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Bad credit? No problem for some Idaho home builders, flippers

Kerry Angelos on Veristone Capital

Status Homes owner Kerry Angelos explains why he was willing to pay more to borrow from Veristone Capital to finance a residential spec building project in Eagle.
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Status Homes owner Kerry Angelos explains why he was willing to pay more to borrow from Veristone Capital to finance a residential spec building project in Eagle.

Between shaking hands of several potential buyers, Kerry Angelos says a new Eagle home built by his company, Status Homes, won’t linger on the market.

Located in the Eagle Springs subdivision, the four-bedroom, three-bath home is listed at $379,000 and has already received nibbles, Angelos says. He built the home on a speculative basis, shouldering construction costs without a buyer under contract.

Angelos says banks have lacked an appetite for spec building since the Great Recession. Like many small builders, he did not have the cash to pay for the lot and construction.

Angelos says he is in the middle of a long process trying to secure a credit line at a traditional bank. When banks are open to lending to builders like Angelos, they move slowly and require a raft of financial documents, he says.

“You feel like you are getting a colonoscopy without the anesthesia,” Angelos says.

Angelos received a loan from Veristone Capital, a Seattle private lender that makes six-month loans to homebuilders and house flippers who buy, renovate and resell properties at a profit. The $205,000 loan came with a 12 percent interest rate and a 3 percent fee.

Veristone typically lends at 11 or 12 percent interest rate plus a 3 percent upfront fee. Traditional bank loans for building start around 4 or 5 percent, though speculative-project loans are typically shorter term and come with higher rates.

“Hard money” lenders such as Veristone and Idaho Mutual Trust typically underwrite loans carrying high interest rates and secured by real property. They depend less on the borrower’s ability to repay and more on the property’s value than “soft money” lenders such as banks that charge lower interest rates and avoid borrowers with bad credit.

Veristone customers accept the high interest rates because of the short loan terms and speed: The company can cut the time it takes to make the loan from more than a month to sometimes less than a week.

Angelos, whose companies have developed projects in several Western states, filed for bankruptcy in 1989, 2009 and in 2011. In the 2011 bankruptcy, he and his wife listed zero income and $176.6 million in debts and said they were “completely wiped out by the national collapse in the real estate market beginning in 2007.”

“Comparing us to banks is apples and watermelons,” says Joe de Vera, vice president of sales in Veristone’s Meridian office. “Look. If you can get bank financing, please do. We focus on the ability to execute quickly. That’s worth the difference.”

FINANCE NICHE

Veristone says it is on track to increase from $200 million in loan volume last year to $250 million in 2016. It owes part of its growth to banks grappling with increased regulation, de Vera says. The Dodd-Frank Act of 2010 set stricter rules for lending, especially on speculative investments, to curb shaky lending practices that contributed to the housing market crash.

For example, banks must lend based on current property values, not the increased values that flippers and spec builders hope to achieve. The current values must be established by third-party appraisers, and that can take days or weeks before a bank will sign off on a deal.

Banks feel they have enough demand and only capacity for traditional, straight-down-the-middle [loans]... or to finance bigger production builders that have lots and land they bought at discount during the downturn.

Joe de Vera, vice president of sales in Veristone’s Meridian office

The regulatory burden for banks created a niche for lenders such as Veristone and Idaho Mutual Trust, says Scott Gibson, Idaho Division president for Northwest Bank.

“As regulations continue to increase, the time frame to work through the requirements has expanded,” Gibson says. “It’s allowed more opportunity for the hard-money lender guys to meet the needs of those folks.”

Idaho Mutual Trust can approve deals in two or three days for repeat borrowers, says Dan Bureau, senior vice president of the Boise company.

“Timing can save a deal or lose a deal,” Bureau says.

ADVANTAGES

Robert Shaw, owner of WeBuyHouses.com, has taken Veristone loans both to build and to flip homes. He says his company buys about 80 homes in the Treasure Valley a year. He renovates and sells half of those and sells the rest as investment properties. Shaw has also delved into new construction.

Shaw says he has done seven deals with Veristone, usually for more than $200,000 each, more money than he is willing to commit from his company’s coffers.

In time, Shaw hopes to establish a credit line at a bank, but he lacks the volume and balance to appeal to banks now, he says.

“We’re trying to build capital so we can use our own money or get a line of credit, but our balance sheet isn’t amazing,” he says. “We have a couple hundred thousand in the bank. The big builders have assets and lots and money in the bank that they can encumber.

“Banks are always willing to lend you money if you have money already,” he says.

The recession had a huge effect on financing. It’s hard to get money. Even some of the big guys struggled, and some of them end up on (Veristone’s) desk.

Status Homes owner Kerry Angelos

Banks balk at borrowers with troubled credit histories, but not Veristone, de Vera says: “We look at the asset first and the exit strategy second, then the borrower third.”

Most of Idaho Mutual Trust’s loans are for new construction. Typically, the firm lends at 9 to 12 percent interest with fees ranging from 2 to 4 percent on six- to nine-month loans, Bureau says. The company does not disclose its loan volume.

Like Veristone, Idaho Mutual Trust lends to builders whose credit suffered during the recession. It also lends to longtime construction workers getting their start as general contractors, Bureau says.

“Banks have a tougher time reading between those lines,” he says.

MITIGATING RISK

This is a good time to be in the spec game, de Vera says. Home inventory remains low and demand high. The average number of days-on-market fell by more than half in the last year, he says.

That adds up to little worry that builders like Angelos will pay off their loans, he says.

“Days on market is an important number,” de Vera says. “We don’t want houses to sit. We want them to sell and for builders to move on to their next project.”

We understand that what happened [in a bankruptcy] doesn’t necessarily diminish that a builder had 20 years of success.

Dan Bureau, Idaho Mutual Trust senior vice president

However, when inventory eventually rises, making spec building riskier, de Vera says Veristone’s loan structure will keep it in business. Because of the short loan duration, Veristone is at less risk if the market slows than a bank holding onto 10-year notes, he says.

The short durations also allow Veristone to change terms with market fluctuations, de Vera says. Veristone was comfortable lending up to 100 percent of the construction costs for the Eagle Creek house as well as 60 percent of its completed value. In a riskier market, Veristone may lower both percentages while charging a higher interest rate for similar deals.

“We can turn on a dime relative to the banks,” de Vera says. “If the economy goes up, they are stuck with 4 percent rates. Maybe we’d charge 14 percent down the road, or choose to keep rates lower to keep things humming.”

FULL CIRCLE

Idaho Mutual Trust does not sell its loans, but de Vera says Veristone sells notes on about 25 percent of its loans. Veristone services all of its loans, including those it sells.

Sometimes, Veristone sells the notes to the banks that were unable to offer short-term loans in the first place. Those banks use Veristone to tap into the market niche that increased regulations made more difficult, de Vera says.

“And why not? Banks do their due diligence on us. They see our numbers. They make a nice margin.”

Zach Kyle: 208-377-6464, @IDS_ZachKyle. This story appears in the Aug. 17-Sept. 20, 2016, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on agriculture. Click here for the daily Statesman e-edition, including Business Insider (subscription required).

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