Welcome to the 12th episode of the #AskAPrivateLender Podcast brought to you by Mortgage Automator. This episode took us to Nanaimo, BC with our guest Randy Forbes, the owner of the 460 Group of Companies.

Randy has been running successful MICs since the late ’90s and had a lot of great lessons to share. We talked about 460’s approach to lending, how Randy started in the business, the current state of the market in Nanaimo, and much more!

Listen, watch, or read the interview below. And stay tuned for more episodes coming up!

 

Lawrence: For those of you who are unfamiliar with Randy, a couple of key points to know. The guy’s been in the business for a really long time. He’s been working with MICs, for the last 20 years. 460 started about seven years ago. 

Just to have an understanding of their growth, they’ve been doubling pretty much every single year since it started. So number one, congratulations on that. That’s an extraordinary feat. 

But I think it just goes to show that private mortgages, they’re here to stay, and it’s only growing year after year after year, and it’s commonplace in the market today, right? Maybe not so much when you started out, and maybe you can get into that from when you started out. How did you get into the business? Because when you started 20 years ago, it wasn’t a really common thing at that point. Right?

Randy: Yeah. It’s actually quite funny because I was a shareholder general manager of a real estate operation we had called Coast Realty Group. In the early days, we had like 30 salespeople. But as time went by, we got up to 250 salespeople, and we had 12 offices on the coast of the island and the mainland. It used to drive me nuts as the broker general manager of the real estate company, how many realtors had a lot of success in their business and at the end of the day had nothing to show for it.

So I knew a guy over in the mainland that I worked with who had a MIC, and I said, “Well, what’s that about?” So he told me about it. We started an internal MIC, and we called it CRG (Coast Realty Group) MIC. It was for our salespeople and employees. That was back in the old Northwest exemption days. So you could have as many as 50 people in your MIC without doing all the audit statements and a lot of the stuff you have to do today.

It was a recruitment and a retention tool. No interest in growing it to be a big company. It was a recruiting and retention tool for our salespeople. If you worked for us, you could invest in it. If you left us and went to another job, whether you were a salesperson or a staff, you had to turn your shares in, and at the end of the day, we had a lot every year. So one or two people would leave the company. We would put people’s names who wanted to invest in into a hat, and they would get picked out. Our average return back in the late 1990s was about 10%. So it was a really good program.

Funny enough, the more successful it became, we had no interest in growth, it was really about return for our salespeople. So we would limit how many people. Some years, we wouldn’t even take any more money because we didn’t want to find ourselves with more money in than we could put out again.

As the real estate company grew, it got to be a pain with the Northwest exemption with no more than 49 shareholders. People would put their name in the lottery, and we’d have 40 or 50 people for one or two spots. The salespeople, the top people often would call me and say, “Well, look, put my name.” I go, “Well, that’s not how it works.” It’s a random draw. So near the end, as it got bigger and more popular, it actually became a pain because top salespeople go, “Well, you’ve got to let me in, or I’m going to leave”.

Then in 2012, I decided to kind of retire. So I resigned from my job. I was a shareholder of the company, and I ran the MIC for another year, and then I got hassled into starting a new company by a bunch of people, and we started 460. I resigned from running the CRG MIC, and we started what this is, the 460 MIC. It is a public MIC, and it’s meant for shareholders from anywhere. It’s not internal, and it’s not a recruitment retention tool. Although many of our salespeople on staff have money in our name.

Lawrence: Can you explain what does 460 mean?

Randy: It’s the distance from the tip of the island in the South to the tip of the island in the North. 

Lawrence: You guys have been growing rapidly year after year. What kind of deals does 460 do? Are you guys mainly BC? Are you all over Canada? What’s your wheelhouse?

Randy: Right now, we’re just in BC. We found lots of businesses in BC, and it’s a little bit, like I said, in the early days, you don’t want to take in more money than you can put out. We have been non-aggressive about. We have no investment seminars. We’re not out there trying to sell investments. So we don’t go out and try and find investors. They come to us because they’ve heard about us.

That’s a good way to go. We have doubled every year. But just by people that know us or know of us or maybe through our salespeople, they sell a house, they’re looking for a place to invest, so all that’s been really simple. We anticipate at some point going farther across Canada, but at this point, I think our portfolio is about 17 million right now, and it’s growing consistently, and we’ve always got all our money out. As we get more money, we’re going to look for more places. But right now, we’re just in BC.

Lawrence: When I look at successful lending businesses, they kind of stay in the areas that they know. When you start branching out and you don’t know the areas, and you don’t really know what’s going on, that’s when you can get into some trouble.

Randy: Yeah. No question. I was a real estate broker. So I know realtors from all over the province. I may or may not agree with that, but some appraisers aren’t really as knowledgeable on values. Some get a little shaky, but we’ll call up realtors in the area and say, “Can you take a drive-by this house or check out some local deals and give us an idea on whether this appraisal is the right thing.” So we like that secondary comfort on most of our files. You find a great deal of discrepancy.

Lawrence: When you are responsible for the money, right, when it’s your business, and you’re bringing investors, and you know the investors, sometimes it’s friends, it’s family, it’s people you’ve created friendships with over the years, you got to do more than just look at a number on a piece of paper from a guy. Whether he’s saying it’s worth 1,000,000 or 800,000, I mean, that’s a big difference to us in this business.

Joseph: I think, especially on an equity basis, which is where most privates tend to lend on, it’s not serviceability credit. Sometimes dire situations come up. People need money quickly. You absolutely need to rely on that equity to make the right decision so you don’t get burned.

Randy: Yes, absolutely. The discrepancy, like you say, it may seem like it’s a little bit to appraiser. But to us, we like the 70% maximum loan-to-value rate right now. That’s kind of where we’re hanging around. Well, if the appraisal was a hundred grand more and you went based on that, your loan-to-value could be up in that 75-80%, and now you’re into a little riskier portfolio than we like.

Lawrence: You’re not getting the return that you should at that exposure as well. So it’s one thing to go there, as long as you’re getting what you’re supposed to get for that type of a deal, right? 

Do you find yourself getting deals because you have that real estate company? Do you have some of your agents coming to you saying, “Hey, I have a purchaser, maybe a deal fell through the bank, and we got to get the private funds so that they could solidify that deal and it doesn’t fall apart”?

Randy: Mostly what we do, we decided about two years ago that we won’t do any business directly. We deal with brokers all the time. I get a number of people who ask me for direct lending. So if our realtors have somebody who wants a mortgage, we’ll send them to a broker. Brokers deal with us. We deal with brokers. I’ve had people call me directly. I had a call the other day, and I said, “Look, here’s the deal. My job is to get as much return for our investors as possible, and your plan for you, for the money, is to get the best deal possible. How can I serve you by you trying to get the lowest rate and me trying to get the highest rate?”

This is a conversation that I had, and I have my broker’s license. But the difference between realtors and agency and brokers and agency is the gap that needs to be closed for brokers. A broker should be working for the borrower. Or if he’s working for the lender, tell the borrower. So I like the idea where I say to the borrower, “Go to your broker. Tell him that he’s working for you, and you want the best deal possible. If he negotiates with me, he might get a better deal than I would give you.” 

Joseph: It’s fair to say that in this industry, the business you are getting is relationship-based. There are guys that are coming to you. They know who you are. They know how you work. They know they can count on you. If you say you’re going to do something, you’re going to do it. You’re not going to let them down last minute. I think that’s important. I think there should be a lot of emphasis on the broker having that relationship with you and then being able to bring their clients to lenders like yourself for those specific reasons.

Randy: We tell the broker that too. If we get a direct call, reasonably often, and I’ll give them a list of brokers that deal with us and say, “Call any one of these guys or girls and have them put your application on our system with Mortgage Automator and Filogix,” and we get it done that way.

Joseph: It eliminates the conflict of interest.

Randy: It does. There’s no question. There’s a conflict for a borrower to be lending directly without a third-party helping the borrower decide.

Lawrence: So you’re in BC. You’re lending in BC. What kind of deals? Is it residential construction? How big are your loans typically?

Randy: Well, it’s across the board, really. So residential construction, commercial, all three of those, first and second, both of those. Equity is our main ingredient, and covenant is the second ingredient, and funds available is the third ingredient. So our loans will be anywhere across the board. We have a certain percentage of our portfolio that we’ll put in construction, single-family. We’ve done a couple of small developments. But they’re all over the place. 

The reason people need to use private lenders is amazing. I was telling a couple of guys I golf with, in the old days, a badge of honor was paying off your house, right? But it’s not such a big deal anymore. So we find a lot of people that have retired and done in the badge of honor. So you paid off your house. Now they find their living expenses haven’t changed as much as they find it, and all they got is a clear title house and $50,000 in credit card debt at 24%. So we get a lot of that. 

People are looking for money to get their credit back in shape. All our mortgages are one-year terms, and after three months they’re open to the payout. So we’re not going to hold anybody to the loan.

Basically across our company, we want the same integrity across the real estate side. We own a big commercial company as well. We think that integrity has got to run across the whole group of companies. So we don’t want to hold you to the debt that if you can get a better rate from the bank, go ahead and move it. Lots of people borrow money at the borrow rate or at our rate.

Joseph: So you’re not afraid of turning over. Because I guess from your perspective, you’re going to charge a lender fee. You’re going to make your rates. If they pay you back, there’s going to be another deal for you to replace that money with, charge another fee. 

In some ways, it’s a benefit to the borrower because you’re literally not tying them down for a year, which a lot of privates might do that. For you, it’s the benefit because you’re turning your money year over year, over and over, even though you’re paying investors 10 or nine, whatever you’re paying them today, doesn’t matter. You’re able to make more fees on that same 17 million. You might be able to put out $34 million in a year with a $17 million book.

Randy: You could easily do that, and that’s exactly what happened. So we didn’t want to tie the people up. I champion people who get their credit back in shape and go to the bank. The trouble is many of those people just don’t get it. Once they understood money better, they’d be a lot smarter. I give advice to some extent. We aren’t going to hold anybody to a debt. Our returns are increased by a lender fee over a three month period relative to the annual return. If you understand money, so we’re happy. We’re happy for the people. We’re happy for us to put the money back on you.

Lawrence: Are you guys seeing a rate compression right now where borrowers are paying less, investors are making less in the BC area?

Randy: Two things happened. When COVID hit back in March, there was a, “Well, what’s going to happen? How is everything else going to react?” We hunkered down with my directors and said, “What’s going to happen in the real estate market? Is our equity position going to be eroded?”

So we held out about 30% of our portfolio. We kept in GIC at 0.09% of whatever it was and left it in there for about, April, May, June, July, about four or five months. We had a lower return for our investors, but in a conservative, and I think at the end of the day, a smart way. So come about August-September, there was a lot of cash flowing around with the mixer across the province. So there was a bit of a compression in lending rates to a great extent. You might’ve given a point less or maybe a half a point on the lender fee. But it’s all back and going great. We have little money left over, and our rates are back up.

Lawrence: COVID is a once in a lifetime situation. It’s not like you can point back to another point in your life to say real estate prices were fine. I mean, you can’t compare it to anything. So I think yeah, to sit for a few months and make sure that everything is okay, definitely, I would say is a good idea.

Joseph: A lot of the lenders would call me and say, “What are your other clients doing during COVID?” I would say like, “Well, these guys, they’re gunslingers. They’re going to keep going.” Some of them did really well because when everyone stopped, their cost of funds went straight through the roof, or sort of they were charging much higher rates because they were the only players on the street for a few months. A lot of guys sat back, like yourself and a few others. My perspective would be to take a safer approach. 

By the way, in Toronto, for example, we had a V-shape recovery. We had the prices drop and then, within a few months, they were back up. But for a