Real Estate Lending Partners

Mike: Hey, it’s Mike Hambright with flipnerd.com. Welcome back for another exciting expert interview. We’re interviewing successful real estate investing experts and entrepreneurs in our industry to help you learn and grow. Today I’m joined by Mark Filler. He’s the CEO of Jordan Capital Finance, a direct private lender for real estate investors. Mark has more than 20 years experience in the mortgage industry, leading many very large companies to a massive growth, which he’s going to share with us here a little bit. And Mark has lent out hundreds of millions, maybe billions of dollars in his businesses. Today he’s going to share his knowledge with us. Specifically he’s going to tell us about different types of lenders, because they are not all the same, and how to position yourself to maximize your chances of getting approved for a line of credit. He’s also going to tell us how to best optimize your repair draws for your next project, which if you haven’t dealt with that before, it can get messy and there is a very efficient to do it, especially if you’re working with the right lender. Before we get started with Mark though let’s take a moment to recognize our featured sponsors.
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Hey Mark, welcome to the show.
Mark: Well, I’m sorry about that. Hey, thanks a lot for having me. I appreciate it.
Mike: Yeah, yeah, glad you’re here. So as you know, we were talking before the show, a lot of people know this as well after they start working with different lenders, that not all lenders are the same. It’s not all an apples of apples comparison, right?
Mark: They are, that’s definitely is true. I saw a statistics actually. There is more than 50,000 mortgage lenders in the country.
Mike: Wow, that’s incredible.
Mark: So they are not all the same.
Mike: That’s incredible, that’s incredible. Well, before we dive in to talking about some of the topics that we are going to discuss today, why don’t you tell us your background and then how you got to where you are today?
Mark: Sure, I grew up in Chicago, so still living in Chicago. And I was actually a lawyer early in my career. And then a friend of mine convinced that we should start a mortgage company together. And he was a good sales guy, because I didn’t know anything about it all. So we started a company called Prism Mortgage, we started that one from scratch, and we ended up doing an initial public offering and selling that to Royal Bank of Canada. And then I worked at another very large New York stock exchange mortgage company. And then in 2007, immediately before the crash just by a couple of months, I started another mortgage company called Prospect Mortgage Company. And that business today has over 2000 employees in over 45 states. So when I was there . . .
Mike: Despite the timing.
Mark: It was . . . I got lucky because if I had waited three more months, we would have never gotten off the ground.
Mike: Wow.
Mark: And yes, so that was fun, and yeah, they’re doing great today. So one of the most important niches of Prospect Mortgage is renovation lending. And what I mean by that is it’s primarily FHA and some Fannie and Freddie programs, and so about 95% of that is for homeowners, not investors. But we are actually the second largest in the country after Wells Fargo in those types of renovation lending. So I learned a ton about renovation lending, I learned a ton about renovation lending, not just in one state. Most private or hard money lenders operate in one city or one state, but because of my background understanding how to do it all over the country, I’m not a very creative person, so I decided what I was trying to think about what business I wanted to do next. And I said well I’m just going essentially do exactly what I was doing. But instead of doing it for homeowners, I’m going to do it for investors.
And we started the business just over two years ago, and we’ve already in a short period of time, become one of the top five lenders in our industry.
Mike: That’s great. Talk about that shift from a traditional homeowner focus to the investor focus. What was the appeal to move into that space?
Mark: Well, certainly one of the appeals everybody reads about all the regulation, all the regulatory issues in the homeowner space. And this is fun because we actually get to run a business and make decisions based on just simple business practices, and what makes sense. And at the end of the day, all I really have to worry about is my investor going to repay my loan?
Mike: Right. Because it’s B2B not B to consumer, yeah.
Mark: Yeah, exactly so avoiding all that regulatory nonsense is great. And this whole investor world, I think it’s more fun, I think it’s more sophisticated, and it creates more opportunities to being creative in terms of, you’re not just focusing on Fannie May rules or city or B of A [SP], you’re creating your own guidelines in deciding how you want to run your business.
Mike: Sure and maybe talk about, just a little bit before we get started, talk about what’s happened over the past, let’s call it three or four years, in terms of lenders becoming more institutional. Prior to that that, that was much less common, right? There was a lot more boots on the ground, local guy that has retired and has some money as a lender. And there are some organized people certainly at the regional or local market level. But there has obviously been a big transition into more of the institutional type players, like yourself, over the past several years?
Mark: Yeah, that is exactly right. In fact, that may be the number one reason why I started this business, because I wanted to do something on a much, much larger scale than what was happening at the time. At the time I don’t think I knew of one lender that lent more than a few hour drive from their office. And most of the lenders were operating within an hour of their office. And I saw an opportunity to so something at a much, much larger more institutional nationwide way. And it literally didn’t exist when I had the idea. And it turns out I had a good idea, but so did a handful of other guys. And so the whole in that sense though . . . a big part of the business is change in terms of you have a handful of these very sophisticated, extremely well capitalized businesses that want to create something larger. And also I think it’s so clearly in just in the last two years, the market place has become, for lenders has become significantly more competitive, which is great for real estate investors where they are the benefactors of that.
But at the same time, I think it’s worthwhile to know that not very different than the big institutional guys were buying all these single family properties, and everybody thought they were taking over the world, and they were going to own all the single family houses. It’s the same thing on the institutional lender side. All of us, the handful of us that are larger combined we probably have about, I don’t know, a few percent market share. So there are still lots of some small guys out there that are doing well in their local markets.
Mike: Yeah, absolutely. Well, probably one of the areas where you guys . . . I’ve seen this throughout the show and meeting lots of people that have invested in many different markets. So I think even with individual investors, there was a time where they would tend to invest in their backyard. Because the technology, and because of things that have made this more efficient, there’s people that are virtually investing in multiple markets. And I think it seems to make sense to have a lender that can you lend you in all those markets where you operate versus building those relationships across the board. It goes hand in hand with that phenomenon.
Mark: I couldn’t agree more. I also think you find that some of the more sophisticated investors, they are very opportunistic. So they might buy a single family home one day, and a four flat another day and a 25 unit apartment building the next day. And then maybe they focus on renovation. And then all of a sudden they are flipping. And all of a sudden they see something that they want to hold for rental. And then maybe the next month they see a new construction opportunity. So one of the things that I think if I were an investor been able to look at, is I would try to find who can do all those different things for me. I do believe having a relationship with a lender is really, really important, and it’ll be to the investors’ advantage to have a really solid relationship with one or two lenders, instead of having to go to four or five different places.
Mike: Sure, yeah. I know even myself personally I have four of my fix and flips, I have a specific bank that I work with, but they won’t do rentals. And I have another one that I do my rental financing with, and they’ll fix and flips, but it’s not as cost effective as the other one. So I have that even in my own business for sure.
Mark: Sure.
Mike: Yeah, well why don’t you talk a little bit about some of the differences in lenders? So I think there are some terms that are thrown out a lot that people assume all mean the same like, hard money lender, private lender terms like that, but they could mean very different things, right?
Mark: Sure, sure. We say that the differences, or one of the primary differences between a private a lender and a hard money lender is, typically a hard money lender only cares about the asset. So they figure as long their loan is only maybe 60% or lower of the appraised value of the property, that they are not worried about the borrower, they are not even that worried about whether necessarily they get paid back on their loan because they are very happy to go foreclose on the property, own the property and make more money doing that than they could as a lender. And then I would say that a private lender, I think looks more holistically at the situation in terms of wanting to work with investors that have more of a track record, and essentially they know what they are doing, and they are not just going to bring the company just one loan, but they are in to do it more long term business. And I think that type of a lender, us included, but all the large firms we just talked about, they don’t really ever want to foreclose on a property, and make money that way.
They want to work with borrowers that are going to pay them back. And they are there to work things out. And not just . . . that would not a loan to own shop, not somebody that’s just going to say, “Well, you’re 35 days late on your payment. Too bad I’m foreclosing on you.”
Mike: Right, okay.
Mark: So in order to do that some of the private money lenders in some ways can be a little bit more cumbersome upfront in this, because they actually do care about the borrower, and knowing who they are going to do business with. They might ask for a few more documents than the true hard money lender that really cares about nothing beside the appraised value of the property.
Mike: Yeah, and that’s usually upfront though right? Because I know I have a line of credit with a bank for example, they evaluate that upfront and then they asks for tax returns once a year and some things like that. But essentially as long as the deal fits the criteria that we agree to upfront, I know the money is there. There’s never a problem to get loans.
Mark: Yeah, no exactly and that’s another reason that you might want to go to one of the larger firms to get money, because some of the small guys, the typical small guy in our business or even the middle size guy in our business, they are typical model is, they go to their friends and their family. They borrow as much money, they get as much money as they can, and depending on who your friends and family are, it could be half a million dollars, it could be two million dollars, it could be five million dollars, eight million dollars and let’s say they typically they’ll pay their friends and their family around 10% of the money. And then they turn around, and then they lend to that more than 10% and they keep the spread. But they might . . . if one month or two months they have a lot of loan activity, the third month they might not have any more money, because they are friends and family only goes so deep.
And so to your point, if I were in business, I want to know that my lender is going to have money no matter what so that I can act quickly, I can act with confidence. And as an example, one of the things that we do, we approve a borrower and we actually offer a long-term line of credit. So a typical deal would be, a borrower comes to us, we underwrite them, we say, “Here is a million dollars. Now you can go out and spend it. All you need to do is get us a purchase contract and a title policy.” And we can close deals in a week, because we already know a lot about the borrower. And again it’s not just us, but people who have a lot more money and are in this more for the long-term relationships.
Mike: Sure, so let’s talk a little bit about to what . . . how people can optimize that position themselves to be attractive to a borrower for you guys, or some of the other folks that are in your space. What is it that . . . if you’re a hard money lender and you’re looking more at the asset and less at the person, when you are looking at the person as a borrower, what are some of the things that they could do to make themselves more appealing?
Mark: Sure [inaudible 00:16:15] a lot of it would just be organized. As an example, if you could show a couple HUDs on actual transactions that you buy and sell. People get comfortable that you have a track record. I think that’s a pretty big deal. It doesn’t have to be a lot of experience, but if you could show a couple deals that you’ve done, I think that gives people a lot of comfort. Giving all your statements that show your liquidity I think is a really big deal. And so it’s a little bit of a pain in the neck upfront because maybe you have your liquidity in three or four different accounts and you say, “Well it’s a pain in the neck to go get all the statements.” But it’s worth it, because you’re going get a better deal, you’re going to get more capital available to you, and the process is going to quicker and smoother, because they are going to have a greater profile of the overall borrower. Being able to show that you have some net worth certainly helps.
I’ll tell you one of the things that I think is pretty common amongst some of the larger lenders in this industry, is there is a lot of concern about somebody you had a bankruptcy or foreclosure, particularly a foreclosure or a short sale in the last couple of years. Because people are worried about what’s going to happen if something happens bad in the renovation or market or something, to see that, people that at least been okay on their mortgages.
Mike: Okay, yeah, I know for me personally I have to . . . the first time I did it, it was a pain in the neck to create . . . especially with multiple lenders. And then I found out that they didn’t necessarily care if I used their format. They just wanted a personal financial statement, and so I created one that kind of looked like both of them. And once a year we just know the process now. When we get our tax returns back, send them to those guys, we fill out pour personal financial statements that basically just shows our assets and liability. And for us that includes going through all of our rentals to see well re-running what we think the market value is now, because it changes from year to year obviously. And we find out what our debt is, and how much were paid down in those rentals. And that’s actually a really good exercise for everybody to go through anyway.
Mark: Yeah.
Mike: But there were few times where that I was like this is just some extraneous thing I’m creating for my lenders. Even though I’m totally good for the money, in my mind, I don’t have to do all this. I’m good for the money. But it turns out to be a good exercise. It’s like, “Hey you find out . . . ” It’s a snapshot of your personal financial standing. And I look at it more that way now than I did I the past. It’s really not that big of a deal.
Mark: I wish more borrowers shared your point of view.
Mike: Yeah, well.
Mark: It’s actually funny that you say that, because for the first year we were in business, we had a required form that people had to use to fill out their personal financial statement. We got so many criticisms that it took too much time, or it was too much of a burden. So we actually did exactly what you are talking about, and we allowed people to do it on their own forms now.
Mike: Yeah, great.
Mark: But that’s definitely one of the complaints that a more institutional lender will get is, that “Oh well my hard money local guy doesn’t require me to fill out a personal financial statement.” They just care about the appraisal. But I think it’s worth it to know and also if you have a line in credit, then you can actually get a proof of funds. So that if you are trying to buy an asset from let’s say from a more institutional buyer or there’s a competitive situation, where there’s multiple bids on a property, and you can walk in and show that you actually have cash lined up so you are on the same category as a cash buyer.
Mike: Yeah, there’s a lot of comfort in being able to buy with confidence knowing that you got money there to do the deal, yeah.
Mark: If you know you can close in a week, you’re going to be able to get some concessions out of the seller that you wouldn’t be able to otherwise.
Mike: For sure, absolutely. So one of the things that a lot of . . . is always something to consider when you are working either a lender is how quickly they are on repair draws, how easy that process is, because if you don’t have a lot of money and you are borrowing most of the money to do the job, you’ve got to pay your contractors. And contractors tend to be week to week type people, hand to mouth type people so they want to get paid right away. And I’ve always advised people, in terms of how to manage contractors and those things, that there are really are two things that are really critical. One is very clear communications on what they’re supposed to do. And two is paying them like clockwork, because it’s such an important part. But maybe you can just take a second maybe this could be new for some people. Just talk about the concept of what a repair draw is, and how that process works?
Mark: Sure, yeah, so what we do is, we have . . . if somebody wants to borrow repair draw money from us, what we do upfront before we loan them the money for their purchase acquisition piece, we actually ask them for their construction budget. And so then we take the budget. We review the budget to make sure that we think it’s appropriate for the transaction, if things are in the right ball park, if something looks too high, or too low, or they missed something, etc. And now we have this budget. Let’s just using as an example, that the repair budget was $40,000. So what we will do is, as an example, typically we lend 80% sometimes more, sometimes less of the renovation expenses. So we’ll have this $40,000 budget, and it’s actually by line item. And let’s say that the borrower decides after three weeks that he wants to get some money. He’ll call us up, and he’ll say “I’m one quarter of the way done with my renovation.”
So that means that in his mind he’s done 25% of the $40,000 that we have in our overall budget. So we send an inspector out, it takes probably an hour. The inspector goes through the property says, “Okay, yes, you’re 25% of the way done through your renovation, or no, you are not 25% done with the renovation, and you’re only 20% done.” And then 24 hours later we get the borrower that percentage based on the completion of the work percentage, we get them their funds 24 hours later. It’s a pretty simple process. I think the thing that somebody could say is, I get a pain in the neck is, they actually have to show an organized construction budget. So if you are going to do it back of the napkin, I think it’s a good thing because it causes you to be more organized, and make sure that you really get into the project, and you know what it’s actually going to cost you to do things. And it’s worthwhile, because that way if you want to get two or three draws during the process so that you can pay your like you said, you can pay your contractors on time or really quickly, I think it’s clearly worth it.
Mike: Yeah, it’s a good business practice anyway just to be organized. But talk a little bit about, in terms of when you pay that out, let’s say that 25% in your example, is it based on scope of work inside of their? So for example, just to clarify, if people bought all the materials let’s say in that $40,000 budget, let’s say the materials were 15,000 of that total budget, if they just go spend 15,000 on materials and stick them in the garage, do you reimburse on that, or they need to actually be installed and finished work right?
Mark: Yeah, that’s a good question. We, of course, like to see it installed.
Mike: Yeah.
Mark: And in a rare occasion we’ll be flexible, and obviously we’re more flexible with a borrower that we’ve already done a couple of deals with, we get to know him. But initially when we work with people we definitely want to see that it’s installed.
Mike: Yeah, okay and talk about the kind of timing on that process, because I know for a lot of folks that again don’t have a lot of money they are relying on their lender to pay those things. Just talk about the process of, or maybe give some tips on how they can officially manage their rehab, so that they get paid quickly and . . .
Mark: Yeah, that’s a good question. What I would say is it’s again being organized. So if you know that in four days you are going to want to have an inspector come out, and that way the next day you can get funding, instead of waiting to the fourth day you call us up four days earlier and say, “Hey can you have an inspector out here in the next three, four or five days?” So just by giving us a little notice, being a little organized that way we can already set up the inspection. And then it really does go clock work, because the guy comes out on the day that he said he was going to come out, and we can fund you 24 hours later. So I would just think it’s just a question of always anticipating when you are going to want the money as opposed to waiting until the time you actually want the money.
Mike: Yeah, I know in my business where we’ve had hundreds of houses. We had even with our contractors back to that kind of expectation setting, we always had a set up to where, if you email in your invoice to effectively our book keeper by 5 p.m. on a Wednesday, we’ll have a check for you on Friday, and just setting that expectation, because I think a lot of contractors, if you let them, they’ll say “Well, it’s Monday afternoon, and I need a check right now.” And you have to define that process, and I think if you have that process defined for your business, if it was the same process I’ve mentioned where we are going to send in your invoice by Monday or by Wednesday, we’ll have a check for you on Friday.
You just back into, well when do I need to have certain amount of work done, so that I can request my repair draw four or five days ahead of time. Anticipate making that payment.
Mark: Exactly yeah, if we have that kind of notice, we can get you the money when you want it every time.
Mike: Yeah, great. Well Mark, anything else you want to talk about today to give any kind of words or wisdom to people looking to build relations with a lender?
Mark: That’s a good question. Obviously to me, there is a just a lot of basics. Make sure that the lender has a reputation for closing when they say they are going to close. Meeting closing dates to me is as important as just about anything. Making sure that . . . I would think about that as maybe about sometimes when things have not gone perfectly. Let’s say that the construction budget, it turned out that there was some unexpected expenses, or weather caused a month delay in the renovation, or the property took longer than expected to sell, any kind of . . . or the contractor had a medical issue and had to take three weeks off of work, or whatever it is, to talk about how a lender responds in those situations, and what their attitude is in terms of whether they are really borrower centric and borrower friendly versus become combative in those situations. Because we all know that if you use a lender enough something is going to happen. And having that relationship I think is really important to working those kinds of things out.
Mike: That’s great advice. So Mark, if folks want to learn more about Jordan Capital Finance, where do they go?
Mark: jordacapitalfinance.com or jordancf.com.
Mike: Okay, well I add a link down below here, and maybe you could just talk a second to talk about where you lend, and where you don’t. I know that you’re lending in most states now, right?
Mark: Yeah, we are at about 45 states and bottom line for us is we are really focused on anything that’s East, Midwest, and Texas, we have not . . . we are not lending in particular [inaudible 00:29:55] an example, California and Nevada. And like you said 45 out of 50, and the only two big ones that we don’t lend are California and Nevada. There others, there are some small states that had some awkward regulatory issues, so we’ve chosen not go there. It might not be 45 states, it might be 43, I don’t remember the exact, but it’s most of the places.
Mike: Okay, well we’ll add your link to your website down below the video here for those that are interested. Mark, thanks so much for spending time with us today.
Mark: Appreciate it. Thank you very much.
Mike: Good to see you. I appreciate you.
Mark: Thank you.
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