I had the pleasure of interviewing Sal Buscemi on hard money lending and passive real estate investing. The conversation was enlightening. Sal came from Wall Street and his now focusing his efforts on real estate. Check out our interview below and leave a comment.
Here’s Sal’s website: http://www.dandrewmedia.com/
And his book on Amazon: Making the Yield; Real Estate Hard Money Lending Uncovered
Kriss: Hi everybody. This is Kriss with The Franklin Society. And I have Sal Buscemi. Is it Buscemi, Sal?
Sal: That is correct. Yes.
Kriss: Outstanding. I have Sal Buscemi with me here from Dandrew Partners. And Sal, why don’t you give us a quick intro, and tell us what you do?
Sal: Kriss, thanks for the introduction. I appreciate it. Dandrew Partners is a commercial real estate investment bank. It’s a small investment bank that focuses is on real estate deals between 1 and 30 million. And basically, we don’t buy anything, but we fund a lot of things. And our core clients are people who have found something interesting to buy, and they don’t have all the money they need. They come to us. So, that could be like a commercial area or something. Maybe they’re buying something out of probate which happens a lot.
Sal: A lot more often these days.
Sal: The second client that we have are people who have been asked to buy their note back at a discount from banks. A lot of banks right now are looking to clear their balance sheets, even with performing assets. And so you can think of this, even though I don’t want people to use the term as a commercial short sale, if you will. So, sometimes we’re debt, sometimes we’re equity. We’re not a bank so we don’t charge bank interest rates. We are a little high. You want to think of us as being more in the bridge lending side around, between six to as high as 10 percent. And then we also provide preferred equity too. And our special sauce, Kriss, is just being able to structure a solution around every deal. My partner and I both came from Goldman Sachs on the investment banking side. So, we’re passionate about this industry. We’ve been born and bred professionally to look at this…to look at this environment, and all the opportunities they have much differently than other people out there. By looking at it, forcing people to think like a bank because that’s really where all the incentives and all money in real estate is created.
Kriss: Great. This is great stuff. Now, you were telling me before we started recording, you were telling me about some books that you’ve written. And how you’re trying to help investors? Tell us about those?
Sal: Yeah. You know, one of the things…you know, guys like us get into with a lot of edgy deals. And recently, we raised $15 million from an institution that I knew well in New York for a hard money servicer that was going into default, facing receivership issues, regulatory issues. And basically what happens is that, today because people, investors aren’t able to get any good cash flow off of their investments, we call them call them yield if you will. Making less than one percent on your passbook savings isn’t going to get you anywhere in life.
Sal: Especially with inflation ripping at, you know, 4 percent or higher. However, people get desperate and, you know, greed overcomes logic every time, man. And unfortunately, there are a lot of these hard money lenders out there who would prey upon that. They were very good carnival barkers on stage, but they were very poor operators. And so, we went in and we were able to buy these assets for literally nothing sometimes as low as pennies on the dollar. And one of the things that we learned from here is, you know, people who were doing these didn’t have any idea how to make a hard money loan. And so, I put together a book it’s called, Making the Yield. It was just released actually, last month. It’s on Amazon. And it’s a soup to nuts, what I call belt suspenders and life jacket on how to make a private loan. Who to lend to. Who never to lend to. And how people can get involved in these things. Even if they don’t do it themselves or even if they give someone else money, it’s a great foundation book for them to understand before they get in bed with anyone. Whoever they hand over their hard earned money to, as to what to expect as far as how these funds are managed. And a lot of people are using it for their own safety because they see that there’s an opportunity here where they might have gained some notoriety with their friends and family. That they’re actually able to be able to raise money that they want to do in a credible way where they don’t look foolish and this books answers that. We also have a second book coming out too. It should be out next year. It’s called, Raising Real Money. And that’s sort of like the next act, if you will, to making yield.
Kriss: Outstanding. So, you’re training people how to do hard money or private money lending on real estate deals. Do you sort of target any particular kind of deals, or are you really teaching them how to…
Kriss: …how to vet the deal, any kind of deal?
Sal: Everything. I mean, we teach them everything from due diligence, to how to underwrite it, to make sure you’re using cross collateralization. You know, basically if anything goes wrong. These are the secrets of how real banks make money is because they over-collateralize themselves. We talk about the simple things from LTD to terms. We don’t want anyone ever filling out a term longer than one year. And, of course, we never want to lend money to widow and orphans, right? Because that’s how you wind up on the nightly news. So, we deal with, you know, investors who are the rehabbers. You know, and these are people who know what they’re doing, and they have liquid assets, and they’re not folks who just came out of a seminar or something. And there’s plenty of ways to identify and find these people. Property management companies are notorious for having a lot of properties that they manage for these people.
Sal: And title companies as well.
Sal: But we do start out with the residential because that’s important. And we want people to be able to walk before they run.
Sal: There’s a whole commercial component that we talked about in the second book that’s coming out. But as far as really understanding this, we talk about soups to nuts. First, call the funding how to handle this, and then we do get into how to structure an architecture fund later on in the book. It’s really a great book, actually. I like it. I’m sort of bias, of course, Kriss.
Kriss: Because you’re the author.
Sal: Right. But there’s nothing out there that relates to, you know, it’s a very fragmented industry of a lot of people getting a lot of bad advice.
Kriss: Sure. Sure.
Sal: And so, you know, my goal was to sort of consolidate that to create a reference series, if you will, for people to continue to go back to, to be able to use. You know, make sure that their life jacket is on, just like a pilot’s checklist before you make any loan, you want to make sure that you’re actually adhering to certain things and that’s the most important part.
Kriss: Now how about documentation? There’s a lot of documentation. I just did my first hard money loan. As a matter of fact, we have a deed of trust and some documents. Do you include some of these documents of examples people to use?
Sal: Yeah. There’s a whole downloadable tool kit that they can get at hardmoneytoolkit.com. They can go to hardmneytookkit.com and what’s in there, and I’m a big fan of models. And what we actually have is a model. If you’ve ever seen the movie Ghost Busters, one of the key lines is, you never want the lines to cross. Right?
Sal: And this tells you when you need to get out of that loan or your borrower needs to get out of that loan.
Sal: Way before, you know, it’s time to. Because when those lines cross, the golden rule in lending is, if your borrower is not going to make any money, neither are you.
Sal: So, we put together a model. It’s not very sophisticated. We call it, Vigmaker, but it does take time. And it’s a very good tool to use. It tell you exactly when you borrower is going to start to lose money on the deal, so you can stay on top of it. And that’s something that a lot of people never bother to think about.
Sal: Because everybody has this mentality with hard money, thinks well, I’ll just own this loan. But the problem is that you’re not buying real estate if you’re lending on it. Your sole purpose it to get a coupon, is to get a steady coupon clipper every month. And that’s what this book talks about. And a lot people wound up having to foreclose and spend thousands that they didn’t have to because of the fact that they didn’t know how to properly structure the risk away from themselves.
Kriss: Wow. This is great info, Sal. So, for an investor, let’s say…I know it’s not a very typical investor that does something like this. But for a typical starter deal, can you give us an idea of how much cash a hard money lender should start with? And how much he could expect to make? I know it’s not always easy to make that call. There is no average case, quote unquote. But what would a typical starter loan be? His first deal out and how much would he expect to make?
Sal: I mean, here’s what we see, is a lot of people have actually gotten smart. If they don’t have the resource, I think the next big thing in real estate is, as cliché as that sounds, Kriss, is using self-directed IRA.
Sal: I think people don’t know about them. But they’re interested, and they’re looking to get into self-directed IRA as a vehicle to get into real estate. Because they want that more intimate type of money management.
Sal: And so, if I live next door to you, I say, well, I know Kriss. I’m going to give him $60,000 to, you know, fix that rehab because I know he’s a good guy, he’s honorable, plus I have his cell phone, and I know where he lives.
Sal: If I have to, you know, give 60 grand to Martha Stewart, as we were taking before, and the stock plummets 20 percent because she did something stupid again. Good luck getting good old Martha on the phone. It’s not going to happen. Right? What smart people are doing is that they’re actually making money by placing capital into other…using other people’s money to place it into other people’s deal. If you could figure on a $60,000 loan, five points. A lot of these rehabbers are not getting money from banks. So, they’ll pay for this and they’ll give you points, interest. And really what they do is that they’ll charge five points upfront, minimum. You know, five points and then usually charge about, you know, 10 percent per month. So, you know, that’s not bad getting that type of coupons coming in each month on something where you can control the risk on. You can control the area. You can control the housing product. I would only do single family detached.
Sal: The median home price, you know, plus your minus 20 percent.
Sal: No luxury homes. So, you know, a median home price in LA is going to be much different than a median home price say in, you know, Grand Prairie Texas for example.
Kriss: Yes. Sure. Sure. So, you’re advising people to kind of stay right down the middle. Don’t go too high with a luxury home. Maybe don’t go into the really, really low end stuff, just sort of kind of middle class neighborhoods…
Kriss: …in a typical fix and flip. Is that where you’re investing?
Sal: Because here’s why. There’s a lot of lending programs out there for people to buy these middle of the road homes. Right? They’re much more affordable and they’re much more liquid. You get into the, you know, you get into the big white elephants, you know, or land, or people who, you know, go out of their areas of expertise. That’s not going to bring you the stabilized returns that you want.
Sal: I don’t, you know, you’re putting all your eggs in one basket, and economically, it just doesn’t make sense to do that.
Sal: So, you know, if you’re ever in a pinch, you know that this house is going to sell. And you know that they can always get an FHA loan, your buyer for three percent. Get you taken out and that’s it, and you’re back in the game again. You don’t have to really…yeah, you just get up and dust yourself off.
Sal: People who start going for, you know, the higher end stuff. I really don’t understand it but, you know, stranger things have happened. I advise against it because the bigger they are, the harder they fall, especially if a market starts go down. And these markets can shut off immediately.
Kriss: Right. Right. But in…if you sort of stay in your lane and go right down the middle, the worst case scenario is that you have a house now. You’ve taken control of this house. You have the deed of it, and now it’ll be up to you to either fix it yourself or market it. But you can’t say that about a stock that at the end of the day is worthless if that company goes bankrupt.
Sal: Yeah. I mean, and people need to understand, if I can go deep, I will. Is that when you’re buying stock, you’re buying common stock. And what that is, is you’re the lowest man on the totem pole.
Kriss: That’s right.
Sal: If there’s a bankruptcy, you’re going to get wiped out. Whereas, you’re secured owning a piece of real estate. And unfortunately, a lot of people are in the market today and there’s this fear that, well, is it still going to keep going up. So, you know, there’s a fear of loss they don’t want to be…you know, everybody has the greed gland. Right?
Sal: Everybody’s scared of losing. But, you know, at the end of the day, when you look at it, if there is a pull back, and I definitely think there will be pull back. There’s going…you know, these people are going to look a little foolish.
Kriss: Right. Right.
Sal: So, a lot of people I know are taking money off the table and they’re exploring other things. And you don’t have to sell everything off, but you just got to be very careful about it. And then if the stocks do happen, if you start to see companies start going out of business. It’s the people that own the debt. It’s like in real estate that are going to come out clean. Whereas the people who own the equity are going to be totally wiped out.
Kriss: That’s right. That’s right. And we talk a lot about it in The Franklin Society, the true diversification. In my mind, diversification is not moving from the health sector to the energy sector. It’s all part of the broader market. And if the broader market sinks, you’re going to lose on both. If you’re going to truly diversify, you need to diversify your entire strategy. Get into some hard assets. And why not invest in your own community?
Sal: I think that’s right. You know, there’s something to be said about driving pass, you know, your own collateral.
Sal: Knowing that you can spit on it, sneeze on it, you know. You know where it is and it’s not disappearing overnight. You could have a bomb go off somewhere in the Ukraine or something happens, some sort of black swan event happens where you could wake up the next morning and be absolutely decimated. It happened in 2008. It’ll happen again.
Kriss: Absolutely. Absolutely. And I have to say, having just consummating my first hard money deal, it was much easier than I thought it would be. I thought it would be, the hardest part would be to find the deals. That turned out to be the easiest part. We literally approached some real estate investors and now we’re turning down a deal a week, because we already have our money tied up. But it turns out that finding deals to invest in is pretty easy.
Sal: It’s very easy today because as long as you’re the money person, deals are going to come to you. There’s only two things that successfully sells. One is illegal, and the other one is money. And that’s just going back to biblical times. That’s just the way it’s always been.
Sal: So, you know, people are always going to need money like oxygen in order to get into these deals. Otherwise, they’re missing the opportunity. And here’s the other part, they will pay 10 percent, 12 percent, and five points on top of it because they aren’t going to make a dime if they can’t use that money. It’s the availability and access to the capital that they’re paying for rather than the cost of capital.
Sal: And that’s the way finance works. If you need it, you got it. Sales it’s a little expensive, you might not have your shirt on in the morning but it took care of your problem. Whereas, if you’re trying to go to a bank, they’re not going to be lending on you to be able to get rehabs. We have people who are in our, what we call our master class, in New York who we meet with. It’s a roundtable. And they’re raising money using this principles for 10-year hold rentals. And people are very happy to give them money for 10 years. So, you can structure this product, if you will, for anything you want. But you’ve just got to have a good understanding and know-how of what you’re doing. You don’t want to necessarily beginning pulling tooth. You know, being a dentist doing tooth extraction if you don’t have any knowledge behind you.
Kriss: Wonderful. Well this has been amazing interview, Sal. I really appreciate your time. What you’re doing is great stuff.
Sal: Thank you, Kriss.
Kriss: We’re going to link to Making the Yield. I just pulled up your book on Amazon. I’m going to buy it myself tonight.
Sal: Perfect. Wonderful.
Kriss: We will link to hardmoneytoolkit.com, as well. We’re going to be watching your progress. It sounds like you’re going to have some big things coming up. And we would love to work along with you because we know our investors want to learn more about this stuff. So, Sal, thank you so much.