REI INK

From Salesman to CEO

Drive, thick skin and a customer-focused approach propelled Brandon Guzman’s quick rise in the industry. You could say I grew up fast. I was a latchkey kid from Puerto Rico with a single mom. I didn’t have any rules. If anything, that fueled my drive to create something, succeed at something. After moving to Cleveland, Ohio, with my mother, I attended a local Catholic school and was always searching for ways to make money. At age 13, as an eager eighth grader, I officially joined the workforce as a bag boy at the Heinens—a popular local grocery chain. I walked to work after school and worked as long as they would let me. That job taught me a lot about work ethic. Entrepreneurial Spirit Emerges Early My first entrepreneurial endeavor happened the summer after my freshman year of college at Ohio University. My friends and I had all returned home and we needed to make some cash for books and tuition. So, we decided to start a lawn care company. We rented some equipment for lawn cuts and mulching, and we printed thousands of flyers that we hand delivered to every mailbox. We started to get some calls, and then referrals, and then it just took off. Sure, it was a simple business idea, but I found I loved building something from the ground up. And I learned I could outwork the competition. Once I was back at Ohio University, I tended bar every night I could while working toward my business major. After graduation, I took a job I thought would lead to a big career and a big paycheck—insurance sales. I had no idea what I was doing or talking about. I compensated by outworking every other rep in the room. I was good at sales. I have the drive for it, the thick skin, the confidence. But I did not like the company. It was stagnant. A Startup Calls A chance encounter with an investor introduced me to a new startup that was looking for its first sales rep—MFS Supply. I jumped at the offer. The idea of working at a company that had its whole future ahead of it appealed to my entrepreneurial spirit. I started with MFS Supply that Monday. As I walked into the office, I realized the reality of startups. I walked into a single room shared with the other two employees where we had to jostle for chairs. There weren’t any desks. The only bathroom was in another tenant’s office. If all of us were making calls at the same time, you couldn’t hear yourself think. I took to it immediately though. This fledgling company needed its employees to mold it, grow it, establish its brand. Growing Pains In 2007, the year I started at MFS Supply, the company sold five products into the property preservation space to about 20,000 contractors nationwide. As the subprime mortgage crisis hit and the recession enveloped the U.S., MFS Supply thrived. Banks were foreclosing on homes left and right, hiring more and more property preservation contractors to secure and winterize the properties. MFS Supply’s customer base grew to 60,000 contractors by 2008 and hit 100,000 contractors at the height of 2009. I led the charge on expanding inventory from securing products to winterization materials. In 2007, as the first and only sales rep at MFS Supply, I didn’t know what I was doing. I didn’t know the industry, the customer. I worked 10-12 hours a day, just calling customers. Not just to sell but to ask them questions, have a conversation and start educating myself on what they really needed. The idea of really collaborating with your customers, listening to them, putting them first is what made MFS Supply stand out from the competition. It’s now a core value of the company and something we do every day. This set the tone for me and the company. I built out a strong referral program with my customers, and the company grew by focusing on adding value. When I was promoted to senior account manager, I was tasked with bringing in more sales reps to support growth. The customer-focused attitude was instilled in all of us. I remember a time I had a customer who had to have product the next day for a job. But he couldn’t afford the $300 overnight shipping. Another rep and I jumped in my car and drove the three hours to his home to deliver it to him. Often we’d get a customer order after the UPS pickup cutoff. We’d box up the order and take turns driving around the neighborhood to catch a UPS truck to hand off the package. Eyeing the Future In 2010, I signed up for night classes at Baldwin Wallace and started working toward my MBA. College had prepared me for sales, but I wanted a full understanding of management, operations and finance too. My MBA classes were a key driver in my career expectations, shifting my focus beyond sales goals and toward management. The same year I graduated from the MBA program, I was promoted to director of sales. In this new role, I oversaw the birth of a new market—REITs. In 2015, these real estate investment trusts started snapping up affordable homes in bulk in the wake of the financial crisis. Invitation Homes, American Homes 4 Rent—MFS Supply was their first vendor. REITs didn’t need many securing products, they needed appliances. This was MFS Supply’s first big product diversification. Selling appliances was a different ballgame—new shipping structure, new pricing model, huge variety of SKUs, new sales knowledge. So, I built out an appliances team to support this initiative. The following year, I launched into another new market—multifamily—and was promoted to vice president of sales and marketing. The appliance game is tough. High competition, low margins and price driven. We found it was a great way to get a foot in the door in the multifamily industry but not a product we could use

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Property Preservation in Illinois: Know before you go!

Servicers and investors should be sure to know their options when code violations and preservation issues arise. As is often the case in mortgage servicing, properties secured by defaulted mortgages can wind up vacant or in need of repair. Depending on the condition of the property, the municipality may issue code violations and file suit, naming both the owners of the property as well as anyone with a recorded interest. Neighbors also may report conditions to the city or county. In addition, the properties may be vulnerable to vandalism and thievery. Given all this, should servicers or the investor secure the property?  It can be difficult to provide an easy answer. However, from a best practices approach, consider the path with the least exposure for litigation. Under the terms of the standard Fannie Mae & Freddie Mac Mortgage, the answer typically is yes, you can secure.  Still, it is imperative that you always review the actual terms of the mortgage at issue. Most of the time, the mortgage will contain a paragraph relating to what actions the mortgagee may take to protect its interest in the property. The mortgage will call for the borrower to maintain the property and keep it from deteriorating. It will also include specific language allowing the mortgagee to do and pay whatever is reasonable to protect both its interest in the property and its rights under the terms of the mortgage in certain circumstances. Caution is Key From a servicing standpoint, when ample evidence suggests a property is vacant and needs securitization or repair, it may be easy to rush an order to a vendor to secure or repair the property; however, exercise caution. The cautious approach is to first review the terms of the mortgage to ensure you have the option to secure or take actions with respect to the property. Second, evaluate the potential risk and exposure. Would your actions lead to additional litigation? Is the property in foreclosure and has the foreclosure become contested? Is the mortgagor represented by counsel? Does there appear to be personal property within the property? Third, does the municipality have any vacant building registration or securitization requirements?  For example, the City of Chicago requires that a mortgagee shall, within the latter of a residential building becoming vacant for more than 30 days or 10 days after a default, register the building and secure the property to prevent unlawful entry and pay a $700 registration fee. The registration must be renewed every six months for as long as the building remains vacant and unregistered by an owner and a renewal fee of $300 will apply. (Note that governmental entities are exempt from the payment of the registration and renewal fees pursuant to 13-12-126 of the municipal code of Chicago.) Additionally, the property must have a visible posted sign indicating the name, address and phone number of the registered mortgagee or mortgagee’s agent with the vacant building registration number. Further, the property must be maintained so that the exterior is clean and secure and the interior is winterized. (See 13-12-126 of the municipal code of Chicago.) Legal Consultation May Be Needed Because these situations can sometimes lead to confusion or instances in which both sides are pleading their case before the court, consult your attorney and consider seeking a court order allowing the repairs or any actions you wish to take at the property, unless you simply seek to secure the property pursuant to local ordinance requirements. The Illinois Mortgage Foreclosure Law has a specific statutory provision (735 ILCS 5/15-1701) that addresses the right to possession of mortgaged real estate during foreclosure. Specifically, in terms of residential real estate, the mortgagor/borrower shall be entitled to possession of the subject property except if the mortgagee/lender objects and shows the following elements: A sufficient basis why it should be entitled to possession. The terms of the mortgage allow the mortgagee to obtain possession. The court finds a reasonable probability the mortgagee will ultimately prevail in the pending suit. If you do elect to secure the property, ensure that ample photos are taken showing exactly what actions were taken at the property. If you do not obtain a court order, a situation may occur in which a property is secured and the mortgagor(s) or occupant(s) subsequently files a motion with the court seeking relief for time, mental anguish, lost personal items and anything that is reasonably related to being locked out of the property. In these scenarios, it can be difficult to disprove what personal property was or was not present and has subsequently disappeared. This leads to additional litigation fees in terms of having to retain counsel to defend the motion as well as extend funds for settlement, in many cases, to resolve the matter as quickly and efficiently as possible. What if your loan is current and the city or municipality files suit alleging code violations? It is equally advisable to seek the advice of counsel in this situation. If the servicer is named in a lawsuit seeking relief for municipal or building code violations and the loan is current, the servicer will still need to appear in the case and ensure the borrower is taking the appropriate steps toward curing whatever outstanding issues remain. Failing to appear could mean missing out on notice of actions the plaintiff may wish to take at the property, such as appointment of a receiver which could eventually record a lien that takes priority over the mortgage. Typically, in these cases, the court will want to be kept updated from the servicer side of things with respect to the status of the loan (i.e., current or in default). In some situations, the court may ask the servicer to take action at the property. The importance of recognizing building code violations and municipal ordinance issues is not unique to Illinois. As natural disasters continue to occur throughout the U.S. and Mother Nature reminds us of her strength, code violations and preservation issues will continue

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Regional Spotlight: Austin, Texas

The Silicon Hills are on a takeoff trajectory. When you think of Texas, the capital city of Austin probably isn’t the first metro area that springs to mind. Although Austin’s housing market would certainly claim top honors in many other states, it is often overshadowed by headline boomers such as Dallas-Fort Worth, San Antonio and Houston. That is likely to change in 2020. Austin’s real estate market is just taking off, thanks to reliable and steady appreciation, ongoing population growth and an extremely attractive, talented employment sector. “Austin enjoys a strong and diverse economy somewhat dominated by high-tech,” observed Mashvisor analysts in a 2020 report on the Texas city. Austin is home to operations centers belonging to Apple, Amazon, PayPal, eBay, Facebook, Samsung Group, Nintendo, 3M and many others. Not surprisingly, this high-tech cluster contributes to the nickname, Silicon Hills, and has attracted a great deal of highly skilled, highly educated talent to the area. According to the Austin Chamber of Commerce, the metro’s population topped 2 million fiveyears ago, due largely to its ability to attract migrating talent. Among the 50 largest U.S. metro areas, Austin ranked third based on net migration as a percent of total population in 2018. Nearly 7% of the population lived somewhere else just one year earlier. Not surprisingly, this has created an ideal real estate market for investors using both short- and longer-term strategies, though the long-term plays are likely to require less effort and be more rewarding in today’s market. “Austin is an excellent market for real estate investors who have an investing strategy that thrives with consistent growth,” said Daren Blomquist, vice president of market economics at Auction.com. “Home sales have increased annually an average of 6% [over the last eight years of the housing recovery] and home prices have increased annually an average of 7.3%. Blomquist noted that Austin’s real estate market “favors the buy-and-hold investor who purchases rentals” because of its reliable growth pattern: “The cash flow won’t be as eye-popping as in other parts of the country, but that buy-and-hold investor should be able to see solid equity growth over the longer term.” Marco Santarelli of Norada Real Estate Investments agreed. “Austin has a record of being one of the best long-term real estate investments in the U.S. over the last 10 years,” he said. “Investors who got involved early entered the market ahead of an influx of interest and capital. If the appreciation rate in Austin remains steady, the annualized appreciation rate will be over 10%. This could trigger additional strong interest in Austin’s real estate investment opportunities.” Best in the U.S. Austin tops myriad Top 10 and “Best of” lists when it comes to the metro-area housing market. And, like its appreciation rate, high performance is nothing new. U.S. News & World Report has named Austin “#1 Best Place to Live” for three years in a row . CompTIA labeled Austin the 2019 “Top City for Technology,” beating out Raleigh, North Carolina; San Jose, California; Seattle, Washington; and San Francisco, California. Austin ranked third on the list the year prior. From a lifestyle perspective, Austin also performs well. The city ranked in the top 10 for foodies (WalletHub), as a “top city” by Travel & Leisure and as “the best city in America” by Forbes. When asked to comment on the city’s economy and housing market forecasts for 2020, a Pulsenomics/Zillow survey of more than 100 economists and industry experts predicted en masse that Austin’s market growth would “outperform the national average” and is “the most likely [city] in the country to do so.” If those analysts are correct, then 2020 would be the 10th consecutive year that sales volume and median price “topped the previous year’s numbers,” observed the Austin Board of Realtors (ABR). This type of growth is often difficult to maintain in high-population metro areas, but Austin’s unique population, employment characteristics and incoming population create the ideal growth medium for 2020. “I don’t see anything getting in the way of another robust year for [the Austin] economy,” said Eldon Rude, principal of 360° Real Estate Analytics. ABR president Romeo Manzanilla agreed. “Austin’s unprecedented population growth during the past decade has heavily impacted the real estate market. That exponential growth has put enormous pressure on the market…[and] as we look forward to this year, the market is not showing signs of slowing down anytime soon,” Manzanilla said. Beware of Rose-Colored Glasses Despite all the positive expert commentary on the Austin real estate market, investors should take all predictions with a healthy grain of salt. After all, 2020 will mark a decade’s worth of expansion in Austin’s housing market, and the national economy is arguably teetering on the edge of a downturn. However, with the right strategies in place, investors can still invest in Austin despite Local Market Monitor’s president Ingo Winzer’s warning of as much as a 25% overvaluation in some parts of the metro area. “Austin home prices increased briskly in the past decade, to the point where the market is now overpriced,” Winzer said. “This will create problems down the line, but right now the local economy is still doing well and home prices have been up steadily.” Winzer’s numbers put annual appreciation around 6%, which means he said that demand is good for both single-family homes and rentals. He recommended that cautious investors “subdivide properties or put their money into apartments as a safer bet [than single-family residences].” Austin benefits from its relative affordability when compared to other tech-driven markets like Seattle, San Francisco and Boston. Likely, the problems to which Winzer refers will hold off aslong as the comparison remains favorable. According to Yardi Matrix associate editor Anca Gagiuc, the city has a plan to keep affordable units in its active inventory. “The city has approved a plan to build 60,000 affordable units by 2027,” she said. “In October [2019], 3,163 units in 16 affordable communities were underway in the metro.” Yardi and Moody’s Analytics Data indicate that both

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Playing Bigger, Buying Better

Entera.ai Cracks the Code to Control and Scale in Real Estate When you hear words like “machine learning” and “artificial intelligence,” you might think more about algorithms and search bots than you do about real estate. Prepare to rethink that after you learn what the leadership team at Entera is doing. To Entera, the future of real estate revolves around investor access to information—and that means combining AI, machine learning, one of the nation’s biggest residential real estate databases and the human element into one comprehensive buyers’ platform that ultimately serves everyone involved in any real estate investment. Martin Kay, co-founder and CEO of Entera, described the platform as a backbone that pulls all the strategic components of real estate investing together. “We…provide our clients in residential real estate with an AI-powered buyers platform that helps them scale their capabilities, control their outcomes and drive returns all in one place,” Kay said. Kay and Entera’s other two co-founders, Gregory Morrison (CTO) and Robert Salmons (vice president of brokerage), work primarily with institutional and midsize professional investors and real estate funds that buy between 100 and 10,000 or more homes each year. These investors are already dedicated to adopting the innovative technology necessary to find and buy more properties, make better decisions and become more competitive in the increasingly tight real estate market. “Our clients want to find and buy the best homes, scale their capabilities, control their outcomes and drive returns,” Kay said. “We apply technology, real-time data and an on-demand network to the investing process to create a platform that accomplishes this allin one place.” Because efficiency is integral to ongoing growth and success in real estate, that element of consolidation is key, Kay believes, to a successful scaling process for investors. However, those investors are not “cookie-cutter” in nature by any means. Each client leverages the Entera platform in unique ways to accomplish their specific goals. “We present a powerful combination to our clients, and they leverage these tools in highly specific ways that could not take place if they were not able to access all of these resources and data in one place,” Kay said. Profitability and Scale According to Kay, Entera excels in the real-estate platform space because the company’s three co-founders integrated three distinct and vitally important components into the fabric of the platform at founding: Property source aggregation and automated discovery. The platform aggregates real estate from dozens of unique on- and off-market sources and matches the right properties to the buyer’s unique investment thesis. Comprehensive market information and analysis fueled by AI and machine learning. Kay said Entera may be explained simply as the “Bloomberg of Real Estate,” meaning it offers professional-grade decision tools and local on-demand real estate experts to determine the right home and offer for each client. Full-service transaction services. In addition to AI and machine learning, Entera’s human element is dedicated to making sure transactions move smoothly from beginning to end. On-demand local and centralized transactional services “make investors more capable,” Kay said. Harnessing Data and Details Thanks to powerful data integration technology, Entera’s discovery engine has access to roughly 215,000 on- and off-market properties available for purchase across the 14 markets it serves. That number might seem overwhelming, even to an institutional investor. But Entera’s machine-learning technology can customize “short lists” of properties optimized for individual investors’ requirements and already vetted for a high likelihood of success based on the investor’s past actions as well as the market data available. “We have been successful at quantifying qualitative investment criteria like ‘family-friendly,’ ‘millennial-friendly’ or ‘crime-ridden,’ and combining that with information about construction costs, renovation risks, tenant demand and geographic appeal, both present and future,” Kay said. “Then, we consolidate all our information about the properties in our system with our information about the investor’s wants, needs and capabilities. At that point, it is just a question of making a match between properties and investors.” For example, in Atlanta, Georgia, Entera has about 38,000 on- and off-market properties available for purchase. Kay said that on any given day, Entera can find the 10 properties that fit the exact ‘buybox’ (yield, tenant profile, location, home characteristics) of any potential client in a manner of seconds. “Our system runs 24/7, and it is smart,” Kay said. “The platform uses advanced machine-learning technology to interpret how the client interacts with real estate and refine recommendations for future deals.” This means that a client who has a history of loving certain types of neighborhoods, fighting certain types of comp values or finding rehab budgets to be “too high” for them to buy will soon find that the lists of properties they receive factor these preferences and behaviors into the equation. “At that point, it is just a question of making a match between properties and investors,” Kay said. The Entera philosophy places heavy emphasis on matching the right investor to the right property in order to create a living environment that is conducive to long-term residence. The co-founders believe that optimizing investors’ ability to give residents “the home they want” is integral to long-term, large-scale investing. “At the end of the day, what we care about most are the residents living in the home,” Kay said. “The place you call home really matters. When investors give residents the home they want, residents love where they live, stay for a long time and pay their rent.” The co-founders designed Entera to point investors to the right neighborhoods and propertiesthat exhibit growing demand compatible with their investment strategies. This means helping clients understand how to rehab; how to charge competitive, profitable rents; and what amenities and other home features will attract the residents who are the best fit for an investment property. Releasing and Realizing Hidden Potential Entera’s focus on the individual components that make up the biggest and largest-scale real estate strategies in the sector is the key to its clients’ successes. Those successes often come in areas that most investors would likely overlook

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Q&A With Strategy Investment Group

Mike Jordan takes a practical approach to profitable investing, focusing on strategy and diversification.  When Mike Jordan, founder and president of Detroit-based Strategy Investment Group thinks about his greatest successes, the first thing that springs to mind has nothing to do with real estate. It has to do with kidneys. “My father is still around at 83 because I donated my kidney to him in 2011,” Jordan said. “Idid it for myself. I love having him around.” That type of practical, forthright action is typical of Jordan, who has been active in real estate since 1999. He started Strategy Investment Group, a private investment company specializing in the purchase, renovation and resale of single-family residential (SFR) homes in Detroit and the surrounding suburbs, in 2001. During that time, he has had plenty of chances to apply his no-nonsense approach to the industry and to develop a real estate investment philosophy that stresses diversification. “I love real estate, but I know you have to diversify in order to really have the stability and security in your portfolio that most real estate investors are seeking,” Jordan said. “Fortunately, there are a lot of ways to diversify within this industry and keep the advantages that come with owning and optimizing real estate and real estate-related assets.” REI-INK sat down with Jordan to talk about his investment strategy, his business philosophy and his longtime dedication to doing business in his hometown of Detroit, Michigan. How have you diversified your own investments and those of your clients while staying in the real estate sector? A lot of my clients are passive investors, so they really rely on Strategy Investment Group to present them with good investments that are reliable, predictable and will generate good returns. For that reason, we focus on acquiring properties at deep discounts, identifying the right strategy for that property during the acquisition process, and then immediately deploying the strategy to create a good asset for our investors. This is a diverse process in itself, since we might renovate a property and then place a tenant, “wholetail” the property—which means fixing some very basic things and then reselling at a discount once again—or renovate the property for a long-term strategic hold of some other nature. While we are known for our work on the SFR side of the business, we also purchase and renovate multifamily properties, purchase nonperforming mortgage notes and work with private lenders to help them deploy their capital in a very secure, predictable environment. To my way of thinking, you can have an extremely diverse, economically insulated portfolio without ever diverging significantly from this industry. In my case, Strategy Investment Group has also diversified by expanding, at our clients’ request, into property management as well via Strategy Properties. As both a borrower and a lender, what do you think is the most important quality of a borrower in this industry? I tend to think along the lines of “The 5 C’s of Lending.” If a borrower meets all five of these requirements to my satisfaction, then I would expect to qualify for the loan. My 5 C’s of lending are: Character. Will the borrower pay? Capacity. Is the borrower able to pay? Cash Flow. Does the borrower have (or will the borrower have) cash flow to pay principal and interest when the project is done? Creditworthiness. Does the borrower have a history of paying? Collateral. How viable is the asset being used to secure the loan? When I make loans, I also ask the sometimes uncomfortable, but very important, question: If the borrower gets hit by a bus, what happens to my capital? If the answer is unclear or unacceptable to me, then I don’t make the loan. What do you wish every real estate investor knew before getting into a passive real estate investment? I wish that more passive investors had a better understanding of the importance of capacity. Most real estate investing companies like mine have a certain amount of bandwidth. When that capacity is reached, we cannot do any more deals until we finish the ones we started. A company that will admit it has a waiting list and tell you what types of properties it absolutely must acquire in order to make investors’ capital work as promised is a far better bet for a passive real estate investor than one that operates on the premise that the sky is the limit. In most cases, the limit is much lower than the company has indicated, and the passive investors pay the price when that too-ambitious attempt to scale backfires. For example, if I tell you that I have just purchased 4,000 houses and that I plan to do so every month from here on out, you probably should not invest with me. There is not a solid reason to believe I have the capacity to handle that rate of acquisition because last month, and the month before that, and the month before that, and so on, I was doing between 20 and 50 deals a month. On the other hand, if I tell you I need a loan so I can acquire 25 more houses, then you absolutely can feel confident making that loan because you already know I have the capacity. What is your strategy going into the next 12-18 months? We are going to continue to concentrate on the city of Detroit and the suburban areas around Detroit. We have been in this market for years, and we expect it to keep expanding. This area of the country is extremely downturn resistant, especially in the rental sector, so we buy “defensively” by purchasing homes at steep discounts and then either wholetailing them or renovating them and placing tenants in them. These properties are in areas where people want to live, with good schools, low crime and high rental demand, so we feel confident that our strategy of persistent growth and having about 60 purchase agreements in the pipeline at any given time is

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Risk Mitigation Isn’t Just For “Risk Managers”

Risk mitigation starts with originations, continues through relationship management and lending, and merely “plays out” if a loan starts going sideways. By then it can be too late … It’s often been said, “The time between economic recessions in the United States is like a baseball game, one inning for each year.” Whether you agree or not, it’s hard to argue the current economic recovery has gone into “extra innings” since the Great Recession technically ended in late 2009. That said, despite not just one but two yield curve inversions in 2019 (the classic “canary in the coal mine” for an impending recession), there are many key barometers indicating that the next recession—even if it’s just over the horizon—is not imminent. We continue to enjoy record low unemployment, positive wage and GDP growth, generally modest inflation (occasional spikes driven mostly by higher energy costs), strong housing demand and a record stock market. So why should we be more vigilant than ever about managing and mitigating risk? Shouldn’t we all be making hay while the sun shines? Yes, the last 10 years have been great for real estate investors—possibly the best ever. This, in turn, has attracted a lot of smart, innovative capital and new, tech-driven ways of delivering it, making this very much a “borrower’s market” today. The space has also witnessed a lot of new “efficiencies” that make underwriting, funding and servicing loans easier and more “customer friendly” than ever before. As a result, borrowers—especially those with experience, strong net worth and liquidity—enjoy a variety of attractive, convenient financing options. The problem is, it’s getting harder to find good deals with viable exit strategies. And no matter how efficient capital markets have become (we’ve already seen several unrated securitizations for REI loans in recent years), demand—and therefore loan liquidity—will always outpace the supply of quality deal flow. The U.S. housing shortage, driven by historically low interest rates coupled with a limited and therefore rising labor and material costs, has been well-publicized. Despite this, other than large “build-to-rent” master-planned communities and other portfolio or “consolidating” transactions, investors and lenders are naturally compelled to take more risk just to generate the same or even lower returns. All that indicates we’re in a market at or near its peak. The challenges investors face finding good deals combined with an abundance of aggressive (or, shall we say “less than acceptably risk-adjusted”) borrowing options is creating a perfect storm of narrowly profitable deals using higher leverage. All this is a recipe for “significant near-term dislocation.” Risk and reward will always find a way to rebalance, sometimes painfully so. Risk management (i.e., evaluating and forecasting risk) and developing tactics and strategies to mitigate risk must be everyone’s responsibility. Now more than ever, an ideal risk management culture starts further upstream during general marketing and originations and merely continues through underwriting and the end of the loan lifecycle. Marketing Actively manage solicitations and marketing/advertising (human, digital and everything in between) toward the most desirable regions, products or borrower types based on your long-term credit risk strategy. Do not focus on the highest potential immediate volume, lest you’re left “holding the bag” when the music stops. For example, if you want seasoned borrowers, don’t troll through “expert forums” and platforms where new(er) or lesser experienced investors are more prevalent. Make it clear you value client experience and financial wherewithal., Discourage riskier, less seasoned leads. This sounds easier than it is, for the lure of volume and what appear to be attractive gross yields often result in adverse selection—this is a time-tested truism. Originations Despite all that hard work generating new leads, don’t become so committed to “closing the deal” that you avoid red flags or spend too much time trying to fit the proverbial square peg into the round hole. If a deal doesn’t work (i.e., a borrower clearly isn’t qualified, property values look questionable or debt serviceability and recoverability/exit look challenging), it’s better to give a quick “no.” In that case, either introduce them to another suitable borrower or decline the opportunity outright.  Encourage them to keep looking for a better deal and to come back next time. No one likes to waste time and, rest assured, your erstwhile borrower will appreciate your candor and refer you to others who may be a better fit. Being thoughtful and direct “pays it forward” in numerous ways. Underwriting Stick to your underwriting standards. Don’t find ways to bend criteria or make exceptions just because you can sell them to your credit committee or financing partners. For example, if you’re traditionally a fix-and-flip lender who lends up to 90% of cost (or 75% of after-repair value) to borrowers with at least three successful transactions at 12% and 2 points, stick with that and focus on delivering a superior, consistent customer experience. Be responsive and collaborative, suggesting ways borrowers can become more profitable, better project managers or more efficient builders. Really dig into construction budgets to help ensure projects are viable and you are not otherwise funding into a default. Treat the borrower’s precious resources as if they are your own, and help position them for mutual success, even if that means less leverage or occasionally passing on an opportunity. All of this mitigates risk in the long run. Servicing Don’t give borrowers a reason—legitimate or not!—to blame you for projects going sideways. Poor loan servicing can often create an unrecoverable downward momentum that will only increase the risk of loss, let alone profits. Rather, help borrowers by promptly responding to requests or funding draws or simply “working with them” as unforeseen circumstances arise. Don’t burden them with artificial constraints (e.g., sticking to hard-and-fast construction completion dates even in the face of unexpected but understandable delays such as bad contractors and permitting challenges) when sensible flexibility can yield a much better outcome for everyone. Put differently, don’t be a source of frustration for good, honest, proactive borrowers working hard to harvest their investments and pay you back … they’ve

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