[00:00:00] Speaker A: Welcome, listeners. You're listening to the Deeds in the Desert, where real estate investors tune in for the latest news.
[00:00:08] Speaker B: Welcome to Deeds in the Desert. Guess what? We've got the bald guy and the old chick. But we're here again to talk to you about how our underwriting has changed since 2008.
I gotta be honest, Pat. I am so tired of people asking us how our underwriting has changed since 2008, as if underwriting changed. Did underwriting change or did our company philosophy change?
[00:00:32] Speaker C: You know, it's obviously just how you view things.
It's the same way that we view the borrower side of things. I want to deal with people that have been through it before, that have seen the good, the bad and the ugly, to really ride the ship with.
Our company's no different. You know, we've been associated with this type of. Type of lending for quite some time. So we've seen the good, the bad and the ugly associated with it. Now, does the underwriting change when it comes to dirt? Different points of time? No.
The scrutiny on certain criteria, the scrutiny in certain borrowers, certain markets, all of that is a live and learn process as well as, you know, what has happened in the past to give us some indication of where we at, where we're at currently, and maybe more importantly, how will that look in the future. So it does shape how you view things and how you underwrite things. But as to say it changed is.
No, it has not changed. It's evolved.
[00:01:32] Speaker B: It's evolved. Kind of like the hair on your head, it has evolved to falling out.
So here's one thing that I just took from what you said.
It's great to work with somebody who's lived through, through what I would call a fairly significant economic downturn. Right. No matter what market you're in, we happen to live it right here in beautiful Las Vegas.
So let me ask you a question.
Well, first of all, do you remember 2008?
[00:02:03] Speaker C: Quite vividly, as a matter of fact.
[00:02:05] Speaker B: Okay, so what I want to ask you is this, because I think this is kind of more of a real question.
You had an opportunity to evaluate other people's underwriting because you were the cleanup crew.
So what did you learn being the cleanup crew of how others underwrote. I see you smirking because you know where I'm headed here, right? Because I think a lot of it has to do with the person who's underwriting versus the underwriting standards.
[00:02:37] Speaker C: No doubt about it. You. You know, I think the one thing that tends to get lost in Our industry and what we do in general is the risk adverse nature that needs to be implemented. On the debt side of things, the end of the day, if the project is a home run and it doubles in money, our upside is capped. We limit the upside in which we as a company and therefore our investors get as a return because it's simple interest, it's simple as that. So we have to mitigate it some other way, which is on the downside. We don't want to lose everything. We don't want to lose anything, anything. We just want to make sure we get a good rate of return that is secured by real estate. I think some people in the past and some people now, unfortunately going forward as we currently see it in other companies are more sensitive to the home run deals or more sensitive to the sexy projects, whether that is big dollar amounts, major metros, big name sponsors, they want to be involved with these sexy names.
[00:03:38] Speaker B: Yeah.
[00:03:38] Speaker C: We on the other hand, because of the live and learn lessons is it's better to be in the middle market, it's better to be in that two to $10 million range. It's better to be in secondary markets, it's better to be working with sponsors that know what they're doing and aren't trying to raise as much capital as possible to expand their business.
And so I think the live and learn lesson really came from those three criterias.
[00:04:01] Speaker B: Absolutely.
[00:04:02] Speaker C: Go with borrowers that are kind of staying in their own lane, that aren't trying to take over the world, get in front of their skis. Number two, stay in secondary markets instead of trying to go for those perfect downtown primary market locations. And then the third component of, of the, the process of learning there is, you know, really just sticking in to what you know. Yeah, don't get involved with the sexy name. Don't get enamored by the big name projects.
[00:04:28] Speaker B: So simple, not sexy.
[00:04:30] Speaker C: Correct.
[00:04:31] Speaker B: So maybe that's our motto for the day, is simple not sexy. Maybe we should have titled this podcast.
[00:04:36] Speaker C: If we are simple not Sexy, who's who.
[00:04:39] Speaker B: Oh, seriously, we're gonna have that conversation right now.
[00:04:43] Speaker C: Well, if you want to talk about.
[00:04:45] Speaker B: The bald and the beautiful, you're the underwriter. You would have to be simple because you've just illustrated that sexy doesn't work.
[00:04:53] Speaker C: It does not work.
[00:04:54] Speaker B: It doesn't work.
If it does work, it's short lived. It's short lived. So what are some of the other philosophies as a company that changed for us? Because in 08, the vast majority, the vast majority, I'M going to say, I'm going to go out on a limb. 80 plus percent was right here in Las Vegas. What did we learn from that? Because I think what came out of 2008 wasn't changing our underwriting standards. Our underwriting standards were going to be the same variations, but more or less the same. But what did change is the where, the how much to one borrower.
Our asset types drastically expanded. So talk to me a little bit about that learning process because I think, you know, when we're moving from simple to sexy and sexy to simple, we are simple. We're looking for good quality product, good quality borrowers. Nothing crazy, slow and steady. That's what has helped us sustain and grow the way that we have. So now talk about the markets. Why did we expand into other markets? And you can't say because Kerry said so.
[00:06:00] Speaker C: Well, the simple answer is diversification wins.
[00:06:03] Speaker B: Yeah.
[00:06:03] Speaker C: When we have a diversified portfolio, a one sinking ship can't cause catastrophic failure.
[00:06:09] Speaker B: Yeah.
[00:06:09] Speaker C: If you look, if you want to talk about markets specifically and look right out our back, back door into the city of Las Vegas, there's no other market that it was hit quite like Las Vegas during the downturn. And so from a company standpoint, it is vastly important to be diversified over money markets. Although Las Vegas was a sinking ship in 2008, other markets weren't nearly as hard as Las Vegas. So you can't just say, you know, they're all created the same, all hard money is the same. Well, it's not really because it changes throughout the markets you're in. So we want to be in a number of markets, B, markets that we understand, and C, markets that aren't as necessarily cyclically tied to maybe industrial production, maybe defense spending, or maybe natural resources.
So, you know, if you don't want to be around an oil field that's about to dry up and that's the only economic output you have, that's, that's probably a boom and bust scenario that we don't tend to be involved with at all, to be honest with you.
[00:07:13] Speaker B: Yeah, no, totally makes sense. Talk to me about borrower and capacity of portfolio.
[00:07:19] Speaker C: So one of the changes or the kind of modifications associated with the capacity of the borrower, we want to look at kind of two things. One is the capacity of the borrower in of itself, that borrower specifically, how much can they handle before they get, you know, too ahead of their skis? And secondary to that is how does that borrower's capacity fit in our overall portfolio? They may have Capacity to grow, but we may not have that capacity to have them grow within our bounds. Yeah, we want to make sure they're at a fairly low percentage of our overall portfolio. We don't want to get that above about 15% for any one borrower. Our top, top five borrowers will make up a majority of our product.
But we want to have 20 to 30 borrowers at any given point in time.
[00:08:07] Speaker B: Okay. And asset classes. You know, this one's crazy. I get to ask this all the time. Okay, so you guys only do apartments. Do you only do single family? Do you only do this, do you only do that? You can, you can't specialize in everything. What would you say to somebody that says that to you?
[00:08:19] Speaker C: You're right. We only do one thing, and that's real estate. Now, it depends on what your definition of real estate is. Real estate, technically speaking, is anything that is collateralized by real property. Real property consists of anything from your typical asset classes of industrial, multifamily, office, retail, single family, multifamily. But it can go in some of the niche categories as well. Gas stations, oil fields, hunting grounds, marinas, churches, you name it. So long as it's collateralized by real property, a real estate asset, we can lend on it.
[00:08:53] Speaker B: Yeah.
[00:08:54] Speaker C: Now what do we only do? Well, it's only real estate now, where we're typically involved in changes, just like the markets in which we ch. Which we lend in. It ebbs and flows as we see the risk to reward. Ebb and flow as well.
[00:09:08] Speaker B: Yeah. What have you seen happen to others that have decided to just be a one trick real estate asset type? What happens to them?
[00:09:17] Speaker C: Usually they have wild swings. They do extremely well in good times and extremely poorly in bad times.
You know, no matter what asset class you think of today as the darling child, the best asset class to be involved with. There was a point in time where it wasn't number one and was probably close to the bottom of the list when it comes to the most desirable asset class. So we're pretty much asset class agnostic. We will look at it, we will underwrite it, and if it makes financial sense, we will lend on it. However, we don't have preconceived notions of what asset class we have to be in or what percentage of the asset class we need to be in. We will look more holistically and say, does this fit our overall portfolio? Is it the best risk to risk to return that our investors can get? And if the answer is yes, then we'll lend on it.
[00:10:11] Speaker B: Okay.
Talk to me about the difference between a commercial underwriter and a residential underwriter.
[00:10:21] Speaker C: Residential. Residential underwriter is a glorified paper pusher. Sorry for all you.
[00:10:27] Speaker B: It's okay. I mean we're here to be real.
[00:10:30] Speaker C: Yeah, yeah. And. But that's really what it comes down to on the commercial side of things. You have to evaluate all the evaluators.
Instead of going out and get an appraisal and using that as the end all be all, we'll go out and get an opinion of value, but then we'll dive into it as well and make sure we agree with it. We will go out and get market studies, but we will do our own market research as well. So we have to underwrite the third party documents as opposed to take them at face value. Take them for what they're worth. Whatever that number comes in, that's the value, that's the goodness of the property and go forward from there. So we look at it more on a real estate side of thing, on the equity or ownership side than a typical underwriter would. When you think of mortgages lending, you would think typically on that residential type of underwriter, however, with hard money, you definitely want an equity like analyst and equity like underwriter that will look at it the exact same way an owner of property would.
[00:11:31] Speaker B: Okay, and then this is. I'm. We're going to cut it fairly short, but I'm going to ask you this question.
If you were investing in trust deeds in 2008 and you lost a considerable amount of money doing it, why should somebody get back in after all this time? We're almost 20 years, Pat. We're almost 20 years from those dates. Right. It's rounding the quarter very quickly and they're still sitting on the sidelines.
What would convince me to say yes, I should invest in that again?
[00:12:04] Speaker C: For the same reason people go on, don't marry the first person they date. Just because you had one bad experience doesn't make the whole asset class bad. Just because you had one bad experience with a man doesn't mean all men are bad. And asset classes. Hard money is the same way.
2008 was kind of the crescendo on of what a high water mark looks like. Since that time we have not been in any issues quite like that or even close to that. That that period of time was borne by more institutional, systemic issues, government sponsored. That I would argue when it came to unsophisticated mortgages, everybody that wanted a loan could get a loan. Yeah, anybody you need no document loans, low, no Verification loans, low income loans, no down payment loans, interest only loans on a 30 year fixed rate mortgage. These exotic loans as I will call them, kind of cause sexy loans.
[00:13:05] Speaker B: Here we go again.
[00:13:05] Speaker C: Yeah. Bringing it full circle is exactly what caused that recession to take place. We don't have any of that now. None of that now.
[00:13:14] Speaker B: Do you think that's why We've seen almost 20 years of sustainability, I guess you could say, without drastic economic collapses from a real estate perspective?
[00:13:25] Speaker C: I wouldn't say that's not. I wouldn't say that's the reason we've seen level playing fields at some point, but I will say that is the reason we have not seen a recession a drastic. Because of that. Absolutely.
[00:13:36] Speaker B: Yeah. Totally makes sense. Okay, so from, from the start of this it was how did your underwriting change since 2008 to. We've learned some lessons along the way, but our underwriting hasn't changed. Our underwriting still remains very similar to what it was previously.
Pat is very much still a trust but verify. That's never going to change.
[00:13:59] Speaker C: No.
[00:14:00] Speaker B: Even when I say something to him, he still verifies with other employees. So that will never change. So know that he's going to dig and dig and dig and dig and dig. So if you're a borrower out there and you think you can just pass something by us, right.
We're not looking for sexy. We're looking for simple. We're looking for solid product. We're looking for something that a borrower can make money because if they can't make money, what's going to happen to our investors?
[00:14:26] Speaker C: Not good.
[00:14:27] Speaker B: Not good.
Not good. Right. So we're not looking, we're not looking for sexy.
[00:14:31] Speaker C: Simple, secure and sustainable. We want simple projects, not the sexy ones.
[00:14:38] Speaker B: Yeah.
[00:14:38] Speaker C: We want it to be secured by real estate and we want it to be systematic or sustainable. We want repeat borrowers, repeat customers. And so as long as we stay within those bounds, I think our investors currently and ones in the future will be very well protected.
[00:14:54] Speaker B: Sss.
Slow and steady.
[00:14:58] Speaker C: That's it.
[00:14:59] Speaker B: Well, I hope your hair does the same thing. Slow and steady. Just stay put.
Stay put. Slow and steady.
[00:15:08] Speaker C: The hairline is receding. I don't know what war they're fighting, but they're running back quickly.
[00:15:13] Speaker B: Yeah, they, they really are.
But that's okay because you've got the beard coming in pretty solid. I'm seeing some red in there still.
[00:15:20] Speaker C: Yeah, it hasn't gone all full gray slash white yet.
[00:15:23] Speaker B: Yeah, just the sides.
[00:15:25] Speaker C: Yes.
[00:15:25] Speaker B: Okay. Look at that side profile. It's like glowing depending on the angle.
[00:15:31] Speaker C: Yes, it can be. I'll shine it up next time.
[00:15:33] Speaker B: Wow. Incredible.
All right, Pat. Well, it's been fun. We might as well end it on the fact that 2008 doesn't really scare us.
We're ready for whatever the next century has to bring, right?
[00:15:45] Speaker C: Absolutely.
[00:15:46] Speaker B: All right. You've heard it here.
Not sexy. Keep it simple. We'll see you next time on Deeds IN the Desert.
[00:15:56] Speaker A: Thanks for joining us this week on Deeds in the Desert, where short term investments meet long term investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right?
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