An interview with Joe Zaniboni of Grand Coast Capital
Why hard money? As real estate investors, when we find a deal, we need to move fast. Conventional banks don’t understand our needs, and often don’t have products that match those needs. First, we try to get money from sourced
we have cultivated. If that fails we turn to the Hard Money Lenders (HML). The hard money lender is going to be more expensive. they will have a higher interest rate, and “points”, but as long as we have taken that into account when we made our calculations before the offer, these additional costs will not hurt us.
On June 15th I interviewed Joe Zamboni from Grand Coast Capital. They are not the only hard money lender out there, and each one will have different terms. Some might charge a higher rate, others a shorter term, still others might have a charge if you exceed the term.
The Hard Money Interview
Ed Weinberg: Okay, great. Just as a quick introduction, this is Joe Zaniboni. He’s from Grand Coast Capital, and why don’t you tell us a little bit about, why don’t we first talk about what a hard money lender is and what kind of loans they give and how they qualify people and properties, and then you can tell us a little about your company. Go ahead, Joe.
Joe Zaniboni: Yeah, absolutely Ed. Thank you for the introduction there. Looking forward to chatting with you guys today a little bit about hard money lending but what we call, which essentially is what hard money lending is, is asset-based lending, right? Which is simply a form of lending where the primary collateral for a given loan or debt obligation is a hard asset. In our case it’s real estate, That is what I do over at Grand Coast Capital. We’re a national lender.
By industry standards we would be considered a hard money lender. Our primary product that we offer and we work with investors nation-wide, to provide them with short-term renovation capital for their fix and flip deals. That’s what I do. I’m a loan officer for the company. I’ve been with Grand Coast for going on just over three years now, but I’ve been in real estate for a few years prior to that. Also studied real estate in my undergrad, in my bachelor’s degree at San Diego State, so been in real estate for some time now. Actually prior to my experience here with Grand Coast Capital, I worked as a acquisitions team member for CT Homes.
I don’t know how many of you guys are either fortune builders, students or are familiar with CT Homes, but they are actually formerly Connecticut-based, so you may have heard them. They’ve been on the show Flip this House back in ’07, ’08 I believe, in the formative years of the popularity of that show. I had a chance to work with that company for a couple years while I was finishing up my bachelor’s degree and served as an acquisitions team member. I’ve been on the investment side as well as the lending side. I also have my own company with my father. We flip houses as well, but my primary role right now, like I said, I am a loan originator, a loan officer, for Grand Coast Capital. I’ve done just over $55 million in origination for single family or one- to four-unit residential homes for investment properties, and I’ve underwritten over $100 million in real estate transactions for residential real estate.
I’m looking forward to chatting with you guys. Sounds like we’ve got a smaller group here so I’m definitely up to keep it open and conversational and looking forward to talking with guys, and if anybody wants to jump in with any questions while I’m talking here, we can definitely do that, but yeah, that’s it for an intro from me.
How They Qualify Loans
Ed Weinberg: Okay. Joe, your description of how you qualify a loan, you’re doing it basically on the value of the property, that’s what asset-based means. Is that correct?
Joe Zaniboni: Absolutely. There are multiple things or criteria that we look at as a lender or as an asset-based lender, renovation capital under a hard money lender, whatever you want to call it, but the collateral or the asset, in this case the real estate, is our primary focus, yes, absolutely. When we’re looking at any given loan opportunity, the first thing we want to understand is, is this deal going to be profitable for our borrowers, right? There are a lot of lenders out there that don’t necessarily care whether or not you’re making a profit on the deal, because all lenders lend at a discount to either the cost or the value of the property. In all likelihood, they’re typically going to be protected. Whether you break even, make some money or lose a little bit of money, they’re typically going to be okay. We don’t operate that way. We’re trying to build long-term relationships with all of our borrowers, and we do that by ensuring to the absolute best of our ability, that we are putting you into a good deal when we fund one of your deals, so yes, the primary focus for us when we’re working with investors who are flipping is to make sure that the deal itself is profitable, and there are a number of criteria that we look at in order to do that, which I’m happy to get into with you guys.
How Much Do You Put Down?
Ed Weinberg: Okay, so if I’m going to buy a piece of property, when I purchase it there’s something that you guys call a loan-to-value ratio. Now-
Joe Zaniboni: Yes.
Ed Weinberg: … what loan-to-value ratio are you typically looking for, and have the original purchase, and what kind of percentage would you like the borrower to be putting down?
Joe Zaniboni: Sure. That touches on the capital aspect. The way I like
The Four “C”s
• Collateral securing the loan.
• Capacity to complete the project.
• Charactor of the borrower.
• Credit History.
to kind of explain how hard money lender works and what we look at is by using what I call the four Cs of credit. Obviously I didn’t coin that term myself, but I like to use that because it applies to every aspect that we look at in a given loan opportunity. The first one we talked about or the first C was collateral. That was the real estate, that was the property itself, and we’ll jump back to that in a second, but your question Ed is in regards to the second C, which is capital. Every lender will provide a certain percentage like you mentioned of the total cost or of the total value of a given property. The key is to first understand what that lender’s criteria is, what the maximum amount they will lend is, and then to figure out if the lender is providing you with X, I need to make sure I’m covered for the difference right, which includes a number of costs. Just to break it down for you guys and to get into a couple of metrics that you just touched on, Ed, that are very important for everyone to understand, we look at things like loan-to-value, or LTV for short, and loan-to-cost, or LTC for short. Loan-to-value is simply your loan amount as a percentage of whatever the projected after-repair value would be. Just to repeat that, it’s your loan amount as a percentage of the projected after-repair value. The formula for LTV, to calculate that, is just your loan amount divided by your after-repair value. That’ll give you a percentage, which would be an LTV number. The next one is loan-to-cost. Rather than your loan amount as a percentage of the total value, your loan amount is a percentage of the total cost of the project. The way we look at total cost is simply your purchase price plus your rehab costs. That’s your total costs. The formula for that is just your loan amount divided by that sum, the sum of your purchase and rehab costs. That’s loan-to-cost and that’s loan-to-value, and so each lender has a maximum LTV and a maximum LTC, which they will loan. For example, here at Grand Coast we have a maximum loan-to-cost and I like to focus on loan-to-cost, and I’ll tell you why in a second, but we focus on loan-to-cost. We have a maximum loan-to-cost of 80%. Grand Coast will lend up to 80% of the total cost of your project.
Ed Weinberg: Okay, so that total cost includes both the acquisition cost and the, plus the fix-up cost.
Joe Zaniboni: That’s correct. Just to break down, just a super easy example for you guys, let’s say the purchase price is $100,000, right? We’ve got rehab costs of $50,000. Our total cost on that project is $150,000. If Grand Coast is lending 80% of your total costs, we just take that total cost of $150,000, multiply it by 80%, we get $120,000. When you’re doing your deal analysis, that’s what you want to plug in, right? To assume that Grand Coast will do 80% of whatever my total cost is. In this example we get $120,000 as our loan amount. You can see here the way that breaks down, and here’s where folks, especially newer folks, may sometimes get confused. It’s about the allocation of that total loan, right, so how much is going towards the rehab, how much is going towards the purchase, what’s my down payment, et cetera? We take that $120,000 loan, right? At Grand Coast we’re always going to cover the full rehab. Whatever the rehab cost is, we’re going to cover 100% of the rehab. Lenders typically like to cover the full rehab because it allows them to kind of stay in front of the progress on the deal and to make sure that they’re never funding ahead of any value that’s being created, if that makes sense.
Ed Weinberg: If I can just get a clarification here, although we’re putting in, you’re going to only loan, was it $120,000 or $125,000? I don’t remember.
Joe Zaniboni: $120,000, yeah so that’s 80% of the total cost.
Ed Weinberg: You’re going to loan $120,000, so when we purchase it you’re going to have a check ready for 80%, which would be $80,000 in your example, and me, I’m an investor, I’m going to have to bring $20,000 plus whatever closing cost there is to the table when I close. Is that right?
Joe Zaniboni: No, actually. Let me break this $120,000 loan amount down for you. Again, like I said, we’re always going to cover the full rehab costs, so if you remember, in this example, if we have a loan amount of $120,000 and we’ve got rehab costs of $50,000, and Grand Coast is always going to cover 100% of whatever the rehab costs are, $50,000 of our $120,000 loan amount are going to be set aside and issued to the investor or the borrower in draws as work is completed on the rehab aspect of the property. If we’ve got $50,000 of that $120,000 allocated towards the rehab, any remaining balance after that is going to be applied towards the purchase price. In this example, $50,000 towards the rehab leaves us with $70,000 to be applied towards the purchase price. In this case, you’ve got your purchase price of $100,000. We’re funding $70,000 on the purchase, so your down payment would be $30,000 or 30%.
What’s A “Draw”?
Ed Weinberg: Okay, so I’m putting down 30%, but after I put down that 30% I’m going to have a draw, so are you going to give me the money in advance or, let’s say that we break it down into, the $50,000 into three different sections, three different milestones. Am I going to get the first milestone or do I have to do the work, front the money myself and then get the first milestone from you after I finish the first milestone?
Joe Zaniboni: Sure, that’s a great question, Ed, and that’s why when we’re underwriting any given deal, we always want to make sure our borrowers have some level of cash reserves available, because the way it works, for most lenders as far as national lenders go, or renovation capital lenders go, the draws are reimbursement for work that is completed. You would have to float some of those initial costs or of course, once you’re in the business for some time, you’ve got good relationship with your contractors, maybe they’re willing to complete some level of work and know that the payment is coming shortly thereafter, but if not, yes, you would be floating some of the purchase of the materials and some of that initial labor before we’re able to reimburse you.
The size and timing of each draw is totally up to you, so the draws can be as frequent or infrequent as you want. That’s totally up to you, but yes, they are paid in arrears, which is how most construction or rehab lenders operate. The one caveat to that is that we can reimburse up to 50% of material purchases as long as we’ve got receipts and invoices and those materials have been delivered onsite. In that case, we can reimburse up to 50%. After that, all the funds are coming after work is completed.
Ed Weinberg: If I’m getting a hard money loan from you, you would probably want to see sitting in my bank account enough money to fund, enough to get through the draw and also enough to pay you interest for the total length of the loan, term of the loan? Did I lose you Joe?
Joe Zaniboni: Hey Ed. Sorry about that. I think I got disconnected there.
Ed Weinberg: Oh, okay. All right, so we’re going to need enough money if we want to do this project, we’re going to need enough money to put down to close on the house, and then afterwards enough for the draw, and we’re also going to need enough to pay the interest on the loan.
Joe Zaniboni: That’s correct, yes. We look at all those things. When we’re underwriting a given deal and that kind of ties back to the second C of credit that we’re talking about here, which is capital, right? Once we’ve got the loan amount figured out, they key is figuring out that remaining piece, outside of Grand Coast, outside of our loan amount, how much cash is the borrower responsible for? How much cash is the borrower putting into the deal? This is what we call your borrower equity, or your skin in the game, so to speak. This includes the down payment that we talked about, which in that example was 30% or $30,000, right? It also includes things like your closing costs, title and escrow fees, things like that. It includes your points or commitment fee or origination fee. These are interchangeable terms that you might hear, but they all mean the same thing. Points are a percentage of the total loan amount that a lender charges and it’s due up front, when the loan is funded. For Grand Coast for example, our points typically range anywhere from 2-1/2 to 4 points, or 2.5% to 4% of the total loan amount, and that’s due up front. That’s another closing cost. Then you’ve got your carry costs throughout the term of the loan. You’ve got interest payments of course, right? You’ve got taxes, insurance, utilities. These are all things that a lender is looking at and projecting out into the future, however long the projected term is, whether that’s six, seven, eight, nine, 10, 11, 12 months, whatever that is, they’re projecting those costs for the length of the entire term, and they want to make sure that you as a borrower are covered for all of that, for your down payment, closing costs, carry costs, everything throughout the entire term of the loan. Yes, those are all things that we look at. Now, one thing I will say real quick, Ed, here, is there are a lot of lenders out there where you as the borrower would be responsible for covering all of that yourself. We are okay with you as the borrower using private money lenders or second lenders to come in, in a second lien position, and kind of help you bridge that gap between our loan amount and all of the funds that you’ll need for the deal, for not only your down payment but all of your other costs as well.
Ed Weinberg: Okay, and one other question that, and I know that this is also something that varies from lender to lender, some lenders will charge you an extra point if you go over six months with the term of the loan and you don’t sell it in time. How long will you allow us to use this money?
Joe Zaniboni: Sure, good question Ed. We have, at Grand Coast, we have uniform term of 12 months on all of our loans. Now, the length of the term does not affect anything as it relates to the pricing on the loan, whether interest rate points or any of that. It’s a uniform 12-month term for all of our loans, so we are seeking to get into or lend on deals that are obviously relatively quick turnaround. We’re not looking to get into two-year, three-year projects. These are all single family or one- to four-unit flips that we’re focused on. Typically 12 months is more than sufficient, but one thing I will say about that is there’s no prepayment penalty for early repayment. You do have to make at least three months worth of interest payments, but let’s say we do a 12-month term and you finish and sell the property in month five, at the end of month five. You will have made five interest payments, but you’re not going to owe any interest for months six, seven, eight, nine, 10, 11 and 12. You simply repay the principal balance at the end of month five and that’s it.
Ed Weinberg: Okay. As I said, there are others that I heard of that I’ve spoke to, that say they want their money back after six months, and if they don’t get their money back they want to, they don’t care. You could pay them a point or something like that and you can keep the money for another six months, but I guess most of us when we’re doing a flip, what our expectations are is that it would take somewhere between three and six months to purchase it, put it together and find a buyer, but of course it could always go over to a seventh or eighth month, depending on how good a buyer you find the first time and if the first one actually gets the loan to buy it. That extra cushion is certainly something that I’d like to have and not have to pay an extra point on. It’s a little bit of a load off my mind.
Joe Zaniboni: Yeah, we’ve learned over time Ed, and it wasn’t always that way. We used to have six-month term, nine-month term, and 12-month term options, and obviously the shorter term meant more favorable pricing, but we scrapped that and just went with a uniform term that has zero impact on our pricing. The reason for that is because we’ve learned over time that borrowers tend to underestimate the amount of time that they think it’s going to take them to purchase, rehab and sell the property. For the most part, it takes at least a month or two longer than our borrowers typically are projecting, for a variety of reasons. We’re always going to be conservative in the way we underwrite a deal. Let’s say a borrower thinks they’re going to be in and out in six months. In all likelihood, we’re going to be projecting at least a seven-, eight-, maybe even a nine-month term. Of course, depending on the market, what we’re seeing for days on market as well as the size and scope of the rehab project itself.
Ed Weinberg: Just two more things, then we’ll take questions from people. The main thing you’re looking at is the property. Are you going to look at the FICO score of the people doing the work? I’m sure you’re going to look at their experience, but are you going to also, say if they’re a new investor and haven’t done one before, or this is the first time they’re doing a deal with you, are you going to look at their credit report, and how critically are you going to do that?
Joe Zaniboni: Yeah, that’s great Ed, and again that flows perfectly with our theme here of the four Cs of credit, because the third C, so first we had collateral, which is the deal itself, which by the way, there’s a few more tips I want to be able to give you guys on that, but we’ll jump back to that in a minute. We’ve got the collateral, the third C is capacity. It’s basically, do you have the experience and/or level of competency or wherewithal to successfully complete this deal? There are a number of things that go into that, that we look at and that are a part of our criteria. You mentioned a credit score there, you mentioned experience, so I’ll touch on experience first. Obviously, having a track record in real estate particularly in doing what it is we’re lending on, so flipping houses, having an established track record and deals under your belt is a good thing and will help you not only to secure an approval, but also can favorably impact the pricing that you may get on a given loan. With that said, we also lend to plenty of first timers. I don’t want to discourage any folks that are still working towards that first deal. We also give you the opportunity in our application to give us any information that you have on any general relevant experience. It doesn’t necessarily have to be real estate related. There are a lot of transferable skills from various industries that we consider very relevant to what we’re doing here in real estate. Not to mention a track record of success somewhere else in some other field in a lender’s mind is an assumption that you will be successful in what we’re doing here in real estate. So yes, experience is something we look at. It’s not necessarily a deal breaker, but it’s something we look at. Credit score was the next thing you mentioned there Ed. That’s something we look at as well. As far as the importance level of that I’ll say it doesn’t rank at the top. It’s something that we look at but it’s really just a piece of the overall puzzle of this deal profile that we’re looking at. We officially have a minimum FICO score of 640, but I will say we frequently make exceptions to that. The key is to just find out if the score is below 640, what is kind of the story behind the score and what’s been done to repair that credit score in the meantime. Again, I don’t want to discourage anyone that has a score below 640 not to submit because we fund plenty of deals for folks that have those lower scores. The pricing may be impacted a little bit but we can certainly work with you.
Can I Become A Hard Money Investor?
Ed Weinberg: Okay. I guess one last question, supposing I’ve got some extra money and I want to invest, or I want to invest using my IRA that’s got some money in it. What’s the minimum that you would take as an investment and do I have to qualify myself to invest with you?
Joe Zaniboni: Gotcha. Okay, you’re talking about our investment fund here just to make sure I’m clear here, right Ed?
Ed Weinberg: Yeah, that’s correct.
Joe Zaniboni: That’s a good question. We do have, for folks that are interested in a truly passive investment, we do have a fund set up, and that is our primary source of capital to be able to go out and make these loans is we raise capital from accredited investors. We are an SEC licensed and managed fund, so as a result we have to follow SEC stipulations, that’s the Securities and Exchange Commission. The first thing, first requirement to be able to invest into the Grand Coast Capital Fund is to be accredited. What accredited means, that essentially is $1 million net worth, excluding your primary residence, or $200,000 annual net income for two consecutive years with the expectation for that to continue. It would be $300,000 if you’re filing taxes jointly with your spouse. If you think you meet that accredited criteria, and again, that’s an SEC criteria, not something that we’re in charge of. That criteria is put in place
To be considered an accredited investor by the Security And Exchange Commission, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
to make sure investors are protected, right? If you do meet that criteria, you can certainly invest into the Grand Coast Fund. We have, right now the opportunity is for our second fund, which is a commercial equity fund that we’ve recently opened, which we are purchasing commercial properties throughout the country and even some abroad. The returns that we target for our investors is 12 to 15%. You mentioned investing through your retirement funds. That is set up a little bit differently, and to be totally honest with you Ed, my focus, I am a loan officer for Grand Coast. We have investor relations team members that kind of help us do fundraising for our fund and focus on that aspect, so they can get into a higher level of detail as far as the investment criteria and the returns you can get by investing through your IRA. I wouldn’t be able to speak too accurately on that right now.
Ed Weinberg: Okay. That’s good. Thank you Joe. Does anybody have any questions?
Joe Zaniboni: Yeah, happy to go through any questions that you guys have. I know we could cover another hour here of just me talking, but I figured, any questions you have I’m happy to clarify.
What Is The Minimum Hard Money Loan?
Melanie: I have a question. Do you have a minimum loan amount that you use?
Joe Zaniboni: Yeah, great question. We have a minimum loan size of $100,000. We go all the way up to $3 million. The key with that minimum loan size is you want to look at the total cost of the deal and make sure that 80% of the total cost equals or exceeds $100,000. Does that make sense? Basically, your total cost on a given deal would need to be between purchase and rehab costs, however that’s allocated between the two, you want your total costs to be at least $125,000, $130,000, because 80% of that would put us just at that minimum loan size of $100,000. Good question.
Ed Weinberg: Okay, and of course we’re in Connecticut, where you can find houses that are less expensive, but there’s not a lot of them. Go ahead. I’m sorry, I interrupted you.
Joe Zaniboni: Yeah, meeting that minimum criteria is certainly easier for folks along the coast, both east and west, than it is for folks in some of the more centralized parts of the country. It’s all relative I suppose.
Ed Weinberg: Okay, and by the way, I’ve had requests from both the Facebook group and from the group that my real estate company has to put a recording of this up so that other people who couldn’t make it could hear it. You’re okay with that I assume Joe?
Get Your Numbers for a Hard Money Loan
Joe Zaniboni: Yeah, yeah, absolutely, and you know, I’m certainly open to take more questions too here, but two other kind of quick points. I know we’re kind of jumping around here a little bit, but, especially for folks that might be viewing this later, I want to make sure, I can give you some tips to try to make sure when you’re doing your deal analysis that you’re working on a deal that might be in range as far as Grand Coast Capital’s lending criteria.
Like I said, we’re very concerned with making sure that your deals are profitable, so we do that, number one by making sure obviously that you have a solid budget that’s been confirmed by a general contractor that you’re going to be working with. That way we can make sure we’re underwriting an accurate rehab number. Then also and most importantly is the ARV, or After Repair Value. We’re a national lender so it’s impossible for us to have that same intimate local market knowledge that you guys have in every one of your markets, so as a result, we rely very heavily on sold comparable properties in the area to justify the ARV. I could spend a couple hours talking about this, but just a couple quick tips for you guys as far as that goes. When you’re looking at your comparables, a lender typically wants to see sold comps. They’re not as interested in actives or pending comps. They really want to see sold comps, because that proves the market. You want to be able to identify at least three or four of those. If you have trouble with that, especially a national lender, they may have trouble getting comfortable with the deal, because they need to make sure that the data’s there to prove the valuation. The other tip for you guys, you want your comps to all have been sold within the last six months. You can go out a year if you have to, but you really don’t want to be going out any more than a year when you’re looking at sold comps. Another good rule of thumb is you want your comps to be ideally within a mile of the subject property. That’s just a rule of thumb. It’s not a hard and fast rule. What we’re really trying to do when we look at that mile proximity rule is we’re trying to zero in on the neighborhood, right, which is a little harder to define. The proximity rule helps us get there. Again, it’s not a perfect rule. You could have a subject property and then another property 300 yards away but it’s on the other side of a set of train tracks, a river, a freeway, whatever it is, and it’s a totally different neighborhood. It’s not a perfect rule but it helps us kind of zero in on the same or comparable neighborhood. Those are just a couple tips. Oh, last one, when you’re looking at the comps, you want to see a low days on market, right? You don’t want to be in an area where properties are sitting on the market for three or four months at a time, right? You want there to be strong velocity in the market, which basically just means that the properties are selling relatively quickly. A good rule of thumb for that when you’re looking at sold comps is 90 days or less, ideally. Again, there are exceptions to that rule. Sometimes properties are overpriced and they sit for a while. Doesn’t necessarily mean it’s a bad market, but that’s just a good rule of thumb to follow. Yeah, just a couple tips on that.
Ed Weinberg: Okay. Anybody else? Jorge? Melanie? I know Jorge’s probably an expert on this already.
Melanie: No, actually you guys have covered a lot and I’m familiar with Grand Coast because I’m a fortune builder student so hearing some of the things over is like a refresher, so it’s good to go back over all of this information.
Jorge: I learn something every time, so never stop learning. Thank you so much.
Joe Zaniboni: Right on.
Ed Weinberg: Okay. All right then, I’m going to wrap things up and people who are here can leave me notes and give me suggestions on what you’d like to hear about next time. As I said, we’re going to post this and I’m not sure exactly, probably put it on a YouTube channel and/or upload it to Facebook and it’ll probably be on the Dex Property Solutions Facebook page.
Jorge: I was wondering if I could share my email address so-Ed Weinberg: Sure.
Jorge: … the people here can keep in touch. I don’t know if that’s appropriate.Ed Weinberg: Go right ahead, and Joe, if you want you can give your contact information and then we’ll wrap things up.
Joe Zaniboni: Yeah, absolutely.
Ed Weinberg: Go ahead Jorge.
Jorge: Okay, so it’s email@example.com,
Ed Weinberg: Okay, and how can we find you Joe?
Joe Zaniboni: If you need a hard money loan, or just have questions, email me anytime at firstname.lastname@example.org. Then if you want to give me a call, you can always reach me direct at 857-403-1733.
Ed Weinberg: Okay. I guess if that’s it, we’ll just wrap things up. This is the Beginner Real Estate Meetup. We meet on the first and third Thursday of each month. I hope everybody has a nice week and finds some deals, and maybe if you find some deals next time you can tell us about them.