Private Lender by AAPL by American Association of Private Lenders

PL PRIVATE LENDER The Official Magazine of AAPL July/August 2016

+ Could Brexit Wash Ashore Here? + How to Keep the CFPB Happy + The Trouble With TRID + Debunking Private Lending Myths

LENDER LIMELIGHT:

ROBERT BUCHANAN Trend-Watching from Every Angle

COVER YOUR ASSETS! at the American Association of Private Lenders 7th Annual Conference

AAPLANNUAL CONFERENCE 2 PRIVATE LENDER

2016

11 aaplonline.com NOVEMBER 13-15 | CAESARS PALACE | AAPLCONFERENCE.COM

JULY/AUGUST 2016 3

4 PRIVATE LENDER

CONTENTS JULY | AUGUST 2016

Commercial Concerns

Lender Limelight

Is Brexit a Tidal Wave That Could Cross the Atlantic?

Viewing Investing Trends With 360-Degree Clarity

by Jeffrey N. Levin

with Robert Buchanan

Misconceptions

Debunking the Myths About Private Lending by Charlie Fitzgerald

Factoring

Alternative Angle

Regulation Crowdfunding: Where We Are Headed by AdaPia d’Errico

Marketing

Factoring vs. Purchase Order Funding for Your Business

Breathe New Life Into Your Marketing

by Mike Ponamarew

by Chrissey Breault

Real Deal Perspective

Technology

Tips to Help Investors Acquire Financing

Up-to-Date Systems Will Keep CFPB Happy

by Abhi Golhar

by Elizabeth Morales

Self-Directed IRAs

Ease of Use for Lenders: Past, Present and Future by Clay Malcolm

Strategic Thinking

Residential Investing, Lending in Modern Era

by Nic Walling and Tim Leber

Question & Answer

On Learning, Leadership and Lending with Linda Hyde

Peak Performance

Using Property Valuations To Spot Opportunity by Ron Ahlensdorf Jr.

Online Lending

Regulatory Issues

by Matt Rodak

by Jaspreet Kaur, Esq.

by Anthony F. Geraci, Esq.

Is it the ‘Next Big Thing’ Or Dot-Com Bust Again?

The Continuing Trouble With TRID

Your Appraisal Fees At Risk Under TRID

JULY/AUGUST 2016 5

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•••

CORNER OFFICE

PRIVATE LENDER R. MICHAEL WRENN CEO, Affinity Enterprise Group

EDDIE WILSON President, Affinity Enterprise Group

LINDA HYDE Executive Director, AAPL

LINDA WIENANDT Editor-in-Chief

CHRISSEY BREAULT Director of Marketing & Member Services, AAPL

ROBERT RAKOWSKI Vice President of Media Sales rrakowski@affinitymediaservices.com o. 913-599-2020 / c. 602-617-7410

DUSTIN THOMAS Sales dthomas@thinkrealty.com o: 913-888-1250 / c: 816-718-4091

EMILY BOWERS Graphic Designer

CONTRIBUTORS: Ron Ahlensdorf Jr, Chrissey Breault, AdaPia d’Errico, Charlie Fitzgerald, Anthony F. Geraci, Esq., Abhi Golhar, Jaspreet Kaur, Esq., Tim Leber, Jeffrey N. Levin, Clay Malcolm, Elizabeth Morales, Mike Ponamarew, Matt Rodak and Nic Walling

PHOTOGRAPHY: Cover/Lender Limelight: Ashton Leon Photography Q & A with Linda Hyde: Pro Focus Photography Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers.

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

Old is New Again Now PL comes to you in print

For nearly three years, the American Association of Private Lenders, through our direct marketing efforts, has provided Private Lender e-zine as a go-to resource for the private lending industry—the people, the companies and services reshaping today’s real estate. We’ve grown up with the web and understand its magic. We know the power of imagery, educational articles and broadcast-quality videos. It made sense to us that we deliver through another medium we know our readers care about: print. Surprised? That’s the point. While others are running away from print, we’re embracing it to give our readers another resource for the industry. Our bi-monthly magazine showcases original work you’ll find in the magazine first, each piece reported and crafted by many of our own members, staff and industry leaders. In our inaugural print issue, you’ll find Financing Tips for New Investors by Abhi Golhar, Misconceptions of Private Money Lending by Charlie Fitzgerald and an exploration of what Brexit could mean for the U.S. commercial real estate market, by Jeff Levin, just to name a few articles. In the Lender Limelight, you’ll learn about Robert Buchanan of CCG Capital, plus you’ll learn a little more about me. The enthusiastic Chrissey Breault brings her alwaysentertaining perspective on marketing. Only Private Lender brings impacting stories for the private lending industry that matter to you, and now we’re proud to share them in print. •

BACK ISSUES: Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. Copyright © 2016 American Association of Private Lenders. All rights reserved.

LINDA HYDE

Executive Director, AAPL

JULY/AUGUST 2016 7

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•••

CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE

RON AHLENSDORF JR. is president of Summit Valuations, LLC, where he is responsible for strategic partnerships, product development and revenue growth. He has over 15 years of relevant industry experience. He can be reached at ron.ahlensdorf@summitvaluations.com.

CHRISSEY BREAULT is a Pittsburgh native and hospitality major, who started a parttime photography and design business in 2009, while working full-time in local government communications. She is currently Director of Marketing and Education Services with the American Association of Private Lenders.

ADAPIA D’ERRICO is an entrepreneur, investor, and strategic business adviser. She worked in banking and finance in her early career, transitioning into entrepreneurial ventures in brand development and strategic marketing across the new media, consumer products and entertainment industries. Over the past three years, she has done a deep dive into the high-growth alternative finance space as Chief Marketing Officer at Patch of Land, where she is responsible for driving brand awareness, marketing and communications strategy, and partnerships and business development. She has positioned the company as a recognized leader in real estate crowdfunding, P2RE®, and marketplace lending. She is a frequent contributor and presenter on these topics, as well as on topics ranging from leadership and marketing, to real estate, economics and crowdfinance.

CHARLIE FITZGERALD, MBA, is Branch Manager/Senior Account Executive for Civic Financial Services, LLC, in Las Vegas, Nevada, and has served his community for over 25 years. He has worked for the past 20 years in banking and finance representing conventional/ conforming, alt-a/sub-prime, commercial and private money loan clients throughout the United States. Fitzgerald has personally originated in excess of $2 billion in loan volume and has been recognized numerous times as a Top 100 Originator in the industry. He attended San Diego State University, majoring in Political Science/Pre-law; Acton Liberty University – Business Administration (MBA); Kaplan University – Legal Studies and Policy Administration (BS) and a vast number of banking, finance, securities, legal and lending educational programs over his 20-plus-year career in the industry. Contact him at Charlie.Fitzgerald@civicfs.com or by calling 702-561-1056 or 877-47-CIVIC.

JULY/AUGUST 2016 9

CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE

ABHI GOLHAR is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Golhar uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in electrical engineering from the University of Michigan. You can find him on Twitter, Snapchat and Instagram - @AbhiGolhar. #RealEstateDealTalk

ANTHONY F. GERACI, ESQ. is the managing shareholder of Geraci Law Firm. He is in charge of firm strategy and development of the Geraci team and culture. He is skilled in mortgage lending and securities law and has authored numerous articles on real estate finance and security subjects. Geraci is a leader in creating national mortgage pools and mortgage funds as well as sophisticated net branching arrangements among several mortgage companies.

JASPREET KAUR, ESQ. is an Associate in the real estate finance section of the Geraci Law Firm. Her experience includes representing lenders and brokers, preparing commercial, residential, and construction loan documents, assignments, and subordination agreements. She also has experience with non-judicial foreclosures and default related matters.

TIM LEBER is an analyst at Colony American Finance, a leading financier for real estate investors. Leber has spent his career in real estate finance. Prior to working at Colony American, he was an associate at Newmark Grubb Knight Frank, a commercial real estate advisory company. He also has held positions at Grubb & Ellis and Morgenstern Property Co. Leber is a graduate of the University of Arizona. Reach him at timothy.leber@colonyamericanfinance.com.

JEFFREY N. LEVIN is the Founder and President of Specialty Lending Group, a boutique private real estate lender in the Washington Metropolitan Area formed in 2007. Prior to that Levin was a Co-Founder and CEO of iWantaLowRate.com, a regional lending company that he ran for over 10 years. During his career, Levin has overseen total loan production of over $750 million, with approximately 3,500 loans being generated. Prior to launching iWantaLowRate.com, Levin was Founder and President of Monument Mortgage, a regional mortgage lender from 1993 to 2000. Levin is a frequent lecturer and panelist on real estate investing. He earned a B.A. from The American University in Washington D.C. and lives in Washington D.C on Capitol Hill with his wife Dunniela, a Canadian trade lawyer, and his two sons, Jack and Charlie.

10 PRIVATE LENDER

••• CLAY MALCOLM oversees most avenues of marketing, teaches continuing professional education and informal classes and webinars, and facilitates the training of business development and client representative teams at New Direction IRA Inc. Malcolm has more than 20 years of management experience in various roles, including as the vice president of Jersey Films and as a director for Princeton Review. Malcolm draws upon his teaching background – including instructor roles with Colorado Outdoor Training Initiative and Ivy West Education – to develop the educational aspects of New Direction IRA and impart knowledge about self-directed IRAs to its clients and prospective clients. He received his Bachelor of Science degree in Communications from Northwestern University.

ELIZABETH MORALES is the Business Development Director for Applied Business Software, makers of The Mortgage Office, a leader in private lending loan servicing software. She has a proven record in senior operational roles and is known as an inspirational leader and a datadriven marketer. She has created full-scale marketing platforms; handles media, public relations and brand management for ABS; and is a strategic planner and forward thinker. Morales has a Bachelor of Arts degree in Spanish Literature and a Masters degree in Business Administration. You can contact her at elizabeth@absnetwork.com.

MIKE PONAMAREW joined the Factoring industry in 1999. He is the Founder and CEO of The Finance Institute and Managing Director of The InvoiceXchange. Ponamarew is a Factor member who managed $750+ million in transactions. He is an acclaimed industry educator that has taught over 5000 business professionals, consultants and business owners how to profit in the lucrative Factoring industry. He is a contributing author of industry publications and blogs as well as guest and keynote speaker for events. He established and vended three successful businesses prior to joining the alternative finance and private lender industry.

MATT RODAK is the CEO of Fund That Flip, an online lender that provides short-term loans to experienced residential real estate redevelopers. Accredited investors can invest in loans originated by Fund That Flip. Annual yields range from 10 percent to 14 percent over 6 to 12 month terms. You can learn more at www.fundthatflip.com/lender. Rodak can be reached at Matt@fundthatflip.com.

NIC WALLING is a Production Analyst at Colony American Finance, a leading financier for Real Estate Investors. Walling has spent his career in commercial real estate. Prior to CAF, Walling was an associate at Green Street Advisors, an equity REIT and commercial real estate research and advisory firm. He has also held positions at Turnstone Capital and Newport Coast Capital Management. Walling is a graduate of USC’s Marshall School of Business where he studied real estate finance. You can reach him at nic.walling@colonyamericanfinance.com.

JULY/AUGUST 2016 11

WHAT’S CURRENT TRENDING INDUSTRY TOPICS

APPLIED BUSINESS SOFTWARE ANNOUNCES MAJOR SOFTWARE UPDATE Applied Business Software Inc., developer of The Mortgage Office and The Loan Office software, announces a major update to its signature software The Mortgage Office. Among the new features of Version 2.1.7: •O nline payments that allow borrowers to make payments using their credit/debit cards or bank account information with instant confirmations. •E lectronic payments over the phone for real-time credit card and EFT payments. •A dded enhancements to QuickBooks and PeopleSoft integration, which allows posting of company funds to the general ledger. •E xcel import to easily import loans, co-borrowers, lenders, vendors, funding and more via the powerful import wizard. •C DFI certification from the U.S. Department of Treasury for the 2016 reporting year. Long Beach, California-based Applied Business Software, founded in 1978, is a market leader and global provider of software

be tasked with hiring Account Executives and ensuring the resulting team meets specific loan production goals through the establishment of ongoing business relationships with mortgage brokers, real estate agents and investors located within an assigned territory. Civic also is recruiting for the Account Executive position. That position is responsible for meeting specific loan production goals through the establishment of ongoing business relationships with mortgage brokers, real estate agents and investors located within the assigned territory. Civic is a private money lending group specializing in the financing of residential investment properties. Civic provides mortgage brokers, investors and real estate agents with a mortgage lending solution for investment property acquisition and refinance transactions in various states. Positions are available nationwide; for information, email info@civicfs.com.

LAND GORILLA-PRECISION BUILDING GROUP PARTNERSHIP ANNOUNCED

systems and solutions to the lending industry. ABS offers

Land Gorilla, an industry leader in construction lending

a complete suite of software

risk management solutions, is expanding its commercial

products designed from

offerings by partnering with Precision Building Group

the ground up to specifically

to conduct Precision Commercial Project Reviews. Land

address the needs of those who

Gorilla offers cloud-based construction lending software

originate and service loans. For more

and services to address the many nuances of construction

information visit www.themortgageoffice.com, www.theloanofficesoftware.com or call 800-833-3343.

CAREER OPPORTUNITIES

and renovation lending facing banks today as they balance increased opportunity for commercial loan growth with the inherent risks involved in construction lending. “In today’s highly competitive lending environment, bankers need to respond quickly to loan requests while

Civic Financial Services is currently seeking an

addressing the risks involved with project feasibility,

Account Executive Manager, with responsibility first

contractor pre-qualification and post-closing loan

for building a book of business. Eventually, this person will

administration,” noted Sean Faries, Land Gorilla CEO.

12 PRIVATE LENDER

•••

“Expanding our offerings through this strategic partnership

more than $30 million of principal and interest payments

with Precision Building Group provides bankers with

to investors and funded more than 270 projects totaling

the tools they need to conduct thorough analyses of the

$130 million, with an average blended rate of return to

construction projects they underwrite in order to improve

investors of over 11 percent.

budget accuracy and ensure successful project execution.” Added Karl Vaillancourt, CEO of Precision Building Group: “Land Gorilla is doing exciting things for banks.

For more information, please visit www.PatchofLand.com.

PEOPLE IN THE NEWS

Today’s compliance requirements are daunting – especially for regional and community banks. Land Gorilla’s tech-savvy

Shea Pallante, Managing Director

approach streamlines the administration process for lenders

of Civic Financial Services, and

and takes care of the compliance headaches for them.”

Serena Yang, Director of Marketing,

For more information visit www.landgorilla.com.

PATCH OF LAND ADDS INSTITUTIONAL PARTNERS AS FRACTIONAL INVESTORS

are among the 2016 “Young Guns” recognized by Mortgage Professional America. MPA’s list of 42 emerging leaders under age 35 represent “the new face of the mortgage industry as

Patch of Land, a leading online marketplace lender for

they attain new heights in and out of

real estate, has added more institutional funding partners

the office,” MPA says. In addition, Yang

that invest fractionally on the platform. Prime Meridian

recently was recognized as a “Woman of

Capital Management, an investment management

Influence” by Housing Wire Magazine.

firm specializing in online Peer-to-Peer (P2P) lending

Pallante leads the firm’s focus on

strategies, and AlphaFlow, a P2P investor technology

providing nationwide private money

platform founded by a real estate crowdfunding veteran,

lending. He has over 13 years’ experience in the financial

have committed to invest in Patch of Land loans from

services industry, having started his career at NationPoint,

their real estate

a subsidiary of Merrill Lynch, where he managed retail

lending funds.

sales, marketing and product development, building

Investments are

their originations platform to become a top-ten online

made on a fractional

mortgage lender. Yang has more than 13 years of real estate

basis on the Patch

marketing experience, and was Director of Marketing at

of Land platform, in

Colony American Finance, a subsidiary company of Colony

the same manner as accredited investors transact in their

Capital, prior to joining Civic.

individual loan selection. This is a key difference from forward-flow or whole loan purchasing agreements, in which an institution purchases an entire note. Patch of Land issued its first loan in October 2013, with

Opus Capital Markets Consultants, LLC was selected as the winner of a Silver Stevie ® Award in the “Company of the Year–Financial Services” category

a focus on real estate debt; diversified lending products,

in the 14th Annual American Business Awards. In

including short term bridge, commercial and rental loans;

addition, Jennifer LaBud, COO at Opus CMC, was

an innovative investor note structure, and the prefunding

named the winner of a Bronze Stevie Award in the

of loans. Since inception, Patch of Land has returned

“Woman of the Year” category. The American Business

JULY/AUGUST 2016 13

WHAT’S CURRENT

•••

TRENDING INDUSTRY TOPICS

Awards is among the nation’s premier business

& Development with loanDepot.

awards programs. More than 3,400 nominations from

com where she built, managed and

organizations of all sizes and in virtually every industry

evolved many impactful training

were submitted this year for judging by more than 250

programs, including compliance and

professionals worldwide. Recognizing Opus in the new

best practices training for sales and

world of financial regulation and compliance, judges

operations.

commented, “Opus CMC deserves accolades for leading by example.” They further praised Opus’s submission for its well-written account of strong company outlook

NUVIEW IRA PLANS 4th ANNUAL ALTERNATIVE INVESTMENT SYMPOSIUM

and growth in recent years. Likewise, judges noted LaBud’s “strong track record” and detailed her “high

Tickets are still

performance and visible effect on the growing success

available for NuView

of other women in the industry.”

IRA’s 4th Annual Alternative Investment

Ali El Wakeel and Summer Martinez, originators, are new senior account executives at Civic

Symposium Sept. 2930, 2016, at the Lake Mary (Florida) Marriott. “Planning For Prosperity” is a two-day investment

Financial Services, the lending arm

symposium featuring top real estate and lending

of Wedgewood Inc., one of the largest

experts from around the nation sharing how to move

distressed-real-estate acquirers on

from “earned” to “passive” income and ways to build a

the West Coast. Previously, El Wakeel

successful personal alternative investment portfolio.

was senior originator at Colony

Participants will have the opportunity to network

American Finance. He started his

with over 150 industry experts along with hands-

career at Auction.com, where he

on workshops and a self-directed IRA client panel

was a part of the team that founded

discussing how to successfully build tax-free wealth.

Auction Finance. Martinez started in the real estate finance industry over 12 years ago, beginning at First

To purchase tickets and for more information, visit: www.nuviewira.com/events/planning-forprosperity-2016/ •

Franklin and Lending Tree, where she held multiple roles from customer service management to loan processing. Martinez later worked at Auction.com and Colony American Finance. Her focus at Civic is developing the company’s line of credit program. Sophie Kim is now the Director of Learning and Development at Wedgewood Inc. & Civic Financial Services. She brings more than a decade of origination experience with reputable direct lending organizations and recently served as the Vice President of Learning

14 PRIVATE LENDER

submit your news

Send us your news, updates, or job opportunities for possible inclusion in our next issue! Submit details to PrivateLender@aaplonline.com

2016

D E V I V R U IS E T A T S E L A E R

Hosted By

A Powerhouse Lineup of Industry Experts Converge for The Biggest Night in Real Estate on October 21

On October 21, 2016, join The Norris Group and our panel of industry experts at the Nixon Library in Yorba Linda, California for another award-winning evening. Get the inside scoop on top real estate trends from the leaders shaping our industry. Dress up, enjoy a spectacular meal in the Presidential East Room, network with successful real estate professionals from all over California, and help raise funds for kids with life threatening medical conditions.

THE PANEL

Bruce Norris President The Norris Group

THE CHARITY

Nick Bailey Vice President Zillow

John Burns CEO

John Burns Real Estate Consulting

Doug Duncan Chief Economist Fannie Mae

Sean O’Toole President PropertyRadar.com

THE SPONSORS

All funds directly beneﬁt Make-A-Wish and St. Jude Children’s Research Hospital. We’ve raised over $600,000 for charity since 2008.

Gary Acosta CEO

National Association of Hispanic Real Estate Professionals

Apartment Owners Association of California, Inc.

MVT PRODUCTIONS

Auction.com Coachella Valley Real Estate Investors Association Coldwell Banker Town and Country Elite Auctions First Lending Solutions imortgage First Lending Solutions For Investors By Investors (FIBI)

In A Day Development Inland Valley Association of Realtors Jennifer Buys Houses Keller Williams Corona Keystone CPA Las Brisas Escrow Leivas Tax Wealth Management New Western North San Diego Real Estate Investors

Northern California Real Estate Investors Association Orange County Building Industry Association Orange County Investment Club Pasadena FIBI Pilot Limousine Real Wealth Network Realty 411 Magazine

Realty Executives Rick and LeAnne Rossiter SONOCA Corporation Spinnaker Loans uDirect IRA Services Westin South Coast Plaza Wilson Investment Properties

www.ISurvivedRealEstate.com or 951-780-5856

JULY/AUGUST 2016 15

COMMERCIAL CONCERNS

Is Brexit a Tidal Wave That Could Cross the Atlantic? by Jeffrey N. Levin

rivate lenders are justifiably

UK’s Commercial Property Price Index

concerned about the implications

has more than doubled. Assets across

of “Brexit”—the British exit from

all manner of CRE investments were

the European Union—for the U.S.

paying off and attracting more buyers.

commercial real estate market,

However, during the spring of

considering the wave of uncertainty

2016, signs began to emerge that

that has washed across the UK and

the party was almost over and the

Europe. In the months prior to

hangover was starting to set in. Over

the June vote in the UK, the CRE

the three months prior to the Brexit

industry appeared to be flattening out,

vote, deal flow in the UK and EU

suggesting it had reached the peak of

slowed significantly, particularly in

across the investment world. The

its seminal business cycle.

London. Of the pending deals, many

official vote was announced: Britain

had contingency clauses that allowed

would leave the EU. Prime Minister

of any business cycle tends to be

lenders or buyers to exit the contract

David Cameron, chief advocate of

downward, but the question remains:

in the event Brexit passed.

the “Remain” side, stepped down.

Naturally the “view” from the top

Will Brexit be the catalyst that pushes

In advance of the vote, most polls

Brexit, Regret It. On June 24, pure panic set in

The ruling Conservative Party was

the U.S. CRE into bearish territory?

suggested the “Remain” side would

reshuffled and a new Prime Minister

Or will it prove to be a boon as interest

win by a couple of percentage points

selected. Meanwhile, nobody had a

rates stay low and investor liquidity

and the UK would stay in the EU

clear view on how a breakup between

flows to the safety of our shores? The

economic structure. However, prudent

the highly integrated UK and EU

answer will be determined in time.

lenders and buyers were nervous that

markets was supposed to proceed.

As this all plays out, private lenders

Brexit might somehow happen, an

Leaders on either side of the English

should carefully monitor what is

anxiety compounded by the localized

Channel could not even agree on the

happening across the UK and EU

shocks of grisly terrorist attacks.

start date for the untangling.

markets, as opportunities and new

Starting in early July, before the

For investors and buyers, the news

deals are sure to surface as a result, as

vote, several leading commercial

of the “Leave” vote and the calamitous

well as a hefty new dose of risk.

property funds barred withdrawals

political environment left in its wake

Prior to this year—and the

by investors who wanted to cash out

caused CRE markets in the UK and EU

instability associated with Brexit—the

as a hedge against a possible Brexit

to seize up virtually over night. Pundits

UK had enjoyed steady growth in

downturn. Given the vote to leave

declared it would lead to a severe

the commercial real estate market.

the EU, more funds are likely to

downturn of all world markets. The

Indeed, compared to its last peak in

adopt this approach over the course

public CRE companies trading in U.S.

2007, prior to the Great Recession, the

of this summer.

markets, as well as the London bourse,

16 PRIVATE LENDER

all took a big hit in share value. Global

purposes, thrown into one common

and other countries compounds the

and domestic banks immediately

bucket called the Brexit effect. No

feeling ordinary Europeans have

adopted a much tighter approach to

matter what the original root cause of

of being under siege. CRE service

buyer debt ratios. Meanwhile, the

these problems was—like Italy’s overly

companies across the EU have lowered

British currency plunged, causing CRE

aggressive track record in property

expectations, as deals have been

funds in Britain to lose billions of value

lending—the EU now has to deal with

canceled or downgraded.

in a matter of days.

the symptoms in a collective manner;

Banks across the UK and Europe were battered as a result of the vote

with, as usual, larger economies like Germany bearing the brunt of the cost.

and remain that way, with share prices

Will Brexit Impact the US? Prior to the Brexit vote, the U.S. CRE market was already showing signs of

tumbling and bond prices also under

Brexit, Terrorism and the

being at the peak of a lengthy business

pressure. According to an article in

Very Bad Summer

cycle, possibly at a bubble stage, with

the Financial Times, the cause is less

While the UK is ground zero, real

a potential market correction looming.

a direct effect of Brexit and more a

estate in the EU is under tremendous

function of what the central banks of

pressure and not simply because of

Europe are going to do about it: “The

Brexit. It was reported after the bloody

issued warnings about lending

medicine: very low interest rates, with

July attack in Nice, France, that one

practices in CRE transactions. Banks

little difference between short- and

of the main extremist aims was to

had over $1.8 trillion in outstanding

long-term interest rates, make it hard

destroy the economy of that country.

loans—billions more than the last

for banks to profit from lending.” Italian

Shocks that harm tourism, a vital

peak before the Great Recession. This

banks, the article went on to note, were

economic sector for most European

year regulators and lenders began to

in trouble long before the “Leave” vote.

countries, have a cascading effect on

carefully monitor the risk in CRE loans

Now, all pre-existing problems for

Regulators took notice. In 2015 the Fed, FDIC and others

investments in hotels, restaurants,

versus equity and are now backing off

the banking and CRE sectors across

airports and infrastructure. Similar

some loans. According to one report,

the EU can be, for political and policy

acts of terror in Belgium, Turkey

bankers are getting tougher regarding

JULY/AUGUST 2016 17

COMMERCIAL CONCERNS

•••

lending for more speculative projects,

unpredictable path ahead for the UK

lowering allowable loan-to-value

and EU in determining their economic

ratios. Expectations that the Fed would

engagement for the post-Brexit era.

market conditions are different and

increase interest rates, albeit slowly,

Investors and analysts reached this

require careful research, intrepid

created more cause for worry. It’s a stew

conclusion pretty quickly in the

private lenders may also find

of uncertainty peppered by terrorism,

aftermath of the Brexit vote. The

opportunities in the UK and Europe

an unpredictable presidential election

doom-and-gloom expectations for

in this post-Brexit environment.

cycle, a slowdown in China’s economic

major indexes lasted no more than

Even though there may be some great

growth and now Brexit.

three weeks, and by mid-July, the Dow

opportunities, without a doubt there

Jones Industrial Average jumped to

will be fewer overall CRE opportunities

several all-time records.

on the other side of the Atlantic.

London newspapers as well as some American media outlets likened Brexit to a contagion that would infect all the world’s markets. But in fact, the U.S.

increase as a share of the market. Furthermore, while regulatory and

While it’s very early in the process Be Bold, But Not Too Bold…

that will see Britain start a new

has been pretty well inoculated. This

Because of today’s high risk in the

course on its own, investors should

inoculation results from two factors.

CRE market across the UK and Europe,

stay upbeat and diligent. There will

and the fact that the US market—while

be gems out there for private lenders

philosophy is to use low interest

relatively more stable—still presents

looking for the right opportunities.

rates as a lever to support economic

a good amount of unpredictability,

The big drop in the British currency

growth. When the economy is

private lenders need to be more vigilant

against the dollar could offer as many

healthy, the Fed is supposed to ease

about risk while keeping the door

good deals as it discourages.

up on this lever so rates gradually

open to lucrative new opportunities.

increase. Last December, after seven

The risks are many: property and

European banks back off during the

years of the most accommodating

collateral values may fluctuate; funds

transition, by ratcheting up collateral

monetary policy in U.S. history,

and traditional lenders may pull money

requirements and making financing,

the Fed approved a quarter-point

out of deals; and buyers may bail out of

insurance and securitization of CRE

increase in its target funds rate.

contracts. Yet other factors may create

deals more difficult in a bid to reduce

The range for its target funds rate

positive conditions here. For example,

their portfolio exposure, many

went from 0 percent to 0.25 percent

investors who ordinarily would have

buying and financing opportunities

previously, to 0.25 percent to 0.5

pursued deals on the other side of

are likely to emerge for those private

percent where it is today. Prior

the Atlantic may flock to the relative

lenders paying attention.

to Brexit, there was widespread

safety of the U.S. as buyers find more

expectation of another 25 basis point

attractive possibilities here. Traditional

understanding that Brexit is the first

increase to come by the fall of 2016.

lenders getting the screws put to them

such divorce from the EU and could

Now, however, the “Brexit Surprise”

by regulators may leave prospective

result in further financial crises. The

caused the Fed to reverse course and

buyers hungry for private lending,

EU countries are fluid and economies

signal that the time is no longer right

despite a yield spread that will probably

like Italy could be in danger at any

for an additional interest rate hike.

widen over the next few quarters. While

moment. Private lenders will want

the total number of CRE deals may

to do more than their usual due

investor liquidity from the UK and

well shrink from the torrid pace of the

diligence, but the potential victories on

Europe are likely to flow to the relative

last few years, the percentage of deals

the other side of the Atlantic could be

safety of the U.S. market, given the

coming to private lenders may actually

well worth the effort. •

First, the Federal Reserve’s

Secondly, massive amounts of

18 PRIVATE LENDER

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JULY/AUGUST 2016 19 directlendingpartner.com

LENDER LIMELIGHT

360-DEGREE PERSPECTIVE Multidisciplinary approach gives CCGâ&#x20AC;&#x2122;s Robert Buchanan a clearer vantage point to view trends and investing possibilities.

20 PRIVATE LENDER

JULY/AUGUST 2016 21

LENDER LIMELIGHT Robert Buchanan has one of the most established names in the private lending space. He leads the CCG Family of Companies, which evolved from the Pride of Austin companies in Texas, and is a founding member of the American Association of Private Lenders. AAPL asked him to share his story with the readers of Private Lender.

PRIVATE LENDER: Tell us a bit about your company, CCG. ROBERT BUCHANAN: The CCG family of companies—including CCG Capital, CCG Development and CCG Realty—is a group of affiliated companies that brings together a broad scope of real estate-related services under one roof. We are a small and

investors that give us key insights into

Marketing and Business Development,

flexible operation that is able to serve

what is and is not a good investment

Ryan Stewart – Construction Manager,

the real estate community in creative

in Texas and several other hot markets

Drew Buchanan – Realtor and Portfolio

ways and provide services outside of

across the U.S. We are keenly aware of

Manager, Dylan Chambers – Project

the traditional approach. CCG Capital

what will and will not work in terms of

Manager, and Gabriel Candelas – Site

provides real estate construction

location, form and function.

Superintendent.

PL: What kind of management structure does your operation have? RB: I serve as the managing member

PL: How did you get your start in the industry? RB: In 2007, we were operating as a

for the CCG companies and am

single company providing residential

committed to the strategic and

construction services. Austin was

PL: What kind of an edge does having a hand in multiple aspects of the industry give you? RB: That enables us to be aware of

continual development of each

a hot market at the time, and our

affiliated company and the CCG team.

development company was acquiring

I lead a group of highly competent

more projects than we could secure

professionals who effectively manage

financing for as a newly established

movement and trends happening

their individual responsibilities and

business. That year, I received a mass

from the evolution of the original

often work as a team to get things done.

email from Leonard Rosen, “The most

idea throughout construction and

financing and manages two Regulation D Securities Funds. Our holistic approach is unique in that we also operate an in-house contractor and real estate brokerage services.

We run three companies with seven

interesting man in hard money.” His

with the end user. Viewing the

people, so I sought out staff that I could

message –“Be the Bank”—immediate-

market from a variety of perspectives

trust to be self-motivated and confident

ly caught my attention.

is a benefit to the projects we choose

within their roles. The CCG team

to finance and develop.

consists of Allyson Bruner - Director of

and with a degree in accounting and

Operations, Amin Noorani – Lending

career experience in auditing and

Associate, Tabette Stewart – Director of

bank loan reviews, I knew I had the

We are continually analyzing loan requests from smart real estate 22 PRIVATE LENDER

I have always been a numbers guy

••• potential to successfully build this type

of Austin, the Greater Austin Home

expect a lot from my team. I hire people

of venture. I started attending Rosen’s

Builders Association and the Urban

I can trust and supply them with the

Pitbull Conferences and within 14

Land Institute. Our team regularly

tools they need to succeed. I hold each

months I had attended three of them.

attends meetings and events held by

member of the team accountable for his

After extensively researching the

each organization to network and

or her responsibilities but don’t do a lot

ins and outs of starting and managing

continually educate ourselves on

of micro-management.

a fund, I decided to take a plunge. I

changes in the industry.

I also tend to throw my employees into

had become acquainted with Anthony

As a builder and a developer, our

sink-or-swim situations, knowing it will

Gerarci (of Gerarci Law Firm) through

company is required to stay current on

help to develop their skills. My lending

the conferences and knew that he was

regulations and municipal ordinances

associate, Amin, can attest to that.

an experienced securities attorney. He

within the construction industry. Having

drafted the original legal docs for the

an ongoing awareness of these changes

fund, and the rest is history.

is extremely valuable when it comes to

Over the past five years, CCG Capital has grown from managing a portfolio of 12 loans with $10.3 million in assets to managing a portfolio of 47 loans with $72 million in assets. I’m very proud of the substantial growth we have seen during this period. The High Yield Fund just announced an 11.83% net yield to investors for the second quarter ending June 30, 2016.

PL: What types of things do you do to keep current? RB: I think it’s important to stay in contact with like-minded lenders from all around the country. I have a handful of people with whom I talk regularly who are working in different markets, and that allows me to see what type of loans they are financing and if anything is changing with their business. Being active with industry organizations is another great way to stay connected and current. We are proud to say that we were one of the founding members of AAPL and always enjoy seeing what’s new at the conference in Vegas. We are also active members of the Real Estate Council

underwriting construction loans and assessing the viability of projects.

PL: What kinds of mistakes have you seen professionals make when it comes to their investments? RB: Not staying within your lending

PL: What’s the most difficult decision you’ve made in the last two years and how did you come to that decision? RB: Last year we decided to go from two managers to one and completely rebrand the company. Taking over as the sole managing partner and changing the identity of the companies has been

parameters and getting out of your

very challenging and rewarding at the

comfort level just to make the deal.

same time. I renamed the company

I’m a stickler for this one. I have seen

CCG after my three children—Carson,

too many deals go wrong that started

Clayton and Grace—and rebranded

this way. CCG Capital has a simple

to reflect the business values and

set of parameters, and if the borrower

professionalism we bring to the table. I

doesn’t like them, they will likely

have built a team of hard-working people

find another lender to do the deal

who take pride in their work and are a

under their terms. Keeping it simple

perfect representation of the company

and consistent helps us to maintain

culture. We are a family-style company

fairness and transparency with our

doing honest work and are dedicated

borrowers and is just good business.

to providing exceptional services to our

Another mistake I have seen several

clients. I’m extremely proud of what the

business owners make is growing

businesses have evolved into and the

too rapidly without the capacity to

challenges created by these decisions are

sustain it. It is tempting in a hot

completely worth the gain.

market, but I think it’s important to understand your capabilities and prepare for long-term growth.

PL: How would you describe your management style? RB: We run “lean and mean,” so I

PL: What advice would you give to borrowers to help them establish their credibility with lenders? RB: Lay all your chips on the table. It is really important to me that borrowers be transparent and don’t try to hide JULY/AUGUST 2016 23

LENDER LIMELIGHT

•••

anything. If a borrower is trying

of tools and a cool car. In college, my car

elaborately falsified. Several years later

to hide something from his or her

was nicknamed the Batmobile. It was a

I’m still dealing with the REO property I

financial past, we will most likely find

low, stretched-out sports car with super-

acquired as a result. From that time on,

it. If we do discover in underwriting

dark, black-tinted windows. I was pretty

I do not take a pre-lease as evidence for

that a borrower has not provided full

cool back in the day.

a speculative project. It would have to be on the owner-occupied market.

disclosure, I generally will not do business with that person. hard as a conventional lender. As a

PL: What do you think the biggest misconception about you is and why? RB: I meet a lot of people over the

conservative lender, we ensure each

phone and I am very direct. I can come

borrower is fully vetted so that we build

across as short and unapproachable.

a portfolio of viable and profitable

I tend to cut off people who are full of

projects. If you come to us with a solid

fluff and get straight to the objective.

We have been told that we write as

team and a well-thought-out plan, the

People who work with me on a

process will run much smoother and

regular basis and have had time to

faster, and that way we all win.

get to know me, realize that it is not

“

at all my

My wife always tells me “this too shall pass.” She encourages me to never give up and continue working hard with the end goal in mind.

“

PL: What are three things you tell yourself when your chips are down? RB: 1. I turn to my faith. Pray for clarity. 2. I look at my family to remind me of why I do what I do. 3. And I reach out to others for advice. Find a professional who can provide expertise. Having been in the industry for a while now, I am keenly aware of the ups and downs. Now if a deal goes south, I just remember that tomorrow an even better deal will likely walk through the door, and there is probably a good reason the previous one didn’t happen.

PL: Who would win the fight, Spiderman and Batman? RB: Batman – He has a better collection 24 PRIVATE LENDER

intention to be rude and that I really am a nice guy. Once people

understand how I work, they usually quit taking it personally and find that it is easier to do business with me.

PL: Was there a person in your career who really made a difference? RB: I worked for a man named Claude Lindsey, who owned Lindsey Contractors in Waco, about 10 years ago. Though I only worked with him for a short period of time, his character and business values inspire me to this day. He started with a trailer and a backhoe putting in water and sewer lines in and around Waco and worked hard to build a successful general contractor business. His word was gold, and he was always on a level field. He demanded a lot from his employees but never failed to be the first one at the office each day. He had two sons who worked with him, and I admired their father/son dynamic.

PL: What’s the best advice you’ve ever received? From whom? RB: My wife always tells me “this too

It made me want to work hard to

shall pass.” She encourages me to

I could someday teach my children

never give up and continue working hard with the end goal in mind.

PL: Tell us about something that you did in the past, what did you learn from it and what would you have done differently? RB: I made a deal once where I accepted

become a business owner and build something that I was proud of so that the same strength of character.

PL: If you could be anywhere in the world right now, where would you be? RB: I would be at home with my family. I try hard to be at home with them as much as possible and not let work get

a pre-lease as evidence for a commercial

in the way of my time with them. It

spec project. I’m not sure there is any

is not always easy to do when you are

way I could have known at the time

managing multiple businesses, but I do

that the pre-lease documents were all

make it a priority. •

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SELF-DIRECTED IRAs

•••

Self-Directed IRAs and Ease of Use for Lenders: Past, Present and Future by Clay Malcolm

ince their inception, it has always

technological practices to bring

investing and crowdfunding more

been possible to use self-directed

retirement account management into the

accessible to investors of varying

IRAs to invest in private loans. This

modern era. Fully automated account

accreditations and income levels.

includes both originating loans or

management services means quicker

Borrowers and lenders of all variations

buying existing notes. However, the

disbursement of funds, along with quick

likely will be able to connect and utilize

private lending marketplace has

and convenient transaction processes.

their retirement accounts to extend

not always been optimized by selfdirected IRA providers. As retirement investing moves into

Online marketplaces have revolutionized the ability for lenders and borrowers

or purchase private loans quicker and easier than ever before. Innovative technological

the future, innovative technological

to connect and carry

processes have now made it easier

out transactions.

than ever for lenders and borrowers to

Many self-directed

retirement investors

utilize their self-directed IRA accounts.

IRA providers

can easily compare

have integrated

between IRA providers.

their automated

Integrated automated

The Past Historically, self-directed IRA providers

technology with

processes is one of the main features that

services such as the

used paper processes for everything

online marketplaces so

from opening an account to purchasing

investors can utilize their

or distributing an asset. This caused the

retirement accounts to originate loans

via your desktop or smartphone are

disbursement of funds from accounts to

in one seamless process.

good indicators of whether or not the

be a relatively slow-going process. In the past, lenders who were looking to find a borrower had to do

ability to open an account and carry out transactions

provider prioritizes the modernization The Future As we look to the future of self-

of its company’s processes. Automated processes can also be a glimpse into

so manually, rather than connect

directed IRA investing, the evolution of

how much time and effort the account

to an online market. Similarly

investment and banking technology will

owner is going to have to spend

all due diligence processes (like

predictably allow retirement investors

managing his or her account.

credit checks, etc.) were performed

to purchase private loans at the touch of

manually and could be expensive.

a button. Advanced technology should

quick and easy to manage as your

make it easier for IRA transactions to be

bank account, so make sure you have

properly documented and tracked per

a provider who utilizes the most

IRS standards.

cutting-edge technological practices

The Present To stay in-step with modern banking processes, self-directed IRA companies have begun to adopt innovative

26 PRIVATE LENDER

The maturation of the JOBS Act will likely continue to make online

Retirement accounts should be as

to bring your self-directed IRA into the modern era and beyond. •

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MISCONCEPTIONS

Debunking the Misconceptions About Private Lending by Charlie Fitzgerald, MBA

cquiring the finances necessary

lending sources and is assessed on the

for your real estate investments

basis of the strength of a real estate

flexible version of hard money

can be a difficult process. This

purchase rather than the financial

lending. Unlike hard money loans,

holds true for real estate veterans

credentials of the borrower. Unlike

private money can be acquired from

and for new investors alike. With

private money, hard money is still

friends, family, professional referrals

so much information available on

acquired from a licensed organization.

or business associates. The most

the web, it is often hard to discern

Hard money lending must adhere to

Private money lending is a more

appealing aspect of private money

which information is correct, a

a series of lending criteria. Established

lending is its flexibility. With the

misconceptionâ&#x20AC;&#x201D;or just plain false.

by the hard money lending firm,

aforementioned lending criteria being

Traditional sources such as banks

each loan has a defined duration, an

â&#x20AC;&#x153;up for discussion,â&#x20AC;? both the lender

and other national lenders offer few

interest rate and a section of upfront

and entrepreneur can work out a

options when it comes to proper

points, all of which are discussed prior

business deal with fewer constrictions.

financing. Private money lending

to a loan ever being issued. These

Although hard money lending firms

and hard money lending firms have

three criteria often help investors shop

are more accessible, private money

stepped in to fill the void, helping the

for available options when considering

proves comparatively lower in cost.

real estate industry by creating unique

a hard money lending firm.

The tradeoff is that private money

ways of doing business. If you are an investor interested in real estate investment capital, it is important for you to understand the differences between hard money lending and private money lending, as well as the truths, falsehoods and misconceptions that follow them. Hard Money Lending Firms vs. Private Money Lenders Both hard money and private money are typically asset-based loans. Each is from non-traditional

28 PRIVATE LENDER

••• is more difficult to find without the

it could do just that without the

proper avenues of contact.

necessity of you, the investor. The

regulations take effect.) If you are a real estate investor, it

logic behind a private money lender

is in your interest to consider private

is to make money with money, while

money funding as an option when

you, the investor, derive income

acquiring real estate investment

about the roles of private money

from your properties. Together,

capital. This quick and affordable

lenders. Let’s look at four common

both entities generate a form of

process could help you acquire your

ones, in an effort to dispel the myths

income. What a private money

properties and/or pay for the costs for

that have grown up in the space,

lender really wants is to retain your

rehabbing them if they are applicable

based on opinions or incorrect

business. Successfully acquiring a

to your business model.

information.

profitable business partner is far

Misconceptions Debunked There are many misconceptions

MYTH #1

“Private money is too

expensive for me.” Not all private money lenders are expensive. Price depends solely on

more valuable than buying and selling acquisitioned properties. MYTH #3

“My bank can do a better

job for me than a private lender can.”

About Civic Financial Service Civic Financial Service is both a hard money lending firm and a private money lender. The company specializes in financing non-owner-

In today’s lending environment,

occupied investment properties and

money lender. Additionally, using

traditional bank loans have become a

can also provide mortgage brokers,

private money without making sure

very frustrating process and are tough to

borrowers, investors and real estate

that you are recovering the costs of

qualify for. The Dodd-Frank Mortgage

agents with funding for investment

that capital in your investment is

Reform legislation has inundated the

property acquisitions and refinancing.

where most people hurt themselves.

lending industry with layers and layers

As an institution, the company offers

Money is no different than any

of additional regulations and guidelines

loans for clients seeking to:

other “thing” you purchase for use

that have made acquiring a loan as

in your business. As a real estate

complex a process for the lenders as it is

• Fix & Flip

investor, money that you borrow is

for the borrowers.

• Buy & Hold

the deals you barter with your private

used to purchase property with the intention of earning a return on your investment. Think about the cost of the money borrowed as just another business operations expense. “Private money lenders

MYTH #4

“I need my money quicker

than a private lender can give it to me.” “Time efficiency”—being able to move swiftly and fund quickly to turn your money over fast is the key. This

• Rate & Term • Cash Out & Refinance • Use Bridge Financing • Use Wholesale Financing Based in Redondo Beach,

is where you as an investor can benefit

California, Civic Financial Services

from private lenders. Private lenders

LLC is a leader in private money

have the ability to fund a loan for

lending services and has helped

a borrower in four to 10 days. That

numerous cities and communities

is not so much about acquiring

significantly beats the average of the

across America. The company

property as it is about acquiring,

30-45 days from traditional financial

specializes in short-term, non-owner-

building and retaining business

lenders. (This could be even longer

occupied and investment property

relationships. If a private money

after Oct. 3, 2016, when the next major

financing utilizing private hard

lender wanted to purchase property,

changes to the conventional lending

money and bridge loans. •

MYTH #2

want me to default on my loan so they can take my property away.” False. Private money lending

JULY/AUGUST 2016 29

SOMETIMES IT HELPS TO TAKE A STEP BACK and look at things from a different perspective. AdaPia d'Errico, CMO at Patch of Land, explores some of the most interesting topics affecting real estate, like technology, online finance and crowdfunding.

e v i t a n r e t l A an

E L G N A d'Errico ia P a d A h wit

30 PRIVATE LENDER

#AltAngle

The JOBS Act and Regulation Crowdfunding: What It Means and Where We’re Headed by AdaPia d’Errico

he JOBS (Jumpstart Our Business Startups) Act, a law

aimed at economic revitalization by encouraging the funding of small businesses in the United States, arrived in 2012. Upon signing, President Obama said, “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.” We will explore that watershed moment, whether and how small businesses have been fundamentally and dynamically impacted and whether entrepreneurs (and real estate professionals) are benefiting from the promise of expanded access to capital. Kicking off the JOBS Act, and remaining its core was Title II, which went into effect in September 2013. Also known as Reg D, Rule 506(c), it lifted the ban of more than 80 years on general solicitation and advertising for certain types of private investments. The caveat was that all investors had to be

Rapid Adoption and the Dawn of Alternative Finance Despite these limitations, changes brought by the JOBS Act have indeed been significant. Title II served as the launching pad for equity and debt capital raises, with volume of “crowdfunding” raises jumping to $1 billion in 2014, a mere 15 months after Title II was enacted. Real estate has been the biggest and most active category in crowdfunding. For nearly three years there has been a proliferation of new companies that

estate models are scaling rapidly, evidenced by the data below in the accompanying chart. In a recent commentary, Forbes noted that crowdfunding has already “permanently changed commercial real estate,” while reminding us that “behind stocks, bonds and cash, commercial real estate has emerged as the fourth largest asset class in the U.S. over the last few decades.” Title IV Before Title III In 2015 there was another major

have built online platforms from

development in alternative finance

which they offer real estate investment

and crowdfunding, when the SEC

opportunities to new investors.

adopted final rules for Title IV of the

Crowdfunding has firmly taken its

JOBS Act, known as Regulation A+.

place at the table alongside other new

Title IV was hailed as the fulfillment

forms of capital raising. Together,

of the long-awaited promise of

these new forms are called alternative

democratizing investment in startups

finance. A recent Cambridge study on

and small businesses in the U.S.

alternative finance, in collaboration

through equity crowdfunding. What

with KPMG, tracked a 212 percent

had only been partially democratized

increase in the use of alternative

(because of the limitation to only

finance from 2014 to 2015. Real

accredited investors) would now be

accredited, which means you have to have made $200,000 the past two years, with an expectation to make the same currently, or $300,000 for a couple. Or, you must have a net worth of over $1 million excluding the value of your primary residence. In short, crowdfunding opportunities were limited to the wealthy—

EQUITY CROWDFUNDING

$596 MILLION*

120%**

REAL ESTATE CROWDFUNDING

$469 MILLION*

250%**

MARKETPLACE/P2P REAL ESTATE LENDING

$782 MILLION*

480%**

*2015

**2015 OVER 2014

specifically, the top 8 percent.

JULY/AUGUST 2016 31

ALTERNATIVE ANGLE available to every potential investor. Regulation A+ allows startups and

••• exchange for ROI). Such investors—

impose disclosure requirements on

better known as “backers”—could only

issuers for certain information about

later stage, pre-IPO companies to

fund startup projects via platforms

their business and securities offering and

use equity crowdfunding platforms

such as Kickstarter or Indiegogo in

create a regulatory framework for the

to raise as much as $50 million from

return for a discount, swag or the

broker-dealers and funding portals that

both accredited and non-accredited

product itself. They did not own, or

facilitate the crowdfunding transactions.”

investors. There have been only a few

earn, anything beyond what they

Reg CF limitations include:

examples of Title IV put to use due

received in their “tier.”

●

For companies, a raise limit of $1 million in a 12-month period.

to many limitations. The regulation

Those who backed Oculus Rift

did not turn out to be as helpful as

(which raised a cool $2.4 million on

many had hoped in allowing non-

Kickstarter) may have received V.1 of

your financial statements, among

accredited investors into the space.

the headset, but they didn’t receive a

the other disclosures, need to be

However, Reg A+ isn’t a viable

dime from the company when it was

reviewed by accountants.

option for raising capital on a per-

bought by Facebook for $2 billion in

deal basis; there is still no option for

cash and stock just 18 months later.

worth or income below $100,000

offering single assets to unaccredited

And those who couldn’t invest in

can invest either $2,000 or 5

investors nationwide.

companies like Uber that raised early

percent of their annual income or

Fundrise, one of the first real

●

the sidelines watching as a $10,000

launched an e-REIT in December,

investment in Uber in 2010 turned into

2015. The product is basically a Real

an estimated $127.5 million today.

For investors, anyone with a net

net worth—whichever is lower.

rounds on sites like AngelList stood on

estate crowdfunding platforms,

Must be a U.S.-based entity, and

●

For portals, the approved ones are regulated by the SEC and FINRA.

Will this be the funding vehicle that

Estate Investment Trust (REIT)

Regulation Crowdfunding is the

the next tech unicorn needs, or can

offered digitally over Fundrise’s

last hope for unaccredited investors

utilize? And will companies want to

platform. This offering significantly

to find their Facebook, Oculus Rift

go through these requirements? Some

altered its business model, moving

or Uber. When the SEC officially

don’t believe so. One million dollars

Fundrise from a deal-by-deal play to

announced its adoption of final rules

is a small check in the eyes of a tech

a fund structure, able to raise up to

to permit companies to offer and

company looking for lightspeed scale.

$50 million using Regulation A+.

sell securities through crowdfunding

But there are plenty of companies

in October 2015, platforms like

that are not in tech, not looking for

SeedInvest, Crowdfunder and

magical “scale,” that don’t reside on

Republic (AngelList’s Title III

the outskirts of Silicon Valley and

certainly great leaps forward in

platform) all began gearing up for

that could easily use that million to

terms of democratizing investment,

crowdfunding—for a much larger

jumpstart their growth.

the “real” crowdfunding regulation,

“crowd”—finally.

Crowdfunding, Finally Though Titles II and IV were

Title III—also known as Regulation

As of May 2016, Reg CF permits

And, what about the thousands of small businesses, local businesses,

Crowdfunding (Reg CF)—still hung

individuals to invest in securities-based

that can now reach out to their

in the balance. As discussed, U.S. law

crowdfunding transactions—subject

communities for funding? This is the

previously prohibited unaccredited

to certain investment limits. Per the

opportunity that Reg CF proposes. It

investors from investing in private

SEC’s statement, “The rules also limit

is meant more for them than the next

companies in exchange for equity (or

the amount of money an issuer can raise

Oculus Rift, mobile gaming or app-

in privately issued debt instruments in

using the crowdfunding exemption,

based meal delivery service.

32 PRIVATE LENDER

JULY/AUGUST 2016 33

ALTERNATIVE ANGLE

•••

It is meant for everyone else—and

example of bipartisanship in such an

small business owners who will

not the usual parties who already had

overheated political environment, as

take to the Internet, via authorized

access to capital—truly and finally.

of this writing also just passed the

portals, to raise much needed

“Fix Crowdfunding Act” by a vote of

capital—from neighbors, to strangers

394-4, and has sent it to the Senate,

across the country, and even from

where it is expected to pass easily.

angel investors. The crowdfunding

The AltAngle Take I’m an optimist. I see abundance and opportunity in everything. Like

The act was geared toward fixing

industry has come a long way in

many others, I want crowdfunding,

some of perceived limitations of

four years. Where it was once illegal

crowdinvesting, crowdfinancing—

Reg CF and was sponsored by Rep.

to advertise a private placement,

whatever we are calling it—to unlock

Patrick McHenry (R-NC), one of the

thereby constricting access to people

the promise and potential that is

original co-sponsors of the JOBS Act.

who would have gladly invested, Reg

wasting away, sitting in depository

It sought to increase the 12-month

CF is expanding the pool of eligible

accounts, CDs and “investments” that

$1 million cap to $5 million, but that

investors from the 8.7 million

most people don’t care about. Though

was stripped by the House. This,

accredited investors to over 300

I’m not alone, there are still many

amongst other concerns about Reg

million Americans.

skeptics and critics.

CF, was not addressed.

For one, “Wealth Management”

What is left of the “fix” is the ability

This will expand how Americans view and conceptualize investing in the

ran a recent op-ed article that

to create a legal vehicle that will make

first place, which will eventually have

announced “Crowdfunding is a

crowdfunding a much simpler process

spillover effects in how real estate is

Failure,” a pronouncement to which

for a company via the creation of a

perceived, invested in and ultimately

many who have been working

Special Purpose Vehicle (SPV) that

revitalized and renewed, outside the

toward these regulations take

allows them to organize shareholders

purview of traditional, and often

considerable exception.

into a single entity. Also, the numbers

physically remote, lending institutions.

It turns out by “crowdfunding,” the article actually meant “Title III.” And

and types of investors that can invest in startups will increase from 100 to 250.

while it acknowledged the change might help smaller businesses attract initial capital, it later decried too much transparency as one of the downsides, particularly the disclosures on any individuals who may own 20 percent or more of a given company. But it’s hard to put a genie back in a bottle once it’s been uncorked, and the trends, especially with online platforms where crowd participation—and nearly instant feedback—are the norms, is for more transparency going forward. Fix Crowdfunding The House, in another rare

34 PRIVATE LENDER

In comments to an Angel Investors conference in Washington, Rep. McHenry said

Will Reg CF Work For Real Estate? When Reg CF launched this spring,

it is “very important for us in the rest of America, the ones outside

many real estate crowdfunding

of large urban areas, to ensure that

platforms were asked, “Will you

entrepreneurs with great ideas have

now be offering your deals to

an opportunity to get started.”

unaccredited investors?” The answer

Martin Luther King talked about

to that, unfortunately, is “No.” From

the arc of the universe bending, over

Patch of Land to RealtyMogul, there

time, toward justice. On a smaller

isn’t a real estate platform that is

and more immediate scale, it is hoped

adopting Reg CF to issue any single

that the unfolding—and ongoing—

asset, multi-asset or fund offering.

changes brought by the JOBS

While Reg CF is still unlikely to

Act will continue to bend toward

have any direct, near-term effect

far more participation, far more

on real estate crowdfunding, it will

democratization, of investments than

be a fit for many entrepreneurs and

our economy has previously known. •

JULY/AUGUST 2016 35

STRATEGIC THINKING

Residential Real Estate Investing and Lending in the Modern Era by Nic Walling and Tim Leber

pportunities in the real estate space are often undervalued and

As we opine on the opportunities

office building, residential investment

presented by our modern markets, we

properties present investors the

overlooked. Perceived as static and

look to the strategies and successes of

unique opportunity to benefit from

illiquid in comparison to other asset

our predecessors. We have the benefit

both short-term rental income and

classes, the majority seem to opt for the

from learning from their experiences,

long-term market appreciation.

excitement of the stock market or the

good and bad. We should take full

stability of bonds. Generally regarded

advantage, adopting best practices in

large inventory of distressed assets

as a long-term and capital-intensive

the hopes of bettering our processes

available at the end of the last decade.

investment strategy, the inexperienced

and ultimate returns.

The tragedy of the last financial

investor generally looks to limit

The combination of a fresh

Many took full-advantage of the

crisis presented a great opportunity

his or her exposure to real estate,

perspective and the invaluable context

to creative, cash-rich investors who

outside maybe a personal residence.

provided by the transactions and market

amassed large portfolios of residential

Market players—namely institutional

of the past puts the modern investor

rentals at a considerable discount

investors—generally stick to the major,

is a position of power with limitless

to market. In the short-term, the

commercial asset classes: multifamily,

opportunity. Our ultimate success—

rebound of the market has already

retail, office and industrial.

coupled with historically, self-regulating

handsomely compensated investors

financial markets—is determined by our

via market appreciation. Thinking

Real estate misconceptions and

ability to learn from past experiences

creatively about residential investment

opportunities

and apply new and creative perspectives

assets, innovative investors have

to modern opportunities. As we can

found ways to generate consistent and

estate is often misunderstood and

Even among the asset classes, real

all most certainly attest, balancing

impressive terms in a marketplace

under-explored. Traditionally, the real

the tradeoffs between creativity and

once thought to be too small and

estate investment market has largely

efficiency in today’s markets is no simple

disjointed to support long-term,

been focused on the commercial

task. Unconventional thinking lends to

institutional investment.

asset classes, neglecting many of

atypical returns.

the opportunities presented by the

Much of the recent success within the residential investment space is the

residential sector. In recent years,

Thinking outside the box as we live

result of creative thinking by some

as the residential investment space

in the box

commercial players. The opportunistic

continues to grow, generating sizable

Early adopters of residential real

investment in single-family homes

and consistent returns for strategic

estate investing are now reaping the

has become more attractive as it

investors, conventional commercial

rewards of strategic acquisitions and

provides a diversified alternative to the

investors are now delving into the

market timing. With likely a more

volatility of the stock market.

residential space.

manageable monthly payment than an

36 PRIVATE LENDER

Savvy investors apply the lessons

â&#x20AC;˘â&#x20AC;˘â&#x20AC;˘

and strategies learned in the

localized mom-and-pop investment

commercial space to residential real

fund, there is money to be made in

estate investing. Playing to their

the residential real estate market at all

lenders develop programs that are

strengths, these innovative investors

levels and scales.

strategically targeted to fuel the

have adapted commercial acquisition,

With time, the market often

contemporary investor. Thinking outside the box, these

continued investment and success in

management and financing strategies

rebalances. As these rental portfolios

the residential rental space. Applying

to this under-serviced sector of

continue to grow and new investors

commercial processes, these lenders

the real estate market. Investors of

enter the marketplace, the need

have adapted to meet the needs of this

all sizes have adapted real estate

for creative financing solutions

growing segment of the real estate

investment strategies as the demand

became more apparent. With

and investment market. Playing to

for rentals continues to grow. Whether

an ever-increasing demand for

their strengths, these portfolio lenders

a publicly traded residential REIT (like

financing, portfolio lenders entered

provide for greater opportunity (via

Colony Starwood, owner of 40,000

the marketplace with unique

access to capital) for investors in an

residential assets nationwide) or a

capabilities tailored to the needs of the

emerging class of misunderstood assets.

JULY/AUGUST 2016 37

STRATEGIC THINKING Savvy residential investors are

Long gone are the days of receiving

commercial brokers to focus on the

now seeking financing—outside of

high commissions baked into the

residential income property space.

rigid, government programs—for

yield spread on debt deals with

The first misconception to address is

their existing and growing, creative

compression in coupons for core and

that these pools of rental homes and

investment portfolios. In response

even secondary apartment deals. With

small multifamily properties will be

to this need, portfolio lenders have

so much competition among lenders

a time suck and ultimately will end

adapted commercial, blanket debt

and brokers to win the business of

up being broken up into different

structure to residential rentals. In

institutional multifamily and other

pools for each profile or broken into

providing commercial mortgages and

asset classes, there is often not room

individual mortgages. This notion

bridge financing for residential real

for brokers to fit their fee in the spread

may have been true 10 years ago,

estate investors, lenders have helped

and still win the business.

where the CMBS space had seen very

investors grow their portfolios at a much more rapid pace. Structured similarly to commercial

The core asset classes are too

few commercial blanket loans over

well understood to have large rate

pools of fractured asset class. Outside

volatility from lender to lender.

of some creative deals in which

debt, notes are secured by cross-

There is strong uniformity on shifting

i-banks or regional banks with large

collateralized pools of residential

spreads in the CMBS space with all

private clients would attack, mid-level

investment assets. These lenders

lenders adhering to similar ratings

and quasi-institutional investment

benefit from operating in both the

agencies when they securitize.

groups simply could not find a one-

residential and commercial real

Now, let’s take a step back and

stop-shop for their strategy.

estate markets, taking full advantage

analyze the reasons there has

The second major concern

of both retail and correspondent

not been a strong pull for true

that both mortgage brokers and

channels. This hybrid role allows for direct, investor relationships, as well as utilization of the existing infrastructure provided by the mortgage banking and brokerage industries. Two marketplaces. One financing solution. Residential real estate investing from the broker perspective Let’s take a look at residential real estate investing from the broker angle. With cap rates condensing and competition to win deals in the true multifamily space becoming substantially fiercer, there is a drastic shift in how real estate professionals and brokers aim to be compensated on transactions.

38 PRIVATE LENDER

••• borrowers share is the amount of

one-off residential assets which many

confidence they need when referring

cost and time associated with these

high-net-worth private investors plan

business our way. With the growing

large pools of residential assets.

on holding long-term.

need for borrowers to find creative

Commercial blanket mortgages have

More often than not, real estate

financing for an aggregation of

offered a streamlined solution to the

and mortgage brokers are given

residential real estate assets, the

high closing costs associated with

a “trial run” of a more difficult

space is becoming more and more

collateralizing hundreds of properties

portfolio for which to arrange

attractive. With the volatility in the

with individual mortgages all with

financing before private investors or

capital markets environment over

separate rates and loan terms.

large investor groups will give them

the past year, borrowers with long-

One pertinent way to think

a shot at their easily transactable

term holds are beginning to turn to

about it is that these loans are an

institutional-quality assets. Savvy

long-term commercial blanket loans

institutional multifamily loan but

brokers know that this an easy home

as a means to maintain certainty in

instead of units, you are looking at

run if they know where to turn.

an uncertain world.

separate properties. There will be less

With the asset class being not as

uniform assumptions associated with

well understood, brokers can bake a

the individual line items in the NOI

point, two points, or whatever they

calculation, but the ease of having one

are comfortable including into the

performance standpoint, the

rate, one payment and a drastically

yield spread, as less sophisticated

underlying fundamentals of real

less expensive and less strenuous

borrowers often do not understand

estate investment are relatively

closing cost schedule, most operators

spreads on these types of loans.

consistent across asset classes.

and borrowers will choose to use the

With fewer players in the space

Back in the shoes of a real estate investor or market player From a financial and general

Whether looking at office buildings

portfolio loan to save money up front,

and more ambiguity in terms of asset

or apartments, investors and

even though a cost of capital might

profile, it leaves the opportunity for

lenders alike are looking at the cash

be comparable to financing the assets

brokers to offer a high level of service

flow and market value of potential

individually in some cases.

to the client, do minimal amount of

investments. At the end of the day,

legwork from a broker standpoint and

rents are rent; income is income.

Commercial loans for

still get paid a premium that would

Whether it’s for a five-year lease of an

single-family assets

traditionally be ground down by the

office suite or a month-to-month one-

borrower/lender network in other

bedroom apartment, the underlying

more mainstream asset classes.

performance metrics are the same.

Companies like Colony American Finance are beginning to offer solutions for the “out of the box”

The true opportunity for brokers

A growing trend in rental

financing requirements that would

is not only to simply transact and

investment and with an increasing

have previously been the bane of real

execute at a high level, but in finding

amount of portfolios coming to the

estate professionals and mortgage

a new and creative way to finance

marketplace has triggered a shift

brokers looking to lock down

something that doesn’t fit the

in thinking. In this circumstance,

competitive debt solutions. Being

mold in the mainstream financing

those quick to adapt and meet the

that these commercial blanket loans

community. The strong track record

demands of the marketplace have

are a relatively new asset class (or at

and certainty of close that Colony

been the most successful. But again,

least not as well widely understood)

American Finance, for instance,

the line between innovation and

it offers real estate professionals the

offers its borrowers gives real

absurdity is blurred. Without risk,

opportunity to service some of their

estate professionals and brokers

there can be no reward. •

JULY/AUGUST 2016 39

FACTORING

Factoring vs. Purchase Order Funding for Your Business by Mike Ponamarew

n looking at which is best for your

creditworthy customers. This can be

business—factoring or purchase

useful if suppliers are not extending as

perhaps even a tarnished reputation. If word gets around that a company

order funding—we first need to

much credit as a business/vendor

is turning away business because it

define the differences between those

needs, or if the supplier is asking for

can’t afford to fulfill purchase orders,

two strategies.

upfront or C.O.D. payments.

customer trust is diminished. Other

As you can see from the definitions, FACTORING

The purchase of Business

customers who considered giving that

factoring involves funding AFTER

company their business will likely think

to Business (B2B) or Business to

performance of an obligation and

twice about placing orders.

Government (B2G) accounts

purchase order funding requires

receivable (current or outstanding

funding PRIOR to performance. A

advantageous. It is pretty easy to qualify

invoices) for goods or services that

small business owner who receives

for and much easier than traditional

have been rendered in the past at a

a purchase order but doesn’t have

bank financing. Purchase order funding

discount for services.

the money to pay for the product/

hinges mostly on the financial strength

merchandise from the supplier stands

and creditworthiness of the customer

to lose the purchase order, the chance

who has issued the purchase order/

term financing solution that provides

to receive future purchase orders and

contract with a particular business

100 percent of the cost associated in

possibly the customer relationship.

(vendor) and not on the business itself.

filling single or multiple customer

Having to turn the order down would

This makes it a viable option for new

purchase orders or contracts from

obviously mean loss of revenue and

and established businesses and those

PURCHASE ORDER FUNDING

40 PRIVATE LENDER

A short-

Purchase order funding can be quite

••• with average credit. There are five key elements that typically need to exist for PO funding

has paid out more money and the

example the funding source was going

payment for the purchase order is

to advance (factor) 85 percent of the

still outstanding.

total invoice. The vendor will receive

to take place:

the outstanding 15 percent (called the How Purchase Order Funding Works

1 The business must be incorporated. 2 Purchase order must be from creditworthy customers.

3 Purchase order must be firm—no contingency sales or letters of intent.

We have a company (vendor) that is in the apparel business. The vendor receives a purchase order from a large

reserve) once Macy’s has paid for the invoice less the factoring fee. The advance would be calculated as follows:

retail box store (let’s say Macy’s) for 1,000 silk shirts at $20 each, for a

$20,000 x 85% = $17,000

4 The product/merchandise must be

total of $20,000. The vendor sources

Less Cost of Silk Shirts = $10,000 Less PO Funding Fee = $500

5 T he order must be shipped directly

the shirts from a domestic apparel manufacturer at a cost of $10 each

Total Advance = $6,500

for a finished good.

from supplier to customer.

or $10,000 total. The manufacturer refuses to ship the silk shirts until

Macy’s ended up paying the invoice

OK, so, if you put your funding

it receives the payment. In many

in 30 days. The funding source charged

hat on, would you advance money

businesses, cash flow issues exist.

a discount (factoring) fee of just 2.0

to a business and HOPE it ends up

There will be times when there is

percent of the total value of the invoice

performing so you can get paid back?

simply not enough money available

or $400 ($20,000 x 2.0 percent). The

Or, would you prefer to advance money

to cover the costs of doing business.

funding source will then deduct this fee

to a business after it has performed on

In this example, the vendor requires

from the remaining 15 percent (called

the purchase order/contract?

$10,000. The PO funding source

reserve) of the invoice that is still owing

provides the payment and the domestic

to the business/vendor (or $3,000 –

order funding with a request

apparel manufacturer ships the shirts

$400 = $2,600).

for raw material financing—the

directly to Macy’s. The vendor then

goods or materials a manufacturer

creates an invoice to Macy’s and

implementing this type of funding

converts into a finished good.

now the funding source factors (see

solution the vendor was not only

Unfortunately, this type of funding

definition above) the invoice and

able to fill the purchase order but

is hard to obtain, given the risk

advances cash less the cost of silk

also received $6,500 in immediate

involved (for the funding source)

shirts and purchase order funding fee.

working capital plus $2,600 at the

Many people confuse purchase

So, as you can see, by

end of transaction, totaling $9,100.

in the event the finished good is

Many times a business vendor feels

not manufactured/delivered to

Value of Purchase Order: 1,000

specification. The good must be

Silk Shirts x $20 = $20,000

it needs PO funding when all the

reworked and more raw materials

Cost of Silk Shirts: 1,000 x

vendor really needs to do is factor its

would have to be purchased and

$10 = $10,000 (amount paid to

current receivables to free up the cash

paid for by the funding source to

manufacturer)

needed to pay suppliers.

fulfill the purchase order. Under this

Purchase Order Funding Fee:

scenario the vendor’s gross profit

$500

for new startup and established

is greatly reduced and the funding

Value of Invoice = $20,000

companies, wholesalers, distributors, resellers, importers, exporters and

source is still out of pocket for the original purchase of raw materials,

Purchase order funding is ideal

Let’s say for the purpose of this

businesses with average credit. •

JULY/AUGUST 2016 41

MARKETING

Breathe Life into Your Marketing by Chrissey Breault

utbound marketing is not dead.

If your outbound strategies

and identify new trends along the

are customer-centric and tightly

way, just remember that it doesn’t

sent to an audience through TV, cold-

integrated with your inbound content

always mean that your targets will

calling, e-mails, direct mail and paid

strategy, you can see a significant

be jumping across the desk to pick

searches are alive and well!

improvement in your marketing.

up the phone. They may slowly

That’s right, those messages

Inbound marketing—regarded

come on board thanks to your best

as the future of marketing—has

78% of decision-makers have

inbound marketing efforts. Through

grown leaps and bounds over the

taken an appointment or

your outbound tactics, they have

last few years. Marketers across the

attended an event that came

been driven to your website, read

globe prioritize inbound marketing

from an email or cold call.

your content; downloaded your

– DiscoverOrg

over outbound. The decline of outbound marketing is a response to a fundamental shift in consumer

whitepaper, attended a webinar and you may have even followed-up with a

Now that you’ve created life-

phone call or e-mail.

behavior. People are in control of what

changing content for your website,

information they receive and how. In

blog and social media site and are

outbound marketing strategies

outbound marketing, the company

preparing to embark on a new

for solid business promotion is

is in control. Still, that doesn’t mean

outbound marketing strategy for new

not possible without 100 percent

that we should be making funeral

lead generation, you have some tough

understanding of the characteristics

arrangements for outbound marketing

questions to answer:

of each. Using these methods

strategies. Today’s B2B products and services have long, complex sales cycles and usually include multiple decision-makers which have made marketers realize that mass-marketing tactics with no thought to relevancy, timeliness or personalization just don’t work. Online content through landing

1 D o you understand what your top

Your market mix of inbound and

wrongly only results in frustration, resulting from wasting financial

target segments are?

resources and opportunity cost.

persona(s)?

It’s Not Cheap

2 C an you clearly define your buyer 3 Do you have all the right tools? 4 Have you considered everything it takes to build a team?

5 D o your managers have the

Outbound marketing can be an expensive endeavor. The traditional (or old) way of telling people about your business or product is costly.

pages, SEO and social media aren’t

bandwidth to do everything it

TV commercials, newspaper ads and

always enough to build strong leads

takes to lead a team?

radio commercials are expensive

for your sales team. One shouldn’t rely solely on inbound strategies to build

6 D o the benefits outweigh the costs?

relationships and qualify leads. You can bridge the gap with thoughtful, targeted data-driven outbound marketing.

42 PRIVATE LENDER

and tend to make the most sense for advertisers with larger budgets. In outbound marketing, success is

When you have all the answers

directly proportional to repetition.

and have dedicated time to review

Repeated broadcasts can persuade

people, but repetition shoots the

personalized communication,

budget through the roof.

marketers (and company cultures)

proving an ROI on marketing spend

must adapt. Marketers will also

is considered the largest challenge by

marketing is not as effective as

continue to face increased ROI

over 50 percent of both B2B and B2C

inbound marketing. Some estimates

challenges as the consumer

marketers, regardless of company

suggest that the average American

experience becomes more

size. Similarly, securing budget is

is exposed to 2,000 promotional

fragmented and competitive.

considered a top pain point for about a

It is fairly safe to say that outbound

activities a day. A CBS article

According to a Hubspot Report,

The right marketing mix begins with

third of marketers.

suggested a number as high as 5,000.

understanding the need. As a business

Although an accurate number is hard

owner or marketer, you know what

will look toward tactics capable of

to find, as the information varies from

keeps you up at night when it comes to

both reporting and delivering ROI.

study to study, one thing is clear:

marketing. If youâ&#x20AC;&#x2122;re like most, finding

The reasoning is simple: the better

people are exposed to hundreds of

the best ROI is near the top.

they can demonstrate the impact of

To mitigate these issues, marketers

promotional activities each day. With that number of messages, a resistance

TOP CHALLENGES BY COMPANY TYPE

is built, and that only makes it harder

ROI is the thorn in the for-profit sectorâ&#x20AC;&#x2122;s side, while nonprofits struggle most with website management

to get one of the most important factors in marketing: attention.

B2B

The biggest downside for inbound marketing is its reach. You canâ&#x20AC;&#x2122;t target the entire nation with inbound

B2C

Nonprofit

Proving the ROI of our marketing activities

marketing the same way you would with a TV commercial or printed ad.

Managing our website

Simply said, nationwide coverage is not 100 percent effective with inbound marketing because you can only promote to a willing audience. There is no marketing silver bullet

Securing enough budget

Identifying the right technologies for my needs

Every business is different. A variety of tactics is necessary to hit the right

Training our team

people in the right way. Your strategy is defined by how your users behave. Some businesses rely mostly on inbound tactics to drive qualified leads, sprinkling in outbound tactics

Targeting content for an international audience

Hiring top talent

as needed. Larger, more established business built their companies ONLY

Finding an executive sponsor

using outbound marketing tactics, but are now exploring new methods. As technologies develop and

consumers expect more thoughtful,

JULY/AUGUST 2016 43

MARKETING

••• INBOUND VS. OUTBOUND BY COMPANY SIZE

Inbound is the dominant marketing strategy for companies with fewer than 200 employees Inbound

90%

Outbound

84%

80% 71%

70% 60%

49%

50%

48%

40% 27%

30% 20%

13%

10% 0%

1 to 25 employees

26 to 200 employees

200 or more employees

their marketing investment, the more

percent for inbound. For companies

inbound programs and well as reach

budget they will receive.

with more than 200 employees, an

prospects who don’t yet know they

equal amount of both inbound and

have a need—and come full-circle by

outbound tactics are used.

providing those prospects with inbound

Does Company Size Influence the Approach?

Globally, we are just focused on

content for awareness and education.

converting contacts into customers,

Just like you need to inhale and exhale,

more pervasive inbound marketing,

increasing the overall number of qualified

your marketing likely needs both

while larger companies are likely

leads generated and proving ROI.

inbound and outbound to survive.

The smaller the company, the

to deploy a mixture of both. For

No, outbound marketing is far from

It’s ultimately on each business

businesses with less than 25

dead. The trick is, can you breathe

to understand its customer journey

employees, inbound is used by a

life to the entire landscape of your

and the channels that lead to success.

whopping 84 percent, versus just 13

marketing strategies? With inbound

Companies with a focus on ROI,

percent for outbound. For companies

marketing, you can draw prospects to

regardless of size, should favor inbound

with less than 200 employees,

you through awareness and education.

tactics, while outbound tactics should

outbound marketing is deployed by

With outbound marketing, you can

be used cautiously and with a higher

27 percent of companies, versus 71

help qualify the leads generated by

degree of accountability. •

44 PRIVATE LENDER

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ASSOC-AAPL10

ON LEARNING, LEADERSHIP & LENDING AAPL Executive Director Linda Hyde takes her cue from her firebrand, to-the-point Grandma Kate.

EDITOR’S NOTE: Linda Hyde, who assumed the Executive Director’s role at the American Association of Private Lenders in February, is no stranger to the organization. She joined AAPL in 2013 as Member Relations Coordinator, then moved up to Director of Operations and Member Services before her promotion to the association’s top spot. Here, she shares some of the experiences that brought her to this point and offers insight about the challenges of leadership.

46 PRIVATE LENDER

•••

Q+A

PRIVATE LENDER: Success very rarely “just happens.” Usually, there are mentors, confidants, bosses or colleagues whose help and guidance have been integral. Who has filled that role for you? LINDA HYDE: I can actually give that credit to two mentors I have had in my career. Craig, who was my boss at my previous company, and Brian, who was VP of Operations there, are both talented leaders who taught me many ways to improve my own leadership skills and also taught me the ins and outs of business. They both gave me someone to look up to in my position as a new leader at the time. I can say I owe most of my personal and professional development to them and their leadership.

LH: Because we are somewhat small-staffed, it is easy for us to be supportive of one another, not only professionally but personally, too. I believe that you need to take care of your own people before you can expect them to help others in a way that helps grow partnerships. There is a poster on my wall with a quote from Richard Branson: “Train people well enough so they can leave, but treat them well enough so they won’t want to.” I try to follow that, and I encourage others to, as well. PL: It’s apparent that you are a collaborative leader. But ultimately, the buck does stop with the person in charge. Give us an example of how you deal with that.

LH: The first time I was someone’s boss I was 18 years old and worked for a small contact center making cold calls. I learned that I was very immature and certainly not ready to manage a full team at that time. I had to take a step back to learn more about myself and what I wanted to do when I grew up.

LH: Yes, you are right that part of my style is to listen to all sides and give everyone a “place at the table.” A good example would be our planning for AAPL’s Annual Conference. Everyone has an opinion on what can be done better—which I appreciate. However, I have to keep our overall strategy in mind and so sometimes have to make tough calls that not everyone will agree with. But I always strive to deliver those messages in a way that still maintains integrity and respect for the relationship.

PL: And now you ARE grown up, and leading a dy-

PL: Can you recall an instance of being faced with a

LH: The toughest part of my job has got to be maintain-

LH: One challenging situation that stands out occurred when I was an Engagement Manager and had been trying to keep a group of employees focused and doing what was asked of them. It seemed as if every time I took my eyes off of them, they would get up and walk around. I recognized they needed additional responsibility to keep them busy, so I began grooming them to take over escalation calls from the reps. In the end, the “least likely to succeed” ended up being my most trusted and hardest-working employees, simply because I gave them a chance.

PL: Which is most important to AAPL—mission,

PL: What are the attitudes, skills or characteris-

PL: Tell us about your experience as a first-time

supervisor of others.

namic organization in AAPL. What’s your biggest challenge in this job?

ing our core values as an association and a team that wants to have a positive impact on not only the members but the industry. With a small team and the amount of growth we have experienced over the last three years, it is important to me that we always maintain our integrity while staying light-hearted. “Business” is not a word we like to use, as we build friendships with our interactions. Our goal is to be as supportive as possible to each and every one of our members. core values or vision?

LH: Certainly, they are all important, but of the three,

I have to say core values. Ours revolve around honesty, integrity, professionalism and mutual support. I believe without the structure of core values there is no vision or mission that is attainable for success.

PL: How do you encourage others in your organization to communicate those core values?

management problem that you were able to resolve in an unexpected or particularly successful way?

tics that you admire in other women leaders?

LH: I admire women who are strong-willed, direct and

opinionated. I have never been afraid to speak my mind or stand up for myself. Historically in my field, there have not been a lot of women to look up to in leadership roles. I got my strength and conviction from my Grandma Kate, who was a fireball of attitude and strength.

PL: As you have progressed in your career, has that changed in any way?

JULY/AUGUST 2016 47

Q+A

“

I BELIEVE WITHOUT THE STRUCTURE OF CORE VALUES THERE IS NO VISION OR MISSION THAT IS ATTAINABLE FOR SUCCESS.

“

48 PRIVATE LENDER

••• LH: I find myself gravitating to leaders who have proven

success but are still grounded, humble and take an interest in developing those around them. It is refreshing to have somebody on your side who challenges you to meet your goals but supports you every step along the way.

PL: What do you see as the biggest challenge today for women in business?

LH: It’s equality. And I do not want to get into a political discussion here, but I can say my response is based on my personal experiences. It has a direct effect how I take care of my team.

PL: What advice do you have for other women aspiring to leadership roles?

LH: Find a mentor who supports you. Stand by your convictions. Leave your work at work whenever possible. And remember that tomorrow is a new day. I believe if you can’t find one reason to laugh throughout your day, then you should probably re-evaluate your goals. Additionally, I would urge them to find time to talk to others they admire, continue their education, read lot of books and join the American Association of Private Lenders. PL: How do you describe AAPL’s differentiating characteristics, in a nutshell?

PL: What sorts of things are you doing to ensure you continue to grow and develop as a leader?

LH: That should be an ongoing effort, no matter what

your industry or place on the leadership ladder. As for me, I read as many articles and listen to industry-specific presentations as I can, and I also try to learn as much as I can from my colleagues.

LH: This is the only association that sets professional standards for the private lending industry. Ethics. Education. Excellence. PL: What are the biggest challenges AAPL has faced since you joined the team?

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Q+A

•••

LH: Since we are a growing company, we face new challenges every day. So I am sure that any given day’s challenge would be the biggest one yet. I overcome them by talking through them with the team and with my boss. It certainly takes a strong team to build a strong foundation for a company. PL: What changes might we see

in private lending and for the American Association of Private Lenders this year and next?

LH: The results of the upcoming election no doubt will affect the regulatory bodies that have been created for our industry and their guidelines for how lenders conduct business. The same goes for the economy and housing market. Make sure you come to AAPL’s Annual Conference to hear Dr. Mark Fleming plus many others provide a glimpse into what’s to come. As for the association, you can expect great things to come, starting with this issue of magazine you are now reading. This is the first printed edition we have had for distribution. We’ve also just announced a partnership with Geraci Law Firm, which will be helping us update our educational platform. PL: Earlier you talked about

leaving work at work. So let’s end with a few questions about your non-work activities. What was the last book you read? And what did you like about it?

LH: “One Step at a Time,” by Josh Bleill. It’s the story of his mental and physical recovery from an IED attack that happened while he on patrol with fellow Marines in Iraq. I seem to be drawn to tragedies, but luckily they all have a happy ending. I was inspired by his undying enthusiasm, infectious joy and sense of humor as he shares his message of going forward, one step at a time.

50 PRIVATE LENDER

PL: What else do you do when you have time away from the office (and e-mail)? And what do you enjoy the most?

LH: Time with my little girl; she is my world. I spend as much time as I can with her. She is growing up so fast, and I don’t want to miss a minute of it. I also enjoy shopping—A LOT. •

•••

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REAL DEAL

PERSPECTIVE Vital Tips to Help New Real Estate Investors Acquire Financing by Abhi Golhar

•••

PERSPECTIVE

espite a certain level of volatility

• Fewer tax burdens

common methods of acquiring the

in the national and global

• Stronger borrowing and buying

down payment is through obtaining

economies, the U.S. housing market has rebounded strongly, opening the

power (increased capital) • Increased collective investing IQ

door for an influx of new investors. For seasoned real estate investors, the

what is known as a second mortgage. This is not always easy to do, but it is a viable way to come up with at

This collective has the power to

least 20 percent of the loan. There are

current upswing of the housing market

influence the approval decision of

agencies, like 14th Street Capital, that

has simply opened another area in

potential lenders. Lenders consider

specialize in helping investors obtain

which to play, because they find ways

numerous variables when assessing

loans that are specifically designed for

to make the market work for them

risk factors for potential investors.

investment properties.

despite any current volatility.

Working as part of a collective

With prices stabilizing in most of the

theoretically improves the chances of

Be a Strong Borrower There are a number of variables,

major markets, now is the ideal time for

being approved. Depending on the size

new investors to get their feet wet. Still,

of the group, the weak link (in terms of

including loan-to-value ratio and

many potential investors are somewhat

credit score) can be omitted from the

lender policies, that can impact the

apprehensive and question their ability

application, subsequently improving

ability of an investor to obtain a

to effectively procure investor financing.

the chance of loan approval.

loan. Of those, the one variable that

The truth is that there are abundant

When building an investment team,

will have the greatest impact on

methods for acquiring the funding

it is wise to ensure that each person

your ability to obtain a loan is your

necessary to invest in residential real

has something unique to add to the

credit worthiness. This is why you

estate, though many require creativity

team, so that the collective seems

should check your credit score before

and flexibility.

strong to the lender.

attempting to do a deal. If there are

Joint Ventures

Have a Sizable Down Payment

Joint Ventures sits atop my list of financing tips for new investors

Although this is not always possible

any adverse entries on the credit report that can be challenged and removed, that should be done first. Due to some questionable lending

because it presents a number of

and there are ways around it, a sizable

practices that led to the financial

benefits in addition to the ability

down payment will open you or

crisis in the middle of the last

to raise capital. The best real estate

your group up to more conventional

decades, lending guidelines have

investors are not necessarily the ones

financing options. Mortgage insurance

become stricter with most lenders.

who have or know everything; they

does not cover investment properties,

Consequently, approval becomes

are the ones who are smart enough to

so in order to qualify for a more

increasingly difficult to attain as a

surround themselves with people who

traditional style loan, you will have to

FICA score drops below 740.

know what they don’t. Building a solid

put down a minimum of 20 percent. If

investment team is one of the best

you are able to put down 25 percent,

with a low FICA score cannot still find

ways not only to enhance financing

you will qualify for an even lower

financing; it simply means that some

options, but to increase the level of

interest rate.

of the more conventional avenues will

collective experience and expertise. Some benefits of creating a joint real

If you don’t have the down payment, there are some ways that you can come

This does not mean that someone

be closed to that borrower. One alternative you have if your

estate venture are:

up with it, especially if you prefer a

score is below 740 is to pay points

• Shared liability

conventional loan. One of the most

based on your score. This basically

JULY/AUGUST 2016 53

PERSPECTIVE

•••

equates to paying a higher interest

creative starts to come in. Private

collateral and if the borrower cannot

rate for the property. This is not

money lenders are used quite often

pay, the lender will simply foreclose

necessarily a terrible thing, especially

by investors, because they can set the

on the property. Depending on the

if there will be a rapid turnaround on

terms and don’t necessarily have to

property and the terms of the loan,

the sale of the property in question.

jump through as many hoops. Another

a default may or not be reported to a

reason that private money is so popular

credit reporting agency.

Additionally, having reserve funds in the bank to cover any investment-

is that private lenders don’t have to

related expenses for a minimum of six

abide by all of the restrictions and

of deals can be higher than with

months after the property is acquired

guidelines that conventional lenders

conventional loans; therefore, it is

will also improve the chances of

do. Private money lenders don’t have

imperative that you figure the cost of the

being approved with a lower score.

to be concerned with certain risk

loan into the numbers associated with

When there are multiple investment

factor guidelines. In many cases,

the investment deal. There have been

properties, lenders now want to see

private lenders will totally disregard

occasions in which investors have lost

reserves in the bank to cover expenses

the creditworthiness of the investor,

money or barely broke even because

for each property.

as long as the property in question

they failed to properly account for the

has built-in equity or presents a great

cost of the loan. Private loans are rarely

opportunity to turn a profit quickly.

used for new home construction, which

The lender will use the property as

normally requires conventional or

Private Money Lenders This is where your ability to be

54 PRIVATE LENDER

The interest rates for these kind

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PERSPECTIVE highly specified equity lenders.

Hard Money Lenders Hard money loans are similar to private money loans, with the primary distinction being that not all hard money loans come from private lenders. There are large lending

creditworthiness of the borrower.

them, rather than being seen simply

With the property as collateral, it is a

as another number entered into a

win-win situation for the lender. Hard

computer system. You will also be

money loans are ideal for investors

able to take advantage of a more

who are working on fix-and-flip deals.

proactive and involved philosophy

Stay Away for Big Banks Unless your credit is ideal and there

from the bank. These local banks will also have a better understanding of the local real

institutions that will provide hard

are no extenuating circumstances,

estate market, which will allow them

money loans. With a hard money loan,

you should avoid larger banks.

to better understand your investment

the terms of the loan are extremely

It is better to seek out smaller

strategy. If there are some problems

short term. There are many hard

neighborhood banks for financing

with improving your application, a

money loans that mature in as little

investment deals. These smaller

smaller bank will most likely guide you

as 60 to 90 days while others can

lending institutions will have more

toward the steps you need to take in

extend as long as three to five years.

flexibility in what they will be able

order to get approved.

Like private money loans, hard

to approve and the terms and rates

money loans place more emphasis

they will be able to offer. You’ll also

on the value of the property than the

get a more “personal” touch from

Pursue Owner Financing When you find a motivated seller,

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AAPLOnline.com 913-888-1250 56 PRIVATE LENDER

•••

Learn to Think Laterally

there is a good chance that that person

organizations offer a variety of loan

will be willing to owner-finance the deal,

options to investors to help meet

Being able to think “outside

especially when there is a promise of

their short-term financing needs.

the box” is vital to being able to

a rapid turnaround. This can be true

These organizations can offer a large

put real estate deals together. For

even when the owner of the property is

variety of loans that are specifically

instance, if you are working on a

a bank; however, this works best with

designed for investors, and they have

solid property that has the potential

private owners. There was a time when a

an exceptional amount of experience

to produce a high profit, you should

request for owner financing would make

in the real estate industry.

consider securing a down payment

a seller suspicious. This was because

Working with an organization

or renovation funds through home

almost anyone could qualify for a loan.

can really help simplify the process

equity lines of credit or even

With the tighter lending restrictions that

for a newbie. There is a lot to

using credit cards to get the down

are in place now, sellers are more likely

consider when entering the world

payment. There have been instances

to accommodate the request in order to

of real estate investing. By working

of investors who put down payments

expedite the deal.

with an organization that can

on a credit card with 60- to 90-day

help simplify the loan acquisition

no-interest and completed the deal

process, you can focus on other

in time to pay off the balance on the

strategic matters associated with

card before any interest had accrued.

your investment strategies.

The key is to be resourceful. •

Working with a Lending Organization As mentioned earlier, lender

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TECHNOLOGY

Up-to-Date Technology Will Help Keep CFPB Happy by Elizabeth Morales

ll lenders want to stay on the

regulatory actions; findings from their

what additional documents and

good side of the Consumer

prior examinations; servicing transfer

information are needed, along with

Financial Protection Bureau,

activity; the number, severity and

a reasonable date to submit it. Also,

particularly in light of the agency’s

trends of consumer complaints; as well

servicers must now foreclose on the

recent criticism of mortgage servicers.

as input from housing counselors and

date they have specified and not a

How best to do that?

other stakeholders about institutional

few days before, as examiners found

performance based on their experience.

in many cases of deceptive practices.

First, give great customer service. Second, stop using your hands and

What does that mean? Because so

Some servicers failed to convert

toes to count money. Yes, the CFPB

many homes went into foreclosure as

trial modifications to permanent

recently released a 21-page qualitative

the servicers didn’t properly notify the

modifications after borrowers

and quantitative report, a study from

borrowers of the foreclosure process

had successfully completed trial

January 2014 to April 2016, in which

and deadlines, servicers must now

modifications, resulting in their owing

it criticized mortgage services, their

notify the borrowers in writing within

higher amounts of accrued interest.

outdated technology and poor follow-up

five days to acknowledge receipt

with borrowers.

of the loss mitigation application

Yes, but as quoted in The Wall Street

“Mortgage servicers can’t hide

Can I use Excel to service my loans?

and whether it is complete. The

Journal and Forbes, most recently, “88

behind their bad computer systems or

loss mitigation application must be

percent of spreadsheets have errors.”

outdated technology,” CFPB Director

received at least 45 days before a

Do you remember the JP Morgan Chase

Richard Cordray said in a press release.

foreclosure sale. If incomplete, the

“London Whale” incident, Barclays

“Mortgage servicers and their service

servicer must send a letter stating

offer to buy Lehman Brothers and the

providers must step up and make the investments necessary to do their jobs properly and legally.” The examiners found that other than deficient technology, “several mortgage servicers lack proper training, testing and auditing of their computer systems and software platforms and those of their service providers.” So what exactly did they look at in each servicer? Several things: the strength of compliance management systems; the existence of other

58 PRIVATE LENDER

••• Reinhart and Rogoff famous paper on

to the credit agencies of your choice,

requests this information in writing,

debt sustainability? A common error in

support Graduated Term loans, ARM,

your software should have the ability to

spreadsheets is hiding columns rather

HELOCs, commercial, construction

produce the proper reports or notices

than deleting (as in formulas, etc.).

loans, and many other features.

that would inform the borrower of their

If you are going to use spreadsheets,

In other words, do your homework.

current account status.

make sure you have a team to review

There are many providers out there.

them individually and then collectively.

Do a demo, ask questions, compare

his delinquent account status, make

If you have worked with spreadsheets

pricing and remember—you get what

sure that your software can produce

after a few hours, everything tends to

you pay for.

late notices based on rules defined

In order to inform the customer of

get blurry. Once you have done all the

In your research of loan servicing

in the software. For example: if the

checking on your part, there is a very

software perhaps the most important

borrower is 30 days late, send him a

big chance there still will be mistakes.

thing is to be sure that the calculations

letter stating that his payment is now

Finding one’s mistakes is very hard,

in the software are accurate. This

30 days late. If the borrower is 45 days

so have a committee for spreadsheet

may seem like a given, but the

late, you can inform the borrower that

checking. If you don’t want to invest

number of software companies in the

the loan is getting ready to go into

all those resources, then look for loan

industry that produce reports and

default. You should be able to email

servicing software.

generate transactions with erroneous

and print any report, notice or letter

What should I look for when

calculations is more common than one

to ensure the borrower receives the

purchasing a software system? You

would think. In order to avoid these

proper notification. Also, your software

definitely want to ensure compliance

inaccuracies be sure to try real-life

should be able to generate custom

with federal and state regulations,

scenarios before making a decision.

letters. Another important feature of

Dodd-Frank—and if you are in

In other words, when you are doing

your software should be the capability

California, BRE compliance, as well.

a demo, bring in your own numbers

to attach documents to a borrower’s

It would be great if the software has

that you know/think are right and

file. This becomes important when

Quickbooks integration, electronic

ask the presenter to put those into the

the borrower calls and says: “I didn’t

payment processing to be able to take

software. That’s a true test.

receive (something).” You can go to

payments online and/or over the

How can investing in great software

that file and see the exact day and time

phone, Microsoft Office integration, in

aid me in providing great customer

the report, letter, notice was generated

person and over-the-phone training,

service? The right software will give you

and sent either via email or mail.

technical support, website portals,

access to all of the loan’s information in

product updates, maybe an app for

order to accurately inform borrowers

in a software package that would

your investors to see their accounts

of their current account status.

help you keep the borrower properly

24/7 and for your borrowers to be able

For example, if a borrower who is

informed and may avoid their account

to go online and pay. Make sure you

delinquent on his account calls in

going into default and later foreclosure.

can print, manage and e-file 1098s and

and wishes to know what it would

In conclusion, do your job right—

1099s; have the ability to import loans

take to bring his account current, you

not because you can get caught

to reduce loss of data or inaccuracies

need to be sure that your software

doing something wrong, but simply

due to manual data entry; you should

contains a reinstatement calculator

because it is the right thing to do—

be able to email statements and letters,

that would provide the borrower with

and automate your back office by

have an event reminder system, track

all outstanding payments and fees due

purchasing reliable, accurate and

impounds and reserves, report info

as of a certain day. If the borrower

robust loan servicing software. •

These are prime examples of features

JULY/AUGUST 2016 59

PEAK PERFORMANCE

Using Property Valuations to Spot Opportunity by Ron Ahlensdorf Jr.

or private lenders, the real estate collateral against which they lend

But private lenders who do not have large portfolios are better served by

is critically important. It often is the

another approach: Using property

deciding factor in whether the investor

values to locate opportunity, which

can avoid loss in the case of default. But

involves watching national property

valuation also serves another critical

valuation trends.

function for the private lender. It can help identify opportunity. Most lenders use valuations on a case-by-case basis, testing

Watching the National Trends There are a number of national

each potential deal on a go/no-go basis,

organizations and large firms that

using property value as the filter. That’s

watch the housing market, reporting

a very time-consuming method, though

back to the industry on the trends

essential for good loan underwriting.

they observe. It can be challenging to

Looking at the market using a larger scale

aggregate all of this data into one place

is much more effective when it comes to

for analysis, but if you can accomplish

finding areas of opportunity.

that, you get a very good idea of where

There are generally two approaches

the month of May. Melikian’s most recent analysis

the opportunity lies in the U.S. housing

concluded that sales volume may

an investor can take when seeking

market. As a service to our clients, we

slow in the short term and values

opportunity by looking for property

compile that information each month.

may be steady in some markets.

value. The first is to systematically

We then include an analysis of the data

“Predicting future residential home

search through a portfolio of existing

from Summit’s Chief Valuation Officer,

values is very difficult, especially

loans to uncover those properties that

Mark Melikian, author of the report.

given the many differences we see

have experienced higher-than-expected

Each month, Melikian collects real

between regions,” he said. “However,

estate market data relating to existing

the data we’re seeing, when trended

homes, employment rates and interest

over the past few months, indicate

larger investors who have a portfolio

rates from the National Association

that we will likely see a drop in the

of loans to submit to a bulk valuation

of Realtors, the U.S. Department of

number of homes sold over the

vendor who will supply Broker Price

Labor and Freddie Mac, respectively.

next month or two and a continued

Opinions (BPOs) or some custom

This information is then used to

decrease in housing affordability in

report based on a broker’s estimate

perform an analysis of the real estate

high-demand markets.”

of value. This is an effective approach

market nationwide. The most current

because BPOs are affordable and can be

report (at press time) included data

of housing, the pending home sales

delivered with a short turnaround time.

collected during June, which covered

index, the federal unemployment

valuation gains. Typically, this method works best for

60 PRIVATE LENDER

In May 2016, the month’s supply

•••

rate and mortgage rates all decreased

Summit just issued.

year-over-year. The median sales

lead to an eventual decline in prices. Affordability concerns, which were

price and the seasonally adjusted

What the Data Mean for

addressed in the February 2016

annual number of homes sold

Private Lenders

report, also impact home prices in

both increased during the month,

Melikian pointed out that a

areas where it now takes a larger

according to the data. Melikian says

decrease in sales volume, housing

percentage of personal income to

that the data suggest a decrease in

price affordability challenges in

afford a house. As a result, these

the number of homes sold over the

some markets and inventory levels

markets could see home prices

next 30 to 60 days.

remaining level in the past month

leveling in the near future.”

On a regional level, the South had

could result in a relatively stable—or

How the national real estate data

the highest number of existing home

even slightly lower—median sales

impacts the private lender’s local market

sales and the West had the highest

price in the next month.

will depend on many factors, but it

median price. The West experienced

“Long-term, home prices in

will most certainly have an impact.

the largest percentage increase in the

the residential real estate market

Finding a way to stay abreast of national

number of seasonally adjusted existing

continue to be driven by tight

trends will make it easier to spot local

home sales while the Midwest had

inventory, investor activity and

opportunities. To get on our mailing list

the largest percentage gain in median

interest rate,” he said. “An increase

and receive a copy of Melikian’s monthly

sales price, month-over-month. Charts

in inventory or interest rates, or a

report, contact me at ron.ahlensdorf@

to this effect are included in the report

reduction in investor activity could

summitvaluations.com. •

JULY/AUGUST 2016 61

ONLINE LENDING

Is Online Real Estate Lending the ‘Next Big Thing’ or a Repeat of the Dot-Com Bust? by Matt Rodak

uring the dot-com bust of

lack of computer programmers to

This has normally meant developing an

the late ‘90s, hundreds of

meet hiring demands, weak payment

in-person relationship and, over time,

companies went broke. Now, nearly

technology infrastructure—and the

building up a level of trust. Put another

two decades later, a lot of those early

list goes on.

way, real estate finance is largely a

concepts have revived themselves as successful enterprises.

Over the next decade, technology and job skills caught up with the novel

relationship business that requires a high degree of trust.

From retail giant Amazon to

dot-com ideas. High-speed internet

streaming video service Netflix,

is widely available, more computer

is that borrowers are now more

just about any product or service a

programmers are being minted and

accustomed to developing “online

consumer could want can be found

an entire industry exists to allow

relationships.” They manage personal

online. There have, however, been a

companies to access all the backend

relationship on Facebook and Instagram

few laggard industries. Real estate

technology needed to spin up an

and buy other goods and services online

finance is surely one of those.

e-commerce site without the overhead.

without a second thought.

This lagging industry seems to

Much like the early dot-com failures,

The shift that is currently happening

As borrowers become more

be catching up. Since 2013, more

real estate finance has had a difficult

accustomed to operating online in

than 100 online real estate finance

time transitioning online due to

other aspects of their lives, developing

companies have cropped up. So the

customer behavior and technological

a relationship with an online lender

trillion-dollar question is whether or

limitations. However, now might be

starts to feel more natural. They

not these new companies are leading

the time for this industry to finally

can connect on LinkedIn with their

the shift online or are destined to fail

make its way online. Here are a few of

account managers, read online reviews

like the companies before them.

the previous barriers that have kept

and start to develop a level of “trust”

To answer this question, let’s

the industry largely offline and why

that would have been much more

that’s likely to change.

difficult to do with an online lender

look back to see what caused the dot-com companies to fail. A big reason had to do with the fact that the technology of the time wasn’t yet ready to support consumer

five years ago. Developing Trust Online to Acquire Customers Originating a real estate loan is a

Consider that Airbnb is a billiondollar company that built an entire business on homeowners opening

needs. Remember when web pages

complex transaction that involves

their doors and welcoming strangers

took minutes to load on dial-

hundreds of thousands of dollars and

to sleep in their beds! Online

up? Consumers didn’t have the

complex contracts. Traditionally, a

relationships and trust development

patience to wait for a page to load to

customer has needed some level of

are real and seemingly here to stay.

efficiently “shop” online. Then there

assurance that he or she is dealing with

This same dynamic is helping real

were issues around high overhead,

a reputable firm that can be trusted.

estate finance companies acquire

62 PRIVATE LENDER

customers via online channels like

other local “boots-on-ground” services

capital for traditional lenders.

never before.

allows an online lender to largely

These institutions tend to be very

replicate “local knowledge” previously

conservative and slow to move. This

only available to offline lenders.

has made it difficult for innovative

Underwriting and Origination Another barrier that has kept real

Similarly, information about

online lenders to scale, as these

estate offline is that underwriting a

borrowers is more available than

institutions are inherently skeptical

new borrower and loan has needed to

ever. Technology allows underwriters

of new methods of doing business.

be done very locally. Neighborhoods

to perform credit checks, verify

can be different street to street,

income and bank balances to confirm

estate finance moving online was the

and lack of local market knowledge

creditworthiness.

passage of the JOBS Act by Congress in

can cause a lender to make poor

More and more data is making its

Perhaps the largest catalyst for real

2013. This new legislation made it more

way online, which will help inform

efficient for lenders to source capital

Now, with technologies like Google

underwriting decisions. Combine this

through “general solicitation” online.

Maps, underwriters can virtually “drive”

with powerful computing engines and

through just about every neighborhood

talented engineers and an argument

originate loans and raise capital online

across the country. There are also

could be made that objective, data-

from millions of individual accredited

numerous data sources that allow easy

driven underwriting could outperform

investors. While this capital base is

access to comparable market data, crime

the “gut” underwriting done by those

much more fragmented than larger

statistics, school data, employment

with local knowledge.

institutions, technology and online

underwriting decisions.

advertising allow for raising capital

information, income, demographics, lien searches, etc. Using these online data sources

This means that lenders can

Capital Formation Large financial institutions like

this way to be done efficiently. This new source of efficient capital

combined with third-party appraisal

banks, hedge funds and pensions

has allowed early online lenders

firms, construction draw inspectors and

have largely been the supply of

to syndicate loans to thousands of

JULY/AUGUST 2016 63

ONLINE LENDING

individuals who are more innovative

••• DRONES

This may sound crazy today,

product will look like, giving the

and quicker to move. At the same time,

but imagine an underwriter ordering

underwriter further insight into the

individual accredited investors are

an appraisal that sends out a drone to

future value of the property.

able to invest in real estate like never

the property. This drone will fly around

before. It’s proven to be a win-win for

the neighborhood, providing photos

online lenders and individual investors

and live-stream videos. Further, the

looking for access to this type of asset.

drone could be let into the house and

As these new lenders have proven out their business models using

fly around the interior, reporting on the condition of the property.

individual accredited investor capital, the larger institutions have become more and more interested, allowing for the online lenders to further scale.

As the industry moves online

Data will continue to be

developed and used to contribute to underwriting. For example, there is now technology that captures sound volumes at properties. Are airplanes or trains passing nearby a property

VIRTUAL REALITY

Imagine a borrower

walking through the house with a virtual reality camera. The underwriter can sit in his or her office and do a

Future Predictions

BIG DATA

“walk-through” with the borrower. Further, the borrower could take the

there are other new technologies

underwriter on a tour of the

developing in parallel that could have

neighborhood, pointing out comps.

interesting applications for real estate

For construction loans or significant

finance. Here are a few that could be

rehab loans, renderings can be

interesting in the next five to 10 years.

developed showing what the final

regularly? What impact does this have on valuation? As technology-first lenders continue to develop their underwriting models, more and more data will be used to better inform lending decisions. In summary, there appears to be a perfect storm brewing around customer buying behavior, technological developments and capital formation legislation that’s enabling online real estate finance companies to form and grow. Further contributing to this is market timing. The real estate world was coming out of one of the worst downturns in history as this market was hatching. The big question hovering over the online real estate finance industry is: What will happen in the next downturn? While there is a high likelihood that not all of these new companies will last, it does appear that real estate finance has started its transition online. For those companies that make it as long-term going concerns, the future will be filled with many interesting new technologies to be further integrated into smarter underwriting. •

64 PRIVATE LENDER

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JULY/AUGUST 2016 65

REGULATORY ISSUES

The Continuing Trouble with TRID by Jaspreet Kaur, Esq.

everal months after the

perspective on the changes. While

average, closings take about four

Consumer Financial Protection

TRID does mean the work they face

days longer than they did before

Bureau (CFPB) finally implemented

may be more complicated, it also

TRID was implemented. However,

the new TILA-RESPA Integrated

allows the most competitive vendors

where exactly TRID is causing these

Disclosure (TRID) rules, mortgage

to differentiate themselves by

delays is less obvious since they tend

lending operations continue to

providing better and more efficient

to occur at various points throughout

struggle with the new regulations.

compliance products.

the loan process. Also, anecdotal

Critics of the rule argue that the

Some technology companies believe

evidence suggests that customers are

complexity of the regulations is

that lenders face difficulties when

causing delays in closings, which

they attempt to throw more personnel

leads to a rise in origination costs.

at a compliance issue, rather than just

performing physical workarounds

Furthermore, some investors are

investing in the technology necessary

for issues that may be caused by

either suspending or outright

to cope with the long-term changes.

paperless functions. Yet other lenders

rejecting acquisition of loans

In other cases, lenders may have

seem to be optionally adding a couple

originated under the new rules,

purchased acceptable technology but

days to their closing times as padding

fearing defects in the loans and

failed to utilize it properly within the

against expected TRID issues.

potentially significant buybacks.

context of the new regulations and

Whether or not the mortgage

updated rules.

industry will be able to integrate the new rules remains to be seen. Some lenders fear the worst, decrying

noticing the delays as well. Some delays may be due to lenders

While some of TRID’s kinks are still being worked out, the CFPB seems confident that most lenders

How Long Until Full Compliance Industry experts estimate that it

are now in an excellent position to identify roadblocks in the

TRID as an insurmountable disaster

may take longer for the mortgage

loan process and deal with them

from which the industry may never

industry as a whole to implement

accordingly. Whether or not the

recover. Others claim that the

new TRID-compatible technology.

increased costs TRID has created

current TRID fallout represents

Most analysts say that the date

in the loan process will continue to

the new standard for the industry,

effectively tends to land at about a

affect the industry moving forward

with its increased operation costs,

year to a year and a half out. While

remains to be seen.

high fees for keeping rates locked,

predictions vary as to how long it will

delayed closings and more regulatory

actually take the industry to reach

scrutiny. In other words, it is just

complete compliance, nobody can

Some believe that as time goes

part of doing business.

deny that the months since TRID’s

on, mortgage companies will have

However, in contrast to these

Implementing Full Compliance

initial implementation have been

invested in the proper technology

negative predictions, many mortgage

fraught with closing delays and other

and processes, resulting in a drop

vendors—especially mortgage

issues thanks to the regulation.

in cost for lenders. Critics are

technology firms—have a positive

66 PRIVATE LENDER

Evidence demonstrates that on

skeptical, saying that while TRID

••• may be effective in its objective of protecting consumers, the cost is being passed along to mortgage companies, which will be forced to foot the bill for permanently increased costs. At some point,

Your Appraisal Fees at Risk Under TRID by Anthony F. Geraci, Esq.

ith the advent of the new TILA-RESPA Integrated Disclosure Rule (“TRID”), there is an issue to consider that will have an effect on both

appraisers and lenders once the rule goes into effect on Aug. 1. The new Loan

the extra costs will eventually be

Estimate (LE) and Closing Disclosure (CD) form will replace both the GFE

borne by the homeowner as part

and HUD-1 forms, and the appraisal fee must now be disclosed and signed off

of normal loan fees.

by the borrower before proceeding.

As the debate rages on about the

That means the new requirement will not allow credit card information to

long-term effects TRID, supporters

be collected, nor may appraisal fees be charged until the initial disclosures are

point to the RESPA reform in

signed off. As is already law, the LE must be delivered to the customer no later

2010, which created challenges

than three days after application.

for a few months after it had been

In addition, once the associated appraisal fees are included in the CFPB’s

introduced. While the new process

zero-tolerance section, they may not be increased except in instances where

was refined, it ultimately worked

a valid change of circumstance arises. Consequently, AMCs and appraisers

well. They argue that the current

cannot use standard “up” charges to cope with situations that may cost more,

situation with TRID represents

such as complicated property assignments.

a similar instance of the growing

The new rules specify that a rural or larger property appraisal does not

pains inherent in the course

qualify for the “change of circumstance” exception since the address of the

of introducing new rules and

home is known from the outset. One possible solution advocated by some

processes.

in the appraisal industry is a regular overestimation of the fee, followed by

Those companies who invested in the right technology early on are going to have an easier go of it. But

a refund of unused funds once the costs have been finalized. However, this solution seems to contradict directly the rules laid out by TRID. The appraisal fee can be increased when a valid exception exists.

for those who have concentrated

For example, an appraiser can run into a situation where the actual

on the manual workarounds rather

property did not match the description of the property on the

than the technology are now left

assignment, making it subject to an entirely different schedule of fees.

figuring out just what the cost

This instance would provide a valid reason to alter the amount of the

will be to their bottom line when

appraisal fees due to change of circumstance.

upgrading their technology. Mortgage insiders mostly agree

Industry experts have expressed that “padding” of the fees to create a cushion is not permissible under TRID. The rules clearly indicate that

that the new regulations will

the fees must be based on the best information available. It is therefore

benefit the consumer and is a

recommended that lenders evaluate the information about the area

complex challenge that needed to

where they are conducting business to ensure they are disclosing the

be tackled. However, even those

correct appraisal fees from the onset.

most optimistic about the long-

Regardless of how experienced the lender is, there will be certain

term success of TRID are willing

circumstances in which appraisal fees will need to be altered in light

to concede that the process of

of additional information or unforeseen circumstances. However, to

total TRID compliance will be a

remain compliant with TRID, altering the appraisal fees must not occur

lengthy and involved one. •

unless there is a valid justification to do so.

JULY/AUGUST 2016 67

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