Real Estate Crowd Funding

Mike Hambright: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright, and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week, which are available in the iTunes store, or by visiting FlipNerd.com. So without further adieu, let’s get started.
Hey, it’s Mike Hambright from FlipNerd.com. Welcome back for another exciting Flip show. Today I have with me Jilliene Helman, who is the CEO of RealtyMogul.com, which is a crowd funding sourcing platform for real estate investors. It’s a real hot area right now and an exciting topic because a lot of real estate investors are always looking for new sources of funding. Before we get started with Jilliene, let’s take a second to recognize our featured sponsors.

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Hey, Jilliene, welcome to the show.

Jilliene Helman: Thanks for having me, Mike.

Mike: Yeah. Yeah. And I understand you’re a little bit under the weather so we’ll say pardon us for everybody if you sound like you’re a little stuffy but hope you feel better.

Jilliene: Aw, thanks. I appreciate it.

Mike: I’m glad you’re a trooper to not cancel. That’s awesome. Well, you’re in a really hot area right now. Crowd funding is a very interesting area right now for real estate investors and I’m excited to kind of learn more about what you guys are doing at Realty Mogul, but why don’t you kind of introduce yourself first and talk about your background and kind of how you got to this point.

Jilliene: Sure. So, I came out of a big banking background. A big, bureaucratic, $90 million bank; I was working predominantly in wealth management, so working with our high net worth clients, individuals, endowments, non-profits, to invest their capital. A lot of these folks were investing in stocks. A lot of them were investing in bonds but I grew up in a real estate family. So my grandfather was a developer, my mother and father always owned real estate and I really kind of learned my real estate chops around the dinner table. And in April of 2012, Congress first approved the Jobs Act. And it’s the first time in 80 years that the securities laws have changed to allow for a couple of things.
One is advertising securities, so whether it’s real estate securities or other securities, it gives us the ability to advertise. And two is this concept of crowd funding. So, opening up the capital markets to a broader scope of individuals and I saw this political shift happening at the senate level, at the congressional level and I just said to myself you know there’s always an opportunity when there’s a political shift. I went to my co-founder who runs our technology and our product group and I said “Hey, we’ve got a great opportunity here. We can open up real estate investing to a broader market. Let’s take real estate finance to the internet,” and that’s what we did. So we started about a year and a half ago now. I left my job in big corporate banking bureaucracy and we’ve gone running, building our own business ever since.

Mike: That’s awesome. That’s awesome. And so, talk a little bit about kind of how you’re structured. I know some other crowd funding folks and they only do single family homes, but I know you do some larger commercial stuff and some other things, so talk a little bit about I mean you have two customers. You have those that are potential lenders and then you have those that are the borrowers that are doing deals. Is that right?

Jilliene: Right, exactly. And first of all, crowd funding at its core is pooling capital together, so we’ve built an online marketplace at RealtyMogul.com for these investors or lenders to get access to real estate transactions they historically would not have had access to. And then beyond that, we are working with a number of borrowers who need access to capital. Our main goal for these borrowers is to give them really, really fast access to capital and to make the process really painless. So we’ve taken all the good stuff. Your private lenders make you send stuff in and fax stuff and email, and built an online mechanism of ingesting all that data and making the process really simple. We’re both residential and commercial, so we do residential loans, so single-family loans, we’re happy to be somewhere in between a private lender and a hard money lender. And then we also do commercial loans. So we’ll lend on apartment buildings, we’ll lend on retail shopping centers, we’ll lend on self-storage facilities in addition to 1,2,3,4 unit properties.

Mike: Okay, okay. So for those folks that are prospective lenders that will lend money into these pools, what does that person look like? What is the ideal prospective lender from your standpoint?

Jilliene: So it’s interesting. We’ve, I think, got the biggest database in the country of lenders or prospective lenders and they really do range. So we’ve got three buckets of lenders; bucket one Is high-tech; bucket two is finance and real estate; and bucket three is professional. So let me dive a little bit deeper there. In bucket one, we’ve got a whole host of lenders who are really comfortable with technology. These are senior software engineers at Google. They’re product managers at Facebook. They work at Yahoo and at these big companies. They may have never lent against a real estate loan in their life so this may be their first exposure to it because they’ve never had access. And our marketplace is really about opening up that access. That’s kind of the tech bucket. Bucket two are people who are in finance and real estate. These folks tend to be very sophisticated. They’ve made loans against real estate in the past and they’re looking for deal flow. So they come to RealtyMogul.com to get access to more deal flow. And bucket three are professionals; attorneys, CPAs, these are folks who are sophisticated, they’re high net worth, so they make a decent amount of money, but they just don’t have an easy, fast way to get access to real estate loans and they use Realty Mogul for that.

Mike: Yeah. And can you say-I know it differs quite a bit-how is the rate determined? Is that supply and demand that’s determining that or is it something that the borrower comes in and says “This is the amount I’m willing to pay,” or the other way around? Kind of talk about how that happens.

Jilliene: So, my thought process around rate and around what you’re charging in any market is risk and return. So we have a tiered pricing system. It depends on the borrower, so how strong is the borrower? What’s their credit score? How many transactions have they done historically? It also depends on the market.

Mike: And, I want to talk about the actual borrowers in a second, but I guess what is the typical-if it was a very low-risk deal relatively speaking-what kind of return would an investor, a lender expect to make?

Jilliene: So our lenders are probably making between 8% and 10% depending on the transaction.

Mike: Okay. Okay. And what about, is there or maybe there’s not a limit on the riskiest of your loans. I’m sure that if they’re super risky you’re probably not doing the deals but at the other end of the spectrum, what type of rates are folks typically receiving?

Jilliene: You’re right. It totally depends on the riskiness of the deal and on the structure of the deal but we’re usually making a point or two in between. It could be 9% to 12%, 9% to 14% depending on how high that risk profile is. It also depends on the market. There are some markets that you have really, really small single family homes. So if you’re doing a $20,000 or a $40,000 loan compared to putting out a $400,000 loan the pricing is going to be different just because it’s in some respects the same amount of work to do a small loan as it is to do a bigger loan.

Mike: Right. Right. And talk about, I guess from the borrower’s side how do they-because you said you’re kind of between a private lender and a hard money lender-and I guess what, from a borrower’s perspective, why do they use Realty Mogul versus one of those other two things? Is it because it’s better rates than hard money? Is it because of ease of use? Kind of talk about some of the benefits that borrowers would get.

Jilliene: Yeah, so really what we pride ourselves on for borrowers is three things. Number one is speed. We are fast and we believe in efficient processes. So first and foremost we are a financial services company, but second of all we are a technology company. And we use technology. We have a multi-million dollar budget this year in technology. I don’t think there’s another hard money lender in the country that could say that to you and we’re not strictly a hard money lender but we really believe in technology. What that technology allows us to do is number one speed; number two is user experience and ease of use. We’re trying to make the experience a wonderful, wonderful experience for our borrowers. I know lots and lots of borrowers who have said “My experience with my lender is just miserable. I don’t know where I am in the process. I don’t know what documents they need. I don’t know if I’m funding, if I’m not funding. I can’t sleep at night because I don’t know if we’re actually closing,” so that whole feeling around that we’re really trying to change.
The third one is related to speed and user experience, which is certainty of close. When we say to a borrower “We are closing, we are going to provide this loan to you,” irrespective of if our lenders have funding or not, we’re making that loan. So it’s really about user experience and it’s repeat. One of the beauties of having this online technical system is that we don’t ask borrowers for the same information twice. If you’ve given us the information we’ve stored it, it’s in our system, I’m never going to ask you for that again unless there’s a change. Your other lenders, they’re going to ask you to fill out the same form every time. There’s no easy button to just say “Rinse and repeat.” We’re really in the business of let’s find great borrowers, let’s give them great user experience and let’s rinse and repeat.

Mike: Yeah. I think the traditional mortgage industry needs all three of those things that you just talked about as well. I’m a real estate investor myself. I sell a lot of houses and boy, it’s a miserable process every time.

Jilliene: Yeah. Yeah.

Mike: You said “speed,” so talk a little bit about speed. I’m sure there’s a process where users have to become a member and go through maybe a background check or they check on the deals or whatever. But talk a little bit about the timing from the time that somebody already is a member, brings a deal to you, what the timing and the process looks like.

Jilliene: It depends on if it’s residential or commercial but let’s focus on residential maybe because I think a lot of the listeners are in the residential business. We could close rapidly. We can close in five days or less. It’s really dependent on the borrower in a lot of respects. We obviously do need information from the borrower. We try and make it as streamlined and simple as possible, but our express program, if we’ve got all that information from the date that we have all the information we can shoot for five days or less, so it might be a 10 day total process. It’s really because we’ve built systems and we’ve built process in order to be able to give the borrower that kind of experience.

Mike: Yeah. That’s great. And do you do, for single family home investors, do you do 100% of it was purchased, right? Are you doing 100% of purchase and repairs, potentially if the deal was purchased right?

Jilliene: Well, we can depending on the market. In a tier one market we’re going to be more comfortable than in a tier three market. We’ve got guidelines and we’ve got credit underwriting guidelines but it really depends on the borrower. It depends on the market. It depends on the speed of close, so we kind of mix and mingle those four aspects that I talked about earlier. We want to make sure that we know what the value is, right? So we’re doing internal valuations, we’re doing external valuations; in certain circumstances I think we can but it should only be expected if it’s a rock-solid borrower and a tier one market with a fantastic track record and history.

Mike: Yeah. Yeah. That’s great. It sounds like everything you’ve said should be music to a lot of real estate investor’s ears.

Jilliene: We hope so.

Mike: So talk a little bit about from the business side of your business where you’re at and where you see things going from here and really kind of just generally the whole lending space. I mean, technology is really enabling everything you’re doing and a lot of other things in terms of lending and making markets that didn’t exist before. Just talk a little bit about where you and Realty Mogul are going in the years to come, I guess.

Jilliene: Yeah, so we’ve been in business about a year and a half now. We’ve funded about $150 million in real property value. We’re active in a variety of states. We’ve been active in 16 states to date. I think that we’ll be largely national by the end of the year. We’ve just received another $9 million in operating capital, so we’ve raised $9 million for our own operations in order to invest in technology, invest in people, invest in process and it’s only going to grow from here. I can see us doing hundreds of millions of dollars in loan originations for real estate investors. Our core bread and butter is all non- owner occupied. We’re not doing any owner occupied mortgages. It’s all non-owner occupied. We are a partner to real estate investors. I think that you’ll see our volumes skyrocket. While you’ll see volumes skyrocket, I also think that you’ll see us hold very steadfastly to quality. Credit quality is important to us. Half of our business is working with borrowers. Half of our business is working with lenders and those lenders expect high credit quality or they expect to know and understand those risk profiles. I’m building out a lot of risk profiles, but we’re working very closely with borrowers and lenders but it’s a streamlined process. Our whole company can tell you that every day I’m saying “How can we make that process better? How can we throw away that current process and make it more streamlined?” That’s just so core to our culture here.

Mike: Yeah. You know what’s interesting is that I just heard a statistic that somebody else gave us. It was higher than what I thought but that what they said was 40% of single-family home purchases in America last year were cash buyers.

Jilliene: Wow.

Mike: Where, usually probably were backed by financing one way or another. I always thought that it was about 25% or 30% which even that probably shocks a lot of people but this is a huge cottage industry it seems. It’s very fragmented. It’s a matter of finding those people but there’s a lot of deal volume happening that is not owner occupants.

Jilliene: Yeah, I don’t know that stat but you look at all these big institutions that have jumped in the market. You look at the Blackrocks of the world, you look at the Quality Capitals of the world that are these institutions that are just coming in and scooping up single family on an all-cash basis. So I’m not surprised that that number is high.

Mike: Yup. Now do you provide financing for folks that want to keep houses as rentals as well or are you primarily just like bridge-loan, shorter-term financing?

Jilliene: Today, we’re primarily bridge loans and shorter term. We’ll go out to 24 months today but in the future it’s possible. We’re seeing some smaller community banks come back in that market where they’re willing to do sort of this buy to rent model. We’ve kept durations fairly short. Our loan terms are usually 12 months to 24 months but it’s not inconceivable in the future that we introduce new loan products depending on demand. It depends on what real estate investors want, what real estate investors need and we’ll be looking to meet that demand.

Mike: Yeah, yeah. That’s great. Well can you talk a little bit about just the market in general and where you see things going? I mean there’s been a ton of investor activity. Some would say that it’s gotten a little overheated in the markets and the investors are, in fact I know people, large buyers, even hedge funds that have said we’re not buying anymore right now, we’re not buying in that state or we’re not buying in that region of the country right now. Even the little guys have kind of gotten squeezed out in a lot of areas but you know that’s cyclical, right? So talk about where you think the investor part of the market is and where it’s going to go over the next few years.

Jilliene: Yeah, so we’re very cautious about this at the investment committee level and I’ll share a perfect example. I mean multi- family, we’re just tossing multi-family deals out. We’ve looked at billions and billions of dollars in private real estate transactions and we’re seeing multi-family be acquired for a 4%, 5% or 6% cap rate when historically you would have acquired that at a 7%, 8% or 9% cap rate. We’re seeing a lot of cap rate compression. We’re seeing people overpay for deals, substantially overpay for deals and their internal valuations are off. The BPOs or the appraisals aren’t actually matching what the internal valuations are. So we’re very concerned about that. We have a saying that leverage cures all. You don’t want to be over-leveraged.

We don’t want to be over-leveraged as a lender but actually the borrower shouldn’t want to be over-leveraged either. Taking back a property or giving back a property is not an experience that anyone wants to go through and it can typically be cured with leverage. So don’t be greedy upfront. Keep leverage at bay. But yeah, we’re concerned about where the market is. I don’t know that we’re at the height of the market. I’ll never be able to guess that or tell you that but I don’t think we’re at the bottom. So it’s a question of are we in the middle, are we in the upper three-quarters, are we at the top but I think that if you keep leverage at bay and if you are smart about where the market is trading and where the market has historically traded you can use data to figure this stuff out. We’re big believers in using data in our underwriting in order to have some gauge of where the market is or may be going. But I think we’re not at the bottom of the market anymore.

Mike: Right, right. What prohibits you from growing faster? My guess is-I don’t want to answer it for you-but it’s finding deals, but finding deals to finance. You probably have access to more money than deals is my guess. Is that right?

Jilliene: It depends. Really what’s inhibiting our growth is ourselves. Credit quality is inhibiting our growth the most. We want to grow quickly but conservatively. We want to grow quickly. We actually have access to a lot of borrowers. The borrowers who have borrowed from us, I think we’ve got like a 70% repeat rate, so if you borrow from us once you’re 70% likely to borrow from us again because they love our process. It’s so easy. It’s so streamlined. They just come to us and say “This is amazing.” For those borrowers that do meet our credit criteria they’re not looking to be over-leveraged. We’re just a fantastic partner for them. I’d say that it’s really our desire to grow conservatively while still growing quickly is our biggest hindrance.

Mike: Yeah. What do you do about folks who have more money to lend than you can apply? That’s always a challenge with raising money as I know for a fact personally I could raise far more money than I would ever need and that doesn’t do you any good because nobody’s going to just stuff it in their mattress for you until you need it so how do you deal with that?

Jilliene: It’s a balance. We have some lenders that want to come in and take out whole loans, right and we’re doing bigger loans right now so we might have a $450,000 loan and they want to come in and take down the whole thing. So we try and provide for an open marketplace. We do it on speed, so if those lenders are faster than other lenders then we have no issue with that. This isn’t high frequency trading. They have ample time to do due diligence. We typically use a pledge mode in advance of going live with a transaction so they have the ability to do their due diligence in pledge mode. They can pledge and give a non-binding intent of interest but it’s a balance. And it’s a happy balance with our lenders but I think that because we are an open marketplace, because we are active in a lot of markets, we’ve been able to put a lot of supply on the marketplace and lenders can actually put their money to work at, call it 8% to 10% depending on where they want to invest and what their risk tolerance is.

Mike: Yeah. And what happens for folks, I mean there clearly is a market on those that are willing to lend to you as well. I mean, what do you do? It wouldn’t necessarily be a bad thing for you as a business if you had some private equity funds or some folks who have some extremely deep pockets that come in and say “We’ll lend to you guys because we like your process. We’ll lend to you at 4% or 5%,” because their cost of money is somehow cheaper than that. That’s a little difficult to understand. I mean I know some very big players right now that are lending at ridiculously low rates because they can borrow it much cheaper and I mean, do you have institutional players or can you foresee institutional players coming in to partner with somebody like you because you have a marketplace and saying “We will lend to you at a lower rate than probably what all your other prospective lenders will,” and then what does that do to your business model because all those people that were relying on you to invest their capital have essentially gotten pushed out by an institutional player?

Jilliene: Right. I think there will definitely be institutional players in this market. We already have a lot of interest from institutions and we’re happy to take those conversations and figure out. I think that the onus is on us from a business to manage that growth. Our lenders are the life blood, our lenders and our borrowers are the life blood of our business. Not only is that institutional lenders, it’s also retail lenders or high net worth lenders and we want them to be a part of our business. I’m a big believer in diversifying your sources of capital no matter what business you’re in. For us that’s diversifying your sources of capital across lenders. For borrowers that may be giving some of their allocation to a marketplace like ours and keeping some of it with their local hard money lender or their local private lenders. I’m a big believer in diversifying sources of capital but I do think there is a place for institutional investors. The onus is on a business like ours to make sure that the institutional investors don’t just gobble up all the loans.

Mike: Right, right. If that scenario happened would that bring down rates for folks you’re lending to or would that just increase your spreads at a marketplace like yours?

Jilliene: You know, it totally depends on what that depth is. I think that at the same time you’ve got risk and reward. I don’t know that that would just bring up our spread. I think it would probably bring down rates to borrowers. You’re playing a supply and demand game. People should be cognizant of that risk. If other people are valuing that risk as a lower risk then it’s going to bring down the prices of capital. We’re really big believers in building an open and transparent marketplace. For us that’s about not being greedy. It’s more important for me to build a bigger marketplace than it is for me to get an extra point.

Mike: Right, right. Awesome. Well, talk a little bit about how both sides of the equation, folks that may want to lend through your marketplace and then those that may want to borrow, talk a little bit about how they would find, how they would learn more in the process that they have to go through?

Jilliene: Yeah. So, for both lenders who start on RealtyMogul.com, if you’re an investor or a lender you go through our investor on- boarding process. We’re limited today to only accredited investors, so those are investors with over $1 million in net worth or an annual income of $200,000 or more. That’s a regulatory limitation unfortunately but they would go through our on-boarding process and then they’d start being able to do due diligence on transactions. So you can click through various loans, click through various investment opportunities, find an investment opportunity that’s right for you. For our investors, for our lenders the entire transactional process is online so you’re signing your legal documents online, you’re funding directly online and then we have access to an investor dashboard which gives you 24/7 access to really watch and monitor how your money is working for you.
If you’re on the borrower or work side, similarly it starts at RealtyMogul.com. We have a borrower application for individuals who are looking for debt. You go through the borrower application. We’ll start to collect relevant data and information from you. In the background we’ll be running all our checks; background, criminal, credit, all of that good stuff. We’ll pull in property information and then we’ll present you with pricing. We’re very up front. We’re very transparent about our pricing. We’re very up front and transparent about our process. Those borrowers will go through the process and then we’ll fund directly into escrow for that borrower.

Mike: Great. And I presume borrowers, if they want to use your platform they’re probably best to start doing that before they have a deal that needs funded. Is that accurate?

Jilliene: Yeah. We’re open to that. If you want to get pre-approved as a borrower, fantastic, let’s get you pre-approved, let’s make sure the background, criminal and credit check out so you’re not relying on us to close a deal we haven’t solved for that piece of it yet. The beauty of it is that they can start and stop their applications. We’re very flexible for borrowers, but yeah it makes sense to get into the system, it makes sense to provide us with some detail about what you’re up to as a borrower, and then we can be a partner for you moving forward.

Mike: Do you provide some sort of pre-approval letter for those borrowers that need that in terms of maybe doing deal flow?

Jilliene: You know, we haven’t historically. Historically most of the borrowers that we’ve worked with have the ability to get transactions under contract and then they share us as the funding source typically afterwards but we’re not opposed to it. I’m always looking for ways to improve the experience for borrowers so if there is a certain category of borrower that needs that because of liquidity concerns and credit checks out and market checks out and leverage checks out, we’re not opposed to that.

Mike: Yeah, yeah. Awesome. Well it’s an exciting space and you guys are off to the races, so it will be exciting to see where you go over the years to come. But like you’ve said a lot of folks that don’t think are really investing in their platform, they’re just milking whatever they can out of their own effort and taking advantage of a good market or in some cases a bad market but I think unless you build a platform that it sounds like what you’re doing there, it’s hard to stand the test of time. So Jilliene, hey thanks so much for your time today. Folks that want to learn more may go to RealtyMogul.com. Whether you’re a borrower or a lender and for those that aren’t interested in either, I definitely encourage you to keep an eye on what Realty Mogul is doing because it’s a very exciting space right now. So Jilliene, thanks so much for joining us today.
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