AIPIS 94 - Jeff Ball, Visio Financial Services and Econohomes

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com. Welcome to the AIPIS show for accredited income property investment specialists and those who aspire to be. If you're a real estate, mortgage or financial professional, this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life.

Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds. It's my pleasure to welcome Jeff Ball to the show. He is CEO of Vizio Financial Services, President of Econo Homes, former global head of semiconductor Investment Banking at J.P. morgan. Jeff, welcome. How are you?

I'm doing well. Thank you for having me.

Good. I'm really excited to have you on the show today to talk about one of the big challenges for real estate investors and that is financing. It used to be so easy, but maybe that was the problem. That's why we had a subprime crisis obviously, because it was way too easy. And then it got, you know, after the crisis the banks, I think they just overcorrected and it just got too hard. I think investors make a huge contribution to rescuing the housing market. But oddly the government, the banks, of course they're in bed together. You know, they've put up a lot of roadblocks and made it really hard for investors, especially foreign nationals, IRA investors, and those people with more than 10 Fannie Mae or Freddie Mac or agency loans. Your company offers some some other financing options. So we defin want to hear about that. Tell us a little bit of the background if you would.

Sure, Jason. So you know, we founded VFS really as a side business initially to finance properties that we were selling from Econo Homes. And Econo Homes had bought and sold about 11,000 single family investment properties around the country. And one of the things that we noticed was that, you know, for properties, inexpensive properties, sub $100,000 properties, the financing alternatives were essentially non existent. And so we initially started out as a captive lender to homes that we were selling to small investors around the country. And then we extended into providing financing on Properties that investors were buying from other sources, including government sponsored, whether it was Fannie or FHA properties, HUD propert and even in private transactions. And we also started to provide cash out financing as a way to provide investors additional liquidity to fund their small business of investing in real estate.

Give us a little bit of an overview of the types of loans you do and what makes you unique. And I want to drill down, if we can, into rates terms, however much you want to say, but try and get specific. And of course all listeners should know this is definitely subject to change. It's at the time of recording. You know, tell us a little bit more about that.

Yeah, so our product family really families break into two components. The first would be very short term financing which is really 12 months or less and we have an interest only product. And that product is really designed for either investors who are doing primarily doing fix and flip or they need short term bridge financing. Then on the other side we provide medium term financing which is usually a 10 or a 15 or a 30 year amortization with a three year balloon. That product is designed for folks who are interested in building a rental portfolio. And over time we're aspiring to offer longer term financing. Not a three year balloon, but maybe a five or a seven or even a full 30 year loan production. Those loans amortize. The shorter term loans are interest only. Really what differentiates us is we are a no doc lender. So we use credit scores to provide tiered pricing. We have really three tiers of pricing. But we do not require income verification, asset verification, we do not require reserves, we don't require tax returns or those sorts of things. So we differentiate ourselves on the speed and simplicity and the dependability of our financing. And so that's how we've positioned ourselves in the marketplace.

Okay, so let's take one of the categories you talked about, rehabbers and people who are fixing and flipping, I believe. And then you talked about the buy and holders. Would that be the two basic categories?

That's correct.

Okay, so let's talk about the buy and hold, which is, you know, I've always said, Jeff, over the years that I've been in this business, the people who flip properties, they have spending money. The people who buy and hold have real wealth and they're both good, definitely. But the real wealth is even better than spending money. You know, what do you offer for the buy and hold investor? You mentioned a three year balloon and that's, that doesn't sound so great. But fill us in.

Yeah, I think so our customer base is really, it's differentiated from some of the folks who are in the marketplace who are providing something much closer to. You mentioned Fannie Financing. There's some large players such as B2R and Colony and Cerberus First Key who are out there providing long term financing. But those are largely fully underwritten loans with lots of requirements around. In many cases the property must be leased. In many cases the property must be managed by a licensed property manager. In our case what we're offering is financing that is again done on a no doc basis to an investor. In some cases these investors have very strong credit but the property isn't leased or it's possible, as you'd mentioned, they've hit the limit with Fannie and they don't meet some of the other requirements of some of the other capital providers in the market. So that's where we fit in.

Let me just make a comment if I could on that. We've had many clients go to B2R and they were very excited and then the reality struck that it was just a lot harder than it looked. And I hear that they've had their growing pains and they are figuring it out and making it, you know, and think things are getting better in terms of actually funding deals. You know, we've definitely heard, heard some concerns. They do offer some great programs. You know, offering them and actually getting them funded are sometimes two different things. But you know, you did mention that. So did you have further comments on that in terms of the fully underwritten versus your program?

Yeah. So the only thing I would say is what you just described as a very real issue for investors, that uncertainty of that process of getting that financing. If they're seeking that financing, it's usually they're seeking that financing because they have other deals that they would like to do. And so the uncertainty of whether they're going to make it through that much more documented and more difficult process actually interferes with in many cases their ability to execute on deals that they see in front of them that they want to do. So that's a place where we fit in. Our financing is not designed for the investor who is working to optimize their capital costs and who are looking to shop across bank and some of these larger capital providers. Our capital is designed for those investors who are looking for, you know, very certain capital that they has very limited requirements in order for them to get it.

Let's talk specifically about the terms. So if someone came to you today and wanted to do a buy and hold property we're just talking about one property. We can talk more about portfolios of properties as well, if you want. But say they just want to do one buy and hold deal or they want to do them one at a time as they're building a portfolio of, you know, 10, 20 single family homes, whatever. What is the loan to value ratio?

Yeah. So on a purchase we require a 35% cash down payment.

Okay. So that's a, that's a 65% LTV or loan to value ratio. Okay. On a purchase, yeah.

65% LTV. And then it's typically going to be, depending on, on the credit tier, 3, 3 points and about 12%.

So don't panic people on those rates. Hang on a second. We'll talk more. Okay, and that's a buy and hold purchase is going to be a 12%. That is, that's not bridge financing. That's not short term, hard money type stuff.

That's correct. But again, this is a no doc loan.

Okay, but you do check credit. Just no other docs.

We check credit, but no other docs. The property does not have to be leased.

Okay, so it could be vacant.

Yep, it can be vacant. So you could have purchased it with the goal of leasing it and.

Well, one, one distinction. We are talking purchase money right now, not refinance.

Right, Correct.

Okay, so this is being purchased, you know, it's probably not leased when it's being purchased, you know, initially, most of the time at least. What. Tell us about the term though, Jeff. You said it's a thing three year balloon. What does that whole term look like? The rest of it.

So the longest term AM we've got is a 30 year amortization, but it's due in three years. So your payments are being calculated on a 30 year AM but then obviously at the end of the 36th month, the loan is due.

It's just due. It's not adjustable or.

That's correct.

Now, what about Dodd Frank compliance? That's a fairly short fuse. Only three years there.

When you say Dodd Frank compliance, would I mean more specifically, what are you asking?

Well, you know, they, they don't, Dodd Frank doesn't like balloon payments, you know, so I, I don't, I don't know. You know, I mean, I'm no Expert on the 2700 pages of Dodd Frank. Okay. I mean, nobody is. It's absurd. But, you know, they, they don't seem to like those balloons. But when it's in, you only loan to investors. So if it's not a homeowner you probably are okay there, I assume. Okay, so what else should we know about this loan? The purchase money, buy and hold loan.

From a purchase money, buy and hold loan. I think that gives you a good sense of the basic terms of that. So our objective over time is to reduce our terms, particularly our rates to investors and to extend out that balloon. Either eliminate that balloon or at least extend it out to five or seven years. Because that financing, as you said, that three years is a relatively short fuse in many cases. Our borrowers have credit scores maybe in the mid-600s, which they're seeking to improve their credit score over time and then refinance that loan with a less expensive loan. So for us, it's really our capital. Our terms that we offer to the market are largely tied to the terms available to us through our capital partners. And so as we.

And by the way, that's a good side note. Where are you getting the money?

Yes, so for us, our capital has come from a combination of high net worths. Then we moved to hedge funds, then we added in bank financing. And so today most of our financing comes from bank financing and then also some credit funds in the marketplace who are seeking to provide capital into the market but don't want to build their own origination platforms.

What about the refinance version of the buy and hold refinance or not buy and hold, but property you're holding and you want to re. You know, this is good for someone who maybe bought the property with cash and they got these properties at cheap prices a couple of years ago and now the prices have gone up and refinancing makes a lot of sense. How's the refi look on this? And then let's talk about the bridge financing.

Yes, the refinancing, the primary difference is the maximum today for us the maximum loan to value is 50%. So we're conservative on cash out refis.

But it can. Yeah, it's cash out. Of course.

That's right. So that's the primary difference in the product is just a lower ltv.

And to get that phenomenal. I'm being sarcastic with you, that phenomenal 12% interest rate. What kind of credit score is required?

So we break it into three tiers. For us, a top tier borrower is 700 or better and then the next tier is from 700 to 620 and then the lower tier is from 580 to 619.

And how do those rates differ? Say just go down a tier and tell us about the next interest Rate and points with that other tier.

So we go something like 12, 14 and then 16.

What about bridge financing? How does that work?

So the bridge financing is an interest only product and as I said, we offer it up to 12 months. Again, the primary differentiator for us in the marketplace is that it's a no doc loan where we use credit score for tiered pricing. And so that's again for some investors, the fact that it's no doc and it's offered both in a purchase form as well as in a cash out refi form that that loan product is very simple and easy for them to use. And so we do not provide traditional after repair or ARV lending. We do not provide financing. And what I mean by that is we do not provide financing of repairs. We either fund the purchase of the property and again we require a 35% cash down payment or we offer that product in a cash out structure with a 50% advance rate. And so one of the innovative way that our customers use our products is they've bought a property, they've renovated the property, they've actually got the property on the market, they're trying to sell the property and they have their next deal that they want to do and they need cash out of that completed property to buy their next deal. In many cases, financiers will not finance a property that is currently on the market. We can do that loan very quickly because it's a no doc loan. We need credit, we need an appraisal on the property. They can get their cash very quickly and that allows them to actually start their next deal while they're waiting for the price that they would like on the property they have on the market.

Rates, terms, other features of that product.

Rates and terms are very similar to the longer term. Again because it's being driven by the capital that we have available to us. So the lowest rate that we offer for a top tier borrower on that short term loan is 10.99.

You're pretty conservative and concerned about inflation risk obviously, because when you first said, when we first talked about that buy and hold program, it sounded like hard money. I mean I make loans like that all the time. You know, where I'm loaning it, you know, 12 and a quarter percent, couple three points, maybe six month term. You know, I do, I, I do all the payments at the end. I don't want to calculate any payments or receive any payments. I just, you know, take it all at the end. But yeah, interesting. Okay, so I, I just got to ask you do you feel that we've talked about enough about your loan programs and so forth? Is there anything else you want to say there? Because I would just like to close by talking to you about real estate investing in the market in general for a moment.

Yeah, no, I think that gives folks a pretty good overview what I would encourage folks to do to the extent that they're interested in understanding more about what we offer to them. On our website we actually have a very innovative, you know, we call it our product picker. But you can actually go in there and you can describe what are you interested in doing and tell us as much information as you want. And our system will actually tell you, here's the loan product that is available to you, here's what the payment would be. So it gives you the ability to run your own scenarios with a real life financier that has capital available to lend out.

You've got a lot of experience around finance, semiconductor, investment banking experience at J.P. morgan. What's your outlook for the economy and the real estate market in general?

Yeah, it's a timely question. We've actually been going through a planning cycle here at VFS and asking ourselves a lot of those same questions. So I think I would break it into a few components. I would say overall, my view on the economy is when I look out over maybe the next two years, I think it's, I think it's going to probably be a relatively steady, as she goes environment. I think employment, if I think about employment, inflation and interest rates, I think the employment picture is going to remain relatively stable. We've seen some softness, but I don't see major bumps on the horizon there from an inflation perspective. You know, I think inflation is going to remain relatively muted and I think so from an interest rate perspective, I'm certainly expecting it's more likely than not that we will see some rate increases over the next two years. Whether that will translate into a direct correlation to what happens to mortgage rates, I think remains to be seen. Mortgage rates have bumped here, I think, in anticipation of that. And I think when you go back and you look at as the Fed brought rates down, the Fed's actions and mortgage rates decoupled at one point. So I'm not sure they're as directly correlated as they might be within certain higher bands of interest rates and mortgage rates. So from our perspective, I think we believe supply of real estate is going to remain relatively tight. And I think that's a function of as rates do move up at least some, it becomes more expensive to Buy homes, which I think puts some pressure on housing prices. And I think it just basically means the velocity of homes, I think will remain relatively muted. So for investors, I think that means you got to pick your deals wisely. There's, there's less margin for error.

You always have to do that. Now, let me, let me make a distinction though. When you say for investors, you're talking, I mean, picking your deals wisely is a lot more important with if you're a flipper than it is if you're a buy and holder. You know, you, you really have like no margin for error if you're flipping something because you know the chickens are going to come home to roost really quickly, you know, in those deals. I just wanted you to maybe define investor when you say that.

Yeah, I would agree with that. I think maybe three years ago there was more margin for error and flipping than there is today. There's not much.

Definitely that margin is compressed.

That's right. So I think that favors folks who are potentially doing this as a much larger part of what they do. In terms of our survey data suggests at least more than half of the investors out there are part time. So I would say this is an environment increasingly where for flipping, it's favoring professional flippers. On the buy and hold side, I think there's every reason to believe that rental demand is going to continue to increase. Some of that is a function of personal choice. I think there are a lot of folks who have come to understand that renting is actually potentially a good solution for them. Some of it is, some of it's necessity. When you look at what's happening overall to demographics and real wages and those sorts of things, some folks just, it's going to be very, very difficult for them to ever buy a home, to gather the down payment and to meet the underwriting requirements. So I think it's a, it's a phenomenal environment to continue to buy properties, to build a rental portfolio. I think it's hard to find those properties.

I want to ask you if you are as bullish as I am just on this part of the concept of investing. I think that we may be living at the best decade ahead of us in history for rental housing. I mean, with the student loan debt problem, with generation Y, seeing a lot of their parents get burned in the housing market, with the mobility being the best thing you can have on a resume, with the fact that generation Y, you know, the millennial generation, is the largest demographic cohort by, you know, by about 4 million in American history. I mean, there, there are just so many factors that make this such a good time to be a landlord.

You know, I agree, I think, I completely agree with that. And I also think one of the interesting dynamics. So I think the demand side is very attractive. As I've already said, I think it's not going to be easy to acquire properties to turn into rentals because I think the velocity of homes is a little bit stifled for some of the reasons I outlined.

We talk a lot on the show about the velocity of money. When you say velocity of homes, you just mean inventory. Or what do you, what exactly do you mean by that?

Maybe, yeah, I think it's so in, in my neighborhood, I live in Austin, Texas. What I see is folks don't sell their home because if they sell their home, they're not sure where they're going to buy their next home.

But to be fair though, you probably live in a pretty high end neighborhood. I mean, that's not an investor neighborhood, I don't think. But I don't know yet. So, no, that's.

That, that's correct. But I do think there is the dynamic of folks are reluctant. That phenomenon I just described, I would agree, is isolated to certain markets where folks are concerned. If I sell my house, am I going to be able to find another house to buy? But I do think that there is also the phenomenon of people are in their house, they've got a phenomenal mortgage rate, they're uncertain about their job prospects even though they're working, they're not certain about the stability of that and therefore they're not going to upgrade to the next house. And so we don't have people kind of moving between the strata of housing.

So that's, that's an interesting thing. I think you said something that's very important there and I, I've definitely given it a lot of thought and that is that people with these really comfortable great mortgages, they're like the same people, Jeff, that are living in rent controlled apartments in New York City and San Francisco. They may want to move, but their deal is so good that they just can't make it make sense, you know, to lose that great mortgage they have.

I would agree. And I think that issue only becomes more pronounced as if rates move up, I guess. I won't presume that rates move up, but the more rates move up, the stickier the existing home becomes.

Sticky is a good way to describe it, by the way.

Yeah, I grew up in Northern California and you know, in California they have this Odd, you know, state law that at one time kind of essentially fixed property taxes. As a result, no one moved.

Yeah, well, you mean Prop 13 in 1978. Good old Howard Jarvis.

That's right.

Yeah. You know, I would submit to you, by the way, that. And I don't think I've ever said this on the show, but I've definitely thought about, about it, you know, for decades now. But if we did not have Prop. I'm in La Jolla, California, by the way. Okay. Spent most of my life in Southern California. If we did not have Prop 13 in California, this real estate market would have never appreciated as much as it has. Because if you compare it to high tax jurisdictions, you know, Texas is fairly high property tax for sure. You know, New Jersey is disgusting. Illinois is pretty darn high too. You know, you compare it to these jurisdictions, I think that's one of the things that kept those prices from appreciating like crazy in the fluffy markets where, you know, everything's going nuts. You know, I think the property taxes put a bit of a damper on appreciation in those markets.

That's an interesting point because you're right. Property taxes here in Texas are pretty extraordinary and I think they do put some, some cap on it.

But you know, it's such a business friendly state and the tenants feel like they're getting away with murder because they don't pay state income tax and they don't pay property taxes. But really, you know, it passes through. The rents are higher than other markets we do business in. You know, we, we know everything's a pass through entity ultimately, you know, so, you know, forget about taxing the rich and taxing the corporations. All they do is pass it through. Okay, so, you know, good stuff. Well, very interesting conversation. Is there anything I didn't ask you that you'd just like to say, you know, any outlook on the economy or real estate market or anything in general?

Yeah, no. The only other thing I would share with folks is having bought and sold so many properties at econohomes, we built a very, very large database of small investors around the country. So we do an annual survey to try and get an understanding of what are investors doing out there. And it has some good demographic data in it, it has some good information about what are investors outlooks for the coming years. So that is available also on our website. So if folks just, you know, search for Visio Financial Services, they'll find that it's a very high quality document. And so I'd just like to make that content available to folks.

Excellent. Well, Jeff Ball, thank you so much for joining us.

Thank you for having me.

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