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 all you know, it could have easily gone the other way.
Lawrence: You have to take the safe approach. That’s my view because this is a safe investment vehicle. This isn’t a vehicle where you’re trying to get rich overnight, right? It’s ‘slow and steady wins the race’. So if you slow it down a little bit, and then you pick it back up, it’s still a slow and steady wins the race. If you try and get there and something goes wrong, all of those returns are wiped out. That’s my view.
Randy: I think every MIC runs differently. Ours is a bit conservative. We have a target. We like to have a return for our investors somewhere between 7% and 9%. For the fiscal year ending August 31st, we returned just over 7%. But we’ve been averaging over eight. So we lost about 1% for our investors. But as a board of directors, we said, “You think people would rather have a zero return or a negative return and the risk, or do you think they’d rather take that conservative?” We thought 6% or 8%. We ended up at seven. So that was a conscious decision by my board of directors. We discussed quite a bit.
Lawrence: I’d be shocked if you got phone calls from your investors saying, “What happened to that 1%?”
Randy: We just did our drips out toward people and advised them better returns, and we got more comments this year about how happy people were than ever before.
Lawrence: You were talking about how you sometimes give borrowers advice, right, on money management maybe, things that you know. You deal with investors. I’m sure you’ve dealt with some extremely wealthy people over the years, some of which may invest with you. What’s the best money-related advice that you’ve picked up along the way that you think about every now and again?
Randy: Well, everybody’s in a different position. I think the first thing you have to do is understand your position. If you’re a multi-billionaire, it doesn’t really matter. If you got money, it doesn’t matter. If you’re trying to make your way to retirement, then you really got to understand your own position. I think that’s the best advice I can give to somebody. I mean, we talked about credit and making sure you pay your bills.
When I was 30 years old, running a real estate company, and somebody said, “Gee, if you can get half a million dollars in your RRSP, and you get a 12% return, that’s 60 grand a year. You can live a pretty good lifestyle, and you had your CPP and OAS. That’s great.” If you were lucky enough or somehow managed to take the risk and run your investments up to a million dollars, at 12%, that’s 120 grand a year. Now, it’s a great lifestyle. You can do whatever you want.
That was yesterday’s information. Today’s information says if you want a secure investment at a bank, I think I just did a GSE for 0.8%. Well, 0.8% return on even a million dollars is eight grand. So you can’t live with real nice lifestyle at eight grand a year, right?
So I think that’s the best advice for anybody as an investor, as a borrower—understand today’s metrics because they’re totally different than they were five years ago, and way, way different than when I was your guys’ age.
If you’re going to do that, you want to get a return like 7% or 8%, like our MIC is. There are some risks to it. The exempt market products across the board and across Canada now are all lumped into one big bag, and they say exempt market products that are risky, and you got to be careful.
The way we run ours, don’t feel that it’s risky as others are. So, understand the MIC you’re looking at and the philosophy behind it. As an investor in a board, just check around. Get some good advice from somebody who’s working for you, and the banks aren’t necessarily working for you. Right?
Joseph: I think a lot of people put too much emphasis on the front-end APR. What is it costing me to borrow this money at closing? But I started saying to people just in my close conversations, don’t look at the front end APR anymore. Look at what it costs you when you discharge that mortgage.
Randy: I’m a fan of mortgage brokers, they should give you that good advice, and I think they will. I’m not against banks, but if you go into a bank, they’ve got one product, and it’s theirs. I think we have a few more options on it. So again, if you’re a borrower, today’s best information is to get a myriad of advice based on your metrics, and the old ways are no more. There’s a new way up there that you can probably make a better deal and a more informed deal.
Lawrence: Hey, Joe, remember when we were at that party a few years back for one of the top banks, I can’t remember which one it was, but there were those investment guys there?
Joseph: Yeah, they were kind of bragging about how they get millions and millions of dollars from people to invest in their products. They make less than 1% return for them, and the fees they charge are more than the return. So these people are losing money year after year, and they didn’t have an issue with it, because it’s a big brand name. People call them. They reach out, “Hey, I’m calling from this bank or that bank. Invest your money with us.” It’s just they don’t care.
My jaw dropped because just talking to them, they were like, “Even if we lose money, they’re still going to pay us fees, and they don’t know where else to go. They don’t understand. Their families have been dealing with this generational wealth, millions and millions of dollars.” They’re like, “As long as we don’t really lose them money, they’re happy to keep it with us, and we’re making crazy commissions.” They’re bragging almost about the commissions. It kind of almost resembled… Did you ever watch The Big Short, Randy?
Randy: I read the book, but I didn’t see it.
Joseph: Okay. So there’s this one part, this one scene where they go around, and they’re talking to these mortgage brokers. They were bragging about their commissions on all the crappy deals they put their clients into on those variable mortgages that go up a year later but qualify on the discounted rate. It’s kind of resembled that attitude. These bankers don’t care about their consumer or their clients, and it’s all about fees and just literally just making money, putting into their pockets.
Randy: Well, here’s a good example, I mentioned it earlier. Maybe 10% of our applications are older people with equity in their house that don’t qualify for bank rates, which are about 1.5%-2% right now. But they can borrow money on a credit card till the cows come home. They don’t have to qualify. They just send them in the mail, so credit card debts as high as $120,000, and the banks are happy to lend money at 24%.
And this is the same guy. I mean, it might be a guy in the next office. As a consumer of debt or consumer of credit, you should understand, right, banks are happy to charge 24%. You don’t even have to qualify.
Joseph: It’s actually really interesting because with the new B21 or B20 guidelines, you cannot borrow money. You’ve got to go through this whole step to make sure you can service this debt at these rates. But then people have $10,000, $15,000, $20,000 credit card limits at 24%, and they don’t ask you a question. You have a pulse, you have a set number. Great. Here’s $24,000 that you can go spend or whatever you want, and we don’t even care.
Randy: We’ll lend it out probably in that 10%-12% range, which was half the rate, depending on the credit card. It’s an equity position. So there’s a place for us. But the borrower, they’re responsible. They can fix it. They can fix it real easy. But if they understand it, maybe they’ll fix it. It drove me nuts. It still does to a certain extent.
Joseph: Well, the other issue is, and I remember this back in the day, and I’m pretty sure it’s still the same way today. It’s a 3% minimum payment on those balances, right? So you owe 100 grand, that’s 3Gs a month. You borrow money from Randy, it’s 750$-800$ a month. With the cashflow savings, you can pay all that debt off in a few years.
Randy: It’s the truth, and it’s why companies like ours are there. We’re not out chasing people down to lend them money. We’re saying, “If you got a problem, the banks won’t lend to it at their posted rates or the B20 qualifying rates, we can fix that.” There’s enough people in Canada, particularly in BC for us that need that kind of money short term, and that’s why it’s growing. I don’t know the numbers now, but I know I’m a member of the BC MIC Managers Association, and there’s a lot of capital out there where you do investment companies. Now, it’s growing quite rapidly.
Lawrence: Randy, you’ve been around MICs for quite a while now. What would you say is the most memorable deal that you ever did?
Randy: This was one I used to lend directly. So this is four or five years ago. One of my salespeople had a lady who wanted to buy a waterfront condo, and I’m trying to remember the numbers, but I think it was like $215K or $225K, and she was getting divorced, and she had $100,000 coming from the separation, and she had $100,000 coming from an inheritance, and they would be there within three or four months. She was on a pension, and she went to the bank, and of course the pension didn’t cover the debt to borrow the money. So she had $100,000 down, was going to pay it off in three months.
So I said, “Bring somebody from your family.” So she brought her son in, and I said, “Look, you have to go to every bank in town and then come back to me when they won’t lend you money.” So sure enough, about a week later, she came back, and we lent her at 50% of the value. She bought the condo. Paid the debt off within three months. So it was great for us because the returns were fabulous. Within a year, that condo was worth like $380K. It has almost doubled in price, right? Her son, every time I see him in town, he goes, “That was just the best deal ever because mum would have never got that place, she had nowhere to go.” For us, it was a great deal, and for her, it got her into a position that the banks weren’t going to let her get into. Got a million of them, to be honest with you because everything’s different. For over 23 or 24 years, you deal with lots of people and lots of situations.
Lawrence: How big is Nanaimo? How many people are there?
Randy: Nanaimo is about 100,000 trading population. With COVID, we’re finding the real estate market is going crazy because people like the lifestyle of smaller towns now. We have offices in Port Hardy, Vancouver. We just opened an office in Powell River, which is actually on the West Coast. We opened there yesterday with realtors, and we have a big project in Victoria that we market. So we’re all over the islands. We have people in each of those areas, and we lend money in those areas as well.
Joseph: It’s funny you’ve mentioned that because what we’ve noticed here in Toronto is the prices of cottages and cottage country have skyrocketed since COVID. There was a scare, obviously March, April, May. People knew what was going on. People were terrified. I was looking at some stuff, and there are bidding wars on cottages up North. I’ve seen prices go up 25% literally within six months of COVID kind of calming down in the summer. People are realizing they’re working from home more. There’s more remote accessibility. Internet’s available pretty much fairly far North these days.
Lawrence: We have no golf here. We have terrible ski hills where we are. We have no view at all. We buy real estate. We look at nothing.
Joseph: Yeah, we look into other people’s backyard.
Lawrence: Who should brokers call if they want to send in a deal?
Randy: Well, brokers can contact us through Filogix, that’s an easy one. They could send us an email. We’re online. Go to 460mic.com Click on there, and the emails through there will get to me, and it’ll give you some information as an investor and as a borrower, what you might expect.
Lawrence: For the brokers listening who are going to submit deals, just know you’re dealing with a good group here. They’re all about the island lifestyle. It’s easy to deal.
Randy: Yeah, by the way, we like you guys too, as this is a mutual admiration society here. I know Laurie, my administrator, is happy with our move to Mortgage Automator. We were struggling with the new rules that came out last year with Filogix and all those things. So we’re happy with that. I know it’s a moving target, getting everything ready, but we’re happy with all the ways things have fallen together so far.
Joseph: We really appreciate your kind words, Randy.