Visit aaplonline.com/education-advisory-committee for more information about our Education Committee.

What’s next?

Those two syllables are enough to give any in-the-know lender heartburn: Futureproofing is a dichotomy between an eye-rolling salvo and the secret dream for private lenders everywhere. We balance on a line between the demand of the housing market and the ability of traditional financing to meet it. Our tangible “what’s next” answers are usually measured in months rather than years.

So for private lenders who want to know what to start learning today to keep their businesses in the black in years to come, we turned to industry experts on our
Education Committee. These AAPL members guide our own “what’s next” objectives
as we continue to develop AAPL into your resource for Education, Advocacy and Ethics.

We presented all Education Committee members with this question: What should private lenders be learning now to prepare for changes to the industry over the next one to five years?

Sam Kaddah, President and CEO, liquid logics
The name of the game is not change! It is positioning yourself and your organization for change. I believe private lenders are learning not to listen to the media hype and let fear drive their decisions. More importantly, it is now being proven again that returning to private lending fundamentals, diversification of business lines and long-term product mix are the secrets to long-term success.

Relying on one type or source of funds is a recipe for high-risk failure. Having a mix of your own fund/investor resources, your own warehouse line, servicing portfolio and secondary markets sales is the key for a long-term, sustainable operation. No matter the change, position yourself to absorb most of it and evolve. Finally, when things get complicated, having an efficient technology-driven operation that handles origination, docs, servicing and fund management in one comprehensive system makes a world of difference!

Stephen L. Kuptz, Principal/Founder, Trinity Mortgage Fund LLC
My business partners and I are confident the entrepreneurial American Spirit will prevail.

We believe a “loan to own” mentality will be critical for success in the private lending industry over the next several years. If we do not want to own the real estate personally, we should not be lending on it. We need to know our markets well and have a clear exit strategy upfront that we understand and can personally execute if necessary.

Product-specific operational knowledge is critical. If you or someone on your team does not know how to run a hotel, you should not be lending on it.

Despite best intentions and underwriting, loan challenges will arise over the next several years. Our desire is to work closely with our borrowers for their continued success.
Their success is our collective future. Private lenders must have a strong workout skill set and be prepared and willing to be creative to keep loans performing. When all else
fails, have a skilled team in place that is experienced in default, foreclosure and bankruptcy matters so that, if necessary, you can efficiently step into the ownership
that you carefully planned for upfront.

Erica LaCentra, Director of Marketing, RCN Capital
Private lenders should be focused on two “Ts” to prepare for upcoming changes in the industry: trends and technology. First, the COVID-19 pandemic should have taught private lenders that if you are not staying current on industry trends, you will be in serious trouble when change arrives. Erica LaCentra, RCN Capital

Private lenders need to not only see where the market is going as it happens but also get ahead of it to ensure they are developing and adjusting programs, terms and guidelines that will set them up for the future. This is a highly competitive industry. If you’re the last to the table, you’ll have trouble getting your share.

Technology is something every private lender should be looking into and investing in. The private lending industry has been slow to adopt technology, but living off spreadsheets and Google docs for loan management needs to stay in the past. At minimum, private lenders should be investing in a customer relationship management (CRM) platform and a good loan origination software. These two pieces of technology will be crucial to making their customer experiences smoother, easier and more transparent.

Beeta Lecha, Principal, Spiegel Accountancy Corp
The COVID-19 crisis has many private lenders focusing on ways to respond to challenges facing the industry. Several lenders have reached out to us about how to handle accounting circumstances for their defaults or loan loss reserves. Their focus is on today’s economy and what is happening currently in their business. As the economy begins to recover and restrictions are lifted, private lenders should take a moment to reflect on what they can do to improve their business model. They should ensure their company is poised financially not only to recover from a downturn but also to come out ahead.

Now is a good time to shift from reactionary responses to proactive measures. Lenders reacted quickly to transition their teams to work remotely. I would encourage lenders to analyze what went well and what needs improvement. If a stopgap technology (procedural or communication) was put in place overnight, spend the next year focusing
on ways to build upon this strategy rather revert to the old way of doing business.

Moving forward, lenders should evaluate their existing professional networks and strive to expand industry relationships. We had several clients who lacked strong banking relationships and struggled to apply for the PPP loans. Additionally, lenders should work to strengthen their connections with trusted advisers, attorneys, bankers and CPAs to ensure they have the right team in place when they need it most.

 

Jeff Levin, Education Committee
COVID-19 is forcing change in private lending. Change is coming in the long term, too, as the industry continues to proliferate and new technology is developed to further
commoditize our product.

The first tranche the industry must prepare for is the post-COVID lending environment. Preparing for something that is impossible to predict is difficult because nobody knows whether there will be a second wave. What we do know is the lending environment will tighten, and lenders—even private lenders—should take a more conservative approach. Jeff Levin, Specialty Lending Group

Certainly institutional investors will restrict to experienced borrowers with higher credit score requirements, as well as lower LTCs and LTVs. This creates a better environment for private lenders and hopefully a reversal of the rate suppression we have seen. But we, too, should take a more conservative approach. There will be a lot of delinquencies in the next 6-12 months, especially if there is a second wave. This will create opportunity for some of your clients, but potentially huge headaches for the lenders.

In the longer term, competition and commoditization will create pressure. It behooves lenders to keep abreast of the latest technologies and the implementation of AI in
such things as underwriting. Implementation of the newest technology will be key to remaining competitive.

As always, it is important to know your local market and stay informed of industry trends. One way to do this is to continue to support the AAPL as the leading industry resource.

Clay Malcolm, Business Development Specialist, Advanta IRA
This is an excellent time to be building business connections and increasing your knowledge of businesses that interact with your own. One effect of COVID-19 is the broad understanding that “we are all in this together” to an extent that may not have been apparent before the pandemic. This shared crisis makes it a natural time to reestablish business relationships and connect with new ones. Clay Malcolm

A business ecosystem with strong connections and a broad understanding of the needs and vulnerabilities of the borrowers, the lenders and the financing sources has a better chance of adapting to changing conditions than a business ecosystem in which each member is rigidly and blindly performing their function. Change is here, for at least the foreseeable future. Why not strengthen your business’s ability to evolve by learning even more about your business environment?

I have learned more about the private lending space in the last several weeks, and I hope those to whom I have spoken have learned more about IRA investing, how it can interact with their business and how it could impact their own retirement strategy.

Melissa C. Martorella, Supervising AttorneyBanking & Finance, Geraci LLP
The prMelissa Martorella, Geraci LLPivate lending community should learn how to harness various capital sources. Having the ability to rely on different options for funding deals, including using individual investors, operating a mortgage fund, or through loan sales or lines of credit will be essential to making sure lenders are able to operate in any circumstance. The COVID-19 pandemic has taught us that lenders who rely solely (or primarily) on loan buyers or lines of credit had a more difficult time pivoting when those resources were unavailable. A balanced capital source “portfolio” is just as essential to making sure your company can thrive as having a balanced loan portfolio.

Randy Newman, Founder, Total Lender Solutions
Private lenders should be learning everything they can and more. As we find ourselves in this brave new world, we are at a point at which none of us has any experience. Lending guidelines may need to be torn up and rewritten from scratch.

Randy Newman,AAPL Education Advisory CommitteeRight now, legislatures throughout the country are balancing economic devastation with lenders’ and borrowers’ rights and obligations. If you don’t know who your local and national representatives are, find out immediately. Get in touch with them, make yourself known and become involved. Like most people, legislators respond to the squeaky wheel. If they’re not listening to you, they’re listening to someone whose interest may align against yours. Read the legislation that affects you and your industry. Do not rely on some legislator telling you what it means. Sadly, some legislators do not even read the bills before them. They vote along party lines regardless of what is in or what is missing from the legislation. Join AAPL and any other local industry organization to which you belong and visit the senators and representatives on legislation day.

Chris Ragland, AAPL Education Committee Member and Government Relations Committee First Chair
Another decade, another recession. A lot of the difficult learning heading into this recession has already taken place. We have cut budgets, dropped platforms and lost employees and partners. We’ll learn the next set of lessons as we turn the corner of survival and begin the journey down Thrive Avenue. Out of disruption comes opportunity, and there will be plenty of it. Where others fail, be ready to pick up the pieces and capitalize. Real estate value basis, particularly value basis in underlying failed or nonperforming loans, is where the largest opportunity will be.

Chris RaglandThose of us who built a rental portfolio have seen the power of diversified income streams and will be tempted to double-down on that effort. But real maturity in a
business that is built to survive comes through diversification. Resist the temptation to keep it all. Balance your exits and holds to parlay cash from one deal and into the next. Acquire, reposition and exit at least two out of three deals while generating cash flow from the third. Rebuild your team by sharing income opportunities with others. You will be rewarded with loyalty, production and maybe even some good karma.