Leonard Rosen was a news anchor on the Financial News Network in the 80's. Mr. Rosen also hosted the Leonard Rosen show which appeared nationally.
Mr. Rosen is currently the CEO of Pitbull Conference which is the largest organization in the country educating real estate investors, brokers and lenders on the emerging opportunities in private money financing. He is also considered an expert in the field of creating real estate investement funds.
Welcome to Mortgage Markets Today, my name is Louis Amaya and today is January 27, 2014. Former CFPB director, Raj Date, left the bureau and in late January to launch an investment advisory firm he called Fenway Summer. The venture will table fund non-QM loans and assume all the risk from the lenders. This new channel will provide an outlet for regional banks as well as mortgage brokers. The new CFPB rules provide an opportunity for non-prime lenders to compete and develop a niche for themselves as the larger banks continue tight credit. Joining me today is Leonard Rosen, former news anchor on the Financial News Network, who also hosted the Leonard Rosen Show which appeared nationally. Mr. Rosen is currently the CEO of Pitbull Conference which is the largest organization in the country educating real estate investors, brokers and lenders on the emerging opportunities and private money financing. He is also considered an expert in the field of creating real estate investment trust. Non-prime lending, up next on Mortgage Markets Today.
Leonard, welcome to the broadcast. Thanks for taking the time.
Louis, good morning!
So, we'll jump right into it on non-prime or private money lending. What opportunities exist today as a result of the evolving market and a tightening of credit for private money lending?
Well, I agree with the first part of your question. I am not sure I agree with the second part. The first part is, I see tremendous emerging opportunities that are available in private lending for real estate. In terms of capital markets, in terms of credit available, I see more investment dollars going in to the private money sector that I have seen in perhaps the last 20 years. The market has clearly changed. We all know about 2008 and the real estate implosion, which created havoc in the industry, not only the real estate industries but our economy as a whole, but the opportunities are available now more so than they ever have been and that is what makes it exciting for me.
So, you know, from a traditional mortgage banker, banking loans where housing and someone offers secure ties to them and I want to build another channel, is that possible or what is that process look like?
Well, it really depends on what your current business model is. Look, if you are mortgage broker, for example, and you are looking to make a change in your business model. Clearly private money lending is, I think, an outstanding opportunity. Having said that, I think one has to take a look at really what is your core business model is. If you are doing a paper loan for residential borrowers, this probably is not the right venue for you; however, if you have more of the entrepreneurial spirit and vision, one can take a look at that the small balance commercial properties, large balance commercial properties and the fastest segment which is the non-owner occupied rehab market is really where the opportunity is, I think for many people. You have to take a look, I think, at your core business, now I get calls all the time, Leonard I want to get involved in the private money sector, I want to get involved and play a role in that. But if you are not getting any kind of deals flow to your office people asking you about private money and you are just brokering private money or you're just brokering a paper loan, maybe private money is not the right avenue for you.
But I would imagine, say, if there is a banker out there that has retail offices throughout California and has a brisk banking business on the traditional type of loan products and they work with, and their base is primarily router based, they are gonna see deal flow that could be moved into private money, would it make sense in issues like that to consider different business model to offer more products channeled through, maybe a different LLC or a different real estate investment fund.
Yeah, I think that is a fair assessment. I guess what I am saying is that there is three kinds of people in the world. There is people who talk about other people, which I think is the lowest level of thinking and then there is people that talk about places and things and that is a mid level thinker and then the highest level thinker is the person who talks about or thinks about vision, opportunities and looking at the big picture, so if you're a big picture thinker and you step back and you look at the market and say well look, you know, the bank clearly are not lending on certain types of real estate assets, perhaps there is a opportunity for me to add this into my portfolio and so it really have to do with the kind of thinking you have and the kind of business model you have and what you want that business model to be in the future.
So, we will take the same scenario and we want to move in --someone wants to move into a spot where they can provide, broaden their spectrum, channel the loans through different investment vehicle primarily portfolio one may imagine. How do you get started, so you raise--you have to go there and raise private money. Historically from my understanding, the hard money business is, it used to be primarily kind of mom and pop investors, investing in second trust deeds but obviously that market has changed dramatically and you had mentioned institutional investors, so does one start to go out a network with private wealth, pension plans, larger institutional investors, I mean, what type of investors are applying for this type of product?
That is a great question. Okay. First of all, let's talk about the actual business model and the business model is, that if you want to be a private lender or investor. If you want to be in that world, the first thing that we have to do is to understand that we got to create a business model for that, which is going to be very different than the business model for traditional lending. You have to create underwriting guidelines that are going to be safe for your investors. You have to determine what type of asset classes that you are going to lend on, what type of geographical areas you need and investor relations program and so forth and what we see is, and we help with that. We help create that architecture if somebody wants to do that. the investors who participate in a real estate fund are primarily self-directed IRA investors that are looking to deploy capital that is already in their self-directed IRA. So you are not asking an investor to deploy additional capital into the marketplace; however, that conversation is more redeploying or redirecting some of the capital that they have and using their
self-directed IRA. Now that is the big part of the market today and most investors, the average investor is a $25,000 to $80,000 investor into a fund. That is one market and then the second market is the people who have money that sitting on the sidelines that is not in the self-directed IRA that they deploy into a fund, and most funds are going to give anywhere between 9% to 12% interest.
On first trust deeds in metro areas and a leader can be a one to four unit not owner occupied and up, so if we use a 60% LTV and the asset is in a major metropolitan area, the market would have to fall 40% just for the fund to break even so there is no investment that is foolproof that is certainly for sure but I think it is a pretty darn good business model.
Do you think the private money we were talking a little bit prior to the broadcast and historically hard money, private money, second trust deeds, unresidential owner occupied homes, even first trust deeds, will that market ever come back? I mean would private money lending ever come back to maybe fill the needs with the non-QM stuff?
I don't think so, and I will tell you why. I remember 10 years ago, there is a lot of big mortgage companies that were doing owner occupied first, second and even third trust deeds for investors and it worked back then, but it does not work today and the reason it does not work in today's marketplace is simply because of the rules, regulations, downtrend, and some of the high-classed requirements that the government has put in and so, it does not financially make it feasible for a lender to do owner occupied types of loans. Now, whether that comes back in the future, I am saying that that market is dead. I am saying that that is over, that ended in 2008 and so investors and lenders as well have become much more conservative in nature and they want to give their investors the safest possible investment with a conservative dividend yield and, think of it this way. If an owner occupied borrower cannot pay 6% on a mortgage and are in foreclosure, how are they gonna pay 10% or 11%. It does not make sense and so just from a sheer economic point of view, I do not see that market ever coming back and quite frankly, I don't know anyone who is doing owner occupied first or second.
Interesting, so the non-owner occupied and the commercial loans that the market that you saying is growing is not impacted by the frank or the CFPB to the extent as owner occupied homes are currently, so therefore that space is wide open and still provides the returns that attracts investors.
Yeah correct, that's absolutely correct. As a matter of fact not only is the non-owner occupied not affected, it actually is affected -- it is not affected in the negative manner, it is actually affected in a very positive manner because when you are loaning on a non-owner occupied asset, essentially what is happening is, it is a commercial loan and because of the commercial loan, it is not affected by the new rules and governing and legislation that has been put into place so if you are lending on for example, I was recently involved in a deal where one of my clients wanted to buy 40 REO properties from one of the local banks which he did and he battles properties. All those properties now are -- he purchased those properties as non-owner occupied. He is then going to sell those properties off as non-owner occupied investments to other investors. Those investors who purchased those properties from him can rehab the properties, put them up for sale to an owner-occupied, so there is a step in between them. The lender himself does not want to get involved in that, but you can sell it to an investor who rehabs the property and then takes the property, the market, and sells it to a qualified borrower. That is a tremendous market and that market, I think, in my judgment for the next 5 to 7 years is going to be the market that most investors are gonna get involved with and that's what we see at our conferences.
You know, we have done 31 national conferences over the year, the 32nd one will be February 20 in Fort Lauderdale and we see more and more real estate investors come to the event, real estate brokers or real estate investors who come to the event who are doing non-order occupied rehabs where four or five years ago, most of the market was doing small balance commercials, small shopping centers, that kind of thing and we do not see that much any more, so the market clearly has shifted.
I am gonna guess this answer is a no, but the state federal laws regulating for closure process timeline dual tracking, has that have had any negative impact on the market that you are speaking of?
None. Absolutely zero.
So what are the typical underwriting guidelines then for these types of loans that you generally see across broadly speaking.
Well, I mean it depends -- it is different obviously in every market. The Southern Carolina markets is gonna be a little different than the Texas market, Arizona market, or Florida market, which are the biggest markets for this type of investment. But having said that, I think the 60% loan to value ratio is somewhat consistent. Let's talk about that for just a moment. When we talk about loan to value when one gets an appraisal or a BPO, broker price opinion, from someone, those broker price opinion and that retail appraisal is based on the 12 marketing time, so if you go to appraiser to help gain appraiser's property and let's say the property is valued at $100,000, that's assuming they have a 12-month marketing time to market their property, but a private money lender or investor looks at things a little differently. They look at that property and say hi, what is the 30-day marketing time. If something went wrong and if loan did not perform, what can I expect to get from this property given a 30-day marketing time so that may not be a 100,000 any more and maybe 90,000 and then the lender or the investor will loan 60% of the 90,000 which really come down to about 56% LTV. So that is essentially how the market works.
So if an individual or a company decided to get into this space, what are the steps of raising the capital and meeting the investors and securing the infrastructure to make this happen.
Okay, well, step one is you have to create a business model. Step one is you have to create a model as I spoke and addressed to earlier and that is what are we doing, what is the function and what is the purpose of this new model that we are creating, are we going to do small balance commercial loans, are we are going to do raw land for development, are we going to do it or are we gonna lend on rehab. We have to establish what the business model is, we have to establish exactly what we are offering the investor, what kind of revenue streams we have, because what's beautiful about doing a real estate fund is that where most brokers just don't get it, is most brokers think the money's made in the origination points, so I am gonna go out the originator loan I am gonna make by 2-1/2% or 3% on it and then I just move to the next loan. The problem with that business model is at the end of the year he has not build the business, you are just hustling business, you are just hustling from one loan to the next, but when you do a real estate fund, when you do a true real estate fund, you are creating an annuity for yourself because not only getting the origination points but you are also receiving the arbitrage spread so if we are doing the commercial loan and we are lending out at 15%, we are giving our borrowers 9%, that 6% of the investors' money go to me. That is my spread, so if I had 20 or 30 million dollars deployed into the marketplace I am getting 60% of that in addition to the origination points. And then there is also another point for the servicing the fund, another point for managing the fund and then loan extension fees and prepaid penalty fees and they goes on and on, so the money is made in the back end. Having said that, how do you get investors?
Well my experiences then, that obtaining qualified accredited investors is never an easy job clearly, but having said that, if you have a good business model, and if you have a model that makes sense. You are able to raise capital. Now, we did a real estate fund for a company in Arizona, Titan Capital Holdings, and we raised over 2 million dollars in the first six weeks of the fund going live. We have an investor, lender, portfolio manager that we get a fund for four years ago down in Florida. He has raised 100 million dollars, 100 million dollars that's like unbelievable that's clearly not typical. Most real estate funds are 20 to 30-million dollar funds and you close the fund out, don't take any other investors, and then you open up your second fund. I mean essentially what we are talking about doing is same thing that Warren Buffett does, only were using the real estate model as our medium rather than using the stocks and equity markets.
So when you raised the fund, is that a soft commitment or is that actual money in the bank that you can deploy as soon as you get a deal or do you have to resell each individual deal as they come in?
Great question, that's actually a great question because the old business model was do worn off deals. You do a worn off deal, so you find a great deal you have an investor in you back pocket, you say next to investor, I've already underwritten this deal, I wanna sell this to you. So you make your origination point, he buys the loan. He gets the servicing on the loan, he gets all the benefits of the loan. That's an old business model. The new business model is you get 100 for example, 100 investors who deploy capital into the fund for a period of time, either one year, two years or three years. So it is not as liquid as the CD is, but the return on the investment can potentially be much greater. You pull their money together, so investor A puts in 100,000; investor B puts in 500,000; investor C puts in 50,000. You put all their money together, it is now into the fund general account for deployment. You then deploy that capital into the marketplace and based on the capital contribution from each investor, they receive a dividend yield. The beauty of this model is, is that if a loan does not perform and that does happen and you have to take the property back, the investor that you have into the fund is not impacted because that may be one asset out of 100 assets. And so that's the beauty of being in the fund. Just like being a neutral fund, if one stock goes down, it does not really affect the dividend yield that the entire neutral fund may have an impact, but it is not as if you -- if you were to buy that property for example, and you owned it, you gonna have to get legal fees and there is a time that you are not receiving payments and so forth.
So I like the model of the real estate fund where the money is pulled together. I like that better in today's marketplace and I think the investors do too. This is not a double-digit type of investment where you are gonna get 18% or 19%, clearly not. I mean this is the type of investment that's depending on the fund, you are gonna get anywhere between 8-1/2% to sometimes 11%, sometimes 12% because the way some fund managers have it worked out is, is they do what's called the waterfall. The first dividend yield paid out before anybody is what's call the preferred rate, that maybe 8%. Over 8%, whatever that fund does is split with the manager up until 12%. Above 12% then, the manager receives 100% of the profits, so the idea of a real estate fund is that everybody wins. That's the whole idea, conservatively written with small investors on prime real estate low loan to value ratios and if that's all done correctly having a real estate fund can be very exciting.
So where does one meet these investors to pitch to, is there a place that is doing all conference or it is the relationships? Once you have your business plan, you have your pitch book, where do you meet these folks to pitch?
Well I mean there is a lot of different ways of presenting the opportunity to investors clearly, and I learned a long time ago that investors are investors are investors and that people will invest in something if they feel safe and I learned a long time ago that people will forget what you did for them. People will also forget what you she said to them, but people will never forget the way you make them feel, and if you make an investor feel comfortable, safe, warm fussies, and you show them a good model, investors will invest. Now, having said that, our national conference is obviously a great tool, we're not the only event that one could go to. You could also go to some of the state mortgage association events and so forth, but investors are out there. They are clearly out there and every investor I know who has the portfolio, whether it be a stock portfolio or whatever that portfolio is, there is always a best-case scenario and a worse-case scenario in a portfolio and the investments that are on the bottom of the totem pole are the ones that need to be replaced with a better investment. Did that make sense?
Yes, it does. Leonard, we are just about out of time. One last question is somewhat of a forecast, so how big was the market in 2013 for private money lending and you had mentioned the market should be good for the next four or five years. Are there any other niches that you see developing other than, within the private money space, other than the non-owner occupied small balance commercial.
Okay, well it is very difficult to answer question in terms of what is the actual size of the market. There are some people who say that it is upwards 150 billion dollars just because the real estate values have now come back. So there is no way of really identifying or knowing what the true amount in terms of market capitalization is in the private money sector. Having said that, I have ever seen it as brisk as it is now and it has been over the last two years and I think I mentioned to you know the next five to seven years, I think we are gonna see some incredible growth in the industry. Outside of the owner occupied rehabs there are 3 trillion dollars of commercial property that is coming up for renegotiation, loans that are coming due, that are not going to be able to be performed by the borrowers. Those properties, those commercial properties will be the next wave for the investors and the lenders who have the capital to deploy. You watch in the next 24 months.
That's excellent information. I appreciate the time, Leonard. A great insight into the private money business and the small balance commercial. You do have a conference coming up, so I just wanted to give you an opportunity to again, the dates and place and the website they can get more information on.
Oh great, I appreciate that. February 20th Fort Lauderdale, Florida. www.pitbullconference.com and if anyone else have some questions, they can call my office at 858 736 7788.
Thanks. Leonard. I appreciate your time and I will probably pin you again in a few months, I'll kind check in and see how things are going maybe have a back on and given update, but again, thanks again.
I appreciate that. Thank you.
That wraps up today's broadcast. This year's attendance at the five star government form is more critical than ever on March 25th Leaders in the Houses and Mortgage Servicing Industry will engage with government officials and regulators in meaningful discussions on housing and mortgage policy. Please connect to mortgage markets today via LinkedIn, Facebook and Twitter or at the five star radio.com or dsnews.com as well as subscribe to Mortgage Markets Today on iTunes for simple downloading and listening to every podcast at your convenience. We'll talk to you next time.
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