JF1547: Here’s How Commercial Lenders Are Looking At You with Leslie Smith
Leslie has over 20 years of experience in the financial services industry. She works with commercial investors and helps them get their deals funded. She’ll get creative and they will finance in situations where a lot of banks will not. Hear what lenders like Silver Hill are looking for in their clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Leslie Smith Real Estate Background:
- Managing Director for Commercial Direct, a consumer facing direct lender
- Led the launch of Silver Hill Funding in 2016
- Experienced financial services professional and thought leader with more than 20 years in the industry
- Based in Coral Gables, FL
- Say hi to her at email@example.com
- Best Ever Book: Something in the Water
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Leslie Smith. How are you doing, Leslie?
Leslie Smith: I’m doing great, thanks.
Joe Fairless: Well, I’m glad to hear it, and welcome to the show. A little bit about Leslie – she is the managing director for Commercial Direct, which is a consumer-facing direct lender. She led the launch of Silver Hill Funding in 2016, and she is an experienced financial services professional and thought leader, and has been one for more than 20 years. Based in Coral Gables, Florida. With that being said, Leslie, will you give the Best Ever listeners a little bit more about your background and your current focus?
Leslie Smith: Sure. I’ve been in financial services for most of my career, with originations in particular; I came into commercial originations about 12 years ago. It’s had different flavors, given how lending has changed over the last 12 months, but still, strictly in the commercial space.
Personally, I’ve been a banker, and now an originator at a non-bank institution, and it’s quite different and interesting… Both interesting, but still very different.
Joe Fairless: What’s different about the two?
Leslie Smith: Well, when you’re thinking about a bank – it has its own rules in a box; it’s kind of pre-determined for you, for many different reasons, whether it’s the risk tolerance of the bank, whether it’s the regulations that really kind of shape the lending decisions…
For a non-bank lender, you have a little more flexibility. There are still rules that we have to abide by and regulations, but less regulatory oversight, so therefore it gives you flexibility to change more quickly, adapt to what the market needs and wants more quickly… And that’s generally been my experience – that speed to entry into the market, and flexibility to be much more creative on the lending side.
Joe Fairless: What are some specific examples of where you have more flexibility?
Leslie Smith: For my platform, we do small balance commercial loans nationally, and where we see flexibility, for example, is a lot of our customers come to us for cash-out. They’re looking to refi their current commercial property for cash-out, and the reasons for using that – there’s many different reasons, but the main reason is either to acquire another property, or reinvest in their own business and improve it.
From a banking perspective, that’s rare, for someone on the small balance side to get cash… But we’ve got uncomfortable from a due diligence credit perspective to be able to offer cash-out to the small borrowers… And what I mean by small – let me step back and say that our average loan size is about $350,000, so we are talking small. Our range is 250k to 5 million, but the core of our small business owner borrower is in that 350k range.
Joe Fairless: Got it. And what is a typical project that a customer has that you lend on or help with that cash-out refi?
Leslie Smith: From an investor perspective, they’re gonna buy another property, depending on where they are in their experience; we see a range of folks that have already bought single-family homes and have a nice, small portfolio, and then they’re kind of migrating into more multifamily properties… So we see that kind of cash-out, to invest in another property.
Another would be purchasing more equipment. We’ve seen folks trying to expand their businesses and buying additional equipment, or even just improving the look and feel of their current property; especially from a restaurant/bar perspective, there’s a lot of competition, so people wanna do a refresh. So those are some of the reasons they use the cash-out.
Joe Fairless: With a bar owner versus an apartment building owner, what are the different nuances of the underwriting process?
Leslie Smith: At the core of it is really how do you really look at their income. A lot of our borrowers have really not fully documented their income, and that’s where banks are just not comfortable lending. What we’ve done is figured out a way to find that income. It’s not always through tax returns [unintelligible [00:06:55].26] Bank statements. We can analyze a couple of full years of bank statements, and you get a lot more about the health of that business in that way. That’s one way. You also leverage a lot of third-party data to assess what’s happening in that business.
On the smaller side it’s slightly more difficult, because there aren’t that many data points when you have an auto park place or a small little retail strip mall, but still, you could be surprised how much you find out about someone and their business by simply googling.
Again, you have to be creative, you have to use non-traditional means to figure out whether this person is a good borrower and they’re gonna repay.
Joe Fairless: And earlier you said during the due diligence you look — credit is one thing, and then due diligence that you do on them is another thing… From a credit perspective, what do you look for?
Leslie Smith: We’re looking for a minimum score of 650 to start, as a FICO score.
Joe Fairless: What if it’s 625 but they’ve got a really good story.
Leslie Smith: I’ve done that. The story is important. When you’re talking about someone that’s asking for a $350,000 loan, that’s gonna be storied. If someone has the ability to go to a bank and get a loan, they’re gonna get that loan, especially if they have a local banking relationship. But the story is really important, whether it’s a 700 credit score or 625, there’s gonna be a story, with our borrowers in particular. And a lot of times that 625 – it may be a one-time hit, like maybe they maxed out their credit card for one month… And we see that. We see that because some people run their businesses that way. Particularly if you refurbish homes, you run up a bill of Home Depot, but you pay it down… And we just kind of take a second look at what affected that credit score.
The story to me is very important. It tells a lot more about what we’re looking on on paper, and actually brings it together. And frankly, as a national lender doing this out of Coral Gables, we’re just looking to see whether the documentation, the story and what we find from third-party sources aligns. That’s what we’re looking for. So for me, storied loans are what I like, and what we see every day.
Joe Fairless: What type of terms are typical for one of your customers?
Leslie Smith: A typical term for us is a 5-year term, 30-year amortization. Typically the loan-to-value is in the 68%-70%.
Joe Fairless: Got it. And when you come across a client and it just doesn’t work out, what’s the most common reason why it just doesn’t work out?
Leslie Smith: Typically for us it’s an unstabilized property. We’re the type of lender that’s looking for a higher occupancy; that’s one. The second piece is really that the story doesn’t align. We find some really significant holes in what they’re telling us and what’s really happening as we complete our due diligence. The third is real estate value.
Joe Fairless: Will you elaborate on real estate value?
Leslie Smith: Typically, when we’re refying, a lot of times people feel that their property is worth a lot more than it actually is. In addition, you have a lot of investors that have put in a lot of money into a serious investment into a property and refurbishing it, and a lot of times they’re new to that, and they think that for every dollar that you invest, it increases the value, and it doesn’t do that; it doesn’t translate into that. There are many other factors that go into that value.
Joe Fairless: What are some renovations that an owner did where they thought it would increase the value, or they thought it would increase value more than what you thought? I’m curious what those renovations were.
Leslie Smith: Specifically, I would say a lot of times they are really focused on the quality – more expensive tiles, and expensive wood fixtures, and cabinetry, and it’s good quality stuff, but if it’s just an investment property and they’re not living there, they need to think about do they really need the most expensive tile? Could they just not necessarily remodel the entire bathroom, but just fix it, and make it look presentable to rent? I think that’s where a newer investor really is not aware. Also, they don’t necessarily hire the right contractors, and that bill can increase that overall cost of that renovation.
Joe Fairless: Yeah, right. So if someone else could have done the same exact work, paid half as much, and both parties got the same increased valuation, but one party paid twice as much as the other.
Leslie Smith: Yeah. I mean, I think a success story there is when you have an investor that already has partnerships and established people they use. They have a contractor, they have people that do specifics, and they as a pod continue on to different investments… And you kind of formulate a strategy by which “This is what it’s gonna cost me to do this, and these are my people, and my timelines have been pretty much consistent.” That’s when you know someone’s a little bit more experienced. They’ve probably made a mistake or two and they’ve learned from it, and now they have a method by doing the investment that makes sense.
Joe Fairless: Okay. Hypothetical scenario – I’ve got a 50-unit apartment building I’m gonna want to do a cash-out refinance… What would be the reason why I’d go to you versus a community bank?
Leslie Smith: A couple of reasons. If you’re gonna personally guarantee that loan, as most banks would want, are you comfortable with that personal guarantee? Are you talking about purchase only, or refi?
Joe Fairless: We’ll do refi.
Leslie Smith: Okay. So refi – number one, the bank probably won’t give you the cash that you want. Number two, they’re probably going to look at that real estate — because I’m not doing class A real estate. If you look at some of my properties, they’re not as pretty when you take a picture of them. So that’s another reason you would come here. If your property is not in the best neighborhood and it is not fully occupied, you’re probably gonna come to me. If there are concerns around environmental, you’re gonna come to me. If you want to close a loan really quickly – our average close is about 45 days – you’re gonna come to me.
Joe Fairless: Got it. What about on a purchase? If it’s not a refinance, but if it’s a purchase? What would be any differences or new things that you’d mention?
Leslie Smith: It’s probably the high LTV. We go up to 80%. So if you’re purchasing and you only have to put 20%, it makes a big difference.
Joe Fairless: Okay. And did I hear you correctly that you don’t require a personal guarantee?
Leslie Smith: In certain scenarios, your pricing is better if you do personal guarantee. If you do a personal guarantee, then we’re adjusting your overall rate to less risk because you’re personally guaranteeing. If you’re non-recourse, then the pricing looks different. So there are both options.
Joe Fairless: Will you give a hypothetical scenario for what the difference would be between guaranteeing it and not guaranteeing it?
Leslie Smith: I think you see a non-guarantee when you’re an investor, and this is not something you’re willing to put your personal net worth into…
Joe Fairless: Sorry, what I meant to ask was from your side, the difference in terms between the guarantee versus non-guarantee – what is a difference in terms typically between those two?
Leslie Smith: From an LTV perspective, you’re not gonna get to 80% of you’re not guaranteeing the loan. Your interest rate will probably look more if you’re not guaranteeing the loan, in the eights to nines, and if you’re guaranteeing the loan, you’re looking six to seven.
Joe Fairless: What’s the LTV usually?
Leslie Smith: For a guarantee, or a non-guarantee?
Joe Fairless: Guarantee you said it was around 80%, so for a non-guarantee.
Leslie Smith: Probably in the sixties.
Joe Fairless: Sixties… So for someone listening who has not been through this process, and they hear you say 8%-9% and 60% loan-to-value, they’re like “Oh, my gosh… Those 8%-9% interest rates… That’s twice as much as what I see when I search interest rates right now on Google.” What’s your response?
Leslie Smith: A couple things. Interest rates continue to increase. We’re in a very different place than we were last year at this time, generally… And also, we’re taking on risk. We’re taking on risk on someone probably — that profile of that borrower, their credit score is not the best maybe, the property probably is not in the best location, or has some sort of issue with it, where a traditional bank where they would give you that 4%-5% would give… So the pricing reflects what your scenario is, and the risk that the lender is taking. That’s really what it is.
Particularly if you’re thinking about doing a cash-out, if you’re gonna do unsecured, you’re gonna do double digits. If you’re gonna get a working capital online with any of the OnDecks of the world, that’s gonna be double digits and that’s gonna be a really harsh loan. We’re talking about using your current real estate, getting a loan that makes sense, and it’s not going to come due in 18 months. So it’s a couple different reasons, but literally the 8%-9% and 60% is just the risk that we’re taking with the property and the borrowers on the loan.
Joe Fairless: Got it. What’s your best real estate investing advice ever?
Leslie Smith: Know your objectives. You really have to have a plan, because I think that if you think it’s a good idea but you don’t really know what you want out of it, that really affects who you choose to work with and who your lender ultimately will be. It’s really important for you to know what you’d like out of that investment. If it’s short-term or long-term, then there are different lenders out there, and different costs to that loan, so it’s really important that you really know what you’re looking for.
Joe Fairless: Short-term or long-term, so thinking through how long we want to hold the property… What are some other questions we should ask ourselves when determining those objectives?
Leslie Smith: I would say also is this just gonna be a one-off, or are you building a nest egg for yourself, and are you building long-time wealth with this? That’s different, as well. I think that we see a lot of folks that really are thinking about their long-term wealth, and not just kind of a fix and flip and we’re done… So you have to kind of step back and consider that.
I would say don’t limit your investment property to where you live; think about maybe another area that is up and coming… So understand what’s happening in the neighborhoods, and maybe invest outside of where you live… Just in case anything happens, at least your particular property is in another part of the city that’s thriving if where you live is not.
Diversify. Don’t necessarily always buy in the same neighborhood or the same property type. Thinking about whether you could align yourself – if it’s a nest egg type of scenario – with a property manager to help you manage those properties effectively. I think that was maybe the most important…
Joe Fairless: If someone calls you up and they say “Hey, I’ve got a deal I want to do a refinance on”, what are some of the questions that you will ask during that first phone conversation?
Leslie Smith: Credit score, number one. What is your credit score right now? How long have you owned the property? That matters, for us particularly. If you have someone that has kept their property and their business through the recession, that speaks volumes. We ask also are they current on their personal home mortgage? That’s very telling to us from a consumer behavior perspective. If you’re current on your mortgage, that says something about you as a borrower.
We also talk about “Can you validate your income?”, because that then takes us to different types of conversations… Because we have a Full Doc program where you have bank statements, and tax returns – your more traditional underwrite… And then you have a Lighter Doc version, as we talked about earlier, which is our bank statement program.
So those are the questions that we ask, so then we can counsel as to where would be the best program to place them… Or from the beginning we could say “Well, maybe we won’t be able to do it.” Maybe their credit score is 500 and we won’t be able to do that loan, but at least those qualifiers upfront help us understand what they’re trying to do.
Joe Fairless: If it’s a Lite Doc program where you verify income through bank statements, does that mean they will have less favorable terms than if it was a Full Doc program?
Leslie Smith: Probably, and that’s where we’ll probably be limiting LTV.
Joe Fairless: Cool. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Leslie Smith: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Leslie Smith: Oh, my goodness… I’m a listener now. I’ve actually really adopted Audible very much. So I would say the last that I listened to that was pretty good was “Something in the Water.” It’s a murder-mystery. It’s what I like.
Joe Fairless: Sounds intriguing. What’s the best ever challenge you’ve solved in over 20 years of being in the financial services?
Leslie Smith: Hiring the right people. Hire slowly, fire quickly. Without a team that’s strong and that’s agile it’s really difficult to build a business.
Joe Fairless: Best ever way you like to give back?
Leslie Smith: I give back to my local university. I like to mentor a lot, whether it’s within our own organization – I participate in mentoring – and also within my local university… Because I think when people see a person that went to their school, graduated, and now their career evolved in a very non-traditional way, I think it helps people feel less about not becoming a doctor or a lawyer, or something that’s much more formed and shaped… That, I think, is the best way. I’ve also been able to recruit really great people that way over the years.
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Leslie Smith: Well, you can find us at CommercialDirect.com, and you can find me through LinkedIn as well.
Joe Fairless: Leslie, thank you so much for being on the show, talking about the different types of loans that you do, how you qualify your customers, and the pros and cons of the loans, as well as the getting into specifics of the due diligence that you look at. It’s important that we know that, as borrowers, so that we know what to have prepared whenever we speak to a lender… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Leslie Smith: Thank you, it was a great experience.