How to Bill Your Tenants for Water Usage with Kelly Koontz

 

How to Bill Your Tenants for Water Usage with Kelly Koontz

 

Guest: Kelly Koontz, a seasoned expert in utility submetering solutions tailored for multifamily properties. With over two decades of experience at Submeter Solutions, Kelly has been at the forefront of revolutionizing utility management strategies, empowering property owners to maximize efficiency, enhance property value, and foster tenant accountability. In this episode, Kelly shares invaluable insights into the intricacies of utility submetering, its profound impact on property management practices, and practical strategies for seamless implementation.

 

Big Idea: At the heart of utility submetering lies a transformative approach to utility management for multifamily properties. By accurately measuring and allocating utility costs to individual tenants, property owners can unlock a myriad of benefits, ranging from significant cost recovery and increased property valuation to fostering a culture of responsible resource usage among tenants. Through the integration of modern metering technology and innovative billing methodologies, utility sub-metering not only optimizes operational efficiency but also empowers property owners to proactively manage utility expenses, mitigate financial risks, and elevate the overall tenant experience.

 

 

    

Dan: So Submeter Solutions Inc. Would you mind starting us off here with what your company does and what you’re focused on.

Kelly: Happy to do that, Submeter Solutions, we’ve been in business since about the year 2000 and our whole business niche is all about servicing multifamily or multi-unit properties that are getting a single utility charge at their building but the owners, managers want to figure out how to allocate those charges down to the tenant-resident level. So our business will be in the first part selling you the proper equipment and metering equipment to be able to meter each individual unit. Then our second part of our businesses we can offer monthly utility billing services for those residents on an ongoing basis. So excited to be here today Dan and talk through all the details about how we do that for multifamily owners.

 

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%.  Buy & Hold Loans Offered Even Lower.  Get a FREE IPad when you Close Your First Deal by Registering Now at  http://REILineOfCredit.com

 

Resources mentioned in this episode:

https://SubmeterSolutions.com/

 

For Access to Real Estate Deals You Can Buy & Sell for Profit:

https://AccessOffMarketDeals.com/podcast/

 

Kelly Koontz & I Discuss How to Bill Your Tenants for Water Usage:

  • Introduction & Financial Impact of Submeter Solutions – 1:01: Kelly delves into the core principles of utility submetering and its role in transforming multifamily property management practices.
  • Comparison of Billing Methods – 4:11: Contrasting traditional flat-rate billing, RUBS (Ratio Utility Billing System), and utility submetering, elucidating the advantages of metered billing for property owners and tenants alike.
  • Technical Implementation of Submetering Systems – 10:42: Providing comprehensive insights into the technical aspects of utility submetering, from metering equipment selection to connectivity solutions and data management strategies.
  • Utility Bill Integration with Rent – 20:59: Exploring lease structures and billing methodologies to prioritize utility payments alongside rent.
  • Ideal Clients and Property Types – 29:30: Identifying ideal clients, including self-managing landlords, property managers, and commercial property owners.
  • Alerts & Leak Detection – 40:00: The importance of leak detection, particularly in low-income and emergency housing, alongside active methods for instant alerts on flooding like frozen pipes, leading to significant property damage and renovation costs.
  • Insurance Premiums & Installation Costs – 45:10: Kelly discusses how insurance premium reductions are linked to active leak detection systems, the logistics and costs of installing sensors in multifamily units, and the growing regulatory and market demand for leak management solutions in water-scarce regions.

 


    

Relevant Episodes: (200+ Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.

Avoid Property Insurance Nightmares With Public Adjuster Andy Gurczak

The REI Diamonds Show - Daniel Breslin | Andy Gurczak | Property Insurance

 

Guest: Andy Gurczak is a seasoned real estate investor and public insurance adjuster. Starting with a humble duplex, Andy has strategically expanded his portfolio to include a variety of commercial properties. He leverages his construction background and keen market insight to navigate the complexities of real estate and insurance claims, making him a valuable resource for both novice and experienced investors.

 

Big Idea: Andy Gurczak delves into the intricacies of insurance claims for property investors, emphasizing the importance of strategic decision-making and a thorough understanding of the process to avoid pitfalls. He also shares his journey from residential to commercial real estate investing, highlighting the lessons learned and strategies for success in the commercial sector.

This episode of The REI Diamonds Show is sponsored by the Deal Machine. This software enables real estate investors to develop a reliable & low-cost source of off-market deals. For a limited time, you get free access here.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

 

Resources mentioned in this episode:

AllCity Adjusting

 

Andy Gurczak & I Discuss Avoiding Property Insurance Nightmares with Public Adjuster:

  • 5:50 – Details of a 1031 Exchange: Insights into executing a 1031 exchange successfully and the lessons learned from the process.
  • 10:01 – Acquiring a Seven-Unit Commercial Property: The story behind acquiring a prime commercial building and its financial implications.
  • 15:40 – Financing Strategies: How leveraging relationships with local banks facilitated property acquisitions.
  • 18:30 – Property Management and Tenant Relations: Managing properties personally and dealing with tenant issues directly.
  • 27:35 – Critical Timing in Claim Filing: Brother Elijah’s experience highlights the importance of acting swiftly and seeking expert advice to maximize claim value.
  • 29:19 – Settlement Offers and Pitfalls: Andy shares insights into deciphering settlement offers and avoiding potential traps.
  • 35:52 – Commercial vs. Residential Claims: Understanding the dynamics between commercial and residential claims can influence strategy and approach.

 

Relevant Episodes: (200+ Content-Packed Interviews in Total)

Watch the episode here

 

Listen to the podcast here

 

Avoid Property Insurance Nightmares With Public Adjuster Andy Gurczak

Andy Gurczak, welcome to the show. How you doing?

Dan, thank you so much for having me on. It’s a pleasure.

Yeah, for sure. We’ve been trying to link up here for a little while to get you on the show. Main topic’s going to be insurance claims, and I think it’s valuable for the readers to hang in there, whether they’re single-family investors, whether they’re commercial investors, nobody wants to have an insurance claim ever, but when you do, you can really, in my experience, get screwed up by doing it wrong or maybe even choosing to make the claim in some instances.

Andy Gurczak’s Investing Journey And Business Focus

I know that’s been my issue, claiming something too small, but we’ll get into all the problems and the solutions and what you do as an adjuster and why that’s something valuable here shortly. Before we do that, Andy, do you want to give us a background on maybe some of your investing career and then also how you got into and what your adjusting business is now?

Yeah, so when it comes to the investing, Dan, me and my wife bought our first duplex. This was when we got married. We bought our first duplex. We lived on one side and rented the other side. We basically lived for free. We had a little bit of income, even left over. I was able to scale the business, not pull any money, didn’t need to even make money at that point. I was able to reinvest everything. My wife worked where it brought enough for groceries into small stuff. That was under FHA. I think we bought that actually before we got married. Right before we got married, I think we bought that under my name. Two years later, we ended up buying another FHA under her name.

It was another duplex, so we ended up doing only 3.5% down, which was nice. It was a small investment out of our pocket to have two properties that were cashflowing really nice. From then, we bought a townhouse that was a foreclosure. We ended up buying a building that’s in downtown Crown Point where we live that we converted into a commercial. There are three tenants in there, actually.

In 2023, we did our first 1031 where we sold one of the duplexes, took the money and then bought a seven-unit building. It’s a commercial building. There are seven suites, about 15,000 square feet. I think that’s it. I know we have a lot. We’re building a home right now. Real estate has been something that we’re always interested in. We’re always looking to buy something different.

Before we get into the insurance topic, could we pull on the thread of the commercial deals? I think a lot of the readers, including myself, you flip, you start out maybe wholesale a couple of houses, flip a couple, do the house hack, like you did. I know there’s a lot of investors who will start by flipping houses, holding a few rentals. We all have this pool toward commercial real estate.

 

The REI Diamonds Show - Daniel Breslin | Andy Gurczak | Property Insurance

 

“I’m going to do commercial real estate someday. I want to get into commercial real estate someday.” That’s where I’m at. Over the last few years, I bought into a shopping center. We’re developing fourteen self-storage buildings. I have a 30,000 square foot warehouse that we’re just going to flip that one here coming up shortly. It’s been cool. It’s been a cool transition for me in the last couple of years. It is exciting to be able to put a little more capital to work when later in your career you have more capital to put to work. Would you mind touching on that first Crown Point commercial deal, maybe the purchase price, what your plan was?

Just so you know, all the properties we have were commercial. It happens because of the business. The business grew, so we needed more space. As a business grew, we’re like, “Let’s look.” The landlord actually that I was in renting from at that time, I always asked him. I knew he was a big developer. I said, “Do you know a lot of people in this area? If you were ever to sell anything or have something else, please let me know.”

It turns out he had a deal. The grandma, I don’t know if she passed away or something happened. The kids knew my landlord since he was little so they offered the house to him. He called me and said, “I don’t want this. We’re focusing on different stuff now. Would you want to take this off me?” I met him and I knew it’s in a perfect location. Location is everything. The price he gave us was so good. We could have probably turned around and doubled it right away. We took the first floor. We cut it in half. We did two offices. I took the back office, my business, we rented the front. The upstairs is a just a residential tenant.

That one made sense. It was cheap. You could have sold it for more immediately. There’s probably no hesitation there.

No. That one I knew right away. We bought that for I think $220,000. That one’s probably worth around $500,000, $600,000 at this point. The location is perfect.

Navigating A 1031 Exchange In Real Estate

Now you have the seven unit and the 1031 exchange. I think the 1031 exchange, I did one. I don’t know of a whole lot of interest in doing anymore. I probably would try them, but I remember the pressure and the stars having to align to make that deal work for me when I did it. It’s a great tool. I think it’s good. I think there’s a lot of readers who are like, “Yeah, I would like to do that someday too.” Would you mind walking us through the 1031 deal, Andy?

Same thing with this building. Our business has grown. We had more people, we needed a bigger space. We were looking to rent because there was nothing on the market. Everything’s pretty expensive. We found the building and there was a unit available. I contacted the realtor. We looked at it. I’m like, “That’s too big for what we need.” I explained to him that we’re always looking to buy. He said, “The owner is getting older. He is actually looking to sell.” I said, “Ask him how much he liked.” He came down with the price, which was really good. We bought it. I’m like, “Okay, we’re buying it.” I told my wife, “Let’s see if we could do a 1031.”

We ended up listing our duplex that we had another one and got offers on that right away. The 1031 process for us was super easy because we had the property already identified. For us, tactically it was different. Most people do no sell, then they have to identify the property within, what is it, 60 or 90 days? Whereas we already had the property. We knew a could sell really quick. To us, it was a no brainer. Everything made sense. The only mistake we made then that I wasn’t aware of, that property we had, the duplex was in mine and my wife’s name. When we bought this commercial, we wanted to buy that under our new LLC. When you do a 1031, you have to name it.

If you’re selling them your names, then you have to buy the property, the new one, in the same way you’ve sold the other one. If I knew that, I would’ve had retitled that duplex under the new LLC so then the closing, it would’ve been easy because then you’re selling as an LLC and you’re going into LLC, the same name. You can’t switch names. It follows the person that sells the building. If that makes sense, meaning if for anyone that ever does a 1031, make sure whatever you’re selling, that’s where you’re going to have the new building titled at, whether it’s your name or a different LLC.

Nice pro tip. How many square feet is this seven-unit commercial building?

15,000 square feet.

Nice size. One of the cool things I have to underline for the readers, because it’s just such a powerful way to find commercial property, is you stumbled upon this one, it sounds like. You call the agent for the vacant unit. There’s a lot of buildings out there with a similar type of circumstance where someone’s like, “I could just keep renting it. I could sell it. I’m not really trying to put it on the market.”

You have that perfect timing with a low amount of competition in the event that you overturned that stone, which you did hear on calling on the vacant unit and now it just so happens to be for sale. That’s like one of the expert strategies. I know quite a few people who have done that successfully and found phenomenal deals here, just like you did.

They always say there’s no good or bad. There’s no perfect market. Even now, people are like, “There’s no deals.” There’s deals. If I was 100% in real estate, I would be calling. I would find all our deals. Even the duplexes, we found those on our own with my wife. We didn’t even call an agent. By the time the agent told us this property’s for sale, we’re like, “Yeah, we’ve already told another agent. We’re already under contract.” Agents are just so slow sometimes. We find our own properties. The townhouse we bought that was foreclosure. We contacted the agent. By the time he contacted the seller, it was under contract. We’re like, “He was so slow about it.”

 

There’s no perfect market, but there are always deals. You just have to look and find them yourself.

 

A couple of weeks later, we’re looking online and the property’s back on the market. We called a different agent and made an offer. That guy, we were literally under closing, he calls. He’s like, “Huys, this property’s back on the market.” I’m like, “Yeah.” There’s always deals. You just have to look and find it yourself. The way we did this one, even speaking with that other developer, again, if you just talk to people and you get in networks you’ll find deals. There are deals out there.

Acquiring A Seven-Unit Commercial Property

What was the current net operating income on that when you bought it? Did you know that number and what was the purchase price?

The purchase price of the new building was $860,000. We bought it at $860,000. I want to say around $12,000 gross was what it was bringing in per month or more. Right now, it’s grossing around $15,000 something with me obviously not paying that much because I’m taking one of the main suites.

What are you paying in taxes?

We’re netting about $10,000 a month.

Okay. You’re at about $120,000. Even at an 8.5% cap, that’s got to put you at what?

I never do cap numbers. I don’t make real estate confusing, I make it very simple. What is our monthly expenses, our mortgage, our taxes, what is the income, what’s left over? I know what I still have to have for, if anything breaks. I know I can look at a building and know what needs to be remodeled or updated in the next years. To us, the numbers made so much sense. After all our expenses, snowplow and grass cutting in the summer, everything else you are left with a little bit over $10,000 a month.

You have space in there. I guess you’re paying yourself a little bit in a sense from the business.

It should probably be another $2,000, $3,000 netting in there if I was to pay the regular. Remember, the duplex we sold, we netted around $200,000. We took $200,000. Basically, the whole down payment was from that duplex. That duplex doubled in value. We took all that money put into this one. Technically, we only finance like $600,000

This thing would appraise no problem right now at like $1.4 million. I don’t know how anxious the banks are when there’s an owner occupant with the space. There are rules sometimes of certain percentage the owner occupies. They may treat it like owner occupied versus certain percentage is tenant-based. You have more investment value. $1.4 million, even at like 65% loan to value, which you could probably geta cash out refi and something like that would be around like $900,000. It would make complete sense to do that deal if you weren’t even going into that deal. You bought it for $860,000, you got it tenant in and then you pulled your cash back out. Did you guys have to put se serious capital improvements at all?

Nothing. I was in construction so I could inspect the building. I had to do my own inspections. I inspect my own buildings. No, I looked at this building, I knew that there’s seven air handlers on the rooftop units. I knew three of them are old. I knew that it was a matter of time and I could budget $7,000 or $10,000 grand for each one that’s going to break. One did go out. One of my employees, her husband actually owns a HVAC company. He got the unit for me for half the price. Had a friend put it in. I saved like half the month. I knew that was going to go out. Everything else, the building is all brick. Everything is fine. No maintenance.

It’s a smoking deal and I really appreciate you being candid here on the show about it because I think it’s a great. If someone’s flipping houses and they’ve got 10, 20 rentals, 40 rentals, a deal like this would be a great stepping stone into the commercial arena versus like buying a 100,000 square foot shopping center. I don’t know, I think you’d better off maybe learning on the $860,000 purchase.

I wouldn’t be ready to go into a shopping center. This was our first, and then that other commercial property that we turned right into a commercial, our little commercial on the square that we call it on a little downtown area. We took that single home, took it into the two offices and the tenant upstairs. We don’t really consider this commercial. This is really a true commercial unit, a true commercial building. I always told my wife like, “If we’re going to try it, let’s try it.”

We went from netting around $1,000 a month to taking the money from that property into this one and netting over $10,000. We’re going to lose a tenant right now that we were aware we’re going to lose. We’re going to lose about maybe 25% of income because they’re moving out. However, because this area is by the hospital and it’s a really good area, even if it takes longer, we’re fine. We could lose half our tenants and we’d still be even. All that stuff, we take into account. When it comes to numbers and cap numbers, to me, I always protect. If we lose half the tenants or if we lose how much do we have, how much do we have left over everything, worst case scenario?

Structuring Financing For Real Estate Deals

Yeah, and I like it. It’s a building that’s yours. There are not investors. A lot of people who are doing commercial deals are like raising the money from 10, 15 different people. There’s something to be said for owning the asset 100% with the wife, whatever the case is. There’s something to be said for that control long-term, especially to mitigate the risk of like, rent increases in space that your company might need. There’s a ton of reasons why this deal would make sense. How did you put the financing together? Was it like a local bank and you have to refinance?

Yeah, let me tell you. This was super great. I don’t know how much can I indulge into this, but we’re building a house. We’re building a house not far from here. We had a lot and because I’m GC-ing it myself, it was very hard to find a loan because not many banks want a loan to someone that’s GC-ing a project themselves.

There’s a local bank here that’s got two branches and they’re great. They ended up loaning the entire project, the entire build with me GC-ing. It turns out then my neighbors actually know the president of the bank. He’s also the underwriter. It turns out he’s great. He loves small businesses. As soon as we had this property, we found out. I contacted them.

I said, “We have this property. Would you guys want to look at it?” He was like, “Yeah, send me the numbers.” Next day, he was like, “Yeah, this is great.” That’s it. In a month, we were closed. That’s how it should be. It was working with them even for this construction loan now for anything. Now I’m like, “I will never go to another bank. They will get all my money. I will do every deal with them because it’s the most simplest process.” It was great. In my business, we banked with the Chases, like all the big branches and the servers just don’t care, I guess, unless you’re doing millions with them. You had to go through like ten people to just get an answer on some of the simplest stuff.

Understanding Market Rent And Price Per Square Foot

I feel like it must be hundreds of millions you have to do with them to get their attention. They’re trying a little bit, but their hands are always tied at the local level. There’s only so much they can do. Those local banks are fantastic. Do you know what your price per square foot is for the rent on any of the tenants? What’s your market rent?

I’m not sure. My wife has all the numbers in terms of square foot and what we’re renting each unit for. I know where they were rented for like fair amount compared to everyone else because she did the math when we compared it to other one. She would have those numbers. She runs more of the numbers. She collects the rents. Of course she collects the rent. She does the leases. I handle all the problems. The worst part is I’m in this building with the other six tenants. When there’s an issue, they just come and knock on my window.

It’s the only drawback.

My original plan was don’t tell anyone that I’m the landlord, but I like talk to people. As soon as we moved in, I’m the new landlord. All of a sudden, now I got people knocking on my window. We might have someone knock while we’re sitting here.

You must have all kinds of problems then.

Not many. Honestly, the only issues we’ve had besides the AC is the lights going out, the light bulbs. Now we’ve been converting them to LED. As soon as we have an issue, we have a method to convert them to LED and then we call it a day.

It’s a good deal. $57 a square foot on the purchase. I’m throwing a dart, but if I had to guess, probably like $8 to $11 a foot, something like that as the rent. I can see why the president was like, “Yeah, this one makes sense,” because when you do it on the cap rate and the investor math, it’s a good deal. Congrats on that find.

The agent asked us like, “What would you want to pay?” I said, “No. What does he want? I want him to make us an offer.” I think he said $890,000, and then we came down and we met at $860,000. The city appraised it for $1.1 million.

Was that just for taxes?

Yeah, and the city’s appraised low always. We knew if the city’s appraising it $1.1 million, we’re getting it. The math just made sense.

The Role Of An Insurance Adjuster In Real Estate

Let’s switch gears and dive into the insurance adjuster. What is an insurance adjuster and why should a real estate investor care?

There’s different adjusters. There’s a staff adjuster that works for the insurance company. You’re going to have the independent adjuster who works for the insurance company and then there are public adjusters. Sometimes they say private adjusters, but a public adjuster as known. The license it holds is an adjuster that works only for the insured. We can only represent the insured on their own claim.

When we explain to clients, it’s like, “The insurance company has their own adjusters, their own attorneys, their own contractors, their own team. Everyone works for the insurance company, so they’re all looking out on behalf of the insurance. They can’t they can’t be representing the insurance company and then coming out and looking on your behalf. It’s like an attorney representing two parties.” As a public adjuster, we represent the policy holder and advocate only for the policy holder.

Small little delineation there, but I’m just thinking back to when I first bought insurance, and I think I had a claim for a car accident when I was in my twenties. They came out and gave me a check. This is great. The adjuster just came right out. It was easy peasy. Through real estate, I’ve learned that they don’t necessarily pay out on every claim and they try to minimize the amount on certain claims. That would be the staff insurance adjuster or an independent adjuster working for the insurance company versus a public adjuster, which the insurance company’s not going to tell you that you should find or use a public adjuster, right?

That’s correct. They’re never going to tell you, you can hire a public adjuster. They’re not going to say hire an attorney. They’re going to keep pushing their own people, whether it’s, “We have our own vendor. Would you like to use our contractor? Would you like to use our own this?” They want to control the claim. We’re in this industry, so when I had an accident years ago and I got an estimate for my truck, we don’t work car claims, vehicle claims, but I remember going through the estimate line by line item, just like we do with buildings.

I remember there was $3,000 missing in that estimate because he had quoted lower parts that the truck actually had because it was like a better model. I was able to find $3,000, never worked in car loans. Just knowing the industry. If I was just a regular consumer, I would’ve got the check and be like, “Great. He cut me a check. This is all nice.”

What was the total amount of that claim? You found $3,000 extra in a claim.

It was $5,000 they gave me for my truck, and then I ended up finding another $3,000 there that they owed me. It was a $8,000 claim total.

We’re not talking an insignificant percentage of fine. That’s what the car insurance companies do. How much worse does it get in real estate?

We’re talking about huge numbers.

That’s right. Maybe we could talk about an example on a claim where they issued a certain amount of money and then you got involved and you found what, and then the total claim ended up being how much?

Yeah, the best one, we finished there’s probably a video with the insured. Brother Elijah, his claim, it was a church they purchased. They have a church, but they also do schooling. They were going to convert this old church into a school. They had a fire like a couple months after they purchased it. The adjuster came out and I think his initial estimate was like $800,000. That claim settled for like $3.1 million, I think, or $3.21 million.

It’s so significant, right? You could say, “Andy, that’s just your winners.” We’re always like, if we take a claim, we’re always going to significantly raise and get our clients every penny. That one’s a really big one. I’ll tell you, we had a sixteen-unit building that burnt down. He had a $550,000 policy and had a total loss. The adjuster came and wrote damages for like $580,000, but then he took depreciation. There’s a difference between ACB policy and ARCB policy. That insured only had an actual cash value policy, meaning that once the depreciation was taken away, that’s all he would get. He would not be able to claim the depreciation.

That adjuster gave him the $330,000 check. He actually called us because his investor-mentor recommended us. We looked at the building and I looked at the claim and I said, “You could tell that the adjuster start stopped writing his estimate because he got to like $580,000.” It was like right over the limit. When we got a hold of this job, the adjuster actually reached out to us and said, “Why is he hiring you guys?” I said, “What do you mean?” “I already paid him limits.”

I’m like, “We didn’t pay him limits. You wrote limits, but because the depreciation is so high, you’re only getting him $330,000. That’s all he could claim because he’s got an ACV policy only.” We ended up writing that estimate that damages were over $800,000. Even after you took out all the depreciation, he got a full settlement of $550,000 plus there was an endorsement for debris removal, so he had another $25,000 plus 5% of I forgot what other endorsement. He ended up getting an extra, I think, $300,000 that he wouldn’t have got.

Impressive. You breezed past ACV and ARCB.

Yeah, sorry, I didn’t want to stop right there. We just had an insured, same thing. They had a fire their investors out of Mexico actually, and their policy was an actual cash value policy too. A lot of people don’t know that. It’s scary. When the claim is settled, it’s always settled on a replacement cost value. When we calculate it, we’re going to say it’s going to cost $100,000 to replace this home. We’re going to say it’s twenty years old, all the material. Now we’re going to depreciate the material and, in some states, labor by 20%.

 

A lot of people don’t realize their insurance policy is actual cash value, not replacement cost. It makes a huge difference in a claim settlement.

 

If we’re going to take $100,000 depreciated by 20%, that’s $20,000. You take $20,000, that’s the depreciation, and now the insured gets the actual cash value, which is the $80,000, that’s your actual cash value, what’s left after the depreciation. Now if you have an actual cash value only policy, you are only getting that $80,000. Most policies are replacement cost value, meaning you get that depreciation amount once the repairs are complete.

The replacement cash value is the one that readers would want to make sure they bought.

A hundred percent. You always want a replacement cost policy.

Is that like the insurance broker should normally pick that up as they’re placing your policy, which brokers are shoving people into actual cash value policies?

I’m wondering the same thing because if I’m a broker and you come to me. I get a lot of the consumers maybe want to have the lowest premium. I don’t care. If I’m a good broker, I’m going to explain to you, “You’re going to save $1,000 or $2,000 a year, but understand that if you have a fire, you have a major disaster, you’re going to get half the money and that’s it.”

I don’t know how as an agent, you’re not explaining that well enough for the client to spend a little bit more or get them in it with a different carrier so they can actually be covered for the full amount. It’s a scary thing because if you know fires, again, no one ever thinks something’s going to happen to them. That’s the call we always get. “I always had insurance. I never thought this was going to happen to me.”

Everyone reading the show right now, that’s what we’re all thinking. “Nothing’s ever going to happen.”

I was on a podcast and the host, a really nice gentleman, and I won’t say his name, but a month after he reached out to me, he had a fire a month after we were on the podcast that he had me on. It never happened to him.

I’m assuming it worked out and you were able to perform?

Yeah. He was super happy. He was grateful.

Critical Timing In Claim Filing

Let’s go back to Brother Elijah’s deal. They offered $800,000, you got him $3.1 million. What a time period, and like what were the interactions? Maybe what we’re trying to pick out in this example, Andy, is could Brother Elijah have made a mistake by signing a document or cashing the check of $800,000 or something he could have done that would’ve like jeopardized the position? Do they have to call the adjuster within some certain timeframe? Where at in the process would you fit in there?

Yeah, Brother Elijah was very smart. They cut him the first check. I don’t know if he right away knew something was wrong. Actually, when we talked, he purchased the building for $700,000-something. When they told him it was $800,000, he thought it was pretty fair. When he got a contractor in there and the contractor told him, “There’s a lot of damage here. You might want to call, get a second opinion,” is when he reached out to us.

When I initially walked through that building, in my eyes, I’m like, “This is around $2 million and up.” Having a construction background, I know what it takes to put stuff back. I know the material price and labor price of stuff. In my head, right away, I could calculate everything. Even if he cashed the check, unless the check is a settlement, meaning it says settlement amount that you’re settling a claim with them, it doesn’t do anything. It’s an old myth. If they give you money, you take that money and you deposit as quickly as possible. Take that money, that’s your money. Whether you hire a public adjuster like us or you don’t, you want to take that money and keep fighting the claim.

Will they try to put a document in front of you at some point that says, “We’re accepting this as a full settlement,” or is there laws against that?

They wouldn’t put a document in. There’s claims we settled to where they say, “This is where we’re at. Would you guys want to accept the settlement offer at this?” The settlement offer says, “You guys are going to get a check and it says it’s a final settlement offer.”

That’s what you want to look out for then?

As long as the check doesn’t say settlement or you’ve signed something, but most checks that you get those first checks are those actual cash value checks. Brother Elijah, that $800,000, I think, his actual cash value was $400,000 like $500,000. That was his first check, the $500,000. If he was to deposit that check, it doesn’t hurt the claim or doesn’t do anything with the claim, that’s his money.

How Insurance Claims Are Paid Out Over Time

Does a normal insurance claim pay out 2, 3, 4 different checks? I’m curious, if I’m the insurance company and I want to operate in an unscrupulous fashion, why wouldn’t I have him sign off on the $500,000 when I’m sending the $500,000? It seems like they would attempt that, but they’re not attempting that all the time.

Most people won’t hire a PA. I think it’s said there are only 5% or 6% of insureds that actually hire a public adjuster or get help. They know most people won’t get help. They’re not going to look out to an attorney or reach out anywhere. They’re just going to they’re going to do their thing, they’re going to settle the claim, have a contractor go and do the repairs. Most of the time, when they want to hire a peer or want to hire someone, it’s too late.

 

Most people won’t hire a public adjuster. They’ll settle the claim, hire a contractor, and by the time they realize they need help, it’s too late.

 

Yeah. You have to get in there quick. Did Elijah hire you very early in the process? You may have just mentioned that

Very early. He got the offer and as soon as he got the offer, he had a contractor go in there and then a couple days after he contacted us. It was pretty early.

It sounds like one of the critical step steps is hiring the public adjuster immediately.

Yeah. If he hired us from the beginning, as we always recommend with most investors, like we’re Brother Elijah now, he had another fire actually at another building that he rents out to his parishioners for free. Actually, he doesn’t rent it out. If parishioners are going through a hard time, he lets them stay at this house. This guy’s great. This house actually caught on fire and so he called us right away. The best step is, again, even with that church, if he called us right away, it probably would’ve been more than $3.1 million. It probably would’ve been settled in half the time.

What was the timeline it took to settle that one?

Once we got hired, I think within 90 days, that was settled. That one was very quick. Depending on the claim, depending on the insurance company, depending on where we come in the claim process,

What would be the long end someone could expect. Let’s say single-family. We talked a little bit about commercial. Owner occupant, even. We run into this a lot. We buy these houses in Philadelphia, Chicago, around the country, and occasionally we’re getting the fire damaged. They’re calling because they had a fire a few months ago. One of the things the sellers are often mentioning to us, Andy, is, “We’re fighting with the insurance company. Let us settle this out, then we can deal with the sale.” I’m wondering if there might be a synergy there for us to introduce the adjuster or make sure they have the adjuster. I’m also curious, what’s that timeline for them on the long end to sort that out?

Yeah, with a fire, it should go pretty quick. Once we get hired on a fire, fire claims go pretty quick. That’s our specialty. Majority of our claims that we handle at all city is fires. We’ll do large water claims. We actually do in a couple tornado claims in Ohio. Large losses is our specialty. When it comes to a fire in like Chicago, those go pretty quick. If you have State Farm, again, I don’t want to shoot out one insurance company, but I just said it. With State Farm, they’re just so behind their adjusters that even if we give them our estimate and give them everything, it still takes like two months to go through like five managers just to issue a check.

You got to wonder if that’s because they’re behind or it’s a great strategy.

I’m going to tell you right now, this claim here in Ohio is a fire, it’s an investment group. There’s four investors. They just called us and we just did this Ohio claim and we met with the adjuster. I’ll tell you how long it’s taken because this is a large loss. This is going to be about $500,000. Since the fire happened, 21 days. We already wrote our estimate. We inspected it, we already prepared all our documents. We already met with the adjuster. He’s already got our estimate. We should have their initial offer. If it’s good, it’ll be their initial offer or their final within 10 days, 30 days. If there’s stuff missing, then we’ll have to go back and negotiate it. Within 60 days, we should have that claim wrapped up.

Let’s say they get an offer and they hire us. Now we have to go and recreate the whole story like, “Dan, what happened in the last five months of this claim?” “I gave them this paperwork and I told them this and this happened.” Now, not only do we have to present the amount of damage, but we have to say, “Go overturn everything you’ve already told and or you’ve already said.” It’s a little bit more work and it takes more time.

Do you operate nationally, Andy?

Yes. I think it’s close to 40 states now.

Okay, so not quite nationally. Are there any states, maybe the no state list if someone was reading versus all three?

The reason I say all states, because some states don’t, like Alabama doesn’t have public adjusters. There’s states that don’t have public adjuster designations.

Okay. They’re not legal, it’s not written into the insurance.

Pretty much every state, major state. I don’t think we’re in like Montana, the Dakotas, I don’t think we were in. That’s pretty much it. If you called us now and said, “We had a fire in Montana,” we’d reciprocate our license within two weeks, we’d have a license and work claim out there. It wouldn’t be an issue. That’s how we grew our business actually, originally. When we had our first original investors here in Chicago, Indiana, as they grew their portfolios, we grew with them. They would grow to Ohio. We’d get our license there, get an office and grow with them. That’s how we got into so many states and grew nationally.

What makes up your business in a percentage commercial versus single-family residential?

I would say 70% is commercial whether it’s a single-family commercial or like single-family investors. 30% would be residential homeowners.

Is there a low end of the property value that you simply can’t get involved? I don’t know. They have a $100,000 insurance policy or something.

Our claim, we stick to $100,000 claims and up. That’s where we like to like to be at, where it makes sense for us.

That’s typically going to be the large losses, like you mentioned, the fires, tornadoes and I guess a frozen pipe on the third-floor flat?

Frozen pipes and third floors are the greatest. We do them all the time. Again, not great for everyone, but we do them a lot. If someone calls us, “I had a frozen pipe in my basement,” probably not much in a basement, 2,000 square feet. It might be a $40,000, $50,000 claim. Not much we can help. We just recommend someone or say, “Here’s someone we know.”

It’s not about money and stuff. More or less it’s large loss because we have the team to handle it. We’ve built the company around handling large loss and bringing in the right people. Our main estimator spent twenty years with farmers handling large loss. He was in charge of million dollar claims and up in all of California and some others, so that’s how we’ve built the company.

Yeah. He’s going to have to fly out to Georgia or wherever the claim is.

We fly out everywhere. In Galveston, Texas, a home right on the beach had a fire. From Galveston, we’re going to Ohio for a tornado. We’re everywhere.

How do you get paid? Is this like paying you by the hour contingency fee? What does the client expect?

Whatever state we work at, whatever claim, it’s 10% contingent on what we recover. If we get hired right from the beginning, it’s 10% of the final settlement. If the final settlement is $300,000, it’s 10%.

Does that normally get paid like straight to you? Does it go to the client?

No, the insured. The insured pays us once we settle the claim. Either they’ll get a check or we get a check, we’ll endorse it, and then they send us a check or we’ll write a check to them minus the fee, and they’ll endorse the insurance check. The getting paid part is like us getting paid in the final is pretty easy. It’s just making sure we get the client paid.

Is there ever a time where it’s contingent so if no resolution comes, there’s no fee. Is there ever a time where you guys try and there is no fee?

In ten years, we’ve had two claims that didn’t go to an attorney claims that were just not denied, but just didn’t get paid. Technically, in ten years, I think there’s two claims that I could remember that we didn’t get paid. There was contingency and there’s just nothing else we could do. We came in too late, the client was already setting up. There were too many parties involved.

How To Avoid Bad Public Adjusters

Are there bad adjusters out there, Andy? Are there people who bungle the situation that we need to be on the lookout for?

Yeah, 100%. You have to do your due diligence when you’re looking for a PA and especially when you’re doing your due diligence, let’s say you had a fire, you had a large loss. Every public adjuster is going to say, “We do fires, we do water, we do everything.” Most public adjusters in like Florida only handle storm claims like wind, hail. They don’t really do fires. You have to make sure you actually specify that the public adjuster knows what they’re doing and they can handle a large loss or they know how to work with management companies or associations or investors or landlords.

 

You have to do your due diligence when choosing a public adjuster. You have to make sure they know what they are doing. Experience matters.

 

It’s different policies than homeowner’s policies. I can tell you for an investor, if you send us a policy, I already know you don’t have code coverage unless you actually paid extra for it. Whereas if it’s a homeowner’s claim, it’s mandatory. You always have it. When you purchase a home and you purchase insurance with State Farm, law and ordinance coverage is already included.

If you’re an investor and you purchase a landlord policy, that law and ordinance is not included. You actually have to buy that separately. Again, knowing that the public adjuster knows what type of claim, what type of scenario is probably the biggest thing you have to be aware of. A lot of pa firms are small. You have to remember, 80% if not more of PA firms are mom and pop, very small local. There’s only so many big companies, big PA firms that can actually handle large loss.

When Not To File An Insurance Claim

I have a question that may not be adjuster-related, but I’m looking at a building right now and the guy made a claim because I think his roof, I don’t know if it caved in or it was leaking, probably 80,000 square foot building if I remember correctly. It was a $500,000 claim. They dropped him and he’s got like 350,000 square feet that I’m trying to buy off of him right now. None of us can now get insurance because he made the claim.

I have quite a few people who are friends of mine, who won’t even make the claim. $60,000, $80,000, $100,000 repair on their commercial property. They know better than to make that claim because they’re going to get dropped. That next insurance premium might go from $60,000 a year to $110,000. You’re fine and you’re in the clear in two years by paying for it out of pocket in a sense. Do you have any insight around there’s time and place not to make an insurance claim?

That’s one of the tips we always give when I’m discussing claim process and adjusting area with people. For our company, something we love to do and we do for all our clients is we advise when to file a claim. There are always times when there’s not a right time to file a claim. When a client calls us, you call us and you say, “Andy, everyone in my neighborhood, all these businesses got new roofs. I should file a claim, I’m going to get a new roof.” No, that doesn’t work that way. If we look at 10 properties, everything’s identical. To that one property, let’s say 1 property, there’s 10 different claims, 10 different adjusters, 10 different insurance companies. Even if it’s the same insurance, ten different adjusters are going to adjust that claim differently.

 

Every insurance claim is different, and every adjuster will see it differently.

 

It doesn’t matter what your neighbors are, what the situation. What we do is we’ll come out, we’ll take a look, and unless we’re like positively that this is going to be a good outcome for the insured, we’ll say, “Do not file a claim because it’s not going to make sense.” I’ll give you an example. Again, most pas are smaller. If they get a call for a million-dollar property, they’re going to file a claim no matter. They’re just going to file because they hope it sticks.

In 2023, we had a call. It was 260 buildings. This is somewhere in Illinois. This was 260 buildings. You’re looking at this, it was 260 duplex senior living families, these buildings. They had a company out of New York come out and tell them they should file claims that there was damage everywhere. They sent them this whole presentation. I looked at this presentation, I’m like, “It looks like there’s a lot of hail damage.”

We pulled the weather data. There was no big hail or storm in the last years. They called us because they wanted someone local. We went against up some other PA firms. We ended up winning the job and we looked and inspected the building and I said, “When did you guys replace the gutters?” They said, “We replaced the gutters like three years ago.” There was damage on certain parts of the siding and these guys took pictures of those old siding where that’s been there for twenty years, so that damage was very old.

I’m like, “If you guys replaced the gutters in the last 3 years and you’re filing a claim that within the last 2 years you had a storm and none of the gutters or down spots have a lick of hail, there’s no damage here.” I met with the board and advised them to retract that claim back because not only did they have a good insurance, but if they would’ve filed a claim, the insurance company would come out and take photograph and then say, “Do you guys have old siding, old roof? We’re going to drop you. We’re not going to insure you anymore.”

Now it’s going to be hard because now every other insurance company is going to see that. They actually rechecked the claim. They still have that same insurance, still have that great premium. If storm ever happens, it happens. They’re insured for it. The insurance is not there to pay for old damage or cosmetic. That was a great question because there are right times. If you have a $50,000 deductible, Dan, and we go in and we say the damage only $60,000, why would you file a claim? It makes no sense. It’s got to make sense for the insured. Since I’m an investor, I always look at it from an investor side of myself, like, how would I be in that scenario? Am I going to come out better? It’s got to make sense.

It sounds like that would be a reason someone could reach out to you as well. It’s not just in the event that total loss. Obviously, if there was a fire, you have to make the insurance claim, but you have this other questionable situation that arises and you’re unsure. In my instance, Andy, I had like a fire next door to the house. The tenant had a little bit of like soot and I called a public adjuster and it was one of the little guys and he filed this claim he had like a $2,500 an hour deductible and it was like $4,500 in cleanup.

That never ended up getting done. We couldn’t schedule with the tenant. I had to evict the tenant. We didn’t even do the cleanup, but I got the check and then my insurance went up by 20%, 30% and I never knew that that was going to be a risk. I’m hoping readers who maybe didn’t know that filing the claim could be a risk as well. Especially now, we’re in an insurance market, I don’t know if bubble is the right word. It’s the opposite of a bubble where all the insurance premiums have gone up and there’s a lot of insurers who are simply backing out of markets and property types.

Your risk of being uninsurable in this market, it’s never been quite this tight, at least in my years of being in real estate. To circle back, that’s a service that you would offer readers if they’re thinking about a really large claim, but unsure whether that risk to their current policy is worth it. That’s something you’d be able to advise.

Right now, we’re going to be able to have like a yearly fee with investors that we look over all their policies, we inspect their buildings and then that fee, if they do ever have a claim, would get subtracted. We’re still working out the fine details of that. In the meantime, because we don’t, we inspect properties, we inspect policies, we look over interpret policies all the time. If you called me now and said, “Andy, I have a couple properties. Can you look at my insurance documents? Can you look at my buildings? A hundred percent all the time. That’s how we’ve built our reputation. When it comes to premiums, it’s illegal for them to fi raise your premium or drop you because you had a claim.

They’ll drop you, but they’ll never say it’s because of the claim. Technically, premiums go up every year. If I look at all the insurance premiums we have, they just keep going up every year. Some of the properties we never had a claim on. When it comes to claims, on our lake house, we had two storms that went through and we filed two claims. Now the whole house is basically brand new on the outside. I would think they would be more than happy to insure me now, because everything’s new, everything’s better. Now I had a hard time getting insurance because I had two claims on the same property.

The loss run history will follow that property, right?

Exactly. It’s that property. It’s not even just you, it’s that property because everything else is fine, all my other building, it’s just that property.

I bought a couple that had losses I didn’t know about before and they were j just nightmare to get insurance on them. I fixed the fire damage and it followed the property, not me, for sure. The yearly fee program to review insurance stocks is interesting because a lot of brokers will offer. I’m like shopping for insurance. “Let me make sure all your claims are in line.” Can I really trust the other insurance broker? He’s trying to sell me a policy like I don’t know the business.

We have a love and hate relationship with brokers for the fact that most of them think know everything when it comes to claims. They’ve never worked the claim or never seen the claim process because they sell policies, they think they know the claim process. The claim process and the claim handling is 100% different from selling policies. They’re selling a policy based on a premium. They’re trying to sell you something. They’re trying to say, “Dan, I got you covered here. It’s only $5,000 a year.” We’re looking at from a perspective of loss mitigation. If you have a fire or you have water damage, are you covered for this? If you have this, are you covered for this?

We look at all the little stuff because we see all of it. We also know which carriers pay claims better. When I say pay better, I mean pay faster. Work claims faster, are easier to work with, have more experienced adjusters. We know that aspect when there’s those brokers that sell it don’t know because they’ve never seen that side of the business.

We’re looking through a different lens and then we are looking through a lens of an investor as well. What are you paying? Is there another insurance that you could get the same coverage for less? We’ll advise you about that. The whole program that we’re trying to make here is to get investors prepared and prepare them for losses before they happen. They might never have a loss. Great. If they do, they’ll be prepared and they’ll just be in a much better scenario.

You’re a disinterested third party because you’re not going to get the commission from selling the policy, but you are an interested party and your interest will be in line with the insured if there is a loss later. In a sense, you’re on the right side of the table to make that make that evaluation.

The reason we wanted to do this, Dan, is we love working with investors. We love reading policies and seeing what’s there, what’s not covered and what’s in there. We look looking at buildings, but it’s to get involved before, like as soon as the claim happens because the problem is we get so many investors and landlords that call us when it’s too late, when they’ve already called the claim.

We’re just dealing with the claim and the investor and whoever called the claim said, “We had a tree root damage.” The actual cause of the damage was there was a clog in the pipe, which technically falls under the full policy limit, but the claim is now denied and we can’t overturn it. It’s got to go to an attorney because whoever called the claim said the wrong thing. We’re calling the claim and we’re inspecting it before they do anything, before they even call the insurance.

I think you touched on it before, but I’m feeling like the biggest underlined point for me is if I have the loss, even if it is a total loss and it’s a fire or a tornado or whatever the case is, it’s smart to call the public adjuster first before the insurance company.

A hundred percent because the first thing we’re going to do is look at the loss, make sure it’s covered. We look at the policy. These days, it’s not only maximizing the claim and getting every penny that you’re owed, it’s just getting the claim paid and making sure it’s not delayed or worse, denied because a lot of claims we’re getting is denied.

We have an insured that’s with legal right now. They were selling a building, so they had their primary residence. They put it up for sale and then they went to their son. They had another home across the street that they moved in with their son. They took all their furniture out because they were selling the home. The home caught on fire. That loss got denied because that home wasn’t their primary residence.

They lived there, it’s their primary home, but they weren’t living there when the fire happened because they were selling the house. They cleaned it out and they were living literally across the street with their son. It was their house. They were renting. It was their rental. Their home caught on fire. It got denied because they didn’t call it a primary residence. If we were involved, this would’ve never happened because I know that what to say and this. It’s not about lying, but when you’re too honest, you tell them too much, then the adjuster is like, “Okay, it’s not their primary. They’re not living there.” They checked all the boxes and they denied the claim.

I think conventional wisdom is called the insurance company first immediately when there’s a loss. That’s why I think it’s just 180 degrees, turn that conventional wisdom on its head and call a knowledgeable adjuster.

If you can have a private adjuster on your team before, like even maybe you never have a loss, but have one on your team to interview on and have them look at your policies and know what real estate portfolio you have, what properties you own, that’s the benefit. You want to have one before, because then if something small happens, maybe there’s a hailstorm, I would come up and say, “Dan, we looked at your properties. Everything looks good. No damage. You’re good to go. No reason to file a claim.”

As we get to the top of our episode here, before I switch gears, is there anything else I forgot to ask? Maybe just didn’t have the knowledge to ask that might be of interest to the readers?

No, I think you hit the main points. I think we went over all the main stuff.

Books And Podcasts That Inspired Andy

All right. You’re successful business owner, real estate investor. Do you have any books, other sources of inspiration, podcasts that you might want to share?

Of my own?

Meaning like in general, stuff that’s been impactful along the way.

Some of the books have been The Alchemist. Rich Dad, Poor Dad is still one of my favorites. There’s a book called The Slight Edge that had a huge impact on me. It’s a great book. It’s weird. It’s so simple to read. Sometimes I read it over and over again because it’s just so simple. It’s really well put together. Tony Robbins was a big factor. Jim Rohn. All the YouTube motivational, if you’re into that stuff. The one person that stood out always to me was Jim Rohn, soft-spoken. Tony Robbins is a little bit louder.

I got to see Tony live. Actually, when I got to see Tony live, I was pretty young, still, starting in business and then I was didn’t know what direction I’m going and I didn’t really have that much money. I really wanted to see him. I know the tickets to see him up front were like three times more. I don’t know how I got the money, but I got the money to sit up front.

I remember sitting next to all these business owners. The guy next to me, they’re like the biggest importer of produce from Mexico. I’m like, “All these guys have all this money. What am I doing here? I don’t even have money. If they have money and they’re here learning and trying to see, wow.” That was a big eyeopener for me at that time.

Advice Andy Would Give His Younger Self

The crown jewel of wisdom. Andy, if you could go back and share with yourself, let’s say just as you were buying that first duplex, knowing everything you know now, what would you go back and share with yourself then?

The only thing I would go back in real estate and wish I tell myself is buy more property. I wish we bought more. When it comes to business, I would say I didn’t know business that well and I learned business on the fly and I made a lot of mistakes. I would’ve slowed down and definitely watch how I spend money and on what.

Where can readers get more information? Do you have any resources, websites, things of that nature that you’d like to share?

Yeah, they could check us out on AllCityAdjusting.com. For your readers, I’ll leave them with my direct line. If any of your readers ever want to get ahold of me or have questions when it comes to real estate or public adjusting or help with their claims, they can reach me at, at (708) 655-4186.

The Kindest Thing Someone Has Done For Andy

My final question. Andy, what is the kindest thing anyone has ever done for you?

It’s hard. I was trying to think about that. I’m blanking. You got me on that one. I might have to skip on this one. I’m going to have to get back to you on this one because this one I might have to just share with you with an email because I can’t even think.

All right, we’ll take that for now.

I’ll have to get back to you on that one. Not that people haven’t done kind things. I was at Starbucks the and they wrote on my cup, like, “Have a great day,” with a smile. I thought that was pretty nice.

It’s funny. It can be hard to pick the kindest thing. Everyone who’s living life has had people do some kind things along the way. To put one in front of all the others might be unfair, perhaps, right?

There are kind things that happen to me. To pinpoint one, actually, I’m a big office guy and I remember for one of the Christmas, one of my employees got me a mug that says The Best Boss Ever in the Office, which was cool. Sometimes, it’s the little things. There’s so many of those I could pinpoint. If I ever think of one big one, I’ll definitely get back to you.

That’ll work. Andy, I appreciate you coming on the show. I got a couple of pages of notes here and I learned a lot and I’ve been doing business for a little bit of time here and consider myself okay at it. Call the adjuster before the insurance company. What a huge piece for me. In closing, I really appreciate you taking out the time and coming on the show.

Thank you so much for having me. Again, don’t forget to mention that picture you got in the back.

For the readers who are like not watching the video, there’s a dog behind me on the wall here.

Not a normal dog.

It’s a famous dog, actually. The most famous TikTok meme dog, I think it was, from 2023. It’s that guy right there on the wall that I just had to have. Actually, I put him up, Andy, because we had our dog pass away, I think October 2023, right before we headed to Florida. We’re back in Chicago. English Springer, he had brown liver spots on him. We have a new English Springer who we’re going to pick up. It’s at my fiancée’s aunt’s house and we’re like really excited. A little bit in celebration for the new dog. We have this guy here on the wall.

That’s awesome. I’m sorry about your other dog. Congrats on the new edition. That’s awesome.

Yeah, I appreciate it, Andy.

 

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New Silver Fintech CEO Kirill Bensonoff On Blockchain Hard Money Loans

The REI Diamonds Show - Daniel Breslin | Kirill Bensonoff | Hard Money Loans

 

Guest: Kirill Bensonoff, CEO of New Silver, a groundbreaking fintech lending organization, is at the forefront of revolutionizing real estate investment. With a focus on fix-and-flip, ground-up construction, and buy-to-rent projects, New Silver provides investors with innovative financing solutions backed by cutting-edge technology. Combining his expertise in technology and a deep understanding of real estate, Kirill brings a unique perspective to the table, unraveling the intersection of blockchain and trust within the industry.

Big Idea: New Silver combines financial expertise with advanced technology to streamline the lending process for real estate investors. By leveraging blockchain technology and smart contracts, New Silver offers faster loan approvals and closings, reducing the time and complexity traditionally associated with hard money lending. The discussion revolves around the pivotal role of trust in real estate transactions amidst the rise of blockchain technology. While blockchain promises seamless transactions and tokenization, Kirill and Dan delve into the fundamental necessity of trust in every aspect of real estate, from lending to investment.

This episode of The REI Diamonds Show is sponsored by the Deal Machine. This software enables real estate investors to develop a reliable & low-cost source of off-market deals. For a limited time, you get free access here.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

Resources mentioned in this episode:

New Silver

Kirill Bensonoff & I Discuss Blockchain Hard Money Loans:

  • Exploring the Role of Hard Money Lending in Real Estate Investments (02:12):
    Unpacking the significance of hard money lending as a crucial financing option for real estate investors, offering flexibility and speed in transactions.
  • Demystifying Loan Requirements, Down Payments, and Interest Rates for Profitable Ventures (05:34):
    Breaking down the essential components of real estate loans, including requirements, down payments, and interest rates, while discussing profitability calculations to empower investors.
  • Effective Strategies for Strengthening Offers and Accelerating the Closing Process (17:01):
    Offering tactical approaches to enhance offers to sellers and expedite the closing process, ensuring a competitive edge in real estate transactions.
  • New Silver’s Dedication to Tailored Solutions and Building Strong Borrower Relationships (20:10):
    Highlighting New Silver’s commitment to providing customized solutions and nurturing robust borrower relationships to foster trust and long-term success.
  • Blockchain Applications in Real Estate Transactions (25:05):
    Discussing the potential of blockchain to streamline real estate processes such as property title transfers and asset settlement, enhancing efficiency and reducing transaction costs.

Watch the episode here

 

Listen to the podcast here

 

New Silver Fintech CEO Kirill Bensonoff On Blockchain Hard Money Loans

Kirill, welcome to the REI Diamond Show. How are you doing?

Good, Dan. Thanks for having me.

Location stamp, I’m in Chicago recording. We have our office here. I’m at my home office. Where are you tuning in from?

I’m right outside of Boston.

For people who don’t know who you are, do you want to give a brief introduction about New Silver, what the business model is, and why that might make sense for fix and flip, rehab and rent type of investors?

I’m a technologist by background. We started New Silver in 2019. We’re essentially a Fintech lender. We think of ourselves as a Fintech, meaning that we have the financial part and the technology part. The financial part is, at the end of the day, we’re a lender for real estate investors. Our typical client would be somebody who’s doing single-family residential, fix and flip, ground-up, or buy-to-rent type of project.

We’re now in 39 states. On the technology side, what we’ve done is build a pricing engine that helps us value and underwrite deals, meaning you can go to our website, start the application, and finish the application in under five minutes. You get your term sheet, you get your loan pricing, and everything else. It’s a quick-to-market type of process. We’re working towards everything but right now, the majority of things are web-enabled. We try to make things convenient. That kind of convenience is our North Star if you will, and that’s what we’re trying to drive towards.

Let’s stay on the hard money topic for people. We don’t have a lot of hard money lenders on the show, and we’ve had some in the past, and we still do business with some of them. Thirty-nine states, you and I talked about the main markets that Diamond Equity, my company, invests in, which are the Illinois area, the New Jersey, Pennsylvania, Delaware, Maryland tri-state, quad-state area, and Georgia.

You told me that you’re in all of those markets. Some of the lenders we had on the show in the past, and I’m hesitant to say that because you might take this back to your lending partners and pull the plug, but we’ve had lenders who would start in Illinois and maybe then they like Georgia. I have one I still do business with.

He moved from Illinois to Georgia and stopped lending in Illinois. We had another nationwide lender as well who we still do close a lot of business with in the other markets, also pull out of Illinois. They did not like the foreclosure process timeline. Hopefully, that won’t be the case by the time our show goes live in 3 or 4 weeks. I did want to highlight that to point out as we’re talking now. You guys are lending in the markets where we have our offices for those who know who we are.

To your point, things do change. We pulled out of Alabama. As we talked before the show, I’m not an expert on underwriting and things like that. I know enough to be dangerous, but I’m not an expert in that. I’m not exactly sure why our underwriting guys decided to pull out of Alabama for whatever reasons. Certainly, the economy is rocky and the judicial foreclosure states, for some of them or maybe many of them, it’s a challenging process.

 

The REI Diamonds Show - Daniel Breslin | Kirill Bensonoff | Hard Money Loans

 

The Chicago, Illinois market is a fantastic real estate market to be a part of. We have expensive real estate here. The property taxes are high. The rents are high. Even on the low end, the price of the house is high. They come with a nice high-quality $80,000 or $90,000 renovation. I say it on the show often, business is abundant in the South Side of Chicago. Even in some of the highest-ranked crime areas, the houses will still sell if you do them right. I think it’s an overall positive for the real estate and the city of Chicago that investors are incentivized to go in.

They can flip a house and make $80,000 or $90,000 on deals I’m sending out. You’re going to be hard-pressed on the low end to make that profit in the city of Philadelphia. It’s probably $40,000 to $50,000 with a little less renovation but a little less profit at the end of the day. All markets offer the opportunity, but Chicago offers very large, it’s almost the size of a country, the size of the market here, we’re talking about 8 or 9 million people. It’s going to sustain, and there will be new lenders, and you guys are in the market.

Understanding Hard Money Loan Requirements

There are a lot of lenders who do stick around and love to do business here because the profits are here to be had. Enough of that for now. I’ll get off my soapbox here about Chicago and the underwriting. I’m sure for anyone who is considering a hard money loan, the first question they’re going to ask is, what is my down payment requirement, and what is the interest and points on the average loan?

The one thing that we do is we’re very data-driven. We tend to have a pretty wide range in what we charge folks, based on this pricing engine that I mentioned earlier and other things. In general, I believe the typical requirements are down payments maybe around 15% to 20% on the average of the total loan amount. Points are high 1 to 2.5 on the range, and our interest rate is from 10 on the lower side up to 12-something on the high end.

Do you guys have minimum loan terms, minimum payoffs, or anything that people should be aware of?

It’s typically a twelve-month term. I believe $100,000 would be the minimum for the loan amount. Our average loan size is a little bit higher. If we go back even a few months, it was probably around $300,000 or $350,000. In the last 2 or 3 months, it has gone up to maybe around $500,000. With the market and the way that it is, there are different project types to be had.

I want to add one thing on the lending side. Where we’re good is on the ground-up construction. We’ve built a nice product there, and we have a lot of folks coming back to us. I believe we’re differentiating what we can do there, and we have more abilities to do things on that end. Obviously, fix and flip as well, but that’s where we shine.

Profit Expectations For New Construction

It’s funny. I find that to be something I’m interested in, going back 8 or 10 years. I’m a passive investor in quite a bit of new construction industrial products around the country, and I’m bullish on that. Personally, it’s always been existing houses that we’ve done our renovation on. It’s not a limiting belief because we have such a vibrant business in that space, and it always made sense to me. I’m lacking when it comes to ground-up new construction, and I hear numbers like $350,000, $300,000, $500,000.

These investors who are doing this must be making good money. I imagine they’re not going to borrow $400,000. Do you have any insight on their profit expectations on a $500,000 loan or more if it’s new construction? What should an investor expect to make on new construction for completing a project if they’re going to bring a loan to you and it’s going to be safe enough for you to fund?

We do have a profitability calculation that we look to. In our experience, and to be on the safe side with the market the way it is now, we like to advise people. We could do a loan for somebody that’s doing a lower profitability than this, especially if they’re experienced and we’ve worked with them before, but we like to advise people to plan for at least a 30% profit off of all their expenses, and everything else, and holding costs, and all of that. That’s just our advice. We would do a loan with somebody that’s experienced, and they have a solid project, and maybe it’s a quick turnaround. It also varies a lot.

Some markets like where I live right outside of Boston, it’s a fairly expensive market. I’m sure some of the markets outside of Chicago and many other areas are. What I’m seeing anecdotally on my own is there’s a lot of ground-up construction going on where the older stock is being taken down and rebuilt with a massive mansion that’s five-plus bedrooms and 5,000 or 7,000 square feet, and they’re selling for millions. The profit margin there is very healthy, but it also takes some expertise to acquire one of these.

You have to find the right stock to work with, and be able to build something. This is a high-end build, so I presume there’s a lot of capital that goes into it, and then being able to hold onto it, because maybe there’s not a buyer that’s willing to put down $4 or $5 million that’s sitting on the sidelines and waiting for you to finish this house. Maybe you get lucky, there is. I know some builders locally, and all of them have gone through where they built something, it’s a beautiful piece of work, and they’re very proud of it, but it’s been on the market for twelve months. There are no buyers even in this tight market.

I vacation in New Jersey on the coast, Avalon and Stone Harbor, it’s a 7-mile island. We’ve had our eye on the properties out there, being in the real estate business since we started going there. We were looking at oceanfront property. It was out of my price range personally, but I think $6.9 million was the asking price, and it was a year on the market, and they sold it. I forget what it sold for, it was right around $6.9 million, and I’m wondering what is that builder’s meditation practice to deal with the patience of being on the market for a year without a price drop?

I was able to take a lesson from that. We were spoiled during COVID, 2020 or 2021, it sells in four days, a week, and two weeks, and then the market changed in 2022 and 2023, and all of a sudden we’re all panicking a little bit if we’re getting up to 21 days or 30 days on market. Having some patience, this is what a more normal market operates a little bit like it does now since I’ve been in the business since 2006, where it’s 30 or 45 days on the market, you’re going to sell it. That’s not the year that the $7 million property took to sell, and maybe that’s how the expensive price points work. They have to have that patience. It’s not a discount product, you’re looking for a very unique buyer to fall in love with that location, the build, the design, and everything else.

You’re right. If we’re going back to COVID or even pre-COVID times, right before COVID, where things were flying off the shelf, it’s different now. I also keep getting blown away by how profitable the real estate business could be for the people who are doing it right, and have a process around it, and they’re thoughtful about the whole thing and have the patience. Prices are continuing to go up in most places even after the rates are what they are. It’s been two years of rocky roads, but we’re still seeing healthy profits, and things are happening.

Where Most Hard Money Loans Are Happening

On one hand, I’m watching the inflation figures and I’m like, “We need the prices to go down,” but then, on the other hand, I don’t want the prices to go down when I’m holding the bag on a dozen properties or more. I want the lower interest rates to stimulate things, so I’m finding myself fighting both sides of that. I want the prices to go down, but not the real estate prices, but the real estate prices are exactly what’s keeping the inflation high at the moment, and I’m okay with that because we’re still all making money, the music continues to play. Kirill, do you have any insight, in the last 6 to 12 months, around the country, by the state, where are you seeing the predominance of your business grow? These $500,000 average loans, where are they taking place?

Our biggest state for originations was Florida for quite a while. It was Florida, followed by Connecticut, and then, this is going back to maybe 5 or 6 months ago, things have changed since. It’s still the Southeastern. We’re good along the Eastern Seaboard, that’s where the majority of our business overall is. It’s the Southeastern states, but now, as winter turns to spring, we’re seeing some pickup in the Northeast a little bit as well. We’ve had quite a few deals come up in California. At one point, California is still a very expensive state. We’re a little bit better in inland California versus the very coastal, the most expensive areas.

I don’t know that there are a ton of opportunities in the coastal areas at those prices, maybe there are, I’m not too familiar, but a little bit inland, where regular people live, that’s where we operate. We’ve seen stuff there. The Eastern, sort of the Northeast, as well as the Southeast, continues to perform fairly well. Midwest, we’ve done a lot in Tennessee, and certainly it’s not a secret. A lot of places in Tennessee saw a lot of growth over the last couple of years, but we haven’t traditionally done a lot there. In the last six months or so, we’ve seen an uptick in that state.

Tennessee and Florida are both interesting states with no state income tax, so they are going to continue to have that as a main draw to go to that market. You start at a certain size, and the growth can be more impactful to the bottom line for an investor who buys 1, 2, or 3 houses and holds them. Maybe Florida had more inflation along the way, and it feels like a little bit more of a risky market if I were going to buy, and I did buy 1 or 2 a year or so back for myself, a riskier market to hold the property long-term, especially if I factor in the cost of insurance in Florida. It’s a big problem, it’s expensive, and it’s killing a lot of deals.

Tennessee, I don’t know what the insurance is, but it does not have that reputation amongst my national commercial real estate investor friends, as being a major problem to get property insurance. Tennessee also had lower prices per square foot in a lot of neighborhoods, a lot of areas, a lot of the cities, where your ability to get in and cashflow and hold that property might have that long-term potential. I’m bullish on Tennessee. I think Tennessee is a great market to do business, and we’ve done well there on several deals that we did in the last year or so out there.

How Fast A Hard Money Loan Can Close

Let me switch gears again back, for the underwriting process. If anybody was going to use New Silver, what is the timeline to get to closing? A lot of times with the hard money lender, if I’m on the selling side of a deal, I have some hesitation anytime there’s a hard money loan funding that buyer. I’m going to ask them first, “Do you have the cash and you could go refinance, get the hard money?” Sometimes they can, and that makes their offer more desirable in my eyes if I were going to accept it.

I would take a cash offer, oftentimes $5,000, $10,000, or $15,000 less than a competing hard money loan offer because it’s not a guaranteed sure thing. They need 7 days, they need 14 days before they can give you the green light. The hard money lender can and will step in and say, “We’re not going to do this deal, you need to renegotiate the price.” I’m now back at the same price I should have taken the other one.

A lot of time, I don’t know if discount is the right word, but we’re looking at the cash offer with a lot more confidence. Going into a hard money loan, knowing how fast they can close, and knowing how fast there’s a solid loan commitment on the line is important for me as a seller when I’m evaluating a buyer. I think it’s important for anyone who is a buyer using hard money. How do we strengthen the offer in some way when we’re communicating that to the seller? You could package the answer directly as, how quickly can you close and how quickly can you give the commitment?

On the commitment side, we say we provide a term sheet in five minutes, and we close in five days. On the term sheet side, that is 100% of the time. If you’re conditionally approved by our software, this is what I’m good at, this is what I was involved in originally and continue to be involved in, the software side of things, the technology side of things. We built a pricing engine that tries to evaluate the borrower and the asset, tries to figure out what’s the value, which is much easier, and also what’s the value after the repairs are done, and provides a number.

If the potential borrower is happy with the number that they see on their screen, they can go on and essentially go to a full-term sheet that’s a conditional approval term sheet. That takes five minutes or less. We have closed in five business days. We don’t do that every single time. That usually is, from what I understand, from our team, usually because of other parties involved. We could be ready to close quickly. We do require an appraisal, but not in every case.

We’re able to waive the appraisal requirement upfront, and we could do the appraisal post-close. We have that ability if we need to close quickly and if the property’s right. To answer your question, we can close as quickly as five business days. I don’t honestly know what our average is. We never extend an offer, a final commitment, unless we know for 100% that we’re ready to close this, we’re ready to fund it. Not every single person, not every single project gets approved. I don’t think I’ve ever heard of us telling our borrowers to go back out and renegotiate the price.

If we decline somebody for some reason, whether it’s a project or their personal background or something like that, then we would typically keep it at that, and they could look for another partner too. We help people too. We have relationships, and if it’s something we can’t do. Maybe the project itself is outside of our wheelhouse, where we focus on single-family, 1 through 4 families. We’ve done a few smaller multifamily, but that’s not our wheelhouse. We’ll go out and help people find it. We try to keep the relationship, we try to do the best we can to accommodate folks. They come back to us or spread the good word about New Silver.

Blockchain And Real Estate Investment Model

We covered it from the borrower’s perspective. Maybe we could talk about the business model a little bit because I think that part of the reason I was excited to do this episode is that you guys have this unique model, and the model is there’s blockchain packaged into the business, which was interesting. You and I were talking beforehand, it may not necessarily be completely necessary for the way the model is set up, but we were also talking about people coming to the table with cash who want a return on their money too. That would be part of where blockchain would be interesting.

I saw the website, I read up on the blockchain. In my mind, I envisioned buying crypto or something, or something. I go in, I load $25,000, and I get these tokens, and then they’re going to pay out interest to me, a passive investment, was how I envisioned it. That wasn’t exactly how it’s set up, but maybe you could touch on what would be the opportunity and they’re more interested in New Silver because maybe they can passively participate in some of these deals.

I can touch on the broader blockchain and why blockchain, whether it’s today or five years from now, and then talk about our opportunities to invest with New Silver. Part of our capital source does come from the blockchain. What that means is this is not technology that we built ourselves. To give maybe a broader overview of the blockchain, most folks are probably familiar with Bitcoin and Ethereum and things like that. Blockchain is essentially a collection of nodes or computers, that talk to each other over the internet, and value can pass from one wallet to another.

This is all done in a digital, cryptographic format, meaning that your wallet is a public key, and you have a private key that allows you to execute transactions, but the other people on the network are not supposed to know what your private key is. Your wallet is your address. If I want to send you value in Ethereum, if I want to send you Ether, knowing your wallet address, I could send you whatever amounts that I want. Other things can be done. That’s one part of blockchain.

The other part is a smarter way of doing business. There are things called smart contracts, which are essentially programmed resources that have certain rules. Think of it as a business rule. If A happens, do B. That kind of thing. Those contracts are immutable, typically, so that once they’re deployed, first of all, everybody can see exactly what they should do. There are security audits, code audits, and things like that. They shouldn’t be able to not do what they say that they do. In reality, there are hackers, malicious actors, bugs and flaws in code, and all that. What they’re supposed to do and what they do, sometimes there is a variance there.

Nevertheless, it’s come a long way. Bitcoin, was in 2011, I believe, when it was born if I’m not mistaken. It’s been over a decade at this point, and things have come a long way. There are many different blockchains. There’s first generation, second, and third layer, they call them to layer one, layer two, etc. Blockchains built on top of other blockchains. There’s a lot you could do with it. I think blockchain holds a huge promise, in my view, specifically for assets, and real estate is the biggest asset. There are huge opportunities.

Is it today that all of these things are available? Probably not because real estate, as your audience probably knows, is a legacy industry. It’s been operating since we learned how to build houses, and our modern way of title and all that has been invented. Every county and every town has its own little something. Even to this day, we don’t have digitization of records across the board. Blockchain is the next step. We’re not even at the internet age everywhere. We’re taking the next step. Where I think blockchain could help is the settlement of value, for example.

This could be true for any asset. It could be stock, it could be debt, it could be real estate. One use case that some folks try to do, and it may be in some pilots or some small use cases somewhere, it’s not mainstream yet, for example, closing on a real estate purchase is an expensive, time-consuming process that takes multiple parties and multiple days to settle for the title, for the deed to be recorded, and all that. With blockchain, theoretically, you could do it much faster, with the help of smart contracts and the ability to send value. For example, if I’m the owner of a house, that could be a token sitting in my wallet, an NFT token, which could describe, This is the property located at this address and whatever the deed would describe.

 

Closing on a real estate purchase is an expensive, time-consuming process. Blockchain could theoretically make it much faster.

 

That would be my legal contract to this piece of land, a piece of property. If I’m selling it, I would receive value, or there would be an escrow that’s a smart contract. Most likely, value would be sent into that. I would send my deed into that. That takes minutes. Once the smart contract knows that everything that needs to happen has happened, it’s going to be released, the value will go to me, and the deed will go to the buyer. That could take minutes or a very short amount of time. Again, the laws and the facts on the ground do not necessitate this to happen in the way that I described, and in a couple of minutes here.

This will take tons of technical, legal, and other work. I do think, at some point, that could happen. People talk about, for example, another interesting use case with stock trading. I don’t know if folks know, but when you’re buying and selling stock using any platform, like Schwab or Robinhood or any other platform when you buy equities, they’re not like, this is something that’s done on an electronic exchange. It takes three days, at this point, for them to settle. For your broker to get the actual equities in their account, I’m not even sure. I don’t think that they deliver them in paper format. It’s all electronic, but they still deliver them. It takes three days to settle.

Some of them, they’re going to T+1 now. It may take one day to settle, but with blockchain, it could take minutes to settle once this is exchanged. The other big thing is you get rid of a lot of the intermediaries too. There may not be a need for title insurance in a real estate transaction, for example. If you have an automated way that people trust and believe that this works the way it’s intended, and everybody uses it and it’s programmatic, it’s code that was written once, and companies support it, developers are involved, whatever, but there’s not necessarily a need for title insurance because, if I have the token in my wallet, nobody else can physically have that token. That’s impossible because only one of the tokens is allowed on this blockchain.

Whereas, with a traditional title, I don’t know the intricate details, but from what I understand, there is that, again, the time before the recording, and if it’s recorded, but then somebody else comes in and says, “This is my property.” You now need title insurance so that everybody can be made whole, and the transaction can be reversed, or people can get their money back. Some of the intermediaries can be removed. That removes a lot of the costs that you and I, and everybody else reading, probably pay when they do transactions, and that could potentially save everybody money and lower the cost of doing business. There are thousands of use cases, probably, from big to small. These are probably some of the bigger ones, maybe some of the most challenging ones to implement. There are smaller things.

People are already using blockchains. For example, a company called Ripple, they’ve been doing this for quite some time and they’ve partnered with Western Union and other money transfer agents. Blockchains are being used now to send money to these companies across countries. There are a bunch of other use cases that are live now as well. We may not even know about some of them because they’re in the background. It’s the same thing with us.

We’ve partnered with a company called Centrifuge, and they built their platform to essentially tap into blockchains and do many different things. The core of it is that the blockchain enables investment into a securitized pool of loans. Private securitization is the closest example that I could put on this. If you think of an MBS securitization that happens in the public or private markets, they’re similar. We have a trustee who oversees the whole thing. We have different roles.

There are senior investors and junior investors, two tranches. Folks, organizations, and institutions can invest money into this pool of loans that New Silver originates and earn the return. Senior earns a fixed return. Junior earns a variable return. We also have a fund we call the New Silver Income Fund, for folks who don’t want to deal with blockchain, which is the majority of folks these days. We take care of all of the technical details.

If you want to invest in that pool of loans, we’ll take US dollars, convert them, and do all of the stuff, hold your tokens for you. When you want to pull out, we’ll sell them and return your funds. It’s an income fund. It’s a quarterly income payment. Your principal doesn’t change. You get an income return. The fund has done well. It returned a little bit over 17%, net of fees, in 2024. We’ve been doing this fund for about two years.

How New Silver Achieves 17% Returns

I’m curious, how do you get 17% if I’m only paying 10% to 12% interest and a couple of points? There’s not much money left over for New Silver if I hit 17%. Are you guys bringing in alternative financing? I think before, you had mentioned, maybe it was before the show started, $25 million in loans. Is that like $5 million from the income fund and $20 million from a lower-interest source to get some of the arbitrage?

It is a leveraged fund. We do use that, which comes from our partner that’s a crypto DAO, a decentralized autonomous organization. It’s a decentralized organization managed by its members. They vote on things, etc. It’s a different process from going to a bank or an asset manager or someone like that. This is what’s left over between the cost of capital on the senior side and what we sell the loan into the pool at. The percentage that I mentioned, that’s what’s left over for the junior. The fund invests in the junior piece, and that’s where the majority of the yield is.

Is that the junior piece coming with another level of risk than the senior?

When we lend capital at New Silver, the borrower puts in an average of 15% or 20% or so of the loan amount. That’s their equity. The junior, and then the senior. Junior is essentially the second loss. The borrower equity would be the first loss. Junior would be the second, and senior would be the last. Risk comes with reward, and that’s why the returns have been nice.

 

Risk comes with reward.

 

Do you expect similar returns through this year?

We closed Q1. We had a 4% net return, exactly 4%. At this rate, it’s 16% annualized. We’re hoping to be around the same. I think it’s reasonable to expect around a 17% return, like we did in 2024.

Do you happen to remember the exact amounts for each quarter in 2023 to give us context on whether Q1 2024 was up or down?

I do not remember, unfortunately. We did have one quarter that had a little bit of a lower return, I remember. That was because the junior wasn’t leveraged enough. We had a lot of junior capital come in, and there wasn’t enough usage on that in the quarter. The return was a little bit lower, and I don’t remember if it was the first or the second quarter, but I can get you that information.

It’s interesting. We talked about buyers coming to New Silver for hard money loans because it’s quick to apply, and we can get to settlement quickly. We talked about investors coming in on the other end of the transaction, in a sense, which is interesting because, a lot of times, like, I pay my lenders two points and 10% interest. It’s safe, it’s a first-position mortgage. There’s no other leverage coming behind it. I don’t care if I make $100,000 on a deal or lose $100,000, which I’ve done on deals.

Trust And Tokenization In Real Estate

The lender’s getting his 10% interest, no matter what. We’re coming out of pocket, and I can’t say it’s a guarantee, but it comes with my implicit personal guarantee, and I come out of my own pocket to pay them off with the interest if I have to. If you throw in the leverage factor there to get you to that 16% or 17%, I’m sure we’ve piqued some people’s interest on the call. Regarding blockchain use in real estate, I want to touch on that for a few minutes if we can.

Here’s one of the things, for me, that everything boils down to, tokenization, meaning it’s akin to shares in a company. I’m buying shares in a company. We’ve already had this, we’ve had it forever. It’s nothing new. We attached a new name to it, getting around currency creation laws. Normally, you have to have a very strong military, some land, and a government to put together a currency, and Bitcoin came and shattered that. There’s now a list of, I don’t know how many currencies that are out there.

For the sake of real estate, there’s another company that we did a case study on a few months back, like a crowdfunding platform, and they’re using blockchain. You’re buying into this $400,000 property. Somebody is managing it. There are going to be some payments coming out according to the number of tokens that you own. It’s no different than if there are 1,000 shares in a company.

I bought 200 of them, I own 20%. It’s no different than that, other than the clearing and record-keeping of the payments is going to be a lot more seamless. I can probably scale up from 1,000 to 2,000 to 20,000 to 10 million and sell them off in smaller pieces and then do investor relations among all of these 10,000 or 20,000 or million investors that are in my token. What I noticed, that I didn’t hear anybody talking about, is this all still boils down to trust, Kirill.

You put your money in PNC Bank. Why do you do that? You may not consciously be aware, but you’ve chosen to trust them with your money. You don’t have to trust them if it’s a quarter million dollars or less, you have to trust the U.S. government in that instance to cover your loss under FDIC insurance at 250. If you have 300 in there, that other 50 is an implied trust of PNC Bank. If I go into a Charles Schwab investing account and I want to buy shares of Google, I’ve made two choices, two investments of trust, if you will, one in Charles Schwab, being a platform that my money will be there and they’ll hold my share of Google that I bought.

A second implication of trust is going to come in where I trust that Google is going to continue running a company. They have the money in the bank, they say they do on their reports to the SEC, and so on. That’s the same thing you’re going to run into in crypto in a real estate context. It can sound like, from the outside, I know it has sounded that way for me, like, we’ll have tokenization, you’ll click a button, and you’ll get money for the settlement like no.

You’re going to go through a process, and the person who’s going to give you the money is going to see if they can trust you enough to make the loan, which is exactly what you’re doing in your underwriting process. This all still boils down, it’s like REITs in the ’50s, ’60s, and ’70s, they were nascent, they were like blockchain and real estate now. The trust grew, and through the ’90s and 2000s, REITs were a fantastic place to have money.

When the rates went all kinds of ways in the last little run, the REITs, maybe a lot of them, didn’t pan out so much, but you still had to have the same trust in that specific REIT, you would in the share of Google or New Silver is going to have in Dan Breslin if Dan’s borrowing $600,000. It all boils down to trust. You have to run a company, and you have to be a trustworthy component of the economic machine for this to work. It’s not free money falling from the sky, which, during this Bitcoin rise over the last decade, there has been what seemed a lot of free money falling from the sky.

I agree with you completely. I think the promise of Bitcoin and other cryptos, and now, to take a step back, we’re not a crypto company. We’re a fintech. We think of ourselves as a technology-enabled lender. We certainly go through the fairly regular process of underwriting, though tech-enabled. I believe we do things faster, more efficiently, and more conveniently for our borrowers. At the end of the day, we still have humans, we still have a company, and all of that stuff. On our capital market side, the blockchain is a technology enablement. When people invest, these tokens are not like Bitcoin, they can’t be moved or sold or any of that stuff.

 

On the capital market side, blockchain is really just a technology enablement, not a business in itself.

 

They’re there to represent your share, your investment into the pool of loans. That’s all it is. I think, to clarify, but on a theoretical point, I agree. Crypto, as we all know, has gone through its own challenges over the years. There’s been bear markets, there’s certainly been fraud. We all know the FTX case that was in the news, with the founder getting sentenced and all kinds of stuff going on. I don’t think that we’re in that day anymore, at least in the US, where you could throw something on the blockchain and call it, “This is a crypto, this is a blockchain company.” I think that you have to have something behind it. You have to have a business, you have to have trust.

Though the premise of blockchain, and I think there’s still plenty of people that believe it, and I believe it to a degree, I’m a bit more of a skeptic now, after all the different things that have happened through the years. I still believe the tech is solid. Down the road, we’re going to see more and more of it. People are going to use blockchain as their backend operations, business-to-business type of stuff that we, as consumers, will never know is even out there. We’re going to use the app or whatever, and it’s going to be a blockchain backend to it.

Going back to the premise, which was trustless value movement, the idea is that you have two wallet addresses. We don’t know who we are. I want to send you value, and I’m confident that if I type in your wallet address correctly, you’re going to get it, and then you’re confident of the reverse of that. That simple process is perhaps workable, but to integrate that into the real world, where you have all of the regulation, all of the complexities of thinking about real estate, certainly other sectors, having the trustless, anonymous relationship does not work. You have to know who the people are.

Aside from technology, there are humans. I think the blockchain industry, also has woken up to that. I was reading about this company, I don’t know much about it, but they’ve created a newer way of, I’m not going to say the name because I don’t want to promote something I don’t know. It’s essentially a hedge fund on the blockchain. You buy their token, and they essentially use some arbitrage. They buy perpetual swaps on the blockchain against another currency. They say they return something like 30%, per yearly yield, some 30%, or something like that.

I don’t know how long they’ve been around, again. This is something that works, but that immediately made me think of the issues that other blockchain companies have had, where it’s almost like it sounds great, you buy a token, but you don’t know what’s going on behind the scenes. Is it a pyramid scheme?

Are they giving 30% to the next guy while you’re the last one out like there’s nothing left? We don’t know. This new company I was reading about seems to be more transparent than the last ones that went under. As to your point, everybody should do their own diligence. If you see an investment that doesn’t show, there are people behind it, you can’t call anyone, I would not advise doing that investment. Who knows what that is?

 

If an investment doesn’t show that there are people behind it, doing that investment is not advisable.

 

Blockchain is like a technology grill. A lot of perception or judgment was suspended by a lot of people because this technology came with money attached to it we could see the price of Bitcoin going to astronomical numbers, just like it’s doing now. I honestly don’t follow the price. It came with more controversy and more pop culture appeal than we might’ve seen when other new technologies were introduced. If we go back to the mid-’90s, we had the dot-com bubble, and the technology was, “We can get on the internet, and it’s going to change the world. It’s going to do all these wonderful things.”

We had the bubble, and the bubble exploded. That doesn’t change the fact now, I’m sitting here 25 or 30 years later, and I’ve spent an inordinate amount of time designing my website and having a dot-com for multiple avenues of our business. I still use that technology to make a lot of money from that. It’s almost like DocuSign, blockchain in a sense. DocuSign may not have had this same cultural appeal and allure that Bitcoin had, but how much better is the world now that we have DocuSign?

We are, in a sense, executing contracts, six-figure contracts or more, 100% on DocuSign. The laws have had to change, in certain instances, for them to be considered enforceable contracts. It’s along those same lines. It’s dot-com technology. We have DocuSign technology, and here’s the blockchain technology. I think there’s a place for it inside of viable, operating business models like we’ve had all the way along. It’s like Pets.com, however many other dot-coms that went bankrupt immediately. There was no viable business model.

There were no high-caliber decisions being made by a group of talented people like there were at Amazon.com through the ’90s, which still exists to this day. They had durability because there was a business model and smart people at the rudder. Maybe as a conclusion here, before we shift gears to the end of our episode, I would say that if we’re going to invest money in something or someone, we better be cognizant of the caliber of decisions that are being made, ideally, in my opinion, by people whose faces and names I know, and I can make a call and get in touch with them if I’m going to invest money before I send that money off.

I know I can’t do that with Google or Amazon or a litany of stocks, but I don’t put my money there. That’s my latest observation on blockchain technology, it’s effective, and it’s going to be useful in a variety of things. I don’t know if it deserved the amount of fanfare that we gave it over the last four years, but I think that’s come with the fact that Bitcoin had a price, and we could see that appreciate, and it became a bit of a gamble in real time versus simply a business model.

It was driven by the speculative markets and people making money, and it seemed people were making money all around on this stuff. There was definitely more than one bubble in this, but if we look back to dot-com, we had the 2001 bubble, with Pets.com or others. I’m pretty sure a lot of companies haven’t come back from that.

The same thing here, but at the end of the day, DocuSign and other great businesses, tons of great businesses, Zoom that we’re talking on were born, and they use the infrastructure. I believe the same will happen with blockchain. The one potential detriment that’s making it more difficult is the financial component of it because there’s value in money being moved, and there’s a lot of regulation, and there’s a lot of danger in that. It will find its place. It was too soon. I do think that in the near to medium term, we’re going to see more and more of it.

Best Real Estate Books And Podcasts

Nice. Kirill, you’re an interesting guest, coming from more of a technology background than a real estate background. I’m curious if you have 1 or 2 books, or maybe a podcast or some other source of information you might recommend to me and the real estate community here.

Good question. I wasn’t ready for that one. As far as podcasts, because that’s what I’ve been in, I’m a news junkie, I think, in the last six months, I’ve spent a lot of time listening to various news analyses of macroeconomic and global political things that are unfortunately going on these days all around the world. I listen a lot to The Economist magazine. They have both podcasts and an app, or a paper version if you like.

That’s what I’ve been in. I haven’t read a book in the past six months, to be perfectly honest with you. I’ve been thinking about what is it that I should read, and I’ve picked up a copy of a business book called Built to Last. That one I read many years ago, and I picked it up and looked through it to remind myself, that it’s all great stuff. I think that’s one of the books I remember from a decade or more ago that I read it. I think it’s so relevant now. It’s crazy how you pick something up years down the road, and it’s still very relevant.

I like looking through. I thinned out my personal library significantly, probably 50% of the books are going to the donation bin, but it was amazing to have that experience. I’m looking off-camera at some of them now, as you described, where I pick up some of the books I read, and the thing that came to mind for me was, that these were the things that helped me build the life that I have today.

Kirill’s Advice For His Younger Self

I could see some of the things I underlined, that it’s how I think. It’s normal operation now, but it’s like, this is where it came from. I can’t believe it, because if I think way back, there was a time when I didn’t know any of that, and I didn’t have the results that were in my life. Crown jewel of wisdom, Kirill, if you could go back to when you were eighteen years old, you were getting started back out in the world again, with everything you know now, what would you share with yourself then?

When I was eighteen, I got to think back to that.

20 or 21.

First of all, invest in real estate. I’d probably be a lot wealthier now if I knew this back then. Buy Bitcoin the day it comes out.

That’d be a good one.

I’m only kidding. I think investing in real estate is certainly great. It’s proven itself over the ups and downs of this country and the world in general, most likely, but specifically in the US. This is a great country. I’m an immigrant, I love where I live, and I love the country. I think that people want to come to the U.S. It’s not a place that is ceasing to amaze, and there’s a lot of land, there’s a lot of opportunity for people to come here, and build a life for themselves. With that, real estate is needed. I think real estate is an awesome space to be in. I think investing in yourself, reading great books, listening to podcasts, learning as much as possible. If I was spending less time going out to bars if I was 21.

 

Investing in real estate is certainly a great investment. It has proven itself over ups and downs.

 

You’d be both.

I do think that investing in yourself is super important.

Where can readers go to get more information about the things we talked about?

NewSilver.com is our website. If you’re interested in speaking with me personally, we can perhaps put up my socials or my email, happy to share. We have the lending side that you can find very quickly. The New Silver Income Fund is for accredited investors. That’s on there as well.

The Kindest Thing Ever Done For Kirill

My final question, Kirill, what is the kindest thing that anyone has ever done for you?

That’s an interesting question too. I don’t know about ever because I think I’ve been fortunate to have many kind people around me. I want to thank my mom for giving birth to me.

Perfect. Thank mom. I enjoyed the show here. I appreciate you coming on and sharing with us.

Awesome, Dan. It was my pleasure. It was nice to be here with you.

 

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