What is Private Money Lending? ft. Chris L. Boulter | Coffeez for Closers with Joe Shalaby Ep. 44

0:28What's up, everybody? Join us today as we discover how Chris's blend of expertise and innovation has redefined success in the financial world. Without further ado, we welcome Mr. Chris Volter. Hey, good morning, Joe. Thank you for the invite. I look forward to talking about the business and what we've done in private money lending over a cup of coffee. I appreciate you. And thanks, Chris. You know, I feel like you've been kind of like private. You know, a lot of people don't know who you are. So it's it's good to be out in the in the general public because for years I personally I wanted to meet you.

1:03So I'm glad I got to meet you today. And I'm glad that the public now gets to also meet you because, you know, Valfris is doing some great things. And I'm blessed to partner with them and I'm blessed to be at the forefront of all the things that you guys are doing. And now that we have this additional relationship, I think that there's a lot of big things coming between our partnership and our synergy. So I'm going to just jump right into it. Fire away. Hard money, it's pretty niche. Now, of all the sectors in the financial space, you know, regular conventional mortgages, Fannie Mae mortgages, why did you select private money?

1:41What was it that inspired you to get into the private money space? And not only that, but to dominate that space. Well, I don't think I picked private money, actually, Joe. I think private money picked me. Back in my youth, after I got out of college, graduating from USC, I was working in the wine business. I was selling wine. And my father-in-law had started this company a few years prior to that, and his partner was retiring. And he said, I've got a private money lending business. What do you think about getting into this industry? And he convinced me to quit my corporate job and go to work as his partner.

2:16and that's how we started out. It was just myself, my father-in-law, my mother-in-law in a small 800 square foot office. This was before fax machines, cell phones or any modern technology. There was just the three of us and at the time I think we were on loan number 59 or 60 and my father-in-law started with loan number one and now we're in the 15 ,000, 16 ,000 range or possibly even higher than that. So it kind of found me, I guess. And I fell in love with it. It didn't take long before it kind of overwhelmed me. And I enjoyed it. I found it passionate. I found every day a challenge. And it gave me a lot of flexibility because private money doesn't have quite the boundaries that conventional lending has.

3:06Yeah. So what are some of the things that drew you to private money, you think? Well, I think what I liked about it is that I could make decisions every day about whether a loan was approved or not approved. And the underwriting criteria was incredibly flexible. In private money, we're focused primarily on, at that time, we were only focused on loan-to-value. So we could make a loan to virtually any borrower, regardless of their credit, regardless of their ability to document their income, regardless of whether they were employed or unemployed, if they had sufficient equity. So I like that freedom of being able to help virtually anybody.

3:42I like the ability of not having to tell somebody no because they couldn't fit one of the 30 boxes possibly they were required to fit when they did a conventional loan or a subprime loan. If they had the right loan to value, again, we could approve them and we could close the loan quickly too. And then that was nice because most loans only took maybe five to 10 days to underwrite before they funded. Wow. Now, you know, Valcress has just exploded recently. And obviously, you've been doing this almost five decades now. What are some of the key strategies that you've implemented to really scale Valcress?

4:20Well, when we first started out, because, again, we were so small, we didn't have much in the way of marketing. Back in those days, Joe, I used to hop in my car with some printed flyers, and I would just drive to offices, real estate offices and mortgage companies. and I would walk in unannounced and I would just say, hey, here I am. I'm your private money lender. And I would hand out flyers because there was no such thing as the Internet or other marketing tools. And, again, I just started to learn more about the business, and as technology changed, we again began to use some of the other avenues to make ourselves more exposed to more and more people.

4:58We also found that by focusing our business primarily on brokers, A-paper lenders and real estate brokers, we started putting on small seminars at their offices. We would get ourselves invited to their sales meetings, kind of like talking over coffee. I started out going to offices with a box of donuts and getting invited to sales meetings and spreading the word. And then we then decided we needed to start attending some of the trade shows, the mortgage trade shows, the real estate trade shows, to get ourselves more exposed. And we continually focus on the fact that we're kind of your lender of, in some cases, your lender of last resort, but we're somebody you can rely upon on virtually any loan transaction as long as there's equity.

5:46And I think that the word of mouth kind of got around. And then we've, again, over the years, I've now brought in some younger people, people who are much more savvy than I am as far as marketing, and they've helped blow up our volume and our exposure to help our company grow even further. Yeah, you guys are doing a fantastic job. Are you guys still attending all the trade shows every year? We're attending more, more and more. I mean, I think like everybody else, we came to a screeching halt with COVID. But since then, we started to make ourselves more and more exposed. We're now attending some of the realtor expos, and we're attending more of the mortgage conferences so that we have more exposures.

6:20And we've invested the money from a marketing perspective to have a nice presence, to make sure that we're in an area we can share our product with many of the experts like yourself who dominate the conventional lending market to at least let you know that when your client doesn't fit your particular lending criteria, there might be an alternative. And we want to be that alternative lender. And you guys are that alternative lender. Now, I know that things have shifted now because interest rates are so high. And I know that you guys are starting to gain a lot of market share in the second space.

6:52Now, tell the audience now who's listening about private money second mortgages, because a lot of people who are actually listening, whether they're loan officers or borrowers themselves, they don't even know that private money seconds exist. So tell me about that and tell me like the qualified, the qualifying parameters for attaining a private money second mortgage. Well, I think that is probably one of the biggest reasons why our business has grown so dramatically in the last few years is that, as we all know, over the last few years, prior to maybe 2022, when rates were incredibly low and many homeowners out there refinanced their properties or were able to buy a property at all-time low interest rates in the twos and the threes, things have changed a bit.

7:40Interest rates are much higher than they were two or three years ago. And there were still lots of people out there who'd like to pull equity out of their property. But they have a reluctance to pay off that low-rate loan. I know myself. I have a mortgage on my property, and I'm at 2.5%. If I wanted working capital for some reason or I wanted to buy something else for an investment purpose, I would be hard-pressed to pay off that 2.5%, 2.75 % if I had to pull out a new first mortgage. That's below free. two and a half? It's almost. I mean, it's incredible. But if I came to you and you had to say, well, geez, the current market's six and a half, 699 or 7%, in some cases higher, that would be a hard pill for me and a lot of borrowers to swallow.

8:24So what we did is we changed our marketing emphasis and we said, hey, what if we focus more on second trustees that are at higher rates, but when you get to keep your first, and in many cases, that's the bigger portion of the financing at this very low and credible rate, while our rate is higher, let's look at the blended rate. So if you've got a million dollars at two and a half percent and you want 200 ,000 extra, and let's say that's a 12 percent, if you go a million at two and a half and 200 at 12, your blended rate is probably three and a half, maybe four percent. So we've marketed our efforts to APAPER lenders like eMortgage, and we said, hey, if you can't get that client to take out a new first, here's an alternative.

9:07Our rate's going to be higher, but let's, again, let's focus on the blended rate. And if the blended rate is considerably lower than what can be offered by getting a new first, that marketing approach has taken off. That's awesome. We found that a lot of A paper lenders have said, hey, you're right. And the upside is our loans are short-term loans. When rates readjust and they come back down, and you know that's going to happen. Rates are going to come back down. Well, great. You can pay our loan off. Most of our loans either have no prepayment penalty or there's no prepayment penalty after six months, which means you only got to keep the loan for six months.

9:44Now you can pay it off when rates get better. And it works out great for APAPER lenders like yourself because you get them this loan now, you get them what they need, you're going to get a refinance when rates get better and you're going to get them into a better product. That's right. Everybody wins. Yeah. So you're saying that your private money seconds are only 11 or 12 percent? That's in line with the regular home equity line of credits. They are. I mean, they do go higher. There are instances where they're in the 13s, and even sometimes maybe as high as 14 percent, but a vast majority of our seconds are 11.99 to 12.99.

10:16And again, the great part about private money is we don't require bank statements. We don't require tax returns. We don't require a minimum credit score. We make loans to foreign nationals, people who don't even have citizenship here. What we primarily require is that you have equity. So if you meet our loan to value requirement, you're 90 % to the finish line. What is the LTV requirement for a second? Right now, and our loan to values also fluctuate depending on the economy. So when people have more confidence in real estate and values, our loan to values will go up. There have been times when we've been as high as 80 % loan to value.

10:53Right now, we're at about 65 % loan to value. So if the loan to value, if you add up the debt on the property right now and the additional loan you want, add those together. If they're not more than 65 % of the appraised value, there's a good chance we can help you. That's really fascinating to me because I personally don't understand too much about the dynamic as to why you're willing to go up to 80 % when the economy is booming and why you're only willing to go up to 65%. Because the economy, consumer confidence, I mean, it's pretty good right now. Well, I think consumer confidence is the name of the game because what we do in our business is we fund all of our loans with our own capital and our own lines of credit.

11:34But what we do after funding them is we sell them off to private investors, people like you and me, people who want to buy mortgages as part of their investment portfolio, maybe in their 401k or their IRA or their own personal funds as a way of diversifying their estate. A lot of people have money in stocks and bonds and other investment vehicles. Trustees are quite popular. But we do find right now we are trying to get our investors who are somewhat conservative, because most of them are my age, old guys, old ladies, we're trying to get them to become more confident that values are starting to come back.

12:12Values are going up. And you know this probably better than me. They're actually going up in a lot of markets. But we're still we're pushing our investors to build their confidence back in that any adjustments in the market have taken place and they have nothing to fear. But that's a little bit of an uphill climb for us at the moment. And as we build that confidence, our loan to values will go up. So was that confidence at 80 percent pre-COVID? Yes, absolutely. I think COVID, you know, while the economy's recovered quite well since then, I think a lot of people still have some fears that there may be some underlying adjustments that may affect the market, that maybe things aren't back to normal, that maybe we can't count on.

12:57That steady appreciation we've seen over the last, you know, for the history of real estate. I mean, like you said, I've been doing this for almost five decades. I always tell people, well, I can't promise you real estate is going to go up every year, but I certainly can tell you that historically speaking, it always does. So that's what we deal with. Wow. I mean, listen, I can't imagine the things that you've seen in the last five decades, but that does lead me to my next question. How has the landscape of private money really changed over the last five decades? Well, it's changed in a lot of ways.

13:31I'm pretty old, Joe, so I'm going to go back to my roots here. When we first started out, where I first started out back in the 80s, a typical interest rate on a private money loan would be 15%. That would be a first trustee. And the typical loan origination fee would be anywhere from 10 to 20 points. That's 10 to 20 % of the loan amount. That's why they called it hard money back then. So the market has changed dramatically because now the loan origination fees have come down dramatically. Now a typical loan origination fee could be anywhere from two to two and a half points, which is two to two and a half percent of the loan amount.

14:07So the fees have become significantly lower than they used to be. And the interest rates, as we were talking about, what are the rates on seconds? Interest rates have come down dramatically as well. So the market's changed in that particular manner, and it's become more acceptable. Back when I started, again, hard money was truly hard money. We dealt primarily only with borrowers who had financial challenges, mostly people with terrible credit. Possibly they were in foreclosure. That was our primary clientele. Today, we deal with a lot of people with outstanding credit. It's not uncommon for me to have borrowers with credit scores in the 800s, doctors, engineers, school teachers, people who are pillars of their community, but need capital and are unable to obtain it due to some of the underwriting criteria that today's borrowers have to be able to meet.

15:02So because of that, I think private money has become more acceptable. It's a more acceptable alternative. Our rates are lower, our fees are lower, and we now cater to a broader spectrum of borrowers because now we're not just dealing with people with financial challenges, which is what hard money used to be. Now I'm dealing with people all the time who say, for instance, I'm doing a loan for a dentist right now. He wants to borrow extra half a million because he wants to expand his dental practice. And it's far easier for him to take a loan from me than it would be for him to get an SBA loan, for instance, which is a small business administrative loan.

15:39He could get a better rate there, but it might take him three to six months to get the loan done. My rate's going to be slightly higher. My cost will be slightly higher, but I can underwrite him in a few weeks and get his loan closed. So we become more acceptable for borrowers. We become more acceptable with real estate professionals. And I I think that's where the market's changed. We're more – we're not in that main lane yet for conventional financing, and we never will be, but we're more acceptable. You know, that's funny that you say acceptable because I feel like the stigma of hard money has, like, disappeared.

16:14There's not a big stigma because I think there's been a blend now of hard money and private money, and now private money is used for one-time construction loans or various business purpose loans. It's kind of like intertwined now. Private money, hard money, it's almost synonymous. You're absolutely correct. We deal with a lot of very sophisticated investors out there who, like you said, they need to get something. They want to buy a property. They want to fix and flip a property, and they need cash quickly. The benefit of private money is we get things done quickly. Typical turnaround is two weeks.

16:52And if they need cash quickly to possibly negotiate a better deal, maybe they can buy a property. There's an opportunity from a seller who says, if I can get cash in two weeks, I'll give you a better price. Well, if that price is such a good discount that it overcomes the additional cost of private money, well, why wouldn't they do it? So again, you get a lot of sophisticated investors and you get very sophisticated borrowers in a lot of cases as well. Like I was talking about that dentist who just said, hey, his broker says I can get the money from you in two weeks. I got to pay a little bit more, but I want to get my expansion going.

17:28I don't want to wait three months. So that's, again, why we become more mainstream, I think. Now, let me ask you this, because I'm sure you know about all the artificial intelligence happening now in the mortgage sector. How does Valcris intend to continue to adapt in this very technological, fintech-centric mortgage marketplace that we're entering into? Well, that's something that's probably better asked of my son-in-law, who's my vice president. He's in charge of all of our marketing efforts. I'm a little bit old school, and while I'm trying to become more averse in the social media and the marketing avenues that are out there and becoming more knowledgeable about artificial intelligence, it's certainly not my strength.

18:15And I'm somewhat embarrassed about that, Joe. And I'm leaving that to the younger bucks in my office. They are getting me up to speed. I've got a staff now of two people who focus entirely on our marketing efforts, excuse me, who are getting me up to date on other alternatives, Like, how are we going to use AI in our business? How is that going to make us more competitive? How is that going to get us more exposure? How is that going to help us do our job better? So I'm just kind of listening. And then we're also using consulting firms also. We have people who monitor our website, who monitor our social media platforms and our exposure through other marketing and advertising media.

18:58So I listen to them because I'm not the expert there. Ask me about underwriting. Ask me about funding loans and I do that all day long. So I focus on that and I hire people and have people on my staff who can do that better than I can. Yeah, that's good. You know, I know there's this, again, another stigma in hard money that it tends to be like old school and not adapting to change. And I know that that's, you know, you guys want to remain on the forefront because you're dominating and you're expanding. Are there any big expansion plans, state expansion plans? I know you guys are in eight states right now.

19:30So do you guys want to dominate more of the West, the East, or what's the plans there? Yeah, we are looking at some other states. What's important to us is because keeping in mind that all of the loans we fund, we sell off to private lenders. We look for states that are friendly to private money lending operations like ours. And every state in the union has different state laws and regulations. And some of those states are averse. For instance, the second mortgages. Let's take the state of Texas, for instance. And I'm not going to pick on Texas, but there's a lot of states like that. It's very difficult to do a second mortgage in those states.

20:07And in California, we call them trustees. In some states, their mortgage is the same thing. It's an instrument that shows evidence of the loan. We're trying to get more exposure in those states that are going to be private money lender friendly. And what that means is that the regulations aren't overwhelming to become licensed in those states. And because we're not prepared to have a brick-and-mortar office in every one of the states we want to get approved in, we're looking to states that don't require that physical presence. So we do have our target right now on three or four states, primarily more western, on the western part of the United States, generally because their laws are also more familiar and they're more similar to California laws as far as real estate is concerned.

20:56And we want to make sure any states we go into, we understand the laws, we understand the regulations, so we do things right. And some states, particularly some of the states on the East Coast, are pretty complicated. So that would probably be our last horizon before we consider those. But I do see some expansions into three, maybe four Western states. We've got our eye on one more East Coast state that's very private money friendly. So I do see that happening in the next 12 to 24 months. But we're keeping ourselves pretty busy in the eight states we're in right now. Yeah, and you guys are doing really, really well.

21:30Let me ask you this. What are some of the biggest challenges that you think private money has faced over the last five decades? Now, you don't have to go into the ones from the 70s or early 80s. I won't go back that far. Well, I think a part of it is what you said. It's the stigma. Everybody talked about we call it private money now. It's certainly a better description than what it used to be called, which is hard money. And the stigma has always been something that's taken time to overcome. Because when people think of hard money, they almost think of the guy on the street corner loaning you money at 2 % a day, 60 % a month.

22:09Think of like loan sharking. Exactly, like loan sharking. I've been called that on more than one occasion. And I try to remind people, hey, listen, we're not a loan shark here. We're not going to come knock on a borrower's door and ask where their payment is. and we don't have an enforcement agency. We're nothing like that. We are a family business. We don't run our business much different than a financial institution. We make loans to people who may not choose to go to a bank or to another conventional financial institution or just can't meet their underwriting guidelines. But the way we structure our loan is almost identical.

22:46It's a note that explains the payments and the rate, and it's a deed of trust, which is the same thing you would get at a bank. So overcoming, I think, that stigma over the years has been one of our biggest challenges. Another big challenge is that oftentimes the laws change. And when the laws change, you have to be able to adapt. You've got to be a chameleon. When you change colors, you've got to adapt to your environment. And the laws have become more and more difficult, probably for yourself as well in A-paper lending. Compliance is always a battle. It's always a battle. It's a lot of time.

23:22I know like the CFPB doesn't like private money, right? And the regulators don't like private money. Because what happens is every once in a while, there's a bad apple. And when that bad apple occurs, they think the entire industry is that way. The bottom line is a company like ours has been around since 1975. We're under incredible scrutiny. And part of it is because we use private money to fund our loans. So we're using mom and pop investors to buy our deals. And because of that, they have some additional regulations and requirements because they're trying to protect the consumer. But some of the laws, they get over the top.

23:59And that's probably something you see in conventional finance. You kind of scratch your head and you go, well, who is that regulation really protecting? Is it protecting the borrower? Is it protecting the lender? Why? So dealing with the rules, the regulations, the new compliance is always a challenge. We have to keep attorneys almost on contingency to ask them, well, we understand the state of California assembly is looking at a new bill. What does that mean to our business? Because we have to be incredibly sensitive to make sure we cross every T and dot every I. Because as a private money lender, too, we're still a target.

24:40People do consider us, well, why did you make a loan to somebody who had poor credit? and we're kind of like, well, because why shouldn't they have every opportunity to borrow on their asset that somebody with good credit? Why should they be punished because they had an unfortunate circumstance in their life that may have been unforeseen, maybe a medical emergency, maybe a loss of a family member, maybe unemployment? That caused them a tremendous speed bump in their financial section. Why should they be punished? Why shouldn't we make them a loan? If they've turned over a new leaf, life has changed, why shouldn't they be given a second chance?

25:15But we get challenged on that all the time. So dealing with compliance, dealing with regulators is a big part of our challenge. And again, educating APAPER lenders and the consumers that we're not a loan shark. We're an alternative. And like I said earlier, our rates are so much lower than what they used to be. In fact, for a time there, when we were doing first mortgages at 7.5, 799, there was a time when non-QM rates were higher than our rates. Wow. So we're not always out of line with non-QM loans and APAPER loans. We're typically going to be higher. But there are times where we're almost battling neck and neck.

25:53You are neck and neck for sure on the seconds. And then on first, you're neck and neck with non-QM as well. We do find right now we hear that same thing on the streets. And that's why we're out promoting ourselves more and more with large lending operations like eMortgage. We're trying to tell people, hey, listen, if you can't get your client into that product for whatever reason, if they've got equity, don't put them in the trash can. Don't give up on that yet. Give me a call. The great thing about working with myself and our company is I can get you an answer in a few hours. And when I give you an answer, it's something you can rely upon.