89 – How Hard Money Works with Corey Siegel

What I look at when I talk to a client is where are you seeing value on your exit? How long do you think it’s going to take you to do the work? And how much money do you have on the front end estimated for rehab? It’s really hard to kind of get that number of super accurate without walking the property but at least it gives us a baseline. And once we take a look at that, now I’ll run comps for my clients on those deals to really try and hone in on where the ARV maybe. And then based on that after-repair value and an estimate for rehab you can kind of work in and give ranges, right, to where the purchase price should be or can be. I’d never liked doing deals when let’s say a client is planning on holding the property for six months and if they hold it for eight months they break-even. That’s too thin of a deal, to be honest with you.

Hey everyone, and welcome to another episode of the Everything Real Estate Investing Show with Sean Pan. Today, we have Corey Siegel. Corey is a hard money lender with S&L Capital Group based in Los Angeles. And today he’ll share with us how he created a hard money lending firm and why it’s important to have a great relationship with your lender. If you enjoyed this episode, subscribe to the show in the review. We release episodes every Wednesday and Sunday and we release the show notes on our site EverythingREI.com. Enjoy!

Sean: [00:01:35] Thank you very much for being on the show today. Go ahead and introduce yourself and let us know what you do and how did you get started?

Corey: [00:01:40] Hey Sean, well thank you so much for letting me join you here on your podcast or squadcast. My name is Corey Siegel with S&L Capital Group. We are a hard money lending company, kind of a boutique private money lending company here located in Southern California. I know you guys are up in the Bay Area but my business partner and I, his name’s Brad Laddusaw, we started S&L Capital Group. My last name is Siegel and his last name is Laddusaw. So clearly creativity is lacking when we talk about S&L Capital Group, it’s just beginning initials of our last name. But we started our company to try and take our business from a… you have a lot of companies getting into this market on the lending side that are trying to be gigantic and there is benefits to clients on that front. From our standpoint, we really take a personal approach when working with clients and try to make sure that our clients are talking to decision makers. Efficiency and speed really is the play that we have. So we both worked at a larger company in Los Angeles. I’ve been in this industry for about seven years. S&L Capital Group just celebrated our two-year anniversary and a couple years ago my business partner and I decided why don’t we try to do this thing on our own and have a little bit better quality of life from the standpoint of time and not spending time in traffic and everything like that. And when we got set up what we quickly realize is working with investors on the fix-and-flip side or the rental property side of things, or even commercial properties, most of the clients that we work with are small business owners. You have entrepreneurs that are really trying to get some financial freedom. When you’re talking to them about getting into real estate investing, there’s usually a motivation behind why people are leaving their 9 to 5 to get into real estate investing and that’s a very personal decision. So why build a company in which you’re a loan number or an account? We want to build a company where it’s person to person, you’re talking to decision makers, we can give you quality advice. And similar to kind of what you’re doing too, which is why I reached out to you to connect with you, is we have a YouTube channel, we have our educational videos. One of our biggest places to try and give more than we asked for, in all honesty. In regards to education, we want to bring up things that just spark some activity in the brain and go into detail on things that we feel will be useful and take requests on that front as well. Because if we can provide you with quality content and information, that’s really the goal and the name of the game. So being a small company at this moment, you know with what my business partner and I are doing from a strategy standpoint, gives us the ability to really truly give information and not necessarily have the expectations of receiving anything back. And the reason why we can have those expectations be where they are is we’re a very lean company. So we don’t need to do a hundred fifty loans a year to be successful. And it just allows us to do a little bit more about what we’re passionate about which is just try and provide some information. We’ve looked at a ton of deals over the last five to seven years and you know, there’s a lot of crazy stories. So hopefully we can avoid you making mistakes that we’ve seen and vice versa, because the more successful our clients are the better it is for us.

Sean: [00:04:50] Yeah, that’s amazing. And when you’re smaller, you’re more lean, right? And when you’re lean you’re more flexible to do whatever you want to do for your customer’s needs. And I want to ask you: how do you go about starting a hard money lending company?

Corey: [00:05:03] Yeah. I mean I think pertaining to where you kind of ground and pound with what you want to do in California. And we mainly do most of our business in California. There are a couple of states that I would consider licensed, lenient states where you can utilize your California broker’s license. But in the state of California, when you do hard money loans typically, and in our case we do business purpose loans and investment properties, they’re technically considered commercial loans, whether it’s against a residential property or it’s against a 20-unit multifamily complex, because it’s not owner occupied. That is when you kind of take a look at things and go “That’s a commercial loan”. And you can have a broker’s license, a traditional real estate broker license, to do those types of loans. You don’t necessarily need your NMLS or your MLO license because we don’t provide that consumer situations. So the first thing you would do, you would want to get a broker’s license, a traditional real estate broker’s license, and then you start working on your processes and getting your capital online and work in your relationships. We’re huge believers in networking, which I know with your meetup group up north, you’re definitely a believer in that as well. You would be surprised how many people in the room, if you aren’t actively in these rooms, are actively lending money to people as private lenders without processes and we call them like levels of mitigation, right? But mainly looking at private lenders that work with investors on like a handshake deal and everything like that, those relationships are incredibly valuable. But at some point in time in order to protect your investors, you kind of want to put into place some sort of system and process to where you’re vetting out the deal. And I think that with with private money lenders, whether you’re meeting them through meetups, whether you’re meeting them through CMA conferences, or AAPL conferences or American Association of Private Lenders, wherever you’re meeting your particular investors, they’re going to buy into your process and if they feel that you have really vetted out the deal, you start getting taken more and more seriously about what you’re doing. So the capital really has been flooding the market. There are million hard money lenders here in California. So what sets you apart to your investors that will make them feel comfortable with putting their money out on your transactions? And so what we started with was some relationships that we’ve had throughout the years of being in the business and word-of-mouth. I mean you talk to as many real estate agents and brokers that you possibly can to meet them and try to find a way to have them believe in your process of closing. I mean, it’s all about trust to a certain extent and feeling confident that you’re going to be able to come through on your word. And it’s really difficult to do that part because you got to get somebody to believe in you first before they’ve had a chance to work with you. But honesty and transparency is the way to go on that front.

Sean: [00:08:03] So it’s like a chicken and the egg problem. Do you find the funding first or do you find the deals first?

Corey: [00:08:08] Well, I mean right now the most difficult part I would say is finding the deals. As you probably know to be very active in real estate or in your investing side of things, once you have a deal the money will be there and you can go and call whoever you need to call to really vet out the lender that you’re working with, to try and find the option that’s a little bit better than what you currently have on the table. So I would say, it’s a difficult question to answer because the deal right now, we have an influx of capital that we literally can’t get all the capital out with the investors that we work with because they just want to keep putting it out and putting it out and putting it out. And so I would say you have to have the capital to get the train in motion, but the deals is kind of like the coal that’s going into the fire that keeps it going.

Sean: [00:08:53] Right. So what it’s like the agreement you have with your investors, like is it percentage-based? Is it debt-based or equity-based, for their returns?

Corey: [00:09:01] Yeah, so we broke the loan to let’s say… I mean most common right now would be like fix-and-flip properties and everything of that sort. So we have investors that we’ve worked with for a few years now that we’ll provide the money and fund the transaction. So the difference between that type of relationship and dealing with a company that is a fund, a traditional fund, is the companies with a fund has a pool of money. And that pool of money can be deployed on any particular transaction. In our case, what we like to do, what we prefer to do is we work with individual investor A, B, C, D, E, and F, right? But whatever it may be. And we will take a look at the deals that are submitted to us on a daily or weekly basis and will match up the investor that we feel and that we know from our history with them, will enjoy that opportunity. And so the yield or the interest rate is typically something that’s driven by the deal itself. And the type of deal is there’s an appetite per investor. For a high leverage fix-and-flip, there’s you know investor A and B that really like those. If it’s a low leverage cash out refinance on a rental property resulting in a lower interest rate, then we may have other investors that are more interested in that. So the agreement between us and the investors is let us provide you with a full documentation and checklist of the deal that we have to let you know that we’ve kind of vetted out that particular investment. And then the deal itself will command the LTV or the interest rate and the cost of the loan. The higher the risk, typically the higher the cost. And the more that the investor will yield but they have to be comfortable with that type of transaction if that makes sense to you.

Sean: [00:10:46] Makes sense. And are you guys mostly just … like are you guys taking a spread of the yield or are you taking a brokerage commission…?

Corey: [00:10:55] Right, so on our loans there are origination fees that typically will go to us as a company, S&L Capital Group. They’re processing and underwriting, and doc drawing fees. We do draw all of our docs in-house. So you have those types of things, that’s pretty standard throughout the market. The servicing side of it is an interesting side of it, too. Because yeah, there is a way to build in like an arbitrage or a spread on the on the interest rate, but that really requires us as a lender to be active in servicing the loan. So we utilize a third party in order to service our loans and primarily because we want to kind of shed that light really, right? Trust accounting in California is something that’s really overlooked. And one of the biggest things is that the Department of Real Estate will literally shut you down from if you don’t have proper trust accounts in order, reconciled, audited, reviewed, by a CPA. So the cost of keeping trust accounting in-house really needs to be outweighed by the return that you’re getting and even in that case the liability just becomes something that if you feel comfortable with then you do so. We utilize a third-party servicing company to handle 99.9% of our loans and what we do then is we can log in to our account with that Servicing Company and see all of our active loans that are in there from a portfolio standpoint. And now we can still be engaged with our clients on the borrowing side to ensure that some people have 10 properties, right? So let’s make sure that you make those payments. We don’t want you to get hit with late fees. We don’t want you to get hit with default interest. You know certain things like that. So we try to take a proactive approach on that and let the investors to sit back and you know make that PO Box money or get those ACHs once those payment is processed because that’s really what they want. You know, they want that passive income and everything of that sort.

Sean: [00:12:42] So is it usually like one investor per one deal or do usually have maybe two or three investors for one deal?

Corey: [00:12:48] Yeah, and so what you’re talking about is a Whole Note investor versus a Fractionalized investor, right? Our company we do Whole Note investing, so we don’t fractionalize notes. There are plenty of companies that that are okay with fractionalizing. And to me I think as a client if you’re looking at it from a borrower’s perspective, and I for S&L Capital Group, my main focus is to work with our clients, who originate deals, who find properties, or have properties that need to apply for a loan and everything like that, my business partner Brad, he handles most of our investor stuff. So I would say from a borrower’s perspective, it’s really irrelevant to you as a borrower whether it’s fractionalized or not. You’re looking for that company to say, “I’m going to hit this loan amount of $500,000 or whatever it may be and it’s going to be at a 9% interest rate.” And really all you care about is do I get that loan and do I get that term? So that’s kind of the interesting part about it. Now I do know on the other side from the company if we were to fractionalize, there’s just a lot more hands in the cookie jar, right? So if you have a $500,000 loan and you’re fractionalizing through five or six investors, you could get through to four of them and they like it, and the last person just says “no”. So we prefer to kind of have that certainty when we work with some of the investors that we work with to have them put out the capital for the full loan amount. And so we mainly focus on whole note investing whether we’re doing that in a first position or junior position. We have yet to do a fractionalized loan, you know on our side. So that’s just kind of how we prefer to do it and it makes it a little bit easier for us to put those deals together.

Sean: [00:14:25] It makes sense. It’s just more complicated. It’s just more complications on your side.

Corey: [00:14:29] Yeah from our side. Yeah for sure.

Sean: [00:14:31] Right. And it’s interesting because now they’re doing whole note loan investing. Some people are just throwing down million dollars for someone, as a first, right? A million dollars. They’re the bank basically. How do you guys get connected with such high net worth investors?

Corey: [00:14:45] Yeah, I mean you’d be surprised at how visible they are in the market, right? So you go to conferences, you go to seminars, you go to events, local meetups, to be honest with you. It’s funny, sometimes the people with the most amount of money look like they don’t have money at all. You know they’re wearing cargo shorts and they have their T-shirt tucked into into their shorts. And you’re going “There’s no way!” but that particular investor has a hundred million dollars that he puts out on anytime. So when you find them, you find them at these professional networking and seminar types of organizations, right? You chat with them. I think it’s important to understand that every broker in the room is chatting with them as well. And every company that needs capital is chatting with them as well. So as it is with any type of sales situation, what sets you apart? You know, if you’re a realtor what sets you apart? If you’re a mortgage broker what sets you apart? If you’re trying to attract investor capital what sets you apart, right? So that’s where I think company, not necessarily policy but a little bit of that, but culture, belief system, you know, whatever your kind of infrastructure is as a company, people with a lot of money they can be very particular with who they work with, right? So it’s important for us to be able to show them and not just talk to them, but show them how we are taking their money seriously. So once you get introduced to them, once you meet them and they tell you what they do, obviously you have to vet them out as well. But at the same point in time, more so than trying to fake it till you make it, a good saying in the industry or in any industry, you have to show them what you do that will set you apart to make them feel comfortable with putting $500,000 or a million dollars out on a loan that you originated with them. And that’s kind of nice.

Sean: [00:16:36] And how much you have committed to your company before you were like, “Okay, we’re now open for business. We are now a hard money company.”?

Corey: [00:16:43] So funny thing that you say that. So we’ve had some relationships over quite a long time and the people that we’ve been lucky enough to work with, capital is not the issue. Again they’re looking for deals. They own companies that need to put out, were talking hundreds of millions of dollars a year. And they work with a bunch of brokers throughout the market. So you could go to a CMA and sit down at the table and meet five of them and barely even know it, right? So our plan when we first started S&L Capital Group was you know, let’s get open for business and if we needed to broker a deal out to another company, if let’s say we got a deal, a fundable deal within a short period of time, we’ll always be open to doing that. And being a small and lean company would allow us to be competitively priced while having that option. But what ended up happening is we got open for business and we started doing some social media marketing and posting some stuff on our various platforms and everything of that sort. And what ended up happening was some of these people in the industry would reach out to us and say literally like, “Hey man, how could we help you out? You know, we’ve known you for a long time. We’d love an opportunity to try and help you guys get off the ground.” And that was a very humbling experience because it was something that we weren’t expecting at all. But at the same point in time, it definitely helped us get a little bit of a jump start with what we were wanting to do. And you know, you’re only as strong as your clients and your investors in this business. So you could be the best real estate investor and identify the best properties, if you don’t have the money behind you or you don’t have the source for those properties, it’s going to be very short lived. So yeah, we were very lucky in that sense in which people wanted to literally call us and say, “Hey, how can we help you out?” Yeah, we’re open for business.

Sean: [00:18:28] That’s awesome. And what kind of deals are your investors typically looking for?

Corey: [00:18:32] Yeah. So we typically write first position loans. If we’re doing fix-and-flip loans, sometimes we’ll do a combination of like a first and a second. I don’t think anybody knows where the markets going to be in the next couple of years. I know that people are a little bit reserved. Interest rates just went down earlier this week again. So there should be a pretty steady flow of real estate deals moving forward without any huge corrections. But again anytime you say, some sort of policy should change. So with that being said, we’re not writing too many seconds anymore. But the rate of return for investors on first position loans, it’ll all be based off of LTV, right? So you’re looking at somewhere between 7 and 10% yield annualized on their money. Thus the lower end of that might be for a 1 to 4 unit rental property that’s got a decent cash flow. And the client wants to go into like a private money non-QM type of 30-year fixed loan. And those rates are starting in the low 6s, but that’s a pretty specific type of program and 10% would be your 90% of the purchase price fix-and-flip loan. The second position investors still have a smaller amount of capital out in each individual deal, maybe 10% of the purchase price, or 10 to 15% of the purchase price. And those yields are somewhere between 13 and 15%. So just kind of depends but we haven’t really been putting too many seconds together or as of late. We’ve trying to keep our carrying cost for a clients down so they can make some more money

Sean: [00:20:01] Yeah, you mentioned QM. I don’t think I’ve heard that term before. What is it?

Corey: [00:20:05] Yeah, QM is qualified mortgage. So non-QM would be a mortgage that’s not qualified by like certain regulations, right? So like Fannie Mae or Freddie Mac loan would be a qualified mortgage. So they have different types of underwriting, it’s more of like consumer debt, all of that kind of stuff, owner-occupied properties. Non-QM would be like certain portfolio lenders or what we do on the hard money lending side, but ours are traditionally known as Bridge loans. But there’s a program that we have now that’s considered a non qualified mortgage meaning we’re not necessarily looking at the client in a lot of detail to offer a more traditional type of loan. And so there’s always an investment property and if it’s a you know rental, 1 to 4 units, we’re going, to put an ambiguous number here, but like 90 to 95% of what we look at to qualify the deal is based on the asset. So we look at gross income of the property on a monthly basis. Look at that number against what the projected mortgage payment is, any tax and insurance impound, and we want to make sure that that gross income covers those monthly expenses. And then that’s pretty much it. I mean as long as the client has a 650 FICO, we can get you into a fixed rate, long-term loan, that would pay down principal and interest which is not very likely or not very common in the hard money lending space. And you don’t have to go through all the hoops that you have to go through if you’re going to a traditional bank to get a loan. But some of those banks are now coming out, stated loans are about to anyway. So, you know stated income loans are kind of coming back. So but yeah, that’s non-QM would be non qualified mortgage.

Sean: [00:21:48] Got it. Thank you for that explanation. Because earlier in the show, you mentioned how you are giving basically commercial loans, even though they’re for residential properties. Basically as long as they’re not owner-occupied, right? There like a business loan. What happens if in the middle of construction, the person moves in like what are the repercussions? I’m curious.

Corey: [00:22:10] Well, yeah, I mean traditionally I think every lender will have a different answer for you. The most common one and obviously I’m not a real estate attorney or anything like that. Disclaimer on the show here. But our promissory note, our deed of trust are synced together. We have you sign as a client a certificate of business purpose loan, loan disclosure. And so what that has is literally spelled out on that disclosure where your primary residence is, and that this loan, and the proceeds of the loan are being used for a business purpose completely, right? So you’re signing off on the front end that it’s going to be a business purpose. And your promissory note will have a clause in it that it isn’t owner-occupied. If you end up moving into it technically you’re in violation of your note and deed of trust. So, what does that mean? There’s an accelerated default clause which means you can file a notice of default right away to accelerate that particular part of the process. And the reason why, well not the reason, but there’s a different foreclosure laws in place for consumers versus business purpose loans. And so that’s why it’s kind of considered a commercial loan. Every broker will kind of have a different thought process on that. But even if it is a residential property in our opinion, technically, it’s still a commercial loan if it’s non-owner occupied, right? But if people move in then you would be in default of the loan. One, it would have to be brought to our attention, you know, if it’s a rehab loan we’ll have a funds control account. That’s pretty easy because we will do an inspection of the property and we’ll kind of see what the property looks like and so on and so forth. But if you pay us off and you want to do a fix-and-flip, but you love the property at the end of the day, and you go to a traditional bank and get a refinance to pay us off and then you move into the property, there’s literally nothing we can do once we’re paid off. But if it’s within our loan, then you would be technically in default of that particular loan.

Sean: [00:24:01] Got it. Is it basically because if someone moves into the house, now as a lender you are more at risk because if they decide to not pay the loan anymore it’s a lot harder to evict someone who actually lives in the property than if they just own it for business purposes?

Corey: [00:24:16] Well, so it’s kind of…not necessarily. Yes and no, right? So you’re looking at it from a standpoint of what licensing does the broker have? How did we disclose the loan on the front end, right? So when you do a business purpose loan or a commercial loan, the disclosures are completely different than if you do a consumer loan, right? You have like a three-day cooling off period, you have a TRID disclosure document, you have Dodd-Frank and other regulations that are required to protect consumers after the last down turn. So one, the risk is “Hey, I didn’t disclose this loan to be an owner occupied loan.” The second one would be from a licensing standpoint. Typically, you need your MLO license or your NMLS license to do consumer loans. And so if you don’t have that license, which in our case we don’t, we prefer not to because we don’t even want it to be known that we have the license, and we don’t do consumer loans. We would just rather not have the license, not to consumer loans at all. So the risk from that standpoint is if you’re doing a consumer loan, there are different foreclosure processes in place than if you are doing a business purpose. And so you want to as an investor on the broker side, on our company side, make sure that the proper disclosures are signed off on by the client. So they understand that this is truly a business purpose loan and they’ll sign on the dotted line for that so that we’re all on the same page. But luckily knock on wood, you know, that hasn’t come up here with us.

Sean: [00:25:40] Yeah, it’s not a very good situation. But yeah, I have heard of some situations kind of coming up. Just want to clarify that.

Corey: [00:25:47] Well funny that you mention that too. I hear all the time too, is where I’m gonna think I’m getting into fixing and flipping. I’m going to buy this house and I’m going to live there so I can do all the work, I could just be there and I can oversee everything right? I mean, I hear that a lot too because people want to be so involved in the project. And there is nothing wrong with that but from a hard money standpoint, it’s a big No-No on our side.

Sean: [00:26:10] Right, and there’s like house-hacking right? Have you heard of that term before, where you buy a property and you rent. So house-hacking is basically you buy a property and you rent out the other ones. So a strategy would be you just buy a house that has a lot of different rooms in it, or you buy like a four-plex, live in one unit and rent out the other three. But because you’re living in it, you can’t get the hard money loan, basically?

Corey: [00:26:30] Well, so there’s a little bit of a gray area there, right? So if you’re talking about a single family and you’re renting out some of the rooms, then yeah, that would be owner-occupied. If you’re talking about like a Triplex or four-plex and you’re living in one of the units, there are lenders out there that will account for let’s say 75% of this building is generating investment income. So you may actually have an argument to some investors that this is an investment. I am living here, but I can qualify for your private mortgage or whatever, maybe because I’m generating income for the other units. So we haven’t come across that specific situation, but it’s interesting that you bring it up because my business partner Robert actually talking about it a couple days ago.

Sean: [00:27:09] Interesting. Okay, so I guess there’s some wiggle room there if it’s for a multi-family property. Now, let’s go on to the borrower side. So like what do you think borrower should know when they’re trying to get loans, especially like hard money loans?

Corey: [00:27:20] Yeah. Yeah, I mean I think ultimately from a borrower’s perspective, I think it’s really important to put yourself and have a little bit of empathy on the other side of the transaction. I work with borrowers all the time, so I like to think of myself and I like to think of the clients that I work with, we’re all optimistic right? I’m buying this deal, I’m doing this work to it and I’m going to sell it for this amount and it’s really nothing to it. So I always kind of joke around, you know, because it’s kind of off the cuff, but whenever somebody tells me that there’s a slam dunk deal or a no-brainer or there’s no risk in this particular deal, that’s always a red flag to me because whether it’s as sturdy, you know, as you as you think it may be or whether you don’t, some things are better left unsaid. As an investor and as a lender, you don’t necessarily need to convince somebody that your deal is so good that they’re never going to lose money because on the other side of the table that investors thinking of every bad thing that can go wrong with your transaction. And is he or she protected in that situation. So I would say from a borrower standpoint, find somebody who you can call on for resources and for advice who can truly be like an unbiased opinion. We encourage our clients to call and contact as many hard money lenders as they possibly can to just kind of understand the service side of it. What we had mentioned a little bit earlier, Sean, was in our industry, most hard money lenders are going to be priced competitively. If you’re not, chances are you’re not doing too much business because there’s just been such an influx of capital in the industry. So all things considered, if pricing is relative, not everybody is exactly the same, but if pricing is relative then as a borrower or client, you got to go with comfort. You have to go with a surety and trust with who you’re working with. Do they answer when you call? Do they give you good advice? We can put a loan just about on any investment property. But that doesn’t mean that our clients are set up to make money on that deal. So I would rather talk to a client and say, “Hey, let’s look at the details of this deal and it doesn’t look like there’s that much profit at the end of the day.” You’d be surprised at how many times clients miscalculate expenses on transactions. And we’re talking like agent commission’s which agents earn their money when they do a really good job. That’s a large expense. If you’re not calculating that then your profits’ going to be drastically different than what it was in your mind. So, I guess the long and short of it is we want to try and find a way to have a common ground in a respectable communication that you may not hear the best things from us all the time, but we would rather tell you on the front end why we think your deal is good or in most cases, some cases not good. So then you can avoid losing money. Sometimes the best investment is not making one. So we’re only going to be as successful as you are and if you can do more deals then hopefully you’ll come back to us to make more money. And I talk to clients all the time, whether it’s my fault or your fault, if you don’t make money on a deal you’re going somewhere else to get a loan. It could be because the loan was too expensive, it could be because your rehab budget went over. But regardless of that you’re going to try and find an option that allows you more leeway to make more money moving forward. And so the information on the front end is really important. So understand, number one, understand what the investor may be looking at in your deal. What’s the scope of work? How straightforward is it? Do you have any experience doing it? Try to fill in all the blanks before you really approach a lender for that. So that when they ask questions, because they will and they do all the time, when they ask questions you already have prepared answers that make it known that you really have dived into this particular deal. And then the second thing as I mentioned is just find somebody that you can in a certain sense trust. Trust and verify. We do some educational videos and my business partner didn’t want referrals and testimonials, you know. I mean, you can ask for referrals and you can ask for testimonials from a standpoint of like, “Hey, check out what our Facebook page and see all the testimonials that we have.” But all of those are going to be good. So what are you really doing as a client? Are you really vetting us out if I can send you over five testimonials that say “Corey and Brad did a great job on this”, you know? You got to find a way to really understand what we’re offering and not necessarily take other people’s word for it because it’s really a personal business, so you got to really trust who you work with.

Sean: [00:31:48] So, how do you go about vetting people?

Corey: [00:31:51] Yeah, that’s a very good question. So there are ways. The Department of Real Estate makes it pretty easy for you to see if one, you’re a broker and that you registered with them, right? Your license information is easily accessible on the DRE. Are you what’s considered a threshold reporter or a multi-lender reporter, right? And you can go on the DRE to see. So what’s common in the hard money space and especially if you’re new to investing and applying and looking for hard money, you’ll run into a lot of people who say that they are direct hard money lenders, but they broker those transactions out to other companies. And so what does that really mean? That just means that you’re not going direct to the source. So if you find a relationship with a broker that he or she can really uphold their end of the bargain, they’re going to be worth their weight in gold. But at the same point in time, if you find somebody who is going to take all your information, look at the deal, and then just blast it out to a lot of companies to see who’s going to give you the best option, that’s a little bit risky. So I would always ask for the broker’s license. If it’s not already in their email address, I would also just go on the Department of Real Estate to kind of check to see if they are registered, if there’s been any complaints, if anything kind of red flags kind of show up. If it’s somebody who’s promoting themselves as a company, like let’s say us for example, S&L Capital Group, go on the threshold reporting portion of that DRE website. We’ll be listed right there. You definitely want to verify those kind of things because regardless of whether we’re servicing loans in-house or not, there are companies that do and trust accounting, we kind of I think we chatted a little bit earlier, is one of the biggest things that will set a company up for failure. And what that means as a client is you never want to be halfway through a project and then some sort of trust accounting issue comes up with your lender. Now your money’s tied up and that means your property is tied up in most cases. So that’s how I would vet. I would vet through the DRE and kind of make sure that there aren’t any complaints or anything like that, to go along with that.

Sean: [00:34:01] And when you guys are helping your clients do like asset valuations, because like someone will say, “Hey, I need a loan from you guys. Here’s my project. And here’s how much I can make from it. Here’s my scope of work.” What are you guys doing to make sure that they are in line, kind of makes sense? And what kind of profit do you expect your clients to make, otherwise, you’d be like “Look this is not worth a loan. This is not worth giving you the loan for”?

Corey: [00:34:25] Exactly,and I think… I always love to be involved with the clients very early on the process. So I have clients who literally call me on every property that they’re going to write an offer on and just to get an idea of how strong they can go on that offer. And by strong, I mean not only what the purchase price can be but also timeline to close, right? If we’re all on the same page today and you’re not writing your offer until tomorrow, I have a 24 hours of a jump start to run comps to kind of take a look at what after-repair value comps look like. So a lot of times if you look at enough transactions, and being in this industry for about seven years, I mean, we probably looked at thousands of transactions. And that’s probably not, I mean that’s not even an overstated number, that’s probably light. I mean it’s got to be pushing 10,000 deals with all the turns out, turndowns that we have. And the reason why I say that is we’ve seen every rehab did that I feel like we can see. You see the one that’s written on the back of a napkin and is just kind of scratched along on a $20,000 bid, and you seen the full blown general contractor estimate broken down by line item cost with foundation issues and roofing problems and all that stuff. So what I look at when I talk to a client is where are you seeing value on your exit? How long do you think it’s going to take you to do the work? And how much money do you have on the front end estimated for rehab? It’s really hard to kind of get that number of super accurate without walking the property but at least it gives us a baseline. And once we take a look at that, now I’ll run comps for my clients on those deals to really try and hone in on where the ARV maybe. And then based on that after repair value and an estimate for rehab, you can kind of work in and give ranges to where the purchase price should be or can be. Or how many additional months can we plan for as just like a safety net, to make sure. I never liked doing deals when let’s say a client is planning on holding the property for 6 months and if they hold it for 8 months they break even. That’s too thin of a deal for me, to be honest with you. I like to typically see about 20 percent cash on cash return for clients. But depending on the market that you’re in, and that could be a lot of money or it could be not a lot of money. Obviously in the Bay Area, everything seems to be a little bit expensive, same with Los Angeles and you know near the coastal cities. But I’m sure there are inland areas up in the Bay area as well that are similar to like Riverside County or San Bernardino Inland Empire down here in Southern California. You know, if you bring in $40,000 per deal and you make 20 percent of your money, that’s $8,000. Is that worth your time? So it’s not necessarily minimal profit number. It’s more like a percentage because percentages are just percentages no matter what the numbers are. And then the secondary part about it would be like, is it worth your time as a client? And sometimes it is for clients to make $10,000 a deal. Most the time it’s not, though. But it’s more about I guess percentage protection, right? If I’m bringing in a hundred thousand dollars on any given deal, it would be nice to clear 20 or 25 after a six-month period. It’s a good return annualized and it kind of builds in a few months of cushion in case you have a buyer fall out or something happens that’s out of your control. So we look at all that on the deal analyzer spreadsheet that will kind of break down the numbers and include all of the estimates for expenses and everything like that. And we typically take a look at it on that front.

Sean: [00:37:58] That’s good. That’s good to have a second set of eyes especially for your investor clients. So I also heard that you guys do a lot of like public education and public outreach. What are you guys doing to educate others?

Corey: [00:38:12] Yeah. I mean we speak at at clubs down here in Southern, California. Investors, new, experienced, everything of that sort. We do quite a bit of social media stuff. We have a YouTube channel that we work on that offers up like quick tidbits. So the goal with that is to, let’s say there’s this very specific thing. You have a client who is refinancing a property and they want to pull cash out of that property to buy another investment, which this exact example came up. Well we open up title and we take a look at the title report and a loan from 2013 from a previous lender that has already been paid off is still showing on the title report. And what does that mean, right? From a client’s perspective it could mean nothing, but what it does mean is it’s going to extend your timeline. So if you’re working with an auction property, if you’re working on a short sale, or probate, or fill in the blank on what that timeline to buy that property is so firm that you can’t go a day over, how do you make sure your property is in a position to be able to be cashed out of very quickly without any hiccups? So we go over what recons are. We go over how to verify people, we have a video for that. We go over some of the loan programs of properties and projects that we’ve worked on, the importance of the insurance that you have. The education part for us is huge because I feel like in the hard money space, it’s kind of like the elephant in the room where people look at this industry as almost the loan shark side of it has gone away over the last seven years, right? Some agents really do have a bad taste in their mouth with private money and what we offer. But I think it’s because they there’s a misunderstanding about the value that we can offer our clients. And quick money, aggressive loan to values, taking on higher risk, and people need to be more familiar with the process. And so the education side for us is really a basic tool for us to just try and have people understand that where investors in our own sense and that we have knowledge of the industry from what we’ve been through over our years of being in here. We’re not the smartest guys in the room. We are wrong on certain occasions because everybody’s not perfect. But if we can provide some value and have you start asking the people that you work with questions about these topics, hopefully it’ll help your investing. That’s the real important part. Can you take a tidbit of what we speak about. Comparing loan structures, you know, what’s the difference between a loan structure that’s 80% of the purchase price and 100% of the rehab versus a loan structure that’s a hundred percent of the purchase price and then you bring in the rehab? You know, those things, the way to calculate some of the marketing strategies that are out there right now, as especially as a new investor you know, there’s a lot of stuff out there that’s a little bit overwhelming. So the education is meant to kind of spark that activity to create the conversation and to really just kind of take just one little tidbit that you can move into your day-to-day investing cycle and maybe avoid an expensive mistake or cross your T’s and dot your i’s and that’s the education side that we look at.

Sean: [00:41:27] Yeah, that’s great. I mean everyone starts from somewhere, right? Most of my education was based on other podcasts and going to other peoples meetup groups as well. So yeah, just thank you for putting that out there. What is the name of the channel that you guys have?

Corey: [00:41:42] So it’s just you should go onto YouTube and you search for S&L Capital Group and it should just show up. It’s a picture of me and my business partner. So yeah it would be pretty easy to find.

Sean: [00:41:50] Cool. Very nice. So what else do you think we should know about hard money that we haven’t talked about yet?

Corey: [00:41:56] I think hard money will always have a functionality in the marketplace. So rates are coming down. Which what does that mean for hard money lender, you know? When we were expecting rates to increase over the last couple years and they didn’t and you know policy has a huge effect on that, I would oftentimes talk to my business partner, and I’m like, “This is great for us because the smaller the gap is between traditional bank money and hard money rates, then now people are going to start looking at the ease of getting that capital. And the difference of the cost is going to be less, right? So that obviously didn’t play out quite yet and eventually it will because interest rates will at some point have to start going up. But there’s always a need for private money. There’s always a need for the timeline right? I’m sure in the Bay Area it’s just as competitive, if not more competitive than some of the markets down here, you’re up against all-cash offers. And I don’t think there are any real statistics on how many all-cash offers turn to private money loans by the time that they close. But I do have to assume that not everybody has millions of dollars in the bank and can just write and close on all-cash. So I think a large portion, maybe not large portion, but my my assumption is that a portion of all-cash offers turn into private money and hard money loans because we’re able to act quickly, right? Obviously, it’s not as cheap as conventional bank money, but it’s a whole different purpose. It’s not comparing apples to apples. So with hard money, understand that if you’re comparing it to a bank loan, I would take the bank loan every time I could get it. So go after the bank loans and much as you can. At some point you get active enough in this particular market that traditional bank isn’t happy that you’re using their consumer loans to do fix-and-flips because you’re going to pay them off right? I had a client that had worked with in the past with one particular bank, I’ll leave them unnamed, actually stopped writing and looking at his loans to purchase properties because he had paid off his loans within six or nine months on three or four or five different occasions, right? So you get to that point. You also get to a point where when you have enough assets under management banks tend to tend to pull back on the amount of loans that you can get. So specifically what I’m talking about are rental properties, right? If you flip a couple properties to then buy something even in-state or out-of-state to hold as a rental, when you get to four or five or six particular loans on the conventional side of things, then it’s going to become more and more difficult to qualify for those traditional loans. So I’m not even saying you need to have hard money as your option A. But it’s important to have that in your roster so that you can take advantage of opportunities. Hard money is more expensive, but I’m a big believer in always moving forward. So if you’re not buying properties because you don’t want to use hard money, I would argue you’re missing out on opportunities. And you just have to find a deal where the hard money works, right? I used to say, but I don’t really anymore, if the deal doesn’t pencil out with a hard money loan then you shouldn’t do it. But I understand that some people probably have different beliefs on that. But I do think that adding to your portfolio, keeping your investments going is the only way that you’re going to create compound interest and compound return on investment and velocity of capital. How do you get your money out of one deal and into the next as quickly as possible? And then the other thing about hard money is most clients want the most aggressive loan. Highest loan to value, lowest amount of cash to close, you know, fill in the blanks on all of that. We do quite a bit else which is today’s market is a little bit unknown I guess. But low leverage loans, utilizing some properties that you may own. There are ways to effectively protect our investors by offering a little bit more conservative loans and at the same point in time as a client, that results in a lower monthly payment, that results in the lower interest rate, more favorable terms in general. So sometimes we talk to clients about their overall portfolio of properties that they have. Do you own anything with a low mortgage? It may make more sense to pull out X amount of dollars from that property than for us to do a 90-100% loan on the purchase of this flip. And that’s where I think where we circle back to talking to somebody who you can really call on and feel good about the information that they’re providing is, what are all the options that I have as a borrower? It can’t just be this 65 to 70% ARV loan, right? Like “that’s all, yep, 65-70% ARV at 9% and 2 points and that’s what we’re going to offer.” There’s a lot more that goes into it and you should be aware of what options are out there for you to be able to capitalize on this market. So interest rates are down, I think that’s a good sign for investors, really really good sign for investors.

Sean: [00:46:55] Yeah and being flexible like your company, you’ll be able to figure out creative strategies like cross-collateralization between your different properties to get a decent loan. And to be honest, I think hard money loan rates are not too bad. Like I used to hear stuff on like BiggerPockets. 12-18 percent for hard money, and I’m like “damn!” Here it’s like 10%. I’m like, “Okay, that’s not too crazy.”

Corey: [00:47:20] Well, it’s funny you say that because I started in this industry in 2012. And there was not as much capital as there is now in the industry and we were regularly charging 3-4 points and 12-14% interest. That’s nuts but it was it was normal and it was doable. But now there’s so much money in the market that you should be getting a sub 10 percent rate for sure and nobody should be charging you more than two points. If you get a loan offer that’s over two points or close to three, what we had talked about before about verifying who you’re working with, chances are there’s a broken involved. So you know, that’s how you get some added costs on that. And there’s a purpose for it. It’s an interest-only payments, it’s quick, you should have this flexibility of getting in and out of the loan as much as possible. Ideally no prepayment penalties or guaranteed interest. But again, if there’s a six-month prepay and your project’s going to take you nine months, don’t argue with the lender that you don’t want to prepay. It doesn’t have any effect to you, right? And that happens all the time too. On our fix-and-flip loans we don’t have any prepays but I always talk to people about that too. The three-month interest guarantee doesn’t matter. You’re not going to fix-and-flip a property in less than three months. And if you do, congratulations. Like, you know, that’s awesome. But most of the time it doesn’t happen. So yeah it’s definitely a different world than what it was. And what we’ve seen and what we are trying to… we still love fix-and-flip because it’s a quick way to get money out. But we’re trying to kind of diversify our product offerings into more long-term stuff and commercial bridge loans. Because what we see is the big boys in the industry, you know, Wall Street money, Fintech companies, there’s a lot of people that are offering higher leverage for lower return to their investors, which goes against just your traditional investment strategies where higher risk-higher return. But they’re coming from a different world and not necessarily the real estate world and they have the pockets to be able to do that and they need that yield that return on their investment. So it’s an interesting time, you know in the market. But as quickly as those big companies have come into the market, they’re smart enough to know when to get out and they’ll get out just as quick as they came in at some point in time, but not before they do really well in the industry. So yeah, it’s kind of an interesting time, right now.

Sean: [00:49:37] And it’s pretty interesting how you talk about how banks get pissed off at people if they pay off their loan too quickly. If you think about that some people are like, “Oh, I’m happy to have my loan paid back.” But no they want the yield, right? Now they need the money back to work somewhere else. They have to originate another loan. More work, right?

Corey: [00:49:53] Well, that or they sell it on the secondary market. So there are certain like traditional mortgage brokers that have programs and products in which the client is expecting and kind of quote-unquote required to make three months or six months of payments. And if they don’t then the broker has to pay back the commission. I got a really close friend of mine who’s down here in Los Angeles who I was talking to maybe a month or so ago, wasn’t that recently. But with rates continuously going down, people would refi their house at 4.25% let’s say, and then two weeks later rates would go down or maybe a month later to 3.75%. Whatever,I mean, I’m not even in that space. And two or three months down the road the client would say, “Oh, I’m going to refi because I can get a sub 4% rate. What does that do to the mortgage broker? The first time ever he had to pay back his commission on a loan because the client didn’t make enough payments. And so the secondary market’s different. That’s a whole different ball of wax on that front end. You know, go watch the Big Short if you haven’t been, that’s a great movie that kind of explains that kind of stuff.

Sean: [00:50:54] I watched it three times and every time I watch that movie, I learned something new.

Corey: [00:50:58] That’s awesome. That’s a great movie. It’s such a great movie and I don’t think we’re necessarily going down that path again to that extent but it does paint a picture of why I guess… I guess, I have different thoughts about it too every time I watch it, but I can understand why the knee-jerk reaction was to put more regulation on things because of the way that it went down. Effectively the secondary market was the victim of financial institutions selling them paper that wasn’t presented the right way. They’re saying it’s A paper and it’s not so yeah, that’s like I said a whole different ball of wax that’s for sure.

Sean: [00:51:36] And a good conversation for maybe another time.

Corey: [00:51:38] Right right.

Sean: [00:51:40] Awesome. Well, thank you so much for sharing everything. How can people get in contact with you?

Corey: [00:51:44] Yeah, so I’ll give you my phone number. I’ll give you my email address and our website. We have a Facebook page. So it’s S&LCapitalGroup and it’s the Ampersand. So just type in S&L Capital Group and you’ll find us on Facebook, you’ll find us on Instagram, LinkedIn YouTube. My email address is my first name Corey@SLCapitalGroup.com. And then yeah, we do not hide behind a logo so I’ll give you guys my cell phone number, 310-889-5393. We try to be as available as we possibly can to help you guys out. I mean as often as we can and real estate happens on the weekend, so seven days a week. Sometimes my wife doesn’t like it, but that’s okay because we gotta do what we gotta do.

Sean: [00:52:31] I’ll call you at 3:00AM tomorrow night. Let’s go.

Corey: [00:52:34] Awesome, perfect. I’ll probably be feeding my daughter, my four month old daughter, so. But yeah, anyway, we can help, you know, we could take a look at deals. We do deals all throughout California. Our rental program is available in Texas, Tennessee, Missouri and Florida, along with California. So, you know, ultimately we try to add programs to our lending profile to offer our clients a one-stop shop for what they need to do and we got a few holes that we still need to fill but we’d like to think we have the resources to get you something that’s worthwhile for you. But outside of that just give us a follow for any type of educational stuff or just a good conversation.

Sean: [00:53:14] Cool. So for anyone listening, if you are looking for a hard money loan give Corey a call. Preferably not at 3AM on a Sunday, but give them a call for some seven days a week. Anyways Corey thank you so much for telling us everything that we need to know about hard money loans and I think it was really interesting how you talked about even like how to create a hard money loan company and how to find investors to like give you the loans in the first place. So thanks a lot for that.

Corey: [00:53:37] Yeah Sean, I appreciate it and definitely look forward to keep following you, man. Love seeing what you’re doing.

Sean: [00:53:42] All right. Take care.

Corey: [00:53:43] Thanks.

Here are some of the key takeaways from this episode. Hard money loans offer non-owner occupied properties only. This way they can do it as a business loan and don’t need to go through all the hurdles that most lenders need to go to to originate an owner occupied property. Your hard money lender should work with you intimately and may help you identify a bad deal if it doesn’t match up to their underwriting standards. The best way to raise money is to raise it from people who are outside of real estate. Go to other meetups or talk on other podcasts to get access to a whole new crowd of people who aren’t already bombarded with deals from other real estate investors. Hope you learned a lot. You can find the show notes on our site EverythingREI.com. Thanks, and have a great day!