Hand Shake

IF YOU DON’T KNOW, FIND SOMEONE THAT DOES.

Every time I turn on HGTV there is another fix-n-flip show gracing the airwaves where regular people seemingly make huge profits by putting granite in a bathroom. Do these people ever lose? Yes…yes they do, but it’s a TV show.

The first time I spoke at a National Conference, I was nervous. I mean really nervous. Here I was a small-time fund manager from Florida with no Wall Street background. I was serving on a panel with three other fund managers that managed real estate and non-performing loan portfolios each with assets under management in excess of $1 billion. As we met backstage, one of the managers and I hit it off. He was a really friendly guy that had been around the block. I suspect he sensed my nervousness, but he was an old pro and wanted me to feel better. The other two were quite impressed with themselves and had no time for the little guy from Tampa.

As the panel kicked off, my nervousness melted away. We were all given softball questions that were pre-discussed by all on a conference call a couple of weeks before hand. The other guys spoke in Wall Street acronyms. It was clear that they viewed the assets in their portfolios like securities and not like loans or real estate. I spoke more like a seasoned lender with a strong collection and underwriting background while they spoke more like guys that were experts in raising capital. There was a clear distinction between how we spoke to the crowd.

Any concerns I had about belonging on the panel with these heavyweights completely disappeared once the question and answer session started. A gentleman from the Atlanta area stood up and asked a question about buying loans in the State of Georgia. I looked at the other panelists and they seemed unable to answer the question, so I took it. I explained that the Georgia Department of Banking and Finance views loan buying differently than other states. I explained the legal requirements of purchasing loans in that State to the audience and the questioner thanked me for the advice. I then looked over at the other panelists and realized that they were unaware of the basic information that I provided to the audience. They had portfolios full of Georgia loans that they didn’t have the proper licensing to have purchased.

The next question was loan underwriting related. I looked at my fellow panelists to answer as I didn’t want to be “that guy” that likes to hear himself talk. They simply looked at me with blank stares. It was at that moment that I realized that these big-time fund managers have never made or collected a loan in their lives. They pay someone to do the due diligence on loan pools, they purchase them, and then they hand them off to servicers to handle it from there. That was the last time I was intimidated in an environment like that.

The folks that put together the loan traunches that led to the mortgage market collapse of the mid-to-late 2000s didn’t have extensive lending backgrounds. All they knew was that they could make tons and tons of money by selling “safe” investments to unwise investors. With my background in consumer finance, mortgage lending, and banking, it was so obvious that the crash was coming that I left a lucrative banking career to bet on what later became Castle Rock. I was laughed at and I was told that I was throwing away my career.

Some people know how to fix cars and others know how to heal the body. I knew real estate lending and worked hard to completely understand the field. What is it that you know better than anyone else? How does that relate to the types of investments you are contemplating? There is a famous saying that if you have been sitting at the poker table for 15 minutes and you don’t know who the patsy is, you’re the patsy. If you don’t understand the market, find someone that does. The field of real estate and loan purchasing can be rewarding and lucrative, but “being the patsy” is the way you find yourself on the wrong side of the mortgage market collapse.