Todd Pigott 0:00
How do we get our money? We’re not a bank, we’re not a credit union. We have the same licensing as major banks. We have the same licensing as Wells Fargo. The difference is that we’re privately funded. And this is why we can finance distressed properties. See, banks and credit unions can’t they’re prohibited, for the most part, for the most part. And so they’re there, they don’t have that ability to go finance a lot of these distressed properties because they get their money from the FDIC. As such, they are governed by certain restrictions and what they can do, but we don’t get our money from the FDIC. We get it from zinc Income Fund. This is great. We have our own mortgage fund with a summary feature. It’s fantastic investors invest their money in a zinc Income Fund. passively, they get a cash distribution every single month returns about 8%. So our investors in our fund are an 8%, fully secured fund, no losses, and then we take that money, and then we lend it out to borrowers who are buying these properties with the intent of rehabilitating them and reselling them. So it’s just I gotta tell you it’s super fascinating man. We got a win win win win.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.
J Darrin Gross 1:26
Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
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Today my guest is Todd Pigott, Todd is the principal and President and oversees Zinc Financial and the Zinc Income Fund. Founded in 2007. Zinc Financial is a licensed lender having originated and serviced close to $1 billion in loans with a loss ratio of less than 1/8 of a percent. And in just a minute we’re going to speak with Todd Pigott about making money lending to fix and flip operators.
But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest, Todd Pigott, welcome to CRE PN Radio.
Todd Pigott 3:21
Thank you very much for taking time to have me as a guest today on your show today. It’s an honor to be here and I hope that I could share some intelligence, some information that helps both you and your guests today. Thank you.
J Darrin Gross 3:32
Well, I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Todd Pigott 3:41
Absolutely. I’m originally born and raised in Southern California. My father was vice president of investments out of Pacific Life out of Newport Beach, relocated here in the late 70s. I played a lot of water polo and swimming eventually ended up at Fresno State with a degree in construction, real estate with an emphasis in finance. I owned a facilities maintenance company that I built from scratch when I was very poor. I built that up to 500 employees, service in three states. I left the facilities maintenance company and my 500 employees and about oh six and formed Zinc. The reason for forming Zinc is that’s my passion. I’m extremely passionate about real estate investment and lending. Today I preside over three entities Zinc Auto Finance, indirect private money lender and the auto space. Zinc Investing or Zinc Income Fund rather which is our mortgage fund with a separate feature. That fund is doing exceptionally well, no losses. And of course the Zinc Financial is our lending arm. We loan money to real estate investors that buy distressed assets with the intent of rehabilitating those properties, reposition them, and then reselling them on the open market. We’ve done about a billion dollars lifetime. I have myself fixed and flipped over $100 million myself. So I’m very active in the space of distressed assets, distressed lending. And it’s been it’s been a quite a positive effect on both society, our borrowers, our investors, and obviously improving the neighborhoods for which we land. That’s a little bit about us and what we do.
J Darrin Gross 5:17
Awesome. Appreciate you sharing that. So, if I understood right, Zinc has been in business, since you said 2000 was in six that you left
Todd Pigott 5:25
2006 is when I sold my facilities maintenance company, yeah, to a private equity firm out of New York. And it was during that time that I decided I wanted to do something that I really enjoy. I don’t want to own a grocery store or a car lot or a bar or restaurant, for goodness sakes. My real passion involves in real estate. I had bought a number of properties in the multifamily as well as commercial sector. And I had rehabilitated those at that time, probably in the late 90s to early 2000s is when I started doing that on a part time basis. And so I did multifamily commercial. My big success was an in depth industrial, industrial was outstanding for both cashflow, property maintenance, as well as tenant mix. That was our that was our best success. So I had had done those on a part time basis, but I sold the company in oh six. At that time, I decided that I want to dedicated my full time resources to real estate and finance. We did two things bought properties, rehabilitated them sold them. That was one division of our company I did approximately eight per month, I’ve done hundreds. And so that was really fascinating to me, I really, really enjoy taking a junky property, a janky property, mostly in the residential space, sometimes multifamily. These are houses fire damage, water damage, Arios, dated properties, probate, whatever, that property is in disrepair, it cannot be sold conventionally. So in order for that property to be sold, it has to meet the conventional standards primarily set by the federal government. We’ve all sold a house. And we’ve we’ve gotten that that inspection report back before it can be sold that you must fix the smoke alarm and you must fix the cracked window and the GFI doesn’t work. So I did this, I actually bought these properties. I rehabilitated them rent, rolled them up and kept them or sold them. And so I did a lot of that after I sold my first company and really enjoyed it, I still enjoy it. But then we got into the lending arm. The lending arm is super fascinating as well. We we lend money to real estate investors that find these distressed properties. Whether it’s small cap commercial, small multifamily, mostly residential, with with the intent of rehabilitating those up to conventional standards, and then reselling them to earn a profit, we actually track the sales price and acquisition price as well as the rehab amounts. Our average borrower or investor earns somewhere between 30 and $80,000 per transaction. That’s just approximate. But we became a lender to these real estate investors across the country. We’re in about 45 states. And so we help borrowers or investors acquire these properties with the intent of rehabilitating selling. So I’m now on the lending side. And of course, I’ve actually been an operator for probably the best part of two decades as well. So how do we get our money? How do we get our money? We’re not a bank, we’re not a credit union. We have the same licensing as major banks, we have the same licensing as Wells Fargo. The difference is that we’re privately funded. And this is why we can finance distressed properties. See banks and credit unions can’t they’re prohibited, for the most part, for the most part. And so they’re there, they don’t have that ability to go finance a lot of these distressed properties because they get their money from the FDIC. As such, they are governed by certain restrictions and what they can do, but we don’t get our money from the FDIC. We get it from sink Income Fund. This is great. We have our own mortgage fund with a summary feature. It’s fantastic investors invest their money in a sink Income Fund, passively, they get a cash distribution every single month returns about 8%. So our investors in our fund are an 8%, fully secured fund, no losses, and then we take that money, and then we lend it out to borrowers who are buying these properties with the intent of rehabilitating them and reselling them. So it’s just I gotta tell you, it’s super fascinating me we’ve got a win win win win. What do I mean by that? Well, our investors that invest in our zinc Income Fund, they’re winning. They’re in a fully secured fund, first position deed of trust. On the underlying collateral. Our average LTV is about 65%. They earn passive income every single month of 8%. Furthermore, our fund has a 20% tax deduction, because it has a sub REIT feature. So 20% of the distributions are not our Have a tax deduction certainly tax on 80% of the distributions. So, our investors in our fund win because they get possibly earning 8% with a 20% deduction. Then our borrowers which are the real estate investors, they when they buy this janky, property, probate, fire reo, whatever the turnaround, they repair that get it up to conventional standards rent, roll it up, they make a little bit of money. So our investors make 8% passively approximately. The guys we lend money to they make 30 to 80,000. And then look at this. We have a first time homebuyer, there’s such a shortage of housing across the nation. We have a show we have a first time homebuyer that now has the ability to buy this newly rehabbed house, they’re excited during tears, they love it. Finally, we improved the neighborhood. You know, these are drug houses, these are Oreos. You know, Christmas lights are still up the yards overgrown by two inch 24 inches, you know, old junky cars in the driveway with a bunch of tires stacked beside that’s the house or property that were taken over. And the neighborhood loves it because we you know that our investor cuts the grass, takes down the Christmas lights, puts a fresh coat of paint on it, put some new windows in, fixes up the yard completely remodels the inside and improves the neighborhood. So it really is a cool thing that I do here. We improve the neighborhoods they win, provide a first time homebuyer with a new entry level home, or multifamily or small cap commercial, you know our investors win because they’re earning 8% passively. It’s a fully secured fund. And, and finally, I when I make a few bucks on the side. So that’s a little bit about us. And if I could add to that, I think today’s a ripe opportunity for this. There’s a lot of dynamics out there that are shifting. We have high interest rates, we have inflation, we have some currency concern, whatever. There’s a lot of dynamics today that are out there that I’ll tell you one thing that’s that’s really in our favor right now. And that is we have a shortage of housing. Across the country, believe it or not, housing has not depreciated that much. As a matter of fact, in central California last month alone, 50% of the house is actually sold above asking price. So still competitive demand right now, our average time on market across the country is between one and two months, that’s still historically low. So we’re not seeing the depreciation cycle that one might expect or that you you hear about on major internet cycles, that’s not occurring. We have a stabilized high prices, mostly due to shortage of inventory, lack of affordable housing, this is keeping prices and inventory or other prices elevated throughout the country. There is a need for our product class with all the dynamics out there. And the risk associated there. This is what I would consider a very safe, a safe investment for today’s climate.
J Darrin Gross 12:57
Let me ask you a little few questions for you. And I appreciate you kind of going through that because it clearly outlined all the levels of of opportunity that you guys work with. So your investors, the people that invest capital in the fund, is there a minimum investment,
Todd Pigott 13:16
There is a minimum investment. Minimum. It’s this is a this is a registered fund with the SEC mortgage fund. It’s a debt fund. And so the minimum investment is $50,000. It’s open only to accredited investors. We are fully registered with the SEC. We are fully audited by one of the largest fund auditing firms in the country. Our legal is done by djerassi out of Irvine, one of the largest private money fund operators. And then of course, we have veribest up in Oregon. They provide all of our compliance and licensing soar, we’re heavily watched, heavily regulated. It’s a $50,000 minimum investment for investors in the fund, but it is a fully secured debt fund. So all of the capital is fully secured with first position liens against the underlying collateral.
J Darrin Gross 14:14
Got it? So And how long has the fund been in existence?
Todd Pigott 14:19
Yeah, so Zinc, Zinc was formed about 18 years ago, after I sold my previous entity. Our fund has been in existence for approximately two and a half years. Prior to that we used our own money or we used credit lines, but I had such a demand for investors wanting to participate with me and both the lending arm as well as the individual fix and flips that we we formed a fund. The fund is proved to be very, very beneficial for both them and us. And with that 20% tax deduction. That’s that’s a real neat trick that was signed into law in 2017 by President Trump. And so that 20% deduct tax deduction also provides just a real favorable than fit, which makes it highly sought after and highly desirable. Also, there’s also two other if I could add two other tax strategies that Trump signed into law in 2017. Number Number two, IRA funds are no sudden no longer subject to ubit. Tax, there was a there was a tax and tax return that must be done prior to the signing of the law. For investors who put their IRA money to work in a fun, President Trump remove that. So people that put their IRA money into our fund, they’re no longer subject to a ubit tax, I’m qualified business income tax and are no longer subject to a tax return. Finally, the third strategy that was employed was residents that are out of state in a favorable tax state call it Texas or Nevada, they’re taxed in a state that they reside, even though the income is generated in California. So previous to this law. If you earned income in California, you had to pay the taxes associated with that income. Today, if you reside in a favorable tax state, you don’t have to do that. So we took advantage of these laws and 2017 that were signed into play a 20% tax deduction be if you’re out of state and a favorable tax state, you’re taxed in a state that you reside in, even though the income is earned in California, on California real estate, and then see, if you invest your IRA money, you’re no longer subject to ubit, tax, Trump signed all these into law, Congress approved them. And so these benefits are something that we take advantage of. And that’s how we structured our sec, a mortgage Fund, which is a debt fund for the for these benefits. So yes, my investors realize these benefits, they love them. It’s very, very good for them. And again, it’s a fully secured, fully secured vehicle with the first position deeds of trust against the underlying properties. I hope that helps you.
J Darrin Gross 16:55
Yeah, no, that’s, that’s great. The 20% on the the tax thing, is there any, can you expand on that just a little bit, I’m not familiar with how that that works.
Todd Pigott 17:06
Absolutely. It’s a 199. A, that is the IRS code. And so what happens here, is it’s very hard to get approved, but we did it very hard. We have our mortgage Fund, which is registered with the SEC. And then we built a REIT within that fund. And that REIT within the fund, or sometimes called a summary, enables us to take advantage of a tax strategy provided for by the IRS and the SEC, called 199. A. Now what that means is if you invest money into our fund, and let’s say, you get distributions every month, let’s just say you get distributions every month of $10,000 in cash, or 120 grand a year, you’re only taxed on 80%. At the federal level, at the federal level, you’re only taxed on 80% of the distributions from our fund, at the federal level. So if you earned $100,000, from our fund over a over fiscal year, you’re only going to be taxed on 80,000, even though you actually received 100,000. So this is extremely, extremely beneficial for our distribution and our investors. And then on top of that, if you lived in Texas, or Nevada, or whatever a tax favorable state, you know, if you don’t have the personal income tax state in your in your state, and you get a 20% deduction on federal, that’s a win win. So very, very good for investors 8%. fully secured, then, of that 8%, you’re only taxed on 80% of that. And then of course, if you’re in a tax favorable state, like for instance, Texas, then then you don’t even pay up pay on the state side. So that’s how that works a little it’s called a 199. A signed into law back in 2017.
J Darrin Gross 18:56
And I appreciate you sharing a little bit more on that. i I’m sure the listeners will appreciate that. The other thing I wanted to ask you about you mentioned the ubit penalty. Previously I had talked with other investors. I guess it’s been a little while since I’ve talked to anybody about specifically the benefit from the Trump tax law. How is it so if because I’m assuming a lot of your investors are using some retirement funds, 401k funds, self directed IRAs type stuff in now that’s there’s not there’s no penalty when when investing in something where there’s actually a lien against the property or so.
Todd Pigott 19:45
A lot about half of our investors in our fund use their retirement 401 K Ira whatever. Now I’d like to preface this with I’m not a tax attorney and I’m not a CPA, but from a high level view When participants invested their IRA money, or retirement savings in a vehicle, they used to have to do what’s called a ubit. Tax EBIT, tax EBIT unqualified business income tax. Again, I’m not a tax attorney or CPA, but there was a tax associated with you investing your IRA money. Furthermore, you had to actually do a tax return. So you had to, if you invested your IRA, or your 401 k into a fund like ours, you had to you had to do a tax return at the end of the year. And then you had to pay some tax and some fees called ubit. Tax. In 2017 2018, somewhere in that range, President Trump removed that. And now as part of the IRS Code, if you invest your IRA, in a fund like ours, you no longer have to do a separate tax return, and you no longer are subject to the ubit tax. So this, again, is extremely beneficial. So if somebody has an IRA, and they want to put it into our fund, number one, it’s fully secured. Because all first position liens are held by the fund. Number two, you’re not subject to the ubit tax, or even a tax return. So if people have IRA money, it’s a it’s a safe haven to put it in a fund like ours, very secure, great returns above market returns, you have the safety and then you no longer have that EBIT tax issue. So I think that’s been a real positive thing that’s happened at the federal level that Trump was able to get through Congress. And of course, we’re taking advantage of this, again, a difficult to get done, because a lot of lawyers, we invested a lot in this, but we did get it approved. And it’s it’s, it’s, it’s, it’s something that we’re very proud of.
J Darrin Gross 21:40
Well, that’s great, I appreciate you providing more info on that. As far as it being a fund. I know like if somebody’s investing in like syndication or something like, you know, actually in the property, you’re locked up in that property until investment, sells or has a some sort of liquidation event or a refi. If one invest in your fund, and they they’re in there for a period of time, and they want out, is that an easy call to get their money back? Or what’s the, what’s the options for that?
Todd Pigott 22:19
First of all, that’s it. That’s a fantastic question. And I’m glad you brought it up. You know, a lot of a lot of REITs out there, a lot of funds out there are asset funds. In other words, you put your money in, and there’s all these wonderful projections. But really, your money’s in there until that asset is repositioned or sold, it can be years, it’d be seven years until that shopping center, or the apartment complex, or whatever, until you realize your profit. A lot of those funds honestly have very lofty projections, very lofty performance, you’re locked in for long periods of time. And it’s very difficult to extract because that asset is just illiquid. So I don’t like those funds, because they’re often have lofty projections that are never realized, and you’re locked in there for years and years and years. And then at the end of seven years, you often have much less than what you thought you were gonna get at the beginning, our funds a debt fund. And as the money comes in, we lend that money out to real estate investors with Hi Fi goes and in good cash reserves and great properties. And so that money is coming in every single month that are distributions or every single month, you’re not waiting seven years, you’re not waiting any anything the second year in the second those distributions come through. Your question is how easy is it to get the money out? We do have a 12 month lockup, it’s absolutely the minimum that’s available at the IRS level. Anything less than that. We have to it’s becomes a securities issue. If it’s anything less than it’s rated as securities and it’s taxed differently in a structured differently. 12 months is the minimum. Another thing with a 12 month lockup is our loans are about nine months. So if somebody comes in to our fund, obviously we’ve loaned that money out and that money is now tied up alone for nine months. So if they want their money back, no problem, no problem. There is a 12 month lockup. However, I will tell you that in the event of calamity, for personal calamity, ie medical or or some kind of urgent need by an investor, we can almost always get them out earlier of all the investors we’ve had. We have never lost ever an investor to a performance issue or conflict. The only investors that we have lost candidly have been over medical or personal reasons like a you know a health issue or divorce or something like that. So and with those investors that are in a time of need, we’ve been able to return their money in hole pretty quickly. But you know, we want to do that you know somebody if somebody’s in The situation and need, we want to take care of them as quickly as possible. And we we’ve always been able to do that. But by the letter of the offering circular, or the PPM rather, we do have a 12 month lockup that money is out in loans is that money is is returned to us? And of course we can we can take them out immediately.
J Darrin Gross 25:19
No, that’s great. Hey, I wanted to ask you a little bit about the borrowers. So you guys lend nationwide, or pretty much nationwide? Is that right?
Todd Pigott 25:30
I would say we’re predominantly nationwide, I’m we’re very heavy and non judicial states, were a little bit less present. And in judicial states, that means that in a judicial state, the foreclosure laws are a little bit tougher to get through, you actually have a court, a court that you have to go through non judicial, to get our collateral back in the event of default. It’s very quick and simple. So we’re very, very aggressive and non judicial states. So in the event of a default, we’re able to, you know, get to our equity relatively quickly. We are in 43 states across the country, you know, mostly, mostly nationwide is where we where we lend to our borrowers.
J Darrin Gross 26:16
And as far as the underwriting for a borrower How do you guys are what’s your, you know, your box that you look for as far as property location, the borrower’s experience, size alone, all that fun stuff?
Todd Pigott 26:34
I love that question. I will love it. We are very, very strict here, very strict. I have my own money in this fund. I have my friends and families money in this fund. Furthermore, and listen to this, I posted $500,000 in cash that’s held at the fund level, I’m in a first loss position before any of my investors would ever lose dye. So are offering circular as Todd Piguet, myself as a first position last with $500,000 Already at the fund. So because of this, because I’m personally invested in this, and I’ve already deposited $500,000 in cash, I am heavily heavily invested in our product. With that said our underwriting is extremely strict. Why? Because I’m heavily invested in this alongside my investors. And I posted a $500,000 cash at the fund level, guaranteeing my investors that I would lose that before they’re even touched. So our underwriting is very strict both at the property as well as the borrower level. We’re heavily credit driven. We’re connected here to all three credit bureaus. We’re also connected directly to the IRS. And we’re also connected background checks the same database used by fire and courts. So we run a full background check on any borrower, we actually go to the Social Security ministration and check their Social Security. And we run a tri merge credit report. Our credit Mapbox matrix for our borrower or average borrower has a 710 Fico. These are prime borrowers, our average borrower has 20% cash down on the subject property that they’re invested in. So they’re heavily invested that 20% usually represents over half of their net worth. So we have a good credit borrower, with a good job with a good what I call meaningful cache alignment of interest. We are not a hard money lender. We’re a private money lender, we’re close to the credit union spectrum of lending from a credit box, we’re very, very particular 80% of our submissions are declined. Because the borrower does not meet our credit matrix, you must have good credit, you must have a good job, you must have a good meaningful cash alignment of interest with us by 10 to 20% down on the underlying transaction. Why am I so strict on credit? We loan money on distressed assets, not distressed people. I’ve been doing this for a very long time. I’ve done a billion dollars of it. And I’ve learned one thing, I cannot fix bad people. They’re set in their ways at age 15. It’s not going to happen. And so we just don’t loan money to bad people. We loan money to bad ugly properties, those can be fixed. So with that we’re very aggressive on our credit underwriting matrixes with our borrower they must have cash, they must have good credit, they must have a clean background and they must have exposure to this industry. The collateral I’d like to speak to that we’re very strict there as well. What type of collateral do we lend on? We lend primarily on housing. We do do commercial, we do do multifamily, but 85% of our loan product is entry level housing. We Why? Entry Level housing is very easy to liquidate in times of need. Everybody needs a house. And so we focus on housing below the median cost of housing. We focus on it in geographical regions, where there’s a population of at least 50,000 people. I call it my curbs and gutter theory. It must be an entry level house, in a geography where there’s a 50,000 person population, my curves and gutter theory refers to the elevation of the house and the location. We’re looking for sidewalks, neighborhoods, close to a Starbucks and McDonald’s, a church and a school. There must be a ie curb and gutter. Is it on a street? Is it in a conforming neighborhood with a conforming elevation that’s below the median cost of housing? Why do I like that asset class, I’ll tell you, in any type of distressed economy, or distressed market or distressed anything, I can always liquidate an entry level home by either meeting the low the cost of housing below the median cost of housing, in a solid neighborhood, next to a McDonald’s a church or school yard. That is the easiest collateral in the world for me to liquidate. Now commercial much more difficult. I’ve been in commercial I do commercial. But I’ll tell you what, that is harder to liquidate in times of distress. So commercial is a little bit touchy for me. Multifamily little, a little bit touchy, but an entry level house and a good solid neighborhood and a desirable area and a desirable community is very easy for us to move. So our underwriting conditions are very strict on the collateral, and very strict on the borrower. We don’t do ranches. We don’t do a rural desert mountains, vacation homes, simple to understand, simple to evaluate simple to appraise simple to a fixed value on entry level housing below meetinghouse. Housing, that’s what’s in our fund predominantly. And that’s the safest as safest asset class that I can determine for for our for our investors as well as myself.
J Darrin Gross 32:15
So you mentioned the average duration around nine months. You mentioned kind of the location thing. Appreciate you getting into that. What what’s an average loan amount? You mentioned 20%, down, but entry level homes. I mean, depending on where you’re at, can range from, you know, that’s all too Oh, my God, depending on the zip code. What what’s an average loan size that you gave last,
Todd Pigott 32:46
our average loan size is just under $400,000. A lot of our lending is done in California. And that’s a larger loan size. It’s actually less risky. So people sometimes have this false sense of security that doing smaller loans is more granular and less risky. That’s actually it’s actually the opposite. A $1.8 million home in San Francisco, believe it or not, I mean, despite the news. And despite everything that you see from tabloid perspective, I can liquidate that house and in two weeks, so the higher the loan, believe it or not, as sometimes safer. Because the desirability I call it the absorption rate. What I mean by that the absorption rate in that community is so high is so prevalent, that I can easily liquidate that in a time of need. So San Jose, the average home there is 1.5 million right now, the absorption rate is phenomenal, I can get out of anything in days. Now, I did some loans in Ohio. Three homes $40,000 Each, I’m not speaking negatively about Ohio. But those three loans that are 40,000 each might seem less risky, they’re actually more risky, because the absorption rate in these communities in Ohio is poor. So So I would rather do a 1.5 million in San Jose than a 40,000 and Ohio and so the absorption rate in that community is paramount to our our our lending criteria and and candidly, the more expensive areas are likely higher absorption rate more demand and therefore easier from a from a valuation standpoint and a liquidation strategy to place our money.
J Darrin Gross 34:38
Yeah, no, I get it with demand you’ve always got an exit you know, no demand you got maybe a long term hold it and count on. So the the average loan size, nine months What is it pretty much you know, resurfacing You know, the the carpet walls, fixtures, you know, Kitchen Bath, maybe a roof windows? Is that kind of the the list of things or do you get into anything that’s more substantial whether adding square footage or a teardown or?
Todd Pigott 35:15
That’s another great question. So we’re very collateral, heavy on underwriting as well. So once we’ve identified that the borrower has made our met our credit matrix, they have good cash, they have good credit, we’ve done a background, they’re good, they have good exposure. Once that’s been completed, then we’re into the collateral is that property in a good geography, location, curbs and gutters theory, good elevation, etc. Now let’s look at the property itself. What does it need? An eyeball high level picture, we look for a property where the rehab is going to be 10 to 30%. Of the acquisition price, why? If they’re doing too little improvements to the property, that’s a danger zone for us. What’s your value add, if you’re just going to do paint and carpet, that is typically not enough to create value. So anything less than 10% we show concern, anything over 30% we also get concerned because the rehab is so heavy that you’re getting into things that don’t return in value. So we look for properties where most of the work most of the value add is going to be in cosmetic paint, carpet, cabinetry, granite counters, new plumbing, new lighting, new fixtures, new baseboards revitalized, complete remodel of the bathroom, we do get a little bit concerned if they’re going to get into HVAC, framing, fencing pool. Concrete. Why? Because if you’re doing concrete roughing, roofing, or HVAC, these are not items that can create a lot of return. You put in $12,000 in HVAC, but nobody pulls up to that house and says Honey, look at that. Isn’t that a wonderful new unit on the roof, that doesn’t happen. So you put that $12,000 into a new HVAC unit. But you’re really you might get back just to that. So we don’t like rehabs that are really heavy with heavy bones that need to be improved it framing HVAC, roofing, stuff like that. We like properties that are in moderate to heavy rehab. But that rehabilitation is concentrated mostly on cosmetic features drywall and is I guess what I would say the drywall in is the simplest effects. It’s the easiest and creates the most value lift, new finished plumbing, new finish lighting, new cabinets, granite, new dishwasher new appliances, you can get an 8x return on those those contributions were rough, that’s $12,000, you might get back just $12,000. So from a property perspective, we look at at moderate rehabs. We don’t like super heavy relapse. And we don’t like minor rehabs either, because there is no value creation. And so we’re very, we’re very tight on those areas as well. Got it.
J Darrin Gross 38:07
As long as I can remember, the fix and flip thing has been a model. And I’ve got clients that used to go to the courthouse steps and you know, buy at auction, you know, distressed properties, fix them up and sell them. And then, you know, I think post 2008 There was a really big wave with all the bank foreclosures and stuff. You mentioned earlier that you think this is a really good time based on the demand. I’m curious, from your vantage point. Has anything changed? As interest rates are creeping up overall? You know, just the the change in the marketplace. what’s your what’s your thought on? You know, from today forward?
Todd Pigott 38:56
I will tell you that I Your question is great. You know, Todd, what is your prediction? Interest rates are rising. We you have friends I have friends, I was actually the one of the largest purchasers of homes at the at the auction for foreclosures down there on the trustee sale. Todd, what’s your what’s your prediction on warehousing is going from a collateral evaluation standpoint. I speak on this topic often at conferences. And so I’m going to I’m going to delve a little bit deep into the details here and I’ll but I’ll try to move it along swiftly. First of all, I’m very very data driven, metric driven. I do not get my data from tabloids TV or the internet. I pay for it. And I get it from two sources. I get it from the General Services Administration at the federal level and the National National Association of Realtors, and this is how I track housing. I go to the GSA. I pay a lot of money for data metrics on the servicing centers across the nation. The General Services Administration tracks, servicing of housing portfolios, about 80% of the nation. And what I do is I drill down into the spreadsheets and I look for stress points. And here’s what I’m looking for. My definition of a stress point is calls coming in to servicing centers for stress. I have this data directly from the GSA, when a call comes into a servicing center for a pickup payment, foreclosure avoidance, loan modification, I can’t make my pay, I need help. Whatever all of these calls are tracked, most people don’t know this. And so all these calls are tracked every one of them by the federal government, and then they’re put into ratios. And then I take those and put them into graph form. Number one, the last two months, we have had a 50 year low 50 year low of people calling in to servicing for foreclosure avoidance, pickup payment, a loan modification etc. Point 4% of call volume tracked by the GSA was that stress points, what I’m conveying, we do not have a wave of people calling in saying, I’m in trouble. What can I do? Today’s borrower is simply this, they’re performing at the highest level in 50 years. Number two, number two, we have record equity, that is also at the highest point and almost half a century. Number three mortgages today are are out there are in the twos and threes. What this is created is a huge burden for inventory. There are not foreclosures coming onto the market. As of today, it’s not the servicing volume is telling me that the calls coming in for stress points is an all time low. Simply put mortgages are performing at one of the highest levels and 50 years. On top of that people are not moving, they’re not moving up. Why? Because they’re in a 2.7% mortgage loan. And if they do move up, they’re gonna pay, you know, yesterday heard 773 quarters. So instead of moving there just adding a bathroom or adding a red room or stacking the kids on top of each other as opposed to getting another house with a bigger and better. So this is restricting inventory. At the federal level, we don’t have that inventory of foreclosures coming we do not have that coming. Secondly, we have move up buyers or transplants that are not moving either because they’re in a 2.7% loan. As a result of these things that I watch and pull. We have tight supply, really across the nation, which is keeping prices elevated right now. Right now. And this is fascinating to watch media outlets. Fascinating. You know, off offers. Bob, I read this on CNN offers were down, you know 35%? Well, I’ll tell you, I looked at this nationwide last year at this time, the average home sold 404% of list price. Today, almost two thirds of the country’s between 98 and 99. Now CNN or the news outlets will post this a huge problem my gosh, housings as dropping off and it’s it’s no ladies and gentlemen, I tracked this I get that data, we went from 104% or less price down to 9899. Housing is still moving at list price that is not a collapse. Furthermore, the percentage of housing that is sold above asking price is still a very, very high level right now in California alone is 50%. Why we have constricted inventory. So so my prediction is and this is my prediction. Housing will stay constricted, prices will remain elevated. Even with interest rates of 7% the velocity and absorption absorption rate out there is still at a very sustained level. I remember Oh 708. I remember the oh five recession. I remember the the 96 recession when I got out of college. This is different. We have short supply of housing. We don’t have a wave of foreclosures coming. For that reason. I predict that housing will be relatively stable. We might have dips of depreciation. For instance, San Francisco has dipped about four to 5% but it’s not dipping to the levels that the news outlets would be predicting you from like the oh seven and oh eight. Let me share with you this. I was very very heavy in this in the in the oh eight collapse, very heavy in it. That the HAMP program came out and I argued that that program would be a failure is a failure. At that point in time, I bought a lot of properties, hundreds of properties, and I did a lot of evictions, every single property that I personally went to the knocked on the door from a from a eviction standpoint was not a borrower in distress that was a borrower that did not want to keep their house strictly from an equity standpoint. I took over hundreds of properties myself in a way, none of them were from somebody that lost their job or couldn’t make the payment, they all could make the payment, they just didn’t want the house because it was worth 400. And they paid 600 for it today, we don’t have that issue. Since Oh, eight. Since Oh, eight, the mortgage has changed 91% of mortgages today are underwritten by the federal government, Fannie, Freddie, FHA, all of those loans are full doc loans. So all of those loans are the servicing centers, which I spoke about earlier, are fully performing full dock 30 year amortized loans. As a result, last month, that the distress the stress points that came into the call center is only point 4%. Why these are full dock loans, with equity with people that can afford them. And therefore we don’t we have high performance of these portfolios back in oh eight, we had pickup payment loans negative and loans, no doc loans, stated income loans, stated asset loans stated everything loans, those loans were not performing. There was no equity that couldn’t do it. And so that the mortgage today is different. And for that reason, the performance level of the mortgage is different. And for that reason, we don’t have this wave of foreclosures coming it’s going to keep inventory restricted. Therefore value is elevated. And I think for that reason, it’s a very safe place to put our money today.
J Darrin Gross 46:52
I think I think you’re right. There’s gonna be some other stress and and other cracks that will reveal themselves but I think your your head on there are spot on that. He taught if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker, and Assa to work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When we cannot avoid it, we look to see if there is a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a yes, right. Right. Great vehicle.
Todd Pigott 47:35
Great, great elaboration that you’re absolutely right.
J Darrin Gross 47:38
So I like to ask my guests, if they can look at their own situation, could be your clients, the Fed political winds, you know, whatever it is that you see in your business and your situation that you identify and consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Todd Piggott, what is the BIGGEST RISK?
Todd Pigott 48:14
In my opinion, and I evaluate that all the time, what’s our biggest risk? I manage $100 million. Right now other people’s money throughout our fund, what’s the risk that I’m trying to avoid? I can predict the interest rates, I can look at the metrics provided by the GSA for portfolio performance and assess risk there. I can look at absorption rates and assess risk there. I can look at the borrower got good cash down, got good credit backgrounds clean, I can assess risk. They’re my biggest concern of risk, and what I do every single day. And I think if there’s any time for this to happen, it’s it’s now my biggest risk that I view as a potential threat to my specific platform, is a calamity outside of housing that will cause housing or real estate to collapse. I believe that housing today is extremely safe. We have 1.8 months of inventory. We have construction. We don’t have a wave of foreclosures. We have a shortage of housing and all these point to stability right now except for little pockets here and there down 5% You know you 99% of list prices and my biggest concern. My biggest concern is a calamity outside of housing that will quickly affect housing, a terror attack political dysfunction, a drop in our currency war, war war. You know, everybody can call me a crazy for these things. But I believe that in 2023 The chances of some type of calamity occurring outside of housing or real estate that will affect housing or real estate is as likely. And I think that we’re, we’re, we’re seeing some of that we’re seeing things happen politically, society, currency, or even even globally, we’re seeing things happen that we’ve never seen in our lifetime. And so I think if one of those events occurs, that would send housing into an into a spiral. And so that is, here’s how I look at this, though, that is something that I don’t have control over. I don’t know what’s gonna happen there. And if it does happen, I tell my investors this, our worst scenario is that we have a classic event outside of housing, that causes a deep decline in asset values across the nation, both in stocks and everything else. So what do we do? I tell them this, at least I’ve got real estate, I’ve got a home with a first position lien, we’re a borrower with good credit, put down 20%, I can get in my pickup truck, and drive to that property. And we at least have that. So we, he bought it for 400, he put down 60 to 80, we’re into it 320, we thought it was gonna be worth 550 and the whole world fell apart. At least we can get in our pickup truck and drive to that property. And I’ve got a property that somebody has to live in, we will freeze the fund, freeze it. And we will be renting those or holding those for cash flow as as entry level housing until that calamity starts to dissipate. So my investors are coming. So what’s the what’s the worst thing that can happen? The worst thing that can happen is a calamity outside of housing. At that time, we would at least freeze the fund. And we would at least have assets that we would stabilize with renters for positive cash flow until that calamity dissipates. So that’s how I plan on mitigating that that risk threat. And I think that risk threat is potentially real, potentially real, something out there is going to happen five years, 10 years, three years, I don’t know it’s going to cause a discourse and affect us. I don’t have control over that. You don’t have control over that. But the best way to protect about that is at least have some type of plan B or extra strategy and we do.
J Darrin Gross 52:28
Awesome. Todd where can the listeners go if they’d like to learn more connect with you.
Todd Pigott 52:35
That is Gosh, darn happy to share that and thank you for allowing me that opportunity for investors that might want to consider our fund. It’s a fully secured fund. It’s a debt fund with monthly cash distributions 8% With great tax benefits, I’d like to invite them to ZincInvesting.com ZINC investing.com, or they can reach us here at the office 559-326-2509. If there’s a borrower out there that is looking for capital to fund a distressed property that they want to buy, and reposition and fix and flip, whether it be commercial, multifamily or residential and we’re very heavy in residential. They can visit us at Zinc Financial.com Or give us a call at the office at 559-326-2509. I’m Todd Pigott. I’m the principal and president of zinc financial, I’m the Managing Member of Zinc Income Fund.
J Darrin Gross 53:36
Awesome. Todd Pigott, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot and I look forward to doing it again soon.
Todd Pigott 53:45
Thank you very much for taking time to have me today. I hope your listeners got something from this.
J Darrin Gross 53:51
Awesome. For our listeners, if you liked this episode, don’t forget to like share and subscribe. Remember, the more you know, the more you grow. That’s all I’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks CRE PN Radio.
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