Fixing Up the Subprime Mess
During the subprime mortgage crisis and a massive overstock of unused homes, former Fed Chairman Alan Greenspan had a good idea: He said the low cost solution to clear the excess inventory would be to bulldoze over all the unused properties.
Stan Bril, however, was more creative. He started his privately financed commercial bank MCG LLC in 2009 to exploit a niche in the market and benefit the community as well as the economy.
Stan brings together investors and savvy real estate developers or contractors to fix up those foreclosed and run-down homes and make them useable again. The investors get a 7 percent return on their loan for one year—outrageous compared to Treasury bonds yielding 1.99 percent for 10 years.
The developers get funding they can’t get anywhere else, because banks either cannot or do not want to deal with the messy details of fixing up a run-down house.
The community benefits from new and affordable housing coming to the market at a time when homes have become scarce again.
Because of the intricacies of managing many different moving parts and different relationships, Stan is always on the phone, always on the move. Epoch Times caught up with him while he was driving from one appointment to another.
How Do Hard Money Loans Work?
We have investors who come to us and give us loans. Loans that we feel spur the economy and help the community. A person would buy a broken down property here in Philadelphia or in the Northeast. And that person would use these funds to renovate the property so you get a brand new home.
These would be foreclosed houses, run-down houses, and estate sales. Sometimes short sales, sometimes uninhabited houses. A lot of these properties don’t have running water or heat, a lot of them don’t have walls or roofs or bathrooms. More severe than run-down.
Who Are the People You Loan the Money to?
Typically to real estate developers, contractors, anybody and everybody who deals with real estate and the development of real estate.
Why Are These Projects So Lucrative?
Everybody who is involved makes money. Our depositors make a minimum of 7 percent per year. It’s unheard of to get that for a year. To the contractor or developer who sometimes only puts in his sweat equity and makes money on the resale of the property. Our company makes money for lending it out.
What Is the Risk?
There is always a risk involved. But there is minimal risk just because the property is collateralized. You are putting your money into brick and mortar. Unlike the stock market, which has a lot of volatility.
Also, we only loan out a maximum of 65 percent of the worth of the project, so there is an equity buffer. So if the project is worth $100,000, we only loan out $65,000. If there is another real estate dip, our investors can still recoup their funds.
Because of the distressed nature of the property, the equity is already built in. The developer is getting a steal and is making money by buying the property below market value. We don’t do anything at market value. That does not leave any room for unexpected cost or a dip in prices.
Can You Give an Example?
We just did a deal like this. The house is worth $160,000. The developer needed $40,000 for the purchase of an estate. And then another $55,000 for the repairs. Including the costs for the loan and closing costs, the developer got a loan for $109,000 on a property that is worth $160,000. And the only thing they had to bring was the $5,000 for closing.
It’s worth $160,000 after the repairs. But we don’t give the developer all the money right away. We give what is called construction draws. We give $40,000 at purchase and then they give us a contractor’s proposal.
According to the proposal, we give them a loan to fix a certain part of the house. We then inspect whether this was done properly, after which we release the next part of the loan. If something goes wrong, we can always pull out.
With this particular deal, we gave the investor $60,000 at the beginning and the property was valued at market and in the run-down state at $110,000. So we were still below our 65 percent threshold.
We also have a time buffer. Our investors give us money for one year. Our longest term for a loan is nine months. So if something goes wrong we have a three-month buffer to fix it. So far we haven’t had to foreclose on any property and we have always made good on the 7 percent.
That Almost Sounds too Good to Be True
I will tell you that we are not on the Rip Off Report. We have been around since 2009 and have an A rating with the Better Business Bureau. Even the nicest people become the biggest jerks when you mess with their money. So we have zero complaints on either side—lending the money or borrowing the money. So far we have done $250 million worth of these loans with zero complaints.
What Areas Do You Focus On?
We do this work in Pennsylvania, New Jersey, and New York.
We will also go into questionable neighborhoods as long as they are up and coming. There are neighborhoods in Philadelphia that a year ago or two years ago the whole block was run down. Now there are three or four that are run down. But we will never be the first one fixing a house in that run-down neighborhood.
How Is This Benefiting the Economy and Community in Your Opinion?
I believe—and I actually was told by the city of Philadelphia—it helps renovate the city. There are parts of the city where a couple of years ago you would not go there during nighttime because of homeless people and drug addicts. As the city is being cleaned up and as the properties are being renovated and as people are moving into these homes, the whole city becomes nicer.
Maybe they couldn’t have had a nice home before because they could only afford that neighborhood, you are helping people get better affordable houses. You are giving people work, the more projects we do, the more people need to be hired by the contractors to do the work. The better the neighborhood becomes, the better local businesses do. It’s a trickle-down effect.
So If This Is so Lucrative, Why Isn’t Everybody Doing It?
Big banks’ operations are very black and white and are limited by regulations. In addition, this business is very demanding on time. I always have my phone on because people call me late with all sorts of things. My loan officers, my account executives are always working 24/7 because something always needs to be done. We had a deal last week and I was on the phone with the borrower at 10:30 at night, trying to make sure we would close the following day. The banks don’t want to do that.
In a big bank, you are just an account number, no one really cares. With us we give you that personal touch that extra attention. All of our investors and borrowers have my personal cellphone.
A normal person won’t be able to do it because they need to hire someone to do the repairs. This is very expensive and there is always a risk it won’t work out. All of our borrowers are either contractors, home developers, real estate developers, or construction workers who have experience building and who do the building themselves.
Throughout the years we have built up excellent relationships with these parties, so we know they can do the work right. So it is also a matter of experience, trust, and relationships.
Stan Bril is the founder and CEO of MCG LLC, a privately financed commercial bank. The interview has been edited for brevity and clarity.