Achieving Success – While Treating Others Fairly.
Jeffrey Tesch of RCN Capital shares his strategies for meeting market demands while practicing the Golden Rule.
Jeffrey Tesch, managing director and co-founder of RCN Capital, grew a small, local private lending company into one of the largest in the U.S. in just eight years. Tesch followed a specific recipe for building that success. By his own account, he is not one to keep that recipe a secret. Here, he shares insights with Private Lender on developing the best loan products to meet market demands, hiring stellar employees and cultivating clients’ trust.
What were the strategies you followed for growing your private lending business, while managing risk?
Because I was from the non-banking world, it was all about not knowing what I did not know. I spent a great deal of time researching how other hard money lenders ran their process. I figured out how they secured their loans in such an effective manner. Many of these lenders were loan-to-own shops, meaning they would secure the property with such onerous terms that they would hope a customer would default, because then they would end up with a property that would be at a great LTV.
This type of business practice was obviously not one I was interested in copying, but it did teach me how to become effective at being an asset-based lender. I would encourage folks just getting into the business to really spend a great deal of time making sure that all their energy and focus initially went into truly understanding the value of the asset their company is securing. Running credit and background and understanding your customers’ personal financial statements are nice; however, it is really only the asset itself that will truly protect you if the loan goes into foreclosure.
From the beginning, I insisted on getting a full appraisal from a licensed appraisal management company. We eventually partnered with Appraisal Nation, which ended up becoming the leader in valuations in the private lending space. Aside from valuations, stick to your lending guidelines and do not chase deals. If the loan does not fit your program, walk away. There will always be someone else looking for money.
You are on AAPL’s Ethics Committee. What work still needs to be done to further strengthen and legitimize private lending?
Some of the opportunities that attracted me most to this business were the lack of branding and professionalism that existed in such a huge industry. The industry has come so far since 2010, when we started RCN Capital. The private lending industry was largely made up of fragmented local hard money lenders, many of which took advantage of their customers. I believe the American Association of Private Lenders has helped standardize and elevate what private lending should be. The association helps set standards that must be adhered to for membership, and that is critical. The one area that still concerns me personally is brokers and small lenders who charge exorbitant loan application fees to generate income. Many of these so-called lenders have no chance of funding a loan and are just generating income by charging a fee to collect some documents. From the beginning, RCN insisted on only getting paid via origination fees if the loan closes; otherwise, we actually lose money.
How can every private lending professional work to elevate the industry?
By treating the customer the same way you would want to be treated if you were looking for a loan. This may sound simplistic; however, the Golden Rule works extremely well in our industry. Focus on basic items like not charging upfront fees, not charging outrageous document fees and not quoting turn times that are completely unrealistic just to lock in a customer. Even doing simple things like returning phone calls goes a long way. Just do the right thing!
What are your projections for the private lending industry?
RCN is an asset-based lender securing nonowner-occupied residential properties across the U.S. For our business, the outlook is very bright. There continues to be a strong demand for renovation of properties that are close to urban centers. Many of these properties have not been touched in 30 or 40 years. These rehabilitation loans are not loans that a traditional commercial bank makes. This type of financing has contributed to a great deal of growth in the privatelending industry.
A newer trend that seems to be really taking off across the country is the aggregation of single-family homes for rental. This has become a very large industry in a short period of time; however, it is easy for the new investor to enter as well. Until single-family new construction begins to meet the demand, I continue to expect robust growth.
Before co-founding RCN Capital and becoming a lender, you were in the trenches of residential and commercial real estate investing. How did your experiences as an investor help inform the way you operate your lending company?
As a customer of lenders, I knew what I did not like about hard money lending. Some of these items included high rates, no commitment letters, commitment letters changed right before closing, closings canceled because the investor ran out of money and inability to get the “broker” to tell me what was going on. I knew that if I combined my experiences and knowledge over the years as a restaurant franchisee with my years as an investor, I could put the customer first.
We really made this part of our DNA at RCN Capital from the very beginning. Sometimes we run into situations where this mandate costs us money. For example, if rates change from our warehouse lines or an appraisal issue changes valuation, that will cost us. However, this mentality is worth it. We must protect the brand at all costs. Every team member at RCN Capital knows at the end of the day we must do right by the customer, no matter what it takes.
How do you determine what products to offer investors, and what is your advice for other lenders who are trying to decide what products to offer?
Today the private lending space has become so competitive in the nonowner-occupied housing segment that research is critically important. RCN started off offering purchase money and no rehab dollars. The market quickly changed, and we began offering money to fund purchase plus renovations. As the years went by, more folks began holding homes as rentals, and we introduced a fully amortized 30-year loan. The key here is to stay in touch with what your customers are requesting as well as what your competitors are offering.
Join the AAPL and other associations and interact with other lenders. Attend local REIA meetings and hear directly from other lenders and customers about the state of the marketplace. Constant research is required to stay on top in this business.
What is the one question every private lender should ask before developing a loan product?
If I create this loan product and I have to foreclose and own this property, will it be at a value that my original loan amount will be covered?
How do you keep a handle on industry and market shifts, and do these shifts continue to inform your product offerings?
I attend as many industry conferences as possible. Nothing, and I mean nothing, replaces having a friendly conversation with your competitors in the industry. I always enjoy sharing what RCN is seeing in the marketplace as well as hearing what my competition is doing. I bring back ideas to my senior leadership team and we add loan products or change the ones we have based on that information.
Do you foresee any big market shifts and, if so, how are you preparing for them?
In the next 24 months, I believe we are in good shape in the single-family fix-and-flip space as well as in the single-family rental space. I believe the supply of homes in the U.S. has a long way to go before the supply finally catches up with demand. If you look at some of the data, the number of permits filed for construction of single-family and multifamily homes in September are at the lowest they’ve been in almost three years. We would need to see an almost 15 percent increase in housing units to meet demand. Unless we return to the course of traditional commercial lenders financing large tracks of speculative single-family housing, we will continue to see solid demand for our customers’ renovated homes.
What is your hiring philosophy?
We hire on culture. We get all sorts of folks applying for careers here at RCN Capital. Some are experienced; some are just out of college. What we have figured out is that a fancy resume does not always equal a good, long-term employee. Each manager of their respective department knows what type of energy and culture fit is required for their team.
To really boil it down, we are looking for the type of employee who can buy into the vision of creating the No. 1, nonowner-occupied residential lender, who is consistently rated best in service. The theme always goes back to the brand that we have created. We need folks who will always put our company—and the customer—first.
RCN always tried to hire from the conventional mortgage industry. What we figured out was that doing that did not always make the best hire. We started to recruit from industries that had hard-working individuals who were good on their feet. This includes the automotive sales business, restaurant managers, any sort of high-tech marketing, as well as recent college graduates.
How do you spend your time away from work?
My family takes up the majority of my time outside of work. I am married with three boys, two of which recently graduated from college and live out of state. I still have one boy living at home who runs his own successful property maintenance business. My wife and I enjoy traveling locally as well as longer trips on vacations. We both enjoy exploring destinations that we have never seen before. There is an excitement in discovering a cool place that you have only heard about or seen in pictures.
If you could travel anywhere, where would it be?
Australia. My wife and I, as avid tennis fans, have always wanted to go to the Australian Open held every year in January in Melbourne.
What is your favorite food?
I have a lot of favorite entrees, but let’s get right to my biggest weakness: ice cream! I love a deep, dark chocolate, hot fudge sundae.
Do you have a philosophy by which you live?
It really goes back to the way we started RCN: Treat others the way you would want to be treated. Over the years, I have learned how far a simple smile goes when you pass someone in the street or hold a door. Folks often tell me: “You always seem to be happy, Jeff.” Well not always, but I can assure you when you interact with others from a positive perspective, your own demeanor will greatly improve.
What do you hope your legacy will be?
A family-man first, who truly appreciated those around him, and when rallied for a common goal, could take those individuals to a place they never imagined. ∞