annual Conference (see p. 84 for the preview) is set to
become our best—and largest—ever.
Code Standard No. 3). Continue to receive
Sponsorships are nearly sold out, the
updates at aaplonline.com/ethics.
hotel room block is full, and attendance
Advocacy // On the legislative front, 2021
is up significantly compared to 2019. The conference schedule is packed with breakout sessions (so it’s a good thing we’re recording them all for replay), and we’ll be launching new initiatives you will want to be there to hear first. Earlier this year, we released our first-ever Market Insight Report. The 11-page report detailed the industry’s first look at private lender data metrics pulled from our proprietary Q4 2020 and Q1 2021 surveys (see p. 32 for a sneak peek). The first report is now in survey respondent’s hands. If you’re a private lender and your company hasn’t signed up to respond, you’re missing out. Visit aaplonline.com/survey. Finally, we expanded our Certified Fund Manager course to include 201-level learning (taught in-person at the annual conference, with 101 online and serving as a prerequisite). We are also bringing the Certified Private Lender Associate course you know and love online.
was a little quieter, with foreclosure and
eviction moratoria slowly coming to an end. We did have a few key battles in California, Colorado, and New York. Check out the recap on page 78. At the time of this writing, we haven’t attended the 2021 Virtual Day on Capitol Hill, but we plan to visit with the offices of key senators on the finance and banking committees to discuss topics like HMDA, opportunity zones, bankruptcy regulation, and the S.A.F.E. Act.
And Beyond! // If you’ve visited aaplon-
line.com recently, you’ve probably noticed significant changes. We’ve redesigned most of the site, rebuilt our membership system, and revamped the navigation to make it easier than ever to find the resources you need. Our website isn’t just a marketing/publicity tool—it’s a portal for everything you need to find success in private lending. It is also the one place borrowers can check to verify membership
Ethics // We refreshed our Code of Ethics
and find reputable partners.
ward while expanding AAPL’s oversight
you’re not an AAPL member, we need your
to make some elements more straightforcapacity on others. We built an all-new Best Practice Dashboard to provide detailed guidance about following the
code. Our Ethics Committee continues to
Finally, I would be remiss if I didn’t say this: If support. Your membership dollars keep the initiatives above thriving. We can’t do it without you. Join today at aaplonline.com/ join. For those of you who already support
work on additional direction and advice
us through membership and sponsorship,
(see p. 38 for Kellen Jones’ write-up on
we appreciate and thank you! ∞
EDDIE WILSON CEO, AAPL
Managing Director, AAPL
KAT HUNGERFORD Executive Editor
KELLY SCANLON Copy Editor
DAVID RODRIGUEZ Design
Dennis Baranowski, John Beacham, Katie Bean, Daren Blomquist, Gina Comeaux, Frank Desloge, Michelle Esparza, Mike Hanna, Kat Hungerford, Ruben Izgelov , Beth Johnson, Kellen Jones, Jay Parsons, Serge Petroff, Chris Ragland, Alex Samsonov, John Santilli, John Tedesco, Marc Weitz
COVER PHOTOGRAPHY J&C Creative Co.
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 aaplonline.com/magazine-archive, email PrivateLender@aaplonline.com, or call 913-888-1250.
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PROPERTY VALUATION IN AN UPWARD TRENDING MARKET When comps are scarce, use these strategies to determine accurate values. by Frank Desloge and Alex Samsonov
n an upward trending market driven by rapidly changing
supply and demand dynamics,
comparable sales (comps) that reflect the current market may be lacking.
How does one arrive at a reasonable
property valuation in such a situation?
As a starting point, if selected comps do not support pricing, it is time to take a 6
step back and question whether pricing and value are in alignment. Price reflects the amount asked, offered, or paid for real property, and may or may not reflect value (The Dictionary of Real Estate Appraisal, 6th ed., Appraisal Institute). If pricing always reflected value, there would be no need to go through the valuation exercise, and valuation professionals would be out of business.
Here are some techniques for estimating value when comparable sales are scarce.
PRIORITIZE RECENT COMPARABLE SALES DATA In an ideal world, when performing sales comparisons, one would be able to select comps that have been sold recently and are
on current or relatively recent comps as
they can be more relevant than a property located closer to the one being valued.
PHYSICAL CHARACTERISTICS MATCH A different option appraisers commonly
use to round out comps when performing a valuation analysis with limited comparable sales is a physical characteristics
match. In this approach, listed properties that match the physical characteristics
of the subject property in that submarket similar in physical and location characteristics. Keep in mind, the word “recent” is a relative term because one can source comps from three to six months, or longer, before the date of valuation, depending on the transaction velocity in a submarket or the uniqueness of the property. If such comps aren’t readily available, one option would be to expand the search criteria for comparable sales to include older, but highly similar, comparable sales. An adjustment on market conditions could then be applied to the older comps by examining pricing changes in the overall market, ideally through repeat sales or a repeat sales index. Changes in submarket conditions are highly correlated with changes in overall market conditions, even if the repeat sales or index might not be specific to a submarket. However, in an upward trending market, more weight should be given to recent comparable sales. That approach better reflects rising prices for comparable properties, even if it means expanding the geographical scope of the search area. More emphasis should be placed
are considered. Typically, a downward adjustment of 10%-15% is given from
physical differences could be estimated through the analysis of paired sales. Paired sales analysis is premised on the idea that when two properties are equivalent in all respects but one, the value of a single difference can be measured by the difference in price between the two properties (The Appraisal of Real Estate, 15th ed., Appraisal Institute, 2020). Such an analysis is a challenging and time-consuming pursuit, but with diligence and effort, it can be done effectively.
INCOME-PRODUCING INVESTMENT PROPERTIES
the list price to account for the comparable being listed above market value;
however, in an upward trending market, this adjustment can be minimized.
It is important to note that listed comps are not as reliable as sold comps and
should be used as a data reference point
only when sold comps are limited or not
available. This can also be said of proper-
ties that were listed for a period but never
sold. If a property is similar to the subject property in location, physical character-
istics, and unit mix (among other factors),
the old list price of this comp may be used
to bracket the comparable sales of the subject property relative to a superior comp.
LOCATION CHARACTERISTICS MATCH Another option that can be useful in the
sales comparison approach is paired sales analysis. With this technique, you might
select recent sales similar in location characteristics, but less than ideal in terms of physical characteristics. Adjustments for
If the subject property is an income-producing investment property, the income approach may be the most appropriate method to estimate value. Income-producing real estate is typically purchased as an investment. From an investor’s point of view, earnings and cash flow are the critical elements affecting property value. A basic investment premise holds that with all else being equal, the higher the earning potential or cash flow of an income property, the higher the value. An investor purchasing income-producing property is essentially trading present dollars for the expectation of receiving future dollars. The income capitalization approach to value consists of methods, techniques, and mathematical procedures that valuation professionals use to analyze a property’s capacity to generate benefits (i.e., usually the monetary benefits of periodic income and reversion from a future sale) and convert these benefits into an indication of present value (Appraisal Institute, 2020). FALL 2021
The most widely used income approach method is called direct capitalization. Using this method, the valuation profession converts a single year’s income expectancy into an estimate of value by dividing the projected net operating income estimate by an appropriate capitalization rate (or cap rate). Direct capitalization is most applicable for properties operating on a stabilized basis or being valued under the assumption they are stabilized. The approach can also be used for forward projections of value if rents are expected to increase, or to value a new construction income property project (Appraisal Institute, 2020).
One way to combat this inflation is to assume the operating expense ratio as a constant. Here’s an example: A newly constructed four-plex may have operating expenses of 25%, whereas a more dated four-plex may have operating expenses of 30%. This can also be projected onto multifamily buildings—a 30% expense ratio may be used for new construction, and a 35%-40% expense ratio may be used for a more dated property. By assuming the same expense ratio for all comparable sales, you can nullify the variability of the expense ratios being used to determine cap rates and reach a more accurate submarket cap rate.
ABOUT THE AUTHOR
The direct capitalization method can run into issues, however, if the capitalization rate is unknown due to a lack of comparable sales or reliable information on those sales. For example, if one reviews recent market sales of similar income properties to determine the cap rate, but does not account for certain listings that have minimized the operating expenses the property is incurring, then it would problematically increase the net operating income and cap rate.
Once a direct capitalization rate is determined for that submarket or geographical area, it can be applied to the subject property, or adjusted accordingly in an upward trending market without a surplus of comparable sales. Since income properties are valued for their cash flow potential, an income approach can be weighed more heavily than a sales comparison approach as a possible solution to limited sales comps.
disposition decision support for
Since owners and listing agents generally want to increase the marketability of their properties, they are prone to exaggerate the cash flow capabilities of their assets, thereby increasing the cap rate at which that property was sold. This means one’s valuation analysis may be skewed at these higher cap rates if one were to just reference those listings without assuming the cap rates have been inflated.
Although it may be challenging in an upward trending market to value a property, there are many creative solutions available to compensate for a lack of comparable sales. Ultimately, one can use good judgment to weigh trade-offs for each technique to develop a reliable value estimate. ∞
FRANK DESLOGE Frank Desloge is a commercial real estate underwriter at Arixa Capital Advisors. His responsibilities include due diligence, underwriting, and valuation analysis.
He has experience leading investment analysis, valuation, and acquisition/
multifamily, retail, industrial, office, hotel,
and other commercial real estate. He holds a CFA designation, as well as MBA and
MSRE degrees from Cornell University.
ALEX SAMSONOV Alex Samsonov is director of underwriting at Arixa Capital, where he has personally underwritten more than $1 billion of
loan volume. He evaluates loan structure and credit risk, and he leverages his
experience and technical expertise in
property valuation, corporate structures, and title work to develop strategies with
the Investment Committee to mitigate the risk of Arixa’s credit files.
Before joining Arixa Capital in 2014,
Samsonov was a paralegal at a boutique law firm specializing in nursing home medical malpractice cases. He graduated UCLA
with a bachelor’s degree in political science and holds a CA DRE salesperson license. 8
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Title Glitches to Avoid Even experienced private lenders miss these important details when titling a property. by Michelle Esparza
WORKING WITH THE WRONG TITLE COMPANY Freddie Mae and Fannie Mac, as the purchasers of nearly all mortgages, have certain titling requirements, so most title companies will follow these to a T. However, private lenders don’t sell their loans to Freddie/Fannie and do not need to follow their requirements. Private Lenders likely have different needs entirely. If the settling agent has never had exposure to this before, they 1) may not be willing to deviate from what they’re familiar with and 2) may cause delays as they pursue items they would need for Freddie/Fannie loans or miss different requirements that are unique to the private lender. For example: T itle Commitment (a closer look
othing can be more frus-
property lies. This ensures from the start
last-minute titling hiccups
property. Some borrowers make up their
trating than discovering
before your closing or being told
your closing date has to be moved.
Why do these glitches occur? Here, in no particular order, are several of the items often overlooked. Make sure none of them become culprits for you and your clients.
NOT GETTING THE CORRECT INFORMATION
the title abstractor examines the correct
own addresses for duplexes and triplexes by adding unit numbers that are legally incorrect. One possible solution is to
default to the address on the tax bill. With investment properties, the purchaser needs to know whether there is a current
tenant. If there is, the seller needs to pro-
vide the current lease and rent roll. These are vital to the transaction and especially
important for the settlement agent to comThe beginning of the transaction starts with obtaining the correct legal address (not an abbreviated form) and property type from the borrower. Property owners should be able to provide a copy of their vesting deed with the full legal description and/or map reference number issued by the tax assessor of the county in which the 10
plete the final numbers correctly.
The seller’s contact information is also
vital for moving a file through the pre-closing process faster. If there are any vesting, estate, forbearance, or bankruptcy issues,
being able to reach the seller immediately will help mitigate any delays caused by information discovered last-minute.
at the requirements section):
W arranty deed verbiage from the seller (or the personal name of the borrower) to the new borrowing entity on refinance transactions S ecurity instrument verbiage ranging from the borrower entity to the correct lender name in the finalized loan amount. O utstanding mortgages, liens, and/ or judgments being listed in the exceptions section, rather than in the requirements section R ental restrictions—the lender and buyer/borrower may request to review the association closing letter or estoppel F or homeowners, association violations that need to be remedied before closing or providing enough time for the buyer to review and determine whether they will accept the prop-
erty as is and agree to correcting the violations after purchase is essential. E ntity name being listed incorrectly throughout documents (It needs to match the filed articles of organization. Any missing punctuation could nullify the proper legal transfer during recording.) C losing Protection Letter or
Insured Closing Letter:
E ntity name is incorrect L ender’s addressee information is incorrect or missing ISAOA/ ATIMA (The lender’s title order to the settlement agent must include the correct mortgagee clause, loan number, lender name, and proper mailing address, if different from the mortgagee clause’s address.)
“Private lenders don’t sell their loans to Freddie/Fannie and do not need to follow their requirements. Private Lenders likely have different needs entirely.” H UD or Settlement Statement:
Missing fee structures or judgments and liens needing to be paid Missing HOAs or special assessments from the county ot setting the tax estimate/tax N escrow high enough (In most cases figures are based on previous years’ taxes that include a home-
owner’s exemption or temporary discount. Every jurisdiction does taxes differently. Possible solutions: Some lenders may try to verify this themselves and put pressure on the title if there is any uncertainty.) M issing rental restrictions (Be sure to review the Covenants, Conditions, and Restrictions, also known as CC&Rs.) FALL 2021
MISCELLANEOUS ITEMS There are multiple details when it comes to the title and closing. The following round out some of the most commonly overlooked.
want to sign at a public location rather than at home can all be problematic. Sometimes closing funds are not
received—don’t let that be the case for you! Finally, if an underwriter consid-
Don’t be surprised to learn there was a payoff or the title to the property is vesting in something other than the entity of the borrower.
ers the transaction “high risk,” then
Also, make sure the signers on your documents match your authorized signers. Do the articles of organization and entity documents match up to the signers and their title? Having a complete and accurate organization chart can be an issue. The longer you spend collecting and reviewing organizational documents, the more time you lose; however, what can appear to be a clean organizational chart based on verbal representation is not always the case. Have there been any recent changes, such as a previous partner who is no longer involved or a recent divorce?
Borrowers, buyers, and lenders often forget
additional endorsements and or documentation may be requested.
And here’s a bonus glitch to consider:
that a title commitment has a limited shelf life, usually 30 to 90 days, depending on the underwriter and the jurisdiction. It
must be updated to check for any new liens, such as mechanics and construction, that may have been filed and recorded before your closing that could put your lien in
a second position if the closing extends beyond that period. This can come as
an unpleasant surprise when a closing
takes longer than expected and can create additional interest costs for your client, particularly when the update reveals a
When a lender orders insurance, the title company needs an invoice showing whether the insurance is due or paid. If the insurance is paid, the title company needs the balance from the agent along with the address on where to send the funds.
new lien that must be accounted for before
A big help is having the analyst, loan officer, or lender let the borrowers know what day the documents are dated so the borrower does not try to negotiate a different time with the notary. Then the notary must notify the title company, who then notifies the lender. If the docs are date sensitive, they need to be redrawn for the new date.
rience each and every time. Since real
Signing locations must be coordinated ahead of time! Signers at different locations, signers on vacation, or signers who
without meeting some additional require-
ABOUT THE AUTHOR
a clear to close can be established.
Working with the right title partner who
MICHELLE ESPARZA Michelle Esparza is senior vice
president at Apex Closing Services LLC, title and escrow specialists. In this role, she ensures client experiences and
expectations are met across the entire real estate transaction. She works to
construct tailored solutions to fit client and prospect strategies
Michelle has more than 28 years of
experience in the title industry and has worked at a large national underwriter as well as a large national title agency that catered to investors. She has
worked on projects ranging from local single-site to multi-site, multistate
deals. She also speaks in front of large
groups and associations on a multitude of real estate topics.
communicates frequently and provides
She has a BS in banking from Palo
goes a long way to having a good expe-
from the American Management
detailed lender (closing) instructions
estate is all about referrals and repeat
business, it’s important to get everyone
involved in the transaction to the finish line with the least amount of pain.
Remember, not all title companies are alike. Due to their underwriters’ requirements, they may or may not be able to insure
ments. Be sure your partner is flexible and able to help you when you need it most. ∞
Alto College, a marketing certification Association, a statistics certification from the University of Texas at El
Paso, and mortgage banking from the Mortgage Bankers Association.
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INSTITUTIONAL HOMEBUYERS ARE BACK, BUT NOT BUYING DISTRESS Most distressed sales are going to smaller-volume buyers and, increasingly, owner-occupants. by Daren Blomquist
oreclosures are expected
Meanwhile, foreclosures being sold in
of the pandemic and subse-
older homes purchased primarily by
to surge in 2021 because
quent financial crisis. Some people
believe they may double (or worse).
the post-pandemic housing market are smaller-volume local investors—and
increasingly by owner-occupant buy-
Large-volume homebuyers ramped up property acquisitions in the first half of 2021, but these are not your father’s institutional buyers.
ers—who are willing and able to put in
Unlike a decade ago, when Wall Streetbacked hedge funds and other institutional investors swooped into the housing market and scooped up hundreds of thousands of foreclosure properties, the large corporate buyers of 2021 are largely eschewing foreclosures. Instead, they favor newer, non-distressed homes that require little rehab to flip and represent low-maintenance rentals.
proprietary data from the Auction.com
the work and time required to renovate these highly distressed properties.
MORE OWNER-OCCUPANTS BUYING DISTRESS
An analysis of public record data and marketplace sheds light on the new
brand of institutional buyer active in
the 2021 housing market. That data also reveals the buying opportunities still available to individual investors, and even owner-occupant buyers, thanks
to advances in technology and broader
access to distressed-property financing. These are helping to level the playing
MORE ONLINE REO AUC TIONS SOLD TO OWNER- OCCUPANTS O wner-Occupant Share
Multi-Purchaser Share 13.1%
field for local investors and owner-occupant buyers, allowing them to compete and often beat out institutional buyers in the context of a transparent, real-time auction marketplace.
Proprietary data from Auction.com shows most distressed properties sold on its platform go to small-volume buyers. So far in 2021, 87% of foreclosure auction sales on the Auction.com platform have gone to buyers purchasing five or fewer properties, while 95% of online REO auction sales have gone to that same category of small-volume buyers. An increasing share of buyers purchasing via online REO auction are owner-occupants, according to the Auction.com data. So far in 2021, more than 13% of buyers who purchased an REO property via online auction on Auction.com said they were owner-occupant buyers, up from 11% in 2020 and up from a low of 8% in 2017. By comparison, less than 1% of online REO auction buyers so far in 2021 (0.6%) said they were multi-property purchasers, down from 1.4% in 2021 and down from a peak of 1.8% in 2018.
MOST CASH SALES TO INDIVIDUAL BUYERS 1.8% 0.7%
Source: Auction.com analysis of public record data from ATTOM Data Solutions
The trend is similar when looking at the larger real estate marketplace. All-cash home purchases reached nearly 950,000 in the first half of 2021, FALL 2021
Cash buyers purchasing just one property during the first half of 2021 accounted for 82% of all cash purchases during the period, up one percentage point from 81% in the first six months of 2011. Meanwhile, entities purchasing 100 or more homes in the first six months of 2021 accounted for 4.3% of cash home sales during that period, according to the analysis of the public record data. That was twice the 1.9% share going to large-volume investors in the first six months of 2011, the peak year for all-cash sales share over the last two decades. But it was still dwarfed by the volume of cash sales to individual buyers and small-volume investors.
BRIGHT, SHINY OBJECTS
J an-Jun 2011
Jan-Jun 2021 81%
Buyer Purchases Volume (Number of Properties)
In the first half of 2021, 92% of allcash home purchases were by entities purchasing five or fewer properties during that six-month period. That’s down just one percentage point from the 93% going to small-volume buyers in the first half of 2011.
ALL- C A SH HOMES SALES BY BUYER VOLUME
10% 2% 2% 1% 1% 1% 1% 0% 1%
Source: Attom Data Solutions
SHRINKING SHARE OF DIS TRESSED C A SH SALES J an-Jun 2011
Share of Purchases in Some Stage of Foreclosure
the highest total in the first half of any year going back as far as data is available (2000). But the vast majority of cash buyers in the first six months of 2021 were individual buyers purchasing one property or small-volume investors purchasing fewer than five properties.
Buyer Volume Band by Number of Cash Purchases.
Individual buyers and small-volume investors who want to avoid competing with the large-volume institutional investors are focusing on older, distressed properties. Unlike in 2011, the bright, shiny objects for most institutional homebuyers in the 2021 market are non-distressed 16
Source: Auction.com analysis of public record data from ATTOM Data Solutions
homes in need of little or no rehab and with low ongoing maintenance costs.
first half of 2021 (3%) were in some stage
The public record data show that just 1,400 of the more than 40,000 properties large-volume cash buyers purchased in the
first half of 2011, the distressed property
of foreclosure when purchased. In the share of cash sales was more than three times that, representing 10% of cash sales.
AGE BEFORE BEAUTY
for speed of closing; however, it doesn’t mean we’re not getting financing.”
Large-volume cash buyers in the first half of 2021 purchased homes that were an average of 31 years old, built in 1990 on average, according to the public record data. By comparison, homes small-volume cash buyers purchased were nearly 10 years older, built in 1981 on average.
Local banks and local private money lenders have long been sources of financing for investors like Aalerud. The emergence of what he calls local money lenders that only take collateral into account provides a third alternative that is often faster than local banks and with lower rates that private money lenders.
The average property age was older for cash buyers purchasing two to five properties (46 years on average) than it was for single-property cash buyers (40 years on average), indicating that many single-property cash buyers may be owner-occupants who are less inclined to deal with heavy-duty rehab and deferred maintenance issues. Further, the average property age was 49 years for cash buyers purchasing between 10 and 50 properties so far in 2021. This category likely represents professional investors who are willing and able to take on properties requiring more extensive rehab.
“We’re not a massive fund, but we can compete with their strategy,” said Aalerud, noting the financing options now available to small and medium-sized investors allow them to close deals quickly as cash buyers. “We’re going in as ‘cash’ to our sellers, as they want to ensure there’s no financing contingency, and
“We’re seeing huge inventory that’s extremely old. You have a huge housing need in the country,” Sturm said, noting it’s important that standardization comes hand in hand with growth. “We have to maintain discipline on good credit standards, so we don’t blow up the industry like in 2008.”
“I can pick up the phone and get 100% financing for any investment we do, if it’s within 75% of after-repair value, because of our experience and track record,” Aslerud said, adding that less experienced investors also now have better financing options than they did historically. “Access to capital is everywhere, but sound deals are harder to find in this market.”
He noted: “If we can help all these small-business owners grow their business, and not only them but their borrowers, by helping them access securitization-level capital, I love it.”
The new category of “soft money” lending is poised to expand to more smaller-volume
INS TITUTIONAL BUYERS TARGETING NEWER HOMES Average Property Age (years)
BROADER ACCESS TO CAPITAL These are investors like Nick Aalerud, owner of AA Real Estate Home Buyers, a local real estate investing company that has been buying distressed and deferred maintenance properties in the Boston area for 15 years.
borrowers as traditional banks continue to shy away from the type of loan products needed to renovate the nation’s increasingly aged housing inventory, according to Ray Sturm, CEO of AlphaFlow. He co-founded the company in 2015 to connect local private lenders and the local real estate developers they lend to with capital markets.
Buyer Volume Band by Number of Cash Purchases Source: Auction.com analysis of public record data from ATTOM Data Solutions
“Technology is helping small-volume buyers expand their distressed property acquisition radius.”
ABOUT THE AUTHOR
DAREN BLOMQUIST Daren Blomquist is vice president of
market economics at Auction.com. In this
LEVELING THE FIELD FOR LOCAL BUYERS Although distressed inventory in 2021 is down dramatically from pre-pandemic levels, due primarily to the national mortgage forbearance program and foreclosure moratorium for government-backed loans in place for most of the pandemic, technology is helping small-volume buyers expand their distressed property acquisition radius. Most foreclosure auction and online REO auction purchases so far in 2021—at least 75% in both cases—are still within 100 miles from the buyer’s home ZIP code, but the average distance between buyer and property purchased is gradually expanding. For foreclosure auctions, the average distance is 257 miles so far in 2021, up from 252 miles in 2020. For online REO auctions, the average distance is 238 miles so far 2021, up from 182 miles in 2020. Chattanooga, Tennessee-based investor Steve Johnson recently purchased two foreclosure auction properties
using the Remote Bid feature on the Auction.com mobile app. The feature allows buyers to bid remotely at live foreclosure auctions that historically required in-person attendance to bid.
role, Blomquist analyzes and forecasts
Technology like Remote Bid is helping local buyers like Johnson compete against better-capitalized, out-of-state investors.
Blomquist’s reports and analysis have
“Chattanooga has just been flooded with investors from California and other places,” said Johnson, who started investing after he retired from his fulltime job in the insurance business three years ago. “There’s not many properties that you can buy and afford here. With Remote Bid, I can buy anywhere.”
publications such as The Wall Street
Johnson still sticks to buying properties within driving distance of his Chattanooga home, but Remote Bid has increased the amount of inventory available to him by allowing him to bid on multiple foreclosure auctions occurring in different counties on the same day. “Remote Bid allows me to bid on many properties in many different locations at the same time,” he said. ∞
complex macro and microeconomic data trends within the marketplace
and greater industry to provide value to both buyers and sellers using the Auction.com platform.
been cited by thousands of media
outlets nationwide, including all the major news networks and leading
Journal, The New York Times, and USA TODAY. He has been quoted in hundreds of national and local
publications and has appeared on
many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.
Property Perseverance Private lenders must be aware of the new trends emerging in the residential asset classes. by Gina Comeaux
he real estate market of
kind: fear. Specifically, fear of being
uncertainty to unfore-
fear, combined with the widespread
2020 transitioned from
seen heights, but where is it now, in 2021? And what trends have
emerged from a market movement that took on a life of its own?
Although they navigated a series of hits early in the pandemic, residential asset classes—single-family, condos/townhomes, and multifamily properties—are now in the midst of some trends that put them in a league of their own.
too close to other human beings. This ability to work remotely, motivated city residents in crowded, vertical spaces to head to the suburbs and small towns.
After months of sheltering in place, the idea of spending 24/7 with household
members in close quarters also became an important force that ignited home purchases, with a preference for new
a multitude of factors like job growth and population migration, to name a few, the following trends stood out.
or fully updated homes. The idea of
more square footage, yards, functional
tion as workspaces, educational spaces,
SINGLE-FAMILY HOUSING, RENTALS, AND INVESTMENTS
homebuying into a downright quest.
According to the California Association
The following selection of the four most
of Realtors’ 2020 Annual Housing Market
residential asset classes was guided by
to the tune of 40.2% of buyers opting for
Estate 2021 report compiled by PwC and
townhome, or apartment—and 38.8%
Before dissecting the impact the pandemic posed for various property types, let’s take a step back and consider a holistic view that actually accounts for people. Discussion of any current trend would be incomplete and disjointed if we did not consider their impact on human lives.
floorplans, and homes that could func-
notable and relevant real estate trends in
Survey, buyer preferences have changed
The notion of a highly contagious infectious disease prompted one of the strongest influencers known to human-
data from the Emerging Trends in Real
a single-family home instead of a condo,
the Urban Land Institute. Considering
of buyers opting for a bigger home.
and multi-generational spaces turned
Emerging Trends in Real Estate 2021
are traveling again, and they are opt-
reported that single-family rental subsec-
ing for more privacy and distancing
tors have the highest ROI potential. With
than traditional hotels provide, making
the great migration of families moving and
short-term rentals for vacation homes a
seeking detached rentals with more space,
rapidly growing investment category.
the real estate opportunity is one you’re
In addition, with the slowdown in vacation
already quite familiar with. Of the nation’s 46 million rental units, about a third are single family. The build-to-rent market is growing as well, and about 12% of new construction of single-family homes this year has been in the area of rentals.
travel, more people are simply buying vacation homes as second homes. The flexibility to work from home and the desire to move away from metropolitan
CHARACTERISTICS OF CONDO-MANIA Although the demand for single-family housing has driven down inventory and affordability, people’s desire for their own home hasn’t budged. Coupled with low mortgage rates, more first-time buyers
areas has motivated investors and home-
have turned to the condo market.
buyers to flock to the wide-open spaces,
A July 2021 report from the Califor-
The report also confirms the sin-
small towns, and resort areas, resulting
gle-family rental subsector is attracting
in the vacation home share of total sales
increased investor interest. Americans
rising to the highest level in four years.
nia Association of Realtors noted that condo/townhome sales decreased 2.1% for repeat buyers in 2020 as compared FALL 2021
to 2019, but the appeal was evidently there for first-time buyers who drove a 3.1% increase in the condo/townhome category overall. Condo and townhouse prices remained high after a big recovery in June, and they’re up $100,000, on average, since last summer. So, while condos might not be the first choice for many compared to single-family homes, they have fit the mold for buyers who have been wanting to buy for some time, have a desire for more urban-like conveniences, and are focused more on low payments than price appreciation.
MULTIFAMILY MARKET MOVEMENT Multifamily, as a residential asset class, has emerged from the pandemic in an extremely strong position. It has rebounded from the initial negative impact on demand and performance, due largely to an unquenched need for housing and the recovering economy. As a result, rent growth has been healthy in recent months. The COVID-19 vaccine has allowed people to resume most of their normal activities and has given people a sense of being able to return safely to their urban roots. According to the U.S. Multifamily Outlook Summer 2021 market report by Yardi Matrix, all top 30 metros on a national basis are performing well from a rent growth standpoint. People are returning to cities in droves. Just think about students and recent graduates who moved in with family during the pandemic and are now returning to their metropolitan neck of the woods. 22
With that said, it was reported that approximately 174,000 units were absorbed nationally through May, putting 2021 on track to be among the hottest years since the 2008 recession. A wild second quarter growth put asking rents up 6.3% year-over-year as of June. Rent growth can’t continue at these levels indefinitely, but the stage is set for above-average growth to persist for months.
BRIDGE VERSUS RENTAL: 2021 IN REVIEW When it comes to the loan activity associated with these residential asset classes, the data speaks for itself. According to Nema Daghbandan, Esq., partner at Geraci LLP, it was no surprise—2021 shows very strong activity in the residential market. “From a trend standpoint, bridge loans, which are primarily construction loans, are holding fairly steady from a rate environment with a national average of 9.75% for the year analyzed over 1,800 loan transactions with an average loan amount of $612,504,” said Daghbandan. “Quarter over quarter, bridge loans have varied from a low of 9.58% to a high of 10.05%, showing a steady rate environment for residential bridge loans.” Daghbandan continued: “Rental loans continue to expand market share and rates continue to compress as most of these loans are securitized, and the cost of capital continues to be driven down. The national average for 2021 rental loans is 4.99% analyzed over 1,000 loans, with an average loan amount of $346,160. The quarterly changes in interest rate
here are more dramatic with first quarter average interest rates of 5.47% and third quarter averaging 4.65%. Similarly average loan amounts in rentals are rising with the first quarter averaging $278,067, and the third quarter to date showing $431,894—an approximate 50% increase in average loan size.” As a lender right now, we must all continue to be vigilant and adaptable. We can argue that COVID-19 did not necessarily create new trends, but instead accelerated trends already underway. What we do know is the investor real estate market is always in flux. With home values soaring, a continued spike in buyer demand, and low mortgage rates, the real estate market and the state of residential asset classes has ultimately proven to be a bright spot during an otherwise challenging time. ∞
ABOUT THE AUTHOR
GINA COMEAUX Gina Comeaux is the director of
communications for CIVIC Financial
Services. Joining the company in 2017, she handles external communication,
press relations, social media marketing, and writing. Comeaux has a bachelor's degree in communication with an
emphasis in public relations from San Diego State University.
Your journey to private lending industry data begins here. AAPL has launched the industry’s first benchmark data survey from an impartial organization. The quarterly survey gathers information on everything from origination volume to loan terms and foreclosure rates. Respondents receive FREE aggregated and anonymized results on a quarterly basis, providing a national and regional snapshot of the private lending industry.
Sign up today at aaplonline.com/survey.
Urban/Suburban/Rural: Demographics Are Shifting Post-COVID While macros are unlikely to change, investors and lenders should take local people movement into consideration. by Jay Parsons
uring the last decade, before the pandemic,
a simple rule governed
housing investment: The lesser
the density, the higher the risk.
The lesson emerged from the financial rubble of the Great Financial Crisis of
2008-2009. The view was caricaturized by the hit TV tragicomedy Arrested
Development, which depicted a family-run
housing developer’s demise in the far-flung exurban desert of Southern California.
In real life, housing developers shifted to
smaller lots and began building apartments as well. Institutional apartment investors bet heavily on coastal markets and downtown submarkets.
That view, of course, proved faulty, not
just when COVID-19 hit, but long before
that. Like with many things, COVID-19 was the accelerator of preexisting trends in housing. It’s also a reminder to be skeptical of those who generalize trends. Not every suburb in 2009 could be defined as speculative sprawl; in fact, relatively few were. And not every downtown in 2021 is dead; in fact, most aren’t. Looking ahead, what will be the lasting impact of COVID-19 on housing? It probably won’t be the demise of the urban core. It won’t be a massive upward shift in homeownership. It won’t be that single-family rentals are preferrable to multifamily or vice versa. The biggest impact will likely be on policy, as the pandemic put rental housing, in particular, in the crosshairs of policymakers, elevating investment risks in a handful of large coastal cities.
SMALL, BUT SIGNIFICANT SHIFTS The big picture housing demand patterns are unlikely to materially change. Sun Belt markets will remain magnets for growth and relocations. Suburbs should continue to outperform urban cores, as has been the case since 2013. And all major housing types stand to thrive, boosted by favorable demographic tailwinds. Rather than major shifts, expect smaller ones. We’ll see continued evolution in floorplans and amenities tailored to current tastes within new developments. As one example, the added time people spent at home has more households looking for fresh-air amenities like patios and balconies. We’ll also likely see the continued emergence of tertiary cities as
more households choose to work from anywhere. Well-located smaller cities near mountains (i.e., Boise, Provo) or beaches (i.e., Charleston, Savannah, Wilmington, Sarasota) should remain popular among both renters and buyers.
price growth. Apartment occupancy
INVENTORY SHORTAGE AND HIGHER PRICES
Given the supply shortages, price growth
There’s one more lesson COVID-19 taught us: Housing is essential. Because housing is essential and because way too many local and state governments put up way too many roadblocks to new supply, demand has vastly exceeded supply in the pandemic era. Bearing a black swan event (which we’ve learned the hard way can never be ruled out), there’s little reason to expect housing demand to materially erode over the next few years. Because of much more demand than supply, major housing types are seeing historically low levels of availability, triggering historically high levels of
hit an all-time high of 97.1% in August. Single-family rental occupancy is at the highest level since 1994. And the number of active listings among forsale homes remains far below normal. for all housing options has reached multi-decade highs. Apartment renters signing a new lease paid more than 18% above what the previous resident paid for the same unit, a record high roughly equaling the blistering pace of for-sale housing price growth, according to data from RealPage and the National Association of Realtors. Rent growth in single-family homes also hit a record high of 12.7%, accord-
The remarkable performance of all housing types—for-sale homes, single-family rentals, and multifamily rentals—should erase the false narrative of a cannibalistic relationship between them. There is no real evidence to support the common misconception that rentals suffer when home sales increase. They tend to move in tandem, as a rising tide of economic growth and household formation fuels demand for all housing types. Housing demand drivers have almost all been very strong since summer 2020, a fact obscured by policymakers’ and media’s rightful focus on the small share of households struggling to pay rent or mortgages.
GEOGRAPHY INFLUENCES INVESTMENT RISK
ing to data from Chandan Economics. These peak numbers are certainly unsustainable, but the cooling to come should be moderate as the market shifts from “really, really hot” to just “hot.”
Investment risk levels going forward are likely to vary less by housing type and more by geography. Although tales about the death of downtowns and big cities are
“ The remarkable performance
of all housing types—for-sale homes, single-family rentals, and multifamily rentals—should erase the false narrative of a cannibalistic relationship between them.”
grossly exaggerated, the pandemic era does raise worthwhile questions about the risk/ reward profile of urban versus suburban, as well as coastal gateway city versus Sun Belt market. A deeper review shows that COVID-19 only magnified performance and risk gaps that existed before the pandemic, even if many investors and lenders missed those indicators before the pandemic. In the years following the Great Financial Crisis, apartments in large Sun Belt markets produced better risk-adjusted returns with lesser volatility compared to core gateway markets (generally perceived by investors as lesser risk) like New York, Boston, Washington, D.C.,
CREDIBILITY WITH YOUR INVESTORS IS MORE IMPORTANT THAN EVER Specializing in Audit, Tax & Fund Accounting CPAs with over 20 years experience working with Private Lenders
San Francisco, Los Angeles, and Seattle, according to a fall 2018 research article in the Pension Real Estate Association’s Quarterly Magazine. However, investor and lender preferences hadn’t quite caught up with renter preferences, leading to favorable pricing in the Sun Belt. Although that study was limited to apartments, the other sectors would likely show similar patterns. Not coincidentally, large homebuilders and institutional single-family rental owners also tend to concentrate in Sun Belt markets, as do apartment developers. Gateway city volatility and risk were further heightened during the pandemic era, likely for the long-term. Eviction bans remain in place in most of these cities, less so in Sun Belt cities, even with the national moratorium in the rearview mirror. Those renter protections have not been paired with sufficient property owner protections. As one example, most eviction bans apply even to higher-income renters ineligible for federal rental assistance, meaning there’s likely no reimbursement for unpaid rent—even as property owners must still pay property taxes, staff, maintenance, insurance, and mortgages. There’s concern among some real estate investors that heightened political climates will lead to discussions of long-term, underfunded eviction bans, rent controls, and other policies hostile to property owners. Another layer of the geographic story is urban versus suburban. The rental dynamics are often grossly oversimplified, whereas the truth is rather complex. There’s no doubt that downtown areas are seeing a resurgence in demand following
a challenging 2020, but suburbs have outperformed for most of the last cycle, producing roughly twice as much rent growth, on average, from 2013 to 2019. The splits deepened in 2020, as rents held flat in the suburbs while falling sharply in urban areas. Supply plays a big role. New construction expanded the apartment base by an average annual rate above 4% in downtowns nationally versus less than 2% in the suburbs. More supply means near-constant competition from lease-ups, often competing for the same upper-income renters.
The big takeaway from all this? COVID-19 has changed the world in many lasting, significant ways. But for housing demand, COVID-19 served to highlight and accelerate patterns that began long before the pandemic. ∞
ABOUT THE AUTHOR
Going forward, there’s little reason to expect the urban/suburban dynamic to change. For one, there’s the long-term question about urban housing demand, assuming increased remote work is the new norm. Secondarily, supply will remain a big factor. Downtown supply nationally will continue to grow at twice the rate of the suburbs over at least the next two years. As much as developers want to build in the suburbs, it’s very challenging to build in desirable locations given NIMBYism and because restrictive zoning is more likely to occur in the suburbs than in a downtown. Single-family build-for-rent developers face similar challenges, but they’re generally finding opportunities (as are homebuilders) in outer-ring suburban locations where there tend to be few apartments and more welcome arms toward development. It’s worth noting that single-family construction remains stubbornly limited in spite of demand. Multifamily construction has been more plentiful, but less so in suburban locations where demand is strongest.
JAY PARSONS Jay Parsons serves as a vice president and deputy chief economist at
RealPage, a global provider of real
estate software and analytics. He is a frequent author and speaker on
several topics, including rental housing investment and asset management strategy, rental housing policy
issues, risk management, and renter engagement.
Parsons has been cited in the Wall
Street Journal, Bloomberg, and CNBC,
among other outlets. His commentaries have been published by the Pension
Real Estate Association, the Mortgage Bankers Association, the National
Apartment Association, American Banker, and GlobeSt.
FORECASTING THE FALLOUT FROM FORBEARANCE AND FORECLOSURE FREEZES What will the long-term impacts look like? by John Santilli
lbert Einstein once stated,
“We can’t solve problems by
using the same kind of think-
ing we used when we created them.”
In response to the coronavirus pandemic and its impact on the economy, new thinking has been employed because of lessons learned from the 1998 financial crisis and the 2008 banking crisis. Both events taught financial industry leaders and the government that extreme measures were necessary to avoid a full-blown financial crisis. Now, the protections put in place in the beginning of the pandemic as part of the government-backed CARES Act are expiring or receiving last-minute, confusing extensions. The federal foreclosure moratorium, which was created to protect people from foreclosures on their homes, ended July 31 2021. For some, protections 28
are still in place through the federal government. Eviction protections are also still in place through certain programs. Additionally, there are statewide protections in states like New Jersey, where the eviction moratorium was extended through Dec. 31, 2021, for those who qualify. In short, the protections vary greatly. The point, though, is that many of these protections are coming to an end, which means the mortgage industry is in for a whirlwind future.
PREPARING FOR AN UNKNOWN FUTURE In about four days’ time, the Federal Housing Finance Authority (FHFA) and the Department of Housing and Urban Development (HUD) took swift action to address the impact of the pandemic,
an unprecedented world event, through the foreclosure and eviction moratorium. It was created in March 2020 to address the impact the pandemic might have on the housing market. “Might” is the key word here. Those behind the moratorium were forced to make decisions in regard to an unknown future. Who knew how long the decisions would need to stay in place? Who knew what impact the pandemic would have on our economy and housing affordability? This is a different kind of financial crisis. Those of you who worked with a lender, bank, investment bank, or fell prey as a borrower to subprime lending as a homeowner during the housing crisis of 2008 likely already know this. The pandemic-driven economic concerns are not about irresponsible lending. Instead, they have been fueled
by a health crisis that pushed the
economy into a downward spiral. As we continue to progress in an uncertain world, what will the
long- and short-term impact be?
DISGUISING THE ECONOMIC FALLOUT
and many government-backed stimulus programs have largely disguised the economic fallout, however. The fact is many of those who entered forbearance agreements took the option but did not truly need the program. While the post-COVID world is still unknown, one thing is certain: There is a backed-up dam of loans awaiting foreclosure.
The initial forbearance and foreclo-
Although the impact is not expected to
private lending. The federal morato-
little fewer than 2 million homeowners
of rent, foreclosure moratoriums,
DIFFERING FEDERAL AND LOCAL LAWS The mix of federal, state, and local laws will make the maze of discovering opportunities for real estate investors more challenging. One can presume that not all foreclosures will happen immediately or at once, but they will happen. The first on the chopping block will likely
sure issues were not associated with
be as severe as the 2008 housing crisis, a
rium on evictions for non-payment
are currently in forbearance, according
agreements or were in the middle of the
to the Mortgage Bankers Association.
foreclosure process before March 2020.
be loans that entered into forbearance
The government has put tools in place— such as 40-year loan modification terms and pushing forbearance payments to the backend of the loan—to mitigate or prevent servicers from rushing the foreclosure process. Additionally, you can expect the foreclosure process to vary state by state, and even county by county. Law firms and others who are anticipating confusion have created state-by-state road maps to navigate the mitigation practices and rules, along with the different loan modification practices. It is expected that certain lenders will be more lenient than others. It’s no secret the foreclosure process is exhausting and
requires a large amount of a lender’s time and financial commitment. As a result, some lenders may be willing to work
with homeowners to avoid foreclosure.
EXPLORING THE COMPETITIVE HOUSING MARKET Higher rents and housing demands set an attractive stage for real estate investors
everywhere. As of now, one can predict
that the housing market will remain com-
petitive through 2021. Retailers and sellers of homes are holding out and continuing to drive housing prices higher, and there is simply less supply than demand.
hydrate your business. 30
Business Insider reported an estimate that the housing market is short 2.5 million homes. The shortage of homes available has resulted in a highly competitive market, where renting seems safer and faster than buying. The Chicago Tribune recently reported that 18% of American millennials expect to rent forever and have no plans to own a home. This number was closer to 12% in 2020, demonstrating a substantial increase in rental interest. As such, rental market attraction and demand is here to stay. For small-scale investors, large-scale aggregators, or build-for-rent commu-
nities, the investor outlook seems stable and rich with opportunity. The same goes for the borrowing options. Nonetheless, lenders will need to be on their toes to deliver product options and speed-to-close options to support all types of small and large buy-and-hold investors. When a significant amount of lending paused in March 2020, another housing crisis was feared. The government, however, made effective corrections with home lending after 2008. The loans made after 2008 have proven to be healthier, and the institutions and insurance companies backing these loans have shown they are prepared for growth in this market. Many of the “Non-QM” and other lenders who survived the lending pause earlier this year are stronger than ever. Many of them are filling the void by offering 30-year DSCR loans that conventional lenders cannot and do not offer. The cash-out options are helping replenish the funds of real estate investors and keeping the investor train moving forward. In the event we see a dramatic drop in home values, real estate investors as well as private mortgage lenders could find themselves unable to sell or refinance out of the properties. Many private lenders are putting good disciplines in place due to the concerns surrounding pockets of inflated housing prices. Both scenarios are something to watch over the next 6-12 months.
THE END OF THE FLIPPING ERA? In the 10 years before COVID, flipping homes was filling the private money
portfolio of loans on their balance sheets. Now, the movement is clearly showing the buy-and-hold loan is growing every day. Homebuilders are cautiously building, and real estate investors seem to be looking deeper than ever into distressed properties in marginal areas to take advantage of lower home prices. Many of the anecdotal and actual data suggest selling prices post-rehab completion are surpassing original appraised after repair values by 10% to 20%. For the time being, flipping still seems like a very viable market. Other variables continue to challenge us to look at all potential factors while approving borrowers for short-term lending. COVID-19 continues to do its best to keep everyone vigilant. Rising construction costs and lack of cash reserves continue to challenge borrowers and lenders to work through underpriced statements of work. Whether lenders are dealing with their own money, the fund they are managing, or the warehouse line they guaranteed, they should ask themselves daily, “Would I lend that investor my own money?” As we continue through this tumultuous time, keep the faith and stay true to what we know works: Do not lend above your head or permit investors to borrow above theirs. The moratoriums were put in place to help a crisis and environment none of us ever encountered. The future is still unpredictable, and the obstacles are being redefined daily, but private lending is thriving. If the COVID-19 tragedy reminded us of anything, it is that we are nimble, resilient, and should fear complacency much more than inevitable change. ∞
ABOUT THE AUTHOR
JOHN SANTILLI John Santilli is the chief revenue
officer of RFG, which he joined in July 2019. Santilli is responsible for all
opportunities connected to the growth
of RFG, and he is focused on expanding the company’s sales channels to
maintain their position as a leader in rehab financing.
Before joining RFG, Santilli had
25 years of lending and marketing executive leadership experience
across multiple private and public
marketing-dependent companies. He
had managed companies from startup to maturity and ranging from $2.5
million to more than $50 million in annual revenue.
He earned a master’s degree in
management from the University of
Pennsylvania and a bachelor’s degree in business administration with a
concentration in marketing from Drexel University. He currently resides in
Wynnewood, Pennsylvania, with his
three children, and enjoys family first, live music, and finding the perfect balance of work hard/play hard.
AAPL's Market Insight Report The association releases first private lending benchmark survey results. by Kat Hungerford
lthough private lenders
originate billions in loans
annually, there is a lack of
quantifiable data to support this
aggressively expanding industry.
From the outside, it makes private lending look smaller and less instrumental to the
loan origination industry than it is. Inter-
nally, it means originators, fund managers, note buyers, brokers, and service providers operate in an analytical dark age when it
comes to trends specific to private lending. Due to the primarily business-purpose nature of their loans, private lenders
are not subject to many of the consumer loan reporting requirements regula-
tory agencies require banks and other institutional lenders to complete.
This absence of many reporting requirements means that specific market
research data is almost nonexistent. Until now. 32
In early 2021, the American Association of Private Lenders (AAPL) invited private lenders across the nation to participate in the industry’s first benchmark data survey in exchange for complimentary access to the results report. The quarterly survey includes fill-in-the-blank numerical matrixes that poll portfolio volume, origination metrics, foreclosure and delinquency rates, loan terms, loan type, collateral location, and collateral type. It also includes scale opinion questions that gauge participants’ market confidence. The same questions are asked each quarter. AAPL released its first Market Insight Report in July—two months after the closure of the second survey polling period. The report analyzed the inaugural two surveys that polled metrics for the Q4 2020 and Q1 2021 periods. As the association develops processes to analyze the data more quickly, future reports will be released closer to survey closure.
This article details a few insights from the inaugural 11-page report. To participate in the survey and receive full future reports, sign up at aaplonline.com/survey.
RESULTS IN CONTEXT As we examine the first two periods polled, we must make special note of the context in which private lending companies completed the inaugural Q4 2020 and Q1 2021 surveys. These and the surrounding quarters marked a period of socioeconomic upheaval across the globe due to the coronavirus pandemic. While any information is helpful at this juncture, we caution level of inference until there is more supporting data. A confluence of factors has led to the lowest housing inventory seen in decades. The inventory issue has in turn disrupted the housing market, with ripple effects now being felt more keenly among real
whether they would be able to find a subsequent home to move into. According to Money.com in April, this caution meant normal home turnover stalled, even as demand was high. D ue to the shelter-in-place orders,
many homeowners started home improvement projects, according to the Joint Center for Housing Studies at Harvard. While the U.S. economy shrank 3.5%, home improvements and repairs grew more than 3%—and that trend is increasing in 2021. This may keep many of these homeowners in their homes longer, especially as more of the projects were DIY, which tends to create more attachment.
T he federal foreclosure moratorium
estate investors and private lenders. These factors caused fewer profitable deals for real estate investors, which meant less demand for private lender loans. They also provide context for why we might be seeing surges from Q4 2020 to Q1 2021 in certain product lines, asset classes, and assessments of loan availability, even while we lack earlier comparative data. R ising inflation, low unemployment,
increasing wages, and the growth of the U.S. economy has historically resulted in rising home prices and lower inventory. Pre-pandemic, that trend was very much in effect, and COVID-19 pressures exacerbated the situation further.
T he pandemic caused significant
demographic shifts as both homeowners and renters left metros, fewer people moved into cities, and many people near retirement age advanced those plans early, according to the Wall Street Journal in April. This led
to increased demand in outlying areas that priced out real estate investors because homebuyers purchased properties normally in investors’ purview. Meanwhile, homeowners in suburbs
and rural areas were cautious about listing their homes due to uncertainties surrounding job security, how the pandemic would play out, and
PANDEMIC DEMOGRAPHIC SHIFTS
PRE-PANDEMIC ECONOMIC BOOM
and availability of mortgage forbearance meant that the normal turnover of REO, short sale, and distressed homes was largely not present, as reported by the Federal Reserve in March. While some expect these homes will surge onto the market in the aftermath of the moratorium’s sunset, we urge caution: Continued political and stimulus action may mitigate some of this turnover.
PERSONAL UNCERTAINTY STRESSORS
BOT TOMING OUT HOUSING INVENTORY
HOME IMPROVEMENT PROJECTS
PORTFOLIO VOLUME: A PEEK AT SECONDARY MARKET ACTIVITY & SIGNS OF POTENTIAL MARKET EXPANSION Survey responses gave us an unexpected view into the involvement of the secondary markets in the private lending industry. Nearly half of participating companies retained at least some notes in their portfolios. It will be interesting to track this trend to see how post-pandemic market activity influences lenders’ retention of notes. Will we see more lenders hold notes to diversify in the aftermath of the capital markets freezing deal flow in the early pandemic? Interestingly, the total number of funded loans in companies’ portfolios increased by an average of 23% in Q1 2021 and accounted for a corresponding 124% increase in total portfolio dollar volume. We will watch future survey responses to see whether this correlates positively with the note retention analysis above. It is otherwise too soon to tell whether this increase is a temporary uptick as private lenders recover portfolio volume post-pandemic or a harbinger of market expansion.
# PORTFOLIO LOANS AMONG COMPANIES 350
TOTAL PORTFOLIO LOAN VOLUME ($usd millions) 70 M
REGIONAL PERFORMANCE: ORIGINATION VOLUME
The Regional Performance section of the report also included analysis on company loan origination numbers, average loan amounts, total loans, and delinquency/foreclosure rates, which are not included in this article. There is little correlation between regions in terms of origination volume, although expectedly, total origination 34
AND DIVISIONS OF WA
THE UNITED S TATES
volume tracks positively with average loan amount. All regions reported an overall increase in average origination volume over three months, except for the West.
AVERAGE COMPANY ORIGINATION VOLUME $USD MILLIONS
T he West The West decreased
5% in average origination volume per company.
T he Northeast
This region saw the greatest change, jumping 142%.
T he South
Earning the title of “most stable,” the South jumped only 16%.
T he Midwest
The flyover states had the smallest origination volume, but came in second place on change, jumping 94%.
PRODUCT PERFORMANCE This portion of the report also included deeper analysis into origination vol-
ume, number of companies extending the product type, and average loan term for the different products polled. Average interest rates and percentage of originations held mostly steady—but all fell at least slightly—among the respective product lines, with most of the change traced back to different responding companies from quarter to quarter. Rates fell across all products polled. Although more data from subsequent surveys is needed, here is our early inference as to why we might be seeing this:
% TOTAL ORIGINATION VOLUME 100%
0% FIX & FLIP
It is an indicator that private lend-
is slowly ending.
LONG TERM RENTAL
(AMONG THOSE THAT RESPONDED BOTH QUARTERS)
FIX & FLIP
W ith less demand from real estate inves-
tors struggling to find deals, lenders seek to underprice the competition.
T he exodus of less experienced real
# COMPANIES ORIGINATING EACH PRODUC T
ers in the market continue to mature from the post-recession boom and can more accurately and quickly adapt to market changes.
T he “pandemic premium”
LONG TERM RENTAL
estate investors from the market has left the more experienced investors who are able to earn their way to lower rates.
AVER AGE INTERES T R ATE
COLLATERAL PERFORMANCE 12%
This section of the report also included deeper analysis of metrics polled for each collateral class, including number of companies originating loans secured by each property type and average days to close. The percentage of origination volume fell in Q1 2021 across all asset classes except commercial, which more than doubled. On the other hand, more companies originated loans secured by each property 36
0% FIX & FLIP
LONG TERM RENTAL
AVER AGE % OF COMPANIES' ORIGINATION VOLUME 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% COMMERCIAL
Please contact AAPL at email@example.com with any questions. If you are a private lender seeking access to the full report, you may sign up to receive full access to subsequent reports at aaplonline.com/survey.
ABOUT THE AUTHOR
# COMPANIES ORIGINATING
tion costs, and external socioeconomic factors. These contributing factors have led to disruptions in offered product lines, diversification of asset classes, and changes to foreclosure rates. We are curious to see if some of these trend indicators herald market expansion, with many “this bears watching” notations. ∞
KAT HUNGERFORD Kat Hungerford is executive editor of Private Lender magazine and
type. The explanation is a good thing because companies are diversifying their loan offerings, responding to borrower needs and housing inventory issues. Lenders’ responses on average days to close correlates with the long-held understanding that although the industry has grown and matured, it is still compartmentalized from one business to the next. Average days from application to close not only varied among companies within each property type, but it also wasn’t stable from quarter to quarter— even among companies that responded both quarters. Although this may be explained by lenders’ flexibility and the complexity
of different deals, it also bears watching to see if this is standard for the industry, or a calling card for pandemic-related delays in closing processes.
project development manager at
the American Association of Private
Lenders. She specializes in operations, project management, and marketing. Hungerford also acts as secretary for
the association’s Government Relations Committee, which serves as AAPL’s
advocacy arm in Congress and state legislatures.
The results analysis of the inaugural Q4 2020 and Q1 2021 surveys provide insight into one of the most unique periods in recent memory: the impacts of the pandemic on the private lending industry among preexisting stressors of low housing inventory, rising construc-
AAPL is the oldest and largest national organization representing the private lending profession. The association
supports the industry's dedication to
best practices by providing educational resources, instilling oversight
processes, and fighting regulatory
encroachment. Find more information at aaplonline.com.
AAPL’S CODE OF ETHICS: HONEST, FORTHRIGHT AND PROFESSIONAL These are the hallmarks to which association members strive. by Kellen Jones
APL’s Code of Ethics has
to. In fact, these character-based provi-
Code is well-articulated in
of the industry and provide protec-
several purposes. The
the association’s annual conference content, continued education for
fund managers and private lenders, and online. The association strives to
create industry best practices, enforce a
sions in the code shape the reputation tions for members in good standing. In the traditional capital markets, independent review agencies such as Standard & Poor’s typically rate groups with stellar
HONESTY AND INTEGRITY Honesty and integrity are frequently
used interchangeably. In private lending, dishonest players rarely blatantly lie. Thus, identifying and reporting unethical behaviors that often hide
within financing and servicing pro-
code of conduct, and prevent regulatory
reputations higher than those with obvi-
encroachment. Most items adopted are
ous impairments. But in non-bank lending,
cesses becomes even more important.
included to address “gray areas” surround-
the burden falls on private lenders, and
ing formal regulations already in place.
then it trickles throughout the ecosystem
Lenders may bait borrowers with entic-
The association itself acts almost as a
self-governing body on issues outside of
to loan brokers, borrowers, and vendors. One guideline within the AAPL code of
regulation. Those who operate through
ethics states, “Members will be honest,
out with time. But other areas of the code,
business dealings.” Everyone has different
are just as important for members of the
ing loan economics but ultimately fund at much higher prices. It’s one thing
to apply risk adjustments to loan pricing after a careful underwriting, but
it’s problematic when lenders have no
regulatory loopholes typically get weeded
forthright, and professional in all their
outside of regulated business practices,
applications and perspectives in business
advertise under any circumstance.
when it comes to character adjectives,
private lending community to adhere
which makes defining standards difficult.
Brokers may lead borrowers to believe
intention of offering the terms they
they are direct lenders, but really
manage no capital. It’s one thing to
have correspondent or table funding relationships, but quite another to
mislead applicants. Borrowers have several opportunities to fudge in any number of areas throughout
the application, underwriting, and
approval processes. Although it’s fair for borrowers to put their best presentation forward when seeking a loan, leaving critical details out is dishonest.
FORTHRIGHTNESS Forthrightness is a first cousin to hon-
esty. Being habitually direct and sincere in practice saves everyone money and arrives at the facts sooner. The adage
that “all truth comes out in time” usually
proves accurate when a borrower or lender gets through the funding process nefar-
iously. If a party fails to be forthright in
the lead-up to a loan closing, the project or loan will likely fail or be negatively impacted by the omitted information.
Rarely is the intended outcome awarded
when it was achieved by skirting the truth.
PROFESSIONALISM Professionalism can also vary in definition. Office culture, company vintage,
the staff ’s generation identity, education level and discipline, experience, and
entirely, the standards that define positive character traits typically suffer. On the contrary, an organization that lacks levity may breed less trustworthiness, which leads to greater challenges unilaterally.
noble, the industry must strive to really
Professionalism is an important quality for private lenders because it requires checks and balances, policies, and procedures. Committing to a system helps organizations protect themselves against fraud and deception, while breeding an honest culture.
rity,” Quinn McKay provides subtle
NO LIP SERVICE
AAPL code goes beyond the tenants of
professionalism we’re used to address-
ing (dress codes, phone etiquette, etc.). When an organization lacks decorum
understanding that sometimes, these
elements get glossed over or generalized. In his book “The Bottom Line on Integtools of deception that apply almost universally. He explains that most
deception and dishonesty center around manipulations in the communication process. Here are a few he covers:
O utright lying by saying things are not
so, that truly are, is the same as stat-
ing a falsehood. Although most would agree that lying is wrong, many still
industry can affect how traditionally
professional organizations must be. The
address matters of integrity head on,
Private lenders must be careful not to use character adjectives as clichés. Many organizations integrate concepts of integrity into mission statements and company collateral. Although these inclusions are
engage in this type of dishonesty to
avoid getting into trouble, to make a
sale, or to get out of a difficult situation. Perhaps an organization had a
bad experience that became publicly
known. Instead of addressing the root of such a problem and addressing it head on, perhaps a lender trains its originators to deny culpability or existence of the issue. It’s almost always better to “own” a crisis, take responsibility, and commit to a change if needed. O verstating or exaggerating is a
common form of deception. To compete against other organizations, loan pricing, fund performance, or borrower experience may be misrepresented in an effort to find an edge.
Understating circumstances is a
common tactic because it may feel less dishonest to merely understate a problem. Perhaps a lender hears about a storm near a project after the lender already completed its site visit and asks the prospective borrower whether any major damage was suffered. The borrower may know full well the property experienced significant damage, but to maintain their approval, they state they haven’t been to the property yet.
W ithholding information is a well-
used tactic of dishonesty. When loan approvals require only certain information, even originators will sometimes withhold information from underwriters to avoid a denial. This type of deception leads not only to more default and contention but also to more regulation. Providing disclosures and all the pertinent information is almost always better than withholding it. Lenders can factor in any challenging dynamic of a loan scenario and work with borrowers and brokers to overcome the obstacle.
McKay further articulates how pressure within our organizations and industry 40
can create an environment in which dishonesty thrives. These pressures can lead to bad decisions that often
require defensiveness in organizations competing to survive. Organizations
must recognize that operating under
pressure can often lead to overstepping
deception operate in a place of scarcity; in an effort to gobble up anything they can, success comes at any cost. Beyond implementing more honest practices throughout your organization, AAPL has established a place to help identify and remove bad actors with ill intent from the industry. ∞
ethical or even legal boundaries. Quo-
tas and benchmarks can be a great way
to motivate individuals to achieve their highest potential, but without proper
guidelines and expectations, motivation can quickly lead to unhealthy pressure.
ABOUT THE AUTHOR
Leaders should eliminate and reduce any major pressure source however
possible, even if it means reducing the intensity of competitive dynamics.
Training should be offered to help people develop highly ethical behaviors.
Leaders must create an integrity litmus test at the ground level and commit to
revisiting it often. Questions to ask:
Kellen Jones is president and co-fund
How close are the terms we
Funding Database. Over the last 15
are using in marketing to the terms we are funding with?
How are we telling our orga-
How are we achieving and reporting
our organization’s performance?
How are we representing our lend-
ing volume? Is it accurate?
A m I creating pressures in my organiza-
tion that cause our people to deceive?
At the industry level, each member has
an obligation to contribute to a culture of honesty, forthrightness, and professionalism. There is an abundance of busi-
ness available for anyone who ethically
wants to participate. Most aggravators of
manager at Prospera and CEO of
years, his companies have originated $1 billion in volume. Beyond the private lending activity within
Diversified Fund, Jones co-founded Prospera Growth Fund in 2017, now
exceeding $300 million in value. The group also manages two propertyspecific opportunity zone funds.
Jones has become a thought leader with an emphasis on underwriting and credit quality, capital raising and management, and business
ethics. Jones serves on AAPL's Ethics
Committee and advises businesses in
several verticals from fintech to retail.
Jones resides in Utah with his wife and four children.
NTS E S E 021 2 R , P 3 1 P BER I LL M C E A T P R GE O - SE W T N SEASO
The Podcast that Looks Beyond the Title of Private Lending Leaders CATCH US ON THE 2ND AND 4TH MONDAYS OF EVERY MONTH https://geracilawfirm.com/lender-lounge/
early every mortgage
broker and lender has dealt with a loan in
which the value of the real property offered as collateral is insufficient to meet the underwriting requirements. As an alternative to changing
the loan amount and other loan terms, a lender may require the borrower to offer additional real property as collateral. Unfortunately, not all borrowers own additional real property or, if they do, it may not be of sufficient value to meet a lender’s requirements. Fortunately, there is an alternative to either merely passing on the loan or altering the terms (i.e., reducing the loan amount, increasing the interest rate, and offering other loan terms that leave a borrower feeling unsatisfied). The potential solution is demanding additional security in the form of personal property assets.
NON-REAL ESTATE ASSETS AS SECURITY Personal property assets can be used as collateral when the value of the borrower’s property does not meet a lender’s requirements. by Dennis Baranowski
WHAT ARE PERSONAL PROPERTY ASSETS? Essentially, personal property includes any asset that is not real estate. It is divided into two categories: tangible and intangible. Tangible personal property refers to physical objects, including inventory (e.g., packaging, manuals, and instructions), merchandise, raw materials, work in process, equipment, machinery, tools, office equipment, supplies, furnishings, and fixtures. Intangible personal property is all other personal property that is not physical (e.g., stocks, bonds, retirement accounts, business records, deposit accounts, inventions, intellectual property, designs, patents,
patent applications, trademarks, trademark applications, trademark registrations, service marks, service mark applications, service mark registrations, trade names, goodwill, technology, know-how, confidential information, trade secrets, customer lists, supplier lists, copyrights, copyright applications, copyright registrations, licenses, permits, franchises, tax refund claims, and any letters of credit, guarantee claims, and security interests).
REQUIRING PERSONAL PROPERTY ASSETS AS COLLATERAL Supplementing the value of the real property collateral to meet loan-to-value and other underwriting requirements is a primary reason personal property is used as collateral. Other typical reasons a lender will require personal property assets to be pledged as collateral include: E nsuring business assets remain. The
a franchise could be operating at the real property, so it is in a lender’s best interest to keep the flag in place. Some other business assets that can be taken include insurance policies, contracts with third parties, accounts receivable, merchant accounts, and bank accounts. S eeing construction is completed.
To ensure a construction project is completed, a lender should consider obtaining collateral assignments of construction and construction-related contracts, plans, and permits. By taking collateral assignments of these types of personal property, a lender can step into the shoes of the borrower and developer and complete the construction, maximizing the value of the real property. A half-finished construction project often severely limits the value of the real property collateral, forcing the lender to complete construction to try to save the investment.
borrower, or an affiliate, is operating a business at the real property collateral and the lender wants to ensure that in the event of foreclosure, those business assets will remain at and tied to the real property. If the tangible business assets utilized in hospitality (i.e., hotels, restaurants, etc.), gas stations, assisted living, cannabis, and other similar industries remain at the real property and are subject to sale, the value of the real property can increase, or at least stabilize, since an ongoing business venture is often much more valuable than starting from scratch.
D iscouraging the borrower from
Tangible assets used to operate the business are not the only desirable personal property collateral related to a business borrower. In some instances,
A lender can protect itself from such a borrower by requiring the borrower to pledge the following as collateral: all ownership interests in borrower or its affil-
cutting losses and walking away
from the real property. Sometimes, as a result of thorough underwriting, a lender will determine that a borrower lacks a history of servicing this type of debt, or has a history of cutting bait and running when circumstances are less than ideal (i.e., borrower is an entity, sponsor is about to file bankruptcy, and borrower determines that solely based on economics, the best decision is to strip the property and/or business of all of its assets and walk away).
iate(s), accounts receivable, and deposit accounts. Obtaining a collateral interest in these items will facilitate the appointment of a receiver to operate the real property as well as obtain writs of attachment and other pre-foreclosure relief.
HOW TO TAKE A COLLATERAL INTEREST IN PERSONAL PROPERTY In general, Article 9 of the Uniform Commercial Code (UCC) governs secured transactions involving personal property and has been adopted in every state. There are two steps involved in the creation of a personal property collateral interest: attachment and perfection. Attachment is the moment at which a security interest is created in the collateral. For the security interest to attach in the collateral, (1) value must be given for the security interest, (2) the pledging party has rights in the collateral, and (3) the pledging party enters into a security agreement. In the instance of a mortgage loan for which the lender is requiring additional personal property collateral, the loan itself is the value given. The security agreement should be included in the loan documents along with the promissory note, loan agreement, and mortgage or deed of trust. The critical aspect of attachment is ensuring the pledging party actually has an interest in the personal property being pledged. A common mistake occurs when a lender believes it is taking a collateral interest in the assets of the business operating at the subject property by having the borrower sign a collateral security agreement—only to discover the business is being operated FALL 2021
by a tenant or affiliate of the borrower. In that instance, the business assets are not the property of the borrower, so no security interest would attach to them. Perfection gives priority in the security interest to the lender over all other parties. Thus, attachment creates the security interest between lender and borrower, and perfection applies to other creditors, bankruptcy trustees, and other parties that are obtaining an interest in the personal property collateral. For example, attachment occurs when a borrower executes a mortgage and funds are disbursed, but perfection does not occur until the mortgage is recorded. Perfection can be accomplished by (1) filing a financing statement (UCC-1) with the appropriate government office, (2) taking possession of the personal property collateral, (3) controlling the personal property collateral, or (4) taking a purchase money security interest in consumer goods. If a secured party fails to perfect its security interest, another creditor could do so in the future and still have priority. A lender that fails to properly perfect its security interest still may assert its security interest against the borrower or pledger.
FORECLOSING ON PERSONAL PROPERTY COLLATERAL Article 9 of the UCC describes the process by which a lender may foreclose on personal property collateral following an event of default. Under Article 9, following a default, a lender may sell, lease, license, or otherwise dispose of any or all the collateral covered by the security agreement. 44
The only limitation on what a lender may do is that its actions must be reasonable. A lender may, therefore, resort to self-help to recover personal property security, as long as the actions are reasonable and do not disturb the peace. In most instances, 10 days’ notice of sale is deemed reasonable. Although Article 9 provides for a simple and fast foreclosure option, the ease and speed of an Article 9 sale will depend on the following factors: L evel of cooperation from the pledging
party. If the pledging party refuses to cooperate, obtaining and taking control of collateral could be difficult.
A bility to possess or control the collat-
eral could impact perfection of the security interest, as well as conduct a sale.
Creditors with priority.
Although these items will make foreclosure of the collateral extremely difficult, a secured party still may enforce its rights by foreclosing judicially and obtaining assistance from the courts with determining the rights in the personal property collateral and forcing the turnover collateral to lender.
EFFECTIVELY ADDING PERSONAL PROPERTY SECURITY Taking personal property as additional collateral for a real estate loan can be an excellent tool for lenders to use if the proper steps are followed. Anyone interested in requiring personal property collateral should consult with a professional versed in the creation, attachment, perfection, and enforcement of security interests in personal property. ∞
ABOUT THE AUTHOR
DENNIS BARANOWSKI Dennis Baranowski is a partner at
Geraci LLP and a supervising attorney in the banking and finance group. He has extensive experience in helping
banks, credit unions, mortgage funds, private lenders, brokers, developers, and loan servicers navigate through complex transactions, including
negotiation of terms, transaction
review, and drafting of documents. Baranowski developed and manages Geraci’s cannabis lending and
compliance practice and has regularly
presented on cannabis lending. He has also published articles on the topic in national trade publications.
Baranowski believes in dedicated,
constant communication and providing swift, custom, effective, and efficient solutions to client problems. He
understands that his role is not to
stand in the way of a transaction but rather to be a trusted guide in all lending matters.
The ® Your Ultimate Lending Platform
Borrowers in Bankruptcy Part 4 Get the most out of the bankruptcy: Understand the risk management strategies you can take prior to granting a loan. by Marc Weitz
s part of a series of articles discussing strategies for
private lenders to deal with
bankrupt borrowers, this fourth and final article discusses risk manage-
ment strategies you can take before granting the loan or prior to the
bankruptcy. These strategies may
include waiver of the automatic stay,
use of special purpose entities, blocking shares and blocking directors,
keeping good records, and moving quickly to record documents and serve notices.
Disclaimer: This article is for informational purposes only and is not meant to be legal advice. Consult your local bankruptcy attorney for your particular situations.
PRE-BANKRUPTCY WAIVER OF THE AUTOMATIC STAY When a borrower files for bankruptcy, an automatic stay goes into effect, stopping and forbidding you from collecting your debt, including foreclosing on the property. There is a trend toward permitting the borrower to waive the automatic stay, but courts are split on its permissibility. Courts that view such waivers negatively say that it is against public policy and defeats bankruptcy’s objective of giving the debtor breathing room. Courts have ruled that pre-bankruptcy waivers of the automatic stay in the initial loan documents are given the least weight, meaning they’re likely unenforceable. However, pre-bankruptcy
waivers of the automatic stay are more likely to be enforced in subsequent
agreements (e.g., forbearance agreements or agreements in prior bankruptcies).
Rather than treating such waivers as comprehensive, courts factor in such waivers
as part of determining cause to grant relief from stay. They also look at the sophistication of the debtor making the waiver, any consideration received by the debtor for
such a waiver, the effect on other creditors, and the feasibility of the debtor’s plan. For lenders, it certainly does not hurt to put in such a waiver. But it is not automatic. You still must move the
court for relief from stay. Do not just proceed without court authorization assuming the waiver to be effective;
otherwise, you could face sanctions.
The strongest pre-petition waiver is one
the collateral asset and the loan. This
versial, and there is a split of author-
similar alternatives are to (1) have the
Then you can implement this idea in three
There are two main problems. The first
ity of voting shares so you would have
corporate governance, federal bankruptcy
given in exchange for a forbearance. Two borrower agree to not oppose a relief from stay motion or (2) get the borrower to
stipulate to facts that support the grant-
ing of relief from stay, such as admitting that the borrower has no equity or that your lien is not adequately protected.
BANKRUPTCY REMOTENESS USING GOLDEN SHARES OR BLOCKING SHARES
usually takes the form of an LLC.
ways. The first is to give yourself a majorto approve the SPE’s bankruptcy filing.
These are called “blocking shares.” The
second is writing into the SPE’s governing documents that a creditor or creditors
must approve or can block a bankruptcy filing. These are called “golden shares.” The third is putting your own repre-
sentative on the board of directors who
could, again, block a bankruptcy filing. The idea behind this strategy is to give
In all these cases, it’s about gaming the
should file for bankruptcy. At the initi-
that you could, in theory, vote to pre-
yourself a vote on whether a borrower
ation of the loan, the borrower creates
an SPE (Special Purpose Entity) to hold
borrower’s corporate governance so
emptively block any bankruptcy filing should the need arise. This is contro-
ity, but the trend is against them.
is that even though state law controls courts have found it is against public
policy to deny corporations their right
to bankruptcy protection. Thus, courts have recently ruled that blocking and golden shares are invalid and cannot
block an SPE’s right to file bankruptcy. There is a more dangerous concern
regarding board members who represent you in the SPE. Board members
have a duty to their shareholders and a vote against bankruptcy with only the
interests of the lender in mind violates the board member’s fiduciary duties
of care and loyalty. In such a scenario, FALL 2021
“DURING THE 2008 CRISIS, LENDERS HAD PROBLEMS FORECLOSING AND COLLECTING ON LOANS BECAUSE THEY SIMPLY LOST THE RECORDS. DON’T LET THAT HAPPEN TO YOU.” you and the board member may be liable for breach of those duties.
For these reasons, you may be wasting your time setting up the SPE
sional lender will have a good system that can produce this information instantly.
with these preemptive provisions. It is a good idea to avoid these strategies for the moment, but they are something to think about and discuss with your
counsel depending on your jurisdiction and future developments in the law.
GOOD RECORD KEEPING Keeping good records should go without saying. You should have all your records
in order. In this era when many states no
longer require hard copies and only elec-
tronic records, it is easy to keep and maintain good records. During the 2008 crisis,
File documents right away, record trust deeds and liens immediately, and send notices at the earliest legal date. Be proactive; don’t let things linger. As soon as the loan is signed, record your trust deed or similar instrument right away. This goes for deeds of foreclosure and anything similar. Don’t be caught with an unrecorded lien when the debtor files for bankruptcy and that automatic stay comes into effect. There are exceptions for recording after the automatic stay is in place, but if you’re too late, you’ll then have an unsecured claim in bankruptcy.
and the promissory note. In addition, you
The same goes for required notices. You’re likely aware that to foreclose, notices need to be served on the borrower. In California, the process takes about 200 days and begins the first day the borrower misses a payment. The lender must advise the borrower of the default. Thirty days later the lender records a notice of default. Ninety days after, the lender records a notice of trustee sale. Then, 21 days later, the auction takes place.
is owed as of the petition date. A profes-
Don’t be late on any of those days. The more advanced you are in the process
lenders had problems foreclosing and collecting on loans because they simply lost
the records. Don’t let that happen to you. Remember, when a borrower files for
bankruptcy, you need to file a proof of
claim with the court. Your proof of the
loan and the amount due are attached as
your “proof ” of your claim. In California, this would be a copy of the trust deed
need to provide a statement of how much
when the borrower files for bankruptcy, the better your recovery in bankruptcy. For instance, if the borrower files for bankruptcy after the notice of trustee sale is recorded, you may continually postpone the trustee sale indefinitely in the hope that the bankruptcy gets dismissed or relief from stay is granted. You avoid having to restart the process. Follow a system that calendars these dates in your state and ensures all these notices are filed in a timely manner, which means neither early nor late. Borrowers filing for bankruptcy is inevitable, but you can take steps before you give the loan that can give you an edge should a bankruptcy arrive. ∞
ABOUT THE AUTHOR
MARC WEITZ Marc Weitz is a California bankruptcy and real estate attorney helping
private lenders recover investments from borrowers in bankruptcy. With a combined 23 years’ experience between the law and investing,
Weitz has a unique knowledge and
understanding of both the investment and legal side. Weitz is also a
Chartered Financial Analyst (CFA), a
California licensed real estate broker, and an investment property owner.
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LENDER LIMELIGHT WITH CINDY NASSER
Boldness and Bravery Defy Adversity Cindy Nasser’s experience in foster care Cindy Nasser's early life experiences taught her lessons about taught her lessons about business, empathy, business, empathy, and and leadership leadership that that drive drive her her success. success. by Katie Bean
by Beth Johnson
indy Nasser’s career path has been anything but typical. But her life experiences
have equipped her with insights that uniquely qualify her to lead teams at PCV Murcor.
As chief operating officer, she touches nearly all parts of the business, including IT, vendor management, client services, order fulfillment, quality control, and support teams. Watching her successfully lead an appraisal management company, you’d probably never guess she began her career
in a call center. Or that she dropped out of high school to work full time when she was emancipated from the foster care system in California. Nasser’s life has encompassed many twists and turns, but that circuitous path has led her to exactly where she can make an impact on her company and employees.
TAKING A STAND Nasser’s life was upended at age 11 when her biological mother died. She lived with her biological father for a few years, but FALL 2021
LENDER LIMELIGHT WITH CINDY NASSER
“that situation wasn’t good for me,” she said. At 14, she ended up in the foster care system. Nasser soon realized foster care was not good for her either. She learned a lot in the short time she had with her mother, who taught Nasser to stand up for herself. “I learned very young that the best person to have your back is yourself—that you have to fight for yourself, stand up for what you believe in, and do that for others,” she said. In foster care, she worked three jobs to earn money, compensating for the neglect at her foster home by buying her own food. Being older and more independent, she looked out for her younger foster sisters, who she said were mistreated and didn’t have access to necessities such as hygiene products. True to her values at a young age, she ultimately reported the home and got it shut down. Unfortunately, it wasn’t the total win she had expected. “When I reported my foster mother, I thought I could just leave the foster care system,” she said. “My social worker’s like, ‘Well, that’s not quite how that works.’” Nasser discovered she would have to petition the court. She was only 16, but she would need to demonstrate she had a plan and could support herself. “I told the judge, ‘If anybody’s going to screw up my life, let it be me,’” she said. The judge agreed, and on Oct. 11, 1991, she was emancipated from the system. Nasser had only herself to rely on—and she acknowledges it was hard. By age 19, she was homeless and said she had “my midlife crisis.” 52
“I’d been working so hard,” she said. “I
didn’t really have a normal high school
THIS OR THAT ?
life, teenage life. I’d been working pretty much since I was 14, and I was tired. But
being homeless really wasn’t an option.” She found a job at a toy store but couldn’t
T E X T O R C A L L?
quite make ends meet. She found another job at Bank of America as a part-time phone representative.
CO M E DY O R M Y S T E R Y ?
“Pretty much that whole time I was just in
survival mode,” Nasser said. “I didn’t really have a clear path or understanding of what my future was going to look like.”
About three months after she started work-
ing at Bank of America, she saw an opening for a temporary job in the workforce man-
H O T C H O CO L AT E O R E G G N O G G “EGG NOG IS BLECH!”
B E AC H O R M O U N TA I N S ?
agement and resource planning department. She hadn’t met the minimum required
employment length at the bank the job post-
RAIN OR SHINE?
they can do is tell me ‘no.’ So I applied.”
“MAYBE IF I SAY IT, WE’LL GET SOME!
ing specified, but she figured, “The worst
The bank didn’t say “no”—she was hired
for the position. That job launched her on an upward trajectory.
“From there, I just started getting promoted,” she said.
FLIP FLOPS OR SNEAKERS? “MY ACHILLES DIDN’T APPRECIATE FLIP FLOPS.”
Nasser worked her way up from analyst
to managing multiple workforce manage-
ment teams to overseeing five call centers across five states.
One of her bosses at the bank pressed
started college. Between the university and
groups, being able to communicate using
degree would help her continue to move
classes at community college, she earned a
data and having a lot of influence,” she said.
her to go back to school, saying a college up in the long run. Nasser argued she
degree in business management after nine
couldn’t afford it.
years. Nasser is glad she did it. It comple-
“I fought her for a long time,” Nasser said.
mented her work experience, filling some
When she was 24, Nasser learned about the University of Phoenix, which could accommodate her work schedule. She finally
gaps and refining her teamwork skills.
STEPPING OUT OF A “BUBBLE” While she was attending school and
“One of the greatest things I got from that
working full time, Nasser’s career path
program is being able to talk in front of large
took a sharp turn. After being caught up FALL 2021
LENDER LIMELIGHT WITH CINDY NASSER
in massive layoffs at the bank following
“ WHAT I TRY TO TELL EVERYBODY ON MY TEAM IS: DON’T EVER BE ASHAMED OF YOUR STORY.”
9/11, she went on to help telecom and
tech companies build and manage call
centers. Yahoo bought the small tech firm
where she had just streamlined call center operations, and her role continued to
increase at the tech giant. Her work with these companies helped her realize an
appreciation for processes and creating software that can help her teams.
“I’m so naturally inclined to developing
processes to scale and creating efficien54
cies. I didn’t know that going in,” she said. “But I love the technology part of it.”
That experience gave Nasser a specific skill set she called upon when she was recruited to PCV Murcor. A former boss
M OV I E:
had become the COO and wanted her to
“The Wizard of Oz”
become the director of operations. “I didn’t know anything about the appraisal industry. I didn’t know much about mortgages—I hadn’t bought a house yet. I knew nothing about appraisals,” Nasser said. Nasser said she loved her job at Yahoo and wasn’t looking to make a move, but she
P L AC E T O T R AV E L : I love D.C. and Colorado. Those two are tied. In D.C., I love all the history and how walkable it is, and it’s just beautiful in the fall. In Colorado, I love to hike, and the hiking there is incredible. It’s just absolutely beautiful. I just love Helen Hunt Falls.
realized this opportunity could get her out
B O O K:
of “the call center bubble.” She was hired
One of my favorite books is “Freakonomics.” I got to meet the
on the day she interviewed with PCV. She had her work cut out for her. When she arrived in 2007, the company was one of the worst-performing appraisal management companies on their clients’ rosters. Almost everything was being done on paper or in spreadsheets. The company
authors. That was one of the highlights of my life! I just recently read a book called “What Happened to You? Conversations on Trauma, Resilience, and Healing” that Oprah Winfrey co-authored with Dr. Bruce Perry. It’s about how trauma affects you.
G U I LT Y P L E A S U R E:
had only recently transitioned from send-
I binge watch “The First 48” and “Snapped.” “Snapped” is about
ing appraisals via snail mail. Departments
women that go and kill their husbands. My boyfriend is always like,
had no controls in place to ensure performance, including KPIs or scorecards to
"Are you studying?!"
track productivity and progress. There was a lot of room for improvement and streamlining processes—Nasser’s specialties. One of her first moves was to create an
LEADING THROUGH TOUGH TIMES
online operating system, collaborating with developers to build a tool that works for everyone. Now, nothing needs to be printed. She also developed scorecards, measuring productivity metrics to break down how long
As PCV Murcor celebrates its 40th year in business, the company has a lot to celebrate, Nasser said. The company remains privately and minority-owned, and the
each part of the process takes, and
owner still has his appraisal license. Its
implemented KPIs for every department.
teams of longtime appraisers leverage
their expertise to perform high-value, complex assignments competitors can’t fulfill, she said. “We pride ourselves on service,” Nasser said. “What’s in our DNA is providing extremely good service to our clients and really being partners to them.” It’s more important than ever to go the extra mile now, she said, when appraisals FALL 2021
LENDER LIMELIGHT WITH CINDY NASSER
A HOBBY THAT SLAYS
hen she’s not at work, Cindy Nasser is often solving murder cases. No, it’s not a real-life version of
“Murder, She Wrote.” She discovered a new hobby on vacation when a bartender casually mentioned that he was heading home to help his girlfriend work on solving a case. “My boyfriend immediately looked at me, and then he asked the guy, ‘You’re going to have to tell her what it is,’” she said. “I went online immediately and ordered it, but I don’t think I really understood what I had ordered.” It was a subscription to a murder-mystery box. Each month, she receives clues that she has to solve. She emails the service when she has the answer. What Nasser didn’t realize is that it’s a yearlong subscription. “It’s incredibly painful because I’m so impatient. It took me 30 minutes to solve,” she said. “Waiting for the next box for me is torture.” Fortunately, she found out she can ask them to send the next box immediately after solving each segment. Nasser’s boyfriend discovered a similar game at Target where the entire case is in one box. She handed him the envelope with the answer and went to work. It only took about 45 minutes to crack the case— even less time than it takes Jessica Fletcher in a one-hour episode.
are often perceived by lenders as creating a bottleneck. “The perspective from the lenders is that the AMCs are the ones charging really high fees. That’s simply not true,” she said. “Right now, the appraisal industry is struggling because there’s simply a lack of supply of appraisers. The appraiser population is dwindling by the day.” Though the industry may appear to have plenty of licensed appraisers, she explained, many of them are on staff at lending companies and AMCs like PCV—meaning they’re not working in the field, performing residential and commercial appraisals. “There simply aren’t enough appraisers to fulfill the demand, especially because of the most recent refi boom that happened during the pandemic,” Nassur said. “Certain markets … have a lot of activity going on, and there aren’t enough appraisers to do it, and then they’ve got some deadlines or closing dates they need to meet that just aren’t realistic in certain areas.” Regulations in the Dodd-Frank Act of 2010 made the requirements to enter the profession extremely restrictive, which discouraged people from becoming appraisers. Though some of those regulations have been relaxed, Nasser said, there’s now a disconnect in what is required at the federal level and in different states. That disconnect creates challenges in the industry. Asserting the appraisal industry is currently in a state of flux, Nasser said “they need to do something, but nothing’s going to happen fast enough” to meet current demands. Despite the external pressures, Nasser is proud to have built a close-knit team that feels like a family and who genuinely care about
each other. She notes that what sets people
and deconstruct any us-versus-them mentali-
apart at her company is they’re coachable and
ties departments may have had.
open to giving and receiving feedback. “You can’t grow without getting feedback,” she said. “It’s not good or bad; it’s constructive.” Nasser said she has received valuable feedback from mentors throughout her career.
“My role is to emulate the behavior I want my team to have,” Nasser said. “I have worked hard to build a culture of cohesiveness. We’re not always going to agree. We’re not always going to like certain things, but we have to
Early on, she said she was defensive and
work through that.”
took the feedback personally. But through
Most important, Nasser has modeled open-
training and reading books about management and relationships, she became a better leader.
ABOUT THE AUTHOR
ness with her team, sharing her past. She said her mentors couldn’t have helped her if she hadn’t told them about her life experiences,
By bringing all of operations under her
and now her employees know they can trust
purview, she’s been able to break down silos
her in sharing what has shaped them. ∞
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.
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CASE STUDY ADVOCACY
INVESTING IN AFFORDABLE HOUSING EXPANDS OPPORTUNITY FOR EVERYONE Communities are revitalized at every level when private lenders invest in affordable housing.
he need for more affordable
housing in the U.S. could not
be more severe. There needs
to be more of it—and it needs to be of
struction in the U.S. over the past 20 years
fell 6.8 million units short of what is needed
fell 5.5 million units below historical levels.
to meet household formation growth and
Within that shortfall, 2 million are single
normal reductions to housing inventory.
family homes, 1.1 million are units in build-
As the pool of available housing continues
ings with 2 to 4 units, and 2.4 million are in
to shrink, people who need affordable
According to a report from the National
buildings with at least five units. In addition,
Association of Realtors, new housing con-
housing face increasing pressure to find
new home construction in the past decade
To put the significance of the current
Although a solution achieved through
shortage in perspective, for every 100
ground-up construction will take years
low-income households, there are only 37
to make a measurable difference, home
affordable and available rental homes.
renovation can provide more immediate
The COVID-19 pandemic has only made
relief for the affordable housing market. Opportunity is not the issue. There is a
the affordable housing problem more acute because the sudden and sustained
pressing need for updates to outdated
flight from city centers has combined with
housing stock, conversions of industrial
new migration patterns to raise prices on
and retail properties into residential units,
homes that were previously accessible to
and conversions of single-family proper-
those with lower incomes.
ties into multifamily properties.
NO TIME TO WAIT Mohin Abedin is familiar with the need for more affordable housing options. He has been committed to a solution since he was 19 years old. Raised in Elizabeth, New Jersey, by his father, an immigrant from Bangladesh, Abedin saw lower income families gradually pushed out of neighborhoods that for generations served as starting points
Lender // Toorak Capital Partners Borrower // Mohin Abedin Amount Borrowed // $3.6 million Project // 23 affordable housing units in low-income areas Results // Nearly doubled property values from $3.8 million to $6 million within an average of one year; during the year of
investment, Abedin deployed both Toorak Capital’s initial and draw funding to employ local residents and improve neighborhoods by bringing economic activity and better living conditions in areas otherwise neglected.
# Residential Units
Time to Fixup
Initial Prop. Value
Value Upon Completion
for minority groups and immigrants from Asia, Africa, the Caribbean, and Latin America. Abedin especially took note of nearby Newark, a city experiencing a rapid transition from low-income rentals to higher priced units—and, in the process, displacing long-standing communities of people who have no path to affordable options or home ownership. While enrolled at Farleigh Dickenson University, Abedin took an internship with a real estate finance firm. There, he decided to take matters into his own hands: He dropped out of college and started his own home renovation company. Using capital provided by Toorak Capital Partners (which is funded by KKR), Abedin has deployed more than $3.6 million to rehabilitate and stabilize 23 homes in Newark for families with an average household income of $44,000—well below the U.S. national average of $78,000. Abedin’s investment almost doubled property values, which rose from an aggregate of $3.8 million to $6 million within just a year.
SPRINGBOARD TO UPWARD MOBILITY What makes Abedin different from many professionals engaged in home renovation is his focus on the local community. Abedin understands that renovating previously dilapidated homes not only has a positive impact on residents and the overall aesthetic of the neighborhood but also serves as a springboard for broader community engagement, employment,
and education. All are paths to upward mobility. Instead of looking outside the community to realize higher rent or resale value, Abedin actively seeks out members of the Newark community in need of affordable housing, particularly historically disadvantaged groups such as immigrants and people of color. In most cases, Mohin rents his rehabilitated properties and remains engaged with his tenants as a way to educate them on the process and merits of home ownership. He provides credit counseling, financial planning, mortgage brokering, and other services that enable tenants to improve their financial standing to the point where they may remain in their homes as first-time buyers. Abedin has seen immediate and significant improvements to neighborhoods in Newark following these renovations and continues to expand his engagement by interacting further with the local community. For each project, he tries to hire locally at every level. When possible, he uses skilled laborers and craftsman from the area to complete the renovation itself and to perform ancillary work, including clean up, landscaping, debris removal, and
ers, who in turn empower local entrepre-
in capital available for loans, and by
neurs and community-based businesses.
extension, for more housing inventory to
Local borrowers are critical to the affordable housing solution. They are on the ground in underserved areas, and they can often shorten the learning curve for the ultimate homebuyers (e.g., credit improvement and understanding the benefits and opportunities of home ownership). Larger banks and agencies are not structured to address this segment of potential homebuyers in a timely manner, and they do not
have visibility into each neighborhood’s
PRIVATE LENDING IS PART OF THE SOLUTION
tions for improvement.
unique background, obstacles, and soluAfter capital has been deployed and the projects are complete, there is an attrac-
Abedin’s work in the Newark community is an ideal fit for the Toorak/KKR strategy
tive market for private capital providers like Toorak to purchase these residential
of offering residential bridge loans that
bridge loans from the local borrowers.
places capital in the hands of local borrow-
Doing so allows for greater turnover
be introduced. All of this equates to more engagement in disadvantaged areas, more home ownership, and improvement in overall quality of life based on organic, community-focused growth rather than through gentrification. Abedin’s work in Newark is just one example of Toorak’s larger impact on the affordable housing market. Since 2016, the firm has funded more than $5 billion of loans to renovate or stabilize approximately 30,000 units for families. More than 85 percent of these units are considered affordable, with an average value per unit of less than $400,000. These investments help communities and residents by providing new and improved affordable housing, repairing unsafe or unhealthy housing conditions, and improving quality of life in underserved communities. ∞
SINGLE-FAMILY HOME RISES FROM THE ASHES Borrower sought short-term bridge loan for massive renovations; refinanced with 30-year mortgage later.
single-family residence in Glenn Dale, Maryland, was condemned and sat vacant for nearly a year after a fire on November 5, 2018. It was finally purchased on Octo-
ber 15, 2019, and the borrower sought a bridge loan from Pimlico to address the extensive repairs and renovation needed. Later, the
PROJECT SCOPE The renovation included partial reconstruction of the house itself; full reconstruction of the roof, gutters, and downspouts; new sid-
borrower sought refinancing of the original mortgage, at which
ing and masonry work; renovation of all bathrooms; replacement
point PeerStreet became involved.
of all windows and doors; new plumbing, HVAC, and electrical;
Lenders // Pimlico Capital/Peerstreet Client/Borrower // Anonymous Location // 11414 Glenn Dale Ridge Road, Glenn Dale,
MD 20769 Architecture Style // Single Family Year Built // 2007 Square Feet // 5,200 Loan Amount // Original bridge loan: $196,000;
30-year refinance: $562,250 AFTER
LTV // 39.2% on bridge loan LTC // 81.67% on bridge loan Client Borrower Experience //
Intermediate Interest Rate // 10% on bridge loan Renovation Cost // $180,000 Loan Term // Bridge loan: 6 months; mortgage refi-
nance: 30 years Construction Budget // $180,000
new flooring and carpet; new drywall on first and second floors; new kitchen countertops and cabinets; repainting throughout.
Exit Strategy // Rent
The total cost of the renovation was $180,000. Pimlico funded the initial bridge loan independently. The application came in on June 24, 2020, and the deal closed August 7, 2020. The initial loan amount was $196,000 at a 39.2% LTV (based on ARV) and 81.67% LTC at 10% interest to be paid over six months.
The borrower ultimately decided to start refinance discussions into a 30-year fixed rate loan. The original bridge loan was extended an additional six months until the borrower could refinance under a 30-year loan with PeerStreet and pay off the
The first construction draw was funded on August 12, 2020.
initial bridge loan. Discussions with PeerStreet began in March
After completing the repairs, the borrower successfully
2021. PeerStreet agreed to fund a 30-year loan for the full amount
rented the home.
of $562,250. The loan closed August 24, 2021. ∞ FALL 2021
Alternatives to Foreclosure An alignment of interests may solve the oncoming foreclosure wave. by Serge Petroff
t feels as if every other arti-
cle these days focuses on the
effects of forbearance across
various asset classes. From agen-
cy-backed paper to service non-QM loans, the consensus is there will be a drastic increase in overall foreclosure activity. Although most industry professionals agree the increase in foreclosures may fare much better than the foreclosure tsunami of 2007-2009, the sheer volume of current defaults is staggering. As Kate Berry from American Banker writes, “[t]he percentage of loans in forbearance remains the highest for mortgages held on bank portfolios or backed by private level mortgage securities.” The risks are undoubtedly real. You’ve undoubtedly heard the old proverb “the best time to plant a tree was yesterday. ”There are two main goals in planning for the upcoming waive of defaults. The overall goal is the alignment of interests of all stakeholders. The nuanced goal is getting to that point. 66
Let’s consider a procedure we can implement and follow so we are prepared and ready.
COMPLETE ALIGNMENT OF GOALS Our current market model assumes the following: I nvestors must get a return on their
money as quickly as possible
D efault servicing companies
only get paid when servicing defaulted loans.
A ttorneys must bill
(usually at inflated rates).
Where does that leave us? Unfortunately, this complete misalignment of the respective parties’ goals will be the catalyst for another housing crash. Thus, there must be a complete and total
counsel. Such an alignment will enable a unified asset positioning that will glide through any forthcoming crisis. That said, mortgage-backed collateral allows for greater long-term equity accumulation than most other asset classes. It provides security for investors as well as wealth accumulation for borrowers. So, rather than positioning real estate as the next bubble to burst, let’s entertain a simple idea: The alignment of goals brings stability and prosperity for all involved.
FIVE-POINT PLAN There are five major parts of the approach to a complete management of non-performing assets in your portfolio. Everything must be examined from the prism of where you want to be with
alignment of roles, goals, and actions
your matters. You must have clearly
of all parties—investors, default ser-
identifiable goals, quantifiable proce-
vicing companies, and their litigation
dures, and airtight implementation.
01 D ocumentation // Those with
construction and development experience will appreciate this. Documentation management and storage is as important as a building’s foundation. You must know where the documents are, how they are stored, who has access to them, and when you can use them. Scanning is great, document management systems are amazing, and instantaneous cloud
access is irreplaceable. However, the most important thing is “Where is the original?” Proper upkeep of original documentation is the necessary and indispensable foundation for successful default asset management.
02 O utreach // If you never ask for
it, you are never going to get it. So, call, email, and send a letter. It’s that simple. Keep your borrower apprised of what is going on with the loan
and how you can work it out. Litigation is an unpredictable, irrational, and unquantifiable event. Why go
through it unless absolutely neces-
sary? I assure you, no party benefits
from the uncertainty of litigation. On one hand, the borrower’s equity is
exhausted, leaving them with nothing. On the other hand, the investor is left with a judgment worth less than the underlying collateral.
“ The most profitable client for an attorney is the one who walks in
ABOUT THE AUTHOR
and says: ‘I am going to show him.’” The most profitable client for an
of litigation expenses, swiftness of
says: “I am going to show him.” All
successful appellate process, etc.).
attorney is the one who walks in and the attorney will hear is, “How can I help you put your kids through
college?” Focus on your bottom line. At times, you are better advised to work out the issue on a personal
level rather than involve the courts.
03 Litigation // You have your docu-
ments. Your affidavits and assignments are in order. Your outreach is not productive. Don’t waste your time going from one offer to another. Resolve it through court.
The best approach here is to file your complaint in the same form and sub-
stance as if you are seeking a judgment and dealing with the best opposition.
Why wait and hope that it will not be
answered or go on default? Remember,
the law is on your side. You have a valid debt and evidence of default—you win. There is no rhyme or reason why you
should feed your litigation piecemeal.
Come out strong right from the begin-
ning and take charge of your litigation.
04 A ttorney // The most important
procedure, fruitful negotiations,
The driving force in this very intimate relationship is the alignment of goals.
Unfortunately, many times, alignment of goals gets lost in the grind of daily court appearances. Who is making
your appearances? How is your attorney’s position reflecting your future? Why is the case not moving? These
questions must be asked and answered daily. If you hear, “this is how it is”
from an attorney, you must immedi-
ately switch over all your cases before
the call is even over. Simply, your goal
Serge Petroff is the CEO and founding partner of Axylyum Charter.
His dedication to the field of
foreclosure has been recognized
by numerous organizations.During his tenure as a civil litigator in New
York, Petroff attended thousands of
foreclosure settlement conferences, successfully conducted trials, and
argued contested foreclosure matters before the appellate courts.
His commitment to offering litigation services to individuals with special
needs and those in poverty has been
must be the goal of your counsel.
recognized by numerous nonprofit
05 O versight // “Trust, but verify.”
York. Petroff has been awarded the
This was one of Ronald Reagan’s favorite lines. Suzanne Massie, a
very influential American scholar
of international acclaim, taught it to him. All the points abpve boil down to this: The most successful default portfolio managers will accept this as their mantra. There is no better way to effectively execute on your
non-performing assets than to ver-
aspect of the attorney/client rela-
ify the actions of your processing,
of goals. Judicial foreclosures have a
Responsibility and accountability are
tionship is the complete alignment
litigation support, and attorneys.
number of goals (i.e., minimization
the cornerstones of your strategy. ∞
organizations of the State of New
New York State Supreme Court Pro
Bono Award, Brooklyn Bar Association Gold Certificate for Exceptional
Commitment to Pro Bono Service, and was a member of Director’s Circle of the Volunteer Lawyers Project. As a practicing trial attorney,
Petroff taught various programs to
admitted attorneys in New York. In
addition, he is an active speaker and
presenter in the industry. Some of his
engagements include The Foreclosure Program Roundtable, Foreclosure Updates for Volunteer Lawyers,
Foreclosure Basics, and Advance Topics in Foreclosure Defense.
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MAKING THE CASE FOR PRIVATE LENDERS' VALUE PROPOSITION Helping the general public and legislators understand the macro impact of private lenders and real estate investors requires a deliberate educational effort. by Mike Hanna The views expressed in this article are those of the author and not necessarily the opinions held by the publisher.
enerally, private lenders in states that require a mort-
gage lender license to make
a business-purpose loan are already licensed, and those in states that do
not require a license are not licensed.
With some exceptions, no one really knows what private lenders do, and they are sometimes viewed in a negative context. Unless you’re an active real estate investor that rehabs houses for a living, you probably have never heard of private lending, you don’t understand the value it brings to the market, and you certainly don’t understand why you should care about the continuing regulation of this industry. Explaining to someone, including real estate professionals, what private lenders do, usually results in responses like, “Why wouldn’t someone just get a mortgage or 70
go to their bank to get a loan?” Or “They must be borrowers with bad credit.”
borrower from the business purpose
Even former congressman Barney Frank, co-author of the Dodd-Frank Act, who spoke at a recent AAPL conference, thought his audience was a group of small private banks serving the consumer market. To be respectful, no one tried to clarify this misunderstanding with him, and the confusion undoubtedly continues.
lawmakers needs clarification.
The confusion doesn’t stop there. Most of the public thinks a real estate investor is someone who buys a home, moves in, waits for the market to go up, and then sells it. After years of reality TV shows focused on flipping houses, the news media still defines real estate investors in this manner. But because private lenders are fundamental to the stability of the real estate market, separating the consumer
borrower in the minds of the public and
SO, WHAT IS A PRIVATE LENDER? And, importantly, how are they beneficial not just to real estate investors but to the market overall?
Most private lenders are small businesses, operating locally, loaning money on dis-
tressed, business purpose real estate proj-
ects (i.e., flips and rentals). They also tend to be somewhat invisible to the public.
Private lenders are risk takers. They bring capital to the market where it cannot be
obtained elsewhere (e.g., traditional mortgage lenders, banks, or credit unions that
will not loan on distressed properties and
that tighten their lending criteria during
By funding real estate purchase trans-
changed, and capital for real estate became
actions for investors (not consumers)
difficult to secure. Even private lenders,
Without private lenders, even in a healthy
looking to rehab and sell or acquire rental
economy, real estate transactions in certain markets would slow because distressed properties could not be rehabbed
property (not move into it as their primary residence), private lenders help maintain real estate values on a continuous basis
who used small banks to fund part of their transactions, had lines of credit eliminated due to market conditions. At the time, inventory levels of single-family real estate
or repaired to meet the requirements of
and improve them.
traditional financing. Subsequently, if
The 2008 market crash offers the most
there was a downturn in the economy,
recent example. Foreclosures were occur-
these same markets would collapse if there
ring on a national level, and many occu-
were no private lenders to fund the inven-
pants facing foreclosure moved out ahead
the depreciation. This left a glut of vacant,
tory that becomes available.
of any legal pressure. Financing rules
were increasing, creating a negative impact on values in markets nationally, with certain submarkets taking the brunt of
VITAL TO NEIGHBORHOOD VITALITY When houses are vacated and not maintained, local municipalities board the
windows and doors. Even in a nice neighborhood, one can get a false impression it is a bad area, especially when you see
more than one house like this on a street, or a series of them throughout a subdivision. In just a short period, these houses
become an eyesore with overgrown yards, debris and trash on-site, and other evi-
dence of normal erosion of a house that’s not regularly maintained. These houses
also attract unwelcome activities. During the Great Recession, some cities made
national news for areas where most of the houses were vacant. This led to higher
crime and vandalism in those areas, caus-
ing remaining residents who lived there to abandon their homes.
Once widespread abandonment begins
to occur, the value of an entire commu-
nity can completely erode, which lowers
property tax revenue and impacts schools, hospitals, and even essential services like police and fire. Homebuyers have less
desire to purchase a home in a neighbor-
hood with three boarded up houses on the
street. Safety becomes the No. 1 concern in
these situations, and fear will make buyers and renters look elsewhere.
Until private lenders step in, willing to
take necessary risks to loan in these areas, the timeframe for a market turnaround
increases significantly. Once properties
can be rehabbed, refinanced for rentals,
or sold to a homeowner, the neighborhood will improve, and values will increase. So will the associated tax assessed values. 72
Jobs are also created as part of this effort, as contractors are hired, materials are purchased, utilities are turned on, and overall work is performed to get the property in market-ready condition.
funds ready for improvements, and provide local market and subject matter expertise are most important to real estate investors. These are certainly what assisted the market during the last recovery.
AN OPTION FOR DISTRESSED PROPERTIES
EDUCATION IS KEY
Still, the market doesn’t have to be experiencing a downturn for private lenders to be in demand. The market is dynamic, and distressed inventory is always present at some level. For example, some real estate investors find opportunities with fire or water-damaged properties, realizing that traditional financing will not work with a consumer buyer until these items are addressed. Even small items (e.g., a disconnected condensing unit or hot water heater) will be a red flag for a conforming or conventional underwriter and will prevent a buyer from closing. Private lenders will need to be there to close the gap. Looking at it from this perspective, you can make the argument that private lenders add more value to a distressed community than anyone other than the real estate investors purchasing the property. Contrary to how it might sound, this is not intended to be an arrogant statement. Rather, it’s meant to give some perspective on private lenders that is most likely being overlooked. Government-sponsored enterprises (GSEs) don’t offer this type of financing and neither do most banks. Short-term, business purpose, asset-based loans from private lenders are needed not only to fund the daily activities of real estate investors but also to soften a downturn and resurrect a market. The ability to close quickly, offer
Private lenders need to continue to educate the public, including lawmakers, about the value they are bringing to the real estate market—and to communities overall. When the next downturn occurs, which it eventually will, private lenders need to be there to help mitigate the crash, keep the market moving forward, and ensure as much stability as possible. Whether the market is strong or weak, private lending for real estate will be there taking the risks other won’t, so communities can continue to thrive. ∞
ABOUT THE AUTHOR
MIKE HANNA Mike Hanna is a real estate investor, private lender, mentor, and author. He is a Certified Private Lender, a
member of the AAPL Ethics Advisory
Committee, and the managing partner at Investmark Mortgage.
Filmed on location, Titan Talk is a one-on-one interview between you and Eddie Wilson, CEO of Think Realty and the American Association of Private Lenders. This personal endorsement carries extensive publicity, marketing opportunities, and bragging rights, naming you as the exclusive Titan of your real estate sector for a year.
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A One-on-one, 20-minute video interview by Eddie Wilson filmed on location, with B-roll footage of your office shot for use in the video.
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A Titan Talk web page dedicated to you as the exclusive Titan of your real estate sector for 12 months. The page will headline your video interview, profile, featured article, and other articles by you.
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4 Ways 1031 Exchange Reform Could Negatively Impact Real Estate The proposed changes to the 1031 exchange will create significant burdens for small local investors. by Ruben Izgelov
he 1031 exchange has
been around since 1921. It has been a point of con-
tention across political lines for
decades, but now it seems President Biden will take a decisive step to change the path of this tax law.
The popular tax break, also known as a “like-kind exchange,” allows real estate investors who have owned a property for 74
at least two years to defer their capital gains taxes when they invest their profits from a real estate sale into buying another property within 180 days. In other words, it allows real estate owners the ability to make optimal decisions about whether to keep or sell their assets, without negative tax consequences. President Biden plans to eliminate 1031 exchanges on transactions where the
capital gains exceed $500,000. Support for the proposal hinges on the idea that this will only impact wealthy investors (i.e., the 1% who can easily afford it). While this may be great sounding PR to sell to the American public, this is far from the case. Rather than being a tax loophole, likekind exchanges serve as a catalyst of economic activity. They support small scale investors and small businesses too.
The proposed changes will negatively affect real estate in a variety of ways.
the Biden administration’s proposed
ties that have been in the hands of small
negative consequences on small local
exceed this $500,000 amount. In other
changes to the 1031 exchange may have investors, including making it more
WON’T IMPACT WEALTHY INVESTORS ONLY According to the National Associa-
difficult for smaller investors to acquire larger assets using a 1031 exchange. As a result, larger assets may be pushed
into the hands of institutional owners.
tion of Realtors survey from 2020, 1031
A well-functioning market depends
transactions between 2016 to 2019. And
sizes. Government policy that makes
we see that 84% of these 1031 exchanges
and pushes more profits outside of
exchanges were used in 12% of real estate
on a healthy mix of investors of all
if we dig a little deeper into this survey,
it harder for the little guy to compete
were used by small investors (defined as
local communities skews that mix.
sole proprietorships or S corporations).
The proposed change to 1031 exchanges intersects with the recent restructuring we’ve been seeing among multifam-
ily and single-family rental property
family businesses for decades will easily words, the proposed tax reforms may
significantly impact small businesses. It’s not only small businesses that own
their commercial properties that could be impacted by the proposed change.
Small businesses that rent their premises are very concerned that landlords will push this extra tax to them via higher
rents. The results of the Realtors’ survey mentioned previously show that 68% of respondents worried about this.
Many businesses and retail stores are suf-
INCREASED FINANCIAL BURDEN ON SMALL BUSINESSES
fering from the effects of the pandemic and the shift to e-commerce, and many local
commercial centers are at risk of decline in occupancy in the coming years. These pro-
ownership moving more toward larger
Among the statistics on 1031 exchanges
posed tax reforms would strain small busi-
larger investors is being driven by sev-
small businesses that own their commer-
trying to adapt to post-COVID consumer
institutional investors. The trend toward eral factors. Most notable is the lack of support offered to landlords since the
onset of the eviction moratorium, which is pushing many small landlords to sell.
A National Rental Home Council survey
conducted earlier this year revealed 23% of small landlords said they plan to sell at least one property due to that factor.
quoted above, you will find independent
nesses even further at a time when they are
cial premises and have benefited from
habits and the shift to e-commerce.
the tax break when relocating to new
premises. This includes small businesses accounting firms—mainstays of local
MAY REDUCE INVENTORY AND TRANSACTIONS
encourages such small businesses to
If the proposed tax reforms eliminate
such as barber shops, grocery stores and
neighborhoods. The current 1031 exchange expand by offering them tax incentives
Institutional investors, meanwhile, have
when they purchase a larger facility.
up hundreds of thousands of rentals en
lifeline for many small businesses
the tax incentives associated with selling real estate (above capital gains of
been continuing their play of buying
In fact, the 1031 exchange can be a
$500,000) and make it less profitable
masse. According to Redfin, $77 billion
that must relocate or want to expand
then such reforms could reduce the
of institutional capital made its way into acquiring residential rental properties during the first half of 2021 alone.
The existing 1031 exchange rules provide much-needed financial benefits for many small investors. However,
and trade up for a larger facility
for investors to sell such real estate,
number of transactions in the market.
Under the new proposal, however, plenty
Investors adopt a “wait-and-see”
nificant chunk of these tax incentives.
to see whether future administrations
of small businesses would lose a sig-
Although $500,000 sounds like a high
threshold, plenty of commercial proper-
approach, holding onto their properties reverse the proposed changes to the
1031 program. In such a scenario, the FALL 2021
1031 exchange reforms could have a big impact on inventory. According to the Realtors’ survey referenced previously, more than half the properties that made up all the 1031 exchanges in their study were residential assets. A further reduction in inventory in this scenario would push up prices even more, potentially increasing affordability issues for both homebuyers and mom-and-pop investors, again becoming another trigger that pushes more units into the hands of institutional investors, because they have the deepest pockets.
their work from real estate investors who
require renovations. If real estate investors begin slowing their activities, ancillary businesses will feel the impact of that
slowdown. Some may even go out of business or be absorbed by a larger company.
LOOKING AHEAD Tax hikes aimed at the richest in society may sound appealing on paper. Once
you start analyzing the impact of such tax hikes and peeling back the layers,
we begin to see some dire consequences that may result. This is very much the
NEGATIVELY IMPACT ANCILLARY BUSINESSES Any significant slowdown in transactions or investments due to changes in 1031 exchange rules could impact ancillary businesses servicing the real estate industry. Some of these businesses include real estate brokerages, lenders, construction firms, contractors, insurance companies, title companies, and real estate attorneys. According to recent research from global business consultancy firm Ernst & Young, 1031 exchanges help support an estimated 568,000 jobs across the industry, which contributes $55 billion to gross domestic product annually. A slowdown in transactions would reduce demand for many of these services. And, once more, small businesses will be impacted the most, because they are less able to cushion the blow of a drop in revenue. For example, many small construction firms and contractors pick up a lot of
ABOUT THE AUTHOR
case with the Biden administration’s
proposed changes to the 1031 exchange. The proposal could actually be a boon
for wealthy institutional investors who
can easily outmaneuver the little guy and
actively pushing out smaller investors. The
REUBEN IZGELOV Reuben Izgelov has more than a
decade of experience in the real
estate industry, acquiring, flipping,
developing, and financing more than $350 million worth in real estate. He
has quickly become a renowned real
estate expert, speaker, and guide for many professionals in the industry. During the 2009 financial crisis, Izgelov bought, fixed, and sold
distressed properties, demonstrating his determination in both bullish and
irony of this should not be lost on anyone.
bearish markets. After using private
That’s not to mention the risk of
saw the innovation desperately needed
pushing up prices for homebuyers and creating an additional financial burden for small businesses.
If this misguided plan becomes law,
real estate investors should focus on
acquiring residential assets well below the $500,000 capital gains threshold.
Acquiring smaller assets will ensure that investors will still be able to capitalize
on the benefits of doing 1031 exchanges. Investing in small residential assets will
be a good way to weather the storm. And considering the massive housing shortage that exists in this country today,
this investment strategy may prove to be a homerun in the long term. ∞
money financing himself, he quickly in the private lending space and
decided to spearhead it by co-founding the private lending platform We Lend,
LLC. Izgelov started as a hard-working eight-year-old boy distributing flyers on the streets of New York. To this
day, he takes that work ethic with him everywhere he goes.
Izgelov is a graduate of St. John’s
University and Touro School of Law, where he earned a bachelor's degree in legal
studies and his Juris Doctor, finishing cum laude and magna cum laude.
MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing. As a member, you’ll gain prestige through our:
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JOIN TODAY! AAPLONLINE.COM 913.888.1250
AAPL ADVOCACY UPDATE: FIGHTING MISGUIDED LEGISLATION Sometimes the “fix” is worse than the so-called “problem.” by Kat Hungerford
s we review the American
tended impact such legislation would have on the small businesses in our industry.
Lenders’ (AAPL’s) response
Although many of these efforts occurred at the state level, AAPL has long seen unaddressed local issues herald sweeping changes that jump from state to state to become the new standard across the nation. Lenders who do not operate in a state where these changes are taking hold should still support advocacy efforts to forestall this snowball effect.
Association of Private
to government action that impacted our industry, we understand that
although we may call “government
overreach” in many areas, we know
that in the larger picture, our concerns are minor against the tragedy of the coronavirus pandemic that resulted
in millions of lives lost, long-lasting
health issues, and personal financial
hardship individuals everywhere face.
Some of the concerns AAPL addressed were a direct result of the pandemic.
SEC EXPANSION OF “ACCREDITED INVESTOR” DEFINITION
Congress and state and local governments sought to mitigate the coronavirus’s health and economic fallout, but most of their efforts were misguided attempts to “fix” other issues. As a result, our advocacy efforts primarily focused on education— who we are, what we do, and the unin78
Regulators’ Goal // Include “knowledge
and expertise” criteria to allow those who have certain professional expertise to invest in exempt offerings, even if they otherwise lack the net worth requirement of a traditional accredited investor.
R esult // The SEC adopted nearly all
our recommendations, and our comments were the only private lender association cited in its official ruling. STATE
CALIFORNIA FORECLOSURE MORATORIUM & MANDATORY FORBEARANCE L egislators’ Goal // Provide relief
to individuals facing potential housing issues because of coronavirus-related financial hardship. U nintended Impact // The bills
did not require tenants or property owners to show proof of hardship to gain forbearance. They effectively allowed anyone who owned residential property—regardless of whether they resided in it or not—to apply.
Result // AAPL joined many other
impacted organizations in opposition to the bill. The omnibus bill that eventually passed did not include mandatory forbearance or foreclosure moratoria.
COLORADO LOAN SERVICING L egislators’ Goal // Regulate non-
bank mortgage servicers, currently not required to have the capital to withstand financial losses, by requiring a license to service any loan.
Unintended Impact // The bill defined
illegal, and would cause many area private lenders to stop lending in the state, effectively creating a deficit of incoming capital and affordable housing. Result // AAPL implemented call,
email, and letter education campaigns every time the legislation was presented, eventually speaking before the committee. The legislation was defeated every time, and it has not been reproposed for the past two years.
NEW YORK FLIP TRANSFER TAX
“nonbank mortgage servicers” too broadly, which would have effectively required private lenders who chose to self-service their business-purpose loans to also hold a servicing license.
L egislators’ Goal // Alleviate New
R esult // Conversations with the bill’s
U nintended Impact // The legis-
sponsor to highlight the oversight resulted in the legislation being withdrawn so it can be reworded to exempt self-servicing, nonbank lenders.
FLORIDA BUSINESS-PURPOSE LICENSING L egislators’ Goal // Prevent money
laundering by requiring any individual or entity transacting a business-purpose loan secured by real estate to be mortgage licensed. Note: This legislation was continuously proposed over the course of three years due to the lobbying efforts of one individual who sought to hinder their local private lender competitors. Unintended Impact // It would not pre-
vent money laundering, which is already
by requiring a license to transact loans of $500,000 or less made to New York businesses. Transacting a loan without a license would make the loan terms unenforceable. U nintended Impact // The vague-
ness of the bill’s wording effectively meant that transacting any loan of $500,000 or less made to a New York business would require a license, regardless of the loan’s collateral. R esult // The legislation saw no
further movement after AAPL’s initial objection/inquiries to allies on the committee. ∞
York City’s affordable housing pinch by taxing real estate speculators 15%-20% of the sales price if they resold the property within two years of purchase. lation didn’t account for real estate investors making needed improvements to a property and then selling to homebuyers, landlords, etc. These end buyers would be ill-equipped to make the improvements themselves (much less find the financing for such undertakings), resulting in less housing returning to the New York City market and more derelict, vacant, and declining houses and neighborhoods.
ABOUT THE AUTHOR
Result // The legislation saw no
Kat Hungerford is executive editor
further movement after AAPL’s initial objection/outreach to the bill sponsors.
NEW YORK COMMERCIAL LICENSING L egislators’ Goal // Stop preda-
tory practices by some factoring and non-real estate secured lenders
KAT HUNGERFORD of Private Lender and project
development manager at the American Association of Private Lenders. She specializes in operations, project management, and marketing.
Hungerford also acts as secretary for
the association’s Government Relations Committee, which serves as AAPL’s advocacy arm in state and federal legislatures.
The Down-Low on Low Equity Loans Equity buffers are one of the most important ways to protect your private money investment from speeding out of control. by Beth Johnson
he first article in our Back to Basics series stressed that not making data-
driven decisions about who to lend to and what to lend on can leave
you in a tough position—and put
your principal investment at risk.
The second article in the series addresses one of the most important ways to secure a private loan through safe equity buffers. Especially for new borrowers who are unknown entities, high-equity buffers (represented as low loan-to-value or LTV ratios) are critical until borrowers can prove themselves. Many seasoned private lenders will tell you experience and relationships can often justify higher LTVs based on their proven track record; however, relying on those two factors can still lead to challenging situations if you aren’t prepared or lack experience.
COVER YOUR ASS(ETS) If you have a sense of humor, you might quip “What could possibly go wrong?” when discussing complex loan requests. You can find yourself ratholed on deals trying to make sense of the gray areas rather than pushing them out due to risk factors. It takes discipline to temper the need to deploy funds with the need to protect your principal investments as well as those of your capital partners. Many things could go wrong: market fluctuations, project mismanagement, budget overruns, etc. All these factors further erode what little protective equity buffer is in place. First, you have back interest and default interest as well as any late fees identified in the promissory note. And, before you can be paid out, other parties could get paid out before you,
and you’ll need to protect against that. Here are some examples. S enior lien position loans // If
you are a junior lienholder, the first lender will be paid out before you, including any default interest and penalties, which can rack up quickly with private money lenders.
D elinquent real estate taxes //
These would come into play if your borrower failed to stay current.
M echanic liens // These come
from contractors who’ve placed claims against the property for money owed to them based on services provided before the date your loan recorded.
A ttorney fees // The foreclosing
lender almost always pays upfront for legal fees associated with a default or foreclosure proceeding.
TAKE EXTRA CARE Here are several situations in which you will want to exercise extra caution: If you are new(ish) to private lending, you may want to be extra cautious with equity buffers while you learn steps to evaluate and underwrite a prospective loan. L ow-volume lenders originating
loans a few times a year need to get reacquainted with market conditions, which can be challenging. A conservative approach is prudent.
I f you’re encountering a complex project
or loan scenario, do your homework. For example, if you’ve only done vanilla
fix-and-flip loans and your client requests a new construction loan or to purchase a commercial building, you will need to learn how to vet the deal since project financials and exit strategies vary greatly by asset class. I f you are unfamiliar with the mar-
ket, you will be lending in or you are lending out of state, lower LTV loans are a good idea until you better understand market dynamics.
WIDENING THE GAP There are many aspiring lenders with “smaller” amounts of capital who are
eager to get their funds deployed and
earn passive income. Many do not yet
qualify as accredited investors and are
unable to participate in pooled mortgage funds or syndications. These limitations make “do-it-yourself ” private lending investments one of the few available
options. As a result, lenders with limited capital end up in a few scenarios
that pose greater risk of principal loss. One such scenario is to provide gap
fund loans. Put simply, these are the
funds needed for down payment assis-
tance and/or rehab costs while another primary lender funds the majority of
project costs in first position. In Seattle, for example, median home prices
gate. For example, if the borrower
“ With private money investments, the primary goal should always be return of principal rather than return on investment or ROI.”
obtains an 85% LTV loan from a private lender for their project and asks you to gap fund the remaining 15%, there is zero equity buffer to protect you. Lack of borrower capital contributions means the borrower could walk away with little skin in the game. It
exceed a half million. Although $50,000
in second position or unsecured, to fill the gap between total project costs, what’s financed by another primary lender, and borrower capital contributions, if any.
to $100,000 can be a large chunk of change to some, it won’t stretch far on a standard fix-and-flip deal. This leaves private lenders with limited capital to
Why is this risky? For starters, you’re at nearly 100% LTV right out of the
take on riskier gap funding loans, often
also could mean the borrower has little capital to cover unforeseen expenses. And if the first position loan defaults, high default interest rates and possibly steep balloon payment penalties could be imposed, leaving you at risk of your principal loan amount being shorted.
We Provide INSTITUTIONAL CAPITAL for Lenders Nationwide ✓ M U L TIPL E L ENDING PR ODU CTS
✓ C O NSISTENT AND RELI ABLE DELIVERY PR OCESS ✓ C O MPETITIVE BUY RATES ✓ R E SIDENTIAL (1-4 unit), MULTIF AMILY (5+) & MIXED-USE PRO PERTIES
WE BUY THE LOAN; YOU KEEP THE CUSTOMER Over 15,000 loans funded to date CLOSED LOAN PRODUCTS WE BUY INCLUDE: Bridge Residential & Multifamily Ground Up Construction
Long Term Rental (DSCR/SFR)
• Balance: $50K to $10M • Up to 85%LTV/LTC, up to100% Budget Funded • Term: Up to 36 months • Balance: up to $5M(1-4 units)/ up to $10M (5+) • Up to 75% LTV/LTC • Term: Up to 24 months • Balance: $50K to $5M • Up to 85% LTV/LTC • Term: 30 years
For more i nformation or questions email us a t BD@toorakcapital.com
Toorak Capital Partners, is a real estate debt investor backed by KKR & Co. The firm, which buys real estate loans in the US and UK, has funded over $5.0 Billion loans on residential, multifamily, and mixed-use properties to date. TOORAK CAPITAL PARTNERS 15 Maple St., Summit, NJ 07901 | 212.393.4100 | www.toorakcapital.com
WHEN CASH(FLOW) ISN’T KING Lenders with limited capital sometimes lend out of their home state in smaller markets where property values are less expensive. These markets generally are more inland or rural compared to coastal metropolitan markets that can often be saved through appreciation. While this may sound like an easy way to get started in private lending, these “cash flow” markets tend to have home values that remain relatively flat by comparison to larger metropolitan markets. If you choose to lend to investors buying in these states, you’ll need to pay particular attention to home prices and market appreciation trends, average days on market, and other demographic-related factors that could adversely affect your principal loan amount. It may sound great to buy a single-family house in the Midwest for $60,000 with rental income of $700 a month, but if your LTVs start out too high and the project goes overbudget or the market dips, you may find yourself underwater and unable to offload the loan or property without a significant principal loss. Additionally, many financial institutions won’t lend below $100,000, so be sure to have your borrower prequalify their take-out financing if they plan to BRRRR.
OTHER PREVENTATIVE MEASURES
fortable with the loan and sleep well at night. For example, if you personally prefer to remain within a 30% equity
buffer or greater (70% LTV), there are other loan terms you can rely on to
provide further protection in the event of default. Here are a few to consider:
C ross-collateralization // Adding
other properties already owned by
the borrower can help provide addi-
tional equity protection as well as an added incentive for the borrower to
perform. After all, nobody wants to
lose a property, let alone two or three. R ehab or construction holdbacks //
ABOUT THE AUTHOR
If you are funding rehab or construction costs, keeping a portion of those
monies back until certain milestones in the project are reached can help ensure the project starts off on the right foot. F ormal property valuations // A
lot of private lenders do “in-house”
valuations rather than pay for a third party to complete an appraisal or a
BPO (broker’s opinion of value). Having one of these done for the as-is values
as well as the after repair value (ARV)
can be helpful in shoring up your LTVs and ensuring equity buffers are solid. If no other collateral exists or you can’t
hold back funds for key milestone checkins, and LTVs are still too high for your
taste, strongly consider walking away from the deal. With private money invest-
ments, the primary goal should always be What are reasonable equity buffers? That all depends on the project and loan type as well as your own risk tolerance. Every lender needs to figure out the sweet spot that allows them to be com-
Hopefully, you feel more confident now with the reasons why protective equity buffers are one of the most important ways to protect your private money investment. The goal isn’t to scare you off but to instead give you the full picture of the potential risks you could encounter when you don’t safeguard against the unforeseen. ∞
return of principal rather than return on investment or ROI. Does it really matter what interest rate you are receiving if
the principal amount you lend out could be shorted due to low-equity buffers?
BETH JOHNSON Beth Johnson is co-founder and
managing partner of Flynn Family Lending, a family-owned private
lending business offering creative
financing solutions throughout 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.
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cial crisis,” said Paul Jackson, principal
following the global economic downturn.
crisis was one in which nearly everyone in the housing industry—from lenders and investors to flippers and contractors— had to find and secure new footing. So, in 2009, when Residential Capital Partners LLC opened its doors, they focused on building a strong foundation right out of the gate—and merged it with a desire to
of Residential Capital. “With roots in the commercial real estate investment and development business, we turned our attention to buying distressed debt during the downturn and underwrote every asset type offered by the major banks during that period.”
manufacture thoughtful and creative fi-
With a focus on hard, thoughtful, cli-
nancial tools on behalf of their borrowers.
ent-centered work, Residential Capital
They entered the industry offering innovative solutions to help customers weather the storm with bridge rental products, specifically a hard money, fix-and-flip solution and a rehab-to-rental solution, both of which positively benefited the industry upon launch. Both solutions have been tailored and tweaked over the past 10 years to maintain efficiency as the economy evolves.
P L AT I N U M
S I LV E R
ACCOLEND ARCHWAY CAPITAL ATTORNEYDRIVE BAYPORT FUNDING BRIDGE LOAN NETWORK CANTON CAPITAL MANAGEMENT DUNER AND FOOTE FASTAPP APPRAISAL MANAGEMENT FCI LENDER SERVICES INC FIDELITY MORTGAGE LENDERS INC. GODOCS HASZ FUND CONTROL IGNITE FUNDING JCAP PRIVATE LENDING LENDINGHOME LIBERTY SBF LYNK CAPITAL MORTGAGE AUTOMATOR NATIONAL LENDING EXPERTS NORTHWEST CONSTRUCTION CONTROL INC. PACIFIC PRIVATE MONEY PATCH OF LAND PRIVATE LENDER LAW PRIVATE MORTGAGE FUND LLC SCOTSMAN GUIDE SHARESTATES SUPERIOR LOAN SERVICING THINK REALTY TRELLY WHITE STONE DEVELOPMENT
AC TIVITIES CONFERENCE SESSIONS With three session tracks interspersed with main stage presentations, attendees may choose from more than 45 top-of-their-field experts. Tailored to private lenders, sessions feature topics ranging from legal and compliance issues to data analytics, market trends and forecasts, business strategy, and more.
NETWORKING OPPORTUNITIES PRE-, DURING,
A A PL A N N UA L CO N FE R E N C E A PP | Connect and chat with attendees virtually with the official A APL
& P O S T-
app. Our “Shake to Connect” feature allows attendees to quickly exchange contact information with
anyone—anywhere in the world—who is also actively using the feature.
S U N , N O V. 14
V I P R EC E P T I O N AT T H E O M N I A | Enjoy cocktails and hors d’oeuvres while catching up with VIPs from
7: 0 0 P M
across the country, all overlooking the gorgeous Las Vegas Strip from the OMNIA’s private deck. This
M O N , N O V. 15
P OW E R N E T WO R K I N G | This fun, fast-paced 30 minutes will put you on a first-name basis (if you
exclusive reception requires RSVP ahead of the conference.
5 :15 P M
can remember them all!) with nearly everyone at the conference. No business cards needed this year
M O N , N O V. 15
A F T E R- H O U R S R EC E P T I O N | Continue conversations at this after-hours networking reception
either— come logged in to the A APL Annual Conference app to use the “Shake to Connect” feature.
where attendees, sponsors, and speakers can enjoy complimentary hors d’oeuvres and two drink
T U E , N O V. 15
O FF I C I A L A F T E R- PA R T Y | Details TBA; please see aaplonline.com/conference and
tokens (or perhaps more if you buddy up with Prospera, the reception sponsor).
the A APL's Official Conference App.
A A P L D E S I G N AT I O N C O U R S E S A APL of fers its members t wo cer tifications: Cer tified Private Lender Associate (CPL A) and Cer tified Fund Manager (CFM). This year, we’ve expanded the in-person CFM to 201-level subjec t mat ter, with CFM 101 (available online) required as a prerequisite. These full-day courses, held Sunday, Nov. 14, allow members who pass the final exam to use the of ficial A APL designation and emblem in their marketing.
h t! g i N ing n e p O
American Association of Private Lenders’
VIP RECEPTION 7:30PM Sunday, Nov. 14 • AAPLCONFERENCE.COM FREE for sponsors & AAPL members • $149 tickets • RSVP REQUIRED
AWA R D S 2021 E X C E L L E N C E A W A R D N O M I N E E S We’ve pledged to champion the private lending in-
Our Excellence Awards showcase peer-nominated members who have
dustry as a viable alternative to conventional finance,
leveraged their resources to solve problems, kick-start innovation,
safeguarding its reputation and growth. As part of that
and improve their communities. Each year, we gather nominations in
mission, it is crucial to recognize those who strive to
the following four award categories, with winners—determined by
elevate the profession.
popular vote—announced at our 12th Annual Conference.
R I S I N G S TA R Rising Stars are members who have accomplished outstanding growth in their companies over the past year. JAC K B E V I E R | Dominion Financial Services “Jack is firmly at the helm as he grows Dominion Financial from a company with $50 million in annual originations just six years ago
to more than $800 million estimated for 2021. Jack is a proactive, forward thinker who epitomizes what it takes to build the lending company of the future.” — F red Lewis
DO U G RO B E R T S | HouseMax “Doug has gone from supervising loan officers to becoming a strategic partner and CRO of HouseMax, which is one of the top
private lenders in the country. The company has achieved that status due in no small part to Doug's leadership. He’s one of the true industry stars.” — R ay Sturm
SAU R A B H S H A H | InstaLend “Saurabh has extensive experience in real estate investing, transaction structuring, and asset management. He is the co-founder of InstaLend, a tech-enabled lender for real estate loans providing fast, affordable, and convenient capital to real estate developers.
Saurabh has grown the business at InstaLend by more than 400%. He has been crucial at stroking new partnerships and onboarding new borrowers for the company. Previously, he has worked in investment banking in New York and Mumbai, where he has helped companies raise growth capital from private equity and debt funds.” — S ohin Shah
E R I C A S I KOS K I | Bridge Loan Network “Since Erica's move to Bridge Loan Network's marketing manager, she has significantly impacted the company's growth over the last
year. Her skillful planning and coordinated marketing efforts have helped Bridge Loan Network gain greater recognition in the private lending and mortgage industry, and she continues to set the company up for success as it enters 2022.” — E rica LaCentra
MEMBER OF THE YEAR This award goes to one lender and one service provider based on their deep expertise, unique value, and strong commitment to clients and growing the industry.
CO R T C H A LFA NT | Nexus Private Capital “Cort is passionate about education. He contributes time, energy, and effort as First Chair of the AAPL Government Relations Committee. He also promotes educational opportunities for our members and leads by example, demanding the high standards of professional and ethical conduct AAPL wants its members to embrace. As an advocate for AAPL, Cort routinely refers third parties to AAPL resources and service providers, encourages our corporate team members to attend the annual meeting, take certification classes, and use the resources AAPL has to offer.” — S andy Alter
C A R R I E COO K | Ignite Funding “Carrie Cook is president of Ignite Funding, a hard money lender. Carrie combines her 15 years of experience specializing in private lending and her boots-on-the-ground approach to leadership to continue navigating the company to success, even during a global
pandemic. It is no secret that traditional bank lending retracted in response to the pandemic. Under Carrie’s leadership, Ignite Funding and its investors continued ’business as usual‘ and filled the gap, which kept dozens of borrowers in operation and, therefore, hundreds of jobs in the real estate industry intact. ” — S tephanie Fryar
W I LLI A M T E SSA R | Civic FS “I nominate Bill Tessar, president of Civic FS. Bill has an abundant knowledge in the mortgage industry, specifically in private money lending. He has communicated with transparency and empathy through the pandemic to the benefit of all industry personnel. He has provided education, guidance, resources for all. I believe he exemplifies the AAPL mission.” — K endra Rommel
AWA R D S MEMBER OF THE YEAR
(CO N T I N U E D)
J OS E PH FOO K S | Mortgage Automator “Joseph co-founded Mortgage Automator in 2019, spurred on by his 16-yearlong career as a private lender. Since then, Automator has been helping hundreds of private lenders to streamline, automate, and grow their businesses. Thanks to the company's
continuous innovation and stellar customer support, more than $10 billion worth of loans have been funded through the system,
with more than 100,000 auto-generated documents that have saved mortgage professionals thousands of hours of precious time. With new developments, partnerships, and exponential growth, Joseph continues to advance the vision of Mortgage Automator, bringing the disrupting leading-edge technology to private lending, an industry long overdue for a shake-up.” — Tatiana Caciur
B E E TA LEC H A | Spiegel Accountancy Corp “Beeta, principal at Spiegel Accountancy, is a driving force in the private lending and real estate investment industries. Beeta’s
commitment to staying atop current trends and regulations, in addition to her highly skilled approach in providing tax and fund
accounting strategies and services, make her an invaluable resource for fund managers and real estate investors. Her reappointment to AAPL’s Education Advisory Committee is a testament to her dedication to the private lending space.” — Jeff Spiegel
R A N DY N E W M A N | Total Lender Solutions, Inc. “Randy consistently finds ways to educate others and assist both AAPL members and our clients in solving their issues. He always goes above and beyond to make sure whomever he is working with is beyond satisfied.” — M ax Newman
CMOEM MM BE U RN IOTFY TI H M EP AYCETA R This award honors dedicated and innovative professionals and their commitment to bettering their local and/or private lending communities through volunteering, community development programs, or civic/legislative efforts.
R AU L AV I L A | The Av fund Group “Raul specializes in fix-and-flip funding and in rehabbing blighted properties in underserved communities. Raul embodies entre-
preneurial leadership and community spirit. He serves as a board member on many nonprofit groups, and he recently established his own 501(c)(3) nonprofit, the Avfund Family Foundation. His community volunteerism over the decades has positively contrib-
uted to the livelihood of many underserved families attaining the American dream of homeownership. Raul is a strong advocate of empowering youth and individuals to expand their knowledge, advocate for civic safety, and take action on social issues.” — L iz Soto
B E T H J O H N SO N | Flynn Family Lending “Beth has been an unrelenting educator and advocate for private lending and in getting more women involved in private lending.
She mentors and writes articles to bring more awareness to the industry. Her motivation and enthusiasm are second to none. Beth also serves on AAPL's Education Committee, underscoring her dedication to making sure private lending has a voice and is practiced legally. She personally has changed my life with her caring nature, drive, and level of knowledge.” — A lex Breshears
R AY S T U R M | AlphaFlow “Ray Sturm has been a thought leader in our industry since its founding. Through his first crowdfunding platform RealtyShares and
his current company AlphaFlow, a technology-driven investment manager, Ray has been focused on finding ways to better connect those with capital to those with investment opportunities. He has helped automate manual workflows, increase capital to lenders/ borrowers, and ultimately lower the cost of doing business—all while providing quicker paths to growth and profitability for com-
panies serving the $75 billion fix-and-flip industry. In turn, these activities have helped to more quickly redevelop communities and increase the amount of housing supply for the betterment of many across the country.” — Hanna Soskina
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
lenders they have previously
keep an eye on this publication
worked with, and reviewing
for future updates, and check
provider specialties. These
their product offerings.
service providers do not
AAPL members can access
pay to be included. Instead,
aaplonline.com/magazine-archive. Then consider joining
AAPL to support this and
expertise, talking to private
guide. If you’re not a member,
other association efforts!
FALL THIS ISSUE!
Appraisers & Valuations
D efault & Loss Mitigation
D ata & Metrics
D evelopment Cost Estimates
N ote Buying/Selling
Private Lender Executive Editor
we vet them to ensure their
all service providers online
out our magazine archive at
R aising Money
E ducation Fund Administration M arketing P roperty Insurance
Investor Reporting Portals Loan Origination Services L oan Servicing L oan Underwriting
Want in? Nominate yourself or a company you’ve worked with at aaplonline.com/resource-guide-nominations.
Indicates AAPL Membership
FUNDS CONTROL QUICK DRAW FUND CONTROL, INC.
q uickdrawfundcontrol.com (909) 986-7405 Secondary Specialties // Development Cost Estimates
LOAN ORIGINATION SERVICES ALFRED TECH
a lfred.tech (424) 230-3080 Secondary Specialties // Loan Servicing, Investor Repor ting/Management Products & Services // Sof tware for Loan Origination, Loan Servicing, and Investor/ Fund Management
BRIDGE LOAN NETWORK
w ww.bridgeloannetwork.com (860) 432-9700
www.lendingwise.com (888) 400-6516 Secondary Specialties // Loan Servicing Products & Services // End-to-End Loan Origination, Management and CRM Sof tware for Private Lenders and Brokers for Commercial and Residential loans; Manage Borrowers, Brokers, Investors; Set Up Loan Applications; Auto-Generate and Send E-Sign Ready Documents; Collect Documents Via Cloud Por tal; Manage Loans With Milestones and Stages; Auto ACH Debit From Borrowers; Auto Credit to Investors; Draw Management With Funds Control
liquidlogics.com (866) 547-8430 Secondary Specialties // Loan Servicing, Lead Generation Products & Services // Origination and Servicing for Private Lenders, With Platform That Includes Borrower Por tal, CRM, and Servicing; Marketplace Platform Brings Together Investors, Lenders, Borrowers FALL 2021
Indicates AAPL Membership
LOAN ORIGINATION SERVICES MORTGAGE AUTOMATOR
us.mortgageautomator.com Secondary Specialties // Loan Servicing Products & Services // Loan Origination and Ser vicing Sof tware for Private Lenders, including Borrower Por tals, Automated Document Generation and Communication, Payment Tracking and Processing, Fund and Investor Management, Repor ting and Much More
THE MORTGAGE OFFICE
www.themortgageoffice.com (866) 547-8430 Secondary Specialties // Loan Servicing, Accounting Products & Services // Loan Origination: Online Loan Application Por tal, Pull Credit Repor ts, Loan Document Generation and E-Signature Capability, Create Loan Process Workflow, Manage Loan Pipeline and Forecasting, Integration for Mor tgage Call Repor t; Loan Servicing: Unlimited Funding Sources Per Loan, Track Loan Charges and Advances, Process Payments, Generate Emails for Borrower Bills and Statements, Document Storage, Escrow Administration Features, Let ter Writing, E-File Tax Forms
LOAN SERVICING ESSEX FINANCIAL SERVICES LLC
EVERGREEN NOTE SERVICING
Products & Services // Loan Ser vicing, Construc tion/Bridge Draw Reviews and Asset Management for Institutional Mor tgage Investors, Private Lenders, and Par ties Retaining Ser vicing Responsibilities for Loans They Originate and Sell
(866) 358-6683 Products & Services // Servicing for Seller-Financed Payments, Long-Term Escrow, Private Notes, Real Estate Contracts, E-File Tax Forms
Indicates AAPL Membership
www.fileinvite.com (628) 201-0083 Products & Services // Document Collec tion: Collec t Digital Signatures From Multiple Par ties; Monitor Where Documents Are in Review Process; Send Automated Reminders to Chase Documents in Order to Get Timely Feedback; Plus More
landgorilla.com (805) 250-1976 Secondary Specialties // Funds Control Products & Services // Construc tion Loan Management Sof tware, Lien Waivers, Title Updates, Inspec tions, Projec t Reviews, Contrac tor Acceptance, Risk Management, and Professional Ser vices
NOTE SERVICING CENTER, INC.
noteservicingcenter.com (800) 646-3445 Products & Services // Ser vicing for New Notes/Loans, Fixed-Rate First or Second, Seller Carr y-Back Financing, Installment Sale. Impound/Escrow Ser vicing, All Inclusive Trust Deeds (AITD) and Other Ser vicing Requiring Payment of an Underlying Mor tgagee; Other Specialized Ser vicing
BSI FINANCIAL SERVICES
b sifinancial.com (972) 347-4350 Secondary Specialties // Loan Origination Services, Default & Loss Mitigation
THE PRIVATE LENDER NETWORK
(512) 637-28410 Secondary Specialties // Default & Loss Mitigation, Loan Origination Services, Capital Provider, Loan Underwriting
L AST CALL WITH JOHN BEACHAM
APPROACHING OLD PROBLEMS WITH NEW THINKING by John Beacham
’ve never been a big believer in
obstacles. When it came to allevi-
ating the housing shortage, it was clear to me that creating a new path would be much more effective than trying to shift the momentum of the existing market.
According to the National Association of Realtors, new housing construction in the U.S. over the past 20 years is 5.5 million units below historical levels. I created Toorak Capital Partners to provide capital in a new way—through the funding of loans targeted at refurbishing single-family and multifamily homes. These loans are used to improve the living conditions of existing homes and also to increase the unit density in properties being converted to a higher unit count. Historically, real estate investors had limited options in this space. Since banks and government programs do not typically offer these loans, financing choices were limited to local lenders with interest rates upward of 10% and varied credit standards. These lenders often funded themselves with friends and family money or other local funding sources because there was almost no institutional presence in the space. Many rehabilitation projects went 98
unfunded due to a lack of capital, which only worsened the housing shortage.
This process also creates jobs for local
My solution was to create an ecosystem that linked real estate lenders to institutional capital, enabling growth along the supply chain while feeding capital back into the system to fund future projects. The most efficient way to manage this process is to provide capital to local, regional, and national lenders, who in turn work directly with the borrowers who rehab properties.
within communities. The additional capital
We began working with our first such lender in 2017. Since our first deal together, this company has originated thousands of rehabilitation loans worth well over $1 billion. After the lender closed the origination of each loan, they were able to sell it to Toorak and direct funds toward the next transaction. We are proud that this success story has been repeated among many of our lending partners. This approach allows hardworking entrepreneurs a chance at wealth, regardless of education or background. In turn, these entrepreneurs transform outdated housing stock into newly renovated, affordable housing. In fact, more than 85% of units we’ve financed are affordable to families earning the median income in their neighborhoods.
laborers, increasing economic activity we provided has drawn other institutional investors to the market. The benefits to borrowers are clear, including reduced interest rates by more than 2% and “Dutch interest” terms, where borrowers pay interest on undrawn construction funds have now become a minority of the market. The key to making this type of financing available is to package the loans in ways that would appeal to institutional investors, and Toorak has been the leader in convincing Wall Street to accept the asset class through our six securitizations totaling nearly $2 billion. This capital is used to finance more loans, which leads to additional rehab projects and more housing inventory being released to the market. I have found that, when approaching solutions to problems as far-reaching and complex as the housing shortage, the most efficient path is one that encourages entrepreneurism with the checks and balances necessary for successful engagement at the institutional level. ∞
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