Edward Brown assists Pacific Private Money with capital raising and investor presentations. In this episode, he discusses hard money loans, starting funds, helping investors with bridge loans, and how to stay liquid and earn a high interest rate.
Edward Brown | Real Estate Background
- Previously CEO of a hard money loan company for many years, as well as an expert witness and writer. Today, he assists Pacific Private Money with capital raising and investor presentations.
- Based in: California
- Say hi to him at:
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Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm with today's guest, Edward Brown. Edward is joining us from Novato, California. He was the CEO of a hard money loan company, an expert witness and a writer for many years. Edward's current role is raising capital for real estate mortgage funds for Pacific private money. Edward, thank you for joining us, and how are you today?
Edward Brown: Excellent, Ash. Thank you for having me as a guest.
Ash Patel: Hey, it's our pleasure. Edward, before we get started, can you give the Best Ever listeners a little bit more about your background, and what you're focused on now?
Edward Brown: Yes. I have a bachelor's degree in accounting and a master's degree in tax. For many years, I had my own tax and financial consulting business, with real estate license, investment license, tax preparation license and insurance license, certified funds specialist... I have a lot of degrees and certificates. And back in 1991 (I think it was) is when I started getting involved in real estate mortgages, either buying discounted ones, or originating, and started my own hard money loan business back in the early '90s, and was CEO... And you know what - I don't like being CEO. I actually like sales. I've always been a good salesman. So I decided back in 2009, I was a co-host of a radio show in the San Francisco Bay Area. And then in 2010, I started my own show with Mark Hahn, president of Pacific Private Money. And for three years, we never did any business together; all we did was just strictly [unintelligible 00:02:23.17] And then in 2013, he decided he wanted to start his first fund, and he knew that I knew a lot about funds, so he asked me to help him start it up. And I said "You know what, Mark, only because it's you, and I've gotten to know you well enough over the last few years, that I think you're fairly trustworthy. So as long as I can have some input with regard to how to investors get out, what's the holding period, how are your interests aligned, I'd be glad to help you out." So since 2013, I've been primarily helping him raise money for four different funds.
Ash Patel: And can you explain to us what a mortgage fund is?
Edward Brown: Yeah, imagine it's like a mutual fund, but instead of buying stocks and bonds, we have real estate mortgages. So they're mortgages backed by real estate; effectively, we're the bank. So it's a diversified pool of real estate mortgages.
Ash Patel: Do you originate the mortgages, or do you purchase them?
Edward Brown: Generally, we do originate them. We believe that we may be the largest in the country for originating from a private capital standpoint, owner-occupied consumer bridge loans. So there are a lot of fix and flip lenders out there, but there aren't too many who actually do the origination, due to Dodd-Frank and all that. Primarily, I think it's because it's a pretty expensive barrier of entry, and we decided to spend the money to get into that. And between all of our funds, we'll probably do about a billion dollars this year.
Ash Patel: What are those barriers to entry?
Edward Brown: It's very expensive with regard to the licensing, the legal, the software, the continuing education... It could range probably upwards of $100,000. And if you're a typical fix and flip lender, and you're successful at what you do, why would you want to spend that money to enter a new space, and learn the whole thing, and get involved with the attorneys etc.? But we decided to make that leap some years back, and it's been very profitable.
Ash Patel: So Edward, a lot of banks don't typically like to lend to fix and flippers. They don't like the short-term quick hits... So it's usually private money that they use, right?
Edward Brown: Yes. And actually, with us - the same kind of thing with regard to bridge loans. Because our bridge loans last less than a year, and our typical duration is only about four to six months. The reason it's profitable for us is because we do charge points upfront. So we've done loans where a loan has been paid back in as little as a week, which you've then got to put the money back out again. But if you're charging points, it's pretty profitable to us.
Ash Patel: What's the typical loan run a consumer through your accompany?
Edward Brown: The interest rate that we charge the borrowers?
Ash Patel: Interest rate and points, and terms.
Edward Brown: Okay. So generally speaking, because interest rates have gone up now, we are charging in the high 9.5% to 10% range for a first mortgage, usually no higher than 70% loan-to-value, and typically one and a half to two points; it depends on the size of the loan. But now let me clarify that, because we have done loans where the loan-to-value has been 100%, but we've had cross-collateral on the existing house. So our cumulative loan to value is less than 70%.
Ash Patel: Interesting. So will you cross-collateralize other assets?
Edward Brown: Just real estate.
Ash Patel: Sure. So that can really help investors.
Edward Brown: Absolutely, yeah. The whole idea is don't lose money. That's always been my mantra in helping with these funds. And so far -- Pacific Private Money started in 2008, but if you remember what was going on in 2009, 2010 and 2011, the real estate market was still going down, and yet no investors lost any money. We hadn't started our fund until 2013, but individual clients did not lose any money.
Ash Patel: Who's your competition? Every other private lender out there?
Edward Brown: Generally, no; our main focus is California, but we are expanding outside of California. In California, there's only a handful of lenders who will do owner-occupied consumer bridge loans, again, because of the barriers of entry, I believe. We actually work really well with other lenders, because we're not as competitive, let's say, in the typical fix and flip market. So we'll refer that out to other hard money lenders. So there's not that much competition for us, and it's crazy how we have so much demand for our product now... And it's interesting, we've got some clients to call and be a little concerned about how things are going in the real estate market... But the fact is, even though there are some contracts that are being cancelled by purchasers, the refinance market has slowed considerably. So there are a lot of mortgage companies who have laid off employees. So now we're becoming like a bigger fish in a smaller pond, so to speak.
Ash Patel: Who is your ideal customer?
Edward Brown: Somebody who owns a home, who wants to make a competitive offer on another property, and doesn't want to move twice, and has a lot of equity in their current house.
Ash Patel: Well, you want shorter-term loans, right? So you basically want to bridge a gap.
Edward Brown: Correct.
Ash Patel: Okay. And who's your ideal investor? And what kind of returns do your investors see?
Edward Brown: Generally, our clients are going to be ones who are looking for monthly income; very simple. Conservative people who just want a monthly income, and can go to sleep at night. All of our funds are requiring accredited investors. We're mostly pushing our freedom fund because that's where we have the biggest demand for need of money. So there is a $250,000 minimum. We do have some flexibility to take less capital than that, but generally, we're trying to keep it at the 250 mark. And at 250,000, clients can get 7%, at 500,000, they get 8%, and at a million or more, they get 9%. And the best part of this is it's fairly liquid. So we're only requiring a 30-day notice if people want their money back. And the reason that we can perform that for them is because the primary focus of that fund is to do these loans where we package them out and sell them to the big boys. I say sell them to Wall Street; not necessarily Wall Street, but the large institutions.
A few years ago, we put $100 million securitization offering together, and then as these loans get paid off fairly quickly - because again, who wants to pay us 9.5% interest when they have an 800 FICO score, and they can qualify for five or 6%. So the money comes back to us every roughly two to three weeks, and then we ask, "Has anybody put a request for redemption?" And if they have, then we cash them out. If not, put it back on the conveyor belt and do another loan.
Ash Patel: Okay, so how do you package this up and sell it to an institution if they're all short-term loans?
Edward Brown: Because these institutions really like our product. We had to go through extensive due diligence with these companies for, I believe, at least a year, where they looked up and down us very carefully to make sure that our due diligence was good on doing the loans, and then they did due diligence on us... So they liked the fact that these are very conservative loans, because the risk of them going into default is very low. So as the loans pay off, then we have to backfill them with new loans. So their investors are going to get anywhere from a four to 6% return as out there selling it.
Ash Patel: In the back of my mind, it begs the question, "Why not start a bank where you can pay 1% interest to people and loan out the money at a factor of 10, at 9%?"
Edward Brown: Yeah. Because banks have their own special regulations, and there are certain rules that you have to follow. We have a little bit of wiggle room from the standpoint that we will follow regulations, but we don't have reserve requirements, we don't have to worry about the Fed coming in and saying, "You've got to put this loan on the watch list, because the FICO score is three points below what we like to see." So it's been a better way for us to just go out into the private capital and raise money.
Ash Patel: And if you're paying investors 7% to 9%, you guys are on fairly thin margin. So those points really come into play here.
Edward Brown: Absolutely. Especially when we're turning the money over every three weeks or so... And it's very interesting, about three or four weeks ago I had a new client call up and say, "I've been watching you guys, getting your newsletters, and talking to people... For two years, and I've never done any business with you, but I like what you have to say about this freedom fund, and I'd like to come in and write a check for a million dollars to get that 9%." Because we've just recently instituted that 9%, at that rate. Son of a gun; [00:11:14.04] in person, he liked what I had to say, and he wrote a check right on the spot for 3 million, and then four days later, he called up and he said, "You know, I really do like this thing. Can I add another million to it?" So the guy hadn't even received his first check yet, and he's got 4 million with us. And we've had people who have put in requests for a million dollar redemption, and depending upon when we're in the cycle of that three week period, we've been able to redeem people in as little as four days. So can you imagine - you're earning an interest rate of anywhere from 7% to 9%, and it's almost like a money market account, except there's no check writing privileges, and you have to give us 30 days notice. I mean, it's a great fund.
Ash Patel: Yeah. I love the liquidity. But you're getting taxed at ordinary income, right? Or at [unintelligible 00:12:00.15]
Edward Brown: Unfortunately, yes, they are, but all of our funds qualify for [unintelligible 00:12:03.19] So if the client is qualified, where their income is -- I can't remember if it's $315,000, or they may have changed the rules on that... But that was a law that was passed a few years ago, where income that we pay potentially is not taxed on 100%, but only on 80% of it. So there's a little bit of a tax break if the investor qualifies. And people call up and say "Hey, can I 1031-exchange into your funds?" Unfortunately not, because again, it's a mortgage pool fund.
Break: [00:12:34.01] to [00:13:40.27]
Ash Patel: Edward, what is your bottleneck right now? Is it lack of clients or investors, or lack of people to loan money to?
Edward Brown: Right now we are still in a position where we can use all the capital we can get our hands on. We've expanded quite a bit with regard to brokers. There are a lot of people out there, realtors, brokers, who don't even know that our product exists. And when we've done presentations to realtors, and they say, "Holy smokes, I didn't know that I could get my client this bridge loan. I thought I had to sell his property first to go buy another one." So we think that we've got in the pipeline at any point in time about 15 million a week in loans to fill. So that's one of the reasons why we raised our interest rates to our investors. There was a time about a year ago where we were just paying a flat 6%. But in order to attract money, and especially when interest rates are going up, you've gotta pay a little bit more. So we are working on a thinner margin, but we're not losing money for sure, because we're obviously charging more than even 9%, plus the points, and then the volume turnover is very quick, so we're doing very well.
Ash Patel: Do you lend to investors on commercial properties?
Edward Brown: We do. That's not our major objective, but it's a deal by deal basis. So we'll look at that. We'll also do second mortgages... But again, it's got to make sense. So there are some second mortgages that are actually more conservative than first mortgages, depending upon how big the first is, and the fair market value of the property. So we will do some commercial, but we kind of stay away from strip malls and stuff like that. [unintelligible 00:15:11.06] really odd type; we'll do some multifamily... They're somewhat plain vanilla, but every deal is a little different.
Ash Patel: Alright, so I am a non-residential commercial investor. I do strip malls, office buildings industrial... What's the most amount of money you would lend to one person?
Edward Brown: So the big boys who are buying our loans, they will not accept a loan that's larger than 3 million per investor. But if we put it in one of our other funds, I think we've lent over 5 million. We potentially could lend more, but we just haven't had a request. Actually, I take that back... I believe that we actually did a $40 million loan. I wasn't involved in this one; a $40 million loan in New York for an apartment building.
Ash Patel: So you won't do strip malls at all?
Edward Brown: No, I wouldn't say we won't do that; again, we'd have to really scrutinize it to decide if it fits within our criteria. We're mostly underwriting the property rather than the borrower. And then again, if there's cross collateral, we'll look at that... The loan to value... So we'll analyze it; we may not be as competitive as other companies, but we'll look at it.
Ash Patel: So I'll go easy on you. Let's say there's a multifamily person who is contractually obligated to close within 10 days, 20 days, and his loan's not going to come in for 45. His appraisal is not going to come in for 45. And they need $2 million in 20 days. Is that something you could do? And what parameters would you look at?
Edward Brown: On commercial, we may be going down to 60% loan to value. So we'll look at the rent rolls... We'll do the typical underwriting that any hard money lender would do on that. It depends on where the property is also... So we'll look at that.... Again, deal by deal basis, and if we can't do the loan, we'll usually suggest another lender.
Ash Patel: Awesome. What's one of the hardest lessons you've learned in all of your years in real estate?
Edward Brown: Boy, I tell you, because I know one of these questions comes up about losing money... I like to stay away from land deals, mostly because there are so many political things that go on, especially in California, where you can't control where the wind's gonna blow one day, and you get held up, and time just works against you. So I personally like to stay away from development type deals.
Ash Patel: If you can go back in time, what would you do differently as it pertains to real estate and business?
Edward Brown: Well, one, I would stay away from land deals... [laughs]
Ash Patel: Uh-oh... You got burned on one, huh?
Edward Brown: Oh, I got burned in the seven figures. Yeah. So that was a very challenging lesson. And if I could actually kind of expand on that...
Ash Patel: I'd love to.
Edward Brown: Going back in 2006-2008, when the banks were giving money away like water... So when I was CEO of my own hard money loan business, it was harder to find deals, because we couldn't compete with the banks. Again, it was too easy to qualify with them in a fairly timely basis. So we expanded our horizon, so to speak, and we got caught in some land deals; even though you'd look at it and say "How can you lose on this?" Well, unfortunately, there were some unknowns in there. Now, that being said, I actually have been associated with a land deal in Texas that has worked out very well.
Ash Patel: How can you mitigate land deals to minimize the risk of exposure?
Edward Brown: Get as much cross-collateral as possible. Because even though you get personal guarantees, a lot of times that's just an afterthought, because then you have to go to judicial foreclosure... It takes so much time. There's too many other things that can go involved. You really have to underwrite the property.
Ash Patel: What went wrong on the land deal? Just timing, market conditions?
Edward Brown: Mostly market conditions? Yeah. And then what ends up happening is specifically in California, and in certain counties, you try to go back to the county and say, "Look, this property isn't worth nearly what our loan is. The market has dropped out." And until you can produce a comp sale, not even the fact that "Look, we're trying to sell this for 10 cents on the dollar, and there's no offers", the county doesn't accept that. They want to see an actual closed transaction. So you actually end up losing the property because the real estate taxes are too high.
Ash Patel: That's insane.
Edward Brown: It is. Welcome to California.
Ash Patel: I know, yeah. Interesting. Thanks for sharing that story. If somebody wants to get into hard money lending, what's your advice to them?
Edward Brown: One thing I would caution people about is doing fractionalized deeds, especially if that person does not have more than 50%. And again, I know this from experience, because we had some deals - at the old company; not Pacific Money, but my old company - we did fractionalized deeds. And when things are going great, everybody's happy. But when things start to go down, and you have to foreclose, now you're a part owner with 10 people, six people, four people, 20 people, depending upon the licensing you have, with being able to do fractionalized deeds... And trying to herd cats is difficult. And even though my old company, we actually had documents that people signed, and powers of attorney that people signed, the title companies just said, "We don't care what your documents say; unless you can get the person to physically come in and sign with a notary for allowing you to make the decision, or signing off on a deal, we don't accept it." Well, sure enough, we've had a couple of people who held us up. So now you're talking lawsuits, and all this other kind of stuff.
So I would say either as an individual investor, if you want to do a hard money loan with a broker, because you don't want to get involved with usury, take the entire loan yourself. It's getting more difficult though, because funds like ours -- in fact, that's one of the reasons we started a fund to begin with; not our Freedom Fund, but our regular Pacific Private Money fund, was we would get a request for a smokin' hot deal that we had to close in 10 days, and before I helped Mark start his first fund, he was just acting as a hard money loan broker. So he had maybe 50 clients at the time, and he'd send out a blast email to these 50 clients saying "I've got the smokin hot deal. It's $400,000 on a million-dollar property. They've got to close in 10 days", all this great stuff. And within let's say an hour, he had maybe four or five clients saying "Okay, I've looked at this. This looks really good. I want it." And it's like, "Uh-oh..." So one guy got it, and the other four or five people were told "I'm sorry, you're too late." Well, it doesn't take too many of those situations to where you start getting upset clients. And I myself was experiencing that as a high net worth individual investor with other brokers, where they were doing that. I remember answering an email in 17 seconds, because I could analyze it really, really quickly, and said, "I want that deal", and I was told I was too late.
So a lot of these loans are being swooped up by funds like ours, because we had to start a fund in order to not get too many upset clients to where we could start raising money, and the fund has first crack at the loan.
Ash Patel: That makes a lot of sense. Edward, are you ready for the Best Ever lightning round?
Edward Brown: Yes.
Ash Patel: Alright, what's the Best Ever book you've recently read?
Edward Brown: I know it's gonna sound cliche, but it's absolutely the Bible, because it's a living book, and each time you read it, God speaks to you, teaching you things you hadn't seen before, and making it relevant in your life. So it's sort of like watching a movie where it kind of keeps changing all the time. So I'll have to go with the Bible.
Ash Patel: And Edward, what's the Best Ever way you like to give back?
Edward Brown: I like giving free advice. One of the things I remember doing is meeting this guy in the gym one time, and when he knew I did real estate loans, he said, "Oh yeah, there's a friend of mine who needs a second mortgage on his house", and we both agreed that I was going to charge him 12%, and it's a really safe loan, etc. And I said, "Well, listen, I'm not an attorney, so I'm not giving you any legal advice, but I would like you to talk to a real estate attorney and ask him what the usury laws are. Because I knew what the rules were, but I wanted to make it very, very clear that I was not giving them legal advice. I said, "There are some serious challenges that happen if you charge more than 10% and you don't use a licensed mortgage broker."
Ash Patel: Yeah.
Edward Brown: I saw him about a week later and he said, "Edward, thank you so much. My attorney 100% agreed with you, and he told me what the legal ramifications were..." So I like giving free advice like that.
Ash Patel: So how do all these other hard money lenders get away with going above and beyond?
Edward Brown: Well, if you're licensed, then usury rules don't apply.
Ash Patel: How many of them are licensed?
Edward Brown: Oh, I think most of them are; for the hard money lenders, I would think most of them are, especially if you're advertising. You're playing with fire. Here's the funny thing - that rates are now starting to go back up. Three years ago when interest rates were low, you didn't have to worry about it, because nobody was charging 10%. Now the rates are starting to go back up... But I would presume that most people are licensed.
Ash Patel: I would tell you that in the Midwest, most people that I know that get hard money loans - they're not from licensed people. They're from individuals just doing loans.
Edward Brown: Wow... Okay. Well, again, like my friend who I talked about; and I don't know if that's a federal law or state by state.
Ash Patel: I don't know either. I know in Ohio, usury laws can be overcome by lending to one LLC to another.
Edward Brown: Gotcha. Again, I'm not an attorney, I don't know all the rules...
Ash Patel: All the Best Ever listeners, don't listen to us. This is no legal advice. We're just popping ideas back and forth. Finally, Edward, how can the Best Ever listeners reach out to you?
Edward Brown: The best way is just my simple email, Edward [at] PacificPrivateMoney.com.
Ash Patel: Awesome. Edward, I've got to thank you for your time today. You gave us some great insight into hard money loans, starting funds, helping people with bridge loans, and a potential great way to stay liquid and earn a high interest rate. So thank you for all of your time today.
Edward Brown: Ash, thank you very much for having me.
Ash Patel: Yeah, it's a pleasure. Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share this episode with someone you think and benefit from it. Also, follow, subscribe and have a Best Ever day.
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