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How to Scale Commercial Real Estate


Mar 4, 2022

Will you trust subprime borrowers?

 

From Blake Selby’s experience mixed with proper risk management, it is possible! Blake is the Owner of Selby Rentals, which has serviced the greater Quad Cities Area and has since expanded to 11 states and takes on complicated transactions and creative financing arrangements, allowing them to carve a unique niche in the market.

 

He discusses how offering lower cost loans becomes advantageous by shifting the focus towards the asset–it is less about the borrowers and more about the asset itself. Low LTV is key as it becomes possible to work towards offsetting the risk. Blake also shares the reality in the private lending space on fees and the way his company creatively solves problems considering state laws.

 

[00:01 - 04:43] Opening Segment

 

  • Blake Selby shares how he started from owning a gym to getting into real estate
  • How he managed high asset value and wiped off all the bank loans

 

[04:44 - 10:48] Becoming an Asset Lender

  • Blake’s experience in growing the team and vetting borrowers
  • Why Blake didn’t opt the usual route of starting with bringing in an outside fund
  • The rationale behind considering subprime lenders and offsetting the risk

 

[10:49 - 16:38] High Loan-to-Value is King

  • The realities of the private lending space on hidden fees and appraisal
  • Creatively solving debt problems - low LTV is key
  • Beware of online private money - vet that title, company, and attorney

 

[16:39 - 18:56] Closing Segment

 

  • A tool or resource you can’t live without
    • Google Drive
  • A real estate mistake you want our listeners to avoid
    • Don’t trust of low renovation estimates and high ARVs
  • Your way to make the world a better place
    • Helping downtrodden areas
  • Reach out to Terry
    • See links below 
  • Final words



Tweetable Quotes

 

“Sometimes, you'll find somebody who is asset rich, cash poor, and credit poor. So I can pull off of those assets, without the borrower ever having to come up with any money themselves, to help them purchase another asset… Sometimes it is maybe they'll make enough money off of that to solve their problems. ” - Blake Selby

 

“We can actually make some money off of extensions, which is a whole lot better than finding a new client, you know. Your existing customer is a lot easier to make money off of than a new customer, which has an acquisition cost and wasting my office employees’ time.” - Blake Selby



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Email selbyrentals@gmail.com to connect with Blake or follow him on LinkedIn. Visit Selby Rentals and look into the creative financing opportunities.






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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

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Email me → sam@brickeninvestmentgroup.com




Want to read the full show notes of the episode? Check it out below:



Blake Selby  00:00

I'm not one to criticize anyone else's business plan, just probably people a lot smarter than I am. See things that I don't see. So I just look at the raw details of what's in front of me. And I say, “Does this make sense for me to lend on?” “Do I feel safe and comfy?”. And if I do, and if it's a good enough return, that's always variable by every deal is different. But if the returns are good relative to the comfort level, then I'll usually just greenlight it.

 

Intro  00:23

Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.

 

Sam Wilson  00:35

Blake Selby of SelbyRentals.com is a private investor that likes to explore the many revenues of real estate. One of the fun interesting facts about Blake is that he actually got into real estate from owning a gym. But you know, that's not what we're here to talk about today. Either way, Blake, welcome to the show.

 

Blake Selby  00:51

Thank you for having me. I appreciate it.

 

Sam Wilson  00:53

Hey, man, that's a hoot. You know, how did you go from, I got three questions. I always ask everybody, but I am, I do want to talk about it. How did you go from owning a gym to being and investor in real estate?

 

Blake Selby  01:03

The quick 30-second version is owned a gym, had it for three years, turned it around, sold it to a chain, use some of that money to parlay into owning over 300 rental units, and then sold about two thirds of those large profit, enough to be able to start a private lending operation and still own the other things I had outright and pay off all my debt. So that's the, essentially, how we got to this point. So you know, now we've got a, just our assets in the company are about 10 million, and then other our debt is about 100,000. So that gives you an idea where we're at.

 

Sam Wilson  01:37

Gotcha, man, that's absolutely fantastic. And I think you've hit the three questions. I asked everybody who comes on the show, which is where do you start? Where are you now? And how did you get there? And I think you win the award for the most succinct way of unpacking all that information in, so, well done. Hey, I'm looking forward to jumping in today. So you guys, you own the rentals, you have 300 of them, which is a lot of single family rentals to own. And what prompted you to sell those off?

 

Blake Selby  02:00

We were blessed with buying into an inclining market. And so when we picked a lot of these up, in ‘15, ‘16, ‘17, when it came time for 2019, 2020, we had already appreciated so much. And a lot of these, we got sold just before the pandemic and a little bit into it, which in my opinion, was a great time to sell, especially for the types of assets we were selling. We weren't in the $500,000 home spaces or anything like that we were in the lower end rental. So for us, the appreciation from COVID didn't really happen with that lower range as much. So we definitely sold it at the right time, I feel.

 

Sam Wilson  02:35

Man, that's fantastic. And then you said “Hey, why not go into the private money lending business?” I mean, that's kind of a next logical step. Maybe, I don't know, how did you get involved in that?

 

Blake Selby  02:44

I had been doing some lending concurrently with the rentals along the side. But it was a very small part of the business, less than 10%, until 2020, when it became about 80% of the business. And now it's almost exclusively, you know, what we do. So it's been a great path forward, it's obviously less management intensive. You know, I basically, it's sort of a binary option, I'm either paid or I'm not. So, but there's only two outcomes that happen. And then of course, we may have to do dispositions if we don't get paid, but that's pretty rare, so.

 

Sam Wilson  03:16

Right, that's tremendous. Break those numbers down for me use the numbers 10 million in equity a hundred thousand  in debt, what does that mean?

 

Blake Selby  03:22

So we've got a combination of real estate assets we own, obviously, our own private mortgages that we generated, and then also some mortgages that we finance some of the homes to folks. And so when you combine all that, together, we've got a couple of smaller sister companies that we own, and all of that together is about 10 million in just overall asset value, the company value would obviously be higher, but the asset value is there. And then we just have a little baby $100,000 loan on our office building, where we run our office out of, and that's our only debt. So we paid off all the bank loans. We have no investors, no bank loans, you know, we don't have any private loans, all of its wiped, we're just 100% you know, and so it's just myself as the owner of the company 100%. And then I've got 10 full time employees, five, which work in the office, and then five VAs, so they each go pretty much 40 hours a week.

 

Sam Wilson  04:13

That's a light team and Dave Ramsey would be proud of you on the debt free except for $100,000 loan, which I'm just really curious. I mean, it seems like at that point it’d be more of a nuisance than just writing the check and be done with it.

 

Blake Selby  04:28

It's just like, it's 3%, you know, and so yeah, we just have, we're gonna just wait till it, you know, balloons in five more years or something, and then we'll just pay it off then. But we just have it's already set up on, you know, to be paid every month. So we just didn't, didn't bother with it.



Sam Wilson  04:41

Right, the $800 a month it cost does not matter. That's really intriguing. Absolutely love that. I mean, one, that you have a light team. Two, I mean, in this day and age, like everyone preaches that against real estate, and you're kind of the opposite on your business side. And yet the very thing you're doing on the other end of the spectrum is leveraging that against real estate for your borrowers. So talk to us about that experience, you know, starting that out, but then really growing the team around that. And then especially as it comes to vetting your borrowers as to making sure you're making sound investments, because you're the 100% of the company, you're the one that's going to lose.

 

Blake Selby  05:17

I would say, we're an asset lender is the best description of what we do. So the borrowers, while we love our borrowers, we really don't look at the borrowers that hard when we look at a deal, we're looking more at the asset itself, which is very helpful for some flippers, landlords, and especially when they've got deals that are in a weird price range. Like let's say, under $50,000, right, let's say they've got a deal, their banks really don't want to mess with it. And the fees that are associated with private lenders, and banks often, and hard money lenders, with under 50 grand can be excessive, you know, high percentages. So, we do zero upfront fees on any of our loans and then we do no monthly payments. And so, with those two things being there kind of makes us a unicorn and we're also a little lower LTV. So where a bank might be 75% LTV, we're closer to 50%. Because again, we're not running credit, we're not looking at the borrower, if they can repay us. We assume, you know, from the jump that we're not going to get repaid from the start. And then we work backwards from there. So we just start worst case scenario. And often we're pleasantly surprised, but we have to kind of look at the downside first and then go backwards, so.

 

Sam Wilson  06:25

Yeah, that's really intriguing. Well, not only is it a weird price range, which you're adding up here, right, because this is your business. But I mean, I've been there and we first started out and that especially here in the Memphis market, you could find houses for under 50 grand, which is just impossible to finance.

 

Blake Selby  06:39

We do higher prices, too. We just that's just one example of kind of an area where we find a lot of success, you know, under the 50,000. Certainly under, I would say, 80% of our loans are probably under 200,000, to give you an idea.

 

Sam Wilson  06:50

Are you lending just in the Iowa, Davenport, Iowa, area. Are you nationwide? Where are you?

 

Blake Selby  06:56

I would say we're nationwide, but we're not in every state yet. I'd like to be. So we're probably in about 12, 13 states right now and pushing out more and more as time goes on.

 

Sam Wilson  07:05

 

Right. And you said you have no outside private lenders who are funding the loans you're writing. That's a common business model in the lending space where, especially for a private money lender, like yourself to bring in outside capital, build a fund and then lend from that fund? Why have you chosen not to go that route and does that cap your potential, you know, how many loans you guys can do?

 

Blake Selby  07:26

So what I thought about, you know, when I started this is basically to focus on the core business, which is that and if half of my team is dedicated to sourcing outside money, that's half of my team that I don't have, you know, sourcing the, I guess, the deals to use our money on. And so, you know, with that being said, I like keeping everything streamlined, keeping everything in house, I'm not beholden to anyone else as far as their terms, and I'll finance some deals that I know no one else would ever touch. So that's kind of helpful, and they wouldn't touch them, because they don't understand them. It's not because they're bad deals are actually fantastic deals. For example, someone who has a 400 credit score, right? I might finance that person, right? Whereas somebody else would say, oh, my gosh, I'm not touching this person with a 10 foot pole, they could be in a bankruptcy, and I might still finance them. So these are all things to, you know, to consider. So we're okay with borrowers that are very, very, you know, sub prime, I would say.

 

Sam Wilson  08:18

Yeah, that's really intriguing. And I guess you're offsetting that risk by, you know, keeping your LTV very low. Let me ask you this, if you have a borrower with a 400 credit score, it's unlikely that they're sitting on a pile of cash, where they can turn around and say, “Oh, okay, well, I'm giving the owner 70%, you know, 70%, of what the house is worth.” And so they got to find the other 20%. How do those two work together?

 

Blake Selby  08:39

So what ends up happening is you do actually find that some people that are cash heavy are credit poor, which is shocking. I never would have thought that it's like how can those two things exist simultaneously. And usually, it's just a timing issue, where they've gotten maybe a settlement or an inheritance or some kind of a huge chunk of cash. But then again, they don't have the credit built up, or sometimes in some cases, no credit at all. Also, sometimes you'll find somebody who is asset rich, cash poor, and credit poor. So I can pool off of those assets, without the borrower ever having to come up with any money themselves, to help them purchase another asset, if that's what they're looking to do if they find some, you know, I don't, you know, judge anybody's business plans. I mean, if they think that, if they're in that pickle, if they think that buying another asset is the way to go, you know, sometimes it is. Maybe they'll make enough money off of that to solve their problems. I'm not one to criticize anyone else's business plan, there's probably people a lot smarter than I am. See things that I don't see. So I just look at the raw details of what's in front of me. And I say, “Does this make sense for me to lend on?” “Do I feel safe and comfy?”. And if I do, and if it's a good enough return, that's always variable by every deal is different. But if the returns are good relative to the comfort level, then I'll usually just greenlight it.

 

Sam Wilson  09:54

Wow, that's really, really intriguing talk to me. You guys said you're also doing something unique in doing seller finance deals where you're just selling to an end buyer. Was that right? Did I misshear you?

 

Blake Selby  10:04

Yes, so we still do acquisitions. That's not the biggest part of our business. But we'll basically acquire properties with the sole goal of doing dispositions as soon as we get it. So if we end up buying a property for, let's say, 30 cents on the dollar, we're going to quickly then try to offload it for 90 cents of the dollar, just to get that spread in between. And sometimes if somebody's got a down payment that's decent sized, you know, 20, 30 cents, well, then all of my risk is gone, because I've recouped my capital. So why wouldn't I just hold the note? And then I can avoid paying the capital gains taxes, you know, all at once. And so that can be very helpful for us on from a tax liability standpoint.

 

Sam Wilson  10:42

Right, yeah, absolutely. If you can get an infinite return on an investment, why not, or close to it, that makes all the sense in the world, that's really intriguing. What have been some things that you've learned in this business that were surprising, I guess, that you really didn't expect out of the gate?

 

Blake Selby  10:55

I was shocked at how many lenders charge upfront junk fees, I couldn't believe it. And also, I was surprised how many lenders require monthly payments, even for short term mortgages, which is an overhead. So to a flipper, that's a nightmare, because they're having to come out of pocket for repairs and monthly fees. So we've kind of become a flipper’s dream, where they come to us, they put you know, only the cash up toward the purchase, or if they have some collateral, they can just do that instead. And then basically, from there on out, they don't owe us a dime until the thing sells, or they refinance us out, which is pretty fun.

 

Sam Wilson  11:28

Yeah, ‘cuz we're seeing a lot of times in the private lender space, you know, 2 and 10, or 4 and 12, we're seeing a lot of you know, and I'm out of that game. But when I was in the single family flipping space, I mean, those were not uncommon fees. So how are you making money on this, if you're not charging those types of fees?

 

Blake Selby  11:46

Right, so we don't, we don't even charge points, which is pretty wild. So it's a very cut and dry, what I do is I look at a flat amount. So we don't do percentages or anything like that. If I'm loaning, let's say, $50,000, I'm gonna say, you know, 50,000 bucks, you know, you can have it for a year, pay, you know, pay us back and, you know, nine months a year, let's just say it's a year in this example, maybe I make 10 grand, but that's all I make. I mean, it's a flat 10. You know, never anything else that goes along with it. There's no hidden fees, no appraisals, no nothing. So it's basically you know exactly what I'm making on day one. And you know, that on the 50. I'm loaning out 50, 60’s coming back, and it's the easiest paperwork imaginable, so.



Sam Wilson  12:26

That really is. I mean, so you set flat fees up front, I'm certain, I would imagine, you have contingencies in there for the duration of the loan, you can't...for 10 years.

 

Blake Selby  12:35

No, it's usually we, our two most popular loan periods are one year and six months. So you can see that we generally attract flippers, and you know a lot more, because that's usually their time windows. Sometimes we'll build one in where it's like an option at six months, and then they get an option at a year, just depending on how long they think they're gonna go for, but it'll be cheaper, the less the length is run that flat fee down.

 

Sam Wilson  12:56

Right. And that makes sense. I mean, there was a boat and RV storage facility we just sold last week, where we brought in some private money to fill in the gap between the first and because I didn't want any money on my own in the deal. And there was a minimum payment due on it, which is fine. I mean, it was like, hey, we're gonna loan this and no matter what I pay it back, if it's within the first 36 months, this is what you owe, and which was great. So it sounds like similar thing to what you guys are doing right there. Is that a way of getting around? Because I've seen this, you know, as much as I hate it, because the state will charge you 18% interest on our state tax that's due. And then they say that you can't charge more than like eight point, I think in Tennessee, the maximum interest rate you can charge on a loan is 8.75%. Right? So the state set these rates, is that a way by defining $1 amount and not the interest rate, you get around kind of those state laws that define maximum interest rates?

 

Blake Selby  13:44

You can and there's actually some great ways to get around owner occupied with the Dodd Frank, you know, deals as well. And those are, that's kind of some things that we figured out along the way, you don't necessarily have to do a loan, you don't necessarily have to do a mortgage, you can do a purchase with an OP, you know, basically give them a first right, you know, that's another way to go about it too. So I can just go and purchase the property and then give them a first right of refusal, which are two separate transactions. So it sort of behaves potentially, you know, like one but again, that purchase to that option to purchase is optional. It's not debt, right. So there's no debt instrument if it's, you know, you can't secure something that's optional, right?



Sam Wilson  14:21

Yeah, that's really intriguing. That was something I always wondered about, I would see these money lenders playing in what I would probably say some gray space, which we were all happy borrowing money, and they're all happy lending it no one right wheel, but it was, you know, there were rates that were far above that you're like, right, you know, do whatever it works for me. So I'm gonna keep quiet. But that's really interesting. I always wondered about that, like, “How's their what are some ways to creatively solve this problem on the lender front?” That's really, really intriguing. And you said you guys don't really have a whole lot of take backs right now. Is there ever any fear of that with a correction or anything else?

 

Blake Selby 14:55

So the way that, because we're so low LTV, I think that inherently just prevents a lot. Because nobody's gonna let us have, you know, the property for that amount of money, we would let them sell it, you know, obviously before that happened. And also another reason we don't have as many take backs is because if things are working, oftentimes if somebody needs more time, I'll say, “Hey, you know, this is what I'll charge you for an extension,” you know, so we can actually make some money off of extensions, which is a whole lot better than finding a new client, you know, your existing customer’s a lot easier to make money off of than a new customer, which has an acquisition cost and wasting my office employees time and you know, this and that. So, you know, we try not to, and again, we're not in the business of holding property, so we would end up selling it anyways, so.

 

Sam Wilson  15:38

Yeah, absolutely. Makes sense. Blake, is there anything else? Or what are, let me ask this question a different way, what are some things I should have asked you that I hadn't that you'd like to share with our listeners?

 

Blake Selby  15:46

That's a great question. I would say just be very careful, especially with like, online private money, that whether it's hard money or private lenders, because there are so many people who say that they're a direct lender, but they're really not a direct lender. They're actually just daisy chaining, you know, loans. And then also, they're gonna charge you upfront fee. So never pay an upfront fee, unless it's to an attorney, or a title company. Never send a wire to an individual and you better vet that title, company and attorney, make sure they're a real person, look them up, make sure they've got reviews, make sure they've got a good web presence. If they don't, you should be very concerned.

 

Sam Wilson  16:21

Oh, yeah, absolutely. That's interesting you say that, because I go back to the days of starting out and scrambling for capital. And yeah, I just saw so much of that. I'm like this is all suspect. This is all absolutely suspects. You bring up some great points there that maybe if you're just starting out in this space that you really should be paying attention to and looking out for. Blake, thank you for your time today. Let's jump here into the final four questions. First one is this - what is one digital tool or resource you find you can't live without?

 

Blake Selby 16:46

Google Drive is just fantasti for us. We love it. We are a cloud based company. We're on Drive exclusively, we pay extra for the extra services that it offers. So we just can't say enough about the Google and the drive products.

 

Sam Wilson  17:00

Right, man, that's absolutely fantastic. What is one mistake you could help our listeners avoid? And how would you avoid it?

 

Blake Selby  17:05

Don't trust ARVs. Don't trust ARVs, what I mean by that is you can go into a market and when somebody says there's an after repair value of you know, 200,000 on this house, you may not realize the amount of work it would take to get it to sell for that price. You know, so two things that, two caveats to that. Beware of low renovation, estimates and high ARVs, those two things can kill your profit margins, and sometimes take your profit margin away entirely.

 

Sam Wilson  17:34

Oh, man. Yep, you said it, especially if it's a wholesale deal. You got to do your numbers yourself, that's for sure. Question number three, when it comes to investing in the world, what's one thing you're doing right now to make the world a better place?

 

Blake Selby  17:44

So one thing, by doing some of these lower cost loans that a lot of banks won't touch, we're you know, preventing loss in some lower end neighborhoods. And we're also putting some capital into some neighborhoods that probably wouldn't get it. So I would say that we're, you know, kind of helping, you know, downtrodden areas by doing what we're doing. Certainly can't do it alone. But it's, you know, we're taking steps toward it.

 

Sam Wilson  18:06

That's awesome. Blake. If our listeners want to get in touch with you learn more about you or your loan products. What is the best way to do that?

 

Blake Selby  18:12

The easiest way is our website, which is SelbyRentals.com. It's on my hat here. I'm not sure if it'll show up on screen there for you, but SelbyRentals.com has everything from contact info to videos to everything that you need to know about private lending.

 

Sam Wilson  18:27

Awesome, Blake, thank you for your time today. I do appreciate it.

 

Blake Selby  18:30

Thank you too, Sam.

 

Sam Wilson  18:31

Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners, as well as rank higher on those directories. So I appreciate you listening. Thanks so much and hope to catch you on the next episode.