Welcome to the 11th episode of the #AskAPrivateLender Podcast brought to you by Mortgage Automator. Our first guest of 2021 is David Mandel, President and CEO of First Source Mortgage Corporation.

David has a vast experience in the industry, both on the lender and the broker side, so he had some amazing insights to share. We talked about the different aspects of being in the private lending business, from dealing with borrowers and brokers to appraisers, and more. David told us how First Source cultivated their reputation and what sets them apart from the competition. This episode is full of great advice and lessons for any private lender out there.

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

 

 

Lawrence: Obviously, everyone knows about First Source. But people don’t know about the hard work and all the hours you put into a business before it becomes known. How did you get started?

David: I guess it’s not really a long story, but it did take a long time. I was in a completely different business at a direct marketing company, which was really quite successful. I started it up right out of university. It went well for a while, and then I had a falling out among the partners.

So, I started to look for something else. I was fortunate enough to have some family members in the mortgage business. They seemed to be doing really well. It was early 1989. The fax machines were relatively new, and you would stand by the fax machine feeding deals in. It was an interesting beginning because I remember sitting down, and my superior at the time said, “See this newspaper? Open it up to the real estate section.” I opened up to the real estate section. “See all these people? They all need a mortgage. Start dialing.”

That’s how I started. Honestly, I never looked back. 1989, it all hit the fan. It was a bloodbath. I learned the business doing really difficult deals, helping people, saving people’s homes. I was a mortgage broker. At the time, it was a little bit different. 

I’d already come to the business with business experience, business background. I had several businesses under my belt. I also had a business education, which I think really helped me, particularly when it comes to the commercial side of the business. I grew a brokerage, it was called First Equity Financial. I think at one time I may have had 21 agents in total. It was quite a good business. As a family, we started lending on mortgages, did a lot of second mortgages.

We had a small lending business at the same time. About a dozen or so years ago, I met my late partner, who was a lawyer and a builder-developer. He was looking to get out of the building business because he was really a small fish in a big pond. It was really difficult, as a builder-developer at the time, to control all your trades, or even get trades when you needed them. Despite being a guy who, I think his last project might have been about 150 loft condo units down in the Junction, it was troublesome. He found that the people making all the money were people financing his business. So, he really wanted to get into the mortgage business.

It came to a point where we talked about it for a real long time, and I’m still running my brokerage business. Finally, I just threw a deal on his desk and said, “Here it is. It’s $700,000. Me and some of my investors will put in half. You put in some money. Call up some of your lawyer buddies or whatever.” We started and we never looked back.

Lawrence: So you got his feet wet on that one deal, and it ended up turning into a partnership?

David: Yeah, we started the partnership. We started First Source. You start off a deal, $300,000, $700,000, then a million, then two million, and 12 years later, I think our largest deal this year was $42.5 million.

Coming from a broker background, it’s probably important to the people I do business with because I’ve stood in their shoes. I did residential brokerage for years, a good 20 years in residential and subsequently, commercial brokerage. Ultimately, we decided that there was a niche in the commercial lending space, particularly in Ontario. I think we’ve made really, really good inroads into that space. 

I think my years, also being involved with the Independent Mortgage Brokers Association, my last duty, I was a past president. I worked with IMBA for about a dozen years. I think that was also good for my career. It’s also a great way of giving back.

Lawrence: I think anyone can raise money, right? I think money is out there to lend out. I think that having that knowledge, that understanding of not just lending out money but also the other side, as a broker at one point and doing all those deals, I think it’s good for every side of the transaction. So, your investors that come in, they’re comfortable knowing that you understand how to put deals together. You understand what you’re lending on. 

At the same time, the broker understands when they’re providing a deal to your company, it’s another set of eyes on that deal. How can we make this happen? Is it a good deal? How can we structure it properly?

So the inexperienced broker that maybe comes up with a commercial file, that doesn’t know how to put it together, maybe they’re sitting on gold and they don’t even know it. Sending it into a company like yours, you’ll massage it, and you’ll help them put it together. With that knowledge, they can get a deal funded that maybe they wouldn’t have otherwise been able to do.

David: Even if we can’t do the deal, I can help them. I guess that’s my nature. I can help them with structure. With 30 years in the business, I can tell them what lender to call. We have certain lending parameters, and we have certain sweet spots, but often, I can also tell you if your deal’s been shopped.

One thing about being in the lending business, you know where you stand in the food chain. I see a lot of business. We have a very strong pipeline. I see deals being recycled and recycled, and for newer brokers or brokers that don’t have experience in construction or commercial, that don’t really know how to do that deal. I mean, I built my brokerage business as being a broker’s broker, somebody you could call and split a deal with. We’re here to help. We’ve got a system in place that can most definitely provide you with a quick answer, whether we’re going to do the deal, or whether I can assist you by sending you in the right direction, or telling you, “You might be wasting your time, and here’s why.”

Joseph: I think that’s one of the more important things that David had touched on, which is being a broker and understanding the thought process, understanding you have a different motive as a broker than you do as a lender. 

You’re able to also sort of figure out what they’re telling you, maybe what they’re not telling you, know how to ask those questions, but also at the same time, you would probably look back and say, “You know what, these are all the things I didn’t get as a broker, service-wise, relationship-wise that I’m going to change and bring that attitude to the lending side and let my guys feel like they’re going to be looked after. They’re going to be nurtured. They’re going to be educated. We’re going to try to get deals done any way we can.” And I think that you bring that attitude to the table and that is the recipe for why you guys are successful today.

David: I think it has a great deal to do with it, and thank you for that. One of our processes that we instituted immediately that I don’t think you get elsewhere, coming from being a broker is an understanding that the people that are sending me business are trusting me to assist them with their livelihood. 

So what we do I think that’s different from others is from the moment we decide or tell you that we want to do your deal is we’ll back it up with a letter of interest or even if we go straight to commitment, but we want you to be and feel protected. And I think that goes a long way with people that this is a learning experience for commercial lending or construction. So we will write your fee right into our documentation. 

So even though you’re trained and you know that you’re going to get a direction notice and you have to trust a lawyer to deduct your fee, and it may not be your lawyer. There’s a lot of trust there. I mean, I had the experience as a broker where my fee didn’t get deducted. I had to go chase fees. You don’t want to be in that position in private lending.

Your fee is built right into our documentation so a borrower can never say, “Well, I didn’t know you were charging me that much, or you were charging me. I thought you were getting a finder’s fee.” Everything’s in black and white from the beginning. We like to do that because it helps our sources of business, our agents and brokers to train their borrowers and set expectations properly the first time, and allow us to do our job and often deal directly with the borrower as if we were doing the broker’s job too. And that way we eliminate broken telephone. 

We can talk to a broker, but if that broker is a residential A broker, even if I tell them to ask for this and this, they may not know how to ask for it or what the purpose is. So we like to work really closely with our brokers and agents and make sure they’re protected from the outset.

Lawrence: I’m sure they all appreciate that too. Let’s talk about First Source. So you guys are predominantly a commercial-based lender. Do you do residential as well, the odd time, or is it always commercial?

David: What I will look at is I really don’t want to do a deal under a million dollars and sort of between one and three million dollars, I’m doing those selectively. Our sweet spot is about $3.5 million to $15 million, in that range. So I will look at luxury residential homes in really good areas, Oakville, Forest Hill, York Mills, and Bayview, bridge loans in that instance. 

I like doing residential development land. That’s probably one of our sweet spots, something we’re really well known for. It’s typically residential development land for first-time buyers product or move-up buyers product. So it’s townhouses, stack towns, sometimes a mix of medium density, like townhouses with higher density. So maybe a mid-rise involved. By saying later stage, I’m talking about a product that is maybe two years away from site plan approval. It’s easy to understand, and the value of the property increases in value as you’re going up. So our loan to value is decreasing. That’s in a steady marketplace.

It’s also important as lenders and dealing with many different types of private investors and family offices, everything we do, we’re thinking about the preservation of capital. One thing about us is we know how we’re getting out before we get in. We know what our exit strategy is, and that’s a learning experience once again for brokers and agents, because it’s something we focus on because we need to know that we have an exit strategy. And also if push comes to shove, our exit in selling a property in the enforcement process, we’ve got a reasonable cushion to work with to get out.

Lawrence: Yeah, understanding that we’re putting a deal on our books. How is the deal going to get off our books one day I think is an important part of the equation when you’re in that business. Yeah, I think it’s actually one of the most important parts of the deal. 

Deals can look great, but if you can’t get it off your books one day, you’re kind of stuck unless you’re selling it. And I’m assuming you’re not really in the business of selling properties. You want to have smooth transactions. You want to make your interest. Your investors are happy. There are no bounced payments. You want a clean book of business. In order to do that, you have to think about those things ahead of time.

David: In the private lending business, and really what separates the men from the boys is your ability to deal with adversity and enforcement. If you’re going to lend at private mortgage rates, ultimately you never go into a deal knowing that there’s going to be a problem. Maybe if you’re a residential lender and you’re working at a power of sale. But in commercial, it’s different. Like I said, we go in with an exit strategy in mind, but things happen. Over the years we’ve developed a reputation of being very strong in dealing with the enforcement process. It was three years ago or so that we launched our mutual fund trust, and it’s gone from $0 to about $85 million under administration in that entity. We’ve had to deal with enforcement. But we haven’t lost money. We don’t lose money. Thankfully that’s been the case for us since our inception. 

Not to say initially we didn’t have a few minor bumps in the road when we were doing some smaller deals. In particular, second mortgages, which we do not do. We’re a first mortgage lender strictly, and in talking about that, I just wanted to say that as far as locations… Don’t call me unfortunately to lend in Kirkland Lake or Elliot Lake, or sometimes, depending on what it is, we will make an exception. But for the most part, we lend from London to Ottawa in urban centers.

Lawrence: What makes you guys strong? Is it that you’re strict with the borrowers? Is it that you work with the borrowers to try and help them get out of a problem? What contributes to your success in terms of not losing and being strong if you have to go through the enforcement process?

David: I have an incredible team. I’ve got nine basically dedicated, hard-working individuals that have years of experience. Whether it be in underwriting, which is very, very key, and origination, anybody that works with us that originates is an underwriter at heart. They understand credit, and they understand how to deal with borrowers and how to deal with the property. But realistically, we underwrite every deal, which includes a peer review of every appraisal. I appreciate appraisers and appraisals, but if you look at how we manage our portfolios, you’ll see in our portfolio listing appraiser value…

Joseph: … And your value. I get it.

David: We deal with Altus and CBRE, and all of them. That’s fine. And some have better appraises than others. The other thing is that just coming from being a business owner, not just in the mortgage business but in other businesses, you learn to be a salesman. And as a salesman, you learn to deal with and read people. I think that’s a key feature of something that you find in the most successful mortgage brokers. It’s their ability to empathize and relate to their borrowers. 

I think because of how we deal with our borrowers and our sources of business, our originators as well, we’re competitive, but rate becomes a nonissue when you know what you’re talking about. When the people you’re dealing with understand that this guy knows what he’s talking about, he has experience, and I think that’s something that we really bring to the table.