All Forum Posts by: Brian Burke

My best advice is to align with an active sponsor in a role that embraces your skill set.  If you have strong market knowledge and the ability to find deals, working in acquisitions for a syndicator or a real estate private equity shop could be a good fit.  There you can build up your skills even further and these jobs can pay a lot if you are producing great results.  

@Jay Hinrichs yes Maui did the same thing after the Lahaina fire, and you're also right that Santa Rosa had no such restrictions.  In my observation here in Santa Rosa, the first lots out of the gate that sold went for too high of a price.  I think there was some thinking on the part of "investors" that they were getting great deals on lots, when what was actually happening was they failed to realize how much lots were devalued after such a disaster.  

As time went on, prices came down because buyers saw the challenges with rebuilding--trade labor, insurability, not knowing what will be built on adjacent lots (like one lot where the owner built a house that looked like a concrete mushroom and that devalued the adjacent new construction homes built to more conforming architecture), and so on.

The weakness with moratoriums such as these is that it is now illegal to offer less than FMV as of 1/6/25--but what was FMV on 1/6/25?  How many lots in those neighborhoods sold near that date to establish comps?  My guess is ZERO, because that area was fully built out.  And, FMV on 1/6/25 is not FMV today because now you don't have a lot in an established neighborhood, you have a lot in a disaster area which comes with the challenges I listed above.

We built about three dozen "fire lot" homes after our fire--all lots acquired off MLS or from owners that came to us (we didn't market for lots), and not at a price that anyone would call a "discount". Most of the homes we built on these lots sold at a profit, but a couple did not, again, because of the reasons above. If anyone thinks this presents a runaway opportunity, think again. It's a big money maker for architects, engineers, and contractors, but not a huge opportunity for investors, nor should it be. Leave the owners alone, when and if they are ready to sell, they will, and there will be plenty of lots to choose from on the MLS.

I have no statistics to back this up, but in my casual observation after our fire is about 1/3 of the owners rebuilt their homes (some built similar, some duplicated exactly--big mistake, and some built better/nicer/larger homes).  About 1/3 sold within 2 years or so.  About 1/3 were in limbo--neither rebuilding nor selling, while owners tried to decide what to do--sell, rebuild, or fight with the insurance company--or just didn't have the money to rebuild and didn't want to sell.  I'd guess half of this final third eventually sold, even if several years later.  It's now been 7 years since our fire and cookie-cutter neighborhoods are about 90% rebuilt, custom home neighborhoods are about 75% rebuilt, and luxury homes about 50% rebuilt.  On my street, only about half of the homes are rebuilt, and about half of those are occupied by the pre-fire owners.  The other half is a mix of spec and owners buying lots to custom-build for themselves (more of the latter than the former).

Thanks @Don Konipol, but I can’t take all the credit here. I had outstanding partners. They were great at managing people. If anything, this is a great lesson in partnerships. The right chemistry can accomplish incredible things. The wrong chemistry, well, see what happens if you put a few drops of brake fluid into dry pool chlorine (actually, do not do this!).

Partner with people that bring things you do not.  And you bring things they do not.  Hire only “A Players”.  Be prepared to spend a lot of money creating the infrastructure.  Expect to put no money in your own pocket for a couple years.  

@Chris Seveney when I started my lending company with two partners our aim was to go from $0 to $2.5M per month.  We accomplished that within a few months, and five years later we were doing well over $100 million per month before we sold the company.

To get there, we hired top originators from our competitors.  We not only offered them a better comp package, but we offered them the opportunity to work for people who knew real estate investing as investors, not just as lenders.  That makes a real difference.

Initially we had one originator, one part-time processor, and a part-time admin assistant.  Within a year we had 3 or 4 originators, 2 or 3 processors, and a full-time admin assistant.  After year 1 we added more originators, more processors, an appraisal review analyst, a VP of capital markets.  By year 5 we had around 55 people.

We did hire a marketing person but frankly marketing wasn't our strong suit.  Our website was just OK, our email campaigns were hit and miss, our conference presence was fairly minimal.  Nearly all of our business came from the relationships that our originators had built over the years.  This doesn't come cheap--these folks were making high six to seven figures depending on volume.

We focused on lending to professional real estate investors--so our customers were frequent repeat borrowers.  Build and nurture those relationships.  Just like any aspect of real estate investing, non-consumer lending at a large scale is a relationship business.  If you don't have the relationships, hire someone who does.

@James Wise you're right about California's bad leadership.  But that's not why it's on fire.

Here is how I get my perspective:  I was a firefighter in CA for about a decade in my former life.  The house I'm sitting in right now is on a hill with 270 degree views and I can see about ten miles in each direction.  Nearly every house I can see from here burned to the ground in 2017, including the house that was on this very lot and almost every house on this street.  5,300 in total.  Thankfully, at that time I lived just a bit to the south and the winds blew the fire right by my house, missing by 3,000 feet.  I woke up that morning to a wall of fire as far as I could see.  

I drove to my office, everything around me was on fire including the landscaping and dumpsters in the parking lot--no firefighters around.  But the office itself didn't burn.

The fire had traveled ten miles in about 3 hours. You can't get mutual aid (with a several hour ETA) in time to stop it. The calvary arrives just in time to mop up.

I have a second home in Maui, and as I look out in one direction the entire town I used to see burned to the ground in 2023.  The wind blew that fire to our south, this time missing us by almost a mile.  This is becoming all too familiar, and yet I'm extraordinarily lucky that I suffered no direct fire loss in any of these.

In both of these fires, hydrants didn't work.  Firefighting resources were overwhelmed.  Winds were near or exceeding hurricane force.  The fire created it's own weather including "fire tornados".  

Part of the reasons hydrants didn't work was some water storage was already depleted for maintenance.  Power was shut off to prevent it from starting more fire (or was killed by the fire) and this power is what drives the municipal water pumps.  Homes burned, leaving their water service lines severed and freely flowing water onto the ground, depleting the pressure.  It's just chaos.

Suggestions above include:

To not rebuild and convert the land over to parkland.  How do you buy out over 5,000 homeowners?  Infeasible.

To build out of concrete block.  Ok, but from my house I can see what used to be a K-mart about a mile away.  It was made out of concrete block and it burned to the ground, along with a lot of other concrete and brick structures.  My next door neighbor built their house out of poured in place concrete.  Will it help?  Maybe.  The building codes are pretty strict.  Ours is built with stucco siding, concrete tile roof, tempered windows, self-closing soffit and crawl space vents (they melt when exposed to heat).  A lot of structures go up because the intense radiant heat from the wildfire ignites contents inside the home through the windows, or the embers enter the attics and crawl spaces through the vents--so just building from block won't be a cure.  

Build with steel.  These fires are so hot even the steel structures melted and burned.  The winds were so strong and fire so hot there were cars turned upside down in driveways, and then melted.

The bottom line is that 100 mph winds combined with dry grass and just about any ignition source is unstoppable once it gets going.  If the fire can be knocked down in its infancy you can save entire towns.  And that's what usually happens--there are hundreds of fires no one hears about.  But the ones that aren't stopped right away and get a head on them, when close to an urban area, with wind like this, will cause extreme devastation.  No amount of water will stop it.

And don't even get me started on insurance.  My $7,500 policy was "non-renewed" and I only got two quotes:  $42K and $92K.  Then by a stroke of luck I found another quote for $13K.  If that carrier doesn't stay afloat it's pretty dismal.

If the market value mentioned above is accurate and the “initial” loan balance hasn’t increased by rehab funding, I wrote above that the proceeds are just a couple million after closing costs and commissions. I don’t know how much initial equity but if your guess is right 10 cents on the dollar is about right. 

The investors can get back to whole, it’ll just take time.  They don’t have time. They can get time, but they’d all have to double or more their investment (if any of these assumptions are right).  I imagine that the investors cannot or would not pony that up.  It’s just too big of an ask.  And therein lies the risk of high-leverage.  If the market moves against you, it takes too much capital to fix it.

Contrast that to this scenario: let's say that the acquisition loan was 60% LTV originally, and after a market drop of 30% the loan is now 85%. To refinance at 70% LTV (new value) you'd need a capital call of around 30-35% of the original equity raise. Thats far different than a 100% capital call to get out of a high-leverage loan.

 @Timothy Hero unfortunately not. If anyone tells you that you can get 15% cash-on-cash it's either a scam or ultra high risk. Fifteen percent IRR is possible, and single digit cash on cash is achievable. This would mean that the difference between the cash on cash return and the IRR is appreciation, which you'd receive upon sale. Higher risk structures can achieve higher IRRs, but can also break even or even lose money.

@Robert Ruschak I'm a firm believer in "everything happens for a reason." My first multifamily purchase was my 34th acquisition and my first multifamily syndication was my 103rd acquisition (and wasn't my second multifamily purchase, either). That pace feels pretty good to me...I can get past the "rookie mistake" phase of my career before there is investor money on the line, and I can "fail small" because SFRs and small multifamily doesn't hurt as much as larger properties when things go wrong.

Timing had a role, too. Had I scaled up in 2002 after buying my first multifamily, I'd have had a much larger multifamily portfolio during the great financial collapse and I probably wouldn't have survived it. And I certainly wouldn't have survived it with no investor losses, as I was able to do thanks to having a manageable portfolio at that time.

All that is to say that I wouldn't change a thing. Had I scaled faster, I wouldn't be where I am today--I'd probably be working a job somewhere and have a lot of investors hating me.

@Ram Go "Initial Debt" may or may not be the same thing as the current loan balance.  If the loan was fully funded at closing and since then the loan is in an interest-only payment period, these numbers would equal.  But most of these bridge loans have future funding components where the lender will fund renovation work as the work is completed and add that to the loan balance.  If that was the case here, the current balance could be quite a bit higher than the initial balance.  It's important to find out.

But for now, let's assume that the property is worth $63 million as @Jason Piccolo indicated above and the loan balance is $59.8 million. If this is true, the good news is that the property is worth more than the loan balance. The bad news is the LTV is 95% currently, and after a $4 million paydown it's still 88.6%. If the property sold today, after 1% cost of sale there's only $2.5 million in cash coming from that sale and that's assuming that there's no exit fee on the loan and no outstanding payables. In other words, the investors are nearly wiped out already.

Such a situation is recoverable if there is enough time for a market recovery and the cash flow is at least break-even (or there is enough reserve cash to cover negative cash flow until it can turn positive).  How long would that take?  No one has that answer, but I'm fairly certain that nearly everyone would agree it's longer than a year, and it seems that's all this capital call gets you.

Next, consider why the lender is willing to make this extension. You can tell that the lender isn't granting this extension under the provisions of the loan's 1-year extension options. If they were, they wouldn't be asking for a $4 million paydown. This means that the property doesn't qualify for the extension, probably because it doesn't meet the covenants such as DSCR or debt yield, so the lender is making an exception and is willing to grant the extension in exchange for the $4 million. They don't have to do this, and they don't have to do it again a year from now. They reason why they would do this is to get $4 million, and they won't have to foreclose into a bad resale market. Instead, they can foreclose next year and sell into a better market, and they are starting off $4 million better than they were. They aren't doing it to help syndicate investors.

I don't know anything about this deal other than what I've read here, so take everything I say with a grain of salt...but this plan appears to kick the can for a year.  Then, you'll be in the same boat, but the lender might not be as cooperative.

A better plan would be something that buys you 5-10 years. This would require a refinance into a loan with a 5-10 year maturity. At 70% LTV that loan would size around $44 million (less if cash flow causes a coverage constraint). You'd need a capital call of at least $16-$17 million to make that work, assuming the current loan balance equals the "initial balance". My guess is that's probably around 50% to 100% of the amount of capital initially raised when this deal went out.

This scenario is illustrative of the risks of short-term loans.  If there is a maturity in the midst of an adverse market cycle, the options for escape are pretty thin.