REIA 233 Vernon Beckford: Make Real Estate Debt Your Friend

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now here is your host, Dr. Allen Lomax.

Hello, enlightened investors, and welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. It is a delight to be with you again today as we look at making real estate debt our best friend. And how we can achieve exponential growth by making lenders fall in love with our next project. As a double Ivy League educated real estate financier, Vernon Beckford helps small and mid-sized real estate operators achieve exponential growth by obtaining debt to fund their projects. So Vernon, take us into the show and share a memorable experience that helped you to be who you are today.

Absolutely. And thanks for having me here, Dr. Allen. When you You asked the question. It's funny because it stirred up all kinds of memories of my childhood. But the worst one that really popped up to me was when I was about 7 or 8 and I had to get surgery on my leg and I was terrified. And I remember walking into a store and my mom could sense that I was really nervous. I think the surgery was in a day's time. And I said, hey, can I get this comic book? I just, you know, for whatever reason, saw a newsstand, one of those old newsstands with comic books and picked one out. And she said, yeah, absolutely. Get whatever you want. And I remember that night just going through that book and it really addressing and calming me in preparation for the surgery. And the reason why I bring up that memory is because that started a very long-lasting relationship with comic books that ultimately in a very, very strange way, I think also led to my interest in real estate because ultimately not only did it open up my imagination about what could be created and what can be done and not thinking inside of a box. But it also showed me bravery and courage on a consistent basis and made me want to find a way to apply some sort of superhero tendencies or gifts to changing the world around me. And I don't think there's any industry that is more impactful in people's lives than real estate and whether it be where you live or where you shop or where you play. And so I think in a very, very roundabout way, that was one of the first guardrails that actually led me Certainly into entrepreneurship, but also into real estate.

Well, interesting how those early childhood experiences really have a major impact on us. And certainly it appears you did follow that hero journey throughout, throughout your career. Not everybody gets into Ivy League schools for sure. And you've had an illustrious career ever since then as well. Well, Vernon, so glad to have you with us and Take us into the show here in terms of real estate and debt. You say that many small sponsors fail to achieve the growth they want because they do not create compelling narratives to get their projects funded. What are you talking about in terms of narrative and how is it that so many of us screw up on that particular aspect of debt financing? Absolutely.

Thank you for the question. So I think the overwhelming majority of folks fall victim to a couple things. They're looking to invest in real estate specifically. The first is that once you decide you like a deal, you fall in love with it so much, you convince yourself everybody else is going to love it too. And that's not a crazy assumption if your analysis is substantiated, but you can't take it for granted that they're going to understand the deal as much as you do without you really painting the picture as to why they should find it compelling. So I find a lot of folks either getting frustrated or assuming that their lender Right. Is just going to roll over and race to do their deal. I think the other misconception that lenders have, or that investors have, or that lenders are sitting with unlimited amounts of time, they're waiting for your deal. As soon as it comes in, they drop everything and you're top importance. And they're going to take all the time to fill in the blanks as to why your deal is financeable. And the reality is that is not the case. Most lenders, like everyone else, have A finite workday. They may be looking at 20, 50, 100 requests coming in in a given week. And so they have to manage their time and budget their schedules such that they're putting priority on the deals they think not only are the most attractive, but that they can get through their internal processes and their credit committees to get approved for a loan. And so what I find is that folks underestimate how much they need to frame. And when I say narrative, the story both around them as an operator and their deal, holistically such that if I'm sitting on the other side of the table and I have a pile of 75 deals, am I going to stop and prioritize yours and figure out how to make that deal work and attractive to you? Or am I going to deprioritize it, forget about it, or at worst just reject it outright because it really doesn't jump out at me? So that's what I mean when I think small operators, largely because maybe they are either resource constrained or They just simply may not be aware to the same extent of their larger counterparts really can do themselves a disservice in not taking the time upfront to really perfect that narrative.

Well, what I hear, Vernon, is that there really are 2 aspects to that narrative. There is the narrative in conjunction with the investor themselves and the narrative in conjunction with the deal. I would assume that the narrative in conjunction with the investor is probably most critical If this is your first introduction to this investor, what are some of the elements that you are going to be looking for in terms of the narrative on the investor?

Sure. So your statement is true, but I'll caveat it with a big but. So if, for instance, I am a very experienced operator who's done many deals in my local market, you know, I can draft on my experience a lot more boldly. I can speak to how many deals I've completed. I can tell you how many, how much of a profit I've made on transactions. I can show you before and after photos. I can show you how much money I've made for my investors. These are all things that make it very easy then for me to bring a deal to you and almost say, give me credit for my own good judgment and let's prioritize me over my deal. I find that when an operator is a little bit earlier in their journey where they don't have quite as much runway in terms of prior deal flow, then the deal itself and its merits becomes a real asset in focusing and emphasizing why a lender should take the chance. So in that instance, the operator may not have as much experience personally, but they can do 2 things. First of all, they should draft on any indirect experience that they have and really frame that as being a proxy for what they can do on their own. So for instance, if you invested passively in deals in the past, If you've worked as a partner on deals in the past, if you're a contractor that has now transitioned into doing your own deals and you've built deals in the past, finding ways to incorporate that into your story while also now really doubling down to demonstrate that you understand the granularities of your own business plan. And so what I find is that folks sometimes do themselves a disservice because when you get on the phone with them, they can speak back and forth, left and right, as to how great their deal is, or even talk about their experience. But in many cases it's disorganized. It's not truncated. It doesn't fit into an overall story and it leaves someone feeling confused or maybe uneasy that this is the person that they really should be focusing and prioritizing. So I think it really is a situational case-by-case basis as to how in combination you weave your story into the broader story of the deal in order to accentuate whatever assets you bring to the table at that point in your development.

Well, that makes sense, Vernon. Is Is there a template that would help investors with this? I've seen softwares for business plans and what have you, but is there a boilerplate that you could suggest for helping? Go ahead. I'm sorry.

No, it's fine. It's funny you mentioned that because currently, as you know, I would say that the template is working with an advisor who can guide you through each of the steps. But it's funny you mentioned because Diversified Lending Solutions, my company, is actually working to develop a curriculum that will help folks. Do this independently, learn the steps and actually guide them through the process if they actually have the patience to do that on their own. Because we find that many cases, small operators are nimble, they're entrepreneurial. They said, give us the resources. We would do it if we knew the roadmap. So that is something that we're actually in the process of developing. It's a very timely question because we found that that is something that folks are looking for more direction on who have the appetite to do it themselves.

Well, definitely it would make a difference, I think, to a whole lot of people. The level of a person's writing skills and ability is going to have a lot to do, I think, with what you are talking about. And some people have had the opportunity to develop those writing skills and they could put together a compelling narrative because of the level of writing skills. But many entrepreneurs just don't have that in their background. They've been out there doing action activities and their time is consumed with that. And they've never developed those writing skills in the first place. So I think that would help a great deal. Vernon, before we go any further here, I've got many other questions left here, but you and your company have a great deal to offer. You just mentioned the template that is, or the curriculum that is being developed. How can people get in touch with you to take advantage of what it is that you have to offer?

Sure. You can reach us at dlsloans.com. That's DLSLoans.com. One word, dlsloans.com. You can also reach me on LinkedIn, Vernon Beckford, B-E-C-K-F-O-R-D. Very accessible on LinkedIn. And if you either connect with me or follow me, you'll see that I share a lot of free content online to provide resources to small operators. So those are the 2 easiest ways to get in contact with us. And of course, if you want to email me, you can reach me at vernon.beckford@dlsloans.com.

Vernon, it's obvious that the narrative is very important. And I guess a part of the narrative would also be what you call objective soothing. But I think that goes beyond the narrative as well. What do you mean by soothing or objective soothing?

Yes. So we termed part of our process as objection smoothing. And what we mean by objection smoothing is that the very, very, very first step of your process is actually to obviously evaluate your deal. Once you've evaluated the deal, you framed a narrative around Now that you've walked that deal into someone's office and shown them that, you have to assume that they're going to have questions, concerns, objections in response. And I find that many operators find themselves on the defensive because they didn't frame the narrative through the lens of what do I want to accentuate? What do I maybe want to leave unsaid? Because I'm hoping that someone asks about it and I can show the deals even more attractive. What mitigants do I have to the concerns that I can anticipate? They're going to ask me. And so objection smoothing is almost that dance of anticipating what someone who's thoughtful in the lending sphere would have a concern about and having a way in advance to respond to it. And then to the extent that there are questions that come up that weren't anticipated, being able to have the flexibility to respond very quickly in ways that don't turn that person off. So there are many cases where I found that folks either get a bit defensive and either the answer is very short and brief, which is fine, but it usually doesn't address the concern and can kind of leave the lender either annoyed or just not address the core issue. Or when they answer the question, it's indirect, or when they answer it's incomplete. All of these things just obviously shoot, you know, shoot yourself in the foot because they don't cut at the core issue, which is that lender is telling you, help me get comfortable with this, educate me so that when I go inside to my credit committee and someone asks me this question, that I have a response that seems logical and cogent, and that I don't look frankly silly because I don't have a good answer to it. So really empower the lender or whoever you are interfacing with to be your advocate in their own shop.

Vernon, you've mentioned several times defensiveness from the borrower. Do you encounter that frequently?

You know, it's a good question. I would say that defensiveness takes many forms. So the answer is yes, there's the defensiveness and maybe I'm not super experienced, so I'm afraid that someone's going to open the kimono. And so I'm going to keep a distance, you know, hoping that they just kind of accept what I tell them. And then there's the defensiveness that comes from being highly experienced and saying, I've already done this so many times. Why are you asking me this? Clearly I know the answer. And if you think that I don't, maybe I shouldn't be doing business with you. So I found that defensiveness comes in many forms. It's understandable in both of those instances. And so one of the advantages of working with an advisor is you can create a buffer between you and the counterparty that you're dealing with such that you don't get in your own way and that you don't accidentally act in ways that are against your own self-interest. So if I was in the shoes of many of my clients, I may behave exactly the same way. And that's why I stand in between them and the lender, because I know if we really do want to get the best terms, this is some of the things that we're just going to have to deal with. In terms of getting them comfortable.

Vernon, you've mentioned lending brokers as well as lending advisors. What's the difference between the two and how do we know which one to turn to when?

Great question. So I would say the average real estate operator thinks of debt as a commodity. It's like water. There's a million lenders, and if my deal is good, they'll all just kind of turn on the spigot and the water should be available for me to drink. And that assumes then that Whoever I hired to help me arrange that is really just collecting water and water is everywhere. So they're really, for lack of a better term, an order taker. They're saving me some time to do something I could have done on my own. And I'll let them just collect some information and bring it back. And so that's the category that I would define as a broker. Maybe that's an individual who has a handful of very strong relationships with different types of lenders. You give them some information, they run off and speak to those lenders and come back with what the lender said. And that's fine. But I would say that's at the very first level of how you actually get the best loan terms for your deals. An advisor is someone that says, whoa, whoa, whoa, before we— hey, I'm not just going to take your materials and just pass them along to someone else. Let's dig into your narrative. Let's dig into your story. Is it compelling? Will it make sense? What are the objections you're going to face? Have we addressed that? Then let's be thoughtful as to who we're going out with. to about your deal. Let's sequence that and figure out maybe if there's some folks we should go to first to get some early feedback and then use that to refine our pitch to the ones we really think we can get the best terms from. And then once we get in an engagement with these folks, how do we steer the conversation and negotiate the terms such that we can leverage the fact that there's several lenders that have interest and that we're going to migrate all of that into the best comprehensive terms. We're not just going to focus on interest rate. We're not just going to focus on the loan size, which I think is what most brokers will focus on because that's what everyone's taught is the most important things to focus on when there's probably 15, 20 other points that are very granular, not as well known, that can have a huge impact on the quality of your loan, whether you make or lose money, your peace of mind, and so on. So I would say the advisor is really taking a more holistic approach to helping get you to the finish line and thinking about where you want to be 2 years from now, as opposed to being maybe just an order taker who's an outsourced individual for your team just to go collect information.

Vernon, it sounds like in terms of the advisor, it's more of a consultant than it is what we would be used to as the broker. As an advisor, do you actually interact with the lender on behalf of the borrower, or are you just as purely a consultant, you're just advising the borrower and you're telling the buyer to present this, to say this, or don't say this?

No, absolutely. Great question. We're on the front line every day with our clients. So we are the main point of contact to the lender and to the lenders that, that we're engaging. We are the main point of contact when they have questions for all intents and purposes. We are a member of your team, you meeting the client. And for all intents and purposes, when we're not dealing with you, we're actually your face when dealing with the lending community. And only under circumstances where it's advantageous to us to utilize you and your expertise would we pull you into the fold. But for the overwhelming majority of the process, not only are we being a consultant or your banker in order to arrange the strategic orientation, We're actually going out to market and acting on your behalf directly with the lenders themselves.

Well, Vernon, what I'm hearing here, just kind of a correlation here is this is kind of like an attorney-client relationship. I'm not saying you're attorneys and I'm not, I don't want anybody to get the impression that's what you are or that you're giving legal advice. But from what you're explaining to me, that's just the correlation that I can relate it to in terms of relationship, not in terms of knowledge and expertise. Would you say that's correct?

Absolutely. You could think of us in the same way, another way to frame it was instead of being a mortgage broker, you're— this is your mortgage banker. When you think of a banker, it's someone who's actually going to actually sit down with you, think through what your comprehensive financial goals are, and actually work to arrange it in whatever capacity that is. So yes, I think that's spot on in the sense that it's someone who's doing both strategic work with you, strategic planning, but actually spearheading the actual day-to-day interactions that gets you to that point from A to Z.

Vernon, it sounds like a really compelling relationship to engage in. How is it that you are funded for this service?

Absolutely. So the overwhelming majority of deals are structured with a success-based fee. So think of it as a commission that's largely driven by if we can procure the financing for our client at terms that we said we could. There are instances on other transactions where If we are going to be involved upfront in not just helping frame the narrative, but help whether that be financial projections around your underwriting, whether that be evaluating the market, whether that be looking through comparables and validating the plan, we will work on a case-by-case basis on a retainer basis to effectively help you develop the plan itself before we actually work through the nuances of how we should frame it. So It's really those 2 verticals and our level of involvement is largely driven by the client's desire. There are some clients that say, hey, I really need help putting together a business plan to figure out if this is a good deal. And I want you to take me soup to nuts to get it financed. There are other folks that say, I know this is a great deal. I just don't know if I'm framing it the right way. And I don't know which lenders to go to. Help us on that aspect of it. Help me make sure that the framing's correct. I've thought through the objections that I should expect and Help me engage the lenders that I should be speaking to.

Is there any instance where you would take compensation as part of the deal as say a general partner?

Absolutely. One of the things that I'd say both myself and my partner, Eric Andrew, are deal junkies. So we love, you know, digging into a project. We view ourselves as members of the team whenever we have a client, a new client. So, you know, we like to put our money where our mouth is. So if the deal is attractive, we would absolutely consider participating in the GP as a portion of our consideration for the transaction.

Okay. Vernon, you say that self-sabotage is real, and I couldn't agree with you more. In so many realms of our life, it is we are me, myself, and I that gets in the way. Expand on that just a bit.

So when I say self-sabotage is real, what I mean is that I've encountered many transactions where the transaction's great, the operator's great, the lender's great, and everybody is happy on Monday. And then an operator gets a question on Tuesday and their first inclination of how to respond, we say, whoa, stop, hit the brakes. And when we realize that There are many instances where there are blind spots and maybe because Eric and I both sat in the seat of a lender where we understand how lenders interpret certain information, we understand how easily it is for folks to say and trans— you know, transmit, overshare information that just muddies the water, confuses people, raises eyebrows, raises concerns. And we say to ourselves, you know, why would someone volunteer that information. So what we do in many cases is we're that brick wall that prevents you from just, you know, running over, over the cliff and doing something that after you already, let's say, have an accepted term sheet, a lender wants to fund you. Now you answer the question the wrong way, and now it completely changes the deal or the lender's now questioning whether they want to do it. You don't want to find yourself now playing catch up. Or trying to claw your way back into a room that you were already in because now you've overshared something that really wasn't relevant. But now that people know about it, they have to address it. And so that's what I mean when I say self-sabotage is real because you don't want to get, you know, to the 1-yard line and then just hand the ball back, which is what happens sometimes.

Well, I can certainly see how that could be a major issue in a lot of instances. Enlightened Investors, what a joy it was being with you today. And wonderful information that Vernon has shared with us can be so helpful in so many instances. Take advantage of what Erik has to offer. Get in touch with him when you're doing your next deal and looking for your debt financing there. Erik, thank you for being with us today.

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