The Hard Money Lending Business - Matthew Weidert of Longleaf Lending - e13

Hey, Michael here. You will now hear some episodes of the Michael Girdley Show that we had branded differently, called Unusual Profits or some such like that. Same show, same person, just me interviewing people and producing content that could be helpful on your journey and mine as well. So with no further ado, here's the episode. Hey, Michael here. Sponsor for today's show is actually a product that I'm a part of called DM Bridge. And what DMBridge is, uh, is a service that we built, uh, to solve the problem that Twitter's direct messaging functionality is a total mess. So we built DMBridge to help you fix that. Um, a lot of the other solutions, uh, do things like requiring you to install a whole nother inbox. We didn't want another inbox, so we created DMBridge. And what it does is it takes all of your Twitter DMs and has them appear inside of your email inbox. So you can reply to them just like it's a regular email. You see them just like it's a regular email. You can search them later like it's one of your regular emails, all just by using DMBridge. So, uh, we're currently live with the product. Uh, would love for you to sign up and become a customer, uh, and check it out. So you can find that at dmbridge.app, uh, and go on there, put in your name, uh, and be either part of the beta or join us as part of the live use of the product. And again, check it out, dmbridge.app. All right. Welcome to the How My Business Works podcast. It is a wonderful Friday afternoon. I am your host, Michael Girdley, and I am here recording today with a special and exciting guest to talk to us about the world of hard money lending. Matt Weider. Matt, have you ever had anybody describe hard money lending as a wonderful and exciting business?

Never. No, I've tried to post a little bit about it on Twitter and the engagement is subpar. So I don't know, maybe this will be the spark that I need to blow it up.

You'll be the next mini storage coffee drive-through.

That's it.

Sexy thing on real estate private equity, the sexy stuff on Twitter.

Yeah, this is private real estate lending's moment right here.

Yeah, this is it. We're going to make it happen. Well, It's interesting. There's an inverse correlation between stuff that I'm involved in, the magnitude of that. The bigger the magnitude is on my personal world, the less people are interested in it on Twitter. But the, hey, I was bored during COVID and I started a coffee business, everybody just wants to talk about that. It's just the weirdest phenomenon. I'm like, no, no, check out this tech thing I did. It's a million times bigger and super important and nobody cares. Yeah.

They don't want to talk about that.

Yeah. It's like, well, let's talk about the shack where you're selling coffee. Okay, fine, we'll just do it. But again, thanks so much for being here. You've had like a really cool background. We definitely want to dig into that. But first of all, I'd love to, love to just kind of get a 101 from you for somebody not familiar. You know, what is, what is your business? What do you guys do? What's the market and that sort of thing?

Yeah, that sounds good. Again, thanks for, thanks for having me on the pod. Um, so my company Is Longleaf Lending. We're based out of Houston, Texas. We lend only in Texas right now, although we can go outside of Texas, which we'll probably grow someday. But we are private real estate lenders. So you may have heard hard money, private lending, private money is the most recent one. So we go by all of them. Gotta give the people what they want. So we'll put all those keywords on the website. But we basically make loans banks can't. So what do you do to speed? I can fund a deal in 48 hours if we had clear title. And then we also can have some flexibility with regard to underwriting or borrower requirements. So my partner and I, we co-founded this company about a year ago, but we've been lending for a number of years now. My partner a little bit longer than I. Combined, we've done about 300 loans. I think we're up to about $65 million total if you look at our entire history. And it's been mostly a side hustle for both of us for a while. And we got talking last year, decided to combine efforts, come together and form Longleaf. And so we worked on that over COVID and company went live in December. So kind of about 6 months of history really. And since December, we've done about 70 deals, about $15 million So you can do the math, average check size for our loans we're lending against single-family houses, it's about $225,000. It may seem small. I mean, if you're from California, that's probably shockingly low, but if you look at the Texas real estate market, it's got, I think, 3 or 4 of the top 10 in the country, and there's just tons of inventory at that price point, whether it be San Antonio, Dallas, Houston. I really wouldn't count Austin right now. That market's just Crazy hot, so we don't really touch it or we don't play there. But the team right now is, there's 4 of us, so myself and Pete, we've got a virtual assistant, and we have a part-time kind of commission-based loan officer. So still pretty small. We spent a lot of time just ramping up, doing a lot of the work ourselves, but also getting the back office process up and running, the tech. And we're going to start kind of building the team out from here. I'd say Another thing that makes us unique, we're direct self-funded lenders. So we're not brokers, come to us, we're lending with our balance sheet. We haven't taken any investor capital quite yet. We may do that someday, but the way that we fund deals, it's a combination of our own capital, and then we partner with regional banks here in Texas. So we fund a deal, we take it, and we're able to pledge that promissory note. So that's the collateral that we give the bank, and that creates availability on a line of credit, and we use that availability to go fund the next deal.

So who is— most of us, when we buy a house or a fourplex or whatever, we go to put down a down payment, we go to the bank, and they underwrite us, and they underwrite the property, they get an appraisal and all that kind of stuff. So that's obviously kind of mainstream. It doesn't sound like you compete with that kind of scenario. You compete more with special situations. So what are those? Who are the customers? That you're targeting? Yeah.

I think you could break our customers down into two buckets. So it's people that are making money investing in single-family houses, and that's up to 4 units. So we can do up to a fourplex. Anything above that is considered commercial. So there's, I would say, two camps. There's the guys that want to go fix and flip and then sell it. So they're buying a property, they're doing some work, so a rehab or a renovation, Improving the property, raising the value, and then listing it and selling it. There's another camp that is doing what's called the BRRRR method, not to be confused with money printing, but if you're around real estate, you may have heard that, but it's— let's see if I can get this right. It's buy, rehab, rent, refi, and then repeat. So basically building a portfolio of cash flowing assets is a way to generate kind of semi-passive income or build wealth over time. And so they use hard money lenders like us to quickly purchase the asset. And then once the property is improved and they have a tenant in it, they will do a cash-out refi, get into some cheaper capital or cheaper notes, some 30-year paper. And then if there is a cash-out component, they'll take those proceeds and they'll roll them forward into the next deal.

So it just sounds like the BRRRR guys and gals are doing Basically, they're both doing value add, right? Both camps are taking a piece of real estate, fixing it up, and it's just what happens on the other side. The flippers are selling it and that's how you get your money back. That's how they make money. The BRRRR folks are leasing it up and then holding it for some period of time afterwards. But at its core, everybody coming to you is fixing up real estate. They're rehabbing it of some sort?

Yeah, for the most part. There are some deals where— And I would say that most of these deals that they're buying are not listed. So there's kind of an entire industry. You've got wholesalers out there that are finding off-market deals and they're getting them under contract, and then they'll assign the purchase agreement to an investor, and that investor will buy it from the actual seller. There's some investors that we work with that have their own proprietary deal flow, but for the most part, investors that are playing in this space, they're buying these deals from wholesalers, and a lot of them are off-market. The stuff that is listed that you see in the MLS or on Zillow, those deals just don't really pencil. You're not able to buy them deep enough for it to make sense buying it with a hard money loan.

Yeah. Well, the wholesaler business has been fascinating to me. I've known about it for a few years, and I guess I knew one of the folks who ran here locally in San Antonio, the New Western Acquisitions Group, which I guess is— they're statewide or whatnot, but kind of doing that. They would go and find people with off-market properties or things with problems and then never actually really take possession of them. There was a simultaneous close where the seller sells it and the flipper buys it the same day and they take a cut in the middle of those two things. I found it to be a fascinating model.

Yeah. I was dealing with Northwestern two weeks ago on a transaction. So exactly as you described, they do what's called a double close. They're just making a spread. So usually it's $15,000 or $20,000 that they're making as a cut on the deal, but they're never taking possession. They're never owning the actual asset.

So how are those guys not predatory? I mean, it feels a little like, wouldn't these guys be able to— Are they taking advantage of people who should know better, should do a public market list, a public listing of it on MLS and have a real agent listing them? Stuff like, I guess, why is that repeatable? Why is it not yucky? It feels a little predatory.

It can be. And I think there are some that are a little bit more predatory than others. So for sure, they do target, they're able, there's a lot of data out there and they can look at properties that are about to be foreclosed on. For whatever reason though, that person that owns the asset got themselves to the point where they're getting foreclosed on and oftentimes taking an offer from a wholesaler is better. It's a better outcome for them. Rather than lose all the equity, maybe they're able to recover some of it. There's other sellers of some of these assets that maybe they're out of state. Those are common targets. And for whatever reason, people just want the cash fast. They don't want to deal with a 30, 60-day close or maybe somebody backing out. And so they're willing to sell it for a little bit less than market value in order to get that cash. So yeah, you're absolutely right. I mean, there's predatory folks in every industry. But I think for the most part, everybody's— or most of them are well-intentioned. And I guess at the end of the day, it keeps me in business. So—

Well, and so how do you end up finding borrowers? Is it coming through the wholesalers? Is that how you're finding referrals and stuff? Or people who need money just find you? Or how are your borrowers coming in the door?

Yeah. So my first deal, I guess we can get into that a little bit. I previously worked in investment banking and one of my partner, one of my coworkers here in Houston, we were energy upstream bankers. He had a deal that he didn't want to fund. He was doing this on the side already. He handed it off to me. So that was my first deal. I got coached on it. And from there, I had a friend that I went to school with that actually did some wholesaling and it just snowballed from there. People liked working with me, word of mouth. They handed off me to somebody else and that person to another folk, some other folks. And before I knew it, I had done 40 deals in about a year. So we're still primarily word of mouth. We just recently have started leaning in on the marketing piece and we're experimenting with that. And a lot of it's what we found that works so far is Facebook ads and we're working on search engine optimization. We just put our first blog post. We're going to start Working on trying to rank higher organically. We found out that does not work is Google, Google Click Ads. We spent a bunch of money on that, paid a marketing firm to run that, not successful. I mean, we get away way better return on the Facebook stuff. I would say another way that's been pretty successful for us is we've partnered with real estate events around town. A lot of those are starting to come back with kind of COVID behind us, these in-person events. And so we've sponsored them and we get a couple minutes to talk, we put up a booth. There's definitely a huge ground game component. People like doing deals with people they know and they like, especially this industry. And so we've gotten pretty good reception from showing up to those events and spending a little bit of money. But yeah, so far it's been a lot of word of mouth.

Yeah. So walk me through the economics. So basically if I were to go, say I'm a house flipper and I have very limited capital, so I can't go to the bank, which that, let's say that money should cost me 3 to 5%, depending upon owner occupied, all that kind of stuff, size and whatnot. What are the economics, the setup work with y'all? So you're charging origination points? How does that work in terms of the money being at a higher interest rate from a hard money lender?

Yeah, we're definitely expensive. The rates, I think the industry probably ranges from, I don't know, somewhere 8% up to 15%. We're there in the middle. We're reasonable on rates. We're not going to be the cheapest, but we range from 10% to 12%. So if you're new with us, you're going to start out at 12% and try to build long-term relationships with our borrowers. So our goal is to try and get you down a little bit lower if possible. So you'll pay, at least with us, anywhere from 10% to 12%, and there's usually a point or two upfront. So generally, we'll start somebody out at 12% and then 2 points. So If you're unfamiliar with what a point is, that's just 2% of the loan. If it's 1 point, it's 1% of the loan value that you pay at close, generally upfront. Some of those points can be deferred to the back end or the payoff. As far as other fees, sometimes there's an appraisal fee, document fee, buyer fee. We treat most of those as pass-through. There's some lenders that try and charge as much as they can on fees and they treat it like a profit center, but Try to minimize those. So as far as the rest of the deal structure though, I can walk through an example if that would be helpful, just how about, or how we think about a loan-to-value and how we get to a determination. So let's say we're working with one of our borrowers and he's found a target property. Let's call it, it's $150,000 is the purchase price. He thinks there's about $25,000 in rehab that needs to get done. And so we're looking at an all-in, kind of all-in cost of $175,000. We do our homework, we come up with what's considered an ARV. So that stands for after repair value.

Okay.

And we agree that that after repair value is $250,000. We're going to want some type of skin in the game. So we're not going to fund the full purchase price and the rehab. So our loan value is not going to be $175,000. But we'll go up to kind of a minimum is like 90%. It's a good rule of thumb. So we'll fund 90% of the acquisition, so $135,000, and then 100% of the rehab. So our loan value is $160,000. So the math on that—

So you'll expect them to have— the flipper needs to have some skin in the game. It's just for them, it may be a proportionally large amount of money, but as a percentage alone, it could be pretty small, right? You have 10% collateral or 5%. Is that what I'm hearing from you?

Yeah, that's right. So in this case, the equity required is $15,000, but that's still less than the 20% that usually you'd have to bring to the table for a mortgage. Got it. Got it.

Okay.

And there are definitely circumstances where if the loan value is low enough, we might go higher than 90%. There's some lenders that'll do 100% loan to cost so that there's little required out of pocket for the investor, aside from closing costs. But generally, 90% is a good rule of thumb. And so this example, you've got loan value of $160,000, the value of the property is $250,000, so your loan-to-after-repair value's kind of right around 65%. And so that's the last check for us. We're not going to lend more than 70% on a property. And so let's say the after-repair value, the valuation of the property is a little bit lower. I don't know, call it like $200,000 or $215,000. If that's the case, then we might still do the deal, but we're just going to bring Wes to close and the borrower or the investor's just going to have to bring the difference.

Got it. And then you make your money on that through the origination fees. So let's say 2 points upfront, right? That'd be a $6,000 commission on a $200,000 deal. And then you would get interest obviously on the money that you loan, which that's, you know, the 10 to 12% per annum interest is what you're charging folks. And those are typically, they're interest-only loans. There's no amortization or anything like that?

Yeah, that's right. They're kind of 6-month to 12-month deals and interest only. As far as— I mean, our model is pretty unique, and I got to give my partner credit for kind of figuring it out. When I describe to people, it seems pretty strange. We go to banks, they lend money to us, and we turn around and we lend that money to borrowers. But these are loans that they never would be able to do, but if we're in between in the transaction, they can get comfortable with it. So I like to tell my real estate Twitter friends that— So let's call it a 12% deal. So the interest rate's 12%, 2 points, and there's 6 months maturity. So in a given year, we're going to turn that deal twice. So you can think about it as being like a 16 cap that we're levering up to 80, 85% with our bank line, and we're borrowing from the bank at 4%. So the returns are pretty strong following this method. There's definitely a lot of downsides to managing a bunch of different bank relationships, We have great partners, but at the end of the day, we're dealing with banks and there's lots of paperwork, lots of requirements, and all of them are a little bit different. But I'm dealing with it right now because we're growing and the returns are good.

Yeah. And so you're basically— you're the one with the MBA, not me, but it's basically risk.

I didn't bring that up. You brought it up.

It's fine. Well, I was about to use the word— I was about to use like an MBA investment banking word, and there's a risk I use it wrong because I've totally— I've never had one lesson, so to speak. But I mean, basically there's a level of risk arbitrage that you're doing here, right? You're, you're able to assume— you're assuming some of the risk of these folks not paying back, and then you can turn around and borrow more cheaply because you're, you're assuming that risk if there's a problem.

And absolutely.

Yeah. So core of the business. So you're able to borrow. So you're right now you're doing each deal you're doing a line per deal, basically? You go and you're— when somebody comes in and wants to borrow $100 grand, you're going in to get an $80K short-term line with a new bank each time? Or do you guys, you know, do you have a standing line that you're working out of? Or I guess a hybrid of the two? Or how's that working?

We have right now, I think it's 4, maybe. Yeah, I think it's— I know we're up to 5 lines right now. Any— each of those has a standing line. Every, every time we do a deal, we're not putting a new facility in place, so there's a limit on the max that we can draw on that. Even if we provide a ton of properties to it, there's a cap and we're increasing and growing those lines over time. We just got through our first round of increasing them since we got them in place late last year.

And then are you personally guaranteeing those, you and your partner, or how's that working?

They are personally guaranteed.

Yeah.

That's how the bank gets comfortable there, right? I mean, they've got our balance sheet and our cash flow from other stuff. They're sitting at, if we're lending 70% max and they're advancing, let's call it 80%, I mean, their loan-to-value on the thing is probably in the low 50s, and then they've got our cash flow assets. So it's a really good deal for them. And you can go get a construction loan that has a lower rate than us from a bank, and I would say that that is a higher-risk product than us, but we pay higher rates to the banks than the construction the guys going out and getting a construction deal. So it's interesting. It's a unique model. We're not the only ones doing it, but yeah, we're going to have to figure out the right way to grow going forward.

Yeah. I mean, I guess there is, at some point, once you get to scale, there's an opportunity to go get potentially even a cheaper cost of capital at scale, right? Where you could potentially do some bank levering, but then have some sort of equity partner in with you or a standing standing debt funds sitting behind you that could potentially lower the rates with the banks and maybe even make another flexibility thing happen there? I assume as you get to bigger scale, and maybe you guys are thinking about that or maybe not.

Michael Girdley Yeah, absolutely. We've had some initial conversations around that, going and getting a much bigger facility that might be syndicated to a few different parties. We've also looked at junior capital. We got a term sheet a couple days ago from From a lender, it's an asset-based lender that likes sitting at that mezz level. So they'd sit behind the first lien. And that was interesting. I don't think we're quite at the right point to take that type of loan, that term sheet that sits at the corporate level. But yeah, I think there's a lot of possibilities, a lot of potential to go maybe about 6 months once we've got a few more deals under our belt and Longleaf's been around for about a year to go do 1 or 2 facilities. I'm not sure we ever want to do just 1 facility because if that one decides to go away or that bank gets acquired and the acquirer decides that they don't like this product, that could absolutely put us out of business. So—

And so right now, on average, you're turning your capital, a given dollar, you'll turn it twice a year. Is that what you said? Typically a 6-month turnaround for these folks from allocation to basically repayment of the loan. Is that about what you're seeing?

Yeah. I think right now we're just under 6 months, but You know, that might just be luck. We've had a lot of deals pay off pretty quickly recently that we've been able to recycle, but I would say on average it's probably somewhere in between 6 and 9 months.

And that's— well, I guess that's a big factor of how fast can people rehab the homes, and then secondarily, how fast can they monetize them by selling them. And at least in the case of the selling, this is a good time to be selling. But probably the labor shortage and inventory shortage on things like lumber and stuff like that, that's not good for y'all's business.

No. I mean, the increases, just the market, how hot it's been, it's great for our current book, but every time we fund a new deal, we're taking on additional risk, just like you described. The market's valuations are going up, so we're assuming that risk. And then we have actually seen, we have talked to a lot of our borrowers that their prices are going up. So Yeah. Yeah. It's an interesting time to be a lender in this market. We're definitely being cautious, but we're thankful for all the deal flow that's out there right now.

Yeah. So in terms of minimizing risk for y'all, how do you do that? I mean, I'm sure you're mandating title insurance on everything. There's borrower risk, there's sales risk on the back end, there's environmental challenges and, you know, reducing those risks obviously would cut into the margins for the flipper. And but there's stuff that you would want to see, like where, where do you kind of draw the line in between what the banks typically want out of stuff with Phase 1 environmental and that kind of junk to like, you know, YOLOing it and getting the money in so they can get to work? Where do you guys sit kind of in that, that stuff?

We pretty much follow what most of the rest of the industry does. I mean, there's no environmental assessments that are done on residential. That would definitely be something that is done. There are commercial private lenders as well. They consider those loans kind of bridge loans. It's a commercial term. If we were doing that, we'd absolutely have some type of environmental inspection. But I'd say the things that protect us, just like you mentioned, so it's a title policy. So they issue the title commitment at close and then the policy comes later. So that'll protect us from any type of ownership issues that arise or potentially could arise. They're supposed to clear all that up, but something hasn't happened yet, knock on wood, but something inevitably could pop up there. We require insurance, so we're protected in the sense that we're added as what's called the mortgagee. So if there's a fire, burns house down, we get the payout first rather than that payout just going directly to the borrower and they're like, "Oh, great. Just got to check," and they run away with the money. So we're on the insurance policy. We do require flood insurance. We do a search to make sure, especially in Houston where there's a lot of flood areas, we look to see if they're in a special flood hazard area. And if they are, they're required to provide flood insurance. We don't run credit checks for the most part, unless they're going to be— the strategy is to refi. We don't do background checks yet. That might be something we think about in the future. But we do get— we've been fortunate that we know most of our borrowers really well. Going forward, once we start turning on the marketing, we're going to be introduced to new borrowers. And so some of that we're figuring out with our underwriting process. And that's a good reason that we haven't taken outside capital quite yet. We want to make sure that our process is down and it's solid before we go potentially start taking other people's money in the future. But at the end of the day, we're asset-based lenders. And so we just need to be comfortable taking that property back. And the way that we do that is by Just making sure our loan value is strong and doing the comp work ourselves. We don't rely on appraisals. We actually do need appraisals, but one of the reasons that we're so fast is that we can fund them. We can fund a deal without having appraisal. We can have that come on the backend and that's part of the paperwork and the requirements that we need for our banks. But we do our own comp work. We lend in Texas. We lend in areas that we're familiar with. We're not lending out of state and just taking somebody else's numbers kind of truth because I've seen appraisals go way wrong.

So you kind of hinted about something that I was really curious to understand. So how do you kind of mitigate the asset risk like you're talking about there? Like, you make sure you're, you're buying, you're loaning money to somebody that really that asset after it's fixed up is going to be worth what they think it's going to be worth and you're not left underwater on it. So you said you're doing comp work yourself, kind of the stuff that an appraiser would do. How do you guys go about that?

That's right. We use some software that gets us MLS access. We actually don't, neither of us have our real license, but we do have team members that have that. One of our loan officers has it. But there's other ways without being a realtor to get access to the MLS. So we're looking at what the actual sale prices were. And so we're looking at those comps, getting comfortable with them. I mean, again, we're looking in areas that we're familiar with. 'Cause there's always peculiarities with areas that you might not pick up from just looking at the comps. We also do, depending on the deal, we'll look at rental comps too. So if things really go bad and we need to take the property over and potentially the market's wrecked for whatever reason and we can't sell the asset, can we turn that into a rental and put it on the market and at least hold onto the asset and cover some of our costs in the meantime?

And so you guys will do almost everything an appraiser does, it sounds like. You'll look at comps, you'll build a— sales model and outcome model around stuff. You do site visits, I assume?

Yeah, we do site visits. Uh, we'll either go out and inspect the property ourselves or we'll send an inspector out. Yeah, you mentioned, uh, kind of like a little model. Depending on if it's for experienced guys, we probably won't do this. Um, we just— I mean, some of it's bandwidth. Uh, in the future, once we have more team members, we might figure out, you know, we might improve our process a little bit. But we do have a profitability calculator, so looking at what their rehab is and what their all-in costs are going to be. What are they paying interest and closing costs and insurance and actually making sure that there's enough margin there. They're going to make enough money on the deal for it to make sense. And we like being the sole lender for a lot of our borrowers. We'll tell them if the deal sucks and a lot of them are thankful for that. So we built these relationships up and a lot of our borrowers will just keep coming back to us because they actually trust our advice and they value it.

Yeah. I would guess there are times in which a borrower has come to you that maybe is somebody you know is upfront and you tell them you don't think the deal underwrites and they should rethink about doing it. Has that happened before? Or is that by the time it gets to you, that ship has sailed and those people are pot committed to doing the deal, or has that ever happened?

Yeah. It definitely happens. And you can risk losing that potential borrower, but we'd rather have that happen than go fund a shitty deal at the end of the day.

Yeah. So maybe, maybe this is a dumb question, but, you know, you're, you're making your money off of points and a fixed rate of interest. So you, you— that kind of brackets your returns on the deal. Um, has anybody experimented with, say, like a, you know, a floor, a floor with kind of accelerators as the deal gets more profitable for the other side? You're— you'd be okay giving them 6% at a base rate, but like above a certain amount of return or a certain amount of gain for them, your accelerators go up with, say, almost a carried interest in terms of underwriting the deal. Has anybody played with those kind of things or is it just so ingrained that this is the way it works? Everybody just charges points and interest and you go from there?

Yeah, it's an interesting idea. I definitely haven't heard of that occurring. I mean, there might be some folks that are playing around with that. I just think that might be tough to try and keep up with and manage and actually measure the returns that the borrowers are getting. I mean, a lot of them, we love them, but a lot of them aren't as sophisticated. You might, you might think they are. So it's just an interesting model. Think about it, get back to you. But yeah, I'm talking about—

Yeah, well, I guess probably the problem with that model is you don't know what they're actually really spending on the rehab in the grand scheme of things. So it's tough to really— and I'm sure they had— most of these folks are probably like Uber drivers. They way underestimate what their costs are when all is said and done. I don't know if you've ever done that experiment. Next time you're in an Uber, ask an Uber driver what their take-home is per hour and they'll tell you their gross. They won't tell you their net. They don't know. Like, I've asked probably 30 of them. I have weird hobbies. And only one who was like a college economics professor doing it on the side for fun knew what his net was. He's like, yeah, I make $11.37 an hour. After expenses and depreciation, my vehicle, all that kind of stuff.

I think you're probably right. There are some that absolutely do that track it to that level. And we have, you know, we'll fund the rehabs. We fund 100% of the rehabs. We have their budget. What they actually spent is a mystery. We're not tracking, you know, if they had overages or anything like that. We're, so we see a piece of it, but not the whole.

Yeah, I hear you. Okay. All right. Well, thanks for going down that rabbit hole with me. Let me know if anything magical comes to that. Cool. All right. So let's talk about— let's— we've talked about the things that could go wrong, right? And what you do to mitigate those risks. So there's asset risk, borrower risk, there's some market risk and financing risk. All those things are part of it. And then natural disaster risk. So it seems, it seems like you have ways to mitigate all that. Walk me through what happens when things do go wrong. So say, you know, a person who is the flipper gets hit by a bus, right? And they can't finish the deal and it's halfway done. They end up defaulting on you or there's problems, what do you guys do to earn that spread that you're getting when the risk comes home on the wrong side of the coin?

Sure. And I don't have a ton of experience actually dealing with this. My partner's been around doing this a little bit longer than I, so he's had one or two of these. I can talk about one that happened to me. So there was an issue, a strong borrower, but he just couldn't get a refi done. Some of this had to do with COVID Small business owner, his business was having trouble. So for whatever reason, he couldn't get the refi done. These things were just kind of peculiar. It was a duplex, it was a peculiar property. Wasn't ever meant to be listed and sold. People would live in this and rent it, but it's not something that somebody wanted to be owned. So we're kind of stuck, couldn't get the refi done, couldn't really sell it. So in this case, I just worked out a deal with him. I was like, look, "Let's avoid the foreclosure. Let's avoid that hit on your record. We can make this happen next week rather than waiting 2 months to get the cycle to..." Because you have to, and don't quote me on this, you have to send them a letter and then there's a certain date you have to register it with to be on the docket for the next month's foreclosure process. And some of that was also complicated during COVID It wasn't clear if some of those were actually happening or not, and it was dependent on the county and the city. And so what we just did was call it deed in lieu. So he basically deeded the property over to me and I took it and then I used my network with the wholesalers I know and basically sold the asset to the investor community and recovered my capital that way. And we made a deal like if I have to come out of pocket or if I have a loss of principal, then he would have to pay that back, which wasn't the case for this. But Yeah. So we got creative on that one. We were cooperative with each other. It wasn't something me against him. Worked together. It was a good outcome. If something does go wrong, generally you get an attorney because we can write letters or send them emails all day, but people really wake up when they get a letter from an attorney. So we'll pay an attorney to send somebody what's called a demand letter, say, "Hey, you're in default on the loan because you haven't paid interest or the maturity date has passed." That usually solves the problem. A lot of the time they'll get current or they'll go ahead and sell the asset or do what they need to do. If it does go to foreclosure, you go to the foreclosure process. And again, don't quote me because I haven't actually gone through this myself, but I think you have to set a price and that's usually, I think it's called the clearing price, which is generally the number that we need to recover our principal and maybe any outstanding interest or attorney's fees. Hopefully somebody buys it at that price. If nobody does at the auction, then we take the property back. If that happens, then we just dispose of it ourselves. Robert Leonard Yeah.

Well, that's great. It sounds like the one time you got close, you were able to do a workout with the person. I guess that's just a testament to— Yeah. Testament to money lending is a lot more fun if you're lending it to the right people. So borrowers— Michael Girdley Thank you for that. Robert Leonard Yeah. It'll be interesting to watch your growth over the coming years as you switch from this handpicked network of folks that you've gotten to know pretty well to randos who saw your Facebook ad.

Yep.

So let's talk a little bit about market risk. I mean, it feels like this is a really successful business that's easy to do when there's no sudden downturns. But in looking at you, I think we're not that far off the same age. We've lived through a few downturns where everything shuts off like a light. That happened in 2008. It happened to me when I was living in San Francisco in the early 2000s. Just nobody was doing any transactions. A couple months in the early 2000s, I think things shut down too in terms of transactions until they came roaring back. But how are you thinking about not being a bag holder in the next one? Is that something in your mind or you think the turns are so fast you don't have to worry about that?

No, we absolutely worry about that, especially right now. We're focused on loan-to-value right now, just not reaching where— when we underwrite our deals, we're definitely being careful as far as what we're choosing as a value on the property. So I mean, just underwriting good deals, following our checklist, following our process is probably the first line of defense. We're lending up to 70%, I'd say our book, our average loan value is probably maybe 65%, right around there. So asset prices would have to drop 35% before we would be affected. And so that's really how we protect ourselves. We underwrite good deals, work with people we know, or we work on building those relationships. And in the event that happens, we're comfortable taking these properties back and managing them. I haven't been through a downturn like that, especially in this industry, but we would have to think about how we would manage our portfolio, whether that be taking the assets and try and sell them. If there was a really big hit to asset valuations, we might have to do that. We might take them over and try and get them leased up and hold onto them and hope that asset prices come back. But it just comes down to underwriting good deals, following our process, and being diligent when it comes to loan-to-value. Yeah.

No, I dig that. So, um, I mean, what really keeps— you know, I was just trying to think about how if I, if I wanted to go compete with you, which I don't, uh, he's not very formidable. Well, that's one of the things about this podcast that's great. Like, usually by this point in the, uh, in the, in the interview, I'm like, there is no way I want to compete with this person. So, uh, everything from wineries to the goat rental guy, like, I'm just like, oh, there's no way. Like, if, if everybody in this industry is this smart, I'm not interested. But how are you building a moat around your business to keep nimrods like me from coming in and being like, "Yeah, I'm going to beat Matt by 200 basis points, 2%, and that's why you should borrow from me." What ends up happening to keep this from being a real red ocean for you?

Yeah. Somebody on Twitter, the one person that engages with my If my tweet's on private lending, he asked me or somebody asked me, "Who's the best lender out there?" I think that's tough. It's just such a fragmented space. You Google hard money lender, whatever city, San Antonio, you're going to see 1,000 lenders and all claim, and a lot of them actually are not lenders at all. They're brokers that pretend to be lenders and they'll take your deal and they're going to sell it to somebody else. They don't actually have the balance sheet to fund it. But I think I responded, my response is something along the lines of there's a couple of different ways that we can differentiate ourselves. I mean, the product at the end of the day, it's money, same. So the way we can separate ourselves from competition is 3 things. And I don't think any lender, I think most lenders do 1 out of the 3. Not a lot of them are good at 2 and maybe there's a handful that can do all 3, but I don't think that's the case. I think we do 2 out of 3 pretty well. So First is terms and pricing. So that's your interest rate, how many points, what kind of fees you paying, is there a prepayment penalty, that kind of thing. What's the length of the loan? Second's speed and process. Process kind of goes hand in hand with speed. How fast can you fund the deal? If it's a big company, they probably have a lot more process. They're going to require an appraisal. They're going to be slow. So they're not going to compete on that one well. But that same company that's huge, has access to cheaper capital, so they're going to outcompete us on pricing. And then the last one I'd say is your customer experience and technology, I think plays a big part of that as well. So the big companies as well, I mean, they might have some lending software, but I made the mistake the other day when I was collecting some intel on this, just how we wanted to grow, signing up for, I don't know, it was like privatelenders.com saying I was interested in a loan. Man, immediately, just robocalls. There were actually people that were calling me, but 4 or 5 different numbers from all across the country, Connecticut, I think Washington State, somebody called me from Oregon, these huge national companies that just have teams distributed across the states. That was a huge mistake. I got calls for months based on that submission. And so there's a lot of people that aren't going to respond to that. I mean, they want to work with somebody local. That they can go shake hands with, they can meet at an event, that's going to show up to their project and walk through it with them. And so I'd say, going back to the top, we're never going to be the cheapest, but we're not unreasonable. We charge, I think, fair prices. We're the fastest in the business, hands down. We can fund faster than anybody else. There's others that can do it as fast, but I'd say we're the fastest. The last one, I mean, we're focused on Texas because we have a presence here. We can show up, at a project. We're going to eventually have teams in Houston and Dallas and San Antonio. We think we can outcompete those bigger national guys and that people are going to be willing to spend a little bit more to have that relationship. I think I mentioned earlier, it's just a big ground game component to this. People don't go on Google and use click ads to find a lender. They show up at real estate events or they get on Facebook. Facebook is huge with the investor community. There's a lot of real estate investor groups. And the last thing I think that we do on that third bullet is technology. So we signed up for— we spent months, or maybe not months, but weeks banging our head against the wall doing demos, trying to find a private lending platform. So something that could help us originate the deals and then service the loans. Thought we found the right one and we ditched it after 3 months. We were taking all the data out of the system, because we couldn't really manipulate it and we were pulling it into Excel and then Excel was feeding into Airtable and we were using Airtable as our— if you're not familiar with Airtable, go check it out. It's got endless number of uses, but we were using this really high-speed, powerful kind of online database tool and we were using Airtable to, you know, service the loans and then, you know, have dashboards and be able to see what was going on. And we cannot keep going with this system. We had reliability issues. People were having trouble logging into the portal. The biggest thing about it is a portal. You need the borrowers to go into the system to read what they need to do and upload documents and communicate back and forth. I mean, it blows my mind that this industry, there's still a lot of people, even big companies that are doing things entirely back and forth by email. Like, "Hey, here's a loan application with information that we've asked you for 50 other times. Can you please fill it out with a pen?" sign it, scan it, send it back. I mean, just so much that going on. So we saw this big opportunity, found a system called Stacker, like familiar Stacker, but it sits on top of Airtable. And within, once I found that within 24 hours, we had, I mean, it took me 2 hours to build. We had a prototype borrower portal. I basically integrated directly with Airtable and we're like, oh, this is it. And so then a month we, uh, we transitioned all the data over. And rolled it out to our borrowers. And it's amazing. It's fast. It's user-friendly. They can log in. They can submit new loan requests. They can see what payments are due. They can submit draw requests. They can update their profiles so we don't have to collect their personal information every time we do a loan application. And I think the features are going to just keep on growing too. I had a call with Backer yesterday, a demo, just because they have a new release coming out and there's some pretty interesting stuff that they're adding on. Payments so we could, rather than sending, because right now we'll send somebody an invoice on PayPal if they need to pay a fee. And in the future, that could be directly in the portal. And I'm 35, never written a piece of code in my life, and this stuff is all no-code. I built it, like the preliminary part of it, in 2 hours. It's great. So I think that's going to also help us differentiate. I think once we get people in the door and they can see how easy it is to use our system, and then that's just like the one-stop shop anytime they want to go look at a prior loan or they want to access I did a deal a year ago in that same area. Oh, I can go to the portal. I can pull up my rehab budget that I submitted. We're even making it super easy if they have to extend a loan, for example, to go in and see their insurance information and contact their insurance agent. Because like I mentioned earlier, a lot of these guys are not super sophisticated, so we're just trying to make it easy for them to access all their data. And it's going pretty good so far.

Robert Leonard Super cool. Well, yeah, I agree with you. I think There was this, in my world, investing in stuff and looking at small software opportunities. There were so many businesses kind of like yours where they needed specific SaaS software for that, but it never was enough of a pain point and enough of a big enough market to justify the amount of work it was going to take for coding something like that and getting a team of 12 together. And now that you could do it with these no-code or low-code things, It's going to be, it's going to, it's going to expand the breadth of the type of software that's out there for sure. And to even more kind of crevices of the economy, like where you are. Um, and I don't mean that in a bad way, like cracks and crannies, not like a, not like a crevice anyway. We talked about the opportunity to edit stuff out. Maybe my use of the word crevice is a great opportunity to remove this. But I'm leaving, we're leaving it in. We got to do it right for the people. Oh man. This has been super cool. I have learned so much about this business, uh, and yes, I don't want to compete with you. You seem really good at this, so kudos to you. And I, I love the vision of you guys expanding, and you know, just how you're thinking about it is, is really fun. Just, uh, you know, I've seen people doing your business, and, uh, you're right, a lot of it is straight out of 1985— fax machines and stuff like that. Bringing youth and, and just hard work and, you know, a little vision to it. I'm, I'm really impressed. Super cool.

Yeah, hey, thanks. Appreciate that.

Yeah, well, so, um, how can we help? What should people know? How can they follow you? I mean, I follow you on Twitter. It sounds like other people should too. What, what would be best?

Yeah, no, Twitter's, Twitter's great. Um, it's just my name, Matt Weidert, is my handle. I do post about this. I've had my head down for the last couple months, so I haven't been super active, but coming up for air here pretty soon. Other than that, you can reach out on the website or if you want to check out just a little more detail about what we do, I think I'll give you the website and you can throw it on there. It's just longleaflending.com. Perfect.

Great. Well, thanks for doing this, man. Super impressed. Yeah. I will tell you, you've had the sweetest mustache of any guest I've had so far. The viewers at home cannot see that, but But that's killing the mustache. It's super cool.

You don't know, you don't know how much that means to me.

Your business is okay, your mustache is better.

Yeah, that's why we did it.

Cool, man. Thanks for being here.