Unlike the last several years, access to capital is easy again. Most real estate investors are also feeling the pinch of competition. Easy money and challenging competition sometimes come together to allow real estate investors to get sloppy and take on more risk than they should. Stephanie Casper of Colony American Finance joins us today to talk about how to stay safe, how to find the right lending partner, and how to focus on what you’re good at. Don’t miss this episode!
Mike: Hi, everyone. It’s Mike Hambright with FlipNerd.com. Welcome back to another exciting expert interview where I interview great guests from across the real estate investing industry to help you learn and hopefully inspire you into action. For today’s show, I’m joined by Stephanie Casper. She’s the VP and Head of Bridge Lending at Colony American Finance. Stephanie has held a number of impressive financial leadership roles at leading organizations across the country and has a really rich background on the financial side of the real estate investing industry and some great lessons the share with us today.
In the last couple of years, unless you’ve been under a rock, you realize money has become easier and easier to get and as the market becomes more competitive and challenging to buy, some investors, I saw this the last time around, have a tendency to start getting sloppy and buying properties outside of their sweet spot, going into multiple states in some instances. As we move forward into 2016, it’s important to not lose focus and not get sloppy because we’ve seen what happens when that happens.
Stephanie has her ear to the ground really unlike anyone else and she knows what investors are doing. She’s going to share her experiences on how to stay safe but still be able to hit your goals as we move into 2016. Before we get started with our show today, though, and before we get started with Stephanie, let’s take just a moment to recognize our featured sponsors.
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Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Mike: Hey, Stephanie, welcome to the show.
Stephanie: Hi, Mike. Thanks for having me.
Mike: Yeah, great to see you. This is a really interesting topic. You were sharing some of the weird things you started to see investors doing and it brought back memories of when I was just getting started in 2008 and people were doing some wacky things like buying builder closeouts and all sorts of crazy things. I think it’s going to be interesting to talk to people because I think a lot of folks get blinders on and they forget the past and they forget those lessons that they either learned or maybe should learn from somebody else’s mistake so it’s going to be a good discussion today.
Stephanie: Absolutely. I think that’s spot on and talking about it with some friends this weekend, I think enough time has passed that maybe people are starting to forget the pain and suffering that at least I remember.
Mike: Yeah, there was just some carnage. There were people that were on top of the heap and in the next . . . sometimes in a matter of months they were just gone like out of business and just disappeared.
Stephanie: Absolutely. It makes you scratch your head. Even some of our two . . . . the big banks that went away that we thought would never go away or a different company. It’s amazing.
Mike: Before we get started and before we get too far into this, why don’t you tell us your background and kind of how you got to where you are today?
Stephanie: Sure. I grew up in the Boston area and my grandfather was your typical small, tiny investor into real estate. Any time he had some spare cash and could pick up a house at a good price, he bought houses, did little fix up and rented them out and kind of amassed some meaningful real estate portfolio over time as a firefighter. So kind of a cool thing to experience. It always gave me a little bit of the bug for real estate. Interestingly enough, my first love within the real estate asset classes is the hotel space. Got in my head when I was young that I want to go to hotel school and learned about the Cornel Hotel School.
Had a great experience there, cut my teeth in that industry and then really wanted to dig into more of the strategic real estate finance sort of underlying reasons why certain people succeed and others fail and went back to school and have held a variety of positions with GE Capital, Marriot International, small firm out of San Diego where we worked with banks and I found my way to Colony in this bridge loan business.
It’s been an interesting, a little bit circuitous route. Looking back, I see how very many of my experiences lead me into this role ironically.
Mike: It’s interesting how that works out. I mean, I don’t know very many people at this day and age that have this clear-cut career and it just was such an obvious ladder to success. It’s usually some oddball story these days.
Stephanie: I think that right. When you’re young, you think it’s going to be this very straight line and it doesn’t seem to work that way.
Mike: Maybe it used to. It probably was for my parents, but now that’s . . . somebody asked me what . . . I still don’t know what I want to be when I grow up at this point in my career so I just try to do fun stuff and let the rest work itself out.
Stephanie: I agree.
Mike: We’re talking about folks that . . . I think what tends to happen, this is my guess, is it’s a combination of easier money and this what I saw last time around. People were lending based on tax value and just a bunch of silly money starts to come into the marketplace as time goes by. And at this stage in the bubble, I started to see some people that are willing to do liar loans again, you don’t have to disclose your . . . and this is for homeowners actually. Literally people are publicizing, hey these loans are back you don’t have to disclose your income. It’s like, “Woah my God. What’s happening here?”
Stephanie: No docs, no income, no credit checks loan.
Mike: Yeah it’s crazy.
Stephanie: Please don’t bring those back.
Mike: It’s just a matter of time. I guess that’s what creates bulls. When it comes to a combination of easier money, when I first started in 2008, good luck finding a lender. It was just . . . that’s why a lot of competition went away so it was good from that standpoint. But it’s come full circle again and money is easier than it has been a long time. And then also people, because the markets getting difficult to buyers, it’s more challenging, a little more competitive in a lot of markets, then investors who are very entrepreneurial usually start to try to get creative and say, “Well, yeah, I’m buying these $100,000 houses. But if I just do that million-dollar deal that I’ve never done a thing like that before, I can make five times more money than I do on one of these.” Start to make just really bad decisions that somehow sound good the time.
Stephanie: Yes, I think that’s absolutely right and I guess I sort of view myself . . . I tend to be . . . as the lender, I tend to be the person that’s delivering the “no”s a lot. We definitely see that where we have a buyer or a borrower where their business model is very well defined in this range of pricing from an asset perspective, certain markets and recently they have a new asset that’s come across that they’re taking down for a million or two, which is five times their typical purchase price. That makes you scratch your head a little bit and say, “What’s the play on this property?” I get that entrepreneurs are . . . they’re looking for value opportunities where they can make a difference and get in and get out.
On the one hand you think, “Okay. Well, we’ve taken a good, hard look at their business plan and their track record in the past and they’ve been able to execute and they’re good borrowers,” but it’s worth a conversation, in my opinion. “What are you thinking about this one because it’s a little bit different?”
Mike: What do you . . . I guess last time, what would be interesting to know now is I think we talk about us a little bit, not to point the finger. Lenders ultimately kind of enabled some of that behavior. Because they may have had so much capital they had to apply and get busy or they had . . . they just started to put blinders on as to, “Well, nothing is really risky because the market just keeps going up.”
Stephanie: Right, 10% appreciation in real estate year over year. Yeah. I think it’s also in alignment of incentives too. There was an easy way for lenders to then move these assets off their books and have somebody else take on the risk. I’m not sure we have that quite as much now, especially in the straight up residential lending, not necessarily sort of commercial lending from residential investment. But it seems . . . I’ve read the books from analyzing the last meltdown and it definitely seemed like the incentive was just push as much through in the shortest time as possible because we’re going to push it off and get the fee income somewhere else.
Hopefully, I know that “regulation” is a four-letter word in our space, but at the same time, hopefully, there’s a little bit more cooler heads prevailing and thinking about those things.
Mike: Sure. Can you share some insights to investors that are listening to this that are in there, starting to get a little creative and thinking of . . . because, at the same time, real estate, the great thing about real estate is I would say generally speaking a lot of real estate investors are opportunists. We’re looking for arbitrage opportunities, right? Want to buy something low and sell it high. What tends to happen is they either feel the pressure of their market or they want to take it to another level and . . . what advice can you give to people to, one, still have goals to grow and expand and be successful but not take on too much risk? How can they hold themselves accountable if their lender doesn’t hold them accountable?
Stephanie: Well, look, I think with anything, I think everybody needs to take a step back when you’re evaluating going down a path that may be outside of your box historically. It’s one thing to go from these four counties to expanding to three other counties that are adjacent in the market that you’ve always been executing in. It’s completely another to say be investing in Georgia and make a determination that you’re going to start buying in southern California.
Those are two very different dynamics and very different markets. And so as lenders, we need to get really comfortable with that and ask those questions. But I think as investors, there’s something to be said for sticking to your knitting. My advice would be to grow in measured ways. I know that the opportunistic guys don’t want to hear that per se. That’s not exciting.
Mike: Don’t hold me back.
Stephanie: I’m sure people are thinking, “Ugh. Typical lender now.” But think about what you can truly digest and go from there because the run will stop at some point. Hopefully, not for a little while, but I think it’s best if you really stick to what you know versus really branching out.
With one caveat out there, though. Of course people . . . we all want to grow out and we all want to take some measure of risk and I guess that would be the punch line is to take measure risk. And have the story. If there is a great story about . . . I mention this million dollar house when they’ve been buying $150,000 houses, great. I’m sure. Tell us. Think through that story and that plan.
Mike: Yeah. Maybe you could talk about the role of a lender in helping you be a partner. I think people either look at their . . . I think historically people . . . not everybody, but people tend to look at their lender as not so much a partner, as just like
Stephanie: Business prevention?
Mike: Maybe. But part necessary evil or whatever it might be. But I think that’s starting to change. Obviously, there are a lot more highly qualified lenders now than there were in the past, more institutional people that are some smart people. And so maybe talk about the role that a lender should play and maybe how that’s changed over time since last time as well.
Stephanie: I think the lender . . . I know that we really try to think about partnering with our borrowers and I think most lenders in this day and age are thinking that way. But we want to know you and understand your business plan and get our arms around that so that you’re comfortable and so that we’re comfortable with your execution on that. Because our offering is a bridge line of credit and so we need to understand your business plan and we will help partner with you in terms of executing that and try to get you the best execution from a loan perspective, I guess.
Whether it’s the assets you’re going after, whether it’s a valuation issue when you’re trying to do an advance, there are a number of ways that we really do try to act in the best interest of our borrower. Obviously, managing the expectations of the business need as well. So I think it’s also a view of taking a customer-focused perspective versus a checking the box perspective. I think my hospitality background has positioned me the well for that because that is where I cut my teeth in business and it was all about this service mind. I think there is an element of that is in our business and a number of our competitors in this space where we want to know the business. It’s not just about feeding the model, if you will. Not that that’s a great answer.
Mike: That’s great. Would you say that’s even more true for those are listening right now? Just to clarify, what you offer at Colony American are bridge lines of credit or just lines of credit, essentially, that are, depending on what markets you’re in, I think you said you start your lines around a half million. Was that right? Typically, those lines are set up so that people can do multiple deals and it’s easier to do more deals. So by its nature, you’re less kind of transactional than historically a lender that’s deal to deal. Would you say that mentality fosters relationship and partnership more than just the transactional folks?
Stephanie: I think that’s true. And the reason is this, Mike, we have a commitment over a period of time to our bridge borrowers for a set loan amount that they can take advances on properties over the investment period, if you will, which is typically about 12 months. We have a relationship with them. It’s not kind, “Here’s two months to underwrite and close a loan,” one and done, moving on. We need to make sure that we’re fostering that dialogue throughout as we guide them through the process of taking withdrawals on this line.
We do also have a term lean businesses, as I think you’re aware, that is more targeting the guys and the businesses where they’re amassing portfolios of rental properties, they’re stabilized and then they’re into more permanent financing. But again, even on that, in that business, we all take the position it’s far more efficient to work with borrowers on a repeat basis than to have to go back to the pond, fishing every time you want to load the pipeline. That customer service focus, I think, is something that we really strive for.
Mike: I think, from my perspective, I’ve always worked from lines of credit. I’ve always had usually community banks in my area who I’ve historically worked with. But I have a line of credit for a certain amount, more than enough to do all the deals that I want to do, and there’s something nice to be said about, hey, as long as it fits the criteria of a deal” which I know what that is, that there’s not going to any problems getting the financing done and it’s going to happen traditionally a lot quicker because we’ve worked together many times before.
Stephanie: Right. We have taken the time at the front end to do all the underwriting of the business and the borrower so that we’re comfortable so that when we get assets from a funding perspective, it’s what’s the valuation, what’s the purchase price, title comes through clear and we’re able to fund in, say, 10 business days, which is pretty quick. And sometimes even shorter, but just depends on what the situation is from a title commitment perspective. It can be fast, it can certainly be fast. I think when you’re underwriting all the assets at the same time that you’re underwriting the borrower, that prolongs the process.
Mike: Sure. Where do you see things going from here with investors that are looking to work with . . . the landscape has changed pretty dramatically over the past two or three years, obviously.
Mike: Where do you see that going from here?
Stephanie: Look, I think you can’t have a conversation about lending without talking about crowdfunding or crowdsourcing in some way. I think that’s going to have a meaningful impact in the lending space in general. But I still think there are a lot of investors out there and borrowers who are not so enamored by that model and maybe it’ll get flushed out a little bit more. I think lenders . . . everybody is trying to determine what their box is and how much they can expand or should they tighten it up, especially as we get into parts of the cycle that might start to feel a little frothy and . . .
Mike: Are we there now?
Stephanie: I don’t know if we’re there in this commercial lending for single-family home investors. I think there has been some froth. I know multifamily . . . I just read a report this morning that deliveries have really driven rental rates down. But our friends, analysts out there were calling that sometime in late 2015, early 2016, we would start to see that come through. And while they’ve experienced huge rental rate growth over the last two years, it’s going to be tempered, excuse me.
I think hotels are starting to see it. There was a pretty exciting run there and has been a pretty exciting run. All that being said, I think there are still plenty of opportunities for people to invest and make money across all the asset classes. It’s just a question of buying right and having a good plan.
Mike: I think that’s an interesting thing about real estate is there is always . . . in my space, we buy houses from usually distress situations, death, divorce, inheritance, problem rentals and all those things. Those things go on regardless of the market cycle. As an investor, it’s just important to really do two things. One is to be able to anticipate changes and be comfortable changing your business as the market changes.
But two, have great relationships with lenders that can withstand those cycles because if the people in the past that only had one or two relationships or they were the wrong relationships and lost their financing, they were largely out of business until they secured those lines again. So yeah, I don’t think that the market is constantly changing. But you, as an investor, you just have to evolve.
Stephanie: It’s true. I’m a lender because I’m probably less risk averse than my more opportunistic investor friends out there. But I think there’s going to be plenty of opportunity going forward, especially in the single-family space. I don’t think it’s a market that is ever going to go away. What’s the statistic? Something like it’s only 2% of the homes are owned by these big aggregators and most of it is mom and Pops, right?
I’m that person too. We have a couple of duplexes and we’re looking for another one, but only at the right price. And that kind of thinking, I think it’s much more pervasive amongst some of your small timey guys and girls.
Mike: Yeah. There’s no doubt that there’s a lot . . . and you probably see this. You can speak to this. There are a lot more people that are real estate investing, even though it’s always been a very fragmented mom and pap type business, but it’s becoming more of obviously a main street asset class because a bunch of people have lost interest in the stock market and the financial engineering of Wall Street and they just want a tangible asset that they could . . . they don’t want to have to drive past what they can if they want to.
Stephanie: It’s true. And somebody that I . . . one of my colleagues used the term that it’s capital preservation, not necessarily . . . it’s return of capital not return on capital. The smaller . . . my grandfather, for example, to bring him up again, he just wanted the park his money somewhere where, to your point, wasn’t the mattress and wasn’t in something he viewed as hugely risky. He’s not a flipper. He wasn’t a flipper.
Just park the money, hold the property. And I think that’s the sort of idea that you want your money to come back to you and not be driven by huge ROIs. There’s a lot of that that still drives especially the single-family market. Park that money, put it . . . just the kids’ college fund, that type of thinking. Because people with the market got kind of burned this past go-around. And that’s not to say that you can’t do well, right? I don’t mean to diminish that. But I think real estate has always been this great tangible asset, to your point, you can drive by.
Mike: It’s always been a great hedge against inflation, which I think we probably all know is coming, right?
Stephanie: Yeah. Hopefully, it’s not a big one, but yeah. I think it definitely is. You can see it in the rates markets, sort of how things are being projected a few years out or a few months out. We’ll see, yeah.
Mike: Sure. In your product of lines of credit, what advice would you give to people . . . I want to ask you in just a second how folks can learn more about you or who they should get a hold of at Colony American if they’re interested. But would you say that it’s a good thing to get a line of credit even if you don’t have an immediate use for it? Is that something that you guys advise? I know you want to work with customers that can deploy that capital, obviously. Do you think it’s a good thing for people to have lines of credit that are there when they need it?
Stephanie: I do think so. We see a mix. We have institutional borrowers who put huge portfolios onto their line immediately after they close. We have more entrepreneurial borrowers that have a couple of properties under contract that they’re going to put on their lines shortly thereafter. And we have the guys who are targeting some assets. They maybe don’t have a tape, if you will, ready to go when they close.
My business is about utilization of that line, though. I need to weigh both of those. But I think it is a good idea. It gives you . . . what’s the buzz . . . It’s like playing real estate investor bingo when they say the word “dry powder.” You hear people say these buzzwords and it gives them dry powder. It’s considered sort of same as cash so you can go in with the proof of funds that you have this available to you and that helps you take down assets more quickly, I think.
Mike: Absolutely. And it gives you the confidence when you’re buying that you can actually do the deal.
Stephanie: Absolutely. We do have, obviously, a liquidity requirement because we’re not funding the 100%. We’re not a hard money lender in that sense where we’re relatively low LTV lender, 75% at the top end. You still have to have some liquidity to be able to take down assets. I think it’s definitely beneficial to have it in your in your bag of tricks as an investor.
Mike: Great great. Well, Stephanie, we started this conversation by talking about how people can stay safe, but still focus on growing their business and having the right partners and things. Any words of wisdom you could share with folks? Any kind of final words of wisdom on how to move forward into 2016?
Stephanie: Yeah. I think it’s still back to buying right and knowing where your strengths are and sticking to them and being able to leverage those strengths and then your partnerships, whether that’s with your lender or your equity partners, the realtors or brokers with whom you work to source deals. I think that’s the most important thing, especially as things maybe start to get heated.
Mike: Well, if folks want to learn more about potentially working with Colony American Finance or want to reach out to a member of your team, where should they go?
Stephanie: Yeah, they should definitely visit our website, which is ColonyAmericanFinance.com. We also have LinkedIn, we also have a Facebook page. Come find us. I guess you could cyber stalk me.
Mike: Stephanie, I already did. I told you, I already did.
Stephanie: That’s why I brought it up.
Mike: Great. We’ll add links down below here. I definitely appreciate your time today and appreciate your insights. For those that watched today, if you weren’t around six to eight years ago when the meltdown happened, depending on what part of the country you were in, ask some of your friends or colleagues that were and try to learn from their mistakes. I think what happens is people tend to start putting blinders on and forgetting what happened in the past and say that that’s not going to happen again or that won’t happen to me. One of the things at FlipNerd that we are a huge advocate of is really making a difference in your life through real estate investing. And we don’t want to see that all come tumbling down because of some bad mistakes.
Stephanie: Somebody said to me recently the worst four words in business is “This time it’s different.” Hopefully, it is.
Mike: I feel like, to be honest, I do feel like a lot of people learned a lot from the last time around. People tend to be more wise, a little more diversified, but you can see some sloppiness out there too.
Stephanie: Yeah, I agree with you. I feel like people are far more measured and a little less cowboy-esque, which is nice. But, like I said, I still think there’s tons of opportunity out there.
Mike: Absolutely. Well, Stephanie, thanks so much for spending time with us today.
Stephanie: Mike, thanks for having me. It was fun.
Mike: Absolutely. We’ll talk to you again later.
Stephanie: Okay. Sounds great.
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