How Lending Works

Mike Hambright: Welcome to the FlipNerd.com Podcast. This is your host Mike Hambright. 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 3 new shows each week which are available in the iTunes Store or by visiting FlipNerd.com. So without further ado, let’s get started. Hey, it’s Mike Hambright with FlipNerd.com and welcome back for another exciting VIP interview where I interview some of the most successful Real Estate Investing experts and entrepreneurs in our industry to help you learn and grow. Today I’m joined by Scott Ferguson, CEO of the Private Loan Store, who’s a private lender to real estate investors. Today Scott is going to share a lot of information on how lenders look at you and how you should evaluate prospective lenders for your business. Before we get started, let’s take a moment to recognize our featured sponsors.

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Hey, Scott. Welcome to the show.

Scott Ferguson: Hey, thanks for having me, Mike. I appreciate it.

Mike Hambright: Yeah, happy to be here. I’m happy to be here. I’m happy you’re here. What’s interesting is, I know we’re going to get into a topic and talk a lot about what you look at from prospective people that you want to lend to and also what they should look at in a lender, and I don’t think a lot of people look at it that way. I think a lot of real estate investors tend to say “if they’ll give me money I don’t care who they are,” but there is a lot more to it than that, as you know.

Scott Ferguson: Yes.

Mike Hambright: So it will be interesting to pick your brain on that. But before we get started with some of those details, tell us a little bit about your background and how you got into lending.

Scott Ferguson: OK. My background is comprised of startups. I have started 7 companies. I have since either sold or merged all those companies off. The current companies, I have a Real Estate Investment company and a private lending company and that’s where I focus all of my time now, so I started my first company at the age of 20. I have never worked for anybody else. I have been self-sufficient and plowing that road all by myself for the entire career I have had.

Mike Hambright: Yeah, that’s great. I know originally you started actually investing, you’re an investor now and I know you hold a bunch of rental property, but talk about the decision that you wanted to be on the lending side versus actively buying and selling houses.

Scott Ferguson: I really started the real estate career in 2009. Probably a bad time to start the career but I saw an opportunity. I saw a lot of depressed values and started investing in real estate; buying, flipping, buying rentals. I worked that for about 2 years and realized for my skill set and what I like to do, I would be better on the lending side of this business. I have borrowed a lot of money, I’ve used hard money lenders, banks, friends, family, private lenders, and realized that the lending side of the business fits a lot more in line with my skill set and what I’m good at. So a couple years ago I started a private lending firm. We now service quite a few states and provide lending to real estate investors, mostly for fix-and-flip investing and small commercial deals.

Mike Hambright: OK. Can you share a little bit about that skill set? You said your skill set is a better fit for the lending side. Can you talk about what some of those things are? For folks that are looking to get started or have already started and they can’t seem to make progress – not that you didn’t make progress, but just some of the things for you that made sense for you to be more of a partner to real estate investors to lending to them than necessarily being the lender yourself.

Scott Ferguson: Yeah, those skills for me are finance. I have a pretty strong background in finance and running companies. Process; you have to be very process oriented to be a good lender. There are a lot of things that can go wrong lending, so a good process is paramount. Deal analysis, deal structure, those are the things that are probably my forte. Those are the things I am really good at.

Mike Hambright: Yeah. Can you share a little bit about your, we talked a little bit before the show about your investing theory. A lot of real estate investors just assume real estate is the only thing out there. That’s what they do. Of course that’s ridiculous. And of course there are a lot of people that, for a long time, the only way they could invest – or they thought they could invest – is in the stock market, right? That’s actually changing quite a bit. Real estate is becoming more of an asset class that other investors that traditionally don’t invest in real estate can invest in, but can you share what we talked about a little bit ago about your theory on investing, not necessarily just real estate investing?

Scott Ferguson: Absolutely. Everybody should be an investor, as simple as that sounds. There are a lot of things to invest in. I try to categorize everything into 2 categories. There are income investments and there are growth investments. In each of those 2 categories there are bank or Wall Street type investments and there are alternative investments. In your growth category, you have bank or Wall Street and you have income, bank and Wall Street type investments or alternative investments. When you’re talking about growth, those things for the banks for Wall Street providers are going to be things like stocks, mutual funds. You know, the typical 401k choices would have. In alternatives in growth there are a few things. There are precious metals. There are real estate, fix-and-flip type investments. When you move to the income side of the equation, you still have those same 2 categories, the Wall Street type or bank type investments and you have the alternatives. The Wall Street or bank investments in income are things like CDs, bonds, annuities, things along those lines, investments that provide income. When you move to the alternatives, there are oil and gas, real estate. So there are a lot of investment choices, and we’re talking today specifically about some very specific investments, could be growth or income, but they’re in the alternative space. A balanced portfolio is going to have a mixture of some of those things. It’s not going to all be real estate, it’s not going to all be stocks and bonds. A savvy investor is going to have some mix of those and really understand where their money is deployed and what kind of returns and when that return is coming. They are really going to understand that portfolio well.

Mike Hambright: Right, right. So can you talk about some of the best sources of money for real estate investors? I know there are some real estate investors, sometimes early on people think hard money is there only option. There are some that cringe at the idea of using hard money because they know that is typically synonymous with high rates and points and things like that. So there are a lot of different places where real estate investors can get money and probably it is wise for any real estate investor that’s listening to this to have more than 1 source of money for their business because you don’t want the success of your business to be tied to any 1 source. Talk a little bit about where the best sources of money are for real estate investing that you believe.

Scott Ferguson: Well, I don’t know that there is one best, but there are typically 4 main categories of sources of money. You have banks. You’re typically going to have the lowest interest rates at banks, but the biggest headaches. It’s time consuming, there is a lot of paperwork, it’s a frustrating process right now to get a loan at a bank, but you do get great rates and terms. There are hard money lenders; higher rates, much easier to get, a lot less headache, the money is always there, it’s quick, it’s easy, and if you’re borrowing short term, the higher interest rates should not have a significant impact upon your deal profitability. As long as you’re buying the deal right, you’re in the deal right and you’re not long term, hard money is a great solution. There are private lenders, private individuals, doctors, lawyers, things like that that are looking for alternative investments for their portfolio. Those monies are great. You can get great terms, very flexible, not heavy underwriting. The problem with those guys: they go on vacation, they invest in other things, so their money is not always available, not always a reliable source. Then you have your own cash. Own cash is easy, it’s always there, it’s available, and I think it’s probably the least intelligent move to use your own cash in investing in real estate.

Mike Hambright: Yeah. Most people, unless you’re independently wealthy that will dry up quickly one way or another.

Scott Ferguson: It dries up quickly. It dries up very quickly and you have better uses for that cash.

Mike Hambright: Yeah, if you’re a real estate investor and you’ve been doing this for a while you quickly realize that leverage is the name of the game. So talk a little bit about from your perspective, you’ve been on both sides of the fence, how a lender evaluates a prospective borrower for a deal in terms of, I guess every aspect that you could evaluate them on, but in terms of the level of experience in how they talk to you and how good they are at buying, all those different perspectives. I don’t think we’ve ever had anybody on the show from a lender’s perspective to say “here’s what we’re really looking at.” Everybody assumes it’s just the deal, but there has got to be more to it than that.

Scott Ferguson: There is. First impressions are everything. When you first approach a lender you need to look professional, you need to look like you can get the job done, you need to look like you have experience. That first impression is very important to the lender because that sets the tone for the conversation moving forward. Past that, the deal becomes important, so you want to make sure that you’re providing the lender with a very clear, concise picture of what the investment opportunity is, because that’s what you’re really providing; it’s not just a deal you want to do and you need some money for, it’s an investment opportunity for a lender. Think about it, if you were going to purchase some stock from a company and they said “hey, I’ve got this deal. I am going to buy it for this and sell it for this,” would you really be invested? There’s no story to that. There’s no meaning to that, there’s no passion to that story, it doesn’t really give the lender a great feeling. Yeah, it’s a deal. There are thousands and thousands of deals out there to do. How do you make yourself different from everybody else? You tell a story, and you tell that story with facts and figures and analysis that you have provided. You should know how much it’s worth and you should be able to support to the lender what it’s really worth. The lender is going to do independent research and find out what it’s worth, but it’s going to provide a lot of confidence if what you say its worth is what the lender feels that it’s worth after they’ve done their analysis. When there is a 30, 40% difference in valuations, the lender becomes nervous and says “this guy doesn’t really know what he’s talking about. Why would I lend somebody money who doesn’t know what they’re talking about?” Probably the chances of success really aren’t that high. So there are things you can do right up front in the initial stages of the conversation to win favor with a lender that makes you look good in the lender’s eyes and instills confidence in the lender that they know, or have a good reasonable chance of knowing that you’re going to be successful in the project with the lender’s money.

Mike Hambright: Yeah. Talk a little about how, specifically you and lenders like you that lend in large parts of the US or multiple states, do that because most of the relationship is done, I assume, via phone and email, right?

Scott Ferguson: It is, and that’s OK. That’s all it really takes. We lend in many states and what we typically will get, I will just tell you from personal experience, we have a website and people can submit deals on there and there is an option on that bottom of the form to attach additional information. So you could attach whatever you want. It’s a resume, a deal summary, pictures, you can attach in there whatever you want. But I would say 80% of the people that apply for a loan attach nothing, so when we get it we see a name, a property address, what they think the value is and how much they’re looking to borrow. The ones that have information attached go to the top of the pile. Those are the ones the people that work for me analyze first because it’s the easiest to get started with. It’s much easier to start with something where you have a much bigger picture than trying to take a little tiny picture of the entire deal and get started and do any sort of reasonable initial analysis.

Mike Hambright: Yeah, back to that partnership level, how could, presumably a partner you’re trying to work with be impressed upon you sloppiness if you’re not willing to go overboard to spoon feed them with “here’s everything you could possibly need and then some.”

Scott Ferguson: Right. That first impression is important. I have had submissions from one extreme to the other. I have had emails come to me with an address that say “will you fund this?” I don’t know, I have never met this person, but I get an email with an address that says “will you fund this?” Those just get deleted. On the other extreme I have a full submission that has got a professional looking presentation; pictures, with market statistics, what are the days on market for this area, 3 comps. It’s almost like a CMA has been provided. A full scope of work, what we’re going to do to this house and why that’s going to create the value in the house. That’s a much easier place to start for a lender than just the address of a property, “will you fund this?”

Mike Hambright: Of course. What advice do you give for real estate investors, and this is going to be aimed towards newer folks that are looking for money, that they should look for in a lender? I think a lot of new folks assume “anybody with money, I’ll take it,” but you don’t want to find your spouse that way. You’re going to have to live together. Maybe not forever, but at least for some period of time with your lending partner. What are some of the things you think the prospective borrower should look for in a lender?

Scott Ferguson: I think all good real estate investors build teams. There can be contractors on the team, attorneys, realtors, title companies. And a lender should be part of your team. A lender is an integral part of building a business. If you’re a real estate investor who just wants to do 1 or 2 deals a year, you want to use your own money, that’s fine. That’s perfectly fine, but if you’re really trying to grow a real estate investing business, you’re going to have to borrow money. Bottom line, if you’re going to grow, you need access to capital. Having access to capital from somebody that can provide that capital reliably, consistently, and at terms and rates that work for your deals. A lender should also provide insights. I talk a lot of my borrowers out of their deals because I don’t think they work. I have a lot of experience in deal structure, I have a lot of experience buying and selling real estate, so I talked my borrowers out of doing deals a lot of times when they think it’s a great deal, we do analysis, we look at things a little differently. You can’t measure that value of not doing a deal that you lose money on. It’s hard to measure that value, but a good lender will help you steer clear of bad deals.

Mike Hambright: Yeah, that says a lot. I haven’t personally had this experience but I know of other people that are lenders that love to take a house back. It’s part of their objective to take a certain number of houses back because they’ve got your money and probably can make some more money on top of it. And I think if you’re looking to build a business you want to build a recurring stream of revenue and business from keeping investors safe and in the game, and if you make some money on one person one time and they’re knocked out of the game, then that’s not a great sustainable business model either.

Scott Ferguson: It’s not. I have never taken a house back. I just don’t get myself into those kind of situations where deals can have a chance of going bad like that. I’m not saying it will never happen. Things happen. But so far I have not taken a house back. That’s, in my opinion, being a better partner to my investor’s team than actually being a lender that is just looking out for themselves.

Mike Hambright: Right, and I think every small business can appreciate the power of recurring business and if somebody treats you right and helps you stay safe and every once in a while maybe even talks you out of a deal that you probably shouldn’t be doing, then that’s got to come back around. I think from a real estate investor perspective, you should appreciate that.

Scott Ferguson: Yeah. I think it’s valuable. I think it is.

Mike Hambright: Spend a little time talking about how, especially I guess for newer investors, or even those that have been around for a while, what they can do to package themselves, package their experience or lack thereof, whatever it is, to present themselves to a lender that if they want to start a business or if they want to build their business and it’s not just transaction to transaction, how they can package themselves to be more appealing to a prospective lender.

Scott Ferguson: Every investor has a background. It may not be in real estate, but there’s a background, there’s a skill set. So highlight the skills that are applicable to real estate investing. If you were a marketing person before, marketing is a very important part of real estate investing. If you’re a construction expert, that’s a very important of real estate investing. Highlight the expertise that you have and any place where you are weak, bring somebody on your team that fills that weakness. If you’re not good at marketing or you’re not good at technology and computers, bring people into your team that fill in those places where you’re weak. Don’t try and be everything in a company. As a real estate investor if you’re doing wholesaling, if you’re trying to do rehabs, you’re trying to hold onto some properties for rental income, that’s a lot of work. That is a business that really takes more than one person, in my opinion. So don’t try and do it all. Do what you’re good at and fill in your weaknesses with other team members. A strong team will look much better than a strong individual to any lender. So I think that’s one way you can separate yourself apart from other borrowers or other investors.

Mike Hambright: Yeah. For any of those folks that are listening that are investors, the challenge that all, we talked about this a little bit before we started today, one of the challenges that most lenders have is they don’t have unlimited capital so it’s going to come to a point where, at one point or another, where they have limited funds and you want to make sure you’re on the short list.

Scott Ferguson: That’s right. That’s right.

Mike Hambright: Yeah. Scott, can you share some of your thoughts on, as real estate investors get more experience and they have access to, not just access to capital – they maybe built up some cash reserves and things like that – why they should maybe consider lending, themselves, to other investors.

Scott Ferguson: Sure. I made a transition from a full time investor doing a lot of rehabs and rentals over to the lending side. A couple reasons why I did that is risk management. When you are a borrower I think you are assuming more risk just by inherently borrowing the money and doing the deals. As a lender I can limit my risk with several things. We write the terms of the note, we have a down payment, we limit our LTV, which is a ratio of the lended amount to the value of the property. We’ll set the LTV a little lower on deals that we feel are more risky. We go a little higher when we’re a lot more comfortable. So that is something that we control, not the borrower. So lenders, as you know if you go to the bank, who has all the control? The bank has the control. You sit down in front of them and you do what they say and they tell you what they’re going to do for you. I particularly like to be on the other side of the table. I like to set the terms. I like to be in charge of the deal. I like to have the control. It just feels better to me to do my investing that way. The other piece of that is when you are investing and you’re making down payments, you borrow money but you’re putting in additional money to get the project purchased or rehabbed or whatever, the riskiest capital, if I was making you a $90,000 loan, Mike, and you were putting $10,000 in and the property is worth 120 let’s say, just to pick a number, who’s in a more risky position? Is it me or is it you?

Mike Hambright: It’s me, yeah.

Scott Ferguson: It’s you. You are in a much riskier position than I am. Even though I lent a lot more money than you have, you are in a riskier position. Now, if we’ve both done our jobs right, everything is going to work out just fine, but if for some reason things don’t work out I’m going to assume less risk in something not working out than you are.

Mike Hambright: Right. Absolutely. Tell us a little bit about your company and how you work with investors and ultimately how folks can learn more about you as a prospective lending partner.

Scott Ferguson: Sure. I don’t quite fit the mold of what people think of private lenders and I don’t really fit the mold of a hard money lender. I’m kind of in between. I’m kind of bridging that gap. My money is always available, it doesn’t go on vacation when I take a vacation. I don’t invest in other things and can’t fund your deal like if you’re using your attorney or a doctor or something that has some extra cash, a high net worth individual, likes to fund deals but they’re not always available and they’re not quick. Things can happen. Hard money lender, you know you’ve got fairly low LTVs, you’ve got high points, you’ve got a high interest rate. I kind of fit in the middle. Neither of those 2 lenders provide you a lot of advice, a lot of insight, a lot of help getting your deals done, they just provide the money and expect you to pay them back with a return. I kind of fit in the middle of that. I have zero or low points, I have reasonable rates for private money, but I JV on a lot of the deals, so I can provide a higher LTV, we will share typically in the net profits of the deal, but I provide advice, I’ve got a lot of experience, I coach real estate investors, I’ve had a lot of business experience, I have a lot of contacts across the country, so I help borrowers get deals done. My goal is to make sure the deal gets done successfully and everybody wins. Not a lot of lenders are on your team in that manner. They’re on your team as a funding provider and that’s where it stops. So that’s how I bridge the gap between the different types of lenders.

Mike Hambright: OK. If folks want to learn more, where do they go, Scott?

Scott Ferguson: We have a website. PrivateLoanStore.com. A little information there. You can submit deals there and there’s a contact link on there if you need to talk to me or somebody in the company. You can get a hold of us there, there’s a phone number there.

Mike Hambright: OK. And where all do you lend at? I know you lend in about half of the US or so, but just generally speaking where do you typically lend?

Scott Ferguson: Typically the southern states, fair weather states. No particular reason other than it’s easier to do business in those states; easy to get to from where I’m at. We don’t go too far north. We don’t go northeast. But California across to maybe Virginia and down. We’ve been to most of those states.

Mike Hambright: That’s a lot. Yeah, awesome. Well, Scott, any final words of wisdom you want to share with either prospective borrowers or newer real estate investors that may have a question they want to ask, but they don’t necessarily know what it is yet about lending?

Scott Ferguson: I would say the one thing I see very commonly is people are looking at dollars of return versus percent return or ROI. A couple of the things that we monitor very closely are gross margin and net margin percentages, not dollars. Percentages. A lot of people think for some reason when they get to the large dollar properties, you do a million dollar property it’s OK if you make a hundred thousand dollar profit. That’s a lot of money. And it is a lot of money, but it’s a 10% margin which is a very thin margin and I would caution anybody, a 10% margin is too thin. Too many things can go wrong. It is not hard to lose 10% of value on a property where you end up making nothing or losing money. So that’s one very common thing that I see a lot of that I would caution your viewers and really any real estate investors, make sure you’re watching out what the gross and net profit margins are on a project.

Mike Hambright: Yeah. That’s good advice. I tell people, too, even on the lower dollar deals, sometimes you need to look more at dollars than percentages, because the percentages may not add up to a whole lot of dollars. For folks that are buying a certain percentage of ARV or whatever they be, when you get down below $100,000 or certainly below 60 or 70, those percentages don’t mean a whole lot.

Scott Ferguson: That’s true. There is a flip side to that coin.

Mike Hambright: That’s right. Awesome. Well hey Scott, thanks so much for joining us today. For those of you that are listening, we’ll add a link to Private Loan Store down below here so you can click on that and learn more about Scott. Scott, I really appreciate your time. Thank you for joining us today.

Scott Ferguson: Thanks for having me, Mike.

Mike Hambright: OK. Please stay in touch.

Scott Ferguson: You bet.

Mike Hambright: Alright. Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests, please access all of our podcasts in the iTunes Store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.