The Long Game in Private Lending: Building Without Institutional Capital

Kevin Kim:

You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping our listeners in the private lending industry grow, improve and streamline their business. I’m Kevin Kim, partner at Fortra Law, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending.

They’re eager to share their years of wisdom and best practices for lenders, brokers, borrowers, investors and more. Subscribe to Lender Lounge on your favorite podcast platform and visit our website, fortraLaw.com to learn more about how we can help you scale. Check out the episode summary below for other valuable resources.

Everyone, welcome to another episode of Lender Lounge with yours truly Kevin Kim today. I’ve been on their show now they’re coming on my show and I’m glad to have them. We have a lot to talk about.

Chris and Jason from Hard Money Bankers podcast also their company is called Hard Money Bankers, but I’m glad you guys came on the show this time. We have appreciate you guys making the time for you for our audience. Please give the audience a bit of background about who you guys are, what you do, you guys do a lot of stuff.

So let’s give the audience a brief explanation of what y’all are doing out there. And we’ll get started.

Chris Haddon:

Yeah, sure thing. I bet we’ll both have a few things to plug here. First, thanks for having us on.

I know that we had a you know, back and forth on coordinating. And yes, you’ve been on our podcast twice now. And glad to be on the Lender Lounge.

I’m a fan of the show. I’ve listened to a lot of the episodes. Good to be here.

So we are private hard money lenders based in Maryland. We lend around the mid-Atlantic region and we have done so since the end of 2007. So we started kind of as the next generation, the young guys when we were getting in the business like everyone was, you know, our fathers’ age pretty much and now we become the older generation because we’ve been in this game for a while and we’ve seen a lot of stuff.

And along the way we started a podcast of our own and a mastermind group for lenders and I’m sure we’re going to get into detail on those. It’s been a great run, love the industry. And we love talking about it’s one of the reasons why we started the podcast is because that’s what we’re doing in the office anyway, is hanging out talking about lending, real estate, investing deals, marketing, the whole nine.

Why not turn on a camera and start doing it for an audience, right?

Kevin Kim:

Love that. Yeah.

Jason Balin:

Yeah. And you know, one unique thing about us that wasn’t unique back in the day, but now it seems to be unique today is we’ve never really taken on institutional capital. So we’ve always funded stuff with private investors.

It started with all private investors, we didn’t have any of our own money when we were kind of in our mid to late 20s when we started this company. So we went out and we learned how to raise capital. And we’ve learned a lot.

And we met a lot of connections and high net worth individuals. And, you know, it taught us how to do deals responsibly, and the right way. And then we kind of molded, you know, we’ve kind of learned after doing 4000 deals and closing, you know, about $50 million in production every year.

Kind of what works great for us and what doesn’t work great for us, right? Because there’s lots of different types of lenders out there. And you can be in this space and look very different than your competitor or than your neighbor, there’s a lot of different ways to be in this in this sector.

So we do we do it the way that we feel is the best way. And we’ve turned it into a investment vehicle as well. As the company grew, we were able to start lending out our own money.

So not just all capital investor money. And, you know, we’ve kind of built this based on, you know, what meets our risk tolerance and, you know, the way that we’re comfortable doing this and churning through, you know, 20 deals every month.

Kevin Kim:

And that’s one of the reasons why, like, I really wanted to have you guys on the show is because I feel like there’s been a lot too much, a bit too much discussion of kind of the what’s becoming the new formula in our industry, and in private lending and how, you know, there’s that part of the business, that side of the business, but there’s kind of a forgotten truth that our space has, you know, multiple iterations and various ways to be successful. And you guys have been doing for nearly 20 years.

I mean, next year will be your 20th anniversary. It’s amazing. Not many lenders can say they’ve been in business for 20 years, right.

So that being said, like, I’d like to take in, you know, we always on the show, you know, we’ll try to get in the time machine, go back, because 07, I mean, what a time, right? What a time. I was in law school, and I remember how bad it was, I had just left the bank.

And I was like, what a time to be in real estate. So let’s take a time machine and kind of go back, give us the story of the company. And yeah, you know, I’d like to know about, you know, foundational history, because it’s, it’s always part of this show.

We always want to give our audience kind of that, how you guys got off the ground backstory.

Chris Haddon:

Yeah, let’s go back a little further.

Kevin Kim:

Okay.

Chris Haddon:

We started in real estate and mortgage lending out of college.

So like 02, 03, I worked for a large commercial bank who was SunTrust. Now it’s Truist in residential, conventional mortgage lending. Jason did some mortgage stuff as well.

And also real estate, we’ll get into some of that. It was a really good business 101. Looking back at that industry, conventional mortgage learned a ton about a bunch of different things, right?

So real estate, underwriting, credit, underwriting, income, marketing, sales, like it was secondary market stuff. It was a really, really good 101. During that time, we started dabbling in some real estate investments, did a few wholesales, some flips of our own, bought a rental or two.

And the market was really good at this time. This is like 03 to 06, kind of market was really hot. Rates were low.

Things were crazy. That was our introduction to business is that like things were at the top, but it was not hard to see that it was very bubbly. Everyone is getting really aggressive with their lending terms and the 107% LTVs and like subprime stuff.

It was even for a newbie, you know, guys in their twenties, like figuring out business, it was not hard to see that it was a crazy time in a bubbly market. Right? So during that time, we, we were doing a fix and flip deal in New Jersey, not too far from where we’re based here in Maryland.

And we borrowed from a hard money lender in Texas and we did okay on the deal, you know, put some money into it, resold. We did. Okay.

We made some money. The lender made some money too. And we noticed that he had to do way less work than we did in terms of construction on this property and design marketing, selling everything else.

And with our lending background, we just thought it was a better use of our skillset than property stuff, design construction. That wasn’t our skillset then. And it really isn’t as much now.

So around the middle of 2007, when everything was starting to pop, we came along with the great idea to start Hard Money Bankers. We were going to raise capital. We were going to start doing this type of lending.

But the problem was the sentiment around real estate, especially investment real estate was awful.

Kevin Kim:

It started to sour for you guys. It’s 07.

It’s hard to see the writing the wall in 07. Okay. Okay.

Chris Haddon:

Property values were dropping foreclosure boom, right? Like it was, it was a wild time and very different from now. And we had some capital, not a lot, but enough to get started.

And back then, just having capital, because mind you, like private lenders took a hit too, along with everyone else. There are people who made it out clean. And there are, you know, plenty of people who did not.

And just having capital at that point in time, made you super popular amongst local real estate investors, which is a complete opposite to now, right? Where everybody has capital, whether it’s institutional or private, whatever it may be, there’s tons of money in the space. And back then it was the absolute opposite.

It was a wild time to start. And there were many challenges back then, but also a really good time because the market was at the bottom had nowhere to go but up.

Jason Balin:

Yeah. There was very little liquidity in the private money sector. Every other lender that was out there seemed to be like, you know, like an older attorney who had some side money and he knew some real estate investors and he’d lend them money on the side. Nobody did marketing for deals.

The mindset was, I have the capital, I make the rules. It was like old school commercial banking, right? Like I have the money, I’m going to charge you whatever I want to charge you 18% and eight points, like whatever, whatever it is.

And there’s no competition. And it’s it’s it was more, it was kind of like private money with hard money rates.

Kevin Kim:

Right. It’s kind of the what we call in the office legacy hard money. Right?

Done the old school way, where basically it’s a bunch of rich dudes calling the shots and tearing people’s eyes out because there was no other option. And there was no supply, there was no demand. It was literally just like, well, there was demand, but there was no supply.

Chris Haddon:

And very little, it was almost like you had to know a guy.

Kevin Kim:

I had my first exposure to that. In 2004, when I was a banker, I was a loan officer doing commercial loans. And we were taking out private lenders, as I call them today, but they were back then they were the true hard money.

And it was just like fascinating what they would be able to able to get away with. But let me ask this, like, was this the time for most of our guests on the show that were operating back then, it was the story of the courthouse steps is kind of the iteration of the business, the first iteration of the business, like they would just show up with capital, and they would just be the belle of the ball, right?

Was that kind of your first way to break in? Or was it that you guys already had kind of a group of borrowers that you were able to tap into? Because it was a weird environment at the time, because you didn’t really inventory was there.

But like, you didn’t have access per se, like we would today, like it’s not as real estate investing was not a popular thing in 07. You know?

Jason Balin:

No, yeah, I’ll I can I can talk about that a little bit. Because, yeah, there were definitely some interesting things that occurred 20 years ago.

So, you know, Chris and I had been doing some active flipping. I worked at a mortgage company, we knew a lot of real estate investors, you know, we used to go to some like local meetup groups and things like that. Or they weren’t meetups back then, they were REIA groups.

And I always felt like, oh, yeah, all we got to do is is find some money, find some capital, because we know all the real estate investors locally, we felt like we knew them. Right?

Kevin Kim:

So you were one of them, right?

You were all friends.

Jason Balin:

Yeah, yeah. But like, we felt like, oh, yeah, like, I think a lot of people feel like, oh, I know plenty of deals. I have plenty of deals.

People think they have plenty of deals that don’t have the capital. And they realize that the deals they have aren’t probably the deals that the capital are going to be attracted to. If you want to give 100% financing at cheap terms to a guy that doesn’t know how to flip a house, you know, and those are all the deals that you have.

Like, that’s what people think. It’s like, oh, yeah, you know, we know lots of people that are flipping and, and that. So we just, you know, when we started, we were, I mean, we’re still very conservative today, but we’ve, we were conservative at the beginning, because we were terrified to lose investor capital.

So remember, being like, thinking kind of having this, like mental block of like, it’s gonna be really hard to go raise, you know, 200,000, 300,000, 400,000. And we kind of mapped out what our deals would look like, like, this is the type of borrower, this is their cash, this is the area.

Kevin Kim:

So you pre-planned the box, which is great.

I mean, that’s not a common story, actually.

Jason Balin:

So so so we went to capital investors. And it was a very common response.

It’s like, yeah, if you bring me that deal, I’ll do that deal all day long. Like that, that deal’s a home run.

Kevin Kim:

And knowing you guys, it must have been like a very low LTV kind of prospect.

Jason Balin:

We were I remember it was like 20, 30% down on purchase money, on purchase money. We didn’t do commercial at the time because we didn’t fully know it.

When we got into commercial, it was even higher down payments. But anyways, it was one of those things that that was kind of the way we bought we’re like, how can we how can we make this like a home run? And then capital investor after capital investor was like, yeah, go find me those deals.

But then the hard part was finding those deals, like we thought they were going to be easy to get. But then we talked to borrowers be like, hey, good news. We’ve got capital.

You know, it’s 15% and five points, because that was the going rate then. There was no there was no pushback on that. The pushback was like, wait, I gotta put down 20% on every deal?

30% on every deal? And we’re like, yeah, but it’ll be easy, it’ll be fast, it’ll be local. And I mean, that’s still what we do today make our borrowers put 20 or 30% down.

And the difference is back then it was like a few people to talk to. The difference is now we got to churn through hundreds and hundreds and hundreds of opportunities in order to find, you know, to get a deal to the table.

Kevin Kim:

You guys weren’t prospecting at the courthouse, then you guys were actually going to the community of builders.

Jason Balin:

We were but we didn’t realize that those guys all wanted high leverage.

Kevin Kim:

Oh, they wanted super high leverage at the courthouse.

Jason Balin:

I mean, there was a lot of substitute purchasers we were doing. I think at the time it was just Maryland. We didn’t even really get into some of the other markets just because we were located in Maryland.

And we knew it and we had resources locally, even though DC, Maryland, Virginia overlap a lot. But we would prospect at a lot of people, all the wholesalers would do substitute purchaser agreements. So the wholesalers, you know, we create a relationship with wholesalers, they’re like, oh, you have capital, love to send you guys deals, this is my borrower.

So we would source them to the wholesalers that bought everything at the at the courthouse steps. But then a lot of the borrowers wanted, you know, high leverage. That was challenging.

And it got to a point where we’re like, we kind of intuitively just became a marketing machine. And that’s like, we just realized it’s like, we got to go to meetup groups every night, I was living in the Baltimore area, Chris was living in the DC area. So like, every night, I’d go to a Baltimore meet REIA, every night, he’d go to a DC REIA.

And then like, the next day, we’d meet back in centrally and in the middle of Maryland, right? We’d each, he’d drive 30 minutes north, I’d drive 30 minutes south. And we’d meet up in this little crappy office that we got for free from a title company owner that we were friends with.

And like, that was the game plan. And then it was, let’s get the phones ringing. Let’s start creating YouTube videos.

Like this is right when YouTube started.

Kevin Kim:

This is 07, this is, YouTube was in its infancy, the idea of marketing on YouTube was nonexistent. It was cat videos.

Chris Haddon:

Well, also, mind you, like the for a hard money lender like us, there was no marketing. And we were kind of the timing was good. So like, we talked about how the timing was good in the real estate market, started at the bottom.

So it was hard to raise, but it was also kind of like, hard to lose because values were going up. But also it was the switching to the next generation. And we were in our 20s, comfortable with tech, had a real brand and a website started getting social profiles, email marketing, all the basic stuff.

That’s still the basics today. But no one else is doing it.

Kevin Kim:

Right.

Chris Haddon:

I mean, I think people were still using faxes in 07 to some degree.

Jason Balin:

We’ve no I remember faxing. I remember faxing like, not a rate sheet, because that’s not what we did. But like a one page or two realtor broker, like a tear sheet, and it asked them to pin it on their boards.

Because, you know, I, you know, I was a real estate agent right out of college for a small period of time. And, you know, every Tuesday, we would have these meetings, and they would bring in service providers. And we’d all huddle up.

And there was like this, you know, pin sheet, you know, whatever that’s called a corkboard with like all the service providers. And I was like, literally faxing. Yeah, we would fax them that tear sheet and say, hey, can you put this up on your board?

And on our way to the meetup on the way to the REIA groups, we’d stop at real estate offices, we stop at mortgage broker offices, we just this, you know, we bought 10,000 cards from VistaPrint business cards. And we figured out a way to hey, if we can get in touch with all these people, we’d come back with stacks of business cards. And then and then we would just put them in our email database, which I don’t even know how we learned how to do that, probably from some email marketing course that we had purchased.

And we would send them emails every week. And that would and that’s what got our phone ringing, and still does today.

Kevin Kim:

And the fascinating part for me is more on the side of timing, right? Because you guys said it’s 07, the shoe really didn’t drop until 08 mortgage, right? 08 was the year where just like, I mean, literally shit hit the fan.

I mean, it’s everything just fell apart, right? Bear Stearns, Lehman, everything started to happen in 08, that was the year everyone started. Oh, right. But you’re on the up.

Chris Haddon:

That was our first full year. Our first closed deal was December of 07.

Kevin Kim:

Oh, wow.

Chris Haddon:

Our first industry event was January of 08. Oh, in Vegas at the Pitbull, at the old school Pitbull show, met a lot of industry people who are still around at some level now.

And 08 was our first full year.

Jason Balin:

You know, it’s actually really funny. I’ll never forget this. I remember we went there a few months after being in business.

And I remember vividly feeling that like, we had a step ahead of all of our other competition. I felt like the barrier to entry was so little. Back then.

Kevin Kim:

Back then it was, I mean, even until 2012. The market was nonexistent. It was a country club type game, which which what the the foundations of the market were to begin with, it’s all these kind of commercially weird esoteric type transactions that were not necessarily grouped into a particular product that is today RTL.

Right. And so like, you know, it’s, it was it was nonexistent at the time. And at the time, it was hyper local, right?

I lend in Maryland, I lend in California, I lend in Texas. I mean, when I first met a lender in Texas, I just lend in Dallas/Fort Worth, I don’t lend anywhere else. And that was kind of the nature of the market until 2012.

At least my recollection.

Chris Haddon:

2012, or even 14. I don’t think there were institutional guys in our office physically in our office until 2014.

Kevin Kim:

14 was the big, big year where we came out. That was when like the Genesis deal happened. And that was like, Colony had just done their first deal.

And we’re all kind of like, oh, there’s actually horsepower in this industry. But that’s, we’re moving. We’re moving light years ahead.

Jason Balin:

You know, those deals back in the day, those lenders, the best way to describe them, it was it was loan to own. It was we will do a we will do a loan, we will lend you whatever we’re comfortable owning this property at. And that’s just what the numbers were.

And if you buy it at a bad price, I’m gonna lend you a lot less. If you buy it at a good price, I’m gonna give you high leverage.

Kevin Kim:

Right.

Almost like a “distress, no fire” kind of strategy.

Chris Haddon:

I mean, in all fairness, though, that’s also because that’s just risk management. It’s not because people wanted to own these properties. I think most every lender out there back then and today, would agree that REO is just a super pain, you know, unless you’re in the NBL business, right?

But that’s otherwise, unless you’re specifically in that business, it also just happens to be a, you know, a smart amount of leverage, what you would acquire the property for, like the numbers work out whether or not you want to own and manage that property, kind of a kind of a different subject, but borrowers still think that, oh, they just want to take the property. It’s like, trust me, guys, we do not. We really, really don’t.

The headaches of doing that, bankruptcy…

Kevin Kim:

Yeah. So when when was, 08 was your first full year? Was there a was there in kind of the lifecycle early stage?

Was there a moment for you guys? Okay, we’ve got we’ve got something here. Like this is actually really working.

We’re making good money. Our investors are happy. We’re getting more attention.

Like, was there a pivotal moment for you guys? Like, oh, wow. You know, because you say you felt like, man, we’re, we’re a step ahead of the guy, other guys.

What was this? What was the moment for you guys in the earlier part of the lifecycle?

Chris Haddon:

So I bet we’ll both have some input on this one. So one of the things that I never liked about the conventional mortgage industry was one, the profit margins, and two, the lack of control. And that becomes relevant later on in the story.

So once we saw that we could do a few deals, and granted, like the pricing was wild back then the 15 and five, we made the decisions, we papered the file, we hit go on our own wire. And we had these great spreads where we could close a few deals and make a solid amount of money. And I would say that it did not happen that moment that you asked about in the first year, I think we closed 18 or 19 loans in the first year.

And then the next and then after that, it was like double, double, double. I would say for me, probably sometime during 2009, when we were really going, and it was a loan volume that we could handle. It was a workload that was a lot.

It was before we started hiring. But we were taking home some good money. And I’m like, I think I think we might have a viable thing here.

Like we got through like maybe 18 months of startup phase. And we’re like, I think we have a real company here. Still in our 20s.

Kevin Kim:

What was the measurement that made you feel that way?

Chris Haddon:

For me, I would say it’s money. Yeah, yeah, the money that we were taking home.

The money that we were taking home, like it wasn’t hard back then. And now it’s not hard to go into an office and do a ton of work every day. It is challenging to take home good money.

Right? Those are two different things. And so once we saw that we were taking home a decent amount of money for being 28 or 29 at the time, I was like, I think we have something here.

Jason Balin:

Yeah, I mean, the model and the model changed from what we thought it was compared to what it is today or shortly after. You know, originally, we were like, hey, we’re just gonna broker these deals to these capital investors.

Kevin Kim:

And just to be clear, those those capital investors were just the high net worth guys? What were they like?

Jason Balin:

Yeah, I mean, people that had people that understood this space, that were either lending money themselves already, and they had more, you know, lit, they had more capital. And they wanted, you know, they thought our deals were better. I remember, we had a lot of capital investors that we created relationships early on that all understood hard money lending, they all did it themselves.

But they liked our deals better. Like our deals were just more conservative than theirs. And they didn’t have to do anything.

And they hated the business because they had to do everything. But they’re not full time hard money lenders. You know, one ran a law firm, one ran another business, one ran a carpet store, they were doing it as a side hustle.

And they were like, hey, if this guy comes to me, I can charge them 15 and five, or 12 and four, whatever, or you guys will just pay me a, you know, flat fee passively, and I don’t have to do anything. So it was like, it’s a better deal. And it’s less and I don’t have, you know, so that it was great, because they already understood the model.

They were sophisticated, they understood the risks. They’re willing to take what we were doing. I mean, back then, when we were charging 15%, we would take a 3% servicing fee.

So they would get a 12% return, a point a month. It’s not bad. So they were they were, you know, comfortable with that.

But like, I remember always being like, oh, well, if we broker the deal to you, and you service the loan yourself, you get the full note rate. But if you want us to service it, we’re gonna get a 3% servicing fee. And everyone was like, okay, I’ll just take, yeah, everyone’s like, I’ll just take the higher rate of return.

Everyone’s like, I’ll take the higher rate of return. And then it just ended up we didn’t have to service it anyway, because the borrower would call us, like that only lasted a few months until we’re like this stupid, there’s no option.

Kevin Kim:

Well, they start realizing what what posture they have, they are in actually, right, the investor? Right.

Jason Balin:

So you don’t know what you don’t know. The aha moment for me, though, for this business wasn’t necessarily the business, it was the investment vehicle associated with this business. Because we never, we never knew that or thought of that side.

So year three of the business was the aha moment. When we had one of our bigger capital investors, he had about, I don’t know, maybe like $3 million deployed into deals. And I remember, we were printing out 1099s, 1098s.

And we printed out his 1099-INT. And keep in mind, you know, a 12% return on $3 million or so portfolio, that’s close to $400,000 a year, we certainly weren’t making $400,000 a year. So, you know, at that time in year three, and I remember like, God dang it, dude, this guy’s in a few deals.

He doesn’t have to do anything. And he’s making $400,000 a year and year three, we were still in our 20s. Right?

And we’re like, man, that’s the game. And that’s when we started taking, you know, for the most part, you know, minimum amount of money out of the company, and then each of us taking the difference and putting them, you know, into our lender accounts, you know, and deploying that capital, co-lending with capital investors. And like, then it turned into an investment vehicle.

It was like, we have the active side of the business and the passive side of the business, the active side of the businesses are hard work, making fees, you know, grinding, grinding, making company money. But the passive side of the business business back then is we’re making a 12% return on our capital as well. And you almost make twice as much money doing the exact same amount of work, because you’re not doing anything on the passive side.

And that was the aha moment of like, hey, when we can, you know, get to a place that maybe we self fund this business, or we get to a point where we’re, you know, we have heavy interest in on as a capital investor, that’s when things really work out. So I did. But that’s, that wasn’t our game plan.

At the beginning, we just learned that this thing’s a freaking investment vehicle.

Chris Haddon:

We’re just trying to get the bills paid. But yeah, let’s emphasize that for a minute. Like, this guy’s couple million bucks had more earning potential than our entire year of work.

And we were doing pretty well. At the time, he was making more and we’re like, ah, okay, we see now.

Kevin Kim:

You start realizing there’s there’s real, there’s real earnings to be made off of these assets, right? And like, you start thinking about them as assets and like, oh, okay.

Chris Haddon:

It’s not it’s not just a fee machine. It is a fee machine. And it’s a great one.

But it’s also a fantastic investment vehicle. Right.

Kevin Kim:

So you guys are rolling through this and growing. You mentioned double double double. But you know, 2012 and 14 come around and the market starts to get pretty crowded.

From your perspective, I’m sure right? Because like, that market that you’re in is a small market, still is. I mean, it’s a very, very well, like everyone knows each other in those markets. And it’s just growing.

Chris Haddon:

Yep. It was gradual.

That that growth was gradual. I remember when we were coming up, there’s a company that’s still around in DC Metro. And actually the one of the founders is now CEO of a big real estate company.

That aside, they were a few years behind us. And we were both coming up and around DC and around Christmastime every year, he would send me a text and be like, all right, you know, cards on the table, what’d you guys do in terms of volume? Right.

And we’re always a little bit ahead of them. And that was cool. Until the institutional money rolled around.

And I remember, like I started to mention before that, I remember is after some meetup group, we’re here in the office. And it was at night, it was later than I would normally be here. And these guys from New York were here talking about, all right, so we can get like, we were still raising capital at the time, probably not super actively, but we were still raising, still growing.

And they’re like, yeah, we can give you money at this.

Kevin Kim:

What year was this?

Chris Haddon:

This was 2014.

Kevin Kim:

So early?

Chris Haddon:

Yeah, I mean, bankers were in early.

Kevin Kim:

Yeah.

Chris Haddon:

Well, I mean, we were, we were kind of known, we were like, the volume has gone crazy. You know what it’s doing these days in the industry. But back then we were known for like, deploying a lot of money in this area.

And so we were, I suppose, one of the first shops that they came to. Here’s what the kind of money we can give to you. Here’s how much it’ll cost.

It’s cheaper than what you’re paying now. Plus, it’s basically unlimited. Here’s your underwriting matrix.

Here’s your price add-ons. And I was like, oh man…

Kevin Kim:

It was a loan buyer kind of relationship at the time? Or what was it?

Chris Haddon:

Yeah. So there were a couple of different firms, one of them in particular still definitely around.

And it was we would fund loans and sell them. I don’t think there was any table funding at the beginning. And there wasn’t DSCR yet.

Kevin Kim:

Yeah, understood. Yeah.

Chris Haddon:

And so they, and so obviously, we’re going to look at it, right? We’re going to look into it. You know, why, why not consider something like that?

We’ve been actively raising capital. Why not see what’s going on there? And, man, we just got flashbacks to the mortgage days.

We were like, oh, no, pricing matrix. Oh, no, price add-on sheet. Oh, no, all this kind of stuff that we had gotten away from in, in, you know, five plus years leading up to that.

And I don’t know, it didn’t seem like it just didn’t feel right. It just didn’t feel good.

Kevin Kim:

Was it because of the control fact? Cause you mentioned earlier control, right? It was like, you had no control over your business when you were mortgage banking.

Chris Haddon:

That had a lot to do with it. And mind you, like the money was cheaper, but it wasn’t like a crazy amount cheaper. Not back then.

Yeah. You know, not back then. And the control was a big part of it.

Like we, we already knew how to underwrite and how to paper a file and how to service it. Like we didn’t need somebody coming along, like redoing our process in their way. Right.

And so it just never, it just never felt right. It never felt like what we wanted to do. And it’s like, yeah, everyone wants to do more volume, but how many more people do we want to have to hire?

Like how much further are we going on the marketing budget? Like, are we really going to change our P&L based on this new capital? So like we already had a good P&L.

We liked it. We liked our team. Like things were pretty good.

And mind you, during that time, in the next few years, my friend who owned that company across town, that we would text every about volume every Christmas, they started going crazy with the volume into a hundred million, 200 million, like boom, just exploded way past us in volume. In order to do so, they cut price, they hired staff, like they, they changed their P&L drastically, but there is no longer a text coming around Christmas because there’s no point in having this conversation around volume anymore. Right?

Jason Balin:

There’s apples to oranges.

Chris Haddon:

It became apples to oranges. That’s a good point. Became apples to oranges.

Jason Balin:

Well, we, you know, in a few things, like by then we were used to the flexibility that we had internally. And we didn’t want to necessarily take on or what felt like was a boss that in essence, like, oh, well, you know, we’re doing everything with this type of capital now and we don’t make all the rules.

Chris Haddon:

Well, the discussion around independence, right?

Like we need to do the right thing.

Jason Balin:

Yeah. And so that was important.

That was important to us. It’s like, we looked or like, well, we probably couldn’t do this deal with this capital.

Kevin Kim:

I mean, it’s an issue today.

Jason Balin:

Yeah. And, you know, the only comparison that we had back then is there was a company locally that had a fund. The guys were a few years older than us.

And I remember every time we would chat, they’d be like, oh, yeah, we can’t do this deal in our fund, but it’s a really good deal. And we don’t have another means to do it because it was just the way the deal structure. So I always like kind of thought of that side.

But, you know, we’d go back and forth because it was like, do we need more capital? Our capital was growing slow and steady. So would it have been easier, you know, to have one big, you know, pool of capital?

Yeah, it would have been. But there is like the risk, the reward. There is also like, do we want cheaper capital?

We can do we can make more money on these deals, but we’re going to give up flexibility. So it was just not that we were we were really willing to do it at that time. And going back to the competition in 2014, 15, 16.

And I think this is an important thing to note is a lot of our borrowers outgrew us. They outgrew us because we we were great for them when they were when they were smaller, they needed more flexibility. They could put on that, you know, they didn’t have many other options.

But after the institutional capital came out in waves, just those borrowers just outgrew us. Like, well, like I remember we did we worked with one of the biggest homebuyers in Virginia. They’re still open.

They’re still open today. We did 100 loans for him between let’s call it 2008, 9, 10, 11, 12, 13, maybe 14-ish. And then it was like, hey, listen, no more.

You know, if you guys can lend me this, and at this leverage, we’ll continue. And I was like, I, you know, and I remember Chris and I sat down, it’s like, hey, that’s two deals a month that we’re going to take that we’re going to lose. And it was worth it.

And I mean, to us, it was like, okay, let’s lose it. And we’ll find new real estate investors, we’ll spend more time on marketing, we’ll bring new people up. And I’m sure that guy’s never defaulted on a loan ever.

So we probably left a lot of money on the table if we had continued to work with him. Based off his terms, you know, 10 years later, but it wasn’t a direction we wanted to go in. We wanted to be, we kind of wanted to have our own model that we believed was best.

And we wanted to be able to sleep at night, right? Like we, there’s a risk tolerance that, you know, some people have high risk tolerance. They’re like, you know what, I’m willing to do lots and lots and lots of these deals.

And I know a bunch of them are going to default and I’ll deal with that.

Kevin Kim:

Like, well, at the time, right, the advent of someone’s gonna buy my loans, like some big institution’s gonna buy my loans, like the idea of it was kind of foreign. And also the risk that comes with that was kind of foreign, right? So a lot of folks who had been doing this for a long time, like, what’s my risk in doing this?

Buyback risk. Are they going to buyback? And at the time, buybacks were not a thing.

It just didn’t happen. For whatever reason. I mean, even if the loan was kind of not good, the demands wouldn’t be sent.

That’s a different story today. But that was kind of the logic by a lot of the guys that jumped on board was like, I think at the time was they were just kind of like, they’re not stupid enough to buy my, make me buy back the loans. Right.

That was kind of the thesis. Like, and then the buyers were becoming increasingly like trying to pick up market share. And so they were just like making all kinds of weird accommodations at the time.

I remember it was a very, it was a very strange time because like they would do, they would buy loans and my clients wouldn’t do. And I was just like, this doesn’t make any sense. But it was strange because like clients who jumped on board, like you said, your friend on the street, like they, they did, you know, have that meteoric rise.

But at the same time, when, when, you know, uh, we had a blip in 17 or 18 and we, and then we had 2020 happen, uh, you know, a lot of them had to go back to the drawing board. So I mean, there is a lot of credit to be given to like, you know, basically staying the course, but I got to ask, like, it must have, there must have been some major FOMO on your guys’ side.

Chris Haddon:

To this day, Kevin, there’s FOMO to this day. So let’s talk about that topic because that’s important for the audience, especially like, you know, some of the people who weren’t around pre.

Kevin Kim:

Yeah.

There’s a lot of new lenders being set up right now too. So, you know.

Chris Haddon:

Absolutely.

I mean, we came into the business being very aware of buyback risk because in the conventional mortgage business there, there, the, the subprime buybacks put hundreds and hundreds of companies out of business overnight. So we were very aware of what a buyback was and when that, all right. So like at first the institutional money that was coming around was not offering crazy terms.

They were kind of conservative in underwriting. The market wasn’t booming. It was just good.

And rates weren’t like crazy low, like they were fine. Like, and they were, they were doing terms, not all that different from what we were doing in terms of leverage and like, you know, qualifications like risk management type stuff. But then that started to change.

And again, we’ve always kept our eye. We have a lot of friends in the industry. We’ve always kept our eye on the institutional world.

And it started to turn into a situation where this loan, we would not do with our own money, but we can do it with theirs.

Kevin Kim:

Oh, that’s a, that’s a still a common thing right now.

Chris Haddon:

A hundred percent.

Well, that’s the majority of the industry now. People just don’t know that’s the case.

Kevin Kim:

And what does that ring, what does that remind you of? The NINJA loans back in 2006.

Chris Haddon:

I mean, what that is called is a top of a credit cycle, right? So, and so we having a good business and knowing how to underwrite and mind you like the loan amounts and the leverage that we choose, it’s not just made up out of thin air to be conservative. It’s because we have the defaults and we know how they work out in the states where we lend.

And we know that a first mortgage lender should not lose principle. That’s part of the, the, the structure of a real estate deal. We take the least amount of risk.

We’re probably getting the least amount of return. And that’s the way senior debt on real estate goes. And so when you start changing that dynamic and taking on more risk than the senior lender should, then we’re talking about some real problems here.

So then, and I, I see this stuff go around on, on LinkedIn and wherever else where, you know, if you’re a loan originator and you’re earning commission on the deals you close and you’re, and you’re, you know, putting out like, we just closed this really high leverage deal. And, you know, a lot of people look at that who underwrite real estate, own real estate, people who are responsible for the financial performance of their loan portfolio go, whoa, that’s some scary stuff. But that W-2 loan originator has no risk.

And so by all means, they should do everything their company allows them to do. But then you can’t help but look at the owners of the company and think like, do you guys know what you’re getting into when you’re funding super high leverage, new construction across the country in a market you don’t know?

Kevin Kim:

Yeah.

Chris Haddon:

Are you aware of what you’re getting into? Because it’s just like Jason was saying before, outside of our risk tolerance. And we probably leave, we definitely leave money on the table because of our risk tolerance.

And it’s just how we have to run it, you know? And if we get the right size portfolio, the right amount of our own dollars into our deals, then we’re having the financial outcomes that we want. So we don’t have to risk our company by shooting for a billion, right?

Jason Balin:

Again, there’s lots of different ways to play this game. However, whatever you see fits best for you is fine. There’s not a right or wrong.

Kevin Kim:

It’s becoming increasingly a point of debate, right? So I had, we just had our conference a few weeks ago. And, you know, we had a bunch of institutional guys on the panel.

And I was asking them their thoughts on this is the market headed toward a more mortgage banking type structure, right? It’s starting to look a lot like non-QM to me. All right.

And so, especially because of DSCR being layered in, but like, even without DSCR, you know, ground construction and fixing is starting to look remarkably like our friends over in non-QM. And we all know like a non-QM, you know, the slight change in capital markets posture can shutter a business that has billions of loans a year, right? And that’s the fun, the question mark.

And they’re like, you know, the kind of mixed perspective, but general consensus seemed to be that the, yes, it is heavy because it serves their, it serves their goals, right? Because they’re the institutional shops, right? But the funny part was the banker that was on the actual banker who was on like retail banker who was on the panel who provides lines of credit, his position was not, you know, that won’t be the truth in five to 10 years, right?

And so his position was more when this market has to hit a correction, which it’s probably going to have to soon, it’s the balance sheet guys, it’s the direct guys, it’s the independent guys that are going to be around and clean up, just like in COVID, right? When COVID happened, it was the local guys, the independent guys, the guys that cleaned up. And that’s an indication of kind of where, and that’s been my thesis the entire time.

But, you know, all my other partners, like they’re like full on board with this kind of mortgage banking approach. And it’s interesting. It’s an interesting debate.

I don’t know. It’s a very weird industry that we’re in. So it’s hard to say what’s right, what’s wrong, you know?

Jason Balin:

Yeah, I mean, you, you adapt and you pivot to what needs to be. I mean, the other reason why some of the institutional stuff wasn’t great for us is like we talked about year three was the aha moment of this is an investment vehicle. This just isn’t a business.

Like, we’re, we’re working hard every day in our business. So we can keep our capital deployed, our friends’ money is deployed, our family, our, you know, closest partners and investors. Like our investors would be upset if we just took on $50 million of institutional capital and said, hey, here’s all your money back.

You’re not getting a high rate of return anymore. Go find another investment vehicle.

Chris Haddon:

And it took so long to build that trust with those guys.

Jason Balin:

Yeah. And I’m sure you’re, you know, this and listeners do as well. Like those are real good relationships with real solid people.

Other doors open with that. Like there’s, there’s, there’s other things that, that occur to that. Um, so, so for us personally, the investment vehicle is…

Kevin Kim:

But it’s still a difficult path, right? It’s the kind of like, this is the argument that we have is the debate we have. Like it’s still the harder path. It’s still the more difficult path.

It’s not the path of least resistance, but it, but it fulfills your value.

Jason Balin:

Could be the long-term path though.

Chris Haddon:

I don’t think it’s easy either way. Yes.

I agree with Jason that it’s the long-term path because we want this to be a multi, you know, decade and possibly even generational business. And so it’s hard either way. I mean, look on the institutional side, like those guys are competing with almost identical products, similar pricing, and trying to pump out tons of volume.

Kevin Kim:

Well, at the end of the day, the guys, the guys who are actually ending up with those loans are basically a select few of institutional shops that are actually buying the paper. You don’t have very much diversification on the, on the actual end result of where the end loans end up. And so like, it’s, it’s, it’s basically the same stuff.

Chris Haddon:

Being a lending company competing in that space is very challenging. It’s just like the conventional mortgage industry or non-QM. You’re just trying to out market your competition.

Sometimes you creep up and leverage to try to beat them. Sometimes you decrease pricing to beat them. It’s not a great game.

We’d rather play a lower volume, higher margin game where we don’t have to put out a hundred million a month. And we have a team of 10 and a pretty good lifestyle business. Plus the investment vehicle stuff we’re talking about.

So like it has kind of split into in this industry, doing similar deals, maybe not the same. You can run a mortgage company, or you can run an investment vehicle. And sometimes there’s some overlap, but not usually.

Kevin Kim:

Do you guys find yourself doing something that would be more risky to yourself to you guys right now? Because everyone in your position seems to be saying the same things like, oh, man, we’re really trying to, we’re trying to avoid this, but we find ourselves having to push a little bit risk, a little more risk, a little more leverage here.

Jason Balin:

To do more volume, you mean?

Kevin Kim:

Not even to do more volume, to sustain volume.

Jason Balin:

Yeah, to keep up with the volume that they’re currently doing.

Chris Haddon:

Yeah. I mean, it’s a daily battle to get deals. I mean, we have four full-time originators.

Everyone’s grinding. You know, we have a lot of leads coming in, a lot of marketing happening. We’re trying to pick up every deal that we can that fits in our box that we’re willing to do.

And yeah, it’s a battle every day.

Jason Balin:

Here’s another kind of, put this in perspective, like we’re going on year 20, Chris and myself, as both full-time owner operators of this company, devote the majority of our day on marketing and, uh, figuring out ways to originate, not necessarily doing the loan origination, but figuring out ways to keep the phones ringing, keep figuring out ways to keep our, you know, go high level CRM, spitting out content, text, phone calls, automation.

We’ve implemented, you know, a decent amount of, uh, you know, AI voice agents, everything that we can to, to stay on the cutting edge and to stay on top of this, because we need deal flow over and over and over and over. We, we’ve used leverage by having business partners and loan officers to generate more business. I mean, I remember we, we capped out maybe around 30 million in the DC, Maryland, Virginia area, maybe about 10 years ago in loan production.

And there’s plenty of stuff, but we capped out because like we said, when the institutional capital came on, we had borrowers, good borrowers that outgrew us and it was hard to replace them. So we, we had to expand into other markets to create market share there. And there’s the argument of do higher volume for at lower terms, at higher leverage locally for A plus borrowers, not really what we want to do or tackle, or do less volume, what we believe is higher quality and expand into some other markets and things like that.

We’re, we’re kind of known for creating A plus opportunities out of B borrowers and out of B situations.

Kevin Kim:

And that seems to be the point that a lot of the local lenders are using as a point of leverage is we’re going to help more than that. We’re just not, we’re not your lender. Right.

And, and the institutions are learning actually. And it’s really kind of funny how the national guys are learning from the local guys to, and they’re seeing that value add component.

Jason Balin:

And that’s not easy. Like that, like you, like that’s human element that takes time to do. And there’s also got to be enough margin to do that.

Like if we brought in business partners or, or loan officers, like they’re heavily compensated because like if they’re making, you know, 25 bips on a deal and they’re like, Oh, cool. I made, you know, 400 bucks to do this deal. They got to do a ton of them.

You know, our loan officers in essence, like if they can do several deals a month, there’s enough income streams that come through it to, you know, to still have high quality people. One other thing that we were talking about earlier that I think is important, and I’ll call both of ourselves, me and Chris out on this. We never actually thought the institutional capital model would even work and we’re, and we were wrong.

I never thought that would even work. And the reason why is we’re like, there’s not even enough deals in this space to do that. We, we used to be like, how many deals are there?

Cause we always thought about scalability. We’re like, how many deals are, are in the DC, Maryland and Virginia area a month. And we’re like, yeah, probably like 20 deals, 50 deals a month.

Kevin Kim:

Right. I think your thesis is coming true right now. I think that thesis is starting to come true.

Chris Haddon:

It’s a hundred X what we thought it was. That’s Jason’s point. A thousand X.

Kevin Kim:

If you look at the market today, the current landscape of private lending, if you noticed more and more, you know, guys that just did construction loans or just did fixing loans are starting to do multifamily.

They’re starting to do stuff that they wouldn’t touch three years ago. DSCR is a different product now. And there’s a lot of shops that just like double down on DSCR.

That tells me something’s up on the traditional kind of usual loans that we’ve all kind of been used to for the past 20 years. Right. Or you guys have been used for the past 20 years.

It’s interesting because, well, if that’s, if you guys have these giant flywheels of machines and you’re still now entertaining these kinds of loans, well, what does that mean? Right. Is it because the borrower is growing up or is it because there’s not enough opportunity in the residential market, in the 1-4 market?

Jason Balin:

I would, I would guess that less than a third of our loans are fix and flip at this point.

Kevin Kim:

Right. No, you’re right.

Jason Balin:

You are right.

Kevin Kim:

As you transition to ground of construction, commercial real estate came back past few years, like people’s businesses are evolving.

Jason Balin:

One of the reasons why we were able to maintain this $50 million portfolio, and we’ve had the same portfolio size for a long period of time, like almost a decade at this point. And we’ll do less loan volume in Maryland, but then we’ll do more deals in Pennsylvania. Then we, you know, then we have a partnership and we open up an office in North Carolina.

So we might do less deals here, but now we start doing North Carolina. Now, all of a sudden we do more commercial deals, commercial loans stay in our books for a longer period of time. So then they’re outstanding.

We do less fix and flip, but now there’s more kind of creative bridge funding, refinances on free and clear rental properties. So then those come into the mix. So we’ve always kind of, hey, you know, we’re not doing as much here, but you know, it’s getting replaced from other lines of business or other, other structures.

And I think that’s because, you know, this mastermind group that we run, we, there’s been a challenge in that group over the last year and a half where a lot of people are like, I can’t keep the volume up. And I’m like, well, are you only doing fix and flip loans in your local area still? And they’re like, yeah.

And I can’t maintain that balance. And I’m like, I agree. Start looking into refinances, start doing commercial stuff, potentially doing commercial stuff.

Start trying to figure out if, you know, if you’re in Knoxville, Tennessee, maybe going to Nashville, Tennessee, or maybe going to Atlanta, Georgia or someplace like that. Like, and I’m at least entertain it, because that might be where it needs to happen, because there could be less volume. That that was why I kind of always thought the institutional capital wouldn’t be in this space.

And I might be wrong about this too. But I, but I’ve also always felt that the institutional capital would eventually leave the space if there’s not enough deals for them either.

Kevin Kim:

Well, it’s funny, I be having my foot in both sides of the industry. Like it’s kind of interesting, because that is becoming a very interesting conversation, because there’s different shapes of institutions coming in and out and that kind of stuff. And so we’re kind of seeing a time right now where the current status quo is starting to feel like there’s a little bit too much risk.

And there’s changes in different credit criteria, and obligations and requirements. And the funny part is, there’s another kind of insurance, institutional money, life insurance, that’s starting to make its headway into the industry. And you’re seeing, the first iteration was it with our friends in commercial, and now we’re seeing it over here.

And it’s very interesting how like, as one group starts to change their perspective on it, another group is starting to see, oh, hey, that’s good for us. And so I mean, what’s interesting is they, they see it, they like it. And so it’s, I don’t necessarily know it’s going to go away, away, but there’s always going to be ebbs and flows, because they’re so fickle when it comes to performance.

And so, you know, they’re not going to be as long lasting in the in their current it’s gonna change a lot, right? And the market’s gonna have to react with it. I would like to pivot real quick, because you mentioned the mastermind.

And I, I don’t know many lenders that operate their own kind of education group for local lenders and, and provide resources to them, because effectively, you’re creating your own competition was kind of the thought process behind that. But talk more about that, like how that started and why you why you’re what you’re doing right now. Because it’s a very unique thing that you guys are doing. Not many lenders do that.

Chris Haddon:

I mean, that’s why we did it is because it didn’t exist. So we were in a mastermind group.

When our company was growing, it was, you know, 2015 16 ish, we were in Russell Brunson’s mastermind, he’s the founder of ClickFunnels, it was not real estate or lending focused, it was marketing business growth. That’s what we wanted to, you know, learn about and focus on back then. And we got tremendous value from being in that group, even though we had to fly out to Boise, Idaho a few times a year, like it was really inconvenient, but the value was tremendous.

And also, in that process, we learned how to run a mastermind. So a little while after that, we were like, why are there no masterminds? Because you could in real estate investing, for example, you could find 100 of them, right?

Funds, podcasts, masterminds, conferences, you could find, you know, hundreds of them. And in our type of lending, there’s almost nothing, not even a podcast at the time. And so we started with the podcast of Private Lenders’ Podcast, talking about this stuff right here, right?

Talking about lending, how we’re running our company, managing risk, defaults, raising capital, all of it. And then that became the online mastermind. And also around that time, we kind of came into running a mastermind and consulting by accident.

And here’s how that happened. Our friend Nick Kapetanis, he runs a lending company in Richmond, which is like one market down where we don’t lend. He was following our stuff for a while.

And this was back when we were one of the only few brands marketing and like, there just wasn’t that kind of content presence amongst lenders. And he reached out to us and was like, hey, I’ve been following your stuff for a while. Any chance I can pay you guys some money and like come shadow you or learn from you for a few days?

And we had never thought about doing anything like that. We’re like, sure, we’ll come up with a number for that. Right.

And that’s kind of that plus our experience at Russell’s mastermind group is how the whole thing was born.

Jason Balin:

And because we do everything kind of with private capital, own money, things like that, the whole group is set up that same way. Because if someone’s out there trying to, I don’t know, grow this, this big, this big lending operation, take on institutional capital, DSCR, do DSCR loans, like I don’t know anything about that. Chris doesn’t know anything about that.

So there’s so many and I don’t even want to call these lenders mom and pop lenders because they’re not because the the group, in essence, we do online stuff and offline stuff. But we we do a few meetings a year. And I mean, there’s dozens and dozens of lenders that come into each one.

And they’re all between 5 million on the low side and 100 million on the high side. And they either have a fund or they’re doing direct placement or they’re doing something kind of in between or just lending their own money and related to the competition like there’s not much competition because so many of them just lend locally into the areas that they know. We typically try to limit, like let’s say somebody is in like Tampa, Florida, and there’s a new lender that wants to come in the group, we typically poll the group to make sure it’s a good fit, especially if they’re in the same market.

Same reason why there’s not any other lenders from from like Maryland in there as well. Because, you know, we, you know, when you’re in a mastermind, you’re, you know, you’re very transparent of what’s going on.

Chris Haddon:

You’re sharing a lot of intel.

Jason Balin:

It gets pretty good and bad. But I’ve, but we’ve always come to the conclusion that, you know, it’s better to just be an ally with your competitors than anything else. There’s more good than bad, at least kind of in our, kind of our small sector of hard money.

You know, we, there’s a lot of, like, I’ll give an example. You know, there’s a big well-known lender in Baltimore. They do a lot of Baltimore City stuff.

They own a lot of properties. They’re a big lender. And, you know, back in the day, we would pass deals back and forth.

We didn’t want to do anything in Baltimore City. They didn’t want to do anything in Washington, D.C. We’d pass deals back and forth. Or we’d pick up the phone and say, hey, listen, you know, I don’t, you know, have you ever talked to this borrower before?

I’m not getting a good feeling about him. And I’m scared to put them on our books. You know, we just share a lot of resources and there was more good than bad.

And at this stage of the game, the same thing happens. You know, there’s a lender in Des Moines, Iowa, right? He doesn’t lend out of Des Moines, Iowa.

He gets deals in Kansas City, passes them on to a Kansas City lender. They get deals in Minnesota, passes on that way. In Chicago, passes on.

Kevin Kim:

That’s what I love about this industry is the community aspect of it.

Jason Balin:

And we get, we haven’t raised private investor capital in a long time because we haven’t really needed to. Because, you know, even, and this is kind of like a weird thing to say, but, like, private capital has grown quicker than the deal flow has. Right?

At least when, like, our size operation, the types of capital that we want. So if new capital, you know, we have a lot of capital investors that reach out, potential capital investors that reach out, and they want to invest with us. We don’t have an outlet for them to do that.

So it’s like, hey, here’s three lenders that are in your local area that we know from our mastermind group. Call them up, see if you can deploy capital through them. So there’s just a lot of sharing of resources through this group, which has been cool.

Kevin Kim:

I really like that. And that still does happen kind of across the spectrum of private lenders. And, you know, vis-a-vis our conferences and different industry events.

But at the same time, the local guys are all hurting for more, not just education, but like, yeah, that whole, like, kind of mentorship, camaraderie, kind of, you know, and also, like, someone that can kind of help them when they’re in a pickle, right? And show them ideas that they may not have thought of.

Jason Balin:

Kevin, some of these people in this group are super successful. They just don’t know private lending because they haven’t, don’t have experience of it. And they, and this is what happens.

They come to us when they have about three, four, five, six million deployed. And they look at their portfolio. They’re like, oh, my God, like, I have a lot of money deployed, and I don’t know what the crap I’m doing, you know, what the heck I’m doing.

And I’m scared. And they get to a point where, you know, they fumbled their way through it, but now they start having defaults. Or now they’re, a lot of them aren’t even using attorneys to do loan docs. It’s like, hey, you need to do this, or defaults happen, and investor disputes happen.

Kevin Kim:

Exactly. They don’t, fraud happens, and they just don’t know what to do.

Like, just kind of lost. Yeah.

Jason Balin:

They fumble through it.

Chris Haddon:

There’s no roadmap. Like, there’s no blueprint.

Unless you hook up with some people to create one, or just really, really know real estate inside and out. And even still, there’s going to be holes in your game. What type of insurance do you need?

What kind of software should you be using? Like, you can join a mastermind group and shortcut 10 years of trial and error in six months, in two meetings, right?

Kevin Kim:

And you’re getting that kind of local peer-to-peer intelligence that you won’t get at a conference. I always like the small groups that are out there. And I was wondering, like, you know, we have a local trade association here in California.

It’s kind of a small group, less than 200 people. And it’s kind of the same vibe, right? You’re all, guys have been doing for 50 years, and they’re kind of sharing intel with the younger guys, and resources and education, which has been the most important thing for the newer guys.

Chris Haddon:

And over these past handful of years, like seeing the growth of the other lenders in the group, especially the people who have been around since the beginning, I mean, just, you know, doubling, tripling, like a number of people have legit professional jobs have been able to quit. And then some more people come in, and they go through that same path, and they come in at five mil, and then now they’re at 30. Like, and being able to see that trajectory, like, it’s a really rewarding thing.

I didn’t think that we would be getting into that line of business being, you know, private lenders around here doing our thing. But it’s been an awesome addition to our career, to our line of business.

Kevin Kim:

I guess you’re adding to the community, which is also very, you know, that’s kind of the challenge when you’re in this competitive business. But kudos to you guys for that. I do want to bring up something a little bit more, I guess, not so positive vibes, but it is something we’ve talked about on your show.

And I kind of want you guys to talk about it to our audience, because you guys are, you guys are in that DMV market. And, you know, the past year, or maybe two years, that Maryland market has had a lot, it’s been in the news a lot, let’s just say that, right? We’ve been talking a lot about it.

This whole discussion surrounding fraud and appraisal really stems from Baltimore and stems from Maryland, and Philly. And it’s been funny to watch from my kind of perch here is like, I’m trying to like what I’m trying to get, because I have clients of all shapes and sizes. And it’s been really interesting to watch the reaction in the industry and what their take is on it and what they should do about it.

Different industry groups are having different opinions on what they should be doing about it. There was an extreme proposal in this past year to go with like two appraisals, as if that’s going to solve the problem. So like, I wanted to get your guys’ take on that.

And you know, did it affect you guys at all? Did you know what, or did it not? And, and, and all that.

Yeah.

Jason Balin:

A few things. I think I know a solution, which I’ll discuss here in a second. But I think before that, it didn’t affect us.

It didn’t affect us. And whenever there’s stuff that you’re we’re concerned about in our size operation, and the way that we have everything set up, we just pivot to be more conservative. It’s like COVID, right?

Like, like March 2020, any loan we originated in March 2020 was the best loan that we probably ever did. Because we were the only game in town. And I vividly remember having a conversation with a buddy of ours, who’s also a capital investor who also, you know, buys a lot of stuff.

And he’s like, hey, man, what’s your thoughts? You know, I’m going to sideline all my capital. I don’t think I want to lend anymore.

I’m not, you know, until this, this COVID thing blows over. And I’m like, why? He’s like, well, I don’t know where the market’s gonna go.

I’m a little bit scared, blah, blah, blah, blah. And I’m like, well just be more conservative on your deals. And he’s like, well, what do you mean?

I was like, okay, let’s use an example. A borrower calls you up, he’s buying a property in Washington, DC in a good area, and he’s paying $800,000 for it. And he has a lot of his own cash and only needs a loan of 300,000.

Would you do that deal? And that’s a very obviously conservative. It sounds like it sounds like an extreme example, right?

So he goes, of course I’d do a deal, I’d be a dummy not to I was like, then you’re not out of the game, you just need to be more conservative. And I said, and that deal I just gave you in that example was a borrower that I spoke to today that says, hey, I’m buying this property, I have 1031 money that I need to deploy. I’m not saying that’s like a deal that you can do 1000s of every month.

But just be more conservative, make the borrower put down 50%, do whatever you want to do. But that doesn’t mean you have to exit the game or exit the space. That could be an extreme example.

But it’s the same thing. So related to the Baltimore City stuff, or the Baltimore stuff and the Philly stuff, we just got more conservative in there. I mean, we have 256 loans on our books right now, we have three in Baltimore City.

So and I get that the DSCR stuff overlapped on some I mean, we know local lenders, they’re small lenders that only have like 5, 10 million dollars deployed. And they’re taking back seven of them. They’re stuck in seven, not taking back, but they’re working out seven of them on them.

So like, that’s a big that’s a big hit for them, or it’s going to be a big hit for them. So it didn’t really affect us too much on that side. Because number one, we were kind of conservative to begin with, number two, we could just moving forward get a little bit more conservative if we had to. Related to a solution…

Because we’ve like what I would do if I were these companies is have in-house boots on the ground, employees that know values and know the areas. So not necessarily get third party appraisers that don’t have an economic interest in the property. I would get somebody who knows the area, pay them well, and have them be their, like in-house appraiser.

And you go to a real estate agent that knows the area, you go to another real estate investor, you go to whoever someone else locally, pay them a real salary, like real money. So you get the right person in there and say, hey, listen, your full time job is on the streets, looking at our property, looking at properties, pulling comps, you’re even doing property inspections for us. So I don’t need third party that like, because the way that we do it internally is number one, like, let’s say we have a property in Maryland, I live on MLS, right?

My high level job at Hard Money Bankers is an underwriter. I’m not outsourcing that to somebody, somebody else. I have an economic interest, Chris has an economic interest, we need to be the decision maker of how much we’re willing to lend to this particular borrower.

Okay, so I’m looking on MLS, pulling comps, I know the areas, we have a full time person in our office who goes to the property, meets the borrower, meets contractors, things like that, does an upfront inspection, valuation, whatever you call it, CMA, whoever you want to have it set up. So they’re out there, they’re doing that they know the area really well, because if you hire these in-house appraisers, they’re territorial, right? Like one person does, you know, this part of Maryland, you know, you might have multiple per state, depending on where you know, where you how big the state is, or how big the area is.

And then have that same person do property inspections for you if you want as well. And it’s been a huge benefit for us to do this because this person that internally not only is he doing the valuation on the front end, but he’s meeting the borrower, right, so we have customer service, he’s doing the property inspections for us. So he sees the borrower four or five times, you don’t think that that borrower when they’re ready for their next deal, you’re going to get that deal?

Plus, you know, so there’s an income side of that as well, can turn into more business. Plus, you can also put your eyes and ears on actual property three, four or five times through the life of the loan.

Kevin Kim:

I mean, the whole genesis of all that scandal was lack of local intel. That block doesn’t value that way. What are you talking about? Right?

Like, it makes no sense, right? Like, and it’s like underwriting 101. And the argument is that at scale, that kind of approach is impossible.

I don’t know about that.

Chris Haddon:

A few more comments on that. So, you know, fraud sucks.

Jason Balin:

Fraud sucks.

Chris Haddon:

As a lender, we’ve gotten caught in different kinds of fraud. That’s another podcast for another time. Some wild stuff, and it can bring people down.

Fraud sucks. This particular fraud, the larger problem is what you were saying is a valuation problem. And like we were discussing on a previous podcast when they were at AAPL and there’s a panel talking about this topic is that they were saying the heads of a number of companies, big players in the industry, that there’s a fundamental problem in relying on appraisals for your value, for your risk management, for the whole transaction.

Kevin Kim:

I’ve been saying that for 15 years.

Chris Haddon:

Yeah, exactly. I mean, and granted that’s, that’s the majority of the real estate lending industry, the conventional Fannie Mae, like the majority of it is appraisal based, but now there can be some major issues. So if you’re relying, if you’re a big company and you’re relying on appraisals for your values, for your risk management, and you’re signing, your company is signing for this paper in one form or another, even if after you sell it, you’re responsible for X percentage of it.

There’s a big problem there. I think they’re a combination of what Jason was saying, kind of like what Jack Bevier does at Dominion and they’re Baltimore-based, high volume all over the place. He’s got overlays for all of the institutional guidelines for credit, for valuations, for all kinds of stuff.

He’s like, yes, I know you’ll buy this. I know you’ll buy this box. Your box is way too aggressive.

And so we don’t want to buy it back. We, being Dominion, we don’t want to buy it back. So we’re going to be careful on this.

We’re not doing 620 credit score. We’re doing 680. We’re going to underwrite these third-party appraisals that you require to make sure that they check out and then we’ll sell to you.

Kevin Kim:

I think that the wisdom there though is that comes from their background in commercial real estate. Cause in commercial real estate, you can’t, you can’t trust an appraisal as far as you can throw it. It’s worthless as paper it’s printed on.

And so like in, and I think, you know, their traditional, their original background is commercial real estate. I guess Fred’s original background is commercial real estate. And like knowing that of them, like I can, I wouldn’t be surprised that they say that the fascinating part is a lot of our people in our industry are coming from residential 1-4 conventional mortgage, where you just kind of like, yeah, we got it.

Move on. Right. And then conventional mortgage, how it’s just fascinating.

How often the LTVs just match up. Right. And so, you know, that’s one of those things.

And I’ve always 15 years of doing this. I’ve been telling people, I don’t trust appraisers. I don’t.

Right. And it’s not the AMC principles that I have a problem with. It’s the actual on the ground appraisers and that comes from knowing how shady that world can be.

And I’ll tell you, it’s very simple to do this. I know so many clients that have an internal guy who happens to be licensed, who has a deep, deep, you know, long record of, of, of experience in valuation. He gets paid very well and he gut checks everything and they have their own internal system.

And they also use third party software and they’re double, triple checking every single valuation they get because there’s a high, high likelihood. And especially with, because of the wholesaling that’s going on these days, that the value is just getting pumped up. And so how do you combat that?

Jason Balin:

Listen, I’m on MLS every day. You know, we’re on the, we’re on the streets. We know these areas, we’ve done a lot of loans locally, and it’s hard to do that.

Like you, like I’m, I’m constantly looking over and double checking work for every one of our originators and our partners on their deals just to see if something doesn’t work.

Kevin Kim:

And, but even at scale though, the argument is, is if you, if you don’t have the guy on the street, I get that. If you’re a big wholesale outfit and you don’t have the guy on the street, well, why not have like a, I mean, I, I mean, shout out to the RicherValues guys, that software is great. Right.

Or like have a guy internally that can actually gut check the actual numbers that come out on the appraisal. Cause you gotta have some, you have to have some secondary review.

Jason Balin:

There’s plenty of resources out there too, between, I mean, you can have a checklist of 10 different things. Like go on Google maps and street view, see if the fricking pictures even match up, you know, go back to what the picture looked like in 2022 to 2024 to now, like you do that, you know, run it through RicherValues, run it through that. You can run it through all, you know, other tech and other types of stuff.

There’s, there’s ways to really determine some of that stuff. Cross-reference tax records.

Kevin Kim:

That’s something we overlook. Tax records are a very good, especially because the wholesaling thing, that’s a good sign that the property has been wholesale too many times.

Jason Balin:

Here’s one thing that every single person misses. I’ll give you an example. So let’s say I buy three properties for $300,000.

So I buy three, I buy three properties, you know, property A property B, property C, it’s $300,000. I get the whole package for 300, right? Well, if you go look on the tax record, it’s going to show that I bought property A for 300 grand property B for 300 grand property C for 300 grand.

I didn’t pay 900 grand. I paid 300 for the portfolio. But if you look on actual, the recording, it’s going to show I paid 300 grand and it’s going to make it seem like I paid 300 grand for each of them.

Not total. That’s just one example. There’s lots of different examples like that, where it’s the same thing.

You’ve got to dig in. And you know, these days, almost every area, like every loan we do, we’re looking at past deeds of trust. We’re looking at deeds, any recorded instrument.

It’s just Google it. It’s free. You can access it.

Kevin Kim:

There’s so many tools now to pull that deed too. It’s not, it’s not like we’re in the old fashioned era where you had to go down to the county recorder’s office and pull records.

Jason Balin:

The problem with a lot of the appraisal stuff in general, which is challenging is one question that people always ask me is what in this neighborhood, what’s the average cost per square footage? Like they always do it based off cost per square footage. I’m like, I have no fricking idea.

I’ve been lending in that area for 20 years. I don’t know what the cost per square footage is. That’s not something that I even barely look at compared to other, other factors.

There’s so many other things to look at because, hey, this is a nice, beautiful subdivision in a new neighborhood. Then you got this oddball house over here. They’re not equal properties.

And this also keep in mind, this happens in city, this happens in older areas because there’s a hell of a lot more risk on a building in a building that was built in, in the 1900s than there is in a building that’s built in the seventies, exact same property. There’s a lot more risk on, on some of the, so, I mean, we can go on and on on that stuff.

Kevin Kim:

100%. I wanted to get your guys’ take on those because not only are you in those markets, but also you guys have a more conventional, traditional approach to this. And I wanted to get your take on it.

Jason Balin:

One other real quick thing related to the appraisal side is the appraiser doesn’t know the difference between me, you, Chris, and anyone else listening to this podcast. And if all of us flipped a house, we’d all sell it for a different price. You might have more experience, right?

I might, you know, say, hey, I come from a big family, so I would want five bedrooms. So I’m going to put five bedrooms in here. Oh, I come from a small family.

I put three bedrooms in here, you know, and then you’re competing with the biggest home buyer. Who’s like, I have to paint my door this color, or I have to make my closet. This you don’t know the appraiser doesn’t know the appraiser doesn’t know that, hey, this guy’s got a 500 credit score.

This guy has a 600 credit score. This guy has a 700 credit score. He doesn’t know what his background is.

He just knows on paper, you know, what statistically it says.

Kevin Kim:

And sourcing of the data on their part, it seems to be more of an art when it should be a science right now at this point. And it’s not that it’s not one of those. And it’s also kind of questionable too.

So it’s, it’s just, I don’t know. It’s been a thing in my, I’ve always wanted software to catch up. And I think it’s here now.

And I think that that’s, yeah. And it’s a time where like, guys, we have, we have, we have no excuse for secondary review and it’s really easy to do. And you can gut check and, or you can do it through a human method. Human method’s also on the table.

Jason Balin:

I think human method ends up being, well, it’d be way cheaper than all the money people lost in that fraud.

Kevin Kim:

And it’s being done at the highest level by the, by some shops, but it’s just other folks who’s like, ah, I can’t justify that expense. And I’m like, yes, you can. Yes, you can.

You know?

Jason Balin:

Yeah. I mean, cause it’s an upfront expense and they’re getting paid on it later. That’s, and I get it.

I mean, we think of that stuff in our business every day.

Kevin Kim:

All right, guys. I think we’re running out of time. Let’s make sure our audience can find you guys. And if any of the local shops want to get more involved with you guys at your events and stuff like that, how do they find you?

How do they reach out to you guys so they can get in touch?

Chris Haddon:

Yeah, sure. So anything lending wise is hardmoneybankers.com. And anything content, Private Lenders’ Podcasts or hardmoneymastermind.com.

We’re out there. We put out a lot of free content. Hopefully people get some value from it.

Hopefully as much value as I’ve gotten. So from so many of your episodes in the past. So thanks again for having us.

Kevin Kim:

Absolutely. So if you’re in that, in that market in the Northeast, give these guys a holler, especially if you’re scaling and you need some help and these guys are a wealth of resource. And I love talking to you guys.

It’s been a blast. Thanks for being on the show.

And we’ll do another one soon. This is Kevin Kim for Lender Lounge signing off. Subscribe to Lender Lounge on your favorite podcast platform and visit our website, fortralaw.com to learn more about how we can help you scale. Check out the episode summary below for other valuable resources.