We are on the precipice of a downturn, and many markets will be affected. Here to discuss how you can navigate real estate and protect your assets is Bill Bymel, Founder/CEO of First Lien Capital. He joins Jack Krupey to talk about the potential impacts of the economic shift on different real estate and financial markets. The two compare the current state of the economy to previous recessions and what conditions differentiate today’s crisis. Bill then shares thoughtful and practical advice on how to take advantage and where to invest to make the most out of your finances. Tune in for more tips as he discusses distressed markets and long-term real estate investments.
Listen to the podcast here
Navigating The Real Estate Market During A Downturn With Bill Bymel
Welcome to another episode of the show. We have a special guest, Bill Bymel, of First Lien Capital. I’ve known Bill for many years in the nonperforming loan business. He’s got a great background across real estate performing and nonperforming loans.
Bill, I’m excited to have you on the show.
It’s great to be with you, as always.
You’ve got a pretty awesome story. If you don’t mind, go through your background, how you got into real estate, and your path, which I think is pretty interesting.
One of the ways that you and I connected was there were some similarities in our backgrounds. This is my twentieth year in real estate. I started as a fix and flip residential investor in South Florida. At that time, I was running my own brokerage of a bunch of residential agents. Imagine the early 2000s in Florida. There were a lot of tailwinds, a lot of excitement, and real estate values were on the up and up.
A few years into that, I became a partner in a commercial real estate firm. This was before the residential market had leveled off. I don’t know if it was good timing or a bit of a stroke of luck, but I got into commercial doing new development for retail and restaurant clients, mostly national brand tenants. I remain a partner in a company called Retail Sites International, based in Fort Lauderdale. It is a 40-year-old brokerage. We’ve represented household names in the restaurant and retail world, such as every Darden concept in South Florida, Red Lobster, Seasons 52, Olive Garden, and Bahama breeze. They own Capital Grille and Yard House. Darden is the largest casual dining restaurant chains.
We are their exclusive representation. We help them find their locations and negotiate. Sometimes, we get involved in the development. We also did that with other retailers over the years, like CVS, Family Dollar, and One Off Restaurateurs. While I was doing all of that from about 2005 to 2009 or 2010, there was some overlap between the residential mortgage meltdown and the residential crisis of 2008. It all started with a call I got in the summer of ’08, three months before the fall of Lehman Brothers.
I get a call from this guy in Southern California. He was at a small 25-person investment firm called Condor Capital. They were bidding a pool of construction to perm loans in Port St. Lucie, Florida, that were all 1st and 2nd payment defaults. This was at a time the residential real estate market, by mid-2008, had probably gone twelve months into a stall in sales. Prices were going down in residential real estate for the first time in decades, and nobody knew where the bottom was. There was an opportunity at the time for me to jump in and get involved in the secondary mortgage market, buying notes at a discount.The mortgage market itself is much healthier in general. Click To Tweet
I did it as an advisor to Condor. It was a light bulb moment in the summer of ’08. We all lived through the fall of Lehman Brothers and the major financial crisis or the end of the American dollar at one point. I would note. Remember all the fighting that went on in DC about this huge spending bill that was $700 billion? Compared to now, it is $3 trillion or $6 trillion. They go, “Let’s write another check.” I’m sure we’ll come back to that in this conversation.
That’s what I’ve done for fourteen years. My focus in real estate has been buying nonperforming and sub-performing residential mortgage loans, mostly first lien positions. We’ve focused on the first lien because we have institutional partners. What I see as the greatest risk-adjusted return in real estate because you’re buying first lien mortgages, either performing, nonperforming, sub-performing, or whatever they might be, is you’re getting them at a discount to their face value.
You’re buying the debt at a discount, and that debt usually sits in a protected equity position collateralized by the real estate in the first lien. From a safety standpoint, it is a great investment. We have done this consistently. I did it at Spurs Capital for ten years as a managing director. I stepped down from my active role at Spurs a few years ago when we thought this little COVID issue was the black swan event that would create a mortgage meltdown or crisis in financial markets. That’s going back to the conversation of $3 trillion that was delayed a few years.
I founded First Lien Capital in 2021. Luckily, I have developed these relationships in this secondary mortgage market. That’s where I met you. We did some trades over the years. We’re part of a little Old Boys Network that we got lucky enough to be invited into. I have access to the product to buy either from private equity firms or banks and work those out. First Lien Capital, in our first year of operations, spent about $30 million buying nonperforming and sub-performing debt, which are mostly tails from our competitors.
We are well-positioned to take advantage of any dislocation that happens in secondary markets. That’s all the talk with the way that the economy has turned, the rise in interest rates, the inflation issues, and the war in Ukraine. The motto is, “If we’re not already in a recession, when will we be and for how long? What will the landing look like?” versus, “Are we headed into a recession?” That was the conversation a couple of months ago. The general consensus is that markets are turning and there will be a lot more distressed products.
The other thing that I want to point out is we’re a buyer of distressed mortgages. Especially in these last few years, as we’re coming to the end of a long cycle upward, rather than buying distressed real estate or distressed assets, we’re looking to buy quality assets or the liens on quality assets with distressed sellers.
It’s a little bit of a nuanced change from where we were years ago when we were buying everything so cheap that it was like, “I’ll buy that crappy house in Tennessee.” You don’t even know if it’s a teardown and maybe land value, but you’ll take the good with the bad. Now, we’ve had to be a little bit more selective with what we’ve been buying. That’s the long story, but I manage a fund that buys distressed real estate, mostly residential.
Thanks for that. You’re taking me back to thinking about 2008 and what things were like then. Let’s build on that a little bit. In 2008, 2010, 2011, and 2012, you’re almost buying everything cheap at a discount. Almost everything was underwater. I generally agree with you that we’re probably moving into some type of recession, but I’m going to quote Howard Marks of Oaktree Capital. He said, “History may not repeat itself, but it does rhyme.” This is different than ‘08.
The mortgage market itself is much healthier in general. You don’t have millions of Americans that are laden with that or that they should never have had in the first place. You do have some that have overextended. There is no doubt we have the largest amount of debt load when you compare not just mortgages and secured debt, but when you look at the unsecured debt that’s out there. People spend on credit cards and other types of unsecured debt. It is the largest number in history. A lot of that debt is variable and expensive. Quicken Loans has laid off 1,000 folks as an example. In any recession, you’re going to see layoffs. You’re going to see companies go under.
There is another aspect to financial markets. The mortgage market and the real estate market are not going to be the catalyst for a downturn in the economy, but we’re going to be a byproduct of it. Real estate is such a huge part of the American and global economy and so much so a part of the everyday American sense of net worth that there will be a side effect to the real estate market.
We’ve seen an increase since COVID of 20% in some areas year over year, so 40% increases in value. That is not a healthy thing for the real estate market. Real estate is meant to be the slow and steady, safe investment that you would normally get a nice and decent single-digit return on, whether it’s as an investment property or whatnot. You’d also benefit from the huge tax opportunities, tax deferrals, and tax advantages of owning real estate. Even in a safe investment, that drives your true return into the double digits when you look at the tax savings.
To see the real estate market go as crazy as it has gone in the last couple of years, that’s the most worrisome part, to be honest. It’s not a good thing for real estate to jump at those numbers. If you look at it a few years ago, let’s say the median income home was $350,000, and the average mortgage rate of 4% or 4.25%. That payment for that median house was $1,400 or $1,500 a month payment. Those houses since the run-up of 2021 are now $500,000 or $450,000. Interest rates are already at 5.5% or 6%. You’re talking about a $2,000 to $2,500 a month payment.
Most people buy homes in America based on the payment relative to the payment amount. Here’s where history will rhyme a little bit. How different were 2006 and 2007 in residential real estate? In 2006, the mentality was very much as it was a couple of months ago. They were like, “Get your hands on whatever you can get. There are 5 or 10 buyers for every deal out there.” Wholesalers are making more money than the actual fix and flippers. The speculators are fighting against first-time home buyers. You hit an affordability wall at some point. That’s what happened in ’06, and then the music stopped.
When you look back on it, it seems like it happened overnight. We’re like the frog in boiling water. We’re not realizing what’s happening. You saw a 25% decrease in new construction home sales year over year in June 2022. The new home builders are already sounding the alarms. At a conference I was at, everyone still wants to paint rosy glasses. They were like, “We’re still 5 million homes short.”Lock-in the lowest interest, long-term, 30-year rate you can find. Click To Tweet
From a supply standpoint, there’s still way more demand than there is supply. Instead of five offers for every property like in ‘06, there were probably 10 or 15 in 2021 for every property out in the market. There is more demand, but the reality and where it rhymes is you can go from a market with zero supply to an oversaturated market, plateauing and maybe on the decline in a period of 12 to 18 months very easily. That’s where we are in the market.
The facts are proving the market’s slowing down. Deals that were selling 20% above list price are now selling at list price. You said it to me earlier. We were talking about this. This is why I told you we got to get this started because this conversation came up a lot amongst these multifamily buyers. Some guys went in a few months ago and bid 98% of list price or 105% of list price on a multifamily 200-unit deal only to be told that they were outbid by 20%.
They’re getting calls three months later from that same seller to say, “The 20% buyer is gone. There were two other buyers ahead of you. They’re gone. Would you like to do the deal?” We’ve seen huge breaks even in commercial multifamily markets and in all other asset classes of commercial being put on this market. It’s not even reflected in the public sentiment, so hopefully, your show gets out before the news gets out so we can take some credit.
I hope so. The million-dollar question on the residential side of the market with rates going up is, “How many people are locked in at a 30-year fix?” In 2006, so many people were on these option arms were three years of the payment went up. My hope is the bull case is the people that bought, bought right, and locked in over rate. Those houses will probably stay off the market as long as they can afford their loan commitment. The other side of the coin is the people that continue to stretch that are like, “5% isn’t still too bad. Let me pay $2,500 a month instead of $1,500 a month.” There’s always going to be a level of distress.
That’s a very good point. You’re right. I’ve been saying this for a year. I’ve been saying, “Lock in the lowest interest long-term 30-year rate.” We will look back on this in 10, 5, or maybe 20 years from now and say, “There will never be a time in this country again that I could imagine where you will be able to get a sub 4% 30-year fixed mortgage.”
I remember as a kid. It was the early ‘80s and my dad came home with an FHA mortgage. We were moving to the other side of the tracks into a big four-bedroom where I got to have my own bathroom. It was so exciting. He came home and he was dancing. He was like, “We got approved. You won’t believe the interest rate. It’s 11.25%.” That’s the reality. We could see interest rates go pretty deep. I don’t think we’ll see the 30-year fix get into the double digits. It’s normal to think that 6% or 7% interest rates on a 30-year fixed loan are a reasonable rate. Hopefully, those people did lock-in and there was a lot more of that going on.
To your second point, there is always a distressed market. There is always some distressing situation. People die. People get divorced. People overextend. They take out second mortgages and HELOCs. All of a sudden, they’re upside down or they lose their job. There is any number of situations in any market historically where there is always distress.
When you look at the residential real estate market, this is what I am constantly being asked by our potential investors, whether they’re private investors or institutional bargainers. They’re like, “Where’s the product? Do you have the product? Do you have access to the supply?” One of the areas that we’ve gotten good at is getting access to products that are negotiated trades off-market. What I say to them is, “If I’m going to deploy $100 million or $200 million, that might sound like a lot of money to you, me, and the average person. In the mortgage world, that is a piece of salt. That is a speck. $100 million buys us maybe 100, 200, or 300 mortgages. There are millions of mortgages.”
We’re at the lowest default rates in history, as to be expected. We’re coming off of cheap money and huge rises in value. At our lowest rates of default in America, you may be 2%. That means there’s $250 billion of debt that’s going through some sort of distress at any given moment. Do you want to be an investor and spend $100 million or even $1 billion? Think about being a billion-dollar investor in the mortgage market. There are 250 times that in the best-case scenario.
Imagine where we’re going to go. We know for a fact that there are somewhere between 800,000 and 1 million loans that were the worst of the worst forbearance loans. People that lost their jobs stopped paying their mortgages because of the COVID shutdown. About 5 million Americans went through the program and 4 million exited successfully through some sort of resolution either to get back on track or sell the property.
We know for a fact that there still sits 800,000 to 1 million loans. That number alone will double the size of our default market overnight once those start to come out of the system. Anecdotally, I can tell you that some of the major servicers that we met with in March 2022 in Palm Beach were telling us, “We got 35,000 loans that have already been defaulted. The notice has been sent and the bank is telling us not to start the foreclosure.” I had another servicer that said, “We’ve got about 50,000 loans queued up and ready to go into foreclosure. Nobody’s wanting to be the first one to pull the trigger.” Since the world reality is setting in, we’re going to start to see a lot of that come out.
The markets have changed. The paradigm is shifting. Thank God. Markets are cyclical. We need this. It’s for the health of the long-term. Long-term real estate is the best investment you can be in, but it’s not going to continue to go up 20% per year. As a matter of fact, you don’t want to be the guy that bought in 2021. If you are, hopefully, you had enough equity in the deal. Hopefully, you can cover with a fixed payment plan or cover your rent payments, and you’re good. You can ride out the coming storm because there is going to have to be a reset in certain markets.
Coming out of COVID, some of the population shifts were pretty incredible during COVID. Some of that had to do with being able to work remotely. I got to bust your chops for this. You’re the only person I know who moved to California and raised their taxes versus moving to Florida or Nevada.
You went so far as to go to the least tax situation. I live in the middle of the Caribbean to avoid taxes. I could care about other benefits.The markets have changed. The paradigm is shifting. Markets are cyclical. We need this for the health of the long-term. Click To Tweet
I live in Puerto Rico. I live a block from the beach. It’s a much better lifestyle. The New York grind can wear on you after a while, though. I love New York. I’d love to have a second home there.
Hopefully, the markets will cycle and we can buy ourselves condos in New York. I’m dying to see California take a turn toward reality because when I looked back several years ago, I could have bought houses in my neighborhood in Beverly Hills. In the upper flats, there were houses that were $2 million or $3 million back in 2010 that were $23 million in 2022. It’s insane. You make a good point.
As investment managers like yourself and myself, we’re trying to stay prescient, ahead, and tuned in to where the economy is going and what’s the right play. A manager that delivers output to his investors is somebody that can see a little bit further into the future, predict where things are going, and figure out how to play off of that.
There is something that has happened here, and this is what you were getting at with the COVID relocation. We’ve never seen this before. You can look at the past as an indication of what the future might look like. It won’t exactly ever look the same, but it might rhyme. There is this scene with decentralization. It’s the need for people to no longer show up at an office and the paradigm shift that’s happened on a corporate national global level. There is something to be said for the fact that you have complete freedom to shift the population demographics in this country. There will be a reset when we come out of this for the lower states like Texas and Florida. They would have to go through some sort of a cycle.
Those guys that are paying $50 million for a house on Palm Beach that was bought a few years ago for $20 million are going to lose a few bucks. There are going to be some cycles on the extreme ends of the market, but there is something to be said for the possibility that there’s a complete shift that has gone on in certain residential or certain real estate markets in general.
Florida is the perfect example. Florida has historically been a boom or bust state in terms of real estate. It’s starting to mature in South Florida and Central Florida. When you look at it from a stability standpoint, Orlando was the one market that was the most stable in the last few years because of the jobs that Orlando always continued to maintain.
You’ll see a downturn and some stress in these new luxury condos in Miami. That’s typical. I also believe you’ve got a new level that you’ve set there. There are hedge funds that have moved to Palm Beach. New Yorkers that don’t have to go back to the office now live there, and that’s true in other parts of the country as well.
There is certainly a demographic shift that will have some bearing on real estate in specific areas of the country. With that said, I also wouldn’t throw the baby out with the bath water when it comes to a major metro. The easy thing to do is to read the headlines or follow the politicians who are saying, “Everyone’s leaving New York. It’s a hell hole.” Granted, when you walk through Times Square, you smell a lot of weed. It’s going through some phases.
You think that would calm the crime a little bit. You think they’d be a little calmer.
They’re like, “Everything’s cool.” My friend told me that the cops don’t even go into Washington Square Park. They sit on the outskirts of the park. That kind of thing is a cycling thing. There are issues there. For every wealthy person that is leaving their Upper West Side condo in Manhattan, which they’re not selling but keeping, and moving to Florida, Vegas, or Austin, Texas, there are 2 or 3 college kids dying to move to New York City. It’s not just New York, but any major metropolitan like Chicago, Detroit, Philly, or DC. When you look at it from a global historical skill, our major metropolitan cities in the Northeast rival some of the greatest cities in the world.
Even with values where they hit the top end of a cycle, it’s still in line or even cheaper than London, Paris, Tokyo, Shanghai, and Hong Kong. You know this. You’ve lived in these other cities and traveled around the world a lot. Comparative, it would still be a great place to be. I am a very big believer in New York. I hope that it would set a law value-wise, especially in Manhattan. There is something to be said for the changing demographic brought on by COVID. We don’t know what that’s going to look like long-term.
One question that has come up a lot where it’s been debated is what percentage of workers will be allowed to be permanently remote compared to before? I’ve also talked to a number of business owners that there are two separate salaries. If you’re trying to recruit someone in New York, you have to pay 20%, 30%, or 40% more. If you’re willing to let them work from suburban Pennsylvania, where they may be coming in two days a week but don’t have to get an apartment in the city and will take significantly less money, that’s going to affect secondary and tertiary markets in a positive way.
We’re already seeing that. I’ve got houses in suburban Pennsylvania, and I have exactly that kind of thing my brokers are telling me. Instead of having to be in Jersey or Long Island, they can be two and a half hours away, come in one day a week or a couple of days a month, and have a big spread and be in rural PA. It’s great. That is happening and it will continue to happen. You’re right.
I’m reframing this to the Great Vacation. Some folks have called it the Great Resignation too. That’s the other term. I’m hearing the exact same thing you’re hearing. If a California firm wants to hire a controller for their real estate management operation, in California, you got to pay that person $250,000 or $300,000 a year. They could search the nation and find a quality controller who could work remotely from Salt Lake City, Utah, for $1.25. Corporations are jumping all over that out of necessity.Long-term real estate is the best investment you can be in. Click To Tweet
If there’s more availability of workers, then we’ll see. I’m optimistic about the fact that corporations are going to find a way to mold to this whole hybrid model where they have an office. What does that do for the office real estate market? That’s a whole other story. You’re going to need another show for that one.
Both of us are actual office guys, but we’re both distressed real estate guys. If you had a defaulted loan on an office building at the right price, would you take a shot at something like that?
Absolutely. When you get into that, though, it’s a location play. If I had to give one piece of advice to people that are looking to buy real estate or invest in real estate in the coming downturn, which we are on the precipice of, it would be to focus on A-quality real estate. You could buy a defunct vacant office building. There’s already talk about converting stuff like that to mixed-use and residential. I would take a flyer. Also, I have a couple of friends that are in the office game. The smart guys know that there are still plays there. It’s on a case-by-case basis.
Offices are not going to go away completely. What I’d be concerned about in the office sector would be if buildings with large amounts of space are leased to one tenant versus a medical office with 25 different doctors’ offices, a health center, or one AT&T operation center. Those are the ones that you have the risk.
Companies are not necessarily going to give up offices, but the companies that have lots of office space are going to downsize. It’s much easier for a company that is 30,000 square feet on three floors to downsize to 10,000 feet or 20,000 feet and give up a floor versus a 5,000-square foot dental office. There’s no real realignment that can happen there. There are certain offices I would still believe in. That’s going to be a market to keep an eye on. There’s going to be a lot of stress there.
Similar to what happened in a residential market, some of the offices need to be repriced. There are going to be groups that bought a 5.5% cap rate a few years ago and 100% occupied that is probably 50% occupied and maybe at a 10% cap rate now. There are going to be some interesting opportunities for the right distressed loan buyers to buy a new structure of those deals.
I wouldn’t even say that’s limited to the office. It can certainly be in types of big box retail that are clothing brand-oriented versus grocery. Grocery stayed strong, but big box retail clothing like the Ross’, TJ Maxx, and indoor old-school shopping malls have to get repriced. Don’t even get me started when you talk about cap rates. I’ve thought that it was ridiculous where cap rates have gone these last few years. It always made sense that McDonald’s had a 5% cap or 4% cap. When you see CVS is trading in the fours based upon that rent, you’re paying $15 million for an acre of real estate and a building that can only be used by 1 or 2 tenants in the country. That doesn’t make sense. It never has and never will.
Where it will be interesting to see is anybody who 1031’d into a triple net deal but then used leverage, there’s going to be a loss of equity in a lot of triple net cap rate deals. It’s necessary that cap rates return to a more reasonable level. That’s what we’re headed for.
I love the triple net for the complete hands-off passive approach, but many of them only have a few percent increases per year or two. If you follow shadow stats for inflation was at 15%, that’s 3% escalation and inflation is 8% or 10%. If inflation continues, that loan should push cap rates to expand.
The pharmacy deals were done with 30-year flat deals or 20-year flat leases. It’s an interesting scenario that we’re sitting in. You and I have been through a few cycles. We’re moderately middle-aged guys. We’ve been through the ‘08 cycle. I was a kid when RTC was around, but I had mentors of mine in real estate that told me about the RTC days. Many of my billionaire or multi-millionaire friends made their money from one deal in RTC. It’s an interesting place to be to live through it with a little bit of knowledge, know-how, and perspective on it.
For our younger audience, explain the RTC. That might be helpful.
RTC is what we would call the other major meltdown in real estate dislocation that happened in the ‘80s after the savings and loan crisis. The S&Ls went belly up. Loans went bad. This was mostly in commercial real estate, where you had thousands of commercial loans on retail, multifamily, office buildings, industrial, or whatever it was.
When the S&L themselves went bad, the government took control of these loans in the Resolution Trust Company. It’s an organization that the government created to take these loans out of the hands of these failed S&Ls and distribute them to private investors all around the country. It was the ultimate auction process.
You had shopping centers in Hialeah that were netting $250,000 a year and they’d sell it at a 10% cap back then. I know one of the guys that bought that. He happened to have some rich relatives. He borrowed a couple of hundred thousand bucks and got a loan from the bank. He bought this $2.5 million and 200,000 square feet shopping center in Hialeah. It immediately was cashflowing. Deals like that don’t exist now. You don’t buy 10& cap deals with upside potential right off the bat.You can look at the past as an indication of what the future might look like. They won't ever exactly look the same. Click To Tweet
There’s an example. There was one deal that existed that this one guy bought and his entire family, kids, and generation are getting off that one deal. The RTC days, which was the ‘80s when we were kids, were the last time there was a major dislocation in financial and credit markets related to real estate. The government had to step in and bail out the savings and loans and disperse these assets to private equity or other banks.
One more thing is the residential mortgage meltdown, where banks and private institutions were motivated to give poor-quality mortgage loans to unsuspecting buyers and borrowers that never should’ve qualified to begin with. You remember those days. I remember it like it was yesterday, getting a loan on a million-dollar waterfront house in Miami. The borrower was a twenty-year employee of Dade County that never made more than $38,000 a year. How did this woman get a million-dollar loan?
I’ve heard stories in New York City of the people that sell apples on the street, buying a three-family in Queens for close to $1 million. It was crazy. There was the joke that if you could fog a mirror, you could get a mortgage. What else do you do? You’re primarily in real estate, both on your commercial brokerage business and distressed mortgage. What else do you do to diversify? Are you in stocks or crypto? What other things do you dabble in?
I do diversify, but I’m the kind of guy that diversifies to give myself heartache, so I would not take my advice in any area outside of the real estate. I know residential real estate. I’ve never lost money in residential real estate. I’ve done very well in commercial real estate and different aspects either as a buyer or an advisor.
I got a little crypto. I bought some stuff here and there. Here’s my take on crypto. It has legs. When there are tailwinds in a market or in any economy, you’re able to hide the con artists and the real failures. Bernie Madoff only became a household name and blew up after people were losing their money in 2008 in other areas. They came to collect on Bernie in 2009. If the market had continued going on, God knows how many other victims Bernie Madoff would have had.
We are at the precipice of a market that’s going to challenge other types of investment classes and real estate investments, but certainly in equities, crypto, and all of these other alternatives. I have a little resentment towards crypto. The reason I thought I was brilliant was in 2017, I bought a Bitcoin for $450. A year later, I sold it for $1,000. I was like, “I’m the best.” Let’s be honest. If I let it ride, we’d probably be talking as neighbors. I’d be with you in Puerto Rico.
I was telling this to somebody. There was this little piece of the Bitcoin when I sold out this package at $1,000. There was 0.09% of a coin that I couldn’t transfer into US dollars because it was less than $1. I went into the Coinbase account randomly and the thing was worth $5,000. It was $5,000 of free money that was worth $0.8. At least I got something, but it makes you realize if I had left the $50,000 in how much it would be worth. You can do the numbers there.
I’m in a couple of other crypto things. My position is to find a few companies that have longevity and just buy and not trade. I’m not a day trader in equities. Every time I’ve tried to play that market, I’ve always been wrong. Maybe it’s because I’m a little more contrarian or I’m more of a straight numbers guy. I look at stocks and I feel like they were overpriced for years. It’s similar to the dot-com era. There are so many corporations, tech companies, and other corporations here in America that have never made a profit. Their valuations have been driven by annual recurring revenue increases, but they’ve never found a way to build a profit.
Everyone thinks the Amazon model will apply to them, and that’s not the case. There are a lot of dead men walking in the equities markets, in my opinion. Some rosy-eyed equity investors would say, “Prices are very cheap. It’s a good buying time.” That’s probably true for the 10% or 20% of stocks of companies that really create revenue or have a history. I would even say they’re Amazon’s of the world, but even the older school companies that have revenue might be priced. Those P/E ratios are coming down to a realistic level.
There are still so many companies out there that shouldn’t even exist. The only way they’ve existed pre-pandemic was the cheap money, and then during the pandemic the even cheaper money that has been available. It’s the fake money that we, as taxpayers, have written the PPP checks to these corporations. I own gold. I’m still a little bit of a doomsday-er.
If you want to go do this doomsday, I listened to a two-and-a-half-hour presentation by Peter Zeihan talking through Ukraine, disrupting commodity prices, and some level of de-globalization. It’s a bit scary.
Share that with me.
I will. It talks a lot about commodities, oil prices, and what happens if global supply chains continue to be disrupted. I’ll send you that link.
We in America have never experienced what the rest of the world has always experienced. We got a little glimpse of this during COVID, but it wasn’t long-lived. Maybe you see some remnants. If you go into European grocery stores, Russian grocery stores, or grocery stores anywhere in the world, there are a few and the shelves are not always full. We’ve never lived outside of the perspective of a boom economy in America.There is something to be said for the changing demographic brought on by COVID and we don't know what that's going to look like long-term. Click To Tweet
I remember growing up. My parents came of age in the ‘70s and early ‘80s with high-interest rates and the recession. It wasn’t quite a Great Depression mentality, but it was certainly a more grounded mentality than I came of age during the dot-com growth and graduated during the dot-com crisis. We have had three crises already. There’s this perspective you only have from getting some scars that I know you and I have both lived through. We’re finishing up here. This has been amazing. Why don’t you please tell the audience how they can get ahold of you? You have a fund as well. I don’t know if it’s open to investors.
We are closing our first fund. All of our limited partnership funds at First Lien Capital are only open to accredited investors. There are eleven million of us here in America alone. A lot of people who maybe wouldn’t have access otherwise can certainly look us up at FirstLienCapital.com. You can find me, my book, my history, and my webinars on my personal website, BillBymel.com. I do a monthly webinar series. You’ve been a guest of mine. I try to bring in guys like ourselves who are on the frontlines doing deals in real estate either in the secondary market, retail, commercial, residential, mortgage, or anything related to real estate.
I have a book called Win Win Revolution. I wrote it a couple of years ago. It is a how-to/anecdotal story of the last mortgage crisis and the paradigms we created on managing distressed debt, dealing with delinquent borrowers, and treating people with dignity. You can find it on my website or on Amazon.com. I am in the works on a second edition retooled for the new economy and what has changed in the last couple of years in secondary markets.
A lot of what will be in the second publishing of this book will be the similar basics of how you deal with mortgages in distress, but it’s going to be a wholly fresh perspective on where the markets have been the last couple of years and what’s different in this secular downturn. I have a little bit of a different perspective on lawyers these days than I had several years ago. I will be reprinting. Maybe that will come out under a different title. Who knows? It’ll be by the end of 2022 that we should have a new printing of that.
Are you still actively selling loans from time to time to individual investors or are you more institutional?
We had a loan training desk for a number of years. We shut it down because we found that we needed to create a whole operation around it. It wasn’t worth the risk and the time that was involved. As we grow First Lien Capital, we will start to sell some of our products preREO. Those are notes and re-performing loans. Much of that stuff is sold to institutional partners through our loan sale advisors. Yet, we do maintain a private database. If you’re a buyer looking to inquire about individual assets, you can reach out to us through our website and register to become a qualified buyer who gets access to this product. WAs we acquire more in 2023, we will then turn around and sell more. That’s what we’re up to.
We’re always looking for good counterparties. We’re always looking for clients. We also do third-party asset management for some of our institutional clients. A lot of people that own loans out there never intended them to ever go bad. That’s one of the unique things I’ve found. It amazes me that private equity firms you wouldn’t even think were in the real estate game owned these mortgage loans that they put on their books to clip a coupon, and those loans have gone bad. There’s going to be a lot of opportunity in the coming years. We hope to be part of that for our own success and then to be able to share that with our investors and other counterparties in the business.
That’s great. Thank you so much for being on this show. This has been great. We could go for hours here, but I’m sure we’ll have you on again as well. I look forward to getting together somewhere. Come down and visit me in Puerto Rico.
I got to make that happen. Why aren’t I doing that? We’ll make a plan. I’m going to get down there.
Thanks to everyone reading. Please leave us a rating on iTunes and like us on YouTube. I look forward to seeing you in another episode. Thanks, everybody.
- First Lien Capital
- Win Win Revolution
- YouTube – JKAM Investments