The Entrepreneur’s Key to Lasting Success: Adaptability

There’s a saying that I like – “Fail fast.”

As an entrepreneur, it means that I need to constantly try new things but if something isn’t working I would rather that it fail fast. It’s less expensive and I don’t expend as many much needed brain cells.

In my main business, the conventional residential mortgage broker business, things are very volatile right now. I built my business to work exclusively with real estate investors in 2002 and the “pool” of investor clients back then was huge.

With the new Fannie and Freddie rules the pool of investors that I can work with as a conventional broker has shrunk by 80%.

Plus, the number of lenders left that I can broker loans to has been reduced by more than 80% and the lenders that are left are scrutinizing investor loans harder than a father screens his daughter’s prom date.

It doesn’t mean that I can’t still place financing for my investor clients. It means that I have to place the loans with lenders that don’t traditionally work with OR pay mortgage brokers. Lenders that are “off the grid”, so to speak.

Private Lending
In 2004, I began raising money from private lenders to broker to local rehabbers. The lending business model was great. We would loan up to 70% of the as-repaired value and roll in all the closing and constructions costs, too.

The lenders made 14-15% return on their investment and the loans were usually paid off within 4 months by either the investor refinancing to keep it as a rental or the rehabber selling it to a retail buyer.

And we always had another deal to put the money back into as soon as we received a payoff.

I went 4 years and funded $24,000,000 in loans without a single default in that program.

Since September we have had 4.

The rehabbers either couldn’t qualify for refinances themselves or their buyers couldn’t qualify for financing because of the new conventional mortgage rules.

We took the properties back deed in lieu of foreclosure and the lenders say they are fine with being landlords now instead of lenders, but it forced me to take a long hard look at that lending model and the liability that comes with it.

Especially since my state, Colorado, recently adopted a rule that mortgage brokers who are raising money from individuals to broker to borrowers must have a Series 63 securities license. I don’t have a Series 63 and am not particularly interested in pursuing one.

I have always run my businesses on two important precepts:

1. Don’t go to jail
2. Don’t lose the house

There are a few more but those really are the main ones.

My Decision
It seemed like no matter how hard we tried to conduct “business as usual”, it just wasn’t working. Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. And he was a pretty smart guy.

Based on the volatility of the conventional mortgage markets and the difficulty in getting the short-term rehab loans “taken out” with refinances or new loans from conventional lenders, I made an executive decision that opened a major rift with my loan officer employee, Kevin.

I sent a letter to all our private lenders saying that I was discontinuing the rehab loan program as I feel that the loan model is obsolete. Because I cannot reasonably guarantee the loans they make will get paid back, I cannot ethically continue to broker them.

Kevin was offended and will continue to broker the loans through his own newly-formed company. He will continue to contribute to The Investor Insights but will chart his own course as a loan officer.

The Lessons
Here’s the thing…

Just because something has always worked and has been extremely profitable doesn’t mean that it will always work.

Things happen. Rules change.

In September I found myself with a million square pegs when all the holes were round. Nothing was working. And the stress was brutal; keeping me up at night pacing and worrying about the loans that we couldn’t get approved with conventional lenders.

The rehab loan model started to fail FAST and I made an equally fast decision to protect myself, my lenders and my company.

Does that mean that I’m out of business?

Hell, no.

Like many foreword thinking entrepreneurs before me I change the model. I adopt a new strategy that DOES work in the CURRENT environment.

And I already have.

The New Model
Real estate investors need financing help now more than ever.  So, instead of being a commoditized mortgage broker, I am an investment real estate consultant.

With this model, I deliver even MORE value to my clients than ever before and I don’t rely on a third party (bankrupt lenders or underwriters) to “allow” me to earn income.

I can work with thousands more lenders – portfolio lenders – to get the tough deals done and save my clients money in the long run.

Private Money
Now, instead of BROKERING the private money I raise, the private lenders partner with me in acquiring undervalued properties (apartment buildings mostly) and discounted, performing mortgage notes.

Because I am an active partner and not just a broker I have a more active role in the partnership. I, again, don’t have to rely on a bankrupt lender or underwriter to determine the success of the investment.

Now I have round pegs to fit into the round holes. And less stress because I took control of the situation and reconciled it with my values.

The Fallout
Will everyone be on board if you make a decision like this in your business?

No.

If you change course as quickly and as drastically as I did, you will experience fallout in your organization just like I have. Some people hate change. That’s life.

But you know what? My vision is strong, I can sleep at night and my instincts have never failed me. I am certain I made the right decision.

A poor decision would have been to do nothing, try to fool myself into thinking that I could conduct “business as usual” and that things will get better. Fortunately, that’s not my style.

So, let’s raise a glass.

Here’s to the next phase of success and record profitability in the ever-evolving and crazy life of a real estate investor!